Earnings Call Transcript - PDD Q2 2021

Operator, Operator

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

Jason Shu, Corporate Secretary

All right. Thank you, operator. 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 GlobeNewswire services. On today's call, our Chairman and Chief Executive Officer, Chen Lei, will make some general remarks on our performance for the past quarter and our strategic focus going forward. Our VP of Finance, Tony Ma, will then elaborate further on specific strategic initiatives and take us through our financial results for the second quarter ended June 30, 2021. Before we begin, I would like to refer you to our Safe Harbor statements in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. So now it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead.

Chen Lei, CEO

Thank you, Jason. Hello, everyone, and thank you for joining our results announcement for the second quarter of 2021. Thanks to our users' trust, our total revenue for this quarter, excluding revenue from merchandise sales, was RMB21.1 billion. This represents a year-on-year increase of 73%. Our annual active buyers reached 849.9 million for the 12 months ending on June 30. Over the quarter, average MAU increased to 738.5 million, representing 87% of our annual active buyers. Our results this quarter demonstrate our enduring commitment to serve our users as well as their trust in us. We feel fortunate and are grateful for their consistent support, and we will continue to do our best to serve them and all our stakeholders. Pinduoduo takes our responsibility to our users and society very seriously. Without them and their support, we will not be where we are today. This is why we are always there with them and for them in their times of need. After heavy rains struck Henan Province last month, we immediately mobilized our networks and partners to provide relief. Close to 20,000 total grocery pickup points in Zhengzhou City helped to distribute emergency supplies to residents living in their vicinity. With Henan's agricultural supplies disrupted by COVID-19 and the rain, we linked up Henan's total grocery network with neighboring networks, including Shandong and Anhui, to ensure that residents continue to have the supplies they needed at stable prices. As user demand in Henan rose significantly, we also increased our warehousing by four times and doubled our manpower there. In addition to these efforts, we contributed RMB100 million towards the rescue and relief efforts. Our support for Henan is in the same spirit as our earlier initiatives to leverage our platform to contribute to society. When COVID-19 disrupted the traditional agricultural supply chain last year, we launched our Help the Farmer initiative connecting farmers directly with consumers across the country. Through our various efforts, we have over 1.13 million farmers selling over 2.06 million tons of agricultural produce by the end of 2020. This helped farmers reduce spoilage and losses and allowed the consumers to get what they needed. As consumers turned to online grocery shopping to minimize contact, the existing delivery system became overwhelmed, resulting in significant backlogs. We responded by launching Duo Duo Grocery, a next-day self-pickup service that connects local demand and supply. Duo Duo Grocery unclogged the backlog, providing users more affordable and fresher produce in an efficient manner. It has since become an important offering to our users, helping to create and preserve millions of jobs along the entire agri-food value chain in the process. It has also proven to work as a support network in terms of needs in Zhengzhou. We will continue to improve it to benefit users, farmers, and their communities. Improving agriculture has been at the forefront of our business from the very beginning. Agriculture touches the daily lives of everyone and has a relatively low digitization rate. With many of our teams being engineers by training, we hope to apply technology to agriculture to make a large positive impact on society and contribute to the national effort to modernize agriculture and vitalize rural communities. Applying technology to agriculture is the best way for us to achieve our mission, which is to benefit all, put people first, and be more open. We are gratified that Pinduoduo serves over 16 million farmers acting as their portal to a digital economy. Farmers are the bedrock of the agri-food system. To help them thrive is to help our agri-food system and society at large thrive. We have seen first-hand how online agricultural retail and technology have benefited farmers. We are pleased that farmers and our partners recognize it too, which is why we have spread the word and helped many farmers on our platform grow so quickly. We want to bring even more farmers on board and work with them to improve their lives and livelihoods. This is possible only if it also works for our users and society at large. This is why we are focusing on strengthening food security, safety, and technology. And now, let me elaborate. First, for security. It's important to secure consumer access to a wide variety of affordable and nutritious food. For this, we need to help our farmers sell better and earn more so that they can cultivate more efficiently and sustainably. On the supply side, we need to upskill farmers as we have been doing through Duo Duo Academy and in partnership with local governments and agronomic institutes to apply new technology. On the demand side, we need to create awareness of their produce and aggregate demand to them. While China has a diverse selection of unique agricultural products, consumers often do not know about many of them. We want to change this by promoting their rich offerings nationwide. This is why we recently launched our third harvest festival, leveraging our RMB10 billion program and the fresh sale. This year's addition featured over 1,000 unique quality produce from 400 quality agricultural production regions. Since the inception of the RMB10 billion program, our zero commission policy for agricultural produce has attracted over 10,000 quality agri merchants to the program, selling over 20,000 agricultural SKUs. I want to take this opportunity to emphasize that we will maintain our zero commission policy for agricultural products to help farmers build a more resilient, efficient, and profitable business. Second, food safety. We want to help improve the tender across the agri-food system. Our supply chain itself will continue to help build the agri-focused infrastructure. We are investing to improve demand and supply matching, cultural integration, and smarter route planning. These efforts will also reduce agriculture's environmental footprint by cutting resource use and emissions from storage and transportation. While we are still at the very beginning of this infrastructure buildup, however, we are confident of its long-term benefits. Third, food technology or agri-food technology. We can only create a vibrant and sustainable agri-food system by seeking solutions through the cutting edge of science and working with farmers to apply these solutions. I would like to highlight the work we are doing in precision farming. Earlier this month, we launched the second smart agriculture competition together with China Agricultural University and Zhejiang University. We challenged teams in a round to plant tomatoes. Last year we challenged teams to deliver cost-effective productivity improvements with strawberries. The technology teams performed very well, demonstrating the cost-adjusted benefits of adopting precision farming by producing three times more fruit than experienced farmers. Two of these teams have since started to commercialize their technology, which will result in real productivity gains for farmers. After last year's successful run, we are stepping up our criteria. In addition to cost-effective productivity improvements, teams will need to demonstrate their farming technology to improve the tomato's nutritional profile while exerting less impact on the environment. We welcome all interested teams with relevant skills to join this competition. Our agri-tech will make agriculture more attractive to the tech-savvy, Internet-native younger generation. We want to help them apply their tech skills in agriculture. To date, we have directly contributed to over 100,000 new farmers returning and working in their hometowns. We will continue to strengthen our training for new farmers and we are targeting to train another 100,000 of them over the next five years. While we have made headway in our agricultural improvement initiatives, there is still a lot to be done to support our farmers and apply technology to agriculture to make it smarter, more resilient, more sustainable, and beneficial for all. As China's leading online agriculture platform, we launched a dedicated RMB10 billion agriculture initiative today, which seeks to face and address the critical needs in agricultural sectors and rural areas. Commercial values are not our goal, but rather we strive to facilitate the advancement of agritech, remote digital inclusion, and provide agritech talents with greater motivation and a sense of achievement. Although RMB10 billion in agriculture initiative will clearly impact our short-term earnings per share for shareholders, it has already received the approval of the Board of Directors and will be personally overseen by myself. We will then hold a shareholder meeting to seek the support of majority shareholders. This is an important and challenging task, which we will invest in patiently. All profits from Q2 and any potential profits in future quarters will first be allocated toward this initiative until the total RMB10 billion commitment is fulfilled. Thank you. And now I will pass it on to Tony.

Tony Ma, VP of Finance

Thank you, Lei. Hello, everyone. Let me begin by providing an update on our progress in improving agriculture by applying technology and elaborate on how we will continue to deploy resources to do so, to achieve our mission to benefit all. I will then discuss our financials this quarter. First, our efforts on digital and technological inclusion for farmers and equity merchants. We are firm believers in online agriculture retail and have already connected over 16 million farmers. We are committed to do more for them and bring more farmers onboard into the digital economy. Many farmers are small-holders and may not be digital natives. We will be directing resources to make it simple and worthwhile for them to embrace tech-enabled agriculture. Our platform helps farmers sell effectively online by making China's rich and diverse agricultural produce discoverable and accessible to our 850 million agri users, resulting in aggregated demand. As a foundation, we are committed to keeping our RMB10 billion program completely free for all agricultural produce. Further to that, we will be focusing on promoting quality agricultural produce. We have seen encouraging results from our third harvest festival last week. This year, pre-sale orders nearly tripled within the same timeframe with our users learning about and trying more special products including vegetables from Shouguang, mitten crab from Hongze Lake, and matsutake mushrooms from Shangri-La. We see great potential for Pinduoduo to become the go-to place to discover unique produce and learn about China's rich agricultural diversity. We will continue to invest heavily to make this a reality. We will apply C2M to help them cultivate better and build their brands. Our pioneering C2M model was recently recognized by the Retail Asia Awards for helping many export-oriented OEMs pivot to the domestic market after COVID-19 disrupted the demand from abroad. Through C2M, they tailored their products to Chinese consumers and built strong brands to sell them. We will be applying C2M to agriculture, working with farmers to understand their customers better and tailor their produce and packaging accordingly, thereby increasing demand while reducing waste, environmental footprint, and other types of expenses. This will help users access fresher, better, and cheaper produce. An early example of our work in this area is with tieguanyin tea producers in Anxi. Tieguanyin is a premium Oolong Tea originated from Anxi, Fujian, and tieguanyin from this area is considered to be the best quality tea within this category. Under the Anxi Country Tea Industry, a new brand alias, we partnered with 10 leading tieguanyin producers in Anxi and analyzed consumers' preferences to provide optimization feedback outside packaging and the price of their products. In addition, we helped them to establish a new brand image of quality tea being not expensive among consumers. This helped to significantly increase sales. Deepening the human capital pool in agriculture is also key to the long-term success of our efforts. We seek to empower farmers and every merchant to grow and sell better, so through Duo Duo Academy, we promote new technologies in partnership with local governments and agronomists. We also help to nurture and showcase agri-tech solutions through our Global Smart Agriculture competition, thereafter encouraging their wider adoption in China. After a successful inaugural event in 2020, we launched the second edition earlier this month. We are very honored that China Agricultural University and Zhejiang University have joined us and provided their strong support. We have also put together a judging panel composed of distinguished experts and growers with backgrounds in horticulture, crop modeling, algorithm designs, and policy-making, reflecting the importance of interdisciplinary collaboration to modernize agriculture to benefit all. We hope that this year's competition will highlight ideas and techniques that can be applied by farmers to improve their farming. Second, retooling logistics for agriculture. We will be allocating resources to improve agri-focus logistics for affordability and efficiency, and to reduce its carbon footprint. We will make it well-adaptive to online agricultural retail. We have made good strides in this area by incorporating our route planning technology into our network solutions. At present, our work has already helped to expand the range of delicate foods and vegetables that can be sold online at affordable prices, allowing our users to enjoy more options because more farmers and agri merchants are joining the digital economy. At the same time, our distribution networks that support these sales have also created many new economic opportunities, catalyzing over 1 million jobs along the way. These improvements have also strengthened the agriculture supply chain by cutting down carbon emissions through more efficient routing and matching of supply and demand as well as reducing food spoilage and waste in the distribution process. While we are encouraged to see the benefits that our logistics solutions have brought to many stakeholders and the environment, there is still much to do and accomplish. Nevertheless, we are determined to play our part and are committed to making significant long-term investments alongside like-minded partners. It is our strategic priority to modernize the agri-food system to better serve all stakeholders and become more environmentally sustainable. We are committed to investing any profit and resources into realizing it. Our efforts are still in the early days, and we will be patient for our investment to show results. Now, let me talk through the financial highlights of the second quarter of 2021. We continue to see healthy user growth in Q2 and are happy with the progress we are making in improving trust and winning mindshare with our users. Our annual active buyers for the last 12 months ending June 30, 2021, increased to 849.9 million, up 26.1 million from the prior quarter. Our MAU in Q2 reached 738.5 million. This is up 30% compared to the same quarter in 2020. Our MAU as a percentage of our annual active buyers was 87% in the quarter reflecting continued healthy engagement with our users. In terms of P&L, our total revenues in the quarter ended June 30, 2021, were RMB23 billion, up 89% from RMB12.2 billion in the same quarter last year. Excluding revenues from our 1P trials, our total revenues grew by 73% to RMB21.1 billion in Q2 2021. The main driver of this growth was our online marketing service. Online marketing services revenue was RMB18.1 billion this quarter, up 64% compared to the same period last year, due primarily to continued increases in merchant activities. We have seen merchants spending more and exploring new ways to engage with users, and our users are browsing more and discovering more items of interest. We can attribute this, at least in part, to improvements in the advertising products and analytical tools we offer to our merchants, which have helped them to meet and exceed their ROI targets. We are pleased to see the growing endorsement by our merchants and our users. Our transaction service revenues this quarter amounted to RMB3 billion, which is up 164% compared with the same period last year. The increase in our transaction service revenue was due to two primary factors: number one, the increase in our GMV in Q2; and number two, the service revenues that we recognized in connection with Duo Duo Grocery for which we provide fulfillment and other related services. We also recorded RMB2 billion in merchandise sales for our 1P trials in Q2 2021 as compared to RMB5.1 billion in the preceding quarter. As we have stated from the outset, our 1P business is meant to temporarily meet user demand for specific products which our merchants are unable to fulfill; therefore, this number may fluctuate from quarter to quarter. Our strategy on 1P remains unchanged, and it will continue to be a very small part of our business. Now, moving on to cost and expenses. Our total cost of revenues increased from RMB2.7 billion in Q2 2020 to RMB7.9 billion this quarter. The increase was mainly due to the costs and expenses attributable to 1P merchandise sales, higher costs of payment processing fees, cloud service fees, and delivery and storage fees. Total operating expenses this quarter were RMB13.2 billion as compared to RMB11.2 billion in the same quarter of 2020. On a total non-GAAP basis, operating expenses were RMB12 billion as compared to RMB10.3 billion in the same quarter a year ago. Our non-GAAP sales and marketing expenses this quarter increased 13% to RMB10 billion from RMB8.9 billion in the same quarter of 2020. This was mainly due to an increase in promotion and coupon expenses as we continue to invest in user engagement and mindshare. June is traditionally a festival month for online retail. At Pinduoduo, we do not emphasize shopping festivals but wish to deliver value-for-money merchandise across various categories to our consumers every day. At the same time, we have detailed internal ROI guidelines on spending and are committed to making investments that meet such ROI guidelines. As a result, we see moderated growth in sales and marketing expenses this quarter consistent with historical Q2 spending. Looking forward, we are committed to making a meaningful investment into categories that we believe could help strengthen consumer mindshare and benefit all in the long term. On this front, we will continue to make it free for agricultural products and fresh produce to be featured in our RMB10 billion program. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue excluding 1P trials this quarter was 47% as compared to 81% and 73% for the same quarter in 2019 and 2020, respectively. The reduction in sales and marketing expenses as a percentage of revenue is a reflection of our economies of scale and the consistent efforts to stick to our high standards of ROI guidelines. However, as we continue to invest into our user mindshare and in light of the upcoming festival season, we expect the sales and marketing expenses to increase, hence impacting the bottom line. On a non-GAAP basis, our general and administrative expenses were RMB214 million, an increase of 57% from RMB137 million in the same quarter of 2020. Our non-GAAP research and development expenses were RMB1.8 billion, an increase of 39% from RMB1.3 billion in the same quarter of 2020. The increase was primarily due to an increase in headcount, the recruitment of more experienced R&D personnel, and an increase in R&D-related cloud service expenses. To sum up, operating profit for this quarter was RMB2 billion on a GAAP basis compared with an operating loss of RMB1.6 billion in the same quarter of 2020. Non-GAAP operating profit was RMB3.2 billion compared with an operating loss of RMB725.1 million in the same quarter of 2020. Our non-GAAP operating profit as a percentage of our revenue improved from minus 6% in Q2 2020 to 14% in Q2 2021. Net income attributable to ordinary shareholders was RMB2.4 billion as compared to a net loss of RMB899.3 million in the same quarter last year. Basic earnings per ADS was RMB1.93 and the diluted earnings per ADS was RMB1.69 compared with a basic and diluted net loss per ADS of RMB0.75 in the same quarter of 2020. Non-GAAP net income attributable to ordinary shareholders was RMB4.1 billion compared with a net loss of RMB77.2 million in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB2.85 compared with a non-GAAP diluted net loss per ADS of RMB0.06 in the same quarter of 2020. That completes the profit and loss statement for the second quarter. Net cash flow provided by operating activities was RMB7.4 billion compared with RMB5.5 billion in the same quarter of 2020, primarily due to an increase in online marketing services revenues. As of June 30, 2021, the Company had RMB92.2 billion in cash, cash equivalents, and short-term investments. As of the end of July 2021, $773.7 million of our 0% convertible bonds due in 2024 have been converted into equity. With that, I conclude my prepared remarks. Operator, we can take questions now.

Operator, Operator

Thank you. Your first question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question.

Eddy Wang, Analyst

Thank you, management, for taking my question, and congratulations on the strong earnings. So I have two quick questions. Firstly, can you share your views on consumption in China in the third quarter? Some leading e-commerce players have indicated that consumption is a little bit weak, while another leading e-commerce platform indicated very strong resilient consumption. I would like to check what you have seen on the consumption side, especially for the third quarter to date. This is the first question. And the second question is about your profitability. I think if I remember correctly, this is the first time that we have seen very meaningful profitability for Pinduoduo on a quarterly basis and the non-GAAP net margin is 18%. That's very impressive. So given that our business model has become more and more mature, should we expect that the profitability pattern in this quarter to be more stable going forward?

Tony Ma, VP of Finance

Okay. Thank you, Eddy, for the question. Let me attempt to answer these two queries. Regarding your first question on consumption, let’s recap what happened in Q2. Generally, with the COVID-19 pandemic under control in Q2, it is natural to see offline retail rebound faster. At the same time, the second quarter in 2020 represented a much higher base as online retail grew faster due to the COVID-19-related stay-at-home measures. We are encouraged to see continued and normalized growth in Q2 this year considering that Q2 is usually a busy quarter for e-commerce players. In the past quarter, we continued to see healthy user engagement and growth on our platform. Our revenue in this quarter grew 89% year-over-year as a whole. If we take out the one key merchandise sales, they increased 73% year-over-year. So I would say the growth is still very strong. However, coming to your question about Q3, we might not be a good barometer of the overall market growth as we are still small compared to some of our peers in this sector. We are focusing more on ourselves. The growth is fueled by two main drivers: user growth and their mindshare. Our user base has already reached 850 million and this growth will slow down eventually. Our new focus is to serve our users better and steadily strengthen their mindshare with the platform. We see much room to further build and strengthen the trust that our users have in us, and making such progress will indeed take time. Regarding your second question on profitability, our profit this quarter was mainly due to the operating leverage from sales and marketing expenses due to the seasonality. It’s a unique quarter as Q2 is typically a lower season for us with less sales and marketing spending. We do not consider this quarter's profitability to be an indicator or reference for our future investments in user mindshare and agri-focused infrastructure. More investments are coming, and as we invest more into agriculture, we do not expect profitability to continue.

Eddy Wang, Analyst

Thank you.

Tony Ma, VP of Finance

Let me just add one more comment on this. We will maintain the zero commission policy for our agricultural produce to help more farmers and agri-merchants, and this type of investment will continue. Thank you.

Operator, Operator

Certainly. Your next questions come from the line of Natalie Wu from Haitong International. Please ask your question.

Natalie Wu, Analyst

Hi. Good evening, Lei Chen, Tony, and David. Thanks for taking my question and congratulations on another solid quarter. I have two questions. Firstly, last quarter, we discussed your views regarding the competitive landscape. However, we have noticed your peers spending more aggressively, and new players like Douyin are also gaining traction in e-commerce. Could you elaborate more on the latest competitive landscape dynamics and how this will affect your strategy? Secondly, regarding your RMB10 billion investment program into agriculture, could management share a bit more color on this program and how it will impact your company's financial statements going forward? Thank you.

Chen Lei, CEO

Thank you for your question, Natalie. Let me address your question regarding the competitive landscape. If we look at e-commerce as a whole, this is a fairly large industry. We think the rise of players like short video e-commerce is not surprising given their huge user base, high usage frequency, and high user content. Based on our operating observations, we see competition intensifying with more platform companies entering e-commerce. Consumer demands are multidimensional and constantly evolving. Six years ago, when we first started, we built a mobile-only platform around our P model, a model we feel remained distinct among players. We are constantly reflecting on whether this model still meets consumers' demands. Our new management is also inquiring about whether we can adjust to meet the evolving needs of our users. The current model must remain relevant to consumers in the coming years. There will undoubtedly be challenges, but the Chinese market is extremely dynamic and vibrant. The emergence of new business models demonstrates the appeal and innovation potential of this market. Regardless of the competition, we need to stick with our principle of benefiting all people first and being more open while being user-centric focused on our consumers' needs, which will ultimately be more important than competition. Regarding your second question about the RMB10 billion agri initiative, Pinduoduo is China's largest online agriculture platform, and this initiative seeks to address the critical needs in the agricultural sector and rural areas. The commercial value of profits is not the goal; rather, we strive to facilitate the advancement of agritech, promote digital inclusion, and motivate agri-tech talents. This initiative will impact short-term earnings per share for shareholders, and we have received the support and approval from our Board of Directors. I will personally lead this project, and we will convene a shareholders' meeting to seek majority support. This is an important and challenging task, which we will invest in patiently.

Tony Ma, VP of Finance

Let me add some color to this question, Natalie. Yes, on the impact on our financial statement, as Lei mentioned, the idea is to reinvest the profits of this quarter and any future potential profits into the RMB10 billion agri initiative. In terms of the areas of interest of this investment, we identify three key pillars: food security, food safety, and agri-food technologies. This investment will impact the bottom line in the medium to long-term perspective. The specific line affected in the P&L will depend on the nature of the spending, whether it will hit R&D expenses or intangible assets when software or technology is capitalized or it could sit on our balance sheet like long-term investments.

Operator, Operator

Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong, Analyst

Thanks, management, for taking my questions. I have two questions. The first is about the online market take rate outlook as well as the measures to support the merchants in coming quarters. The second question is about the competitive landscape in the online grocery space. Can you share about the recent developments and business trends of Duo Duo Grocery? Thank you.

Chen Lei, CEO

Let me address your second question about the competitive landscape for Duo Duo Grocery first. From the day we started in grocery, we have stated that the intention behind this business is to meet the diverse needs of our users; it’s a natural business extension as part of our ongoing efforts in agriculture. Duo Duo Grocery operates differently from what we have been doing for six years at Pinduoduo; it involves heavier operations to which our team is constantly adapting through trial and error. We are in the early stages still. It's more essential for us to concentrate on user demand and better serving them than on competing against others. For fulfillment operations within Duo Duo Grocery, the timing of pick-up points significantly affects user experience. We must continuously evaluate how we can better serve our users and improve services where we fall short.

Tony Ma, VP of Finance

Regarding your question on take rates, our strategy has always centered on serving our users. We believe that growth and monetization are natural results of that service. The highlight is already reflected in our revenues which continue to grow, affirming the healthy ROI merchants see as they sell more on our platform. We keep launching new features to help merchants better understand their target users and enhance their ROI. Specifically, regarding the RMB10 billion program, we are committed to delivering excellent value-for-money products through this channel. As mentioned in our prepared remarks, we are raising the bar on the quality of merchants and products to meet user needs. That said, we are committed to maintaining the zero commission policy for agriculture and fresh produce, which will see additional investment in these products, and we expect to see immediate impacts in the near future. For example, in Q1 this year, the number of agricultural produce SKUs with more than 100,000 orders exceeded 2,600, and the recent launch of the Harvest Festival showed over 200% growth year-over-year for quality agricultural produce on a single day. We are very encouraged by this and are committed to doing more. Overall, on take rate growth, we don’t focus on this on a quarterly basis, as we believe monetization is a direct result of user satisfaction and improved merchants’ ROI. Our monetization rate has fluctuated historically.

Operator, Operator

Your next question comes from the line of Robin Zhu from Bernstein. Please ask your question.

Robin Zhu, Analyst

Thank you. I have two questions, please. The first one is on ARPU growth and cohort growth among your users, specifically about where ARPU stands now on the platform, excluding very new users that have joined in the last year, and where you think it can go. The second question is about the new Personal Information Protection Regulations which make it more difficult for merchants to obtain user information. How do you think this affects the merchants' reliance on your platform, their demand for advertising tools, and how do you plan to address their needs to capture direct consumer relationships?

Chen Lei, CEO

Let me address your second question regarding data protection. The newly issued laws around data security provide guidelines for all companies dealing with data. We see these guidelines as beneficial for the long-term healthy development of companies, platforms, and consumers within this sector. In the short to medium term, we may experience some impact from these changes depending on the specific model, such as advertising. In the long term, we view these measures as advantageous. We have always been strictly compliant with China's data security standards. As regulators and the industry continue to raise the bar on data security, we will maintain the highest standards to ensure a safe shopping environment for our users and merchants. We are diligently working to adjust operational practices to adhere to future policy requirements.

Tony Ma, VP of Finance

Regarding ARPU, as we enhance our product offerings and user experiences, trust and support from users naturally grow. It reflects our users’ familiarity and trust in the platform. We’re working on expanding our product selection across categories and price points. As we provide users more options and meet their demands, ARPU will naturally increase. We've seen an enormous number of new users in the last year, and it’s a challenge for us to understand their needs fully. Familiarity with our platform takes time, and we are dedicated to recognizing and meeting the evolving needs of all users.

Operator, Operator

Your last question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.

Piyush Mubayi, Analyst

Thank you, Lei and Tony, for taking my questions. When I look at your RMB10 billion initiative, focusing on agriculture modernization and rural revitalization, combined with your customer growth numbers, it appears continued profitability might be challenging. Are we at a point where the business model outside the RMB10 billion initiative might see continued profitability, or is that initiative reliant on further profits? Additionally, could you clarify if sales and marketing spending is expected to rise in Q3 and Q4, potentially impacting profitability in the upcoming quarters?

Tony Ma, VP of Finance

Thank you, Piyush, for your question. Regarding the overall agricultural investment you mentioned, COVID-19 has challenged the entire current logistics and distribution network and revealed some pressing issues. There is a demand for a new logistics network that better supports fresh produce and agricultural products. This is a complex system that requires innovation and trial and error. We continuously ask ourselves how technology can reduce waste and environmental footprints, what route planning can minimize food waste and emissions, and what technology is necessary to realize better transportation and storage conditions for agricultural products. This is a significant area of focus that requires patience and long-term investments. As mentioned earlier, the RMB10 billion initiative does not center on profitability or commercial KPIs. We’re committed to investing in the future of this sector for an extended period.

Piyush Mubayi, Analyst

Thank you. And could I just ask about the scale of grocery in the quarter or any metrics you could share regarding agriculture's importance?

Tony Ma, VP of Finance

Thank you, Piyush, for the question. As you know, we stop disclosing any GMV since the end of Q4 last year, so I am not in a position to share that number.

Jason Shu, Corporate Secretary

Okay. Operator, thank you so much. This concludes the earnings call for this season. Thank you so much for everyone joining. Have a good day.

Tony Ma, VP of Finance

Thank you all.

Operator, Operator

Thank you. This concludes our conference for today. Thank you for participating. You may all disconnect.