LinkedIn’s Mounting Challenges With Large Address Books

Researcher eMarketer projects ad revenues from social networks to grow to $5.54 billion this year and double by 2013. Although half of the current year spending is in the U.S., researchers expect that trend to shift to a point that the non-U.S. market will account for 52% of the market. They expect the professional social network LinkedIn to account for $249.6 million in ad revenues worldwide by 2013, compared with $140.8 million expected this year. Although growth at the site will continue, it will do so at a much slower pace.

LinkedIn’s Financials
LinkedIn’s (NYSE:LNKD) Q3 revenues grew 126% over the year to $139.5 million and were ahead of the market’s expectations of $127.6 million. Loss of $0.02 per share was ahead of the market’s expectations of a loss of $0.04 per share. During the quarter, LinkedIn added 15.4 million users, ending the quarter with 131.2 million members, representing 63% growth over the year.

Revenues from recruiting tools grew 160% over the year to $71 million, marketing solution revenues grew 113% to $40.1 million, and premium subscriptions revenues were up 81% over the year to $28.4 million.

A recent comScore report estimates that the number of unique visitors to the site increased 64% over the year to an average of 87.6 million. In September, LinkedIn was ranked the 34th most-visited website globally, 20 positions ahead of the previous year’s ranking. Page views grew 51% over the year to 7.6 billion.

For the current quarter LinkedIn expects revenues of $154 million-$158 million and EBITDA of $19 million-$21 million. They expect to end the year with revenues of $508 million-$512 million with EBITDA of $83 million-$85 million. They plan to raise additional funding through sale of another $100 million of common stock in the coming quarters.

LinkedIn’s International Growth
LinkedIn has been focused on international markets and recently launched operations in Japan, making the site their first Asian-language platform. LinkedIn claims to have more than 20 million users in the Asia Pacific region and is looking to grow that number through the expansion. LinkedIn is now available in 10 languages, with more expected to be added in the coming quarters. Earlier this year, they launched their website in Russian, Romanian, and Turkish. At the end of the quarter, international members were 59% of their member base, compared with 53% a year ago. International markets contributed 33% to the quarter’s revenues, up from 26% last year.

They are also opening an office in Brazil, where they currently have more than 4 million users. Brazil and Mexico are among their fastest-growing countries.

LinkedIn’s Expanding Community
Besides growing internationally, LinkedIn recently added a new category of profiles to attract more visitors. This summer, they launched profile sections designed for students who may or may not have previous professional experience. They followed that up with a data-driven tool that lets members see their alumni to facilitate networking with them and to explore possible career opportunities. The profile is seeing good traction with the number of graduate members growing at more than twice the rate of the overall LinkedIn member base.

They also introduced a new tool, Talent Pipeline, a new tool for recruiters that will let them manage talent leads in one place. Since many candidates on LinkedIn are not actively applying to an opening, it is difficult to track them on a company’s applicant tracking system. The new tool lets recruiters import leads and resumes, search, update, and tag the leads with additional information, and share them across the organization.

LinkedIn’s Acquisitions
LinkedIn is also growing inorganically and recently acquired IndexTank and Connected. IndexTank is a real-time hosted search engine service provider that lets developers build search-based applications without hosting their own search software. LinkedIn hopes to leverage IndexTank’s real-time feed indexing, geo search, automatic faceting, and range search technology to strengthen their professional search engine.

Connected is a social CRM tool for very small businesses. Their tool helps professionals build, maintain, and leverage a user’s contacts available online on Gmail, Google Contacts, LinkedIn, Facebook, and Twitter. Since the product’s launch in 2010, Connected reportedly manages more than 11 million contacts. Through the acquisition of this small business contact management system, LinkedIn may be putting together their own CRM tool for small businesses.

Their stock is trading at $82.37 with a market capitalization of $7.93 billion. It touched a high of $122.70 in May of this year, shortly after the IPO.

Despite the excellent growth, I think, LinkedIn needs to pay attention to their scaling challenges. I was a paying subscriber of LinkedIn’s premium service, but I canceled my subscription because LinkedIn has not been able to address problems with my account. It turns out that my account is heavily networked, as it has more than 6,800 connections. I was one of the earliest adopters of the service back in 2003. However, LinkedIn seems to be having difficulty with the members who have large address books. They need to fix this as soon as possible, or else they will kill one of their golden geese: people like me who bring on huge numbers of new people, keep them engaged, and, when the service performs to satisfaction, are willing to pay for it.