Delay In New Game Launches, Low Mobile Monetization Pulls Down Renren’s Q2’14 Earnings

Renren Inc (NYSE:RENN, China’s largest social networking site, announced its unaudited Q2 2014 earnings on August 25. In line with company expectations, revenues declined 42.5% annually to $25 million. At $11.7 million, the company’s online advertising revenue decreased 23.9% annually on account of rising competition and the low monetization of its mobile platform. Delays in launching successful new titles lowered gaming revenue by a staggering 56.6% annually. Renren’s operating loss increased from $25.9 million to $30.4 billion. However, net income attributable to the company stood at $31.3 million as compared to a net loss of $9.3 million in Q2 2013, primarily due to the $86 million gain on the sale of short-term investments.

Renren has been struggling since the last few quarters due to intense competition in the advertising industry, low monetization on mobile devices and a delay in launching new games. It has restructured its highest revenue generating business, online gaming (accounts for over 50% of its revenue), and intends to launch new games in the latter half of the year, which should help the company arrest the fall in revenues in subsequent quarters. However, the company anticipates its revenue in the current quarter to decline between 48.9% to 53.8% year-over-year as the new games are likely to take time to ramp up and gain popularity. Additionally, considering that Renren is still in the early phases of expanding its mobile advertising business, improving its mobile monetization will also take time.

We are in the process of updating our $3.40 price estimate for Renren.

See our complete analysis of Renren here

Challenges In Monetizing The Mobile Platform

In its Q2 2014 earnings call, Renren mentioned that it is facing challenges in monetizing most of its assets, especially the mobile platform. The adoption of mobile advertising in China is still relatively low and the company only started selling mobile ads in the final quarter of 2013. Even though users spend 80% of their time on Renren via mobile devices, mobile accounts for only 11% of Renren’s online advertising revenue. 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 is still in the early phases of expanding its mobile advertising business. It 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, we believe a successful implementation could lead to an acceleration of revenue growth in the longer run.

Focus On The Young Demographic Can Increase User Base

Renren made a strategic shift to focus on college students and young generations in China at the beginning of 2014. The company considers the same to be an important demographic which can help accelerate its growth in the future. It claims to have made some progress on the strategy in the first half of 2014 and plans to continue innovating to better cater to this segment in the future as well.

The active user base on Renren.com has more than doubled since 2009 and stood at 206 million users in 2013. This rapid growth can be attributed to the increasing penetration of real-name social networks and the absence of Facebook in China. Since 2011, Renren’s user base has increased by about 19% annually while the monthly unique logins has grown only by 9%. ^[1] The company claims that its monthly active users did not grow fast enough in Q2 2014 due to the rising competition.

We expect Renren’s active user base to grow in the future, albeit at a slower pace due to increasing competition from other social networking sites such as Sina Weibo and Tencent Weibo.

New Games Will Take Time To Ramp Up

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 consequent delay in launching these games, along with the maturity of certain older games, has weighed on Renren’s top line over the last couple of quarters. Games net revenue stood at $9.9 million in Q2 2014, 56.6% lower than Q2 2013. The decrease was mainly due to previously launched games having entered into mature stages and the fact that the restructuring of Renren’s gaming business since late 2013 has yet to result in the launch of successful new titles.

The company plans to launch some new games in the second half of 2014. 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.

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1. Renren Form 20-F, Renren Investor Relations, 2013 [↩]