Q1 2023 PDD Holdings Inc Earnings Call

Participants

Cheng Peng

Jiazhen Zhao

Jun Liu; VP of Finance; PDD Holdings Inc.

Lei Chen

Kenneth Fong; Head of China Internet Securities Research and Regional Head of Gaming & Lodging Securities Research; Crédit Suisse AG, Research Division

Lixin Ju; VP in Equity Research & Research Analyst; BofA Securities, Research Division

Natalie Wu; MD; Haitong International Research Limited

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings, Inc. First Quarter 2023 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.
I would now like to hand the conference over to your host today, Mr. Cheng Peng. Sir, please go ahead.

Cheng Peng

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 Holdings earnings release was distributed earlier and is available on our website at investor.pddholdings.com as well as through growth new flat services.
Before we begin, I would like to refer you to our safe harbor statement in 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 Co-Chief Executive Officer; Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer; Liu Jun, our VP of Finance. Lei and Jiazhen 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 first quarter ended March 31, of 2023.
During the Q&A session, Lei and Jiazhen will answer questions in Chinese, and we 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 translate version, statements in the regional language should prevail.
Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer. Chen Lei. Lei, please go ahead.

Lei Chen

Hello, everyone. Thank you for joining our earnings call for the first quarter of 2023. I will start by giving a brief overview of our first quarter results. We achieved a total of RMB 37.6 billion in revenue this quarter representing a 58% year-on-year increase. During the past quarter, we saw consumer sentiment continue to improve. We have seen a surge in demand across various categories, reflecting consumer eagerness to explore a wide range of products we offer. The quarterly results also show that our long-term strategic focus on high-quality development is starting to pay off. We are glad to see that the focus on quality development not only sets a solid [but] for the future, but also delivered immediate gains for consumers and sellers.
We are encouraged by the strong backing from our stakeholders. We work hard to create a limited marketplace where consumers can find what they are looking for and where high-quality values can drive and succeed. Technology is very important to our machine to build a healthy and vibrant platform ecosystem. It is also a vital catalyst to drive efficiency and opportunities in manufacturing and the retailer sectors. That is why we are putting more time and resources into R&D to foster sustainable progress. Our engineers make up about half of our total employees.
R&D helped us meet the unique needs of consumers, provide merchants with deeper understanding in shocking trends and allow manufacturers to response quickly to evolving demand.
Finally, in supply and demand was better together, we can help unlock the potential in different industries. We will continue to step up our investment in R&D.
And now let me talk about our globalization efforts. Last year, we launched to offer quality products at affordable prices to consumers around the world. By working closely with sellers and manufacturers, (inaudible) offers a wide selection of merchandise reduces supply chain inefficiencies, passing savings to consumers. As we move forward, we will keep seeking ways to meet diverse consumer needs. And we are still in the early stage of exploration. We will always start from the fundamental needs of consumers adapt quickly and drive to create our own unique value.
As we continue to grow, we are finding more ways to generate a positive impact to the society. A vibrant as a sustainable ecosystem -- e-commerce ecosystem can all be achieved by encouraging broader engagement in a digital economy. For instance, the advent of mobile Internet has created a space for female entrepreneurs in e-commerce, enabling them to balance the work and family. By providing the opportunities we have been able female to utilize their unique skills in managing successful e-commerce enterprises. In fact, many of our platforms series starting their first business with us. They have created jobs and injected new mortalities into their communities. We are committed to providing more opportunities for individuals to become entrepreneurs through training and while the market progress.
We are probably leading among the younger generation. We believe that maturing a passion for reading can open doors to knowledge. To this end, we hold regular reading events and donate books, and we invite reputable authors to talk with students in rural areas. We hope this will help young students broaden their horizon.
We are also looking to promote agricultural digital inclusion. We are helping young people were passionate about agriculture, to bring new technology from lab to the field, we are working with top universities and institutes to encourage innovation. We also hold competition for young people to realize their skills and ideas, which help create innovative and sustainable farming practices.
As a young company, still in the development stage, we believe that through the increasing business opportunities facilitated by us, we have uplift communities and make contributions to this (inaudible). We will do more as we grow.
And finally, I want to introduce my longtime colleague, Mr. Zhao Jiazhen who was recently appointed as co-CEO and Executive Director by our Board. Jiazhen concentrates more on supply chain management and China operations. While my focus is more on globalization. Jiazhen is a founding member of our company. He led the team to launch and expand our total grocery business and also led our supply chain efforts. Jiazhen and I have been working closely together for over a decade. We have established deep trust in each other. His new leadership role shows that our team is full of vitality and our next generation of leaders are ready to take on more changes.
And now I will hand over to Jiazhen.

Jiazhen Zhao

[Interpreted] Thank you, Lei. Hello, everyone. This is Zhao Jiazhen. I'm glad to join this earnings call. In Q1, many places introduced measures to promote consumption. We see clear recovery trends. Online retail continues to pick up. Users on Pinduoduo show a higher willingness to shop consumption vitality is becoming increasingly evident. These favorable trends lay a solid foundation for the steady growth of consumption for the whole year. We are very optimistic about the process of the consumption market.
Over the past quarter, we actively mobilized platform resources to stimulate and realize the consumption potential. As always, we provide users quality merchandise with more savings in the various large-scale promotional campaigns in Q1, such as the Chinese New Year promotion and the New Year sales, we step up discounts and issued extra coupons to benefit as many users as possible.
Recently, in this year's Double 5 shopping festival in Shanghai, we invested over RMB 4 billion in coupons and discounts, marking a new high. During this event, we partnered with China Central Television and Oriental TV on live streaming sales showcasing a wide range of products to viewers in an interactive and direct manner, enhancing consumer trust in online shopping.
Furthermore, our total growth rate team actively explores innovation by creating new consumption scenarios and deepening the spillover effect of the pickup points of surrounding areas consumption. We hope this can further promote the development and integration of online and offline consumption.
In addition to our strong suit of more savings, we have further improved our ability to provide better services to optimize the consumer experience. We launched the electronics shopping season in advance in April and introduced the concept of everyday is June 18. We not only ensure good prices, but also upgrade services on many fronts to improve consumer experience.
In the Pinduoduo (inaudible) , which kicked off in late April, we invested hundreds of millions RMB to promote high-quality and universal access to reading. A third party-evaluation report shows that in 5 dimensions, including price, authenticity, after sales support, logistic efficiency and promotion levels, the Pinduoduo platform's overall shopping experience for books run as 1 of the best among many e-commerce peers.
Against the backdrop of consumption recovery to satisfy the diversified needs of consumers and form a driving force for expanding consumption. It's both an opportunity and a challenge for us. We aim to further improve the platform ecosystem through a series of impactful measures, including increasing discounts upgrading services and fully protecting consumer rights. We hope to further boost consumption vitality through our focus on quality development of the platform ecosystem.
As consumption rebound it also brings about more intense industry competition. As competition further intensified, some competitive behaviors have gone beyond the scope of normal business activities. For example, since late March, dozens of flagship stores on Pinduoduo bombarded with malicious order. The attackers disrupted its store's normal operation clearly organized and purposeful way or seeing significant losses. We immediately provided protection to the affected stores and upgraded our defense strategy. The stores were back in normal business operations very soon.
We believe that competition can motivate us to learn more efficiently and innovate more quickly so that we can speed up the iteration of our services. We will continue to be consumer oriented and react positively and actively to all types of competition, even when we face malicious attacks, we will maintain positive thinking. We will -- attack from competitors into our motivation to move forward we are (inaudible), improve ourselves constantly, innovates with a clear direction and guide the platform towards higher quality development. For example, we have upgraded the shipping processing time for most merchandise categories from 72 hours after placing the order to no later than 48 hours.
We will provide a preferential after sales services for elderly consumers and consumers in remote area. In addition, we take a more proactive approach in customer service, such as offering consumers the option to receive refund without returning the item.
At the same time, we will further step up our support for quality supply and our investment in the supply chain. We are launching the 10 billion Ecosystem Initiative to offer resources and support to quality sellers and products so that we can promote the quality growth of SMEs and quality sellers and improved overall sellers efficiency and standards. For supply chain, over the years, we have rooted ourselves deeply in major production areas and industrial belts reconnect products directly with end consumers, reduce distribution layers and lower the procurement and sales costs between supply and demand. We will continue to increase investments optimize our supply chain capabilities, strengthen the buildup of physical supply chain infrastructure contribute to the transformation and upgrade of traditional sectors and further deepen our competitive advantages.
This year, Pinduoduo has continuously optimized platform governance and actively take some social responsibilities. We strive to bring more responsibility. For example, we have recently launched several dedicated initiatives such as the initiative protect the miners and the initiatives on our authentic book to name a few, so that we can be the positive ecosystem for sustainable development.
We also promote digitization in agriculture, and we launched the agriculture cloud initiative. To date, our dedicated team has gone deep into the various production regions many products. We provide specialized e-commerce training for pharma sellers and help connect them with logistics infrastructure suitable for agriculture products such as warehousing and co-chain logistics to reduce transportation space and improve product competitiveness to support brand building agriculture, we search for high-quality specialty products provide strong traffic support and help them gain recognition by including them in our 10 billion program through initiatives similar to the agriculture cloud initiatives, we hope to enable more local production regions to emerge as leaders of certain products and drive the digital transformation of the entire industry value chain.
We continue to deepen our cooperation with top economic institutes to support the role of agritech in agricultural transformation and promote agritech adoption. We have hosted various events focusing agricultural development, such as the Pinduoduo Crop Growing Competition, the Smart Agriculture Competition and the Global Agricultural Innovator Competition. These competitions promote innovation and inspire more young people to join agriculture. It also leverages sales to support research and helps bring more research funding to the market. As a part of our 10 billion Agriculture Initiative, we recently donated RMB 100 million to set up the Pinduoduo and China Agricultural University Research Fund to further support fundamental research and innovation in agritech.
We are proud to receive the FAL 2022 Innovation Award from the United Nations Food Agriculture Organization, which recognizes our innovation in the agricultural supply chain. We were the sole recipient of this award globally in 2022. We will continue to work hard, support digital transformation and technology adoption agriculture and uphold the principle of tech for. We will stick to our quality first principle, continue to live up to our role and proactively take up bigger social responsibilities. Additionally, we will remain rooted in the real economy, increase investment in the supply chain and search for strong driving forces towards our high-quality development. We will speed up the process of building up a healthy ecosystem featuring more savings and better services. I look forward to working together with the team to promote high-quality development and promote a healthy win-win outcome for our platform ecosystem.
Now let me hand it over to Jun. She will provide you with an update on our financial performance.

Jun Liu

Thank you, Jiazhen. Hello, everyone. Let me walk you through our financial performance for the first quarter ended March 31, 2023. In terms of income statement, our total revenues in the quarter (inaudible), up 58%, RMB 23.8 billion in the second quarter of 2022. This increase mainly came from encouraging trends in consumer sentiment and positive responses from consumers and merchants towards our focus on high-quality development. Revenues from online marketing services and others RMB 27.3 billion this quarter, up 50% compared with the same period of 2022. Revenues from transaction services this quarter, RMB 10.4 billion, up 86% versus the same period of 2022.
Moving on to cost and expenses. Our total core ship revenues increased 55% from RMB 7.2 billion in Q1 2022, (inaudible) to RMB 11.1 billion this quarter, mainly due to increased fulfillment fees and payment processing fees. Total operating expenses this quarter were RMB 19.6 billion on a GAAP basis versus RMB 14.5 billion in the same quarter of 2022.
On a non-GAAP basis, our total operating expenses increased to RMB 18.1 billion this quarter from RMB 13 billion in Q1, '22. (inaudible) several large-scale promotional campaigns to help with user sentiment, and we continue to invest in our long-term forecast areas to support our high-quality development. Our total non-GAAP operating expenses as a percentage of total revenues this quarter is 48% compared to 54% in the same quarter last year.
Looking to specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB 15.8 billion up 47% versus the second quarter of 2022. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 42% compared with 45% for the same quarter in 2022.
In Q1, we actively leveraged the platform resources to facility consumption recovery. Our non-GAAP general and administrative expenses were RMB 338.3 million versus RMB 208.8 million in the second quarter of 2022. Our non-GAAP research and development expenses were RMB 2 billion this quarter.
R&D is a top-priority and a long-term forecast for us. We are committed to further strengthening our R&D capabilities, and we continue to increase investment in this area. Operating profit for the quarter was RMB 6.9 billion on a GAAP basis compared with operating profit of RMB 2.2 billion in the third quarter of 2022. Non-GAAP operating profit was RMB 8.5 billion, versus operating profit of RMB 3.7 billion in the same quarter of 2022. Net income attributable to ordinary shareholders was RMB 8.1 billion compared with RMB 2.6 billion in the same quarter of 2022.
Basic earnings ADS was RMB 6.13 and diluted earnings per ADS was RMB 5.55 versus base earnings per ADS of RMB 2.06 and diluted earnings per ADS of RMB 1.84 in the same quarter of 2022. Non-GAAP net income attributable to ordinary shareholders was RMB 10.1 billion compared with RMB 4.3 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 6.92 versus RMB 2.95 in the firm quarter of 2022. We continue to increase investment and focus on creating sustainable and vibrant ecosystem to support our long-term high-quality development.
That completes the income statements. Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB 1.3 billion compared with the cash outflow of RMB 9.1 billion in the same quarter of 2022, mainly due to the increase in net income and changes in working factor. As of March 31, 2023, the company had RMB 157 million in cash, cash equivalents and short-term investments.
Thank you. This concludes my prepared remarks.

Cheng Peng

Thank you, Jun. Next, we will move on to the Q&A session. Today's Q&A session Lei ,Jiazhen and Jun will take questions from analyst down the line. We could take a maximum two questions per analyst. Lei and Jiazhen will answer questions in Chinese, and we will help translate their remarks for easier (inaudible).
Operator, we may now take questions on the line.

Question and Answer Session

Operator

(Operator Instructions) Your first question today comes from Joyce Ju with Bank of America.

Lixin Ju

I will translate myself. My first question is noting PDD recently implemented the co-CEO structure, how does the change affect your group strategies? What are your key growth drivers going forward? Per your announcement how's the Co-CEO structure change? Lei will focus more on the globalization side, does that mean your globalization strategy now has a higher priority?
My second question is related to top line growth. Your online marketing services revenue increased by 50% year-over-year this quarter accelerating from the last quarter. How should we think about this reaccelerated momentum what PDD has done this quarter contributing to this?

Lei Chen

[Interpreted] Hi Joyce, thank you very much for your question, and this is Lei. I can take your first question on strategies. Jiazhen and I have been working together for many years and we have established deep trust. With our goal of high-quality development in mind, we have constructed a very clear long-term strategies, and we will continue to lead our team in terms of execution. And on top of that, we will leverage our different backgrounds and ideas and be efficient in decision-making. Over the past period of time, we are steadily shifting our strategic focus from the speed of growth towards the quality of growth. And we have seen positive feedback from both consumers and sellers on the ship, which is also reflected in this quarter's results. Under our long-term strategies, we are continuously strengthening our supply chain capabilities and also expanding the supply of high-quality merchandise, we will further increase our support for quality sellers by launching our 10 billion Ecosystem Initiative and further push forward our platform overall quality and in addition, we will continue to optimize our platform ecosystem. As a tech-driven company, the value we create is inseparable from our R&D capabilities.
So we are also strengthening our R&D capabilities and increasing our R&D investment. Currently, our R&D team makes up about half of our total employees. The China market is huge, and we see big potential for us to further grow. We believe that in the foreseeable future, China market is our biggest market. At the same time, we also note that it is changing very fast, and competition is intense, which demonstrates both challenges and opportunities. This is why our Board has appointed Jiazhen as Co-Chief Executive Officer to design and execute strategies together with me and further strengthened our China operations team.
Next, let me hand over to Jiazhen.

Jiazhen Zhao

[Interpreted] Thank you, Lei. And first, an honor that our Board put their trust in me. I'm very excited from a new role. At the same time, I feel our responsibilities and challenge. As the industry recovers, we are also entering a new stage and in the past few years, we successfully shifted from marketing drivers to R&D driven, and this lays a solid foundation for our development. Now we reach the gate of another stage which is the stage of dedicating ourselves to promoting holistic high-quality development.
In this new stage, we are further improving our platform ecosystem, upgrading consumer services, increasing support for quality supply and also deepening our supply chain expertise. We constantly optimize platform governance to further build a socially responsible platform. And we believe that investing in our platform, ecosystem, supply chain and also R&D can create long-term value, and we will lead our team together to execute these strategies with determination, accelerating our footsteps in entering this new stage of high-quality development.
And let me also take your question on revenue growth. In the past quarter, many places introduced policies to support consumption we see a continued improvement in consumer segment. And these trends show a good beginning for 2023. We have also benefit from this and our platform consumption mortality is further boosted. To support consumption recovery, we continue to start from consumer demand and actively mobilize our platform resources to give consumers more savings, we organized several large-scale (inaudible) events in a row and gave out actual coupons to boost consumer assessment.
We also strive to give better services to our consumers. So we have upgraded consumer production and also services throughout the entire shopping experience. For example, for most of the product categories. The shipping processing time has been cut down from 72 hours to within 48. Our virtual platform ecosystem of more savings and better services has earned us a decent consumer and seller feedback. Also, our Q1 growth is the early testament to our progress in building up the platform ecosystem. Looking ahead, we still need to remain down to earth and further strengthen our core capabilities so that we can create more value for consumers. For example, we are launching the 10 billion Ecosystem Initiative to further support quality supply. Thank you.

Cheng Peng

Hi, operator, I think we are ready to take the next question on the line.

Operator

The next question comes from Natalie Wu with Haitong International.

Natalie Wu

Let me translate myself in English. Therefore, I take my question. So I have 2 questions here. First 1 is with June 18 approaching, we see that many of your peers have rolled out the this year promotion, which seems to be very aggressive. Just wondering what's your response and how do you explain -- how do you plan to maintain your competitive advantage, specifically for pricing? Do you think there will be an analyst spiral of increasing discounts in short, the lowest price? And (inaudible) we noticed that your profitability margin this quarter is another sequential decrease. Just wondering what are the major reasons behind? Is it because of the seasonality or competition? Does it mean that you are now actively spending (inaudible)?

Jiazhen Zhao

[Interpreted] This is Jiazhen here, and thank you for your questions. (inaudible) on competition. So instead of paying too much attention to what competitors are doing, we actually focus more on how we grow in competition. We view competition as a testing ground, and it motivates us to iterate quickly. Just I have mentioned in my remarks, we are always consumer-oriented, and we actively and positively embrace all types of competition. We are accelerating to build up a healthy ecosystem of more series and better services. Our more savings essentially comes from retail efficiency improvement. And we will continue to strengthen our R&D to help better match supply and demand. We will also run ourselves deeply in more production regions to connect quality products to consumers directly. So for example, in initiatives such as our agriculture initiative -- agricultural cloud initiative, we are leveraging our supply chain expertise to offer more users quality and also affordable agriculture products. And we hope to further improve our efficiency and turn it into a sustainable price advantage for consumers. At the same time, we also continue to increase discounts and issue more coupons to give back to consumers.
And better services is another important area we are optimizing our service quality throughout the entire shopping experience. So for example, we offer extra care to the elderly people and also consumers living in remote areas, and we give them preferential customer services. We have also upgraded our post-sales services such as offering consumers the option to receive a refund without having to return items. And we are launching a dedicated 10 billion Ecosystem Initiatives. And this aims to channel more resources towards high-quality sellers to support SMEs and also quality businesses. And enhance the platform overall service efficiency and quality, and we will continue to focus on self- improvement in competition and strive to create more value for our consumers. Thank you.

Jun Liu

This is Jun. Thanks, Nat, for your questions. I will address your question on profitability. Well, as just Lei pointed out, we have very clear long-term strategies, and we see many areas to further improve. We're executing these strategies with determination. We will continue to nurture the development of healthy, more savings and better services platform ecosystem. We firmly believe our patient investment can generate value for consumers, sellers and the platform ecosystem.
Feedback from consumers and sellers also make us more determined in seeking quality development. So we plan to further step up our long-term investment. For example, we are launching our 10 b Ecosystem Initiative to support quality sellers and improve our overall platform ecosystem. As we deepen our efforts our profitability level decreased in the past 2 quarters on a quarter-to-quarter basis. We think it is normal for profitability to (inaudible) between quarters.

Cheng Peng

Operator, we may take questions from the next analyst on the line.

Operator

The next question comes from Kenneth Fong with Credit Suisse.

Kenneth Fong

I have 2 questions. First, for your global business, may management share what is the level of financial impact from Temu? How many users do you serve now? Could you -- may be able to give us an update matrix order volume? And then my second question, now we see more sellers are opening up stores across multiple platforms. So it seems the merchant stay selection of different platforms are becoming more and more similar. Can management share with us what's the differentiation on the supply side, especially for your agricultural products?

Jun Liu

Thanks, Kenneth. I will take your first question about the financial impact of Temu. Well, this business is currently in its early stage and compared to our overall scale. Its revenue contribution is small. For Temu, as we mentioned before, our focus is always how to better understand consumer needs and how to satisfy this need. Financial metrics will be a natural result of our value creation. We will follow our financial discipline and ROI-driven approach when evaluating each investment opportunity.

Jiazhen Zhao

[Interpreted] This is Jiazhen, and let me take your questions on supply chain and agriculture. In many categories, we see a lot of room to expand and optimize supply. For example, the digitization rates of agriculture products is still low. We see a lot of on net demand, and we also see a lot of quality agricultural produce are not efficiently distributed. And we are committed to leveraging our resources to increase supply chain efficiency and also to help more quality produce connect to the nationwide market.
We provide e-commerce, training and connect farmers with agri-focused logistics resources, which helps more produce expand their distribution media and also helps preserve quality as well as nutrition during transportation. On top of that, our total grocery business continues to explore innovation and we help consumers get a convenience as well as a broader selection of fresh produce.
We also continue to drive agritech innovation as well as adoption. And we are deepening our cooperation with top economic institutes. For example, we recently donated RMB 100 million to support a cutting-edge research at China Agriculture University. In addition to that, our platform sales can allow more research findings quickly reach the market, which can help bring more quality products to consumers. And we also proactively support every sells with our platform resources, including traffic to help quality produce reach more end consumers. So in this way, the quality sellers and the platform can grow together healthily and constantly improve our products and service quality.
Agriculture is our long-term strategy. So we will continue to mobilize platform resources and also our inputs go deep into the supply chain and bring more quality of product to consumers. Thank you.

Cheng Peng

Okay. It's about time, and thank you, everybody, for joining us on the conference call today. Thank you, and have a great day.

Operator

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