Renren Deep in the Red

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Despite massive growth, China's very own "Facebook," Renren (NYS: RENN) , came out with third-quarter revenue figures below analyst expectations. Let's take a closer, Foolish look to see why this happened.

Show me the money
Renren saw its total revenues jump by 57.1% to $34.2 million from the previous year's quarter. The company's online advertising revenues shot up by 91.8% to $19.6 million due to the expansion of its user base and ramp-up in user activity, with an increase in the number of active users from 103 million to 137 million from the year-ago quarter.

Revenues from the company's Internet VAS, or value-added services, saw a 26.3% increase to $14.6 million, mainly due to a 23.6% increase in its online gaming revenues and a 35.2% increase in other value-added offerings, which include Nuomi.com, a social commerce website.

Renren's heavier losses can be attributed to a number of relatively higher expenses that eroded top-line growth. First of all, the company's cost of revenue shot up by 62.3% to $6.7 million. In addition, the operating expenditure skyrocketed by 145.9% to $34 million.

Operating expenses included high advertising campaign expenses for Nuomi along with higher promotional expenditure for the launch of new online games such as Plants vs. Zombies. Elevated spending on R&D also played its part due to an increase in the number of employees.

So despite the impressive rise in revenues, the company's earnings actually fell into the red with a net loss of $1.2 million against a profit of $7.3 million in the year-ago quarter.

While Nuomi is the main cause of Renren's current financial woes, even if you exclude Nuomi's operational results, Renren's third-quarter net profit figure would still show a decline by 14% to $6.2 million. This is because of the higher promotional expenses for online games coupled with higher compensations for personnel and increased commissions for advertising sales.

On the other hand, a look at peer Baidu.com (NAS: BIDU) shows a different story, one of soaring revenues and profits along with a strong revenue guidance for the coming quarter, which is expected to exceed expectations. But steeper losses aren't the only problem facing Renren.

China cracks the whip
China has promised to up the ante in terms of monitoring and controlling online messaging and social networking sites like Renren. The law would strictly punish the publication of supposedly "harmful information" that goes against the government. This also applies to peer SINA (NAS: SINA) , which runs Weibo, a microblogging service, and Tencent Holdings, which runs QQ, an instant-messaging service.

Getting more social
Setting all this aside, Renren recently announced the $80 million acquisition of 56.com, a leading video content website in China that features user-generated content, similar to Google's (NAS: GOOG) YouTube. Sites like 56.com have been increasingly popular among social-networking site users. Thus, the acquisition, which is expected to close in the fourth quarter, would further help Renren's users upload and share their personal videos.

The Foolish bottom line
Renren is still in start-up mode, so investors may cut it some slack as long as it's showing fast revenue growth, as it has for the past three quarters sequentially. Ultimately, as it scales up, the company will have to show that it can make, as well as spend, money.

So, what do you Fools think about Renren's performance? Leave your comments in the box below. You can also stay up to speed with Renren by adding it to your very own watchlist. It's free, and it keeps you up to date on the latest news and analysis for your favorite companies.

At the time this article was published

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