Renren Earnings: GAAP Income Down On Lower Revenue

While Renren‘s (NYSE: RENN) third quarter results were impacted by one-time expenses, its core businesses also saw quarter-on-quarter declines in revenue. Combined with some moderately higher operating costs, this translated to a lower GAAP income for the company in Q3 versus Q2 2014. The company reported a non-GAAP net loss of $38 million in Q3, which was boosted by a $47 million gain on equity investments. The operating loss was a whopping $96 million, though mostly on the back of one-time restructuring related losses. ^[1]

Revenue Declines

As we had written in our pre-earnings report, Renren has been seeing decreased ad revenues recently because of the shift to mobile and competition (see Renren Q3 Earnings Preview). This continued into this quarter, as online advertising revenues dropped to $8.8 million from $11.7 million last quarter. ^[1] Another major source of revenue is the gaming segment, in which revenues dropped sequentially to $8.1 million. ^[2]

The major cause of the ad revenue declines is Renren’s limited user base on the mobile platform. This is the case largely because Renren’s registration process for mobile phones is complicated, as it seeks to verify the user’s real identity. Some mobile 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. In the case of gaming revenues, the reason for the drop is that no new titles have been released and the existing games are becoming obsolete. ^[2]

One Time Expenses Dominate Earnings

In the third quarter, Renren shut down its game development division, choosing instead to license games from outside developers/studios. This will have the effect of lowering R&D and SG&A expenses, especially costs related to developer’s wages. It will also lead to one-time expenses related to their severance pay as well as other costs. According to management, this process has been underway for just a month and will take another quarter to really show up in the financial statements. ^[3]

The other cause of restructuring activity relates to the sale of Renren’s stake in video hosting site 56.com to rival Sohu. This has led to two large one-time costs for the company. These costs are $13.7 million for the impairment of intangible assets, and $46.9 million for goodwill impairments.

56.com was acquired by Renren in 2011 for $80 million. ^[4] Much of the price was reported in the balance sheet as goodwill, which represents the premium paid in acquiring a business. Now that Renren has sold off the business, a major chunk this goodwill had to be written off. ^[5] Sohu is only paying about $13 million, which is significantly below Renren’s purchase price. This is leading to the one-time expenses mentioned above.

Betting On A New Business

The silver lining from Renren’s Q3 earnings has been news of promising performance by the company in the student financing domain. It has started disbursing loans to students for purchase of electronic goods such as mobile phones and laptops, under an initiative called Renren Fenqi. The company claims that its status as the largest social network on campuses in China places it in a uniquely advantageous position to market its offerings. It has a large database of college students in China, enabling assessment of their credit profiles and future repayment abilities. Going forward, the company intends to expand its service in terms of the number of products and campuses covered. ^[3]

The financial impact of this new business is expected to be seen starting in the fourth quarter, since it has only been underway for about a month. The company’s management expects Q4 revenues of $15-17 million, representing an approximately 50% year on year decline. ^[6]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap | More Trefis Research

1. Renren Q3 2014 Earnings Release [↩] [↩]
2. Renren’s Q2 Earnings Call Transcript [↩] [↩]
3. Renren Q3 Earnings Call Transcipt [↩] [↩]
4. Renren Buys 56.com [↩]
5. Renren To Sell 56.com To Sohu [↩]
6. Renren Page At Businessweek [↩]