Challenges In Online Advertising And Gaming Will Sink Renren’s Results

Renren Inc (NYSE:RENN), which operates a Facebook-like social network in China, is slated to report its results for the first quarter of fiscal year 2014 on Wednesday, May 21. Owing to challenges in both the online advertising and the gaming business the company’s revenues declined by 29% year on year in the last quarter. Renren expects to generate between $23 million and $25 million in Q1 2014, representing a decline of 40%-45% since the company’s gaming pipeline is loaded for the latter half of the year. ^[1]

Renrens operating loss widened to $42.6 million in Q4 2013 from $22.7 million in the corresponding period of 2012 due to the slump in its top-line. However, $133 million in gains from the sale of its group buying business, Nuomi, to Baidu helped the company to make up for the loss and post net profit of $101.5 million. ^[1] Now that Nuomi no longer exists with Renren, we think that the company can focus on its core businesses, which are the Renren social network and online gaming.

We will update our $3.43 price estimate for Renren after the upcoming results announcement.

See our complete analysis of Renren here

Weak Mobile Monetization To Hamper Sale Of Advertisements

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. That’s because the adoption of mobile advertising in China is low and the company only  started selling mobile ads in the final quarter of 2013. Renren is still in the early phases of expanding its mobile advertising business. Its revenues from online advertising stood 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 and online payment. We feel that Renren needs to think on similar lines.

Gaming Business To Be Hurt By Delay In Game Pipeline

Some new games were beta-tested by Renren at the end of Q3 last year, 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 are likely to 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 think that the company will continue to expand this platform by entering the Android market and by leveraging data analytics capabilities.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

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