Cactus Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 22, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. Please be advised that today's conference is being recorded.

Speaker 1

I would now like to

Operator

hand the conference over to your host today. Sir, please go ahead.

Speaker 2

Thank you, operator. Hello, everyone, and thank you for joining us today. TDD Holdings' earnings release was distributed earlier and is available on our website at investor. Pddholdings.com as well as through the GlobeNewswire services. Before we begin, I would like to refer you to our Safe Harbor statement in earnings press release, which also applies to this call as we will make certain forward looking statements.

Speaker 2

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. Zhaojiajun, our Executive Director and Co Chief Executive Officer as well as Ms.

Speaker 2

Liu Jun, our VP of Finance. Lei and Jiajun 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 Q1 ended March 21 31, 2024. And during the Q and A session, Lei and Jiajun will answer questions in Chinese and will help translate. Please note that the English translation is for reference only and in case of any discrepancy, statements in their original language should prevail.

Speaker 2

Now it's my pleasure to introduce our Chairman and Co Chief Executive Officer, Chen Lei. Lei, please go ahead.

Speaker 3

Hello, everyone. Thank you all for joining our earnings call for the Q1 of 2024. 2023 was the 1st year on our journey towards high quality development. We are encouraged by the positive feedback to our users and merchants and are more confident in our strategic direction. 2024 is a critical year to deepen our execution.

Speaker 3

In the Q1, we benefited from an improving macro environment and achieved steady growth. Our total revenue reached RMB86.8 billion, which represents a 131 year on year increase. Looking ahead, we will continue to work on the fundamentals of our business through our investments in supporting high quality consumption, broadening high quality supply and promoting a high quality ecosystem. Our proactive transition to high quality development will inevitably bring challenges and difficulties, but still, we decided to embark on this journey and are determined to execute it well because we are seeing a few irreversible long term market shifts. First of all, we clearly see a trend of consolidated upgrades.

Speaker 3

And in response to this, we are innovating our service offering to cover more consumption scenarios and at the same time actively engaging with our merchants to broaden our product selection. For example, this year, we are deepening our cooperation with top brands from around the world to bring a new product from Southeast to our platform. In addition to meeting consumers' demand for more savings and better services, we hope to deepening connections with our consumers and strengthening our platform with Myshare in new product categories and among new customer groups. High quality consumption will not be possible without short pricing capabilities. And over the years, we have built our valuable experience across the entire e commerce pricing.

Speaker 3

Through technology innovation and investments in research and development, our supply chain know how is transformed into easy to use tools and services to empower our merchants with constantly digital solutions. This measure has proven proved to be effective in terms of attracting more merchants on our platform, broadening our product line selecting and reducing product dotcom, all of which are essential to support high quality consumption. And lastly, an ecosystem that encourages compliance business contact is the foundation to long term growth of our platform. As commerce integrates with digital technology at a record pace, consumers and regulators are holding e commerce platform accountable for higher standards. And we are taking the initiative to build an industry leading compliance program and to leverage our technology capabilities to empower FMC businesses with our compliance know how.

Speaker 3

This is to foster a healthy environment that attract quality merchants that are willing to play better roles and drive our bad actors, thereby creating a positive feedback loop. When it comes to consumer well-being and economy interest, we always stand behind performance. We are focused on building long lasting trust with our consumers and not on short term games. We also adopt a similar long term orientation to other aspects of our business. As a company that is still in the growth mode, we will continue to focus on long term value creation and invest firmly into opportunities with great potential.

Speaker 3

We are not guided by short term goals and this is also reflected in how we manage our global business. Our global business is still in the exploration stage and there's plenty of room for improvement. We are prepared to respond positively to challenges and we view these as important opportunities to improve ourselves. We are in this for a long term and we will not be distracted by short term results. Instead, we will focus our efforts on building our key capabilities.

Speaker 3

Firstly, supply chain capabilities. We will continue to roll out tailored fulfillment solutions in different markets to improve supply chain efficiency and reduce costs. We welcome Cority merchants from around the world to join us in providing a rich variety of quality products for consumers worldwide. Secondly, legal and compliance capabilities. With the goal of building an industry leading compliance program, we will make friends' investments to create a safe and trustworthy shopping environment for our users.

Speaker 3

To uphold our compliance standards, who will conduct forward looking research into laws and regulations in the markets we operate and transform our know how into tools that can be easily assessed at our merchants. And thirdly, service capabilities. In response to the diverse needs and the quality standards of global users, we will keep up our investment, technology and operations to improve overall user experience. As we bring more value to consumers and merchants around the globe, we are hopeful that our platform will be increasingly recognized and welcomed by local communities we serve. We do not expect this to be easy.

Speaker 3

I mean, we are prepared for investments over the long run. Finally, I would like to say that we are operating in a constantly evolving industry with competition and opportunities are both emerging at rapid pace. Competition can be intensifying in the past has been intensifying in the past quarter, which will inevitably increase our expenses and affect some organic growth. But on the other hand, new technologies and new markets also offer us tremendous opportunity for growth. At this moment, I want to release our first shareholder letter when the company went public.

Speaker 3

We are not a conventional company, and we hope to show you true colors of our company no matter how bumpy or rough the numbers may seem to be. Our business does not follow a linear path and our earnings will almost certainly fluctuate. Therefore, we suggest our shareholders not to measure our overall performance with results from a few quarters, our financial performance may beat or miss market expectation economies. But as long as we keep focusing on long term value creation and ultimately this short term fluctuation will converge to our growing intrinsic value. And now, I will hand you over to our Co CEO, Gavin

Speaker 4

Thank you, Lei. Hello, everyone. This is Zhao Jiajun. Thank you all for joining our earnings call for the Q1 of 2024. This year is a year for consumption promotion.

Speaker 4

The consumer market in the Q1 has made a good start. Online consumption remains strong, and online retail penetration continues to rise. We proactively responded to the consumption promotion policies and launched a series of promotional activities to meet users' shopping needs during the spring festival and other seasonal events. This further released consumption potential and benefits merchants. Driven by both macro environment and our effective promotional events, we achieved solid growth in the Q1.

Speaker 4

We are confident in the consumer market in China. As Lei mentioned, this year, we will step up our investment to deepen the execution of high quality development strategy. High quality development is our long term strategy. Going forward, we will continue to direct our efforts into 3 key areas, which are consumption, supply, compliance and platform ecosystem. We are offering more savings to consumers.

Speaker 4

We also focus on delivering high quality supply and services to more consumers. Guided by this strategy, on the consumer side, in the Q1, we remain committed to putting consumers first. Focusing on more savings and better services, we continue to give back the most tangible rewards to our users. For example, we stepped up our investment in a RMB10 1,000,000,000 program and partnered with millions of quality merchants during the spring festival shopping season and the May Day shopping festival to fulfill consumers' demand for more savings. As for better services, the consumer goods trading program is one of the initiatives driving this year's nationwide consumption promotion efforts.

Speaker 4

We have been actively working with 3rd party service platforms to provide users with convenient trading services, covering mobile phones, electronics, air conditioners, refrigerators, washing machines, TVs and other categories. Today, we have served more than 10,000,000 customers. Our trading services also extend to popular products under the 10,000,000,000 program, which offer consumers attractive discounts As we make it even easier for consumers to upgrade their consumption, their shopping experience is further enhanced. In addition, we wanted to make sure that consumers in remote areas could also enjoy the free shipping shopping experience. So in the Q1, we upgraded our shopping and shipping services and pioneered free shipping to villages in remote provinces.

Speaker 4

Our efforts brought last mile delivery cost even closer to the consumers, with most now within 2 kilometers radius. Such innovation led to a rapid year on year growth of order volume from this region. We're happy to see that our service improvements are further driving our growth. On the supply side, we continue our investment to support and grow together with the brands and merchants. In the Q1, we focused on the theme of trendy national brands and allocated platform resources such as traffic support to high quality merchants.

Speaker 4

This not only ensures high quality supply, but also helps boost our merchants businesses. For example, during the spring festival shopping season, a dairy product brand launched a limited edition offering for the Year of the Dragon inspired by New Year Traditions and chose our platform for the product launch. With the support of our platform's resources, the product quickly gained popularity and became a top seller in the dairy category. Agriculture is our foundation. We are committed to invest in this important sector over the long run.

Speaker 4

In the Q1, we continue to support agriculture technology innovation by launching the 4th Smart Agriculture Competition and the 2nd Duo Duo Academy growing competition. This helps to explore new productive forces in agriculture. At the same time, our agriculture claw initiative has been steadily advancing in production regions such as Anhui, Yunnan, Guangxi and Shandong to bring e commerce training and a 1 on 1 consultation to local farmer merchants. In addition, during our spring festival shopping season, we collaborated with more than 1,000 quality agriculture production regions across the nation, which not only brought more specialty agricultural products to our platform, but also boosts farmers' income. During the Mayday Shopping Festival, we launched dedicated live streaming sessions under the RMB10 billion program for agriculture products.

Speaker 4

With a particular focus on Yunnan agricultural specialties, such as blueberries and flowers, supported the scaling of regional production and the branding of local agricultural products. A high quality ecosystem is critical to our transformation to high quality development. Only a healthy ecosystem with well designed platform policies can support the long term sustainable growth of an e commerce platform. In the Q1, we continued to invest in the RMB10 1,000,000,000 ecosystem initiative and carry out a series of compliance projects. For example, our trust and safety team utilized the technological means to further enhance the efficient automated review of product information on our platform.

Speaker 4

As an e commerce platform serving a vast and diverse consumer base, we also actively utilize our own unique resources to take on more social responsibilities. Since the beginning of this year, we have continued to support the Key to Home nationwide campaign, caring for the elderly and help lost seniors return home safely. Around the World Reading Day, we launched the 7th total reading month and provided direct discount to tens of 1,000 book products, enabling more people to enjoy the benefits of knowledge sharing. Our high quality development strategy is a long term, massive and complex project. We will bring together the efforts and resources from all ecosystem participants to deepen our execution and create more value for our consumers and merchants.

Speaker 4

Now let me hand it over to Jun. She will provide you with an update on our financial performance in the Q1.

Speaker 1

Thank you, Jiajun. Hello, everyone. Let me walk you through our financial performance for the Q1 ended March 31, 2024. In terms of income statements, in the Q1, our total revenues increased 131% year over year to RMB86.8 billion. This was mainly driven by an increase in revenues from online marketing services and transaction services.

Speaker 1

Revenues from online marketing services and others were RMB42.5 billion this quarter, up 56% from the same quarter of 2023. Revenues from transaction services were RMB44.4 billion, up 3 27% from the same quarter last year. Moving on to costs and expenses. Our total cost of revenues increased 194% from RMB11.1 billion in Q1 2023 to RMB32.7 billion this quarter, mainly due to increase in fulfillment fees, payment processing fees, maintenance costs and cost and expenses. On a GAAP basis, total operating expenses this quarter increased 44% to RMB28.1 billion from RMB19.6 billion in the same quarter of 2023.

Speaker 1

On a non GAAP basis, total operating expenses increased to RMB25.6 billion this quarter from RMB18.1 billion in Q1 2023. In the 4th quarter, we invested decisively in key strategic initiatives such as giving back to consumers, investing in our service offerings, promoting brand awareness and R and D. Our total non GAAP operating expenses as a percentage of total revenue this quarter was 29% compared to 48% in the same quarter last year. Looking to specific expense items. Our non GAAP sales and marketing expenses this quarter were RMB 22,700,000,000 up 44% versus the same quarter last year.

Speaker 1

Throughout the past quarter, we continued to give back to consumers over a series of fitness promotion campaigns and increased advertising to promote our brands. On a non GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 26% versus 42% for the same quarter last year. Our non GAAP general and administrative expenses were rmb572 1,000,000 versus rmb338 1,000,000 in the same quarter of 2023. Our research and development expenses were RMB 2,300,000,000 this quarter on a non GAAP basis and RMB 2,900,000,000 on a GAAP basis, up 16% year over year. Technology is at the core of our high quality development strategy.

Speaker 1

We will continue our investment in R and D to provide our users with a more satisfying shopping experience, improve supply chain efficiency and to build a robust compliance program. On a GAAP basis, operating profit for the quarter was RMB 26,000,000,000 versus RMB 6,900,000,000 in the same quarter last year. Non GAAP operating profit was RMB 28,600,000,000 versus RMB 8,500,000,000 in the same quarter last year. Non GAAP operating profit margin was 33% this quarter compared with 22% for the same quarter last year. Net income attributable to ordinary shareholders was RMB28 1,000,000,000 for the quarter, compared to the RMB 8,100,000,000 in the same quarter last year.

Speaker 1

Basic earnings per ADS was RMB 20.33 and diluted earnings per ADS was RMB 18.96, versus basic earnings per ADS of RMB 6.13 and diluted earnings per ADS of RMB 5.55 in the same quarter of 2023. Non GAAP net income attributable to ordinary shareholders was RMB 30 point 6,000,000,000 versus RMB 10,100,000,000 in the same quarter last year. Non GAAP diluted earnings per ADS was RMB 20.72 versus RMB 6.92 in the same quarter of 2023. As Lei mentioned, our business does not follow linear path. This quarter's financial data does not represent the future.

Speaker 1

Fluctuations are inevitable. We suggest investors not to forecast our growth solely based on results from the few quarters. That completes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB 21,100,000,000 compared with RMB 1,300,000,000 in the same quarter last year.

Speaker 1

As of March 31, 2024, we have RMB242.1 billion in cash, cash equivalents and short term investments. Thank you. This concludes my prepared remarks.

Speaker 2

Thank you, Jun. Now let's move on to the Q and A session. In today's Q and A session, Lei, Jiajun and Jun will take questions from analysts on the line. We could take a maximum of 2 questions from each analyst. Lei and Jiajun will answer questions in Chinese and will help translate for convenience purposes.

Speaker 2

Operator, we are open to

Operator

questions. Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Alicia Yap from Citigroup. Please ask your question.

Speaker 4

Hi. Thank you.

Speaker 5

Thanks management for taking my questions. Congrats on the strong results. Two questions. First is regarding the domestic competition. So over the past year, we have seen e commerce platform actively adjusting their strategies in terms of the pricing and service.

Speaker 5

Can management share your view on how you evaluate the competitive landscape? In such an environment, what would be the strategic focus for Pinduoduo business going forward? Second question is related to compliance. I think we noticed on the reasons earnings call, management spend quite a bit of time talking about compliance related matters. Obviously, markets is also paying close attention to the work that you are doing in this area.

Speaker 5

Can management explain a little bit more about the efforts you have made so far and what goals you wanted to achieve? Thank you.

Speaker 2

Hi, Alicia. This is Shunlei. Let me take your question. And regarding your first question on strategy and competition, as for competition, we find that consumers are getting used to making purchases from different platforms. And before they decide on which platform to choose from to shop from, consumers compare the overall shopping experience across different platforms in a few areas.

Speaker 2

For example, product selection, pricing and also on services. And given this trend during the Q1, we are seeing that our industry peers have significantly stepped up their efforts. And we welcome healthy competition. And in response to competition, we always put our consumers first. Our survival depends on the value we create for our users.

Speaker 2

And with our continued investments over the years, we are very pleased to see that our value proposition of more savings and better services is being increasingly recognized and accepted by our consumers. But at the same time, we also realize that consumer demand is constantly changing, and we must do our best to keep And currently, consumer demands are becoming more rational and also more diversified. And this means, in addition to offering more savings, we are also expected to meet consumers' needs for higher quality products and also more varied consumption scenarios. And therefore, on top of deepening our more savings and better services capabilities, we are also working on boosting the supply of high quality products on our platform. And by improving the overall shopping experience, we hope we can further deepen our users' trust in us.

Speaker 2

And regarding your second question on compliance, as our business grows, consumers and regulatory bodies are holding us accountable for higher compliance requirements and also on the merchants doing business with us. And in order to create a trustworthy shopping environment for users, compliance is an area where we're committed to improve and where we have invested significant resources over the past few quarters. And major regulatory frameworks around the world are evolving and new laws and regulations are being introduced. And therefore, we see compliance capability as an important aspect of our high quality development strategy and also compliance capabilities as one of our core capabilities of our platform. And during last quarter's earnings call, we also communicated that with a learning method, we are actively engaging with regulatory parties in various countries.

Speaker 2

And during this process, we are proactively strengthening our compliance capabilities. We are also investing heavily in researching and understanding the regulations of each market, and we have dedicated teams to apply these research findings to all aspects of our business. And our initiatives in the compliance area not only cover those regulations related to our platform's own operations, for example, data related regulations. But it also includes those related to merchant operations as well. For example, product compliance and consumer protection.

Speaker 2

And at the same time, we are also providing the necessary incentives for our small and medium sized merchants to conduct their businesses in a more compliant and high quality manner, which benefits the sustainable development of our platform ecosystem. And the growing high quality merchant base will bring more quality product offerings onto our platform. And while compliant operations and a healthy ecosystem are fundamental to long term development of our platform, both of which will support us in better satisfying consumers' diverse needs for high quality consumption and thereby forming a virtuous cycle. And this is my view on compliance matters. Thank you.

Speaker 4

Thank you.

Speaker 2

Operator, we can move on to the next analyst on the line.

Operator

Thank you. Your next question comes

Speaker 6

I have two questions. The first one is about the growth. The company delivered decent top line growth for this quarter. Please can the management share your thoughts on the growth potential of the business? Is there still room to grow?

Speaker 6

How should we think about this growth rate going forward? And my second question is about the global business. Could the management talk a bit more about your latest thinking around the strategy of your global business? How would this business look like in 5 years? Thank you.

Speaker 1

Hi, Bai Yang. This is Jun. Thanks for your questions. I will take your first question about the growth. Well, rather than being subsidized by short term financial results, we have always focused on long term investments and creating long lasting value.

Speaker 1

And in the long run, we still see many areas to improving the consumption market. The consumption market actually offers plenty of opportunities for platforms and merchants. And in addition to the potential of the overall consumer market, we also see that the online retail industry is growing quickly. E commerce infrastructure continues to improve and new e commerce models continue to emerge. We're absolutely innovating and exploring new models to create greater value for our consumers.

Speaker 1

In the long term, we believe there's still large potential in online retail penetration. We will keep improving our services to consumers. From the merchant side, we are also improving the scope and value of our services. We continue to allocate resources to support high quality merchants who are willing to do business properly. By doing so, we hope to grow together with the merchants and further broaden the selection of quality products on all our platform.

Speaker 1

A positive feedback loop is achieved when these factors work together. In such a rising industry, we need to keep our heads down and focus on execution. Faced with more competition, our constant focus is to deliver more value for our consumers and merchants. We believe that the value we create for consumers and merchants will ultimately be reflected in our financial results. Thank you.

Speaker 2

Hi, Bai Yang. This is Lei. Let me take your question on the global business strategy. And first of all, our global business is still quite new and we are working very hard to grow the business in a high quality way, while at the same time still learning more about new business model. And we are a company that focuses heavily on execution.

Speaker 2

And after setting a strategic direction, we'll do our best to execute. And as we communicated in the past few quarters, looking ahead, we will continue to focus on enhancing our supply chain capabilities, our service capabilities and compliance capabilities. And in terms of supply chain, our goal is to further extend and deepen our supply chain to connect with high quality merchants and high quality suppliers around the world and to further broaden the product offerings on our platforms. And at the same time, we're improving efficiency of the supply chain to make it easier for merchants to sell their products and also to lower their cost of doing business. And therefore, we can all consumers and merchants worldwide will be able to benefit from this.

Speaker 2

And in terms of service capabilities, we are exploring different fulfillment solutions to improve efficiency and also to serve more diverse consumption scenarios. And in addition, we are also leveraging our technology capabilities to improve our customer service and the overall shopping experience. And as for compliance, we have talked about it earlier on this call that this is the key to the high quality and sustainable development of our platform and it is also the foundation for creating a safe truck environment for our users. And we will continue to invest firmly in this area. And finally, the purpose of us doing all these investments is always to bring more quality products at affordable prices to consumers worldwide and to offer them a safe, enjoyable and unique shopping experience.

Speaker 2

And operator, let's move on to the next analyst on the line.

Operator

Thank you. Your next question comes from Kenneth Fong from UBS. Please ask your question.

Speaker 7

Thank you, management, for taking my question. I have two questions. The first is on profitability. The company can still achieve profitability growth in the Q1 despite intensified competition. We are also seeing good operating leverage in terms of sales and marketing expenses.

Speaker 7

Does it mean the company is slowing down the investment in marketing? More broadly, can management talk about your plan in resources allocation? And my second question is on agriculture strategy. Regarding agriculture, could management share how you think about the growth potential of agriculture product category? And also how do you evaluate your key competitive advantage in this area?

Speaker 7

Thank you.

Speaker 1

Hi, Kenny. Thanks for your question. This is Jane. Let me first answer your question about profitability. Well, regarding profitability, we mentioned in our prepared remarks that the company's business does not follow in many parts.

Speaker 1

It will beat market expectation in some quarters and needs expectation in others. We suggest investors not to forecast our future growth completely based on results from a few quarters. We always focus on the long term growth of the company's intrinsic value and we're not smooth out short term financial data. In business execution, we will compare the return of investment in different markets and make prudent plans for resources allocation. We'll not increase or decrease any expense items solely based on a preset budget.

Speaker 1

The company's investment in each quarter depends on the specific investment opportunities we see in the market. Currently, we are still in a growth phase. If we see good value creation opportunities in the future, we will invest in firmly. These investments might bring fluctuations to short term profitability, but will help us grow intrinsic value in the long run. This is our view on profitability.

Speaker 1

Thank you.

Speaker 4

Hi, this is Zhao Zhejiang. Let me take your question on agriculture. Agriculture is our foundation. We started our business with retailing of agriculture products. We have been investing in agriculture for many years, and we initiated the new model of group purchase for agriculture products.

Speaker 4

We have also innovated many agriculture solutions, such as the direct delivery of agriculture products from the PlayFab region and our DuoDoo Grocery, building up a platform that connects local supply to local demand. Agriculture is a challenging industry with low product standardization and decentralized supply. Throwing and transporting agricultural products can be quite difficult. Currently, the online penetration rate of agricultural product remains relatively low, and there's still plenty of room for improvement in digitalizing farmers' operations. Therefore, we have taken it upon ourselves to invest in this industry and dive deep into transforming the agricultural supply chain.

Speaker 4

Throughout this journey, we have accumulated a lot of valuable experience and enhanced our team's capabilities. Agriculture products are now a very important high frequency category. And Pinduoduo has always been a full category e commerce platform featuring agriculture pillars. We're still making firm investment in agriculture. In the 4th smart agriculture competition launched last month, we focused on AI planting and encouraged participants to explore optimization and commercialization of agriculture production.

Speaker 4

Our agriculture cloud initiative also continued to bring digital solutions to farmers in various agriculture production regions. We will continue to invest in diverse aspects of agricultural production and supply chain in the future. Through continued investment in agriculture, we hope to promote modernization of the agricultural industry and enhance the quality and efficiency of the supply chain. At the same time, we help farmers increase their value and income, create local jobs, thereby supporting the overall revitalization of rural communities. Thank you.

Speaker 2

Thank you, Jiajun. And also thank you, Kenny. Thank you all once again for joining us today, and it's about time. And if you have any further questions, please reach out to our Investor Relations team. And thank you, and have a great day.

Operator

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

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