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Hey, LinkedIn: Where Did Those Profitable Years Go?

LinkedIn filed for its IPO yesterday, right on the heels of the Demand Media (DMD) IPO. Aside from the timing, there is something else the two companies have in common. Both claimed a number of years of profitability that their S-1 filings proved were as empty as a vacuum.

When Demand filed its S-1 -- SEC paperwork required for a coming IPO -- some noticed that years of claimed profits were a sham:

In multiple interviews with various publications over the past couple of years, Rosenblatt stated that Demand Media is profitable and suggested that revenue reached about $200 million in 2009. We took his word for it, as we're forced to do with privately held companies.

So when Demand Media filed for an IPO on Friday, we eagerly pored through the 187-page filingâ€"only to find that while the company's revenue last year was close to $200 million its bottom line was deep in the red.

LinkedIn hasn't been that much in the red -- only few million a year, which is good for this type of startup. And the first nine months of 2010 suggest a profit of $10.1 million for the period, although $8.2 million is then given to preferred stockholders. But nine months isn't a year (no telling what expenses might hit at the end), and other than a small net income in 2007 (all given to preferred stockholders), it wasn't in the black since 2005. Below is the table from the S-1 (edited to add the highlight and to remove some blank space in the center because of size constraints - click on the table to have it open in full size):

For those squinting at the table, here's a summary of the results by year:

  • 2005: -$5,312,000
  • 2006: -$677,000
  • 2007: +$328,000
  • 2008: -$4,522,000
  • 2009: -$3,973,000
  • 2010 (first 9 months): +$10,068,000
Yes, 2010 is off to a good start for the company. And yet, like Demand, LinkedIn repeatedly claimed to have been continuously profitable since 2006:
  • In a May 2007 blog post, the company claimed to be in the black. Interesting that the company's fiscal year ends on December 31. At least this was a year when the claim, even if premature, would be correct.
  • In February 2009, in an interview with TechCrunch, LinkedIn founder Reid Hoffman said, "We've been profitable for the last two years, so when we want to IPO we can do that." That was in early 2009, so two years of profitability had to refer to 2007 (profit of $328,000) and 2006 (loss of $677,000).
  • In an August 2009 interview with Business Insider, when asked by Nicholas Carlson if the company was "still profitable," LinkedIn CEO Jeff Weiner said that it was. That would mean a claim of profitability through at least 2008.
  • In June 2010, Weiner dropped by the Business Insider offices and apparently again said that the company remained profitable. That would take the claim through 2009.
In its S-1 filing, LinkedIn presents numbers both using regulation GAAP accounting and also a measure it calls "adjusted EBITDA," which it defines as "net income (loss), plus: provision for income taxes, other income (expense), net, depreciation and amortization, and stock-based compensation."

The company says that the measurement "can provide a useful measure for period-to-period comparisons of our core business." Undoubtedly it can. But it ignores some significant expenses and provides enormous swings in how the company appears to do. Here's a table from the S-1 comparing the values (click on the table to expand it):

Adjusted EBITDA is clearly not the same as profit and loss. You can't ignore major expenses and then pretend that you're profitable. And even though LinkedIn's exaggerations were not as extreme as those of Demand Media, calling itself profitable was still outright false.

Clearly some companies will make any public claims that they think will serve their purposes. Reporters are often either too credulous or they report profitability claims as something companies say without an emphasis that there is no hard proof and that you may not be able to tell if this CEO is one willing to lie through his or her teeth. So I suggest the following wording as a way of more accurately indicating what is really going on:

The company claims to be profitable but would not submit financials to prove that management is not a lying sack of opportunistic dog turds.
Simple, no?

I have an email in to LinkedIn for a comment. Here's what I got in response:

Because we have filed our S-1 and are now in registration, we won't be able to answer questions or provide further comment.
Back to the new standard for comments.


Image: morgueFile user mensatic.
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