Renren’s Q2’14 Earnings Preview: No Significant Improvement Expected In The Quarter

China’s largest social networking site,  Renren Inc (NYSE:RENN) is set to announce its Q2 2014 earnings on August 26. The company 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. In Q1 2014, Renren reported a 40% year-on-year decline in revenues and its operating loss widened to $29.2 million, compared to $20.4 million in Q1 2013. It does not expect to see much improvement in Q2 2014 and anticipates revenue to decline in the range of 47%-52%.

Renren 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. ^[1] Additionally, now that Renren has sold its remaining interest in the group buying business (Nuomi) to Baidu, it can focus on its core businesses of social network and online gaming.

We will update our $3.43 price estimate for Renren after the Q2 2014 earnings release.

See our complete analysis of Renren here

Weak Mobile Monetization Will Negatively Impact Advertisement Revenue

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’s online advertising revenue declined 19% annually in Q1 2014. 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.

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.

Restructuring Efforts & New Game Launches In The Second Half Can Fuel Growth

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 the company’s top line over the last couple of quarters. Renren’s online gaming revenues declined by 53% in Q1, to $12.7 million, due to the restructuring efforts and the absence of new launches. The company now intends to focus on creating and licensing high quality games. It 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.

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. 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] Renren restructured its gaming business in Q4 2013 and Q1 2014 to leverage the above trend, which can help re-accelerate its revenue growth from online games in the future.

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1. Renren’s (RENN) CEO Joseph Chen on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 22, 2014 [↩] [↩]