Dingdong (Cayman) Limited (DDL) Earnings Call Transcript & Summary

Good day, and welcome to the Dingdong Limited Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nicky Zheng, Director of Investor Relations. Please go ahead.

Thank you. Hello, everyone. Welcome to Dingdong Second Quarter 2025 Earnings Call. With me today are Mr. Changlin Liang, our Founder and CEO; and Mr. Song Wang, our CFO. You can refer to our second quarter 2025 financial results on our IR website at ir.100.me. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. For today's call, management will go through their prepared remarks, which will be followed by a question-and-answer session. Before we continue, I would like to refer you to our safe harbor statements in our earnings press release, which also applies to this call. As we will be making forward-looking statements, please note that all numbers stated in the following management's prepared remarks are in RMB terms, and we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings press release and filings with the SEC. I will now turn the call to our first speaker today, the Founder and CEO of Dingdong. Mr. Liang.

[Interpreted] Hello, everyone. Thank you for joining Dingdong's Q2 2025 Earnings Call despite your busy schedules. As of Q2 2025, Dingdong has achieved 11 straight quarters of non-GAAP profitability and 6 straight quarters of GAAP profitability, along with 6 consecutive quarters of positive year-over-year revenue growth. This consistent growth in scale and profitability not only shows that we have overcome the challenge of survival but also proves the resilience and execution capabilities of the Dingdong team, laying a strong foundation for the next phase of high-quality growth. Next, I will review Q2's operational highlights, share the progress of our 4G strategy of good users, good products, good services and good mindset, introduce new growth drivers and update you on our AI-related business development. In Q2 2025, Dingdong reported a GMV of RMB 6.5 billion, up 4.5% year-over-year. The revenue of RMB 5.98 billion, a 6.7% increase from the previous year. Non-GAAP net profit reached RMB 130 million, growing 23.9% compared to RMB 100 million in the same period last year, with a net profit margin of 2.1%, up 0.3 percentage points year-over-year. GAAP net profit was RMB 110 million, an increase of 59.7% from RMB 70 million with a net profit margin of 1.8%, up 0.6 percentage points year-on-year. Building on our robust growth in 2024, we have maintained our scale expansion and profitability this year. By the end of Q2, Dingdong's 4G strategy center on good users, good products, good services and good mind share have been in place for 6 months. While the company is still transforming, it has achieved steady year-over-year growth. Additionally, through adjustments in production relations and productivity improvement, the 4G strategy has already begun to show results. The company remains focused on developing good products, aiming to create more offerings that are well received, commercially successful and distinctive. Our principle is where others fall short, we deliver. Where others deliver, we excel. Where others excel, we redefine. Operational metrics aligned with the 4G strategy continue to improve steadily. In Q2, good product SKUs made up an average of 38% of all SKUs, a 16.9 percentage points rise from Q1 when we first introduced a new strategy. These good products represented 43.1% of our GMV, a 20.9 percentage point increase from Q1. The increase in good products is attracting more good users. The conversion rate of monthly transacting users in Q2 grew by 3.3 percentage points year-over-year with a number of monthly transacting users increasing by 5.8%. Good products also boost user engagement with an average monthly order frequency of 4.4x in Q2, a 3.2% rise year-over-year. Besides general market users, our good product offerings through more good users who value product quality and we're willing to pay for it. In Q2, the number of good users who placed orders increased by 19.3% quarter-over-quarter from Q1, accounting for 28.9% of total users replace orders. These users also placed about 8.1 orders per month. Geographically, the company's 4G strategy center on Shanghai has quickly expanded to Jiangsu and Zhejiang, fueling additional growth in these areas. Despite already high market penetration, Shanghai still achieved a 3.5% year-on-year increase. In Jiangsu and Zhejiang continued market penetration resulted in 11% yearly growth, with 10 cities surpassing 20% growth. Going on the 4G strategy, let's take a look at Dingdong's current business framework and its new growth drivers. First, we strengthened our presence in the supply chain by sourcing over 85% of our fresh growth -- our fresh produce directly from the origin, including Dingdong Agriculture, Guyu Factory, 10 product development division, Dingdong Xiaoman origin procurement and direct sourcing from Australia. This ensure ample product availability. In other words, always have stock on hand. Second, on the demand side, we expanded omnichannel sales. Besides our popular Dingdong app, we also serve domestic and international KA channels and B2B clients such as merchants, hotels, travel agencies, restaurants, canteens and factories. Omnichannel sales boosted sales efficiency and fully showcase the value of our supply chain, leading to sales success. Lastly, we continuously expanded our operational regions, starting from East China to nationwide coverage and then gradually entering Southeast Asia and the Middle East, Central Asia. Looking ahead, we plan to expand into Europe, America and Africa. These simultaneous efforts across supply chains, channels and regions forming interconnected systems, point, line, payment, solid, which broke growth barriers and enhance our core system capabilities and competitiveness. Our overseas approach is not simply a copy of our domestic frontline fulfillment station model. Instead, in centers -- it centers on our supply chain strength and product offerings. These our domestic supply chain expertise. We focus on fresh produce as our key entry points and reduce market risk by partnering with local retail giants. This strategy reflects the concept of exporting supply chain capabilities and jointly developing local channels. For instance, in Hong Kong, we formed strategic alliances with groups like BComKey, Dairy Farm and HKTVmall generating over RMB 10 million in total sales so far with more products to be launched through these collaborations. Next, I want to update you on Dingdong's AI efforts and progress. Dingdong has long been dedicated to enhancing digital capabilities and relies on algorithms to foster business growth. As AI technology has been more deeply integrated into its operations as well has shifted from nearly improving supply chain efficiency to becoming a crucial driver of business model innovation and user experience enhancements. Dingdong was an early AI adopter. And among the first in the industry to extensively embed AI into its business. It now implements a comprehensive full chain AI strategy across all core business segments. Our comprehensive full chain AI strategy centers on these 3 key areas. First, internal efficiency enhancement. We leverage the understanding, generation and reasoning skills of large language models, LLM to help our team boost productivity in various areas, including operations, cost management, food research and development and office administration. Second, supply chain intelligence, we use multi-model technology for smart management and optimization throughout the supply chain, enhancing the accuracy and consistency of mapping between physical and digital environment and ensuring truth seeking and traceability across the entire supply chain. Additionally, a large language model or LLM agent automate decisions on purchasing, allocation and promotions, further improving inventory accuracy and system stability. For instance, we developed an automated system, protecting fruit sugar content, overhauling the technique process to automate everything from image recognition to data analysis to system integration, replacing manual data entry. The results are notable. Data entry time dropped from 20 seconds to under 3 seconds. Accuracy rose significantly to 98.3%, greatly reducing quality disputes caused by human errors, and all test data is automatically synchronized to the system, supporting data analysis and traceability, standardizing data and boosting management efficiency. The system represents a successful application of intelligent supply chain management in its quality control process. Third, enhanced consumer experience, we have integrated multiple AI features into the user app. For instance, our AI chatbot, Smart Diet Butler supports multi-model interactions and has upgraded its recommendation logic from solely based on user behavior to the combination of behavior plus knowledge, merging behavioral data with specialized knowledge on nutrition. Users can query products, and the Smart Butler not only suggests recipes but also offers personalized with nutritional advice using medical examination data. Voice integration enables parents to easily customize healthy meals even when busy with their children. The system also features ingredient/dish dual recognition, which analyzes nutritional balance and displays key nutrients like calories, protein and sugar clearly, helping users quickly grasp the nutritional value of ingredients. Compared to the previous simple select products and place order process, Dingdong now utilizes AI to offer personalized dietary recommendations and dietary purchasing options. This improves user decision-making and turns vague health eating needs into concrete purchasing behavior, greatly boosting user engagement and loyalty. Finally, I want to share our outlook for Q3 2025. Last year's Q3 saw rapid growth for Dingdong this year despite the rollout of our 4G strategy, which led to the drop of some mass market products and users and amid rising competition, we still aim for a stable scale year-over-year and maintain non-GAAP profitability. This wraps up my remarks. Thank you. Now I invite our CFO, Mr. Wang Song to discuss our financials.

[Interpreted] Thank you, Mr. Liang, and hello, everyone. Before I review our financial performance for the second quarter, please note that all of our figures are in RMB. In Q2 2025, Dingdong generated revenue of RMB 5.98 billion, a 6.7% year-over-year increase, marking 6 consecutive quarters of positive growth. Non-GAAP net profit reached RMB 130 million with a net margin of 2.1%, up 0.3 percentage points year-on-year. GAAP net profit was RMB 110 million with a net margin of 1.8%, an increase of 0.6 percentage points. In terms of funds, Q2 recorded a net cash inflow of RMB 100 million from operating activities, the eighth straight quarter of positive cash flow. By the end of Q2, after deducting short-term borrowings, our actual cash earned increased to RMB 2.95 billion, Dingdong has been focused on the instant retail and fresh grocery e-commerce sectors. For over 8 years, our ongoing profitability and rising cash flow reinforce our commitment to the value proposition narrow and deep. Despite external changes, we will remain fully dedicated to the fresh grocery vertical, investing continuously in good products and supply chains following our unique path. Let's now review the specific financial results for Q2. Revenue was RMB 5.98 billion, up 6.7% year-on-year, while GMV reached RMB 6.5 billion, up 4.5% year-on-year, thanks to the steady advancement of our 4G strategy, good products and good users contributed to overall market growth. where the user mind share continuing to improve. The average monthly order frequency hit 4.4x, reflecting not only a year-on-year increase, but also matching the peak level of last year's Q3. Additionally, our 2B business saw consistent growth with revenue climbing 69.4% year-on-year and its revenue share rising by 1.6 percentage points year-on-year. Gross profit margin stood at 28.8%, down 1.2 percentage points from the previous year. The decline was mainly driven by our increased investment in good products, the steady availability of such products and the proactive replacement of unpopular items. For example, in Shanghai alone, we replaced about 3,600 SKUs in the first half of the year, about 1,300 more than the same period last year. Additionally, we took a proactive approach in managing gross profit. We continue to pass the cost benefit to consumers through in-depth product supply chain optimization and cultivation. Our goal is for more families to have access to our good products. Moving forward, we'll continue to incubate good products, conduct thorough research with a craftsmanship dedication and strengthen our core competitiveness. The fulfillment cost rate dropped to 21.7%, down by 0.7 percentage points year-on-year. This decline was mainly driven by economies of scale and ongoing efficiency gains. Meanwhile, we remain committed to excellent service, achieving a record on-time delivery rate of 97.3% so far this year, which is 1.6 percentage points higher than last year in Q2. The fulfillment time of ASAP orders also has improved, averaging 35.8 minutes to 0.6 minutes faster than last year. The marketing expense ratio was 1.7%, a 0.6 percentage point improvement year-on-year. Moving forward, we plan to start to boost investment in promoting good products, leveraging them to generate traffic and continuously enhance our conversion rates. Combined administrative and R&D expenses represented 5.5% of revenue remaining stable compared to the same period last year. We will continue to invest in food R&D, agricultural technology and technical data algorithms to continually enhance our product development and full chain digital capabilities, thereby improving supply chain efficiency. Non-GAAP net profit margin reached 2.1%, up 0.3 percentage points year-on-year, resulting in a net profit of RMB 130 million. GAAP net profit margin was 1.8% for the same quarter, a year-on-year increase of 0.6 percentage points. At the end of Q2, the total of cash, cash equivalents, short-term restricted cash, short-term investments and long-term deposit was RMB 4.01 billion. We're actively improving the efficiency of capital use and financing structure after subtracting short-term borrowings, our net equity stood at RMB 2.95 billion. This concludes my prepared remarks. Operator, we can now start the question-and-answer session.

[Operator Instructions] And the first question will come from Thomas Chong with Jefferies.

[Foreign Language] Mr. Liang. Congratulations to the company for maintaining excellent result this quarter. You mentioned that the 4G strategy has been in place for 6 months. Could you summarize the progress and outcome of the 4G strategy during this period?

[Interpreted] Thank you for your question. The 4G strategy has been in place for more than 6 months. During this period, we've refined our production relations and enhance productivity, enhance emphasizing good users, good products, good services and good mind share. First, we comprehensively restructured our production relationships by dismantling traditional product development centers. We integrated personnel from product development, operations and quality control to form 10 independent product development divisions, each led by a key executive. This shift enabled the company to prioritize high-quality products and increase our organizational efficiency. Simultaneously, we overhaul resource distribution and performance evaluation method. During this period, we removed GMV and profit margin as performance metrics instead emphasizing quality indicators such as the proportion of good products, good users, purchase repeat rate and negative reviews. Secondly, we enhanced productivity by reorienting our apps positioning to love of quality. This shift directed homepage traffic toward good products emphasizing categories, such as organic collection, Taste of China, [ MomSelect ], along with products featuring, clean ingredients and low GI. For instance, in Q2, our sales of organic products grew by about 40% year-over-year. As previously mentioned, we're fully integrating AI and expanding our system capabilities to include more partners. Additionally, this year, we have recruited around 500 management trainees. We look forward to this new talent helping us to advance the implementation of our 4G strategy. Following these organizational changes, I would like to update you on the current progress of the 4G strategy. Let's first talk about our good users. We have served users who prioritize product quality and are willing to pay for it. In June, nearly 30% of users will consider good users accounting for about 68.5% of our total GMV. Furthermore, around 80% of new users were classified as good users. While we once rely on low prices for user acquisition, we now attract customers with good products. The repurchase rate is vital. Now good users show an exceptionally high repurchase rate with at least 8 orders monthly per user compared to the average of 4.4%. We have also replaced over 4,000 items with good products. In June, good products made up 40% of our SKUs and contributed to around 47% of our GMV. This shows a rapid growth in GMV increasing by roughly 30 percentage points since the start of the year. Even in categories often seen as mass market where differentiations can be challenging, we continue to source from the origins with innovation. This has led to a quick rise in the share of good products within these categories. For instance in June, good products accounted for 55% of GMV in meat, poultry and eggs. Organic vegetables represented 12% of our vegetable sales, a 38% increase of its GMV year-over-year. In pork -- black pork accounts for 35%, while in nationwide market, it makes up only 3% of total pork consumption. Overall, after 6 months of implementing our 4G strategy, we gained more good products and users. This indicates that our understanding of the market and user is accurate, and we have developed a winning strategy. We'll persist with the narrow and deep approach to deliver healthy, high-quality ingredients and foods, ensuring every family can enjoy healthier and favorite meals.

The next question will come from Yang Bai with CICC.

[Foreign Language] Thank you management. How does management perceive the current competition, including instant retail and the frontline fulfillment station market? And what's its impact on us?

[Interpreted] Thank you for your question. Competition is a highly relevant topic for everyone. Since our IPO in 2021, we have been attentive to competition in areas such as community group buying, platform delivery and frontline fulfillment stations. We have addressed these issues individually in previous quarters. we focus less on competition and more on creating value, reflecting on this journey, we have stayed consistent and accurate in our understanding and positioning. First, recent competition within instant retail has gone a widespread attention. The battle for users and traffic is fierce with many adopting quick short-term price wars. However, this focus often neglects aspects like supply chains and product development. As we outlined with our strategic approach of narrow and deep, we defer significantly from typical instant retail companies. First, our goal is to develop the supply chain and create an ecosystem, whereas theirs is to compete for more users and traffic. Second, strategically speaking, we emphasize commodity and ecological approaches, unlike their focus on traffic, platform dominance and market monopolization. Third, in our relationships with channels, we seek win-win cooperation and steady growth, whereas they engage in zero-sum market composition. Fourth, our interactions with suppliers are collaborative and mutually beneficial while theirs follow a traditional client provider model. Fifth, our business models grow in proportion to our upstream and downstream partners. In contrast, theirs are characterized by a power-law distribution with a few entities controlling most resources and influence and becoming oligopolies. Sixth, we value long-term relationships and patients, unlike their focus on short-term KPIs. These significant differences set us apart from other retail -- instant retail brands, when you browse social media platforms like Xiaohongshu, RedNote, you see increasing discussions about Dingdong's innovative and high-quality products. This helps us stand out in the current market, which is dominated by price competition and homogeneity. From the consumers' point of view, since the pandemic, more individuals have raised their standards for food quality, consumers are increasingly recognizing that you are what you eat. On one hand, food nutritional content directly impacts your body, influencing your physic, health, energy and immunity over time. For instance, consistently consuming high sugar diet can result in obesity, metabolic issues, while eating more healthy fruits and vegetables can lower the risk of chronic diseases. On the other hand, dietary choices also mirror your identity, values and lifestyle. For instance, vegetarians might prioritize environmental protection and animal welfare, whereas those who prefer local ingredients may support sustainability. In essence, eating not only molds your body, but also defines who you are and what you stand for. Most products on our app are developed to align closely with these consumer needs. That said, we did not introduce Dingdong's 4G strategy, narrow and deep approach and its love of quality positioning as a way to compete. Instead, these have become objectively Dingdong's unique competitive edge, ensuring its strong position in the market. While our transformation will undoubtedly require time, we believe the results will become increasingly evident. Time is our ally. We aim to create long-term value for our investors. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Nicky Zheng for any closing remarks. Please go ahead.

Thank you again for joining our call today. If we have any further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next earnings call. Have a good day and have a good night.

The conference is now concluded. Thank you for participating in today's call. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]