PDD Holdings Inc. (NASDAQ:PDD) Q3 2024 Earnings Call Transcript

PDD Holdings Inc. (NASDAQ:PDD) Q3 2024 Earnings Call Transcript November 21, 2024

Operator: Ladies and gentlemen, thank you for standing by. Welcome to PDD Holdings Inc. Third Quarter 2024 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. At which time, if you wish to ask a question, you will need to press star then one on your telephone. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today. Sir, please begin.

Lei Chen: 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 investors.pddholdings.com, as well as through the Globe Newswire 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 Mr. Chen Lei, our Chairman and Co-Chief Executive Officer; Mr. Zhao Jiajun, our Executive Director and Co-Chief Executive Officer; as well as Ms. Liu Jin, our VP of Finance.

Lei and Jiajun will make some general remarks on our performance for the past quarter and our strategic focus. Jin will then walk us through our financial results for the third quarter ended September 30, 2024. During the Q&A session, Lei and Jiajun will answer questions in Chinese, and we will help translate. Please kindly note that the English translation is for reference only. In case of any discrepancy, statements in the original language should prevail. Now, it’s my pleasure to introduce our Chairman and Co-Chief Executive Officer, Mr. Chen Lei. Lei, please go ahead.

Chen Lei: Thank you. Hello, everyone. Thank you all for joining our earnings call for the third quarter of 2024. In the third quarter, we stepped up our efforts in executing a high-quality development strategy and invested firmly in building a healthy platform ecosystem. We rolled out several initiatives that extended our ecosystem upgrade to the whole supply chain, such as the $10 billion fee reduction program and a high-cost emergency support program. It offers broad cost savings and efficiency gains to over ten million merchants. During the process, we encouraged the agricultural regions and industrial values that we serve to embark on a new phase of high-quality development. This past quarter, we delivered robust results with revenues and net income reaching $25 billion, respectively.

When compared to the last quarter, we have seen an alteration in revenue growth, and profits have also trended lower. This was partly due to the intensified competition in the e-commerce sector and the various challenges faced by our business. At the same time, as noted last quarter, our investments in ecosystem development are expected to impact short-term financial results, and this is within our expectation. Beyond the financial results, we placed greater value on the long-term benefits of ecosystem investments. Over the past quarter, our initiatives in fee reductions and merchant support policies have received positive feedback from merchants, manufacturers, as well as from consumers. In mid-August, we first launched a $10 billion fee reduction program, which included several measures such as service fee refunds, bill reduction for buy now, pay later services, lower security deposits, and an easier fund withdrawal process.

In addition, we also upgraded after-sales survey support for merchants, which brings further cost savings while improving service quality. This effort injected fresh energy into our ecosystem, creating opportunities for growth and transformation that benefit both our merchants and industry-based search. On the first, about an e-commerce platform, we also adopted logistics support vendors to promote e-commerce services in remote regions across Western China. Last quarter, we eliminated the transshipment fees for orders to these regions, with all such costs covered by the platform. This innovation marked the first upgrade to our fulfillment experiences that builds on our earlier initiatives that provided free shipping to some villages in Western China.

Programs like this not only benefit local businesses but also enable merchants to enter these underserved markets, which further strengthens the economic link between the different regions. In addition to fee reductions, we also launched a high-quality merchant support program, which aims to empower merchants and brands that demonstrate strong product and technology innovation capabilities. Leveraging our digital capabilities, we offer comprehensive support in product development, marketing, operation, and supply chain management. The examples set by these quality merchants and brands also serve as the driving force behind the growth and transformation of agricultural production regions and industrial battles in the future. At the moment, the $10 billion fee reduction program covers all product categories across all regions, with over $10 billion RMB in fee reductions planned for the coming year.

The logistics support measures continue to benefit consumers from remote areas, driving significant order volume growth from this region compared to the last quarter. Meanwhile, the high-quality merchant support program has already been implemented in dozens of agricultural regions and industrial zones, enriching our platform supply chain for high-quality products. On the demand side, consumers are experiencing a shift in their preferences, with a greater focus on quality and personalization. This has posed new demands on the supply chain. At the same time, our initiatives in fee reductions and merchant support policies are encouraging more merchants to innovate, which enables them to better meet the consumer’s demand for more quality products, thereby creating a positive cycle.

This reaffirms our commitment to making investments that drive impactful results over the long run. We will continue to firmly execute our high-quality development strategy and nurture a healthy platform and supply chain ecosystem, which brings sustained benefits to consumers, merchants, and manufacturers. As a platform rooted in agriculture, we continue to make our own contributions in this field, with a particular focus on advancing research and technology innovation. On September 20th, we hosted the final round of the fourth Smart Agriculture Competition, where six finalist teams explored cutting-edge technologies in agriculture digitalization and experimented with real-world applications. On September 26th, we hosted the Global AppriIno Challenge 2024 in collaboration with leading research institutes, where young entrepreneurs from around the world presented innovative digital solutions to tackle agriculture challenges faced by farmers around the world.

As mentioned last quarter, as a global company in a new era, we are committed to driving innovation and adapting to change. We are also prepared to do more to give back to society, to support agriculture and other industry sectors, and to take on greater social responsibility in regions across the globe. I will now hand it over to our Co-CEO, Zhao Jiajun, to talk in more detail about our development plan.

Zhao Jiajun: Thank you, Lei. Hello, everyone. This is Zhao Jiajun. Thank you all for joining our earnings call for the third quarter of 2024. In the third quarter, thanks to the steady recovery of macro consumption, our business performance remained robust. As we continue to firmly execute our high-quality development strategy, as Lei just mentioned, we have been actively optimizing the platform ecosystem. This includes a series of fee reductions and initiatives to support our merchants, aiming to ensure benefits for both the supply and demand sides. Let me now take a moment to share some of our efforts in supporting merchants. As we discussed last quarter, our investment in the platform ecosystem focused on two key areas. First, we have reduced transaction fees for high-quality merchants.

On the other hand, we have committed billions of resources to empower merchants and emerging industrial clusters with strong product and technology innovation capabilities. In the third quarter, our $10 billion fee reduction program introduced a series of measures, which played a key role in helping merchants lower costs and improve efficiency through substantial fee reductions and refunds. Many merchants, especially in agriculture and national goods, saved hundreds of thousands of RMB a year, largely reducing their operating costs. This allows them to free up more resources for product redevelopment and technology upgrades, driving the industry toward a new phase of high-quality growth. Additionally, we have enhanced the after-sales service system for merchants.

We introduced a green channel alongside a dedicated after-sales service team to fully support merchants with abnormal orders, complaints, and customer dissatisfaction. Once a merchant’s appeal is approved, the platform compensates for the relevant orders. This improves not only the merchant’s experience but also the overall business environment on the platform. As part of our logistic support initiative, we cover all transshipment fees across Western China. This substantially reduces delivery costs for orders in these regions. For categories like agricultural products and daily essentials, delivery fees were cut by up to 70%, encouraging merchants to enter these markets. Quality products from across the country are now reaching Western China, promoting further infrastructure development in e-commerce and logistics.

It also opens new opportunities for the region’s abundant resources to access national markets. Following our $10 billion fee reduction program, we also launched a high-quality merchant support program. For example, during the harvest festival in early September, we allocated $1 billion RMB in subsidies and $2 billion in online traffic resources to support high-quality agricultural merchants from various regions. This effort helped seasonal agricultural products reach urban markets, boosting yields and income in agricultural communities. The high-quality merchant support program also extended to other industrial communities. Leveraging the platform’s digital capabilities, we are collaborating with manufacturers to explore full supply chain models.

This helps them advance manufacturing processes, strengthen brand recognition, and drive industries towards high-quality developments. In the recently concluded W11 shopping festival, our $10 billion program partnered with numerous national brands to launch customized high-quality products. This initiative led to impressive growth, with sales of national brands, both new and established, rising more than tenfold quarter on quarter. In the coming quarters, we will further broaden our support for high-quality merchants, covering more agricultural and industrial regions to drive industry transformation and advancement. Our firm investments on the supply side have enabled us to provide consumers with a more diverse selection of high-quality products, aligning with their evolving preferences.

In response to shifting consumption trends, we have expanded offerings of new smartphones, top-brand cosmetics, and healthy food to users in first and second-tier cities, addressing the personalized demands of urban professionals and younger generations. For those in third and fourth-tier cities and rural areas, we have focused on offering more premium home appliances, maternity and baby products, and fresh produce, driving a wave of consumption upgrades. As Lei noted, over the next few quarters, we will stay committed to our high-quality development strategy. We will carry on with the fee reductions and merchant support initiatives, further enhance our ecosystem, and keep improving our capabilities to navigate the challenges ahead. Next, I will hand over to Jun.

She will provide an update on our financial performance for the third quarter.

Jun Liu: Thank you, Jiajun. Hello, everyone. Let me walk you through our financial performance for the third quarter ended September 30, 2024. In terms of income statements, in the third quarter, our total revenues increased 44% year over year to RMB99.4 billion. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and orders were RMB49.4 billion this quarter, up 24% from the same quarter of 2023. Revenues from transaction services were RMB50 billion, up 72% from the same quarter last year. In Q3, our top-line growth has further moderated in comparison to the last few quarters amid intensified competition and external challenges. On the cost of revenues, our total cost of revenues increased 48%, from RMB26.8 billion in Q3 2023 to RMB39.7 billion this quarter, due to an increase in fulfillment fees and payment processing fees.

On a GAAP basis, total operating expenses this quarter increased 39% to RMB35.4 billion from RMB25.4 billion in the same quarter of 2023. On a non-GAAP basis, total operating expenses increased to RMB32.9 billion this quarter, from RMB23.9 billion in Q3 2023. In Q3, we further increased our investment to promote high-quality development of a sustainable platform ecosystem. Our total non-GAAP operating expenses as a percentage of total revenues this quarter was 33% compared to 35% in the same quarter last year. Looking into specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB29.8 billion, up 40% versus the same quarter last year. Throughout Q3, we remained focused on giving back to consumers through promotional campaigns and continued to invest in marketing to promote our platforms.

On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenues were 30%, versus 31% for the same quarter last year. Our non-GAAP general and administrative expenses were RMB647 million versus RMB403 million in the same quarter of 2023. Our research and development expenses were RMB2.34 billion this quarter on a GAAP to non-GAAP basis, up 10% year over year, and RMB3.1 million on a GAAP basis. Our R&D expenses reached a new high this quarter, reflecting our focus on strengthening the core technology capabilities of our platform as a foundation for our supply chain innovation and a trustworthy shopping environment. We are committed to further increasing our investment in R&D. On a GAAP basis, operating profit for Q3 was RMB24.3 billion, versus RMB16.7 billion in the same quarter last year.

Non-GAAP operating profit was RMB26.6 billion versus RMB18.1 billion in the same quarter last year. Non-GAAP operating profit margin was 27% this quarter, compared with 26% for the same quarter last year. Net income attributable to ordinary shareholders was RMB25 billion for the quarter, compared to RMB15.5 billion in the same quarter last year. Basic earnings per ADS was RMB18.02 and diluted earnings per ADS was RMB16.91, versus basic earnings per ADS of RMB11.38 and diluted earnings per ADS of RMB10.60 in the same quarter of 2023. Non-GAAP net income attributable to ordinary shareholders was RMB21 billion versus RMB17 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB18.59 versus RMB11.61 in the same quarter of 2023.

As noted last quarter, our profitability may gradually trend lower over the long run, as we continue to invest to support high-quality merchants and promote a sustainable platform ecosystem. More importantly, we will remain committed to long-term investment to build a healthy platform ecosystem, bringing sustained benefits to consumers, merchants, and other ecosystem partners. That completes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB27.5 billion, compared with RMB32.5 billion in the same quarter last year. As of September 30, 2024, we have RMB38.5 billion in cash, cash equivalents, and short-term investments. Thank you. This concludes my prepared remarks.

Lei Chen: Thank you, Jun. Next, we will move on to the Q&A session. In today’s Q&A session, Lei, Jiajun, and Jun will take questions from analysts on the line. We will take a maximum of two questions from each analyst. Lei and Jiajun will answer questions in Chinese, and we will help translate for convenience purposes. Operator, we are now open for questions.

Q&A Session

Operator: Thank you. We will now begin the question and answer session. If you wish to cancel your request, please press the pound or the hash key. Participants are requested to restrict the number of questions to two at each time. Our first question will come from Kenneth Spong with UBS. Please go ahead.

Kenneth Spong: Hi. Last quarter, management placed great emphasis on your commitment to invest in the merchant ecosystem. We have also seen the company implementing a series of merchant support initiatives since then. Can management share the current progress of this initiative and elaborate on the plans moving forward? My second question is, we are seeing that the company is still actively exploring new markets in its global business. But at the same time, we also noted that the external environment is evolving, and we are hearing different views on the business from external stakeholders. Could management share your thoughts on this and also provide an update on the future plans for the global business?

Zhao Jiajun: Hi. This is Zhao Jiajun. Let me take your question on our merchant support initiative. As we have always emphasized, it is crucial for us, along with all our ecosystem partners, to collaborate closely in creating value for consumers. Merchants, as essential partners in serving consumers, are vital in this effort. A healthy and sustainable merchant ecosystem is therefore fundamental to our development. To this end, we have made substantial investments in the merchant ecosystem this quarter, giving strong support to high-quality merchants through the $10 billion fee reduction program. As just mentioned, we have implemented several policies, including service fee rebates, lower security deposits, enhanced shipment fees for orders from remote regions, and enhancing after-sales support for merchants.

We aim to guide high-quality merchants towards sustainable growth through consistent implementation of this policy over the long term. For instance, the fee reduction efforts, such as service fee refunds and deposit reductions, not only lower merchants’ operational costs but also improve their efficiency. This, in turn, empowers merchants to invest more in improving their products and services over time. In the third quarter, we also made substantial progress in logistics. With our logistics fee reduction policy, merchants are no longer charged for transshipment fees for all orders shipped to Western regions. This enables merchants to reach a broader customer base at lower costs. It also furthers our strategy to extend logistics services across Western China, encouraging the distribution of high-quality goods to these regions.

These policies have received notable positive feedback from merchants. Moving forward, we are committed to making more meaningful long-term investments in this direction. By fostering a stronger merchant ecosystem, we aim to establish a more robust supply chain and deliver better products and services to consumers, together with our merchants.

Chen Lei: Hi, Kenneth. Let me take your question on the global business. Our goal in the global business has always been to deliver unique value to consumers across different countries. This commitment remains unchanged. To achieve this goal, we will continue to strengthen our capabilities to improve our supply chain and upgrade our services. As our business continues to grow, consumers and external stakeholders have placed higher requirements on us. In response to these, we have always maintained a proactive and open attitude. Over the past few months, we have been actively engaging with external stakeholders in the markets where we operate. We carefully listen to the feedback and suggestions, and we promptly incorporate their suggestions into our daily operations.

In this way, we are able to continuously enhance our service standards and compliance posture. At the moment, we are already seeing some initial results from these communication efforts, and we are bringing our operations to higher standards in various markets. As for global business growth, we will continue to strengthen our capability in this regard to deliver high-quality services that meet the preferences and expectations of consumers in each market. At the same time, as mentioned last quarter, the impact of the intensifying competition in the global market and the complex external environment combined will bring ups and downs to our business. This is inevitable. However, this will not deter us from exploring the way forward. Challenges from the outside and external expectations motivate us to continue to strengthen our capabilities and deliver a safer and better shopping experience for global consumers.

Thank you.

Operator: The next question will come from Charlene Liu with HSBC. Please go ahead.

Charlene Liu: Thank you. From your prepared remarks and from public information, we noticed that the company recently paid a lot of attention to compliance and platform ecosystem. We also saw some new initiatives being launched. Can you share some detailed measures you have taken and what goals you expect to achieve in this area going forward? The second question is that we noticed that this quarter’s profit and profitability saw a slight decline quarter on quarter. Can you kindly share your thoughts on this? How does this align with the trend discussed by management on last quarter’s earnings call? Looking ahead, how does management think about longer-term profitability trends? Thank you very much.

Zhao Jiajun: Hi. This is Zhao Jiajun. Let me take your question on compliance. Our business growth, coupled with regulatory trends in various markets, has placed higher demands on our compliance capabilities. We believe that providing a safe and reliable shopping environment is the duty of an e-commerce platform. Therefore, we see compliance and a high-quality ecosystem as key components of our high-quality development strategy. To this end, we have taken further steps to scale up the execution of a robust set of trust and safety initiatives, all designed to fortify our compliance systems. In terms of compliance management, we invested heavily in building a strong expert compliance team to closely track regulation changes and industry trends across our markets.

This allows us to translate insights into actionable compliance guidance. At the same time, we have developed comprehensive educational materials for our merchants to enhance their compliance capabilities and foster the high-quality development of the supply chain. Leveraging technologies, we have further streamlined our merchant onboarding and product listing processes. We have invested substantial resources in proactive product quality checks, combining technology and manual screening to properly detect and address potential productivity risks. At the same time, we work closely with external stakeholders to meet their requirements, striving to set industry-leading compliance standards. Through these investments in compliance and our support for high-quality merchants, we aim to achieve further upgrades in the supply chain.

By removing bad actors and empowering top merchants, we are fostering a healthier and more sustainable merchant ecosystem. These efforts will ultimately lead to more valuable products and services for our consumers. Thank you.

Jun Liu: Hi. This is Jun. Thanks for your question. I will take your second question about profitability. Last quarter, we communicated that our revenue growth may see some moderation as a result of competition and external factors. In addition, as we invest primarily to drive a healthy and sustainable platform ecosystem, our profitability may gradually trend lower in the long run. Beyond the financials, we are already seeing good initial results from our investments in the platform ecosystem. We are encouraged by the positive feedback from merchants on our merchant support initiatives. We believe that investment in the merchant ecosystem lays a foundation for the platform’s healthy and sustainable development. In the long run, this asset will benefit the merchants, consumers, as well as the platform, creating more value for consumers by enabling supply chain upgrades.

I think this is a long journey, and we will continue to explore more investment in this direction to drive impactful results. Thanks.

Operator: The next question will come from Joyce Ju with Bank of America. Please go ahead.

Joyce Ju: I want to translate myself. I have two questions. My first question is, can management share with us some new consumption trends that you have observed during this year’s Double Eleven shopping festival? How does management rate PDD’s performance in this promotion? What are the new initiatives that PDD experimented with during this event? Does management feel satisfied with the results? My second question is regarding competition. From what we observed during this year’s Double Eleven, the competition remained intense in China’s e-commerce market, and PDD’s growth rate also slightly slowed down during this quarter. Could management help us understand your thoughts on domestic competition pressure? Will there be any adjustment in your strategies going forward? Thank you very much.

Zhao Jiajun: Hi. This is Zhao Jiajun. Let me take your question on domestic consumption and the shopping festival. We have seen an overall recovery in consumer spending and strong growth in online consumption during the second half of this year. Recently, driven by the shopping festivals, we have also seen increasing consumer activities on our platform. We have observed more diverse choices for consumers in today’s interconnected world and greater movements across platforms. In response, it’s essential to stay firmly focused on the consumer and to deepen their trust in our platform. To achieve this, we have consistently invested significant resources on both the consumption and supply sides, delivering real benefits that reinforce trust in our platform.

During this year’s Double Eleven shopping festival, we introduced the $10 billion voter campaign for the first time, offering consumers direct benefits. The response was extremely positive, with strong sales growth across several product categories, notably agricultural products, small home appliances, and daily necessities, which saw remarkable surges. This success demonstrates how our platform, in collaboration with merchants, has effectively fulfilled consumers’ demand for valuable and cost-effective products. At the same time, our super double discount event supported a group of high-quality merchants with innovative products and technology. Many national brands leveraged our platform to launch new premium products, quickly gaining recognition during the shopping festival.

The growth of these quality offerings enriched the selection available to consumers. This, in turn, strengthened consumer trust in our platform and benefited both the demand and supply sides. Guided by the consumer-first mindset, we have invested patiently and strategically over the long term, gradually earning the trust and preference of our users. Moving forward, we are confident that by maintaining high-quality long-term investments in consumption, supply chain, and ecosystem, we will further enhance consumer confidence in us. This forms the foundation of our long-term healthy demand. Regarding your second question on competition, as we have mentioned on several occasions, the overall competition in e-commerce remains intense, and our business is no exception.

Additionally, with any business, our growth won’t follow a linear path over the long term. Given that, the slowdown in our revenue growth, we believe, is inevitable. Since Q3, the release of additional macroeconomic support policies has opened up new opportunities while also presenting challenges. The Chinese domestic market is highly dynamic, characterized by constant changes, diverse business models, and intensifying competition. However, our team’s gradual aging and lack of certain capabilities might cause us to miss out on macro opportunities, especially when facing new or evolving situations. For instance, multiple macro policies introduced this year have brought significant support to industries and fueled consumer demand. However, our team was unable to fully leverage this macroeconomic shift due to the limitations in our operational experience, solely as a third-party platform.

Consequently, to stay competitive with similar products, we had to incur much higher costs than peers, which inevitably affects our profitability now and in the near future. With the ongoing expansion of consumption-boosting policies, we are excited about the changes ahead and eager to tap into new opportunities to better serve our consumers. However, due to the limitations imposed by our platform business model and operational mindset shaped by our previous experience, along with the challenges in our capabilities, we may continue to experience disadvantages relative to our peers for some time. This could further increase the financial impact, presenting a challenge for us. In response to the current competitive environment, we are committed to maintaining high standards and enhancing our core capabilities.

We will continue to explore impactful opportunities and make long-term high-quality investments in our product chain and ecosystem, ensuring these initiatives translate into more valuable products and better services for consumers. We believe that the high-quality development of the ecosystem and supply chain is fundamental for the platform’s long-term success and allows us to create long-term value for consumers. This is a long journey that requires patience. We are fully prepared for it, and we will not be distracted by the evolving competitive environment. Thank you all.

Lei Chen: Thank you, Jiajun, and thank you all for joining us today. We look forward to speaking with you again next quarter. Thank you.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all now disconnect.