Renren (RENN) announces 3Q11 results on November 10th. The Street expects the company to break even on $35.08 million in revenue. Last quarter, Renren earned $0.001 per share on $30.4 million in revenue. The key numbers that investors should focus on are total and monthly user base, advertising revenue growth, and the results of the group buying unit Nuomi.
In 2Q11, total user base reached 124 million (+28% y/y) and monthly unique users grew to 34 million (+38% y/y). Revenue growth was 53% y/y, driven by stronger advertising revenue growth (+94% y/y) due to the increasing acceptance among advertisers in using social networking sites as advertising platforms. Renren is likely to see continued revenue growth from its core SNS unit. Furthermore, social gaming presents the most upside for growth. As of last quarter, Renren has over 900 social games that attract over 11 million users per month. The company would not only generate gaming revenue from selling virtual items but also advertising revenue from partnership with companies, such as Budweiser (BUD), that wish to embed their company logos within the games. However, Renren faces the challenge of attracting game developers because they consider the scale of user base when developing games. Renren currently lags behind Tencent (TCEHY.PK) and Sina’s (SINA) Weibo in this category, so investors need to pay close attention on Renren’s strategy of expanding its user base.
Last quarter, Renren’s group buying unit, Nuomi, saw its sale jump 37x y/y to $1.1 million and accounted for 4% of Renren’s total revenue (up from 0.1% a year ago). The unit looks to expand its presence in China and partnered with eLong (LONG) to offer group buying deals on hotels and tickets. However, operating loss at Nuomi widened to $4.5 million from $3.7 million a year ago due to increasing competition and decreasing commission rate from upper single digit to the current 5%. As a result, Renren’s operating margin was 2% for the quarter. Excluding Nuomi, Renren’s SNS margin is approximately 18%. Going forward, Renren expects commission rate to stabilize at 5% but this is highly uncertain given the intense competitive environment Nuomi operates in due to the estimated 5,000 group buying sites in China. Nuomi could leverage the Renren brand to attract user base but it is questionable whether the site can compete against its bigger rivals, such as Lashou, Fantong, and Kaixin. That said, it is very likely that Renren would dissolve Nuomi and focus more on its core competencies in SNS and social gaming should the unit continue to be unprofitable in the foreseeable future, just as how Baidu (BIDU) exited the microblogging space after its failed attempt to compete against Sina's Weibo.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.