Renren’s Top-Line Growth Hurt By Delays In Its Gaming Pipeline

Renren Inc (NYSE:RENN) operates the Chinese social networking service Renren.com, which is similar to Facebook in China. It posted net revenue growth of 10.7% annually to $49.6 million in Q2 2013. The company’s revenue growth was impacted by delays in its Android gaming pipeline and low mobile monetization.

We are disappointed by these earnings results on account of the negative sales growth forecast in Q3 and Renren’s low profitability. While the gross margin rose from 62% in Q2 2012 to 64%, its operating margin slid to -70% during the quarter and its operating loss was $34.7 million in Q2 2013. The profitability was impacted by factors such as high investments in its mobile strategy, 56.com (its video vertical) and the gaming business as well as losses from the Nuomi business (its social commerce service). We expect these factors to impact its profitability during the rest of the year as well.

Performance At Different Business Segments

Online Gaming Revenue Hurt By Delays, Challenges To Continue In The Third Quarter

Online game revenues rose by 1.4% annually to $22.8 million. This revenue growth was much lower as compared to around 53% annual growth seen in the previous quarter. The revenue growth was impacted by a delay in the launch of new Android games and due to certain older games reaching their maturity. The company expects to launch new games starting late in the third quarter. We believe the revenue growth in this segment will be slower in the next two quarters as the new games could take time to ramp up and gain popularity.

Renren is also enhancing its mobile gaming advertising exchange network ‘Ader’ by expanding into the Android market and boosting its data analytic capabilities. The company uses Ader to promote its games and also allows third-party companies to advertise on this network.

Challenges In The Online Advertising Market Are Expected To Continue For The Rest Of The Year

Online advertising revenues grew by 2.4% annually to $15.4 million. The slow revenue growth can be attributed to intense competition and low mobile monetization. While the company expects to start selling mobile advertising at the end of third quarter, we believe these challenges will continue to impact the revenue growth at this segment during the rest of the year.

Nuomi Expansion Could Boost Growth, But It Will Continue To Impact Profitability

Nuomi net revenues rose by 69.4% annually to $6.2 million as the company continues to expand this service across China. This service is now active in more than 80 cities in China as compared to 59 cities in the first quarter. Most business metrics improved healthily in this segment in the second quarter as the company is making various investments to boost its market share. Due to this massive expansion, we expect this business to remain unprofitable in 2013. We think the profitability in this segment could improve later in 2014 with the ongoing consolidation in the group buying sector.

Other IVAS Revenues Showed Significant Growth

Other Internet value added service revenue (which includes 56.com and jingwei.com, a professional social network) posted 43.5% y-o-y rise to $5.2 million. This growth was driven by the rising popularity of Woxiu, a virtual talent show service on 56.com.

Mobile Platform Development Represents A Key Strategy For Renren In 2013

Renren is heavily focusing on its mobile platform development in line with the trend towards mobile Internet being seen in China. Mobile time penetration rose to 77% as compared to 74% in the first quarter. ^[1] The company launched around several updates to its iOS and Android applications during the quarter to improve their user experience. Renren aims to start selling mobile advertising by the end of Q3, through news feed and sponsor stories. We do not expect any significant revenue from this strategy during this year as it will take time to ramp up. However, successful implementation of this strategy could help in acceleration of revenue growth starting 2014.

Renren is also focusing on mobile commerce and mobile gaming to bolster its growth. We believe the company’s mobile initiatives will result in higher R&D as well as sales and marketing expenses for the year.

Outlook For Q3 2013

– Revenue in the range of $47 million and $49 million, representing an annual decline of 3% to 7%.

We are in the process of updating our price estimate for Renren’s stock.

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1. Renren Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 15, 2013 [↩]