Renren Could Post Weak Results In The Third Quarter

Renren Inc (NYSE:RENN) operates the Chinese social networking service Renren.com, which is similar to Facebook in China. It is expected to report its Q3 2013 results on November 27, 2013. We believe the company’s results will be weak in the third quarter, owing to pressure on both the top-line and the bottom-line. We expect a y-o-y decline in revenue during the third quarter, due to challenges in the online gaming and advertising segments. In addition, profitability will continue to be low due to investments in various growth strategies and losses from the Nuomi business.

During the earnings call, we will be keen to track how the company intends to collaborate with Baidu to enhance its market share in the group buying sector of China. We are also keen to understand how Renren aims to accelerate revenue growth in 2014 and beyond.

Recap of Q2 2013 results

Renren saw a net annual revenue growth of 10.7% in Q2 2013 to $49.6 million. It recorded strong revenue growth at its Nuomi platform (a group buying site) and other Internet value added services (which includes 56.com and jingwei.com, a professional social network) at 69.4% and 43.5% respectively. However, the top-line growth within the online gaming and online advertising segments was low on account of various challenges.

Online gaming revenue growth dropped to 1.4% annually in Q2 2013, as compared to 53% annual growth in Q1 2013. This was caused by a delay in the launch of new Android games and since certain older games reached their maturity. Online advertising revenue growth stood at a mere 4.7% and 2.4% in Q1 and Q2 respectively, due to intense competition and low mobile monetization.

Profitability continues to be a cause of concern for Renren

Renren’s operating margin dropped to -70% in Q2 2013, on account of factors such as high investments in mobile platform development, 56.com (its video vertical) and its gaming business, and due to losses from the Nuomi business. We believe these factors will continue impact the company’s profitability during the third quarter as well.

Revenue growth will be hit during the third quarter

Renren’s management forecasted annual revenue decline of 3% to 7% during the third quarter. We believe the revenue outlook at both the online gaming and online advertising segments is weak during Q3. While the company was expected to launch new games starting late in the third quarter, we believe their contribution to revenue growth during the rest of 2013 will be low, as the new games could take time to gain popularity. Similarly, the online advertising segment could continue to see headwinds due to rising competition and low mobile monetization. While Renren is expected to start selling mobile advertising at the end of Q3, we believe this new revenue channel could some time to ramp up.

However, we believe the revenue growth at both the Nuomi and other IVAS segment could be strong during the third quarter. Baidu has recently acquired a 59% stake in Nuomi, and we believe this collaboration will allow Nuomi greater financial resources to expand the platform across various cities of China. Further, the increasing popularity of 56.com will boost the revenue growth from other IVAS services.

Renren is focusing on mobile strategy in 2013

There is a rapid trend towards mobile Internet being seen in China. All the major Internet companies including Renren are making aggressive investments in mobile platform development to enhance their popularity on mobile devices. Renren is bolstering its mobile apps, mobile commerce, mobile gaming and accelerating mobile advertising to enhance growth at the mobile channel. While we do not forecast any significant revenue contribution from this strategy during the rest of 2013, a successful implementation of this strategy could lead to an acceleration of revenue growth in 2014 and beyond. We believe expenses on mobile platform development will continue to put an upward pressure on the company’s expenses during the rest of the year.

Our $3.12 price estimate for Renren, represents near 5% downside to the current market price.

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