10-Q 1 a20140331-10qdocument.htm FORM 10-Q 2014.03.31 - 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 March 31, 2014
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 April 24, 2014, there were 105,286,911 shares of the Registrant’s Class A common stock outstanding and 16,472,405 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)
 
 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
508,850

 
$
803,089

Marketable securities
1,797,373

 
1,526,212

Accounts receivable (net of allowance for doubtful accounts of $6,581 and $6,138 at March 31, 2014 and December 31, 2013, respectively)
328,661

 
302,168

Deferred commissions
46,575

 
47,496

Prepaid expenses
47,513

 
32,114

Other current assets
50,933

 
44,391

Total current assets
2,779,905

 
2,755,470

Property and equipment, net
406,543

 
361,741

Goodwill
228,893

 
150,871

Intangible assets, net
101,597

 
43,046

Other assets
44,931

 
41,665

TOTAL ASSETS
$
3,561,869

 
$
3,352,793

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
79,711

 
$
66,744

Accrued liabilities
142,141

 
183,004

Deferred revenue
479,576

 
392,243

Total current liabilities
701,428

 
641,991

DEFERRED TAX LIABILITIES
23,900

 
14,879

OTHER LONG TERM LIABILITIES
70,226

 
61,529

Total liabilities
795,554

 
718,399

COMMITMENTS AND CONTINGENCIES (Note 10)

 

REDEEMABLE NONCONTROLLING INTEREST
5,126

 
5,000

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

 
12

Additional paid-in capital
2,718,321

 
2,573,449

Accumulated other comprehensive income
682

 
314

Accumulated earnings
42,174

 
55,619

Total stockholders’ equity
2,761,189

 
2,629,394

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
$
3,561,869

 
$
3,352,793

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
March 31,
 
2014
 
2013
Net revenue
$
473,193

 
$
324,705

Costs and expenses:
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
62,455

 
42,384

Sales and marketing
166,522

 
109,417

Product development
120,622

 
80,672

General and administrative
74,618

 
42,784

Depreciation and amortization
49,740

 
25,806

Total costs and expenses
473,957

 
301,063

Income (loss) from operations
(764
)
 
23,642

Other income (expense), net
1,026

 
(308
)
Income before income taxes
262

 
23,334

Provision for income taxes
13,581

 
718

Net income (loss)
(13,319
)
 
22,616

Accretion of redeemable noncontrolling interest
(126
)
 

Net income (loss) attributable to common stockholders
$
(13,445
)
 
$
22,616

 
 
 
 
Net income (loss) per share attributable to common stockholders:
 
 
 
Basic
$
(0.11
)
 
$
0.21

Diluted
$
(0.11
)
 
$
0.20

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:
 
 
 
Basic
120,967

 
109,445

Diluted
120,967

 
115,398

See Notes to Condensed Consolidated Financial Statements

4


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2014
 
2013
Net income (loss)
$
(13,319
)
 
$
22,616

Other comprehensive income:
 
 
 
Change in unrealized gains on investments, net of tax
358

 
19

Less: reclassification adjustment for net investment (gains) losses included in net income (loss), net of tax
10

 
(18
)
Total other comprehensive income
368

 
1

Comprehensive income (loss)
(12,951
)
 
22,617

       Accretion of redeemable noncontrolling interest
(126
)
 

          Comprehensive income (loss) attributable to common stockholders
$
(13,077
)
 
$
22,617

See Notes to Condensed Consolidated Financial Statements

5


LINKEDIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Three Months Ended
March 31,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
(13,319
)
 
$
22,616

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
49,740

 
25,806

Provision for doubtful accounts and sales returns
1,207

 
1,314

Stock-based compensation
67,769

 
33,939

Excess income tax benefit from stock-based compensation
(15,982
)
 
(12,556
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(26,764
)
 
(8,849
)
Deferred commissions
1,116

 
(642
)
Prepaid expenses and other assets
(11,742
)
 
(9,398
)
Accounts payable and other liabilities
(18,428
)
 
(3,498
)
Income taxes, net
7,928

 
(4,248
)
Deferred revenue
87,333

 
59,345

Net cash provided by operating activities
128,858

 
103,829

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(88,871
)
 
(44,283
)
Purchases of investments
(737,739
)
 
(158,210
)
Sales of investments
72,239

 
59,031

Maturities of investments
393,044

 
11,230

Payments for intangible assets and acquisitions, net of cash acquired
(85,061
)
 
(226
)
Changes in deposits and restricted cash
(1,404
)
 
(55
)
Net cash used in investing activities
(447,792
)
 
(132,513
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock from employee stock options
8,147

 
12,057

Excess income tax benefit from stock-based compensation
15,982

 
12,556

Other financing activities
(7
)
 
16

Net cash provided by financing activities
24,122

 
24,629

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
573

 
(1,414
)
CHANGE IN CASH AND CASH EQUIVALENTS
(294,239
)
 
(5,469
)
CASH AND CASH EQUIVALENTS—Beginning of period
803,089

 
270,408

CASH AND CASH EQUIVALENTS—End of period
$
508,850

 
$
264,939

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accrued liabilities
$
21,242

 
$
28,071

Issuance of Class A common stock and stock options for business combinations
$
50,168

 
$

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 is the world’s largest professional network on the Internet and 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, 2013, filed on February 13, 2014.
The condensed consolidated balance sheet as of December 31, 2013, 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, comprehensive income (loss) and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2014 or any future period.
 
Principles of Consolidation
The condensed consolidated financial statements include the Company, its wholly-owned subsidiaries, and variable interest entities in which LinkedIn is the primary beneficiary in accordance with the consolidation accounting guidance. All intercompany balances and transactions have been eliminated.
Redeemable noncontrolling interest is considered to be temporary equity and is therefore reported outside of permanent equity equal to its redemption value.
 
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.
 

2.
Fair Value Measurements
The Company measures its cash equivalents, marketable securities 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.

7


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 March 31, 2014 and December 31, 2013, are summarized as follows (in thousands):
 
 
March 31, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
188,796

 
$

 
$

 
$
188,796

 
$
242,712

 
$

 
$

 
$
242,712

Commercial paper

 
33,547

 

 
33,547

 

 
15,698

 

 
15,698

U.S. treasury securities
60,373

 

 

 
60,373

 
318,495

 

 

 
318,495

U.S. agency securities

 

 

 

 

 
50,000

 

 
50,000

Repurchase agreements

 
16,500

 

 
16,500

 

 
1,400

 

 
1,400

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper

 
51,004

 

 
51,004

 

 
85,947

 

 
85,947

Certificates of deposit

 
18,032

 

 
18,032

 

 
20,025

 

 
20,025

U.S. treasury securities
624,451

 

 

 
624,451

 
149,908

 

 

 
149,908

U.S. agency securities

 
702,566

 

 
702,566

 

 
928,473

 

 
928,473

Corporate debt securities

 
385,854

 

 
385,854

 

 
326,345

 

 
326,345

Municipal securities

 
15,466

 

 
15,466

 

 
15,514

 

 
15,514

Other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative contracts

 
343

 

 
343

 

 
453

 

 
453

Total assets
$
873,620

 
$
1,223,312

 
$

 
$
2,096,932

 
$
711,115

 
$
1,443,855

 
$

 
$
2,154,970

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Foreign currency derivative contracts
$

 
$
1,161

 
$

 
$
1,161

 
$

 
$
1,129

 
$

 
$
1,129

Total liabilities
$

 
$
1,161

 
$

 
$
1,161

 
$

 
$
1,129

 
$

 
$
1,129

 
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 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 March 31, 2014 and December 31, 2013, the Company had outstanding foreign currency derivative contracts with a total notional amount of $149.2 million and $94.8 million, respectively.


8


3.
Acquisitions
Bright
On February 28, 2014, LinkedIn completed its acquisition of Bright Media Corporation ("Bright"), a San Francisco, California-based privately held online job board with candidate matching capabilities. LinkedIn's purchase price of $101.8 million for all the outstanding shares of capital stock of Bright consisted of $51.6 million in cash and 241,875 shares of LinkedIn Class A common stock. LinkedIn also issued 11,702 stock options related to assumed Bright equity awards. The fair value of the earned portion of assumed stock options of $0.8 million is included in the purchase price, with the remaining fair value of $1.4 million representing 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 Bright 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 purchase price allocation is pending the finalization of deferred tax calculations and residual goodwill. Bright'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 Bright employees, LinkedIn offered $2.6 million in cash and 55,186 shares of non-vested Class A common stock with a total fair value of $11.3 million that will be earned over three years from the date of acquisition. As the cash and equity awards are subject to post-acquisition employment, the Company is accounting for them as post-acquisition compensation expense.

The following table presents the purchase price allocation initially recorded in the Company's condensed consolidated balance sheets on the acquisition date (in thousands):
 
 
Total
Net tangible assets
 
$
900

Goodwill (1)
 
75,022

Identified developed technology (2)
 
32,200

Net deferred tax liability
 
(6,315
)
Total purchase price (3) 
 
$
101,807

 _______________________
(1)
The goodwill represents the excess value over both tangible and intangible assets acquired. 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)
The identified developed technology has an estimated useful life of 3.0 years, which will be amortized on a straight-line basis.
(3)
Subject to adjustment based on (i) purchase price adjustment provisions and (ii) indemnification obligations of the acquired company stockholders.

Supplemental information on an unaudited pro forma basis, as if the Bright acquisition had been consummated on January 1, 2013, is presented as follows (in thousands, except per share amounts):
 
Three Months Ended
March 31,
 
2014
 
2013
Revenue
$
474,316

 
$
326,504

Net income (loss) per share attributable to common stockholders
(17,263
)
 
19,013

Net income (loss) per share attributable to common stockholders - diluted
$
(0.14
)
 
$
0.14


These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not necessarily indicative of the Company's consolidated results of operations in future periods or the results that actually would have been realized had it been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of developed technology, severance and benefit arrangements in connection with the acquisition, and stock-based compensation expenses for assumed unearned stock options and restricted stock units ("RSUs").


9


Other acquisition

The Company completed one other acquisition for total cash consideration of $4.0 million, which resulted in goodwill of $3.0 million and developed technology of $1.0 million. The developed technology has an estimated useful life of 2.0 years, which will be amortized on a straight-line basis.

4.
Cash and Investments
The following table presents cash, cash equivalents and available-for-sale investments for the periods presented (in thousands): 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Market
Value
March 31, 2014:
 
 
 
 
 
 
 
Cash
$
209,634

 
$

 
$

 
$
209,634

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
188,796

 

 

 
188,796

Commercial paper
33,543

 
4

 

 
33,547

U.S. treasury securities
60,372

 
1

 

 
60,373

Repurchase agreements
16,500

 

 

 
16,500

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
50,972

 
32

 

 
51,004

Certificates of deposit
18,025

 
7

 

 
18,032

U.S. treasury securities
624,291

 
160

 

 
624,451

U.S. agency securities
702,053

 
563

 
(50
)
 
702,566

Corporate debt securities
385,506

 
438

 
(90
)
 
385,854

Municipal securities
15,449

 
18

 
(1
)
 
15,466

Total cash, cash equivalents, and marketable securities
$
2,305,141

 
$
1,223

 
$
(141
)
 
$
2,306,223

December 31, 2013:
 
 
 
 
 
 
 
Cash
$
174,784

 
$

 
$

 
$
174,784

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
242,712

 

 

 
242,712

Commercial paper
15,696

 
2

 

 
15,698

U.S. treasury securities
318,500

 

 
(5
)
 
318,495

U.S. agency securities
50,000

 

 

 
50,000

Repurchase agreements
1,400

 

 

 
1,400

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
85,930

 
18

 
(1
)
 
85,947

Certificates of deposit
20,025

 
2

 
(2
)
 
20,025

U.S. treasury securities
149,845

 
67

 
(4
)
 
149,908

U.S. agency securities
928,371

 
410

 
(308
)
 
928,473

Corporate debt securities
326,027

 
399

 
(81
)
 
326,345

Municipal securities
15,504

 
14

 
(4
)
 
15,514

Total cash, cash equivalents, and marketable securities
$
2,328,794

 
$
912

 
$
(405
)
 
$
2,329,301



10


The following table presents available-for-sale investments by contractual maturity date (in thousands) as of March 31, 2014: 
 
Amortized
Cost
 
Estimated
Fair Market
Value
Due in one year or less
$
1,047,066

 
$
1,047,400

Due after one year through two years
749,230

 
749,973

Total
$
1,796,296

 
$
1,797,373



5.
Property and Equipment
The following table presents the detail of property and equipment, net, for the periods presented (in thousands): 
 
March 31,
2014
 
December 31,
2013
Computer equipment
$
379,455

 
$
347,545

Software
42,099

 
32,103

Capitalized website and internal-use software
91,845

 
80,074

Furniture and fixtures
37,342

 
28,786

Leasehold improvements
137,709

 
116,887

Total
688,450

 
605,395

Less accumulated depreciation
(281,907
)
 
(243,654
)
Property and equipment, net
$
406,543

 
$
361,741

 



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, 2013
$
150,871

2014 acquisitions
78,022

Goodwill—March 31, 2014
$
228,893


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
March 31, 2014:
 
 
 
 
 
 
 
Developed technology
$
70,652

 
$
(19,932
)
 
$
50,720

 
2.5 years
Trade name
7,000

 
(3,453
)
 
3,547

 
1.7 years
Patents
46,556

 
(1,635
)
 
44,921

 
11.0 years
Customer relationships
1,200

 
(440
)
 
760

 
3.2 years
Other intangible assets
6,711

 
(5,062
)
 
1,649

 
1.8 years
Total
$
132,119

 
$
(30,522
)
 
$
101,597

 
6.2 years
December 31, 2013:
 
 
 
 
 
 
 
Developed technology
$
37,452

 
$
(16,340
)
 
$
21,112

 
2.2 years
Trade name
7,000

 
(2,869
)
 
4,131

 
1.9 years
Patents
16,398

 
(1,261
)
 
15,137

 
11.1 years
Customer relationships
1,200

 
(380
)
 
820

 
3.4 years
Other intangible assets
6,705

 
(4,859
)
 
1,846

 
2.0 years
Total
$
68,755

 
$
(25,709
)
 
$
43,046

 
5.4 years

Amortization expense was $4.8 million and $2.8 million for the three months ended March 31, 2014 and 2013, respectively. Estimated amortization expense of purchased intangible assets for future periods as of March 31, 2014 is as follows (in thousands):
Year Ending December 31,
Amortization expense
Remainder of 2014
$
21,594

2015
25,997

2016
18,441

2017
6,131

2018
4,242

Thereafter
24,771

Total
$
101,176

 

12


7.
Accrued Liabilities
The following table presents the detail of accrued liabilities for the periods presented (in thousands):
 
March 31,
2014
 
December 31,
2013
Accrued vacation and employee-related expenses
$
77,671

 
$
64,757

Accrued incentives
19,528

 
60,081

Accrued commissions
12,051

 
32,218

Accrued sales tax and value-added taxes
9,345

 
10,851

Other accrued expenses
23,546

 
15,097

Total
$
142,141

 
$
183,004


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
March 31,
 
2014
 
2013
Interest income
$
1,005

 
$
470

Net gain (loss) on foreign exchange and foreign currency derivative contracts
25

 
(933
)
Net realized gain on sales of marketable securities
14

 
3

Other non-operating income (expense), net
(18
)
 
152

Total other income (expense), net
$
1,026

 
$
(308
)

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.
Immediately prior to the consummation of the Company’s initial public offering ("IPO") of its Class A common stock in May 2011, all outstanding shares of preferred stock and common stock were converted to Class B common stock. As a result, 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 attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to common stockholders 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 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 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 for that computation.



13


The following table presents the calculation of basic and diluted net income (loss) per share per share attributable to common stockholders (in thousands, except per share data):
 
Three Months Ended
March 31,
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
(11,570
)
 
$
(1,875
)
 
$
18,614

 
$
4,002

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
104,100

 
16,867

 
90,077

 
19,368

Basic net income (loss) per share attributable to common stockholders
$
(0.11
)
 
$
(0.11
)
 
$
0.21

 
$
0.21

Diluted net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
$
(11,570
)
 
$
(1,875
)
 
$
18,614

 
$
4,002

Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
(1,875
)
 

 
4,002

 

Reallocation of undistributed earnings to Class B shares

 

 

 
738

Allocation of undistributed earnings
$
(13,445
)
 
$
(1,875
)
 
$
22,616

 
$
4,740

Denominator:
 
 
 
 
 
 
 
Number of shares used in basic calculation
104,100

 
16,867

 
90,077

 
19,368

Weighted-average effect of dilutive securities
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
Conversion of Class B to Class A common shares outstanding
16,867

 

 
19,368

 

Employee stock options

 

 
4,995

 
4,818

RSUs and other dilutive securities

 

 
958

 

Number of shares used in diluted calculation
120,967

 
16,867

 
115,398

 
24,186

Diluted net income (loss) per share attributable to common stockholders
$
(0.11
)
 
$
(0.11
)
 
$
0.20

 
$
0.20


The following weighted-average employee equity awards were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented (in thousands):
 
Three Months Ended
March 31,
 
2014
 
2013
Employee stock options
3,671

 
257

RSUs
1,204

 
451

Total
4,875

 
708

 
10.
Commitments and Contingencies
Aggregate Future Lease Commitments
The Company leases its office facilities and data centers 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 and data centers having initial terms in excess of one year as of March 31, 2014 are as follows (in thousands):
 

14


Year Ending December 31,
Operating  Leases (1)
Remainder of 2014
$
60,622

2015
105,981

2016
106,416

2017
96,263

2018
86,406

Thereafter
542,384

Total minimum lease payments
$
998,072

 __________________
(1)
Subsequent to March 31, 2014, the Company leased additional office space to be developed in San Francisco, California. The Company estimates the aggregate future minimum lease payments of approximately $336.3 million will begin in early 2016. The lease is expected to expire in 2027.
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 costs are significant. 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.
Indemnifications
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 claims made by third parties. In these circumstances, payment 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 may vary.
 
11.
Stockholders’ Equity
Common Stock
As of March 31, 2014, the Company had 105,044,670 shares and 16,613,979 shares of Class A common stock and Class B common stock outstanding, respectively. As of December 31, 2013, the Company had 103,194,534 and 17,157,215 shares of Class A common stock and Class B common stock outstanding, respectively.


15


Stock Option Activity
A summary of stock option activity for the three months ended March 31, 2014 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, 2013
5,130,636

 
$
34.54

 
 
 
 
Assumed options from acquisition
11,702

 
12.11

 
 
 
 
Granted
265,761

 
203.70

 
 
 
 
Exercised
(669,189
)
 
12.17

 
 
 
 
Canceled or expired
(40,012
)
 
37.44

 
 
 
 
Outstanding—March 31, 2014
4,698,898

 
$
47.22

 
6.58
 
$
653,112

Options vested and expected to vest as of March 31, 2014
4,517,093

 
$
43.30

 
6.50
 
$
644,798

Options vested and exercisable as of March 31, 2014
2,781,058

 
$
14.56

 
5.64
 
$
473,961

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 March 31, 2014 was $184.94. The total intrinsic value of options exercised was approximately $128.1 million and $182.3 million for the three months ended March 31, 2014 and 2013, respectively.
RSU Activity
A summary of RSU activity for the three months ended March 31, 2014 is as follows:
 
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Unvested—December 31, 2013
4,048,089

 
$
144.53

Granted
1,075,250

 
202.07

Released
(341,658
)
 
121.83

Canceled or expired
(111,755
)
 
126.67

Unvested—March 31, 2014
4,669,926

 
$
159.86


16


Stock-Based Compensation
Beginning in the first quarter of 2014, the Company transitioned from using the simplified method for calculating the expected term of options as described in the SEC's Staff Accounting Bulletin No. 107, Share-Based Payment, because it now believes there is sufficient historical information to derive a reasonable estimate. The calculation considers a combination of historical and estimated future exercise behavior.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented, excluding assumed acquisition-related stock options:
 
 
Three Months Ended
March 31,
 
2014
 
2013
Volatility
46%
 
54%
Expected dividend yield
 
Risk-free rate
1.12%
 
1.13%
Expected term (in years)
4.00
 
6.28
The weighted-average grant date fair value of options granted, excluding assumed acquisition-related stock options was $75.15 and $88.16 per share for the three months ended March 31, 2014 and 2013, respectively. The weighted-average grant date fair value of assumed acquisition-related stock options granted was $192.20 per share for the three months ended March 31, 2014. There were no assumed acquisition-related stock options granted for the three months ended March 31, 2013.
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
March 31,
 
2014
 
2013
Cost of revenue
$
5,836

 
$
2,806

Sales and marketing
12,181

 
6,861

Product development
33,126

 
17,638

General and administrative
16,626

 
6,634

Total stock-based compensation
67,769

 
33,939

Tax benefit from stock-based compensation
(18,778
)
 
(9,289
)
Total stock-based compensation, net of tax effect
$
48,991

 
$
24,650


The Company capitalized $2.7 million and $1.5 million for the three months ended March 31, 2014 and 2013, 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. As a result of the retroactive extension, the Company recognized a tax benefit of $14.0 million in the three months ended March 31, 2013 for qualifying amounts incurred in 2012. However, the federal research credit has not been extended for new research activities incurred after December 31, 2013 and as such, the Company will not have a similar tax benefit in fiscal 2014.

17


The Company recorded income tax expense of $13.6 million and $0.7 million for the three months ended March 31, 2014 and 2013, respectively. The tax provision increased in the three months ended March 31, 2014 compared to the same period last year primarily due to the expiration of the research tax credit for activities incurred after December 31, 2013, foreign tax losses which derive no benefit, acquisition costs, and non-deductible stock-based compensation. The Company's foreign losses increased during the three months ended March 31, 2014 compared to the same period last year primarily due to international research and development expenses, which had a higher growth rate than international revenues. International research and development expenses include costs charged by LinkedIn Corporation.

13.
Information About Revenue and Geographic Areas
Revenue by geography is generally 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
March 31,
 
2014
 
2013
Net revenue by product:
 
 
 
Talent Solutions
$
275,875

 
$
184,284

Marketing Solutions
101,783

 
74,796

Premium Subscriptions
95,535

 
65,625

Total
$
473,193

 
$
324,705

 
Three Months Ended
March 31,
 
2014
 
2013
Net revenue by geographic region:
 
 
 
United States
$
284,878

 
$
201,403

Other Americas (1)
31,904

 
24,176

Total Americas
316,782

 
225,579

EMEA(2)
117,871

 
75,157

APAC (3)
38,540

 
23,969

Total
$
473,193

 
$
324,705

 __________________
(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 April 2014, the Company leased additional office space to be developed in San Francisco, California. The Company estimates the aggregate future minimum lease payments of approximately $336.3 million will begin in early 2016. The lease is expected to expire in 2027.

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, 2013, filed on February 13, 2014.

Overview
We are the world’s largest professional network on the Internet and currently have more than 300 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 months ended March 31, 2014, we achieved significant growth as compared to the same period in 2013 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 $473.2 million for the three months ended March 31, 2014 which represented an increase of 46% compared to the same period in 2013. Our future growth will depend, in part, on our ability to continue to increase our member base and member engagement on both mobile and desktop 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. As our net revenue increases, 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 2014, 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 March 31, 2014, we had 5,416 employees, which represented an increase of 43% 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, specifically around mobile, to enable our members and customers to derive more value from our platform. Mobile continues to be the fastest growing channel for member engagement, growing nearly three times the rate of our internally measured unique visiting members, which we internally track and define as the monthly average number of members who have visited LinkedIn.com on either mobile or desktop environments at least once during a month. Mobile unique visiting members represent 43% of unique visiting members in the three months ended March 31, 2014.
Monetization. We expect to continue to aggressively expand our field sales organization to market our solutions both in the United States and internationally.
As a result of our investment philosophy, we may not be profitable on a U.S. generally accepted accounting principles (“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 LinkedIn.com 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):
 
 
March 31,
 
 
 
2014
 
2013
 
% Change
 
(in thousands)
 
 
Members by geographic region:
 
 
 
 
 
 
 
 
 
United States
99,449

 
34
%
 
78,021

 
36
%
 
27
%
Other Americas (1)
51,016

 
17
%
 
36,299

 
17
%
 
41
%
Total Americas
150,465

 
51
%
 
114,320

 
52
%
 
32
%
EMEA (2)
92,835

 
31
%
 
65,635

 
30
%
 
41
%
APAC (3)
53,166

 
18
%
 
38,314

 
18
%
 
39
%
Total number of registered members (4)
296,466

 
100
%
 
218,269

 
100
%
 
36
%
 ______________________
(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 report our unique visitors based 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
March 31,
 
 
 
2014
 
2013
 
% Change
 
(in millions)
 
 
Unique visitors (1)
186

 
170

 
9
%
______________________
(1)
Includes the impact of Slideshare Inc. ("Slideshare"), which was acquired on May 17, 2012. Excluding the impact of Slideshare, the average monthly number of unique visitors for the three months ended March 31, 2014 and 2013 was 142 million and 132 million, respectively.


Page Views. We report our page views based 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
March 31,
 
 
 
2014
 
2013
 
% Change
 
(in millions)
 
 
Page Views (1)
12,157

 
11,622

 
5
%
______________________
(1)
Includes the impact of Slideshare, which was acquired on May 17, 2012. Excluding the impact of Slideshare, the number of page views for the three months ended March 31, 2014 and 2013 was 11.5 billion and 11.1 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, with the exception of LinkedIn Recruitment Media, which is currently part of Marketing Solutions. We believe the number of LinkedIn Corporate Solutions customers is an indicator of our market penetration in the online recruiting market and the value that our products bring to both large and small enterprises and professional organizations.

The following table presents the number of LinkedIn Corporate Solutions customers as of the periods presented: 
 
March 31,
 
 
 
2014
 
2013
 
% Change
 
 
 
 
LinkedIn Corporate Solutions customers
25,844

 
18,138

 
42
%
 
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 customers and agencies. This offline channel is characterized by a longer sales cycle where price can be

21


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, or self-service, 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
March 31,
 
2014
 
2013
 
($ in thousands)
Field sales
$
275,262

 
58
%
 
$
183,971

 
57
%
Online sales
197,931

 
42
%
 
140,734

 
43
%
     Net revenue
$
473,193

 
100
%
 
$
324,705

 
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
March 31,
 
2014
 
2013
Reconciliation of Adjusted EBITDA:
 
 
 
     Net income (loss)
$
(13,319
)
 
$
22,616

     Provision for income taxes
13,581

 
718

     Other (income) expense, net
(1,026
)
 
308

     Depreciation and amortization
49,740

 
25,806

     Stock-based compensation
67,769

 
33,939

     Adjusted EBITDA
$
116,745

 
$
83,387



Critical Accounting Policies and Estimates
Our condensed 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 condensed 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, 2013 filed on February 13, 2014.


23


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. The period-to-period comparison of financial results is not necessarily indicative of future results.
 
 
Three Months Ended
March 31,
 
2014
 
2013
 
(As a percentage of revenue)
Condensed Consolidated Statements of Operations Data: (1)
 
 
 
Net revenue
100
 %
 
100
 %
Costs and expenses:
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
13

 
13

Sales and marketing
35

 
34

Product development
25

 
25

General and administrative
16

 
13

Depreciation and amortization
11

 
8

Total costs and expenses
100

 
93

Income (loss) from operations

 
7

Other income (expense), net

 

Income before income taxes

 
7

Provision for income taxes
3

 

Net income (loss)
(3
)
 
7
 %
Accretion of redeemable noncontrolling interest

 

Net income (loss) attributable to common stockholders
(3
)%
 
7
 %
 ______________________
(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 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
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Revenue by product:
 
 
 
 
 
Talent Solutions
$
275,875

 
$
184,284

 
50
%
Marketing Solutions
101,783

 
74,796

 
36
%
Premium Subscriptions
95,535

 
65,625

 
46
%
Total
$
473,193

 
$
324,705

 
46
%
Percentage of revenue by product: (1)
 
 
 
 
 
Talent Solutions
58
%
 
57
%
 
 
Marketing Solutions
22
%
 
23
%
 
 
Premium Subscriptions
20
%
 
20
%
 
 
Total
100
%
 
100
%
 
 
  ______________________
(1) Certain items may not total due to rounding.
Total net revenue increased $148.5 million in the three months ended March 31, 2014 compared to the same period last year. Net revenue from our Talent Solutions increased $91.6 million in the three months ended March 31, 2014 compared to the same period last year. The increase was driven by increased spending by existing customers as well as generating business with new customers, as evidenced by the 42% increase in the number of LinkedIn Corporate Solutions customers as of March 31, 2014 compared to March 31, 2013.
Net revenue from our Marketing Solutions increased $27.0 million in the three months ended March 31, 2014 compared to the same period last year primarily due to the introduction of our Sponsored Updates product in our field sales and self-service channels, which was launched in the third quarter of fiscal 2013, and to a lesser extent sales of our display advertising products. Sponsored Updates allows marketers to show paid content in LinkedIn members' update feeds. Sponsored content represents 19% of Marketing Solutions revenue and we expect it to continue to represent a larger percentage of Marketing Solutions revenue as we continue to gain traction in our shift to content marketing.
Net revenue from our Premium Subscriptions increased $29.9 million in the three months ended March 31, 2014 compared to the same period last year as a result of an increase in the number of premium subscribers in part driven by higher member engagement. Specifically, the number of registered members is a meaningful metric in evaluating and understanding net revenue from our Premium Subscriptions because an increase in the number of registered members has historically led to a proportionate increase in the number of premium subscribers. In addition, our Sales Solutions products, which include Sales Navigator, are continuing to grow at a faster rate than our other Premium Subscription products as well as continuing to represent a larger percentage of total Premium Subscriptions revenue.
The following table presents our net revenue by geographic region:
 
 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Revenue by geographic region:
 
 
 
 
 
United States
$
284,878

 
$
201,403

 
41
%
Other Americas (1)
31,904

 
24,176

 
32
%
Total Americas
316,782

 
225,579

 
40
%
EMEA (2)
117,871

 
75,157

 
57
%
APAC (3)
38,540

 
23,969

 
61
%
Total
$
473,193

 
$
324,705

 
46
%
 ______________________
(1)
Canada, Latin America and South America
(2)
Europe, the Middle East and Africa (“EMEA”)
(3)
Asia-Pacific (“APAC”)

25



International revenue increased $65.0 million in the three months ended March 31, 2014 compared to the same period last year. International revenue represented 40% of total revenue in the three months ended March 31, 2014 compared to 38% in the three months ended March 31, 2013. The increase in international revenue, in absolute dollars and as a percentage of total revenue, is primarily due to the expansion of our international field sales organization and our site localization efforts. As of March 31, 2014, we operated our websites and mobile applications in 22 languages, and continued our expansion outside of the United States. We expect international revenue to increase on an absolute basis and as a percentage of revenue in 2014 as we continue to focus expanding our sales force outside the United States in key markets where our member engagement supports business efforts at scale.
The following table presents our net revenue by geographic region, by product:
 
 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Revenue by geographic region, by product:
 
 
 
 
 
United States
 
 
 
 

Talent Solutions
$
171,477

 
$
119,993

 
43
%
Marketing Solutions
57,964

 
43,603

 
33
%
Premium Subscriptions
55,437

 
37,807

 
47
%
Total United States revenue
$
284,878

 
$
201,403

 
 
International
 
 
 
 
 
Talent Solutions
$
104,398

 
$
64,291

 
62
%
Marketing Solutions
43,819

 
31,193

 
40
%
Premium Subscriptions
40,098

 
27,818

 
44
%
Total International revenue
$
188,315

 
$
123,302

 
 
 
 
 
 
 
 
Total
$
473,193

 
$
324,705

 
 
Cost of Revenue
Our cost of revenue primarily consists of salaries, benefits and stock-based compensation for our production operations, customer support, infrastructure and advertising operations teams and web hosting costs related to operating our website. Credit card processing fees, sales taxes, allocated facilities costs and other supporting overhead costs are also included in cost of revenue. Consistent with our investment philosophy for 2014, we currently expect cost of revenue to increase on an absolute basis and remain relatively flat as a percentage of revenue.
 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Cost of revenue
$
62,455

 
$
42,384

 
47
%
Percentage of net revenue
13
%
 
13
%
 
 
Headcount (at period end)
838

 
529

 
58
%
Cost of revenue increased $20.1 million in the three months ended March 31, 2014 compared to the same period last year. The increase was primarily attributable to increases in headcount related expenses of $12.2 million, web hosting service expenses of $4.5 million, and facilities and related costs of $3.0 million.

26


Sales and Marketing
Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include customer acquisition marketing, branding, advertising, public relations costs, and commissions paid to agencies, as well as allocated facilities and other supporting overhead costs. We plan to continue to invest heavily in sales and marketing to expand our global footprint, grow our current customer accounts and continue building brand awareness. Consistent with our investment philosophy for 2014, we expect sales and marketing expenses to increase on an absolute basis and decrease slightly as a percentage of revenue. 
 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Sales and marketing
$
166,522

 
$
109,417

 
52
%
Percentage of net revenue
35
%
 
34
%
 
 
Headcount (at period end)
2,309

 
1,656

 
39
%
Sales and marketing expenses increased $57.1 million in the three months ended March 31, 2014 compared to the same period last year. The increase was primarily attributable to an increase in headcount related expenses of $48.4 million as we continue to expand our field sales organization. We also experienced increases in facilities and related costs of $3.0 million and consulting services of $2.3 million.
Product Development
Our product development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers and developers. In addition, product development expenses include outside services and consulting, as well as allocated facilities and other supporting overhead costs. We believe that continued investment in features, software development tools and code modification is important to achieving our strategic objectives. Consistent with our investment philosophy for 2014, we expect to continue to invest heavily in product development; therefore, we expect product development expense to increase on an absolute basis and increase slightly as a percentage of revenue.

 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Product development
$
120,622

 
$
80,672

 
50
%
Percentage of net revenue
25
%
 
25
%
 
 
Headcount (at period end)
1,482

 
1,059

 
40
%
Product development expenses increased $40.0 million in the three months ended March 31, 2014 compared to the same period last year. The increase was primarily attributable to an increase in headcount related expenses of $36.5 million as a result of our focus on developing new features and products to encourage member growth and engagement. We also experienced increases in facilities and related costs of $2.6 million.
General and Administrative
Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, information technology, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, and facilities and other supporting overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase on an absolute basis in 2014 and remain relatively flat as a percentage of revenue. In particular, we anticipate that costs related to legal proceedings will increase as we are, and expect to continue to be, subject to increasing litigation and compliance requirements. 
 

27


 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
General and administrative
$
74,618

 
$
42,784

 
74
%
Percentage of net revenue
16
%
 
13
%
 
 
Headcount (at period end)
787

 
535

 
47
%
General and administrative expenses increased $31.8 million in the three months ended March 31, 2014 compared to the same period last year. The increase was primarily a result of an increase in headcount related expenses of $22.3 million to support our overall growth. We also experienced increases in legal and consulting services of $6.9 million.
Depreciation and Amortization
Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, leasehold improvements, capitalized software development costs and amortization of purchased intangibles. We expect that depreciation and amortization expenses will increase on an absolute basis and remain relatively flat as percentage of revenue as we continue to expand our technology and facilities infrastructure. 
 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Depreciation and amortization
$
49,740

 
$
25,806

 
93
%
Percentage of net revenue
11
%
 
8
%
 
 
Depreciation and amortization expenses increased $23.9 million in the three ended March 31, 2014 compared to the same periods last year. The increase in depreciation expense of $22.0 million in the three months ended March 31, 2014 was primarily a result of our continued investment in expanding our technology infrastructure in order to support continued growth in our member base, and to a lesser extent, increases in amortization of acquired intangible assets of $2.0 million.
Other Income (Expense), Net
Other income (expense), net consists primarily of the interest income earned on our investments and foreign exchange gains and losses. Hedging strategies that we have implemented or may implement to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. 
 
Three Months Ended
March 31,
 
2014
 
2013
 
($ in thousands)
Interest income
$
1,005

 
$
470

Net gain (loss) on foreign exchange and foreign currency derivative contracts
25

 
(933
)
Net realized gain on sales of marketable securities
14

 
3

Other non-operating income (expense), net
(18
)
 
152

Total other income (expense), net
$
1,026

 
$
(308
)
Other income (expense), net increased $1.3 million in the three months ended March 31, 2014 compared to the same period last year. The increase was primarily due to decreases in foreign exchange losses and interest earned on higher investment balances compared to the same period last year.
Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions. We expect that our provision for income taxes may equal or exceed income before taxes in fiscal year 2014.
 

28


 
Three Months Ended
March 31,
 
 
 
2014
 
2013
 
% Change
 
($ in thousands)
 
 
Provision for income taxes
$
13,581

 
$
718

 
1,792
%
Income tax expense increased $12.9 million in the three months ended March 31, 2014 compared to the same period last year primarily due to the expiration of the research tax credit applicable to activities incurred after December 31, 2013, foreign tax losses which derive no benefit, acquisition costs, and non-deductible stock-based compensation. Foreign tax losses increased during the three months ended March 31, 2014 compared to same period last year primarily due to international research and development expenses, which had a higher growth rate than international revenues. International research and development expenses include costs charged by LinkedIn Corporation.

Liquidity and Capital Resources
 
Three Months Ended
March 31,
 
2014
 
2013
 
(in thousands)
Condensed Consolidated Statements of Cash Flows Data:
 
 
 
Purchases of property and equipment
$
88,871

 
$
44,283

Depreciation and amortization
49,740

 
25,806

 
 
 
 
Cash flows provided by operating activities
$
128,858

 
$
103,829

Cash flows used in investing activities
(447,792
)
 
(132,513
)
Cash flows provided by financing activities
24,122

 
24,629

As of March 31, 2014, we had cash and cash equivalents of $508.9 million and marketable securities of $1,797.4 million. Our cash equivalents and marketable securities are comprised primarily of U.S. agency securities, U.S. treasury securities, corporate debt securities, money market funds and commercial paper. As of March 31, 2014, the amount of cash and cash equivalents held by foreign subsidiaries was $184.0 million. If these funds are needed for our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries. The income tax liability would be insignificant if these earnings were to be repatriated. We believe that our existing cash and cash equivalents and marketable securities balances, together with cash generated from operations, will be sufficient to meet our working capital expenditure requirements for at least the next 12 months.
Operating Activities
Operating activities provided $128.9 million of cash in the three months ended March 31, 2014. The cash flow from operating activities consisted primarily of the changes in our operating assets and liabilities, with deferred revenue increasing $87.3 million, partially offset by an increase accounts receivable of $26.8 million, an increase in excess tax benefit from stock-based compensation of $16.0 million, which is reclassified as a financing activity, an increase in accounts payable and other liabilities of $18.4 million and an increase in prepaid expenses and other assets of $11.7 million. The increase in our deferred revenue was primarily due to increases in transaction volumes in the three months ended March 31, 2014. We had a net loss in the three months ended March 31, 2014 of $13.3 million, which included non-cash stock-based compensation of $67.8 million and non-cash depreciation and amortization of $49.7 million.
Operating activities provided $103.8 million of cash in the three months ended March 31, 2013, as a result of our improved operating performance compared to the same period last year. The cash flow from operating activities consisted primarily of the changes in our operating assets and liabilities, with deferred revenue increasing $59.3 million, partially offset by an increase in excess tax benefit from stock-based compensation of $12.6 million, which is reclassified as a financing activity, an increase in accounts receivable of $8.8 million, an increase in prepaid expenses and other assets of $9.4 million and a decrease in accounts payable and other liabilities increasing $3.5 million. The increases in our deferred revenue and accounts receivable were primarily due to increases in transaction volumes in the three months ended March 31, 2013. We had net income in the three months ended March 31, 2013 of $22.6 million, which included non-cash stock-based compensation of $33.9 million and non-cash depreciation and amortization of $25.8 million.

29


Investing Activities
Our primary investing activities have consisted of purchases of investments, purchases of property and equipment specifically related to the build out of our data centers, as well as payments for intangible assets and strategic acquisitions. We also continued to invest in technology hardware to support our growth, software to support website functionality development, website operations and our corporate infrastructure. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software development. We expect to continue to invest in property and equipment and development of software in 2014.
In the three months ended March 31, 2014, we had net purchases of investments of $272.5 million, purchases of property and equipment of $88.9 million, and payments for intangible assets and acquisitions, net of cash acquired of $85.1 million. In the three months ended March 31, 2013, we had net purchases of investments of $87.9 million and purchases of property and equipment of $44.3 million.

Financing Activities
In the three months ended March 31, 2014 and March 31, 2013, our financing activities consisted primarily of net proceeds from the issuance of common stock from employee stock option exercises, as well as the excess tax benefit from stock-based compensation.

Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of March 31, 2014.

Contractual Obligations
We lease office space for our headquarters in Mountain View, California, under operating leases that we expect to expire in 2023. We lease other facilities around the world, including office space in Sunnyvale, California, to be constructed by our landlord, the longest of which expires in 2026. We have several material long-term purchase obligations outstanding with third parties. We do not have any debt or material capital lease obligations. As of March 31, 2014, the following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
 
 
Payments Due by Period
 
Total
 
Less Than
1 Year
 
1 - 3
Ye