PDD Holdings Inc. (PDD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, [ Mr. Chen Pang ]. Sir, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen, and I will help host the earnings call. Pinduoduo earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com as well as through GlobeNewswire services. Before we begin, I would like to refer you to our safe harbor statement 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 non-GAAP measures to GAAP measures. Joining us today on the call are Chen Lei, our Chairman and Chief Executive Officer; Liu Jun, our VP of Finance. Lei will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then take us through our financial results for the second quarter ended June 30, 2022. During the Q&A session, Lei will answer questions in Chinese, and I will help translate. Please kindly note that all translations provided are for reference purposes only. In case of any discrepancy between the original remarks and the translated version, statements in the original remarks should prevail. Now it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei, please go ahead.

Thank you, Chen, and hello, everyone. Thank you for joining our earnings call for the second quarter of 2022. Let me start by giving a brief overview of our second quarter results. Our total revenue for this quarter was RMB 31.4 billion. This represents a year-over-year increase of 36%. We witnessed the resilience of China's consumption during the second quarter. At being temporarily affected in the early part of the quarter, pent-up demand was released and things returned to normal and consumer sentiment gradually recovered in the second half of Q2. Since mid-May, we launched several campaigns and disputed coupons to bolster consumer confidence. Such recovery in consumer confidence was also reflected in a positive reception for this year's June 18 shopping festival. During the June 18 shopping festival, we continue to focus on bringing our customers more savings and more fun. We are encouraged to see consumers buying from a wide range of categories. For example, categories such as agriculture produced FMCG, household electronics and cosmetics all experienced solid consumer demand during the festival. Also, more and more brands are partnering with us and many of them use our platform to launch their new products. These are signs that consumers and merchants are finding values in our platform. Having said that, we still have a long way to go before fully meeting our consumers' evolving needs. Our business activities and investments were affected during the last quarter, especially in the first half. Short-term external factors such as remote working and the travel restrictions caused delays of certain projects, including promotional events and agri-tech initiatives. Even though this might make the quarterly financials look better, the long-term perspective of our platform may be affected, especially considering the current industry dynamics. Therefore, it has become more important than ever to step up our investments and build up our core capabilities. We must make every possible improvement and create value for our consumers, business partners and the society. For consumers, we are constantly on the lookout for new unmet needs and iterating our services to address those needs. For example, during April, we saw a spike in consumer demand for fresh food, groceries and daily necessities in Shanghai. To meet this demand, we set up a special section in the Pinduoduo app for residents to buy fresh food and essential items and have been delivered within 48 hours. On the initial 25 items, we quickly expanded the selection to around 300 products from essentials like rice and the cooking oil to diapers and hygiene products. Given the surge in demand and limited logistical capability -- capacity, we also offered more delivery flexibility through the pooling of orders by housing community. Here, we would like to take a moment to express our gratitude to the colleagues who work hard to ensure the operation of our platform in the past quarter. Their hard work served many consumers in their time of need, and we are deeply senseful and proud of their contribution. Since gradually we turn to normal, we also launched various events to promote seasonal agricultural produce. For instance, in late May, in response to consumer demand, we launched a campaign to help consumers discover and enjoy seasonal fruits from across the country. This event was well received by consumers. Sales of lychee first 158% compared with a year ago, while orders increased significantly for other fruits such as watermelon, coconut and the grape. [indiscernible] consumer feedback, we rolled out a year of fresh produce of China initiative together with some daily newspapers. This initiative will introduce the unique characteristics of different agricultural specialties across the country to our consumers and contribute to better income for local farmers. For merchants, we work closely with them to ensure stable supply, especially at the start of the quarter where the supply chain were affected. For example, we proactively provided traffic updates to help our merchants better plan and address their logistics. We also launched [indiscernible] and the measures to have small and medium-sized businesses and agriculture merchants on our platform. For example, our total grocery operations quickly contacted local suppliers where we lend that farmers in certain regions were unable to sell their vegetables due to traffic disruption. Within a short period of time, we managed to sell hundreds of tons of vegetables through our platform directly helping the farmers to avoid financial losses. To support our farmer merchant, we will continue to weigh the sales commissions of agricultural produces. As a technology company with its roots in agriculture, we firmly believe that the technology can serve as a force for good. We see more communities benefiting flow agricultural e-commerce by new jobs and higher income. Young people now have the opportunity to start their own online businesses in their home town and be close to their families. These benefits are both economic and social, tangible and intangible. We mentioned before that we have trained hundreds of thousands of new farmers, supporting them to set up online businesses and helping their local communities to sell their produce. In addition to farming, we hope to further unleash the vitality of the rural economy by starting the new [indiscernible] program. As with agriculture, we aim to help local artisans and the craftsmen promote traditional crafts, build their brands and widen their access to market. We also expanded our Duo Duo Reading Month campaign to promote a lot of reading among young students in rural areas. As of today, we have donated over 250,000 carefully selected books. We hope that through such efforts, we can do our part in contributing to a better future for this use. To conclude, as we deal with trends from quarter-to-quarter, we remain focused on building long-term intrinsic value and investing for the future. We will stick closely to our core principles of benefit all people first and more open and stay committed to build a platform that serves as the force for good. Thank you. With that, I will hand over to Jun.

Thank you, Lei. Hello, everyone. I will go through our performance in the quarter ended June 30, 2022. In terms of P&L, our total revenue in the quarter were RMB 31.4 billion, up 36% from RMB 23 billion in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and transaction services, offset by decrease in revenues from 1P trials. Revenues from online marketing services and others were RMB 25.2 billion this quarter, up 39% compared with the same period of 2021. This was primarily due to increase in merchant activities as the result of consumption recovery. As Lei has mentioned, we experienced a recovery in consumer sentiment in the latter part of the quarter, especially during the June 18 shopping festival. Our transaction services revenue this quarter were RMB 6.2 billion, up 107% versus the same period of 2021. Moving on to cost and expenses. Our total cost of revenues increased 1% from RMB 7.9 billion in Q2 2021 to RMB 8 billion this quarter. Total operating expenses this quarter, were RMB 14.8 billion versus RMB 13.2 billion in the same quarter of 2021. The postponement of certain projects, including promotional events and agricultural initiates as well as lower business-related expenses during the first half of the quarter temporarily affected our overall expenses. As things gradually returned to the normal, we incurred more expenses in the second half of this quarter. Our total non-GAAP operating expenses as a percentage of total revenues has declined from 52% in Q2 2021 to 41% in this quarter. Looking into specific expenses items. Our non-GAAP sales and the marketing this quarter, RMB 10.8 billion, up 8% versus the same quarter of 2021. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 34% compared with 43% for the same quarter in 2021. Our non-GAAP general and administrative expenses were RMB 164.7 million versus RMB 213.8 million in the same quarter of 2021. Our non-GAAP research and development expenses were RMB 1.9 million, an increase of 11% from RMB 1.8 billion in the same quarter of 2021. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel. Operating profit for the quarter was RMB 8.7 billion on a GAAP basis compared with operating profit of RMB 2 billion in the second quarter of 2021. Non-GAAP operating profit was RMB 10.5 billion versus the operating profit of RMB 3.2 billion in the same quarter of 2021. Net income attributable to ordinary shareholders of RMB 8.9 billion compared with RMB 2.4 billion in the same quarter of 2021. Basic earnings per ADS was RMB 7.06 and the diluted earnings per ADS was RMB 6.22 versus basic earnings per ADS of RMB 1.93 and diluted earnings per ADS of RMB 1.69 in the same quarter of 2021. Non-GAAP net income attributable to ordinary shareholders was RMB 10.8 billion compared with RMB 4.1 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 7.54 versus RMB 2.85 in the same quarter of 2021. Now let me move on to cash flow. Our net cash flow generated from operating activities were RMB 19.4 billion compared with RMB 7.4 billion in the same quarter of 2021, primarily due to the increase in net income and changes in working capital. As of June 30, 2022, the company had RMB 119.4 billion in cash, cash equivalents and short-term investments. To conclude, profitability in the past quarter was mainly attributable to a few short-term factors that may not reappear in the future. First, we saw good user engagement during the past quarter. As competition remains intense, we're not sure whether such engagement momentum will continue. Second, project performance and lower business-related activities affected our overall expenses in Q2. We view this factor just mostly temporary in nature. In fact, we incurred higher expenses in the second half of Q2 when things return to normal. Therefore, given that progress in the second quarter are mainly due to a combination of several short-term factors, we do not expect profitability in the past quarter to serve as a benchmark for future quarters. Thank you. This concludes my prepared remarks.

Thank you, Jun. Next, we will move on to the Q&A session. For today's Q&A session, Lei and Jun will take questions from analysts on the line. We are happy to take a maximum of 2 questions by analysts. Lei will answer questions in Chinese and I will help translate Lei remarks for ease of reference. Operator, we are now ready to take questions from analysts on the line.

[Operator Instructions] Our first question comes from Kenneth Fong from Credit Suisse.

[Foreign Language] I have 2 questions. First, on the second quarter growth rate. We noticed a very strong online marketing service revenue that record a strong growth of 39% year-on-year. And this reaccelerated from the previous 2 quarters. What's the reason behind this quarter strong growth? And the second question is on the brands. Can management speak more about the progress on bringing more brands onto our platform? We saw many brands participate in [indiscernible] events. How does this help our growth for this quarter? And what's your overall plan for the brand recruitment?

[Foreign Language]

[Interpreted] Kenny, I am happy to take your questions. First, about our revenue growth. Starting from the second half of May, we saw a trend of consumption recovery. Also, we actively made efforts to facilitate consumer spending by offering various forms of promotion to help with consumption recovery.

[Foreign Language]

[Interpreted] And during this year's June 18 event, we saw many merchants as well as brands actively participating. We also saw solid demand coming from consumers. Given this background on our platform, many categories, including FMCG products, agriculture produce, consumer electronics and cosmetics, these categories all had a decent growth on our platform.

[Foreign Language]

[Interpreted] In addition, we always try our best to satisfy consumer demand. And this is inseparable from many of our team members' hard work during the past period of time. They worked very hard to help many -- our customers meet their essential demand. And we are grateful towards our team's hard work during this process.

[Foreign Language]

[Interpreted] At the same time, we also saw that competition landscape is still very intense. And in terms of satisfying consumers' needs, we have many areas that we can further improve. And as I mentioned earlier, due to outside reasons, our overall investment activity during the second quarter was impacted, and this is actually not beneficial to our long-term competitiveness.

[Foreign Language]

[Interpreted] And therefore, we need to further step up our efforts and also strengthen our core capabilities so that we can create more value for consumers as well as for the society.

[Foreign Language]

[Interpreted] And as for your second question, our brand, we see that the needs from our consumers on our platform are becoming more and more diversified and different consumers, they have different needs in different product categories and across different consumption scenarios. Therefore, it is very natural for them to -- need more choices and more products.

[Foreign Language]

[Interpreted] And our goal is always to better serve our consumers and to bring them more savings, more [ found ] shopping experience.

[Foreign Language]

[Interpreted] And in terms of how to serve the consumers, we believe that essentially, the brands go and our goal are well aligned. That is to serve consumers well. So we would continue to focus on our own part and remain to be very down to earth and patient. Thank you. Okay. Operator, we may now move on to the next analyst.

Your next question comes from Joyce Ju from Bank of America.

My first question is related to the overseas expansion. Could management share some colors on the reported new initiatives in the overseas market. With the latest status, any main target market? And what's the core value proposition of this new business? And my second question is related to the transaction service revenue. Transaction service revenue continued to grow faster than the online marketing revenue this quarter. Also, we actually see it accelerated from the last quarter to a triple digit year-over-year growth. May we know like what's the reason behind ? [Foreign Language]

[Foreign Language]

[Interpreted] Joyce, so let me address your first question, and I will hand it over to Jun to answer your other question. First, on our overseas business. First of all, we are a young company with a relatively young team. And everyone is continuing to grow and searching for new opportunities during our growth process.

[Foreign Language]

[Interpreted] And overseas business is one of the opportunities that we see. And we also see that the possibility of creating value in this opportunity. At the same time, we also see that many peers in the industry are achieving good results. So we believe that it is a direction that is worth trying out for us.

[Foreign Language]

[Interpreted] And with that said, we will not just simply repeat what others have done in this field. What is important to us is that we will start from the needs of consumers and strive to create our own unique value.

[Foreign Language]

[Interpreted] And at the same time, we are sufficiently aware that overseas business will be for us a challenge, and it will require a constant trial and experimentation. This process would not just happen overnight. But the experience gained along the way would prove to be very valuable to our company as well as to our team. Thank you.

Thanks for your question, Joyce. We're testing about transaction service revenue. Well, first, we always remain customer-centric, operating metrics and the financial matrics are a natural result from how we reserve consumers. And over the past quarter, because of consumption recovery, we had user engagement and transactions. This contributed to the revenue growth. And in addition, for us, our business cycle does not always match exactly to our quarterly financial reporting cycle. And we are not managing our business on a quarterly basis. So it is common to see fluctuations between quarters. We remain focused on serving consumers better and investing creates long-term value.

Okay, operator, ready to move on to the next analyst on the line.

Our next question comes from Thomas Chong from Jefferies.

[Foreign Language] My first question is about cost control and efficiencies. Given the macro uncertainties right now, and we are seeing a lot of Internet companies exercising sort of cost control. I just want to get some color from management about our cost control strategies. And my second question is about our profitability. Given the second quarter earnings comes in better than expected market expectations, how should we think about the profitability trend in the second half?

[Foreign Language]

[Interpreted] Hi Thomas. So let me address your first question. First of all, I believe that we are still in the development stage, not the stabilized stage. And at this point in time, we still have a long way to go and a lot of work to do to serve our consumers well.

[Foreign Language]