Renren Posts Disappointing Results Along With Weak Guidance
Renren Inc (NYSE:RENN), which operates a Facebook-like social network in China, posted weak results in Q3 2013, in line with our expectations. Its total net revenue dropped by 5.6% annually to $47.6 million, due to challenges in both the online advertising and gaming businesses. The guidance was also disappointing, as the company’s management expects top line to fall by 32% to 37% on an annual basis during the fourth quarter (excluding Nuomi revenues). [1]
The profitability also fell during the quarter. While the gross margin improved slightly to 63.1% in Q3 2013 from 61.4% in prior year, the operating margin declined from -41% to -74.7%- during the same period. This resulted in a net loss of $24.6 million during the third quarter. We expect the profitability pressure to remain during the coming quarters, as expense growth could continue to outpace rise in revenue. We believe the revenue outlook is negative in the short run, owing to continuing challenges in the online advertising and gaming segments.
Online Advertising Segment Is Facing Pressure Due To Low Mobile Monetization And Increasing Competition
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Online advertising revenue fell by 11.2% annually to $14.9 million, on account of increasing competition and lower monetization on mobile devices. Renren is bolstering its social networking mobile app with advanced communication features to enhance its appeal and popularity among the younger generation of China. It started selling mobile advertising at the end of Q3, with features such as banner advertising, sponsor stories and news feed. [1] However, the adoption of mobile advertising continues to be low, and we believe that the revenue growth in this segment will not accelerate until mobile advertising gains more acceptance within China.
Increasing competition from WeChat and Weibo is having an impact as well, which Renren will have to address to enhance its revenue growth in this segment. Accumulated activated users on Renren.com rose from around 172 million at the end of Q3 2012 to around 200 million at the end of Q3 2013. We believe the user base growth on this platform in the future will be impacted by rising competition.
Online Gaming Segment Is Facing Headwinds Associated With Delay In Gaming Pipeline
Online gaming revenue decreased by 16.9% year over year to $20.1 million, due to a delay in the launch of new games and the maturity of certain older games. While the company released certain new games for beta-testing at the end of the third quarter, it quickly realized that those games needed further development. Recently, the company undertook a restructuring of its gaming business to devote greater resources to its in-house studios for developing high-quality games, which have a higher success rate. We believe the revenue growth at this segment will continue to be weak in the coming quarters, as the new games could take time to ramp up performance.
Nuomi Segment And Other Internet-Value Added Services (IVAS) Showed Revenue Growth
Nuomi (a group-buying site) net revenue rose by 36% annually to $6.5 million. Recently, the company sold a majority stake (59%) in this business to Baidu, and this merger was closed at the end of October. Hence, Renren’s revenue in Q4 will only include a single month of Nuomi revenue. We believe Renren made the right move by selling off a majority stake in Nuomi, as it was incurring large losses on this business. We believe this move will help Renren to enhance its focus on its core businesses of social networking and mobile gaming.
Other IVAS revenues (which includes 56.com and jingwei.com, a professional social network) grew by 32.1% annually to $6.1 million. Rising popularity of a talent show service ‘ Woxiu’ on 56.com contributed to this performance. The company is focusing on user-generated content (UGC) and partner-generated content (PGC) to raise the adoption of its online video service. We believe this segment will continue to see strong revenue growth in the future.
We are in the process of revising our $3.12 price estimate for Renren.
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Notes:- Renren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 28, 2013 [↩] [↩]