PDD Holdings Inc. (PDD) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo’s First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by question-and- answer session. [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 Penn [ph]. 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 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 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 going forward. Jun will then take us through our financial results for the first quarter ended March 31, 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 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, Chen. Hello, everyone. Thank you for joining our earnings call for the first quarter of 2022. Let me start by giving a brief overview of our first quarter results. Our total revenue for this quarter, excluding revenue from merchandise sales, was RMB23.7 billion. This represents a year-on-year increase of 39%. Our annual active buyers reached RMB881.9 million for 12 months ending on March 31, with RMB751.3 million average quarterly MAU. Given our current scale, our user growth will inevitably slow down. That's why we have shifted our priority from winning new users to how to better serve our existing user base. We also strive to adapt to the constantly evolving patterns of consumer behavior. There is still plenty of room for us to improve and we will continue to work hard to refine and strengthen our core capabilities. In all of this, agriculture continues to be the front and center of our strategy. We remain focused on making long-term investments in agriculture and promoting digital inclusion. A key plank of our strategy has been to develop a tech-driven agricultural infrastructure, less responsive, sustainable and likely meet a need of different stakeholders. We constantly think about how we can use our platform to create more value for our consumers and benefit society. And here, I would like to take this opportunity to express my thanks to our consumers, producers, merchants and other partners for their continued support. We are grateful to them for standing with us as Pinduoduo matures as a company and take through more social risk and quality. We are committed to service all of them better. We are also grateful that Pinduoduo is in a position to serve millions of farmers and conduct them to a digital economy. We help farmers and more by promoting agricultural produce to more consumers across the country. This creates huge value for our consumers who can now enjoy high-quality fresh produce at low cost through our agriculture network. During the Chinese New Year period in the first quarter, we partnered with our merchants and logistics service providers to offer uninterrupted delivery services. Demand for high-quality agricultural produce surged during the period. We attracted orders from consumers who could not fulfill their needs previously due to lengthy delivery time, high cost and wastage. Order volumes for different types of agriculture produce increased significantly during the Chinese New Year period. They include tariffs, oranges, seafood and so on. Their relatively short shelf life and less supply has previously confined to a local region, aided by our agricultural infrastructure, it now takes just a few hours for the fresh produce to arrive at warehouses. This has greatly shortened the time consumer has to wait to receive their fresh produce. As work continues on agricultural infrastructure, we are also pushing ahead on the technology front. And now, I'm happy to share with you some of the tangible results for a second Smart Agriculture Competition, a lot of distance to make a growing challenge that concluded in April. Over the last six months, we worked closely with China Agriculture University, Zhejiang University, the UN FAO and Wageningen University to encourage young scientists and technologists to develop practical and cost-effective Agritech solutions that farmers can use to improve their livelihood. The participating teams have done very well in applying technology to solve real world problem. First, they developed precision greenhouse management solution that substantially improved crop production. The teams were able to deliver double the yields of traditional growers by addressing variables such as humidity and lightning. The nutritional value of the tomatoes also registered in the top range of the industry. These solutions are commercially viable and can be applied by growers without special training. Second, the R&D processes of participating teams diverse other practical technologies. For instance, one group of researchers developed a disease prediction model that gave farmers one-week window to intervene and prevent loss. Another group came up with low cost and environmentally-friendly equipment to enhance plant growth. The teams also make use of visual recognition technologies to help growers make better decisions on irrigation and harvesting. Their achievements demonstrate the benefit of technology when brought into agriculture. We are delighted that the competition is serving, as agreed [ph], in the academia and industry and the channel for the implementation of effective technology. We will be supporting the teams as they roll out their solutions across China. We are also very encouraged that the competition has helped inspire young people from different disciplines and background to improve their work in agriculture. The majority of the participants in the Smart Agriculture Competition will go on in Zhejiang University [ph]. Many have said they benefited greatly from interacting with world-class talent from different fields. They gain new perspectives and new knowledge to help advance their own work. Indeed, some participants in the competition come from a rural background. They agree with a firm belief that agritech will help secure our food supply and relieve the workload of farmers. We will share their deeply health information to make agriculture better through technology. The future of agriculture will depend on attracting more of this tech use and channel their passionate ideas into this sector. And on our part, Pinduoduo gets ready to help facilitate their dream. We believe that the digitalization of agriculture will unlock opportunities and efficiencies that will benefit society at large and environment. We are committed to investing and working with like-minded partners on this important measure. We will play a long game and aim for long-term success. This will mean being patient and evaluating initiatives according to the impact on agri-food ecosystems and future generations. To conclude, we started last year to transition from a phase of hyper growth to one of the more measured development. Our transition from sales and marketing towards research and development continues a phase into 2022. We now have a technology team numbering over 5,600, which represent about 60% of our total workforce. There is not only -- they also own inner rate and improve our technological capabilities but also help attract new talent. We will step our efforts to further build up our in-house research and development capabilities. We continue to believe that, this is the right approach at this stage of our development. We will do more and do better to achieve our long-term corporate mission to put people first to be open and to benefit all. Thank you. And now, let me pass the call to Jun.

Thank you, Lei. Hello, everyone. Let me first walk you through our operating results for the first quarter ended March 31, 2022. Our annual active buyers for the 12 months ended March 31, 2022 was 881.9 million. This is an increase of 58.1 million or 7% from the same quarter of 2021. Average MAU in Q1 was 751.3 million. This is a 26.7 million increase or 4% from the same quarter of 2021. At this current scale, it is inevitable for us to see slower use of growth. We will continue to focus on how to serve our users better to depend the trust users place in us and to improve user main share. Next, I will go through our financial performance in quarter ended March 31, 2022. In terms of P&L, our total revenue in the quarter was RMB23.8 billion, up 7% from RMB22.2 billion in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and revenue from transaction services, offset by the decrease in revenue from 1P trials. Excluding revenue from our 1P trials, our total revenue was RMB23.7 billion in Q1 2022, up 39% from RMB17 billion in the same quarter of 2021. Revenues from online marketing services and others were RMB18.2 billion this quarter, up 29% compared with the same period of 2021. This was primarily due to an increase in merchant activities, a reflection of the value that our platform face within. Our transaction services revenue this quarter were RMB5.6 billion, up 91% versus the same period of 2021. The increase in our transaction services revenue was due to; first, the increase in total transaction processing fee as a result of higher transaction volume; and second, more diversified services that we provide to merchants such as fulfillment services. Moving on to cost and expenses, our total cost of revenue decreased from RMB10.7 billion in Q1 2021 and to RMB7.2 billion this quarter. The decrease came mainly from the reduction of merchandise sales, partially offset by increased fulfillment expenses. Total operating expenses this quarter were RMB14.5 billion versus RMB15.6 billion in the same quarter of 2021. On a non-GAAP basis, our total operating expenses as a percentage of revenue, excluding 1P has been declined from 86% to 55% for Q1 of 2021 and 2022, respectively. Looking to specific expense items, our non-GAAP sales and marketing expenses this quarter RMB10.7 billion, down 16% versus the same quarter of 2021. As we continue to shift away from our previous forecast on sales and marketing, we remain disciplined on our sales and marketing spending this quarter. As a result on a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 45%, compared with 57% for the same quarter in 2021. Our non-GAAP, general and administrative expenses were RMB208.8 million versus RMB160.7 million in the same quarter of 2021. Our non-GAAP research and development expenses were RMB2 billion, an increase of 30% from RMB1.7 billion in the same quarter of 2021. The increase was primarily due to an increase in headcount and the recruitments of more experienced R&D personnel. To better maintain evolving consumer demand and to boost our sustainable growth of our platform, we are committed to further growing our R&D capabilities and stepping up our R&D spending. Operating profit for the quarter was RMB2.2 billion on a GAAP basis, compared with operating loss of RMB4.1 billion in the same quarter of 2021. Non-GAAP operating profit was RMB3.7 billion versus the operating loss of RMB3.2 billion in the same quarter of 2021. Net income attributable to ordinary shareholders was RMB2.6 billion, compared with a net loss of RMB 2.9 billion in the same quarter of 2021. Basic earnings per ADS was RMB2.06 and diluted earnings per ADS was RMB1.84 versus basic and diluted net loss per ADS of RMB2.33 in the same quarter of 2021. Non-GAAP net income attributable to ordinary shareholders was RMB4.2 billion, compared with a net loss of RMB1.9 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB2.95 versus non-GAAP diluted net loss per ADS of RMB1.52 in the same quarter of 2021. More disciplined spending and slowing growth are the main reasons behind the process in the past few quarters. The process gives us more confidence and resources to devote to key areas, such as R&D and agriculture initiatives. That said, we expect profits to fluctuate as we spend to meet changing consumer needs. Notably, our profit this quarter narrowed significantly versus last quarter. Our net cash flow used in operating activities was RMB9.1 billion, compared with outflow of RMB3.7 billion in the same quarter of 2021, primarily due to changes in working capital as a result of seasonality offset by an increase in online marketing services revenues. As of March 31, 2022, the company had RMB95.2 billion in cash, cash equivalents and short-term investments. 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 may take a maximum of two questions per analyst. 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.

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. Your first question comes from Thomas Chong with Jefferies. Please ask your question.

[Foreign Language] Thanks management for taking my questions. My question is about our growth driver in Q1. And given the outbreak of pandemic in recent months, can management share about some of the thoughts about what we are seeing in terms of the recent monthly trend. On the other hand, can management also comment about the trend in terms of the take rate? Thanks.

Hi, Thomas. So let me address your first question around growth rate. Over the past period of time, we have been going through adjustments and development strategies to focus more on technology and agriculture in order to pursue long-term high-quality growth. While it takes time for the final results to bear fruit and in the process our growth rate might be affected. In addition, as we reach our current scale, investors should not expect us to continuously deliver high growth. Well, our development is inseparable from the support of our consumers. So as the user base reaches its current scale, our focus now is on, how to serve our 880 million users and improve their trust and mind share to remain to be user-centric. So, we will continue to pay more attention to technology and Agri investment and to promote our differentiation in agriculture to help create more value for our consumers. Well, as we have been communicating, we always remain committed to investing to create long-term value. If you look from the outside, at times, we might appear to be overly aggressive or overly conservative sometimes. So we recommend you not to pay too much attention to the fluctuations between quarters. Instead, we hope investors would focus on whether what we are doing is generating value and whether it can bring about high-quality development. I hope what I've shared may address your question.

Well, Thomas, this is Jun. Thank you for your question. I would like to further talk about the take rate just mentioned. Well, our focus has always been to better serve our users, as just mentioned by a Lei, with this being said, take rate or monetization rate is not a metric to forecast. Instead, I think it's just a natural result. So, we recommend you now look at quarter-to-quarter changes and in the long run, our monetization rate depends on how much value we create. And for future outlook for monetization, as I said, it really depends on our value creation. One thing we would like to point out as we started Pinduoduo with a strong agriculture forecast from the beginning and we stick to our zero commission policy for agriculture projects. Hence, we definitely will continue to support agriculture merchants for example, offering more traffic exposure. Also, we have communicated before, we will step-up investment in agriculture for better consumer experience. Well, as the proportion of agricultural product increases, our monetization rates might be affected. Thank you.

Operator, we will now take questions from the next analysts in the queue.

Your next question comes from Eddy Wang with Morgan Stanley. Please ask your question.

[Foreign Language] Thank you for taking my question. I have two questions. First is about competition. Can you please share with us your view on China's e-commerce industry competitive landscape? We witness that on one hand, we do see other e-commerce platform are adopting a structured cost control and less aggressive in expansion. But on the other hand, we do see some livestreaming e-commerce platform seems to be very aggressive in the user acquisition and expansion. So I just want to hear your view on the competitive landscape in the e-commerce sector and the impact on PDD? And a follow-up question is about the, "10 Billion Agriculture Initiatives". So what's the proportion of the 10 billion have been used so far? And what's the next kind of areas we want to investment in the next maybe one or two years? Thank you.

[Foreign Language] Eddy, so for your question around competition landscape, I think the current landscape versus two, three months ago, it has not changed much. So essentially, China's e-commerce industry is a huge market and it is full of potential. As industry infrastructure continues to develop and as our consumer needs continue to evolve, more-and-more companies will join e-commerce. We believe that in the long run the emergence of new platforms, as well as new formats will have a positive impact on consumers and on the industry itself. For us, if you look at the -- under the perspective of the recent pandemic, and if you look at areas where other peers have done well, we think that for ourselves, there is still a lot of room to further improve from our current level of service offerings. This is what our team needs to learn from. And our team needs to work harder and also remain down to earth to serve consumers well and to create value for the society as a whole. This is the duty and the responsibility for us as a company. As for our differentiation, while we started out Pinduoduo with agriculture products. As we develop, agriculture has always been our core. We also firmly believe in the future potential of the agriculture sector. Just as I introduced, we are now stepping up investments in core technology especially in agricultural technology. We believe in the long run, these investments can create more value for consumers. So here, let me also address your second question. We announced the RMB10 billion agriculture initiative last year. When we announced it, we also mentioned that we hope this initiative can facilitate the advancement of agritech, promote digital inclusion and also to make a sense of fulfillment for agri workers and agri scientists. Over the past year, our team and myself have been devoting a lot of time and efforts to diligently evaluate and study various proposals and projects in order to deport resources to where they are needed the most. In my previous remarks, I also have given you some examples of how a technology empowers agriculture, including our smart agriculture competition. In addition, we are also cooperating with top agronomic universities and research institutions to jointly work on some research projects. Admittedly, to empower agriculture through technology requires a lot of thinking, deep understanding and extra patience. So we need to compare various options side-by-side and evaluate each options carefully, and we have to leverage our past experiences in agriculture as well as our team's technical background to make the best options and choices. In this area our strategy is long-term, and our investment in agriculture are still in early stage. For such a factor of -- such big scale and impact of our investment horizon as well as investment scale would not change when there are short to medium-term fluctuations. Hope what I share can give you more color around how we think about and what we are doing in terms of agriculture. Operator, we may now move on to the next analyst.

Your next question comes from Kenneth Fong with Credit Suisse. Please ask your question.

Thank you management for taking my question. I have two questions, please. On user, we noticed that despite a high base, AAC and MAU both see accelerating sequential growth. Can you share with us the drivers behind? I understand that we shouldn't expect fast growth given our larger user base, how should we think about user upside and the ceiling? And my second question is on the sales and marketing expense. Despite the fast revenue growth, our control over sales and marketing have been very effective with amount continue to come down on a year-on-year basis. Can you share with us the reason behind? For example, is there a change in our ROI threshold on this acquisition and any room for further improvement? Last year, Pinduoduo said that we are shifting from sales and marketing to R&D focus. Can you also update us on the progress? And when should we expect this to be largely finished? Thank you.

Well, Kenneth. So let me address your question, user number. So, let's look at the numbers first. By the first quarter last year, our annual active buyers and our MAU was approximately 820 million and 720 million, respectively. This was already a relatively high base. And by the first quarter this year, our ASC and MAU further increased to about 880 million and 750 million. We achieved some growth, but I think the long-term trend should be very clear. Though there might be call it fluctuations, I think, it is inevitable that our user growth would be slower, while over the course from the past few quarters, we also have shared this view with you. So now the priority that we see and the duty we have to perform right now is to further improve the existing 880 million consumers user experience and as well as to improve their trust and solidify their mind share in us. As for the strategic shift, we are going to basically amid the changes in infrastructure upgrade and the evolving user needs what we are doing in terms of investing in technology is to find opportunities and improve ourselves to serve our users better. And I'm glad to see that through our efforts, we have indeed created value for consumers, especially in the area of agricultural produce.

[Foreign Language] So another point is that, the recent pandemic does show some of the areas that we need to improve. And in terms of understanding user's needs, and keeping up with the changes in their behaviors and their demand, we need to do better. So, we will continue to explore the evolving needs and preferences of our users, and to continue enhance our capabilities. In addition, as we explore, when we see good opportunities, we will continue to invest. So if we look at the financials, it is possible that our efforts would show up and be reflected in the future financial results as well, especially around technology. And hope or what I just have just shared, I may provide you with more color and give you some insights on our user number and its growth going forward.

Okay. Thank you, Kenneth. I will take your second question about SME expenses. Well as you just said, we are going through a shift with low forecast towards R&D from marketing. And such shift has been in our financial results as you may see. For example, sales and marketing expenses fell 14% year-over-year in Q1, which represents 47% of total revenue and down from 59% of Q1 last year. And at the same time, R&D expenses increased by 20% right away. Well, for every investment, we carefully evaluate the ROI and we allocate resources to generate long-term and high-quality development. As always, we will continue our investment discipline. And in addition, in terms of serving user needs, we're not doing well enough and there's still plenty of room for us to further improve. So we need to further explore how to better serve our users. In fact, recent pandemic also shows certain areas for us to improve. So as we see good opportunities, we will continue our investments to create more value for our consumers. As a result, the future expenses trend is likely to change. And to us, we firmly believe that R&D investment can generate high-quality development. So we will continue to step up the investment, which will be shown in our financial results. And we are still in the investment phase. Instead of the stable stage for financial numbers, we suggest you look at the long-term trends and the value we create from this investment. I hope that can clarify your questions. Thank you.

Operator, I think we still have time to take questions from the next analyst, and that will be the last one.

Your last question comes from Natalie Wu with Haitong International. Please ask your questions.

[Foreign Language] Let me quickly translate myself. So, two questions from my side. First question is related with the COVID. Just regarding the recent COVID breakout, can management share more details about how the pandemic has impacted industry and your operations at Pinduoduo? And how much impact has -- it had on your first quarter results? And also, what is your outlook towards the second quarter results during current pandemic status. And my second question is regarding the capability. You have delivered new core profit on both GAAP and non-GAAP basis for four consecutive quarters. Just wondering at current stage, are you now prioritizing probability of a growth? Should investors expect quarterly earnings to be the norm? Thank you.

[Foreign Language] Well, Natalie, so let me take your question on how the pandemic has affected us and our operations. Well, I think one area that the pandemic has shown us is that, for our business, we need to build it to be more resilient, and there are certain areas that we need to further improve, especially in terms of how we can effectively meet user’s need. And under the current situation, I think our peers have shown certain aspects that we may also learn from. And Pinduoduo is an e-commerce company that focuses on the essential needs of users. During the pandemic, we were also actively leveraging our differentiation to create a value for consumers and to fulfill our social responsibilities. Here, let me give you some examples. First, in Shanghai, we launched a 48-hour supply packages for Shanghai residents through aggregating their ordering and the fulfillment staff, we strive to meet the basic needs from as many households as possible. In addition, on the guidance of our relevant governmental departments, we have made efforts to provide supplies for medical personnel and people need. These are some areas, which we have been working on by leveraging our differentiation and our value proposition. Another important point that I want to make during this pandemic time is that, we also see many young talents writing up to challenges, and they are growing up rapidly, in the face of these real-world challenges. They are proactively securing good supply. They provide technical support to assist fulfillment. And they are also solving some of the operational difficulties. They are taking on more and more responsibilities and challenges. So from this, I'm confident in the potential of our team. So based on what I just said, what I see really has given me more conviction in how our team would perform and in the young talent from our team. And to add on one more point, during such special times. We also see that agriculture and the agriculture supply chain is so essential and the importance of having a very resilient agriculture supply chain. So our long-term investment in agriculture is particularly important. I hope what I've just shared around this point can give you some more color around our take on agriculture.

Well, thanks for your second question about profitability. First, I would like to point out -- just note, our current priority and over the past few quarters, our profits will remain due to our operating leverage, especially from sales and marketing. And as mentioned last quarter, we have also controlled our spending in the face of slower growth. And under current intensified competition, we also see we still have many of our room to improve in terms of certifying users. The reasons is pandemic also shows that. So we need to step-up our investments. And it may cause our quarterly profit to fluctuate in the future. As you may see, this quarter's profit has decreased sequentially versus last quarter. Meanwhile, the profitability over the past few quarters also gives us greater confidence to continue our long-term investments. We hope that everyone will focus more on the value we generate. Thank you

Okay. Thank you, everyone, for joining us on the conference call today. If you have further questions, please feel free to reach out to our IR team. Thank you. Have a great day.

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