Earnings Call: Q4 2019

Mar 11, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Pinduoduo 4Q 2019 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Xinyi Lim, Director of IR. Thank you. Please go ahead. Thank you, Rachel. Hello, everyone, and thank you for joining us today. Pinduoduo's earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com, as well as through global wire services. Before we begin, I'd like to remind you that this conference contains forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking statements can be identified by terminology such as will, anticipate, and similar statements. Such statements are based upon management's current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or factors are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. On today's call, our CEO, Colin Huang, will make some general remarks on our performance last year, on the implication of the ongoing coronavirus outbreak, and our outlook for 2020. Our VP of Strategy, David Liu, will then elaborate further on our specific strategic initiatives as well as take us through our financial results for the fourth quarter and the fiscal year ended December 31st, 2019. Now, it is my pleasure to introduce Chairman and Chief Executive Officer, Colin Huang. Mr. Huang, please go ahead. Thank you, Xinyi. Hello, everyone, and thank you for joining us for our fourth quarter and fiscal year 2019 results announcement. Before we begin, allow me to first extend our deepest condolences to those whose lives have been affected by the coronavirus outbreak. To those braving the front lines to save others, we salute to you. The recent events reminded me of what I wrote at the beginning of our letter to shareholders a year ago. The world is changing at an unprecedented pace. Good and bad change are simultaneously unfolding, many of which are unexpected, and some may even leave people anxious or in disbelief. 2019 was an important formative year for Pinduoduo. We built out our capacity and capabilities, innovated our offerings, and continued to invest in our users to enhance engagement and drive scaling our business. Our efforts were well recognized by users, with our annual active buyers exceeding 585 million and our monthly active users reaching 482 million. Thanks to the ongoing support of our users, merchants, and partners, we also crossed a new milestone. Our 2019 GMV surpassed RMB 1 trillion, representing a year-on-year growth of 113%. Our order volume also grew 77% year-on-year to 19.7 billion. In 2019, our team expanded to around 6,000 employees as we built out our key internal systems and infrastructure. We continue to execute our open platform strategy to prioritize the interests of our users and to benefit all the participants in our ecosystem. Specifically, we invested in sourcing and supply chain management in C2M and agriculture and in strengthening our IP rights protection. David will elaborate on these later. I am pleased to note that as a company, we emerged from 2019 larger in scale and stronger in capabilities. We are better equipped to seize new opportunities, take on unexpected challenges, and shoulder great social responsibilities. Such recent challenges is the COVID-19 epidemic that is impacting the world now. This has been one of the most intense and trying periods we have experienced as a team. The coronavirus upended lives as we knew and affected everyone in China. Here in Shanghai, we felt a sense of mission to fight the epidemic alongside the rest of the nation. As a platform that provides for the daily needs of nearly 600 million people, we shouldered great responsibility and pressures as we raced against the clock to stabilize prices, source essential supplies, and deliver them to those in dire need. At onset of the coronavirus outbreak in China, we saw the market for daily necessities and personal protective equipment thrown into serious disarray. Prices surged as demand far outstripped the supply. The mismatch was compounded by the Chinese New Year holiday, a time when much of the core workforce was away and most businesses were shut. In the face of surging prices, we felt a duty-bound to step in and do our part to relieve consumer anxiety and help our business partners. We thought hard about the limited resources we could mobilize to address the situation effectively. We decided on directly subsidizing these daily necessities and the protective equipment to do our part in stabilizing prices. Of course, these subsidies might impact the company's P&L and the shareholders' return in the short term. As significant shareholders of PDD, the core management team has thought thoroughly about this since the start of the outbreak, we deeply believe this is something we must do. During this time of crisis, we must fulfill our social responsibilities and prioritize the interests of our consumers, because without them, there wouldn't be Pinduoduo. As such, we remain focused on helping our users get through this difficult time. I believe in the market. I also believe that consumers have their own weighing scales in their hearts. They will be the judge of our conduct during this time. Here, I'd also like to take this chance to thank our team for their exceptional commitment and efforts during the outbreak. Confronted with a previously unknown disease, everybody was scared. We were no different. Yet, in spite of that, our management team stayed focused on their responsibilities, while our staff based in Shanghai returned voluntarily during the holiday to join in the fight. We implemented measures to ensure the health and safety of our employees so that all of us could focus on helping others tackle problems brought on by reduced manpower, logistics disruptions, supply shortages, and a heightened demand. Our team poured time and energy into supporting the relief efforts in Hubei province and other regions severely affected by the outbreak. We sourced and donated much-needed medical supplies and equipment. We also aided agricultural producers in regions affected by the outbreak. We set up a new program to let impacted producers list their agricultural goods more easily on our platform, and we recommended their goods to interested consumers. By doing so, we help ensure that most of our users who were quarantining at home needn't to worry about getting quality, fresh produce delivered to their homes. The battle against COVID-19 that China is waging is supported by the selfless contributions of numerous ordinary people and SMEs. These people toil silently without any halos and out of the limelight. They even put their own lives at risk. In similar vein, we were glad to see many of our younger team members stepping up during this extraordinary time to lead. They demonstrated their core values of benfen and a commitment to our platform. Driven by their desire to uphold the interests of consumers and merchants, these young men and women choose to return and stand by their stations, working tirelessly when they could have chosen otherwise. They sourced out-of-stock goods that hundreds of millions of users were waiting for at home, procured protective gears for frontline medical teams, coordinated logistics supported for merchants so that orders could be successfully fulfilled, and they responded patiently day after day to the higher-than-normal level of user inquiries. The unforeseen challenges from this outbreak accelerated their growth and development. These young men and women will become important future leaders of our organization, and I expect they will continue to take our platform to great heights in 2020 and beyond. I am proud to be able to work and fight alongside our teams. It is this kind of professional dedication that would ensure our eventual return to a peaceful life. What we hope to see is that due to our efforts behind the scenes, consumers on our platform can enjoy greater stability in their daily lives and experience more savings and more fun. This is how PDD aspires to be as a company. Seeking the spotlight will never be our goal. During this difficult time, many companies, including Pinduoduo, are likely to suffer economic losses that are yet difficult to quantify. Instead of dwelling on the past, we must look forward. As a company, our most valuable asset is our people. We should all the more commend and reward our team members who have tirelessly labored to create value. As such, we have decided to raise the pay for the vast majority of our staff, rather than asking them to bear the short-term financial impact stemming from the outbreak. We also plan to grant short-term cash bonuses and long-term share-based incentives to those who went the extra mile to serve others during the outbreak in recognition of their commitment to our values. At the same time, we're compensating those merchants who sacrificed their family time in the process to provide a stable supply of goods to tens of millions of families, and they were looking to further expand this scheme. The ongoing coronavirus outbreak has also prompted us to deepen our support for research in medical sciences. In January, we established our RMB 100 million fund in collaboration with the Zhejiang University to support research into the prevention and control of viral infections and respiratory diseases. The fund will also support medical resource allocation to hospitals in heavily affected areas, as well as reward healthcare workers who have contributed significantly to the fight against the coronavirus outbreak. Now, a few words on our 2020 outlook. Today marks 1 month since the resumption of work for most of China. Our merchant operations and the logistics have resumed and are gradually returning to normal. We will continue our subsidies program to support their recovery. The disruption caused by the outbreak will have negative impact on our results for the first quarter of 2020, but our expectations for the long run remain unchanged, and even more positive. We have observed the broad adoption of digital services by consumers during the outbreak, which bodes well for the future of e-commerce in China. We have seen rising consumer engagements on Pinduoduo, and I am confident that our platform stand better prepared for the future. We plan to continue investing in user engagement throughout 2020, and we remain optimistic that this year would be another year of rapid growth and innovation for our platform. Now, let me turn over to David to share more specifics on our strategy and discuss our financial results. David, go ahead. Thank you, Colin. Thank you, Colin, and hello, everyone. Let me first recap our key initiatives in 2019 and discuss the relief efforts and measures that we have implemented since the outbreak to support our consumers and facilitate recovery of the SME activities on our platform. From day 1, Pinduoduo has sought to create an open platform that will align the interests of our merchants and partners to serve our users better, offering them an experience of more savings and more fun. Our top priority remains the same, to deepen the trust and engagement with our substantial user base. We did so by first investing in sourcing and offering a broader range of products at compelling value for our users to purchase without hesitation. Second, we continue to push for greater efficiency upstream in agriculture and in manufacturing industries through our C2M initiatives to deliver tailored, high-quality choices for our consumers. Third, we further invested in technology and operations to strengthen our IP rights protection program. We continue to see strong growth in our user base. As we further increase our reach and understand our users better, we have seen how their interests and needs evolve across categories and price points. Improving our capabilities to source attractively priced, high-quality products and to surface them effectively is a key to elevating the shopping experience on our platform. The innovative 10 billion Subsidy Program we launched 2Q last year has become synonymous with our platform and proven effective in encouraging users to venture out and try new product categories. This program also encourages our users to share great deals more frequently within their network. In addition, we ramped up our cross-border business to offer users popular imported products ranging from electronics to cosmetics and casual luxury directly from reliable and competitive sources. We also partnered with Amazon to open a pop-up store during the Black Friday sales to offer 1,000 products directly from its global stores. We continue to explore partnership opportunities and collaborative models to offer our users a more differentiated experience. The investments in developing our supply chain enabled us to respond quickly to the extraordinary circumstances around COVID-19. To support the front, frontline medical staff, we leveraged our network to source equipment and supplies and donated over 1 million medical masks, 20,000 protective suits, 200,000 pairs of medical gloves, and 30 tons of German-imported disinfectant to affected cities in the Hubei province. We provided RMB 600 million in subsidies to more than 80 million orders as of February first to stabilize prices of these critical supplies and ease our users and society. During this difficult period, it was even more important that we stood with our merchants to help them overcome the logistical and operational challenges they faced. We reserved RMB 1 billion to fund a subsidy of RMB 2-4 per order for merchants fulfilling orders during the outbreak. At the same time, we are not just content with sourcing what is currently available in the market for our users. Through our C2M initiatives, we're seeking to better align supply chain capabilities with user demand in the market. We launched our new brand initiative in mid-December 2018 with a modest goal of helping 100 SMEs build up their brands domestically. Over the course of 2019, we brought over 900 companies into the pilot phase of this initiative to develop, manufacture, and price tailor-made goods specifically to our users' requirements. 2,200 custom SKUs were created, spanning 20 categories such as household electric appliances, digital, and bed linen for over 150 million orders placed cumulatively. Our approach has evolved over time from supporting a single manufacturer to engaging the entire manufacturing belt across China. We have also moved from focusing only on manufactured goods to incorporating agriculture products, a category which has always been close to our hearts. In 2019, GMV for agriculture products on our platform reached RMB 136 billion, up 109% from the year prior. We connected 586,000 merchants selling agriculture products on our platform, with 240 million active users who purchase such goods with over 70% repurchase rate. Last year, about 1,500 SKUs received over 100,000 orders as a result of our team purchase model. Our efforts are improving the lives of over 12 million farmers directly. At the beginning of this year, our new brand initiative expanded to cover 130 tea producers in Anxi, Fujian province to bring quality, affordable tea to the masses. Tea, as you know, is consumed widely in China, but it is often difficult for consumers to ascertain the quality of what they are paying for. We as a platform are well-positioned to help set parameters and provide more transparency to the product, which in turn helps expand the market for the producers. More broadly on agriculture goods production, we have been developing technology related to products, logistics, and user demand, and we're gaining insights from our machine learning-based central processing system. The insights generated help farmers better plan their farming and delivery schedule and ensure our users receive fresh produce at good price. As of the end of 2019, our central processing system covered all China's counties. We leveraged it during the COVID-19 outbreak to source and efficiently deliver more than 100 tons of fresh produce to hospitals in Hubei province. This was a month of supply for 5,000 medical staff at 4 hospitals. The disruption caused by the coronavirus not only affected farmers' current income but it also disrupted their farming plans for the entire year. Meanwhile, restriction on travel and activities made it difficult for many urban residents to purchase vegetables and fruits in a timely manner. To alleviate the situation, we launched our Help the Farmers program on February tenth, which enabled consumers to buy fresh produce directly from farmers in approximately 400 agriculture areas, including 230 national poverty-stricken counties covering 280,000 SKUs. This online channel helps farmers affected by the closure of their usual offline sales channel to reach a new consumer base. Consumers, meanwhile, get to access a much broader selection than what their local outlets can stock. To continue building our trust with our user base, we invested throughout 2019 in anti-counterfeiting technology and grew our platform team in order to stamp out counterfeits and IP-infringing products, and to help our users better identify trustworthy merchants. Our improved capabilities not only contributed to better user satisfaction overall, but they also enabled us to exert greater impact during the outbreak and protect our users during this critical time. We initiated emergency measures on January 22 to inspect disease prevention necessities sold on platform around the clock. Between January 23rd and February 4th, we have prevented the listing and taken down over 500,000 products in question, and imposed restrictive penalties against over 6,000 merchants in question. Now let me take you through our financial results for the quarter and fiscal year ended December 31st, 2019. Our annual active buyers for the last 12 months ending December 31st, 2019, grew by nearly 50 million compared to our annual active buyers at the end of last quarter, to exceed 585 million. Compared to the same quarter in 2018, our active annual buyer base grew by 40%. Our MAU grew by 52 million from the prior quarter to reach 482 million. This is an increase of 77% from the same quarter in 2018. The growing engagement of our user base is a result of our prior investments. We believe these activities will contribute to long-term GMV growth as these users mature on our platform. Our last full month GMV for 2019 surpassed the RMB 1 trillion mark, representing 113% year-on-year growth. Our continued GMV increase was driven by the sustained growth of our annual spending per active buyer, which rose 53% year-on-year to reach RMB 1,720. The increase in this average number should be considered in the context of the rapid increase of our active buyer base over the past few quarters. It highlights that our value proposition is resonating strongly with users who are staying on and increasing their spending as they find more that appeals to their needs on our platform. Our total revenues in the quarter ended December 31st, 2019 were RMB 10.8 billion, up 91% from RMB 5.7 billion in the same quarter last year. The main driver of this growth was our online marketing services. Online marketing services revenue was RMB 9.7 billion this quarter, constituting 90% of our total revenue. This is up 91% compared to the same period in 2018, and is driven by the rising demand for our advertising products as the user traffic and GMV on our platform continue to expand rapidly. The remainder of our revenue comprised of transaction services revenue, which in this quarter amounted to RMB 1.1 billion. This is up 87% compared to the same period the year prior. We continue to offer preferential rates to high quality merchants, and while this affects the monetization in the short term, we believe this will accrue to the long-term value of our platform. Moving on to costs. Our total cost of revenue increased 43% from RMB 1.4 billion in the same period last year to RMB 2 billion this quarter. This translates to a gross margin of 81% as compared to 75% a year ago. Total cost of revenues increased mainly due to higher cost of cloud services, call center, and merchant support services. Total operating expenses this quarter were RMB 10.9 billion as compared to RMB 6.9 billion in the same quarter 2018. Our sales and marketing expenses this quarter increased 54% to RMB 9.3 billion from RMB 6 billion in the same quarter of 2018. This is mainly due to an increase in online and offline advertisement and promotions as we continue to invest in growing our user engagement and user base. We also leverage our mega deal and RMB 10 billion subsidy programs to feature specific items. When we did this for our Black Friday pop-up store collaboration with Amazon, we observed not only high conversion for the featured products, but also meaningful traffic increases to Amazon storefronts. On a non-GAAP basis, our sales and marketing as a percentage of revenue this quarter was 84% as compared to 89% in the prior quarter, and 103% from the same quarter last year. The variation in our sales and marketing expenses as a percentage of revenue not only demonstrates the potential operating leverage in our business model, but more importantly, underscores the discretion we have in driving our business. 2020 will continue to be an important year of investments for us. In the next few quarters, we expect our sales and marketing expenses to remain fairly dynamic, and we will continue to spend when we see opportunities that meet our ROI requirements. General and administrative expenses were CNY 346 million, an increase of 7% from CNY 322 million in the same quarter of 2018, primarily due to an increase in headcount. Research and development expenses were CNY 1.3 billion, an increase of 142% from 525 million in the same quarter of 2018. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel, and an increase in R&D-related cloud service expenses. On a non-GAAP basis, our R&D expenses as percentage of our revenue was 9%. To sum up, operating loss for the quarter was RMB 2.1 billion on a GAAP basis, compared with operating loss of RMB 2.6 billion in the same quarter of 2018. non-GAAP operating loss was RMB 1.3 billion, compared with operating loss of RMB 2.1 billion in the same quarter of 2018. Net loss attributable to ordinary shareholders was RMB 1.8 billion, as compared to net loss of RMB 2.4 billion in the same quarter last year. Basic and diluted net loss per ADS were RMB 1.52, compared with RMB 2.16 in the same quarter of 2018. Non-GAAP net loss attributable to ordinary shareholders was RMB 815 million, compared with RMB 1.9 billion in the same quarter last year. Non-GAAP basic and diluted net loss per ADS were RMB 0.72, compared with RMB 1.72 in the same quarter of 2018. That completes the profit and loss statement for the fourth quarter. Net cash flow from operating activities was RMB 9.6 billion, compared with RMB 5.07 billion in the same quarter of 2018, primarily due to an increase in online marketing services revenue. As of December 31, 2019, the company had RMB 33.3 billion in cash equivalents, and restricted cash. Excluding its restricted cash, we had RMB 5.8 billion in cash and cash equivalents. In addition, we had RMB 35.3 billion in short-term investments. As Colin mentioned, we expect our first quarter 2020 results to be negatively impacted by the coronavirus outbreak, given suspension of commercial activities during March or February and a gradual resumption to normalcy thereafter. Our priority as an e-commerce platform that serves nearly 600 million users is to help facilitate the recovery of people's lives and resumption of smooth business operations. To that end, we will continue to provide the necessary support to our merchants and users, and we look for opportunity to invest our users via sales and marketing to resume our growth trajectory. This concludes our prepared remarks. Operator, we are ready for questions. Thank you. 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 and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, you may press star one on your telephone keypad. Your first question comes from the line of Mr. Thomas Chong of Jefferies. Please ask your question. Hi. Good evening. Thanks, management, for taking my questions, and wish everybody is in good health and stay safe. My question is about the recovery trend across different product categories in the first two weeks in March. Can management shares about how it trend versus the same period last year? My second question is about the GP margin. We noticed that the GP margin is over 80% in Q4. How we should think about the GP margin trend going forward and our investment areas in 2020? Finally, I have a quick question about the sales and marketing expenses. Given the fact that it's going to be quite dynamic in the next couple of quarters, should we still assume that as a % of revenue there would be a leverage on marketing spending? Thank you. Hey, Thomas. Thanks a lot for the question. With regard to your question on recovery, I would say that it is too early yet to assess the full impact of the coronavirus outbreak. During this period, our priorities are still with our users, merchants, and ecosystem partners. As discussed, we plan to continue subsidizing the SME merchants on our platform and to focus on improving their user experience. As we noted, we believe the investments today and by standing behind our users will accrue value for the shareholders in the long run. That said, I will note that, you know, as we launched at the end of February a 3-day campaign on our 10 billion subsidy shopping festival, on the theme of people returning to work, we have sensed, you know, a recovery on consumer demand. During the first 12 hours of that campaign, we sold over 50,000 iPhones on our platform and 20,000 MacBooks. That give us confidence that the longer term demand on for the industry remains unchanged. Your second question was with regard to gross margin trends. I would say that, you know, as we continue to move forward with our investments, it will fluctuate from quarter to quarter between 70%-80%. We will invest as needed and to build infrastructures, and I would not read too much into the patterns. Finally, I think, Thomas, you had a question around sales and marketing. As we have discussed with investors previously, we do not have a quarterly target for our sales and marketing spend. Instead, we make our decisions on sales and marketing spend based on internal ROI hurdles. If we see an attractive opportunity to spend, we will go ahead and do so. Going forward, for the 2020, as I mentioned, this will continue to be a year investment for us. Of course, as the scale grow of our platform grows, certain leverage is likely, but I would not, you know, I would say that, you know, there is no fundamental change in terms of how we are managing the sales and marketing spends. Got it. Thank you. Thanks, Thomas. Operator, before we go to the next question, just a reminder for all the analysts to keep their questions to one question so that we can get around to more people. Thanks. Next question, please. Your next question comes from the line of Jerry Liu of UBS. Please ask your question. Hey, thank you guys. Management, I just want to ask about long-term consumer behavioral changes. First of all, during this outbreak period, have you seen any changes in GMV mix, potentially more consumers having enough trust in the platform to buy fruits and vegetables, any kind of new categories? Secondarily, on the supply side, as we've seen some pressure for the merchants, do you see any potential structural changes as we recover from the outbreak? For example, maybe more manufacturers could turn their attention towards the domestic market versus exporting. So just wondering what are some of the long-term implications. Thank you. Sure. As you know, as the fight against the coronavirus continues in China, I would say that we have seen certain changes in behavior because of the extended period time that people are staying inside the homes. We have seen more users turning to Pinduoduo during the crisis for their daily needs. Our DAU numbers in the fourth quarter have held out very well, have held out well versus, you know, the end of the last year. We are doing our best to meet our users' requests and needs. In terms of, I would say that, you know, the outbreak has also encouraged more users to conduct more of their activities digitally online, including the purchases of agricultural produce. Last year, as we noted, that agricultural products accounted for RMB 136 billion on our platform, and we are already seeing that trend grow in the first quarter. All right. Next question please. Your next question comes from the line of Gregory Zhao of Barclays. Please ask your question. Hi, management. Thanks for taking my question. On the user side, we see very strong user growth in the past quarter. I just want to know what's your plan to further improve the user engagement, such as like some new functions like live streaming or gaming or some social functions to further enhance the engagement. Second one, the take rate. The implied take rate shows very stable year-over-year expansion. Just want to understand more about what kind of new advertising products you will develop to improve the monetization. Thank you. Sure. As we have discussed, the priority for our platform is to focus on growing user engagement. We, of course, are paying attention to different new medias or ways of engaging, and we decided to introduce live streaming function for our merchants a few months ago on popular request. We will observe how things proceed before pushing monetization of live streaming. I would also say that timing was probably quite apt as homebound consumers during this special time were also more receptive to watching live streaming. Through live streaming we have sold a variety of goods and agriculture. Live streaming has been surprisingly popular. A recent series of livestream that we did featured mayors from different agriculture areas spotlighting a local produce, and we have seen strong support from our users with 15 tons of passion fruit and over 10 tons of navel oranges being sold out in 1 day. Your second question, I think, was regarding take rate. We do not manage our business towards a specific take rate target. In fact, over the past few quarters, our priority has been bringing on board high-quality merchants who can offer our users a broader range of selection and giving them better value and better experience. As such, we are continuing to offer merchants preferential rates. As activities of users grow on our platform, we believe monetization will naturally follow. Thank you. Next question please. Please everybody, keep to one question. Thanks. Your next question comes from the line of Alicia Yap of Citigroup. Please ask your question. Hi. good evening, management. Thanks for taking my questions. Can management actually elaborate a little bit when you say, you know, first quarter will be negatively impacted? Could you help us frame and think, relatively impact on the GMV terms, on the active buyers term, and also on the revenue terms? Would that be a scenario that we even see a negative GMV growth, or the negative revenue growth? Thank you. As you know, we do not give guidance on GMV or any financial metrics, I will keep the comments fairly generic. As we have seen a broader, the epidemic, I would say, has a broad impact on across the businesses in China, the industry, we are no exception. Chinese New Year is a seasonally low quarter for e-commerce, this year the impact has been prolonged because the lack of labor force and logistic disruption. A number of products were sold out on our platform, it could not be replenished in time, other products were experiencing shipment delays and simply undeliverable. That said, I would note that our platform has been a very fast growth platform, so any setback, does not change our perspective, in terms of opportunity for the entire year. Okay. Thank you. We would also say that, you know, the broader adoption of e-commerce during the outbreak is actually a favorable thing for the overall industry and for Pinduoduo. Thank you. Your next question comes from the line of Natalie Wu of CITIC. Please ask your question. Hi. Good evening. Thanks for taking my question. Just wondering for the $9 billion marketing dollar spending in the fourth quarter, how much is related with subsidizing new users, and how much is related with the subsidizing the existing ones? To It would be great if management can help us understand the evolution of the ratio in the past several quarters. Thank you. Thanks, Natalie, for the question. As you know, we do not give such breakdown, and I would just say that, you know, we continue to manage our spending on new user ads as well as, you know, coupons and subsidies very dynamically based on where we think we see the market opportunities. Operator, next question please. Your next question comes from the line of Hanjun Kim of Macquarie. Please ask your question. Great. Thank you. I just wanted to understand what your GMV mix by category might look like at the end of last year, and then how you might want to see that change this year. I think you talked about agriculture quite a bit. It sounds like it's almost 20% of your mix, but just overall, apart from that, what are some of the categories you wanna incubate further this year? Thank you. As I mentioned, the agriculture GMV was CNY 136 billion out of CNY 1 trillion, it's really more, it's like 13%. That said, overall mix of GMV on our platform has not changed. Apparels and FMCG continue to account for roughly 50% of our GMV. As, you know, we look forward, the idea is actually not to target specific changes in category mix, but to increase the depth offerings that we have, and we actually see opportunity for growth across all the sectors. Next question please. Your next question comes from the line of Eddy Wang of Morgan Stanley. Please ask your question. Hi, management. Thank you for taking my question. Just a very, very quick follow-up on the apparel category. Some of the platform have mentioned that they have been increasing in-store, you know, inventory of some, you know, the apparel brands. Have you witnessed any, you know, the potential for, you know, more brands addition in terms of apparel in our platform to do such destocking in March and the second quarter this year? Thank you. What I would say is in terms of spending behavior over the course of the first quarter, because of the outbreak, consumers' initial preoccupation were around health-related products and devices, and that certainly has an impact on their spending behaviors around the discretionary product. However, as China resumes to normal, the pace of recovery starts to pick up. We have seen continued demand across discretionary goods and across different categories. As I mentioned earlier, at the end of February, when we did a 3-day campaign, we sold 20,000 necklace sticks in the first 12 hours. I think overall, we expect the trends for the whole year continue to be quite positive. The other thing that I would note is, as a platform that would, you know, have around 600 million users now, with monthly active users close to 500 million, brands are approaching us more and more so to participate and take advantage of our ecosystem. Thank you. Next question. Your next question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask your question. Mr. Mubayi, your line is now open. Hello? Hello. Hello, Piyush. You crossed the magic CNY 1 trillion GMV figure in record time in 2019. What categories ramped up in the year? Which would be the areas of focus for 2020 category-wise? How has the lower tier versus higher tier mix changed for the last year, and how should we think of this, all of these parameters through 2020? Thank you. Sure. Thanks, Piyush. As we do not give specific breakdown between different sectors, I will comment generally in terms of trends. As our user base continue to grow, our user distribution from a population perspective has not changed necessarily. However, what we have seen is because of the trust that we are building with our user base, we are gaining more confidence and consumers are shopping with greater ease on our platform, and we continue to observe that they have more and more needs that we can address as a platform. Moving forward, I would say that, you know, it is about, again, increasing the diversity of the product that we have, the breadth of product we have across all the categories. It is about increasing their frequency of purchase on our platform, which should accrue to an increase in our average order value. Specifically, I would say that, you know, because of the behaviors that we're seeing, we do see growth in electronics and beauty categories, given the interest that we see in tier 1 and tier 2 cities. Thank you. Could I ask another question? I know you said one only. Yeah. Basically, when I look at, when I look at the pace of your active buyer addition, if you continue the pace of the last two years on average, in 10 months you would've caught up with the market leader, and you'd have over three quarters of a billion active buyers. At that point in time, how does the business change for you? China is a very large market, as you know, e-commerce penetration is only around 25%. Frankly, I think we are not so preoccupied with what our competitors are doing or, you know, where we are, but in terms of how can we be doing things better on our own platform. As we stand today, I think, you know, it is again about continuing to build trust with our users, continuing to increase the engagements, and continue to create a unique, fun, and interactive experience for them. Gary, Colin wants to add. Well, I think it's a interesting question, and it's a very good observation. It's true that if we continue this pace, then the user base will be very similar, even surpassing the major competitor. On the other hand, I think it is really a question that we should ask the other party, right? I mean, even today, there are still a lot of press release, you know, that are talking about lower tier city users. When we are looking at 1 billion user base, what's the difference between lower tier and the upper tier? It's kind of interesting to me that people are still dividing the users between lower tier cities and upper tier cities. As you rightly pointed out, very soon, the question itself of lower tier and first tier cities will be meaningless. At that point in time, it's not your question's valid to us, but it's also a question valid to all the players in the market. Together with this, very unusual time, during the COVID-19, a lot of the user behavior has been changing. I would say it's going to be a very interesting time in the next 2 years. Thank you. Next question please. Your next question comes from the line of Joyce Ju of Bank of America. Please ask your question. Good evening, management. Thanks for taking my question. I actually would like to get more colors in terms of the impact from coronavirus. I note you have mentioned that from the demand side, couple categories suffered a kind of like demand shock. Just want to know from the supplier side or the supply chain side, what you have observed, like for your merchants, what kind of challenges they are facing. You mentioned you are Pinduoduo is going to invest to help these small merchants to recover their business. What the platform has done, what's the, like, new initiatives ahead. Also just for financially, should we recognize those kind of investment or support for SME merchants in the revenue side, i.e. take rate, or they will actually impact our growth margins for the next couple of quarters? Thanks a lot. Thank you for that. In terms of impact to the merchants on our platform, we would note that because of the prolonged suspension of travel in China, the ability to return to work, the ability to start fulfill orders and start to manufacture has been impacted for most of the players in China, and this is particularly felt for the small and medium enterprises. Pinduoduo as a platform has a unique ability to help and support these SMEs to return to their normal operations. As I mentioned earlier, we have reserved an RMB 1 billion fund to fund a subsidy of 2 to 4 RMB per order for merchants fulfilling orders through this time period. You should, from a modeling perspective, expect this to be a hit to the take rate. Got it. Thanks. Your last question comes from the line of Winnie Wong of HSBC. Please ask your question. Hi, good evening, Management. Thank you for taking my question. I think, following on just basically if we see that our customer base, our any trailing 12-month active users is already catching up with our close competitor. In terms of the ARPU, right? The annual spending per active customer, of course, we're still at a gap of about maybe 1/8 or maybe 1/7 of it. How are we seeing that we can go deeper into the customer wallet? Because, I think in terms of category expansion, we are properly also quite rich already. Or maybe you think there's further room to increase the category or there's further room in terms of upselling, how are we achieving that? Thank you so much. Thank you for that question. First of all, I would note that we added almost two times the users as our close competitors, in the fourth quarter. That has an impact to our ARPU, which would take time to catch up. As the users mature on platform, we do expect to see that their annual spending to increase over time. In terms of strategy for us in the near term, it's gonna be, continuing to engage the users to increase their interactions and, to help, build their trust, continue to build their trust with our platform. Colin, I think you wanted to say something. Yeah. My answer will be really short. I think it's just a matter of time. With that said, I please don't overestimate our speed to increase that. I also think that you shouldn't underestimate our potential to increase that in the long run. Yeah. Perhaps the answer will be it's just a matter of time. Just wait and see. Yeah. Thank you. We have reached the end of our presentation. I would now like to hand the conference back to today's presenters for your closing remarks. Thanks, Colin, Dave. Thanks, Colin and David. Thanks everyone for joining us on the conference call today. If you have any further follow-on questions, please feel free to reach out to the IR team. Thank you. Have a great day. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, and you may now all disconnect.