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Renren Inc. (RENN) operates the Chinese social networking service Renren.com, which is similar to Facebook in China. It is scheduled to report its Q2 2013 results after the market close on August 14, 2013. The company updated its guidance for second quarter results in mid-July, and it now expects revenue growth of around 9% to 12% in Q2 as compared to its previous estimate of 23% to 27%. We expect its revenue growth in the second quarter to be impacted by delays in the mobile gaming segment and challenges in the online advertising sphere.

We believe Renren’s profitability will remain weak throughout 2013 owing to its high investments in mobile strategy, 56.com (its video vertical), and losses from the Nuomi business (its social commerce service). About 3% and 2% sequential growth was seen in Renren’s active user base and monthly unique login users respectively during the first quarter. We will keep a close eye on these metrics this year due to rising competition in the Chinese social networking market.

Recap of Q1 2013 results

Renren posted net revenue growth of 45.2% annually in Q1 2013 to $46.6 million. The gaming business and the Nuomi segment saw solid revenue growth during the quarter. Online game revenues grew 52.9% to $26.7 million and Nuomi net revenue rose by 102% to $5.1 million.

Online advertising revenue increased moderately by 4.7% annually to $9.8 million. Other Internet value added service revenue (which includes 56.com and jingwei.com, a professional social network) posted 80.4% annual growth to $5 million.

Profitability is a major concern for the company

Renren’s profitability improved slightly in the first quarter. Its gross margin rose to 64.4% as compared to 61.1% in Q1 2012 owing to higher revenue from gaming and Nuomi businesses. Its operating margin stood at -58.9% in Q1 2013, as compared to -64.1% in Q1 2012. Renren continues to be unprofitable due to high investments in R&D (particularly mobile platform development) and 56.com, as well as losses from the Nuomi business.

Owing to high investments in mobile strategy and the video vertical, we expect Renren’s profitability to remain weak throughout 2013. The company’s strategy to invest heavily in Nuomi’s expansion into new cities and development of Android platform for mobile games is also likely to impact its profits this year.

Revenue outlook has been revised down due to delays in the Gaming business

Renren had previously forecast revenue in the range of $55-57 million for Q2 2013. However, it updated its revenue guidance in mid-July to between $49 million to $50 million, representing annual revenue growth of around 9% to 12%. This change has been attributed to delay in the pipeline of Android games. Moreover, operating loss (non-GAAP) for Q2 2013 is forecast in the range of $29 million – $30 million. [1]

Uncertain outlook in the online advertising market

We expect challenging conditions in the online advertising segment during the second quarter, mainly due to intense competition and low mobile monetization. With mobile devices accounting for around 74% of the total user time spent on Renren platform in Q1 2013, we expect low mobile monetization to contribute to the uncertainty in this market segment. [2]

Mobile platform development represents a key strategy for Renren in 2013

With increasing mobile usage in the Chinese Internet market, Renren is heavily focusing on mobile platform development to bolster its growth. The company is revamping aspects such as Renren SNS mobile, Nuomi mobile and mobile gaming initiatives to enhance the efficiency of its mobile investments. It will launch various mobile updates during the year to upgrade its communication based features and user experience. We expect this strategy to result in higher R&D as well as sales and marketing expenses for the year.

We will update our price estimate for Renren’s stock after the earnings release.

Notes:

  1. Renren Inc. Provides Update on Preliminary Unaudited Second Quarter 2013 Results and Second Quarter 2013 Earnings Date Announcement, Renren, July 19, 2013
  2. Renren Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, May 14, 2013

Disclosure: No positions

Source: Renren Pre-Earnings: Slower Growth Expected