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Quick Take

  • Renren will report its Q1 2013 results on May 13, 2013. While the revenue is projected to rise by 37-43% annually, we expect profitability to remain a concern in 2013.
  • We think the increasing competition in the Chinese social networking market could affect growth of active user base on Renren in the future.
  • The growth strategies for Renren include improving the user experience of its social networking platform, investing in mobile platform development and increasing the monetization from Nuomi and gaming.

Renren Inc. (NYSE:RENN) operates the Chinese social networking service Renren.com, which is similar to Facebook in China. It is scheduled to report its Q1 2013 financial results on May 13, 2013. In the previous earnings, the company projected its revenue in Q1 2013 at around $44-46 million, representing an y-o-y increase of 37%-43%. Renren has been unprofitable for the past two years, and we expect its profitability to remain a concern in 2013 as well.

Renren’s active user base rose by 21% y-o-y in Q4 2012 to 178 million. Its monthly unique login users also expanded by 46% annually to 56 million in December 2012. [1] We will be keeping a close track on these metrics this year as the competition is getting intense in the Chinese social networking market. Increasing competition from Tencent’s WeChat (a mobile messaging application) and Sina’s Weibo platform could affect the growth of user base on Renren.

Recap of Q4 2012 Results

In Q4 2012, Renren achieved total net revenue of $48.8 million, which represented an y-o-y increase of 49%. Its internet value-added services (IVAS) revenue grew by 104% annually to reach $36.3 million. Within IVAS, revenue from online games and Nuomi (a social commerce service) rose by 117% and 100% respectively, annually during the period.

However, online advertising revenue fell by 17% annually in Q4 2012 to $12.5 million, on account of macro headwinds in the Chinese economy, increased competition in the Chinese social networking market and low mobile monetization.

Profitability Is A Major Concern For Renren

Renren’s gross margin fell from 71% in Q4 2011 to 64% in Q4 2012, owing to increased costs associated with 56.com (a video hosting service) and online games. Its operating margin also remained negative at -58% in Q4 2012 on account of investments related to mobile strategy and 56.com, and due to losses derived from Nuomi business.

We think that profitability could remain negative in the current quarter as Renren continues to invest in growth opportunities, and the Nuomi business is expected to remain unprofitable in the near future.

Mobile Platform Development Is The Key Growth Strategy For Renren

Renren is focusing on mobile platform development to further grow its business. The Chinese internet market is in the midst of a transition phase with increasing number of users accessing the Internet on mobile. In line with the same trend, the share of mobile in the total user time spent on Renren platform increased from 57% in Q3 2012 to 67% in Q4 2012. [1] The company views this trend as both, a challenge as well as an opportunity.

Renren had initially utilized HTML5 for its mobile applications; however, problems were found in this strategy and it later switched to other native apps. During 2013, it is focusing on improving the user experience of its mobile applications. The company also recently undertook a reorganization of its R&D team to further intensify its mobile platform development.

Renren aims to monetize the mobile platform primarily using gaming and e-commerce. Within gaming, the company continues to launch cross-platform and mobile only games, and views the Android market as a future growth opportunity. And within the e-commerce market, Renren is leveraging its Nuomi business to tap the market potential. Using Nuomi, Renren also aims to bolster its location-based mobile advertising business in the future.

SME Sector Is Being Tapped For Growth In Online Advertising Business

Renren aims to promote its online advertising business using small-medium enterprise (SME) advertising. SME advertising grew by 50% y-o-y in 2012 and it accounted for 14% of the total advertising revenues in the previous year. The company will expand its SME advertising business in 2013, and will pursue location based mobile advertising to enhance its offerings in this sector. Renren expects growth in SME advertising business to surpass brand advertising growth in 2013.

Our price estimate for Renren Inc. stands at $3.17, which is around 5% above the current market price.

Notes:

  1. Renren Management Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, March 11, 2013

Disclosure: No positions

Source: Renren Pre-Earnings: Watching Mobile Growth And Margins