Nuomi’s Sale Will Lift Renren’s Margins Even As Top-line Slumps

by Trefis Team
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Renren Inc (NYSE:RENN), which operates a Facebook-like social network in China, is slated to report its results for the fourth quarter and full year 2013 on Tuesday, March 18. The company witnessed its revenues decline by 5.6% year on year to $47.6 million in Q3 due to challenges in both online advertising and gaming businesses. Online advertising suffered due to weak mobile monetization, while online gaming suffered due to a delay in game launches. [1]

The company expects to register 36% to 41% year-on-year decline in revenues in Q4 owing to continued weakness in its advertising and gaming businesses and sale of Nuomi – Renren’s group buying business. Baidu acquired a majority stake (59%) in Nuomi last year for $160 million. As a result of the acquisition, Nuomi will bring in revenues for Renren only for one month of the uarter. Baidu bought out the remaining stake in Nuomi from Renren in January this year for an undisclosed amount.

Nuomi has been facing huge losses since inception due to intense competition in the group buying industry, which also weighed on Renren’s profitability in the third quarter. Renren’s operating margin declined to -74.7% in Q3 from -41% in the year-ago period. The sale of Nuomi will offer some relief to investors from Renren’s declining profitability. However, the company intends to increase its investments in marketing its new games and its new mobile app for Renren social network. We believe that growing expenditures cap the scope for profit margin enhancement.

Our price estimate of $3.12 for Renren is at a discount of about 15% to its current market price. We are yet to adjust our model for Renren for the recent sale of Nuomi to Baidu.

Advertising Business To Remain Suppressed Due To Low Monetization On Mobile And Declining PC Inventory

Users spend 80% of their time on Renren via mobile devices. Despite this, mobile accounted for less than 10% of Renren’s online advertising revenues in Q3, because the company only launched mobile advertising towards the end of the third quarter. Also, the adoption of mobile advertising is very low in China. Renren’s total revenues from online advertising came in at $14.9 million in Q3, down by 11.2% year on year, on account of the lower monetization on mobile devices. [1]

Renren is bolstering its mobile apps, mobile commerce and mobile gaming to enhance growth in the mobile channel. While we do not forecast any significant revenue contribution from this strategy in the near term, a successful implementation could lead to an acceleration of revenue growth in the longer run. Until then, the company needs to address concerns related to PC advertising. Demand for PC advertising has been declining due to a rising proportion of traffic coming from mobile. Renren’s competitors, Weibo and WeChat, have done well to overcome such problems by focusing on e-commerce. We think that Renren needs to think on similar lines.

Online Gaming To Be Impacted By Delay In Game Pipeline

Renren’s online gaming revenue fell by 16.9% year over year in the third quarter to $20.1 million, due to a delay in the launch of new games and maturity of certain older games. While the company released some new games for beta-testing at the end of the third quarter, it quickly realized that those games needed further development. [1] We believe the revenue growth in this segment will continue to be weak in the next couple of quarters, as the new games could take time to ramp up and gain popularity. Renren is also promoting ‘Ader’, a mobile gaming advertising exchange network, to market its own games and allow other companies to advertise on this platform. We believe that the company will continue to expand this platform by entering the Android market and by leveraging data analytics capabilities.

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Notes:
  1. Renren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 28, 2013 [] [] []
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