Pinduoduo Inc

NASDAQ:PDD

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a 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 Pang [ph]. Sir, please go ahead

[Unidentified Company Representative]

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 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 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. Lei, please go ahead.

[Chen Lei, Chairman & Chief Executive Officer]

Thank you, Chen, and hello, everyone. Thank you for joining our earnings call in 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-on-year increase of 36%.

We witnessed the resilience of China's consumption during the second quarter. Us being temporarily affected in the early part of the quarter, pent-up demand was released and since returned to normal. And consumer sentiment gradually recovered in the second half of Q2.

Since 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 in many of them use our platform to launch their new products. These are signs that consumers and merchants are fighting values in our platform. Having said that, we still have a long way to go before fully meeting our consumer's 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 Agritech initiatives.

Even though this might make the quarterly financials look better, the long-term perspective of our platform maybe 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 flesh food, groceries and the 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.

Flowing [ph] the initial 25 items, we quickly expanded the selection to around 300 products, from essentials like rice and cooking oil to diapers and hygiene products. Given the surge in demand and limited logistical capability -- capacity, we also offer 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 serves many consumers in their time of need, and we are deeply thankful and proud of their contribution. Things gradually returned 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 foods from across the country. This event was well received by consumers.

Sales of lychees surged 158% compared with a year ago, while orders increased significantly for other foods such as watermelon, coconut and grapes. Seeing consumer feedback, we rolled out a year old flash 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 was affected. For example, we proactively provided traffic updates to help our merchants better plan and adjust their logistics. We also launched – campaign and measures to have small and medium-sized businesses and agricultural 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 farmers to avoid financial losses.

To support our farmer, merchants, we will continue to waive the sales commissions of agricultural produces. As a technology company with its rules in agriculture, we firmly believe that the technology can serve as a force for good. We see rural communities benefiting from agricultural e-commerce by new jobs and higher income.

Young people now have the opportunity to start their 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 craftsmen program. As with agriculture, we aim to help local artisans and craftsman promote traditional crops, build their brands and widen their access to market.

We also expanded our Duoduo 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 speak closely to our core principles of benefit all people first and more open and stay committed to build a platform that serves as a force for good.

Thank you. With that, I will hand over to Jun.

[Liu Jun, Vice President, Finance]

Thank you, Lei. Hello, everyone. I will go through our performance in quarter ended June 30, 2022. In terms of P&L, our total revenue in the quarter were RMB31.4 billion, up 36% from RMB23 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 the decrease in revenue from 1P trials.

Revenues from online marketing services and others were RMB25.2 billion this quarter, up 39% compared with the same period of 2021. This was primarily due to increase in merchant activities, as a result of consumption recovery. As Lei has mentioned, we experienced 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 RMB6.2 billion, up 107% versus the same period of 2021. Moving on to cost and expenses, our total cost of revenue increased 1% from RMB7.9 billion in Q2 2021 to RMB8 billion this quarter.

Total operating expenses this quarter were RMB14.8 billion versus RMB13.2 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 [indiscernible] quarter.

Looking to specific expense items, our non-GAAP sales and marketing [indiscernible] quarter RMB10.8 billion, up 8% versus the same quarter of 2021. Our 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 RMB164.7 million versus RMB213.8 million in the same quarter of 2021.

Our non-GAAP research and development expenses were RMB1.9 billion, an increase of 11% from RMB1.8 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 RMB2 billion in the same quarter of 2021. Non-GAAP operating profit was RMB10.5 billion versus the operating profit of RMB3.2 billion in the same quarter of 2021.

Net income attributable to ordinary shareholders was RMB8.9 billion, compared with RMB2.4 billion in the same quarter of 2021. Basic earnings per ADS was RMB7.06 and the diluted earnings per ADS was RMB6.22 versus basic earnings per ADS of RMB1.93 and diluted earnings per ADS of RMB1.69 in the same quarter of 2021.

Non-GAAP net income attributable to ordinary shareholders was RMB10.8 billion, compared with RMB4.1 billion in the same quarter last year. Net non-GAAP diluted earnings per ADS was RMB7.54 versus RMB2.85 in the same quarter of 2021.

Now let me move on to cash flow. Our net cash flow generated from operating activities were RMB19.4 billion, compared with RMB7.4 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 RMB119.4 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 repair in the future. But 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 affect 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, even that process in the second quarter are mainly due to a combination of several short-term factors, we do not expect profitability in the first quarter to serve as a benchmark for future quarters.

Thank you. This concludes my prepared remarks.

[Unidentified Company Representative]

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 two questions per analysts. Lei will answer questions in Chinese. And I will help to translate, Lei's remarks for ease of reference.

Operator, we are now ready to take questions from analyst online.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kenneth Fong from Credit Suisse. Please go ahead.

[Kenneth Fong, Credit Suisse]

[Foreign Language] I have two questions. First, on the second quarter growth rate, we noticed very strong online marketing service revenue that record, a strong growth of 39% year-on-year. And this reaccelerated from the previous two 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 our future events. How does this help our growth for this quarter? And what's your overall plan for the brand recruitment? Thank you.

[Chen Lei, Chairman & Chief Executive Officer]

[Foreign Language] Kenneth, 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 actually made efforts to facilitate consumer spending by offering various forms of promotion to help with consumption recovery.

[Kenneth Fong, Credit Suisse]

[Foreign Language] And during this year's June 2018 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, agricultural produce, consumer electronics and cosmetics these categories all had a decent growth on our platform.

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 consumers meet their essential demand. And we are grateful towards our team's hard-work during this process.

At the same time, we also saw that competition landscape is still very intense. And in terms of satisfying our consumers' needs, we have many areas that we can further improve. And as I mentioned earlier, due to outside reserve, our overall investment activity during the second quarter was impacted and this is actually not beneficial to our long-term competitiveness. And therefore, we need to further step up our efforts and also strengthen our core capability, so that we can create more value for consumers, as well as for other society.

Foreign Language]

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

And in terms of how to serve the consumers we believe that essentially, the brands goal 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.

[Operator]

Thank you. Next question comes from Joyce from Bank of America. Please ask your question.

[Joyce Ju, Bank of America]

Good evening management. Thanks for taking my questions. 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. I mean we know like what's the reason behind?

[Chen Lei, Chairman & Chief Executive Officer]

[Foreign Language] Joyce. So let me address your first question, and I will hand it over to Jun to answer your other questions. 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] 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 achieving good results. So we believe that it is a direction that is worth trying out for us.

[Foreign Language] 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] And at the same time, we are sufficiently aware that overseas business will be, of course, challenges, and it will require constant trials 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.

[Liu Jun, Vice President, Finance]

Okay. Thanks for your question, Joyce. Your question about transaction services revenue. Well, first, we always remain consumer-centric, operating metrics and the financial metrics natural results from how we reserve consumers. And over the past quarter, because of consumption recovery, we had use engagement and transactions. This contributed to the revenue growth. And in addition, for us, our business cycle does not always matched 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 a long-term value. Thank you.

[Chen Lei, Chairman & Chief Executive Officer]

Okay, operator, we’re ready to move on to the next analyst down the line.

[Operator]

Thank you. Our next question comes from Thomas Chong from Jefferies. Please ask your question.

[Thomas Chong, Jefferies]

[Foreign Language] Thanks management for taking my question. 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? Thank you.

[Chen Lei, Chairman & Chief Executive Officer]

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 allow it to go and a lot of work to do to serve our consumers well.

[Foreign Language] And as a part of our development, to constantly satisfy our consumer demand would take a lot of patients. Not only do we need to constantly explore, but we also need to seize the key opportunities and also make the relevant investments.

And in the past quarter and especially during the first half of the second quarter, our team's investment activity was impacted. And during the short term, this might bring about decent financial results. But if we look at it with a long-term perspective, this actually weakens our competitiveness.

And therefore, looking ahead, we would always think about the long-term and we would remain very committed to investing for the future. We need to further strengthen our core capabilities and to continue to focus on investing into the field of agriculture and R&D over the long term in order to create value for consumers as well as for the society. And this would support our long-term and high-quality development. And this is my thinking on our overall strategies and hope to address your first question.

[Liu Jun, Vice President, Finance]

Okay. This is Jun. Thanks, Thomas. I will take your second question. For your second question about profits, well, as mentioned before, we have not changed our strategy on -- to the focus on profitability. So for the past quarter alone, our profitability was mainly attributable to a number of external factors, which are mostly short term or one-off nature.

On the revenue side, we saw a good level of user engagements and consumption, which are mostly boosted by consumption recovery. At the same time, we still face very intense competition.

For the expense side, factors such as project delays and a decrease in business-related activities led to the short-term impact in our Q2 expenses. And to sum up, this quarter’s profitability is due to short-term factors combined. So it is not a good benchmark for future preference, and this is our view on profitability. Thank you.

[Chen Lei, Chairman & Chief Executive Officer]

Operator, we are ready to move on.

[Operator]

Next question comes from Bai Yang from CICC. Please ask your question.

[Bai Yang, CICC]

[Foreign Language] Thanks management for taking my question. My first question is about Duo Duo Grocery. We are seeing that Duo Duo Grocery is reaching relatively steady growth state and players guided 2Q about loss reduction on unit economy. So can management share some color on the future prospects of Duo Duo Grocery? Do we also care more about the efficiency measures? Also, how will the increase in Duo Duo Grocery financial leverage contributed to the firm’s level margin this quarter.

My first question is also regarding to the operating expense ratio. As the company's revenue continues to grow and the operating leverage continue to play its role, the company's expense ratio has dropped to 47%. Should we expect the situation to be sustainable? And meanwhile, we recorded a 36% year-over-year growth in revenue, could management comment on how we managed to optimize expense by also maintaining strong growth? Thank you

[Chen Lei, Chairman & Chief Executive Officer]

[Foreign Language] Hi, Bai Yang. So let me talk a little bit about our Duo Duo Grocery first. First, from a strategy point of view, Duo Duo Grocery is natural retention from our platform. And in terms of how we are able to leverage our value proposition in terms of agriculture to better serve consumers. It also plays a very important role -- and this is the project that we would patiently invest into. And this strategy will not be impacted by external short-term changes.

Since we introduced Duo grocery in the second half of 2020, we have also seen that in the areas of matching localized demand and localized supply as well as in the area of fulfillment, this service can provide our consumers with a fresher, more affordable and more convenient agriculture products, it can create tangible value for consumers.

And at the same time, for the total grocery service, we also see many areas that we can improve. To give you some examples here, how to match supply and demand more efficiently, how to secure more quality products and produce how to better optimize the distribution network and to further improve our fulfillment service quality just to name a few here. And we are still constantly adjusting and improving -- all this is to make an effort to bring better service experiences to our consumers.

And we have always remained consumer-centric and would remain to be so. Our top priority is to create value for our consumers, and this would never change. As for the financial metrics, they are results and a reflection of how well we serve our consumers. Thank you.

[Liu Jun, Vice President, Finance]

Thanks, Bai. On your question on operating expenses trend, well, our total operating expenses as percentage revenue decreased to 47% this quarter, as you just mentioned. But I want to point out here, and many short-term factors, such as project delays and lower business activities caused such decrease. So it is unlikely to continue. In fact, as things gradually went back to normal, expenses during the second half of the quarter actually increased compared to the first half. So the Q2 quarterly expenses may not be a good benchmark.

Also, just as Lei previously mentioned, we believe Pinduoduo is still in the development stage. Such impact on our investment is not good for us from a business perspective. Competition is still intense, so we need to continue to invest. Hope to – addressed your questions. Thank you/

[Unidentified Company Representative]

Hi, operator. We may now take questions from the next analyst on the line.

[Operator]

Thank you. Our next question comes from the line of Natalie Wu from Haitong International. Please ask your question, Natalie.

[Natalie Wu, Haitong International]

[Foreign Language] So, thanks for my question. I have two. First one regarding the department priorities, we have seen some time since later on your leadership, and started to shift it more towards the agriculture program in R&D. But we haven't seen much material impact in terms of the income payment generated from the 10 billion agricultural program. So just wondering, how such priorities have changed and should we expect a change when external factors are different currently. For example, as consumer segment improves, will you prioritize at the end platform-related sales and marketing?

And what are your current key priorities to bring PDD to the next level? It would be great that if we can get a sense regarding your internal strategic priorities for platform e-commerce, agriculture and maybe the new initiatives related with overseas expansion.

And also, you have a strong balance sheet with over RMB 100 billion in terms of cash. We have seen some peers have introduced plans to distribute value to shareholders. Just wondering does PDD have similar plans under consideration? Thank you.

[Chen Lei, Chairman & Chief Executive Officer]

[Foreign Language] Hi, Natalie. So, let me address your question on priority for us. So, first of all, we need to look at on which we base our business and from which we start our business. We are dedicated to serving the rapidly evolving consumer needs and our development is inseparable from the support from our consumers, and this is the duty -- our duty as a company to serve consumers well.

And as our user base reaches the current scale, it is our focus to better serve them and also deepen their trust in Pinduoduo as well as increase their mind share. And toward this goal, we have shifted our attention more towards agriculture and R&D, and this remains to be our priorities.

We have also seen that the investment in these two areas can bring about a tangible value to consumers and the society.

[Foreign Language]

First, let's look at agriculture. In the realm of consumption, we are able to enable more efficient online transactions, and we are able to let consumers enjoy fresher and more food produce. And we also improved the distribution efficiency through the use of technology in distribution

[Foreign Language]

In terms of agriculture production, we facilitated the technology adoption and usage to help farmers improve yield and we also actively provided training to small agriculture merchants and producers to help them receive higher as well as a stable income.

[Foreign Language]

In addition to that, by strengthening our R&D capabilities, we are also able to better understand consumers new demands and preferences to improve their shopping experience, so that we can create more value for them.

[Foreign Language]

What is more, over the past period of time, I see our young team members growing up through the responsibilities. They ensure the stable operation of our platform. And they also helped satisfy consumer essential demand and created social value in the process. We will create more opportunities for these team members to take on more responsibilities and grow.

[Foreign Language]

And we are still in the development stage. So, we need to continue to invest patiently and improve our team's capabilities so that we can better serve consumers. What I just mentioned are our top priorities.

[Liu Jun, Vice President, Finance]

Thanks, Natalie. I will take your second question on cash balance. I think this is essentially on capital allocation. Well, given the current competitive landscape and challenges, we still have many areas to improve to help us better satisfy our consumer’s demand. For example, every purchase and R&D. So, we need to invest patiently in these areas. Meanwhile, I think different companies may be in different development stages. As we have mentioned, for us, we are still in the investment phase. So will we continue to place more focus on these areas to generally long-term value. Thank you.

[Chen Lei, Chairman & Chief Executive Officer]

Okay. Thanks everyone for joining us on the conference call today. Due to time limits, we hereby conclude the call now. If you have any further questions, please do feel free to reach out to our IR team. Thank you and have a great day.

[Liu Jun, Vice President, Finance]

Thank you.

[Operator]

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