Renren Inc.
Q4 2014 Earnings Call Transcript

Published: 19 Mar 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2014 Renren, Inc. Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 19th of March 2015. I would now like to hand the conference over to your first speaker today, Ashley Law. Thank you and please go ahead.

[Ashley Law:]

Thank you and welcome to our fourth-quarter and fiscal-year 2014 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 fourth quarter and fiscal year 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. Let me first review our past year. 2014 has been a year of significant transformation for Renren. We reallocated our resources from group-buying e-commerce, online video and gaming development to new growth areas such as Internet finance. Our original strength with college students forms our core social networking services. As a result, throughout last year we divested Nuomi, the group-buying e-commerce service, as well as 56.com, the online video services. In addition, we also significantly reduced the size of our gaming team and restructured our operation model from in-house development to publishing, a much lighter model. Last but not least, for our core business, Renren social network, we focused back to our target audiences, which are college students and an adjacent young demographics. The transformation came with pains such as significant one-time restructuring costs, reduced revenues and a considerable time and effort devoted to reorganizations. However, we're pleased with the early results we have seen so far; a much leaner organization, lower ongoing operating costs and much more clear focus. Meanwhile, we're encouraged that along with all these changes and restructurings as well as intense external competition, we're able to maintain our brand strength with the college student population in China. Among students Renren continues to be the number one SNS on campus. We will continue to dedicate to this core demographic with more products and services tailored to them. And on that note, one of the new services we launched for college student users, Renren Fenqi, is a business we feel very excited about. Renren Fenqi started as online marketplace offering installment purchase plans to college students, who shop our platform and other e-commerce platforms in China. It has grown rapidly since its launch four months ago. Renren Fenqi now covers approximately 2,000 universities and colleges in 129 cities and continues to scale up. In addition to geographical expansion, we also have widened further offerings on the platform from consumer electronics, cosmetics to selected fashion items and more to come soon. We're encouraged by the rapid growth of this business and hope to build Internet financial services as one of the future growth engines for us. That said we're fully aware that is similar to many other new Internet business models seen in the past few years. There will be many challenges ahead, ranging from intensified competition to inherent risks of an untested and unregulated market. However, one important competitive edge we have for this business is Renren's new -- is Renren's core strength, i.e., college market. We know the student population in China best, based on our leading social networking service on campuses. We know where they go to college, how they spend their spare time, who their friends are, what products they like and so on. This gives us the best resource possible to assess credit profiles, understand what students need and reach out to them effectively. We believe Renren Fenqi is an exciting new growth opportunity for us. That is why I personally and the rest of team spend a lot of time and energy on this new business initiative. Besides Fenqi we are for now taking a cautious approach on our education initiative that I spoke to you about in the last two quarters. We have a small team in place that will continue to work on a regional marketplace concept to link students with top-end tutors and teachers. We'll keep you posted on when we're ready to go live with this new service. At the same time, we continue to innovate and develop new services for our social networking service. We have recently launched Yopay [ph], a mobile app for both professional photographers and general users to add, share and comment on mobile photos with social networking features. We believe our social networking service remains the central pillar for our offered [ph] services, including the internet finance initiatives. Now, after this strategic review, let me update you on our monetization. First, for advertising business, due to strong competition and traffic migration, our advertising business continued to experience a year-over-year decline in 2014. Almost 19 -- 90% of our users now are accessing our platforms through mobile. This traffic remains difficult for us to monetize well, because innovation in mobile display ad is not happening as fast as we would like and we see advertisers in China still prefer video over SNS platforms. Into 2015, we expect no major change in our advertising business. On the gaming side, we finished the restructuring at the end of 2014. We have completely disposed of in-house game development. A much smaller team is focused only on distribution and operations of licensed games and looking for new titles launched in the market. In summary, due to seasonality effects we expect a further decrease in revenues from advertising and games in the first quarter of 2015. However, we're confident that our internet finance initiatives, the completion of our gaming restructuring plus the continued cost control measures will bring Renren back to a growth trend in financial performance. We're not yet out of the woods, but we believe from an operating financial standpoint the worst days are over. Meanwhile, we have set us up for long-term investment with good returns. We will continue to make good use of cash reserves and invest in new growth opportunities that have potential synergies with Renren and give us a strategic position in the future of the converging online and off-line worlds. With that, I will now let Ashley give you the financial review.

[Ashley Law:]

Thank you, Joe. Hello, everyone. As will I discuss both fourth-quarter and full-year 2014 results, let me first note that to better reflect our latest operational status, starting from the fourth quarter of 2014, Renren's financial statements will reflect the deconsolidation of 56.com's online video business operating results. Retrospective adjustments to the historical statement of operations have also been made to provide a consistent basis of comparison for the financial results. Specifically, 56.com's online video business operational results have been excluded from the Company's statement of operations and have been separately itemized under discontinued operations. Let me first begin with the financial highlights for the fourth quarter. Our total net revenues for the fourth quarter of 2014 were $17.2 million, representing a 38.5% 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 $10.7 million. Online advertising revenues were $4.2 million for the fourth quarter of 2014, representing a decrease of 44.1% year over year. IVAS revenues were $6.5 million for the fourth quarter of 2014, representing a 33.6% increase year over year, due primarily to the increase in revenue from the online financial platform Woxiu. Next, gaming revenues were $6.5 million for the fourth quarter of 2014, a 58.4% decrease from the same period of last year. The decrease was due to the lack of new titles and our old games having reached mature stages. Now gross profit. Gross profit in the fourth quarter was $4.9 million, a 65.3% decrease year over year. As a percentage of total net revenue gross margin decreased to 29% in the fourth quarter compared to 51% in the same period of last year, primarily due to the decrease in net revenues. Operating expenses in the fourth quarter were $37.3 million, a 29.1% 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 a decrease in research and development expenses because of the headcount reduction in games development. Next, loss from operations in the fourth quarter was $32.4 million compared to a loss of $38.5 million in the corresponding period of 2013. Though our total revenue decreased, our loss from operations has been reduced due primarily to our significant reduction in operating expenses. Our net income in the fourth quarter was $35 million compared to a net income of $100.8 million in the corresponding period of 2013. In the fourth quarter of 2013, we had a $132.7 million gain from the deconsolidation of our subsidiaries. Adjusted net income, a non-GAAP financial measure, was $43.2 million compared to an adjusted net income of $104.7 million in the fourth quarter of 2013. Adjusted net income is defined as net income excluding share-based compensation expenses, amortization of intangible assets and impairment of intangible assets and goodwill. As of December 31, 2014, the Company had cash, cash equivalents and short-term investments of approximately $706 million compared to $949 million as of December 31, 2013. The decrease was primarily due to the increase in long-term investments. Now let me briefly walk through some key financial figures for fiscal full year 2014. Net revenues in 2014 were $83 million, a decrease of 43.9% year over year. Renren net revenues were $45.9 million, of which advertising revenues in 2014 decreased 35.3% year over year to $26.9 million. IVAS revenues were $19 million, a 9.3% decrease from 2013. Gaming net revenues were $37.1 million, a 56.6% decrease from 2013. Gross profit was $35 million in 2014, a decrease of 62.7% year over year, with full-year gross margin at 42.2%. Operating expenses in 2014 were $194.4 million, up 0.7% year over year, mainly due to the one-time impairment charges for goodwill resulted from the decrease in the estimated fair value of our Renren platform reporting unit which included 56.com. In fact, the aggregate amount of our selling and marketing, research and development and general and administrative expenses were $140.4 million in 2014, a decrease of 25.9% year over year. This decrease was mainly due to our continuous cost control, particularly in promotions for games and the disposal of the games development activities. Loss from operations in 2014 was $159.4 million compared to an operating loss of $99.4 million in 2013. Net income in 2014 was $60.5 million compared to a net income of $63.7 million in 2013. Now let me provide you a quick update on our share buyback program. During the fourth quarter of 2014, the Company repurchased approximately 9.3 million ADS in an aggregate amount of approximately $28.9 million. Finally, let me provide you our topline guidance for the first quarter of 2015. For the first quarter we currently expect to generate revenues between $11 million to $13 million, representing 44.2% to 52.8% 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. [Operator Instructions] Our first question comes from the line of Jerry Jeffries [ph], a private investor. Please ask your question.

[Unidentified Participant:]

Hello. Mr. Chen, I understand there's risk involved in all investing, but over the years I've just watched this Company make excuse after excuse quarter after quarter, squandering every advantage of being the leading social network in China, coming up with excuses as to why you didn't monetize mobile while all of your competitors seem to do so quite ably. You made a remark that your advertisers prefer video over SNS advertising, yet you sold off your video platform. It seems like -- and you sold off group buying -- you sold off all of the things that seemed to have room for growth. Anything that had promise like Nuomi, it gets sold off and it's just excuse -- quarter after quarter, year after year of excuses. Do you have the integrity to resign?

[Joe Chen:]

Jeffrey, thank you for your question. And I think that for the observers of China internet, I think one -- first of all, I think that in China the competitive landscape is very different from the U.S. and our competitive position relative to the leading social network in the U.S., Facebook, is quite different, even though we have a lot of users, because the rise of WeChat, which is a dominant mobile messaging platform, we're facing very different competitive dynamics as in Facebook in the U.S. And also regarding your comment about our divesture of video and group buying, the video, we found it also very difficult to monetize under our thing -- under our management, primarily for the reason that 56 is focused on user-generated content. So under our management it has grown in terms of asset and page views, but we also found it difficult to monetize relative to other video services, which, number one, are much larger, number two, actually spending a lot of money, buying premium content such House of Cards, such as moving sitcoms, very popular moving sitcoms in China. And the media purchase, content purchase is in hundreds of millions of dollars for some of these websites. So we cannot compete on that. And obviously, even though we have a lot of video inventory, the brand advertisers still go for the premium content. So that explains our inability to monetize 56 relatively well. And regarding group buying, you're absolutely right. It has been a growing asset for us, but, on the other hand, we have to be very respectable of the network effect and which is -- we were number three, a distant number-three player, when we exited that business and the number-one, number-two player were much better financed and they are single-purpose corporations and already are dominant in many of the cities. So I absolutely think that it was the right decision to exit that business and transfer the ownership of that business to Baidu, which seems to be doing a much better job than us growing that business. But still, even under Baidu's leadership, Nuomi is still number three. They are not number one yet, okay? And the gap is actually still quite big. So that tells you the intensity of competition in China. It's quite different from the U.S., so I think some of the perceptions that you have might be derived from the U.S. perspective. I totally understand where you're coming from. Thank you for the question.

[Operator:]

[Operator Instructions] And there are no further questions at this time. Please continue.

[Ashley Law:]

Okay. So 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:]

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