Renren, Inc. (RENN) Q1 2019 Earnings Conference Call June 11, 2019 9:00 PM ET

Company Participants

Jintao Ren - CFO

Joseph Chen - Founder, Chairman & CEO

Conference Call Participants

Tina Long - Crédit Suisse

Operator

Hello, ladies and gentlemen, thank you for standing by for Renren Inc.'s First Quarter 2019 Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded.

I will now like to turn the call over to your host, Rachel Wang [ph], Investor Relations for the company. Please go ahead, Rachel.

Unidentified Company Representative

Hello, everyone, and welcome to Renren Inc.'s First Quarter 2019 Earnings Conference Call. Renren Inc. operates a leading premium used auto business in China, Kaixin Auto Holdings, with NASDAQ ticker KXIN as well as several U.S.-based side businesses. The company's financial and operating results were issued in the press release via newswire services earlier today and are posted online.

Participating in today's call are Mr. Joe Chen, our Chairman of the Board of Directors; and Mr. Thomas Ren, our Chief Financial Officer. The company's management will begin with prepared remarks and the call will conclude with a QA session. Mr. James Liu, our Chief Operating Officer, will join us for the Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such the company's actual results may be materially different from the views express today. Further information regarding this and other risks and uncertainties is included in the company's annual report on Form 25 and other filings as filed with the U.S. Securities and Exchange Commission. The company does not obtain any obligation to update any forward-looking statements except as required under applicable law.

Please also note that Renren's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Renren's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over all over to our Chairman, Mr. Joe Chen. Please go ahead.

Joseph Chen

Thank you, Rachel. Good morning and good evening to everyone joining us. Welcome to our first quarter 2019 earnings call. We have not hosted conference calls for a few years, and the reason we are doing it this quarter is to better update our shareholders on changes that have been taking place over the past several quarters. These changes include but are not limited to the spinoff of our ZenZone Business and the investment portfolio that occurred in June 2018; the divestiture of our main social networking business, a business we have had since 2005; and finally the listing of our auto dealership business, Kaixin Auto, on NASDAQ in May this year.

Our remaining business and focus of the newly created or acquired post our IPO in 2011 are Kaixin Auto and our SaaS businesses. Our SaaS businesses are still in the advancement stage, so let me focus on Kaixin Auto on this call. Our auto dealership business model has been an evolving one with each revolutionary move developing as a direct result of our deeper understanding of the industry and where it's headed. We started this business in 2015 within the parent company Renren as a tech-enabled platform that provided floor financing for used car dealers. Supported by the rapid growth of China's used car market and leveraging its own hybrid business model that offers both strong online/offline presence, Kaixin has transformed from its tech-enabled financing platform into a nationwide dealer network that combines self-owned and affiliated dealers along with value-added services.

So how did we get into this business model? From the onset, we realized the central role that financing plays in this industry, while at the same time began developing relationships with prime dealers who were dominating the local markets. In 2017, we established our self-owned dealer network. The goal was to operate in the premium used car segment by providing dealers with access to premium brands, capital, technology, and marketing support. In addition, Kaixin began providing financing on the loans to some of our joint venture dealership partnerships in top markets. Over time, Kaixin became the largest premier used car dealership network in China.

In 2018, Kaixin expanded its business model to include a network of affiliated dealers beginning in the city of Wuhan, my hometown. The goal of the expanded business model aimed to establish a national dealership network underpinning by capital and financing resources from multiple channels. Most recently, we expanded our offerings in order to provide customers with the full suite of services in order to capture additional revenue streams. This includes value-added and after sales services as well as vertical forward integration such as customer auto financing, insurance brokering, and all-important repair and maintenance services. We are prepared to further refine and evolve with this model as needed with the open objective of deepening our market penetration and increasing our profitability.

So, why this particular industry and why this particular niche? China's used car market is still in its infancy because even the new car market in China has been earning a relatively recent development. A typical Chinese consumer did not and does not grow up with a family car, and therefore has very little experience with automobiles. However, car ownership and used car ownership has begun exploding in China and is now a huge and rapidly expanding market. In fact, it is on a trajectory to become the biggest in the world.

There are two developments occurring that combined are creating a scenario that is ripe for premium used car demand. First one is middle-class workers income rising. Many Chinese consumers are looking to upgrade their vehicles or procure one for the first time with an eye toward the U.S. and international premium brands. At the same time, in light of the challenging macroeconomic conditions, including -- the consumers are looking to hedge [ph] their spending exposure with the value proposition offered by the used vehicle. This leads to extraordinary opportunity that Kaixin is well positioned to capture.

Kaixin is focusing on premium car segment which is concentrated in Tier 1 areas and which we believe provides the greatest growth opportunity. With China's used car market still highly fragmented, financing options limited and a lack of skill for others in the market, consumers are presented with a sales environment with inefficient sourcing, poor price transparency, and inconsistent quality, which is leading to overall skepticism and distrust. Kaixin's strategy is to provide consumers with the simplest, most comprehensive, and transparent service available. We believe this differentiated business model combined with our size, scale, dealership funding, availability, and a multitude of value-added services will give Kaixin a huge competitive advantage.

So where are we today from an infrastructure standpoint? Kaixin has 14 dealers covering 14 different cities in 12 provinces in China. On average, Kaixin's dealership operators have over 10 years of experience in the used car business. Kaixin provides used car buyers in China with access to a wide selection of used vehicles across its network of dealers who, as mentioned, are focus on premium brands such as Audi, BMW, Mercedes, Land Rover, and Porsche.

With this current model and the size of the transport market, we have significant growth opportunity ahead. Specifically in order to capture these growth opportunities, here are some high-level initiatives we are focused on: first, leveraging a well-established brand to maintain and increase our online credibility; second, using big data for operational advantages in sourcing, pricing, marketing, and enterprise management systems; third, further consolidating the addressable market of 150,000 mom-and-pop shops by acquiring additional dealers that will cover all premium segments; fourth, providing additional resources for capital, technology, and scale through affiliated dealers; and finally, driving value-added service such as financing, insurance brokering, and repair and maintenance to further monetize transactions, improve margins and profitability, and fortify both customer and affiliated dealer retention and loyalty.

As we grow this business from quarter-to-quarter and year-to-year, we are continually providing investors with the metrics needed to measure our success and the value of Kaixin.

There are three to focus -- focusing on right now. First, units sold. In 2017, 1,830 used units. That's 1,830 used units were sold through Kaixin's network. In 2018, that number jumped to 6,900 -- 6,900 units sold. Second, dealerships. In 2017, Kaixin has 13 dealership in its network which includes both company-owned and affiliated-network dealers. That number rose to 18 dealerships in 2018. Third, average selling price per vehicle, which we anticipate will be around $50,000 in 2019 and 2020.

These numbers speak for itself, and with first quarter 2019 adjusted net losses cut by more than half from the same period last year, we are confident that with the execution of the plan just laid out, we can begin extracting and delivering shareholder value.

To conclude before I turn the call over to Thomas, I would like to summarize how we differentiate ourselves in the marketplace and how the differentiation can make us successful. We serve the premium car segment, which is a very large percentage of the total market and growing faster than overall used car market in China. We are betting our strong local dealerships who have been successful with organic growth and further marketing spend. We leverage strong proprietary technology both on the customer-facing side and the dealership-facing side. We have a strong team in place who is passionate about the marriage of cars and technology and has history of business execution.

Although we are still in the development and incubation mode, we are the number one dealership network in the premium used car segment in China with much runway and opportunity ahead of us to grow.

Thank you again for joining us today, and I would now turn the call over to our CFO, Thomas Ren.

Jintao Ren

Thank you, Joe. Mindful of the length of this call, I will just highlight the key financial measures for the first quarter of 2019, and we encourage you to refer to our earnings press release for further details regarding our first quarter financial results.

Our total net revenues for the first quarter of 2019 were $110.4 million, representing an 18% decrease from the corresponding period in 2018. Kaixin revenues were $104.6 million, an 8% increase from the corresponding period in 2018. Our auto sales revenue for the first quarter of 2019 were $102.6 million, representing a 17% decrease from the corresponding period in 2018. The decrease was mainly due to the closing of our Jinan dealership in the third quarter of 2018.

Other revenue were $7.7 million, representing a 25% decrease from the corresponding period in 2018. The decrease was mainly due to the decreases of live streaming revenue from our mature business and the shift in Kaixin's business focus to used car sales as opposed to third-party floor financing since the first quarter of 2018. And we do not expect to have any financing income related to that financing business in the near future. Our first quarter 2019 cost of revenue was $101.5 million compared to $123.5 million in the corresponding period of 2018.

Next, operating expenses were $19.9 million, a 42% decrease from the corresponding period of 2018. Our selling and marketing expenses were $6.7 million, a 32% decrease from the corresponding period of 2018. The decrease was primarily due to the decrease in headcount and personnel-related expenses due to the shift in Kaixin's business as described above. Research and development expenses were $6.8 million, a 6% increase from the corresponding period in 2018. The increase was primarily due to an increase in headcount and personnel-related expenses for our U.S. SaaS business.

First quarter 2019 general and administrative expenses were $6.4 million, a 64% decrease from the corresponding period in 2018. The decrease was primarily due to a decrease in share-based compensation expenses and a decrease in headcount and personnel-related expenses. Our share-based compensation expenses, which were all included in operating expenses, were $2.8 million compared to $12.3 million in the corresponding period in 2018. The decrease was mainly due to stock options granted during the first quarter of 2018 by Kaixin, over half of which were vested on the grant base and which led to higher share-based compensation expenses in the first quarter 2018 compared to first quarter 2019.

The company's first quarter 2019 loss from operations was $11.1 million, improved from a loss from operations of $23.7 million in the corresponding period in 2018. Net loss attributable to the company was $27.9 million, improved from a net loss of $41.6 million in the corresponding period in 2018.

Non-GAAP adjusted loss from continuing operations was $8.2 million, improved from an adjusted loss from continuing operations of $11.3 million in the corresponding period in 2018. Adjusted loss from operations is defined as loss from operations, excluding share-based compensation expenses and amortization of intangible assets. Finally, non-GAAP adjusted net loss in first quarter 2019 was $7.4 million, improved from an adjusted net loss of $18.8 million in the corresponding period in 2018. Adjusted net loss is defined as net loss excluding share-based compensation expenses, fair value change of contingent consideration and amortization of intangible assets.

And now our business outlook and guidance. The company expects to generate revenue in an amount ranging from $98 million to $103 million in the second quarter of 2019. This outlook is based on the current market condition and reflects the management's current and preliminary estimates of market and operating conditions and customer demand which are all subject to change.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]. We have our first question from the line of Tina Long of Crédit Suisse.

Tina Long

Congratulations on the results. And also, I have two questions on the big picture of the company. The first one is, what's Renren's long-term strategy after the OPI spinoff and sale of Renren assets? And the second one is considering the recent fund raised for Kaixin during the recent U.S. IPO listing -- your non-IPO listing, what will be Kaixin's short- and long-term strategy in the used car market?

Joseph Chen

Tina, thanks. This is Joe. Let me take first crack on your questions, but I kind of mixed up the two questions, but let me -- so you're asking for the long-term strategy, all right. So, let me answer the first question, long-term strategy.

So we went public in 2011 with a social network business, but obviously that business has very strong network effect, and we are locked up in a very, very intense competition with Tencent, and that's actually almost significantly after we went public, they launched WeChat. So we were competing simultaneously with four competitors, four products that's QQ, which has 10x more users than we have back in 2011. And we were competing -- still competing with Sina Weibo. And we were always competitive with QQzone, with QQ, the homepage services. That's our main competitors when we started. And then finally WeChat.

S,o with all these four products competing with us, all bigger than us, and we had to fight with network effect. And although we were the, number one, online-based [ph] network when we went public, and that differentiation somehow wasn't strong enough. It was still -- especially with the launch of WeChat. So we lost that war. And we actually -- in that process, we lost a lot of money operationally. And so, starting from 2 or 3 years ago, or even before that, we decided to, okay, if we -- we don't want to lose so much money on Renren, so we started the manage the cost to the point that we almost turned profitable, and then last year we divested the business.

And then that leaves us -- all the businesses that we have left in the public company are brand new. These are businesses that we have started or acquired post-2011. And all the businesses that we had were sold or discontinued. So we are essentially a new company, even though we still have Renren as the company name and we sold the Renren social networking business, we’re really a very different company.

So, in the long term what we do -- I mean obviously Kaixin is our main business right now. It has most of the operating assets – our company was out of the business. It had the most employee count as well. And so -- more than half of the employees and a lot of advertisers on that business. So, we want to make sure that this business grows and do well, and we have some other business assets that we're incubating, still in the incubation stage. The revenue is still relatively small. And so, when they become sufficiently big, we'll start reporting the performance of this business.

So, to answer the question, clearly the long term is really about -- we're almost becoming a B2B company now starting from a B2C company. And B2B, what it means is that our Kaixin dealer and network business is partially B2C but also B2B in a sense that we need to develop software -- enterprise software that supports our internal operations. That means we need to understand how the dealership works and what's the best technology infrastructure to support them. And in the case when we manage the marketing spending, we also need to understand how to drive demand.

So a lot of that -- at least part of the team is B2B-facing as well as our SaaS business which is pure B2B. So, I think that's the sort of the direction we're going. We're going towards B2B businesses, and we'll find a niche. And if it makes sense, we invest and try to grow to the business.

And going back to your second question which is related to the strategy of Kaixin, we managed to raise a little bit of money, not too much. I think between $30 million to $40 million, so not a lot of capital. I mean you know that in this business. Because we are fundamentally a retailer because we have inventory and we turn our inventory really quickly to the tune of less than 2 months of turn. And we have very good gross margins on it, but we need all the capital.

So, I think the short-term strategy is to keep on raising capital, especially debt capital, and grow our inventory and grow our business. And as you say that we are approaching a trajectory of profitability as well. So, I think as long as we do well on those two, the backdrop of the used car market in China provides a very good wave to ride because there are quite a few large companies that was founded to pursue this opportunity, but I believe we have the most unique model.

I mean everybody else was focused on medium-end priced or low-end priced car because there's a lot of units there, but we focus on premium. And when you focus on premium, offline is 100% more important than online because customers buying a car that's $50,000, they want to touch it, they want to drive it, they want to see it at its house, so we’re seeing a good-looking dealership. They want to make sure that car is merchandised together with a bunch of other good-looking cars, but they want to talk to knowledgable, posh-looking salespeople.

So everything is different. I mean when you're selling a premium used car that's priced around $50,000 on average versus a car that's selling less than $10,000, right? You know that it's a very differentiated business strategy. We are the only one that's on the market pursuing this in scale. So I think we have a pretty good thing going for us on Kaixin.

Operator

[Operator Instructions]. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Unidentified Company Representative

Thank you once again for joining us today. If you have further questions, please feel free to contact the Investor Relations department through the contact information provided on our website.

This concludes this conference call. You may now disconnect your lines. Thank you.