Renren Inc.
Q1 2015 Earnings Call Transcript

Published: 14 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2015 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, Wednesday, the 13th of May 2015. I would now like to hand the conference over to your first speaker today, Mr. Ashley Law. Thank you sir and please go ahead.

[Ashley Law:]

Thank you and welcome to our first quarter 2015 earnings conference call. Joining me on the call today are Joe Chen, Chairman and Chief Executive Officer, and James Liu, Chief Operating Officer. For today’s agenda, management will discuss highlights for the first quarter of 2015. 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 and good evening everyone. Welcome to our earnings call. Let me first give you details on our business operations. Revenue for the first quarter came in better than guided, as revenues from our existing gaming titles were higher than expected. Some of our licensed games appear to have longer lifecycles than we have anticipated. In April we have rolled out two new license games. Though it’s still too early to tell if these new titles will become our next hits, the initial response from players appears positive. With the completion of the restructuring of our gaming operation in 2014, we’re now working with a light operational model for gaining business that focuses on publishing third party mobile games. Our gaming segment has once again become profitable. We expect it to remain stable for the rest of the year with a potential for positive surprises. Next, online advertising. Q1 revenue came in as expected; Q1 was the seasonally weak quarter for past years. Mobile advertising which contribute around 15% of advertising revenue in the quarter was also affected by this seasonality. Long-term, the forward trend of our online advertising hinges upon whether we can grow a user base particularly on mobile. If we can reverse the current trend, the advertising revenue were rebound perhaps strongly. I’ll cover this topic later in my remarks. As for Renren Internet value added services, IVAS, our Woxiu business continues to perform and contribute within the segment. This is business we have retained in our group after selling the online video portion of our 56.com business to Sohu. We think there is substantial value to be tapped from Woxiu. So we have reasonably placed this business under the leadership of our entrepreneurial Woxiu management, with the proper incentives. This team has turned Woxiu into a unit with a positive growth and a much lower spending when it was still a part of 56.com. We will continue to support this business and see to it to unleash its full potential. Now let me talk about our Renren SNS business. Renren was the cornerstone at our IPO four years ago, since then it’s been under intensive competitive pressure primarily from WeChat. For a strategic repositioning of Renren the product has been, number one, to focus on the use; then, number two to focus on mobile and the mobile photos. With that focus we’re able to gradually shrink our expenses in the past two years to a level we feel comfortable to maintain, with a medium size team focusing on mobile and photo. We believe this can eventually lead to the growth for Renren. Despite a much lower level of spending we have observed much smaller team to be able to accomplishing a lot. So there is no reason we cannot do the same thing. This new vision and agile development and operational teams give us confidence to continue to advance in our core SNS platform where we started this journey. Renren SNS remains a further ground for new online finance business, which I will talk about later. Among students, Renren continues to be the number one real name SNS on campus. The mobile percentage of our monthly total user time spent hasn’t reached the nearly 90%. This is clearly important us as core demographics, high school college students and regional grant in China are now heavy uses of their mobile device. We are launching a new mobile version soon, a much improved mobile version focusing extensively on mobile photo and the local discoveries. After mostly years of the transformation I am optimistic about the future of our legacy businesses. Gaming is already profitable on a standalone basis and Renren SNS now has much lower operating loss than last year due to our singular focus on mobile. We have a much more competitive collaboration in Renren mobile 2015. I am optimistic that we should be able to slow the decline and eventually start growing again. In addition to strengthening at defending our existing businesses, we concentrate our efforts on new areas of growth. Our investment portfolio in other innovation companies and the starters that we have carefully built at in recent years. It’s helping us to identify new high growth and partnership opportunities in the new era of the Internet plus. We believe the Internet would disrupt traditional industries with quickening pace, a trend that Internet players have an edge on but without same kind of [modes] or competitive advantages they use to enjoy in their starting places. As at time of the Internet plus we are on top of this trend. As I outlined last quarter one of the new services we have launched is the Internet finance. We believe Internet finance for college students and young demographics has strong potential synergies with our SNS platform and we can leverage our SNS user base. Renren Fenqi is the first Internet finance business we have launched, which we started by providing installment financing plans to college students. Since the commencement of Renren Fenqi we’re continuing to see rapid growth of this emerging business in terms of registered user numbers and orders. By the end of April Renren Fenqi had 270,000 and registered users and together they’ve placed orders with aggregate total RMB330 million for purchases of smartphones, consumer electronics, cosmetics and fashion accessories and so on from a marketplace and very selective e-commerce platforms in China. The cornerstone principle to guide the growth of this business is quality; quality of asset and customer service. We’re fully aware of the irrational frenzy in some of the customers and some of the customer financing segments and companies. But we have determined to stay away from such [hubris]. We think the Internet is just a tool for consumer financing business we are building. The first mover advantage means common proven right and into [indiscernible] no longer hold true here. Internet finance is first financing that than internet. We’re patient with the building up of our financing business as we are aware of how long it took some of the world’s most successful financial institutions to achieve the current success. We believe we’re passionate for quality, make us a trusted and incredible finance company for our customers. Turning now to online education, we think our core strength in the used market can make a real difference in this space. We have beta launched Renren Quxue mobile and Web site to build a marketplace for students and tutors and teachers on which the students can find suitable tutor and teachers for ex-curricular subjects such as piano, soccer and guitar. In the past quarter we have signed up more than 1,000 qualified teachers in Beijing, so one side of the marketplace has been built. We’re now focusing on ramping up paying students and their parents onto the marketplace. We expect to report you further progress in the next quarter. Before I turn to my operational update, let me provide some update on our strategic investments. Through the first quarter of 2015, we have invested a total of 275 million in long strategic investments. The majority of these investments are in Internet finance and O2O companies with synergies to our Internet finance operations. Now we have a portfolio of affiliates and some of the most innovative Internet finance companies in both U.S. and China that provide us benchmark for world class products and risk control and the leading O2O companies in China that will allow us to tap into the high growth markets for consumer financing solutions. In summary the first quarter revenues came in better than expected. We’ve modestly improved this year’s expectation for gaming; we decisively ventured into new area of Internet finance and have ramped up the business volume considerably in the recent period. We expect that together with the reenergizing of our legacy businesses Renren is back to fundamental growth both from a long term enterprise value standpoint and also from operational financial performance perspective. Last, let me give you a sense where we are now, and where we are going in the future. As of today, more than 60% of company’s non-support personnel is working for manning Internet finance initiatives, so from a human capital standpoint we’re already primarily an Internet finance company. In the next few quarter majority of our projected operational investment we're going to this area as well. Parallel with our new direction, we have a financially improving social networking business, focusing on mobile and photo with shrinking operational losses and a profitable service in gaming. Four years ago we were a social networking company, now we are social finance company. The tough battle we fought against much stronger competitors in the last few years has hardened us. We've much -- we have more rigor on our expenses and we look at all of our business through a different lens than before, which is we think of the most, the size and the sustainability of competitive advantages. We like the internet finance business both the lending side of it, because we have Renren SNS, and then we also like the asset gathering side of this business. We see every internet finance company, as first the financial company and then an internet company. The financial part solves a unique problem that current financial product don't solve well. And the internet part is all about user acquisition and operating efficiency. Having started this social networking, our goal is to become the internet finance company with social product inlay in the platform. This can be proven and tested in the next stage of our development and evolution, when we grow existing financing business and the launch of new online financial services with social elements woven into it. With that I will now give the floor to Ashley for the financial review.

[Ashley Law:]

Thank you, Joe. Hello everyone. Let me provide you the financial highlights for the first quarter of 2015. Our total net revenues for the first quarter of 2015 were $13.7 million, representing a 41.1% decrease year-over-year. Now let me walk you through the major revenue components and trends. First, Renren net revenues, which include advertising revenues and IVAS, our internet value-added services revenues were $8.2 million. Online advertising revenues were $2.3 million for the first quarter of 2015, representing a decrease of 62.9% year-over-year. IVAS revenues were $5.9 million for the first quarter, representing a 35% increase year-over-year, due primarily to the increase in revenue from the online financial platform Woxiu. Next, gaming segment net revenues were $5.5 million for the first quarter of 2015, a 56.5% decrease from the same period of last year. The decrease was due to our old games having reached mature stages. Now gross profit. Gross profit in the first quarter was $3.2 million, a 72.9% decrease year-over-year. As a percentage of total net revenues, gross margins [increased] up to [73]% in the first quarter, compared to 50% in the same period of last year, primarily due to the decrease in net revenues. Operating expenses in the first quarter were $29.7 million, a 16.6% decrease year-over-year. The decrease in total operating expenses was mostly due to the decrease in sales and marketing expenses for our online games and Renren's branding campaigns, as well as the decrease in research and development expenses because of the headcount reduction in games development. We would like to note that, starting from first quarter of 2015 we have intensified our investments in the operations of Renren's Fenqi with approximately $3 million of sales and marketing expenses and $1.1 million of general and administrative expenses incurred for this new initiative. We expect to continue to invest in this during the remainder of the year. Next, loss from operations in the first quarter was $26.5 million, compared to a loss of $23.9 million in the corresponding period of 2014. The increase in operating loss was primarily due to the decrease in revenue and our intensifying investments in our internet finance business. Exclusive of our internet finance business, our operating loss would be shrinking compared with last year. We expect operating losses in our legacy business to continue their current trend of reduction. Our net loss in the first quarter was $27.6 million, compared to a net income of $32.3 million in the corresponding period of 2014. In the first quarter of last year, we had a $57.1 million gain from the disposal of our remaining equity interest in Nuomi. Adjusted net loss and non-GAAP financial measure was $21.4 million, compared to an adjusted net income of $36.1 million in the first quarter of 2014. Adjusted net income or loss is defined as net income or loss excluding share-based compensation expenses, amortization of intangible assets and impairment of intangible assets and goodwill. Due to improving efficiency of our legacy business, despite our intensifying investment in our online finance business, we expect our operating losses to stabilize and most likely to improve going forward. As of March 31, 2015 the company had cash, cash equivalents and short-term investments of approximately $413 million compared to $985 million as of March 31, 2014. The decrease was primarily due to the increase in long term investments and stock buyback in the period. Now let me provide you a quick update on our share buyback program. As you know, we launched a tender offer to complete our share buyback program by offering to buy 50 million of our outstanding ADS from our shareholders. By the end of the tender offer period our ADS [indiscernible] had exceeded the high end of the tender off the five range with the result that less than $0.5 million of ADS were tenders and repurchase. As of May 12, 2015, the company has repurchased approximately 15.9 million ADS under the current repurchase program with a total consideration of approximately $49 million. The current share repurchase program will expire on June 22, 2015. Since IPO the company had repurchased a total of 72.5 million ADS valued at approximately $249 million. Finally, let me provide you our top line guidance for the second quarter of 2015. For the second quarter we currently expect to generate revenues between $15 million to $17 million, representing 25.8% to 34.5% year-over-year decline. This forecast reflect 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.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. Your first question comes from the line of Vivian Hao from Deutsche Bank. Please ask your question.

[Eileen Deng:]

Hello, management. Actually, this is Eileen Deng on behalf of Vivian Hao. I have two questions. The first one is regarding your gaming business. Since you have launched two mobile games in April and you just mentioned that you modestly improved this year's expectation for gaming, so should we expect the gaming business to become profitable somewhere this year? And if there's any plan on the game pipeline, how many should we expect for the rest of the year? And my second question is regarding Internet finance. How much does Renren Fenqi contribute to the revenue in first quarter, and what level should we expect it to achieve for the whole year? And could you also give us some color on your next Internet financial product, Renren Itai, as well? Thank you.

[Ashley Law:]

Eileen, thank you for your question so I will take on the first about gaming, as Joe mentioned in his remarks on gaming our restructuring in last year. Right now in the first quarter gaming is profitable and we do expect that it will remain a profitable unit again. As for the gaming pipeline, we just recently launched two new games in April we are yet to confirm that whether it is a hit but we do have teams that constantly solving and negotiating for third party licensing titles. And we expect more titles to come through the remaining of this year.

[Joe Chen:]

The second question is about Fenqi, I think that Ashley could address this issue if you want more, but I think that I already talked about that we have some aggregate of RMB330 million for the business as of April and it’s growing quite strongly. And then in addition to providing student financing we’re also expanding into other areas of financing as well which we probably would talk more next quarter. And in terms of revenue recognition I think Ashley can add-on.

[Ashley Law:]

Yes, Eileen as we mentioned during the first quarter we have received a quite positive response from our users and that like Joe said a substantial amount of orders have been placed with us. We didn’t take all of them because we do have quite a stringent credit control policies. In the first quarter we actually -- for revenue wise we recognized less than a million of revenue from these operations because as we have discussed that during the last quarter, for this business on all the revenue will be recognized over the period of the long other financing solutions that we provided to the users. So since we just started this Renren Fenqi in late 2014 so in the first quarter of 2015 we didn’t recognize a much from our asset portfolio. But we are going to discuss more numbers starting from next quarter after the business grows bigger compare with that.

[Joe Chen:]

So essentially we’re building a backlog of revenues as we ramp up this business, we only recognized a tiny portion at the current reporting period. And the third question, about Itai, I think I talked in my part of the call that we like most of the landing part of this business and -- but I also like the asset gathering part of this business since we think that managing assets, using Internet as a distribution platform is a proven business model as in the U.S. in the form of some of the companies we invested, Motif, and so it’s not a company we’re using as well. So we think that in China obviously there is bull market going on and there is a lot of interest for investors, individual investors and wealth fund managers to deploy the capital in a more calculated manner and that align with on individual goals of wealth management. So we think that there is a big opportunity in the space using Internet to manage wealth online. And we’re in the process of obtaining licenses for us to do this business; we’re already obtained some licenses already and are waiting for some other licenses and we expect to complete the licensing process by Q3 and the we should be launching full scale the wealth management platforms after that.

[Eileen Deng:]

Thank you, management. It’s been very helpful.

[Operator:]

Next question comes from the line of Nora Zhang from Merrill Lynch. Please ask your question.

[Nora Zhang:]

Hi. Good morning, management. Thank you to taking my question. I have two questions. First I want to ask, how do you plan to grow your user base going forward? And I have the second question regarding your Renren Fenqui business. So now your funding source is your own cash balance. How do you plan to increase your -- I mean as the business grow, what’s your plan to fund the loans going forward?

[Joe Chen:]

Hello and thank for the questions. On the first on, how we grow the user base? I think I’ve touched upon that a little bit. We have substantially reduced our expense level at Renren SNS, and the way we did it was focusing very much so on mobile, we used to have liked quite a few products that basically on pads, on PCs and different kinds of softwares as well as iOS and Android apps. So now we focus very much our product development efforts on iOS and Android platform and that reduced the scope for product development a lot. And also another thing is that we become much more focused on mobile photo, because essentially we are in the [instinct] business. When we launched -- when we acquired the Xiaonei back in ‘06 we’re probably one of the very few companies offerings feed -- newsfeed. But now almost every big company offering some kind of feed product. So feed now longer has a unique competitive advantage. So what we are thinking about is that once we are mobile we want to be become really big platform distributing mobile photos using feed. And the social group that we build is somewhere between the social group -- that private social, private communication such as WeChat versus completely open social groups such as Twitter. So we think that what type of social group potentially can be leveraged to distribute a lot of the high quality photos that the users wants to share beyond their private friends to a much broader audience, where in mean time we still trying the private characteristic of social networking services through [indiscernible] and WeChat as well. So the new version still testing, we expect it to launch it toward the end of this month and early part of next month. So that we think that with this product, we’re using this product past few weeks, I like it a lot. So I hope that all users also like it. And the second question about Fenqi, I’ll refer that to, our COO James who runs this business, questions about how do we, in addition to company balance sheet capital how do we ramp up the capital from all sides to build this business.

[James Liu:]

Yes, thanks for the question this is James, so we started out the Renren Fenqi business understandably with our balance sheet money to get it started especially in the first two months when we started ramping up the business. But starting from earlier this year we have decided that we have to eventually go outside and to third parties, including third party partners as well as consumer and users that we can reach directly. So we have done a few things, number one is we have identified a few third party sort of wealth management product and distribution platforms or peer-to-peer lending platforms to distribute our product. So, so far we have already raised tens of millions of RMB from those third party platforms and the second operator is over the past two months after the Chinese New Year, we started building out our own P2P sort of platform -- marketplace lending if you will to ramp up our own gathering -- asset gathering capabilities, we've just beta launched it, you know, not too long ago and it's sort of been internal beta testing, we did it within our company, it's been well received. We are completing our mobile product offerings as we speak and hopefully we can launch that within the next few weeks.

[Nora Zhang:]

Thank you, that's very helpful.

[Operator:]

The next question comes from the line of Cheng Cheng from Guosen Securities, please ask your question.

[Cheng Cheng:]

Hello, management. I have one question. In addition to the repurchase program which has been carried out, whether there is a further repurchase program? That's my question. Thank you.

[Joe Chen:]

So about stock repurchase. So our current plan expires with the end of June and we still have $50 million left on that program, so you know we will decide whether we are going to do more repurchase in the next few days. But in aggregate, I want to talk little bit about this, Ashley just reported that in aggregate since the IPO the company has purchased $249 million worth of ADS and for 72 million ADS, so that's roughly more than 20% of our outstanding shares, so it's pretty large scale, as has been done in the past years on a very patient basis and I think that's going to be our -- are we going to continue to purchase repurchase stock from time to time and basically we like our stock obviously and hope that we're going to be proven true.

[Cheng Cheng:]

Thank you. Very helpful. And I have one another question. In addition to the advertising and some other profit programs about the finance in college, do we have any other profit consider -- any other profit model about the Internet finance?

[Joe Chen:]

Yes, so, it's a good question and we ask ourselves a lot, essentially few years back, I think that we experimented with so many ways to monetize our user base. One is obviously the advertising was one of the first; gaming, that's one of the first and then we briefly dabble into Group Vine and it was very successful to start with. And then obviously to build -- dominate Group Vine business you need a lot of capital and we decided to exit that business and leave that battle to Baidu to fight on continuously and they're obviously doing a good job. I think finance probably remains the best way to -- that we can see now to monetize our user base and the increase to profitability for the company; because of one thing that one thing we've realized earlier which is ARPU is very high. We successful acquire high quality college or young white collar worker and so our lifetime financial services customer then the value can be tremendous and this compared with our traditional way of monetizing user base which is mostly banner ads from fast moving consumer goods companies basically on a per click, basically we'll make a few cents. And here potentially every customer you acquire come in with thousands of dollars. So we think that this is a very good way to monetize and we constantly -- we think of better way to do it and frankly we think that we do well in this. The company can be very valuable. As you know the financial services industry in China is huge. There is a lot of gap to be filled in this new era essentially with the social networking and mobile with new channels to reach consumers. And so we have investment in lot of world class startups in the space of Internet finance both in China and in U.S. So we are basically the forefront of seeing how this evolution is happening. So we essentially marrying some of the ideas we have seen with user base. So, we like the Internet finance as a way to monetize our user base and if we find other ways to do, we will be very happy to follow as well.

[Cheng Cheng:]

Thank you, and just a last question. Since we have very good foundation conditions in there, whether we consider -- the Internet education now is very popular in China, and whether we consider large scale penetration of this area, large scale penetration of Internet education such as other means, like acquisitions or some other means?

[Joe Chen:]

Yes, so you mentioned online education. So I’ve talked briefly in my remarks Renren Quxue, so the online education market is fairly nil. Of course we think that in terms of sizing the online financial space is probably at least 10 times now 100 times bigger than online education, but we like online education because it’s so relevant to what our users do, most of them are still in school. And they actually spend lot of money hiring tutors for ex-curricular activities and such as painting, guitar, music and sports because those ex-curricular activities just like in U.S. are starting to play a bigger role in helping these students getting into a competitive college. So, we are on the right track and this space is very fragmented, there is no leader. So we are one of the first company in this Quxue space which is one of the online ex-curricular, co-ed [indiscernible] activities. So people still pay quite a bit of money for this on hourly basis so what we did we launched Renren Quxue and the first city that we focus on is Beijing because of our base here and the market is huge in Beijing alone. And we bought 100,000 qualified tutors online onto the platform so that’s one side of the marketplace. And then in this quarter and the next quarter we are focusing on brining paying users, basically the students and their parents onto the platform so they can chose among these 100,000 teachers for particularly say a guitar teacher who is actually very good and who also happened to live nearby. So this is our effort of building up a marketplace for tutors and for ex-curricular market. I don’t know how big the market will be but this is a nascent market, no big players has been here and the market sizing is reasonable. So we think it’s going to be a good business for us.

[Operator:]

This concludes our discussion. At this time, I would now like to hand the conference back to today’s presenters. Please continue.

[Joe Chen:]

We 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 conclude our call.

[Operator:]

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