Renren Inc.
Q3 2014 Earnings Call Transcript

Published: 21 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2014 Renren Inc. Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 21st of November, 2014. 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 third 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 third 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 our earnings call. In this quarter we continued to execute our strategy of focusing our core business, and in particular, focusing on our core user demographics. First, regarding focusing our core business. As you may already know, recently divested the video portion of 56.com to a strategic buyer Sohu.com. While 56's video business has been growing strongly in the past three years and became a leading UGC video player, unfortunately we were not able to monetize it effectively. With the whole company undergoing a transformation and streamlining process, we made a difficult decision to divest it. We trust that Sohu will provide a more synergetic platform for 56 and continuing to support its future growth. Meanwhile, I'd like to take this opportunity to thank Kitty Zhou, the Founder and CEO of 56, and her entire team, for their tireless effort and contribution in the past three years. In particular, we're grateful for the understanding and support during this transaction. Second, regarding focusing on our core user demographics, I'm pleased to report that we have made some good progress. If you recall, since the beginning of this year, Renren started to refocus on college events and the young generation in China. Our product development marketing and promotion approaches as well as monetization strategies has since evolved accordingly. In particular, during the previous quarter's earnings call, we mentioned that we're planning to launch two new services

[Hui Huang:]

Thank you, Joe. Hello everyone. Now let me provide you with the financial highlights for the third quarter of 2014. Our total net revenues for the third quarter were $21.6 million, representing a 47.4% 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 $13.5 million, representing a 34.5% decrease year over year. Online advertising revenues were $8.8 million, representing a 40.3% decrease year over year. IVAS revenues were $4.7 million, representing a decrease of 19.6% year over year. Next, gaming segment net revenues were $8.1 million for the third quarter of 2014, a 60.5% decrease from the same period of last year. The decrease was due to the lack of new titles and our previously launched games having reached their matured stages. Now, gross profit. Gross profit in third quarter was $5.5 million, a 77% decrease year over year. As a percentage of the total net revenues, margin decreased to 26% in the third quarter, compared to 58% in the same period of last year, primarily due to the decrease in net revenues. Operating expenses in the third quarter were $101.2 million, a 108% increase year over year. The increase in total operating expenses was mostly due to the one-time charges of $13.7 million for the impairment of intangible assets, and $46.9 million for impairment of goodwill. This impairment charges resulted from the decrease in the estimated fair value of our Renren platform reporting unit which included 56.com based on the latest operating results and market conditions. Next, loss from operations in the third quarter was $95.7 million, compared to an operating loss of $24.7 million in the corresponding period in 2013. The increase in loss from operations was primarily due to the one-time impairment charge for intangible assets and goodwill, as mentioned above, and the decrease in our revenues. Our net loss in the third quarter was $38.1 million, compared to a net loss of $24.6 million in the same period last year, which was primarily due to the total of $50.6 million in one-time impairment charges, partially offset by the earnings in some of our active investments. Adjusted net income, a non-GAAP financial measure, was $29.3 million for the third quarter for 2014, compared to an adjusted net loss of $19.7 million in the third quarter of 2013. 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. As of September 30, 2014, the company had cash, cash equivalent and short-term investments of approximately $812 million, compared to $909 million as of September 30, 2013. The decrease was mainly due to the increase in long-term investments. Now let me provide you a quick update on our share repurchase program. During the third quarter of 2013, the company repurchased approximately 4 million ADS shares. Finally, let me provide you our top-line guidance for the fourth quarter of 2014. We currently expect the fourth quarter will generate revenues between $15 million to $17 million, representing 45% to 51% 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.

[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 Eddie Leung, Merrill Lynch. Please ask your question.

[Eddie Leung:]

Hi, good morning. Thank you for taking my questions. Two main questions. The first one is related to your new business. Is there any operating metrics and any idea on the potential investments that we need to make for these two new businesses in the upcoming, let's say, year or so? And then, secondly, about the 56.com sale, could you give us an idea roughly how much revenue and costs are related to 56.com in the third quarter? Thank you.

[Hui Huang:]

Hi, Eddie, this is Hui. Thank you for your two questions. The first one, I assume you relate to the student financing business?

[Eddie Leung:]

And the education.

[Hui Huang:]

Education, yes. As Joe mentioned in his remarks early on, yes, we have launched or about to launch this new business. For student financing, we launched about one month ago, and for the online education, we are in the process of preparing for it, and we currently plan to launch in first quarter for 2015. So for the student financing, it's still at a very early stage given it only has one month of operating history. So we think it's a little bit premature to discuss a lot of the metrics given it's very early, right, and a lot of the things are not fully defined yet. But less that, we are encouraged by the trends and momentum that we have seen in the past months in terms of both the number of students who register for this service, as well as the amount and the number of orders they have placed on the service. So we're very much looking forward to sharing and discussing more details on the operating metrics and our further thoughts on this business with you and the other analysts maybe in the coming quarter once this business has further developed for a few more months. So that's your first question. On the second question regarding 56.com, if I understand correctly, your question was how much revenue 56.com contributed in third quarter?

[Eddie Leung:]

As far as the cost. Because after the disposal, there should be -- could be a positive impact to your [indiscernible].

[Hui Huang:]

Correct. But first of all, let me make a quick clarification. This transaction was only for the video part of the 56.com. Woxiu, the talent show business, is not included in the transaction. So it's a partial sale. For the entire 56.com, in the past quarter, third quarter, the advertising business was approximately $2 million plus in terms of revenue contribution. So for that part of the business, we will deconsolidate towards the end of this quarter, once this deal has been officially closed. However, for the Woxiu, for the online talent show business, which contributed to $3.5 million revenue third quarter, that will continue to be part of Renren company.

[Eddie Leung:]

Got that. Thank you.

[Hui Huang:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

[Unverified Participant:]

Hi, good morning. Thank you for taking my question. This is Amanda [ph], asking on behalf of Philip. I have a follow-up question regarding the Fenqi or new business. It looks like e-commerce/promotion campaign to me. So, could you please give us small details about the new business? Do we have any e-commerce partners to work with us on this or do we need to take an inventory for this new business? Thank you.

[James Liu:]

Hi, this is James. Thanks for the question. The new initiative for college students consumer products purchase is actually not a flash sale service. It's actually a service where we provide financial support for students so that when they want to buy products like an iPhone or a Mac PC and they couldn't afford it upfront, we actually provide financial support for these guys, to be able to buy it upfront, but at the same time, paid back over an extended period of time within the next 12 to 24 months. That's the service that we provide.

[Unverified Participant:]

Got it. So of the products we offer on the platform, we don't take any inventory or we don't need to cooperate with other e-commerce companies?

[James Liu:]

Yes, your understanding is correct. For most of the products, actually the logistics part including inventory and so on are shouldered by third-party vendors. Only a very, very small part of the business we take inventory in, and we handle logistics.

[Unverified Participant:]

Got it. Thank you. And my second question is regarding the game pipeline. Could we get --

[Hui Huang:]

Amanda [ph], sorry. Can you speak up a little bit? We're hard to hear you. Can you speak louder?

[Unverified Participant:]

Sure. Sorry.

[Hui Huang:]

Thank you. Much better now.

[Unverified Participant:]

Yeah. Yes. So my second question is regarding the game pipeline. Could we get some updates for next quarter game pipeline?

[James Liu:]

Yes. Thanks for the question. For our gaming business, we have done some further restructuring, so the restructuring over the past quarter focused on releasing R&D efforts into the market, which also means that from this point on, to operate new games, we primarily focus on licensing games from the market. There are also some studios that we spot off from our gaming business, where we still are a shareholder. So, game will be coming from these two sources, studios that are still associated with us but largely operating in a market mechanism, or licensing games from the market. As we speak, we are evaluating a number of very interesting games from the market that we are licensing from, both inside China and from outside of China, from countries like Korea.

[Unverified Participant:]

Got it. Thank you. That's all my questions. Thank you, Joe and Hui.

[Joe Chen:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

[Ashley Law:]

Okay. 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.

[Operator:]

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