PDD Holdings Inc. Q1 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings Inc. First Quarter 2024 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 and is available on our website at investor.pddholdings.com as well as through GlobeNewswire services. Before we begin, I would like to refer you to our Safe Harbor statement in the earnings press release, which also 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 non-GAAP measures to GAAP measures. Joining us today on the call are Mr. Chen Lei, our Chairman and Co-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 first quarter ended March 31st, 2024, and during the Q&A session, Lei and Jiazhen will answer questions in Chinese and will help translate. Please note that the English translation is for reference only, and in case of any 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 all for joining our earnings call for the first quarter of 2024. 2023 was the first year on our journey towards high-quality development. We are encouraged by the positive feedback from our users and merchants and are more confident in our strategic direction. 2024 is a critical year to deepen our execution. In the first quarter, we benefited from an improving macro environment and achieved steady growth. Our total revenue reached RMB86.8 billion, which represents a 131% year-on-year increase. Looking ahead, we will continue to work on the fundamentals of our business through our investments in supporting high-quality consumption, broadening high-quality supply, and promoting a high-quality ecosystem. Our proactive transition to high-quality development will inevitably bring challenges and difficulties, but we still decided to embark on this journey and are determined to execute it well because we are seeing a few irreversible long-term market shifts. First of all, we clearly see a trend of consumption upgrade and in response to this, we are innovating our service offering to cover more consumption scenarios and at the same time actively engaging with our merchants to broaden our product selection. For example, this year, we are deepening our cooperation with top brands from around the world to launch new products on our platform. In addition to meeting consumers' demand for more savings and better services, we hope to deepen connections with our consumers and strengthen our platform with Myshare in new product categories and among new customer groups. High-quality consumption will not be possible without strong supply chain capabilities, and over the years, we have built out valuable experience across the entire e-commerce supply chain. Through technological innovation and investments in research and development, our supply chain know-how is transformed into easy-to-use tools and services to empower our merchants with cost-saving digital solutions. This measure has proven to be effective in terms of attracting more merchants to our platform, broadening our product selection and reducing product costs, all of which are essential to support high-quality consumption. And lastly, an ecosystem that encourages compliance. Business conduct is the foundation for the long-term growth of our platform. As commerce integrates with digital technology at a record pace, consumers and regulators are holding e-commerce platforms accountable for higher standards and we are taking the initiative to build an industry-leading compliance program and to leverage our technology capabilities to empower SME businesses with our compliance know-how. This is to foster a healthy environment that attracts quality merchants that are willing to play by the rules and drive out bad actors thereby creating a positive feedback loop. When it comes to consumer well-being and economic interests, we always stand behind the former. We are focused on building long-lasting trust with our consumers and not on short-term gains. We also adopt a similar long-term orientation in other aspects of our business. As a company that is still in growth mode, we will continue to focus on long-term value creation and invest firmly into opportunities with great potential. We are not guided by short-term goals and this is also reflected in how we manage our global business. Our global business is still in the exploration stage and there's plenty of room for improvement. We are prepared to respond positively to challenges and we view these as important opportunities to improve ourselves. We are in this for the long term and we will not be distracted by short-term results. Instead, we will focus our efforts on building our key capabilities. Firstly, supply chain capabilities. We will continue to roll out tailored fulfillment solutions in different markets to improve supply chain efficiency and reduce costs. We welcome quality merchants from around the world to join us in providing a rich variety of quality products for consumers worldwide. Secondly, legal and compliance capabilities. With the goal of building an industry-leading compliance program, we will make firm investments to create a safe and trustworthy shopping environment for our users. To uphold our compliance standards, we will conduct forward-looking research into laws and regulations in the markets we operate and transform our know-how into tools that can be easily accessed by our merchants. And thirdly, service capabilities. In response to diverse needs and quality standards of global users, we will keep up our investments in technology and operations to improve overall user experience. As we bring more value to consumers and merchants around the globe, we are hopeful that our platform will be increasingly recognized and welcomed by local communities we serve. We do not expect this to be easy as we are prepared for investment over the long run. Finally, I would like to say that we are operating in a constantly evolving industry with competition and opportunities both emerging at a rapid pace. Competition has intensified in the past quarter, which will inevitably increase our expenses and affect some organic growth. On the other hand, new technologies and new markets also offer us tremendous opportunities for growth. At this moment, I want to revisit our first shareholder letter when the company went public. We are not a conventional company and we hope to show you the true colors of our company no matter how bumpy or rough the numbers may seem to be. Our business does not follow a linear path and our earnings will almost certainly fluctuate. Therefore, we suggest our shareholders not to measure our overall performance with results from a few quarters. Our financial performance may beat or miss market expectations at times, but as long as we keep focusing on long-term value creation, ultimately this short-term fluctuation will converge to our growing intrinsic value. And now I will hand it over to our Co-CEO, Jiazhen. Jiazhen, please.

Thank you, Lei. Hello, everyone. This is Zhao Jiazhen. I appreciate you all joining our earnings call for the first quarter of 2024. This year focuses on promoting consumption, and we had a strong start in the consumer market during the first quarter. Online consumption is robust, and online retail penetration continues to rise. We have actively responded to the consumption promotion policies by launching various promotional activities to meet users' shopping needs during the spring festival and other seasonal occasions. This has effectively unlocked consumption potential and benefited merchants. Thanks to the macro environment and our successful promotional events, we experienced solid growth in the first quarter. We have confidence in the consumer market in China. As Lei mentioned, this year we will increase our investment to strengthen the execution of a high-quality development strategy, which is our long-term approach. Moving forward, we will concentrate our efforts on three key areas: consumption, supply, compliance, and platform ecosystem while providing more savings to consumers. We aim to deliver high-quality supply and services to more consumers. In the first quarter, we prioritized our consumers, focusing on offering more savings and better services, returning tangible rewards to our users. For instance, we enhanced our investment in a RMB10 billion program and collaborated with millions of quality merchants during the spring festival and May Day shopping festivals to meet consumers' demands for savings. To improve services, our consumer goods trading program is a key initiative driving this year's nationwide consumption promotional efforts. We have been actively engaging with third-party service platforms to offer users convenient trading services in various categories, including mobile phones, electronics, and appliances. We have served over 10 million customers, and our trading services also extend to popular products under the RMB10 billion program, providing attractive discounts. By facilitating easier upgrades for consumers, we have enhanced their shopping experience. Additionally, we ensured that consumers in remote areas could benefit from a free shipping shopping experience. In the first quarter, we upgraded our shopping and shipping services, introducing free shipping to villages in remote provinces, bringing last-mile delivery closer to consumers, most now within a two-kilometer radius. This innovation resulted in a significant year-on-year increase in order volume from these regions, and we are pleased to see our service improvements driving growth. On the supply side, we continue to invest in supporting and growing with brands and merchants. In the first quarter, we focused on trending national brands and allocated platform resources such as traffic support to high-quality merchants. This strategy not only ensures high-quality supply but also helps boost merchants' businesses. For example, during the spring festival season, a dairy brand launched a limited edition product for the Year of the Dragon on our platform with our support, quickly gaining popularity and becoming a top seller in its category. Agriculture remains a core focus for us, and we are committed to investing in this vital sector over the long term. We supported agricultural technology innovation by launching our fourth smart agriculture competition and our second Duo Duo Academy growing competition. Our agriculture cloud initiative has been advancing in various production regions, providing e-commerce training and consultation to local farmer merchants. We also collaborated with over 1,000 quality agricultural production areas during the spring festival to increase the variety of specialty products on our platform while boosting farmers' incomes. During the May Day shopping festival, we hosted dedicated live-streaming sessions focused on agricultural products, particularly highlighting specialties like Yunnan blueberries and flowers, promoting regional production and branding for local agricultural products. A high-quality ecosystem is crucial for our transition to high-quality development. A healthy ecosystem supported by well-structured platform policies is essential for the sustainable growth of our e-commerce platform. In the first quarter, we continued to invest in the RMB10 billion ecosystem initiative and implemented various compliance projects. Our trust and safety team utilized technology to enhance the efficient automated review of product information on our platform. Serving a vast and diverse consumer base, we are also committed to taking on more social responsibilities, such as supporting the Key to Home nationwide campaign for the elderly and assisting seniors in returning home safely. Additionally, for World Reading Day, we launched the Seventh Duo Duo Reading Month, offering discounts on tens of thousands of book products to promote knowledge sharing. Our high-quality development strategy is a significant, long-term endeavor. We will unite the efforts and resources of all ecosystem participants to deepen our execution and create more value for consumers and merchants. Now I will turn it over to Jun, who will update you on our financial performance in the first quarter.

Thank you, Jiazhen. Hello, everyone. Let me walk you through our financial performance for the first quarter ended March 31st, 2024. In terms of income statements, in the first quarter, our total revenues increased 131% year-over-year to RMB86.8 billion. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others were RMB42.5 billion this quarter, up 56% from the same quarter of 2023. Revenues from transaction services were RMB44.4 billion, up 327% from the same quarter last year. Moving on to costs and expenses. Our total cost of revenues increased 194% from RMB11.1 billion in Q1 2023 to RMB32.7 billion this quarter, mainly due to an increase in fulfillment fees, payment processing fees, maintenance costs, and call center expenses. On a GAAP basis, total operating expenses this quarter increased 44% to RMB28.1 billion from RMB19.6 billion in the same quarter of 2023. On a non-GAAP basis, total operating expenses increased to RMB25.6 billion this quarter from RMB18.1 billion in Q1 2023. In the fourth quarter, we invested decisively in key strategic initiatives such as giving back to consumers, investing in our service offerings, promoting brand awareness, and R&D. Our total non-GAAP operating expenses as a percentage of total revenue this quarter was 29% compared to 48% in the same quarter last year. Looking to specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB22.7 billion, up 44% versus the same quarter last year. Throughout the past quarter, we continued to give back to consumers over a series of seasonal promotion campaigns and increased advertising to promote our brands. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenues this quarter were 26% versus 42% for the same quarter last year. Our non-GAAP general and administrative expenses were RMB572 million versus RMB338 million in the same quarter of 2023. Our research and development expenses were RMB2.3 billion this quarter on a non-GAAP basis and RMB2.9 billion on a GAAP basis, up 16% year-over-year. Technologies are at the core of our high-quality development strategy. We will continue our investment in R&D to provide our users with a more satisfying shopping experience, improve supply chain efficiency, and build a robust compliance program. On a GAAP basis, operating profit for the quarter was RMB26 billion versus RMB6.9 billion in the same quarter last year. Non-GAAP operating profit was RMB28.6 billion versus RMB8.5 billion in the same quarter last year. Non-GAAP operating profit margin was 33% this quarter, compared with 22% for the same quarter last year. Net income attributable to ordinary shareholders was RMB28 billion for the quarter compared to RMB8.1 billion in the same quarter last year. Basic earnings per ADS were RMB20.33 and diluted earnings per ADS were RMB18.96 versus basic earnings per ADS of RMB6.13 and diluted earnings per ADS of RMB5.55 in the same quarter of 2023. Non-GAAP net income attributable to ordinary shareholders was RMB30.6 billion versus RMB10.1 billion in the same quarter last year. Non-GAAP diluted earnings per ADS were RMB20.72 versus RMB6.92 in the same quarter of 2023. As Lei mentioned, our business does not follow a linear path. This quarter's financial data does not represent the future. Fluctuations are inevitable. We suggest investors not to forecast our growth solely based on results from a few quarters. That completes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB21.1 billion compared with RMB1.3 billion in the same quarter last year. As of March 31st, 2024, we have RMB242.1 billion in cash, cash equivalents, and short-term investments. Thank you. This concludes my prepared remarks.

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

Your first question comes from Alicia Yap from Citigroup. Please ask your questions.

Hi, thank you. Thanks, management, for taking my questions. Congrats on the strong results. Two questions. First is regarding the domestic competition. So over the past year, we have seen e-commerce platforms actively adjusting their strategies in terms of pricing and service. Can management share your view on how you evaluate the competitive landscape? In such an environment, what would be the strategic focus for PDD Holdings going forward? Second question is related to compliance. I think we noticed on the recent earnings call, management spent quite a bit of time talking about compliance-related matters. Obviously, the market is also paying close attention to the work that you are doing in this area. Can management explain a little bit more about the efforts you have made so far and what goals you wanted to achieve? Thank you.

Hi, Alicia, this is Chen Lei. Let me address your question. Regarding our strategy and competition, we've observed that consumers are becoming accustomed to shopping across various platforms. They compare the overall shopping experience, including product selection, pricing, and services, before making a decision. In the first quarter, our industry peers have noticeably increased their efforts, and we welcome this healthy competition. In response to competition, we prioritize our consumers, as our survival depends on the value we create for them. Our ongoing investments have led to our value proposition of greater savings and improved services being increasingly recognized by our consumers. However, we understand that consumer demand is always evolving, and we need to adapt accordingly. Presently, consumer demands are becoming more rational and diversified, which means we must not only offer greater savings but also meet the expectations for higher quality products and a variety of consumption scenarios. Therefore, in addition to enhancing our capabilities for savings and services, we are also focused on increasing the supply of high-quality products on our platform. By enhancing the overall shopping experience, we aim to strengthen our users' trust in us. Regarding compliance, as our business expands, both consumers and regulatory bodies are holding us to higher compliance standards, including those for our merchants. To foster a trustworthy shopping environment, we are committed to improving compliance and have invested substantial resources into this area over the past few quarters. Regulatory frameworks worldwide are changing, with new laws and regulations being introduced, so we view compliance capabilities as a vital component of our development strategy and a key competency. Last quarter, we shared that we are actively engaging with regulatory parties in different countries to enhance our compliance capabilities. We are investing heavily in understanding and researching regulations in each market, with dedicated teams to implement these findings throughout our business operations. Our compliance initiatives encompass regulations related to our platform's operations as well as those affecting merchant operations, such as product compliance and consumer protection. Additionally, we are incentivizing our small- and medium-sized merchants to operate in a more compliant and quality-driven manner, which contributes to the sustainable growth of our platform ecosystem. A growing base of high-quality merchants will enhance the quality of products available on our platform. Ultimately, maintaining compliant operations and a healthy ecosystem is essential for the long-term growth of our platform, enabling us to better meet consumers' diverse needs for quality and thereby create a virtuous cycle. That concludes my thoughts on compliance matters. Thank you.

Thank you.

Operator, we can move on to the next analyst on the line.

Thank you. Your next question comes from Yang Bai with CICC. Please ask your question.

I have two questions. The first one is about growth. The company achieved solid top-line growth this quarter. Could management provide insights on the growth potential of the business? Is there still opportunity for expansion? How should we anticipate its growth rate moving forward? My second question relates to the global business. Could management share their latest thoughts on the strategy for the global business? What will this business look like in five years? Thank you.

Hi Bai Yang, this is Jun. Thanks for your questions. I will take your first question about growth. Rather than being captivated by short-term financial results, we have always focused on long-term investments and creating long-lasting value. In the long run, we still see many areas for improving the consumption market. The consumption market actually offers plenty of opportunities for platforms and merchants. In addition to the potential of the overall consumer market, we also see that the online retail industry is growing quickly. E-commerce infrastructure continues to improve and new e-commerce models continue to emerge. We are actively innovating and exploring new models to create greater value for our consumers. In the long term, we believe there is still large potential in online retail penetration. We will keep improving our services for consumers. From the merchant side, we are also enhancing the scope and value of our services. We continue to allocate resources to support high-quality merchants who are willing to do business properly. By doing this, we hope to grow together with the merchants and broaden the selection of quality products on our platform. A positive feedback loop is achieved when these factors work together. In such a rising industry, we need to keep our heads down and focus on execution. Faced with more competition, our constant focus is to deliver more value for our consumers and merchants. We believe that the value we create for consumers and merchants will ultimately be reflected in our financial results. Thank you.

Hi, Bai Yang. This is Lei. Let me address your question regarding our global business strategy. Our global operations are still quite new, and we are working diligently to grow in a sustainable manner while learning about new business models. As a company that emphasizes execution, we strive to implement our strategic direction effectively. Moving forward, we will concentrate on enhancing our supply chain capabilities, service capabilities, and compliance measures. Our aim with the supply chain is to further connect with high-quality merchants and suppliers worldwide and to expand the range of products available on our platforms. We also plan to improve supply chain efficiency, making it easier for merchants to sell their products and reducing their operational costs, ultimately benefiting consumers and merchants globally. In terms of service capabilities, we are investigating various fulfillment solutions to increase efficiency and cater to diverse consumption scenarios. Additionally, we are using our technology to enhance customer service and improve the shopping experience. Regarding compliance, we previously mentioned that this is crucial for the high quality and sustainable development of our platforms and is essential for creating a secure shopping environment for our users. We will continue to invest significantly in this area. Ultimately, our investments aim to provide consumers worldwide with high-quality products at affordable prices and to offer them a safe, enjoyable, and unique shopping experience.

Operator, let's move on to the next analyst on the line.

Thank you. Your next question comes from Kenneth Fong from UBS. Please ask your question.

Thank you, management, for addressing my question. I have two inquiries. The first concerns profitability. The company can still achieve profitability growth in the first quarter despite increased competition. We are also observing good operating leverage in sales and marketing expenses. Does this indicate that the company is reducing its marketing investment? More generally, can management discuss your plans for resource allocation? My second question pertains to the agriculture strategy. Regarding agriculture, could management explain your perspective on the growth potential within the agricultural product category? Additionally, how do you assess your key competitive advantage in this sector? Thank you.

Hi, Kenny, thanks for your question. This is Jun. Let me first answer your question about profitability. Regarding profitability, we mentioned in our prepared remarks that the company's business does not follow a linear path. It will beat market expectation in some quarters and miss expectations in others. We suggest investors not to forecast our future growth solely based on results from a few quarters. We always focus on the long-term growth of the company's intrinsic value, and we do not smooth out short-term financial data. In business execution, we compel return on investment in different markets and make prudent plans for resource allocation. We will not increase or decrease in expense items solely based on a preset budget. The company's investment in each quarter depends on the specific investment opportunities we see in the market. Currently, we are still in the growth phase. If we see value-creation opportunities in the future, we will invest firmly. These investments might bring fluctuations to short-term profitability but will help us grow intrinsic value in the long run. This is our view on profitability. Thank you.

Hi, this is Zhao Jiazhen. Let me address your question on agriculture. Agriculture is the foundation of our business. We started by retailing agricultural products and have been investing in this sector for many years. We initiated a new model of group purchasing for agricultural products and have innovated solutions such as direct delivery from the source and our Duo Duo Grocery, which connects local supply to local demand. The agriculture industry faces challenges due to low product standardization and a decentralized supply system. Storing and transporting agricultural products can be difficult. Currently, online penetration in agricultural products is relatively low, leaving significant opportunities for digitalizing farmers' operations. We have committed to investing in this industry and are focused on transforming the agricultural supply chain. This journey has helped us gain valuable experience and enhance our team's capabilities. Agricultural products have become an important category, and Pinduoduo remains a comprehensive e-commerce platform for agricultural goods. We continue to invest firmly in agriculture. In the recent fourth smart agriculture competition, we emphasized AI in planting and encouraged participants to innovate in agriculture production optimization and commercialization. Our agriculture cloud initiative is providing digital solutions to farmers in various regions. We will keep investing in different areas of agricultural production and the supply chain moving forward. Through our continued investments, we aim to modernize the agricultural industry and improve the quality and efficiency of the supply chain, while also helping farmers increase their value and income, thus supporting the revitalization of rural communities. Thank you.

Thank you, Jiazhen. And also thank you, Kenny. Thank you all once again for joining us today. If you have any further questions, please reach out to our Investor Relations team. Thank you and have a great day.

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