Weak Mobile Monetization And Game Restructuring Hurt Renren’s Results
Renren Inc (NYSE:RENN) continued to disappoint investors by posting a 40% year-on-year decline in revenues ($24.9 million) for the first quarter of 2014. The company has been struggling due to intense competition in the advertising industry, low monetization on mobile devices and delays in game launches. It does not expect the second quarter to be any better since it has provided guidance for revenue decline in the range of 47%-52%. However, the company also restructured its highest revenue generating business, online gaming, and intends to launch new games in the latter half of the year which should help it arrest the fall in revenues in subsequent quarters. [1]
Renren’s operating loss widened to $29.2 million in Q1 from $20.4 million in the corresponding period of 2013 due to the slump in its top line. However, $57.1 million in gains from the sale of its remaining interest in the group buying business, Nuomi, to Baidu helped the company to make up for the loss and post net profit of $32.3 million. [1] Now that Nuomi no longer exists within Renren, we think that the company can focus on its core businesses, which are the Renren social network and online gaming.
We are in the process of adjusting our $3.43 price estimate for Renren based on the recently announced results, and also for the sale of Nuomi to Baidu.
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See our complete analysis of Renren here
Enhancing Mobile Monetization Capabilities Is The Key To Growth
Even though users spend 80% of their time on Renren via mobile devices, mobile accounts for only 11% 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 total revenues from online advertising stood at $7.8 million in Q1, down by 19% 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 and expand into newer verticals.
Restructuring Activities Should Revive Gaming Business
There has been a shift in the online gaming industry from PC to mobile. The mobile gaming market is growing at a very fast pace and is expected to double by the end of this year. That’s because mobile devices are increasingly being used to access the Internet, and the cost of developing mobile games is much lower than developing PC games. [1] Historically, Renren has relied on in-house developed games to generate revenue. The rapidly growing mobile gaming market offers an opportunity to the company to generate incremental revenues by licensing high quality games from other developers. The company restructured its gaming business in Q4 2013 and Q1 2014 to evolve into such a company.
Renren’s online gaming revenues declined by 53% in Q1 to $12.7 million due to the restructuring, and also because the company did not launch any new games in the quarter. It plans to launch four in-house games in the second half of the year. It will also begin licensing games from third-parties. We believe that gaming revenues 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. [1]
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