PDD Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 26, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the PDD Holdings Inc. 2nd Quarter 2024 Earnings Conference Call.

Speaker 1

At this time, all participants are in

Operator

a 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. I would now like to 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. PDD 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 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. Zhaojiazheng, our Executive Director and Co Chief Executive Officer as well as Mr.

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 Q2 ended June 30, 2024. During the Q and A session, Lei and Jiajun will answer questions in Chinese that will help translate. Please kindly note that the English translation is for reference only.

Speaker 2

And 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.

Speaker 3

Thank you. Hello, everyone. Thank you all for joining our earnings call for the Q2 of 2024. In the first half of twenty twenty four, we have remained committed to our high quality development strategy and consistently invested in our platform ecosystem. We received positive feedback for these efforts, Consumer experience and our services continue to improve and a number of new merchants and products have grown significantly.

Speaker 3

This further meets the diverse needs of our consumers. This quarter, we benefited from the improving macro environment and achieved robust financial results. Our total revenues reached RMB97 1,000,000,000, which represents a year on year increase of 86%. However, we are seeing many new challenges ahead from changing consumer demand, intensifying competition and uncertainties in global environment. As a result, we will enter a new phase of high quality development that calls for increased investments and our profitability will affect it as a result.

Speaker 3

Since the beginning of this year, we are seeing that consumer preferences have become more diverse. On one hand, consumers are increasingly choosing experience based consumption over material purchases. On the other hand, there is a growing emphasis on rational consumption. Consumers are making more thoughtful decisions to balance quality and value. In response, we have collaborated with high quality brands and manufacturers to create customized products that cater to these diverse demands.

Speaker 3

This approach has not only propelled many new brands to success, but also revived the popularity of many established brands. And this is just one example of how digital technology and then manufacturing can come together to create new opportunities. At this moment, the competition among e commerce platforms is quickly escalating. And therefore, it's even more important that we go back to the basics of supply chain improvement and invest firmly in supply chain efficiencies. This will be the key focus for our high quality development going forward.

Speaker 3

For example, in the Q2, our teams continue to bring our agriculture cloud initiative to major production regions to helping local growers to bring seasonal foods directly to people's hearts. And in this process promoted local agriculture brand. In addition, to further improve agriculture supply chain, nurture research talents and promote technology inclusion, we continue to support the smart agriculture competition and a Pinduoduo Academy growing competition. The agriculture research fund we established in cooperation with China Agricultural University has also started to bear fruit. On the manufacturing side, we are pleased to find that many small and medium sized businesses have been using the digital capabilities from our platform to support product iteration and innovation.

Speaker 3

Through this process, we have not only emerged stronger from the competition, but also led the local industries towards high quality development. These results have strengthened our commitment to further investing in high quality development. We have communicated on a number of occasions that the profit growth in the past few quarters should not be used as a long term guidance. And it is a result of mismatch between the business investment and the financial reporting cycles. As we enter a new investment phase, I would like to make it clear to our investors that our profits will gradually trend down starting in Q3 and there will be fluctuations or rebound in the short term.

Speaker 3

In the long run, the decline in profitability is inevitable. Finally, our preference had reached a considerable scale and we will remain committed to high quality development and focus on creating a healthy and sustainable platform ecosystem. And to this end, we adopt the necessary policies to vigorously support high quality merchants and tackle low quality ones. On the supply side, we will invest substantial resources to support high quality merchants while we need to innovate and improve qualities. And we will offer significant transaction fees reduction to these merchants with initial target of $10,000,000,000 in the 1st year.

Speaker 3

By doing so, our goal is to provide clear initial incentives for the merchants to join high quality development. On the other hand, we will further deepen our trust and safety capabilities to improve our merchant ecosystem and strengthen our supply chain. We are actively identifying and removing unlawful vectors from our platforms and we will continue to strengthen these efforts. At the moment, we have already started a new round of investments in operations and R and D to streamline the merchant onboarding and product listing process. Leveraging technology will gradually improve the quality of the products sold to our platforms and create a fair and transparent business environment for our merchants.

Speaker 3

In this process, we believe that sacrificing short term profits is necessary. A clear downward trend in profit is expected, but we are prepared to invest firmly and patiently in the platform's long term health. This is a decision that has received unanimous support from all our management team. And now moving on to the global business. In the past few quarters, we have noticed the rapid shifts in external environment, which brought significantly greater uncertainty.

Speaker 3

Our operations has also become increasingly affected by non business factors. And meanwhile, the competition we face is growing stronger. Competition is here to stay and is expected to intensify in our industry. Our global business is facing significant uncertainties from intense competition and evolving external environment. These factors combined will inevitably cause fluctuations to our business as shown in this quarter's results.

Speaker 3

High revenue growth is not sustainable and a downward trend in profitability is inevitable. And finally, as the environment evolves and our company continues to grow, the IR management team and I often discuss how we can better fulfill our corporate social responsibilities. We believe there is still many things that can be done. For example, through enhancing our governance structure and adjusting resources to better adapt to a changing times. We can also do more to give back to a society to support agriculture and other industry sectors and offer greater support to the people who need the most.

Speaker 3

We fully recognize that simply measuring our company's performance by shortened capital returns no longer aligns with where we are today. As a global company in this era, we are committed to driving innovation, adapting to change and taking on greater social responsibilities in the region across the globe. Now, I will hand it over to our Co CEO, Zhao Jazen, to talk more about our operations in the Q2.

Speaker 4

Thank you, Len. Hello, everyone. This is Zhao, Jia Deng. Thank you all for joining our earnings call the Q2 of 2024. In the first half of this year, online retail in China continues to perform well, bringing fresh energy to the overall consumption market.

Speaker 4

Over the past quarter, we continue to advance our high quality development strategy, making steady long term investments to support both supply and demand sides of our platforms. Looking ahead to the Q2 of this year and beyond, we're very confident in the future of the China's consumer market. This quarter, we continue to focus on consumer demand, further enhanced our more savings and better services capabilities and upgraded our after sales services to provide consumers with more value and more enjoyable shopping experiences. During the June agent promotion, we continue to provide consumers with straightforward savings and introduced new promotions to meet the increasingly diverse consumer preferences. We also brought product categories like fresh produce, daily necessities and high end appliances into 3rd and 4th tier TVs and made our contribution to consumption upgrades across the regions.

Speaker 4

On the supply side, we stepped up our support for quality merchants and brands, directing more traffic to high quality products through the term billing program and fresh sales. We have also focused on enhancing the quality and efficiency of the supply chain, bringing more value to the agricultural areas and industry regions and benefiting more producers of quality agricultural and domestic growth. To support the countryside home appliance program and the consumer group trade in, we invested RMB1 1,000,000,000 during the 1st week of June 18. This boost led to remarkable growth for many local brands in categories such as electronics, home appliances, kitchenware and household products. For example, utilizing our digital technology, we helped a local brand with 36 years of history to understand the latest market demand and return to growth with a blockbuster product.

Speaker 4

It achieved RMB100 1,000,000 in sales after joining the platform for just 2 months. In addition, the number of new merchants and new products on our platforms saw meaningful growth. In the 1st week of June 2018, the number of merchants participating in the 10,000,000,000 program grew by over 90% year on year and the number of agricultural merchants increased by 83% year on year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics. To create a better business environment for high quality merchants, we have started a new round investments in operations and R and D.

Speaker 4

Our goal is to build industry leading compliance capabilities and foster a healthy platform ecosystem. For example, we continue to streamline our merchant onboarding and product listing processes to better control product quality and offer consumers a safe and reliable shopping experience. We integrate automatic technology for product screening with thorough manual reviews by our trust and safety team. This approach ensures regrowth oversight on product compliance, while avoiding unintended penalties for quality products and merchants. At the same time, we have invested heavily in developing comprehensive user friendly training materials for merchants to boost their compliance capabilities.

Speaker 4

This effort aims to enhance our supply chain quality, while helping merchants lower compliance costs and expand their market reach. We also deeply recognize that building healthy platform ecosystem and achieving high quality development is a gradual process, especially given the considerable scale of our platforms. So we are committed to a dual approach. One side providing strong support to high quality merchants, while addressing issues with low quality ones. This way, we aim to create healthy and sustainable ecosystem.

Speaker 4

In this process, we will inevitably fix short term costs. As Lee has mentioned, our management team is fully committed to investing heavily for the long term health of our platforms. While profits might vary or even rebound in the next few quarters, it's unavoidable that profitability will trend lower over the long term. As the largest platform for agricultural products in China, this quarter we further advanced our agricultural strategy. We launched the science and technology courtyard project in Yunnan, Dali and Shanxi, Huiping and also kicked off the 4th smart agricultural competition in collaboration with top research teams from around the world.

Speaker 4

We will continue to increase investments in agricultural research to promote the commercial application of research funding and accelerate the market adoption of high quality agricultural products. Meanwhile, we also leverage our strength as a platform working with ecosystem partners to proactively take on more social responsibilities. We invested tons of millions in reading lounge and subsidies to launch the 7th Duoduo reading lounge. This initiative provides direct discounts on thousands of Blue products, making knowledge more accessible to more people. 2024 is a critical year on our path towards high quality development.

Speaker 4

We will focus on creating healthy and sustainable platform ecosystem and empowering our ecosystem partners with more platform resources and technical support. Together, we will lay a solid foundation towards the high quality development of our platforms. Next, I will hand over to Jun. She will provide an update on our financial performance for the Q2.

Speaker 1

Thank you, Jiajun. Hello, everyone. Let me walk you through our financial performance for the Q2 ended June 30, 2024. In terms of income statements in the Q2, our total revenues increased 86% year over year to RMB97,100,000,000 This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others were RMB 49,100,000,000 this quarter, up 29% from the same quarter of 2023.

Speaker 1

Revenues from transaction services were RMB47.9 billion, up 2 34% from the same quarter last year. In Q2, our top line growth slowed down significantly versus the last few quarters. Further slowdown is inevitable as a result of competition and global uncertainties. Moving on to costs and expenses. Total cost of revenues increased 80% from RMB18.7 billion in Q2 2023 to RMB33.7 billion this quarter, mainly due to increase in fulfillment fees and payment processing fees.

Speaker 1

On a GAAP basis, total operating expenses this quarter increased 48% to RMB30.8 billion from RMB20.9 billion in the same quarter of 2023. On a non GAAP basis, total operating expenses increased to RMB28.4 billion this quarter from RMB 19,000,000,000 in Q2 2023. In Q2, we continued to invest firmly to support high quality development of our platforms. Our total non GAAP operating expenses as a percentage of total revenues this quarter was 29% compared to 36% in the same quarter last year. Looking to specific expense items.

Speaker 1

Our non GAAP sales and marketing expenses this quarter were RMB 25,400,000,000 up 54% versus the same quarter last year. Throughout Q2, we stepped up our promotional efforts to give back to consumers and invest in marketing to promote our platforms. On non GAAP basis, our sales and marketing expenses as a percentage of our revenues this quarter was 26% versus 32% for the same quarter last year. Our non GAAP general and administrative expenses were RMB594 1,000,000 versus RMB370 1,000,000 in the same quarter of 2023. Our research and development expenses were RMB2.4 billion this quarter on a non GAAP basis, up 15% year over year and RMB2.9 billion on a GAAP basis.

Speaker 1

It's critical that we maintain our long term focus and continue to invest in R and D to drive supply chain efficiency and customer experience. On a GAAP basis, operating profit for the quarter was RMB 32,600,000 versus RMB 12,700,000,000 in the same quarter last year. Non GAAP operating profit was RMB 35,000,000,000 versus RMB 14,600,000,000

Operator

in the

Speaker 1

same quarter last year. Non GAAP operating profit margin was 36% this quarter compared with 28% for the same quarter last year. Net income attributable to ordinary shareholders was RMB 32,000,000,000 for the quarter compared to RMB 13,100,000,000 in the same quarter last year. Base earnings per ADS was RMB 23.14 and diluted earnings per ADS was RMB 21.61 versus base earnings per ADS of RMB 9.64 and diluted earnings per ADS of RMB 9 in the same quarter of 2023. Non GAAP net income attributable to ordinary shareholders was RMB34.4 billion versus RMB15.3 billion in the same quarter last year.

Speaker 1

Non GAAP diluted earnings per ADS was RMB23.24 versus RMB10.47 in the same quarter of 2023. As Luke noted last quarter, our business does not follow a negative path and profitability in the last few quarters does not represent future. Looking ahead, we will invest firmly to support a healthy ecosystem that encourages high quality merchants. Our profitability may fluctuate in the short term, but we are gradually lower and the long run. This is inevitable as we focus on the longer term high quality development of our platforms.

Speaker 1

That completes the income statements. Now let me move on to cash flow. Our net cash generated from operating activities was RMB43.8 billion compared with RMB23.4 billion in the same quarter last year. As of June 30, 2024, we have RMB284.9 billion in cash, cash equivalents and short term investments. Thank you.

Speaker 1

This concludes my prepared remarks.

Speaker 2

Thank you, Jun. Next, we'll 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 will take a maximum of 2 questions from each analyst. Lei and Jiajun will answer questions in Chinese and will help translate for convenience purpose.

Speaker 2

Operator, we are open for questions.

Operator

Thank Your first question comes from Joyce Ju from Bank of America. Please go ahead.

Speaker 5

I will translate for myself. I have two questions. My first question is, we have seen Duo Duo's profit growth remain robust this quarter. But in the prepared remarks, management mentioned there will be increased investment and profitability fluctuations caused by the competition. Could management share how you assess the profit trend in the future?

Speaker 5

In addition, in terms of shareholder returns, does management have any plans for share buyback or dividend payout? My second question is, in the prepared remarks, we noted that management emphasized a lot on the merchant ecosystem and the merchant supporting policies. Could you please elaborate a bit on your understanding on the housing merchant ecosystem? How to review it? How to understand it?

Speaker 5

And why this will become the focus of the platform in the next stage. Thanks a lot.

Speaker 2

Hi, this is Chen Lei. Let me take your first question. We have communicated on a number of occasions that the profit growth in the past few quarters should not be used as a long term guidance, and it was a result of the mismatch between the business investment and financial reporting cycles. In addition, our business is currently facing intense competition and shifting external factors, which will inevitably bring fluctuations to our business and also slow down our top line growth. We are now entering a new phase of steady transformation towards high quality development and we need to invest patiently in the platform's long term health.

Speaker 2

And to support a sustainable development of our platform ecosystem, we will invest substantial resources over the next 12 months to support high quality merchants. And looking ahead, our profitability may fluctuate in the short run, but directionally, it will gradually enter a downward trend. And empowering and supporting merchants is crucial to building our high quality supply chain and also creating a robust platform ecosystem. Over the long run, this will start up a virtuous cycle for the platform and therefore we will remain committed to patient investments even though short term profits will be affected. In terms of shareholder returns, the company is still in the investment phase and we are facing intense competition on different fronts and also uncertainties from external factors.

Speaker 2

And therefore, our management team and I unanimously believe that it is not an appropriate time for share repurchases or dividends. And in the foreseeable years ahead, we also do not see such a need. Thank you.

Speaker 4

Hi, this is Zhao Zhejiang. Let me take your question on merchant ecosystem. Our platform is a mutually dependent community of merchants, consumers and our operation team. Merchants are our key partners in our joint effort to serve consumers. The increased competition in our industry brings new demands on our community.

Speaker 4

In this process, we feel a strong sense of responsibility as a platform. On one side, we must ensure strict oversight of product quality to prevent substandard goods and protect consumer rights. On the other side, we must ensure fairness so that dedicated high quality merchants can earn meaningful rewards, which is essential for the healthy development of platform ecosystem. To achieve balance in the ecosystem, we have no choice but to firmly transition towards high quality development. Therefore, we will adopt the necessary policies to provide strong support to high quality merchants, while tinkering low quality ones.

Speaker 4

On the supply side, we will strongly support merchants with product and technology innovation capabilities. We will significantly reduce transaction fees for these high quality merchants with an expected amount of RMB10 1,000,000,000 in the following year. We will continue to enhance incentives for the merchants to drive our high quality development of ecosystem. On the other side, we will further enforce strong governance of our platform and merchants. This includes identifying and removing unlawful merchants from our platforms to strengthen our supply chain.

Speaker 4

As of now, we have already started a new round investment in operations and technology to optimize the merchant onboarding and product listing processes, use advanced technology to ensure strict product quality control and create a better environment for our high quality merchants. We grow together with our high quality merchant partners, working together to offer consumers high quality products and services. The consumers can in turn bring new growth opportunities to the ecosystem, creating a virtual cycle, which is the key to the long term healthy development of our community. To achieve the goal of high quality development of the merchant ecosystem, our management has reached the consensus to firmly commit to long term investments and create a healthy sustainable platform ecosystem. Thank you all.

Speaker 2

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

Operator

Thank you. The next question is from Ying Bai from CICC. Please go ahead.

Speaker 6

Thank you, management. I have two questions. The first one is, we have observed that the growth of your global business remains strong. Some external data suggests that the growth rates and the investments in certain markets are slowing down. In your prepared remarks, we also noticed that the company takes a relatively cautious approach towards the future development of your global business.

Speaker 6

Is the company trying to manage some risks proactively? Could your management please elaborate on your thinking in this regard? The second one is, we saw that the overall competitive environment is quite intense. Has this caused any impact on the company's growth? In such a competitive environment, how will the company adjust your investment priorities and how does management think about your position?

Speaker 6

Thank you.

Speaker 2

Hi, this is Lei. Let me take your question on the global business. Our global business is still evolving and we are actively exploring new opportunities. Currently, our global business has entered over 70 markets. And during this growth, we have always prioritized compliance and see it as the foundation for our development.

Speaker 2

And over the past few quarters, we have invested significant resources in building a safe shopping environment. As our business develops, we have noticed that changes in the external environment are accelerating and our operations are increasingly affected by some non business factors and we are seeing a significant increase in uncertainty. And meanwhile, competition is a constant theme in the e commerce industry and is expected to intensify. At this moment, such intense competition combined with the impact of external factors will inevitably lead to disruptions on our global business. But nevertheless, we remain committed to our vision of allowing more consumers worldwide to enjoy the benefits of the digital economy, And this has not changed.

Speaker 2

And in response to the complex environment, we will focus on our core strength and continue to improve our capabilities in supply chain, customer services and compliance to better meet the expectations of consumers around the world and also achieve high quality development in our global business. Thank you.

Speaker 4

Hi, this is Zhao Zhejiang. Let me take your question on competition. Over the past few quarters, the competition has been intensifying, which is natural to the e commerce sector. In such a competitive environment, our revenue growth may slow down. For instance, in the second quarter, our revenue growth has declined, indicating that high revenue growth is not sustainable.

Speaker 4

Currently, consumer demand is becoming more diversified, and e commerce platforms are actively adjusting their strategies to meet these evolving needs. Each platform has its own strength and competitive edge and commit substantial resources to cater to consumer demands. At this moment, we need to focus on our core strength and continue on our path to high quality environment. For e commerce platforms, a robust supply chain is essential to providing good services to consumers. To meet the diversified needs of consumers, we remain focused on the fundamentals and strive for innovation in the supply chain.

Speaker 4

In the Q2, our teams continue to bring agricultural core initiatives to major production regions, helping local agricultural products build their brands and empowering small and medium sized agricultural merchants through collective marketing efforts. Apart from agricultural products, we have expanded our support to the manufacturer through digitalization. By collaborating with high quality national brands and manufacturers, we have successfully launched tailored products for niche categories. This brand and merchants have achieved higher quality development through continuous technological updates and product innovation. We will strongly encourage and support high quality merchants who are dedicated to their business and innovation.

Speaker 4

In addition to the significant reduction in transaction fees that we're planning to offer, we will continue to leverage our platform's supply chain capabilities to help merchants improve quality and efficiency and guide manufacturers towards innovative and high quality developments. We fully understand that only by optimizing and upgrading the supply chain is essential to meeting deeper consumer needs and ensuring the long term healthy growth of our platform ecosystem. We're committed to making long term and patient investments. Thank you all.

Speaker 2

Thank you, Jiajun. And thank you all for joining us today. We look forward to speaking with you again next quarter. And thank you. Have a nice day.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today.

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