Renren Q3 Earnings Preview: Continued Losses Likely, New Strategy For Gaming

Chinese social network Renren (NYSE: RENN) is slated to release its third quarter earnings on November 20. In their last quarterly earnings call, the company’s management suggested that revenue could decline on a year-on-year basis in Q3. ^[1] In this article we review the primary drivers for the company, the new areas where Renren is looking to invest and its strategies for the future.

We have a price estimate of slightly over $3.50 for Renren, which is nearly 25% higher than the current market price.

See our complete analysis of Renren here

Softness In Advertising Revenues To Continue

One of the major sources of revenue for Renren is advertising on its social networking site. The site is popular among college students, so FMCG (Fast Moving Consumer Goods) companies, whose ads target young people more than others, have been very active advertisers on the platform. This had resulted in a steady stream of ad revenues for Renren. ^[2]

Recently, however, ad revenues have taken a hit. This is attributable to two factors, namely the shift to mobile and fierce competition. Renren’s registration process for mobile phones is complicated, as it seeks to verify the user’s real identity. Mobile phone users who do not want to register or use their real names have migrated from Renren to competitors. As a consequence, while other Chinese online companies have been growing their user bases, Renren’s has stagnated. ^[1]

Game Subscription Revenues To Suffer

Renren announced that it would be restructuring its games division this quarter. It is halting in-house development of games and instead looking to source games from other publishers. The company will be letting go of its game development employees. In the transition from in-house development to the new process, game revenues are expected to take a hit, as new game releases halt. Game revenues constitute over 52% of Renren’s total revenues. ^[1]

Renren’s Strategies For The Future

Renren is looking to invest in third party game studios. This is a move inspired by the altered game publishing landscape that has come about in China. Historically, a few large game developers created the games that became successful. However, there are now over 10,000 game developers creating games. Some of them release small titles which, if they become hits, are used to promote more monetizable games, like Lado did with its game Temple Run. Renren feels this ecosystem offers it the option to choose from a larger set of games to operate. To have a more complete set of offerings, they also want to tie-up with large game developing companies to release their role playing games (RPG) through Renren. ^[1]

Renren also has a two-pronged strategy for entering the educational space, since most of its users are college students. The first aspect is in entering social finance with educational loans. Initially, Renren will use its large cash reserves to fund this lending venture. Renren believes it has insight into the behavior of college students and will be able to judge their worthiness for loans based on their social network activity. The second aspect of the strategy relates to online courses leveraging gamification of learning. The precedent of this approach lies in a social quiz game that Renren developed for iOS which received considerable traction among users, making it a top two app. It leverages the social aspects of learning through a quiz game. Renren seeks to extend this approach to make online study sustainable and effective by keeping learners engaged through socializing the e-learning process. ^[1]

Summary Outlook For Earnings

Renren’s revenue for this quarter is expected to continue its declining trend. The company has given a guidance of $19-21 million, nearly half of the Q3 2014 figure. The analysts consensus estimate compiled by Bloomberg is about $20 million. In the absence of gains from sales of equity investments that salvaged the second quarter’s bottom line, the operating losses are expected to translate to  a greater net loss for Renren in Q3. Even with an equity sale gain of about $21 million, Renren’s Q2 loss stood at around $9 million. Most of this $9 million loss, however, was due to discontinued operations, which shouldn’t have as big of an impact on the bottom line in the third quarter. The company will also report some gains on the sale of its video hosting site 56.com (see Renren Sells 56.com To Sohu). On the other hand, a one-time loss relating to the restructuring of its gaming division and severance costs is expected to weigh on the bottom line. Management has, however, expressed comfort with this erosion of cash and said that they are willing to take the longer term view with regard monetization from their shift to mobile, investments in new verticals and the new strategy in gaming. ^[1]

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1. Renren Q2 2014 Earnings Conference Call Transcript [↩] [↩] [↩] [↩] [↩] [↩]
2. ref :1 [↩]