PDD Holdings Inc. (NASDAQ:PDD) Q3 2023 Earnings Call Transcript

PDD Holdings Inc. (NASDAQ:PDD) Q3 2023 Earnings Call Transcript November 28, 2023

PDD Holdings Inc. beats earnings expectations. Reported EPS is $1.55, expectations were $1.23.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today. Please go ahead.

Unidentified Company Representative: Thank you, operator. Hello, everyone, and thank you for joining us today. PDD Holdings’ earnings release was distributed earlier and is available on our website at investor.pddholdings.com as well as through news — 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 Mr. Cen Lei, our Chairman and Co-CEO; Mr. Zhao Jiazhen, our Executive Director and Co-CEO; as well as Miss 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 walk us through our financial results for the third quarter ended September 30, 2023. During the Q&A session, Lei and Jiazhen will answer questions in Chinese, and we will help translate. Please note that the English translation is for reference only. In case of any discrepancy managements statements in the original remarks 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 in our earnings call for the third quarter of 2023. I will start by giving a brief overview of our third quarter results. In Q3, we achieved a total revenue of RMB68.8 billion, representing a 94% year-on-year increase. This is a result of the improving consumer sentiment in our efforts to carrying out the high quality development strategy. As one of the largest e-commerce platforms in China, we clearly felt a continuous recovery of the economy as well as the potential and the resilience of a consumption market. With the introduction of a series of policies to support consumption, we are also seeing robust demand for consumption upgrades. Consumer behavior is telling us that consumption upgrade is not just about quality, but equally about price.

It’s the balance of quality and price that consumers care most about. Recognizing this trend, we are more confident about our value proposition of more savings and better services. And in Q3, we continue to invest platform resources to make it easier for our users to enjoy an ever greater selection of quality products at affordable prices and with great service satisfaction. In Q3, we continue exploring new ways to offer our users special promotions through a series of campaigns such as Duoduo Harvest Festival, National Brand Festival, Duoduo Reading Month, and National Day Sales. Consumers get to enjoy attractive prices that are typically only available a few times a year during shopping festivals. We have always been confident in the vitality of China’s consumer market.

While we are laser focused on the shopping experience, our efforts go beyond the surface. Investing in technology innovation is the key to achieving high quality development. In Q3, we continue to invest decisively in areas such as agri-tech, supply chain technology, and our core R&D capabilities. Our investment in R&D reached RMB2.8 billion, setting a new high. Technology innovation is the core driving force behind our pursuit of high quality development. And we will continue to step up investment in this area. At the same time, we are proactively taking on more social responsibilities. In August, the Xinjiang [Ph] area was hit by severe weather. We immediately went into action and donated RMB30 billion to the China Charity Federation to support affected region.

At the same time, we launched dedicated relief campaigns and charity live streaming events to support affected companies. For example, to help book merchants in the region resume normal operations, we set up a dedicated channel on our platform and provided relief measures such as traffic support and zero condition policy. In Q3, we went back to places in several provinces and hosted a series of Reading for You book donation events. We also donated food and helped build libraries for schools in Gansu and Hebei provinces. We are hopeful that through these efforts, we can do what we can to broaden the horizons of the young people and help them achieve a brighter future. I’m pleased to report that we were awarded the 12th China Charity Award in September.

This is in recognition of our efforts in rural revitalization, disaster relief and knowledge sharing. Although our business outside of China is still at an early stage, it has made a meaningful progress since its launch a year ago. Drawing on supply chain capabilities, we have accumulated over the years, we are able to assist many manufacturers in expanding their presence and to directly engage consumers. Through T-Mobile, our cross-border services now help manufacturers reach consumers in over 40 countries. While we have broadened our reach, the business is still in its early stage and will face uncertainties. We are excited and intrigued by the opportunities and challenges that come with international development. We look forward to working with more manufacturers and all our partners to create a next generation supply chain and shopping experience fit for the evolving trends of our times.

Our mission is to serve all and benefit all and to empower consumers all around the world to live their best lives. This year is a year of recovery and also a year of heightened competition. As always, we will maintain our strategic direction and focus on the execution of our high quality development strategy. We will keep reminding ourselves of the day one mentality and explore new and better ways to serve our users. Through rapid product iterations and feedback cycles, we will gain valuable insights that enable sustainable high quality goals. Through our efforts, we hope we can better the lives of our users and bring about positive trends to the world as a whole. Towards this goal, we will move ahead steadily and tirelessly. And now I will hand it over to our CEO, Jiazhen.

He will talk more about our high quality development strategy.

Jiazhen Zhao: [Foreign Language] Thank you, Lei. Hello everyone. This is Zhao Jiazhen. Thank you all for joining this earnings call. [Foreign Language] In the first three quarters, market vitality has continued to improve. As the effect of consumption support policies gradually works its way into the economy, we are seeing stronger demand for consumption upgrades. Against this backdrop, in Q3, we launched a series of promotions, such as the summer carnival, Duoduo Harvest Festival, National Brand Festival, and Duoduo Reading Month. Guided by our principle of serve all and benefit all, we stepped up our investment to offer more savings and better services. [Foreign Language] And during this year’s single-stay, we continue to simplify our promotions.

For the first time, we offered direct price reduction on top of our 10 billion program. We now also cover many imported goods under the 10 billion program, bringing our users a wider selection of quality products at reasonable prices. As a result of our efforts, we saw good momentum during single-stay and over 620 million consumers benefited from the 10 billion program. [Foreign Language] The single-stay promotion is one aspect of our high-quality development strategy. With the goal of creating incremental value for the consumers and the society, we focused relentlessly on execution to deliver high-quality assumptions, high-quality supply, and to improve platform governance and merchant ecosystem. [Foreign Language] Now, let me walk you through the key initiatives my team and I have worked on during Q3.

[Foreign Language] Firstly, we are focussed on high quality consumption. Since Q3, we continue to work on improving our core capabilities in offering more savings and better services. By adopting our progress platform policies and incentives, we are constantly making affordable quality products more accessible to the public. [Foreign Language] Take the Duoduo Harvest Festival as an example. In September as the largest agriculture platform in China Pinduoduo invented 1 billion platform resources and partnered with over 3000 agriculture merchants in more than 1000 product regions across the countries to launch the Duoduo Harvest Festival. At the same time, we expanded our 10 billion program to cover the true selection of participating agriculture product categories.

[Foreign Language] We continue to invest to support quality and agriculture products and in this process we helped farmers participate in the national market and grow their income. Our farmer merchant are encouraged by the results we receive on our platform and are every more committed to a career in agriculture. [Foreign Language] In addition to the Duoduo Harvest Festival which was dedicated to agriculture products in Q3, we also collaborated with over 100 Chinese National brands to launch the National Goods Festival. In partnership with CCTV, more than 50 top Chinese brands such as Shanghai Soap, 361, Cofinix [Ph] and Arke [Ph] were invited to live streaming sessions hosted on our $10 billion [Ph] program to showcase their products and tell their brand stories to a nationwide audience.

[Foreign Language] The consumer demand was boosted by our various support measures such as featured live stream event, 10 billion program and large group buying. We are pleased to see that some national brands achieved rapid growth in partnership with us. Some even experienced a 40 times growth in the past two years. And the business is still growing quickly. [Foreign Language] The high quality supply is the foundation of a high quality consumption. In Q3, we continue to invest in our supply chain capabilities which in turn enabled more local manufacturing and agriculture producers to emerge as leaders of certain product categories and expand international and even global markets. [Foreign Language] In the third quarter, our team returned to key agriculture production areas such as Jiangsu for aircraft and Northwest for food.

Under our Agricultural Cloud Initiative, we brought digital solutions to local producers to improve the resilience and the competitiveness of the local supply chain. In recent years, with the help of Pinduoduo, we are happy to see that a new generation of growers and farmers is emerging in these regions. Among them are a post-90s finance master degree holder who said no to investment banking and devoted himself to the higher crop trade, and a post-58 village director who helped farmers sell 4 million kilograms of sweet potatoes over three years. They are playing a vital role in driving rural revitalization. [Foreign Language] Innovation is a crucial element of the agricultural value chain. In Q3, we continue to promote digital inclusion and technology adoption in agriculture.

To this end, we hosted the Pinduoduo Academy Growing Competition for the second year, which serves as a platform to bring wider recognition for innovative, tech-driven agricultural practices across the nation. This year’s event attracted 96 research teams. At the same time, our platform also provided strong traffic support and coupons for agri-tech-enabled products, championed by participating teams. This is to promote standardization, brand building, and digitization in agriculture. Our support covered a wide range of products, including oranges, citruses, limes, and kiwifruits from top production regions. [Foreign Language] In the third quarter, we continued the rapid business model iteration for our global initiative. We made it easier than ever for manufacturers to reach consumers in over 40 countries and regions worldwide.

We now serve more than 10,000 manufacturers from over 100 industrial belts across Guangdong, Zhejiang, Shandong, and Anhui provinces. [Foreign Language] In our pursuit of high-quality development, a high-quality ecosystem is the foundation that nurtures a mutually beneficial environment that supports the growth of the platform and its participants. [Foreign Language] In the past quarter, we improved the protection mechanism for miners that now covers account verification, search and browsing, order restriction, and content management. In addition, we also deepened our commitment to copyright protection through a series of dedicated campaigns. We are proactively looking for areas where we can take on more social responsibilities as we strive for a greener and healthier platform ecosystem.

[Foreign Language] Last month, Pinduoduo celebrated its 8th anniversary. Looking back on the journey, we sincerely thank the consumers, farmers, merchants, investors, and other stakeholders for all the support we received. Looking ahead, we will move forward with a relentless focus on execution of our high quality development strategy. On the demand side, we continued to be consumer oriented to provide more savings and better services. On the supply side, we remain firmly rooted in the growing economy driving industrial modernization through innovation. On platform ecosystem we are allocating more resources to upgrade platform governance, support quality as in e-merchant and foster a healthy and mutually beneficial environment. [Foreign Language] 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 third quarter ended September 30, 2023. In terms of income statement, in the third quarter our total revenues increased to 94% year-over-year to RMB68.8 billion. This was mainly driven by the continued recovery in consumer sentiment and encouraging results from excluding our high core development strategy. Revenues from online marketing services and others were RMB39.7 billion this quarter, up 39% from the same quarter of 2022. Revenues from transaction services were RMB29.1 billion, up 315% from the same quarter last year. Moving on to costs and expenses, our total cost of revenues increased 262% from RMB7.4 billion in Q3 2022 to RMB26.8 billion this quarter, mainly due to increase in fulfillment fees, payment processing fees, maintenance costs, and call center expenses.

On a GAAP basis, total operating expenses increased 44% to RMB25.4 billion from RMB17.7 billion in the same quarter of 2022. On a non-GAAP basis, total operating expenses increased to RMB23.9 billion this quarter from RMB15.8 billion in Q3 2022. In the past quarter, guided by our high-quality development strategy, we invested decisively and responsibly in key strategic initiatives. Our total non-GAAP operating expenses as a percentage of our total revenue this quarter was 35%, compared to 44% in the same quarter last year. Looking into specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB21.3 billion, up 58% versus the same quarter last year. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 31% versus 38% for the same quarter last year.

Throughout the past quarter, we continued to give back to consumers and rolled out a series of promotional campaigns. We have seen good consumer feedback to our efforts. Our non-GAAP general and administrative expenses were RMB403.3 million versus RMB226.3 million in the same quarter of 2022. Our research and development expenses were RMB2.2 billion this quarter on a non-GAAP basis, and RMB2.8 billion on a GAAP basis, hitting a new high. Technology is at the heart of our value creation and will be a long-term focus for us. We’re committed to stepping up our investment in areas such as agricultural technology, supply chain, and our core R&D capabilities. Operation profit for the quarter was RMB16.7 billion on a GAAP basis, compared with RMB10.4 billion in the same quarter last year.

Non-GAAP operating profit was RMB18.1 billion versus RMB12.3 billion in the same quarter last year. Non-GAAP operating profit margin was 26% this quarter, compared with 35% for the same quarter last year. Net income attributable to ordinary shareholders was RMB15.5 billion for the quarter, compared to RMB10.6 billion in the same quarter last year. Basic earnings per ADS was RMB11.38, and diluted earnings per ADS was RMB10.60, versus basic earnings per ADS of RMB8.38, and the low earnings per ADS of RMB7.34 in the same quarter of 2022. Non-GAAP net income attributable to ordinary shareholders was RMB17 billion, versus RMB12.4 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB11.61 versus RMB8.62 in the same quarter of 2022.

We delivered solid financial results in the post-quarter. Looking ahead, we will continue to invest patiently to execute our high-quality development strategy. That concludes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB32.5 billion, compared with RMB11.7 billion in the same quarter last year. As of September 30, 2023, we had RMB202.8 billion in cash, cash flow equivalents, and short-term investments. Thank you. This concludes my prepared remarks.

Unidentified Company Representative: 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 analysts on the line. We could take a maximum of two questions from each analyst. Lei and Jiazhen will answer questions in Chinese and will help translate for convenience purposes. Operator, we are open for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question will come from Natalie Wu of Haitong International. Please go ahead.

Natalie Wu: [Foreign Language] Hi, everyone. Thanks for taking my questions. I have two here. First one is regarding the company’s strategy. How does management think about your strategic priorities and the business showed no strong momentum in the past quarter. So from our forward-looking perspective, I’m just wondering what are the key strategies on the top of on the mind of management. And my second question is regarding the agriculture. We understand that agriculture has always been a core merchandise category for Pinduoduo. So just wondering, can management elaborate on why this category is key to our platform? And we recently learned that after so many years of effort in this sector, this product category has continued to perform well and broke the meaningful goals in the past quarter. Can management give us some color on what are some of the key initiatives you have implemented in agriculture for us to achieve that goal? Thank you. [Foreign Language]

Jiazhen Zhao: Hi, this is Zhao Jiazhen. Let me take this question on strategy. [Foreign Language]

Jiazhen Zhao: As we mentioned last quarter, starting this year, we are entering a stage of high-quality development. And for us, this is not an empty catchphrase. We are implementing it in every aspect of our business. [Foreign Language]

Jiazhen Zhao: And first on the supply side, on the one hand, we are strengthening our capabilities in agriculture. And going forward, we’ll continue to invest in agri-tech and in supporting infrastructure. This is to improve the overall quality of the agricultural products that are sold on our platform. [Foreign Language]

Jiazhen Zhao: And at the same time, we launched the 10 billion ecosystem earlier this year to support the high-quality merchants and other ecosystem partners doing business with us. This is to provide the right kind of incentives to facilitate the high-quality development of the whole ecosystem. And at the same time, we are working very hard on improving our platform governance efforts, which is one of our top priorities since I took office. We are making steady progress in areas such as minor protection and also product safety. [Foreign Language]

Jiazhen Zhao: And from the consumer side, first I want to say that our 10 billion program is making some of the higher ticket items more accessible to our consumers. And during the most recent single stay, the number of users who benefited from the 10 billion program went over 620 million. And a positive user mindshare is our most valuable asset. And it takes years of efforts to build up one order at a time, but could be easily destroyed very quickly. So we will not relax in this area. [Foreign Language]

Jiazhen Zhao: And from the consumer side, secondly, we have been improving our capabilities to provide better services to our users since the beginning of this year. And so far, we’ve received positive feedback. Over the long run, through better service satisfaction, we hope to strengthen users’ trust in our platform and deepen the better services mindshare. And by doing so, consumers will be more likely to try new product categories on the platform. So we can also better serve their diverse needs. [Foreign Language]

Jiazhen Zhao: We are prepared to work long and hard for the high-quality development of our business and our platform. We are very pleased to see that the strategy is starting to deliver results even sooner than we had hoped for. [Foreign Language]

Jiazhen Zhao: And also coming back to your question on our strategic priority, the board and management team adopted the high-quality development strategy when I took office earlier this year. And this will continue to be our focus during my tenure. Thank you. [Foreign Language]

Jun Liu: Hi, this is Jun Liu. I will answer this question on your agricultural strategy. [Foreign Language]

Jun Liu: As you mentioned, agriculture is of strategic importance to us. We started out in agriculture, and that’s how many users first came to know us. We are able to retain those users by serving them well through our agricultural offerings. Today, the online penetration of agricultural products is still relatively low. So there remains huge potential in this product category. [Foreign Language]

Jun Liu: Last quarter, we launched the Duoduo Harvest Festival and brought agricultural products directly from more than 1,000 productive regions to consumers across the country. We allocated more platform resources to improve the quality of agricultural products and shopping experiences on our platform. We also brought many regional specialties to the national market for the first time by connecting farmers with suitable logistic resources. In doing so, we were able to better address consumers’ demand for high-quality, fresh, and healthy agricultural products. That’s what we have been doing to improve the quality and efficiency of the supply chain for agricultural products. [Foreign Language]

Jun Liu: At the same time, we understand that improving the supply chain is just one aspect of agricultural modernization. We also need to accelerate the adoption of agri-tech innovation to improve productivity and product quality. [Foreign Language]

Jun Liu: This year, we hosted the third Smart Agriculture Competition and the second Pinduoduo Academy Growing Competition to promote agri-tech innovation and adoption. We also supported talent specializing in agricultural areas and helped farmers increase productivity and reduce losses. Meanwhile, we recognized the importance of fundamental research. In May, we donated RMB100 million to establish a dedicated research fund at China Agricultural University to address critical needs in agricultural research. [Foreign Language]

Jun Liu: In August, we were pleased to welcome Yvonne to our board as an independent director. Yvonne is an expert in agriculture and food safety. With her on board, we will be more targeted in our investment in agricultural research. Our goal is to utilize cutting-edge research to solve practical problems in China. [Foreign Language]