Earnings Call Transcript - PDD Q2 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the PDD Holdings, Inc. Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today. Sir, please go ahead. Thank you, operator, and 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 and also through the Globe Newswire services. Before we begin, I would like to refer you to our safe harbor statement in 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 press release, which contains a reconciliation of non-GAAP measures to GAAP measures. Joining us today on the call are Mr. Chen Lei, our Chairman and Co-Chief Executive Officer; Mr. Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer; and Mr. Liu Jun, our VP of Finance. Liu and Zhao will make some general remarks on our performance for the past quarter and our strategic focus, and Jun will walk us through our financial results for the second quarter ended June 30, 2024. During the Q&A session, Lei and Jiazhen will answer questions in Chinese and will help translate. Please note that English transmission is for reference only. And in case of any discrepancy, statements in the original language should prevail. Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Mr. Chen Lei. Lei, please go ahead.

Chen Lei, Chairman and Co-CEO

Hello, everyone, and thank you for joining our second quarter 2025 earnings conference call. The first half of 2025 has seen rapid trends in the external environment. At this critical juncture when merchants doing business on the platform face challenges, we stepped up our commitment in high-quality development and launched the RMB 100 billion support program. Through this program, we have invested and will continue to invest substantial resources to support the merchant ecosystem. Together with our merchants, we are actively exploring new business models for global business, seeking new growth opportunities and navigating the ups and downs of the market cycles. These significant ecosystem investments were reflected in our Q2 financial performance. Revenue growth further moderated and operating profit declined by 21% year-over-year. However, as we have emphasized in the past, we prioritize long-term value creation over short-term financial results. Our focus remains on investing for the long term, such as strengthening the ecosystem, driving value chain upgrades and delivering tangible benefits to our consumers. As a result of our investments in the RMB 100 billion support program, we are pleased to see that the platform ecosystem is making steady progress towards sustainable and high-quality development. Since August last year, our RMB 10 billion fee reduction initiative has brought substantial savings for our merchants, creating room for them to innovate and offer a wider selection of high-quality products to consumers. At the same time, our logistics support initiative significantly reduced the cost of shipping to remote areas, leading to a 40% growth in order numbers from those regions, injecting new energy into the economy. In this past quarter, the entire company rallied behind the RMB 100 billion support program to deliver innovative solutions to help merchants grow their business, while further reducing costs and commissions for merchants. We see businesses of all sizes from established brands to small merchants gaining new momentum in our ecosystem. Let us look at a few examples. We are seeing established consumer brands successfully reinventing themselves by leveraging consumer insights to shorten product launch cycles, lower R&D costs and enter into new market segments. Many industrial belt manufacturers were able to transition from white label products to branded offerings, breaking away from commoditized competition. With the help of the Duo Duo premium produce program, we are seeing farmers and growers achieving higher margins by improving quality control and moving into food processing to capture higher value. Alongside merchant support, we have also expanded our consumer giveback program. In addition to the RMB 10 billion program, we introduced new long-term consumer campaigns, such as the RMB 10 billion coupon program. During this year's June 18 shopping festival, we provided additional coupons on top of a national trading program, driving record sales across multiple categories, including fresh produce, electronics, appliances, and apparel, offering more value for consumers. Meanwhile, in our global business, merchants on our platform face a more complex business environment. To navigate through the market cycles, we are working together with merchants to explore new business models and new markets while simultaneously delivering innovative solutions to drive efficiency. As a platform that has its roots in agriculture, we continue to invest in agritech through initiatives like the Smart Agriculture Competition, which is now in its 5th iteration. 46 global teams competed in a preliminary held in July this year, showcasing cutting-edge technology in AI farming, hydroponics, and advanced irrigation systems. This event is emerging as an important platform for agricultural technology research and application. Later in this year's competition, participants will bring their technology from labs to fields, testing the commercial application of their research findings. Looking ahead, as the external environment continues to evolve and competition intensifies, we remain committed to long-term value creation over short-term results. Our team will prioritize high-quality growth by creating long-term opportunities for merchants and investing in consumer experience. As we ramp up our investments, profitability will inevitably fluctuate, and this quarter's results may not represent future earnings trends. Now I will hand it over to Zhao Jiazhen to share more details about our performance in the second quarter.

Jiazhen Zhao, Executive Director and Co-CEO

Thank you, Lei, and hello, everyone. This is Zhao Jiazhen. Thank you for joining our second quarter 2025 earnings call. In this quarter, to support merchants facing new challenges, we actively embraced our role as a platform to take on more social responsibilities. We accelerated our RMB 100 billion Support Program, a significant commitment to high-quality development, making it the first merchant support program of this magnitude. These considerable investments affected our quarterly revenue and profit. As Lei mentioned, we prioritize investments that deliver long-term value over short-term financial results, which is why we are willing to accept lower profits to consistently reinvest in our ecosystem. This past quarter, through the RMB 100 billion support program, we allocated substantial resources toward initiatives like the RMB 10 billion fee reduction program, logistics support initiative, and new quality merchant support program. We are continuously lowering costs and enhancing efficiencies for millions of merchants, resulting in significant savings from service fee reductions. These actions have fostered momentum for industrial upgrades. The logistics support initiative also helped align supply with demand and led to rapid order volume growth from remote areas, positively impacting the daily lives of consumers there. On the supply side, the RMB 100 billion support program has broadened assistance for SMEs, new quality merchants, and branded merchants, ensuring various business types benefit from our platform's resources. This supports comprehensive, high-quality development in agriculture and manufacturing regions to fulfill diverse consumer needs. Our Duo Duo premium produce team visited numerous agricultural areas to provide tailored support based on local products. By enhancing product offerings, we assisted fresh produce merchants in overcoming seasonal shortages and achieving sustainable growth. For instance, in Zhaotong, Yunnan, local potatoes, once sold at low value, were transformed into popular flavored chips through automated production because of our platform’s support, positively impacting 11,000 local farmers' incomes. This quarter, our new quality supply team also explored industrial hubs to better understand merchant needs and challenges. By using the platform's digital capabilities and promotional tools, we assisted merchants in discovering new growth models. In Yiwu, local small merchandise markets are facing substantial competition, which our team addressed by integrating merchant systems with our back-end to pinpoint successful products, significantly enhancing new product development success rates while reducing costs. Our support has allowed merchants to innovate and energize local industry transformations. Additionally, the RMB 100 billion support program is empowering consumer brands, particularly traditional brands adapting to contemporary consumer trends. We partnered with these brands to provide a comprehensive solution encompassing product planning, marketing, and store operations, helping them reach younger and niche market segments and unlock fresh growth opportunities. Our supply-side investments also boosted consumer demand, with sales reaching record highs during the June 18 promotion. The Super Double Discount event alone achieved over 3.76 million orders in one day, meeting the evolving needs of consumers. As competition in e-commerce escalates around new business models, we remain dedicated to long-term value creation. We will continue to develop the RMB 100 billion support program, dedicating significant resources to enhance user experience, merchant services, and industrial upgrades to cultivate a mutually beneficial ecosystem. We aspire for our efforts to lead the industry towards a more inclusive and open environment, generating greater societal value. I will now pass it to Jun, who will provide an update on our Q2 financial performance.

Jun Liu, VP of Finance

Thank you, Zhao Jiazhen. Hello, everyone. Let me walk you through our financial performance for the second quarter ended June 30, 2025. In terms of some statements in the second quarter, total revenues increased 7% year-over-year to RMB 104 billion. This was driven by an increase in revenues from online marketing services and transaction services. Revenue growth further moderated as competition intensified and as we help merchants increase efficiencies. Revenues from online marketing services and others were RMB 55.7 billion this quarter, up from the same quarter of 2024. Revenues from transaction services were RMB 48.3 billion, up 1% from the same quarter last year. Moving on to costs and expenses, our total cost of revenues increased 36% from RMB 33.7 billion in Q2 2024 to RMB 45.9 billion this quarter, mainly due to increases in fulfillment fees, bandwidth and server costs, and payment processing fees. On a GAAP basis, operating expenses this quarter increased 5% to RMB 32.3 billion, from RMB 30.8 billion in the same quarter of 2024. On a non-GAAP basis, operating losses increased to RMB 3.4 billion this quarter from RMB 2.8 billion in Q2 2024. In the second quarter, we rolled out significant resources in a series of merchant support initiatives. Looking ahead, we remain committed to supporting the vitality of the ecosystem, and we'll continue to prioritize long-term value creation over short-term results. Our total non-GAAP operating expenses as a percentage of total revenues this quarter was 29%, in line with the same quarter last year. Looking to specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB 27 billion, up 5% versus the same term last year. Sales and marketing expenses as a percentage of our revenues this quarter was 26%, in line with the same quarter last year. Our non-GAAP general and administrative expenses were RMB 667 million versus RMB 594 million in the same quarter of 2024. Our research and development expenses were RMB 3.1 billion this quarter on a non-GAAP basis and RMB 3.6 billion on a GAAP basis, up 23% year-over-year. On a GAAP basis, operating profit for the quarter was RMB 25.8 billion versus RMB 35 billion in the same quarter last year, down year-over-year. Non-GAAP operating profit was RMB 27.7 billion versus RMB 35 billion in the same quarter last year. Non-GAAP operating profit margin was 21% this quarter, down from 36% in the same quarter last year. The year-on-year decline in operating profit reflects our continued investments in supporting our merchants and ecosystem. Net income attributable to ordinary shareholders was RMB 30.8 billion for the quarter compared to RMB 32 billion in the same quarter last year, down 4% year-over-year. Base earnings per ADS was RMB 22.01 and diluted earnings per ADS was RMB 20.75 versus basic earnings per ADS of RMB 23.14 and diluted earnings per ADS of RMB 21.61 in the same quarter of 2024. Non-GAAP net income attributable to ordinary shareholders was RMB 32.7 billion versus RMB 34.4 billion in the same quarter last year. Non-GAAP diluted earnings per ADS of RMB 22.07 versus RMB 23.24 in the second quarter of 2024. The net income in Q2 benefited from e-commerce seasonality and may not represent future earnings. As we remain focused on long-term value creation, the sustained investments may continue to weigh on short-term profitability. That completes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB 21.6 billion compared with RMB 43.8 billion in the same quarter last year. As of June 30, 2025, we have RMB 387.1 billion in cash, cash equivalents, and short-term investments. Thank you. This concludes prepared remarks.

Unidentified Company Representative, Company Representative

Thank you, Jun. Next, we'll move on to the Q&A session. In today's Q&A session, Lei, Jiazhen, and Jun will take questions from analysts on the line. Lei and Jiazhen will answer questions in Chinese and will help translate for convenience purposes. Operator, we'll open for questions. Your first question comes from Alicia Yap with Citigroup.

Alicia Yap, Analyst

Two questions. First is that this quarter, we saw our e-commerce platform has made substantial investments in instant retail, instant shopping, and launched a new wave of industry investment. At the same time, we also saw some content platforms continue to step up their e-commerce efforts. So compared to the peers, the lead in the company's revenue growth rate has narrowed this quarter. So could management elaborate on the reasons behind this and how management is thinking about navigating these competitive dynamics? And then the second question is the external environment has shifted rapidly in the first half of this year. So looking ahead, how does management think about the next phase for your global business? What new directions or evolutions do you see in terms of the business model? And then from a financial perspective, where do you think the main growth opportunities are? And how should we think about the growth target?

Jiazhen Zhao, Executive Director and Co-CEO

This is Zhao Jiazhen, and I'll address your first question. In the last quarter, we saw increased competition in the industry as major players invested significantly in new business models. As a result, our revenue growth further slowed in Q2, and operating profit decreased for the second consecutive quarter. In light of this heightened competition, we plan to take a proactive and long-term approach, viewing competition as an opportunity to enhance the development of our platform ecosystem. Therefore, we have decided to increase our investments and sacrifice some profit to create growth opportunities for small and medium-sized enterprises. From our management perspective, we see this as a responsibility our platform is uniquely equipped to handle, and it's also a long-term investment in bolstering our ecosystem. We don't see the profit levels from this quarter as sustainable, and we anticipate ongoing fluctuations in profitability in the upcoming quarters. The industry is currently at a crucial stage of high-quality development. We believe that taking the initiative and collaborating closely with our supply chain partners is essential for the platform to drive sustainable growth and achieve high-quality development. In response to the intensified competition, we are concentrating on individual merchants and specific support cases to enhance our support measures incrementally. For instance, we have seen merchants working with college research teams to create smart factories and automated production lines to produce high-quality, ready-to-eat, fresh salad products that previously were only available offline and are now offered to consumers through our platform. We are particularly focused on technology-enabled agricultural products and are providing targeted support through our RMB 100 billion support program, which not only helps merchants boost their online sales but also delivers real savings to consumers while expanding the supply of innovative quality products on the platform. There are numerous other examples of such cases benefiting everyone involved, and each case relies on close teamwork among the platform, merchants, and supply chain partners. To effectively provide support and ensure that our RMB 100 billion support program reaches the small and medium-sized enterprises that need it most, we must engage deeply with agricultural regions and industry sectors to thoroughly understand the challenges and issues faced by merchants. Looking ahead, external environmental changes and heightened competition will compel us to increase our investments in the merchant ecosystem. These combined factors will result in short-term fluctuations in our financial performance. However, we are confident that if we execute well on our merchant support initiatives, we will achieve sustainable, high-quality growth alongside our merchants. This is our strategy for navigating today’s competitive landscape.

Chen Lei, Chairman and Co-CEO

Hello. This is Chen Lei. Let me take your questions on our global business. We have observed significant changes in different countries and regions over the past few quarters, as well as shifts on a global scale. We may continue to experience some short-term volatility in various markets. Overall, however, we are seeing steady consumer demand, and consumer trust in our platform is gradually increasing. We will proactively adapt to changes in each region and make timely adjustments to meet the evolving regulatory requirements and diverse consumer needs. Our global business has gone through an initial growth phase, and we are encouraged by the positive reception of our products and services by consumers worldwide. However, our business is still at an early stage, and there is ample opportunity for improvement. Our vision has always been to provide high-quality products to consumers around the globe. Looking ahead, we plan to invest further in our supply chain capabilities, service capabilities, and compliance capabilities to strengthen our foundation for the next phase of global business. We are continuously enhancing our localized operations, collaborating closely with local merchants to diversify product offerings and improve supply stability and delivery efficiency. In terms of service capabilities, we are consistently working with our logistics partners to enhance the fulfillment experience. Our team is focused on building the necessary skills to meet the high expectations of consumers worldwide. Moving forward, the level of service we currently provide is still in its early stages, and our team will continue to strive for improvement in service quality. We aim to win over more and more consumers. Thank you for your questions.

Operator, Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong, Analyst

My first question is about since the launch of the RMB 100 billion support program last quarter, what key changes has management observed in your business operations? From a financial perspective, how is the impact of these investments shown in your financial performance? And on a mid to long-term horizon, how will these affect the company's monetization and spending? My second question is about what's the company's view on the Duo Duo Grocery business? We noticed that some of the company's main competitors in this business have exited certain markets. What are the company's future plans for this business?

Jiazhen Zhao, Executive Director and Co-CEO

Thank you, Thomas, this is Zhao Jiazhen. To address your first question, since the latter half of last year, we have increased commission discounts due to intensifying competition and rapid external changes. We have implemented initiatives like the RMB 10 billion fee reduction, the new quality merchant support program, and logistics support measures to reduce operating costs and enhance efficiency. Earlier this year, management decided to launch the RMB 100 billion support program as our next strategic step, allocating significant resources at the expense of platform profits to foster a sustainable ecosystem. This broad initiative focuses on providing support where merchants need it the most. Recently, we have noted some early positive outcomes. For example, in agriculture, we initiated the 2025 Duo Duo premium produce program to assist merchants in high-quality agricultural regions, helping them to bring agricultural products online and improve their revenue. Additionally, our teams for the new quality merchant support program have engaged with numerous manufacturing areas to aid smaller merchants in their transitions toward high-quality production. Similarly, our logistics initiatives have eliminated shipping fees for remote orders, allowing merchants to reach these markets with minimal shipping costs, thereby broadening their market access. This has not only reduced costs and enhanced efficiency for merchants but has also stimulated regional consumption, benefiting a wider consumer base. Moving forward, we will keep striving to understand our merchants' challenges and, through the RMB 100 billion support program, increase our investments to provide targeted support that strengthens our commitment to the merchant ecosystem. Financially, the investments from last quarter have resulted in slower revenue growth and a decrease in year-over-year profits, underscoring our dedication to merchant support. We will continue to boost our investments to help merchants flourish while creating a more robust platform ecosystem, and thus we do not view this quarter's profits as sustainable, anticipating profitability fluctuations in the future. Regarding your second question about Duo Duo Grocery, this business is inherently challenging and necessitates significant long-term investments. Our competitors' recent exits from this space only emphasize our need to deepen our commitment. We must enhance investments based on our distinct business model and respond to increased competition decisively. When considering a new business, our primary question is whether we can deliver unique value. We launched the Duo Duo Grocery business in 2020 as an extension of our e-commerce efforts, recognizing that traditional supply chains were struggling to meet consumer demand for fresh produce, leading to significant spoilage. To address these issues, we've invested in refining the supply chain to better align local supply with demand, enhancing product variety and fulfillment efficiency. After five years, Duo Duo Grocery now reaches 70% of villages nationwide, solving last-mile delivery challenges and catering to consumer demand for affordable, high-quality products. We have also established a robust distribution network to connect local farmers and small merchants with consumers. Since the beginning of this year, we have increased support and traffic to remote areas as part of the RMB 100 billion program, which has enhanced local product offerings in recently serviced regions and expanded our network to meet growing consumer needs. Further, this venture has generated competitive local job opportunities, contributing to economic development in these areas. As previously mentioned, while the Duo Duo Grocery business requires significant investment, we believe it is valuable, and we will continue to increase our commitment. We aim to strengthen our long-term focus on product quality, supply, service, and delivery efficiency in this space, ultimately benefiting consumers and supply chain participants. Thank you for your question.

Operator, Operator

Lixin Ju with Bank of America.

Lixin Ju, Analyst

Let me translate my questions. First, in the last quarter's earnings call, management mentioned that the mismatch between investment cycles and the return cycle was a primary cause of the profit decline in the first quarter. Looking at the second quarter results, it seems the company's expense ratio and profit margin levels are showing signs of stabilization. I wonder if this indicates that the company's investment cycle has already stabilized. How should we expect the profit margin trends to progress, both long-term and short-term? My second question is that we have recently seen signs of improving consumer demand from some industry data. Has management observed a similar trend lately? Any updates on consumer sentiment or behaviors would be appreciated. Additionally, how does management view macro trends in the third and fourth quarters this year?

Jun Liu, VP of Finance

This is Jun. I would take your first questions. Firstly, our profits in Q2 benefited from e-commerce seasonality. So this quarter may not represent future earnings. If we're looking at the numbers, our Q2 revenue growth further slowed to 7% and operating profit dropped to 21%. We believe there are several reasons for this. First, under the current conditions, the platform has increased its investment to support merchants, which naturally impacts profitability. Second, intensified industry competition continues to create challenges for our merchants and the platform. Therefore, the profit levels reported in Q2 should not be seen as a reference for future performance. We do not believe this quarter's profit levels are sustainable, and fluctuations in profitability can be expected in the coming quarters. As we have communicated in the past, in the current market environment, increasing platform investment to help merchants through the cycles is a responsibility that the platform can and must take on. We are confident that these investments will create a healthier merchant ecosystem in the long run. Our focus remains on long-term value creation rather than short-term financial performance.

Jiazhen Zhao, Executive Director and Co-CEO

This is Zhao Jiazhen. Let me address your second question. China's consumer market shows significant potential and resilience, fostered by ongoing pro-consumption policies. We have seen consistent growth in overall retail sales, along with a continuous increase in online retail penetration. We are very optimistic about the potential of China's consumer market. However, looking at the industry's structure, we notice growing competition, making it easier for consumers to switch between platforms. The competitive landscape is likely to change. In this scenario, the platform needs to adopt a more proactive stance by ramping up investments. During the June 18 shopping festival in Q2, we extended considerable support to high-quality agricultural and national brands, while also providing additional coupons to consumers, ensuring greater savings for their mid-year shopping. A number of agricultural and new quality merchants involved in the RMB 10 billion program doubled, allowing many SME merchants from various categories to achieve new milestones. Additionally, segments like beauty, skincare, maternity and baby products, and pet supplies saw good growth through the promotion. The 2025 Duo Duo premium produce program has reached numerous high-quality agricultural regions, connecting urban consumers with superior agricultural products. For instance, lychees from Guangdong Maoming sold over 50,000 kilograms shortly after being highlighted in the RMB 10 billion program. Our team focusing on the new quality merchant support program has also been active in engaging with hundreds of manufacturing regions, such as footwear and apparel in Xinjiang and cameras in Guangdong, using the momentum from the shopping festival to quickly promote a variety of quality products in the market. The platform's proactive investments have received positive responses from both consumers and merchants. Moving forward, in this increasingly competitive landscape, we will continue to elevate our support on both the supply and demand sides, accepting a reduction in the platform's profit to nurture a healthier and more dynamic ecosystem. Our aim is to assist more SMEs in cutting costs, boosting sales, and providing consumers with greater tangible benefits. Thank you. I appreciate your time. Thank you once more for joining our call today, and we look forward to connecting with you again next quarter.

Operator, Operator

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