Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings, Inc. First Quarter 2023 Earnings Conference Call. 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. . 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. PDD Holdings earnings release was distributed earlier and is available on our website at investor.pddholdings.com as well as through GlobeNewswire Services. Before we begin, I would like to refer you to our safe harbor statement in earnings press release, which applies to this call as we will make certain forward-looking statements. 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 Co-Chief Executive Officer; Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer; Liu Jun, our VP of Finance. Lei and Jiazhen will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then take us through our financial results for the first quarter ended March 31, 2023. During the Q&A session, Lei and Jiazhen will answer questions in Chinese, and we will help translate. Please kindly note that all translations provided are for reference purpose only. In case of any discrepancy between the original remarks and the translated version, statements in the regional language should prevail. Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Chen Lei. Lei, Please go ahead.

Hello, everyone. Thank you for joining our earnings call for the first quarter of 2023. I will start by giving a brief overview of our first quarter results. We achieved a total of RMB37.6 billion in revenue this quarter representing a 58% year-on-year increase. During the past quarter, we saw consumer sentiment continue to improve. We have seen a surge in demand across various categories, reflecting consumers' eagerness to explore a wide range of products we offer. The quarterly results also show that our long-term strategic focus on high-quality development is starting to pay off. We are glad to see that the focus on quality development not only sets us to a solid footing for the future, but also delivers immediate gains for consumers and sellers. We are encouraged by the strong backing from our stakeholders. We work hard to create a limited marketplace where consumers can find what they are looking for and where high-quality values can drive and succeed. Technology is very important to our mission to build a healthy and vibrant platform ecosystem. It is also a vital catalyst to drive efficiency and opportunities in manufacturing and the retailer sectors. That is why we are putting more time and resources into R&D to foster sustainable progress. Our engineers make up about half of our total employees. R&D helps us meet the unique needs of consumers, provide merchants with deeper understanding in shocking trends and allow manufacturers to respond swiftly to evolving demand. Finally, when supply and demand put better together, we can help unlock the potential in different industries. We will continue to step up our investment in R&D. And now let me talk about our globalization efforts. Last year, we launched Temu to offer quality products at affordable prices to consumers around the world. By working…

Thank you, Lei. Hello, everyone. This is Zhao Jiazhen. I'm glad to join this earnings call. In Q1, many places introduced measures to promote consumption. We see clear recovery trends. Online retail continues to pick up. Users on Pinduoduo show a higher willingness to shop. Consumption vitality is becoming increasingly evident. These favorable trends lay a solid foundation for the steady growth of consumption for the whole year. We are very optimistic about the process of the consumption market. Over the past quarter, we actively mobilized platform resources to stimulate and realize the consumption potential. As always, we provide users quality merchandise with more savings. In the various large-scale promotional campaigns in Q1, such as the Chinese New Year promotion and the New Year sales, we stepped up discounts and issued extra coupons to benefit as many users as possible. Recently, in this year's Double Five shopping festival in Shanghai, we invested over RMB4 billion in coupons and discounts, marking a new high. During this event, we partnered with China Central Television and Oriental TV on live streaming sales, showcasing a wide range of products to viewers in an interactive and direct manner, enhancing consumer trust in online shopping. Furthermore, our total growth rate team actively explores innovation by creating new consumption scenarios and deepening the spillover effect of the pickup points of surrounding areas' consumption. We hope this can further promote the development and integration of online and offline consumption. In addition to our strong suite of more savings, we have further improved our ability to provide better services to optimize the consumer experience. We launched electronics shopping season in advance in April and introduced the concept of Everyday is June 18. We not only ensure good prices, but also upgrade services on many fronts to improve consumer experience.…

Thank you, Jiazhen. Hello, everyone. Let me walk you through our financial performance for the first quarter ended March 31, 2023. In terms of income statement, our total revenues in the quarter were RMB37.6 billion, up 58%, RMB23.8 billion in the same quarter of 2022. This increase mainly came from encouraging trends in consumer sentiment and positive responses from consumers and merchants towards our focus on high-quality development. Revenues from online marketing services and others RMB27.3 billion this quarter, up 50% compared with the same period of 2022. Revenues from transaction services this quarter were RMB10.4 billion, up 86% versus the same period of 2022. Moving on to cost and expenses. Our total costs of revenues increased 55% from RMB7.2 billion in Q1 2022 to RMB11.1 billion this quarter, mainly due to increased fulfillment fees and payment processing fees. Total operating expenses this quarter were RMB19.6 billion on a GAAP basis versus RMB14.5 billion in the same quarter of 2022. On a non-GAAP basis, our total operating expenses increased to RMB18.1 billion this quarter from RMB13 billion in Q1 '22. We energized several large-scale promotional campaigns to help booster user sentiment, and we continue to invest in our long-term focused areas to support our high-quality development. Our total non-GAAP operating expenses as a percentage of total revenues this quarter is 48% compared to 54% in the same quarter last year. Looking to specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB15.8 billion, up 47% versus the same quarter of 2022. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 42% compared with 45% for the same quarter in 2022. In Q1, we actively leveraged the platform resources to facilitate consumption recovery. Our non-GAAP general and administrative expenses…

Thank you, Jun. Next, we will move on to the Q&A session. For today’s Q&A session, Lei, Jiazhen and Jun will take questions from analysts on the line. We could take a maximum of two questions per analyst. Lei and Jiazhen will answer questions in Chinese, and we will help translate their remarks for easier reference. Operator, we may now take questions on the line.

Your first question today comes from Joyce Ju with Bank of America.

My first question is: noting PDD recently implemented the Co-CEO structure, how does the change affect your group strategies? What are your key growth drivers going forward? Per your announcement, post the Co-CEO structure change, Lei will focus more on the globalization side. Does that mean your globalization strategy now has a higher priority? My second question is related to top line growth. Your online marketing services revenue increased by 50% year-over-year this quarter, accelerating from the last quarter. How should we think about this reaccelerated momentum, what PDD has done this quarter contributing to this?

Hi Joyce, thank you very much for your question, and this is Lei. I can take your first question on strategies. Jiazhen and I have been working together for many years and we have established deep trust. With our goal of high-quality development in mind, we have constructed very clear long-term strategies, and we will continue to lead our team in terms of execution. And on top of that, we will leverage our different backgrounds and ideas and be efficient in decision-making. Over the past period of time, we are steadily shifting our strategic focus from the speed of growth towards the quality of growth. And we have seen positive feedback from both consumers and sellers on this shift, which is also reflected in this quarter's results. Under our long-term strategies, we are continuously strengthening our supply chain capabilities and also expanding the supply of high-quality merchandise. We will further increase our support for quality sellers by launching our 10 Billion Ecosystem Initiative and further push forward our platform overall quality. And in addition, we will continue to optimize our platform ecosystem. As a tech-driven company, the value we create is inseparable from our R&D capabilities. So we are also strengthening our R&D capabilities and increasing our R&D investment. Currently, our R&D team makes up about half of our total employees. The China market is huge, and we see big potential for us to further grow. We believe that in the foreseeable future, China market is our biggest market. At the same time, we also note that it is changing very fast and competition is intense, which demonstrates both challenges and opportunities. This is why our Board has appointed Jiazhen as Co-Chief Executive Officer to design and execute strategies together with me and further strengthen our China operations team. Next, let me hand over to Jiazhen.

Thank you, Lei. And first, an honor that our Board put their trust in me. I'm very excited from a new role. At the same time, I feel our responsibilities and challenge. As the industry recovers, we are also entering a new stage. And in the past few years, we successfully shifted from marketing-driven to R&D-driven, and this lays a solid foundation for our development. Now we've reached the gate of another stage which is the stage of dedicating ourselves to promoting holistic, high-quality development. In this new stage, we are further improving our platform ecosystem, upgrading our consumer services, increasing support for quality supply and also deepening our supply chain expertise. We constantly optimize platform governance to further build a socially responsible platform. And we believe that investing in our platform, ecosystem, supply chain and also our R&D can create long-term value, and we will lead our team together to execute these strategies with determination, accelerating our footsteps in entering this new stage of high-quality development. And let me also take your question on revenue growth. In the past quarter, many places introduced policies to support consumption we see a continued improvement in consumer sentiment. And these trends show a good beginning for 2023. We have also benefited from this. And our platform consumption vitality is further boosted. To support consumption recovery, we continue to start from consumer demand and actively mobilize our platform resources. To give consumers more savings, we organized several large-scale sales events in a row and gave out actual coupons to boost consumer sentiment. We also strive to give better services to our consumers. So we have upgraded consumer protection and also services throughout the entire shopping experience. For example, for most of the product categories, the shipping processing time has been cut down from 72 hours to within 48 hours. Our virtual platform ecosystem of more savings and better services has earned us a decent consumer and seller feedback. Also, our Q1 growth is early testament to our progress in building up the platform ecosystem. Looking ahead, we still need to remain down to earth and further strengthen our core capabilities, so that we can create more value for consumers. For example, we are launching the 10 Billion Ecosystem Initiative to further support quality supply. Thank you.

Hi, operator, I think we are ready to take the next question on the line.

The next question comes from Natalie Wu with Haitong International.

Thanks for taking my question. So I have two questions here. First one is with June 18 approaching, we see that many of your peers have rolled out this year's promotion, which seems to be very aggressive. Just wondering what's your response and how do you explain -- how do you plan to maintain your competitive advantage, specifically for pricing? Do you think there will be an endless spiral of increasing discount in short or the list price? And secondly, we noticed that your profitability margin this quarter is another sequential decrease. Just wondering what are the major reasons behind? Is it because of the seasonality or competition? Does it mean that you are now actively spending extra for growth?

This is Jiazhen here, and thank you for your questions. I will share my views on competition. So instead of paying too much attention to what competitors are doing, we actually focus more on how we grow in competition. We view competition as a testing ground, and it motivates us to iterate quickly. Just I have mentioned in my remarks, we are always consumer-oriented, and we actively and positively embrace all types of competition. We are accelerating to build up a healthy ecosystem of more savings and better services. Our more savings essentially comes from retail efficiency improvement. And we will continue to strengthen our R&D to help better match supply and demand. We will also root ourselves deeply in more production regions to connect quality products to consumers directly. So for example, in initiatives such as our agriculture initiative -- agricultural cloud initiative, we are leveraging our supply chain expertise to offer more users quality and also affordable agriculture products. And we hope to further improve our efficiency and turn it into a sustainable price advantage for consumers. At the same time, we will also continue to increase discounts and issue more coupons to give back to consumers directly. And better services is another important area we are optimizing our service quality throughout the entire shopping experience. So for example, we offer extra care to the elderly people and also consumers living in remote areas, and we give them preferential customer services. We have also upgraded our post-sales services such as offering consumers the option to receive a refund without having to return items. And we are launching a dedicated 10 Billion Ecosystem Initiative. And this aims to channel more resources towards high-quality sellers to support SMEs and also quality businesses, and enhance the platform overall service efficiency and quality. And we will continue to focus on sales improvement in competition and strive to create more value for our consumers. Thank you.

This is Jun. Thanks, Nat, for your questions. I will address your question on profitability. Well, as just Lei pointed out, we have very clear long-term strategies, and we see many areas to further improve. We're executing these strategies with determination. We will continue to nurture the development of healthy, more savings and better services platform ecosystem. We firmly believe our patient investment can generate value for consumers, sellers and the platform ecosystem. Feedback from consumers and sellers also make us more determined in seeking quality development. So we plan to further step up our long-term investment. For example, we are launching our 10 Billion Ecosystem Initiative to support quality sellers and improve our overall platform ecosystem. As we deepen our efforts, our profitability level decreased in the past two quarters on a quarter-to-quarter basis. We think it is normal for profitability to change between quarters.

Operator, we may take questions from the next analyst on the line.

The next question comes from Kenneth Fong with Credit Suisse.

I have two questions. First, for your global business, may management share what is the level of financial impact from Temu? How many users do you serve now? Could you -- may be able to give us an update metrics such as the order volume? And I have a second question, now we see more sellers are opening up stores across multiple platforms. So it seems the merchant style selection of different platforms are becoming more and more similar. Can management share with us what's the differentiation on the supply side, especially for your agricultural products?

Thanks, Kenneth. I will take your first question about the financial impact of Temu. Well, this business is currently in its early stage. And compared to our overall scale, its revenue contribution is small. For Temu, as we mentioned before, our focus is always how to better understand consumer needs and how to satisfy this need. Financial metrics will be a natural result of our value creation. We will follow our financial discipline and ROI-driven approach when evaluating each investment opportunity.

This is Jiazhen, and let me take your questions on supply chain and agriculture. In many categories, we see a lot of room to expand and optimize supply. For example, the digitization rates of agriculture produce is still low. We see a lot of on mass demand, and we also see a lot of quality agricultural produce are not efficiently distributed. And we are committed to leveraging our resources to increase supply chain efficiency and also to help more quality produce connect to the nationwide market. We provide e-commerce, training and connect farmers with agri-focused logistics resources, which helps more produce expand their distribution media and also help preserve quality as well as nutrition during transportation. On top of that, our total grocery business continues to explore innovation and we help consumers get convenience as well as a broader selection of fresh produce. We also continue to drive agritech innovation as well as adoption. And we are deepening our cooperation with top economic institutes. For example, we recently donated RMB100 million to support a cutting-edge research at China Agriculture University. In addition to that, our platform sales can allow more research findings quickly reach the market, which can help bring more quality products to consumers. And we also proactively support every seller with our platform resources, including traffic to help quality produce reach more end consumers. So in this way, the quality sellers and the platform can grow together healthily and constantly improve our products and service quality. Agriculture is our long-term strategy. So we will continue to mobilize platform resources and also our inputs go deep into the supply chain and bring more quality of produce to consumers. Thank you.

Okay. It's about time, and thank you, everybody, for joining us on the conference call today. Thank you, and have a great day.

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