Q4 2022 PDD Holdings Inc Earnings Call

·25 min read

Participants

Cheng Peng

Jun Liu; VP of Finance; PDD Holdings Inc.

Lei Chen; Chairman & CEO; PDD Holdings Inc.

Ellie Jiang; Analyst; Macquarie Research

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

Yang Bai; Analyst; China International Capital Corporation Limited, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to PDD's Holdings, Inc. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. (Operator Instructions) I must advise that today's conference is being recorded.
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 GlobeNewswire 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 non-GAAP measures to GAAP measures.
Joining us today on the call are Chen Lei, our Chairman and Chief Executive Officer; and 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 fourth quarter and fiscal year ended December 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 their 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.

Lei Chen

Hello, everyone. Thank you all for joining us on our earnings call for the fourth quarter and fiscal year of 2022.
Let me begin by summarizing our results for Q4 and the full year of 2022. Our total revenue for this quarter was RMB 39.8 billion which is a 46% increase compared to the previous year. Our total revenue over the past year was RMB 130.6 billion which represents a growth of 39 year-over-year -- 39% year-over-year.
In 2022, we focused on strengthening our core capabilities. We invested over RMB 10 billion in research and development last year, which is the highest amount since our establishment. Our goal is to further improve our technological know-how and bring the benefit of digitalization to our users and ecosystem partners. We will continue to invest in R&D as a long-term commitment to better serve our users and suppliers as a whole.
During the past year, we are encouraged to see many of our young colleagues take on more responsibilities and step into bigger roles. These young talents are pure our passion and creativity to have demonstrated their ability to take on new challenges, explore different possibilities and asking our vision with patience and determination. We will continue to provide more personal development opportunities for them to grow as future leaders.
As a young company, still in the investment stage, we remain agile and energetic as we move forward, and we are committed to adapting to trends in consumer preferences.
My team and I are eager to keep exploring and identifying the right opportunities. When we find the right opportunities to invest and execute relentlessly to create value for consumers and the society.
In Q4, we observed the rising sentiment among our users. To support consumption recovery, we actively leveraged resources in our Pinduoduo platform. During the promotion season, we stepped up our investment to further improve consumer engagement and build their chart. For example, during the Double 11 period last quarter, we provided robust coupons and discounts in a simple and straightforward way, making shopping easier and more enjoyable for our consumers. We are also working hard to enlarge the diversity of product of our platform to address our consumers' diversity.
With efforts of our platform as well as merchants, we saw decent performance across various categories during the promotion season. For example, categories such as mobile phones and cosmetics saw encouraging growth among users with different demographics. The auto volume of many seasonal agricultural products more than doubled, which helped to boost consumer awareness of various local agricultural production regions.
As the Chinese New Year happened earlier this year, we launched the Chinese New Year promotion in late December to meet consumer needs. We work closely with merchants all over the world who will curate more product selections for consumers. And we are happy to see that our efforts have paid off with many imported products such as curry or chili and the salmon from Norway, receiving very positive feedbacks.
We are glad to contribute to in supporting consumer confidence. As the consumption continues to recover and consumer sentiment continues to improve, everyone can see the potential opportunities in this market.
As the industry evolves, we noticed a number of recent moves by our peers. I believe healthy competition is beneficial for the industry. But sometimes, when competition intensifies, some companies may take different actions. For us, we will always adhere to our [conscience] duty as a company, focus on our own sustainable development, embrace competition, even when sometimes it involves unsustainable practices from peers.
We always think about how to better serve our consumers. We are also fully aware that we still have a long way to go before we can fully meet consumers' evolving needs. We are committed to deepening our value proposition of more savings, more fun. In addition, we will continue to invest in supply chain, improve supplier efficiency and satisfy consumers' increasing needs for quality product.
In the manufacturing sector, for example, Pinduoduo can quickly gather consumer insights to help manufacturers make more informed decisions on project design and production. This enables the creation of products that better met consumer need and passes on the savings to consumers.
In the past year, we rolled out multiple initiatives to help manufacturers directly engaged with end consumers. Take manufacturer in the personal care sector as an example. We use our insight to identify opportunities for personalized quality products among a younger generation. As a result, the manufacturer developed personal care products with present features and designs, which receive excellent market feedbacks. This also help the manufacturers to gradually establish its own brand.
Over the past several years, we have helped incubate thousands of manufacturers' brands in this way. Our [pricing] insights and technology can help manufacturers better position themselves, develop popular products in the rapid changing market and reduce uncertainty in production. We are dedicated to build a platform that is accessible to all merchants and brands regardless of size.
In the agricultural sector, we continue to utilize our resources and technology to promote digital inclusion and generate a positive impact. We devote ourselves to facilitating the adoption of agritech solutions. Since 2020, Pinduoduo has hosted a flagship smart agriculture competition for 3 consecutive years, offering a stage for young agricultural researchers and growers to explore practical technology solutions that improve yield, short-term production cycle and promote sustainability.
We also have teams on prohibit competition to commercialize their technical solutions on a large scale. By promoting agritech adoption, we hope to push forward agricultural modernization.
Another key driving force is the training of new farmers. These young new farmers have returned to their home town after years of experience in large cities. They are tech-savvy about latest tools such as live streaming and they are a pool of energy and drive. With the help of insights on our platform, it is in fact a good understanding of consumer needs and play an important role in their local communities.
On average, one such new farmer can bring 5 to 10 other young people into e-commerce, creating around 50 local job opportunities directly or indirectly. In addition, our efforts in supply chain have generated a meaningful positive impact for the society. For example, last quarter, bad weather in winter caused a supply chain disruption which prompted us to quickly assemble a dedicated team and launch a nationwide campaign with people's will.
Through our helpline farmer channel on Pinduduo platform, we provided dedicated traffic support to help affected farmers to sell their unsold seasonal produce by reaching more end consumers in a short period of time.
Our Duo Duo Grocery teams all across the country also helped play an important role as each team visited various agricultural production regions in their harvest, sourced unsold produce directly from farmers and quickly matched it with local consumer demand to sell it. With our team's strong efforts, we were able to sell nearly 15,000 tons of agriculture produce nationwide during this campaign. And we are encouraged to see that our supply chain capabilities can create tangible value for the sector and society.
We are proud to receive the FAO 2022 Innovation Award from the United Nations Food and Agriculture Organization, which recognize innovation that creates an impact in agricultural supply chain. This award is a vote of confidence in our holistic and proactive approach to agriculture and it motivates us to keep bolting ahead so that more and more people can enjoy the benefits of digital inclusion and technology adoption in agriculture.
Here, I would also like to provide an update on Temu, a new global online marketplace that we launched in September 2022. Temu and Pinduoduo are sister companies under a parent company, PDD Holdings, which has built the sourcing, logistics and fulfillment capabilities developed to support its various businesses.
We strive to create our all unique value with PDD. So we always start from a fundamental consumer needs to explore how we can serve them well. Temu will stick to the values of empowerment, diversity and inclusion, integrity as well as social responsibility.
As we enter the new year, we remain committed to creating value for all stakeholders. And therefore, we will remain patient and invest for the long term. Our goal is to further improve the services we provide to consumers and bring more businesses into a digital economy to increase opportunities for local communities and small businesses.
Thank you for your continued support. And now let me turn it over to Jun to update you on our financial performance.

Jun Liu

Thank you, Lei. Hello, everyone. Now let me walk you through our financial performance in the fourth quarter and fiscal year ended December 31, 2022.
In terms of income statement, our total revenues increased to 46% year-over-year to RMB 39.8 billion in the fourth quarter. and 39% year-over-year to RMB 130.6 billion for the full year of 2022. This was mainly driven by an increase in revenues from online marketing services and transaction services.
Revenues from online marketing services and others were RMB 31 billion this quarter, up 38% compared to the same period of 2021. This was primarily due to an increase in management activities as a result of improvement in consumer sentiment. Our transaction services revenue this quarter were RMB 8.8 billion, up 86% as same period of 2021.
Moving on to cost and expenses. Our total cost revenues increased 37% from RMB 6.5 billion in Q4 2021 to RMB 8.9 billion this quarter. For the full year, our total cost of revenues decreased to 1% to RMB 31.5 billion. Total operating expenses this quarter were RMB 21.8 billion on a GAAP basis versus only RMB 13.8 billion in the same quarter of 2021.
On a non-GAAP basis, our total operating expenses increased to RMB 19.3 billion this quarter from RMB 12.3 billion in Q4 2021.
During the fourth quarter, we devoted more resources to better address user needs, encourage their consumption confidence as well as step up investments in our long-term focus areas such as R&D and agriculture. As such, our total non-GAAP operating expenses as a percentage of total revenues have increased from 45% in Q4 2021 to 48% in this quarter. For full year of 2022, Total GAAP operating expenses were RMB 68.7 billion, up from RMB 55.3 billion last year.
Looking into specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB 17.3 billion, up 59% versus the same quarter of 2021. We offered various forms of promotions and subsidies and increased advertising spending in Q4 to support consumption recovery.
On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenues this quarter was 43%, compared with 40% for the same quarter in 2021. For the full year, non-GAAP sales and marketing expenses increased from RMB 43.2 billion in 2021 to RMB 52.2 billion in 2022. Our non-GAAP general and administrative expenses were RMB [360.8] million in Q4 versus RMB (inaudible) million in the second quarter of 2021.
Our annual non-GAAP general and administrative expenses were RMB 1 billion in 2022, versus RMB 748.4 million last year. Our non-GAAP research and development expenses were RMB 1.7 billion in the fourth quarter, an increase of 34% from RMB 1.3 billion in the same quarter of 2021. The increase was primarily due to an increase in (inaudible) and the recruitment of more experienced R&D personnel and server cost.
As a technology-driven company, the value we create cannot be achieved without our R&D assets. We need to further grow our R&D capabilities to understand the constantly evolving customer demand and drive innovation to satisfy their needs more effectively. In addition, we continue to leverage our technology background to improve digital technology adoption success such as agriculture and manufacturing. Also, it is worth noting that, for full year, our annual GAAP R&D expenses crossed RMB 10 billion for the first time. We aim to continue to step up investment in this area to form a solid foundation for our long-term development.
Operating profit for the quarter was RMB 9.1 billion on a GAAP basis and RMB 11.6 billion on a non-GAAP basis. Net income attributable to ordinary shareholders was RMB 9.5 billion for the quarter, and earned RMB 31.45 billion for the full year. In the fourth quarter, base earnings per ADS were RMB 7.42 and diluted earnings per ADS was RMB 6.52 versus base earnings per ADS of RMB 5.26 and diluted earnings per ADS of RMB 4.66 in the same quarter of 2021.
Non-GAAP net income attributable to ordinary shareholders was RMB 12.1 billion for the quarter. In the fourth quarter, non-GAAP diluted earnings per ADS was RMB 8.34 versus RMB 5.88 in the same quarter of 2021. That completes the income statement.
Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB 26.6 billion for Q4 and a RMB 48.5 billion for full year of 2022, compared with RMB 16.4 billion in the same quarter of 2021 and RMB 28.8 billion in 2021, primarily due to the increase in net income and changes in working capital. As of December 31, 2022, the company had RMB 149.4 billion 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. For today's Q&A session, Lei and Jun will take questions from analysts on the line. We could take a maximum of 2 questions per analyst. And Lei will answer questions in Chinese, and I will help translate his remarks for easier reference.
Operator, we may now take questions on the line.

Question and Answer Session

Operator

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

Lixin Ju

I have 2 questions. The first one is, as now Pinduoduo developed into an e-commerce conglomerate with multiple business initiatives globally, how could management actually prioritize different business lines? And can management share more about your latest strategies going forward? Have you shifted your strategy after you have expanded your business line fully? And how do you position yourself in the global market?
And my second question is actually related to the revenue. Your online marketing service revenue grew 38% year-over-year last quarter, ahead of the industry growth and peers. But at the same time, we have seen this represent a deceleration from the third quarter. How should we understand the growth? And how should we actually expand the momentum going forward?

Lei Chen

(foreign language)

Cheng Peng

[Interpreted] Hello, Joyce, and thank you for your questions, and I can take your question on strategy first. First of all, we are still in our development stage instead of a stabilized phase and we still have a long way to go in terms of serving consumers well. And to better serve consumers, we will firmly stick to our strategy which is to create long-term value through R&D and technology.
We are a technology-driven company and more than half of our employees are engineers. Also, many of our core management team members are also from a technical background. So from the perspective of creating more value for users. Many areas such as understanding the rapidly changing user preferences, and continuously iterating our services. All these areas are inseparably linked to our R&D capabilities. And we firmly believe that the key to serving our users well in the future is to further strengthen our R&D capabilities.
At the same time, we will continue to focus on supporting the agriculture and manufacturing industries through technology. For agriculture, we will continue to invest in the various mix along the agriculture value chain with our technical expertise, so that we can facilitate the efficient distribution of agricultural produce. And we will also leverage our resources on the Pinduoduo platform to bring more agritech solutions to the market faster.
As for the manufacturing sector, we will devote more resources and help many more manufacturers as well as factories to go through digital transformation and improve their efficiency.
And we have a very clear long-term strategy to strengthen our R&D capabilities and to improve the efficiency of the agricultural and manufacturing supply chain. Our strategic direction as well as the investment level will not be affected by short-term external trends or fluctuations. And we will continue to make a long-term and patient investment.
And as for your second question regarding our revenue growth, well, throughout the past quarter, we saw a strong resilience and also bigger in the consumption market. And we are confident toward the prospects of this market. During events such as the Double 11 and the Chinese New Year promotion, we collaborated with more merchants and also brands and provided consumers with a broader selection of high-quality products and many consumers showed a good shopping demand at the same time.
And under the backdrop of consumption recovery, we have also devoted more resources to better fulfill consumer demand. In the fourth quarter, the Pinduoduo platform leveraged its focus on serving the fundamental needs of users and sales volume of daily essential products on the platform showed steady growth. Furthermore, as consumer demand towards high-quality merchandise is growing categories, including mobile phones, beauty, cosmetics, and maternal and baby care products, all had decent growth.
At the same time, we are fully aware that the competition in the market is intense, and consumers have many different e-commerce platforms and shopping formats to choose from. We still have a lot to further improve. So as a result, our team must continue to work hard, and we plan to step up our investment, strengthen our core competencies and continue to provide our customers with more savings, more fun shopping experience.
Hi, operator, we can take next question on the line?

Operator

Your next question comes from Kenneth Fong with Credit Suisse.

Kenneth Fong

I have 2 questions. First is could management comment on the latest competitive landscape? Specifically, we saw a number of your peers stress the importance of low price. Do you have any plan or program in response? How do you position yourself to achieve quality growth in such an environment?
And my second question is about sales and marketing, which we saw an acceleration in sales and marketing expenses of 56% year-over-year to around RMB 18 billion in the fourth quarter. So what investment opportunities do you see as consumer sentiment improve? Are you becoming more aggressive in terms of investment? Or does this just reflect a temporary seasonal hike?

Lei Chen

(foreign language)

Cheng Peng

[Interpreted] Kenneth, so I will first share my views on your question on competition. The e-commerce market in China is huge and it is for energy. Also with the optimization in pandemic control measures, it continues to show strong resilience and I believe it is easy for everybody to see the opportunities in this market. Therefore, I think it is natural and also logical for e-commerce peers to choose to raise lending, which makes competition more intense as a result.
Also, we have noticed the recent moves in the industry. And we saw that different companies may form different strategies in face of competition. And as I have mentioned in my remarks, we believe that healthy competition is beneficial to consumers and the entire industry. But when competition intensifies, sometimes peers reaction could go in a different direction. And we always keep our duty in mind, focus on our own healthy development and embrace industry competition, even when sometimes it involves sustainable practices from peers.
For us, we believe that serving consumers better is the key to creating long-term value and we will continue to provide consumers with more savings, more fun shopping experience. Therefore, we start from our own unique value proposition. And our team and I are exploring how to provide more value to consumers. And towards this end, we will continue to focus on R&D so that we can better understand the new needs and preferences of consumers, improve their shopping experience. And in this way, we can increase consumer satisfaction.
At the same time, we are fully aware that we still have a lot to improve. So as a result, we will further step up investments, especially in the areas of agriculture and manufacturing sectors, as well as improved supply chain efficiency so that we can create more value for consumers and deepen our more savings, more from proposition. So this is my view of industry competition.
As for your question on sales and marketing expenses, I will leave it to Jun to answer your question. Thank you.

Jun Liu

Kenneth, this is Jun. Let me take the question on sales and marketing expenses. Well, during the fourth quarter, we saw consumption recovery trends continue. And given this background, we offered various types of promotions and subsidies to support consumption, as I just mentioned in the remarks. And these offers are reflected in the financial number. And you can see that our sales and marketing expenses in Q4 increased and actually, we always carefully evaluate the ROI for early investment for all of our projects.
We hope to allocate resources to places that can generate long-term high-quality development. When we see good opportunities that can create value, we invest certainly. Thank you.

Operator

Your next question comes from Ellie Jiang with Macquarie.

Ellie Jiang

I have 2 regarding our overseas product, Temu. We saw that you are now introducing Temu to Canada and Australia. Although we saw exciting commercials being put out on Super Bowl. Can you first share with us some latest developments and operational updates? How would Temu differentiate from the more well-established players in the current market?
The second question is on the relative impact on the fourth quarter financials. How did Temu's revenue being booked? Any operating metrics that management could share regarding the estimated loss levels, order size or even economics? Do we have any GMV or growth target for Temu going forward?

Lei Chen

(foreign language)

Cheng Peng

[Interpreted] Ellie, so let me take your question on our global business. So for this initiative, we aspire to create our own unique value. For example, using our supply chain know-how that we have accumulated over the years, we can offer our consumers a curated selection of quality goods at our attractive prices and also through evolving our product features, we hope to improve consumers' shopping experience.
And since we launched this platform in September of last year, it has only been about half a year and instead of focusing too much on competitors right now, we actually pay more attention to our own development and product iteration. We see that different markets in different regions, they have many differences. And we still have a lot to learn and a lot to improve. So we will remain patient iterate constantly and create -- strive to create long-term value.
And in addition, we also appreciate the support coming from consumers and merchants who have chosen our platform at this early stage of its development. Their support motivates us to do this business well. And they have also given us many valuable advices to improve our services.
As for the second part of the question, on the financial bookings -- revenue booking and financial impact of our Temu business, I will hand it over to Jun to further discuss.

Jun Liu

Okay. Let me address the questions on revenue and financial impact of our global business. Well, Temu -- well, it just started out roughly half a year ago. And given the early-stage nature and the financial impact from this business in Q4 is relatively small. And in terms of revenue booking, this business recorded as a 3P model. We are entering new markets, so we need to understand customer demands better and experiment how to make their demand effectively.
And we are not driven by financial metrics. In fact, the most interesting thing for us right now is to build our own unique value of the long run. Over time, financial metrics are just a reflection of the value we can generate. And in terms of future investment and the financial impact, as always, we will continue to carefully evaluate different opportunities, stick to our investment discipline and keep up reach our high ROI standard.

Cheng Peng

Okay. Hi, operator, I think we still have time to take 2 questions from one more analyst.

Operator

Your next question comes from Yang Bai with CICC.

Yang Bai

My first question. Can management to share with us some updates on your total grocery business? We understand that online grocery business is slowing down. And are you still expanding this business? Or do you focus more on efficiency and cost control right now?
And my second question is about the profitability. We noticed that your profitability margin decreased from the last 2 quarters. Given Q4 is the yearly strong quarter in terms of profit, does that mean that you have shifted focus more to growth and what opportunities are you spending actual?

Lei Chen

(foreign language)

Cheng Peng

[Interpreted]. Bai Yang. Let me take your question on our dual grocery business. Pinduoduo started by selling agricultural products and agriculture is one of our key long-term strategies. Through our total grocery business, we leverage technology to improve agricultural distribution efficiency and match local supply and demand effectively. This business plays a very critical role of leveraging our unique positioning in agriculture and creating our own unique value.
And in our total grocery business, we have seen the value that we can generate by improving supply chain efficiency in areas such as offering more choices of local produce, increasing fulfillment efficiency and improving user experience. At the same time, the total grocery business also creates positive social values.
Let me give you a recent example here that in the fourth quarter, we launched a dedicated campaign to help sell through seasonal unsold agricultural products to consumers directly. And the local teams of the grocery went upstream into the agricultural production region to source agricultural produce directly and match these products efficiently with local demand.
We are still in the early stage in our agriculture investments. And we see a lot of areas that can be further improved with technology. So for total grocery, we are still far away from the best level of services, and there are still a lot to improve. As a result, we will remain down to earth and continue to make long-term investments in order to further create value for our consumers. Thank you.

Jun Liu

This is Jun. Let me take your question on the profitability. And well, we are in our development stage. We still see many areas to improve and create more valuable users. We will continue to step up investment in key areas to strengthen our R&D capabilities, support agriculture and manufacturing through technology and improve our service offerings to users and profitability is not our current priority.
With that said, we always practice financial prudence for every investment. We carefully evaluate the ROI and ask ourself if it can create long-term high-quality development for us. When we see good opportunities, we will invest definitely. Thank you.

Cheng Peng

Okay. Thank you, everybody, for joining us on the conference call today. That concludes the call, and have a great day.

Operator

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