Renren (RENN) reported its 3Q11 result after the market closed on Thursday.
- Total net revenue: $34.2 million (+57.1% y/y)
- Online advertising revenue: $19.6 million (+91.8% y/y)
- Gross margin: 80.4% (-50bps from 2Q11)
- GAAP income: $1.2 million net loss, compared to net profit of $7.3 million in 2Q10.
- Non-GAAP income: $0.3 million, compared $6.3 million a year ago.
What I Liked: Impressive Advertising Revenue And User Growth
Online advertising revenue (57% of total revenue) increased 91.8% y/y, driven by strong growth in activated user base which is estimated to be ~137 million (+37% y/y). In addition, monthly unique log-in users increased 58% y/y to 38 million.
Internet Value-Added Services (43% of total revenue), which includes online game and group-buying units, saw sales grew 26.3% from a year ago to $14.6 million. Online gaming revenue grew a modest 23.6% y/y. Group-buying unit, Nuomi, recorded $1.7 million in revenue, compared to $1.1 million in the previous quarter.
Renren also ramped up its mobile initiative, which has penetrated 35% (13.3 million) of the company’s unique monthly users, of which over half access their Renren account through a mobile device. Renren’s location-based-service (LBS) commercial platform currently runs 30,000 promotions and deals from thousands of merchants. The attractive deals and promotions could generate user stickiness as consumers search for local deals in their area.
What Concerned Me: Nuomi Continues To Disappoint
As expected in my earnings preview, Nuomi’s result was disappointing. While Nuomi’s sequential revenue growth of 54% q/q was very impressive, the unit’s gross margin fell sharply to 91% compared to 97% in the previous two quarters. The decline in gross margin highlights the concern I pointed out in the earnings preview in which Nuomi operates in a highly competitive environment that has over 5,000 group buying sites and faces downward pressure in its commission rates as the unit tries to attract merchants.
Nuomi is negatively impacting Renren’s overall result.
During the quarter, Renren’s operating expense was $34 million (+145.9% y/y), of which $8.1 million was incurred on Nuomi. Excluding Nuomi, Renren’s operating expense was $25.9 million (+91% y/y). Furthermore, Renren’s GAAP and Non-GAAP income could have been a $6.2 million (18% net margin) and $7.7 million (23% net margin), respectively, had Nuomi be excluded from the overall result (Note the positive net margin is due to foreign exchange rate and interest income).
While I am positive on Renren’s growth as China’s leading real-name SNS, the company is expanding in multiple fronts where the markets are highly competitive. The acquisition of 56.com could be a double-edged sword as it competes for contents, and Nuomi could prove to be a failure should it experience further margin deterioration and competition.
Renren could be better served by focusing on its core competencies rather than venturing into untested waters. During Facebook’s early years, founder Mark Zuckerberg focused entirely on upgrading Facebook’s core competencies by creating better user profile and experience, and improving the site’s functionalities. As a result, Facebook has over 800 million users worldwide and could generate $4.27 billion in revenue this year since it was launched in February 2004, while Renren has 137 million users and is expected to generate a meager $120 million in revenue this year since it was launched in December 2005.
Even though disregarding group-buying and online video and focusing on SNS might not create the publicity that Renren desires, such a strategic focus might be beneficial to the company in the long term.