Earnings Call Transcript - PDD Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings, Inc. Third Quarter 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. 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 news services. Before we begin, I would like to refer you to our Safe Harbor statement in our 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 non-GAAP measures to GAAP measures. Joining us today on the call are Mr. Cen Lei, our Chairman and Co-CEO; Mr. Zhao Jiazhen, our Executive Director and Co-CEO; as well as Miss 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 third quarter ended September 30, 2023. During the Q&A session, Lei and Jiazhen will answer questions in Chinese, and we will help translate. Please note that the English translation is for reference only. In case of any discrepancy, management's statements in the original remarks should prevail. Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Chen Lei. Lei, please go ahead.

Cen Lei, Chairman and Co-CEO

Hello everyone. Thank you for joining our earnings call for the third quarter of 2023. I will start by giving a brief overview of our third quarter results. In Q3, we achieved a total revenue of RMB 68.8 billion, representing a 94% year-on-year increase. This is a result of the improving consumer sentiment in our efforts to carry out our high-quality development strategy. As one of the largest e-commerce platforms in China, we clearly felt a continuous recovery of the economy as well as the potential and resilience of the consumption market. With the introduction of a series of policies to support consumption, we are also seeing robust demand for consumption upgrades. Consumer behavior is telling us that the consumption upgrade is not just about quality, but equally about price. It's the balance of quality and price that consumers care most about. Recognizing this trend, we are more confident about our value proposition of more savings and better services. In Q3, we continued to invest platform resources to make it easier for our users to enjoy an ever greater selection of quality products at affordable prices and with great service satisfaction. In Q3, we continued exploring new ways to offer our users special promotions through a series of campaigns such as Duoduo Harvest Festival, National Brand Festival, Duoduo Reading Month, and National Day Sales. Consumers got to enjoy attractive prices that are typically only available a few times a year during shopping festivals. We have always been confident in the vitality of China's consumer market. While we are laser focused on the shopping experience, our efforts go beyond the surface. Investing in technology innovation is the key to achieving high-quality development. In Q3, we continued to invest decisively in areas such as agri-tech, supply chain technology, and our core R&D capabilities. Our investment in R&D reached RMB 2.8 billion, setting a new high. Technology innovation is the core driving force behind our pursuit of high-quality development, and we will continue to step up investment in this area. At the same time, we are proactively taking on more social responsibilities. In August, the Xinjiang region was hit by severe weather. We immediately went into action and donated RMB 30 billion to the China Charity Federation to support the affected region. At the same time, we launched dedicated relief campaigns and charity live streaming events to support affected companies. For example, to help book merchants in the region resume normal operations, we set up a dedicated channel on our platform and provided relief measures such as traffic support and zero condition policy. In Q3, we went back to places in several provinces and hosted a series of Reading for You book donation events. We also donated food and helped build libraries for schools in Gansu and Hebei provinces. We are hopeful that through these efforts, we can do what we can to broaden the horizons of young people and help them achieve a brighter future. I'm pleased to report that we were awarded the 12th China Charity Award in September. This is recognition of our efforts in rural revitalization, disaster relief, and knowledge sharing. Although our business outside of China is still at an early stage, it has made meaningful progress since its launch a year ago. Drawing on supply chain capabilities we have accumulated over the years, we are able to assist many manufacturers in expanding their presence and directly engaging consumers. Through T-Mobile, our cross-border services now help manufacturers reach consumers in over 40 countries. While we have broadened our reach, the business is still in its early stages and will face uncertainties. We are excited and intrigued by the opportunities and challenges that come with international development. We look forward to working with more manufacturers and all our partners to create a next-generation supply chain and shopping experience fit for the evolving trends of our times. Our mission is to serve all, benefit all, and empower consumers all around the world to live their best lives. This year is a year of recovery and also a year of heightened competition. As always, we will maintain our strategic direction and focus on the execution of our high-quality development strategy. We will keep reminding ourselves of the day one mentality and explore new and better ways to serve our users. Through rapid product iterations and feedback cycles, we will gain valuable insights that enable sustainable high-quality goals. Through our efforts, we hope we can better the lives of our users and bring about positive trends to the world as a whole. Towards this goal, we will move ahead steadily and tirelessly. And now I will hand it over to our CEO, Jiazhen. He will talk more about our high-quality development strategy.

Zhao Jiazhen, Co-CEO

Thank you, Lei. Hello everyone. This is Zhao Jiazhen. Thank you all for joining this earnings call. In the first three quarters, market activity has continued to improve. As the impact of consumption support policies gradually takes effect in the economy, we are witnessing stronger demand for consumption upgrades. In this context, in Q3, we launched several promotions, including the summer carnival, Duoduo Harvest Festival, National Brand Festival, and Duoduo Reading Month. Guided by our principle of serving all and benefiting all, we increased our investments to provide more savings and enhanced services. During this year's Single Day, we also simplified our promotions. For the first time, we offered direct price reductions in addition to our 10 billion program and extended coverage to many imported goods, offering users a broader selection of quality products at reasonable prices. Our efforts resulted in good momentum during Single Day, benefiting over 620 million consumers through the 10 billion program. The Single Day promotion is part of our strategy for high-quality development. Aiming to create incremental value for consumers and society, we focused on execution to deliver high-quality assumptions, high-quality supply, and enhance platform governance and the merchant ecosystem. Now, let me share the key initiatives my team and I worked on during Q3. Firstly, we are concentrating on high-quality consumption. Since Q3, we have aimed to enhance our core capabilities by offering more savings and better services. By implementing our progress platform policies and incentives, we are making affordable quality products more accessible to the public. For example, during the Duoduo Harvest Festival in September, as the largest agriculture platform in China, Pinduoduo invested 1 billion in platform resources and collaborated with over 3,000 agriculture merchants from more than 1,000 product regions across the country to launch the festival. Additionally, we expanded our 10 billion program to include a wider range of participating agricultural product categories. We continue to invest in supporting quality agricultural products, aiding farmers in entering the national market and increasing their income. Our farmer merchants are encouraged by their success on our platform and are increasingly committed to their agricultural careers. Besides the Duoduo Harvest Festival, which focused on agricultural products in Q3, we also partnered with over 100 Chinese national brands for the National Goods Festival. In collaboration with CCTV, over 50 top Chinese brands, including Shanghai Soap, 361, Cofinix, and Arke, participated in live streaming sessions on our $10 billion program to showcase their products and share their brand stories with a nationwide audience. Consumer demand was boosted by our various support measures, including featured live stream events, the 10 billion program, and large group buying. We are pleased to witness that some national brands achieved significant growth in partnership with us, with some experiencing growth of up to 40 times over the past two years, and the business continues to expand. High-quality supply is essential for high-quality consumption. In Q3, we continued to invest in our supply chain capabilities, enabling more local manufacturing and allowing agricultural producers to become leaders in specific product categories and expand into international markets. Our team also returned to key agricultural production regions like Jiangsu and Northwest for food during the third quarter. Through our Agricultural Cloud Initiative, we provided digital solutions to local producers, improving the resilience and competitiveness of local supply chains. We are delighted to see a new generation of growers and farmers emerging in these areas, including a finance master’s degree holder from the post-90s generation who turned down a career in investment banking to engage in the crop trade, and a former village director who helped farmers sell 4 million kilograms of sweet potatoes over three years. They are crucial in driving rural revitalization. Innovation is a key component of the agricultural value chain. In Q3, we continued to promote digital inclusion and technology adoption in agriculture. To support this, we hosted the Pinduoduo Academy Growing Competition for the second year, recognizing innovative, tech-driven agricultural practices across the nation. This year's event attracted 96 research teams, and our platform provided strong traffic support and coupons for agri-tech-enabled products advocated by participating teams to promote standardization, brand building, and digitization in agriculture. Our support extended to various products, including oranges, citruses, limes, and kiwifruits from leading production regions. In Q3, we also advanced our global initiative, allowing manufacturers to reach consumers in over 40 countries and regions worldwide. Currently, we serve more than 10,000 manufacturers from over 100 industrial belts across Guangdong, Zhejiang, Shandong, and Anhui provinces. In pursuing high-quality development, we recognize that a high-quality ecosystem is foundational for creating a mutually beneficial environment that supports the growth of the platform and its participants. In the past quarter, we enhanced protection mechanisms covering account verification, search and browsing, order restrictions, and content management. We also deepened our commitment to copyright protection through several targeted campaigns and are actively seeking opportunities to take on more social responsibilities as we strive for a greener and healthier platform ecosystem. Last month, Pinduoduo celebrated its 8th anniversary. Reflecting on our journey, we sincerely thank consumers, farmers, merchants, investors, and other stakeholders for their support. Moving forward, we will maintain a relentless focus on executing our high-quality development strategy. On the demand side, we will continue to be consumer-oriented, providing more savings and better services. On the supply side, we remain committed to driving industrial modernization through innovation within the growing economy. In relation to platform ecosystem, we will allocate more resources to upgrade governance, support quality e-merchants, and cultivate a healthy, mutually beneficial environment. Now I will hand it over to Jun, who will update you on our financial performance.

Jun Liu, VP of Finance

Thank you, Jiazhen. Hello everyone. Let me walk you through our financial performance for the third quarter ended September 30, 2023. In terms of income statement, in the third quarter, our total revenues increased by 94% year-over-year to RMB 68.8 billion. This was mainly driven by the continued recovery in consumer sentiment and encouraging results from executing our high-quality development strategy. Revenues from online marketing services and others were RMB 39.7 billion this quarter, up 39% from the same quarter of 2022. Revenues from transaction services were RMB 29.1 billion, up 315% from the same quarter last year. Moving on to costs and expenses, our total cost of revenues increased 262% from RMB 7.4 billion in Q3 2022 to RMB 26.8 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 increased by 44% to RMB 25.4 billion from RMB 17.7 billion in the same quarter of 2022. On a non-GAAP basis, total operating expenses increased to RMB 23.9 billion this quarter from RMB 15.8 billion in Q3 2022. In the past quarter, guided by our high-quality development strategy, we invested decisively and responsibly in key strategic initiatives. Our total non-GAAP operating expenses as a percentage of our total revenue this quarter was 35%, compared to 44% in the same quarter last year. Looking into specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB 21.3 billion, up 58% versus the same quarter last year. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 31% versus 38% for the same quarter last year. Throughout the past quarter, we continued to give back to consumers and rolled out a series of promotional campaigns. We have seen good consumer feedback on our efforts. Our non-GAAP general and administrative expenses were RMB 403.3 million versus RMB 226.3 million in the same quarter of 2022. Our research and development expenses were RMB 2.2 billion this quarter on a non-GAAP basis, and RMB 2.8 billion on a GAAP basis, hitting a new high. Technology is at the heart of our value creation and will be a long-term focus for us. We're committed to stepping up our investment in areas such as agricultural technology, supply chain, and our core R&D capabilities. Operating profit for the quarter was RMB 16.7 billion on a GAAP basis, compared with RMB 10.4 billion in the same quarter last year. Non-GAAP operating profit was RMB 18.1 billion versus RMB 12.3 billion in the same quarter last year. Non-GAAP operating profit margin was 26% this quarter, compared with 35% for the same quarter last year. Net income attributable to ordinary shareholders was RMB 15.5 billion for the quarter, compared to RMB 10.6 billion in the same quarter last year. Basic earnings per ADS was RMB 11.38, and diluted earnings per ADS was RMB 10.60, versus basic earnings per ADS of RMB 8.38, and diluted earnings per ADS of RMB 7.34 in the same quarter of 2022. Non-GAAP net income attributable to ordinary shareholders was RMB 17 billion, versus RMB 12.4 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 11.61 versus RMB 8.62 in the same quarter of 2022. We delivered solid financial results in the past quarter. Looking ahead, we will continue to invest patiently to execute our high-quality development strategy. That concludes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB 32.5 billion, compared with RMB 11.7 billion in the same quarter last year. As of September 30, 2023, we had RMB 202.8 billion in cash, cash equivalents, and short-term investments. Thank you. This concludes my prepared remarks.

Unidentified Company Representative, Company Representative

Thank you, Jun. Next, we will move on to the Q&A session. 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. Operator, we are open for questions. Your first question will come from Natalie Wu of Haitong International. Please go ahead.

Natalie Wu, Analyst

Hi, everyone. Thank you for taking my questions. I have two. First, regarding the company’s strategy, how does management view your strategic priorities given the lack of strong momentum in the past quarter? From a forward-looking perspective, I’m curious about the key strategies that are at the forefront of management's mind. My second question is about agriculture. We know that agriculture has always been a crucial merchandise category for Pinduoduo. Can management elaborate on the importance of this category to our platform? Additionally, we recently learned that after years of effort in this sector, this product category has continued to perform well and achieved significant goals in the past quarter. Can management provide insights into the key initiatives implemented in agriculture that helped us reach that goal? Thank you.

Zhao Jiazhen, Co-CEO

Hi, this is Zhao Jiazhen. Let me address the question regarding our strategy. As we mentioned last quarter, starting this year, we are entering a stage of high-quality development. This is not just a catchphrase for us; we are actively implementing it in every aspect of our business. First, on the supply side, we are enhancing our capabilities in agriculture. Moving forward, we will continue investing in agri-tech and supporting infrastructure to improve the quality of agricultural products available on our platform. Additionally, we launched a significant ecosystem initiative earlier this year to support high-quality merchants and ecosystem partners collaborating with us. This initiative aims to provide incentives that promote the overall high-quality development of our ecosystem. We are also focused on improving our platform governance, which has been a top priority since I took office. We are making steady progress in areas such as miner protection and product safety. From the consumer perspective, our 10 billion program is making higher ticket items more accessible. During the recent Single Day event, over 620 million users benefited from this program. Positive user sentiment is our most valuable asset. Building trust takes years, but it can be lost quickly, and we will remain vigilant in this area. Additionally, we have been enhancing our service capabilities since the start of this year, and the feedback has been positive. Over the long term, we aim to build trust among users through improved service satisfaction, encouraging them to explore new product categories on our platform to better meet their diverse needs. We are committed to the high-quality development of our business and platform, and we are pleased to see our strategy yielding results sooner than expected. Regarding our strategic priorities, the board and management team adopted the high-quality development strategy when I assumed my role earlier this year, and it will remain our focus throughout my tenure. Thank you.

Jun Liu, VP of Finance

Hi, this is Jun Liu. I will address your question regarding our agricultural strategy. Agriculture is of strategic significance to us. We began our journey in agriculture, which is how many users first became familiar with our services. We retain these users by providing them with high-quality agricultural offerings. Currently, the online market for agricultural products is still quite underdeveloped, representing substantial opportunities in this segment. Last quarter, we introduced the Duoduo Harvest Festival, bringing agricultural products directly from over 1,000 productive regions to consumers nationwide. We enhanced our platform's resources to improve the quality of agricultural products as well as the shopping experience. Additionally, we connected farmers to appropriate logistics, allowing many regional specialties to reach the national market for the first time. This has enabled us to better meet consumer demand for high-quality, fresh, and healthy agricultural products. We are committed to enhancing the quality and efficiency of the agricultural supply chain. Moreover, we recognize that improving the supply chain is just one facet of agricultural modernization. We also aim to accelerate the integration of agri-tech innovations to boost productivity and product quality. This year, we organized the third Smart Agriculture Competition and the second Pinduoduo Academy Growing Competition to encourage agri-tech innovation and its implementation. We have supported talent in agricultural fields to help farmers increase productivity and minimize losses. At the same time, we understand the importance of foundational research. In May, we donated RMB 100 million to establish a research fund at China Agricultural University aimed at addressing critical agricultural research needs. In August, we were happy to welcome Yvonne to our board as an independent director. Yvonne brings expertise in agriculture and food safety, and her presence will help us be more focused in our agricultural research investments. Our objective is to use advanced research to tackle practical issues in China. Moving forward, agriculture will continue to be a key element of our high-quality development strategy. We will keep leveraging our technological advantages and platform resources to optimize the agricultural supply chain, promote agri-tech innovation, and deliver more quality products directly from farm to table, ultimately benefiting our farmer merchants. Thank you all.

Unidentified Company Representative, Company Representative

Thank you, Natalie. Operator, we can move on to the next analyst on the line. The next question comes from Ronald Keung of Goldman Sachs. Please go ahead.

Ronald Keung, Analyst

Thank you, management, for taking my question. My first question is related to the increased focus on value-for-money products by many of your competitors this year, which has made it easier for manufacturers to establish storefronts on those platforms. Some of your peers have reported strong momentum among users and merchants. How do you assess the competitive landscape, and what key initiatives are you implementing to maintain your competitive edge in this environment? My second question is about the robust momentum your global business has been experiencing since its launch just over a year ago. Could you share the latest developments and your strategy for this business moving forward, as well as your vision for it in the near to medium term? Thank you.

Zhao Jiazhen, Co-CEO

This is Zhao Jiazhen. Thank you for your question. Let me share my thoughts on competition. As Lei just mentioned, this year is a year of recovery, but it's also a year of heightened competition. With the gradual rollout of supportive policies, it's not surprising that our industry peers have increased investments to stimulate consumption. Our industry must directly confront the evolving needs of consumers, who now have various platforms to choose from, making competition inevitable. There is no permanent solution to competition; instead, we continually focus on enhancing our core competencies and collaborating with ecosystem partners to create greater value for our consumers. In the third quarter, we remained innovative by promoting savings and better services, offering quality and affordable products, and ensuring a great shopping experience for our consumers. While deepening our traditional focus on savings, we aim to build consumers' trust in our platform through improved services. This should encourage more users to explore new product categories, allowing us to better meet their demand for consumption upgrades. Meanwhile, we will expand our physical economy and assist new farmers and manufacturers across the country in overcoming the digital challenges of the physical economy. We will help connect their products to consumers globally, enabling more producers to benefit from the digital economy and expanding their shopping options. Our approach to competition is clear—we prioritize consumer needs over competitors' actions. We have observed a clear trend of consumption upgrades among our users, leading us to formulate a high-quality development strategy to adapt to this trend. This strategy is simple yet effective. There are both healthy and malicious forms of competition, and sometimes it shifts into unhealthy market practices, attracting criticism towards successful performers. For instance, we saw a short-sale report on our company issued in early September, containing baseless allegations from a short-seller with a questionable track record. The report appeared aimed at inciting panic and driving down stock prices to benefit short positions. Our investigations revealed more follow-up actions by those behind the report, making their motives and unusual conduct clear. We're encouraged that many investors recognized the underlying motives and saw through the unfounded claims. Looking ahead, we will maintain our focus on our consumers and our high-quality development strategy. With conviction and concentration, we will emphasize execution, and ultimately, we believe consumers will respond with their wallets. This is our view on competition. Thank you.

Jun Liu, VP of Finance

This is Jun. Thanks, Ron. Let me take your question on global business. Our global business aims to leverage the supply chain expertise accumulated over the years to create a new form of channel and a shortened experience, which directly connects the factories with consumers, based on a flexible supply chain. Currently, consumers from over 40 countries with diverse cultural backgrounds are able to purchase directly from high-quality factories through our services. However, this is still in a very early stage. Many of our initiatives are in the beta testing phase. Our team is learning about the different markets and consumer needs worldwide. It will be an iterative process that will be challenging but at the same time interesting. We look forward to working with our partners on this journey to make the lives of consumers around the world more enjoyable. Thanks.

Unidentified Company Representative, Company Representative

And operator, I think we have time for one more analyst. The next question comes from Ellie Jiang of Macquarie. Please proceed.

Ellie Jiang, Analyst

Let me clarify my questions. First, regarding revenue, the company experienced impressive growth of 94% year-over-year. What do you believe contributed to this growth? What actions taken in the past quarter do you think were effective? Additionally, how do you view the sustainability of this growth into the fourth quarter and next year? The second question pertains to margins. We have observed a decrease in your margin on both a year-over-year and quarter-over-quarter basis. What key investment areas are you focusing your resources on? Is this decrease connected to the competition? How is your global business affecting your profitability? Lastly, how should we anticipate margin trends in the coming quarters? Thank you.

Zhao Jiazhen, Co-CEO

Hi, this is Zhao Jiazhen. I will start by addressing the question about growth. As Lei mentioned earlier, our financial performance this quarter is the result of improving consumer sentiment and the execution of our high-quality development strategy. In the past quarter, driven by consumption recovery, the Chinese economy grew faster than market expectations, demonstrating its resilience. What we are seeing on our platform also confirms the potential of the consumer market. We have confidence in the Chinese consumption market. There remains much to be done to better serve consumer demands. Although industry players did not have major promotions planned during Q3, we maintained our everyday low price philosophy and worked hard to offer consumers a wider selection of quality products at affordable prices, enhancing our cost savings value proposition. While we addressed the basic needs of our consumers, our collaboration with branded merchants also yielded good results. During the National Goods Festival, we invested in coupons and platform resources to help more national brands quickly increase their popularity. In partnership with our platform, some brands were able to achieve significant growth in the past year or two. We implemented suitable policies and offered platform resources to encourage our merchants to collaborate with us to provide more savings and better services. We are pleased to see growing trust in our platform and increased user activity, which in turn provides more sales opportunities for the merchants. Merchants, in turn, are more willing to invest in our platform. We have consistently stated that revenue is the natural outcome of the value we create for our ecosystem partners. We will maintain our strategic direction and focus on executing the high-quality development strategy. Instead of being overly concerned with short-term revenue trends, we will focus on enhancing our core capabilities to serve consumers and our merchants. Thank you.

Jun Liu, VP of Finance

This is Jun. Thanks, Ellie for your question. I will answer your question about profitability. First and foremost, we are still in a development phase. Profitability in the short run is not our priority. Instead, our team is focusing on executing our high-quality development strategy, which we hope will increase the value of the platform in the long run. In the past quarter, guided by the high-quality development strategy, we stepped up our investment in key areas such as promotional activities and service upgrades to deepen our more savings and better services for merchants. We also further built on our supply chain capabilities and ecosystem improvements. We are seeing encouraging results from our execution and we will continue to invest firmly when we see good ROI potential. In terms of future trends, we are operating in a fast-paced market environment where investment opportunities change on a daily basis. Because of this, our business execution will not align perfectly with the financial reporting schedule. Going forward, our profitability may continue to fluctuate on a quarterly basis. Thank you.

Unidentified Company Representative, Company Representative

Thank you all once again for joining us today. It's about time. If you have any further questions, please reach out to our IR team. Thank you and see you next quarter. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, and you may now disconnect.