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Renren, Inc. (NYSE:RENN)

Q2 2014 Earnings Conference Call

August 25, 2014 9:00 p.m. ET

Executives

Ashley Law – VP of Finance

Joe Chen – Chairman and CEO

Hui Huang – CFO

James Liu – COO

Analysts

Jiong Shao – Macquarie

Alicia Yap – Barclays Capital

Eddie Leung – Bank of America Merrill Lynch

George Meng – Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2014 Renren Inc. Earnings Conference Call.

[Operator Instructions] Please be advised, this conference is being recorded today, Tuesday, August 26, 2014.

I would now like to hand the conference over to your first speaker, Vice President of Finance, Mr. Ashley Law. Thank you. Please go ahead.

Ashley Law

Thank you, and welcome to our second quarter 2014 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 second quarter of 2014. 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.

Joe Chen

Thank you, Ashley. Good morning, good evening everyone. Welcome to earnings call and the midyear review on core businesses.

First, on Renren. In the beginning of this year, we mentioned that Renren would refocus on college students and the young generation in China. Now half a year later, in reviewing this strategy, we believe that it's the correct one and a necessary one. Renren has traditionally been strong among college students, and a focused approach will in addition enable us to better understand and service this demographic, and hence strengthen our leadership in this critical segment. All these considerations are important for us to stay relevant in this highly competitive and rapidly evolving industry.

We're pleased to report that this strategy has made some progress. And let me share a few examples that best illustrate what we have been doing.

A few months ago, we organized a marketing think-tank alliance, called Young People Matter, or [Chinese language spoken] in Chinese. We lined up leading consumer brands, major advertising agencies, as well as a variety of other organizations, and formed this alliance. We offered a series of events for the alliance members to conduct the right conversations with young consumers, particularly the thought leaders and the most active users on Renren. We organized forums for the members to share their learnings and [indiscernible] about the new generation who were born in the 1990s, and hold debates on how to bond with them and win their hearts.

These series of events have been very well received and further strengthened Renren's reputation as the best venue and intermediary to access and understand today's young people in China.

With over 200 million people in China aged between 16 and 26 which have significantly higher education and higher family income level compared to just a few years ago, we believe that an initiative such as [Chinese language spoken] is very important and meaningful from both business and social perspectives. Young people matter. They do.

The other example of fruition from a dedication to young people is our recent successful launch of a new product, Momoda [ph]. I don't know how -- it's in Chinese, but Momoda [ph] is an interactive social quiz game. Users can play to challenge themselves with interesting quiz, or contribute questions to the game. Players can also challenge each other [indiscernible] and their friends on Renren for real-time contest.

During the first week of its release, it rapidly reached the top five in overall ranking on iOS app store in China, and the number one in the category. These days many of colleagues are having great fun beating me on a quiz and posting their triumphant results online. They found [indiscernible] to beat their boss.

The world for social products is rapidly changing and evolving, from Facebook to Instagram, from WhatsApp to Snapchat, from [indiscernible]. We see an accelerated pace of product innovation and user behavior changes.

Therefore, we fully understand the pressing need for Renren, being eight years old and born in the PC era, to innovate and reinvigorate. Momoda [ph] is a good example to demonstrate our team's ability and dedication to innovate products that are tailored to our core young user base, and the leverage of Renren as a social network [indiscernible] growth.

We believe this is the right direction to pursue. While our monthly active users, or MAU, has not grown visibly, due to the strong competition and we're focused on young generation, we're very encouraged to see a rebound of some key user engagement metrics, such as average time spent and UGC uploads.

As a next step, we will continue to explore new features and products that are tailored toward today's young people and more tightly integrate the new products with their needs.

For example, for Momoda [ph], we're planning to apply this highly engaging format of quiz game to online education. One of the challenges for online education so far is how to keep the users engaged and ensure that the self-study is sustainable and effective. Gamificiation is one of the directions that people are exploring. We hope that our experiment with Momoda [ph] helps to show that online study of a wide range of subjects can be fun and engaging.

In sum, in terms of user growth strategy, despite formidable competition and rapidly changing user preferences, we will focus on leveraging our strengths to provide highly tailored and innovative services to our core target audiences. We're determined to maintaining and strengthening our leadership in social products for China's young generation.

Now let me talk about Renren's monetization. Traditionally and in the foreseeable near future, advertising has been the main approach to monetize our users. Due to the continuous traffic migration to mobile and fierce competition, our advertising business has been soft. In Q2, we continued to see a year-over-year decline in our advertising revenue, and we expect it will remain light for the rest of the year.

However, we're encouraged to see that advertising continues to ramp up in both percentage and absolute amount. In the second quarter, our mobile advertising represented 18% of our total brand advertising revenue on Renren, compared to 11% in the previous quarter.

In addition, we're also trying to explore other approaches to better monetize our user base, through both new formats of advertising, as well as other monetization models, beyond advertising. For example, we plan to provide loans to our core users, college students. We have a substantial database for most of the college students in China. And Renren is a de facto platform to observe the consumption behaviors and the lifestyles. For certain consumer products, such as smartphone and light electronics, college students are an increasingly important consumption and trendsetting force.

In addition, for early investment in social finance, a U.S. based student loan company provided us an opportunity to learn the potential in this area. We're currently preparing for this new service, and plan to launch it in the next quarter.

While these new initiatives will take time to be fully tested and rolled out before they can contribute more meaningfully to our revenues, we're encouraged by these new possibilities and their potentials.

This wraps up my update on our core social business. Now let me shift from Renren to our other two businesses, gaming and 56.

On gaming, as mentioned in the previous quarter, we expect that our gaming revenue will decline or stagnate for a few more quarters, due to restructuring. Indeed, the performance of our gaming business in the second quarter was consistent with such expectation.

We have recently done a lot of thinking on the online gaming business. The industry has significantly changed, since we first got into this business, six years ago, particularly in the past couple of years, with the mobile games.

With the changes in the industry dynamics, we have decided to focus on operating games, instead of in-house development. We will substantially trim down our game development team and release them to the market.

Meanwhile, we will selectively invest in third-party game studios, including those to be set up by our development staff. We expect to finish this restructuring in the next couple months. While there will be one-time charges for the restructuring, we hope that a much lighter business model and a leaner organizational structure will benefit Renren games in the long term.

Let me now turn to 56.com. We're very pleased to report that the traffic on 56.com continues to grow very strongly. 56's average daily video viewership in the past month has exceeded 80 million, a record high. Meanwhile, the amount of daily UGC videos uploaded has also more than doubled, compared to a year ago, also a record high. In addition, recently the mobile percentage of 56 daily traffic has reached 45%, compared to less than 10% a year ago.

While we're very encouraged by the momentum in 56's traffic growth, nevertheless, we face ongoing challenge in monetization. As mentioned in the previous quarter UGC content in China's video industry is very under-monetized, compared with professional content. It will take time for more advertisers to adopt UGC video based advertising.

Before I finish my operational update, let me provide a quick update on Jingwei. The number of professional contacts in our database has grown, from 16 million in March, to approximately 19 million now. Based on this foundation, we recently beta-launched [Chinese language spoken], an alumni-focused social network.

Alumni network is one of the most valuable social relationship one could have in China. By focusing on this particular social graph, we aim to provide more value-added service for alumnis to connect, socialize and help each other. This app is currently at early stage, but we're excited about its prospect and look forward to reporting its progress in the coming quarters.

In summary, we're pleased with various transformation and progress made so far in our business. For Renren, we have and will continue to offer innovative and tailored products to further engage and target young users. For gaming, we want to be adaptive to the latest industry dynamics and move forward with a lighter business model. For 56, we're seeing great momentum in the traffic growth.

That said, we're conscious that our overall monetization level lags behind. Therefore, we are proactively exploring new monetization models, especially the areas that best suit college students, such as online education and student loans.

We will do our best to reduce the gap between our user base and the monetization level, and unlock the value of our assets.

That concludes my operational update. Let me now pass it over to Hui, for the financial review.

Hui Huang

Thank you, Joe. Hello, everyone. Let me provide you the financial highlights for the second quarter of 2014.

Our total net revenues for the second quarter were $25 million, representing a 42.4% decrease, year over year. Now let me walk you through the major revenue components and the trends.

First, Renren segment net revenues, which include advertising revenues and IVAS, or internet value-added services revenues, were $15.1 million, representing a 26.7% decrease, year over year. Online advertising revenues were $11.7 million, representing a 23.9% decrease, year over year. IVAS revenue were $3.4 million, representing a decrease of 35%, year over year.

Next, gaming segment net revenues were $9.9 million for the second quarter of 2014, a 56.6% decrease from the same period of last year. The decrease was due to that previously launched games have reached the mature stages and no significant new titles have been launched.

Now, gross profit. Gross profit in the second quarter was $9.1 million, a 65% decrease, year over year. As a percentage of total net revenues, gross margin decreased to 36% in the second quarter, compared to 60% in the same period last year, mainly due to the decrease in net revenues.

Operating expenses in the second quarter were $39.5 million, a 23.8% decrease, year over year. The decrease in total operating expenses was mostly due to the decrease in advertising and promotion for online games, as well as reduction in R&D personnel related expenses.

Next, loss from operations in the second quarter was $30.4 million, compared to an operating loss of $25.9 million in the corresponding period in 2013. The increase in loss from operations was primarily due to the decrease in our revenues.

Our net income in the second quarter was $31.3 million, compared to a net loss of $9.3 million in the same period of last year, which was primarily due to the $86 million gain on the sales of short-term investments, partially offset by losses in certain equity investments.

Adjusted net income, a non-GAAP financial measure, was $37.4 million for the second quarter of 2014, compared to an adjusted net loss of $3.8 million in the second quarter of 2013. Adjusted net income is defined as net income, excluding share-based compensation expenses, amortization of intangible assets, and impairment of intangible assets.

As of June 30, 2014, the company had cash, cash equivalent, and short-term investments of approximately $887 million, as compared to $836 million, as of June 30, 2013. The increase was mainly due to the sale of Nuomi, and the realized gains on short-term investments, which were partially offset by operating cash outlay and long-term investments.

In terms of share repurchase program, our previous one-year repurchase program expired on June 27, 2014, with approximately 22.4 million ADS shares repurchased with a total consideration of $69.4 million.

Our Board of Directors has authorized a new share repurchase program, with up to 100 million of the company ADS, within one year, from June 28, 2014.

Finally, let me provide you our top-line guidance for the third quarter of 2014. For the third quarter, we currently expect to generate revenues between $19 million to $21 million, representing 49% to 54% year-over-year decline. 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

[Operator Instructions]

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

Jiong Shao – Macquarie

Good morning. Thank you for taking my questions. Could you talk about--for your mobile app, could you talk about the MAU, DAU, those operational metrics? And could you also talk about, going forward, what are the strategies or distribution plans to help you increase the user engagement and user acquisition? Thank you.

Joe Chen

Jiong, this is Joe. Thank you for your question. So as we disclosed the -- we disclosed the monthly actives, which are 80%, 70% on mobile. And so let me talk a little bit about the mobile distribution, which is the second question you asked.

Renren requires -- when we were on PC, we required kind of a lengthy registration process, which requires a real name, a photo, and as well as preferably the school that the students are coming from.

So when we moved to mobile -- and that registration process is much more lengthy and complicated than other mobile apps, which simply requires maybe a phone number or sometimes don't even require a phone number. So distribution for us on mobile has always been a challenge, relative to PC. Because on PC, you just search Renren, and you just -- putting the required information, then you become a user.

So you have hit the -- I think you have hit the nail on the head, which is I think one of the main evolutionary direction we're taking is to make our app more easy -- more easier to be distributed online, which means you have lowered the barrier for the users to join the network.

And as you know, that Chinese mobile app distribution space, especially on Android is like zoo. You have people who control some of the gates, demanding huge tariffs for people to go through. So it's not the most market-efficient distribution network.

One way -- so there are two ways to do it well in that ecosystem. One way is that you become a very high ARPU app, which is a very sticky form of gaming. So that's why the mobile gaming industry is partially brewed out of this environment.

And the other is that you want to become a tool. If you're a tool, then your -- the activation rate is high. So if you spend some money to distribute these -- preinstall these software on the new phones or you promote it in app stores, you have higher uptake.

So unfortunately, Renren is sandwiched between the two types of app. We don't have very high ARPU in terms of the ability to make money directly. And unfortunately, we're not a tool, and it also requires very heavy registration involvement from the user base.

So to answer your question quickly, our next couple of versions of Renren will require less efforts, in terms of registering. And increasingly, we'll have functions and features that more resembles tools.

So -- and that's for Renren. And we have also -- we have other apps, which we talk about Momoda [ph]. Momoda [ph], until recent weeks, it was ranked on iOS, as a top five, even top two app, overall speaking, and number one in the gaming subcategory. It's a social quiz. And for that, we didn't spend that much money at all to promote it, and it just effortlessly got on the top ranking.

And so the way we think about it is that I think Renren has the social DNA. So I think that we realized it's the third -- in addition to the two categories of generalized app distribution strategy in this kind of ecosystem. The third one that's relevant for us is social. As long as we develop social apps that draw on the core user base here and address to certain strong needs, such as online education, such as users' needs to challenge each other, that's embodied in Momoda [ph]. I think we're going to have a better success, in terms of distributing our apps.

Jiong Shao – Macquarie

Thanks, Joe, for the comment. My second question is on your mobile game business. I think you talked about you've been restructuring that business for some time.

Given the marketplace, industry for mobile game today is perhaps a bit different from a year ago, could you share with us your views on what kind of, for example, game genre you're going to be focusing now, casual, mid-core or hardcore, card games, or the first party versus third party, and the industry, kind of the pricing trends, i.e. when you license a game, and the user acquisition costs. Anything you have observed from your side would be helpful. Thank you.

James Liu

Jiong, this is James. Sorry, my voice is actually not functioning that well today, so bear with me a little bit. I'll address your questions on gaming. Gaming, we started our restructuring late last year, and it took us two months to finish -- two to three months to finish that restructuring. In an effort -- that effort of restructuring, we were really focused on trimming the non-core gaming businesses. We overblew our staff, into a lot of non-core areas. So that effort was focused on trimming that part of the business.

Over the past couple of quarters, that last restructuring, one major trend we have witnessed is the way that gaming development is organized, throughout the country. So you guys probably are aware of this as well, but today, unlike the old days, when PC client-based games were being developed, today it's evolving from a more large-scale, factory type of model, into mom and pop shop type of model.

All across China, there's over 10,000 gaming development studios. Some people say it's more than that, twice more than that. But we believe 10,000 is about the right number, that are turning out something in the range of 7,000 to 10,000 games a year.

And these gaming studios are relatively small, ranging from a few people to 20 people. And actually some of the biggest hits were produced exactly by these type of studios, rather than big factories because in the old days, client-based games, they required scale. They required very long lead time to development. In the extreme case of World of Warcraft, it took them 10 years to develop. So a lot of money and efforts need to go into there. That requires a large-scale factory type of manufacturing to exist.

But today, it's evolved into more of a creativity-based type of industry. So we have decided, as Hui mentioned earlier in her remarks, that we need to do something with our in-house development team. And we have decided to do it in a more market-oriented manner, which we have observed some of the other gaming companies are doing as well, which is releasing them into the market.

So instead of keeping them in house, we will release most of them into the market. And they will be competing along with the other 10,000 studios. And instead of keeping them in house, we will pick and choose the best studios, with the best genres of games and the best game quality games. And we will potentially invest in them or form a partnership and work very closely with these guys, to lock in the publishing -- future publishing of these games for ourselves.

In terms of genre of games, we have witnessed a number of different types of genres can all see success, right? There's companies like Lado [ph], which licensed third-party games, small hit titles, like Temple Run and Cut the Rope, into China, and leverage on huge user base to cross promote heavier, monetizeable games.

There's card battle games, like [indiscernible] which is a great example of card battle games, morphed from their origins from Japan. There's also RPGs and ARPGs. There's a lot of ARPG titles that are hugely successful in China.

So we don't think there's one particular genre that will dominate the success of mobile games, going forward. And we are actually experimenting with quite a few genres. We will release RPGs, as you will see, probably in the next quarter or two. We are in discussions with some of the big titles, with very heavy IPs in that particular space.

We are also -- Joe talked about Momoda [ph], which is an education app with gamification efforts. And in a way, it's a casual game. So we believe opportunities like that also exist, especially given Renren's platform, which is a social platform. So we're experimenting with those. And going forward, we will see ourselves licensing way more from third-party developed games, from outside of the company, given that we are keeping a less emphasis on in-house developed games.

Jiong Shao – Macquarie

Okay. Thanks, James. Could I have a follow up? I think there are a few major -- sorry. There are a few major CPs all trying to be a publishing business, as you know. What do you think would differentiate Renren? Like how can you be sure or increase the chance of success to be a very good publisher?

James Liu

John, that is a very good question. A couple of reasons that we believe we will become a relevant player in this increasingly competitive market. Number one is we have been in this industry for quite a long time. We were the first one, you know, one of the very few -- the earlier movers into the mobile gaming space. We moved into there at the end of 2011. So we believe we have built up some experience in publishing games starting from publishing our own games and now, increasingly publishing third party games.

The second thing is Renren as a platform, once again, you know, we refer - Joe is talking about Momoda [ph], right? This is a very highly sociable game. Basically, you know, you pick a rival and you compete against them on a you know, answering those questions after doing that, if you win, a lot of people are more than happy to share their results with their friends.

And you know, although the Renren platform is not the biggest social platform in China, we have seen that it is highly successful in launching social oriented services, you know, including in those early days, Nuomi, right? The first deal we actually brought in -- sold 300,000 movie tickets because it also is a very social activity, people share it on Renren at the beginning.

We have witnessed the same kind of success on Momoda [ph] so we believe we want to place a heavier emphasis on social type of casual games and leveraging on the Renren platform, that could be a very, very interesting angle.

Joe Chen

John, a very quick addition is that we don’t expect that -- a change of strategy producing a dramatic better results in a very short term. But we do think that we will make this more focused and it minimizes our risk on the money which is so essentially, we are diverting some R&D spending to licensing and similarly more promising gaming titles out of the 10,000 Studios that James talked about. So the return profile on those R&D money that we have previously spent, which is large, well, they are different, right? In the old days, it is going to be hit driven, right?. It's going to be hit driven out of the studios that we have, still small odds. But going forward, we're going to apply some of the money externally but when we plunk those money down, we are going to have to take a look at games and get a good assessment on the likelihood that it will be successful.

So the success rate is going to be higher but the expected return should be about the same but it is more certain and so I think that the whole industry would -- the whole industry is moving, as you pointed out correctly and -- but the fact that there are so many studios out there and typically, for each genre, you know, each CP can only control so many titles because if you are a gaming studio, you don’t want the license to somebody who already has five similar titles on their hand. Right? So from the oversupply side of the market dynamics, I think this is always the low-hanging fruit out there for us to pick.

But we have to be careful.

Jiong Shao – Macquarie

Okay, great.

Thanks, Joe and James for the comments

Joe Chen

Yes, thank you.

Operator

Your next question comes from the line of Alicia Yap of Barclays. Please ask your question.

Alicia Yap – Barclays Capital

Hi, good morning, Joe, James, and Hui, thanks for taking my questions. I have a couple of quick questions. Number one is can you elaborate a little bit on the $86 million gain that you recorded this quarter. What are these investments on and then are there any other investments in our book that we potentially could also have some similar benefit down the road? That is my first question.

Hui Huang

Hi, Alicia. This is Hui. And thanks for your question. For the gain, the realized gain from short term securities in 2Q, it was actually similar to the one we had in previous quarter, the first quarter as well, it is also one investment in the publicly-listed Chinese companies that we made about a year ago or a year and a half ago and recently given the stock market performance, we thought it was good timing to realize from the gain.

So we started to dispose that security in the recent quarters. And as a result, the realized gains was reflected in Q1 and Q2. But we have disposed the majority of the holding and we don’t expect similar realized return from that particular investment in the coming quarters.

Alicia Yap – Barclays Capital

I see, so to follow up on that, do we have other investment in other public companies that is still in our book that we may consider disposing in the future?

Hui Huang

The short answer is no. If you recall, in the past six years since 2008, and to date, we have only made three investments in public securities. Aand the first two were eLong, which we invested in 2008, and realized gain in I think Q4 2011. And the second one, as everyone knows, was our investment in [VIP Shop], and again, we disposed of our position fully early last year. And then the one that you saw in the past quarter, Q2 and Q1, was our third and last investment in public securities.

Alicia Yap – Barclays Capital

I see, okay. That is helpful, and then in terms of your cash and you know, given you have more than $800 million still in the cash position and I know that you used some of that for buyback. So can management give us some -- you know, guidelines or maybe the plans that you target to use some of this cash for. Thank you.

Hui Huang

Sure. Well, first and foremost, the use of the cash is for operation, and as you see, and also as we mentioned in our earlier prepared remarks, our monetization still is quite lags behind our asset. We are very conscious that we are still loss-making and we still have operation and cash outlay and so our operations need continuous cash support. So that is the number one usage.

And then number two, you also mentioned we have this new share buyback program, we have selectively repurchased our shares. And thirdly, we are also making selections for investment, no matter if it is the third party gaming studios that James was talking about, or other investment in relevant internet business that we think are very interesting and have long-term value. So this will be three area for cash usage.

Alicia Yap – Barclays Capital

I see.

Joe Chen

Yes, Alicia. This is Joe. I think another addition is that we talked briefly about the student loan, I think that is going to be a very interesting way to deploy a small pile of cash and jump in to the internet financial industry that -- in the very early stage of development in China.

Alicia Yap – Barclays Capital

I see. So thank you, Joe. So can I follow up on that, is that so it means we are going to use some of our balance sheet and for the student loans and you know, opportunity, right?

Joe Chen

It is going to be a relatively small site with our balance sheet money and because we believe that we can you know, control the cost at a reasonable risk and a reasonable expense, and once we have proven the model to be scalable and profitable, we will start leveraging outside capital.

Alicia Yap – Barclays Capital

Yes, and are we partnering --

Joe Chen

Yes, go ahead.

Alicia Yap – Barclays Capital

No, sorry. So are we partnering with some financial institutions to do that and --

Joe Chen

Well, for the first stage, it is experiment and basically figuring out a model, right? So that is going to be just a [indiscernible] but going forward, two things will happen. One is we need to fund a source of capital that is low cost on a competitive basis, and in mature,, we need to find partnerships or just build our own business to migrate the users to higher value products, and to capture the tail end of the value.

Alicia Yap – Barclays Capital

I see. And if you wanted to put a timeframe on this new initiative, is there any like visibility in terms of how long or you know, what is -- kind of like the early expectation that we should at least, you know, monitor or expect to see in terms of how the progress you guys are making.

Joe Chen

So -- okay, two comments. One is that we are going to launch this hopefully early Q4, and that's -- but how quickly it's going to take, this is a really nascent industry. I think this demand out there that's latent but waiting to burst. And so I think early movers will capture a lot of market space just like in the early days of group buying.

But just like our experience in social finance has shown in the past three years, we are early investor, we have seen how it grows. And it is going to be -- I think the cost of capital is going to be a major -- because that directly influenced our own margin and so I think that the size of the industry and -- depends on two things. One is that whether the cost of capital -- institutional capital will be low enough, and secondarily, whether somebody can figure out a way to capitalize on the tail-end of the value.

And if you work this out, it's going to be tremendously significant business. So we don’t know how long it is going to take but we think this is just like the early days of us discovering group buying.

Alicia Yap – Barclays Capital

I see. Okay, great. Thank you.

Operator

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

Eddie Leung – Bank of America Merrill Lynch

Good morning. Thank you for taking my questions. Two related questions. The first one is about your strategies to penetrate deeper into the young generation. So I'm wondering if there is any metric you can share with us to show us the progress you have made in the past few quarters. And then related to that, just wondering if you can also share with us any impact, good or bad, from you advertising basis, given a potential change in user mix. Thanks.

Joe Chen

I will answer the first question on focusing on users. So as I indicated in the conference call this 200 million consumer in China between age 16 and 26, so this is the second largest age cohort in China, second after the parents generation which were born a few years after the great leap forward, so these all right the two biggest age cohorts. So if you are a consumer business guy, you figure out a strategy on these two cohorts. So for us, we have a nice $200 million user base to work on.

And so we would all have to be one for all. So that allow us to build applications that are tailored to young people's needs as we mentioned earlier, we launched our newer version of Renren which as a campus-wide, you know, campus-wide photo sharing and messaging services, so I don’t think that any other -- I don’t think other messaging services could offer similar stuff but it could still be -- they have to be one for all, right? And so the focus allows us to offer differentiated service, number one. And number two, is that I think that the upgrade and penetration of cheaper, faster, better smartphones, that is going on in a very fast pace in China has given us brand new opportunities.

Previously in this age cohort of 200 million, the smartphone penetration was not that high. But now, with the cost of smartphone being so low, now, almost everybody in the school should have a phone and most likely, it's going to be a smartphone once they retire their feature phone in the next few quarters.

So we think that there is going to be a new wave of much higher usage in terms of photo capturing, sharing and stuff that you know, originally, give rise to the rise of social networks globally, right? Because you recall how social networks came to place. It was a photo sharing app on PC, right? And people take photos with their digital cameras and they share with their friends on PC.

So we are entering this new era where most of the photos now are increasingly captured by smartphone. And people needs to share them and I think that the 800 pound gorilla players on this space, they have a good portion of that business but the social network or the distribution network it built is quite closed. So we are. in terms of openness, and closeness, Renren and the social networks sits right between mobile messaging and as well as the Twitter type of network, right?

And so I think that it is going to be interesting to experiment with different forms of social graph and with the focus to massively distribute the photos that is going to be taken on this -- and the tens of millions, the hundreds of millions of smartphone by the Chinese use. And so that is our strategy overall speaking and after the change of -- up to the strategic focus on use, we have observed that per UCVC [ph] and usage has improved a lot. But we have not seen the MAU to grow.

Hui Huang

And Eddie, in terms of second half, your question, i.e. the impact on our education business and our refocus on the young generation. I think the different sectors have a different response to this strategic shift. For example, FMCG, fast moving consumer brands, they love it, because most of their target consumers are they young generation and they very much resonate with what we try to do there.

But for certain other segments who target the more mature consumers such as automotives, you know, apparently, there is a focus on people aged between 16 to 26 and may not match exactly their need at this stage. And so in short, advertisers whose focus are geared towards young people, like it very much. And those for more mature population, they like the idea but from the purchase perspective, maybe they will not translate immediately advertising campaign yet.

Eddie Leung – Bank of America Merrill Lynch

Thanks.

Operator

[Operator Instructions]

Your next question comes from the line of George Meng of Morgan Stanley. Please ask your question.

George Meng – Morgan Stanley

Hi, good morning, Joe, James, and Hui. Thank you very much for taking my questions. I have two questions, the first one is regarding your mobile apps and so can you provide us an update on your mobile revenue app with more the in-app communication function introduced a couple of quarters ago. And also, you mentioned about this Momoda [ph] app quite intensively so I just noticed that the ranking of this app actually come down a little bit this week. How do you see this going forward? Is this normal therefore, this kind of viral app that tends to. taper off after a while? And I have a follow up. Thanks.

Joe Chen

Hi, George. Momoda [ph] I have actually had a meeting with more guys talking about --it is actually the ranking went down miraculously after we have launched the new version and with the same or better retention rate. So I don’t know what happens down the iOS platform but regardless of that, it's -- yes --

James Liu

Sorry, George, this is James. I think that part of the reason, at least it is part of the reason for [Momoda's] drop is because starting from this week, in the past couple of days, you know, some of the other cost like Tencent, they are heavily starting to promote some of their games like Candy Crush from King.com, Tencent licensed it from quite a few quarters ago. They finally decided to start promoting it so you see very happy promotioning in the past couple of days and Candy Crush in now number one on the entire you know, IOS list.

And so that partially comes from other people's heavy promotion.

Joe Chen

So going back to your question, George, on Momoda [ph] is that have not spent money on IOS promotion as viral and natural growth, but as I said earlier, Android, you do have to promote it so we have not started promoting on Android and so once we start promoting on Android and I think that you are going to have crossover effects because it's is a very social and viral app so the Android user will be inviting their friends who are using IOS. So hopefully that is going to help.

But how long this phenomenon is going to last, I honestly don’t know because this is the first time we are doing this but I think this is definitely something we are truly good at and with a platform that we can leverage on.

And on the communication feature, thanks so much, George, for actually talking to that kind of detail. And we are not seeing massive uptake of communication, even though we devoted two tabs, our main Renren app, the first one and the fourth one, and the one in the middle is actually camera and publisher if you use our Renren app.

So we devoted quite a lot of real estate to promote this but the fact there is that the students and our users still strongly prefer to use Renren as their sharing tool or communication tool. And so I think I alluded to this a little bit more, I think that our bread and butter back in PC days has always been photo, and on mobile days, it is still going to be photo and photo sharing.

And so you should expect that we are refocusing our photo in the next few iterations of products. I think the -- after the past few quarters of iterations, I think we are getting to a slightly faster pace in terms of turning over each version and as well as the quality of the product in terms of network lag, crash rate. And so that allowed us to keep on experimenting.

As I said earlier, one is focused on more photo and devoting more prime real estate to that and because we do expect an explosion of smartphone taken photos, particularly from our user base. Number two is still to further adapt the social networking registration process to the mobile era which means you probably don’t even need real names as long as you have the phone number and you share your address book. We think that is as good as a user who has a real name and a real photo but actually potentially marketing account [ph] of some company.

And so these are the two directions we are taking. One is to increasing the stickiness, show better support of photos and the other is for better distribution which really lower the bandwidth of -- lower the barrier of joining the network. Because if you try joining Renren, it is not easy because there are so many hoops you have to jump through. And I think in the mobile era, it has to be simplified quickly.

George Meng – Morgan Stanley

Okay, got it. That is helpful. And my second question is related to your mobile monetization, especially the non-game part and so it is good to see that your mobile ad actually [ph] contributed 18% of your total ad revenue, but do you think that the mobile monetization I mainly like an extension of the PC monetization or do you see actually new monetization opportunity that is more specific to mobile? And specifically, for example, for your Gen-Y [ph] network, apart from the alumni app that you rolled out, what are the other monetization opportunities that you are looking for? Thanks.

Joe Chen

So Jingwei's monetization obviously will be ultimately on recruiting just like Miping [ph], and all games is to build a durable professional white-collar mobile social networking platform. So the way to monetize that is through recruiting initially and later on, probably in business development and advertising. But just going back to Renren, we think that the number one, I think the first 10% to 15% of the mobile advertising probably is just the PC advertisers and going to mobile, taking advantage of the low rate of -- because you know, if you know how to do this well, it is really cheap to advertise.

And unfortunately, in China, online advertising, especially brand advertising, it is primarily a PC world. And the move has been very slow because it is -- I think from earlier quarters, a customer make the decision primarily on an annual basis, where in the meantime, mobile internet is growing at a quarterly pace. And so there is a big lag over there and if you want to talk about like the unique monetizations, I think that for China, and for us, are pleased, I think that increasingly, I think that monetizing beyond advertising and to a certain extent, mobile games, going into bigger ARPU services such as online education and online financial services, you know, it's probably the long-term, more profitable way to make money.

And because -- you know, because of the relatively small size of the mobile advertising environment and also a general lack of third party infrastructure to support the industry, meaning the measurement and agencies, this ecosystem followed the customer and followed the [span] and right now the easiest transition from brand advertising standpoint is the customer is -- move part of their budget from TV directly to online video.

And if you think about the online video business, it's a different business model, right? Because they spent so much money acquiring content and that generates a lot of the interest, right? So it is like -- basically, it is basically, before this business become really profitable, you could view those content acquisitions as basically continuous CapEx.

So you can't compete with another business model that is easier to transit and with continuous huge CapEx. And so that forces us to think beyond advertising and I think we are going to make some mobile apps by promoting third party mobile apps, and -- but in China, you have the Android application distribution system which is a sort of like you know, which is you know, which are highly comparative money driven right? Monetization driven. So I think that is the -- I mean, we are going to focus on a couple of promising areas that we are going to focus on and try to do a better job in monetizing through advertising.

George Meng – Morgan Stanley

Okay, cool. That is very helpful. Thanks a lot.

Joe Chen

You're welcome.

Operator

There are no further questions from the telephone lines. I would now like to hand the conference back to your presenters for closing remarks. Thank you, and please continue.

Ashley Law

Thank you. 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. Good bye.

Joe Chen

Thank you.

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