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Renren, Inc (NYSE:RENN)

Q2 2012 Earnings Call

August 07, 2012, 9:00 pm ET

Executives

Sam Lawn – Director, Investor Relations

Joseph Chen – Chairman and Chief Executive Officer

Hui Huang – Chief Financial Officer

James Jian Liu – Chief Operating Officer and Executive Director

Analysts

Timothy Chan – Morgan Stanley Asia Ltd.

Jiong Shao – Macquarie Capital Securities Ltd.

Eddie Leung – Merrill Lynch Far East Ltd.

Alicia Yap – Barclays Capital Asia Ltd.

Amanda Sigouin – Jefferies & Co., Inc.

Wallace Cheung – Credit Suisse (Hong Kong) Ltd.

Alex Yao – Deutsche Bank AG (Broker China)

Ming Zhao – UBS Securities

Andy Yeung – Oppenheimer Securities

Fawne Jiang – Brean, Murray, Carret & Co. LLC

Muzhi Li – Citigroup

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q2, 2012 Renren, Inc. earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today 8th of August 2012.

I would now like to hand the conference over to your first speaker today Investor Relations Director, Sam Lawn. Thank you. You may begin.

Sam Lawn

Thank you. And welcome to our second quarter 2012 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 2012. This will be followed by 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 contained 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.

Joseph Chen

Thank you, Sam. Good morning, good evening everyone. Welcome to our second quarter 2012 earnings conference call. We are pleased to report our second quarter revenues came in above our guidance year-on-year growth of 48%, supported by strong came in growth and a better-than-expected performance by our group-buying service, Nuomi.

Let me now update you on our user metrics. Total activated users this quarter reached $162 million compared to $124 million at the end of the second last year. Showing continued interest by internet users to join the Renren community. We also have $45 million monthly unique login users in June, representing an increase of 71% year-over-year.

On a sequential basis, this number also represents a good rebound from the pronounced of seasonality we experienced in the first quarter during school winter exams and the Chinese New Year. The growth in monthly unique logins in the second quarter was also supported by the launch of a Version 6 for PC and our new mobile apps for both Android and iOS.

Our mobile penetration continues to grow. As our user base further expands in the second quarter an average of 40% of monthly unique login users in the quarter continuing to access their Renren accounts through mobile devices compared to 71% in the same period last year. Over 72% of Renren mobile users are now using smartphones representing the high quality of our user base. Even more importantly, the total time spent on mobile continue to represent over 60% of our total user time.

Meanwhile, we also saw the aggregate PC user time increase sequentially due to enhanced PC experience of our Version 6. Moving forward, we will continue to focus enhancements for both the mobile and the PC Versions to provide best user experience on both fronts.

Finally, our average for the entire quarter our login users spent 7.8 hours per month on our platform. Even as our platform continues to attract new users, we are pleased to see our user engagement levels maintained at a consistent and healthy range.

Moving now to our advertising business. Brand advertising remained challenging in the second quarter, due to weak market economy, increased competition and a continued migration of your PC traffic to mobile mediums. Our total advertising revenue in the second quarter saw over 16% sequential growth but an 11% decline compared to the same period last year. Primarily, due to ARPU standing and large brand advertisers.

On a positive side, we did witness an increase in the number of brand advertising clients on our platform, which indicates that Renren’s platform continues to attract more advertisers. In addition, we continue to see momentum in our SME advertising, which represented 14% of our total advertising revenue in the second quarter.

In terms of advertising business outlook for the second half of this year, at this moment, due to limited visibility, we think it will remain challenging for the rest of the year. Brand advertiser spending will continue to be affected by market conditions. In addition, for mobile user growth, while a positive trend to our long-term strategy, remains a challenge and near-term monetization in terms of advertising.

We are, however, experimenting different mobile advertising model, in user experience and effective advertising models. This will be a priority for us as mobile growth is both an opportunity and an industry-wide disruption. We expect no significant revenue contributions for our mobile advertising in the near-term. As the next few quarters will be about perfecting these models and preparing for execution.

Advertising on social networks in general is still at early stage of development and we will continue to work on educating the market, while perfecting our own platform solutions at the same time.

Now, let me update you on our gaming business. We had another strong quarter in our gaming business, thanks to the success of our own titles, as well as the mobile gaming as an extra growth catalyst. Gaming revenues grew 122% year-over-year in the second quarter driven mostly by the popularity of our in-house developed titles. Our mobile versions of these in-house games continue to attract new high quality users, while increasing time distribution by allowing users to play the same game through PC and multiple mobile mediums.

Finally, I would like to provide an update on Nuomi, our group-buying business. We are pleased to see that Nuomi demonstrated a strong momentum in the second quarter as our GMV, or general merchandise value grew over 50% sequentially, and quarterly active paying users grew over 40% quarter-over-quarter as well.

Even more encouraging, we start to see Nuomi’s losses narrowing. And we are confident that this positive trend will continue in the coming quarters. Meanwhile, we’re seeing increasing signs of industry consolidation. We believe Nuomi is a well-positioned to be one of the consolidators giving its own growth trajectory, as well as our strong financial resources. At the same time, we will continue to execute our strategy on Nuomi as an integral part of developing our mobile and a local business ecosystem.

As a matter of fact, we are already seeing progress in Nuomi’s users making purchases through mobile. And expect this trend to be even more visible like the mobile payment infrastructure further develops.

In conclusion, our strategy, advancements and progress so far are consistent with what we laid out in the beginning of the year. As competition within our sector continues to intensify, opportunities will also [come about] as we further evolve and grow. We will continue to invest for the future, with the mobile as the key focal point.

With that let me turn to James, our COO, to give you a more detailed operational update.

James Jian Liu

Thank you, Joe. Let me take this opportunity to talk about some of the more noteworthy operational developments in the past quarter. On the product development side, the [highest priority] in terms of effort and investment continues with mobile products and building out our ecosystem around our real-name user base. Our newly designed Renren mobile app further gained traction with our users, as is exemplified by our MAU growth and mobile time spent on our platform.

The new upgrade not only came with a better user-interface and sharing capabilities, but also included many new communication features and easy-to-use functionalities. We have also been developing other applications for certain vertical categories, which we feel are complementary to our SNS platform. We hope to launch some of these products in the coming few quarter and month as we continue to enhance our mobile offerings, while also embed new features on our Renren mobile app to heighten our user experience. While mobile remains our key focus, nevertheless, we continue to upgrade our PC services. As we believe PC-based social networking will still remain an important and differentiated content distribution gateway for our users.

The new version of renren.com, Version 6, which we launched in April, continues to attract the PC users. We have received a very positive feedback about the cleaner look, new features and enhanced functionalities of this upgraded version. As for our gaming business, our gaming platform continued its momentum in the second quarter, particularly our in-house development games, which resulted in overall higher ARPU growth.

As Joe mentioned, the cross-platform games which enable our users to play the same games between PC, smartphones and tablets have significantly contributed to the strong growth in our gaming business.

Looking ahead, we will continue to focus on developing new titles with mobile versions to meanwhile growing our user base to further attract the third party developers. As for Nuomi, our group-buying business, as Joe mentioned we are pleased with the strong operational performance in the reporting quarter. In the second quarter, Nuomi had over 2.6 million active paying users, of which 38% are repeat users. This clearly demonstrates the stickiness and loyalty among Nuomi fans.

Our group-buying business continues to show consistent signs of improving metrics across the board, such as rising GMV, ARPU, participating merchants, paying users and repeat users. Even as competition intensifies in top tiered cities during the consolidation phase, Nuomi continues to gain market share, as reported by recent industry reports such as Tuan800.

Lastly, let me also update you briefly on 56.com, our UGC focused video service. We made progress on several fronts as we continue to upgrade 56.com user experience to bandwidth investment and services to make it more social and engaging. Integration with Renren upgrades on entertainment functions and the launch of its Android mobile app all have helped the sequential profit increase on 56.com in the second quarter. We continue to believe UGC video is a very complementary service for our SNS platform through both PC and mobile mediums. At the same time, it is also a critical service to enable our users to be able to upload and share their UGCs in all platforms including text, photo and video. That concludes my operational update. Let me turn over to Hui for a financial review.

Hui Huang

Thank you, James. Let me provide you with financial highlights for the second quarter. Our total net revenues for the second quarter were $44.8 million representing a 48% increase from the same period in 2011. Now let me go through the major revenue components and trends for the reporting quarter. First online advertising revenues were $15.1 million, a sequential increase of 52% for the year-over-year decrease of 11%.

As Joe previously mentioned, we continue to upgrade in a challenging environment for online advertising, where slow economic growth has led to much more conservative spending among brand advertisers. In terms of verticals, the top five ranked in the order from highest to lowest revenue contributors were FMCG, IT, Daily Care, Auto/Finance and Apparels.

Auto/Finance saw solid year-over-year growth particularly with the bank and credit card advertisers. FMCG and particularly Daily Care both picked up nicely after a weak first quarter resulting in moderate sequential growth. However, the Apparel sector seems to have been hitting the hardest in terms of budget cut backs due to the macro-economic slowdown.

Next internet value-added services, or IVAS, revenue in this quarter was $29.7 million representing 120% increase from the same period last year. Within IVAS, online game revenues were $22.5 million, 122% increase from the same period last year. Our strong gaming revenue growth in this quarter was largely due to the popularity of several in-house developed games we recently launched, which all have cross-platform capabilities leading to higher ARPU. Other IVAS revenues were $7.2 million, a 113% increase year-on-year. Other IVAS revenues included $3.6 million net revenues from Nuomi and approximately $1.7 million revenues from 56.com.

Now turning to gross profit, gross profit in the second quarter was $27.9 million, a 13% increase year-over-year. As a percentage of total net revenues, gross margin was 50% in the second quarter, compared to 81% in the same period last year. The gross margin rate decrease was primarily due to significantly increased bandwidth related investments in 56.com and less advertising revenue.

Operating expenses in the second quarter were $50.1 million, a 109% increase compared to the corresponding period in 2011. Among this, Nuomi’s operating expenses for the second quarter were $10.4 million. Excluding Nuomi, our operating expenses would be $39.7 million for the second quarter, a 117% increase year-over-year. This increase is primarily due to a significant increase in headcount, particularly in R&D functions, as well as additional sales and marketing expenses.

G&A expenses increased due to the growth of our business, company size, transactional costs associated with M&A activities and additional costs associated with being a public company.

Next, loss from operations in the second quarter was $22.2 million, compared to a gain of $0.7 million in the corresponding period of 2011. The increase in loss from operations was probably due to three factors; one, our significant investment in R&D, particularly in mobile-related initiatives where monetization lags behind investment, two, losses generated in the Nuomi business, and three, our investment (inaudible) to improve its infrastructure and user experience.

Our net loss in the second quarter was $24.9 million, compared to a net income of $0.8 million in the corresponding period of 2011. Excluding the result of operations attributable to Nuomi in both quarters, net loss in the second quarter of 2012 would be $17.7 million, compared to a net income of $5 million from same period in 2011.

Adjusted net loss, a non-GAAP financial measure, was $21.8 million for the second quarter of 2012, compared to $2.3 million adjusted net income for the second quarter of 2011. Excluding operations from Nuomi in both quarters, we would have adjusted net loss of $14.5 million in the second quarter of 2012, compared to adjusted net income of $6.5 million in the corresponding period in 2011.

Adjusted net income or loss is defined as income or loss from continuing operations excluding non-cash share-based compensation expenses, amortization of intangible assets and impairment of intangible assets. As of June 30, 2012, the company had a cash, cash equivalent, term deposit and a short-term investment of approximately $922 million.

I would also like to update you on our share repurchase program. During the second quarter, the company repurchased approximately 3 million shares of ADSs, bringing the total share repurchased to approximately 10.9 million ADSs.

Finally, let me now provide you our top line guidance for the third quarter. For the third quarter, we currently expect to generate revenue between $49 million to $51 million, representing 43% to 49% year-over-year growth. This forecast reflects our current and preliminary view, which is subject to change.

This concludes our prepared remarks. We now would like to open the call for questions. Operator, please go ahead. Thank you.

Question-and-Answer Session

Operator

We will now begin the question-and-answer-session. (Operator Instructions) Our first question comes from the line of Timothy Chan with Morgan Stanley. Timothy, your line is open.

Timothy Chan – Morgan Stanley Asia Ltd.

Yes. Can you hear me? Hello?

Hui Huang

Yes.

Joseph Chen

Yes.

Hui Huang

Carry on.

Timothy Chan – Morgan Stanley Asia Ltd.

Let me repeat my questions. You talked about the intensified competition for the advertising business. Is it due to the ramp-up of social media apps by your competitors and are you seeing advertising budgets, the allocations tip from Renren to other platforms? And I have a second question. Thank you.

Joseph Chen

Hi, this is Joe. Thanks for the question. I think that your first, the answer is that you probably described the phenomenon probably more accurately. We see those or two of the biggest competitors in there are probably defined as social media space intensifying their brand advertising efforts, and combined with the fact that our brand is relatively less well-known compared with other more [adept] players. So I think those factors show I think that describes what you refer to as intensified competition.

Timothy Chan – Morgan Stanley Asia Ltd.

Thank you. I’d like to ask about the mobile games performance for the quarter. Has it become the main driver for your games sales growth and roughly the contribution to your total games sales right now? Thank you.

James Jian Liu

Yes, thanks for the question. This is James. Mobile gaming, as we have said, has been a revenue generator of our total gaming revenue business, right? It’s very early stage. So at this moment we don’t really disclose the portions between, rather the split between PC and mobile. But over the past three quarters starting from Q4, we have seen very strong momentum coming, primarily from users initiated from the mobile side of the business and for our ongoing development strategies going forward. For all of our in-house developed games, we provide PC version as well as mobile, pad and smartphone versions, all at the same time, to provide users a cross-platform (inaudible) and we believe it will continue to be the driver for our gaming revenue growth going forward.

Timothy Chan – Morgan Stanley Asia Ltd.

Thanks very much.

James Jian Liu

Okay.

Operator

Our next question comes from the line of Jiong Shao with Macquarie.

Jiong Shao – Macquarie Capital Securities Ltd.

Good morning. Hi. Thank you for taking my question. I’ll start with a couple of questions on mobile as well. Just on mobile gaming, I was wondering, could you talk about, for example, how many, what the percentage of your gamers are also playing mobile games and on mobile games, what’s the typical monetization model and how have you solved the payment mechanism? Thank you. That’s my first question.

James Jian Liu

Jiong, thanks for the question. So as I said earlier, we don’t provide a breakdown given it is still at the early stage of our gaming development. We don’t provide a detailed split between revenues coming from PC and from mobile, but at the same, suffice to say, a significant percentage of our users do come from the mobile side, but their user experience involves not only game playing on mobiles, but also on PC. In terms of revenue sources for gaming, all of our games are item billing based and not time based, alright? So users, all the games are free to play and free to download from iOS or Android, primarily iOS today. So it’s item billing driven. And in terms of payment, we provide the normal payment, right? Primarily on PC it’s from credit card and debit card and [BPAY]. From mobile, clearly you can do it through iOS.

Jiong Shao – Macquarie Capital Securities Ltd.

Okay. So for the Android, I think they don’t have the payment (inaudible) in China. To follow, for your players, for the time being there’s no payment solution yet.

James Jian Liu

Yeah, we haven’t really launched our Android platform yet. So all of our games are on iOS.

Jiong Shao – Macquarie Capital Securities Ltd.

Okay. Thanks. My second question is also on mobile. Just beyond gaming, you talked about you are experimenting with some of the mobile products. I was just wondering, just philosophically, in terms of the monetization, do you think is that going to be from advertising or location based services? Longer-term what are some of the areas you see the biggest potential for you to generate revenue in mobile other than gaming? Thank you.

Joseph Chen

Hi, this is Joe. Thanks for the question. We think that – as we initially discussed I think last two conference calls, we think that mobile gaming will be the first category of services that will be a fact in monetizing traffic. And then and the second stage, we think that e-commerce, but equally both local services e-commerce such as Nuomi will be a very strong force to combine location based capability of mobile, as well as the payment availabilities, as well as the fracture time span for this type of service to take advantage of this mobile platform and expand market share. And of course advertising will always be make a big component of mobile monetization. And also in aggregate we think that, just like in PC, for any new computing platform the consumer ARPU will take on the trajectory similar fashion as in the PC era. So as play as develop different ways to monetize and utilize the abilities of the platform. So we think that that’s going to take many years to come. And then the first category will be mobile gaming.

Jiong Shao – Macquarie Capital Securities Ltd.

Okay. Thanks. Could I just please follow-up with a very quick question? Last question I promise. Your user growth has been pretty solid, if you exclude the Nuomi users and the new users, and could you just talk about for the core what the user growth has been for the core Renen user base in recent months? Thank you.

Hui Huang

Shao, this is Hui. For the monthly unique login user we reported they are Renren.com users, which do not include 56.com and the Nuomi users

Jiong Shao – Macquarie Capital Securities Ltd.

Okay, great. That’s very clear. Thank you.

Hui Huang

(Inaudible) Thank you.

Operator

Our next question comes from the line of Eddie Leung with Merrill Lynch.

Eddie Leung – Merrill Lynch Far East Ltd.

Good morning guys. Thank you for taking my questions. Just a follow-up question on your online game business; in housekeeping you are doing quite well. I heard that you mentioned that there has been some ARPU growth for your online gaming segment. So just wondering, is ARPU the key growth driver? Could you also share with us some rough idea on the growth on the user side? So just wondering whether is the ARPU or APA being the key factor behind the trend? Thanks.

Hui Huang

Hi Eddie, this is Hui. For the second quarter gaming growth, it’s primarily driven by ARPU increase. We did also see some increase in the number of game users, but the ARPU increase continued much more to the total last revenue growth of the gaming. The reason is most of our games are cross-platform games, and then they attract iPad users and high-end smartphone users. And those users who own iPad’s and high-end smartphone tend to be of higher disposable income. The iPad in China still costs quite a bit. So those people tend to have more disposable income and also by offering cross-platform [capabilities] it attracts the most addicted, most loyal, most active gamers, because they want to play anywhere and at any time. So those people tend to spend more as well. So due to those factors, we do we attract some very high quality paying users. And as a result there is growth in the ARPU.

Eddie Leung – Merrill Lynch Far East Ltd.

Understood, and then one last question on Nuomi. I’m just wondering if you guys have seen the growth coming more from the same group of merchants, or is it actually getting more popular among merchant group buys are becoming more sustainable distribution channels?

Hui Huang

Yes. So we definitely see increase of the merchants and transactions that participate into Nuomi’s group buying activities. Part of the drivers that for Nuomi’s significant, our [G&D] growth in the second quarter was due to much larger sometime, yeah, or deals or transactions that participate in the group buying activity.

Eddie Leung – Merrill Lynch Far East Ltd.

Got it. Thank you very much.

Hui Huang

Thank you.

Operator

Our next question comes from the line of Alicia Yap with Barclays.

Alicia Yap – Barclays Capital Asia Ltd.

Good morning Joe, James, and Hui. Thanks for taking my questions. My first question is regarding your guidance. So can you give us in terms of your 3Q guidance the breakdown in terms of the online games and advertising? Should we still expect our advertising to experience year-over-year decline and then related to that, are you still on track to achieve your full year guidance of about 50% to 55%? Thank you.

Hui Huang

Alicia, thank you for your question. On your first question in terms of third quarter guidance, for the growth outlook for each of the three major revenue streams, yes, laterally I think we will see similar pattern for third quarter as we saw in the second quarter, i.e. on advertising, as we mentioned in the call early on, will continue to experience some challenge and experience a year-over-year decline. And gaming will continue to be very strong and we’ll probably see similar growth trajectories as we have seen in the second quarter. And then for the IVAS, Nuomi will continue to ramp-up and 56.com will also continue to contribute more IVAS revenues.

So largely the growth pattern will be similar to what we saw in second quarter. So that’s your first question. As regards to your second question, for the full year guidance, with our current visibility we think we should be able to meet the full year guidance we previously laid out in the beginning of the year. In the past few years, we typically saw Q4 seasonality dip. That [probably] because the seasonality for our advertising business and advertising in the past two years represented a much larger portion of our total revenue. However, this year given, the revenue mix is shifting as we see gaming represented a bigger portion. So we’ll probably see much larger total revenue seasonality in the fourth quarter. As a result of that, at this moment we will maintain our previous full year guidance. Thank you.

Alicia Yap – Barclays Capital Asia Ltd.

I see. Can I have one follow-up on regarding the mobile? So can management share your views by regarding some of the testing that you guys have? What are some of the app formats that are better accepted by user and what are some of the app formats that favor by the advertiser. And lastly on mobile games, do you think this will become a sizable industry in China. Thank you.

Joseph Chen

Hi, this is Joe. I think the type of apps that’s favored by users are the ones that are less intrusive and mostly text based, for example location-based and for Nuomi local services, when a user is checking a particular location and that were showing deals around that location. So that those are very, very I think acceptable by the users. And on the advertisers side, particularly the brand advertisers, they want of course a large real estate on that little screen. And I think that’s a big market. We experiment in several ad formats, according to IAB standards and I think in the future that we will be offering, just like gaming cross-platform brand advertising both on PC and on the smartphones and the mobile devices. So we are experimenting on [mobile phones]. If you use your iPhone and Android app you probably see some of those testing in.

Operator

Our next question comes from the line of Cynthia Meng with Jefferies (NYSE:HK).

Amanda Sigouin – Jefferies & Co., Inc.

Hi good morning. I’m Amanda, asking on behalf of Cynthia Meng. My first question is regarding your second half games outlook. Do you think you will be driven more by ARPU growth, continued ARPU growth, or increased cross-platform capability or new games being launched? And if you can give us an update on how many [sorts of] those games you have currently in the pipeline for the second half of this year? And I have a follow-up question.

Hui Huang

Thanks. I think in terms of the growth drivers for gaming for the second half of this year, you might have learned that in previous conversations, it will continue to be driven primarily by ARPU increase, but meanwhile to a lesser extent, by an increase in the number of paying users. In particular, we do plan to further diversify the genres of games. So those hopefully will attract the new players as well beyond our traditional SLG and aptitude games. So that’s number one. And in terms of pipeline, right now we operate about 10 in-house development cycles and in addition to that probably 40 to 50 third party developed games. And we plan to release two new titles in-house developed games for the next two or three quarters. So two new games in-house every quarter.

Amanda Sigouin – Jefferies & Co., Inc.

Okay. Thank you. And my second question is regarding the exchange losses and equity investment losses in the second quarter and also the gain on marketable securities. Could you just give us some color on what these are related to? Thank you.

Hui Huang

Sure. For the exchange losses, given we had a relatively large slice of cash, as you recall, in second quarter, in previous year’s first quarter we had approximately $1 billion cash and we deposited probably 30% of those in offshore RMB, and RMB depreciated in the second quarter compared to the end of first quarter. So overall, the RMB deposit still gained in ForEx, but in second quarter, from end of March to end of June RMB depreciated a bit. So that’s the unrealized foreign exchange loss reflected in the second quarter. And so your second question is the losses in the equity market investment, correct.

Amanda Sigouin – Jefferies & Co., Inc.

Yes.

Hui Huang

Again this has two items in it. One is our investment in (inaudible). If you recall, last year we invested in this mobile mapping company. They are losing money at this moment. So we’ll pick up certain losses from this investee company. And then secondly, we have another treasury investment product, which, from a company treatment is [acting asset]. And again, it is unrealized loss on paper to reflect the movements from quarter-to-quarter and in second quarter, this particular treasury investment experienced a lot. So that are the two items, reported item. Thanks.

Amanda Sigouin – Jefferies & Co., Inc.

Thank you very much.

Operator

Our next question comes from the line of Wallace Cheung with Credit Suisse.

Wallace Cheung – Credit Suisse (Hong Kong) Ltd.

Hi. Thanks for taking my question. I think first question is on Nuomi. Can management give a bit more color on the overall outlook of the group buying market as we see some of your peer group actually have some management changes, (inaudible) consolidation is happening. How will Renren position in this market right now? And also, a quick follow-up is on the operating losses, it seems like they’re still flat on q-on-q basis, but on the (inaudible) side they actually did quite well. So what’s exactly the demand and cost that you’re investing for? So the second question is on the balance sheet side. So why is there a significant jump in repaying expenses on commercial basis? It could relate to some of the M&A activities over there. Thank you.

Joseph Chen

Hi, Wallace. This is Joe. Thanks for the question. Nuomi, I think that the consolidation of the industry played a big part in our improving performance in Q2. I mean, this consolidation to show there’s been less competition in pursuit of high quality local merchants as well as slightly improving pressure to maintain a low gross margin in order to sign some high quality merchants’ [accounts]. So there are reduced players on average in each city. Our bargaining power has increased and that allows us to do more deals with improving margins overall. And another important improvement area is actually the leverage of technology.

We think that the group buying actually is a technology expensive business. It is by nature as both e-commerce as well as is also an advertising platform. Not only an advertising platform, but across platform, across PC and mobile, location-based advertising platform. So there is a lot of rooms for improvement to increase user conversion rates. So when a user landed on a particular page, where you have deals going on, how do you improve the, and base it as a classical advertising platform problem that you can solve. That’s how we improved.

We increased our R&D efforts in the last two quarters in our business and operational efficiency is really driving our improvement. We think that’s going to be a major competitive advantage. The General Manager for this division used to be an Engineer working in Google. So in a way culturally we’ll have the right success to do well in this business.

Hui Huang

And then, Wallace, for the other more detailed questions on the financials. For the prepayment, majority of that pre-paid amount is the money we pre-paid for share repurchase through cost (inaudible) because the mechanism do those share repurchase is through a derivative of cost (inaudible) and for that we do pre-pay. And most of those options will, the majority will come in the next month or two. So by then we know whether those pre-paid options will be exercised or not. The majority are related to pre-payment for the share repurchase program.

And I guess, the other question, if I recall correctly, is some of the G&A expense increase. The G&A increased primarily due to rental expenses, increased because the current office building, we have here is a very crowded and we have a significant new fresh come in. So we went to another space. So that’s an increase in rental. And also we were evaluating certain M&A opportunities, which involved financial or legal due diligencies largely (inaudible) so on and so forth. And also the new office, the renovations start to be amortized this quarter as well. So all in d same quarter. So all this contributes to higher G&A.

Joseph Chen

Wallace, this is Joe. Real quickly. For those of you who are internationally interested in the difference (inaudible) in China versus other countries, two major difference in terms of the form of product. One is that, let’s say in U.S. the group on product depends a lot on email versus China email is much less internet infrastructure. So that plays a big role. And secondarily, on any given day, if you go to, say on Nuomi page on Beijing, the number of live deals are much more than any other group buying sites in other countries and areas and those factors slow intensify the advertising platform nature of this business.

Wallace Cheung – Credit Suisse (Hong Kong) Ltd.

Okay. Thank you. Just on the M&A related expenses, it seems to be quite big. So are we expecting from these really (inaudible) for some major events to happen here? And in which area that you (inaudible)? Thank you.

Hui Huang

Wallace, as mentioned earlier, the increase of G&A expense are not all related to M&A transaction expenses. As mentioned a bigger chunk is related to all this rental increase, amortization of renovation for the new office building and also we have also engaged some head hunters for some senior talent upgrades so there’s head hunters (inaudible) on the force. And then it’s M&A transaction costs. There is a lot of the industries that are experiencing very dynamic change. While we are focused on growing our own business, we will be open-minded to evaluating potential opportunities right now we’re just evaluating potential opportunities.

Wallace Cheung – Credit Suisse (Hong Kong) Ltd.

Thank you. I’ll go back to the queue.

Hui Huang

Thank you.

Operator

Our next question comes from the line of Alex Yao with Deutsche Bank.

Alex Yao – Deutsche Bank AG (Broker China)

Good morning and good evening everyone. And thank you very much for taking my question. I have a two question, number one is about the net (inaudible) monthly unique log-in increased pretty significantly compared to previous quarters. I understand you guys mentioned you’ve (inaudible) on desktop as well as on mobile usage increased. Can you share with us to what extent is it driven by the new PC version and to what extent is it driven by the new mobile user growth? And secondly, can you update us on your web gaming strategy particularly how would you envisage to overcome the challenge of short time or short life than of the $10 and how to manage the (inaudible) from these risk? Thank you.

Joseph Chen

Hi, this is Joe. Let me answer your first question. In Q2 both our PC and mobile products has improve and new versions launched. It’s based on (inaudible) which is mobile users are growing much faster. Some you maybe tempted to attribute most of gross coming from mobile, but [we’re noticing] a confounding trend, which is really the overall (inaudible) so its really difficult to, we have two positive forces all acting at the same time we don’t know how to separate, which one works better. We think that both the, I think that, first of all I think that for the PC version it’s because it took us quite a few months to launch and (inaudible) in the version stakes is quite significant particularly with the inclusion of some more successful social (inaudible) products such as (inaudible) which is a leading (inaudible) type of that website in China. I think that PC has improved quite a bit. And the mobile versions keep updating. So we think that, we think that those improvement in contributor growth and we should continue to enjoy the market growth on the mobile side. And the second question is on web gaming, right?

James Jian Liu

Yeah, yeah. This is James, thanks for the question. Our gaming strategies, in going forward we believe our strategy will remain that, focused on a number of things, number one, we will continue to provide games across all the platforms as we mentioned earlier, right. So for every new game we will provide mobile version, as well as PC version. Second dimension is, we will provide a diversified instead of one game, instead of one type game, right. If we look at some of the overseas companies like Zynga, right? Their games have focused on social games. What we have realized is, even though the lifecycle for social games is kind of short right. Other type of games are like that, once we provide SLGs and RPGs tend to have relatively longer lifecycles. So we will continue to provide a diversified set of [games].

Alex Yao – Deutsche Bank AG (Broker China)

Got it. (Inaudible)

Hui Huang

Yes.

Joseph Chen

No more from him. Next one.

Operator

Our next question comes from the line of Ming Zhao with UBS.

Ming Zhao – UBS Securities

Hi good morning. Thanks for taking my question. I think my first question regarding the SME advertising. Actually we have seen a very good trend in the advertising this quarter. What’s your guidance for SME advertising going forward?

Joseph Chen

For SME business, nowadays I think it’s almost entirely coming from PC. So if we successfully transplant that business from our platform to mobile of course I think we enjoy the growth on that one. And secondarily, we think that in the long-term business, SME is a very good business not (inaudible) segment of the economy that deserves a lot of investment for China.

Also increase in China we have the one dominant player, Search Baidu. I think that actually provided a very good price on umbrella for companies (inaudible) differentiated traffic and advertise effectively with these clients. So in terms of price, I think it’s more attractive going forward as long as the dominance of Baidu can be maintained. Secondarily, we cannot leverage on mobile gaming.

Ming Zhao – UBS Securities

Okay. And I have another question about 56.com. So I thought those in other ideas, so how much of that is from 56.com and how much from (inaudible).

Hui Huang

56.com contributed approximately $1.5 million, other IVAS in second quarter.

Joseph Chen

And I think most of that. Yeah, most of that is actually coming from user (inaudible) premium product.

Hui Huang

Okay.

Joseph Chen

It’s…

James Jian Liu

It’s not coming from gaming.

Ming Zhao – UBS Securities

So then, how about social games? So (inaudible) social games and other idea.

Hui Huang

Well the social games, it was relatively small. I think we mentioned that in the previous few quarters, social games for us are primarily for user engagement rather than for amortization. So the contribution is rather immaterial from a revenue point of view.

Ming Zhao – UBS Securities

Okay, got it. Thank you very much.

Hui Huang

Thank you.

Operator

Our next question comes from the line of Andy Yeung with Oppenheimer.

Andy Yeung – Oppenheimer Securities

Hi, good morning. Thank you for taking my question. I have two questions today. My first question is about your gaming business. I think your gaming segment has grown very significantly this year, almost half of your revenue now. Given the potential of gaming on desktop and mobile platforms, how well does your gaming penetration among your user base? Also do you have plans to further increase both penetration and amortization of the gaming business among your users?

James Jian Liu

Thanks for the question. Gaming, so today our gaming platforms are close to 100% of our users for our gaming business. They’ve registered Renren users. So it’s in terms of the users of our games all of them are Renren users. In terms of the penetration Renren games users seeing Renren total users is still a relatively small percentage and an even smaller percentage of that is paying users. We will continue to focus on expanding the penetration, the gaming into the Renren users.

Andy Yeung – Oppenheimer Securities

Yeah, I think from a macro standpoint, we think that the mobile gaming has just started. There is the rapid proliferation of iPads and iPhones and other [more advanced] gaming capable smartphones. We think that this market has multiple years of high growth. So we want to be very focused on catching this wave as well as the (inaudible).

James Jian Liu

Just to give some perspective, this year there will be $150 million in the smart devices shipped in China, right, which is huge just one.

Andy Yeung – Oppenheimer Securities

Right. Okay, my next question is about your LBS initiative. I think you mentioned some time that location-based services could be a very significant in your product service. Given that you have emerged in Melbourne last year. Can you help us understand your overall view and clarity in the mobile and LBS? Thanks.

Joseph Chen

LBS was actually our first area of focus on mobile because one year ago we recognized that LBS as truly mobile feature compared with PC platform. So we guess one of the reasons we invested in our Nuomi because we envisaged out that would be one way there for us and amount of time. And secondarily we made investment into [Metabo], which was a beginning of leading map provider, but at that time when we invested they were primarily a PC provider for the service. So obviously as we have made investment they are moving more aggressively into mobile and we think that some of your mobile app are doing well, so without still in early stage and we anticipate further synergies between their coverage on mobile because these maps are the most natural starting point for location-based service app.

Andy Yeung – Oppenheimer Securities

Great. Okay, thank you.

Operator

Our next question comes from the line of Fawne Jiang with Brean Murray.

Fawne Jiang – Brean, Murray, Carret & Co. LLC

Good morning. Thank you, for taking my questions. I actually just have a few housekeeping questions. First, (inaudible) first quarter also put that investment phase and secondly it seems like part of your expense for this quarter comes from third party, I just wonder what is the new addition for the second quarter and at end of second quarter (inaudible) and lastly, it's regarding the share repurchase program. I just wondered how much of that is for unprecedented budget, that’s the first.

Hui Huang

Well this is Hui, for your housekeeping questions, actually I only got the second and the third part, so let me answer this two first and then I’ll ask you to repeat the first question. The second question regarding the headcount. For the second quarter we added probably 300 some have come from Nuomi and they will continue to have R&D in team but, as the most of the hiring actually well probably first be reflecting on third quarter because the new college graduates will come again in the summer.

And year we’ll probably have around 400 new college graduate they join us in the summer. So the third quarter was the higher operating expenses literally in R&D team. And for Nuomi at the end of second quarter Nuomi has approximately 1,400 people, that include some of the incurrence and test, but the full size is 1,400. And Renren is about over that and 56.com is approximately 250 and they will have sales and marketing about 300 to 400 and the rest are back offices. So that's the first, our gaming is about the 7.8 at the end of the second quarter. So hopefully that answers the second question. The third question, I think you are asking about the share repurchased the remaining amount? I think Wallace, as I mentioned such a prepayment, the large amount in prepayment that’s most of them are (inaudible) mature in the quarter. So depending on the strike price, depending on the market price at the maturity those opportunities may or may not be exercised. And if you don’t mind, can you repeat your first question?

Fawne Jiang – Brean, Murray, Carret & Co. LLC

Sure. As I just wondered what the cash from operation for second quarter and what’s the investment, what’s the total investments made in the second quarter?

Hui Huang

For the second quarter, if you compare the cash balance between beginning the quarter and the end of the quarter, the cash is decreased by $135 million, mostly paid up prepayments for the share repurchase. The operating cash outflow in excess was in the mid-teens. And then we have about $25 million impact on (inaudible) and renovations and part of them for property. So a pure operating-related cash outflow in the second quarter was in the mid-teens.

Fawne Jiang – Brean, Murray, Carret & Co. LLC

Also you basically mentioned around $15 million, right, net – that $15 million, it's actually…

Hui Huang

Operating-related cash outflow.

Fawne Jiang – Brean, Murray, Carret & Co. LLC

Okay, operating, got it. Thank you very much.

Hui Huang

Yeah.

Fawne Jiang – Brean, Murray, Carret & Co. LLC

Okay, got it.

Hui Huang

Okay.

Operator

Our next question comes from the line of Muzhi Li with Citigroup.

Muzhi Li – Citigroup

Hi good morning, thanks for taking my questions. Just want to ask you about how much revenue of gaming revenue come from your self-developed games versus the third-party. And also for your self development games, what kind of a lifecycle are you expecting and what kind of a development cost for each game? Thank you very much. I have a follow-up question on that, thanks.

Hui Huang

In the second quarter, given the outperformance of our in-house games to get effort in our overall platform games. The market does not have too many others this type of the games yet. So, in-house games represented over 70% of our game revenues in second quarter. And in terms of the lifecycle and the development cycle, for app games, the lifecycle typically is anywhere between net amounted to 24 months depending on the quality of games. For, highest quality games, sometimes if the games in around more than two years, and development cycle is typically six to nine months.

Muzhi Li – Citigroup

Okay. Also how many people participate in the – how much percentage of active users participate in the gaming activity during the month?

James Jian Liu

It’s a 30% comp in single digits that is in the upper single digit.

Muzhi Li – Citigroup

Okay. Thank you very much.

James Jian Liu

Thank you.

Operator

And there are no further questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

Joseph Chen

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

Thanks everyone bye-bye.

James Jian Liu

Thanks a lot. Thank you.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for participating, you may all disconnect.

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