Earnings Call: Q4 2020

Mar 17, 2021

Ladies and gentlemen, thank you for standing by and welcome to Pinduoduo 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll 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 to the first speaker today, Mr. Jason Yu. Thank you. Please go ahead, sir. Thank you, AJ. Hello, everyone, and thank you for joining us today. Pinduoduo earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com, as well as through GlobeNewswire services. On today's call, our CEO, Chen Lei, will make some general remarks on our performance for the past year and our strategic focus going forward. Our VP of Strategy, David Liu, will then elaborate further on specific strategic initiatives. Our VP of Finance, Tony Ma, will then take us through our financial results for the fourth quarter and fiscal year 2020, ended December 31st, 2020. Before we begin, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make certain forward-looking statements. This call includes discussion of certain non-GAAP financial measures, please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. Now it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Lei, please go ahead. Thank you, Jason. Hello, everyone. Thank you for joining us on our earnings call for the fourth quarter in the fiscal year 2020. Pinduoduo delivered another quarter of strong growth and solid execution as our users continue to trust us with their purchases. Our annual active buyers increased 57 million in Q4 to reach 788 million for the trailing 12 months. User engagement has also accelerated. Our MAU increased to 720 million. Total number of orders placed on our platform increased by 94% to reach 38.3 billion in 2020. Total revenues, excluding revenues from merchandise sales for Q4, was RMB 21.2 billion, or an increase of 96% from a year ago. Non-GAAP operating loss narrowed in Q4 from the same quarter a year ago. 2020 was a challenging year for Pinduoduo, as it was for many others. The COVID-19 pandemic, which by now has already stretched over two winters, has put our team and platform through a toughest test since we were founded six years ago. It has been a humbling experience for us. I'm glad that we have responded quickly and responsibly to continue serving our users better, thereby winning their invaluable trust. I would like to thank our users and our team for their continuous support. As we transition from 2020 to 2021, I would like to share some takeaways and do a recap of this very long year. First, 2020 has been dictated our view from the get-go, which is that the separation of the online and offline world is increasingly irrelevant. With the advent of mobile internet, online, offline are just parts of a single world, blended together more and more seamlessly and complementary to each other. Unlike with desktops, smartphone users could go online anywhere, anytime, and for any length of time. Users no longer have to carve out time and be confined to a specific place, which is common practice for desktop era. This is why six years ago, we insisted on developing a mobile-only platform for our users. In fact, we are the only one among internet companies of our scale to be mobile-only to date. If anything, COVID-19 has accelerated this blending. It was already happening fast, even pre-COVID-19. Today, the younger generation that grew up with smartphones are not even conscious about the countless and seamless transition they make each day between online and the offline. Among other age groups, China's highly advanced online payment system and mobile communication tools have also made it clear, make it nearly impossible to do anything purely offline. This has in turn helped increase familiarity and acceptance of this commingled world. With COVID-19, the adjustments that we have had to make our routines have only expanded online space and exercised its blending with offline space. Consumers are able to frequent brick-and-mortar shops turned to online platforms like Pinduoduo to purchase food and other grocery, and erstwhile preserve of wet markets which Chinese families visit not just to get grocery, but as a social activity. Users unable to travel back home to spend Chinese New Year with loved ones have also tapped on us to deliver warmth. They either send care package of food and clothing to loved ones living elsewhere or order the taste of home for themselves. We rose to a challenge of deliver the best service to our customers. We went further than we had before. Over the Chinese New Year holiday, we worked with merchants to stay open and dispatch orders. We also worked with logistic partners to ensure that around 1 million delivery men were deployed to deliver parcels. We fulfilled a surge of orders from hometown delicacy. As for fresh produce and groceries, we provided consumers with most of what they wanted quickly and affordably. Consumers did not have to stock up before a long Chinese New Year break. In this way, we helped to fill a gap left by brick-and-mortar shops, thereby bring values to our users. Going forward, Pinduoduo as a pioneer in this space, we will build on the lessons we have learned and double down to improve our offerings to our users. We will always be on the lookout for new ways to create more values for them. Second, 2020 has highlighted that we can and should do more for agriculture sectors and rural communities. Pinduoduo started off by selling fresh produce online. It was a conscious decision because we found them to be a necessity, and optimizing their production, distribution, and consumption would bring the greatest widespread benefit. The online penetration of agriculture sectors has also consistently lagged industry at average. We have never lost sight of this beginning, and agriculture has consistently been a strategic priority for us. We are proud to be China's largest agriculture platform. Our GMV for agricultural products doubled to more than RMB 270 billion in 2020. 12 million farmers sold their produce directly to consumers via our platform. We were among the leading technology companies commended for making outstanding contribution for the war on rural poverty. We see this as affirming our investment to bring solutions to optimize every part of agriculture value chain. In 2020, we also launched live stream sessions for farming communities and dedicated channels to promote their products to relieve difficulties brought about by COVID-19. We observed that order volume was so large that our sellers and delivery partners had issues fulfilling them, especially in the summer. To solve this, in August, we launched Duoduo Grocery, our next-day grocery pickup service that helps local farmers and distributors to sell directly to consumers, increasing sales and cutting waste and costs for customers. Pinduoduo's vision of Costco plus Disney started from agriculture products in the farmland. We are now already the largest agriculture platform in China. We can and should do more. We hope that in the next stage, Pinduoduo will become world's largest agriculture and grocery platform, and make groceries sourced around the world affordable and available to our users. To this end, we aim to build up an agri-focused logistics infrastructure platform that will reduce waste, lower costs, and speed up delivery for agricultural products. This is a work in progress. We expect to make a few more years of investment before it can realize its full potential and achieve efficiency. We share the vision of contributing to China's agriculture sectors with technology to help increase the resilience of the food chain and stave off the looming global food crisis. We will continue to invest in agriculture and food technology and look into global investment opportunities in alternative proteins, food safety, and precision farming. Third, 2020 has also made us more committed than ever to continue to promote digital inclusion of rural communities and disadvantaged. Pinduoduo has created a level playing field for business of all sizes, including in the agricultural sector, where margins are thinner. In addition, live stream and online business on our platform have created new roles that prioritize different skill sets and allow inclusion of users who might otherwise be excluded. For instance, agriculture is traditionally labor-intensive. Women and physically weaker people may not be able to participate in it. Live streams and online business operations do not exact the same physical requirements, and these individuals are able to participate in them. In fact, of our stores actively engaged in the sale of agriculture products, over half are managed by women. This is a win-win situation for everyone. With our commitment to social responsibility, we definitely want to and will do more here, including by provide further training for them to sell well on our platform. Last but not least, many of you have learned that Colin stepping down from his chairman role effective today. On behalf of the board, we would like to thank him for his leadership and contribution to Pinduoduo in the past 6 years. We will cheer him on as he explores new frontiers for Pinduoduo in years to come. As the new chairman of the board, I will ensure everyone that our strategy remain the same, which is to stay true to our value benefit and provide a more saving, more fun experience to serve our users on our platform. We are proud that we have become the world's largest e-commerce platform by user number. We will work hard to deliver even better results in years to come. Let me turn it over to David to provide update on our recent initiatives. Thank you, Lei. Hello, everyone. I'll further elaborate some points Lei made just now. First, on our continuing efforts to improve the agricultural value chain. Second, on our revenues from merchandise sales. Third, on our ESG priorities for 2021. Improving the agriculture sector to benefit our users, that's farmers and consumers, is a central and strategic priority for us. We take a systems-based approach to this and devote substantial resources to identify and implement improvements at all stages of the agricultural value chain. As Lei mentioned, we share the vision of transforming agriculture in China with technology and aim to increase food security. To begin at the upstream, we'll work with industry partners and universities to introduce more technology to farming. In 2020, we launched the inaugural Smart Agriculture Competition in partnership with China Agricultural University, where teams from around the world participated in investigating the use of artificial intelligence in optimizing strawberry planting. The competition identified cost-efficient and scalable technology that can potentially be standardized across China. The winning team has started to commercialize its research findings. Last year, Pinduoduo also supported the Global AgriInno Challenge 2020, which was co-organized by the Food and Agriculture Organization of the United Nations and Zhejiang University. The competition attracted over 150 teams from around the world to propose an innovative solution to challenges in the distribution and sales of agri-food products during COVID-19. AquaFarms Africa, an agri-tech startup based in Conakry, Guinea, won the competition with its technique of aquaponics, which combine fish farming with soilless vegetable growing, allowing the production of fruit and vegetables that are normally imported. We will continue investing in the promotion of digital agriculture and precision farming going forward. At the downstream, we have helped over 12 million farmers sell directly to our 788 million consumers. We train more than 100,000 new farmers who return to their rural communities from urban areas to operate online businesses and vitalize their hometowns. We have committed to training another 100,000 new farmers over the next 5 years. To relieve difficulties brought about by COVID-19, we sponsor live streaming sessions for poverty-stricken farming communities and establish dedicated channels to promote their products. We continue to work with these communities to provide direct access to our consumers. Circling back to the midstream, as mentioned in our earnings call last quarter, the rapid increase in orders for fresh produce, particularly leafy vegetables via our platform, surfaced the urgent need to develop a dedicated logistics infrastructure to deliver fresh produce to our users in the optimal condition at compelling prices and within 24 hours. This new solution goes beyond streamlining distribution. It will be different from existing ones, and it will take time, resources, and multiple iterations for us to eventually arrive at what works best. However, we believe that we have made some progress in the right direction through Duoduo Grocery, our next-day grocery pickup service that intelligently connect local farmers and distributors directly to local consumers, thereby reducing spoilage from storage and transport. We have been increasing the number of agriculture producers and regional distributors and expanding the number of pickup points. However, there's still so much more we can do. We will need to make substantial investment in people, technology, potentially capital assets. While our preference is to work with strategic partners towards this goal, we are prepared to make equity investments to expedite the requisite development or purchase assets in places where they are unavailable. We are prepared to persevere in this endeavor, even though it could take some time to pay off. As we are confident of how it will benefit our users, we hope that investors will be patient and supportive of this challenging but meaningful endeavor. Next, I would like to say a few words regarding our revenues from merchandise sales. This quarter, you will have noticed that we are reporting an additional revenue line item, merchandise sales. This line item captures the revenues generated from the 1P trials we started last year. In our 1P trial, we aim to temporarily fill the gap of missing product our users need on our platform while we look for merchants who can offer these products on our marketplace. We have no plan to grow this business. We expect this line item to remain very small % of total GMV we generate. As of Q4, it is less than 1% of total GMV we generated. Now onto our ESG priorities for 2021. As we continue to manage the challenges caused by the global health crisis, we are pausing to reflect on what more we can contribute to a more sustainable and equitable future. Specifically, we have identified the following ESG priorities for 2021. Firstly, continue to promote digital inclusion in rural communities. As China's largest agriculture platform with 780 million users, we firmly believe in playing our part to empower people and businesses to take part in the digital economy. Since our inception, we have connected farmers directly with consumers, coached them on setting up stores online, provided them with access to end demand, and helped them to increase household income. Our efforts have helped more than 100,000 young men and women return to their hometown and become e-commerce-savvy new farmers. They have gone to become champions of digital inclusion, often catalyzing a multiplier effect and wealth creation for their local communities. We have also partnered with China Post and farmers' cooperatives to bring agricultural products from remote areas to the national market to boost rural incomes. In this three-way collaboration, China Post local offices opened online stores on Pinduoduo and source directly from agriculture co-ops. This approach has proven very effective in helping to tackle rural poverty. Looking ahead, we are continuing our efforts to work with local communities, regulators, and academics in modernizing farming practices. In addition, we see technology, such as the finding from our Smart Agriculture Competition last year, to play a more central role in driving China's agriculture revolution. We also see investment opportunities in food and agriculture technology that we can help to extend across farms in China. Secondly, continuing to empower women and the physically challenged. Pinduoduo's zero additional commission policy and our SKU-oriented recommendation approach creates a more level playing field for smaller entrepreneurs. We have seen many success stories on our platform from women and physically challenged entrepreneurs who might otherwise be excluded from the offline job markets. As Lei mentioned, we are and will continue to provide more training to enable these entrepreneurs and look forward to helping them create further success stories on our platform. Thirdly, continuing to make our service greener and more efficient. Pinduoduo is committed to protecting the environment. As we mentioned in our ESG report last year, we are investing in technology and working with our logistics partners to optimize delivery route planning. We are also investing in research and development of green packaging design and materials. We're working with our merchants to eliminate excessive packaging and providing them with more suitable environmentally friendly solutions, such as different sizes and biodegradable materials. We see ourselves making a positive difference for the environment, especially as order volumes on our platform rise. Let me pass the floor to Tony to discuss our financial results. Thank you, David. Now let me take you through our financial results for the quarter and fiscal year ended December 31st, 2020. Our annual active buyers for the last 12 months ending December 31st, 2020, grew by over 200 million from the end of 2019 to 788 million. Our MAUs in Q4 grew by 77 million from the prior quarter to reach 720 million, or an increase of 50% from the same quarter in 2019. Our MAUs in Q4, as a percentage of our annual active buyer, exceeded 90% for the first time, which we see as a reflection that we are satisfying the needs of more users. Our last 12 months GMV for 2020 grew to RMB 1.67 trillion, representing 66% year-on-year growth. In comparison, our average annual spending per active buyer increased 23% to RMB 2,115. The lower rate of increase should be considered in the context of substantial increase of 203 million active buyers over the past year. Most of these new users are still building trust with our platform and have contributed less than a full year worth of purchases in 2020. We continue to observe that as our users season on the platform, they make purchases across more categories and increase their average spending over time in each category. We did observe an increase in purchase frequency in 2020, partly due to the grocery business we launched. In 2020, our platform generated a total of 38.3 billion orders or an average of 49 orders per active buyer. This is an increase of 44% from a year ago. As the average order value of grocery are lower than our platform average, our AOV came down 15% to RMB 43.5 in 2020 as compared to RMB 51.1 in 2019. Please note that starting from Q1 2021, we will retire the disclosure of quarterly GMV. We will continue to disclose full year GMV, which is the practice adopted by our peers. Since our IPO, when we were operating as a straightforward marketplace model, we have reported both quarterly and annually GMV on the same basis as our peers in order to provide the public with a meaningful barometer to assess our progress as a new market entrant. However, as the complexity of our business grows, quarterly GMV is increasingly less relevant to evaluate our overall business, nor is it reflective of our strategic priorities, especially when we do not manage our business against the quarterly GMV targets. As our revenues grow in scale and with the introduction of new initiatives such as Duoduo Grocery and our 1P trials, we would encourage investors to focus on our P&L and cash flow metrics going forward to assess our ability to generate sustainable value. In terms of P&L, our total revenues in this quarter end December 31st, 2020 were RMB 26.5 billion, up 146% from RMB 10.8 billion in the same quarter last year. As David mentioned, we reported the revenue from merchandise sales of our 1P trials this quarter. While as the contribution of our 1P trials to our GMV is negligible, we are reporting it as a separate line item as it accounts for 20% of our total revenue in Q4. To give you an apples-to-apples comparison, excluding revenue contribution from 1P trials, our total revenue grew by 96% to RMB 21.2 billion in Q4 2020. The main driver of this growth was our online marketing services. Online marketing services revenue was RMB 18.9 billion this quarter, up 95% compared to the same period last year, due primarily to an increase in merchants' recognition of our platform's capability to help them reach to their target buyers effectively and efficiently. Our merchants are spending more on our platform because of our constantly improving services and also the increasing user traffic. Our online marketing services revenue as a percentage of our GMV in the last twelve months end December 2020 was 2.9% as compared to 2.7% for the same period ending in December 2019. We are pleased to see the growing endorsement by our merchants and our users. Our transaction service revenue this quarter amounted to RMB 2.3 billion, which is up 105% compared with the same period last year. On the trailing twelve months basis, our transaction service revenues as a percentage of our GMV has been quite stable at around 0.3%. Moving on to cost. Our total cost of revenues increased from RMB 2 billion in Q4 2019 to RMB 11.5 billion this quarter. The increase in our cost of revenues was mainly due to the cost associated with the 1P merchandise sales. Costs related to the operation of Duoduo Grocery, such as warehouse rental costs and higher costs of cloud services, call center, and merchant support services. The total operating expenses this quarter were RMB 17.1 billion as compared to RMB 10.9 billion in the same quarter of 2019. On a non-GAAP basis, our total operating expenses as a percentage of our revenue, excluding the 1P contribution, has been declining from 112% to 94% to 76% for Q4 of 2018, 2019, and 2020 respectively. The gradual improvement continues to demonstrate the operating leverage in our business model. Our sales and marketing expenses this quarter increased to 59% to RMB 14.7 billion from RMB 9.3 billion in the same quarter of 2019. This is mainly due to an increase in online and offline advertisements and promotions. As we continue to invest in user engagement and mindshare, on a non-GAAP basis, our sales and marketing as a percentage of our revenue, excluding 1P trials this quarter, was 68% as compared to 84% and 103% for the same quarter in 2019 and in 2018. The decrease in sales and marketing as a percentage of revenue, excluding 1P trials, has demonstrated scale of economy and the fact that our strategy of having a higher bar of ROI in our sales and marketing investment has worked well. In fact, since we started Pinduoduo, we have accumulatively spent RMB 81 billion in sales and marketing expenses. On a non-GAAP basis, which averages to about RMB 103 per active buying users we have accumulated up to date. We will continue to consider our sales and marketing division holistically and invest whenever we see opportunity that meet our ROI requirement. On a non-GAAP basis, our general and administrative expenses were RMB 153 million, an increase of 26% from RMB 121 million in the same quarter of 2019, primarily due to an increase in headcount. Our non-GAAP research and development expenses were RMB 1.56 billion, an increase of 65% from RMB 943 million in the same quarter of 2019. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel, as well as an increase in the R&D-related cloud service expenses. On a non-GAAP basis, our R&D expenses as a percentage of our revenue, excluding the 1P contribution this quarter, was 7.3% as compared to 8.7% for the same quarter last year. To sum up, operating loss for the quarter was RMB 2 billion on a GAAP basis, compared with operating loss of RMB 2.1 billion in the same quarter of 2019. Non-GAAP operating loss was RMB 1.1 billion, compared with operating loss of RMB 1.3 billion in the same quarter of 2019. Net loss attributable to ordinary shareholders was RMB 1.38 billion, as compared to net loss of RMB 1.75 billion in the same quarter last year. Basic and diluted net loss per ADS were RMB 1.13, compared with RMB 1.52 in the same quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders were RMB 185 million, compared with RMB 815 million in the same quarter last year. Non-GAAP basic and diluted net loss per ADS were RMB 0.15, compared with RMB 0.72 in the same quarter of 2019. That completes the profit and loss statement for the fourth quarter. Our net cash flow from operating activities was RMB 14.9 billion, compared with RMB 9.6 billion in the same quarter of 2019, primarily due to an increase in online marketing service revenues. Net cash used in investing activities in this quarter increased from RMB 11.5 billion in 2019 to RMB 26.6 billion. The increase was primarily due to our decision to invest a portion of our cash reserve in cash management products. As of December 31, 2020, the company had RMB 87 billion in cash equivalents, and short-term investments. As of the end of February 2021, $712 million of our 0% convertible bonds due in 2024 have been converted into equity. Thank you, operator. We are ready for questions. Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press pound or hash key. Once again, it's star followed by one to ask a question. We have the first question from the line of Binnie Wong from HSBC. Please go ahead. Hi, good evening, management. Congrats on such a very robust quarter to conclude 2020. I have two questions here. First question is actually on the user side. You look at the users is actually very amazing at 788 million. That of course surpassed your peers and is one of the largest. Can you help us understand what are the strategy that you have used to, you know, deliver such growth, and how would you think you can sustain that in terms of this user engagement level? My second question is also on the community group purchase. I think you mentioned it is a 3-tier model. Just want to take a deep dive into in terms of the accounting-wise. How does it really work in terms of your commission paid to the community group leaders? Is it that, most some of it will be transacted via our marketplace platform? I guess it's just in terms of for us to better understand the accounting, how it really works. Also in terms of the profit, I mean, like on the GP dollar side, how much losses are we running at? If you can give us some idea, not necessarily numerically, if this is not at the right level to disclose, but I guess more just in terms of clarity as to how we should think about the investments that we do need for the rest of the year. I think management has mentioned about the infrastructure, the logistics side of things as well. That'll be great. Thank you. Hey, thanks, Binnie. Why don't I ask Lei to address the first part of your question, and then I will have Tony Ma talk a little bit about accounting. Some of the technical stuff, we can take it offline as well. Hi. We continue to observe very good momentum in terms of our user growth. In each of the past 4 quarters, we added on average over 50 million annual active buyers for each quarter of them. That being said, as we are approaching a 100 million user landmark, it's natural that our user growth will slow down. As we always said that we are less focused on the user numbers We are more focused on building users satisfaction and trust by bringing them a better shopping experience and a value-for-money product. We believe that as long as we can continuously serve our users well, we will keep growing. Thanks to their trusting us. One sector is we, actually we always say our priority is in the agriculture sector. Not only is agriculture the least digitized by mobile internet, it's also the greatest widespread benefit actually we can create as a big platform. We are now China's largest agriculture platform, in the future, we will commit to do more for agriculture sectors and rural communities. The other thing I like to talk about is in the future is integrate world of online/offline. Definitely, we are targeting this kind of new world. Think about it, you really need to look at this wider retail market. Today, China's total retail sale for consumer goods already reached CNY 39 trillion in 2020. It is expected to grow at 5% per year over the next 5 years. If you take a look at our numbers, so our GM stands at only 4% of it. I believe as consumers' behavior of online/offline continue to integrate, an opportunity for us will definitely continue to expand. Yeah. Let me pick up on the second question on Duoduo Grocery. As you mentioned, Duoduo Grocery, we operate it as a 3P offering. From a accounting point of view, we generate transaction service revenues for the service we provided to our merchants and some farmers. The contribution in Q4 and fiscal year 2020 of the Duoduo Grocery part are still immaterial. Most of the cost associated of running Duoduo Grocery operation, such as warehouse rental, delivery logistics are captured under our cost of revenues. Just so you know, Duoduo Grocery is a very young business, like, we just started with a few months, and it is still evolving. We are very confident about this business model and it brings significant values to our consumers and other participants among this value chain. A few key drivers we can think of on the UE side, if we are able to streamline unnecessary layers of the distribution, and each layer traditionally would take up a meaningful markup. A more efficient supply chain would also mean less spoilage. All these factors putting together will definitely bring additional value to the stake for all the participants, the stakeholders to share in this business model. Like I said, the development on the infrastructure, on the whole process will take time to be there. At this moment, profitability, won't be a target for us to set for Duoduo Grocery. Benny, I just want to add on top of that to say that PDD at the end of 2020, we are the largest e-commerce platform by users already. As we have always talked about, you know, focusing on engagement really is the core of our strategy. We are confident now with an even further enlarged base that is continuing to grow at good momentum. We should be able to drive even better engagement. Duoduo Grocery really plays into that by giving us an additional access point to address the needs that we previously couldn't have. We have our high hopes for the Duoduo Grocery business because it is integral. It is the extension of our overall platform. As the model evolves, I think, you know, the roles of the different constituents of the Duoduo Grocery ecosystem may also evolve as well. Stay tuned and bear with us. We think this is could be tremendous opportunities. We're confident that we'll be able to execute, but it will take some iterations to find the perfect model. Why don't we move on to the next question? Thank you. The next question comes from the line of Thomas Chong from Jefferies. Please go ahead. Hi, good evening. Thanks, management, for taking my questions. I think, in the prepared remarks, management comments about Duoduo Maicai has the merchandise sales, which is a 1P trial business and is not significant to the GMV. I just want to get a sense about, when the business is getting bigger and bigger, should we expect the merchandise sales continue to decline in absolute amount in coming quarters? On that point, is it possible to give us some color about the GP margin of this 1P trial business, as well as the overall Duoduo Maicai GP margin as well. My second question is about the GMV growth. I think management also talks about the focus on monetization. How should we think about the GMV per buyer going forward? Thank you. Sure, Thomas. I think you asked quite a number of questions in your two questions, so let me try to maybe take that in, yeah, bits and pieces of it. The first thing I want to make clear, if there is any confusion, is that the merchandise business that we Merchandise sales business that we are reporting as an additional revenue item, has nothing to do with Duoduo Grocery or Duoduo Maicai. We are referring this to, as Duoduo Grocery, in English, going forward. The 1P merchandise sales business has nothing to do with Duoduo Grocery, so I wanna make sure that is very clear. The 1P businesses we mention is because we have noticed that there are consumer demands on our platform, which we haven't been able to identify the appropriate merchants for, and we have to step in these situations temporarily to make sure that our users can find the product they want at the prices that they are looking for. Right. Because this is a temporary measure, we have no intention to grow this into a larger scale business. In the fourth quarter, the 1P business is less than 1% of our GMV, and I think you should expect that to stay as a small percentage of our GMV going forward. As to the Duoduo Maicai, it is, as Tony mentioned, it is a very new business initiative, and the business model continues to evolve. I would say that, you know, the first thing I do want to take the opportunity to clarify is that the Duoduo Grocery business itself is not a community group purchase business. It's important that the investors understand this distinction because it impacts, I think, your understanding of how the economics works, right? First of all, it is not a typical community group purchase because unlike group purchases where neighbors or group leaders or store owners actually aggregates a group and earn a commission for organizing that purchase. With an active buyer base of 780 million users, Duoduo Grocery does not actually rely on community leaders to attract users. User and users can just place order independently by themselves through our app. This is the reason why we are approaching Duoduo Grocery as an integrated and an extension of our e-commerce platform. The economics accordingly and the type of roles that these group leaders play are quite different. Secondly, I would say is we introduced Duoduo Grocery to cater to that rising demand that consumers have for convenient, affordable grocery, and it is now available in 300 cities across China. A key part of this offering is really the agriculture-focused logistics infrastructure that we are working to build, and the idea here is to really reduce waste, to lower costs, and to speed up delivery of agriculture products. To that end, we are leaning on technology to achieve better quality control, better sourcing, better forecasting of demand, which can all reduce wastage and improve supply chain efficiency. We are working with third-party providers now to make strategic investment where needed to accelerate the build-out of the necessary infrastructure, so we can achieve less than 24-hour turnaround time for the orders. We believe that as proven out in the, you know, last 5.5 years, as long as we remain laser focused on anticipating and meeting the users' needs, users, they will continue to vote for us with their wallets. I think, Thomas, you also asked about gross margin trends with regards to the individual businesses. We're not gonna comment on the specifics, but suffice to say that excluding the impact of our first-party merchandise business, which, as I mentioned earlier in my remarks, is still small, this business is loss-making. If we actually exclude the impact of the 1P business, the fourth quarter bottom line and margins are actually very much similar to the non-GAAP net margins we reported in the third quarter. Lastly, you talked about ARPU, or, you know, spendings per user. Look, I think, you know, without taking too much time, I would just say that with the user base that we have and with the focus that we are spending around engagement, we are very confident that, you know, as user activity grows, the availability of merchandise on our platform will grow. As the users season our platform as we have seen in the past, they will continue to shop across more categories. They will make more purchases within those categories because as the trust level builds, the mindshare, the market share or wallet share we have with them will also grow. We are quite confident with the outlook on the ARPU. The way I would think about the monetization point you alluded to earlier or let's say the 3.2% kind of LTM monetization you see in the fourth quarter-That really is an endorsement of the merchants seeing good conversion for their advertising spend. That is only possible if the user activities are translating into sales. Let me actually stop there and then move on to the next question. Thank you, David. Okay, Tony. The next question comes from the line of Alicia from Citigroup. Please go ahead. Hi, thank you. Good evening, management. Thanks for taking my questions. I have two quick ones. One is I wanted to follow up on what exactly is the item category in this 1P trial that we have. Second is, could management comment on this Duoduo Grocery performance? I know it is still early, how do you rate the performance so far for the fourth quarter? Is that in line, above or below your internal expectation? Thank you. Sorry, Alicia, I was sidetracked a bit. On your question regarding the 1P business, the product categories is actually quite diversified. How we approached it was really identify looking at items or SKUs on our platform where we know there are clear consumer demands, but we aren't able to source sufficient merchants for. The product categories are quite diverse. The strategy itself, it is not category specific. The second thing I would say is, are your question regarding the progress of Duoduo Grocery. you know, as both I think Lei and Tony have commented, this is a very long-term commitment for us, because we think the opportunity is immense, and because we think we can really create some values here for the users. you know, I think we are experimenting as we move forward. As I mentioned earlier in my response, the service is now available across the nation in over 300 cities. I think we are pretty comfortable with the progress or the pace of the rollout on the geographic footprint. What is more interesting from our perspective, however, is to build and develop a corresponding infrastructure network, right? It's easy to drive user growth, and particularly for a platform like us, we naturally have a very intrinsic advantage, I guess, from a traffic perspective. The question we are more concerned about is what investments do we need, and how can we deliver the right type of user opportunities to the user experience to address the opportunities we see? I think one of the few elements of success to the Duoduo Grocery business in our mind, I guess maybe to highlight two things in particular, one of which is sourcing and forecasting, right? How much you can sell or how, what price will you, what price can you sell the SKU for ultimately depends on your ability to forecast the demand properly and be able to organize the supply chain around it in the most efficient way possible. The second part of it is an infrastructure that can be aligned appropriately and largely for agriculture and fresh produce, such that we can arrange the fulfillment and deliver in this less than 24 hour type of a cycle. We are still really in the very early innings of, you know, what we consider to be kind of our approach to grocery business in China. I think we are pleased with the progress that we have made so far, but there are definitely still a lot more we can do. Okay. Thank you. Next question, please. Thank you. The next question comes from the line of Natalie Wu from Haitong International. Please go ahead. Hi, good evening. Thanks for taking my question. Just a little bit add about the synergy question of the last question. Just wondering what kind of the synergy between Duoduo Grocery and your original marketplace business in terms of the supply chain should we expect in the longer-term future, and what's your progress, what's your progress now? Also, wondering if that could be the key competitive edge that differs you from other competitors in the longer run. Thank you, Natalie. As we have discussed, we can see Duoduo Grocery really as an integrated part of our marketplace, right? It is an extension of the experiences that we can offer. It is an extension of our ability to address more of consumers' needs and use. From listening to what we have said about being focused on building our infrastructure, the idea is really to figure out how we can address their needs better, both really continuing to leverage on the existing express delivery infrastructure network, as well as to develop this, you know, less than 24 hour type of fulfillment infrastructure for Duoduo Grocery. If we can organize both of these delivery logistics very efficiently and actually be able to forecast and recommend the appropriate SKUs to consumers based on their desirable use case and fulfillment case, we actually see a lot of opportunities to drive synergy between the platform of marketplace today and the Duoduo Grocery scenarios. Certainly, on the supply chain side, as I mentioned earlier, most of the suppliers today are local. That said, there are 12 million farmers on PDD today who are sourcing and who are supplying to our users on a nationwide basis. These could all be potential sellers or suppliers into the Duoduo Grocery scenario, provided that they have enough support around logistics and via coordination, right? Certainly, over time, I think we see the infrastructure being able to support not only locally driven supplier, but on a nationwide basis to really leverage the supply chain available on PDD's marketplace, that also extend beyond pure agriculture produce. This is the reason why in Lei's remarks, pointed out that our vision is really to become China's largest agriculture producer, and by doing so in that process, become the largest grocer for the world. Got it. That's clear. Thank you. Thank you. We have our next question from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Very much. My first question is about a comment in Colin's letter to shareholders, where he mentions that traditional approach to competing through scale and efficiency has its inevitable limitations. I wonder if you could elaborate. In the interest of time, I wonder if you could talk through the impact of Duoduo Grocery on the broader business. When I look at your take rates, they are a record high of 3.23%, and you expanded on that. When I look at your sales and marketing spend is that it's one of the lowest we've seen at 77.8% if you strip out the merchandise sales and just look at marketing services. That seems to be the start in the right direction. If you could just expand on that and also elaborate on, if possible, in the limited time, the impact of Duoduo Grocery on the gross profit line, that would be great. Thank you. Hey, Piyush. I think the way you should think about Duoduo Grocery's impact on the business model overall is highly synergistic, right? In a sense that we now have an incremental scenarios of being able to fulfill the user's needs that we previously weren't able to address. That increases our ability to address that need over time. Because of that, we certainly expect the engagement overall on the platform to continue to improve. As more users become more familiar with our platform, we also expect their spending will continue to improve. One of the things that I think, you know, you may notice that is, from an average order value perspective, for the year, it is actually decreased right away over the prior year. You need to take that in the context of the significant number of user add and also the increase in order numbers. We are quite confident actually, as the users continue to mature on our platform, with the improvement in engagement level, this will continue to trend in the right direction and resulting in more operating efficiency that Piyush you have identified. In the interest of time, why don't we take one last question. Definitely. We have the next question from the line of Eddy Wang from Morgan Stanley. Please go ahead. Thank you, management, for taking my question. The question is also related to the grocery business. As you mentioned that Duoduo Grocery is not a community group purchase business, but if we look at the competition in the, you know, fresh grocery side, actually you are competing with the other community group purchase, you know, players. As you said that, you know, or next step will be, you know, investing this kind of as a heavy, you know, warehouse and agriculture focus on logistics. Just want to know your thoughts whether or not, you know, in terms of this, all these players, they are, you know, now the next, you know, focus will, will be the infrastructure investment and user engagement instead of, you know, the user acquisition, maybe, you know, very aggressively in the past 6 months. What's your view on the competition, you know, in terms of fresh grocery, online fresh grocery in the, you know, in this year? Thank you. Sure, Eddy, thank you for that. We are obviously not in a position to comment on other players' strategy. I would say, you know, instead, let's focus on what we are doing, right? If you look at what PDD is today, we are an e-commerce platform with 788 million users, highly active users at that, right? The MAU for the quarter was at 720 million, almost 90% of my annual active user. We are confident that, you know, the user engagement measures will continue to trend. As we have communicated through the past quarters, growing user base has never really been our priority, the entire year was really focused on engagement. With better engagement, with better trust building on the platform, the user number have grown. We have seen, you know, very strong growth momentum in that. As Lei mentioned, given the scale of our user base today, it's inevitable that user growth will start to trend down. It's much more important that we are focused on engagement and focused on satisfying their needs on our platform. The Duoduo Grocery provides us that opportunity to, or I should say, incremental opportunity to address that additional aspect of, you know, needs for groceries, for grocery on more timely basis and at more compelling value. I think it's important to recognize and the fact that to do Duoduo Grocery appropriately, we as a platform do need to become more heavy. It is an operational heavier business. We are getting involved in warehousing operations. We're getting involved in delivery logistics operations. The investments in offline operations will be an important part of success factor. I would say, you know, you know, thinking through the competitive dynamic, it's important not to lose sight the strategic advantage that we as a platform with 700, almost 800 million users have over in this business model, right? We will continue to focus what we have been doing well, which is understanding what consumers are looking for, recommending them the most appropriate product based on our understanding of what their needs are, what their expectation of value for money is. Except the difference is now instead of having to rely only on express delivery, we actually have an additional fulfillment mechanism that can actually enable a shorter turnaround of delivery for particular categories of product where that time sensitivity actually matters, right? We are fully committed to making sure that we have the right infrastructure in place to win in this business because we think by doing this right, the opportunity is immense and is highly synergistics to the marketplace business that we continue to see a very long runway for. Thank you very much. With that, we will wrap up the call for the evening. Thank you very much everyone for your time, and look forward to speaking again in the next quarter. Thank you. Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.