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Executives

Sam Lawn - Investor Relations Director

Joseph Chen - Founder, Chairman and Chief Executive Officer

Jian Liu - Chief Operating Officer and Director

Hui Huang - Chief Financial Officer and Principal Accounting Officer

Analysts

Alicia Yap - Barclays Capital, Research Division

Timothy Chan - Morgan Stanley, Research Division

Alex Yao - Deutsche Bank AG, Research Division

Jiong Shao - Macquarie Research

Andy Yeung - Oppenheimer & Co. Inc., Research Division

Mi Zhou - UBS Investment Bank, Research Division

Long Lin - Brean Capital LLC, Research Division

Renren (RENN) Q4 2012 Earnings Call March 11, 2013 7:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Renren Inc. Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Monday, 11th of March, 2013. I would now like to hand the conference over to your first speaker for today, Mr. Sam Lawn. Thank you, sir. Please go ahead.

Sam Lawn

Thank you, and welcome to our fourth quarter and fiscal year 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 fourth quarter and fiscal year 2012. This will be followed by a 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.

Joseph Chen

Thank you, Sam. Good morning, and good evening everyone. Before I provide update on our fourth quarter's performance, let me first reflect upon the past year. 2012 was a challenging and a crucial year here at our company. In addition to macro headwinds, we faced the challenge of navigating our business through the new mobile landscape of the Internet. It was a huge transition as we transformed our company DNA to adopt a new mobile-centric environment. We also had to make the important key decisions on focus and how to better position for shifting competitive environment. Mobile is now the industry-wide game-changer that creates a whole new sense of a playing field for Internet services, and I believe we have reached the important strategic junction of our journey to becoming a true mobile company.

As I have mentioned before, mobile is both an opportunity and a disruption. During the year, our exploration definitely had its trials and errors. For example, one of the mistakes we initially made was switching to HTML5 our Renren mobile applications. The quality of the user experience on H5 turned out to be less satisfactory, and we ended up migrating back to native apps.

I'm pleased that we made progress in several mobile developments. For example, we rapidly grow our mobile user traffic on Renren, and our overall user base continued to grow steadily despite intensifying competition. We drove significant revenues from mobile-related games, and we opened up a whole new dimension for mobile commerce on Nuomi. Now at this point in time, I feel good that our priorities and the strategies are focused, and I'm excited about our prospects for 2013.

Throughout the past year, we also recognized our core strengths and how best to leverage them. First, from a product perspective, social networking has a natural affinity to mobile. And this offered us a great basis for transitioning into a mobile-centric company. For example, photo-taking and sharing has now become a simultaneous habit by most SNS users. We're fortunate to be in a mobile-adaptive business because not all Internet services can transition easily into mobile and maintain the same market share.

We recently integrated our PC and our mobile R&D teams for Renren into one from the previous 2 separate teams in order to improve efficiency and truly integrate our mobile DNA into our products. We will continue to dedicate a significant part of our resources to expanding our core foundation as Renren SNS still has more room to grow. We will seek to constantly improve the performance of Renren mobile services and be truly committed to a better user experience. After all, better user experience drives user engagement and expansion of social graph.

Secondly, on monetization, we have thought hard on how to monetize mobile and have concluded very early on that, in general, gaming and e-commerce will be the first 2 major means of monetization ahead of advertising. This would prove to be particularly true for Chinese social networking market, the market we're in. This was one of the major reasons why we launched the Nuomi, our group-buying service, more than 2 years ago, which, in addition to being an e-commerce business, is also a way to tap into the massive LBS space mobile advertising business. We expanded our gaming business from WAP to mobile very early on, and now we're currently enjoying a first-mover advantage.

In our view, the development of the mobile Internet will be a much more rapid pace than the PC Internet. Therefore, the company needs to evolve faster and respond more quickly to changes in order to capture new opportunities during this mobile transition. Most players in the space, including us, have already invested heavily in mobile, and we suspect this trend to be -- this trend to continue this year. In terms of timing, I think this year will be the year we see moment of truth. Because of the changing ecosystem and the nature of things being so different on mobile from PC Internet, most of the efforts on mobile Internet, like PC industry in general, will prove to be probably less than desired in the long term. I hope, however, and remain confident that despite this hyperrealistic outlook, our efforts will be in the small subset of those projects from an industry that will yield tremendous returns.

Now let me update you on our user metrics and the performance of each of our business lines in the first quarter, as well as our current plans for 2013. Our active daily user base expanded to a total of 178 million, representing a 21% year-on-year increase. In December, our monthly unique log-in users also reached 56 million, a 46% year-on-year increase. This was partly due to a successful user email recall campaign. While we are pleased with this user growth momentum, our future expansion expectation of monthly unique user growth will remain more normalized as in previous quarters. During the quarter, Renren user also spent an average of 7.5 hours a month on our SNS platform, slightly higher than the previous quarter. Despite intensifying competition, particularly from Tencent's WeChat, we're pleased to see that our user growth continues and the user engagement remains stable.

Brand advertising remain challenging due to the weak economy, the increased competition and the continuing shift of our user time to mobile. While we have seen some early signs of sentiment improvement toward China's macro condition, it is too early to tell how it will affect our brand advertising in 2013. On the other hand, the small medium enterprise, SME, advertising, has grown steadily through the year, increasing 50% year-on-year and now accounts for 14% of our total advertising revenue. We expect our SME advertising growth will continue to outpace our brand advertising this year. In 2013, we will focus on differentiated services to large-brand advertising accounts. We're also further expanding our SME advertising business. We will also continue to experiment with mobile advertising solutions by utilizing our vast real-name user base and the location-based information. SMEs, particularly, have similar needs as to ones for mobile advertising as both will likely depend on accurate targeting, local consumer information and action-based pricing models. Although SME advertising on SNS is still small and the gap between mobile advertising budgets versus user mobile time will continue in the near term, we need to prepare early and develop sustainable models to service those emerging sectors.

Our gaming business had another strong quarter with 116% year-on-year growth and a 7% quarter-on-quarter growth. Revenues was once again driven by our in-house-developed, cross-platform games. We have been successful with our gaming strategy on iOS, and we now have been testing our games on Android at the end of the fourth quarter. The Android market offers huge potential but also represents highly fragmented ecosystem and needs to be carefully mapped out. While we're still in the early stage of exploring Android opportunities, we remain very excited about its prospects.

Finally, let me update you on Nuomi, our group buying business. Our key metrics continue to improve, and we're well positioned as one of the final consolidators in this sector. As we'll continue to compete for market share against the remaining leading players, our operating losses has been narrowing for 3 consecutive quarters and we now have the flexibility of either achieving profitability by the end of this year or keep on investing to gain more market share. For an e-commerce business in China with less than 3 years of history, I would say that's quite an achievement.

In conclusion, 2012 was a year of exploration and a change in our company-wide mindset to grasp and think mobile. It was also a year of investment and organizational evolution to secure our future. Compared to a year ago, we're much more experienced and a focused company. Our priorities in 2013 are clear and simple: to build the best user experience on our core SNS service, explore mobile growth opportunities across our business lines and strengthen our existing monetization-centric businesses of gaming and group buying. If we look back at the past few years, new competition enter into China's social networking sector every year or every other year. We continue our steady growth in the user base. We are a resilient company with a strong social graph of loyal and reunion-based users and, most importantly, a team that's committed to continued self-evolution that's in sync with how fast our industry changes. Looking forward, we're committed to continue our growth and solidifying our place in the new mobile Internet era.

This concludes my remarks. Now I would like to pass the floor to James for the operational review.

Jian Liu

Thank you, Joe. Let me start off first by updating you on the mobile metrics. In the fourth quarter, the mobile penetration in our daily unique log-in users continued to reach higher at an average of 64%. During the quarter, 67% of the total user time spent on our platform came from mobile compared to 57% in the previous quarter. We are excited to see that user engagement on mobile continues to be strong as this underscores how the center of gravity for our business has shifted to mobile.

During the quarter, we also continued our relentless drive to upgrade services and launch new features on mobile, as well as on PC. Let me give you a few examples. First, we launched our Renren voice SNS, which is a first-of-its-kind feature in the world that allows users to post a voice status and exchange voice comments on their friends' status and photos. We're really excited about this product as mobile offers unique engagement functions not often found on PC. Voice is such an important element of human communication and interaction. This adds a new yet natural dimension for people to communicate with each other on our social network. We believe we are the first SNS company to fully incorporate the convenience of sharing and commenting via voice. Available across both mobile and PC, it is a feature that has already helped to deepen user interaction and engagement among Renren users.

Second, we migrated our Renren mobile app from HTML5 back to a completely rewritten native version, which improved performance and speed. While this version did not focus on adding new features, it was important that we improve the performance and speed of our mobile app so that our users can enjoy a better experience. In addition, we will soon introduce another upgrade with new and enhanced existing features, all with the sole aim to drive our users to share, comment and communicate more on our platform. Our core Renren division is dedicated to continuously optimizing user experiences.

Thirdly, we upgraded our Renren PC services to really provide a differentiated service from our mobile apps. While mobile represents the majority of where our users spend their time, PC nevertheless still represents an important entry point and can offer a different experience. PC typically offers more rich media and a visual-heavy content viewing, such as time line services, while mobile is for convenience and instant access to communication and sharing. We have also upgraded on PC our new public page customizable services. The goal is to help companies, organizations and public figures get better brand visibility, ultimately building closer relationships with their customers.

Turning now to our gaming business. At the end of December 2012, we had a total of 15 in-house titles and 46 third-party game operating on our platform. We maintain a healthy portfolio plus pipeline of games and look to attract more third-party game developers to our platform. We will continue to introduce new cross-platform as well as mobile-only games with a particular focus on Android market in 2013.

For Nuomi, I'm pleased to note that in the fourth quarter, we surpassed the $100 million general merchandise value, or GMV mark, for the first time. During the quarter, Nuomi also had 3.3 million active paying users with 48% repeat users, another record we have set. ARPU continued to grow healthily as it did for the last 5 quarters, and it is at an all-time high. Mobile sales also represent over 20% of total sales, and it continues to grow. We're very encouraged by all this progress and look to further execute on this momentum.

Finally, let me briefly update you on 56.com. We are pleased that in the fourth quarter, its video viewership more than doubled year-on-year, showing that our investment in user experience is paying off. This year, we will focus on further improving quality UGC content, UGC mobile video and increasing monetization by both expanding the IVAS service and the video advertising on 56.com.

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

Hui Huang

Thank you, James. Hello, everyone. As I will discuss both fourth quarter and the full year 2012 results, let me first begin with the financial highlights for the fourth quarter.

Our total net revenues for the fourth quarter of 2012 were USD 48.8 million, representing a 49% increase year-on-year. Now let me walk you through the major revenue components and the trends. First, Internet Value-Added Services, or IVAS, revenues in this quarter were $36.3 million, representing a 104% increase year-on-year. Within IVAS, online game revenues were $25.9 million, a 117% increase year-on-year. Our gaming revenue increase in this quarter was primarily due to the increasing popularity of several in-house-developed games. Other IVAS revenues were $10.4 million, a 78% increase year-on-year. Other IVAS revenues included a $5.4 million net revenue from Nuomi, which grew 100% year-on-year. Next, online advertising revenues were $12.5 million, representing a decrease of 17% year-on-year due to the challenges that Joe already mentioned earlier. Our top 5 verticals in the fourth quarter for advertising business starting from the highest ranked were IT, fast-moving consumer goods, auto and the financial services, daily care and apparels.

Now gross profit. Gross profit in the fourth quarter was $31 million, a 34% increase year-on-year. As a percentage of the total net revenues, gross margin decreased to 64% in the fourth quarter compared to 71% in the same period of last year probably due to increased costs associated with the bandwidth and content investment for 56.com and increased direct operational cost for our launched games.

Operating expenses in the fourth quarter were $59.3 million, a 38% increase year-on-year. Operating expenses in the fourth quarter of 2012 included $10.8 million expenses incurred on Nuomi. The increase in total operating expenses was mostly due to headcount particularly in R&D functions relating to mobile investments, as well as a G&A expense increase due to the growth of our company size and business operations.

Next, loss from operations in the fourth quarter was $28.3 million compared to a loss of $19.7 million in the corresponding period of 2011. The increase in loss from operations was primarily due to 3 factors: one, our significant investment in R&D particularly in mobile-related initiatives, where monetization lags behind investment; two, losses generated in our Nuomi businesses; and then three, our investment in 56.com to further improve its infrastructure and user experience.

Our net loss in the fourth quarter was $21.1 million compared to a net income of $44.3 million in the same period of last year, which was largely due to a onetime $51 million gain from disposing our investment in eLong. Nuomi contributed $5.6 million to the fourth quarter net loss compared to $9.1 million loss in the same period last year, reflecting the encouraging trend of narrowing losses at Nuomi.

As of December 31, 2012, the company had cash, cash equivalent and short-term investment of approximately USD 905.5 million.

Now let me briefly run through some key financial figures for fiscal full year 2012.

Net revenues in 2012 were $176.1 million, an increase of 49% year-on-year. IVAS revenues in 2012 were $122.3 million, a 109% increase. Within IVAS, online gaming revenues were $90.2 million, a 113% increase from 2011. Other IVAS revenues were $32.1 million, a 100% increase over last year. Within other IVAS revenues, Renren's social commerce service, Nuomi, recorded $16.1 million of net revenues for 2012, a 150% increase from 2011. Advertising revenues in 2012 decreased 10% year-on-year to $53.8 million.

Gross profit increased to $109.5 million in 2012, an increase of 19% year-over-year, with the full year gross margins at 62%.

Operating expenses in 2012 were $201.2 million, up 65% year-on-year as 2012 was definitively a major investment year for Renren, particularly in mobile initiatives.

Losses from operations in 2012 was $19.7 million (sic) [$91.7 million] compared to an operating loss of $30.2 million in 2012.

Net loss in 2012 was $75 million compared to net income of $41.3 million in 2011.

Finally, let me provide you our top line guidance for the fourth quarter of 2013. For the first quarter, we currently expect to generate revenues between $44 million to $46 million, representing 37% to 43% year-on-year growth. This forecast reflects our current and preliminary view, which is subject to change.

On the last note, I will also like to share we were able to renew our share repurchase program during the fourth quarter effective from January 1, 2013 through the remainder of the calendar year. We will provide more updates regarding details of our stock repurchase program on our next quarter's earnings call.

And with that, we conclude our prepared remarks. Now we would like to open the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Alicia Yap from Barclays.

Alicia Yap - Barclays Capital, Research Division

My first question is regarding the overall growth outlook for 2013. I wonder if you will be able to give us some colors in terms of what we should be expecting for this year, I mean, given 2012 was a difficult year for your online advertising. So I wanted to get a sense that -- if we expect to see some rebound. And also for online gaming business, after a very strong growth in 2012, will this trend actually continue into 2013? And what type of growth should we expect?

Hui Huang

Alicia, this is Hui. Thank you for your question. In terms of 2013 outlook, at this moment, based on our current visibility, our preliminary forecast is that the top line growth will see a similar growth rate as we saw in last year, so -- but of course, as it was still early in the year, the view and the estimate will be further reviewed and updated as we move into the year. And within different business lines, for advertising, we expect a somewhat recovery from last year's. So most likely, it will grow in the range of 20% for our advertising business on a full year basis. And then gaming continue to be one of the strongest drivers of our revenue growth. And as mentioned early in the call, in addition to the iOS system, this year, we will also start to explore Android market for our mobile and the cross-platform games. And hopefully, that will continue to add in additional growth. But given the -- our effort in Android market is still very early on, it's -- so we're not in a position to really -- to quantify the potential growth of that market. So for the time being, we estimate our gaming business most likely will grow in the range of 40% to 50% range. And thirdly, Nuomi, as mentioned in the call early on, we're very encouraged by the trend of Nuomi in both its operating metrics, as well as the financial metrics. So Nuomi, this year, will see a very visible revenue growth, I think more than 100% in terms of top line contribution. And lastly, for our video business, 56, again, after last year's full year effort in integrating the business to Renren and improving its infrastructure, this year, we'll definitely step up the monetization effort in this asset. And for this, we currently estimate to be around over 100% growth as well. So that's our current view. Once again, I want to stress this is very preliminary and subject to change and updates as our business grow during the course of the year.

Alicia Yap - Barclays Capital, Research Division

Okay, great. My second question is on -- related to the online gaming business. So I think Renren actually made a very early move into the mobile games over 1 year ago and resulted in a very solid growth in 2012. But then as we are hearing more and more from other traditional MMO gaming companies and also other independent mobile games developers entering more aggressively into the mobile games development, so what is our view on the overall competitive landscape? And do you -- do we have any -- like internal or third-party tracking in terms of how much market share Renren currently has for the overall mobile gaming market?

Jian Liu

Alicia, this is James. Thanks for the question. Today, we have been lucky that we were one of the earliest movers into the mobile gaming space. As far as we know, most of the gaming companies don't really separate out their figures from the mobile gaming business. This is the practice we have adopted because we believe it is still in the early stage of development. Having said that, we believe the competition, as you said, is going to intensify because a lot of people have spotted this opportunity. We respond to this competition by doing several things. First of all, we -- because we are the first mover into this business, we -- most of our games today are still in a very healthy stage of their life cycle. So most of our games in the mobile space are still performing very, very strong, and we believe they will continue to do so in the foreseeable future. The second thing is, we are building a pipeline because we have built an advantage in the cross-platform gaming space. It's actually harder to replicate the kind of success on cross-platform space than people typically think. So we believe our advantages in this particular space will continue for quite a while, and we do see a robust pipeline being built, as we speak. The third thing is, we're also reaching out to third parties. So as we said earlier, we are reaching out to third parties at the end of Q4 last year for joint operation opportunities, as well as licensing opportunities, and we hope you can see some results fairly soon in the next quarter or 2.

Joseph Chen

Alicia, this is Joe. Let me add a little bit more color on the big picture. So we were one of the earliest movers in the WAP-based, browser-based games back in 2007. And that -- the emergence of that type of game was after almost a decade of PC-based, client-based games development. So -- and even after that many years of cultivation of that business, the WAP gaming has grown to be a sizable industry. So I think this time around, the mobile gaming because of the fundamental innovation on smartphones as being a talented, very powerful gaming platform, and the platform guys that developing their payment infrastructure right on the device, I actually think that mobile gaming is actually very large, much bigger scale movement than the WAP gaming. And I think that this trend will go on for quite a few years. Although that, I think that one of the characters that probably, the growth trend will be much bigger than the WAP gaming industry in the early days. And the ultimate size of this industry is humongous, so we're an early stage of this development. I think that we're early mover. I think there's going to be a lot of challenges for us. The competitors are all coming, so I think that execution is key. But I think, at least, we got the macro wind behind us.

Jian Liu

I'll just add one more data point to Joe's point which is, the market is huge. This year alone, depending on who you ask, people will tell you between 300 million and 350 million new smart devices will be shipping to the market. And most of them will be Android. That opens up a huge opportunity.

Alicia Yap - Barclays Capital, Research Division

I see, I see. So that's very helpful. And then just last question very quickly on your SME advertising customer. So given that it's actually going very nicely and has contribute a decent size for your total advertising, so wanted to just get a brief sense of which sectors or verticals are these SME advertising customer represented?

Hui Huang

Alicia, the typical customers for our SME advertisers are in sectors like education, catering, tribal [ph] and commerce.

Operator

Your next question comes from Timothy Chan of Morgan Stanley.

Timothy Chan - Morgan Stanley, Research Division

Obviously, mobile has become a very important area for Renren. But when it comes to monetizing mobile traffic, how would you strike the balance between monetization and user experience, especially on mobile advertising? Any color would be very helpful.

Joseph Chen

Thank you, Tim, for the question. In terms of focus, definitely it's on user growth. So we make daily trade-offs on those, and we're getting a lot of interest from the advertiser side. But they demand what we viewed as more disruptive user experience, so we forgone advertising dollar for user experience. So there's no doubt about that. And I think that this market is just picking up because smart advertisers immediately see the value of a large available mobile inventories versus dollar that's prepared in advance on that. So I think any smart advertiser will really see that, that will -- mobile advertising, if well executed, will provide very good return on capital. So I think that we will probably start working with some of the best and smartest advertisers in this area, but provided they don't ruin our user experience.

Operator

Your next question comes from Alex Yao of Deutsche Bank.

Alex Yao - Deutsche Bank AG, Research Division

My first question is can you share with us the user demographics of your mobile gaming user? Are they the kind of type of users who rely on mobile devices as their primary or solo access point to Internet, which means that the mobile gaming revenue you guys generated will be incremental to the PC game and also to the entire market, or are they jumping between PC and the mobile, so their time spent or money spent on mobile is actually cannibalistic to the PC business?

Jian Liu

Alex, thanks for the question. This is James. To your question, the demographics of our users, right? If you look at our past few quarters' earnings release, we have been talking about our focus for the mobile gaming on iOS devices, and that was relatively heavy focus for last year. iOS users tend to be young, relatively more affluent users. So what we have always said is a lot of users we have found that we acquired for our games, actually come from the iOS devices. But the nature of our games is cross-platform, so we provide user experiences both on PC and on mobile. Users start to access the games from mobile but play across all these different platforms and pay also from these different platforms. And at the right time, we will release the breakdown of revenue between these 2 platforms.

Joseph Chen

So, Alex, from -- again, from a macro standpoint, I think there are 2 kinds of gamers. One, the gamers, who has already had experience playing games on PC. And the other type of gamer is actually a brand-new type of gamer that's never played games. I myself belong to the second category. So what we are having now are the both type of users. These includes users who have played actually 3D games in other companies' offering, now switching to mobile and the browser because of the convenience of it. And also, most importantly, we think one of the biggest drivers for growth is, for the entire industry, are the new gamers like me, who never bothered to play because of the cumbersome experience. Now because of the convenience, I have now finally joined this movement. So I think that, that probably -- hopefully, that's helpful.

Alex Yao - Deutsche Bank AG, Research Division

Yes, that's very helpful, very insightful. In terms of how eventually you see this new gaming genre will turn out to be, do you see it more similar to the PC game, which means you will have very strong hit titles with a very long-lasting life cycle? Or is it more like a Web game, which means life cycle is short and there will be a very fragmented market share, very tough competition, et cetera?

Joseph Chen

Yes, I think, Alex, I think my personal view is that this is evolutionary process, right? So the initial games will be easy to monetize, easy to build, high return on development resources type of games. But as competition increase, they eventually -- the developers and operators needs to become more creative and putting more resources and build higher and higher quality games, but equally leveraging on the innate computational capabilities of the smartphones or quickly, or first generation games were very much -- relatively easy to deport from WAP. But the latest generation of games, all native in order to provide a better, much better user experience. So would think that this is really a revolutionary process.

Jian Liu

And Alex, just one more point, to your point of life cycle of these games. What we have seen is it also depends on the genre of the game. If you're talking about RPGs, what we have observed is, as a Web game operator in those early days, we have seen there's no significant difference between the life cycle of RPGs in a Web browser environment than sort of the traditional RPG type of games. There's no significant difference. But if you're talking about SLGs, then that's slightly different. So we think similar trends might be observed on mobile as well.

Alex Yao - Deutsche Bank AG, Research Division

Got it, that's very helpful. And last question is, can you guys share with us how you think about the OTO market in China will play out over the next, say, 1 to 2 years? We obviously have seen different players using different approach, different product to penetrate into the market. What -- how do you guys think about this market, and what's your position in this initiative?

Joseph Chen

OTO. Alex, you mean OTO, right, the group buying business?

Alex Yao - Deutsche Bank AG, Research Division

Yes, yes. Online to offline.

Joseph Chen

Yes, yes, yes. Okay. So -- or Nuomi buying business falls in that category. And well, first, let me make a few comments here. One is, of course, the similarly surprising, improving health of this industry is direct result of the massive investment by the venture capital community 2 or 3 years ago. So the -- as most of the companies sought out what's remaining on further grounds, so that's really one of the reasons. And the second reason is that we think that in this space, as a percentage of the GDP or percentage of the customer spending, we think, is already higher than U.S. on top of the maybe higher percentage of e-commerce in the retail in China. And I think this trend will keep on going as long as the consumers spend very high percentage of their income on housing-related expenses, they have to make extra effort to make the rest of the dollars work. So we think that this trend will keep on going. And I think that this is a very attractive business for us because it basically offers a way to monetize our user base. As you might know that -- or initial success of this business originated from Renren when we launched our first deal that we sold 300,000 tickets in 1 city in 1 day. So that was very good synergy between our social networking business. So we remain to be very committed to becoming leader in this industry. And we think this is probably the last category of unworked land that was to work in terms of commerce. So we think that we're lucky to be accidentally landing here. And we plan to keep on investing.

Operator

Your next question comes from Jiong Shao of Macquarie.

Jiong Shao - Macquarie Research

My first question is on your advertising business. I was wondering, number one, could you tell us how many advertiser customers you now have. And also, I would imagine the move to mobile made -- in the short term had some negative impact on your advertising revenue. And what's your time line to launch the promoted annuity [ph] on your mobile platform? That's my first question.

Hui Huang

Jiong Shao, in terms of your first part of the question for brand advertising customers, on a full year basis, we have approximately 200 -- 7,280 customers for big brand advertisers. In addition to that, we have a close 2000 SME, small and medium enterprise, customers in 2012. And for mobile advertising, we just started testing a few format, and we will roll out a sponsored story in the second half of the second quarter.

Jiong Shao - Macquarie Research

My second question is on your gaming business. Because you are running a hybrid model, i.e., you get a bulk of the revenue from your own games and you have third-party games as well. I know some of your competitors are running the same model. However, there are other players, who are running the pure, sort of platform model, that don't do their own games. And then you have other guys, who only do their own games, they don't really host third-party games. I was just wondering going forward, as you grow bigger and bigger, this part of the business, what is your thinking in terms of the longer-term positioning in terms of your own versus having third party.

Jian Liu

Jiong Shao, this is James. Thanks for the question. If you look at the typical Internet provider, Internet service providers in China, companies, especially in the social space, companies like Tencent, QQ, it's not unusual for a company to provide games both developed from in-house and licensed or jointly operated with third parties. So we are actually no exception from this particular trend. Today, if we look at the mix of revenue contribution from in-house games and third-party developer games, our in-house games contribute a pretty significant portion of up to 80%, around 80% of total revenue mix. But that was not intentionally designed to be the case from last year. We were the first in this movement, so we were leading this trend, as we speak. And most of our in-house games are still performing very, very strong. But going forward just like you said, more and more third-party game developers will try to join this trend. So we are reaching out to other third-party developers through licensing and joint operation activities. And this year, we expect you will see more of them operating on our platform.

Jiong Shao - Macquarie Research

James, just following up on that, are you planning -- the other way is are you planning to put your games on the third-party platforms?

Jian Liu

The answer is, yes, we are considering doing that, too.

Jiong Shao - Macquarie Research

Okay, all right. My last question is on the mobile e-commerce. It looks like you are really making good progress, particularly on the margin side and given some of your old peers, competitors appear to be fading away. Now how you can leverage your existing large customer base for the group idea of expanding to -- what are some of the other location base or services or mobile e-commerce area also in group buying, you are considering to enter into in the next 6 to 12 months?

Joseph Chen

I think in the -- this is Joe, in the OTO [indiscernible] OTO sector, we think group buying is -- at least in China, is still the most lucrative business model for now because e-commerce is a complete circle, all right? You've got distributors, and you've got payment. And then you got the transaction going, right, versus other low-touch business models that you don't touch the money, then the ability to extract profit from that is much lower. So we like this business model because of the transaction. I think that for us, is that we want to become a leading player and a dominant player first in group buying. And then we will look at other ways to leverage on the user base, payment habits, so on and so forth, to go into other business. We have a small portion of the business for similar to Groupon goods, so there's an Nuomi branded, high-quality goods that we procure at a very low price, high quality. So that we're experimenting with that because they have much higher margin than our typical group-buying deals. So I think that summarizing, we want to become much bigger in the group, local group deals; and secondarily, leverage on the user base to gradually move into higher-margin businesses.

Operator

Your next question comes from Andy Yeung of Oppenheimer.

Andy Yeung - Oppenheimer & Co. Inc., Research Division

My first question is also about your mobile and your gaming. I think when we've -- we have so far seen how mobile has impacted our advertising business. Can you give us some idea or color in terms of how mobile is having impact on your gaming business? Is it incremental to revenues, or is it having also some sort of negative impact?

Jian Liu

Andy, this is James. Thanks for the question. I think we -- as we've said earlier, a large part of our new users acquired for our gaming is coming from mobile from last year. And we see this trend to continue this year, and especially as we will expand our entry into the Android markets. Thank you.

Andy Yeung - Oppenheimer & Co. Inc., Research Division

Okay, okay. So largely incremental, you're positive at this point, right? Okay.

Jian Liu

Yes.

Andy Yeung - Oppenheimer & Co. Inc., Research Division

And then my next question is about your investment. Obviously, in 2011, 2012, were both investment years for you. When we look into 2013, how should we look at your expense level? Should we continue to expect the level of spending in 2013, or should we expect some more balance between profitability and growth?

Hui Huang

Andy, this is Hui. As Joe mentioned in his opening remarks, this year is very important in our -- and many other Chinese Internet companies that are mobile initiatives. I think as he said is the moment of truth this year, hopefully. Given mobile is so important for our long-term growth, I think we will continue to invest relatively aggressively in mobile. But other than mobile for our other existing businesses, such as renren.com, such as Nuomi, such as 56, and the gaming itself is profitable. I think all the other 3 existing businesses will see a narrow loss. Nuomi is having some great trajectory. 56 who was stepping up [indiscernible]. So those existing business actually will see less investment in terms of net losses. But however, we will continue to invest around $40-plus million in pure mobile-related initiatives. So with that, the total investment will be similar to last year's. But we think that's absolutely critical to secure our long-term growth, particularly in a mobile-centric world.

Operator

Our next question comes from Mi Zhou of UBS.

Mi Zhou - UBS Investment Bank, Research Division

I have 2 questions. Firstly, when you enter Android market later this year, how do you acquire users? Do you expect a significant sales in marketing costs take to the, for example, app market or even browsers? Secondly, I wanted to know why interest rate in Q4 is so low in the fourth quarter.

Jian Liu

Mi, thanks for the question. This is James. If I understand your question correctly, you're talking about mobile game user acquisition?

Mi Zhou - UBS Investment Bank, Research Division

Right, correct.

Jian Liu

Or renren.com -- or for renren.com?

Mi Zhou - UBS Investment Bank, Research Division

I'm talking about mobile...

Jian Liu

On mobile side.

Mi Zhou - UBS Investment Bank, Research Division

Mobile gaming, user acquisition.

Hui Huang

This will be apps or browsers.

Jian Liu

Yes, so for mobile gaming, user acquisitions, we do it through a number of ways. Number one is, what we found is the most useful way of user acquisition is still through word of mouth. A lot of our users tried our games, liked it and referred it to our other users. So clearly -- especially for repeating users, word of mouth is critically important. Second, clearly, when you launch a new game, we, similar to the other players, we do spend marketing dollars with various marketing network providers to promote the game.

Joseph Chen

So very quickly, the -- this is Joe. Because last year, our mobile game were mostly on iOS, right? So iOS does not have a lot of markets. So I think that regarding to that portion, that's very small last year. But this year, we're moving to Android. So -- and Android distribution is very fragmented. And everybody have very high cost to maintain, so they demand big ticket for the passage. So basically, we expect that we'll spend some money. But definitely, we spend money, it has to be earnings positive for us.

Hui Huang

And Mi, regarding your second question, why our interest income in the fourth quarter were lower than before, I think probably that's because the interest rate for deposit, for term deposits had come down quite a bit, particularly from the second half of last year, so that's the primary reason. And to a less reason, as you can see, our cash balance has also decreased a bit, but that's a minor -- the major reason is the interest rates was lower now.

Operator

Your next question comes from Long Lin of Brean Capital.

Long Lin - Brean Capital LLC, Research Division

I have a question on the online gaming. Can you talk about your top games for the quarter and what percent of your game revenue contribution from your top games?

Hui Huang

Long Lin, our top 5 games in the fourth quarter contributed approximately 68% of our total game revenues.

Long Lin - Brean Capital LLC, Research Division

Also, can you talk about like for the game growth in the quarter, it's mainly driven by ARPU increase or paying users, active paying users?

Hui Huang

In the fourth quarter, the growth actually was contributed by both, although the ARPU increase contributed more, and to a lesser degree, some slight increase in the number of the paying users.

Long Lin - Brean Capital LLC, Research Division

So I'm not sure if you can give me a sense of -- like on the user side in terms of the number of game players, like what percent of your game players are paying users? And also, like how much percentage of your active users are game users, who are participating in the gaming activity during the quarter?

Hui Huang

In terms of our total number of players, it's around 3 million a quarter, 3 million players. And with that -- within that, we have approximately 67% of paying ratio.

Long Lin - Brean Capital LLC, Research Division

Okay, that's very helpful. My second question is regarding Nuomi. I understand that group buying business is still in the consolidation stage. Can you give me a little bit more color on the progress of consolidation for the group buying market, and overall outlook for the sector going forward? Like, what are some of the top players right now, and how will Renren position in this marketing right now -- in this market right now?

Jian Liu

Yes, so Renren is one of the leading players. I think some other leading players includes [indiscernible], so there's 2 or 3 of other players. But we tend to focus more on the more serious remaining players, such as [indiscernible] who both has enough capital and still working very hard to grow. So we think that eventually, some of the players will [indiscernible] and ultimately probably share [ph]. So that's one. And we think that the world [indiscernible] consolidation as standing alone players make less sense to the existing round. So they have to seek buyers or they either combine with remaining players or sell to bigger companies with deeper pockets. So we think both things will happen. But both of these things will lead to less players or aggressive competitive players in local markets. Because if you think about this group-buying business, it's really a network of cities competing with each other. So really, you need to look at a city level. And we think that on average, the serious, remaining serious players in each city on average will drop. We think that once their numbers drop below 3, then I think that overall speaking, the industry might become breakeven or earning positive for the top 2 or 3 players.

Long Lin - Brean Capital LLC, Research Division

Just wondering like, what's the headcount. Just a follow-up on that, what's the headcount, total headcount for Nuomi right now?

Hui Huang

It's around 1,400.

Joseph Chen

So headcount hasn't gone up that much, actually stable compared with last quarter.

Long Lin - Brean Capital LLC, Research Division

You mentioned about acquisition -- like, do you plan any -- do you have any acquisition plans for the group buying space?

Jian Liu

So we're sitting pretty and waiting for other people to call us.

Operator

As there are no further questions at this point in time, I'd like to hand the conference back to Mr. Sam Lawn for the closing remarks. Thank you, sir. Please go ahead.

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. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

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