Earnings Labs

PDD Holdings Inc. (PDD)

Q1 2020 Earnings Call· Fri, May 22, 2020

$97.19

-1.29%

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Transcript

Operator

Operator

Ladies and gentlemen, welcome to the Pinduoduo First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today’s conference call is being recorded. I’d now like to turn the conference over to your first speaker today, Mr. Nick Xu [ph]. Please go ahead, sir.

Unidentified Company Representative

Analyst

Thank you, Rachel. Hello, everyone, and thank you for joining us today. Pinduoduo’s earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com as well as through the global newswire services. On today’s call, our CEO, Colin Huang, will make some general remarks on our performance for the first quarter of 2020 on the COVID-19 implication on our industry, our business and our team. Our VP of Strategy, David Liu, will elaborate further on the strategic initiatives as well as take us through our financial results for the first quarter ended March 31, 2020. Before we begin, I’d like to remind you that this conference contains forward-looking statements within the meaning of SECTION 21E of the U.S. Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, anticipate and similar statements. Such statements are based upon management’s current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company’s filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable laws. Now it is my pleasure to introduce Chairman and Chief Executive Officer, Colin Huang. Mr. Huang, please go ahead.

Colin Huang

Analyst

Thank you, Nick [ph]. Hello, everyone, and thank you for joining our first quarter 2020 results announcement. It is hard to believe that we’re nearly half way through the year. While COVID-19 has put much of the world on a holding pattern since February, it has also resulted in a period of intense activity for many industries and companies seeking to cope with such unprecedented phenomenon. COVID-19 has unleashed powerful forces that are changing the way we live, work and play. It has compressed the years of behavioral change and accelerated the adoption of online commerce at an unprecedented pace. Now more than ever, people relying on online platforms to meet not just their discretionary wants but for their critical needs, but while e-commerce has crossed an important threshold and had become more integral to people’s lives, this change also requires a lot of trust on the part of consumers, something that platforms must continue to work hard to earn. As a company, we made a deliberate decision to step up our support of our users and the merchant community to help tide them over these challenging these challenging times. In the near term, these initiatives might mean higher bandwidth costs, more costs to help offset price increases for medical and household essentials or even more free traffic support for our most trusted merchants. But we made these decisions deliberately because they are consistent with our corporate culture of the firm or doing the right things. This consciousness, our cautious investments help built invaluable trust with our users. People remember when you are there for them in their time of need. The pandemic also unleashed another powerful force, that of the need for better ways to interact and socialize online. This need for the right digital tools has never been…

David Liu

Analyst

Thank you, Colin, and hello, everyone. Let me first comment on our capital markets activities since the end of the first quarter. First, we subscribed for U.S. $200 million of convertible bonds in GOME, a leading retailer of home appliances and consumer electronics in China. We entered into a strategic cooperation agreement pursuant to which GOME will migrate all of its off-line SKUs onto our platform and work together with us to offer more customized, branded goods and better off-line services. We'll continue to evaluate opportunities that will increase value to our users and to our shareholders. Secondly, we launched a private placement of U.S. $1.1 billion at the end of March after receiving strong reverse inquiry from long-term investors. The placement was closed in early April. Net proceeds from the placement will only be reflected in our financials for the June quarter. For the avoidance of doubt, our balance sheet and cash flow statements for the quarter ended March 31, 2020, do not include cash raised from this placement. Since the placement, the company has received a number of questions on our capital raises, operating cash flow and cash position. Let me take this opportunity to respond. First, why did we go ahead with the private placement in March? Like many blue-chip companies such as Berkshire Hathaway, Disney, Pfizer and Netflix that raised capital in the past few months, we also expect high global economic uncertainty and capital markets volatility to persist as the world economy struggles to regain its foothold. At the same time, we expect the challenging outlook to give rise to more attractive investment opportunities. The March private replacement further strengthens our net cash position to weather a potential economic downturn and to pursue strategic opportunities without having to compromise the flexibility in our core business.…

Operator

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Natalie Wu of CICC. Please ask your question.

Natalie Wu

Analyst

Hi, management, thanks for taking my question and congratulations on very robust quarter. So just wondering, what do you think that plays as the major driver behind your GMV growth reacceleration in the first quarter in spite of the COVID-19 impact? And also, in terms of the live streaming function, how does that help your GMV growth on your platform for – in terms of the SSSG according to your observation? Thank you.

David Liu

Analyst

Thank you, Natalie for the question. In terms of GMV growth, we see that as a reflection of our users' continued endorsement of our strategy and our platform. And as we have demonstrated through the first quarter, we continue to make sales and marketing investments in our users and in our merchants. And as China recover or as the pandemic subsided towards the end of February and heading into March, we have seen strong recovery in consumer demand. So overall, I would say that the consumer demand has not been impacted by COVID-19, and you saw a lot of catch-up as a result of both merchants promoting, increasing their promotional activities on our platform as well as logistics being back in normal levels. So this is why we believe we were able to, by middle of March, start shipping over 50 million orders on a daily basis. And because of that, we see that the consumers' spending on our platform are now with higher frequency and also with higher ARPU, resulting in an overall increase in our LTM GMV. In terms of live streaming specifically, as you had mentioned, this is a new business initiative for us. We only rolled out live streaming to all the merchants in January despite the product being online at the end of last year. We see live streaming as a great way to bring online and off-line – we see live streaming as a great way to bring online these off-line experiences our users may not be privy to in their daily lives. So through live streams, we're encouraging merchants to bring platform users into their day-to-day to share with them interesting and entertaining parts about their product. As such, we believe that you have the benefit of lowering the barriers – or lowering consumers' aversion to spend in certain categories such as jewelry or live seafood that we are selling on the platform. And we believe that this will – and this is beneficial in creating further engagement and stickiness and repeated purchases between merchants and users. Next question?

Operator

Operator

Your next question comes from the line of Eddy Wang of Morgan Stanley. Please ask your questions.

Eddy Wang

Analyst

Hi, management, thank you for taking my questions. My question is also about the GMV and the ARPU growth in the first quarter. You mentioned that in March actually, you have witnessed your users have increased the discretionary items. Can you elaborate more about what kind of the discretionary items you have witnessed your users spending in March? And what are the key items, categories you would like to expand actually this year for the platform? Thank you.

David Liu

Analyst

Yes. Thank you, Eddy. In terms of our GMV distribution by product categories, I would say that the COVID-19 impact is, at best, temporary. So overall for the quarter, we have now observed our GMV distribution to deviate significantly from what it was before. So apparels and FMCG continued to account for the most of our – most of our GMV for the quarter. We have seen apparels during the height of the pandemic to be more impacted relative to other categories. But in general, we have seen pickup in activities across the board. Specific to our platform, we continue to evaluate our consumers' interest and needs, and we continue to expand our strategy of deepening of – deepening the depth of offerings in the categories as well as increasing our breadth. Specifically, I think, as we have demonstrated through much of 2019, our investments in building trust with our users are paying off in categories such as cosmetics, consumer electronics, and these will be categories that will continue to grow heading into 2020, but we are seeing growth across the board.

Eddy Wang

Analyst

Thank you.

Operator

Operator

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

Unidentified Analyst

Analyst

Good evening. Thanks, management for taking my questions. I’m asking on behalf of Thomas Chong. And my question is about the GMV strategies. We can see that this time, the GMV is showing a very good result. And do we have any strategies in driving the GMV and user growth in 2020 and especially in second half? And we also want to ask about any update on the C2M initiative. Thank you.

David Liu

Analyst

Sure. In terms of our GMV growth driver, as we have mentioned, the focus for the platform, our strategies, really revolves around user engagement, and it is about giving the users what they want and serving them well. So we do see the strong growth in first quarter in our GMV despite the low seasonality and the challenges posed by the epidemic as an endorsement by user of our efforts paying off, meaning that we are seeing users being able to shop with more confidence on our platform and buying things with greater assurance, and we intend to continue to invest in our user engagements. As I mentioned in my own remarks, our sales and marketing spend are really targeted at all the users on our platform, particularly the existing ones, because these are users who are familiar and recognize the value that we bring to their consumption, and these are our – these are influences, to put differently, for our platform that will be able to continue to help spread the experiences they see on PDD to others and help us bringing other users and making them also more engaged on our platform. In terms of C2M, I would note that the C2M is a long-term secular trend, and it is not a winner- takes-all game. So this is something that will take considerably more time and effort to drive. And in 2019, we have 106 full-fledged C2M partners, and we believe we're on track to hit 1,000 of these partners by the year-end of 2020. The current – so coming out of COVID-19, as Colin had mentioned, we believe that we are even better – more better positioned to take benefit because COVID-19 has forced a lot of export-oriented manufacturers and merchants. So we think a lot harder about their strategy and refocus on the domestic consumption. So by working with the local governments and manufacturers, we have been able to identify a lot of strong potential partners that we believe will accelerate our C2M efforts over the long-term.

Unidentified Analyst

Analyst

Thank you so much.

David Liu

Analyst

Next question?

Operator

Operator

Your next question comes from the line of Han Joon Kim of Macquarie. Please ask your question.

Han Joon Kim

Analyst

[Foreign Language]

Operator

Operator

Excuse me, Mr. Han Joon Kim, your line is open.

Han Joon Kim

Analyst

[Foreign Language]

David Liu

Analyst

Operator, why don’t we move on to the next question?

Operator

Operator

Your next question comes from the line of Joyce Ju of Bank of America. Please ask your question.

Joyce Ju

Analyst

Good evening management, congratulations on the solid results and thanks for taking my questions. My question is actually related to the commission revenues we report this quarter. We actually understand this quarter, the advertising revenue actually grew slower than commission revenue because of, like, we actually provide some free traffic to the merchants. And also, they actually have lower advertising budget. But just curious, per the calculation, the transaction revenue, it seems like the commission rate this quarter actually is higher than the second half of last year. So just to make sure, do we actually include some of the other membership revenue or other transaction-related revenue to this revenue line? Or it's just because we have higher payment or other transaction-related costs, so we have to also increase the charge on the merchants for this particular revenue as well? Thanks.

David Liu

Analyst

Joyce, thanks a lot for the question. So to answer your question, our definition for transaction services revenue is consistent through quarters. So it is the same as what we have – is on the same basis that we have disclosed in the prior quarter. I will say that we do see increased costs in our business, and this is partly reflected in the gross margins because we are investing a lot more aggressively in cloud infrastructures in order to support live streaming on our platform.

Joyce Ju

Analyst

But on the commission rate side, we are not really adding chargeable payment or as a charge to merchants, right?

David Liu

Analyst

No.

Joyce Ju

Analyst

Got it. Thanks.

Operator

Operator

Your next question comes from the line of Alicia Yap of Citigroup. Please ask your question.

Alicia Yap

Analyst

Hi, good evening management. Thank you for taking my questions. I have a question on the level of the support that you provide to merchants. So any qualitative color that you could give us in terms of the magnitude, in which way and for how long? Is that in the form of more the free traffic support? Or is it more the payment commission rebate? And then on the matching – or is it the matching for the promotion pricing amount to the sales and marketing? Thank you.

David Liu

Analyst

Thank you, Alicia. As we – as I had mentioned in my remark, we do believe that – well, I think – well, a couple of things, I suppose. First, the COVID-19 does mean that our – that many of our merchants have to cut back their sales and marketing, their own advertising budget in the first quarter. And certainly, in much of the February, this was impacted. In response to the difficulties that our merchants are making, we do – we are offering better incentive programs. This takes both in the form of effectively lower rate as well as free traffic, as you have mentioned. So in terms of trying to estimate the impact, I will encourage, Alicia, you to take a look at our take rate, so to speak, for online advertising revenue in other quarters and estimate how we have the – against the GMV that we were generating for this quarter, if we were receiving the same type of take rate, what that content would be. And I think you will notice that our profitability will be significantly improved. And I think, in fact, because of the support that we have given to the merchants, I would just add on top of that we have seen the activities on advertising pick up in March as well the rates returning to a more normalized level.

Alicia Yap

Analyst

Okay. Great. Congrats on the solid results.

Operator

Operator

Your next question comes from the line of Charlie Chen of China Renaissance. Please ask your question.

Charlie Chen

Analyst

Hi, management. Thanks for taking my questions. So I have a follow-up question on the take rate, which I have – elaborate a little bit more. So just to go back to the question, so you’re thinking basically the GMV growth basically is robust and you give free traffic as central to subsidize merchants during this difficult situation. So do you think there is a need for you to continue to subsidize them in this recovery period in the coming quarter and going forward? And if you don’t need to give so much subsidies as you did before, do you think that would be – negatively impact your GMV going forward?

David Liu

Analyst

So as I have mentioned earlier, our take rate, so to speak, or our – the revenue that we are generating from our online marketing services since March, we have seen that returning to very much normalized level and – heading into April and May. We – and secondly, as I mentioned, that by middle of March, we were shipping already 50 million parcels on a daily basis. So both the business momentum, I would say, for our platform has recovered to a fairly normalized level; and also, in terms of revenue generation, we believe we are very close to, if not ahead of, where we were ahead of COVID-19.

Charlie Chen

Analyst

Thank you.

Operator

Operator

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

Piyush Mubayi

Analyst

Thank you for taking my call. My question is quite simple in that if you look at what’s happened in the quarter with COVID-19, yet your GMV grew astonishing 99%. I wonder if you could comment on what the – what could have happened to your GMV had COVID-19 not happened. And can we use that as a run rate for what we – what could happen for the rest of the year? Are we into an accelerated mode of GMV growth post COVID-19? That’s it.

David Liu

Analyst

Thanks, Piyush, for the question. I do believe the investment that we have made in our ecosystem, our partners and our users through this period is positive to our overall business momentum. And emerging from the COVID-19, and let’s just you take early March as a starting point, we do see a stronger business momentum in terms of – both in terms of user behavior but also, more importantly, merchants trying to catch up for the time that they have lost in the first quarter. So we are certainly seeing more willingness of merchants to spend and engage with users, and that should help, to some extent, their consumptions. But more importantly, from our perspective, we do think that the users on our platform are now shopping with higher frequency and are making purchases of higher-ARPU items.

Colin Huang

Analyst

Yes. Let me add a few words. So for the first quarter, the pandemic definitely has a negative impact on the business even for the GMV because the delivery capacity during that period of time is – shrank significantly. Then in China now, all the businesses sort of reopened and the society is getting back to normal, so I would say that, well, the growth rate in everything should – is sort of back to the normal stage. But how big is that impact, either negative or positive, the pandemic will have on our business. In the short term, I would say it won’t to be that significant. Let’s look at next quarter or the quarter of next. But if you look at this problem – I’m trying to answer this problem in a two-year or three-year time frame. I would say it will be very interesting, and I will say the impact will be huge, either negative or positive, because I believe some of the user behaviors, both online and off-line, will be changed significantly. And many parts of the supply chain is being shaped and/or being shaped or changed in a very fundamental way. And it will not be back to the days – or to the normal stage. It will be a new normal. Whether the new normal is good or bad, it’s hard to say. But it’s going to be a new format. It’s a new ecosystem. Right now, I think we are sort of in a fairly good position to prosper in the next stage. Yes, thank you.

David Liu

Analyst

Operator, next move to the next, because the less time we have, next question will suppose to be last question for this call.

Operator

Operator

Your next question comes from the line of Binnie Wong of HSBC. Please ask your question.

Binnie Wong

Analyst

Thank you, management for the taking the question and congrats again for a very solid quarter here. And I have a question here, is that if I look at the – like the number this quarter in terms of your revenue versus GMV, the quarterly monetization rates, most of that dipped a bit. Is it just a function of our fast-growing GMV? Or is it because of something else that we are – because it’s the pandemic quarter, we want to support our merchants better? Or is there something else that we should be aware of? And then following up on this question, I think we spoke about it last quarter, talking about – if you look at the mix in terms of how we lift up the ARPU, right. Because of course, user base are catching up with our peers, but then the ARPU is still of a gap, right? How are we going to raise our ARPU this year? Thank you so much.

David Liu

Analyst

Thank you, Binnie. So I think your first question was regarding the take rate in general. So we – during the first quarter, we have seen merchants’ ability to advertise being impacted by COVID-19. So that’s one aspect of it. And because of it, and in order to continue to support them, we also gave them better effective rates, advertising rates, for the first quarter. So that has a direct impact on our online marketing services take rate for the first quarter. And as I mentioned, we have seen the activities pick up in March, and the rates are returning to a normal level. Second question around the mix around – and how do we go about increasing the ARPU, I think the key for us is actually to continue to invest in our existing users to make sure that they continue to find products that they find interesting and/or – and gain growing confidence to be able to shop more frequently and make this really their primary e-commerce destination. So it’s about investing in people’s mind share. It’s about investing in the engagement. And we have seen the result in a pickup in their activities and also in ARPU in the first quarter, and we believe that we are on the right trend. So as the frequency increases and as we bring more selection available to our users, we believe the ARPUs will naturally catch up.

Colin Huang

Analyst

Yes. So let me – regarding our ARPU, let me simply put this way. Raising ARPU is not a part of our management team’s KPI, but I think it will be a natural result as the users’ engagement increases over time.

Binnie Wong

Analyst

Thank you, again. Congrats.

Operator

Operator

I would now like to hand the conference back to Mr. Nick Xu [ph] for the closing remarks.

Unidentified Company Representative

Analyst

Thanks. Everybody, thank you for attending tonight’s call. If you have any further questions, feel free to reach out to the IR team. Thank you and bye.

Operator

Operator

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