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

Ladies and gentlemen, thank you for standing by. Welcome to PDD's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I must advise you that this conference call is being recorded today. I would now like to hand the conference over to your host today, Mr. Cheng Peng. Sir, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Cheng, and I will help host the earnings call. PDD earnings release was distributed earlier and is available on our website at investor.pddholdings.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, so please refer to our earnings release which contains a reconciliation of the 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 third quarter ended September 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 language should prevail. Now it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead.

Thank you, Cheng, and hello, everyone. Thank you all for joining our 3Q 2022 earnings call. Let me start by giving a brief overview of our third quarter results. Our total revenue for this quarter was RMB 35.5 billion. This represents a year-on-year increase of 65%. Over the past quarter, we worked closely with our merchant partners to serve our customers. We continue to provide our users with an enjoyable and affordable shopping experience to meet their growing demand for high-quality and value-for-money product. During the past few months, many product categories such as agriculture, consumer electronics, beauty and cosmetics, they all enjoyed positive consumer feedback. Many brands joined Pinduduo and extended our consumers their best deals. We are happy to keep creating value for our consumers. But meanwhile, we still have many areas to improve, and the current industry competition remains intense. We need to continue to deepen our value creation, increase our R&D investment to help further improve the supply chain efficiency, support upgrade of the price side and facilitate agricultural digital inclusion. We celebrated our seventh anniversary last month, and we are extremely grateful for the support and trust from our consumers, merchants, farmers and society. And we will continue to uphold our core values of putting people first, benefiting all and being more open so that we can create lasting value for all the stakeholders. Technology is at the heart of our value creation. From the very beginning, we committed to introducing technology to improve the efficiency of supply chain and create value to all the parties through digitalization. In the past year or so, we increased our investments in technology and focused on driving innovation through research and development. We have built a young, energetic, innovative team with strong technology background, and we are encouraged to see that our investment in technology is creating positive impact to society. In agriculture, we keep promoting our holistic approach to digitalize the agriculture sector so that more and more people can benefit from advances in science and technology. Our approach in agriculture is a holistic way of creating inclusive growth. By leveraging the resources of Pinduoduo, we hope that more farmers will adopt agricultural technology to improve their productivity and put their farming practices in a more sustainable footing. The harvest festival last quarter is a good example of this approach. In September, Pinduduo launched a dedicated harvest pavilion on our platform to support annual harvest festival as its exclusive e-commerce platform partner. Last 3 months, the harvest pavilion featured over 0.5 million types of agricultural products across the country. We widen the market for farmers by bringing them into digital economy. The millions of consumers also make it more feasible to implement agricultural technology. Farmers are more willing to plant improved crops if they are confident that consumers will buy them. During the harvest festival, we worked with CCTV and several professors from the Chinese Academy of Agricultural Sciences and the China Agricultural University to promote agricultural technology. For example, we introduced a new variety of sweet potatoes that are less prone to disease, developed by research institutes. The Pinduoduo platform helped this new sweet potato to reach more consumers naturally, and this crop is now grown in many parts of China and is available year-round its success has helped many farmers to prosper. This is a good example of how market demand can bring more science out of the lab and into the field. We are committed to using the Pinduoduo platform for consumers to discover new agricultural channels so that they can enjoy healthier and more nutritious food. In the harvest festival, we also showcased a series of new and improved wheat varieties cultivated by China Agricultural University, with the support of our 10 Billion Agriculture Initiative. These wheat varieties have higher yield, higher quality and are more resistant to disease. In addition, we continue to support various events to promote the adoption of agricultural technology. Our flagship Smart Agriculture Competition is currently underway in Shanghai, and this is an annual precision farming contest aimed at encouraging researchers to develop practical technologies. We are partnering with China Agricultural University and Duo Duo University for this competition with technical support from FAO China and the Shanghai Academy of Agricultural Sciences. The theme of the competition this year is vertical farming. Participating teams will compete to produce lettuce in shipping containers using lighting (sic) [ lighting ], crop modeling, and algorithms to control input variables. Several participating teams from the first 2 editions have already implemented their technology in a working farm as well as on large-scale pilot to scale the solution. We hope that this initiative can inspire more young researchers bring more research findings to the market and support the development of smart agriculture. In the same way, we are improving agricultural digitization. We are helping to upgrade rural economy enterprises and manufacturers by connecting them directly with the end consumers. Our pioneer pin purchase model can quickly and directly connect the [ massive supply ] to [ gathering ] consumer demand. We have leveraged digital technology to shorten the product development cycle and help manufacturers create product that closely manage market needs. This can help manufacturers to build their brands. As in the past 7 years, we have helped incubate nearly 1,000 manufacturing brands through technology. And since the beginning of this year, we have launched several activities to support the manufacturing industry. For example, this year, we launched a new craftsman campaign to help local craftsmen and the manufacturers find a bigger market for their products through e-commerce, and we have allocated dedicated resources to support high-quality local product and help small enterprises upgrade their branding. The new craftsman program is now in many regions across the country, helping local manufacturers to build their brand. We hope to use the Pinduoduo platform to have more of these undiscovered manufacturers reach more potential buyers. The increased demand exposure also benefit the local communities through more income and more job opportunities. As we enter our 8th year of operation, we remain passionate and excited about the future. We are a young company with a team full of drive and energy, and we will constantly explore areas to create positive value through technology. And with that, Jun will take us through the financials.

Thank you, Lei. Hello, everyone. I will go through our performance in the quarter ended September 30, 2022. In terms of P&L, our total revenues in the quarter were RMB 35.5 billion, up 65.1% from RMB 21.5 billion in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others were RMB 28.4 billion this quarter, up 58.4% compared with the same period of 2021. This was primarily due to an increase in merchant activities in Q3. Our transaction services revenue this quarter were RMB 7 billion, up 102% versus the same period of 2021. Moving on to cost and expenses. Our total cost of revenues increased 13% from RMB 6.6 billion in Q3 2021 to RMB 7.4 billion this quarter. Total operating expenses this quarter were RMB 17.6 billion versus RMB 12.8 billion in the same quarter of 2021. Our investment in certain projects, including a few agriculture-related projects, was affected in Q3. As such, our total operating expenses as a percentage of our total revenues have declined from 59.6% in Q3 2021 to 49.7% in this quarter. Looking into specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB 13.4 billion, up 39% 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 37.9% compared with 44.9% for the same quarter in 2021. Our non-GAAP general and administrative expenses were RMB 226.3 million versus RMB 178.1 million in the same quarter of 2021. Our non-GAAP research and development expenses were RMB 2.1 billion, an increase of 15% from RMB 1.9 billion in the same quarter of 2021. The increase was primarily due to an increase in head count and the requirement of more experienced R&D personnel. We're committed to growing our R&D capabilities, and we stepped up our spending to drive innovation on our platform so as to better meet evolving consumer needs and lay the foundation for sustainable growth. In the area of agriculture, we will continue to deepen our investment in agritech and promote its adoption. Technology is also key to increasing supply chain efficiency and helping facilitate the development of manufacturing industry. Operating profit for the quarter was RMB 10.4 billion on a GAAP basis compared with operating profit of RMB 2.1 billion in the same quarter of 2021. Non-GAAP operating profit was RMB 12.3 billion versus RMB 3.3 billion in the same quarter of 2021. Net income attributable to ordinary shareholders was RMB 10.6 billion compared with RMB 1.6 billion in the same quarter of 2021. Basic earnings per ADS was RMB 8.38 and diluted earnings per ADS was RMB 7.34 versus basic earnings per ADS of RMB 1.31 and diluted earnings per ADS of RMB 1.15 in the same quarter of 2021. Non-GAAP net income attributable to ordinary shareholders was RMB 12.4 billion compared with RMB 3.1 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 8.62 versus RMB 2.18 in the second quarter of 2021. In summary, we think that current level of profitability in Q3 is temporary and unlikely to maintain. On the one hand, the reinvestment in certain projects were factored in the last quarter. On the other hand, we continue to see good user engagement, which contributed to revenue growth. This shows that our financial and business cycles are not always in sync. We plan to increase our investment to further drive innovations on our platform and strengthen our core capabilities. As such, we think it's unlikely that profit level of the past quarter can be maintained. That completes the profit and loss statement for the third quarter 2022. Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB 11.7 billion compared with RMB 8.7 billion in the same quarter of 2021 primarily due to the increase in net income and changes in working capital. As of September 30, 2022, the company had RMB 137.8 billion in cash, cash equivalents and short-term investments. 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. [Operator Instructions] Lei will answer questions in Chinese, and I will help translate Lei's remarks for ease of reference. Operator, we may now take questions on the line.

[Operator Instructions] The first question comes from the line of Joyce Ju from Bank of America.

I have two questions. My first question is your online marketing services revenue this quarter delivered a faster growth rate than last quarter. What's the reason for this reaccelerated growth in the third quarter? How should we understand the growth rate momentum in the future? And the second question is could management share the latest update on your international initiatives. Could you share your views or any takeaways at this stage? Does the current level of development meet the management's original expectation? [Foreign Language]

[Foreign Language]

[Interpreted] Joyce, so let me take your 2 questions. With regards to your first question on growth, during the third quarter, we worked closely with our merchants to create value for our consumers, and we keep bringing our consumers more savings, more sound shopping experience in the Pinduoduo platform. And we adopted different methods, including coupons and also promotional events, to better serve our consumers.

[Foreign Language]

[Interpreted] And at the same time, we saw that our consumers' demand for high-quality products are growing. We actively make efforts to satisfy their demand. And this year, more and more brands have started to cooperate with us. They provide more choices for consumers. And categories such as agricultural produce, electronics, home appliances, as well as cosmetics, these categories have received positive consumer feedbacks. And we are grateful towards the trust our consumers place in us.

[Foreign Language]

[Interpreted] But in the meanwhile, we should see that industry competition is still intense and also consumer preferences and demand become more and more diversified. So we still have many areas to improve. And the impact of our overall investment activity, in fact, is not beneficial to our long-term competitiveness. So in the future, we will continue to step up investments, and we will invest to better understand our consumers' needs and serve them better. And we will also need to continue to immerse ourselves deeply in the rural economy and invest in technology R&D to help improve the efficiency of the agriculture as well as the manufacturing sector. These would support our high-quality development over the long run.

[Foreign Language]

[Interpreted] And as for your second question for our international business, in our last quarter's earnings conference call, we shared with you the international business that we are working on. And I believe that many of you may have noticed that we rolled out our international marketplace in September, and it has just been a few months since we started this business.

[Foreign Language]

[Interpreted] And for our team, the international business is a new area to explore, and we will start from the fundamental needs of consumers and apply the operations and supply chain know-how and experiences that we have gained over the years and strive to create our own unique value.

[Foreign Language]

[Interpreted] And also, we fully respect that there are many differences across different markets. And we also understand the need to constantly experiment, and we expect that the process will be full of challenges. So we will be patient and work together with our partners to create long-term value for consumers.

[Foreign Language]

[Interpreted] And currently, we are still in the early stage of exploration, and we have many areas to improve in terms of the services that we provide. We need to learn and also optimize. The process itself will take time. But I'm pretty certain that the experience that we gain along the way will be very valuable for our company and also for our team. Thank you.

The next question is from the line of Thomas Chong from Jefferies.

[Foreign Language] My first question is related to the main drivers behind this quarter's revenue growth. If we further break down the revenue to GMV and take rates. Can you share more about the trend in these two factors? Also, have you changed the take rate policy for merchants on your platform? And then I have another quick follow-up. [Foreign Language] And my second question is also related to the first one. Apart from take rate policies, I'm also wondering, for merchants and the industry upstream, can you also help to share if you have support measures and policies? Could management share more about your progress and plan in this area?

[Foreign Language]

[Interpreted] Thomas, so let me address your second question around our support for the manufacturing sector and the supply chain first. From the beginning, we have been leveraging our technical background to help improve the efficiency in the manufacturing sector. And the pin purchase model that we pioneered aggregate order and connect the demand side and the supply side directly. And this helps manufacturers reduce the intermediary layers, help them directly reach out to consumers. And in the process, it helps the brand create their own brands for manufacturers. So over the past 7 years, Pinduoduo has helped to build up nearly 1,000 brands through technology, and we are growing up with many manufacturers together.

[Foreign Language]

[Interpreted] In addition, we also provide one-stop digital solution covering the entire value chain to our manufacturing partners in order to help traditional manufacturers and factories to go through digital transformation. And we cooperate with these manufacturers product designs and adjustments. This significantly lowers the cost and reduces the uncertainty during the R&D and also production processes.

[Foreign Language]

[Interpreted] And all of these that we have done also help consumers get quality products with savings, and we can generate value for consumers in the process. This, in turn, can create a virtuous cycle amongst consumers, our manufacturing partners and also the Pinduoduo platform.

[Foreign Language]

[Interpreted] And this year, we have introduced several dedicated initiatives to support manufacturers with technology. This includes many industries such as consumer appliances, apparel, sports, cosmetics, home care as well as our furniture. And we will continue to invest in this area to improve the efficiency of the supply chain. Thank you.

Thanks, Thomas. I will take your first question about the GMV. In the third quarter, we worked closely with our merchants to serve our consumers and improve their shopping experience. As the consumer activities and engagement grow, we think the merchants are actually coming to our platform for growth and opportunities. And for financial metrics such as GMV and revenue, they are mainly the reflection of the value we create. So for us, the most important thing is to constantly increase value creation. We will continue to invest to deepen user mindshare, engagement and for the build up our technology capabilities. This will lay the foundation for our long-term development.

The next questions come from Ellie Jiang from Macquarie.

[Foreign Language] Let me translate my questions. First, could management talk about the latest industry trends, including what we saw in fourth quarter, quarter to date? Have we -- can you talk about our performance during D11 promotion? What are the key industry themes that we've seen for the Double 11 itself? And then second question is on the overseas. Could management share with us the financial impact for this initiative? What are the -- main financial statement line items does it impact? Could you talk -- could you help us quantify the impact for the third quarter? And what level of investment do you expect to make going forward?

[Foreign Language]

[Interpreted] Ellie, so let me take your question on industry trends first. So for this question, we always start from consumers' fundamental need. And we hope to create value for consumers each single day throughout the year. And I think it is the core driver for the industry and also for ourselves. And we also fully understand that to improve consumer experience and deepen their trust in us, it takes time, and it is a gradual process. And for shopping festival and promotions, they are just one of the many ways to serve our consumers well.

[Foreign Language]

[Interpreted] And we hope that consumers can get more savings and more fun from shopping on Pinduoduo. So when we plan shopping festivals and events, we remain consumer-centric, and we use simple rules to provide consumers with an enjoyable shopping experience. This year, we have cooperated with many brands as well as merchants to bring more quality products to consumers in order to satisfy their diversified needs across different categories and different consumption scenarios.

[Foreign Language]

[Interpreted] And at the same time, if we look at the industry, we do see the competition remains intense, and we need to invest patiently in the supply side. And we need to step up our investment in technology and innovation to further improve the overall supply chain efficiency. We need to support the development of the agriculture sector and also the manufacturing sector. These would essentially enable us to better serve our consumers' increasing demand for quality products. Thank you.

Thanks, Ellie. I will take your question about the financial statements on our international initiatives. Well, first of all, our international business is currently in a very early stage. It is still going through constant trials. Whereas we focus on how to create unique value, we believe that our financial metrics are the natural results from the value that we create. And the international business is still very early, as I just mentioned, so it's current impact on our financial numbers is small. And as with any other part of the business, we carefully evaluate the ROI of every investment.

The next question comes from Kenneth Fong from Crédit Suisse.

[Foreign Language] The management shared about the latest thoughts and developments in agriculture. Are there any cases or projects that you're putting resources into? What are the latest financial impacts on your financial statement? And also for your 10 Billion Agricultural Initiative, is there any update to share? And my second question is about profitability. We have delivered profitability for 6 quarters in a row. We have also noticed that many of your peers have started to focus more on cost control and efficiency improvement. So does your profitability for the past 3 quarters mean you have started to pursue a similar strategy? And should we expect a similar level of profitability to continue over the next few quarters?

[Foreign Language]

[Interpreted] Kenneth, so let me address your question on agriculture first. So we have shared with you before that agriculture is our long-term strategy. We hope to promote agricultural development through technology. And for many of our efforts, we are still in the early stage of our agricultural strategy, but we already see a lot of areas to create value. And we are also very happy to take this chance to introduce more about our latest developments in this area.

[Foreign Language]

[Interpreted] First of all, with our technical background, we help improve the distribution efficiency of agriculture produce. During the third quarter, in our dedicated promotional events such as the harvest festival and agricultural festival, we covered thousands of production regions and helped farmers broaden their market access. This also helps our consumers enjoy fresher and high-quality agriculture produce within a shorter amount of time.

[Foreign Language]

[Interpreted] On top of that, sales volume can also help commercialize agritech solutions and support research efforts and improve how commercialization happens. So for example, in our harvest festival event, we introduced many agricultural products created with the help of agritech. And with resources that we devote into agriculture, we can help these products roll out to the market quickly and help turn more agritech breakthroughs and innovations into consumer products. As for our 10 Billion Agricultural Initiative, we recently introduced a few new wheat varieties developed by China Agricultural University with support from this initiative.

[Foreign Language]

[Interpreted] In agriculture, we will continue to remain down to earth and make long-term, patient investment as well as bring more agritech results to the market. Going forward, we will continue to share updates with you in the future. Thank you.

I will take your second question about our profitability. Well, first of all, I would like to point out the high profitability level for Q3 is unlikely to continue. Over the past quarter, some of our projects such as a few agriculture-related projects, as I just mentioned in my remarks, were impacted in terms of project time line and investment pace. So the expenses line items on our quarterly results were affected. And on the other hand, our quarterly revenue increased as a result of increased merchant activities. Therefore, profitability is partially due to such time lapse. And this shows that our business cycle and financial reporting cycle are not always in sync. We think such profitability level may not be sustainable. In addition, we are still in the development stage, and profitability is not our current priority. We will continue to step up investments, especially to support agriculture and manufacturing industry through technology. And this may cause fluctuations in our future profitability, and the Q3 level will not continue. Thank you.

Thank you, everybody, for joining us today on the conference call. If you have any further questions, please feel free to reach out to the IR team. Thank you all, and have a great day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.