Q2 2025 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the PDD Holdings, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] 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.

Thank you, operator, and 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 and also through the Globe Newswire 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 press 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; and Mr.

Liu Jun, our VP of Finance. Liu and Zhao will make some general remarks on our performance for the past quarter and our strategic focus, and Jun will walk us through our financial results for the second quarter ended June 30, 2024. During the Q&A session, Lei and Jiazhen will answer questions in Chinese and will help translate. Please note that English transmission is for reference only. And in case of any discrepancy, statements in the original language should prevail.

Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Mr. Chen Lei. Lei, please go ahead.

Hello, everyone, and thank you for joining our second quarter 2025 earnings conference call. The first half of 2025 has seen rapid trends in the external environment. At this critical juncture when merchants doing business on the platform face challenges, we stepped up our commitment in high-quality development and launched the RMB 100 billion support program. Through this program, we have invested and will continue to invest substantial resources to support the merchant ecosystem.

Together with our merchants, we are actively exploring new business models for the global business, seeking new growth opportunities and navigating the ups and downs of the market cycles. This significant ecosystem investments were reflected in our Q2 financial performance. Revenue growth further moderated and operating profit declined by 21% year-over-year. However, as we have emphasized in the past, we prioritize long-term value creation over short-term financial results.

Our focus remains on investing for the long term, such as strengthening the ecosystem, driving value chain upgrades and delivering tangible benefits to our consumers. As a result of our investments in a RMB 100 billion support programs, we are pleased to see that the platform ecosystem is making steady progress towards sustainable and high-quality development. Since August last year, our RMB 10 billion fee reduction initiative has brought substantial savings for our merchants, creating room for them to innovate and to offer a wider selection of high-quality products to the consumers. At the same time, our logistics support initiative significantly reduced the cost of shipping to remote areas and led to a 40% growth in order numbers from the regions, injecting new energy into the economy.

In this past quarter, the entire company rallied behind the RMB 100 billion support program to deliver innovative solutions to help merchants grow their business, while further reducing costs and commissions for merchants. We are seeing businesses of all sizes from established brands to small merchants, gaining new momentum in our ecosystem. Let us look at a few examples. We are seeing established consumer brands successfully reinventing themselves by leveraging consumer insights to shorten product launch cycles, lower R&D costs and enter into new market segments.

Many industrial belt manufacturers were able to make the transition from white label products to a branded offering, breaking away from commoditized competition. With the help of the Duo Duo premium produce program, we are seeing farmers and growers and higher margins by improving quality control and by moving into food processing to capture higher value add. Alongside merchant support, we have also expanded our consumer giveback program. In addition to the RMB 10 billion program, we introduced new long-term consumer campaigns, such as the RMB 10 billion coupon program.

During this year's June 18 shopping festival, we provided additional coupons to the top of -- on top of a national trading program, driving record sales across multiple categories, including fresh produce, electronics, on applicants and apparel, offering more value for the consumers. Meanwhile, in our global business, merchants and our platform faced more complex business environment. To navigate through the market cycles, we are working together with merchants to explore new business models and new markets while at the same time deliver innovative solutions to drive efficiency. As a platform that has its roots in agriculture, we continue to invest in agritech through initiatives like the Smart Agriculture Competition, which is now in its 5th iteration. 46 global teams competed in a preliminary held in July this year, showcasing cutting- edge technology in AI farming, hydroponics and [indiscernible] systems.

This event is emerging as an important platform for agricultural technology research and application. Later in this year's competition, the participants will bring their technology from labs to fields, testing the commercial application of their research findings. Looking ahead, as external environment continue to evolve and competition intensifies, we remain committed to long-term value creation over short-term results. Our team will prioritize high-quality growth by creating long-term opportunities for merchants and investing in consumer experience.

As we ramp up our investments, profitability will inevitably fluctuate and this quarter's results may not represent future earnings trends. And now I will hand it over to Zhao Jiazhen to share more details about our performance in the second quarter.

[Interpreted] Thank you, Lei, and hello, everyone. This is Zhao Jiazhen. Thank you for joining our second quarter 2025 earnings call. In Q2, to help merchants tackle emerging challenges we actively leveraged our role as a platform to take on more social responsibilities.

We accelerated our execution of the RMB 100 billion Support Program, which represents a significant commitment to high-quality development. This also marks the first merchant support program of this scale. These substantial investments once again affected our quarterly revenue and profit. As Lei noted, comparing to short-term financial performance, we focus more on investments that bring long-term value to the platform ecosystem.

And this is why we are willing to accept lower profits to consistently reinvest in the platform ecosystem in the long run. This past quarter under the unprecedented investment through the RMB 100 billion support program, significant resources to initiatives such as RMB 10 billion fee reduction program, logistics support initiative and new quality merchant support program. We continue to lower costs and increase efficiencies for millions of merchants, mainly saved millions of RMB each year just from service fee reductions. These efforts created more momentum and space for industrial upgrades.

The logistics support initiative also bridged supply and demand and helped drive rapid order volume growth from remote regions, greatly enriching the daily life of consumers in these regions. On the supply side, the RMB 100 billion support program expanded support for SMEs, new quality merchants and branded merchants, ensuring all types of businesses could benefit from the platform's resource support. This help agriculture and manufacturing regions achieve all-rounded, high-quality development to meet diverse consumer needs. Our Duo Duo premium produce team visited multiple agricultural regions, including Suzhou rice, Zhaotong potatoes, Kunming flowers, Shangqiu eggs, bamboo shoots in Fuzhou, seafood in Shantou and Chaoshan and [indiscernible] in Guizhou to provide customized support based on local specialties and industry advantages.

By enriching product offerings and store metrics, we helped fresh produce merchants overcome seasonal shortages and achieve sustainable growth. In Zhaotong Yunnan, for example, local potatoes are particularly taste and nutritious and have been a main source of income for local farmers. However, due to geographic constraints, these potatoes were traditionally sold as low added value raw produce. In recent years, one of our merchants set up automated production to turn these potatoes into flavored chips.

With the platform's health, the product gained national popularity creating its own online followings. This turned agricultural produce into a key local industry that increased income for 11,000 local farmers. This quarter, new quality supply team also visited industrial belts such as Yiwu small merchandise, Xinyang snacks, apparel in Guanyuan, children's’ wear in Foshan and fishing gear in Weiha. By making these visits, we gained deeper understanding of merchant needs and challenges faced by them.

Following these visits, leveraging the platform's digital capabilities and promotional tools such as the Black Label stores and Duo Duo short videos, we were able to help merchants explore new growth models. In Yiwu, after decades of development, the local small merchandise market is facing intense commoditized competition, with many merchants and factories operating with same profit margins and low barriers to entry. Our team integrated the merchant systems with the platform's back-end to help them identify hit products. Together with the referral support from the platform, this significantly improved the success rate of new product development, reducing the cost of trial and error.

Our support measures created room for merchants to innovate and injected new energy in the transformation of the local industries. In addition to merchant in agricultural regions and industry belts, the RMB 100 billion support program is also empowering consumer brands, especially traditional national brands, facing new consumer trends. Many of these traditional brands are dealing with challenges such as lack of product innovation and slowing growth. Leveraging deep consumer insights, our team worked with brand partners on an end-to-end solution covering product planning, marketing and store operations.

These partnerships have enabled brands to successfully tap into younger and niche market segments, unlocking new growth opportunities and achieving strategic transformation. Our supply side investments also stimulated consumption demand. During the June 18 promotion, sales hit new highs across dozens of categories. The Super Double Discount event alone reached over 3.76 million orders in a single day, meeting consumers' evolving needs.

And as competition in the e-commerce industry intensifies around new business models, we remain committed to long-term thinking. We will continue to deepen the RMB 100 billion support program investing substantial resources in improving user experience, merchant services and industrial upgrades to build a win-win ecosystem. We also hope our efforts can help guide the industry toward a more inclusive and more open environment, creating greater value for the society. I will now hand it over to Jun, who will provide you with an update on our Q2 financial performance.

Thank you, Zhao Jiazhen. Hello, everyone. Let me walk you through our financial performance for the second quarter ended June 30, 2025. In terms of some statements in the second quarter, total revenues increased 7% year-over-year to RMB 104 billion. This was driven by an increase in revenues from online marketing services and transaction services.

Revenue growth further moderated as competition intensified and as we help merchants increase efficiencies. Revenues from online marketing services and others were RMB 55.7 billion this quarter, up [indiscernible] from the quarter of 2024. Revenues from transaction services were RMB 48.3 billion, up 1% from the same quarter last year. Moving on to cost and expenses. Our total cost of revenues increased 36% from RMB 33.7 billion in Q2 2024 to RMB 45.9 billion this quarter, mainly due to increase in fulfillment fees, bandwidth and server costs and payment processing fees.

On a GAAP basis, operating expenses this quarter increased 5% to RMB 32.3 billion, from RMB 30.8 billion in the same quarter of 2024. On a non-GAAP basis, operating losses increased to RMB 3.4 billion this quarter from RMB 28.4 billion in Q2 2024. In the second quarter, a significant resources in rolling out a series of merchant support initiatives. Looking ahead, we are committed to supporting the vitality of the ecosystem, and we'll continue to prioritize long-term value creation over short-term results. Our total non-GAAP operating expenses as a percentage of total revenues this quarter was 29%, in line with the same quarter last year.

Looking to specific expense items. Our non-GAAP sales and marketing expenses this quarter were [[indiscernible], up 5% versus the same term last year. Sales and marketing expenses as a percentage of our revenues this quarter was 26%, in line with the same quarter last year. Our non-GAAP general and administrative expenses were RMB 667 million versus RMB 594 million in the same quarter of 2024. Our research and development expenses were RMB 3.1 billion this quarter on non-GAAP basis and RMB 3.6 billion on a GAAP basis, up 23% year-over-year.

On a GAAP basis, operating profit for the quarter was RMB 25.8 billion versus [indiscernible] in the same last year, [indiscernible] year-over-year. Non-GAAP operating profit was RMB 27.7 billion versus RMB 35 billion in the same quarter last year. Non-GAAP operating profit margin was 21% this quarter, down from 36% from the same quarter last year. The year-on-year decline of operating profit reflects our continued investments in supporting our merchants and ecosystem.

Net income attributable to ordinary shareholders was [ RMB 30.8 billion ] for the quarter compared to RMB 32 billion in the same quarter last year, down 4% year-over- year. Base earnings per ADS was RMB 22.01 and diluted earnings per ADS was RMB 20.75 versus basic earnings per ADS of RMB 23.14 and diluted earnings per ADS of RMB 21.61 in the same quarter of 2024. Non-GAAP net income attributable to ordinary shareholders was RMB 32.7 billion versus RMB 34.4 billion in the same quarter last year. Non-GAAP diluted earnings per ADS of [ RMB 22.07 versus RMB 23.24 ] in the second quarter of 2024. The net income in Q2 benefited from e-commerce seasonality and may not represent future earnings.

As we remain focused on long-term dollar creation, the sustained investments may continue to weigh on short-term profitability. That completes the income statement. Now let me move on to cash flow. Our net cash generated from operating activities was RMB 21.6 billion compared with RMB 43.8 billion in the same quarter last year.

As of June 30, 2025, we have RMB 387.1 billion in cash, cash equivalents and short-term vestment. Thank you. This concludes prepared remarks.

Thank you, Jun. Next, we'll move on to the Q&A session. In today's Q&A session, Lei, Jiazhen and Jun will take questions from analysts on the line. [Operator Instructions] Lei and Jiazhen will answer questions in Chinese, will help translate for convenience purposes. Operator, we'll open for questions.

[Operator Instructions] Your first question comes from Alicia Yap with Citigroup.

Two questions. First is that this quarter, we saw our e-commerce platform have made substantial investment in the instant retail, instant shopping, launching a new wave of industry investment. At the same time, we also saw some content platforms also continue to step up their e-commerce effort. So compared to the peers, the lead in the company's revenue growth rate has narrowed this quarter.

So could management elaborate on the reasons behind this and how management is thinking about navigating these competitive dynamics? And then the second question is the external environment has shifted rapidly in the first half of this year. So looking ahead, how does management think about the next phase for your global business? What new directions or evolutions do you see in terms of the business model?

And then from a financial perspective, where do you think the main growth opportunities are? And how should we think about the growth target?

[Interpreted] This is Zhao Jiazhen, let me take your first question. And in the past quarter, industry competition intensified further as the major market participants invested heavily in new business models. And against this backdrop, our revenue growth slowed further in Q2, while operating profit declined meaningfully for the second consecutive quarter. And in response to the intensified competition, we will adopt a proactive and long-term approach, taking the competition as an opportunity to strengthen the high-quality development of the platform ecosystem.

And then accordingly, we have chosen to increase investment and to forego part of the profits in order to create growth opportunities for the SME merchants. And from management's perspective, we believe this is a responsibility that the platform is best placed to take on. And at the same time, represents a long-term investment in strengthening our ecosystem. We do not believe this quarter's profit level are sustainable and fluctuations in profitability is likely to continue in the coming quarters.

Currently, the industry is going through a critical stage of high-quality development. We realize that only by taking the initiative and working closely with the supply chain partners, can the platform drive sustainable growth for the industry and also achieve high- quality development. Amid the intensifying competition, we choose to turn our focus on the individual merchants and the specific merchant support cases to deepen our merchant support measures one case at a time. For example, we are seeing merchants on our platform collaborating with college research teams to design and build smart factories and automatic production lines, which are then used to produce high-quality, ready-to-eat, fresh salad products.

In the past, these products could only be found offline and now available to consumers through our platform and deliver to their doorsteps. The platform pay special attention to this technology-enabled agriculture products and provide targeted support under the RMB 100 billion support program, which helps merchants increase its online offered tangible savings to consumers and, at the same time, broaden the supply of high-quality innovative products on the platform. There are many more examples of such cases that benefit all parties involved. And each of these cases is made possible only through the close collaboration between the platform, the merchants and the supply chain.

We understand that to deliver effective support and to ensure that the RMB 100 billion support program truly gets to the SME merchants who need it most, we need to go deep into agricultural regions and the industry belts and carefully understand the pain points and difficulties that merchants are dealing with. And looking ahead, changes in the external environment and intensifying competition will inevitably lead us to step our investments in the merchant ecosystem. And these factors combined will cause the short-term financial results to fluctuate. However, in the long run, if we execute well on each and every one of these merchant support cases, we are confident in achieving sustainable, high-quality growth together with our merchants.

This is how we are approaching today's competitive environment.

[Interpreted] Hello. This is Chen Lei. Let me take your questions on our global business. We noted that in the past few quarters, we have seen significant changes across countries and regions and also shifts in the global.

We may continue to see some short-term volatility in different markets. Overall, however, we observed steady consumer demand and consumer trust in our platform is gradually growing. We will proactively adapt to changes in each region, make timely adjustment and to meet the changing regulatory requirements of each region as well as the diverse needs of consumers. Now our global business has gone through an initial phase of growth.

We are encouraged to see that our products and services are well received by consumers around the world. But at the same time, our business is still in its early stages, and there is plenty of room for improvement. The vision of our global business has always been to bring more high-quality products to consumers worldwide. Looking ahead, we will continue to invest in our supply chain capabilities, service capabilities and compliance capabilities to strengthen the fundamentals for the next phase of the global business.

On the supply chain capabilities, we are continuously strengthening our localized operations, working closely with local merchants to diversify product offerings and improve supply stability and delivery efficiency. On the surface capabilities, we are constantly iterating collaborations with our logistics partners to enhance the fulfillment experience. We are continuously building our team's capabilities to meet the high expectations of consumers worldwide. Looking forward, the level of surface we currently provide is still in its early stage.

Our team will continue to work hard day by day through the continuous improvement in service quality. We hope to win over more and more consumers. Thank you for your questions.

Your next question comes from Thomas Chong with Jefferies.

My first question is about since the launch of the RMB 100 billion support program last quarter, what are the key changes that management has observed in your business operations? From a financial perspective, how is the impact of these investments shown in your financial performance? And on a mid to long term horizon, what will these affect the company’'s monetization and spending? My second question is about what's the company's view on the Duo Duo Grocery business?

We noticed that some of the company's main competitors in this business have exceeded certain markets. what are the company's future plans for this business?

[Interpreted] Thank you, Thomas, this is Zhao Jiazhen. Let me answer your first question. And since the second half of last year, with escalating competition and accelerating changes in the external environment, we have scaled up commission reductions across the platform, initiatives such as the RMB 10 billion fee reduction initiative, the new quality merchant support program and the logistics support initiatives have been rolled out to lower operating costs and help drive efficiencies. And earlier this year, the management unanimously decided to launch the RMB 100 billion support program as our next strategic initiative, dedicating significant resources and sacrificing the platform's profits to cultivate a sustainable and healthy platform ecosystem.

The RMB 100 billion support program is very broad in scope. We focus on our support measures where merchants needed most. Over the past quarter, we have begun to see some of the early effects. For instance, in agriculture sector, we launched 2025 Duo Duo premium produce initiative, expanding support to merchants across hundreds of high-quality agricultural regions.

It helped our merchants explore new ways to bring agricultural products online, increase the added value captured by the merchants and drive higher production and income. And beyond agriculture, our dedicated teams for a new quality merchant support program also visited hundreds of manufacturing belts assisting more SME merchants with their transformation and accelerating the manufacturers' shift towards high-quality development. And similarly, through our logistics support initiatives, the platform waived shipping fees from transit warehouses to final destination for orders shipping to remote regions, allowing the merchants to sell their products to these regions by paying only the euro shipping fees, which significantly expanded the market reach.

This initiative not only brought down cost and improved efficiency for merchants, but also stimulated regional consumption and allows high-quality products to reach more consumers and benefiting the wider consumer base. Going forward, we will continue to do our best to understand the pain points and difficulties faced by our merchant and through the RMB 100 billion support program, increase our investments to deliver targeted and meaningful support to deepen our support to the merchant ecosystem. From a financial perspective, the investments made over the past quarter have resulted in slower revenue growth and year-on-year profit decline.

This reflects the platform's commitment to invest in substantial resources to support merchants. We will continue to ramp up our investments to enable merchants to thrive, while building a more sustainable and robust platform ecosystem. And as such, we do not believe this quarter's profits are sustainable. There will be fluctuations in profitability in the coming quarters.

And about your second question on Duo Duo Grocery. And first of all, Duo Duo Grocery is a hard business, requiring significant long-term investments. The competition chose to exit the business at this juncture to concentrate on investing in new business models. But to us, this is not a time to relax, we need to further increase investments based on our own business model and to address the impact from the intensifying competition with relentless execution.

As to the Duo Duo Grocery business itself, when evaluating whether to pursue a new business, the first question that comes to us is always whether we can create our unique value. When we launched the Duo Duo Grocery business in 2020, we viewed this as a natural extension of our e-commerce operations. The initial reason for us to start this business was seeing the traditional e-commerce supply chains struggle to meet the users' demand for fresh produce. And for example, certain fresh products incurred significant spoilage during traditional e-commerce fulfillment.

And in response to these pain points, we decided to increase our investments in the supply chain to better match demand and local supply, building a supply chain suited for agricultural and fresh products and creating value for both users and merchants in terms of product variety and fulfillment efficiency. After 5 years of investment, our Duo Duo Grocery now covers 70% of villages nationwide, addressing last mile delivery challenges in many areas and meeting consumer demand for high-quality, affordable products. At the same time, we have established an efficient agricultural product distribution network, connecting local farmers and SME merchants with local consumers and expanding the market reach.

Since the beginning of this year, with the RMB 100 billion support program, the platform has increased support and traffic allocation to remote regions. In regions where Duo Duo Grocery services were recently launched, local product offerings have greatly improved and expanding the reach of inclusive consumption network to meet local consumers' growing demand for better products. And meanwhile, the Grocery business has created competitive local employment opportunities contributing to the economic growth in these communities. As I just mentioned, while Duo Duo Grocery business requires substantial investment, we believe it is quite meaningful that we will continue to increase our investments.

And going forward, we'll deepen our long-term commitments across product, supplies, service quality and delivery efficiency for the duo duo Grocery business, creating tangible benefits for consumers, supply chain participants. Thank you for your question.

Lixin Ju with Bank of America.

[Interpreted] Let me translate my questions. First, in last quarter's earnings call, management mentioned the mismatch between investment cycles and the return cycle was a primary cause of the profit decline in the first quarter. Looking at the the second quarter results, it seems the company's expense ratio and profit margin levels show signs of stabilization. Just wonder, does it indicate like the company's investment cycle has already like stabilized?

And how should we actually expect the profit margin trends going forward, both long term and short term? My second question is recently, we have seen some signs of improving consumer demand from some industry data. Has management observed a similar trend lately? Any updates on consumer sentiment or behaviors will be appreciated.

And how does management view macro trends in the third and fourth quarter this year?

Joyce, this is Jun. I would take your first questions. First of all, our profits in Q2 benefited from e-commerce seasonality. And so this quarter may not represent future earnings.

If we're looking at the numbers, our Q2 revenue growth further slowed to 7% and operating profit dropped to 21%. We believe there are some reasons for this. First, under the [indiscernible], the platform has increased its investment to support merchants which naturally impacts profitability. And for second, intensified industry competition continue to create challenges for our merchants and the platform.

So to help merchants navigate market cycles, the platform will continue to scale up investments should Q2 profit levels should not be seen as a reference for future performance. We do not believe this quarter's profit level is sustainable -- fluctuations in profitability in the coming quarters. As we have communicated in the past, in current market environment, increasing platform investment to help merchants through the cycles is a responsibility the platform can and must take on. We believe that these investments will create a healthier merchant ecosystem in the long run.

Our focus remains on long-term value creation rather than short-term financial performance, as Lei and Jiazhen just mentioned, we will continue to increase our [indiscernible].

[Interpreted] This is Zhao Jiazhen. Let me answer your second question. China's consumer market demonstrates remarkable potential and resilience and driven by sustained pro consumption policies, we have observed steady growth in overall retail sales, alongside the continuous rise in online retail penetration. We remain very confident in the overall potential of China's consumer market.

However, from an industry structure perspective, we are seeing escalating competition and it is increasingly convenient for consumers to switch between different platforms. And the competitive landscape is is at risk of being reshaped. And in this environment, the platform must take on a more proactive goal by increasing investments. And during the June 18 shopping festival in Q2, we not only provided substantial support to high-quality agriculture and national brands but also offered extra coupons to consumers, to provide consumers more savings for their midyear shopping needs.

And during the promotion, a number of agriculture and new quality merchants participating in the RMB 10 billion program doubled, enabling many SME merchants across multiple categories to reach new milestones. And moreover, categories such as beauty, skin care, maternity and baby and pet supplies also experienced good growth through the promotion. The 2025 Duo Duo premium produce program has reached hundreds of high-quality agricultural regions, helping high-quality agricultural products, which urban consumers. For example, leeches from Guangdong Maoming quickly sold over 50,000 kilograms after being featured in the RMB 10 billion program.

Our dedicated team for a new quality merchant support program also continued to engage with hundreds of manufacturing regions such as footwear and apparel in Xinjiang and cameras in Guangdong, leveraging the momentum of the shopping festival, we helped a large number of quality products quickly reach the market. And then the platform's proactive investments have created a positive feedback from both consumers and merchants. And going forward, in this intensifying competitive environment, we will continue to increase our support on both the supply and demand sides, sacrificing part of the platform's profit to foster healthier and more vibrant ecosystem.

And by doing so, we hope to help more SME reduce costs and drive sales and offer consumers more tangible benefits. Thank you. And I think it's about time. And thank you again for joining our call today, and we look forward to speaking to you again next quarter.

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