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Renren Inc (NYSE:RENN) operates the Chinese social networking service Renren.com, which is similar to Facebook in China. Its total net revenue grew by 45.2% annually in Q1 2013 to $46.6 million, which exceeded the initial guidance of 37%-43% revenue growth projected by the company. Strong growth in its gaming business helped the company achieve this performance.
While Renren’s profitability remains weak, it is showing some signs of improvement. Its gross margin increased from 61.1% in Q1 2012 to 64.4% in Q1 2013 on account of higher revenues from gaming and Nuomi business (its social commerce service). Moreover, the operating margin rose from -64.1% in Q1 2012 to -58.9% in Q1 2013. The company continues to be unprofitable mainly on account of investments in R&D (primarily related to mobile strategy) and 56.com (its video vertical), as well as losses from Nuomi business.
We expect Renren to post strong revenue growth at its gaming and Nuomi businesses in the future. The outlook for online advertising revenues is uncertain due to low mobile monetization. The Nuomi business is expected to remain unprofitable in the near future, as the company will ramp up its investments to expand into new cities.
Revenue And Other Metrics At Different Businesses
Online game revenues rose by 52.9% annually in Q1 2013 to $26.7 million, on account of success of in-house cross-platform games. Revenues of other Internet value added services (which include 56.com, a video hosting service and jingwei.com, a professional social network) increased by 80.4% annually to $5 million.
Online advertising revenues increased by 4.7% y-0-y to reach $9.8 million in Q1 2013. The increase in online advertising revenues is encouraging considering these revenues had fallen by 17% annually in Q4 2012. The user growth on Renren.com was moderate during the quarter on account of intense competition from WeChat (a mobile messaging application). The number of activated users on Renren.com increased from 178 million at the end of Q4 2012 to 184 million as of March 31, 2012. Monthly unique log in users rose slightly from 56 million in December 2012 to 57 million in March 2013.
Nuomi’s net revenue grew by 102% y-o-y to reach $5.1 million in Q1 2013. We expect this division to post strong revenue growth in the coming quarters.
Business Strategy Associated With Different Business Groups
Gaming – Android market will be the key driver for growth in the future
Renren is focusing on the Android market to achieve further growth in its gaming business. It will launch various games dedicated to this market during the year, and it will also modify its existing games to work with Android devices. In the earnings call, Renren stated that its upcoming games pipeline for Android devices got delayed in H1 2013, and the company expects to ramp up in the second half of the year. While the Android gaming market is highly fragmented, Renren aims to achieve a leading position in this market in the future.
Renren also aims to leverage its mobile gaming advertising exchange network ‘Ader’ to achieve growth within the segment. The company promotes its games using this network and it also allows marketers to advertise on this network.
Nuomi – Profitability will be ditched for market share in the coming quarters
In the last quarter, Renren’s management had stated that it has the option to either make its Nuomi business profitable by the end of 2013, or continue investing to gain additional market share. In the latest earnings call, the company mentioned that it will invest heavily in this business during the coming quarters to expand into new cities. In view of this guidance, we expect the Nuomi business to remain unprofitable in 2013.
Online Advertising will remain challenging in the near term
While online advertising revenues showed positive revenue growth during the quarter, the market conditions remain challenging in the near term. Increased competition and low mobile monetization mainly contribute to this outlook. In Q1 2013, mobile devices accounted for 74% of the total user time spent on Renren platform. The outlook for this segment is uncertain for the rest of the year as mobile monetization is expected to remain low in the near future.
Update On Mobile Strategy
As the Chinese Internet industry is undergoing transition with an increasing number of users utilizing mobile devices to access the internet, Renren is focusing on mobile platform development to achieve further growth. The company aims to improve the efficiency of its mobile investments by focusing on key areas such as Renren SNS mobile, Nuomi mobile and mobile gaming initiatives where it has higher probability of success. It is also exploring growth in other new areas such as Jingwei mobile app, by adopting an entrepreneurial payoff structure to contain costs.
The company aims to introduce mobile updates more frequently in the future. Its mobile upgrades will feature more communication based features, as the company is witnessing a trend towards social messaging at mobile devices.
Outlook for Q2 2013
– Revenue in the range of $55-57 million, representing an annual growth rate of 23% to 27%.
We are in the process of revising our $3.17 price estimate for Renren’s stock.