Pinduoduo Inc. (NASDAQ:PDD) Q3 2022 Earnings Call Transcript

Pinduoduo Inc. (NASDAQ:PDD) Q3 2022 Earnings Call Transcript November 28, 2022

Pinduoduo Inc. beats earnings expectations. Reported EPS is $8.62, expectations were $4.69.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to PDD’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. 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. . Sir, please go ahead

Unidentified Company Representative: Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen, and I will help host the earnings call. PDD earnings release was distributed earlier and is available on IR 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 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. So please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Joining us today on the call are Chen Lei, our Chairman and Chief Executive Officer; Liu Jun, our VP of Finance.

Lei will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then take us through our financial results for the third quarter ended September 30, 2022. During the Q&A session, Lei will answer questions in Chinese and I will help translate. Please kindly note that all translations provided are for reference purposes only. In case of any discrepancy between original remarks and the translated version, statements in the original remarks should prevail. Now, it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead.

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Chen Lei: Thank you, Chen, and hello everyone. Thank you all for joining our 3Q 2022 earnings call. Let me start by giving a brief overview of our third quarter results. Our total revenue for this quarter was RMB35.5 billion. This represents a year-on-year increase of 65%. Over the past quarter, we worked closely with our merchant partners to serve our customers. We continue to provide our users with an enjoyable and affordable shopping experience to meet their growing demand for high quality and value for money product. During the past few months, many product categories such as agriculture, consumer electronics, beauty and cosmetics they all enjoyed positive consumer feedback. Many brands joined Pinduoduo and extended our consumers their best deals.

We are happy to keep creating value for our consumers, but the meanwhile we still have areas to improve and the current industry competition remains intact. We need to continue to deepen our value creation, increase our R&D investment to help further improve the supply chain efficiency, support upgrade of the price side and facilitate agricultural digital inclusion. We celebrated our seventh anniversary last month and we are extremely grateful for the support and trust from our consumers, merchants, farmers and society. And we will continue to uphold our core values of putting people first benefiting more and being more open so that we can create lasting value for all our stakeholders. Technology is at the heart of our value creation. From the very beginning, we committed to introducing technology to improve the efficiency of supply chain and create value to all the parties through digitalization.

In the past year or so, we increased our investment in technology and focus on driving innovation through research and development. We have built a young, energetic, innovative team with strong technology background and we are encouraged to see that our investment in technology is creating positive impact to society. In agriculture, we keep promoting our holistic approach to digitalize the agricultural sector so that more and more people can benefit from advances in science and technology. Our approach at agriculture is a holistic way of creating inclusive growth by leveraging the resources of Pinduoduo, we hope that more farmers will adopt agricultural technology to improve their productivity and put their farming practices in a more sustainable city.

The harvest festival last quarter is a good example of this approach. In September, Pinduoduo launched a dedicated amid availing for the platform to support annual harvest festival to its exclusive e-commerce platform pattern. Last in the months the harvest formation features over 0.5 million types of agricultural products across the country. We write the market for farmers by bringing them into digital economy. The millions of consumers also make it more feasible to implement agricultural technology. Farmers are more willing to improve crop if they have confidence that consumers will buy them. During the harvest festival, we worked with CCTV and assemble professors from the Chinese Academy of Agricultural Sciences and the China Agricultural University to promote agricultural technology.

For example, we introduced a new variety of sweet potatoes that are less prone to disease developed by research institutes. The Pinduoduo platform held this new sweet potato to reach more consumers naturally. And this crop is not grown in many parts of China and its available year. Its success has helped many farmers to prosper. This is a good example of how market demand can bring more sites out of the lab and into the field. We are committed to using the Pinduoduo platform for consumers to discover new agricultural charges so that they can enjoy healthier and more nutritious food. In harvest festival, we also showcased a series of new and improved wheat varieties cultivated by China Agriculture University with the support of our 10 billion agricultural initiative.

These wheat varieties have higher yield, higher quality and are more resistant to disease. In addition, we continue to support various events to promote the adoption of agricultural technology. Our flagship smart agriculture competition is currently underway in Shanghai and this is an annual precision farming contest aimed at agricultural researchers to develop practical technology. We are partnering with China Agricultural University and Zhejiang University for this competition with the technical support from FAO China and the Zhejiang Academy of Agricultural Sciences. The theme of competition this year is a vertical farming. Participating teams will compete to produce letters in shipping containers, using lightning, cross modeling and algorithms to consume input variables.

Several participating teams from the first two editions have already implemented their technology in a working farm as well as on our scale pilot to scale solution. We hope that this initiative can inspire more young researchers, bring more research findings to the market and support the development of agriculture. In the same way, we are improving agricultural digitization. We are helping to upgrade real economy enterprises and manufacturers by connecting them directly with the end consumers. Our pioneering team purchase model can quickly and directly connect devices through gathering consumer demand. We have leveraged digital e-commerce technology to shorten the product development cycle and help manufacturers to create product that closely manage market needs.

This can help manufacturers to build their brand. And in the past several years, we have helped to intubate nearly 1,000 manufacturing brands through technology. And since the beginning of this year, we have launched several activities to support the manufacturing industry. For example, this year, we launched a new craftsman campaign to help local craftsmen and the manufacturers by bigger market for their products through e-commerce. And we have allocated dedicated resources to support high quality local products and help small enterprises upgrade their branding. The new craftsman program is now in many regions across the country, helping local manufacturing to build their brand. We hope to use the Pinduoduo platform to have more of these undiscovered manufacturers reach more potential buyers.

We increase the money exposure also benefit the local community to more income and more job opportunities. As we enter our eight year of operation. We remain passionate and excited about the future. We are a young company with a team will drive an energy and we will constantly grow areas to create positive value through technology. And with that, Jun she will take us through the financials.

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Liu June: Thank you, Lei. Hello, everyone. I will go through our performance in the quarter ended September 30, 2022. In terms of P&L, our total revenues in the quarter were RMB35.5 billion, up 65.1% from RMB21.5 billion in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others to RMB28.4 billion this quarter, up 58.4% compared with the same period of 2021. This was primarily due to an increase in merchant activities in Q3. Our transaction services revenue this quarter were RMB7 billion up 102% versus the same period of 2021. Moving on to cost and expenses, our total cost of revenue increased 13% from RMB6.6 billion in Q3 2021 to RMB7.4 billion this quarter.

Total operating expenses this quarter were RMB17.6 billion versus RMB12.8 billion in the third quarter of 2021. Our investment in certain projects, including a few agricultural related projects, which have factored in Q3 and such our total operating expenses as a percentage of our total revenues have declined from 59.6% in Q3 2021 to 49.7% in this quarter. Looking into specific expense items, our non-GAAP sales in the marketing expenses this quarter RMB13.4 billion, 39% versus the same quarter of 2021. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 37.9%, compared with 44.9% for the same quarter in 2021. Our non-GAAP general and administrative expenses were RMB226.3 million versus RMB178.1 million in the same quarter of 2021.

Our non-GAAP research and development expenses were RMB2.1 billion, an increase of 15% from RMB1.9 billion in the same quarter of 2021. The increase was primarily due to an increase in headcount and the requirements of more experienced R&D personnel. We’re committed to growing our R&D capabilities and it will step up our spending to drive innovation on our platform. So as to meet evolving customer needs, I laid a foundation for sustainable growth. In area of agriculture where we continue to deepen our investment in agritech and promote its adoption. Technology is also key to increasing supply chain efficiency and helping facilitate the development of manufacturing industry. Operating profits for the quarter was RMB10.4 billion on a GAAP basis compared with operating profit of RMB2.1 billion in a same quarter of 2021.

Non-GAAP operating profit was RMB12.3 billion versus RMB3.3 billion in a single quarter of 2021. Net income attributable to ordinary shareholders was RMB10.6 billion compared with RMB1.6 billion in the second quarter of 2021. Basic earnings per ADS was RMB8.38 and diluted earnings per ADS was RMB7.34 versus basic earnings per ADS of RMB1.31 and diluted earnings per ADS of RMB1.15 in the third quarter of 2021. Non-GAAP net income attributable to ordinary shareholders was RMB12.4 billion, compared with RMB3.1 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB8.62 versus RMB2.18 in the second quarter 2021. In summary with think the current level of profitability in Q3 is temporary and all likely to maintain. On the one hand the reinvestment in certain projects were factored in the last quarter.

On the other hand, we continue to see user engagement, which contributed to revenue growth. This shows that our financial and business cycles which are not always in sync. We plan to increase our investment to further drive innovations on our platform and strengthen our core capabilities. As such, we think is unlikely that profit level of the past quarter can be maintained. That completes the profit and loss statement for the third quarter of 2022. Now, let me move on to cash flow. Our net cash flow generated from operating activities was RMB11.7 billion compared with RMB8.7 billion in the second quarter of 2021 primarily due to the increase in net income and changes in working capital. As of September 30, 2022, the Company had RMB137.8 billion in cash, cash 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. For today’s Q and A session, Lei and Jun will take questions from analysts on the line. We could take a maximum of two questions per analyst. Lei will answer questions in Chinese and I will help to translate Lei’s remarks for ease of reference. Operator, we may now take questions on the line.

Operator: Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from the line of Joyce Ju from Bank of America. Please go ahead.

Joyce Ju: Thanks management for taking my question. I have two questions. My first question is. Your online marketing services revenue this quarter delivered a faster growth rate than last quarter. What’s the reason for this reaccelerated growth in the third quarter? How should we understand the growth rate momentum in the future? And the second question is. Could management share the latest update on your international initiatives? Could you share your views or any takeaways at this stage? Does the current level of development made the management’s original expectations?

Chen Lei: Joyce, so let me take your two questions. With regards to your first question on growth, during the third quarter, we worked closely with our merchants to create value for our consumers. And we keep bringing our consumers more savings, more short-term experience in the Pinduoduo platform and we adopted different methods including coupons and also promotional events to better serve our consumers. And at the same time, we saw that our consumers demand for high quality products are growing. We actively make efforts to satisfy their demand. And this year, more and more brands have started to cooperate with us. They provide more choices for consumers and categories such as agricultural produce, electronics, home appliances, as well as cosmetics.

These categories have received positive customer feedback and we are grateful toward the trust our consumers placing on us. But, in the meanwhile, we should see that industry competition is still intense. And also consumer preferences and demand become more and more diversified. So we still have many areas to improve. And the impact of our overall investment activity, in fact, is not beneficial to our long-term competitiveness. So in the future, we will continue to step up investments. And we will invest to better understand our consumers need and serve them better. And we will also need to continue to immerse ourselves deeply in the real economy and investing technology R&D to help improve the efficiency of the agriculture as well as the manufacturing sector.

These would have support over a high-quality development over the long run. And as for your second question for our international business in our last quarter’s earnings conference call, we share with you the international business that we are working out. And I believe that many of you may have noticed that we rolled out our international marketplace in September and it has just been a few months since we started this business. And for our team, the international business is a new area to tour and we will start from the fundamental needs of consumers and apply the operation and supply chain knowhow and experiences that we have gained over the years and strive to create our own unique value. And also we fully respect that there are many differences across different markets.

And we also understand the need to constantly experiment and we expect that the process will be full of challenges. So we will be patient and work together with our partners to create long-term value for consumers. And currently, we are still in the early stages of exploration. And we have many areas to improve in terms of the services that we provide. We need to learn and also optimize. The process itself will take time. But I’m pretty certain that, the experience that we gain along the way will be very valuable for our company and also for our team. Thank you. So operator, we are ready to move on to the next question.