10-Q 1 a20130930-10qdocument.htm FORM 10-Q 2013.09.30 - 10Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number: 001-35168
 
 
 
 LinkedIn Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
47-0912023
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2029 Stierlin Court
Mountain View, CA 94043
(Address of principal executive offices and zip code)
(650) 687-3600
(Registrant’s telephone number, including area code)
 
 
 
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 21, 2013, there were 101,776,526 shares of the Registrant’s Class A common stock outstanding and 17,628,285 shares of the Registrant’s Class B common stock outstanding.

 




LINKEDIN CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
  
 
Page No.
 
 
 
 
 
 
 
 
 

2


Part I. Financial Information
Item 1. Financial Statements
LINKEDIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,396,292

 
$
270,408

Short-term investments
875,993

 
479,141

Accounts receivable (net of allowance for doubtful accounts of $5,644 and $3,774 at September 30, 2013 and December 31, 2012, respectively)
208,956

 
203,607

Deferred commissions
28,507

 
30,232

Prepaid expenses
33,831

 
14,344

Other current assets
28,259

 
21,065

Total current assets
2,571,838

 
1,018,797

Property and equipment, net
336,656

 
186,677

Goodwill
150,831

 
115,214

Intangible assets, net
43,209

 
32,780

Other assets
41,744

 
28,862

TOTAL ASSETS
$
3,144,278

 
$
1,382,330

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
70,340

 
$
53,559

Accrued liabilities
139,898

 
104,077

Deferred revenue
335,700

 
257,743

Total current liabilities
545,938

 
415,379

DEFERRED TAX LIABILITIES
15,861

 
27,717

OTHER LONG TERM LIABILITIES
51,347

 
30,810

Total liabilities
613,146

 
473,906

COMMITMENTS AND CONTINGENCIES (Note 10)

 

STOCKHOLDERS’ EQUITY (Note 11):
 
 
 
Class A and Class B common stock
12

 
11

Additional paid-in capital
2,478,813

 
879,303

Accumulated other comprehensive income
470

 
260

Accumulated earnings
51,837

 
28,850

Total stockholders’ equity
2,531,132

 
908,424

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,144,278

 
$
1,382,330

See Notes to Condensed Consolidated Financial Statements

3


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net revenue
$
392,960

 
$
252,028

 
$
1,081,326

 
$
668,691

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
53,395

 
33,778

 
145,043

 
89,278

Sales and marketing
133,172

 
83,168

 
364,865

 
224,792

Product development
106,223

 
72,730

 
282,503

 
179,903

General and administrative
61,767

 
33,194

 
160,776

 
89,022

Depreciation and amortization
33,767

 
23,122

 
91,766

 
55,552

Total costs and expenses
388,324

 
245,992

 
1,044,953

 
638,547

Income from operations
4,636

 
6,036

 
36,373

 
30,144

Other income (expense), net
156

 
672

 
(404
)
 
228

Income before income taxes
4,792

 
6,708

 
35,969

 
30,372

Provision for income taxes
8,155

 
4,406

 
12,982

 
20,270

Net income (loss)
$
(3,363
)
 
$
2,302

 
$
22,987

 
$
10,102

 
 
 
 
 
 
 
 
Net income (loss) per share of common stock:
 
 
 
 
 
 
 
Basic
$
(0.03
)
 
$
0.02

 
$
0.21

 
$
0.10

Diluted
$
(0.03
)
 
$
0.02

 
$
0.20

 
$
0.09

Weighted-average shares used to compute net income (loss) per share:
 
 
 
 
 
 
 
Basic
113,940

 
106,304

 
111,552

 
104,241

Diluted
113,940

 
113,618

 
117,090

 
112,420

See Notes to Condensed Consolidated Financial Statements

4


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
(3,363
)
 
$
2,302

 
$
22,987

 
$
10,102

Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized gains on investments, net of tax
537

 
168

 
229

 
278

Less: reclassification adjustment for net investment gains included in net income (loss), net of tax
(3
)
 

 
(19
)
 
(81
)
Total other comprehensive income
534

 
168

 
210

 
197

Comprehensive income (loss)
$
(2,829
)
 
$
2,470

 
$
23,197

 
$
10,299

See Notes to Condensed Consolidated Financial Statements

5


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
September 30,
 
2013
 
2012
OPERATING ACTIVITIES:
 
 
 
Net income
$
22,987

 
$
10,102

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
91,766

 
55,552

Provision (benefit) for doubtful accounts and sales returns
3,521

 
(145
)
Stock-based compensation
136,738

 
58,747

Excess income tax benefit from stock-based compensation
(27,747
)
 
(13,255
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,991
)
 
(43,284
)
Deferred commissions
1,779

 
(1,923
)
Prepaid expenses and other assets
(14,139
)
 
(12,487
)
Accounts payable and other liabilities
70,406

 
57,290

Income taxes, net
(1,257
)
 
17,970

Deferred revenue
77,957

 
69,249

Net cash provided by operating activities
354,020

 
197,816

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(220,625
)
 
(93,305
)
Purchases of investments
(642,442
)
 
(263,062
)
Sales of investments
111,357

 
25,804

Maturities of investments
128,779

 
66,973

Payments for intangible assets and acquisitions, net of cash acquired
(15,303
)
 
(56,955
)
Changes in deposits and restricted cash
(4,898
)
 
(3,120
)
Net cash used in investing activities
(643,132
)
 
(323,665
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from follow-on offering, net of offering costs
1,348,419

 

Proceeds from issuance of common stock from employee stock options
27,146

 
36,096

Proceeds from issuance of common stock from employee stock purchase plan
11,500

 
7,718

Excess income tax benefit from stock-based compensation
27,747

 
13,255

Other financing activities
811

 
(148
)
Net cash provided by financing activities
1,415,623

 
56,921

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(627
)
 
733

CHANGE IN CASH AND CASH EQUIVALENTS
1,125,884

 
(68,195
)
CASH AND CASH EQUIVALENTS—Beginning of period
270,408

 
339,048

CASH AND CASH EQUIVALENTS—End of period
$
1,396,292

 
$
270,853

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accrued liabilities
$
24,196

 
$
13,481

Offering costs not yet paid
$
360

 
$

Vesting of early exercised stock options
$
763

 
$
3,035

Issuance of Class A common stock and stock options for business combinations
$
40,927

 
$
72,461

See Notes to Condensed Consolidated Financial Statements

6


LINKEDIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Description of Business and Basis of Presentation
LinkedIn Corporation and its subsidiaries, (the “Company”), a Delaware corporation, was incorporated on March 6, 2003. The Company operates an online professional network on the Internet through which the Company’s members are able to create, manage and share their professional identities online, build and engage with their professional networks, access shared knowledge and insights, and find business opportunities, enabling them to be more productive and successful. The Company believes it is the most extensive, accurate and accessible network focused on professionals.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 19, 2013.
The condensed consolidated balance sheet as of December 31, 2012, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP on an annual reporting basis.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2013 or any future period.
 
Principles of Consolidation
The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
 
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.
 
Recently Adopted Accounting Guidance
Comprehensive Income
In February 2013, the Financial Accounting Standards Board issued updated authoritative guidance requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The Company adopted this guidance in its interim period ended March 31, 2013. The adoption of this guidance did not impact the Company's financial results, as the guidance is related to disclosure only, and the Company has not had significant reclassifications out of accumulated other comprehensive income.




7


2.
Fair Value Measurements
The Company measures its cash equivalents, short-term investments and foreign currency derivative contracts at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of September 30, 2013 and December 31, 2012, are summarized as follows (in thousands):
 
 
September 30, 2013
 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
884,275

 
$

 
$

 
$
884,275

 
$
148,384

 
$

 
$

 
$
148,384

U.S. treasury securities
351,697

 

 

 
351,697

 

 

 

 

Commercial paper

 
16,897

 

 
16,897

 

 
18,488

 

 
18,488

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper

 
76,738

 

 
76,738

 

 
46,361

 

 
46,361

Certificates of deposit

 
2,004

 

 
2,004

 

 
2,005

 

 
2,005

U.S. treasury securities
92,731

 

 

 
92,731

 
18,197

 

 

 
18,197

U.S. agency securities

 
432,779

 

 
432,779

 

 
303,450

 

 
303,450

Corporate debt securities

 
257,432

 

 
257,432

 

 
107,517

 

 
107,517

Municipal securities

 
14,309

 

 
14,309

 

 
1,611

 

 
1,611

Other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative contracts

 
7

 

 
7

 

 
146

 

 
146

Total assets
$
1,328,703

 
$
800,166

 
$

 
$
2,128,869

 
$
166,581

 
$
479,578

 
$

 
$
646,159

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Foreign currency derivative contracts
$

 
$
1,994

 
$

 
$
1,994

 
$

 
$
1,040

 
$

 
$
1,040

Total liabilities
$

 
$
1,994

 
$

 
$
1,994

 
$

 
$
1,040

 
$

 
$
1,040

 
The fair value of the Company's Level 1 financial instruments, which are traded in active markets, are based on quoted market prices for identical instruments. The fair value of the Company's Level 2 fixed income securities are obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data. The Company's procedures include controls to ensure that appropriate fair values are recorded, including comparing the fair values obtained from the Company's

8


pricing service against fair values obtained from another independent source. The Company's derivative instruments are valued using pricing models that use observable market inputs and, therefore, are classified as Level 2.

As of September 30, 2013 and December 31, 2012, the Company had outstanding foreign currency derivative contracts with a total notional amount of $81.8 million and $83.5 million, respectively.

3.
Acquisition

On April 17, 2013, LinkedIn completed its acquisition of Alphonso Labs, Inc. ("Pulse"), a San Francisco, California-based privately held leading mobile news reader and content distribution platform. LinkedIn's purchase price of $47.6 million for all the outstanding shares of capital stock of Pulse consisted of $6.7 million in cash and 225,882 shares of LinkedIn Class A common stock. LinkedIn also issued 9,182 stock options related to assumed Pulse equity awards. The fair value of the earned portion of assumed stock options of $0.3 million is included in the purchase price, with the remaining fair value of $1.2 million resulting in post-acquisition compensation expense that will be recognized over the requisite service period of approximately three years from the date of acquisition. The total consideration in connection with the acquisition is subject to adjustment based on (i) purchase price adjustment provisions and (ii) indemnification obligations of Pulse stockholders after the closing of the acquisition.

The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. The final purchase price allocation is pending the finalization of deferred tax calculations and residual goodwill. Pulse's results of operations have been included in the condensed consolidated financial statements from the date of acquisition. To retain the services of certain former Pulse employees, LinkedIn offered non-vested Class A common stock that will be earned over three years from the date of acquisition. As these equity awards are subject to post-acquisition employment, the Company is accounting for them as post-acquisition compensation expense. In connection with these post-acquisition arrangements, the Company issued 244,601 shares of non-vested Class A common stock with a total fair value of $44.0 million.

The following table presents the purchase price allocation initially recorded in the Company's condensed consolidated balance sheets on the respective acquisition dates (in thousands):
 
 
Total
Net tangible assets
 
$
221

Goodwill (1)
 
35,617

Intangible assets (2)
 
14,000

Net deferred tax liability
 
(2,227
)
Total purchase price consideration (3) 
 
$
47,611

 _______________________
(1)
The goodwill represents the excess value over both tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to expected operational synergies, the assembled workforce, and the future development initiatives of the assembled workforce. None of the goodwill is expected to be deductible for tax purposes.
(2)
Identifiable definite-lived intangible assets were comprised of developed technology of $9.5 million, trade name of $2.7 million, registered user base of $1.2 million and backlog of $0.6 million. The overall weighted-average life of the identifiable definite-lived intangible assets acquired was 2.9 years, which will be amortized on a straight-line basis over their estimated useful lives.
(3)
Subject to adjustment based on (i) purchase price adjustment provisions and (ii) indemnification obligations of the acquired company stockholders.

Pro forma results of operations for this acquisition have not been presented as the financial impact to the Company’s consolidated financial statements is not material.



9


4.
Cash and Investments
The following table presents cash, cash equivalents and short-term investments for the periods presented (in thousands):
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
September 30, 2013:
 
 
 
 
 
 
 
Cash
$
143,423

 
$

 
$

 
$
143,423

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
884,275

 

 

 
884,275

U.S. treasury securities
351,700

 

 
(3
)
 
351,697

Commercial paper
16,896

 
1

 

 
16,897

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
76,716

 
25

 
(3
)
 
76,738

Certificates of deposit
2,000

 
4

 

 
2,004

U.S. treasury securities
92,590

 
141

 

 
92,731

U.S. agency securities
432,352

 
428

 
(1
)
 
432,779

Corporate debt securities
257,278

 
197

 
(43
)
 
257,432

Municipal securities
14,311

 
6

 
(8
)
 
14,309

Total cash, cash equivalents, and short-term investments
$
2,271,541

 
$
802

 
$
(58
)
 
$
2,272,285

December 31, 2012:
 
 
 
 
 
 
 
Cash
$
103,536

 
$

 
$

 
$
103,536

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
148,384

 

 

 
148,384

Commercial paper
18,487

 
1

 

 
18,488

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
46,352

 
9

 

 
46,361

Certificates of deposit
2,000

 
5

 

 
2,005

U.S. treasury securities
18,184

 
13

 

 
18,197

U.S. agency securities
302,991

 
460

 
(1
)
 
303,450

Corporate debt securities
107,585

 
10

 
(78
)
 
107,517

Municipal securities
1,612

 

 
(1
)
 
1,611

Total cash, cash equivalents, and short-term investments
$
749,131

 
$
498

 
$
(80
)
 
$
749,549


The following table presents short-term investments by contractual maturity date (in thousands) as of September 30, 2013:
 
 
Amortized
Cost
 
Estimated
Fair Market
Value
Due in one year or less
$
390,295

 
$
390,532

Due after one year through two years
484,952

 
485,461

Total
$
875,247

 
$
875,993


 




5.
Property and Equipment
The following table presents the detail of property and equipment, net, for the periods presented (in thousands): 
 
September 30,
2013
 
December 31,
2012
Computer equipment
$
340,288

 
$
199,022

Software
32,245

 
26,901

Capitalized website and internal-use software
69,445

 
40,971

Furniture and fixtures
25,282

 
17,087

Leasehold improvements
85,963

 
44,362

Total
553,223

 
328,343

Less accumulated depreciation
(216,567
)
 
(141,666
)
Property and equipment, net
$
336,656

 
$
186,677

 
6.
Goodwill and Other Intangible Assets

Goodwill
Goodwill is generally not deductible for tax purposes. The following table presents the goodwill activity for the periods presented (in thousands):
Goodwill—December 31, 2012
$
115,214

2013 acquisition
35,617

Goodwill—September 30, 2013
$
150,831


Other Intangible Assets
The following table presents the detail of other intangible assets for the periods presented (dollars in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Weighted-
Average
Remaining
Life
September 30, 2013:
 
 
 
 
 
 
 
Developed technology
$
37,452

 
$
(13,810
)
 
$
23,642

 
2.4 years
Trade name
7,000

 
(2,286
)
 
4,714

 
2.1 years
Patents
12,782

 
(941
)
 
11,841

 
11.0 years
Non-compete agreements
2,661

 
(2,496
)
 
165

 
1.4 years
Customer relationships
1,200

 
(320
)
 
880

 
3.7 years
Other intangible assets
5,998

 
(4,031
)
 
1,967

 
2.0 years
Total
$
67,093

 
$
(23,884
)
 
$
43,209

 
4.7 years
December 31, 2012:
 
 
 
 
 
 
 
Developed technology
$
30,952

 
$
(7,676
)
 
$
23,276

 
3.2 years
Trade name
4,300

 
(836
)
 
3,464

 
2.4 years
Patents
4,025

 
(750
)
 
3,275

 
13.5 years
Non-compete agreements
2,661

 
(1,717
)
 
944

 
1.1 years
Customer relationships
1,200

 
(140
)
 
1,060

 
4.4 years
Other intangible assets
4,176

 
(3,415
)
 
761

 
2.4 years
Total
$
47,314

 
$
(14,534
)
 
$
32,780

 
4.1 years




Amortization expense was $3.8 million for both the three months ended September 30, 2013 and 2012 and $12.4 million and $6.9 million for the nine months ended September 30, 2013 and 2012, respectively. Estimated amortization expense of purchased intangible assets for future periods as of September 30, 2013 is as follows (in thousands):
Remainder of 2013
$
3,817

2014
14,762

2015
11,655

2016
4,548

2017
1,224

Thereafter
7,064

Total
$
43,070

 
7.
Accrued Liabilities
The following table presents the detail of accrued liabilities for the periods presented (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Accrued vacation and employee-related expenses
$
61,362

 
$
35,803

Accrued incentives
57,585

 
46,554

Accrued sales tax and value-added taxes
8,536

 
9,103

Exercise of unvested stock options
498

 
1,292

Other accrued expenses
11,917

 
11,325

Total
$
139,898

 
$
104,077


8.
Other Income (Expense), Net
The following table presents the detail of other income (expense), net, for the periods presented (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Interest income
$
686

 
$
245

 
$
1,734

 
$
680

Net gain (loss) on foreign exchange and foreign currency derivative contracts
(495
)
 
425

 
(2,247
)
 
(507
)
Net realized gain on sales of short-term investments
4

 
2

 
10

 
55

Other non-operating income (expense), net
(39
)
 

 
99

 

Total other income (expense), net
$
156

 
$
672

 
$
(404
)
 
$
228


9.
Income (Loss) Per Share
Basic and diluted net income (loss) per common share is presented in conformity with the two-class method required for participating securities. Class A and Class B common stock are the only outstanding equity in the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted upon sale or transfer to Class A common stock, subject to certain limited exceptions.
Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The Company’s potential common shares consist of the incremental common shares issuable upon the exercise of stock options, and to a lesser extent, shares issuable upon the release of restricted stock units ("RSUs") and purchases related to the 2011 Employee Stock Purchase Plan. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. The computation

12


of the diluted net income (loss) per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income (loss) per share of Class B common stock does not assume the conversion of Class A common stock as Class A common stock is not convertible into Class B common stock.
The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B common stock is assumed in the computation of the diluted net income (loss) per share of Class A common stock, the undistributed earnings are equal to net income (loss) for that computation.


13


The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
(2,832
)
 
$
(531
)
 
$
1,793

 
$
509

 
$
19,139

 
$
3,848

 
$
6,429

 
$
3,673

Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
95,936

 
18,004

 
82,797

 
23,507

 
92,882

 
18,670

 
66,342

 
37,899

Basic net income (loss) per share
$
(0.03
)
 
$
(0.03
)
 
$
0.02

 
$
0.02

 
$
0.21

 
$
0.21

 
$
0.10

 
$
0.10

Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
$
(2,832
)
 
$
(531
)
 
$
1,793

 
$
509

 
$
19,139

 
$
3,848

 
$
6,429

 
$
3,673

Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
(531
)
 

 
509

 

 
3,848

 

 
3,673

 

Reallocation of undistributed earnings to Class B shares

 

 

 
102

 

 
402

 

 
32

Allocation of undistributed earnings
$
(3,363
)
 
$
(531
)
 
$
2,302

 
$
611

 
$
22,987

 
$
4,250

 
$
10,102

 
$
3,705

Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used in basic calculation
95,936

 
18,004

 
82,797

 
23,507

 
92,882

 
18,670

 
66,342

 
37,899

Weighted-average effect of dilutive securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of Class B to Class A common shares outstanding
18,004

 

 
23,507

 

 
18,670

 

 
37,899

 

Employee stock options

 

 
6,808

 
6,654

 
4,388

 
2,976

 
7,844

 
3,327

RSUs and other dilutive securities

 

 
506

 

 
1,150

 

 
335

 

Number of shares used in diluted calculation
113,940

 
18,004

 
113,618

 
30,161

 
117,090

 
21,646

 
112,420

 
41,226

Diluted net income (loss) per share
$
(0.03
)
 
$
(0.03
)
 
$
0.02

 
$
0.02

 
$
0.20

 
$
0.20

 
$
0.09

 
$
0.09



14


The following weighted-average employee equity awards were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Employee stock options
4,594

 
14

 
560

 
31

RSUs
1,373

 
10

 
216

 
45

Total
5,967

 
24

 
776

 
76

 
10.
Commitments and Contingencies
Aggregate Future Lease Commitments
The Company leases its office facilities under operating lease agreements, the longest of which is expected to expire in 2026. The Company’s future minimum payments, which exclude operating expenses, under non-cancelable operating leases for office facilities having initial terms in excess of one year as of September 30, 2013 are as follows (in thousands):
 
Year Ending December 31,
Operating  Leases (1)
Remainder of 2013
$
12,646

2014
64,210

2015
84,107

2016
84,721

2017
81,785

Thereafter
521,519

Total minimum lease payments
$
848,988

 __________________
(1)
Subsequent to September 30, 2013, we entered into a lease with a provider of data center space. The lease expires in 2025 with aggregate future minimum lease payments of approximately $116.2 million.
Legal Proceedings
The Company is subject to legal proceedings and litigation arising in the ordinary course of business, including, but not limited to, certain pending patent and privacy matters, including class action lawsuits, as well as inquiries, investigations, audits and other regulatory proceedings. Although occasional adverse decisions or settlements may occur, the Company does not believe that the final disposition of any of these matters will have a material adverse effect on the business. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages, and include claims for injunctive relief. Additionally, the Company's litigation matters are maturing, and therefore litigation costs are increasing. Other regulatory matters could result in fines and penalties being assessed against the Company, and it may become subject to mandatory periodic audits, which would likely increase its regulatory compliance costs. Adverse results of litigation or regulatory matters could also result in the Company being required to change its business practices, which could negatively impact its membership and revenue growth.  
The Company records a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company periodically evaluates developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and makes adjustments as appropriate. Significant judgment is required to determine both likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The outcome of any proceeding is not determinable in advance. Until the final resolution of any such matters that the Company may be required to accrue for, it may be exposed to loss in excess of the amount accrued, and such amounts could be material.
Indemnification
In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement

15


claims made by third parties. In these circumstances, payment by the Company may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, it may have recourse against third parties for certain payments. In addition, the Company has indemnification agreements with certain of its directors and executive officers that require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers with the Company. The terms of such obligations vary.
 
11.
Stockholders’ Equity
Follow-on Offering
In September 2013, the Company closed a follow-on offering, at which time it sold a total of 6,188,340 shares of its Class A common stock (inclusive of 807,174 shares from the full exercise of the over-allotment option granted to the underwriters). The public offering price of the shares sold in the offering was $223.00 per share. The total gross proceeds from the offering to the Company were $1,380.0 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled approximately $1,348.1 million.
Common Stock
As of September 30, 2013, the Company had 101,553,310 shares and 17,714,805 shares of Class A common stock and Class B common stock outstanding, respectively. As of December 31, 2012, the Company had 88,829,278 and 19,817,923 shares of Class A common stock and Class B common stock outstanding, respectively.

Stock Option Activity
A summary of stock option activity for the nine months ended September 30, 2013 is as follows:
 
 
Stock Option Activity
 
Weighted-Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
 
Number of
Shares
 
Weighted-Average
Exercise Price
 
 
 
 
Outstanding—December 31, 2012
8,251,850

 
$
10.50

 
 
 
 
Assumed options from acquisition
9,182

 
14.50

 
 
 
 
Granted
727,745

 
171.53

 
 
 
 
Exercised
(2,982,463
)
 
9.11

 
 
 
 
Canceled or expired
(192,417
)
 
14.43

 
 
 
 
Outstanding—September 30, 2013
5,813,897

 
$
31.25

 
6.74
 
$
1,248,881

Options vested and expected to vest as of September 30, 2013
5,583,547

 
$
28.43

 
6.67
 
$
1,215,143

Options vested and exercisable as of September 30, 2013
3,112,202

 
$
8.46

 
5.86
 
$
739,472

Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the New York Stock Exchange (“NYSE”) as of September 30, 2013 was $246.06. The total intrinsic value of options exercised was approximately $177.8 million and $151.6 million for the three months ended September 30, 2013 and 2012, respectively, and $507.7 million and $423.7 million for the nine months ended September 30, 2013 and 2012, respectively. The weighted-average grant date fair value of options granted was $118.50 and $53.40 for the three months ended September 30, 2013 and 2012, respectively, and $88.91 and $61.61 for the nine months ended September 30, 2013 and 2012, respectively.
RSU Activity
A summary of RSU activity for the nine months ended September 30, 2013 is as follows:
 

16


 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Unvested—December 31, 2012
3,239,272

 
$
94.69

Granted
1,854,179

 
178.35

Vested and issued
(839,799
)
 
198.69

Canceled
(258,579
)
 
116.44

Unvested—September 30, 2013
3,995,073

 
$
130.73

Stock-Based Compensation
The following table presents the amount of stock-based compensation related to stock-based awards to employees and nonemployees on the Company’s condensed consolidated statements of operations during the periods presented (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenue
$
4,098

 
$
2,182

 
$
10,817

 
$
4,219

Sales and marketing
9,853

 
5,198

 
25,557

 
12,393

Product development
27,186

 
14,609

 
69,709

 
31,070

General and administrative
13,308

 
4,809

 
30,655

 
11,065

Total stock-based compensation
54,445

 
26,798

 
136,738

 
58,747

Tax benefit from stock-based compensation
(15,209
)
 
(6,483
)
 
(37,963
)
 
(13,086
)
Total stock-based compensation, net of tax effect
$
39,236

 
$
20,315

 
$
98,775

 
$
45,661


The Company capitalized $2.6 million and $1.1 million for the three months ended September 30, 2013 and 2012, respectively, and $6.7 million and $2.4 million for the nine months ended September 30, 2013 and 2012, respectively, of stock-based compensation as website development costs.

12.
Income Taxes
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries, as such, earnings are to be reinvested indefinitely offshore. The determination of the interim period income tax provision utilizes the effective rate method, which requires the estimation of certain annualized components of the computation of income provision, including the estimate of the annual effective tax rate by legal entity and by jurisdiction.
On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012 (the "2012 Act"). Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Act extends the research credit for two years to December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011. As a result of the retroactive extension, the Company has recognized a tax benefit of $15.5 million in the nine months ended September 30, 2013 for qualifying amounts incurred in 2012.
The Company recorded income tax expense of $8.2 million and $4.4 million for the three months ended September 30, 2013 and 2012, respectively, and $13.0 million and $20.3 million for the nine months ended September 30, 2013 and 2012, respectively. The tax provision increased in the three months ended September 30, 2013 compared to the same period last year primarily due to foreign tax losses which derive no benefit, acquisition costs, and non-deductible stock-based compensation. The tax provision decreased in the nine months ended September 30, 2013 compared to the same period last year primarily due to recognizing a benefit for the retroactive reinstatement of the 2012 Federal Research and Experimentation credit, offset by foreign tax losses which derive no benefit. The Company's foreign losses increased during the three and nine months ended September 30, 2013 compared to the same periods last year primarily due to research and development expenses which grew internationally at a rate higher than the growth rate of international revenues. International research and development expenses include costs charged by LinkedIn Corporation.

17



13.
Information About Revenue and Geographic Areas
Revenue by geography is based on the shipping address of the customer. The following tables present the Company’s revenue by product line and geographic region for the periods presented (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue by product:
 
 
 
 
 
 
 
Talent Solutions
$
224,676

 
$
138,433

 
$
614,052

 
$
362,585

Marketing Solutions
88,502

 
64,036

 
248,891

 
175,091

Premium Subscriptions
79,782

 
49,559

 
218,383

 
131,015

Total
$
392,960

 
$
252,028

 
$
1,081,326

 
$
668,691


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue by geographic region:
 
 
 
 
 
 
 
United States
$
245,302

 
$
162,377

 
$
670,982

 
$
430,479

Other Americas (1)
27,027

 
17,134

 
78,060

 
44,190

Total Americas
272,329

 
179,511

 
749,042

 
474,669

EMEA(2)
90,087

 
54,530

 
249,935

 
147,432

APAC (3)
30,544

 
17,987

 
82,349

 
46,590

Total
$
392,960

 
$
252,028

 
$
1,081,326

 
$
668,691

 __________________
(1)
Canada, Latin America and South America
(2)
Europe, the Middle East and Africa (“EMEA”)
(3)
Asia-Pacific (“APAC”)
No individual customer accounted for 10% or more of consolidated net revenue or accounts receivable for any of the periods presented.
 

18


14.
Subsequent Events

In October 2013, the Company entered into a lease with a provider of data center space for total future minimum payments of approximately $116.2 million over the next 11 years.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” below, which are incorporated herein by reference.
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 19, 2013.

Overview
We are the world’s largest professional network on the Internet and currently have more than 259 million members in over 200 countries and territories. Through our proprietary platform, members are able to create, manage and share their professional identity online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities, enabling them to be more productive and successful. We believe we are the most extensive, accurate and accessible network focused on professionals.
In the three and nine months ended September 30, 2013, we achieved significant growth as compared to the same periods in 2012 as our network of registered members and member engagement continues to increase and we continue to benefit from expanded product offerings and international expansion. Our net revenue was $393.0 million and $1,081.3 million for the three and nine months ended September 30, 2013, respectively, which represented an increase of 56% and 62%, respectively, compared to the same periods in 2012. Our future growth will depend, in part, on our ability to continue to increase our member base and member engagement on both desktop and mobile devices, as well as continuing to expand our product offerings and international expansion, which we believe will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions to new and existing customers. We expect our growth rate related to net revenue will decrease over time. Also, we believe the rate at which we are able to increase our member base and member engagement, as measured by our key metrics, will decelerate over time because of the large scale of our network, and that this may impact portions of our business.
In 2013, our philosophy is to continue to invest for long-term growth and we expect to continue to invest heavily in the following:
Talent. We expect to increase our workforce, which will result in an increase in headcount-related expenses, including stock-based compensation expense. As of September 30, 2013, we had 4,812 employees, which represented an increase of 51% compared to the same period last year.
Technology. We expect to continue to make significant capital expenditures to upgrade our technology and network infrastructure to improve the ability of our website to handle expected increases in usage, to enable the release of new features and solutions, and to scale for future growth.
Product. We expect to continue to invest heavily in our product development efforts to enable our members and customers to derive more value from our platform.
Monetization. We expect to continue to aggressively expand our field sales organization to market our solutions both in the United States and internationally.
In September 2013, we closed a follow-on offering, at which time we sold a total of 6,188,340 shares of our Class A common stock. We received total cash proceeds of $1,348.4 million, net of underwriting discounts and commissions and other costs associated with this offering.
As a result of our investment philosophy, we do not expect to be profitable on a U.S. generally accepted accounting principles (“GAAP”) basis in the fourth quarter of 2013 and we may not be profitable on a GAAP basis in 2014.

19



Key Business Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Number of Registered Members. We define the number of registered members in our network as the number of individual users who have created a member profile on our website as of the date of measurement. We believe the number of registered members is a key indicator of the growth of our network and our ability to receive the benefits of the network effects resulting from such growth. Growth in our member base depends, in part, on our ability to successfully develop and market our solutions to professionals who have not yet become members of our network. Member growth will also be contingent on our ability to translate our offerings into additional languages, create more localized products in certain key markets, and more broadly expand our member base internationally.
We believe that a higher number of registered members will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions, as customers will have access to a larger pool of professional talent. However, a higher number of registered members will not immediately increase sales, nor will a higher number of registered members in a given region immediately increase sales in that region.
The following table presents the number of registered members as of the periods presented by geographic region (certain items may not total due to rounding):
 
 
September 30,
 
 
 
2013
 
2012
 
% Change
 
(in thousands)
 
 
Members by geographic region:
 
 
 
 
 
 
 
United States
89,410

34
%
 
69,771

37
%
 
28
%
Other Americas (1)
44,679

17
%
 
29,961

16
%
 
49
%
Total Americas
134,089

52
%
 
99,732

53
%
 
34
%
EMEA (2)
78,968

30
%
 
54,877

29
%
 
44
%
APAC (3)
46,122

18
%
 
32,810

18
%
 
41
%
Total number of registered members (4)
259,179

100
%
 
187,419

100
%
 
38
%
 ______________________
(1)
Canada, Latin America and South America
(2)
Europe, the Middle East and Africa (“EMEA”)
(3)
Asia-Pacific (“APAC”)
(4)
The number of registered members is higher than the number of actual members due to various factors. For more information, see “Risk Factors—The number of our registered members is higher than the number of actual members and a substantial majority of our page views are generated by a minority of our members. Our business may be adversely impacted if we are unable to attract and retain additional members who actively use our services. In addition, the tracking of certain of our performance metrics is done with internal tools and is not independently verified.

Unique Visitors. We base unique visitors on data provided by comScore, a leading provider of digital marketing intelligence. comScore defines unique visitors as users who have visited our desktop website (which excludes mobile engagement) at least once during a month regardless of whether they are a member. We view unique visitors as a key indicator of growth in our brand awareness among users and whether we are providing our members with useful products and features, thereby increasing member engagement. We believe that a higher level of member engagement will result in increased sales of our Talent Solutions, Marketing Solutions and Premium Subscriptions, as customers will have access to a larger pool of professional talent. Growth in unique visitors will be driven by growth in the number of registered members, improvements to features and products that drive traffic to our website, and international expansion.


20


The following table presents the average monthly number of unique visitors during the periods presented:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Unique visitors (1)
184

 
134

 
37
%
 
181

 
117

 
55
%
 ______________________
(1)
Includes the impact of Slideshare, which was acquired on May 17, 2012, beginning on June 1, 2012. Excluding the impact of Slideshare, the average monthly number of unique visitors for the three and nine months ended September 30, 2013 was 142 million and 139 million, respectively.
Page Views. We base page views on data provided by comScore. comScore defines page views as the number of pages on our desktop website (excluding mobile page views) that users view during the measurement period. Similar to unique visitors, we believe page views is a key indicator for gaining insight into whether we are increasing member engagement and whether our members are deriving value from our solutions. We expect growth in page views will be driven, in part, by growth in the number of registered members, improvements in products and features that drive member traffic to our website, and international expansion. However, page views may not capture all of the value that our members and other users derive from our solutions because part of the benefit of certain products and features is that the member or user does not need to visit our website to receive value from our platform. For example, members can respond to InMails they receive from other members without accessing their LinkedIn account or our website.

The following table presents the number of page views during the periods presented:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Page Views (1)
12,206

 
9,183

 
33
%
 
36,133

 
28,030

 
29
%
______________________
(1)
Includes the impact of Slideshare, which was acquired on May 17, 2012, beginning on June 1, 2012. Excluding the impact of Slideshare, the number of page views for the three and nine months ended September 30, 2013 was 11.6 billion and 34.5 billion, respectively.
Number of LinkedIn Corporate Solutions Customers. We define the number of LinkedIn Corporate Solutions customers as the number of enterprises and professional organizations that we have under active contracts for this product as of the date of measurement. Our LinkedIn Corporate Solutions include LinkedIn Recruiter, Job Slots, LinkedIn Recruitment Media and LinkedIn Career Pages, which are all part of Talent Solutions. We believe the number of LinkedIn Corporate Solutions customers is a key indicator of our market penetration in the online recruiting market, the productivity of our field sales organization and the value that our products bring to both large and small enterprises and professional organizations. The number of customers subscribing to our LinkedIn Corporate Solutions product is particularly important to monitor given that we expect revenue from LinkedIn Corporate Solutions to continue to represent a significant portion of our total net revenue, and we are significantly investing in our ability to successfully sell unique products in a rapidly evolving market.

The following table presents the number of LinkedIn Corporate Solutions customers as of the periods presented: 
 
September 30,
 
 
 
2013
 
2012
 
% Change
 
 
 
 
LinkedIn Corporate Solutions customers
22,001

 
13,991

 
57
%
 
Sales Channel Mix. Depending on the specific product, we sell our Talent Solutions and Marketing Solutions offline through our field sales organization or online on our website. The vast majority of our Premium Subscriptions are sold online on our website. Our field sales organization uses a direct sales force to solicit

21


customers and agencies. This offline channel is characterized by a longer sales cycle where price can be negotiated, higher relative average selling prices, longer contract terms, higher selling expenses and a longer cash collection cycle compared to our online channel.
Our online sales channel allows members to purchase solutions directly on our website. Members can purchase Premium Subscriptions as well as certain lower priced products in our Talent Solutions and Marketing Solutions, such as job postings and self-service advertising. This channel is characterized by lower average selling prices and higher cancellations compared to our offline channel, lower selling costs due to our automated payments platform and a highly liquid collection cycle.

The following table presents our net revenue by field sales and online sales:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
($ in thousands)
Field sales
$
227,588

 
58
%
 
$
143,176

 
57
%
 
$
620,786

 
57
%
 
$
374,095

 
56
%
Online sales
165,372

 
42
%
 
108,852

 
43
%
 
460,540

 
43
%
 
294,596

 
44
%
     Net revenue
$
392,960

 
100
%
 
$
252,028

 
100
%
 
$
1,081,326

 
100
%
 
$
668,691

 
100
%
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA, a non-GAAP financial measure. The table below presents a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated (in thousands):
 

22


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Reconciliation of Adjusted EBITDA:
 
 
 
 
 
 
 
     Net income (loss)
$
(3,363
)
 
$
2,302

 
$
22,987

 
$
10,102

     Provision for income taxes
8,155

 
4,406

 
12,982

 
20,270

     Other (income) expense, net
(156
)
 
(672
)
 
404

 
(228
)
     Depreciation and amortization
33,767

 
23,122

 
91,766

 
55,552

     Stock-based compensation
54,445

 
26,798

 
136,738

 
58,747

     Adjusted EBITDA
$
92,848

 
$
55,956

 
$
264,877

 
$
144,443


Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, website and internal-use software development costs, leases, income taxes and legal contingencies have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
There have been no material changes to the our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed on February 19, 2013.
Recently Issued Accounting Pronouncements
Comprehensive Income
In February 2013, the Financial Accounting Standards Board issued updated authoritative guidance requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this guidance in our interim period ended March 31, 2013. The adoption of this guidance did not impact our financial results, as the guidance is related to disclosure only, and we have not had significant reclassifications out of accumulated other comprehensive income.


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Results of Operations
The following table sets forth our results of operations for the periods presented as a percentage of net revenue for those periods (certain items may not total due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(As a percentage of revenue)
Consolidated Statements of Operations Data: (1)
 
 
 
 
 
 
 
Net revenue
100
 %
 
100
%
 
100
 %
 
100
%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
14

 
13

 
13

 
13

Sales and marketing
34

 
33

 
34

 
34

Product development
27

 
29

 
26

 
27

General and administrative
16

 
13

 
15

 
13

Depreciation and amortization
9

 
9

 
8

 
8

Total costs and expenses
99

 
98

 
97

 
95

Income from operations
1

 
2

 
3

 
5

Other income (expense), net

 

 

 

Income before income taxes
1

 
3

 
3

 
5

Provision for income taxes
2

 
2

 
1

 
3

Net income (loss)
(1
)%
 
1
%
 
2
 %
 
2
%
 ______________________
(1) Certain items may not total due to rounding.

Net Revenue
We generate revenue from Talent Solutions, Marketing Solutions and Premium Subscriptions.
Talent Solutions. Revenue from Talent Solutions is derived primarily from providing access to the LinkedIn Recruiter product and job postings. We provide access to our professional database of both active and passive job candidates with LinkedIn Recruiter, which allows corporate recruiting teams to identify candidates based on industry, job function, geography, experience/education, and other specifications. Revenue from providing access to the LinkedIn Recruiter product is recognized ratably over the subscription period, which consists primarily of annual subscriptions that are billed monthly, quarterly, or annually. We also earn revenue from the placement of job postings on our website, which generally run for 30 days. Independent recruiters can pay to post job openings that are accessible through job searches or targeted job matches. Revenue from job postings is recognized as the posting is displayed or the contract period, whichever is shorter.
Marketing Solutions. Revenue from Marketing Solutions is earned from the display of advertisements (both graphic and text link) on our website primarily based on a cost per advertisement model. Revenue from internet advertising is recognized as the online advertisements are displayed on our website. The typical duration of our advertising contracts is approximately two months.
Premium Subscriptions. Revenue from Premium Subscriptions is derived from selling various subscriptions to customers that allow users to have further access to premium services via our LinkedIn.com website. We offer our members monthly or annual subscriptions. Revenue from Premium Subscriptions is recognized ratably over the contract period, which is generally one to 12 months.
 

24


 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
 
($ in thousands)
 
 
 
($ in thousands)
 
 
Revenue by product:
 
 
 
 
 
 
 
 
 
 
 
Talent Solutions
$
224,676

 
$
138,433

 
62
%
 
$
614,052

 
$
362,585

 
69
%
Marketing Solutions
88,502

 
64,036

 
38
%
 
248,891

 
175,091

 
42
%
Premium Subscriptions
79,782

 
49,559

 
61
%
 
218,383

 
131,015

 
67
%
Total
$
392,960

 
$
252,028

 
56
%
 
$
1,081,326

 
$
668,691

 
62
%
Percentage of revenue by product: (1)