Why LinkedIn Surprised Wall Street (And Us)

LinkedIn released their earnings on Thursday, beating estimates. They showed faster-than-expected growth in all segments, particularly premium subscriptions (60% growth, vs a 37% projection) and marketing (111% growth, versus 58% expected). As we have previously argued, LinkedIn is making a useful and aggressive push towards being the “Twitter of business.” Their Twitter partnership refers more traffic to some blogs than Twitter.com itself, and their recent decision to hire former Fortune editor and Wired writer Dan Roth to manage their content shows a commitment to that side of the business.

Those interim indicators—key hires, accelerating outbound clicks—should have indicated that LinkedIn would generate more pageviews, probably selling slightly cheaper ads against them, and end up net growing that part of the business.

That’s not what LinkedIn is reporting, though.

Instead, they say that their pageviews were constant, at 7.1bn this quarter and last quarter. Instead, they’re arguing that this was entirely driven by higher RPMs—$3.36 this quarter versus $2.81, assuming all of these pageviews are monetized through ads. Here’s how they explain the pageview jump:

Page views jumped to 80% to 7.1 billion during the course of the second quarter. Page view growth slightly trailed unique visitor growth due in large part to the fact that new users generally have a lower level of engagement when compared to more mature and the second quarter saw record levels of new members and unique visitors to the site.

Odd. Some possibilities:

• LinkedIn reports ComScore numbers for pageviews. Third party measurements aren’t always accurate. Perhaps ComScore was too optimistic last quarter and too pessimistic this quarter. (Then there’s the question of why management is elaborately explaining a measurement error that they themselves should be aware of.)
• LinkedIn has done some one-time ad deals that temporarily boosted revenue per pageview by 20%, but that won’t last.
• Their user mix has broadened away from job-seekers and HR professionals, both of which are narrow markets who are easier to saturate with ads. The typical LinkedIn pageview is more likely to be generated by a random professional—a doctor, lawyer, or accountant—who can be sold a wider variety of more expensive ads.

Based on their prior reported data, LinkedIn’s RPM has fluctuated between $3.77 (Q3 2010) and $5.43 (last quarter). It was $5.16 in Q4 2009, the earliest quarter for which data is available. Our best guess: between ComScore fuzziness and the still early stage of this business, it’s extremely tough to predict what RPMs will look like from quarter to quarter. A fair estimate would have pageviews rising faster than the current trend (both because downside measurement error won’t necessarily persist and because LinkedIn is, based on other anecdotal and direct evidence, generating more pageviews) and RPM to drop. Another 111% gain compared to the prior year is less likely.

LinkedIn remains in the tragic position of being a great company that is recognized as such by the market. 120% revenue growth is great, but at 2500X earnings, it’s hard to find anything appealing about LinkedIn that the market isn’t already aware of.