PDD Holdings Inc.

Q1 2021 Earnings Conference Call

5/26/2021

spk03: Good day and thank you for standing by. Welcome to the Pinduoduo first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you can press star 1 on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over To our first speaker today, Mr. Jason Hsu. Please take over.
spk09: Thank you, operator. Hello, everyone, and thank you for joining us today. Pinduoduo earnings release was distributed earlier and is available on the ARR website at investor.pinduoduo.com, as well as through Global Newswire Services. So on today's call, our Chairman and Chief Executive Officer, Chen Lei. We'll make some general remarks on our performance for the past quarter and our strategic focus going forward. Our VP of Strategy, David Liu, will then elaborate further on our specific strategic initiatives. Our VP of Finance, Tony Ma, will then take us through our financial results for the first quarter in March 31, 2021. So before we begin, I would like to refer you to our safe harbor statement in the earnings price release which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial matters. Please refer to our earnings treaties, which contains a reconciliation of the non-GAAP matters to GAAP matters. Now, it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead. Thank you, Jason.
spk11: Hello everyone, and thank you for joining our first quarter 2021 results announcement. It has been over a year since the initial break of COVID-19. Since then, we have carefully moved towards double C, while respecting the necessary precautions and occasional measures to tamp down the flare-up of the coronavirus. After mostly staying in place over the lunar New Year holidays in February, Chinese consumers finally took a well-deserved break over the May Day holidays, shopping and traveling around the country. With summer approaching, we hope that the global pandemic situation will continue to improve as more people receive their vaccinations. I would like to thank the merchants and logistic partners who work closely with us to serve our users throughout the period. Together, we created another industry first by staying open and serving users over the Lunar New Year. We provided users with cheer by ensuring that they could get what they required over the holiday and easily send presents and care packages to their loved ones back home with just a few clicks on our app. According to the State Post Bureau, The total parcel volume over the period from 11th to 17th February stood at $660 billion, growing by 260% over the same period last year. We are proud to have contributed towards keeping up our users' spirits while they kept themselves, their loved ones, and their community safe. Our overarching commitment to serving our users has helped us put yet another strong quarter. Our annual active buyers increased by 35.4 million from the December quarter to reach 823.8 million for the 12 months ending on the 31st March 2021. We continue to build trust and my share with our users. User activity on our platform continue to increase. Over the quarter, our MAU increased to $724.6 billion, representing 88% of our annual active buyers. Total revenues, excluding revenues from merchandise sales, was RMB $17 billion, a year-on-year increase of 161%. Our growing scale gives us both greater capacity as well as responsibility to live out our mission to benefit all. We constantly think about how we can best marshal our resources and reach to catalyze improvements and bring more benefit to society. Our direct access to over 800 million consumers and our understanding of them as well as our network of over 8.6 billion merchants on our platform, makes us uniquely well positioned to bring top minds from around the world together to develop practical solutions to real-world problems that our users encounter every day. As we work towards our goal of becoming the world's largest agriculture and grocery platform, we must also seize the golden opportunity to transform and modernize the agri-food system. We want to help consumers adopt healthier and more environmentally sustainable diets while improving all the links of the supply chain and cost structure of agriculture industry. And now, let me touch on two points. First, we are pursuing partnerships to answer questions on the future of food. we have just entered a research partnership to quantify the impact of plant-based meats on human health. Alternative proteins are a promising component of a more sustainable diet. It's useful to know how they affect us. And this is not our first research partnership, and it will certainly not be our last. For example, A year ago, we started a project to develop a more portable and low-cost test for pesticide residues. Upon commercialization, that project will improve food safety and quality, thereby benefiting many people. Second, we are rethinking logistic systems and infrastructure. We have a privilege of being the only exclusively mobile commerce players of this scale in the world. This unique characteristic of Pinduoduo has helped us to become world's largest commerce platform by the number of paying users. This singular focus on mobile-only experience came about because we recognized back in 2015 the immense potential of ubiquitous mobile computing to drive trends in consumer behavior and usher in a totally new era of interactivity among users. Similarly, with logistic systems in infrastructure, we are looking at how things can be done with a fresh pair of eyes with no preconceptions. Pinduoduo has an advantage in this area. We originate many puzzles, over a third of daily puzzles in China last year. and have expertise in complex technological system design. We are already working on algorithm design, data analytics, and co-trained logistic development and optimization. We have applied for some patents as well. We hope to roll them out widely in actual operations and help logistic providers achieve higher efficiency and lower cost. As we continue to grow, I believe that we can use our skill for good. As we search for solutions in science and logistics, we remain committed to becoming the world's largest agriculture and grocery platform. Our mobile-only and discovery-oriented platform, as well as team purchase model, are well-suited for food items and daily essentials. we see strong demand for Dodo Grocery, which is giving consumers the chance to buy a great variety of perishables directly from farmers and agri-merchants located in the region. We will continue to iterate our products and make groceries sourced around the world affordable and available to our growing number of users. We foresee Pinduoduo becoming important force multiplier and enabler that can truly make a meaningful difference in the world. At the same time, we remain committed to our social inclusion effort and support for revitalization of rural communities. For any advancement to be truly durable, we must look out for all our stakeholders, It is critical that we partner and empower them with tech. This means that we will keep on helping farmers and agri-merchants operate better and earn more. We will continue to provide training for them to harness the full suite of tools on our platform to optimize sales and benefit from our platform's visibility into final demand. we will help them increase their productivity by working with local government and agronomic institutes to harness new technology. Since the beginning, we have brought approximately 100,000 new farmers back to their hometown, and we have committed to training another 100,000 new farmers over the next five years. We want to be a catalyst in this virtual cycle. Only with farmers and agri-merchants earn more can they invest in greener agriculture. In building China's first agri-focused infrastructure, our priority remains partnering existing third-party service providers first and foremost on everything from co-trained logistics, warehousing, sorting, and delivery. For Dodo Grocery, we focus on partnering local communities closely. We work with existing shops, including mom and pop stores, to serve as our pickup point, enabling them to gain extra income. We also provide courses to them to aid their digital transition. In fact, since the start of Dodo Grocery, we have catalyzed the creation of millions of jobs up and down the entire supply chain. We hope that the system we build will truly benefit all for a long time to come. This is in line with our core value of benefit of doing the right thing. We hope that this helps you understand better where we are coming from and share our hope for a better tomorrow. Thank you. Let me now hand over to David.
spk12: Thank you, Lei. Hello, everyone. To echo Lei, our overarching commitment is serving our users. We're laser-focused on understanding our users' constantly changing needs and working with our partners and merchants to fulfill them in a way that is respectful of the community and the environment. With our aim of becoming the world's largest agriculture and grocery platform, we want to help create food systems that are greener, healthier, more inclusive, and more resilient. We develop and assess all our initiatives against those objectives. Let me elaborate on how this has worked in three key fronts. First, we're gratified by our positive early foray into agriculture-focused logistics infrastructure system. Dodo Grocery, our next-day self-pickup grocery service is creating many social benefits. It intelligently connects our users directly to local farmers and increases the variety of fresh produce they can purchase online. It lowers cost by reducing spoilage from storage to transport and improves carbon emission and eliminates that from the last mile. Farmers are more as well. Along the way, we create new economic opportunities within the communities. by tapping on existing shops to serve as collection points and through third-party service providers and warehouses that we have built to support it. We're happy that the growth momentum for Dodo Grocery remains very strong. We continue to see an increasing number of farmers and agri-merchants as well as pickup points joining our platform. This will only amplify the social benefits that Dodo Grocery can bring. We have also applied for patents for a proprietary coaching logistics network system that is aimed at minimizing the loss and quality degradation of agricultural products and other perishable products in transportation. The system applies novel technologies that can plant routes based on information of collection and distribution points, availability of coaching infrastructure, and transit points, among others. It is still early days, but we are optimistic that the solutions we develop and apply will bring very positive impact going forward. Second, we will introduce our consumer-to-manufacturer or C2M revolution to agriculture. We already enjoy a very good partnership with farmers and agri-merchants. More than 12 million farmers sell through our platform. This relationship has deepened with initiatives such as Help the Farmers livestream session last year when COVID-19 struck. We also have longer-term partnerships to plant, operate, and sell better through Dodo Academy and Dodo Farms. It is time to elevate this partnership with C2M. Pinduoduo pioneered C2M and in the process recast how Chinese manufacturers think about their value in the supply chain. We have helped factories build a new generation of brands that is delivering both quality and value for money to our users. By aggregating demand and spending patterns of over 800 million users on our platform, we create useful insights for manufacturers. They become more responsive to market trends by making what consumers indicate they need and want. C2M also cuts down waste and cost of distribution and marketing, and provides better price for consumers. Our New Brain initiative helped many export-oriented OEM partners survive the drought of international demand for their products during the COVID-19 pandemic. Agriculture will similarly benefit from C2M. Agriculture produce is diverse and unique. Much skill and effort go into cultivation. By helping farmers to sell directly to users on our platform, instead of via multiple intermediaries, we give value to the diversity and uniqueness of their produce, as well as site over their final demand. We're now focused on helping more farmers to sell better by sharing market insights. Just as we have helped manufacturers, we help farmers more appraise the market information. This enables them to be more responsive to market demand and develop agriculture brands that meet the needs of the market. China is a treasure trove of agriculture and culinary delights. There are plenty of gems hidden in plain sight waiting to be discovered by millions of consumers across the country. We will lend these growers and producers a helping hand to better market their products and develop brand recognition. Third, We're making headway in tapping on science to improve the food system. As Leigh mentioned, we are backing a first-of-its-kind study on the health impact of plant-based meat. There's growing recognition that current dietary patterns are neither healthy nor environmentally sustainable. Replacing meat with plant-based alternatives is a promising solution to both issues. When completed, the study will help consumers make informed choices on dietary transition. and manufacturers refine their products correspondingly. The spirit of this partnership is very much in line with our earlier partnership to develop a more portable and lower-cost test for contaminants on produce, which will help improve food safety and consumer confidence. We will continue to actively look for collaboration opportunities on agri-food tech with partners around the world. At the same time, we have also been active supporters of initiatives to apply the most advanced technology in agriculture. We're proud to have jointly organized the first China Agricultural Robot Innovation Competition. The competition, which concluded with an award presentation last week, attracted over 195 participating teams to apply robotics to agriculture. We're proud to have supported this competition, as robotics is at its early stage in agriculture but holds a lot of promise. We are convinced that our holistic efforts will bring progress to our food systems and benefit stakeholders, including our users, farmers and merchants, the communities we operate in, and the planet. Finally, even as we place a lot of emphasis on agriculture and food, we have not lost sight of the need to nourish the mind. In April, we launched Dodo Reading Month, Through our app, users could access classics like Moby Dick or Notre Dame de Paris and purchase them at discount. Famous historians and writers joined our live streaming sessions to recommend books to readers. In conjunction with the inaugural China International Consumer Products Expo at Heiko earlier this month, we partnered with CCTV News to bring our 10 billion program live streaming studio to Hainan. Through our live stream, users were transported to Hainan and learned about its specialty products, cuisine and fruits, as well as interesting items to offer at the expo. We'll continue to bring color and new experiences to our users through similar initiatives going forward. Let me now hand it over to Tony.
spk08: Thank you, David. Now let me take you through our financial results for the first quarter of 2021. We continue to see solid user growth in Q1 and are pleased with the progress we have made in building trust and winning mindshare with our users. Our annual active buyers for the last 12 months ending March 31, 2021, increased to 823.8 million, up 35.4 million from the prior quarter. Our MAU in Q1 reached 724.6 million from the prior quarter. This is up 49% compared to the same quarter in 2020. Our MAU as a percentage of our annual active buyers was 88% in the quarter, our highest engagement record achieved for any first quarter. According to National Bureau of Statistics, during the Q1, total retail sales in China grew 34%. and online sales of physical goods increased 24% from the same quarter in 2020. The number of express delivery parcels in Q1 grew 75%. The significant growth rate in both online sales of physical goods and parcel shipment volume reflected a strong recovery in e-commerce activities from the low base in Q1 2020 due to the business interruption caused by the COVID-19 outbreak. We also saw less pronounced the Chinese New Year holiday-related seasonality in Q1 this year, as more merchants stayed open in response to people's input. We collaborated with merchants and logistics service providers to ensure uninterrupted order fulfillment and delivery during the quarter. In terms of P&L, our total revenues in the quarter end, March 31, 2021, or RMB 22.2 billion, up 239% from RMB 6.5 billion in the same quarter last year. Excluding revenues from our 1P trials, our total revenues grew by 161% to RMB 17 billion in Q1 2021. The main driver of this growth was our online marketing services. Online marketing services revenue was RMB 14.1 billion this quarter, up 157% compared to the same period last year, due primarily to continued increase in merchant activities. We continue to offer better advertising products and analytic tools to our merchants, educate them on how to best leverage these features and improve their services to their targeted user, and thereby help them meet and exceed their ROI targets. As a result, we have seen merchants spending more and exploring new ways to engage with users, and our users browsing more and discovering more items of interest. We are pleased to see the growing endorsement by our merchants and our users. Our transaction service revenues this quarter amounted to RMB 2.9 billion, which is up 180% compared with the same period last year. The increase in our transaction service revenues was due to two primary factors. Number one, the increase in our GMB in Q1. And number two, the service revenues that we recognize in connection with Dodo Grocery, for which we provide fulfillment and other related services. We also recorded RMB 5.1 billion in merchandise sales from our one key trials in Q1 2021. as compared to RMB 5.4 billion in the preceding quarter. This 1T trial is meant to temporarily meet the demand of our users on products which our merchants cannot fulfill. Therefore, this number may fluctuate from quarter to quarter. Our strategy is unchanged, and this will remain a very small part of the business. Now moving on to COP. Our total cost of revenues increased from RMB 1.8 billion in Q1 2020 to RMB 10.7 billion this quarter. The increase was mainly due to the costs and expenses attributable to 1P merchandise sales. Higher cost of payment processing fees, cloud service fees, and delivery storage fees. Total operating expenses this quarter were RMB 15.6 billion as compared to RMB 9.1 billion in the same quarter of 2020. Our total non-GAAP basis operating expenses were RMB 14.6 billion as compared to RMB 8.3 billion in the same quarter a year ago. Our non-GAAP sales and marketing expenses this quarter increased 80% to RMB 12.7 billion from RMB 7.1 billion in the same quarter of 2020. This was mainly due to an increase in online and offline advertisement and promotions. As we continue to invest in user engagement and mindshare, in the first quarter, we had an incentive program for merchants who could stay open and continue dispatching orders during the Spring Festival. We also recently marked the second anniversary of our hugely popular $10 billion program, which has steadily expanded over time to cover all categories, including agricultural products and fresh produce. In line with our platform's vision of helping to accelerate the transformation of the agriculture sector, we will continue to make it free for agriculture products and fresh produce to be featured in this program. At the same time, we will continue to refine and improve the quality of our $10 billion program by raising the standard required for merchants to participate. Our 824 million users trust us to deliver great value and quality to them, and we will constantly seek to improve to uphold their trust in us. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue excluding 1P trials this quarter was 75%. As compared to 103% and 108% for the same quarter in 2019 and in 2020, The reduction in sales and marketing expenses as a percentage of revenue is a reflection of our economic scale and our consistent efforts of sticking to a high standard of ROI benchmarks. On a non-GAAP basis, our general and administrative expenses were RMB 161 million, an increase of 36% from RMB 118 million in the same quarter of 2020. primarily due to an increase in headcount. Our non-GAAP research and development expenses for RMB 1.7 billion, an increase of 55% from RMB 1.1 billion in the same quarter of 2020. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel, as well as increase in R&D related cloud service expenses. On a non-GAAP basis, Our IMD expenses as a percentage of our revenues excluding 1P contribution was 10% as compared to 17% for the same quarter last year. To sum up, operating loss for the quarter was RMB 4.1 billion on a GAAP basis compared with operating loss of RMB 4.4 billion in the same quarter of 2020. Non-GAAP operating loss was RMB 3.2 billion compared with operating loss of RMB 3.6 billion in the same quarter of 2020. Our non-GAAP operating loss as a percentage of our revenue improved from minus 55% in Q1 2020 to minus 14% in Q1 2021. Net loss attributable to ordinary shareholders was RMB 2.9 billion as compared to net loss of RMB 4.1 billion in the same quarter last year. Basic and diluted net loss per ADF or RMB 2.33 compared with RMB 3.54 in the same quarter of 2020. Non-GAAP net loss attributable to ordinary shareholders was RMB 1.9 billion compared with RMB 3.2 billion in the same quarter last year. Non-GAAP basic and diluted net loss per ADF or RMB 1.52 compared with RMB 2.73 in the same quarter. of 2020. That completes the profit and loss payment for the first quarter. Our net cash flow used in the operating activities was RMB 3.7 billion, compared with outflow of RMB 567 million in the same quarter of 2020, primarily due to an increase in restricted cash outflow due to seasonality, offset by an increase in online marketing services revenues. As of March 31, 2021, the company had RMB $83.4 billion in cash, cash equivalents, and short-term investments. As of the end of April 2021, US$756.4 million of our 0% convertible bonds due in 2024 have been converted into equity. This concludes my prepared remarks. Operator, we are ready for questions. Thank you.
spk03: Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star followed by 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, you can press the pound or hash key. Once again, it is star 1 to ask a question. We have the first question coming from the line of Thomas Chong from Jefferies. Please go ahead.
spk02: Hi, good evening. Thanks management for taking my questions. I have two questions. The first question is about monetization. Can you comment about the feedback on our advertising products and how we should think about the monetization rate going forward? And my second question is about the 1P business. Is it that the 1P GMV contribution to our overall GMV is around like 1%? And on the other hand, can you also comment about our long-gap lead margin without the 1P business? And also, how about the long-gap lead margin without 1P? Thank you.
spk08: Okay, that sounds a little bit more than two questions, but let me try to address one by one. Thank you again for the question. For the first question, I want to emphasize here, our strategy has always been serving our users well. That being said, we believe that either the growth or the monetization are a natural result of that. We also believe there's still a lot of room to grow from where we are now. Today, we see very strong growth performance in Q1. because the merchant's ROI actually is reflected in our revenue. As you can see, our revenue in this quarter continues to grow, which is a reflection of our merchant's confidence with the platform and with the confidence in the ROI they achieved. What the platform is providing is better design of various tools to help them to understand their target user better and so that they can leverage as well as the DODOC Academy to gain more insight on how the technology analysis can help them to enhance their ROI. I believe as long as these targets can be achieved, naturally the growth and motivation will follow. On your second question on the 1P business, as I mentioned in the prepared remarks, Our 1P business is a temporary measurement to offer products that our consumer wants, but for which our vendor cannot offer at that time. So this is not a strategic priority for us. The GMV contribution of the 1P business is immaterial compared to the overall GMV of the platform. And I guess that's your third question on the margin profile. the 1P business contribution to this does have an impact, but stripping that out, our total platform margin profile will stay more or less the same range as previous quarters.
spk02: Got it. Thank you.
spk03: Our first question, please. The next question comes from the line of Natalie Wu from Haitong International. Please go ahead.
spk05: Hi, good evening. Thanks for taking my question. Congratulations on very short quarter. Just curious how do you see the update of the competitive landscape change in the coming year? Given on the one hand we've seen several antitrust-related regulatory departments lately, and on the other hand, the space seems to be getting more and more crowded with the entry of cross-border players like social content platforms and local live service providers. Just wondering, does any of that affect your internal GND target for this year?
spk11: Thank you. 你好,我来回答这个问题,然后我的同事David会帮我翻译。 Thank you.
spk12: Let me go ahead and address this question in Chinese, and David will translate into English this evening.
spk11: When you talk about competition, China's Internet industry has always been very competitive. But I think a lot of people can see that China's e-commerce industry is very developed globally. But I think a lot of people underestimate China's retail industry. With the development of technology and changes in user behavior, it has brought a very wide market opportunity.
spk12: So first your question regarding competition. In China, the internet space has always been very competitive. And it's also true that e-commerce in China is very advanced in terms of development ahead of the rest of the world. But many people underestimate the retail opportunity that comes about and the broad market potential that exists as the experiences improve.
spk11: In terms of agricultural products, if we look at the entire field of agricultural products, the entire digitalization rate and the onlineization rate are actually very low. For a company like Pinduoduo, we are very willing to take root and invest in the agricultural product industry from the very beginning, and we are determined to increase the efficiency of the industry from the fundamental point of view.
spk12: So taking agriculture as an example, the digitalization industry remains low, and opportunities are abundant for those like PDD that can help drive efficiency and other fundamental changes.
spk11: And then, if we look at the past few years of our development, since 2005, we have seen that Looking back to 2015 when we entered this business,
spk12: foresaw that mobile internet would lead to some very fundamental changes to consumer behaviors, making it more real-time, more spontaneous, and making that access more ubiquitous. And we have decided to focus on the development of an entirely mobile product. And that meant we also had to make some very fundamental changes to the e-commerce product available at the time.
spk11: We can see that the behavior of consumers is changing very quickly. We believe that our users, our consumers, always hope for more choices. In order to better serve these users and consumers, we do not need to pay attention to the changes in trends. We continue to invest and innovate in technology and business models.
spk12: Consumer behaviors can evolve quickly, and we believe that people always want to have more choices. So to constantly serve our users better, we need to be aware of these constant changes in consumer trends and to invest in technology and business model innovation. Today, being the largest agricultural platform in China, Pinduoduo is well positioned to play another leading role in driving some change. The team is very excited about the value we can bring to the agricultural industry.
spk11: I personally think that each company has its own characteristics and advantages. But in the end, it still depends on what kind of unique value each company can bring to the consumer. For Pinduoduo, from the first day, we are very focused on the experience, focusing on providing high-performance products, focusing on an interesting and interactive shopping process, and using users as the center of attention.
spk12: So going back to your question around competition, I believe that each company is unique, and ultimately it boils down to the unique value proposition that each player represents to the consumers. For us, We have been focused on delivering value for money products with fun interactive shopping experiences to our consumers through our mobile-only platform from day one. User-centric is deeply rooted in our principles, and it's the first thing that we think of when we need to make tough decisions.
spk11: The market potential is huge, and we are still in the early days, particularly early in a business like Doodle Grocery.
spk12: As the service standards improves and the consumer experiences improve, we believe this new business model will be able to motivate more consumers and further expand the market, addressable market.
spk11: 最后呢,我觉得还要强调一点,就是我觉得良性的竞争永远都是对消费者有利的,不管是出国,就是在B端也好,在C端也好。 At the same time, we think healthy competition is a good thing, whether you're talking about the 2B side of the business or the 2C side of the business. Because as more platforms develop, the users can get better
spk12: services. And that is really fundamentally why we entered this business in the first place.
spk05: Thank you, Ali.
spk12: Why don't we move on to the next question?
spk03: The next question comes from Robin Zhu from Bernstein. Please go ahead.
spk10: Thank you, Guan Yicheng. I have two questions. One is that our company's strategy is to bring more brands to the platform and to run their products. I would like to know from Guan Yicheng that in this quarter, do we have any developments that are worth highlighting in terms of attracting brands to the platform? uh, uh, uh, uh, So I have two questions. One is on bringing brands onto the BD platform and, you know, whether there's progress to be shared in Q1, some of the key bottlenecks and challenges that management might want to share. And then the second question is, again, on monetization rates in Q1 compared to the last few quarters and, you know, an outlook for, you know, how quickly they think this can increase. Thank you.
spk12: Sure, Robin. Thank you for your questions. Let me speak to the brand question that you raised, and then I will pass it over to Tony to talk about your question on monetization. So first and foremost, I would say that we are making steady progress with brands because we believe our user-centric mentality is very much aligned with how brands' efforts in terms of looking for new channels to reach and serve their prospective customers. So as our user scale and engagement grows, we're seeing an increasing number of brands approaching us to collaborate. Since the beginning of the year, you have seen a number of notable new additions to our platform entering into fairly deep strategic collaborations. This includes brand names on the international side, Adidas, Johnson & Johnson, and Unilever. And we have also entered into strategic collaborations with the likes of Madea and Ecovacs. So you asked about challenges in terms of working with brands. I think it's really, really helping them to understand the incremental value that PDD as a platform can bring to brands and how we can work with them to better target and address new users and identify users in a very cost-efficient way and improve their own experiences and their own reach. As an example of that, I will point to our efforts with Medea on the C2M side. We're working with them to deliver more value for money quality products to consumers on our platform by developing a co-customized line of washing machines. So these are the type of differentiation and efforts of strategic collaborations that we can invest. And we're investing in brand partners who are working with us to grow their businesses on PDD. Let me then actually ask Tony to make some more comments on your question on monetization.
spk08: Yes, again, coming back to our vision and our key strategic priorities for Pinduoduo is always focusing on the users, how to serve our users better. And as you know, we have 824 million users. And in the past few quarters, basically, we're having incremental new users coming to the platform, like around 50 million per quarter, and last quarter it's around 35, close to 40. And these new users, they need time to build their mindshare and trust with the platform. And what we are focusing now is really helping our merchants by providing them tools and help them to understand better to reach their target first. Therefore, our users can benefit from the service provided by our platform and the merchant. Then they can have this fun and interactive experience with us and stay longer time with us. And monetization will be a natural result coming out of this target being achieved.
spk10: Got it. Thank you.
spk03: Thank you.
spk04: For the next question?
spk03: The next. Thank you. The next question comes from Xiaolong Shi from Nomura. Please go ahead.
spk01: Good evening, management. Thanks for taking my questions. Congratulations on a very solid quarter. My question is, can you provide any colors to help us understand the size of your community grocery business? its associated loss in one queue. And earlier this year, we noticed from media several local governments issued warning to community grocery platforms due to the alleged excess of subsidies provided by platforms for products sold. I just wonder, after the intervention of the governments, have you guys seen any sort of de-escalation in the competition? Thank you.
spk08: Let me take the first question. Let me just repeat the question you raised. It's on the overall performance of Dodo Grocery business financially, I guess.
spk01: Yes.
spk08: First of all, I think we start the Dodo Grocery business around a little bit more than two quarters. This is still a very young business. And as previously mentioned by Leigh and David in their remarks, Dodo Grocery is one of our strategic priorities, a very, very important initiative for us to help to rebuild the agriculture sector, help to bring additional values to our users. So to me, this is a long journey, a journey full of challenge and excitement. So up to now, I would say the It's too early to tell the business model, and there's still a lot of room to improve operationally. So far, we have been quite disciplined in our investment in Door-to-Door Grocery, and we evaluated every decision based against a set of internal ROI targets. We're quite pleased with the progress we have made to date. We will continue to evaluate the necessary investment on a case-by-case basis. One thing we need to highlight here, we will continue to invest in this area. Some of the areas in the remarks they mentioned, things like logistic infrastructure technology, and also technologies around how to better aggregate the demands in each of the locations. all this type of investment, we will invest heavily.
spk12: John, let me just add up to Tony's comments and around your question around competition. I would say that, look, as we have conceived Dodo Grocery as an extension of our platform business, our priorities are really focused around how to give our users a more holistic and integrated experiences, whether they decide that fulfillment and the convenience through Dodo Grocery makes most sense, or they decide to continue to shop or make purchases for certain items on the overall platform. So whilst the competition in the space continues to be intense, I think it's more important that we focus on serving our users well, and that's certainly what preoccupies us as opposed to looking at what other people are doing.
spk09: Thank you.
spk03: Next question, please. Thank you. The next. The next question comes from Alicia Yap from Citigroup. Please go ahead.
spk06: Good evening. Thanks for taking my questions. Congratulations on the strong set of results. I have two questions. The first one is when we look at the transaction commission revenue line, is there any change of the payment rate or is that fair to assume all the incremental improvements in the revenue was mainly due to the fees that you're able to charge for the dodo grocery. And then second question is, how many of these new users that you were able to acquire or come into our platform is just purely purchasing the dodo grocery produce only versus the original dodo platform? Any color you can share would be great. Thank you.
spk08: Thank you for the question. Let me go first on the transaction service revenue. Our transaction service revenue increased nearly 180% versus last year, the same period. The rate itself doesn't change. We didn't change the rate, and there's two factors contribute to this increase. Number one is in line with the GMV growth in Q1. Number two is the revenue associated with DoDo Grocery. And for your second question, I will let David comment.
spk12: David Chang We have not disclosed, obviously, the breakdown of the users between DoDo Grocery versus our main e-commerce platform, because that's really not how the management thinks about the business. With the introduction of Dodo Grocery, we saw improvement in engagement and purchase frequency among our users. This is because the users' needs in fresh produce and groceries, they now have multiple channels to satisfy those needs, whether it is through the Dodo Grocery channels or continuing through the main app. From the user's perspective, we are looking at this really as satisfying their needs across different product categories and across different types of fulfillment. So this really is meant to be one integrated app, as the orders mostly are generated through the Dodo Groceries channel through our app. So we don't focus on what percentage of our interactive buyer base uses Dodo Grocery only any more than we focus on how they are specific for any particular product categories.
spk06: Okay, great. Thank you.
spk03: Thank you. The next question comes from Jerry Liu from UBS. Please go ahead.
spk07: Hi, management. Thank you for letting me ask a question. Two parts. The first is following up on the service fee. Could we just describe the accounting a little bit in a little bit more detail? Especially if we're talking typical, say, 10 or 100 RMB of GMB from 多多买台, then how does that flow through in terms of the service fees? Is that just a markup for the platform? And then secondarily, I just want to ask about the logistics investments. We saw the additional commentary in a separate press release. Where could any of these investments show up this year? Is it still pretty small, or could we see R&D, CapEx, or any other forms of investments? Thank you.
spk08: Okay, I will go with the first question. Actually, I don't get it very clear what your question is, but like I said, the transaction service revenue composed of all the transaction service fees we're charging on the main platform, and also including a part coming from the DoDo Grocery. But the portion of the DoDo Grocery kind of transaction service revenue as a percentage of total numbers are actually small. I'm not quite sure I get what your question on the accounting treatment on this. Probably you can rephrase your question a little bit. But probably, David, you can comment on the second one first.
spk12: Yeah, so Jerry, maybe if I can just jump in here a little bit. So Dodo Grocery, as you know, is really in providing the Dodo Grocery service, What we as a platform are offering incrementally is fulfillment and other transaction-related services. And for this, we do charge the merchants participating on our platform a service fee. So that fee is included or is being categorized as part of transaction services revenue. So there isn't actually anything complicated from an accounting perspective, per se. And the cost associated with that is booked under cost of goods as part of the cost of goods sold. So coming back to your question around logistics and investments over the long run, look, I mean, we are looking at logistics really as a result of how consumer purchasing behaviors and fulfillment requirements have evolved over time. If you take a step back and look back to the rise of e-commerce in China, it was quite hard for anybody to imagine China today will have an infrastructure that can serve or service, handle 300 million daily parcels efficiently. Well, the current system that we have today can cope with the scale. We do think the next wave of efficiency gains is going to come from a more flexible system, so more technology, more efficiency-driven that can help reduce the need, for example, multiple transshipment needs or how to leverage the current infrastructure such that we can deliver a greener logistics experience. As we look at how the consumer experiences are changing and the new fulfillment methods and better technologies are becoming important, and this is an area where we are innovating. So from the investment perspective, I think for the time being, you will see us reflecting this mostly in R&D. You also see us looking at our total grocery infrastructure that we have today and looking at where we need to bulk up in terms of ability to better provide for user experience. One example I can give you is that we have rented additional sorting facilities for fresh produce as a way to improve the service experiences that we can offer to our users. So that would result in higher cost of goods sold from a fulfillment perspective. But more specifically, though, we are looking ahead. We're looking at the long term, how we can invest. and we're looking at technology. So we've been investing, as they mentioned, working on algorithms, data analytics, and on coaching logistics development and optimization. So we'll continue to focus on innovation and space to better serve our consumers. Okay, thank you, guys. Operator, why don't we take one last question in the interest of time?
spk03: Certainly, sir. The last question comes from Piyush Mubari from Goldman Sachs. Please go ahead.
spk00: Thank you for taking my question. If I look at DDG and look at the scope of the business, could you take us through what the footprint is now? Could you take us through and give us a feel for what the investment line has been? If I look at the investment line that's been bobbing around quite a bit, and it's hard to discern how much of that is going into PP&E, how much is going into other areas of investment potentially because it's one line. So if you could help us better understand where we are, And if you could also dwell on the overall impact of DDG on the business, and in particular looking at sales and marketing spend in the recent quarter, which is a percentage of revenue excluding one piece seems to have risen after two or three quarters of holding steady. Those are my three questions. Thank you.
spk12: Yeah, Piyush, so thank you for that question. So I think your question generally revolves around total grocery So I would say this, as I mentioned on the last quarterly call, our service is now available nationwide across all the 300 plus major cities in China. So from a footprint expansion perspective, we have a footprint that we find sufficient and necessary. And we are adding to that gradually as the infrastructure on a local basis become more mature and provide for the the type of consumer experiences that we want. And your question then around investment, I believe you are referring to the investing cash flow line. And there maybe Tony can correct me if I'm wrong, Most of the investing you see in there is actually more from our cash management investment perspective as opposed to investment in hard capital assets. There are some of that infrastructure required in association to do the grocery, but most of the investment to date has been really in build-out of the operations, which is reflected in the cost of goods sold as opposed to in capital assets and in PB&Es. And then I think the last question you asked was around social marketing expenses. I would encourage you to look at this really over a longer-term basis, right? So obviously the number in the first quarter, first quarter being typically the weaker seasonality quarter. Of course, this year because of the stay occasion in China, the seasonality is less pronounced. But if you look at this quarter versus, you know, The same quarter last year, the year before, sales and marketing intensity as percentage of revenue excluding the 1P is coming down. So I do think you need to take that into account. We are seeing the efficiency from a sales and marketing perspective for us to continue to improve, and this is being done so in a way that's also inclusive to Dodo Grocery as we think about these businesses quite holistically. I realized I didn't specifically comment on your question on Dodo Grocery's impact on our business, and this may be a good way to just kind of touch upon that. The Dodo Grocery business, as we had alluded to earlier on this call, does allow us to extend the services that we can provide to each consumer on our platform, allowing us to better fulfill their grocery needs that requires a 24-hour type of fulfillment cycle. What it also does mean is that the users who are participating in Dodo Grocery does have a higher frequency of purchase and higher level engagement activities on our platform, and that synergistic with the overall activities on the platform, and that does have some benefits when it comes to sales and marketing spend over the long run.
spk08: I have just one point to add, David, here. I think speak of the investment on Dodo Grocery, it's worth to mention as well investment on people, not just embedded in the lines under the cost of goods or PP&E. We have dedicated Pinduoduo teams deployed at each location we're operating, and also our employees work closely with third-party contractors to ensure the Dodo grocery service can be implemented in matters that meet our quality standards. Since the start of Dodo Grocery, we have catalyzed the creation of millions of jobs up and down the entire supply chain. Thank you.
spk12: Operator, in the interest of time, we will conclude the call here. Thank you, everyone, for taking the time to join us this evening. If you have any follow-up questions, please feel free to reach out to our IR team at investor.appinoodle.com. Thank you very much.
spk08: Thank you.
spk03: Thank you. Ladies and gentlemen that concludes our conference call for today. Thank you all for your participation. You may disconnect now.
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