拼多多 (PDD) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo First Quarter 2022 Earnings Conference Call. (Operator Instructions) 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. Chen Ping. Sir, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen and I will help host the earnings call. Pinduoduo earnings release was distributed earlier and is available on our website at investor.pinduoduo.com as well as through global news by 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 the 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 going forward. Jun will then take us through our financial results for the first quarter ended March 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 a discrepancy between the original remarks and the translated version, statements in the original language should prevail. Now it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead.

Thank you, Chen. Hello, everyone. Thank you for joining our earnings call for the first quarter of 2022. Let me start by giving a brief overview of our first quarter results. Our total revenue for this quarter, excluding revenue from merchandise sales, was RMB 23.7 billion. This represents a year-on-year increase of 39%. Our active buyers reached 881.9 million for 12 months ending March 31, with 751.3 million average quarterly MAU.

Given our current scale, our user growth will inevitably slow down. That's why we have shifted our priority from winning new users to how to better serve our existing user base. We also strive to adapt to the constantly evolving patterns of consumer behavior. There is still plenty of room for us to improve and we will continue to work hard to refine and strengthen our core capabilities.

In all of this, agriculture continues in the front and center of our strategy. We remain focused on making long-term investments in agriculture and promoting digital inclusion. A key plank of our strategy has been to develop a tech-driven agricultural infrastructure, less responsive, sustainable and like meeting the needs of different stakeholders.

We constantly think about how we can use our platform to create more value for our consumers and benefit society. And here, I would like to take this opportunity to express my thanks to our consumers, producers, merchants and other partners for their continued support. We are grateful to rent for standing with us as Pinduoduo matures as a company and take through more social responsibility.

We are committed to service all of them better. We are also grateful that Pinduoduo is in a position to serve millions of farmers and connect them to a digital economy. We help farmers and more by promoting agricultural produce to more consumers across the country. This creates huge value for our consumers who can now enjoy high-quality fresh produce at low cost through our agriculture network.

During the Chinese New Year period in the first quarter, we partnered with our merchants and logistics service providers to offer uninterrupted delivery services. Demand for high-quality agricultural produce, third, during the period. We attracted orders from consumers who could not fulfill their needs previously due to lengthy delivery time, high cost and wastage.

Order volumes or different types of agriculture produce increased significantly during the Chinese New Year period. They include tariffs, oranges, seafood SOL, a relatively short shelf life and that supply has processed in confirmed to a local region, aided by our agricultural infrastructure. It now takes a few hours for the fresh produce to arrive at warehouses.

This has greatly shortened the time consumer has to wait to receive their fresh produce. As work continues on agricultural infrastructure, we are also pushing ahead on a technology front. And now I'm happy to share with you some of the tangible results for a second smart agriculture competition, a long distance to make a growing challenge that concluded in April. Over the last 6 months, we work closely with China Agricultural University, Sichuan University, a new FAO and [Ratanga University] to encourage young scientists and technologies to develop practical and cost-effective agri-tech solutions that farmers can use to improve their livelihood. The participating teams have done very well in applying technology to solve real profit.

First, the developed precision greenhouse management solutions let substantially improved crop production. The team was able to deliver double yields of transitional growers by addressing variables such as community and lighting. The nutritional value of [little metals] also registers in the top range of the industry.

These solutions are commercially viable and can be applied by growers without special trends. Second, the R&D processes of participating teams [imbursed] all the practical technologies. For instance, one group of researchers developed a disease prediction model to give farmers 1-week window to intervene and prevent loss.

Another group came up with low cost and environmentally friendly equipment to enhance plant growth. The team also reduced of visual recognition technologies to help growers make better decisions of irrigation and harvesting. The achievements demonstrate the benefits of technology when brought into agriculture. We are delighted that the competition is serving as (inaudible) between academia and industry and a channel for the implementation of effective technology.

We will be supportive team as they rule out their solutions across China. We are also very encouraged that patient has helped inspire young people from different disciplines and background to improve their work to agriculture. The majority of the participants in the smart agriculture competition will long in [1990s] many has said they benefited greatly from interacting with world-class talent from different fields.

They gain new perspectives and new knowledge to help advance their own work. Indeed, some participants in the competition come from a rural background. They bring with an asset belief that agri-tech will help secure our food suppliers and relieve the workload of farmers. We will share the deeply health sensor mission to make agriculture better through technology.

The future of agriculture will depend on attracting more of this tax use and channel the passionate ideas into this sector. And on our part, Pinduoduo is best ready to help facilitate their (inaudible). We believe that the digitalization of agriculture will unlock opportunities and efficiencies that will benefit society at large and environment.

We are committed to investing and working with limited partners on this important measures. We will play a long game and aim for a long-term success. This will mean being patient and evaluating initiatives according to the impact of agri-food ecosystem and future generation.

To conclude, we started last year to transition from a phase of hyper goals to one of the more measured development. Our transition from sales and marketing towards research and development continues space into 2022. We now have a technology team numbering over 5,600 which represent about 60% of our total workforce.

There is not only -- they not only iterate and improve our technological capabilities but also help attract new talents. We will set our efforts to further build up our in-house research and development capabilities. We continue to believe that this is the right approach at this stage of our development.

We will do more and do better to achieve our long-term corporate mission to put people first, to be open and to benefit all. Thank you. And now let me pass the time to Jun.

Thank you, Lei. Hello, everyone. Let me first walk you through our operating results for the first quarter ended March 31, 2022. Our annual active buyers for the 12 months ending March 31, 2022, was 881.9 million. This is an increase of 58.1 million or 7% from the same quarter of 2021. Average MOU in Q1 was 751.3 million. This is a 26.7 million increase or 4% from the same quarter of 2021.

At this current scale, it is inevitable for us to set lower user growth. We will continue to focus on how to serve our users better to depend the trust users place in us and to improve user MyShare.

Next, I will go through our financial performance and quarter ended March 31, 2022. In terms of P&L, our total revenue in the quarter was RMB 23.8 billion, up 7% from RMB 22.2 billion, in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and revenue from transaction services, offset by the decrease in revenue from 1P trials.

Excluding revenue from our 1P trials, our total revenue was RMB 23.7 billion in Q1 2022, up 39% from RMB 17 billion in the same quarter of 2021. Revenues from online marketing services and others were RMB 18.2 billion this quarter, up 29% compared with the same period of 2021. This was primarily due to an increase in merchant activities, a reflection of the value that our platform creates for them.

Our transaction services revenue this quarter were RMB 5.6 billion, up 91% versus the same period of 2021. The increase in our transaction services revenue was due to: first, the increase in total transaction processing fee as a result of higher transaction volume; and second, more diversified services that we provide to merchants such as fulfillment services.

Moving on to cost and expenses. Our total cost of revenue decreased from RMB 10.7 billion in Q1 2021 and to RMB 7.2 billion this quarter. The decrease came mainly from the reduction of merchandise sales, partially offset by increased fulfillment expenses. Total operating expenses this quarter were RMB 14.5 billion, the RMB 15.6 billion in the same quarter of 2021.

On a non-GAAP basis, our total operating expenses as a percentage of revenue, excluding 1P, has been declined from 86% and to 55% for Q1 of 2021 and 2022, respectively. Looking to specific expense items. Our non-GAAP sales and marketing expenses this quarter RMB 10.7 billion, down 16% versus second quarter of 2021. As we continue to shift away from our previous forecast on sales and marketing, we remain disciplined on our sales marketing spending this quarter.

As a result, on a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 45%. And compared with 57% for the same quarter in 2021. Our non-GAAP general administrative expenses were RMB 228.8 million versus RMB 160.7 million in the same quarter of 2021.

Our non-GAAP research and development expenses were RMB 2 billion, an increase of 30% from RMB 1.7 billion in the same quarter of 2021. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel. To better make evolving consumer demand and foster sustainable growth of our platform, we are committed to further growing our R&D capabilities and stubbing net of R&D spending. Operating profit for the quarter was RMB 2.2 billion on a GAAP basis compared with operating loss of RMB 4.1 billion in the same quarter of 2021. Non-GAAP operating profit was RMB 3.7 billion versus the operating loss of RMB 3.2 billion in the same quarter of 2021.

Net income attributable to ordinary shareholders was RMB 2.6 billion compared with a net loss of RMB 2.9 billion in the same quarter of 2021. Basic earnings per ADS was RMB 2.06 and diluted earnings per ADS was RMB 1.84 versus basic and diluted net loss per ADS of RMB 2.33 of the same quarter. Non-GAAP net income attributable to ordinary shareholders was RMB 4.2 billion, compared with a net loss of RMB 1.9 billion in the same quarter last year.

Non-GAAP diluted earnings per ADS was RMB 2.95 versus non-GAAP diluted net loss per ADS of RMB 1.52 in the same quarter of 2021. More disciplined spending and slowing growth are the main reasons behind the process in the past few quarters. The process us gave more confidence and resources to devote to key areas such as R&D and agriculture initiatives. That said, we expect profits to fluctuate as we spend to meet changing consumer needs.

Notably, our profit this quarter narrowed significantly to the last quarter. Our net cash flow used in operating activities was RMB 9.1 billion compared with outflow of RMB 3.7 billion the same quarter of 2021, primarily due to changes in working capital as a result of seasonality offset by an increase in online marketing services revenues. As of March 31, 2022, the company had RMB 95.2 billion in cash, cash equivalents and short-term investments. This concludes my prepared remarks.

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. We will take a maximum of 2 questions by analysts. Lei will answer questions in Chinese and I will help translate later remarks for ease of reference. Operator, we may now take questions on the line.

(Operator Instructions) Your first question comes from Thomas Chong with Jefferies.

(foreign language) My question is about our growth driver in Q1. And given the outbreak of pandemic in recent months, can management share about some of the bots about what we are seeing in terms of the recent monthly trend? On the other hand, can management also comment about the trend in terms of the take rate?

[Interpreted] Thomas, so let me address your first question around growth rate. The past period of time, we have been going through adjustments and development strategies to focus more on technology and agriculture in order to pursue long-term high-quality growth. Well, it takes time for the final results to be fruit and in the process of our growth rate might be affected.

In addition, as we reach our current scale, investors should not expect us to continuously deliver high growth. Well, our development is inseparable from the support of our consumers. So as the user base reaches its current scale, our focus now is on how to serve our 880 million users and improve their trust and mind share to remain to be user-centric. So we will continue to pay more attention to technology and agri-investments and to promote our differentiation in agriculture to help create more value for our consumers.

Well, as we have been communicating, we always remain committed to investing to create long-term value. If you look from the outside at times, we might appear to be overly aggressive or overly conservative sometimes. So we recommend you not to pay too much attention to the fluctuations between quarters. Instead, we hope investors would focus on whether what we are doing is generating value and whether it can bring about high-quality development. I hope what I've shared may address your question.

Well, Thomas, this is Jun. Thank you for your question. I would like to further talk about the take rate which you mentioned. Well, our focus has always been to better serve our users, as just mentioned by Lei. With this being said, take rate or monetization rate is not a metric to forecast. Instead, I think it is a natural result. So we recommend you not look at quarter-to-quarter changes. And in the long run, our monetization rate depends on how much value we create. And for future outlook for monetization, as I said, it really depends on our value creation.

One thing we would like to point out as we started Pinduoduo with a strong agriculture forecast from the beginning. And we stick to our zero commission policy for agriculture projects. And we definitely will continue to support agriculture merchants, for example, offering more traffic exposure. Also, we have communicated before, we will step up investment in agriculture for better consumer experience. Well, as the proportion of agricultural product increases, our monetization rates might be affected.

Your next question comes from Eddy Wang with Morgan Stanley.

(foreign language) I have 2 questions. First is about competition. Can you please share with us your view on China's e-commerce industry competitive landscape? We witness that on one hand, we do see other e-commerce platform adopting a structured cost control and less aggressive expansion. But on the other hand, we do see some live stream e-commerce platform seems to be very aggressive in the user acquisition and expansion. So just want to hear your view on the competitive landscape in the e-commerce sector and the impact on PDD.

And the follow-up question is about the (inaudible) agriculture new initiatives. What's the proportion of the RMB 10 billion have been used so far? And what's the next kind of areas we want to investment in the next maybe 1 or 2 years?

[Interpreted] Eddy, so for your question around competition landscape, I think the current landscape versus 2, 3 months ago, it has not changed much. So essentially, China's e-commerce industry is a huge market, and it is full potential. As industry infrastructure continues to develop and as our consumer needs continue to evolve, more and more companies will join e-commerce.

We believe that in the long run, the emergence of new platforms as well as new formats will have a positive impact on consumers and on the industry itself. For us, if you look at the -- under the perspective of the recent pandemic and if you look at areas where other peers have done well, we think that for ourselves, there is still a lot of room to further improve from our current level of service offerings. This is what our team needs to learn from. And our team needs to work harder and also remain down to earth to serve consumers well and to create value for the society as a whole. This is the duty and the responsibility for us as a company.

As for our differentiation while we started out Pinduoduo with agriculture products. As we developed, agriculture has always been our core. We also firmly believe in the future potential of the agriculture sector. Just as I introduced, we are now stepping up investments in core technology, especially in agriculture technology. We believe in the long run, these investments can create more value for consumers.

So here, let me also address your second question. We announced the RMB 10 billion agriculture initiative last year. When we announced it, we also mentioned that we hope this initiative can facilitate the advancements of agritech, promote digital inclusion and also to make a sense of fulfillment for agri-workers and agri-scientists. Over the past year, our team and myself have been devoting a lot of time and efforts to diligently evaluate and study of various proposals and projects in order to deploy resources to where they are needed the most.

In my previous remarks, I also have given you some examples of how a technology empowers agriculture, including our smart agriculture competition. In addition, we are also cooperating with top agronomic universities and research institutions to jointly will come some research projects. Admittedly, to empower agriculture through technology requires a lot of thinking, deep understanding and actual patients. So we need to compare various options side by side and evaluate each options carefully, and we have to leverage our past experiences in agriculture as well as our team's technical background to make the best options and choices.

In this area, our strategy is long term, and our investment in agriculture are still in early stage. For such a sector of such big scale and impact of our investment horizon as well as investment scale would not change when there are short- to medium-term fluctuations. I hope what I share can give you more color around how we think about and what we are doing in terms of agriculture.

Your next question comes from Kenneth Fong with Credit Suisse.

(foreign language) I have 2 questions, please. On user, we noticed that despite a high base, AAC and MAU both see accelerating sequential growth. Can you share with us the drivers behind? Understand that we shouldn't expect fast growth given our larger user base, how should we think about user upside and the ceiling?

And my second question is on the sales and marketing expense. Despite the fast revenue growth, our control over sales and marketing have been very effective with amount continue to come down on a year-on-year basis. Can you share with us the reason behind? For example, is there a change in our ROI special on this acquisition and any room for further improvement? Last year, Pinduoduo said that we are shifting from sales and marketing to R&D focus. Can you also update us on the progress? And then should we expect this to be largely finished?

[Interpreted] Well, Kenneth, so let me address your question. User number. So let's look at the numbers first. By the first quarter last year, our annual active buyers and MAU was approximately 820 million and 720 million, respectively. This was already a relatively high base. And by the first quarter this year, our [ASC] and MAU further increased to about 880 million and 750 million. We achieved some growth. But I think the long-term trend should be very clear. Though there might be, call it fluctuations, I think it is inevitable that our user growth would be slower. Well, over the course from the past few quarters, we also have shared this view with you.

So now the priority that we see and the duty we have to perform right now is to further improve the existing 880 million consumers user experience and as well as to improve their trust and solidify their mind share in us. As for the strategic shift, we are going through basically amid the changes in infrastructure upgrade and the evolving user needs what we are doing in terms of investing in technology is to find opportunities and improve ourselves to serve our users better.

And I'm glad to see that through our efforts, we have indeed created value for consumers, especially in the area of agricultural produce.

So another point is that the recent pandemic does show some of the areas that we need to improve. And in terms of understanding users' needs and keeping up with the changes in their behaviors and their demand, we need to do better. So we will continue to explore the evolving needs and preferences of our users and to continue enhance our capabilities. In addition, as we explore, when we see good opportunities, we will continue to invest. So if we look at the financials, it is possible that our efforts would show up and be reflected in the future financial results as well, especially around technology. And I hope of what I have just shared, I may provide you with more color and give you some insights on our user number and its growth going forward.

Okay. Thank you, Kenneth. I will take your second question about SME expenses. Well, as you just said, we are going through a shift with low forecast towards R&D from marketing. And such shape has been in our financial results, as you may see. For example, sales and marketing expenses fell 14% year-over-year in Q1, which represents 47% of total revenue and down from 59% of Q1 last year. And at the same time, R&D expenses increased by 20% Y-o-Y. Well, for our reinvestments, we carefully evaluate the ROI and we allocate resources to generate long-term and high-quality development. As always, we will continue our investment discipline.

And in addition, in terms of certain user needs, would not do very enough, and there's still plenty of room for us to further improve. So we need to further explore how to better serve our users. In fact, recent pandemic also shows certain areas for us to improve. So as we see good opportunities, we will continue our investments to create more value for our consumers. As a result, the future expenses trend is likely to change. And to us, we firmly believe that R&D investment can generate high-quality developments. So we will continue to step up the investment, which will be shown in our financial results. And we are still in the investment phase instead of the stable stage. For financial numbers, we suggest you look at the long-term trends and the value we create from this investment. Hope that can clarify your questions. Thank you.

I think we still have time to take questions from the next analyst, and that will be the last one.

Your last question comes from Natalie Wu with Haitong International.

(foreign language) Let me quickly translate myself. So 2 questions from my side. First question is related with the COVID, just regarding the recent called breakout, can management share more details about how the pandemic has impacted industry and your operations at Pinduoduo? And how much impact has it had on your first quarter results? And also, what is your outlook towards the second quarter results during current and mix data?

And my second question is regarding the profitability. You have the lever meaningful process on both GAAP and non-GAAP basis for 4 consecutive quarters. Just wondering at current stage, are you now prioritizing our probability of goals? Should investors expect our quarterly earnings to be the norm?

[Interpreted] Well, Natalie. So let me take your question on how the pandemic has affected us and our operations. Well, I think 1 area that the pandemic has shown us is that for our business, we need to build it to be more resilient, and there are certain areas that we need to further improve, especially in terms of how we can effectively meet users' needs. And under the current situation -- and on the current situation, I think our peers have shown certain aspects that we may also learn from.

And Pinduoduo is an e-commerce company that focuses on the essential needs of users. During the pandemic, we are also actively leveraging our differentiation to create value for consumers and to fulfill our social responsibilities. Here, let me give you some examples. First, in Shanghai, we launched a 48-hour supply packages for Shanghai residents through aggregating their ordering and the fulfillment staff we strive to meet the basic needs from as many households as possible.

In addition, on the guidance of our relevant governmental departments, we have made efforts to provide supplies for medical personnel and people need. These are some areas which we have been working on by leveraging our differentiation and our value proposition. Another important point that I want to make during this pandemic time is that we also see many young talents writing up to challenges, and they are growing up rapidly in the face of these real-world challenges. They are proactively securing good supply. They provide technical support to assist fulfillment and they are also solving some of the operational difficulties. They are taking on more and more responsibilities and challenges. So from this, I'm confident in the potential of our team. So based on what I just said, what I see Pinduoduo has given me more conviction in how our team would perform in the young talent from our team.

And to add on one more point, during such special times, we also see that agriculture and the agriculture supply chain, it's so essential and the importance of having a very resilient agriculture supply chain. So our long-term investment in agriculture is particularly important. I hope what I've just shared around this point can give you some more color around our take on agriculture.

Well, thanks for your second question about profitability. First, I would like to point out just not our current priority -- over the past few quarters, our profits remain due to our operating leverage, especially from sales and marketing. And as mentioned last quarter, we have also controlled our spending in the face of lower growth. And under current intensified competition, we also see we still have many room to improve in terms of [providing] users. The reasons pandemic also shows that. So we need to step up our investments and it may cause our quarterly profit to fluctuate in the future. As you may see, this quarter's profit has decreased sequentially versus last quarter. Meanwhile, the profitability over past few quarters also gives us greater confidence to continue our long-term investments. We hope that everyone will focus more on the value we generate. Thank you.

Okay. Thank you, everyone, for joining us on the conference call today. If you have further questions, please feel free to reach out to our IR team. Thank you. Have a great day.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]