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Executives

Sam Lawn

Joe Chen – Chairman and CEO

James Liu – COO

Hui Huang – CFO

Analysts

Alicia Yap – Barclays

Jiong Shao – Macquarie

Cynthia Meng – Jefferies

Andy Yeung – Oppenheimer

Eddie Leung – Bank of America Merrill Lynch

Mi Zhou – UBS

Echo He – Maxim Group

Renren, Inc. (RENN) Q3 2012 Earnings Call November 13, 2012 8:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2012 Renren, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. (Operator Instructions) I must advise you that this conference is being recorded today Wednesday 14th of November 2012.

I would now like to hand the conference over to your first speaker today, Mr. Sam Lawn. Thank you. Please go ahead.

Sam Lawn

Thank you. And welcome to our third quarter 2012 earnings conference call. Joining me on the call today are Joe Chen, Chairman and Chief Executive Officer; James Liu, Chief Operating Officer; and Hui Huang, Chief Financial Officer.

For today’s agenda, management will discuss highlights for the third quarter of 2012. This will be followed by question and answer session. Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements.

Also this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars.

I will now turn the call over to our Chairman and CEO, Joe Chen.

Joe Chen

Thank you, Sam. Good morning and good evening everyone. First of all, a quick summary of our financials in the third quarter. Revenues were at midpoint of our guidance, in line with our expectations. In terms of bottom line, both operating loss and the net losses were less than our previous forecast due to tighter cost controls. While brand advertising remains challenging, our gaming business once again performed very strongly, along with Nuomi, our group-buying business also progressing well across all major metrics.

On the strategy front, while management focus and investments have continued to shift towards mobile opportunities and challenges ahead of us. As I mentioned in previous quarters, the transition to a new mobile-centric era is an opportunity as well as a disruptive change. The additional capabilities of mobile devices allow us to think outside box evolving beyond just transferring or existing PC base to services and the capabilities to mobile.

As such, we’re dedicating considerable resources and a creative thinking into new products and services for mobile and social, in order to help us defend and to further grow our core social networking business. Meanwhile, our other business lines such as gaming and group-buying have helped to form a broader foundation in discovering additional potential catalyst, for a mobile-centric world. Well we’re encouraged to see that, our gaming business has demonstrated accelerated growth in the past three quarters, driven by our strategic shift in mobile games.

For the month of January through September this year, Renren games has now become number one publisher of mobile games on App Store China, as measured by number of downloads. At the same time for our Nuomi business, we’re also seeing rapidly increasing transaction volumes through mobile. In summary, although we currently face headwinds of over a weak economy, coupled with fierce competition in SNS and online advertising space, we’re pleased to see that our gaming and the Nuomi business are progressing with encouraging signs. Our multi-prong approach will allow us to continue exploring new opportunities of growth as we further focus and deepen our SNS offerings.

Let me now update you first on our user metrics. I’m pleased that our activated user base further expanded in the third quarter to a total 172 million, a 25% increase year-on-year. In September, we had 48 million monthly unique log-in users which was 10 million more than the same period last year, and a 27% year-on-year increases. Renren users also spend average of 7.1 hours a month on our SNS platform continuing a healthy level of user engagement.

In terms of mobile administration, monthly mobile users represented average of 40% of monthly unique log-in users, similar to our previous quarter. Daily unique log-in users are even higher, a compelling 60% penetration rate. Furthermore, we continue to see rapid shift in the amount of time users are spending on Renren through their mobile devices. In the third quarter over 57% of the total user time spend on our platform came from mobile compared to 50% in the previous quarter. This continues to be both exciting opportunity and disruptive shift in our business, as our mobile apps further gain user engagement.

Let me now go over the business lines with you. Although we did see a sequential increase in our advertising revenue, year-on-year, it was a decline. As I mentioned in last quarter’s call, we expect advertising in the second half of the year to remain challenging. The key factors affecting our advertising business this year are slowdown of the economic growth, a rising competitive environment, and the continuous shift by users to mobile which we have yet to monetize.

As we believe mobile advertising solutions were ultimately be a must have for advertisers, we suspect that there will be a lag between where users spend their time and meaningful mobile budget allocation for advertisers. Historically, adaptation by Chinese advertising customers tend to lag behind the developed markets when it comes to new media such as internet, social networking, and the mobile.

Compared to mobile gaming and commerce which are primarily driven by consumers and already have has some time to develop, mobile advertising on a contrary is driven by advertisers, and it will take some time to develop into a true sub industrial result. Nevertheless, we will continue to work with advertisers and agencies on mobile solutions, while also focusing on differentiated and a creative SNS campaigns for large brand customers.

Let me now turn to our gaming business. Gaming continued its strong growth momentum with revenue increase of 120% year-over-year, driven by in-house developed cross platform games. These games can be played simultaneously on PC and the mobile devices, and are synchronized with each other. This cross platform capability has been effective in driving numerous acquisitions and a increase in time spend. Furthermore, we currently only operate on our iOS platform and the PC which was soon deployed the same gaming strategy for the Android platform.

Finally, let me update you on Nuomi, our group-buying business. All key metrics continue to show encouraging signs, including general merchandise volume, active paying users, repeat user ratio, ARPU, the number of merchants and narrowing operating losses. I am particularly pleased that our net revenue has nearly tripled year-over-year. In addition, with very little marketing, purchase through mobile have already reached over 10% of net revenues in the third quarter, pointing to an exciting prospect for mobile commerce on our platform.

The group-buying industry has shown further signs of consolidation. In recent months, several players were used to be top 10 players in China has either, terminated operations, significantly downsized their employees or sought acquisitions. Instead of an irrational expansion, as many other players have gone through in the past two years, our patience, prudent growth and the focusing on improving operational efficiencies for Nuomi has paid off.

We’re now more determined to be the final consolidator of this business, building upon our own solid growth trajectory and deep financial resources. Therefore in the coming quarters, we will step up our investment in Nuomi, continue to expand Nuomi’s market leadership and to further Nuomi as integrate part of our LBS and mobile commerce strategy.

In conclusion, as we start to see encouraging signs for our new investments in gaming in Nuomi, we’re also aware of the challenges that currently face us. Mobile continues to represent both a tremendous prospect and the largest threat to our business. Our focus remains to deepen and expand upon what we do invest and then social networking service. We will continue to recognize new opportunities that build upon our SNS foundation as our platform offers to a deep groundwork of possibilities to embrace upon the new mobile-centric era.

Now I would like to pass the floor to James for operational review.

James Liu

Thank you, Joe. In the third quarter, we continued our focused efforts on mobile R&D. As Joe mentioned, our users increasingly spend their time on the Renren platform through mobile devices. It is imperative, then that our products are built with a mobile mentality and with the goal of servicing mobile users long-term. I would like now to highlight a few of the applications that we have launched in mobile this past quarter.

First, Guangying DV, which is an application for iPhone that provides our users to great video tools, for making, sharing and viewing videos. This application also allows our users to tailor make their videos through filters, themes, sound tracks and other functions. As the mobile penetration continues, user generated content videos through mobile will become increasingly important.

Second, Renren (inaudible) or Renren Radio Station is another iPhone application that works like an interactive radio station. Users can share their music preference, check what their friends are listening to and become social through their mobile music experience.

With regard to our gaming business, we now have a total of 14 in-house titles and over 50 third-party games operating on our platform. Many of our in-house games are still in their early life cycle of monetization, while our pipeline remains excited. We will continue to focus on creating new cross-platform as well as mobile-only games, while also attracting more third-party game developers. While we have made a great head start by developing and operating cross-platform games, we believe we’re still in an early learning curve stage of cross-platform optimization with much more potential to come.

Nuomi, our group-buying business continued a steady pace of progress and growth, achieving new levels of business activity as Joe already mentioned. Let me share with you some of the operating metrics. We’re currently operating in 59 cities and continue to gain market share in those concerned. Gross merchandize value reached to just under US$100 million in third quarter which is an all-time high.

In the third quarter, Nuomi had 3.1 million active paying users with 43% repeat users, another record. ARPU increased consistently for the last four quarters and is also at an all-time high. We are very encouraged by these improving metrics as they reflected the results of our balanced approach in matching, expansion scale with operational efficiency. In a time of consolidation and attention to long-term profitability, our focus on lean operations will continue to be an advantage.

We will look to further optimize Nuomi’s operations as the eventual leader in China’s group-buying sector. Let me also update you briefly on 56.com. We are pleased with the recent strong traffic moment of 56, driven by the quality focus of its UGC content. At the end of third quarter, video viewership has increased over 40% since the acquisition in the October 2011. This rising trend also continued this month as our investments in user experience and bandwidth is starting to show positive results. Maintaining 56.com’s traffic and user engagement growth will continue as the main priority by our UGC video services.

Finally, to illustrate the ongoing strength of the brand. We were please to receive recognition as the 2012 Most Popular Brand by university students at the recent Staffers magazine award ceremony. The award underscored our ongoing popularity among university students and the most educated demographics in China.

And that concludes my operational update. Let me turn over to Hui for the financial review.

Hui Huang

Thank you, James. Let me provide you with the financial highlights for the third quarter. Our total net revenues for the third quarter were US$50.4 million, representing a 47% increase from the same period in 2011. Now let me go through the major revenue components and the trends for the reporting quarter.

First, online advertising revenues were US$17 million, a sequential increase of 12% over the previous quarter but a year-over-year decrease of 14%. As Joe mentioned, we continue to upgrade in a challenging environment for online advertising, where slow economic growth, intensifying competition, and increasing mobile traffic among the users has led to a more conservative spending trend from brand advertisers.

In terms of verticals, the top five ranked in the order from the highest to lowest revenue contributors were IT, FMCG, Apparels, Auto and Finance, and Daily Care. We saw a more balanced vertical contribution this quarter as IT and FMCG were based similar in revenue impact followed by the other top three verticals having nearly the same revenues.

Next, internet value-added services or IVAS revenue in this quarter was US$33.4million representing 129% increase from the same period last year. Within IVAS, online game revenues were US$24.2 million, a 120% increase from the same period last year. Our strong gaming revenue growth in this quarter continued to be driven by the popularity of several in-house developed games we recently launched, which all have cross-platform capabilities and as such leading to higher ARPU.

Other IVAS revenues were US$9.2 million, a 157% increase year-over-year. Other IVAS revenues included US$4.6 million net revenues from Nuomi and approximately US$2.3 million revenues from 56.com.

Now turning to gross profit. Gross profit in the third quarter was US$30.9 million, a 12% increase year-over-year. As a percentage of the total net revenues, gross margin was 51% in the third quarter, compared to 80% in the same period of last year. The gross margin rate decrease was primarily due to significantly increased bandwidth related investments in 56.com and less advertising revenues.

Operating expenses in the third quarter were US$51.5 million, a 52% increase compared to the corresponding period in 2011. Among this, Nuomi’s operating expenses for the third quarter were US$10.6 million. Excluding Nuomi, our operating expenses would be US$40.9 million for the third quarter, a 58% increase year-over-year. This increase is primarily due to a significant increase in headcount, particularly in R&D mobile functions, as well as additional sales and marketing expenses. G&A expenses increased due to the growth of our business and company size.

Next, loss from operations in the third quarter was US$20.6 million, compared to a loss of US$6.4 million in the corresponding period of 2011. The increase in loss from operations was probably due to three factors; one, our significant investment in R&D, particularly in mobile related initiatives where monetization lags behind investment. Two, losses generated in the Nuomi business. And three, our investment in 56.com to further improve its infrastructure and user experience.

Our net loss in the third quarter was US$15.4 million, compared to a net loss of US$1.2 million in the corresponding period of 2011. Excluding the result of operations attributable to Nuomi in both quarters, net loss in the third quarter of 2012 would be US$9.1 million, compared to a net income of US$6.2 million for the same period in 2011.

Adjusted net loss, a non-GAAP financial measure, was US$12.1 million for the third quarter of 2012, compared to US$0.3 million adjusted net income for the third quarter of 2011. Excluding operations from Nuomi in both quarters, we would have adjusted net loss of US$5.9 million in the third quarter of 2012, compared to adjusted net income of US$7.7 million in the corresponding period in 2011.

Adjusted net income or loss is defined as income or loss from continuing operations excluding non-cash share-based compensation expenses, amortization of intangible assets, and impairment of intangible assets. As of September 30, 2012, the company had cash, cash equivalent, term deposit and short-term investments of approximately US$892 million.

I would also like to update you on our share repurchase program which has now being completed as of September 28, 2012. During the third quarter of 2012, the company repurchased approximately 13.3 million ADS, bringing the total share repurchased to approximately 24.2 million ADS and aggregate consideration of US$101.8 million at the end of the program.

Finally, let me now provide you our top line guidance for the fourth quarter. For the fourth quarter, we currently expect to generate revenues between US$45 million to US$47 million, representing 37% to 43% year-over-year growth. This forecast reflects our current and preliminary view, which is subject to change.

This concludes our prepared remarks. Now we would like to open the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) Your first question comes from the line of Alicia Yap from Barclays. Please ask your question.

Alicia Yap – Barclays

Hi good morning Joe, James, Hui and Sam. Thanks for taking my questions. My first question is regarding the fourth quarter outlook. With your guidance range of 37% to 43% year-over-year, it would imply you will be trailing slightly below the full-year guidance that you provided earlier which is 50% to 55%. So wanted to get a sense what has happened between the last quarter call and today? And has the advertising market getting worse and have you seen even more cautious from advertiser or was it mainly due to competition or the mobile shift?

Hui Huang

Yes Alicia, thanks for your question. This is Hui. Yes, with our current fourth quarter guidance, our full-year growth compared to last year is around 47%, which is about 3% below of the 50% guidance we previously provided at the beginning of the year. I think the major contributor affecting for this gap is due to much softer advertising environment we had gone through this year versus what we had expected back in I think January or February earlier this year.

I think the economic growth was even more softer than we had anticipated, compared to the beginning of the year. Advertisers were very conceptive and also the government transition also cost lot of wait and see attitude among the advertisers, so and also as mentioned in Joe and James’ remarks, our traffic shift from PC to mobile has also had some impacts on the amortization through advertising in near-term. So combining all those factors, the advertising performed much less than we had expected 10 or 11 months ago. So that is a major reason for the 3% difference between our current outlook for the full-year versus 50% we guided at the beginning of the year.

Alicia Yap – Barclays

Sure. And then regarding the 4Q guidance, I wanted to get a bit more color on the breakdown, so if you can give us some directions on the expectations for online advertising, online gaming and the Nuomi business would be great?

Hui Huang

I think the each of the – the trend for each of the revenue components is largely similar to what we have seen in Q3 and Q2, i.e. gaming will continue to perform very strongly. Gaming I think historically in the past two quarters saw a 120% year-over-year growth and in fourth quarter currently, we still expect to see a 110% to 120% year-over-year growth for gaming revenues. For other IVAS, again I think which includes both Nuomi and 56.com’s (inaudible) as well as the other IVAS on various platform will continue to see probably 80% year-over-year growth.

And online advertising historically in fourth quarter is always our lowest season for advertising and in this year this pattern will continue and as a matter of fact probably will be even more pronounced due to the current challenging environment, so advertising we will see over 20% year-over-year decline. So that was major trend for the fourth quarter by each revenue component.

Alicia Yap – Barclays

I see, great. And if I can just one last question is regarding the cost. So can you remind us whether you will be under spending some of the costs that you guided earlier or will most of the remaining costs will be backend loaded to the fourth quarter? Thank you.

Hui Huang

Alicia, that’s very good question. I think our current thinking is more of backend loaded, because for gaming and Nuomi, as you may have sensed from Joe and James’ remarks, we are encouraged by its progress so far and we think probably we will further invest to strengthen or expand their leadership in their respective market. So we’ll continue to invest headcount and some of the promotion effort for gaming as well as Nuomi.

And then for mobile which I think is one of our biggest business unit at this moment but it’s so strategic important and we think we should invest in sufficient right now to prepare us for future growth. So for mobile, with recognition that right now that the monetization is on the advertising space, but we will continue to invest heavily in this regard. So combining all those considerations, yes, we’ll see some increase in the cost expenses in fourth quarter.

Alicia Yap – Barclays

Okay, great. Thank you. I’ll get back to the queue.

Hui Huang

Thank you.

Operator

Your next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

Jiong Shao – Macquarie

Good morning, thank you very much for taking my questions. First, a very quick follow-up, apologies if I missed it, Hui, did you guide for Nuomi for Q4?

Hui Huang

Well Nuomi is a part of the other IVAS. So as mentioned in my answer to Alicia’s question, the other IVAS revenues will grow approximately 80% year-over-year in fourth quarter, that includes Nuomi as well as 56.com (inaudible) program as well as the other internet value-added services from Renren platform, so not Nuomi specifically alone.

Jiong Shao – Macquarie

Okay. But do you see Nuomi should reach to a very healthy growth sequential in Q4 as well?

Hui Huang

We will see some sequential growth for Nuomi but at the pace probably is less than what we saw in Q3 in terms of sequential growth. Partially it’s because we think that the overall entire factor has reduced to the marketing dollars very substantially. So it’s a time for consolidation, it’s a time for lot of players to focus on operational efficiency internally. So we may see some of the slowdown in the growth in near-term before we see a much more visible improvement in commission rate and the GMV, so yes, some growth, but not as much as we saw in third quarter.

Jiong Shao – Macquarie

Okay, thanks for that clarification. I have two questions on mobile business. First question is on the mobile gaming. I think I heard you saying that your Renren mobile game is one of the top apps in the China App Store. I was wondering could you talk about how many downloads your app platform has had and the paying habits and revenue contributions from your mobile games. Anything you can share will be very helpful, that’s my first question on mobile.

James Liu

Yes. Jiong, this is James. Thanks for the question. In Q3 as Joe and I both have mentioned earlier, we have seen very strong growth in our games. Our games Jiong, as we mentioned earlier, are all cross-platform games. So we have both mobile and PC and that’s a key strength. From January to September, we are ranked by iPhone to be the number one downloaded – number one in terms of number of downloads for mobile games. And today, we are on a pace of releasing two to three new games every quarter. And all of them are going to be cross-platform basically.

In terms of ARPU, I think we shared earlier on a quarterly basis we’re seeing over US$100 per user and that’s a relatively high level of ARPU and we continue to see this trend continuing going forward.

Jiong Shao – Macquarie

Sorry, the ARPU is for mobile ARPU and how much you said, I’m sorry, I missed a 100 renminbi?

James Liu

We are at a relatively early stage of mobile game development. So to-date we do not provide the breakout of our mobile revenue from the total gaming revenue but (inaudible).

Hui Huang

Jiong Shao, the ARPU James just mentioned i.e., over US$100 per quarter is the – which is the average ARPU for all the gaming users and the trend is that the mobile ARPU is the higher, but as James had all our games are cross-platform, so users can pay through either channel. So it’s for us at this moment it’s not particularly simple to breakdown the mobile payment versus the PC payment.

Jiong Shao – Macquarie

Okay, so Hui you said the mobile ARPU is a bit higher than the PC ARPU? I just want to clarify.

Hui Huang

Yes. That’s correct.

Jiong Shao – Macquarie

Okay, that’s very good to hear. Okay, thanks. My second question, also on mobile is that Renren has some location-based services obviously leveraging our user base but so many other companies seems to be offering location-based services as well. So I was wondering sort of typical how are you playing to differentiate yourself, your services from others and what are the really the winning formula for anyone to be successful in LBS in China?

Joe Chen

Jiong, that’s a very good question. Yes, so basically we are one of the earliest provider of LBS services to consumers, and on a daily basis, this is provided more than million pieces of UGCs through their mobile devices attached with LBS tasks. So we have during the quarter, the past couple of years we have accumulated quite a lot of data on the users LBS information and so we are starting to use some of those information to place group-buying ads for Nuomi, right. So clearly there is a lot of internal synergies here which is at a starting point of that.

And secondarily, we have open platform on mobile, right, so third-party vendors and players could basically use open platform and use the LBS information if they want to offer products and services to our users, but that’s currently very small because on the smartphone, the tendency is to – the tendency for product development is to offer simple and easy use products. So it’s actually not easy to offer comprehensive service as on a open platform service as on PC.

So I think philosophically the LBS capability of mobile from the consumer side, we offer compelling value as part of the UGC they share and create with their friends and for businesses, I think the one of the reason that why we are so aggressive in group-buying because we view that as a big opportunity to ramp up our local-based commerce and as well as advertising.

So I think our advantage in offering that service is tremendous because of the large user base and big data we have built in the past few years. And that will continue to be a very good focus for us.

Jiong Shao – Macquarie

Okay. And a quick follow-up, whose maps do you use?

James Liu

In terms of map, we invested in a company called Mapbar, I think a few quarters back, so we used I believe that most of the map service we use Mapbar service.

Joe Chen

Yes.

Jiong Shao – Macquarie

Okay. Thank you very much guys. This is very helpful.

Operator

Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.

Cynthia Meng – Jefferies

Good morning. Thank you for taking my questions. The management gave some more details on your mobile monetization plan and do you think that the first monetization will come from mobile games and how big that opportunity could be, and also when do you think there will be a chance for monetization on mobile advertisement? I sense that from Hui’s comment that seems to – management seems to be looking at mobile advertisement as the biggest opportunity. I just wonder what specific business model you have for that part of the plan and also on the Nuomi mobile commerce part, is payment a key component for the m-commerce solutions or that is not really necessary? Thank you.

Joe Chen

This is Joe. It’s a very good question. As in my prepared remarks, I think as early as a few quarters ago we recognized that gaming and the mobile commerce would be the first two major categories of monetization that will be happening on mobile. And the reason that I’ve given is that both of these type of businesses were driven by consumers. So basically and they make decisions very quickly as soon as they got a smartphone, they are starting to figure out and they have lot of fragmented time. And both gaming and commerce benefit from the fragmented time spend on mobile.

If you look at eBay, actually eBay is also another big company benefiting from mobile because it’s the fragmented time for auction services, people – consumers checking their auctions, hop a minute and go back to work and go back to whatever they do, right. So because of these fragmented time plus the usage plus the consumer driven plus relatively good payment infrastructures we think that gaming and commerce would be two very large category of business models that will mature and pretty much growing in line with the penetration of smartphones.

But for advertising and historically in China even on PC, advertisings always lagging behind the actual usage by in any way between one year, two year or three years, right. So and still actually as of now PC being around for more than 10 years, the PC advertising still lagging behind actual time spend. So the primary reason, the advertising decisions being made by businesses and the businesses by nature move slowly.

And advertising – and is also particularly true in the big businesses and they move even slower than smaller businesses. So that’s what we’re seeing. So we think that advertising would be a huge business, eventually on mobile but I think it will follow the same kind of time lag or even more so, I think the lag of monetization show advertising versus actual usage, mobile will be even bigger because of the growth rate for mobile usage actually is far bigger than the PC usage growth a few years back, right.

So really we’re already in the midpoint of the – probably beyond the midpoint of the smartphone penetration revolution, but I think the advertising on mobile probably just 1% but even the penetration is already 50%. So there is a lot of growth, but the base will be small for the next quite a few quarters, I would say for the next four quarters, the base was still insignificant compared with the PC advertising.

So but we do see that for us we might have some unique monetization capabilities on advertising. We are testing a few of them than primarily because that’s – we have very strong brand advertising display business. So we think that there might be some unique opportunities for us to move this business along. But to answer your question gaming commerce would be – globally would be the early movers for mobile monetization.

Cynthia Meng – Jefferies

Thank you, Joe. I have follow-up question on games. Can you give us more details on the online games and how many games are on the Renren platform and what is the percentage of games that are self developed? Is there – what are the top games and percentage of revenue contributions? That’s it.

James Liu

Cynthia, thanks for the question. So in terms of revenue split between our in-house games and third-party games, around 80% of the revenue is contributed by our in-house development games. In terms of titles, we have roughly in the third quarter, I think we have 14 titles that’s developed in-house. We have roughly 50 titles, that’s coming from third-parties running on the platform.

In terms of the revenue concentration, I think the top five games contribute to about – around 72%, 73% of total gaming revenues.

Cynthia Meng – Jefferies

Thank you.

Operator

Your next question comes from the line of Andy Yeung from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi good morning, thank you for taking my call. I have a question today. My first question is about your online advertising business, while there seems to be a general deterioration in the online advertising spending in China, there seems to be a more significant deterioration in your advertising business this year, so given SNS advertising is still new, the working [ph] decline trend is actually pretty surprising. So advertising assisting to the advertising format on SNS or is there a decline in your user activities by the desktop users?

Joe Chen

Hi Andy, this is Joe. Let me answer your question conceptually, right. So I think competition is definitely one of it, right. Last year or the year before, I think most of our competitors has not yet started monetizing their competitive assets. And starting from this year, they have started to monetizing the assets very, very aggressively. So that create competition. And secondarily I sometimes would used the analogy of that our business – advertising business is really is a derivative of derivative of derivative of economic growth.

So basically with the newest type of media in the large new media category, so when there is economic uncertainty or growth rate slowing down, the advertisers tend to allocate budgets less experimentally or just going back to the old routine. So I think that’s another reason that’s sort of market related and then thirdly, we are on top of a circular trend that’s very deep and very significant industry which is switching from PC to mobile.

So even though we had a very large user growth in the past year, our PC traffic didn’t grow that much which is really supported most of our – majority of advertising revenue and most of the growth is coming from mobile and we’re not currently able to monetize in mobile, or use at all or very little. So I think this three factors affected us, I think two factors are related us being social and mobile, the other is that due to the fact that we are one of the newest media types in the advertising landscape and it’s really a derivative of a derivative of a derivative.

Andy Yeung – Oppenheimer

Got it. And as a follow-up on that, obviously mobile is becoming increasingly important for you guys and for even everyone that’s staying online advertising space, so can you give us some idea as what the timeframe that you’re thinking about turning on the monetization on the mobile platform for advertising?

Joe Chen

I think we have some good ideas, because majority of our advertising is as display advertising, working with large customers. And I think that we are experimenting some display ad format and a lot of customers are very interested in cross-platform advertising with us because they really want to tap into the entire base of Renren users. If they only advertised on PC, there will only able to tap into less than half of the user on a daily basis which is really lost opportunity for them. So we think that there is a lot of opportunity in that front to transition a lot of the business, expand that business to mobile. And that will be probably the easiest solution for us.

And the other – answering the other question is the our capability LBS. The big data that we’ve build on LBS has yet to be released and that capability should be helping us driving Nuomi’s profitability as well as making money serving third-party advertisers. So that’s the way I see it. I don’t think anybody else has a better solution – much better solution right now for this. And particularly in China, because the rapid increase of smartphone usage created a big gap between the budget allocation and the time spend. I don’t think that’s going to change very quickly.

Andy Yeung – Oppenheimer

Got it. Thanks so much.

Operator

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask the question.

Eddie Leung – Bank of America Merrill Lynch

Good morning. Thank you taking my questions. My first question is on Nuomi, given the changing landscape, do you still prefer to grow Nuomi more organically or you are also thinking about consolidation opportunities in this space?

Joe Chen

As we mentioned in the prepared remarks there are quite a few of the previous top 10 players has either seized operations or reduced the staff or sought acquisition. So we are open for opportunities to consolidate the market, both organically and through acquisitions, but I think one of the main thrust is and that the major value added that we have for this business is really one of the highest operational efficiency we think in this game. Two things that are most critical for winning, one is the most efficient operation, therefore you can afford to stay in this games for a long time and because every day you spend – everyday your lost, you gain market share and you come back to lose and they lose even more money.

And then secondarily of course it is relatively deep pocket to stay in this game, so I think in both accounts we have upper hands. Therefore I think in the quarters going forward, we will step up the investment as well continue to explore opportunities for this business to explode our mobile. As we said earlier, mobile commerce will be huge and it will be growing relatively on track with the mobile penetration.

Eddie Leung – Bank of America Merrill Lynch

Got you. Thank you, Joe. And then I have a housekeeping question. Just wondering what could be the capital expenditure for the year as far as the headcount plan? Thank you.

Hui Huang

Eddie, this is Hui. Are you asking about CapEx and headcount by the end of this year or?

Eddie Leung – Bank of America Merrill Lynch

This year, yes.

Hui Huang

Yes. I think in terms of headcount, we expect that will reach 4,900 approximately by the end of this year. And for the full-year CapEx, we spent – we will probably invest in the servers this year. I need to come back to you with what is that number but on the full-year depreciation and amortization this year is around US$14 million to US$15 million.

Eddie Leung – Bank of America Merrill Lynch

Okay, got it. Thank you very much.

Hui Huang

Yes.

Operator

Your next question comes from the line of Mi Zhou from UBS. Please ask your question.

Mi Zhou – UBS

Thank you for taking my questions. My first question is about your mobile games. So for these cross-platform games, how much time users spend on mobile devices versus on PC?

Hui Huang

Mi Zhou, this is Hui. In terms of time spent between mobile versus the PC on a cross-platform games, lot of users are actually logging the games or come to business games through mobile but in terms of actual time spend I think at this moment PC probably still represents a bit more given the some of the users they still prefer they use on experience on PC. And the mobile games are primarily for those people, for example they travel a lot, where they have fragmented time, so they can take out their mobile devices and continue to play games where, what game left on their PCs.

Mi Zhou – UBS

Okay, got you. Thank you. I have another question, housekeeping question, I saw a significant jump in the long-term investments, could you give us any color of what it is, it grew from US$43 million to US$88 million in this quarter?

Hui Huang

The long-term investments are primarily due to our investment in SoFi. We closed the investment in early September. We invested a US$49 million in SoFi.

Mi Zhou – UBS

Okay, got it. Thank you very much.

Operator

Your next question comes from the line of Echo He from Maxim Group. Please ask your question.

Echo He – Maxim Group

Hi, thank you so much for taking my questions. I just want to learn more about your mobile monetization and you just talk about local-based services and what are other forms of advertise you are actually selling to customers? And including this location-based services and do you charge by per click or per user impression, and what are the revenue returns?

Joe Chen

For mobile – this is Joe, for mobile open platform I believe that we are only doing limited testing with a few vendors, I think those testing are free. And we’re primarily serving relevant Nuomi customers. And in terms of the type of advertising on mobile, we think that for us I think the shorter next few quarters were primarily be brand advertisers who want to extend their reach to Renren users beyond PC. We think that’s the lowest hanging fruits for us. I think the size of that is also reasonable for us to reach first.

Assuming that the brand advertisers are willing to pay the same rate as PC, then you can calculate that easily do twice amount of the advertising business as of today. So that’s the easy picking for us. And then LBS probably is the second easiest picking. And then we have a reasonable sized SME business – advertising business on PC as well. I think part of that, customers could potentially leverage on the mobile to advertise but not in power [ph] base. For example, some of the advertisers are location sensitive, for example they only want to advertise towards the middle class in the particular coastal city because they are offering really travel services to locals.

So obviously that mobile has advantage over blanket PC advertising but for example for e-commerce platform advertisers, for SME, I don’t think that mobile has any particular advantage over PC. I think that again the migration of the SME, CPA type advertising base will be gradual, but I tend to believe that that group of customers will be moving faster than big brand advertisers whose decision cycle is typically a year or multiyear.

Echo He – Maxim Group

Okay.

Joe Chen

Smaller customers move faster, yes.

Echo He – Maxim Group

Understand pretty well. Is it fair to say that at this stage or in the next couple of quarters, you would provide your mobile side advertising app part of the package to current customers and also and the second one is the location-based services right now, you are still testing on this as the display ad and not as a performance based ad, right, is that fair to say that?

Joe Chen

No for advertising base, yes for advertising base I think that it will be mixed right, both display and performance based. And for – we think the opportunity is of course cross-platform advertising just like gaming, right. Gaming is cross-platform, it was big success. We’re really just extended or offering from PC to mobile. So users can play on both side. I think for advertising it should work the same way, but the limiting factor here is not us, is our customers, how fast they move and most of them and also advertising agency industry do not have management services for mobile ads.

So even though we know that we can offer excellent advertising services, nobody can match us and provide that feedback to customers. And also the mobile ad is so new I think the – we’re hoping that some of the more savvy big brand advertisers will move into this space quickly because really the earlier they move in, the lower the rate they got, because typically the marketplace always reward people who eat the crabs, first, they’ll eat the biggest crab at low price.

Echo He – Maxim Group

Yes, all right, got it. And just to follow-up, what the percentage of ad revenue is from SMEs, in the small mid-sized?

Hui Huang

Echo, that’s about 10% in third quarter.

Echo He – Maxim Group

Yes, that’s all. Thank you so much. It’s very helpful.

Hui Huang

Thank you.

Operator

Ladies and gentlemen, we have now come to the end of our question and answer session. I will now turn the conference back to Mr. Sam Lawn for closing remarks.

Sam Lawn

We would like to thank all of you for your participation on the call today. Feel free to contact us, if you have any further questions. Operator, this now concludes our call.

Hui Huang

Thank you. Bye-bye.

Joe Chen

Thank you.

James Liu

Thank you.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participating. You may all disconnect.

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