Pinduoduo Inc. (NASDAQ:PDD) Q4 2022 Earnings Call Transcript

Pinduoduo Inc. (NASDAQ:PDD) Q4 2022 Earnings Call Transcript March 20, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to PDD Holdings Inc. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. I must advise that today’s conference is being recorded. I would now like to hand the conference over to your host today, Mr. Chen Pang. Sir, please go ahead.

Chen Pang: 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 Holdings 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. 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 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 the 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.

Chen Lei: Hello, everyone. Thank you all for joining us on our earnings call for the fourth quarter and the 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 RMB39.8 billion, which is a 46% increase compared to the previous year. Our total revenue over the past year was RMB130.6 billion, which would represent a growth of 39% year-over-year. In 2022, we focus on strengthening our core capabilities. We invested over RMB10 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 as a priority as a whole. During the past year, we are encouraged to see many of our young colleagues take on more responsibilities and stepped into bigger roles. These young talent offer passion and creativity and have demonstrated their ability to take on new challenges, explore different possibilities, and 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 will 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, although we find the right opportunities to invest and execute relentlessly to create value for consumers and the society.

In Q4, we observed rising sentiment among our users. To support consumption recovery, we actively leveraged resources in a pivotal platform. During the promotion period, we setup our investment to further improve consumer engagement and build their trust. 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 in large the diversity of products on our platform to address our consumers’ diverse needs. 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 order volume of many seasonal agricultural products more than doubled with how to boost consumer awareness of various local agricultural production leaders. As the Chinese New Year happened earlier this year, we launched the Chinese New Year promotion in late December to meet consumer needs. We worked closely with merchants all over the world who curate more products lectures for consumers. And we are happy to see that our efforts have paid off. With many imported produce, such as cherries or chili had the sale month for Norway receiving very positive feedbacks. We are glad to contribute to in supporting consumer confidence. As the consumption continue to recover and consumer sentiment continues to improve, everyone can see the potential to opportunities in this market.

As the industry evolves, we noticed a number of recent at our peers. I believe a healthy competition is beneficial in this industry. But sometimes, when competition intensifies, some companies may take different actions. For us, we will always adhere to our beauty as a company, focus on our own sustainable development, embrace competition even when sometimes it involved 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, to improve supply chain efficiency and satisfy consumers increasing need 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 doesn’t match consumer needs and passes on the savings to consumers. In the past year, we rolled out multiple initiatives to help manufacturers directly engage with end consumers. Take a manufacturer in the personal care sector as an example. We use our team size to identify opportunities for personalized quality products among younger generation. As a result, the manufacturer developed personal care products with present features and designs, which received excellent market feedbacks. This also helped 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 supply chain insight and technology has helped manufacturers better position themselves, develop popular products in the rapid changing markets 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 these other options of agritech solutions. Since 2020, Pinduoduo has hosted a flagship Smart Agriculture Competition for three consecutive years, offering a theme for young agricultural researchers and growers to explore practical technology solutions that improve yield, shorten production cycle and promote sustainability.

We also have teams from previous competitions 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 hometown after years of hearings in large cities. They are tech-savvy about our latest tools such as live streaming and they are for energy and drive. With the help of insights from our platform, it has been very good understanding of consumer needs and play an important role in their local communities. On average, one such new farmers 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 prompt us to quickly assemble a dedicated team and launch a nationwide campaign with people’s daily. Through our help of the farmer channel on Pinduoduo platform, we provided dedicated traffic support to help effective farmers to sell the unsold seasonal produce by reaching more end consumers in a short period of time. Our total grocery teams all across the country also have played an important role as each team visited various agricultural production regions in their harvest. Source also produced directly from farmers and quickly matched it with local consumer demands to sell it.

Nejron Photo/Shutterstock.com

With our teams’ strong efforts, we were able to sell nearly 15,000 tons of agricultural produce nationwide during this campaign. And we are encouraged to see that our supply chain capabilities and create tangible value for the sector in a society. We are proud to receive FAO 2022 Innovation Award from the United Nations Food and Agriculture Organization, which recognized innovation that creates an impact in agricultural supply chain. This award is a vote of confidence in our holistic to proactive approach to agriculture and it motivates us to keep forging ahead so that more and more people can enjoy the benefits of digital inclusion and technology adoption in agriculture. Here, I will 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 these various businesses. We try to create our own unique value with Temu. So, we always start from the fundamental consumer needs, explore how we can serve them well. People will stick to the values of empowerment, diversity and inclusion, integrity as well as social responsibility. As we enter 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 continuous support. And now, let me turn you over to Jun to update you on our financial performance.

Liu Jun: 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 the income statement, our total revenues improved to 46% year-over-year to RMB39.8 billion in the fourth quarter and 39% year-over-year to RMB130.6 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 RMB31 billion this quarter, up 38% compared to the same period of 2021. This was primarily due to an increase in margin activities as a result of improvements in consumer sentiment. Our transaction services revenue this quarter were RMB8.8 billion, up 86% versus the same period of 2021.

Moving on to cost and our expenses, our total cost of revenues increased 37% from RMB6.5 billion in Q4 2021 to RMB8.9 billion this quarter. For the full year, our total cost of revenues decreased 1% to RMB31.5 billion. Total operating expenses this quarter were RMB21.8 billion on a GAAP basis versus RMB13.8 billion in the same quarter of 2021. On a non-GAAP basis, our total operating expenses increased to RMB19.3 billion this quarter from RMB12.3 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 the full year of 2022, total GAAP operating expenses were RMB68.7 billion, up from RMB55.3 billion last year. Looking into specific expense items, our non-GAAP sales and marketing expenses this quarter were RMB17.3 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 and 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 RMB43.2 billion in 2021 to RMB52.2 billion in 2022. Our non-GAAP general and administrative expenses were RMB360.8 million in Q4 versus RMB195.8 million in the same quarter of 2021.

Our annual non-GAAP general and administrative expenses were RMB1 billion in 2022 versus RMB748.4 million last year. Our non-GAAP research and development expenses were RMB1.7 billion in the fourth quarter, an increase of 34% from RMB1.3 billion in the same quarter of 2021. The increase was primarily due to an increase in headcount and the recruitments of more experienced R&D personnel and severance cost. As a technology driven company, the value we create could not be achieved without our R&D efforts. We need to further grow our R&D capabilities to understand the constantly evolving consumer demand and drive innovation to satisfy their needs more effectively. In addition, we continue to leverage our technology background to improve digital technology adoption factors, such as agriculture and manufacturing.

Also, it is worth noting that for full year, our annual GAAP R&D expenses to cost RMB10 billion for the first time. We aim to continue to step up investment in this area to form a solid foundation for the long-term development. Operating profit for the quarter was RMB9.1 billion on a GAAP basis and RMB11.6 billion on a non-GAAP basis. Net income attributable to ordinary shareholders was RMB9.5 billion for the quarter and RMB31.5 billion for the full year. In the fourth quarter, basic earnings per ADS was RMB7.42 and diluted earnings per ADS was RMB6.52 versus basic earnings per ADS of RMB5.26 and diluted earnings per ADS of RMB4.68 in the same quarter of 2021. Non-GAAP net income attributable to ordinary shareholders was RMB2.1 billion for the quarter.

In the fourth quarter, non-GAAP diluted earnings per ADS, was RMB8.34 billion versus RMB5.88 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 RMB26.6 billion for Q4 and RMB48.5 billion for full year of 2022 compared with RMB16.4 billion in the same quarter of 2021 and RMB28.8 billion in 2021 primarily due to an increase in net income and the changes in working capital. As of December 31, 2022, the company had RMB149.4 billion in cash, cash equivalents and short-term investments. Thank you. This concludes my prepared remarks.

Chen Pang: 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. Operator, we may now take questions online.

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Q&A Session

Operator: Your first question comes from Joyce Ju with Bank of America. Please ask your question.

Joyce Ju: Thanks management for taking my questions. I have two 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 lines globally and how do you position yourself in the global markets? 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 withstand a deceleration from the third quarter. How should we understand the growth and how should we actually expand the momentum going forward?

Chen Lei: Hello, Joyce and thank you for your questions. And I can take your question on strategy first. First of all, we are in a development stage, instead of a stabilized stage. And we still have a long way to go in terms of serving consumer as 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 links 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 solution to the market factor. 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 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 long-term patient investment. And as for your second question regarding other revenue growth, well throughout the past quarter, we saw a strong resilience and also vigor 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 of few 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 toward high-quality merchandise is growing categories, including mobile phones, beauty, cosmetics, and maternal and baby care products or 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 investment, strengthen our core competencies and continue to provide consumers with more savings or more fun shopping experience. Thank you. Hi, operator, we can take that question on the line.