Renren Earnings Preview: Impact of Faster Internet, Gaming Consoles In Focus

In our Q4 earnings preview for Renren (NYSE:RENN), we focus on the revenue impact of the Chinese government’s investment in Internet infrastructure and the introduction of console games in China. We also look at the impact that restructuring the game development division is likely to have on the company’s results.

We currently have a $3.50 per share price estimate for Renren, which is significantly higher than its current market price.

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Faster Internet

A beneficial change that should influence Renren’s Q4 results is the improved Internet infrastructure in China. Early in Q4 2014, the Chinese Government completed a $500 million project that will lead to faster and cheaper Internet in China. In Q2 2014, the average download speed in China was 3.39 Mb/s. This was almost half the speed available in developed countries. ^[1] The new project is expected to help China’s Internet speeds catch up to developed markets. This will enable more users of online games to transition to more data-intensive games, which have better monetization potential. These games, however, require faster Internet connectivity to play, so the improved speeds should help Renren’s gaming division. This division contributes nearly 25% of the company’s total value, according to our estimates.

Gaming Consoles

Another factor that could influence Renren’s gaming revenues is the introduction of gaming consoles in China. After a 13-year ban, gaming consoles were legalized in China in 2014. They are expected to generate considerable interest among gamers. ^[2] Due to the popularity of console games, and the pent-up demand for them, this could potentially lure users away from Renren’s games.

Restructuring Impact

The impact of consoles will be amplified by the fact that Renren has decided to stop developing games. It has shut down its game development division, looking to transition to a publisher of third party games. This puts the company in competition with consoles, making Renren different from its competitors – such as Perfect World – that have decided to publish their games via consoles.

However, the restructuring of the game development division will also have a positive impact because of the reduction in costs. It will lead to lower R&D and SG&A costs, especially those related to developers’ wages. While this process was underway in Q3, the impact should be more pronounced in the company’s Q4 results, according to management. ^[3]

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1. The Chinese Internet Gets A Stronger Backbone [↩]
2. China’s Console Ban Is Lifted [↩]
3. Renren Q3 Earnings report [↩]