PDD Holdings Inc. Q4 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to PDD Holdings, Inc. Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today. Sir, please go ahead. Thank you, operator. Hello, everyone and thank you for joining us today. PDD Holdings' earnings release was distributed earlier, available on our website at investor.pddholdings.com as well as through the GlobeNewswire services. Before we begin, we would like to refer you to our safe harbor statement in the earnings press release which applies to this call as well. 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 non-GAAP measures to GAAP measures. Joining us today on the call are Mr. Chen Lei, our Chairman and Chief Executive Officer; Mr. Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer; as well as Ms. Liu Jun, our VP of Finance. Lei and Jiazhen will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then walk us through our financial results for the fourth quarter and fiscal year ended December 31, 2023. During the Q&A session, Lei and Jiazhen will answer questions in Chinese and will help translate. Please kindly note that English translation is for reference only. In case of a discrepancy, statements in the original language should prevail. Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Chen Lei. Lei, please go ahead.

Hello, everyone. Thank you for joining our earnings call for the fourth quarter and fiscal year of 2023. 2023 was an important year for PDD Holding. We began a journey dedicated to high-quality development aligned with our strategy. We rolled out a series of initiatives to empower businesses and enhance consumer value. This effort has resonated well with our users and merchants, as evidenced by their positive feedback. Driven by a rebounding consumer market, our total revenue in the fourth quarter was RMB88.9 billion, which represents a 123% year-on-year increase. GAAP net income for this quarter was RMB23.3 billion. Over the past year, our revenue was RMB247.6 billion, which represents a 90% year-on-year increase. In 2023, amid positive consumer sentiment, our platform saw a healthy resurgence. In the fourth quarter, we focused on improving consumer well-being by making higher-quality products more accessible. This was achieved through a series of events such as the Double 11 and Double 12 shopping festivals. Our goal has always been clear: to unlock unrealized consumer potential and empower individuals to achieve a higher quality of life. As a result of these efforts, we have seen sustained growth in consumer engagement on our platform throughout the fourth quarter. In 2024, we will continue to ramp up our support for high-quality supply and enhance our ability to deliver good value and excellent service. We will refine our supply chain insights and technology capabilities to help manufacturers reduce costs, increase efficiency, and develop more products that resonate deeply with consumers. Our support for a new generation of farmers and merchants skilled in both agriculture and e-commerce is unwavering. This is part of our ongoing effort to boost local employment and increase farmers' income. Through our RMB10 billion ecosystem initiative, we grow alongside our high-quality merchants, brands, and small to medium-sized businesses to build a more sustainable ecosystem, which is at the core of our growth as a technology company. Last year, we continued to invest in technological innovation with R&D expenses reaching RMB11 billion. This is the second consecutive year that our R&D expense has surpassed RMB10 billion. In the fourth quarter, R&D expenses grew by 19%, reaching RMB2.9 billion. This year, we continue to channel investments into new drivers of high-quality development. We are dedicated to advancing the role of cutting-edge technology in agriculture and manufacturing. In the fourth quarter, we reinforced our agricultural strategy through supporting projects such as the agricultural cloud initiative and the Pinduoduo Academy growing competition. We hope to encourage the development of more resilient digital agriculture regions to further revitalize rural communities. The growing competition, for example, provides a platform for college students to showcase agricultural innovation. Pinduoduo has been an active supporter of this event for the past year, and we also pay close attention to the development of agricultural products driven by technology. For instance, Pinduoduo supports specialty agriculture products through initiatives such as zero commission programs for agriculture producers. We formed strategic partnerships with certain producers to broaden their market reach and provide continuous platform support. We also actively look into possibilities. In December last year, as an earthquake struck, we promptly donated RMB20 million. The donation helped facilitate the purchase of reduced-price items and post-disaster restructuring. We set ourselves accountable for making positive contributions to our communities. As for our global operations, since launching in September 2022, we have expanded into 50 countries and regions. As a new player, we are excited to learn from our diverse global consumers and markets as we explore technological innovation. With our supply chain expertise, we are dedicated to helping each consumer live a more fruitful life, and we remain committed to this mission. 2023 marks the eighth year since the founding of PDD Holdings. Since our inception, we have always stayed close to our focus, always putting consumers first and embracing innovation with an open mind. Throughout this journey, our team has experienced remarkable growth and development, and we have seen ambitious young leaders emerge ready to take on greater responsibilities. Our company thrives on the creativity and energy of the younger generation, giving us the confidence to create unique value for our growing consumer base. Now, I will hand it over to our Co-CEO, Zhao Jiazhen, to further talk about our high-quality development strategy.

Thank you, Lei, and hello, everyone. This is Zhao Jiazhen. Thank you all for joining the fourth quarter and full year 2023 earnings call. 2023 is a year of recovery, guided by the principles of recovery, benefit, and innovation. We proactively responded to consumption recovery policies by bringing together the supply of quality products and the demand for consumption upgrades. We played a part in releasing consumption potential. We achieved decent growth in 2023, which we believe is the combined result of our effective promotional activities and the overall recovery of consumption. Our platform is built to serve the needs of a vast and diverse consumer base. In recent years, through interactions with our users, we have observed a growing demand for consumption upgrades. However, we also noticed that our consumers seek to upgrade in a more rational manner. Consumption upgrade is not about high spending; it is more about offering our users better products and services at more accessible prices to bring more savings. In line with this trend, we paid special attention to broadening the selection of quality products sold on our platform and focused our promotional efforts on premium consumer goods, such as trending national brands, imported goods, and high-quality products. For example, through our RMB10 billion program, we are making it increasingly easy to enjoy imported products, and we are also firmly investing to support national brands. During Singles Day last year, we helped our merchants sell more, allowing our users to Save More. Our flash sale channel acted as a growth engine for over 100,000 SME merchants. By the end of the event, more than 40 product categories saw sales double, including agricultural products, national branded products, and quality imported goods. The number of merchants selling agricultural products and national branded goods that benefited from our RMB10 billion program more than doubled. In our total growth worldwide channel dedicated to imported products, 21 out of the 100 brands achieved a year-on-year growth of over 300%, while 59 items recorded daily sales of over RMB1 million during Singles Day. These numbers also show that the growth of our platform is a result of the value we create for our consumers and merchants. 2024 will be a year of consumption promotion, guided by the principle of Consumer First. We will continue to improve the variety of products and services offered on our platform, enhance our value-for-money mindshare, upgrade our shopping experience, and amplify user activity. Consequently, we will be able to offer more visibility and sales opportunities for quality merchants, thereby strengthening the positive feedback on our platform. 2023 proved to be a pivotal year for us as we embarked on the journey towards high-quality development. In 2024, we will continue to implement this strategy across every part of our operations. We will step up our investments in the three key areas of high-quality consumption, supply, and platform ecosystem to further optimize our capabilities, offering more savings and better services. In terms of high-quality consumption, we will continue to put ourselves in consumers' shoes and adjust our product offerings, closely following changes in consumer demand with tailored promotional events featuring holidays, seasons, and special product categories. We will make it easier for consumers to fulfill their demand for high-quality products at attractive prices. In addition to more savings, we'll also continue to upgrade our services. We will roll out a series of initiatives that benefit consumers, strengthen consumer protection, and improve the shopping experience for remote areas and privileged groups. As for high-quality supply, since Q4, we have been allocating platform resources, such as traffic support and coupons, to help manufacturing brands expand their inflows through promotional activities such as dedicated live stream sessions and the national goods festival. Our merchants make significant progress on our platform. The rise of national brands to industry-leading positions requires the joint efforts of both the brands and our platform. This year, in partnership with both new and established national brands, we will continue to explore new market opportunities and bring better products and a high-quality shopping experience to our consumers. Agriculture is the foundation of Pinduoduo. As the largest agriculture platform in China, we continued our support for the Pinduoduo Academy growing competition in Q4. We also provided ongoing traffic support and other platform resources for agritech-enabled products backed by participating teams. Our goal is to promote real-world applications of research findings and accelerate improvements in farming productivity. Last year, our agricultural cloud initiative reached production regions, bringing e-commerce training and one-on-one consultations to local agriculture merchants. This year, we will increase our investments in agriculture through projects like the cloud agricultural cloud initiative and smart agriculture competition, aiming to bring digitization solutions to local producers, improving the resilience and competitiveness of the local supply chain, thereby supporting rural revitalization and increasing farmers' income. Building a high-quality platform ecosystem will remain our top priority this year. Through the RMB10 billion ecosystem initiative and platform governance policies, we will continue to foster an environment that encourages high-quality supply and services, advancing a green, healthy, and modern platform ecosystem. Now let me hand over to Jun, who will provide you with an update on our financial performance.

Thank you, Jiazhen. Hello, everyone. Now let me walk you through our financial performance in the fourth quarter and fiscal year ended December 31, 2023. In Q4, our total revenues increased 123% year-over-year to RMB88.9 billion and 90% year-over-year to RMB247.6 billion for the full year. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others were RMB48.7 billion this quarter, up 57% compared to the same period of 2022. Our transaction services revenue this quarter was RMB40.2 billion, up 357% versus the same period of 2022. Moving on to costs and expenses, our total cost of revenues increased 293% from RMB8.9 billion in Q4 2022 to RMB35.1 billion this quarter. For the full year, our total cost of revenues increased 192% to RMB91.7 billion, mainly due to increased fulfillment fees, payment processing fees, and other operational expenses. On a GAAP basis, total operating expenses for this quarter increased 44% to RMB31.4 billion from RMB21.8 billion in the same quarter of 2022. On a non-GAAP basis, our total operating expenses increased to RMB29.3 billion this quarter from RMB19.3 billion in Q4 2022. During the fourth quarter, we continued to focus on key areas critical to the high-quality development of our platform, such as investing more savings for our brands and our R&D capabilities. Our total non-GAAP operating expenses as a percentage of total revenues was 33% in Q4 compared to 48% the same quarter in 2022. For the full year 2023, total non-GAAP operating expenses were RMB90.3 billion, up from RMB61 billion in 2022. Looking into specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB26.2 billion, up 53% versus the same quarter of 2022. During Q4, we stepped up our investment in a series of year-end promotional campaigns to give back to consumers and increased our advertising to promote our brands. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 30%, versus 43% for the same quarter in 2022. For the full year, non-GAAP sales and marketing expenses increased from RMB52.2 billion to RMB79.8 billion in 2023. Our non-GAAP G&A expenses were RMB674.5 million in Q4, versus RMB360.8 million in the second quarter of 2022. Our annual non-GAAP G&A expenses were RMB1.8 billion in 2023 versus RMB1 billion last year. Our research and development expenses were RMB2.4 billion in the fourth quarter on a non-GAAP basis and RMB2.9 billion on a GAAP basis. For the full year 2023, our annual GAAP R&D expenses reached RMB10 billion for the second consecutive year. Technology is at the core of everything we do. We will continue to build on our R&D capabilities to promote technology adoption in agriculture and manufacturing sectors to improve supply chain efficiency and to meet our consumers' growing selection of quality products at attractive prices. On a GAAP basis, operating profit for the quarter was RMB22.4 billion versus RMB9.1 billion in the same quarter of 2022. Non-GAAP operating profit was RMB24.6 billion versus RMB11.6 billion in the same quarter of 2022. Non-GAAP operating profit margin was 28% this quarter, compared with 29% for the same quarter of 2022. For the full year, operating profit increased from RMB38.1 billion to RMB65.8 billion in 2023. Net income attributable to ordinary shareholders was RMB23.3 billion for the quarter and RMB60 billion for the full year. In the fourth quarter, basic earnings per ADS was RMB17, and diluted earnings per ADS was RMB15.83, versus basic earnings per ADS of RMB7.42 and diluted earnings per ADS of RMB6.52 in the same quarter of 2022. Non-GAAP net income attributable to ordinary shareholders was RMB25.5 billion for the quarter and RMB67.9 billion for the full year. In the fourth quarter, non-GAAP diluted earnings per ADS was RMB17.32, versus RMB8.34 in the same quarter of 2022. Lei mentioned that 2023 is the first year of our journey toward high-quality development, and we're encouraged by the early results. Looking ahead, while we are excited about this new journey, we recognize there will be challenges and uncertainties along the way, and we need to be prepared to invest decisively in the long-term value of our platforms. Our financial results may continue to fluctuate, and past performance may not serve as a benchmark for future quarters. That concludes my prepared remarks.

Thank you, Jun. Next, we will move on to the Q&A session. Today's Q&A session will have Lei, Jiazhen, and Jun taking questions from analysts. We could take a maximum of two questions from each analyst. Lei and Jiazhen will answer in Chinese and help translate for convenience purposes. Operator, we are open for questions.

Your first question comes from Joyce Ju with Bank of America.

I have two questions today. Firstly, as management mentioned in the opening remarks, 2023 was a very important year for PDD from a strategic perspective. Looking back at the fourth quarter and the full year 2023, could the management share how you would evaluate your execution of the past year's strategies? And how do the actual results compare against the team's original expectations? For 2024, will there be any major changes in your strategic focus? My second question is about the fourth quarter promotions. We all know the fourth quarter is the peak season for e-commerce platforms. How would management assess PDD's performance during the fourth quarter shopping festivals? Are there any interesting trends among consumers, merchants, or platforms that can be shared? Also, could you help us understand the relationship between the promotional seasonality and your very strong fourth-quarter results?

This is Chen Lei. Let me take your question on strategy. As mentioned in our remarks, 2023 marks the beginning of our high-quality development strategy. After dedicated execution, we have seen positive outcomes on the construction side, supply side, and within our platform ecosystem. This further reaffirms our lasting commitment to high-quality development. As we expanded into multiple countries and regions, we encountered diverse consumer habits, cultures, and a rapidly evolving market landscape. We firmly believe that the consumers' demand for more savings and better services is universal. Therefore, in Q4, we continued our investment in alignment with our high-quality development strategy. First, from the consumer side, our top priority has always been to understand and meet consumer needs. During the peak season in Q4, we introduced tailored promotional activities across different markets featuring innovative, direct, and engaging campaigns. These initiatives allow consumers to improve their quality of life with ease and create savings, making it easier for our consumers to achieve high-quality consumption. The response to these promotions has been positive. On the supply side, we continue to allocate platform resources towards high-quality products and reputable merchants to offer consumers more quality products. In addition, we also support merchants in driving volume, improving turnover efficiency, reducing operating costs, minimizing product risks, and consequently lowering product prices, forming a virtuous cycle. A healthy ecosystem is fundamental for the sustainable growth of the platform, and we are determined to put more effort into this area. We continue to make forward-looking investments in platform governance, employing technology to identify risks early and respond quickly. We carry out product screening and merchant reviews on issues such as shipping compliance, IP protection, and product quality, and we have achieved favorable outcomes. Moving ahead, we will continue to take on social responsibilities, fostering a favorable environment for both consumers and merchants. After a year of execution, we are delighted to see the positive changes brought about by our high-quality development strategy. Going forward, we will stick to our strategic focus, deepen and strengthen our strategy, further refine platform capabilities and deliver our unique value to consumers and society. Thank you.

This is Jiazhen Zhao. Let me take your question on the shopping festival. As always, during last year's Singles Day and Double 12, we provided consumers with straightforward price discounts to strengthen our savings mindshare. For example, during Double 11 last year, for the first time, we introduced direct price reductions on top of our RMB10 billion program—we also expanded the brands and products covered by our promotions to meet the growing demand for upgrades. We received positive feedback from our continued efforts, and during Singles Day, over 620 million consumers benefited from our RMB10 billion program with order volume more than doubling. At the same time, we are happy to see that the value of our platform has increasingly been recognized by our merchants. The number of merchants, brands, and products participating in our promotional activities reached new heights. Our merchants are growing together with our platform. While we are pleased to see the results from our shopping festivals, our team actually chooses to pay more attention to the ongoing improvement in our platform's capabilities and how we can better meet consumers' demand for quality products at attractive prices all year round. Since the founding of Pinduoduo eight years ago, we have always concentrated on our core e-commerce business. By patiently giving back to consumers, we have gradually earned a positive user mindshare. The results we have achieved today are not only a result of the promotions in the past quarter but also of the investments we made in the past. From the consumer side, we continue to see growing trust from our users. In addition to serving new users, we are also expanding the volume share of our existing users. We believe it's the result of our growing capabilities in offering more savings and better services. This very encouraging trend strengthens our confidence in the overall direction of our high-quality development strategy. From the supply side, we leverage our technology and scale to provide differentiated services to our SME merchants. Through these services, we help SME merchants expand their market reach while broadening the product selection available on our platform. By doing so, we create a virtuous cycle. Looking ahead, we will continue to invest firmly and patiently to create long-term value for our consumers and merchants and to build a solid foundation for the next phase of our journey. Thank you.

Operator, we are ready for the next question.

Your next question comes from Kenneth Fong with UBS.

My first question is regarding Pinduoduo's domestic business. Can management share your view on the overall consumption market in the upcoming year? What new trends are you seeing in the first quarter? My second question is about shareholder return and margin. In Q4, the company achieved decent profitability despite intensified competition and the rapid growth of your global business. How should management view margins in 2024 and going forward? Additionally, regarding shareholder return, we've seen strong balance sheets and cash flow, especially as peers have announced large increases in share buybacks and dividends. Do we have similar plans?

This is Jiazhen. Let me take your question about the consumption market. In the past year, we clearly felt the depth and resilience of the China consumer market, and we are very confident in its future. From the activities we see on our platform, we clearly feel the improving consumer sentiment, and we look forward to seeing that trend continue into this year with the support of more macro policies. We see many long-term driving forces behind the positive consumption trends. Firstly, consumers have a desire for a better life which lays a solid foundation for consumption growth. Secondly, we observe new retail formats and business models emerging with technological innovation, driving online penetration of retail sales and supporting the industry's future prospects. Thirdly, we see tremendous potential in a substantial number of quality national brands and agricultural products, which also offers further opportunities for our platform. In this favorable consumption environment, we will continue our investment to enhance our service capabilities, collaborate with more merchants to serve our consumers well, and also improve the platform ecosystem. By doing so, we hope to create greater value for our society. Thank you.

Ken, this is Jun. Let me address your question about profitability and shareholder return. Regarding profitability, we always emphasize that we are still in the development phase—our priority is not on immediate profitability. Considering our current stage of development, our strategic focus remains on the high-quality development of the platform. We will prioritize building the platform's long-term value, which is consistent with the interests of our investors. Over the past years, guided by our strategy of high-quality development, we have made significant investments in key areas. For example, we have continued to give back to consumers to deepen our mindshare. We also remain committed to R&D, with R&D expenses reaching RMB10 billion for the second consecutive year. These investments have yielded favorable initial returns. Moving forward, we will continue to make ambitious investments where we see long-term ROI potential. Our business execution cycle is affected by various factors and may not align with our financial reporting cycle. Profitability on a quarterly basis is likely to fluctuate based on the different investment opportunities we identify. Consequently, the financial results in Q4 may not serve as a benchmark for future quarters. Regarding share repurchases and dividends, you're essentially asking about our overall capital allocation, which is influenced by the stage of our development. Each company is at a different stage, and for us, we are still in the investment phase. Therefore, our current focus remains on investing in our long-term value.

Your next question comes from Thomas Chong with Jefferies.

My first question is that we saw your global business gain good momentum in the past year. Could you please share your view on the future plan for global business? Moreover, the market also pays attention to the company's position on compliance. How would the company balance legal and compliance with your business development? My second question is about domestic competition. In the past year, many of your major competitors have pivoted in their strategies, putting more emphasis on price competitiveness. How does management view your competitors' positioning? Are you concerned this might impact Pinduoduo's market share? How do you adjust your own strategy in such an environment?

Thomas, this is Chen Lei. Let me take your question on global business. Our vision for global business is to utilize our supply chain and technological capabilities to bring outstanding merchants and high-quality products all over the world to global consumers, helping consumers from all backgrounds achieve their dreams. Currently, the business is at a relatively early stage, with many uncertainties and challenges ahead. To address these uncertainties, we must constantly improve ourselves and have a genuine desire to learn from consumers in the market. We are actively seeking more innovations in technology and operational models to increase market competition and overcome challenges. As I mentioned earlier, despite shifts in the market environment and competitive landscape, the consumers' demand for more savings and better services is universal. Therefore, we will be dedicated to integrating our high-quality development strategy into global operations and be prepared for long-term investments. We have confidence in the unique value of our platform and welcome many partners to join us in creating more value for consumers globally. You also mentioned compliance; legal and compliance has always been fundamental to our business. It's a big part of our strategic planning, and the management team has put in extensive efforts in this area. Last year, we established a legal and compliance committee chaired by myself to reinforce our legal and compliance capabilities across regions. Through our continued efforts, we enhanced our internal compliance mechanisms and processes. With a humble attitude, we strive to stay abreast of the latest industry laws and regulations and maintain communication and cooperation with regulatory bodies in the countries where we operate. We aim to align with high industry standards in the field of legal and compliance. We will continue to conduct research and invest in this area to lay a solid foundation for our long-term healthy development.

This is Zhao Jiazhen. Let me take your question on competition. As we mentioned earlier on this call, in 2023, we saw sustained recovery in consumer sentiment, and at the same time, consumers started to care more about achieving attractive prices. In this context, we believe it is normal to see e-commerce platforms ramp up promotional efforts and focus more on price competitiveness. Competition is inevitable in our industry. In the face of competition, we always focus on understanding and meeting the needs of consumers while continuing to improve our own capabilities. Over the past year, we have built good momentum following our high-quality development strategy and we are confident in our strategic direction. Moving ahead, we will focus on implementing our strategy across every aspect of our platform operation. First, we'll continue to deepen our consumer mindshare, offering more savings to our users. We will closely follow consumer needs and launch direct promotional activities targeting the most desirable product categories and price ranges. This is the foundation we need to keep investing in. Of course, a good consumer experience is not solely based on price. In terms of services, we also continue to refine our entire shopping experience from pre-sale consultation, fulfillment, after-sale services to consumer protection. Our goal is to offer a safe and enjoyable shopping experience for our users. Moreover, as a tech company, we will increase our investment in R&D, guided by the principle of tech for good. We will continue to strengthen our capabilities to empower a wide range of SMEs, promote the digitization of various industries, and introduce more popular products to the market. High-quality supply is a key component of the platform ecosystem, and it is essential for serving our users well. From this angle, we hope that R&D will further drive the positive development of our ecosystem. We believe that by focusing on these areas critical to long-term value creation, we can remain calm in a fiercely competitive environment and continue to improve ourselves, creating greater value for consumers and society. Thank you.

Okay, Operator, it's about time, and I want to thank you all for joining us today. If you have any further questions, please reach out to our team, and thank you. I'll see you next quarter.

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