Ladies and gentlemen, thank you for standing by. Welcome to PDDs Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I must advise you that this conference call is being recorded today.

I would now like to hand the conference over to your host today, Mr. Chen Ping [Phonetic] Sir, please go ahead.

Chen Ping - Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen, and I will help host earnings call. PDD 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. So please refer to our earnings release which contains a reconciliation of the non-GAAP measures to GAAP measures.

Joining us today on the call are Chen Lei, our Chairman and Chief Executive Officer; Liu Jun, our VP of Finance. Lei will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then take us through our financial results for the third quarter ended September 30, 2022. During the Q&A session, Lei will answer questions in Chinese and I will help translate. Please kindly note that all translations provided are for reference purposes only. In case of any discrepancy between the original remarks and that translated version, statements in the original language should prevail.

Now it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead.

Lei Chen - Chairman of the Board of Directors and Chief Executive Officer

Thank you, Chen, and hello, everyone. Thank you all for joining our 3Q 2022 earnings call. Let me start by giving a brief overview of our third quarter results. Our total revenue for this quarter was RMB 35.5 million. This represents a year-on year increase of up 65%. Over the past quarter, we worked closely with our merchant partners to serve our customers. We continue to provide our users with an enjoyable and affordable shopping period to meet their growing demand for high quality and the value-for-money products.

During the past few months, many product categories such agriculture, consumer electronics, beauty and cosmetics, they all enjoyed positive consumer feedback. Many brands join the Pinduoduo and extended our consumers their best deals. We are happy to keep creating value for our consumers. But meanwhile, we still have many areas to improve and the current industry competition remains intact. We need to continue to deepen our value creation, increase our R&D investment to help further improve the supply chain efficiency, support upgrade of the price side and facilitate agricultural digital inclusion.

We celebrated our seventh anniversary last month, and we are extremely grateful for the support and trust from our consumers, merchants, farmers and society, and we will continue to uphold our core values of putting people first, benefiting all, and be more open so that we can create lasting value for all the stakeholders. Technology is at the heart of our value creation. From the very beginning, we committed to introducing technology to improve the efficiency of supply chain and create value to all the parties through digitalization.

In the past year or so, we increased our investment in technology and the focus on driving innovation through research and development. We have built a young, energetic, innovative team with strong technology background, and we are encouraged to see that our investment in technology is creating positive impacts to society.

In agriculture, we keep promoting our holistic approach to digitalize the agricultural sector so that more and more people can benefit from advances in science and technology. Our approach in agriculture is a holistic way of creating inclusive growth. By leveraging the resources of Pinduoduo, we hope that more farmers will adopt agricultural technology to improve their productivity and put their farming practices in a more sustainable footing.

The harvest festival last quarter is a good example of this approach. In September, Pinduoduo launched a dedicated harvest availing platform to support an annual harvest festival of its exclusive e-commerce platform partner. Lasting three months, the harvest of features over half a million types of agricultural products across the country. We went to the market with farmers by bringing them into digital economy. The millions of consumers also making it more feasible to implement agricultural technology. Farmers are more willing to it improve crops if they have confidence that consumers will buy them.

During the harvest festival, we worked with CCTV and the several professors for the Chinese Academy Agricultural Sciences and the China Agricultural University to promote agricultural technology. For example. We introduced a new variety of sweet potatoes that are less prone to disease developed by its research institute. The Pinduoduo platform helped this new sweet potato to reach more consumers nationally, and this crop is now grown in many parts of China and is available year long. Its success has helpted many farmers to prosper. This is a good example of how market demand can bring more science out of the lab and into the field.

We are committed to using that Pinduoduo platform for onsumers to discover new agricultural charters so that they can enjoy healthier and more nutritious food. In the harvest festival, we also showcased a series of new and improved wheat varieties cultivated by China Agriculture University with the support our 10 million Agriculture Initiative. This wheat variety has higher yield, higher quality, and are more resistant to disease. In addition, we continue to support the various events to promote the adoption of agricultural technology.

Our flagship smart agriculture competition is currently underway in Shanghai. And this is an annual precision farming contest aimed at encouraging researchers to develop practical technology. We are parterning with China Agricultural University and Zhejiang University for this competition with the technical support from FAO China and the Shanghai Academy of Agricultural Sciences. The theme of the competition this year is vertical farming. Participating teams will compete through produce letters [Phonetic] in shipping containers using lightening, cross modeling and algorithms to consume input variables. Several participating teams from the first addition have already implemented their technology in the working farms as well as large scale pilot to scale the solution. We hope that this initiative can inspire more young researchers bring more research findings to the market and support the department of agriculture.

In the same way we are improving agriculture digitization. We are helping to upgrade rural economy enterprises and the manufactures by connecting them directly with the end consumers. Our pioneering team purchase model can quickly and directly connect demand and supply to gather in consumer demand. We have leveraged digital technology to shorten the product development cycles and help manufacturers create product that closely match market needs. This can help manufacturers to build their brands. As seen in the past several years, we have helped incubate nearly 1,000, manufacturing brands through technology.

And since the beginning of this year, we have launched several activities to support the manufacturing industry. For example, this year we launched the new craftsman campaign to help local craftsman and the manufacturers by a bigger market for their products through e-commerce. And we have allocated dedicated resources in to support the high quality local product and help small enterprises upgrades their branding. The new craftsman program is now in many regions across the country, helping local manufacturer to build their brands. We hope to use that Pinduoduo platform to have more of these and discover the manufacturers reach more potential buyers. The increased demand [Phonetic] exposure also benefit the local community through more income and more job opportunity.

As we enter our eight year of operation, we remain passionate and excited about the future. We are a young company with a team full of drive and energy and we will constantly through areas to create positive value through technology.

And with that, Jun will take us through the financials.

Jun Liu - Vice President, Finance

Thank you, Lei. Hello, everyone. I will go through our performance in the quarter ended September 30, 2022. In terms of P&L, our total revenues during the quarter was RMB35.5 billion, a 65.1% from RMB21.5 billion in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others were RMB28.4 billion this quarter, up 58.4% compared with the same period of 2021. This was primarily due to an increase in merchant activities in Q3. Our transaction services revenue this quarter was RMB7 billion, up 102% versus the same period of 2021.

Moving onto G&A expenses. Our total cost of revenues increased 13% from RMB6.6 billion in Q3 2021 to 2 RMB 7.4 billion this quarter. Total operating expenses this quarter was RMB17.6 billion versus RMB12.8 billion in the same quarter of 2021. Our investment in certain projects, including a few agriculture related projects was factored in Q3. As such, our total operating expenses as a percentage of our total revenues have declined from 59.6% in Q3 2021 to 49.7% in this quarter.

Looking into specific expense items, our non-GAAP sales and marketing expenses this quarter was RMB 13.4 billion, up 39% versus the same quarter of 2021. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 37.9% compared with 44.9% for the same quarter in 2021. Our non-GAAP general and administrative expenses were RMB226.3 million versus RMB178.1 million in the same quarter of 2021. Our non-GAAP research and development expenses were RMB2.1 billion, an increase of 15% from RMB1.9 billion in the same quarter of 2021. The increase was primarily due to an increasing headcount and the recruitment of more experienced R&D personnel. We are committed to growing our R&D capabilities. And we stepped up our spending to drive innovation on our platform. So as part to meet evolving consumer need, laid the foundation for sustainable growth.

In area of agriculture, we will continue to deepen our investment agri tech and promote its adoption. Technology is always okay to increasing supply-chain efficiency and helping facilitate the development of manufacturing industry. Operating profit for the quarter was RMB10.4 billion on a GAAP basis, compared with operating profit of RMB2.1 billion in the same quarter of 2021. Non-GAAP operating profit was RMB2.3 billion versus RMB3.3 billion in the same quarter of 2021. Net income attributable to ordinary shareholders was RMB10.6 billion compared with RMB1.6 billion in the same quarter of 2021. Basic earnings per ADS was RMB 8.38 and diluted earnings per ADS was RMB 7.34 versus basic earnings per ADS of RMB1.31 and diluted earnings per ADS of RMB1.15 in the same quarter of 2021. Non-GAAP net income attributable to ordinary shareholders was RMB12.4 billion compared with RMB3.1 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 8.62 versus RMB2.18 in the same quarter of 2021.

In summary, we think that current level of profitability in Q3 is temporary and are likely to maintain. On the one-hand, the reinvestment in certain projects were factors in the last quarter. On the other hand, we continue to see user engagement, which contributed to revenue growth. This shows that our financial and business cycles are not always in sync. We plan to increase our investment to further drive innovations on our platform and strengthen our core capabilities. As such, we think it's unlikely that the proven level of the past quarter can be maintained. That completes the profit and loss statement for the third quarter 2022.

Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB11.7 billion compared with RMB8.7 billion in the same quarter of 2021, primarily due to an increase in net income and changes in working capital. As of September 30, 2022, the company had RMB137.8 billion in cash, cash equivalents and short-term investments. Thank you. This concludes my prepared remarks.

Chen Ping - Investor Relations

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

Question & Answers

Operator

Thank you very much. [Operator Instructions] The first question comes from the line of Joyce Ju from Bank of America. Please go ahead.

Joyce Ju - Bank of America - Analyst

Thanks management for taking my question. I have two questions. My first question is your online marketing services revenue this quarter delivered a faster growth rate last quarter. What's the reason for this re-accelerated growth in the third quarter? How should we understand the growth rate momentum in the future?

And the second question is. Could management share the latest update on your international initiative? Could you share your views or any takeaways at this stage, the current level of development meet the management's original expectations? [Foreign Speech]

Lei Chen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Joyce, so let me take your two questions. With regards to your first question on growth. During the third quarter we worked closely with our merchants to create value for our consumers and we keep bringing our consumers more savings, more sound shopping experience in the Pinduoduo platform, and we adopted different methods, including coupons and also promotional events to better serve our consumers.

[Foreign Speech]

And at the same time, we saw that's our consumers demand for high quality products growing. We actively make efforts to satisfy their demand. And this year, more and more brands has started to cooperate with us. They provide more choices for consumers and categories such as agricultural produce, electronics, home appliances, as well as our cosmetics. These categories have received positive customer feedback. And we are grateful towards the trust of our consumers placing us.

[Foreign Speech]

But in the meanwhile, we should see that industry competition is still intense. And also consumer preferences and demand become more and more diversified. So, we still have many areas to improve and the impact of our overall investment activity, in fact, is not beneficial to our long-term competitiveness. So in the future we will continue to step up investments, and we will invest to better understand our consumers need and serve them better, and we will also need to continue to immerse ourselves deeply in the in the real economy and investing in technology R&D to help improve the efficiency of agriculture as well as the manufacturing sectors. These would support our high quality development over the long run.

[Foreign Speech]

And as for your second question, for our international business. In our last quarter's earnings conference call, we shared with you the international business that we are working on. And I believe that many of you may have - may have noticed that we rolled out our international marketplace in September, and it has just been a few months since we started this business.

[Foreign Speech]

And for our team, the international business is a new area to explore and we will start from the fundamental needs of consumers and apply the operations and supply chain know-how and experiences that we have gained over the years and strive to create our own unique value.

[Foreign Speech]

And also, we fully respect that there are many differences across different markets. And we also understand the need to constantly experiment and we expect that the process will be full of challenges. So we will be patient and work together with our partners to create the long-term value for our consumers.

[Foreign Speech]

And currently we are still in the early stage of exploration and we have a many area to improve in terms of the services that we provide. We need to learn and also optimize. The process itself will take time, but I'm pretty certain that they experience that we gain along the way wil be very valuable for our company and also of our team. Thank you. So operator, we are ready to move on to the next question.

Operator

Thank you. The next question is from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong - Jefferies - Analyst

[Foreign Speech]

Thanks management for taking my pressures. My first question is related to the main drivers behind this quarter's revenue growth. If we further break down the revenue to GMV and take rate, can you share more about the trend in these two practice? Also, have you changed the take rate policy for merchants on your platform. And then I have another quick follow-up

[Foreign Speech]

And my second question is also related to the first one. Platform take rate policies, I'm also wondering for merchants and industry upstream, can you also help to share if you have support managers and policies? Could management share more about your progress and the plan in this area. Thank you.

Lei Chen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Hi, Thomas. So let me address your second question around our support for the manufacturing - manufacturing sector and the supply chain first. From the beginning we have been leveraging our technical background to help improve the efficiency in the manufacturing sector and the team purchase model that we pioneered and aggregate order and connect the demand side and supply side directly and this helps manufacturers reduce intermediary layers, help them directly reach out to consumers. And in the process, it helps the brand create their own brand for manufacturer. So over the year past 70 years, Pinduoduo has helped to build up nearly 1,000 brand through technology and we are growing up with many manufacturers together.

[Foreign Speech]

In addition, we also provide one-stop digital solution covering the entire value chain to our manufacturing partners in order to help traditional manufacturers and factories to go through digital transformation. And we cooperate with these manufacturers on product designs and adjustment. These significantly lowers the cost and reduce the uncertainty during the R&D and also production processes.

[Foreign Speech]

And all that we have done also help our consumers get a quality product with savings and we can generate value for consumers in the process. These in turn can create a virtuous cycle amongst our consumers, our manufacturing partners and also the Pinduoduo platform.

[Foreign Speech]

And his year we have introduced several dedicated initiatives to support manufacturers with technology. This includes many industries such as consumer appliances, apparel, sports, cosmetics, home care, as well as furniture. And we will continue to investing this area to improve the efficiency of the supply chain. Thank you.

Jun Liu - Vice President, Finance

Thanks, Thomas. I will take your first question about the GMV. Well, in the third quarter we worked closely with our merchants to serve our consumers and improve their shopping experience. As consumer activities and engagement grow, we think the merchants are naturally coming to our platform for growth and opportunities. And for financial metrics such as GMV and revenue, they are meeting the reflection of the value we create. So for us the most important thing is to constantly increase value creation. We will continue to invest to deeper user market share engagement and further build out our technology capabilities. This will lay the foundation for our long-term development. Thanks.

Chen Ping - Investor Relations

Operator, we can move to the next analyst in line.

Operator

Thank you. The next questions come from Ellie Jiang from Macquarie. Please go ahead.

Ellie Jiang - Macquarie - Analyst

[Foreign Speech]

Let me translate my questions. First, could management talk about the latest industry trends, including what we saw in fourth quarter, quarter-to-date, have we - can you talk about our performance during 11 promotion? What are the key industry themes have we seen for the 11 if so?

And then second question is on the overseas. Could management share with us the financial impact for this initiative? What are the main financial

Line items, does it impact? Could you talk - could you help us quantify the impact for the third quarter? And what level of investment do you expect to make going forward? Thank you.

Lei Chen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Hi, Ellie. So let me take your question on industry transfers. So for this question, we always start from consumers' fundamental need. And we hope to create value for our consumers each single day throughout the year. And I think it is the core driver for the industry and also for ourselves. And we also fully understand that to improve consumer experience and deepen their trust in us, it takes time, and it is a gradual process. And for shopping festival and promotions, they are just one of the many ways to serve our consumers well.

[Foreign Speech]

And we hope that consumers can get more savings and more fun from shopping on Pinduoduo. So when we plan shopping festivals and events, we remain consumer-centric and we use simple rules to provide consumers with an enjoyable shopping experience. This year we have cooperated with many brands as well as merchants to bring more quality products to consumers in order to satisfy their diversified needs across different categories and different consumption scenario.

[Foreign Speech]

And at the same time, if we look at the industry, we do see the competition remains intense and we need to invest patiently in the supply side. And we need to step up our investment in technology and innovation to further improve the overall supply chain efficiency. We need to support the development of the agriculture sector and also the manufacturing sector. This would essentially enable us to better serve our consumers' increasing demand for quality products. Thank you.

Jun Liu - Vice President, Finance

Thanks, Ellie. I will take your question about the financial statements on our international initiative. Well, first of all, our international business currently in a very early stage. It is still going through constant trials, whereas we focused on how to create unique value. We believe that financial metrics are the natural results from the value that we create. And the international business still very early, as I just mentioned. So current impact on our financial numbers is small. And as with any other part of the business, we carefully evaluate the ROI of every investment. Thank you.

Chen Ping - Investor Relations

Operator, we can move on to the next session.

Operator

Thank you. Our next question comes from Kenneth Fong from Credit Suisse. Please go ahead.

Kenneth Fong - Credit Suisse - Analyst

[Foreign Speech]

Thank you management for taking my question. May management shares about the latest thoughts and developments in agriculture. Are there any cases or projects that you're putting resource into? What are the latest financial impact on your financial statement? And also for your 10 billion [Phonetic] agricultural initiative, is there any update to share?

And my second question is about profitability. We have delivered profitability for six quarters in a row. We have also noticed that many of your peers have started to focus more on cost control and efficiency improvement. So that your profitability for the past three quarters means you have started to pursue a similar strategy and should we expect a similar level of profitability to continue over the next few quarters? Thank you.

Lei Chen - Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Hi, Kenneth. So let me address your question on agriculture first. So we have shared with you before that agriculture is over a long-term strategy. We hope to promote agricultural development through technology. And for many of our efforts, we are still in the early stage of our agricultural strategy, but we already see a lot of areas to create value. And we are also very happy to take this chance to introduce more about our latest developments in this area.

[Foreign Speech]

First of all, we use our technical background. We help improve the distribution efficiency of agriculture products. During the third quarter, in our dedicated promotional events such as the harvest festival and agricultural festival we cover thousands of production regions and help farmers broaden their market access. This also helps our consumers enjoy fresher and high-quality agriculture produce within a shorter amount of time.

[Foreign Speech]

On top of that, sales volume can also help commercialize agritech solutions and supports research efforts and improve the - how commercialization happens. So for example, in our harvest festival event, we introduced many agricultural products created with the help of agritech and with resources that we devote into agriculture, we can help the products roll out to the market quickly and help turn more agritech breakthroughs and innovation into consumer products. As for our 10 billion [Phonetic] agricultural initiative, we recently introduced a few new wheat varieties developed by China Agriculture University with support from this initiative.

[Foreign Speech]

In agriculture, we will continue to remain down to earth and make long-term patient investment as well as bring more agritech results to the market. Going forward, we will continue to share updates with you in the future. Thank you.

Jun Liu - Vice President, Finance

Thanks Kenneth. I will take your second question about our profitability. Well, first of all I would like to point out the high profitability level for Q3 is unlikely to continue. Over the past quarter, some of our projects, such as a few agriculture-related projects as I just mentioned in my remarks, were impacted in terms of project time line and investment pace. So the expense line items on our quarterly results were affected and on the other hand, our quarterly revenue increased as a result of increased merchant activities. Therefore profitability is partially due to such time lapse. And this shows that our business cycle and financial reporting cycle are not always in sync. We think such profitability level may not be sustainable. In addition, we are still in the development stage and profitability is not our current priority. We will continue to step up investments, especially to support agriculture and manufacturing industry through technology. And this may cause fluctuations in our future profitability and the Q3 level will not continue. Thank you.

Chen Ping - Investor Relations

Okay. Operator, it's about time. And thank you, everybody, for joining us today on the conference call. If you have any further questions, please feel free to reach out to the IR team. Thank you all, and have a great day.

Operator

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Q3 2022

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