Renren’s Results Continue To Disappoint Investors

Renren Inc (NYSE:RENN), the operator of a Facebook-like social networking site in China, posted another quarter of weak results. Net revenues declined by 29% year on year to $30.7 million in the final quarter of 2013. Although this was in line with the company’s guidance, its stock price dropped by over 10% post the results announcement because the company told investors to expect the decline to continue in the current quarter. Renren estimates that revenues will fall by more than 40% in Q1 2014 since its gaming pipeline is loaded for the latter half of the year. ^[1]

Due to continued weakness in the advertising and the gaming segments, Renrens operating loss widened to $42.6 million in Q4 from $22.7 million in the corresponding period of 2012. The $133 million gain from the sale of its group buying business, Nuomi, helped the company to cover up the loss and post net profit of $101.5 million. ^[1] Now that Nuomi has been sold to Baidu, we think that Renren can focus on its core businesses which are Renren social network and online gaming.

We are in the process of adjusting our $3.12 price estimate for Renren based on the recently announced results. We will adjust our model for the sale of Nuomi after the company files its annual report for 2013.

Better Distribution Of High Quality Games Could Revive Gaming Division

Some new games were beta-tested by Renren at the end of the third quarter, and the company realized that those games needed further development. A delay in launching these games, along with the maturity of certain older games, has weighed on the company’s top-line over the last couple of quarters. Renren’s online gaming revenues slumped by about 40% in Q4 to $15.6 million. The company now intends to focus on creating and licensing high quality games. ^[1] We believe that revenues in the online gaming segment will continue to be weak in the next few quarters, as the new games could take time to ramp up and gain popularity.

Renren works closely with leading Android app stores such as 91 Wireless to distribute its games. The company is now promoting Ader, a mobile gaming advertising exchange network, to market its own games and to 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.

Mobile Monetization Issues Will Continue To Burden Renren

Even though users spend 80% of their time on Renren via mobile devices, mobile accounts for less than 10% of the company’s online advertising revenues due to low adoption of mobile advertising in China. Renren’s total revenues from online advertising came in at $10.2 million in Q4, down by 18% year on year. ^[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 increasing competition in the advertising space and 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 feel that Renren needs to think on similar lines.

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1. Renren’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, March 19, 2014 [↩] [↩] [↩] [↩]