Operator
Ladies and gentlemen, thank you for standing by and welcome to PDD Holdings Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone. 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.
Leigh
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 Globe Newswire services. Before we begin, I would like to refer you to our safe harbor statement in earnings price release. which also applies to this call, as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Joining us today on the call are Mr. Chen Lei, our Chairman and Co-Chief Executive Officer, Mr. Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer, as well as Ms. Liu Jing, 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 first quarter ended March 31st, 2024. And during the Q&A session, Lei and Jiajun will answer questions in Chinese and will help translate. Please note that the English translation is for reference only and in case of any discrepancy, statements in their original language should prevail. Now, it's my pleasure to introduce our chairman and co-chief executive officer, Chen Lei. Lei, please go ahead.
Chen Lei
Hello, everyone. Thank you all for joining our early call for the first quarter of 2024. 2023 was the first year on our journey towards high-quality development. We are encouraged by the positive feedback from our users and merchants and are more confident in our strategic direction. 2024 is a critical year to deepen our execution. In the first quarter, we benefited from an improving macro environment and achieved steady growth. Our total revenue reached IMD 86.8 billion, which represents a 131 year-on-year increase. Looking ahead, we will continue to work on the fundamentals of our business through our investment in supporting high-quality consumption, broadening high-quality supply, and promoting a high-quality ecosystem. Our proactive transition to high-quality development will inevitably bring challenges and difficulties. But still, we decided to embark on this journey and are determined executing well because we are seeing a few irreversible long-term market shifts. First of all, we clearly see a trend of consumption upgrades. And in response to this, we are innovating our service offering to cover more consumption scenarios. And at the same time, actually engaging with our merchants to broaden our product selection. For example, this year, we are deepening our cooperation with top brands from around the world to bring a new product to our platform. In addition to meeting consumers' demand for more savings and better services, we hope to deepen connections with our consumers and strengthen our platform's market share in new product categories and among new customer groups. High-quality consumption will not be possible without strong supply chain capabilities, and over the years, we have built our valuable experience across the entire e-commerce supply chain. Through technology innovation and investment in research and development, our supply chain know-how is transformed into easy-to-use tools and services to empower our merchants with cost-saving digital solutions. This measure has proven to be effective in terms of attracting more merchants to our platform, broadening our product selection, and reducing product costs, all of which are essential to support high-quality consumption. And lastly, an ecosystem that encourages compliant business conduct is the foundation to long-term growth of our platform. As commerce integrates with digital technology at a record pace, consumers and regulators are holding e-commerce platforms accountable for higher standards. And we are taking the initiative to build an industry-leading compliance program and to leverage our technology capabilities to empower SME businesses with our compliance know-how. This is to foster a healthy commandment that attracts quality merchants that are willing to play by the rules and drives our bad actors, thereby creating a positive feedback loop. When it comes to consumer well-being and economic interest, we always stand behind the former. We are focused on building long-lasting trust with our consumers and not on short-term gains. We also adopt a similar long-term orientation to other aspects of our business. As a company that is still in the growth mode, we will continue to focus on long-term value creation and invest firmly into opportunities with great potential. We are not guided by short-term goals, and this is also reflected in how we manage our global business. Our global business is still in an exploration stage and there's plenty of room for improvement. We are prepared to respond positively to challenges and we view these as important opportunities to improve ourselves. We are in this for the long term and will not be distracted by short-term results. Instead, we will focus our efforts on building our key capabilities. Firstly, supply chain capabilities. We will continue to roll out tailored fulfillment solutions in different markets to improve supply chain efficiency and reduce cost. We welcome quality merchants from around the world to join us in providing a rich variety of quality products for consumers worldwide. Secondly, legal and compliance capabilities. With the goal of building an industry-leading compliance program, we will make firm investments to create a safe and trustworthy shopping environment for our users, uphold our compliance standards we will conduct forward-looking research into laws and regulations in the market we operate and transform our know-how into tools that can be easily assessed by our merchants. And thirdly, service capabilities. In response to the diverse needs and quality standards of global users, we will keep up our investment technology and operations to improve overall user experience. as we bring more value to consumers and merchants along the road. We are hopeful that our platform will be increasingly recognized and welcomed by local communities we serve. We do not expect this to be easy, as we are prepared for investments over the long run. Finally, I would like to say that we are operating in a constantly evolving industry. which competition and opportunities are both emerging at rapid pace. Competition has been intensifying in the past quarter, which will inevitably increase our expenses and affect some organic growth. On the other hand, new technologies and new markets also offer us tremendous opportunity for growth. At this moment, I want to revisit our first shareholder letter when the company went public. We are not a conventional company, and we hope to show you the true colors of our company, no matter how bumpy or rough the numbers may seem to be. Our business does not follow a linear path, and our earnings will almost certainly fluctuate. we suggest our shareholders not to measure our overall performance with results from a few quarters. Our financial performance may be on these market expectation accounts, but as long as we keep focusing on long-term value creation, and ultimately, this short-term fluctuation will converge to our growing intrinsic value. And now, I will hand it over to our co-CEO, Justin
Jane
Thank you, Lei. Hello, everyone. This is Zhao Jiazhen. Thank you all for joining our earnings call for the first quarter of 2024. 我们积极响应促消费政策, 针对平台用户在新春佳节等节庆时令的购物需求, 推出了一系列促商惠民的让利活动, 刺激消费潜能释放。 在政策和活动的双重驱动下, 一季度的整体增长稳健, 我们对国内消费市场的未来充满信心。 This year is a year for consumption promotion. The consumer market in the first quarter has made a good start. Online consumption remains strong.
Zhao Jiazhen
and online retail penetration continues to rise, we proactively responded to the consumption promotion policies and launched a series of promotional activities to meet users' shopping needs during the Spring Festival and other seasonal events. This further relieves consumption potential and benefits merchants. Driven by both macro environment and our effective promotional events, we achieved solid growth in the first quarter We are confident in the consumer market in China.
Jane
As Lei mentioned,
Zhao Jiazhen
This year, we will step up our investment to deepen the execution of high-quality development strategy. High-quality development is our long-term strategy. Going forward, we will continue to direct our efforts into three key areas, which are consumption, supply, compliance, and the platform ecosystem. We are offering more savings to consumers. We are also focused on delivering high-quality supply and services to more consumers.
Jane
Guided by this strategy,
Zhao Jiazhen
On the consumer side, in the first quarter, we remain committed to putting consumers first. Focusing on more savings and better services, we continue to give back the most tangible rewards to our users. For example, we step up our investment in a $10 billion program and partner with millions of quality merchants during the Spring Festival shopping season and the May Day Shopping Festival to fulfill consumers' demand for more savings.
Jane
In terms of good service, the start of consumer goods exchange is one of the major drivers of domestic consumer work this year. We actively join the third-party service platform to provide consumer goods exchange service to users, covering mobile phones, digital, air conditioners, refrigerators, washing machines, TVs, and other types. Currently, the number of service personnel is more than 10 million. Our consumer goods exchange also supports white-collar non-stick products. Consumers can get additional white-collar non-stick products. By further reducing the threshold of consumer upgrade, the customer's shopping experience is also better.
Zhao Jiazhen
As for better services, the consumer goods trade-in program is one of the initiatives driving this year's nationwide consumption promotion efforts. We have been actively working with third-party service platforms to provide users with convenient trade-in services, covering mobile phones, electronics, air conditioners, refrigerators, washing machines, TVs, and other categories. Today, we have served more than 10 million customers Our trade-in services also extend to popular products under the 10 Billion Program, which offers consumers attractive discounts. As we make it even easier for consumers to upgrade their consumption, their shopping experience is further enhanced.
Jane
In addition, we wanted to make sure that consumers in remote areas could also enjoy the free shipping shopping experience. So, in the first quarter, we upgraded our shopping and shipping services and pioneered free shipping to villages in remote provinces.
Zhao Jiazhen
Our efforts brought last-mile delivery posts even closer to the consumers, with most now within 2 km radius. Such innovation led to a rapid year-on-year growth of order volume from these regions. We are happy to see that our service improvements are further driving our growth.
Jane
At the supply end, we continue to increase investment in the brand and participate in joint growth. In the first quarter, we focused on the national goods brand theme,
Zhao Jiazhen
on the supply side, we continue our investment to support and grow together with the brands and merchants. In the first quarter, we focused on the theme of trending national brands and allocated platform resources, such as traffic support to high-quality merchants. This not only ensures the high-quality supply, but also help boost our merchant businesses.
Jane
For example, during the spring festival shopping season, a dairy product brand launched a limited edition offering for the Year of the Dragon.
Zhao Jiazhen
inspired by New Year traditions, and chose our platform for the product launch. With the support of our platform's resources, the product quickly gained popularity and became a topseller in the dairy category.
Jane
the second year of the Science and Technology Festival, to explore the new productivity of agricultural development.
Zhao Jiazhen
Agriculture is our foundation. We are committed to invest in this important sector over the long run. In the first quarter, we continue to support agricultural technology innovation by launching the fourth Smart Agriculture Competition and the second Duoduo Academy Growing Competition. This helps to explore new productive forces in agriculture.
Jane
At the same time, our agricultural operations We continue to go deep into Anhui, Yunnan, Guangxi, Shandong and other places to provide e-sports training and one-on-one direct training for local merchants. In addition, we joined forces with more than 1,000 high-quality agricultural areas in each province to celebrate the New Year's Day. While accelerating the promotion of special agricultural products, we also promoted farmers to collect and pay. During the 55 shopping festival, we started a 100-billion subsidy e-sports delivery live broadcast. The focus is to recommend Yunnan local agricultural products such as orchids and fresh flowers.
Zhao Jiazhen
At the same time, our agriculture cloud initiative has been steadily advancing in production regions such as Anhui, Yunnan, Guangxi, and Shandong to bring e-commerce training and one-on-one consultation to local farmer merchants. In addition, during our spring festival shopping season, we collaborated with more than 1,000 quality agriculture production regions across the nation, which not only brought more specialty agricultural products to our platform, but also boosts farmers' income. During the May Day Shopping Festival, we launched dedicated live streaming sessions under the $10 billion program for agricultural products. With a particular focus on Yunnan agricultural specialties, such as blueberries and flowers, we supported the scaling of regional production and the branding of local agricultural products.
Jane
在向高质量转型发展的过程中,我们非常的重视高质量生态的建设。 只有健康有序合规的生态才能运营出可持续发展的平台。 在一季度,平台继续推进百亿生态专项,做了一系列的专项治理行动。 例如我们的治理小组利用技术手段,进一步提升了不但宣传展示信息的高效的自动管控。 A high-quality ecosystem is critical to our transformation to high-quality developments.
Zhao Jiazhen
Only a healthy ecosystem with well-designed platform policies can support the long-term sustainable growth of an e-commerce platform. In the first quarter, we continue to invest in the 10 billion ecosystem initiative and carry out a series of compliance projects. For example, our trust and safety team utilize the technological means to further enhance the efficient automated review of product information on our platform.
Jane
As the largest e-commerce platform for consumers, we use our own resources to actively carry out social responsibility. Over the past year, we have continued to support the key public service activities of going home across the country, caring for the elderly, and helping the elderly to go home safely. Before the world of reading, we started the 7th多座读书院, using the $1 billion reading fund to collect official subsidies, and for the first time, we have implemented the original supply of 30,000 kinds of reading products, so that more people can enjoy the benefits of supporting the general meeting.
Zhao Jiazhen
As an e-commerce platform serving a vast and diverse consumer base, we also actively utilize our own unique resources to take on more social responsibilities. Since the beginning of this year, we have continued to support the Key to Home nationwide campaign, caring for the elderly and help lost seniors return home safely. Around the World Reading Day, we launched the seventh Dodo Reading Month and provided direct discount to tens of thousands book products, enabling more people to enjoy the benefits of knowledge sharing.
Jane
拼多多的高质量发展是一项长期庞大复杂的系统工程。 我们将汇聚各方力量,扎实推进,狠抓落实,为我们的消费者和商家创造更多价值。 Our high-quality development strategy is a long-term, massive, and complex project.
Zhao Jiazhen
We will bring together the efforts and resources from all ecosystem participants to deepen our execution and create more value for our consumers and merchants. Now, let me hand it over to Jun. She will provide you with an update on our financial performance in the first quarter.
Wang
Thank you, Jasmine. Hello, everyone. Let me walk you through our financial performance for the first quarter ended March 31st, 2024. In terms of income statements, in the first quarter, our total revenues increased 131% year-over-year to RMB 86.8 billion. 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 42.5 billion this quarter, up 56% from the same quarter of 2023. Revenues from transaction services were RMB 44.4 billion, up 327% from the same quarter last year. Moving on to costs and expenses, Our total cost of revenues increased 194% from RMB 11.1 billion in Q1 2023 to RMB 32.7 billion this quarter, mainly due to increase in fulfillment fees, payment processing fees, maintenance costs, and call center expenses. On a gap basis, Total operating expenses this quarter increased 44% to RMB 28.1 billion, from RMB 19.6 billion in the same quarter of 2023. On a non-GAAP basis, total operating expenses increased to RMB 25.6 billion this quarter, from RMB 18.1 billion in Q1 2023. In the past quarter, We invested decisively in key strategic initiatives, such as giving back to the consumers, investing in our service offerings, promoting brand awareness and R&D. Our total known gap operating expenses as a percentage of total revenue this quarter was 29%, compared to 48% in the same quarter last year. looking into specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB 22.7 billion, up 44% versus the same quarter last year. Throughout the past quarter, we continued to give back to consumers over a series of seasonal promotional campaigns and increased advertising to promote our brands. Our non-GAAP basis Our sales and marketing expenses as a percentage of our revenues this quarter was 26% versus 42% for the same quarter last year. Our known gap general and administrative expenses were RMB 572 million versus RMB 338 million in the same quarter of 2023. Our research and development expenses were RMB 2.3 billion this quarter on a known gap basis, and RMB 2.9 billion on a gap basis, up 16% year-over-year. Technology is at the core of our high-quality development strategy. We will continue our investment in RMD to provide our users with a more satisfying shopping experience, improve supply chain efficiency, and to build a robust compliance program. On a GAAP basis, operating profit for the quarter was RMB 26 billion versus RMB 6.9 billion in the same quarter last year. On GAAP operating profit was RMB 28.6 billion versus RMB 8.5 billion in the same quarter last year. Non-GAAP operating profit margin was 33% this quarter, compared with 22% for the same quarter last year. Net income attributable to ordinary shareholders was RMB 28 billion for the quarter, compared to the RMB 8.1 billion in the same quarter last year. Basic earnings per ADS was RMB 20.33, and diluted earnings per ADS was RMB 18.96 versus basic earnings per ADS of RMB 6.13 and diluted earnings per ADS of RMB 5.55 in the same quarter of 2023. Non-GAAP net income attributable to ordinary shareholders was RMB 30.6 billion versus RMB 10.1 billion in the same quarter last year. Non-GAAP, the loaded earnings per ADS was RMB 20.72 versus RMB 6.92 in the same quarter of 2023. As Leigh mentioned, our business does not follow a linear path. This quarter's financial data does not represent the future. Flutterations are inevitable. We suggest investors not to forecast our growth solely based on results from the few quarters. That completes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB 21.1 billion, compared with RMB 1.3 billion in the same quarter last year. As of March 31st, 2024, We have RMB 242.1 billion in cash, cash equivalents, and short-term investments. Thank you. This concludes my prepared remarks.
Leigh
Thank you, Jun. Now, let's move on to the Q&A session. In today's Q&A session, Lei, Jiajun, and Jun will take questions from analysts on the line. We could take a maximum of two questions from each analyst. Lei and Jiajun will answer questions in Chinese and will help translate for convenience purposes. Operator, we are open for questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. Participants are requested to restrict to two questions at each time. Your first question comes from Alicia Yap from Citigroup. Please ask your question.
Alicia Yap
Hi, thank you. Please share with us how the company evaluates the current competitive trend of the industry, and in such a competitive environment, what aspects of the company, especially the strategic center of Pinduoduo's business, will be placed. The second question is, we have also noticed that in the past few business meetings, the management has placed compliance and platform ecology into very important positions. thanks management for taking my questions congrats on the strong results uh two questions first is uh regarding the domestic competition so over the past year we have seen e-commerce platform actively adjusting their strategies in terms of the pricing and service. Can management share your view on how you evaluate the competitive landscape in such an environment? What would be the strategic focus for Pinduoduo business going forward? Second question is related to compliance. I think we noticed on the reasons earnings call Management spent quite a bit of time talking about compliance-related matters. Obviously, markets is also paying close attention to the work that you are doing in this area. Can management explain a little bit more about the efforts you have made so far and what goals you wanted to achieve? Thank you.
Chen Lei
Hello, Lixia. I'm Chen Lei. Let me answer your question.
Leigh
Hi Alicia, this is Chen Lei. Let me take your question. And regarding your first question on strategy and competition, as for competition, we find that consumers are getting used to making purchases from different platforms. And before they decide which platform to choose from, to shop from, consumers compare the overall shopping experience across different platforms in a few areas. For example, on product selection, on pricing, and also on services. And given this trend during the first quarter, we are seeing that our industry peers have significantly stepped up their efforts.
Chen Lei