Earnings Call
PDD Holdings Inc. (PDD)
Earnings Call Transcript - PDD Q2 2020
Operator, Operator
Hello, ladies and gentlemen. Welcome to Pinduoduo's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I’d now like to turn the conference over to your speaker today, Mr. Thank you. Please go ahead.
Unidentified Company Representative, Company Representative
Thank you, Rachel. Hello, everyone, and thank you for joining us today. Pinduoduo’s earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com as well as through global newswire services. On today’s call, our CEO, Chen Lei, will make some general remarks on our performance for the second quarter of 2020 and his primary areas of focus going forward. Our VP of Strategy, David Liu, will then elaborate further on our specific strategic initiatives. Last but not least, our VP of Finance Tony Ma will take us through our financial results for the second quarter ended June 30, 2020. Before we begin, I’d like to remind you that this conference contains forward-looking statements within the meaning of SECTION 21E of the U.S. Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, anticipate and similar statements. Such statements are based upon management’s current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company’s filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable laws. Now it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Lei, please go ahead.
Lei Chen, CEO
Hello, everyone. It's a pleasure to welcome all of you to our second-quarter 2020 results announcement. This is my first time communicating with investors around the world as CEO, even though I met many of you 2 years ago in our IPO Roadshow. It's great to reconnect, and I look forward to working together again and building an ongoing dialogue. I'm joined today by our Vice President of Strategy, David Liu, and our Vice President of Finance, Tony Ma. In the past few months, we have been busy with the management transition that was announced on July 1st. It was an evolving process that started 3 years ago, and the decision was made with the full support of our Board. We've always been thinking about how to create more opportunities to grow the next generation of leaders, how to keep this organization young, vibrant, and at the same time increasingly institutionalized. This is especially important in our fast-changing technology landscape. We challenge ourselves continuously and incorporate fresh perspectives to continuously satisfy and serve our users' needs. At the same time, we need to build a solid foundation for the long-term and sustainable development of the organization. Having built Pinduoduo into one of the largest platforms in China and probably building numerous initiatives by the team during the pandemic, we feel the timing was right to pass on to our younger generation of leaders more responsibility. Pinduoduo has grown at an extraordinary pace in the past 5 years. We are laser-focused on our survival and growth. However, in the next few years, my goal is to elevate this platform to the next level, one that is vibrant, innovative, energetic, and institutionalized. The management and the Board hope to lay a strong foundation over the next few years to create a lasting innovation and ecosystem that serves our society. Colin has taken a step back from day-to-day management responsibility as CEO, but he continues to be fully engaged and has been working closely with the Board and management to explore the company's future strategic processes and organizational structure. Colin is also devoting more time to investing in and supporting fundamental research in areas that will become the future drivers of our company, such as agri-tech. We believe this new division of labor allows Colin and me to cooperate efficiently and steer the company in its next phase of growth and development. With over RMB1 trillion in GMV and 683 million annual active buyers, Pinduoduo is operating at a significantly larger scale with much greater complexity today. We have demonstrated that our user-centric strategy works, and we will continue to do what we do well to offer value-for-money products to our users through a fun and interactive experience. As we continue to see significant potential for our platform, my priorities as CEO include various internal and external initiatives that we deem necessary to support and generate long-term sustainable value for our platform. Internally, it's important that we continue to make operational decisions efficiently, despite our growing number of business units and employees. I’m working with our team to leverage more technology to streamline internal processes and institutionalize best practices. We are also focused on hiring the best talent and personnel development. We continue to encourage mobility within our organization and motivate our employees to generate new ideas and compete for resources. Externally, we are going to increase strategic investment in our ecosystem, particularly in the agricultural value chain. Our investment in the past 5 years has primarily been on our users through our sales and marketing expenses. We have successfully built a substantial user base of nearly 600 million in record time. Our average daily parcel volume accounts for approximately 25% of China's daily parcel shipment. However, in terms of average spending per active buyer, we still see substantial upside potential. We will continue to invest in user engagement to ensure we grow user frequency of purchases and average order value. At the same time, we plan to pursue more strategic investments and partnership opportunities that will allow us to accelerate the digitization of our supply chain and enhance efficiency and value that could be shared with our consumers. In particular, we started our business in agriculture and we plan to continue our focus in agriculture as our next strategic priority. Agriculture is a sector that touches the largest number of people and yet has had the least amount of digitization in the past decade. Any technology that can improve productivity and efficiency of the agricultural value chain will have a huge impact. Pinduoduo is already one of China's leading online distribution platforms for agricultural produce and products. We are uniquely positioned to drive trends in China's agricultural system. We combine consumer demand on our platform to create scale, and we can leverage consumer insights we gain to help farmers make more informed decisions across planting cycles, including what to plant and when to harvest. We are prepared to invest in technology and operations across different parts of the agricultural value chain to assess e-commerce penetration for the category and generate more value for both farmers and consumers. Our aim is to further consolidate our position as China's number one online agriculture platform and to build a worldwide presence in agriculture. Let me now turn over to David to discuss some of our specific thoughts around agriculture.
David Liu, VP of Strategy
Thank you, Lei. One in four Chinese workers work in agriculture, but the industry makes up less than 10% of China's GDP. This is because agriculture has lagged behind other industries in digitization. Nearly 98% of farmers in China work on farms smaller than two hectares. It is difficult to standardize growing practices and achieve economies of scale. The rural workforce is aging and in decline as young people choose to work in the cities. The lack of coordination for food production makes farmers vulnerable to price swings, while wastage and high incremental distribution costs add to consumers' burden. Those are the challenges. The opportunity is that agricultural e-commerce can solve many of these problems. Based on figures from the Ministry of Commerce, the implied total addressable market in 2019 for PBOC agricultural goods sales in China was RMB8.1 trillion, with less than 7% of these sales taking place online. In contrast, the online penetration for physical goods overall was 23% in 2019. Pinduoduo is already one of the leading e-commerce platforms for agriculture. In 2019, we generated RMB136.4 billion or 13.6% of our GMV from agricultural produce and related goods. Over 240 million or 38% of our annual active buyers purchased in this category last year, with a 70% repurchase rate. Pinduoduo has become the go-to destination for high-quality, great-value aquaculture products. This recognition deepens through the pandemic. During the 6.18 promotion, we saw orders for agricultural products grow 136% to RMB380 million. Nearly three-quarters of the orders came from Tier 1 and Tier 2 city users. We expect to continue gaining market share in agriculture, and we see the potential for our agriculture GMV to exceed RMB1 trillion in 5 years. Why do we think agricultural e-commerce can tackle the challenges outlined earlier? Well, simply put, only when you digitize demand and supply can you drive efficiency and gains through the value chain in between. Online retail has an advantage in terms of greater visibility. From production all the way to distribution, we have a unique position to make the value chain more efficient and bring more value to producers and consumers through investment and partnerships that can also unlock commercial opportunities. Our vision is to realize the economic potential of China's vast agricultural resources by improving its overall quality and production efficiencies. Starting with production, our efforts thus far have centered around the development of human capital through farmer training and the initiation of pilot farms in our Duo Duo Farms program. Together with partner institutions such as China Agriculture University, we have been part of farming knowledge and business training to almost 90,000 new farmers thus far, who tend to be younger and more digitally savvy. We see this initiative as a way to foster a new generation of farmers who are more adaptive to new technologies. Duo Duo Farms serves as a demonstration of how reorganizing resources through cooperatives and bringing our economic expertise can help farmers in impoverished regions sustainably improve their productivity and household income. Duo Duo Farms will be a test bed for us to introduce technologies to farmers, such as drip irrigation, while also introducing changes to existing farming practices to drive meaningful change. Building upon these experiences, we plan to invest in technology necessary to implement precision farming, such as robotics, IoT sensors, and low-powered data transmission. Precision farming can help optimize inputs, better control diseases, and reduce production costs. Our ongoing smart agriculture competition, jointly organized with the Agriculture University of China and with the support of the UN's Food and Agriculture Organization, exemplifies our interest to identify cost-efficient and scalable technology that can be promoted as standardized solutions across China. Global teams are competing over 14 weeks to remotely grow strawberries using sensors and machine learning algorithms. The objective is to determine the most cost-efficient techniques to improve yield by integrating technology with traditional growing practices. We also plan to further invest in and develop our proprietary agriculture analytics system. By considering historical and projected data such as price, quantity, geographic distribution, and logistical availability, the system will better advise farmers on which crops of higher economic value to plant, how to optimize quality over quantity, and how to achieve more timely distribution. The system will also help refine our recommendations to consumers to reduce mismatches in supply and demand. Traditionally, agricultural produce goes to at least five layers of distribution before reaching consumers. Industry research estimates as much as 105% added cost and 37% wastage across the chain for vegetables. Pinduoduo’s team purchase model aggregates scattered interests into sizable coordinated demand and connects sellers directly with consumers to eliminate unnecessary costs. The next step is to further optimize logistics for agricultural produce. From how it is packaged, handled, and routed, there are hardly any cost-effective specialized solutions for agricultural produce today. We plan to partner with logistics service providers to develop logistics dedicated to agriculture. As we can forecast demand by region, we can develop technology solutions with logistics partners to optimize delivery routes, coordinate delivery schedules, implement better quality service standards, and optimize loading to and from the rural areas of China. We're also looking at advanced packaging solutions to offer our sellers and considering opportunities in warehousing technology and temperature-controlled logistics. We will also invest in technology for quality control and food safety. Unlike manufactured goods, it is more challenging to provide assurance on the quality and safety of agricultural produce. As consumers in China have become more health-conscious, we expect more will be willing to pay a premium for quality and safety. We intend to address such needs through a combination of technology and certification backed by credible platforms. We started collaborating this year with a research institution to develop a cost-effective, robust method for testing fresh produce for contaminants like pesticides. We envision deploying such tests across a wide array of produce and at various points of the supply chain to provide greater assurance on food safety. We can offer such testing solutions and certification as value-added services to our farmers and merchants. Certified products will receive preferential traffic support and command a premium from our users. Our ability to differentiate such products will allow us to curate and price SKUs based on quality and recommend them to the relevant target users. With better quality products, it is equally, or perhaps more important, to invest in marketing to grow brand awareness. Take the French region of Champagne as an example. Sparkling wines made in Champagne are tightly regulated and must be made from a few prescribed methods using traditional methods to ensure consistent quality. Its sterling, rigorously defended reputation fuels consumers' willingness to pay a premium. Similarly, in China, given its vast agricultural resources, we see opportunities to help create new brands for consistently high-quality produce from various geographic indications around the country. In fact, one of our Duo Duo Farm projects in Hunan is working to establish a nationally recognized destination for yacon grown there. To meet that destination, farmers will have to standardize and improve their farming practices. Farmers are incentivized to improve their practices in exchange for their products fetching a premium. We, as a platform, can provide more visibility to farmers on sales volume and pricing. We can help build awareness and promote origin stories through marketing, including virtual live streaming tours. The recognition of the quality provides further opportunities to develop related sub-industries, from selling oranges to making marmalade and for selling peaches to validating eco-tourism. We see potential to work with farmers and distributors to develop branding for their produce and to address other value-added opportunities, leveraging our consumer insights. While this may be a long journey, we are committed to investing in agriculture and agri-tech, as that enables us to truly benefit all of our platform participants. Now, let me pass it to Tony to discuss our financial results for the second quarter.
Tony Ma Jing, VP of Finance
Thank you, David. For the 12 months ended June 30, 2020, our GMV increased 79% to RMB1.27 trillion from RMB709 billion a year ago as a result of higher user engagement and increased spending per user. We report GMV on the same basis as other industry players to provide a meaningful comparison with that of our peers. The industry definition includes canceled and returned orders. Comparing our GMV in Q2 versus Q1, the level of canceled and returned orders has returned to normal historical levels as China recovers from the pandemic. Our average monthly active users in the second quarter increased by 81 million from the previous quarter to 569 million, or an increase of 55% from a year ago. Our annual active buyers for the 12 months ended June 30 grew 41% year-over-year to reach 683 million. This represents a net add of more than 200 million in the past 12 months. The annual spending for active buyers in the 12-month period ended June 30, 2020, increased by 27% to RMB1,857 from RMB1,468 for the same period in 2019. The increase in annual spending per active buyer was moderated by a significant number of new users added who contributed less than 12 months of purchases to our GMV. During Q2, China's economy continued its recovery from the disruption caused by the pandemic. According to the National Bureau of Statistics, online sales growth of physical goods accelerated in the second quarter, resulting in a 14.3% increase for the six months ended June 30, 2020, from a year ago. This is up significantly from 5.9% growth for the three-month period ending in March. Consumer staples and household goods were significant growth contributors during this period. We observed a similar recovery trend on our platform. In Q2, our users had strong demand for household necessities and agricultural products, and they continue to be more selective and cautious regarding discretionary spending. To address their needs, we expanded our promotion offering under the June 18 campaign to cover more household necessities, food and beverage products, and agricultural produce. We are continuing our efforts to provide compelling value in these categories together with the China Consumer Association in early July. Our total revenue in the June quarter was RMB12.2 billion, representing an increase of 67% from RMB7.3 billion in the same quarter last year. The increase was driven primarily by the strong momentum in online marketing services. Our online marketing services revenue grew 71% to RMB11.1 billion, and our transaction service revenue increased by 38% to RMB1.1 billion. We continued our support for certain SME merchants in Q2 by offering discounted transaction fees but, in general, observed a healthy recovery in merchant advertising activities. We benefited from pent-up demand from merchants and deferred marketing budgets from the previous quarter. We also attribute high advertising activities to better merchant ROI due to higher user engagement on our platform and more compelling advertising products. The implied monetization rate, defined as total revenue divided by GMV for the last 12 months ended June 30, 2020, was 2.9%, in line with the same period in 2019. Now, moving on to costs. Our total cost of revenue this quarter increased by 67% from RMB1.6 billion in the same period last year to RMB2.7 billion this quarter, translating to a gross margin of 78%. Total cost of revenue increased mainly due to higher costs for cloud services, call centers, and merchant support services. Total operating expenses this quarter were RMB11.2 billion, as compared to RMB7.2 billion in the same quarter of 2019. Our sales and marketing expenses this quarter increased by 49% to RMB9.1 billion from RMB6.1 billion in the same quarter of 2019. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue was 73% as compared to 81% for the same quarter last year. We manage our sales and marketing spending dynamically based on expected ROI. Recognizing the fierce market dynamics in this year's 6.18 promotion events, we decided to moderate our investment during the second quarter. We continued with our RMB10 billion program and expanded our offerings to cover household staples that our users were looking for. Looking ahead, we see significant potential to improve our users' annual spending on our platform by building more user mind share and trust. We expect to continue our sales and marketing investment in the second half of 2020 to drive more user engagement. We will continue to spend whenever we see attractive opportunities that meet our internal ROI hurdles. General and administrative expenses were RMB395 million, an increase of 42% from RMB278 million in the same quarter of 2019, primarily due to an increase in headcount. On a non-GAAP basis, our G&A expenses as a percentage of our revenue was 1.1% in Q2. Research and development expenses were RMB1.7 billion, an increase of 107% from RMB804 million in the same quarter of 2019. This increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel and an increase in R&D-related cloud service expenses. On a non-GAAP basis, our R&D expenses as a percentage of revenues was 10.4% in Q2. Technology is fundamental to our operations, and we plan to increase our spending on engineering talent and technological capabilities going forward. Some of our key R&D initiatives include developing our demand forecasting system for agriculture, a database for C2M manufacturers, and a logistics planning system. As a result, our operating loss for the quarter was RMB1.6 billion on a GAAP basis compared with an operating loss of RMB1.5 billion in the same quarter of 2019. Non-GAAP operating loss for the quarter was RMB725 million compared with RMB898 million in the same quarter of 2019. For the quarter ended June 30, 2020, we recorded net operating income of RMB740 million compared with RMB487 million in the same quarter of 2019. The increase primarily reflects the net impact of higher interest income, interest expenses from the amortization of our outstanding convertible bonds, and the gain on fair market value change from long-term investments. We excluded the later two items in addition to share-based compensation in our presentation of non-GAAP metrics. To sum up, our net loss attributable to ordinary shareholders was RMB899 million on a GAAP basis, as compared to a net loss of RMB1 billion in the same quarter of 2019. Basic and diluted net loss per ADS was RMB0.75 on a GAAP basis compared with RMB0.88 in the same quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders was RMB77 million compared with RMB411 million in the same quarter last year. Non-GAAP basic and diluted net loss per ADS was RMB0.06 compared with RMB0.36 in the same quarter of 2019. That completes the profit and loss statement for the second quarter. Now on the cash flow. Our net cash flow generated by operating activities was RMB5.5 billion, as compared to RMB4.1 billion in the same quarter of 2019, primarily due to an increase in online marketing service revenues. As of June 30, 2020, the company's cash reserve comprised of cash, cash equivalents, and short-term investments was RMB49 billion, as compared to RMB41.1 billion at the end of December 2019. We allocated most of our cash reserves to highly liquid short-term investments to receive better cash yield and to maintain flexibility to withdraw and deploy capital strategically as necessary. Finally, let me touch on the ongoing development in the U.S. to prohibit foreign insurers' access to the U.S. capital market if sufficient audit access cannot be provided to the U.S. Public Company Accounting Oversight Board. On August 6, the President's Working Group on Financial Market released its report recommending the SEC implement rules that would require issuers to grant PCAOB access to work papers of the principal audit firm in order to maintain listing by January 1, 2022. The recommendations also provide an option for companies to provide a core audit from an audit firm that meets PCAOB's inspection requirements. The administration's recommendation, if adopted, would still require the SEC to design and put in place detailed implementation rules. We continue to monitor the situation closely and are prepared to work with relevant regulators in China and the U.S. to address these concerns when there's more clarity. We completed our SOX internal control audit for 2019 with no material deficiency identified. We are confident in the quality of our disclosure and financial reporting, and we are committed to continuing our efforts to provide a high degree of integrity in our accounting. This concludes our prepared remarks. Operator, we're ready for questions.
Operator, Operator
Your first question comes from the line of Gregory Zhao of Barclays. Please ask your question. Mr. Gregory Zhao, your line is now open.
Gregory Zhao, Analyst
Sorry, I was mute. So thanks for taking my question. So we saw PDD making some efforts to move to the high-end market and started to sell some luxury products, including Tesla cars. So I just want to understand a bit more about how this will help you improve the ARPU and help you expand into the high-end market? A quick on the year-over-year growth of the GMV growth. So we know last year was the first time you joined the 6.18 promotion season. So how shall we think about the relatively high base, the impact on your 2-quarter GMV growth? Thank you.
David Liu, VP of Strategy
Gregory, thanks for the question. Let me take your first question around brands and products. Our products and brand strategy is actually oriented around giving users what they want and serving them well. So it is not our intention to build or engage in the type of promotion that you have seen. The intention is not to drive our AOV. The aim is actually to build Pinduoduo into a destination for quality, authentic, and value-for-money products across categories and price points. So we are continuing to grow the depth and breadth of SKUs across the platform, whether they are branded or unbranded. In fact, as I highlighted in my comments earlier, we are highlighting agriculture as a product category where we think we can strategically add significant value over the next few years by investing in our supply chain and making available higher quality and better products for our users. With regard to your question on GMV, first of all, I would like to remind the audience that comparing GMV growth in the second quarter versus the first quarter is meaningful because of the impact of the pandemic. In fact, we are very pleased with our GMV growth this quarter, particularly in the context of having added about 100 million active buyers since the beginning of this year. Our focus as a company this year in terms of our strategy is to continue to invest in user engagement and to build our mind share because, as you look at the scale of the user base we have accumulated—683 million active buyers—we believe that what we need to do is continue to improve our engagement with them and to grow their mind share. The GMV for the second quarter is impacted. I will also note that changes in consumer spending— we saw a pickup in consumer activity since the first quarter as the economy recovered. However, we did notice that consumer spending was much more value-conscious, and consumers are looking for more household necessities such as FMCGs and agricultural produce among our platform. As you saw in our 6.18 campaign, we actually expanded our coverage in the campaign to cover more products in these categories, and we are continuing to support the consumers in these efforts.
Gregory Zhao, Analyst
Okay, thank you.
Operator, Operator
Your next question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask the question.
Piyush Mubayi, Analyst
Thank you for taking my question. May I just ask a couple of details of how the transaction commission revenues and marketing services revenues are progressing and how that take rate has evolved? Your marketing service sector seems to have gone up to 3.2% in the quarter, which is a huge improvement year-on-year on any other metric, probably the highest ever. Should we then think of that as the number that we can expect for you to continue to maintain in the future? And also, when you look at the growth rates in transaction commissions, which was 76% in Q1, that's slowed down to 38%. Is there anything there that's different that would lead to that slower growth rate? And in a similar manner, the marketing services revenue, which is at 71%, is meaningfully higher than the pace of growth that you're seeing in the GMV for the quarter. So if you could just take us through what's going on there. Then I have a few questions in agriculture, if I might. Thank you.
Tony Ma Jing, VP of Finance
Okay. Let me take this one then. We did see a stronger-than-expected recovery in merchants’ advertising in Q2. Our merchants had more budget to spend, given limited activities in Q1, and they were eager to make up for their loss in Q1. Higher user activities and advertising also helped to improve the advertising returns. Our higher take rate in Q2 reflects the supply-demand dynamic post-pandemic. The level of returned and unpaid orders also returned to normal levels. If we take together our Q1 and Q2 numbers at an aggregate level, the takeaway for the first half of the year is actually 2.9%, in line with our historical results. Takeaway for us is an output, not a KPI we try to optimize. Our priority is on user engagement. With stronger user engagement, merchants would naturally want to advertise more. We will continue to support good quality merchants and incentivize them to improve their service and provide better value to our users. Regarding your second question on transaction service revenue, the transaction service revenue is comprised primarily of what we previously termed commission fees, the payment process fees, which we charge as a standard rate of 0.6%, however, we continue to offer a preferential rate for certain merchants as an incentive.
Piyush Mubayi, Analyst
And may I just ask a follow-up question? Just wanted to understand what percentage of the GMV today is agriculture, or say, for the second quarter? And when you talk about RMB1 trillion 5 years out, we presume that's about 15% to 20% of GMV at that point. Would that be the right mix to think through for agriculture? And if you could just give us a feel for what sort of take rate that we could earn from the business. Would it be commensurate to or comparable to the 3.2%, for example, that you’ve shown us in Q2, 5 years down the line, I mean. Thank you.
David Liu, VP of Strategy
Piyush, thank you for that. Let me just also add a little bit of context around the take rate. As we have communicated to the market previously, the take rate really is an output. It's a function of the merchants advertising on our platform and seeing the right levels of return. We have seen in the second quarter very strong merchant activities, as merchants tried to move more inventories and goods in the second quarter. As a result, we saw very strong advertising demand, which we think actually contributed to that take rate. Similarly, I would note that on our platform, we are seeing advertising activities really across the board from many different sectors. So it is particularly categories, per se. We do believe there are potentials in agriculture merchants, I mean distributors, to contribute to advertising as long as they are able to actually offer the type of premium product that allows them to generate the type of return. While we are seeing this, given the low e-commerce penetration rate in agriculture, we see substantial opportunity for us to invest in our supply chain and to drive more value creation down the road. So, yes, we do believe that certainly generating a type of return commensurate with what the platform is generating today is possible in agriculture, but that may come in the form of both advertising and also us providing technology solutions to the participants in our ecosystem.
Piyush Mubayi, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Alicia Yap of Citigroup. Please ask your question.
Alicia Yap, Analyst
Hi, good evening, management. Thank you for taking my questions. I have a question regarding the medium to long term. How will PDD attract a wider variety of merchants and brands to join the platform, especially now that you have a larger base of merchants and a significant user base? How do you ensure that all merchants receive adequate exposure? What steps does PDD need to take to support this diverse range of merchants? Additionally, how will the team purchase model evolve with the inclusion of more branded products or merchants on our platform? Thank you.
David Liu, VP of Strategy
Thank you, Alicia. Our strategy around branded products and brands has not changed. In fact, as I mentioned earlier today, the idea is to continue to focus on providing what the users want. From that perspective, what we are seeing is the team purchase model working, and this is the reason why we have been able to accumulate 700 million users in such a short period of time. This continues to work because we are a recommendation-based business model focusing on specific SKUs as opposed to brands, right? We believe that as everyone's demand on the platform really ranges across different price points for different categories. As we continue to get better, our recommendation will understand the users better, and we will be able to push them the most relevant products at the most relevant price points. As user activities and user engagement grows, the merchants naturally are coming to our platform, seeking growth and more opportunities. What we are doing through the algorithms and through our recommendation is to work with the merchants to help them provide products that are suitable for their customer base. We believe the algorithm is working, and over time, our recommendations will get better. Through a combination of offering the right product and also advertising on the platform, we believe the merchants will continue to see attractive returns on their investments.
Alicia Yap, Analyst
I see. Okay, thank you.
Operator, Operator
The next question comes from the line of Thomas Chong of Jefferies. Please ask your question.
Thomas Chong, Analyst
Hi. Thanks, management, for taking my questions. My question is about the business momentum in July and August across different product categories? Thanks.
David Liu, VP of Strategy
Sorry, Thomas.
Tony Ma Jing, VP of Finance
Hey, Thomas, is the question around our strategy or the trends we're seeing across different categories?
David Liu, VP of Strategy
Operator, maybe we can take the next question first before we take Thomas back.
Operator, Operator
Certainly. Your next question comes from the line of Tina Long of Credit Suisse. Please ask your question.
Tina Long, Analyst
Hi, management. Thank you for taking my questions. I have two questions. The first one is about sales and marketing because in your comments, you mentioned that you intentionally moderate the sales and marketing spending, likely because peers have been quite aggressive. Additionally, you expanded the RMB10 billion program to some areas. So, I want to know what the plans are for your sales and marketing in the next two quarters, Q3 and Q4, and under what circumstances you actually implement the sales and marketing strategies. That's the first question. I'll ask the second one after this. Thank you.
David Liu, VP of Strategy
Sure, Tina. Let me ask Tony to address the question.
Tony Ma Jing, VP of Finance
First of all, the Q2 on sales and marketing expenses. We say to moderate our spending when we observe aggressive promotion spending by our peers on electronics. Relative to that, we saw household goods as a more attractive opportunity to advance user engagement. Therefore, household goods have a higher purchase frequency than electronics. So we choose a different strategy to invest in Q2. We actually plan to deepen our user engagement going forward, so we will continue to spend on sales and marketing in the coming quarters to grow the mind share and trust among our users. We expect to increase our sales and marketing investment in the second half of 2020 in a prudent manner as well as we will spend whenever we see opportunities that meet our internal ROI hurdles.
Tina Long, Analyst
Got it.
Tony Ma Jing, VP of Finance
Our annual spending per active user still lags behind our peers. We believe we can narrow that difference by growing our mind share with users and to get more wallet share; that's why we have to continue this type of investment.
Tina Long, Analyst
Okay, thank you, Tony. Yes, my first question is sort of related to this, because I think based on the public data, the actual volume is actually very strong from PDD, but the GMV was sort of lower. So does that imply the average order size is actually trending down? Can you share a little bit more about the average order size and also outlook? Because if you continue to allocate more traffic to the household goods, will we continue to see the average order size to stay at a low level? Thank you.
Tony Ma Jing, VP of Finance
Let me take this. Users tend to associate Pinduoduo as their go-to platform for great savings every day. For us, we also tend to have less concentrated spikes in GMV and user activities around shopping promotions unlike how we use this—our peers. Our user engagement tends to trend in a steady fashion, and this reflects our gain in building our mind share. We will continue to invest in user mind share to build on high frequency of engagement. In fact, that's what we did in Q2. We noticed the consumer spending was more value-conscious, and comers were looking for more household necessities, including FMCG and agricultural produce. That's why we dedicated our promotional programs during the June 18 to include more products in these categories. This definitely had an impact on the AOV. Also, we added almost 100 million active buyers since the beginning of this year, and these users are just getting to know Pinduoduo, and actually, their contribution to the GMV is less than 12 months. They are still developing their spending behavior on our platform.
Tina Long, Analyst
Okay. So does that mean the outlook of AOV will stay at a lower level for a longer period of time?
David Liu, VP of Strategy
Tina, so what we have seen in the second quarter is growth across the categories. But as I mentioned, consumer behaviors in the second quarter were more value-conscious, and we adapted our marketing strategy accordingly. We do believe that Pinduoduo—many users associate Pinduoduo as a platform where they would go for great value products, and we have seen people coming to us in the second quarter, particularly looking for those products. We find these product categories to be quite compelling in a sense, because they have a high frequency and high engagement. We do believe that over time the AOV will continue to grow as they build their shopping behavior and spending behavior on our platform over time.
Tina Long, Analyst
Okay, got it. Thank you very much.
Operator, Operator
Your next question comes from Thomas Chong of Jefferies. Please ask your question.
Thomas Chong, Analyst
Hi. Good evening. Thanks management for taking my questions. Can you comment on the livestreaming online shopping strategies? Thank you.
David Liu, VP of Strategy
Thomas, in terms of livestreaming, we have seen continuing adoption of our merchants using livestreaming as a feature to create engagement with their consumers on our platform. However, we do not position, nor do we consider livestreaming to be a separate marketing tool. We consider it really as part of the integrated experience on our platform. Also, Pinduoduo, as you will note, does not have a dedicated channel of entrance for livestreaming. Instead, our users come into contact or access the livestreaming through their browsing experiences; as they explore their SKUs, they will notice that this particular SKU may be in a livestreaming, and they will click into the livestream and view the product being introduced. In that context, they may choose to purchase or they may choose to bookmark the seller, or they may have seen something through their browsing and next time they end up purchasing. We intentionally position livestreaming to be part of the holistic experiences that our merchants can offer to our users, adding to the exploratory experiences our users have on the platform.
Lei Chen, CEO
Yes, one more thing I'd like to add is that livestreaming will be one of the key demands of our customers this year. Actually, there are many others, and we try to have a full understanding of our customers. We actually have more than just one feature to try to capture different kinds of needs our customers have this year. I believe that livestreaming is just one of them, but not all of them.
Thomas Chong, Analyst
Thank you.
Lei Chen, CEO
Thank you, Thomas. Operator, next question, please.
Operator, Operator
Your last question comes from the line of Binnie Wong of HSBC. Please ask your question.
Binnie Wong, Analyst
Hi. Good evening, management. Congrats on a strong improvement in the bottom line. I’ve two questions here. First question is on the monetization rate. It's true that—the second quarter, the monetization rate sharply increased to 3.2%. But if we look at it on a half-year basis, right, there's only— that’s around 2.5%, which is just similar to what we have done in the past years. So should we just think of it as more about a rise in spending from the pent-up demand? Or should we think about the second quarter as having some structural positive drivers that can last into the second half of the year, so just directionally thinking about it? Following on that, are you thinking about the rising online marketing from which pool— which advertising category? Is it because we also do more—management said about the agricultural advertiser and FMCG? Do they tend to see bigger ad spending? Like do they have a bigger ad pocket? Thank you. I just have a quick follow-up. Thank you.
Lei Chen, CEO
Hey, Binnie, thank you for the question. Your question around the take rates, I would say that take rate itself really is a function of merchants investigating or paying and buying advertising to generate return for their sales. As many of you have noted in your interviews with merchants, the advertising return on our platform is better than that relative to our peers. I would consider—I urge you to consider the advertising spend from merchants from that perspective. Of course, it is true that because in the first quarter, the merchants weren’t able to spend their advertising budget, we did benefit from some of that pent-up demand. But our conviction is that as long as we continue to deliver better or solid attractive advertising return to merchants, they will continue to advertise. We're doing this both in terms of improving our recommendation algorithm and improving better advertising products. As an example, we rolled out at the end of last year a product that helps— a smart tool that helps merchants to optimize their advertising return. Many of the merchants on the platform may not be as savvy, and they don't really understand how to optimize for keywords or for banner ads. However, by using our automated system, they at least are guaranteed a minimum threshold return, so they are in a better position and more willing to spend. We do think that part of that pickup has to do with the better advertising products that we are providing. Of course, you cannot do this without a very, very active user. As I mentioned on our call, our strategy this year is to continue to invest in user engagement. With user engagement, we believe the return on merchants' advertising will continue to be attractive, and they will continue to have that demand over time. As to your question specifically around advertising tools, as you know, we started our advertising business primarily in search. But as our business model focuses on recommendations, we have seen a pickup and we expect to continue to see pickup in advertising as a contributor to the online marketing services revenue.
Binnie Wong, Analyst
Okay. Thank you so much. And just a quick question here; is it—a very good quarter that we see the operating margin is historically the narrowest in terms of the losses. It's a significant improvement in the operating margin side. Do you think this is something that we can extrapolate because of this efficiency and we reached kind of like an equilibrium as to how much we spend, and then how much we can grow our top line? Or should we expect some quarterly fluctuation? Because I do understand sales and marketing is quite impacted by seasonality. Should we think about this to extrapolate into the second half, and is there something that is kind of like we wish this inflection point already? Thank you.
Lei Chen, CEO
Yes, I think you're talking about the profitability question here.
Binnie Wong, Analyst
Yes, that’s right.
Lei Chen, CEO
Our Q2 results demonstrate how leverageable our business model is and how we could deliver profitability in the short term. But we don't believe it is the right strategy to focus on short-term profit over sustainable long-term value. Our vision is to offer value-for-money products to all users through a fun and interactive shopping experience. We still need to continue our investment to grow user mind share and engagement, as we mentioned several times in the prepared remarks. Therefore, we are not considering profitability this year. Actually, we also plan to step up our investment in our ecosystem through strategic partnerships and capital investments to better support our merchants in offering better value and better service to our users.
Binnie Wong, Analyst
Okay.
Lei Chen, CEO
Thank you.
David Liu, VP of Strategy
Thank you, Binnie.
Operator, Operator
I would now like to hand the conference back to the presenters for their closing remarks. Please go ahead.
Unidentified Company Representative, Company Representative
Thanks, operator. Thanks, everyone, for joining us on the conference call today. If you have any further follow-up questions, please feel free to reach out to the IR team. We are always here for you. Thank you, and have a good weekend.
Operator, Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.