PDD Holdings Inc. Q1 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Pinduoduo First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to first speaker today Mr. Jason Zhu. Please take over.

Thank you operator. Hello everyone and thank you for joining us today. Pinduoduo earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com as well as through Globenewswire services. So on today's call our Chairman and Chief Executive Officer, Chen Lei will make some general remarks on our performance for the past quarter and our strategic focus going forward. Our VP of Strategy, David Liu will then elaborate further on our specific strategic initiatives. Our VP of Finance, Tony Ma will then take us through our financial results for the first quarter ended March 31st, 2021. So, before we begin, I would like to refer you to our Safe Harbor statement in the earnings press release which applies to this call as we will make certain 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 the non-GAAP measures to GAAP measures. Now, it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei please go ahead.

Thank you, Jason. Hello everyone and thank you for joining our first quarter 2021 results announcement. It has been over a year since the initial break of COVID-19. Since then we have carefully moved towards normalcy, while respecting the necessary precautions and occasional measures to tamp down the flare up of the coronavirus. After mostly staying in place over Lunar New Year holidays in February, Chinese consumers finally took a well-deserved break over the May Day holidays, shopping and traveling across the country. With summer approaching, we hope that the global pandemic situation will continue to improve as more people receive their vaccinations. I would like to thank the merchants and logistics partners who worked closely with us to serve our users throughout this period. Together we created another industry first by staying open and serving users over the Lunar New Year. We provided users with cheer by ensuring that they could get what they required over the holiday and easily send presents and care packages to their loved ones back home with just a few clicks on our app. According to the State Post Bureau, the total parcel volume over the period from 11th to 17th February stood at 660 billion, growing by 260% over the same period last year. We are proud to have contributed towards keeping our users' spirit high while they kept themselves, their loved ones and their communities safe. Our overarching commitment to serving our users has helped us put together yet another strong quarter. Our annual active buyers increased by 35.4 million from the December quarter to reach 823.8 million for the 12 months ending on the 31st March 2021. We've continued to build trust and mind share with our users. User activity on our platform continued to increase. Over the last quarter, our monthly active users (MAU) increased to 724.6 million, representing 88% of our annual active buyers. Total revenues excluding revenues from merchandise sales was RMB17 billion, a year-on-year increase of 161%. Our growing scale gives us both greater capacity as well as responsibility to live our missions to benefit all. We constantly think about how we can best measure our resources and reach to catalyze improvements and bring more benefit to society. Our direct access to over 800 million consumers and our understanding of them as well as our network of over 8.6 billion merchants on our platform, makes us uniquely well-positioned to bring top minds from around the world together to develop practical solutions to real-world problems that our users encounter every day. As we work towards our goal of becoming the world's largest agriculture and grocery platform, we must also seize the golden opportunity to transform and modernize the agri-food system. We want to help consumers adopt healthier and more environmentally sustainable diets while improving other links of the supply chain and cost structure of the agriculture industry. And now let me touch on two points. First, we are pursuing partnerships to answer questions on the future of food. We have just entered a recent partnership to quantify the impact of plant-based meats on human health. As alternative proteins are a promising component of a more sustainable diet, it's useful to know how they affect us. This is our first research partnership, and it will certainly not be our last. For example, a year ago, we started a project to develop a more portable and low-cost test for pesticide residues. Upon commercialization, that project will improve food safety and quality, thereby benefiting many people. Second, we are rethinking logistics systems and infrastructure. We have the privilege of being the only exclusively mobile commerce players of this scale in the world. This unique characteristic of Pinduoduo has helped us to become the world's largest commerce platform by the number of paying users. This singular focus on mobile-only experience came about because we recognized back in 2015 the immense potential of ubiquitous mobile computing to drive trends in consumer behavior and addressing a new era of interactivity among users. Similarly, with logistics systems and infrastructure, we are looking at how things can be done with fresh eyes and no preconceptions. Pinduoduo has an advantage in this area. We originate many parcels, roughly one-third of daily parcels in China last year, and have expertise in complex technological system design. We are already working on algorithm design, data analytics, and cold chain logistics development and optimization. We have applied for some patents as well. We hope to roll it out widely in actual operations and help logistic providers achieve higher efficiency and lower costs. As we continue to grow, I believe that we can use our scale for good. As we search for solutions within logistics, we remain committed to becoming the world's largest agriculture and grocery platform. Our mobile-only and discovery-oriented platform, as well as team purchase model, are well-suited for food items and daily essentials. We see strong demand for Duo Duo Grocery, which is giving consumers the chance to buy a greater variety of parcels directly from farmers and agri merchants located in the region. We will continue to iterate our products and make grocery resources around the world affordable and available to our growing number of users. We foresee Pinduoduo becoming an important force multiplier and enabler that can truly make a meaningful difference in the world. At the same time, we remain committed to our social inclusion efforts and support for the virtualization of rural communities. For any advancement to be truly durable, we must look out for all our stakeholders. It is critical that we partner and empower them with technology. This means that we will keep on helping farmers and agri merchants operate better and earn more. We will continue to provide training for them to harness the full suite of tools on our platform to optimize sales and benefit from our platform's visibility into final demand. We will help them increase their productivity by working with local governments and agronomic institutes to harness new technology. Since the beginning, we have brought approximately 100,000 new farmers back to their hometown and we have committed to train another 100,000 new farmers over the next five years. We want to be a catalyst in this virtuous cycle; only when farmers and agri merchants earn more can they invest in greener agriculture. In building China's first agri-focused infrastructure, our priority remains partnering with existing third-party service providers, first and foremost arising from cold chain logistics, warehousing, sorting, and delivery. For Duo Duo Grocery, we focus on partnering with local communities closely. We work with existing shops, including mom-and-pop stores, to serve as our pickup points, enabling them to gain extra income. We also provide courses to aid their digital transition. In fact, since the start of Duo Duo Grocery, we have catalyzed the creation of millions of jobs up and down the supply chain. We hope that the system we build will truly benefit all for a long time to come. This is in line with our core value of doing the right things. We hope this helps you understand better where we are coming from and share our hope for a better tomorrow. Thank you. Let me now hand over to David.

Thank you, Lei. Hello, everyone. So as per Lei, our overarching commitment is serving our users. We're laser-focused on understanding our users' constantly changing needs and working with our partners and merchants to fulfill them in a way that is respectful of the community and the environment. With our aim of becoming the world's largest agriculture and grocery platform, we want to help create food systems that are greener, healthier, more inclusive, and more resilient. We develop and assess all our initiatives against those objectives. Let me elaborate on how this has worked on three key fronts. First, we are gratified by our positive early foray into agriculture-focused logistics infrastructure systems. Duo Duo Grocery, our next-day self-pickup grocery service, is creating many social benefits. It intelligently connects our users directly to local farmers and increases the variety of fresh produce they can purchase online. It lowers costs by reducing spoilage from storage and transport and improves carbon emissions while eliminating that from the last mile. Farmers sell more as well. Along the way, we have created new economic opportunities within the communities by tapping into existing shops to serve as collection points and through third-party service providers and warehouses that we have built to support it. We're happy that the growth momentum for Duo Duo Grocery remains very strong. We continue to see an increasing number of farmers and agri merchants, as well as pickup points, joining our platform. This will only amplify the social benefits that Duo Duo Grocery can bring. We have applied for patents for our proprietary cold chain logistics network system that aims to minimize the loss and quality degradation of agricultural products and other perishable products in transportation. The system applies novel technologies that can plan routes based on information about collection and distribution points, availability of cold chain infrastructure, and transit points, among others. It is still early days, but we are optimistic that the solutions we develop and apply will bring very positive impacts going forward. Second, we will introduce our consumer-to-manufacturer (C2M) revolution to agriculture. We already enjoy a very good partnership with farmers and agri merchants. More than 12 million farmers sell through our platform. This relationship has deepened with initiatives such as Help the Farmers live-stream session last year when COVID-19 struck. We also have longer-term partnerships to plan, operate, and sell better through Duo Duo Academy and Duo Duo Farms. It is time to elevate this partnership with C2M. Pinduoduo pioneered C2M and in the process recasts how Chinese manufacturers think of their value in the supply chain. We have helped factories build a new generation of brands that deliver both quality and value for money to our users. By aggregating demand and spending patterns of over 800 million users on our platform, we create useful insights for manufacturers. They become more responsive to market trends by making what consumers indicate they need and want. C2M also cuts down waste and costs of distribution and marketing, providing better prices for consumers. Our new brand initiative helped many export-oriented OEM partners survive the drought in international demand for their products during the COVID-19 pandemic. Agriculture will similarly benefit from C2M. Agricultural produce is diverse and unique. Much scale and effort go into cultivation. By helping farmers sell directly to users on our platform instead of through multiple intermediaries, we give value to the diversity and uniqueness of their produce as well as sight over their final demand. We're now focused on helping more farmers sell better by sharing market insights. Just as we have helped manufacturers, we help farmers be more appraised of market information. This enables them to be more responsive to market demand and develop agricultural brands that meet the needs of the market. China is a treasure trove of agricultural and culinary delights. There are plenty of gems hidden in plain sight waiting to be discovered by millions of consumers across the country. We will lend these growers and producers a helping hand to better market their products and develop brand recognition. Third, we are making headway in tapping into science to improve the food system. As Lei mentioned, we are backing a first-of-its-kind study on the health impact of plant-based meat. There is a growing recognition that current dietary patterns are neither healthy nor environmentally sustainable. Replacing meat with plant-based alternatives is a promising solution to both issues. Upon completion, the study will help consumers make informed choices on dietary transition and manufacturers refine their products accordingly. The spirit of this partnership is very much in line with our earlier partnership to develop a more portable and lower-cost test for contaminants on produce, which will help improve food safety and consumer confidence. We will continue to actively seek collaboration opportunities on agri-food tech with partners around the world. At the same time, we have also been active supporters of initiatives to apply the most advanced technology in agriculture. We're proud to have jointly organized the first China Agricultural Robot Innovation Competition. The competition concluded with an award presentation last week, attracting over 195 participating teams to apply robotics to agriculture. We're proud to have supported this competition, as robotics is in its early stages in agriculture in China but holds a lot of promise. We are convinced that our holistic efforts will bring progress to our food systems and benefit stakeholders, including our users, farmers and merchants, the communities we operate in, and the planet. Finally, even as we emphasize agriculture and food, we have not lost sight of the need to nourish the mind. In April, we launched Duo Duo Reading Month. Through that, users could access classics like Moby Dick or Notre Dame de Paris and purchase them at a discount. Famous historians and writers joined our live-streaming sessions to recommend books to readers. In conjunction with the inaugural China International Consumer Products Expo at Haikou earlier this month, we partnered with CCTV News to bring our 10 billion program live-streaming studio to Hainan. Through our live stream, users were transported to Hainan and learned about the specialty products, cuisine, and fruits as well as interesting items to offer at the expo. We'll continue to bring color and new experiences to our users through similar initiatives going forward. Let me now hand it over to Tony.

Thank you, David. Now let me take you through our financial results for the first quarter 2021. We continue to see solid user growth in Q1 and are pleased with the progress we have made in building trust and winning mind share with our users. Our annual active buyers for the last 12 months ending on March 31, 2021 increased to 823.8 million, up 35.4 million from the prior quarter. Our MAU in Q1 reached 724.6 million, which is up 49% compared to the same quarter in 2020. Our MAU as a percentage of our annual active buyers was 88% in the quarter, our highest engagement record achieved for any first quarter. According to the National Bureau of Statistics, during Q1, total retail sales in China grew by 34% and online sales of physical goods increased by 24% from the same quarter in 2020. The number of express delivery parcels in Q1 grew by 75%. A significant growth rate in both online sales of physical goods and parcel shipment volume reflects a strong recovery in e-commerce activities from the low base in Q1 2020 due to the business interruption caused by the COVID-19 outbreak. We also saw less pronounced Chinese New Year holiday-related seasonality in Q1 this year, as more merchants stayed open in response to people staying put. We collaborated with merchants and logistics service providers to ensure uninterrupted order fulfillment and delivery during the quarter. In terms of P&L, our total revenues in the quarter ending March 31, 2021 were RMB 22.2 billion, up 239% from RMB 6.5 billion in the same quarter last year. Excluding revenues from our 1P trials, our total revenues grew by 161% to RMB 17 billion in Q1 2021. The main driver of this growth was our online marketing services. Online marketing services revenue was RMB 14.1 billion this quarter, up 157% compared to the same period last year due primarily to a continued increase in merchant activities. We continue to offer better advertising products and analytic tools to our merchants, educate them on how to best leverage these features, and improve their services to their targeted users, and thereby help them meet and exceed their ROI targets. As a result, we have seen merchants spending more and exploring new ways to engage with users, and our users browsing more and discovering more items of interest. We are pleased to see the growing endorsement by our merchants and our users. Our transaction service revenues this quarter amounted to RMB 2.9 billion, which is up 180% compared with the same period last year. The increase in our transaction service revenues was due to two primary factors: number one, the increase in our GMV in Q1; and number two, the service revenues that we recognized in connection with Duo Duo Grocery for which we provide fulfillment and other related services. We also recorded RMB 5.1 billion in merchandise sales from our 1P trials in Q1 2021 as compared to RMB 5.4 billion in the preceding quarter. This 1P trial is meant to temporarily meet the demand of our users for products which our merchants cannot fulfill. Therefore, this number may fluctuate from quarter to quarter. Our strategy is unchanged and this will remain a very small part of the business. Now moving on to costs. Our total cost of revenues increased from RMB 1.8 billion in Q1 2020 to RMB 10.7 billion this quarter. The increase was mainly due to the costs and expenses attributable to 1P merchandise sales, higher costs of payment processing fees, cloud service fees, and delivery storage fees. Total operating expenses this quarter were RMB 15.6 billion as compared to RMB 9.1 billion in the same quarter of 2020. Our total non-GAAP basis operating expenses were RMB 14.6 billion as compared to RMB 8.3 billion in the same quarter a year ago. Our non-GAAP sales and marketing expenses this quarter increased by 80% to RMB 12.7 billion from RMB 7.1 billion in the same quarter of 2020. This was mainly due to an increase in online and offline advertisement and promotions. As we continue to invest in user engagement and mind share, in the first quarter, we had an incentive program for merchants who could stay open and continue dispatching orders during the spring festival. We also recently marked the second anniversary of our hugely popular RMB 10 billion program, which has steadily expanded over time to cover all categories including agricultural products and fresh produce. In line with our platform's vision of helping to accelerate the transformation of the agriculture sector, we will continue to make it free for agricultural products and fresh produce to be featured in this program. At the same time, we will continue to refine and improve the quality of our RMB 10 billion program by raising the standard required for merchants to participate. Our 824 million users trust us to deliver great value and quality to them, and we will constantly seek to improve to uphold their trust in us. On a non-GAAP basis, our sales and marketing expenses, as a percentage of our revenue, excluding 1P trials this quarter was 75%, as compared to 103% and 108% for the same quarter in 2019 and in 2020. A reduction in sales and marketing expenses as a percentage of revenue is a reflection of our economies of scale and our consistent efforts in maintaining a high standard of ROI benchmarks. On a non-GAAP basis, our general and administrative expenses were RMB 161 million, an increase of 36% from RMB 118 million in the same quarter of 2020, primarily due to an increase in headcount. Our non-GAAP research and development expenses were RMB 1.7 billion, an increase of 55% from RMB 1.1 billion in the same quarter of 2020. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel, as well as an increase in R&D-related cloud services expenses. On a non-GAAP basis, our R&D expenses, as a percentage of our revenues, excluding 1P contribution was 10%, as compared to 17% for the same quarter last year. To sum up, operating loss for the quarter was RMB 4.1 billion on a GAAP basis compared with an operating loss of RMB 4.4 billion in the same quarter of 2020. Non-GAAP operating loss was RMB 3.2 billion compared with an operating loss of RMB 3.6 billion in the same quarter of 2020. Our non-GAAP operating loss as a percentage of our revenue improved from minus 55% in Q1 2020 to minus 14% in Q1 2021. Net loss attributable to ordinary shareholders was RMB 2.9 billion as compared to a net loss of RMB 4.1 billion in the same quarter last year. Basic and diluted net loss per American Depositary Share (ADS) was RMB 2.33 compared with RMB 3.54 in the same quarter of 2020. Non-GAAP net loss attributable to ordinary shareholders was RMB 1.9 billion, compared with RMB 3.2 billion in the same quarter last year. Non-GAAP basic and diluted net loss per ADS was RMB 1.52 compared with RMB 2.73 in the same quarter of 2020. That completes the profit and loss statement for the first quarter. Our net cash flow used in operating activities was RMB 3.7 billion compared with an outflow of RMB 567 million in the same quarter of 2020, primarily due to an increase in restricted cash outflow due to seasonality offset by an increase in online marketing services revenues. As of March 31, 2021, the company had RMB 83.4 billion in cash, cash equivalents, and short-term investments. As of the end of April 2021, US$756.4 million of our 0% convertible bonds due in 2024 have been converted into equity. This concludes my prepared remarks. Operator, we are ready for questions. Thank you.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question coming from the line of Thomas Chong from Jefferies. Please go ahead.

Hi. Good evening. Thanks management for taking my questions. I have two questions. The first question is about monetization. Can you comment about the feedback on our advertising products? And how we should think about the monetization rate going forward? And my second question is about the 1P business. You said that the 1P GMV contribution to our overall GMV is around like 1%. And on the other hand, can you also comment about our non-GAAP net margin without the 1P business? And also, how about the non-GAAP net margin without 1P? And those are my three questions. Thank you.

Okay. That sounds a little bit more than two questions. But let me try to address one-by-one. Thank you again for the questions. For the first question, I want to emphasize that our strategy has always been serving our users well. That being said, we believe that either the growth or the monetization are a natural result of that. And we also believe there's still a lot of room to grow from where we are now. Today, we see very strong growth performance in Q1 because the merchants' ROI is reflected in our revenue. As you can see, our revenue in this quarter continued to grow, which is a reflection of our merchants' confidence with the platform and the confidence in the ROI they achieved. What the platform is providing is better design of various tools to help them understand their target user better so that they can leverage the Duo Duo Academy to gain more insights on how the technology analysis can help them enhance their ROI. I believe as long as this target can be achieved, naturally, the growth and monetization will follow. On your second question about the 1P business, as I mentioned in the prepared remarks, our 1P business is a temporary measure to offer products that our consumers want but for which our vendors cannot offer at that time. So this is another strategic priority for us. The GMV contribution of the 1P business is immaterial compared to the overall GMV of the platform. I guess that's your third question on the margin profile; the 1P business contribution does have an impact, but stripping that out our total platform margin profile will stay more or less in the same range as previous quarters.

Got it. Thank you.

The next question comes from the line of Natalie Wu from Haitong International. Please go ahead.

Hi. Good evening. Thanks for taking my question. Congratulations on a very solid quarter. Just curious how do you see the update of the competitive landscape change in the coming year? Given on the one hand, we've seen several antitrust-related regulatory developments lately, and on the other hand, the space seems to be getting more and more crowded with the entry of cross-border players like social content platforms and local live service providers. Just wondering does any of that affect your internal GMV target for this year? Thank you.

Congratulations on a very solid quarter. I'm curious about how you view the changes in the competitive landscape for the upcoming year. We've observed several recent antitrust-related regulatory developments, and at the same time, the market seems to be becoming increasingly crowded with the arrival of cross-border players like social content platforms and local live service providers. I'm wondering if any of this will impact your internal GMV target for this year. Thank you.

Thank you. Let me go ahead and address this question in Chinese, and I will translate into English this evening. So first, your question regarding competition. In China, the Internet space has always been very competitive. And it is also true that e-commerce in China is very advanced in terms of development ahead of the rest of the world. However, many people underestimate the retail opportunity that arises and the broad market potential that exists as the experiences improve. So taking agriculture as an example, the digitalization of the industry remains low, and opportunities are abundant for companies like Pinduoduo that can help drive efficiency and other fundamental changes. Looking back to 2015, when we entered this business, we foresaw that mobile Internet would lead to some very fundamental changes to consumer behaviors, making it more real-time, more spontaneous, and making access more ubiquitous. And we decided to focus on developing an entirely mobile product. That meant we also had to make some fundamental changes to the e-commerce product available at the time. Consumers' behaviors can evolve quickly, and we believe that people always want more choices. So to serve our users better, we need to be aware of these constant changes in consumer trends and invest in technology and business model innovation. Today, being the largest agriculture platform in China, Pinduoduo is well positioned to play another leading role in driving some change. The team is very excited about the value we can bring to the agriculture industry.

The next question comes from Robin Zhu from Bernstein. Please go ahead.

So I have two questions. One is on bringing brands onto the PDD platform and whether there's progress to be shared in Q1 regarding some of the key bottlenecks and challenges that management might want to share. And then the second question is again on monetization rates in Q1 compared to the last few quarters and the outlook on how quickly you think this can increase. Thank you.

Sure, Robin. Thank you for your questions. Let me speak to the brand question that you raised, and then I will pass it over to Tony to talk about your question on monetization. First and foremost, I would say that we are making steady progress with brands because we believe our user-centric mentality aligns very well with how brand efforts are looking for new channels to reach and serve their prospective customers. So as our user scale and engagement grow, we're seeing an increasing number of brands approaching us to collaborate. Since the beginning of the year, you've seen a number of notable new additions to our platform entering into fairly deep strategic collaborations. This includes international brand names like Adidas, Johnson & Johnson, and Unilever. We have also entered into strategic collaborations with the likes of Midea and Ecovacs. You asked about challenges regarding working with brands. I think it's really about helping them understand the incremental value that Pinduoduo as a platform can bring to brands and how we can work with them to better target, address new users, and identify users in a very cost-efficient way and improve their own experiences and reach. As an example of that, I will point to our efforts with Midea on the C2M side. We're working with them to deliver more value-for-money quality products to consumers on our platform by developing a co-customized line of washing machines. So these are the types of differentiation and efforts of strategic collaborations that we are investing in and that our brand partners are working with us to grow their businesses on PDD. Let me then actually ask Tony to make some more comments on your question regarding monetization.

Yes, again, coming back to our vision and our key strategic priority for Pinduoduo, it has always been focusing on the users and how to better serve them. We have 824 million users. In the past few quarters, we have been seeing incremental new users coming to the platform at around 15 million per quarter. Last quarter it was about 35 million to close to 40 million. These new users take time to build their mind share and trust with the platform. What we are focusing on now is really helping our merchants by providing tools and helping them understand their target audience first. Therefore, our users can benefit from the services provided by our platform and the merchants. Then we can create an enjoyable interactive experience where users will spend more time on our platform. Monetization will be a natural result following from this target being achieved.

Thank you. Operator, next question?

Certainly, the next question comes from Jialong Shi from Nomura. Please go ahead.

Good evening, management. Thanks for taking my questions. Congratulations on a very solid quarter. My question is can you provide any colors to help us to understand the size of your community grocery business and its associated loss in Q1? And earlier this year itself, we noticed in the media several local governments issued warnings to community grocery platforms due to the alleged excessive subsidies provided by platforms for products sold. I just wonder, after the intervention from the government, have you guys seen any sort of de-escalation in the competition? Thank you.

Okay. Let me take the first question. Let me just repeat, the question you raised is on the overall performance of the Duo Duo Grocery business financially, I guess. First of all, I think we started the Duo Duo Grocery business a little more than two quarters ago. This is still a very young business and as previously mentioned by Lei and David in their remarks, Duo Duo Grocery is one of our strategic priorities, a very important initiative for us to help revitalize the agriculture sector and bring additional value to our users. So to me, this is a long journey, a journey full of challenges and excitement. So far, I would say that it's too early to tell the business model, and there is still a lot of room to improve operationally. So far we have been quite disciplined in our investments in Duo Duo Grocery, and we evaluate every decision against a set of internal ROI targets. We are quite pleased with the progress we have made to date, and we will continue to evaluate the necessary investment on a case-by-case basis. One thing we need to highlight here is that we will continue to invest in this area. Some of the areas in the remarks Lei mentioned include logistics, infrastructure, technology, and also technologies around how to better aggregate the demand in each of the locations. All these types of investments we will invest heavily.

Jialong, let me just add to Tony's comments regarding your question about competition. I would say that we have conceived Duo Duo Grocery as an extension of our platform business. Our priorities are really focused around how to give our users a more holistic and integrated experience, whether they decide to fulfill their needs through Duo Duo Grocery or continue to shop for items on the overall platform. While the competition in the space continues to be intense, we believe it is more important that we focus on serving our users well, which is certainly what preoccupies us as opposed to looking at what other people are doing.

Thank you. The next question comes from Alicia Yap from Citigroup. Please go ahead.

Good evening. Thanks for taking my questions. Congratulations on the strong results. I have two questions. The first one is, when we look at the transaction commission revenue line, is there any change of the payment rate, or is that fair to assume all the incremental improvement in the revenue was mainly due to the fees that you're able to charge for the Duo Duo Grocery? And then second question is, how many of these new users that you were able to acquire coming to our platform are just purely purchasing the Duo Duo Grocery produce only, versus the original Duo Duo platform? Any color you can share would be great. Thank you.

Okay. Thank you for the question. Let me address the transaction service revenue first. Our transaction service revenue increased nearly 180% versus the same period last year. The rate itself doesn't change; we didn't change the rate. There are two factors contributing to this increase. Number one is in line with the GMV growth in Q1. Number two is the revenue associated with Duo Duo Grocery. As for your second question, I will let David comment.

Alicia, we have not disclosed the breakdown of the users between Duo Duo Grocery versus our e-commerce platform, because that's really not how we think about the business. With the introduction of Duo Duo Grocery, we saw an improvement in engagement and purchase frequency among our users. This is because the users' needs for fresh produce and groceries now have multiple channels to satisfy their needs, whether it is through the Duo Duo Grocery channels or continuing to shop through the main app. From a user's perspective, we are looking at this as satisfying their needs across different product categories and types of fulfillment. This really is meant to be one integrated app. The orders mostly are generated for the Duo Duo Grocery channel through our app. So we don't focus on the percentage of our annual active buyer base that uses Duo Duo Grocery only, any more than we focus on how they are specific to any particular product categories.

Thank you. The next question comes from Jerry Liu from UBS. Please go ahead.

Hi, management. Thank you for letting me ask the question. Two parts. The first is following up on the service fee. Could we describe the accounting a little more detail especially if we're talking typical RMB 10 or RMB 100 of GMV from Duo Duo Maicai, then how does that flow through in terms of the service fees? Is that just a markup for the platform? And then secondarily, I just want to ask about the logistics investments. We saw the additional commentary in a separate press release. Where could any of these investments show up this year? Is it still pretty small or could we see R&D CapEx or any other forms of investments? Thank you.

Okay. I would go with the first question. Actually, I'm not quite clear what your question is, but like I said, the transaction service revenue composes of the transaction service fees we are charging on the main platform and also include a part coming from the Duo Duo Grocery. The portion of the Duo Duo Grocery kind of transaction service revenue as a percentage of the total numbers are actually small. I'm not quite sure I got what your question on the accounting treatment on this; probably you can rephrase your question a little bit. But probably David you can comment on the second one first.

Yes. So Jerry, maybe if I can just jump in here a little bit. So Duo Duo Grocery, as you know, in providing the Duo Duo Grocery service, we as a platform are offering incrementally fulfillment and other transaction-related services. For this, we do charge the merchants participating on our platform a service fee. So that fee is included or categorized as part of the transaction services revenue. Therefore, there is nothing complicated from an accounting perspective per se. The costs associated with that are booked under cost of goods – as part of the cost of goods sold. As for your question regarding logistics and investments over the long run, we are looking at logistics as a result of how consumer purchasing behavior and fulfillment requirements have evolved over time. If you take a step back and look back at the rise of e-commerce in China, it's quite hard for anybody to imagine that China would today have an infrastructure capable of efficiently handling 300 million daily parcels. While the current system can cope with the scale, we do think that the next wave of efficiency gains will come from a more flexible system. More technology, more efficiency-driven approaches can help reduce the need for multiple shipments and better leverage the current infrastructure so that we can deliver a greener logistics experience. As we look at how consumer experiences are changing, new fulfillment methods and better technologies are becoming important, and this is an area where we are innovating. From an investment perspective, I think for the time being, you will mostly see us reflecting this in R&D. You’ll also see us looking at our Duo Duo Grocery infrastructure that we have today to determine where we need to bulk up in terms of our ability to provide better user experiences. One example I can give you is that we have rented additional sorting facilities for fresh produce to improve the service experiences offered to our users. That would result in a higher cost of goods sold from a fulfillment perspective but we are looking ahead at how we can invest, and we are looking into technology. We've been investing as Lei mentioned, working on algorithm design, data analytics, and cold chain logistics development and optimization. We will continue to focus on innovation in this space to better serve our consumers.

Okay. Thank you.

Certainly, the next question comes from Piyush Mubayi from Goldman Sachs. Please go ahead.

Thank you for taking my question. If I look at DDG and the scope of the business, could you take us through what the footprint is now? Could you take us through and give us a feel for what the investment line has been? If I look at the investment line that's been bobbing around quite a bit and it's hard to discern how much of that is going into PP&E and how much is going into other areas of investment since it's one line. If you could help us better understand where we are. And could you also dwell on the overall impact of DDG on the business and in particular looking at sales and marketing spend in the recent quarter, which as a percentage of revenue excluding 1P, seems to have risen after two or three quarters of holding steady? Those are my three questions. Thank you.

Piyush, thank you for your questions. I believe your question generally revolves around Duo Duo Grocery. I will say this: as I mentioned on the last quarterly call, our service is now available nationwide across all the 300-plus major cities in China. So from a footprint expansion perspective, we find our footprint sufficient and necessary. We are adding to that gradually as the local infrastructure is maturing and providing the type of consumer experiences that we want. Regarding your question on investment, I believe you may be referring to the investing cash flow line. Most of the investing you see in there is indeed from a cash management perspective, as opposed to investment in hard capital assets. There are some investments required in association with Duo Duo Grocery, but most of the investment to date has been in the build-out of the operations, which reflects in the cost of goods sold—not in capital assets and PP&Es. Lastly, regarding your question on sales and marketing expenses, I would advise you to look at this over a longer-term basis. The number in the first quarter, traditionally viewed as the weaker seasonality quarter, has shown less pronounced seasonality this year due to the occasions in China. If you compare this quarter to the same quarter last year and the year before, sales and marketing intensity as a percentage of revenue—excluding the 1P—has been decreasing. We are indeed seeing improvements from a sales and marketing perspective, which is being done while also considering the efforts from Duo Duo Grocery as we think about these businesses holistically. I realize I didn’t specifically comment on Duo Duo Grocery’s impact on the business, and it might be a good opportunity to touch upon that. The Duo Duo Grocery business, as we have alluded to earlier on this call, allows us to extend the services we provide to each consumer on our platform, enabling us to better fulfill their grocery needs, which are typically fulfilled within a 24-hour cycle. Additionally, users participating in Duo Duo Grocery have a higher frequency of purchase and higher levels of engagement activities on our platform. That creates synergy with overall platform activity, providing benefits related to sales and marketing spend in the long run.

I have just one point to add David here. Speaking of the investment in Duo Duo Grocery, it's worth mentioning the investment in people, not just those embedded in the lines under the cost of goods or PP&E. We have dedicated Pinduoduo teams deployed at each location we are operating. Our employees work closely with third-party contractors to ensure the Duo Duo Grocery service operates in ways that meet our quality standards. Since the start of Duo Duo Grocery, we have catalyzed the creation of millions of jobs up and down the entire supply chain.

Operator, in the interest of time, we will conclude the call here. Thank you everyone for taking the time to join us this evening. If you have any follow-up questions, please feel free to reach out to our IR team at [email protected]. Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now.