Earnings Call: Q3 2019

Nov 20, 2019

Ladies and gentlemen, thank you for standing by, welcome to the Pinduoduo third quarter of 2019 earnings conference call. At this time, all participants are listen-only mode. After the speakers' presentation, there'll be question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be reminded that, please limit yourselves to one question at a time. Please be advised that today's conference is being recorded. I'd like to hand the conference over to the first speaker for today, Ms. Xinyi Lim. Thank you. Please go ahead. Thank you, Annie. 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 GlobeNewswire services. On the call today from Pinduoduo are Mr. Colin Huang, Chairman and Chief Executive Officer, and Mr. David Liu, Vice President of Strategy. Mr. Huang will review business operations and company highlights, followed by Mr. Liu, who will discuss financials. They will both be available to answer your questions during the Q&A session that follows. 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. These forward-looking statements can be identified by terminology such as will, expect, anticipate and similar statements. Such statements are based upon management's current expectations and current marketing, market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all 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. Now it is my pleasure to introduce Chairman and Chief Executive Officer, Mr. Huang. Mr. Huang, please go ahead. Thanks, Xinyi. Thank you everyone for joining us on our earnings call. Pinduoduo turns 4 years old last month, yet it still feels like yesterday when we first started with only a handful of people. Today, we have over 5,000 employees, 536 million annual active buyers, and 430 million MAUs for the quarter ending September 30th, 2019. Thanks to the support of our users, merchants and partners, we continue to generate robust business momentum. Our last 12 months GMV grew 144% year-on-year to exceed RMB 840 billion. Thinking back to when we started the company, we envisioned an open platform that would put users' ever-changing needs first. One that could provide equal opportunities and empower all for a better life. Being born in the mobile era, we set out to build a platform that connects people and promotes trust and a sense of community. We are doing this in several ways. First, invest in user engagement. Second, support users' freedom to choose. Third, enhance IP rights protection. First, investing in user engagement. The most effective way to build trust with our users is to encourage them to try new products and new features on our platform. We make discretionary sales and marketing investments to reduce the barriers for our users to buy the item that they have always coveted, and to try new products, new product categories on our platform. Our ten billion subsidy program that we have launched around June the 18th shopping festival is a great example. The user response has been so positive that together with our merchants, we continue to make the program available all the way through Singles' Day and beyond. What this has done is to change people's perception of PDD. We don't just sell apples, but we also sell authentic Apple iPhones. During the first 11 days of November, we sold over 400,000 latest iPhone models to consumers who might have otherwise thought twice about making that purchase on PDD. Similarly, on Singles' Day, we sold over 1,000 cars for emerging domestic brands like Wuling Hongguang in the first 16 minutes, with the most of the buyers mainly coming from tier 3 to tier 5 cities. Our investments in user engagement not only help us to attract new users, more importantly, it allows us to quickly build mindshare. Typically, it takes time for users to gain enough confidence from their initial purchase to develop broader, sustainable shopping habits on an e-commerce platform. Our peers worldwide have gone through a similar process of educating their users and building their consumption habits to get to their current scale. The difference for us is that we don't have the same luxury of time. By reducing friction from our users, we encourage them to buy across more categories at an early point in their life cycle, which means we start addressing a great share of their wallet sooner while enriching our understanding of their shopping preferences. What we have observed is that users don't simply leave after they buy a discount brand on our platform. Rather, they stick around to explore other attractive products on offer and become repeat buyers. Our annual spend per active user has been growing rapidly for the past few quarters, and is now close to CNY 1,600. For users who have been on our platform for over 12 months, we see that they are capable of spending a few thousands of CNY per year, and this level continues to increase. Our tier 1 users are already spending well over CNY 5,000 based on annualized 2019 Q3 spending. Taking into account the social nature of the shopping journey on our platform, these are also knock-on effects when users started buying new categories. Positive experiences get further disseminated across that user's social network, that user's endorsements are likely to help build trust and encourage others to shop on PDD. Ultimately, our goal is that whenever users think about buying something, coming to PDD would be second nature. Second, support users' freedom to choose. We provide equal and fair opportunities for merchants to sell and the user to purchase. Our user base comprises a wide spectrum across different social and economic standing. The same user may have strong preferences for imported or branded goods in categories such as cosmetics, mother and infant care, whilst preferring to buy the most economical option for household goods. We continue to strengthen our ability to source a wide array of goods, including branded and imported items based on users' needs. At the same time, we are committed to giving equal opportunities to all merchants and brands, big or small. We believe the decision on which merchant's product to view and to purchase should be made by our users themselves, rather than it being a result of certain platform's actions. Indeed, as we continue to grow, we see more and more users voting for us with their wallet, with many merchants following suit as we constitute an attractive source of growth. From day one, Pinduoduo has focused on delivering value for money goods to our users by aggregating demand and cutting out unnecessary intermediaries. By keeping our commission fees low, we also help nurture new brands, many of which have helped us bring even better value to users through tailor-made products. Our prices are presented in a straightforward manner. Users are given the option to purchase authentic, quality goods across all categories and all price ranges. We're also unlocking additional sources of quality products while fighting poverty by training and educating farmers in the impoverished counties on how to sell their produce online. Double Eleven this year was a special day for us, not because of some 1-day sales target, but because it was the day we launched our inaugural Tech for Poverty Alleviation course in Lancang Lahu Autonomous County in Yunnan Province. Over the course of the next 6 months, 60 students aged 20 to 50 from trending villages in the district will start from scratch to learn e-commerce related skills and ultimately open their own stores on PDD. Soon, these farmers will go from sitting on the sidelines to being active participants on our platform to share the literal fruits of their labor directly with all Chinese online shoppers. Rather than virtual skyscrapers, we are building real capabilities for the next generation of farmers, farmer merchants. For instance, the Agricultural Goods Festival we held on our platform in August generated 110 million orders for 20,000 farmers and merchants across 500 agricultural areas, driving meaningful volumes to small-scale farmers. Lastly, enhance IP rights protection. We are actively defending the trusted users placing us by tightening our platform quality control. We launched a Brand Care Program in the first quarter of this year, covering 1,000 well-known brands. We designed and customized anti-counterfeit plans leveraging technology. We study the platforms and study the patterns of infringing activities against the brand products, and tailor-made hundreds of rules to screening every product listing application for IP infringement. 97% of the suspected infringing products listings are intercepted and blocked before they reach consumers. We're also designed over 6,000 screening models to comb through existing product listings on our platform for specific contributed hallmarks. Through machine learning, these pre-listing rules and post-listing screening models continuously refine themselves to identify and block new exploitation tactics attempted by infringing merchants. At the same time, we're closely working with brand owners, merchants, consumers, and the law enforcement agencies to drive lasting and sustainable results. More than 12,000 brand owners have registered their IP rights on our IP Protection Platform. We have cooperated with law enforcement agencies across China to put counterfeiters behind bars. As an open platform, we are actively reaching out to all stakeholders and exploring innovative and collaborative ways to create a safe and a clean shopping environment for consumers. Four years after we started PDD, we are proud of the fact that we remain singularly focused on developing the best interactive e-commerce experience for our users, and we are dedicated to offering equal opportunities for all. We plan to continue to invest in our user engagement to further the trust that they have placed in us, and invite you all to join us on this journey. Now let me turn over to David to go through our financial results for this quarter. David, please. Thank you, Colin, and hello, everyone. We saw strong growth across our operational metrics in the 3rd quarter of 2019. In particular, with our annual active buyer and MAU growth maintaining good momentum on par with the 2nd quarter. Our annual active buyers for the last 12 months, ending September 30, 2019, grew by 53 million compared to our annual active buyers at the end of last quarter to reach 536 million. Our MAUs grew by 64 million from the prior quarter to reach 430 million. User engagement has been steadily increasing, which we believe bodes well for our long-term GMV growth as these new users mature. Our last 12-month GMV grew 144% year-on-year to reach RMB 840 billion, which was in line with our expectations, considering this was a seasonally lower quarter and on the back of our successful June 18th Campaign. Our continued GMV increase was driven by the sustained growth of our annual spending per active buyer, which rose 75% year-on-year to reach RMB 1,567. The increase in this average number should be considered in the context of the rapid increase in our active buyer base over the past few quarters, and it highlights that our value proposition is resonating strongly with users who are staying on and increasing their spending over time as they are finding more and more that appeals to their needs on our platform. I would also note that this growth momentum is all the more encouraging in light of the prolonged pressure exerted by dominant platforms on merchants to take sides. For the last 12 months, the pressure on brands and merchants to take sides has intensified, and over 1,000 well-known brands' flagship stores have been affected on our platform, with a total number exceeding 10,000. Forcing merchants to take sides, and in extreme case, leveraging technology to do so, does not make it easier for them to do business. It makes it harder and ultimately hurts the consumers. By restricting access to users, dominant platforms can charge higher fees to merchants who became involuntarily dependent on those platforms for traffic. These fees ultimately get passed on to consumers in pricing. Over time, these dominant platforms will lose incentive to provide a better user experience, hurting consumers both in the near term and in long term. If such platforms exploit their market position against merchants for a long period, it could even result in forced retrenchment of workers as these businesses' growth take a hit. We know that it is not easy for merchants. Obviously, both the growth of their businesses and our platform would have been even faster if they were given the freedom to choose where to operate. We cannot do much to stop such behavior. We believe that as long as we put our users first, we'll continue to progress together. We'll partner with our merchants to soldier through any obstacles. We do not mind making short-term concessions to take on take rate if it paves the way for better long-term growth. Notwithstanding these anti-competitive measures, which did affect us, we continue to deliver solid top-line growth. Our total revenue grew 123% year-on-year to reach CNY 7.5 billion, with the increase primarily due to the growth of our online marketing services. Online marketing services revenue was CNY 6.67 billion this quarter, constituting 89% of our total revenues. This is up 126% compared to the same period last year, and is driven by rising demand of our advertising products as the user traffic and GMV on our platform continue to expand rapidly. We have been focusing on making it easier for merchants to get started with advertising on our platform, be it through our merchant platform interface design or by having more training courses online and in person to provide our merchants across different industries with tailored support. For some of our newer app products, we will also incentivize merchants to try them. At the same time, we continue to innovate around our user experience. For example, our new games open up more browsing opportunities for our users to discover great products, serving as powerful incremental sources of free traffic for our merchants. We always maintain a balanced approach when it comes to monetization of traffic on our platform, as we believe that aiding the growth of promising good quality merchants is likely to be more beneficial to our long-term value rather than trying to maximize short-term gain. The remainder of our revenues came from transaction services. Our transaction services revenue for the quarter grew by 101% year-on-year to reach RMB 802.5 million. We continue to incentivize merchants this quarter to provide better service for our users, as we know that is beneficial to our platform's growth longer term. To give an example of good service, we have seen that merchants who offer free returns tend to have a 56% lower dispute rate and better customer ratings. Higher user satisfaction drives positive word of mouth and repeat purchases on our platform, while the better customer ratings also help the merchants to get greater exposure organically. Moving on to costs. Our total cost of revenue increased from RMB 775 million in the same period last year to RMB 1.8 billion this quarter. This translates to a gross margin of 76% this quarter as compared to 77% a year ago. The lower gross margin this quarter as compared to the prior year reflects our investment in network infrastructure and merchant support services to support our rapidly growing operations. Total operating expenses this quarter were RMB 8.5 billion as compared to RMB 3.9 billion in the same period last year. Our sales and marketing expenses this quarter increased to RMB 6.9 billion as we continue to invest to build off the momentum from our efforts in the second quarter. Many new users started to hear about the RMB ten billion subsidy program during the second quarter, and we noticed that there was a considerable amount of traffic and sharing generated by this program, reflecting user satisfaction with and recognition of the differentiated experience this program offered. We worked with our merchants to continue our investment in this program this quarter to help prepare the ground for our anniversary sales in early October. As we iterated many times, we do not manage our business towards specific quarterly financial targets, as our platform is still at such an early stage of growth in a competitive industry. We need to make the right investment in the early years to set up a strong foundation for our future growth. This investment in our users is one such example. Not only are we investing to grow our user base, we are also investing to increase our mind share with these users, such that they come to trust the platform and treat us as their default shopping destination. This is a process that does not happen overnight. In evaluating the returns of investment, we keep in mind the potential lifetime value of the user rather than expect an immediate return to occur in the same quarter as the investment. On a non-GAAP basis, our sales and marketing expense as a percentage of our revenue was 89%. In the next few quarters, we expect this to still be fairly dynamic, but we would again remind everyone that we do not set internal budgets around a targeted sales and marketing to revenue ratio, but rather we focus on expected ROI of our investments. Our general administrative expenses this quarter were RMB 436.6 million, or 3% of our revenue on a non-GAAP basis. This marks an increase of 43% year-on-year as we incur expenses relating to our initiatives with local governments to alleviate rural poverty. One example of such initiative is Duoduo Farm. Agriculture is one of the hallmarks of our platform, and the Duoduo Farm initiative aims to improve the entire agriculture supply chain from the moment the farmers decided what to sow to the moment the produce reaches our users' hands. To complete our discussion on expenses, our R&D expenses were RMB 1.1 billion this quarter, a significant increase from last year and a step up from the past quarters as we added more headcount, in particular, hiring more experienced algorithm engineers and spending more on R&D related to cloud services to accelerate our growth. On a non-GAAP basis, R&D expenses as a percentage of revenue was 12%. Operating loss this quarter came to CNY 2.8 billion, compared with a loss of CNY 1.3 billion in the same period last year. Non-GAAP operating loss was CNY 2.1 billion, compared with a loss of CNY 790 million in the same period last year. Net loss attributable to ordinary shareholders was CNY 2.3 billion, compared with net loss of CNY 1.1 billion the same quarter last year. Basic and diluted net loss per ADS were CNY 2.0 compared to net loss per ADS of CNY 1.2 during the same period last year. Non-GAAP net loss attributable to ordinary shareholders were CNY 1.7 billion, compared with net loss of CNY 619 million in the same quarter last year. Non-GAAP basic and diluted net loss per ADS were RMB 1.44, compared to a net loss per ADS of RMB 0.68 for the same quarter of 2018. That completes the profit and loss statement for the third quarter. Net cash flow provided by operating activities for this quarter was RMB 2.6 billion, compared with RMB 1.6 billion in the same quarter last year, primarily due to an increase in our online marketing services revenue. We also raised $1 billion of additional capital through our convertible senior notes offering in late September. We issued a 0% coupon convertible notes due in 2024, which was well received by the market. We view this rate as a way to give us more flexibility on our future investment plans. As of September 30th, 2019, the company had a strong balance sheet with RMB 34.4 billion in cash equivalent, and restricted cash. Excluding restricted cash, we had RMB 15.7 billion in cash and cash equivalents. In addition, we had RMB 24.6 billion in short-term investments, bringing our total cash available to RMB 40.3 billion. While we continue to invest in sales and marketing, we also maintain a healthy cash position with positive operating cash flow. This puts us in a good position to make necessary investments for our long-term growth and further our competitive advantage. This concludes our prepared remarks. Operator, we are now ready for questions. Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. If you wish to ask a question, please press star 1 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. Please limit your questions yourselves to 1 question at a time. Once again, please press star 1 on your telephone keypads. Your first question comes from the line of Grace Chen of Morgan Stanley. Please go ahead. Thank you. Thank you for taking my question. It's good to see nice growth on the revenue. Since I was seeing sales increase in the quarter, I'm interested to know what kind of good opportunities that you see to increase ROI, so you decide to spend more aggressively in terms of sales and marketing. Specifically, if any product categories are spending more aggressively to promote this category. Thank you. Thank you, Grace, for the question. Apologies if I didn't catch all of your question. You were coming in and out a little bit. I believe the question was around sales and marketing and also in terms of product categories that we are focused on. As we have communicated to the investors in the past, there has been no change in how we think about sales and marketing. Our focus is still very much on first growing our user engagement and secondly on our user base. To the extent we can grow faster while meeting our ROI hurdle, we will choose to do so. That means we can reach a wider user base at an even earlier stage and start converting them into loyal PDD users over time. How exactly can we improve the ROI? I think it depends on how we can improve their user engagement. One of the things, as you will note, that we are doing is to continue to enrich the product categories on our platform. We are leveraging promotional events and coupons to encourage our users to explore these new products that we bring onto the platform and to enhance their experiences and to build trust through that process. What do I mean by that? Is as our user base continue to expand, the type of products that they demand are gonna continue to vary. One of the things that we have noted, as an example, is that there are certain demand for branded and imported products on our platform from our users. This is particularly true in categories such as cosmetics and mother and infant care. It is important that we let our users understand and experience firsthand that the products that they can procure in these categories on the platform are genuine, are high quality, and are of competitively valued. This is why we have been quite successful with our RMB 10 billion subsidy program, which, as we have communicated, we aren't paying out RMB 1 billion ourselves, but instead we are leveraging marketing resources, and we're working with merchants to address providing this program to our investors. By encouraging them to try these categories, which they may not have otherwise do, that allows them to experience firsthand and develop a trust with our platform much earlier. I would also note that our older cohorts are now already spending a few thousand RMB each year on average. As Colin mentioned, our tier 1 users today are already spending well over CNY 5,000 based on annualized 2019 Q3 spending. That is a testament of the fact that they're coming to our platform and are spending with higher frequency and are buying product at higher ASP. Operator, next question please. Thank you. Our next question comes from the line of Alicia Yap of Citigroup. Please go ahead. Hi. Thank you. Good evening, management. Thanks for taking my questions. I have a question regarding some of the promotions. Just wondering, if you can share with us, who are the user that bought the iPhones during the June 18 and also the Singles' Day? Are these like the younger generation, or from 1st and 2nd tier cities or lower tier cities? If these are the one-time buyers, would after that, if they stay, how active they are on purchasing the items from your platform? Just follow up a bit, how should we think about the lower monetization rate in the 3rd quarter and translate into the 4th quarter? Thank you. Thank you, Alicia. The question was regarding the buyer's profile in these promotion programs. As Colin had alluded to, we sold during the Singles' on November 11th in the 11 days, we sold over 400,000 iPhones. The buyers for these new iPhone models, 80% of them were buyers born in the 1980s and the 1990s. Yes, these are younger generations, younger users on our platform. In terms of your question on the take rate, as I mentioned earlier, as a platform, our focus today is actually on user engagement, and it is important that we make sure that the merchants that we are bringing onto our platform have an opportunity to also showcase themselves to all the users and letting our users have the opportunity to explore the different possibilities. We are continuing to provide, our priority is actually to seek a balance between growth of online marketing take rate versus the overall scale of the platform. Operator, next question. Thank you. Thank you. Our next question is from the line of Thomas Chong of Jefferies. Please go ahead. Hi, good evening. Thanks, management, for taking my questions. I have a question about our strategy. How should we think about the priority on user growth versus monetization? Understand that if we focus more on user growth, probably, we may not allocate that much resources on monetization. Just want to see our prioritization next year. Regarding our GMV per buyer, we actually see a very good momentum. I want to understand about the dynamics between ASP and order frequency. How would we drive the ASP and order frequency for next year? Thank you. Thank you for the question. In terms of our company's growth strategy, I would say actually it is not so much growth versus monetization, but rather on engagement. If you look at, and I think it is good to focus on our annual spending per active buyer, as we mentioned that the annual spending per active buyer for the quarter, for the last 12 months ending in September is CNY 1,567. In that context, we also reference the tier 1 buyers for the annualizing their spending in the third quarter is well over CNY 5,000. We actually think the CNY 1,567 average spending per user is a very healthy number because that number needs to be put in context of the absolute number of buyer adds in the past couple of quarters. In Q3, for example, we added the most number of active buyers in the last 7 quarters. The reason why we think it is important to actually think about user engagement as opposed to growing the absolute size is because of the social or the team purchase nature of our platform. As we continue to activate our users on our platform to increase their engagement to explore more, and this is why promotional programs like the Billion-Dollar Subsidy continue to be so impactful, is as users learn more about products and features on our platform, have good experiences and build further trust with our platform, they also tend to share more. We actually see the growth in our user base more as a derivation or a natural offshoot of good users having great experiences on our platform. We are convinced that by having strong user engagement, good user experiences, monetization will follow. I would say that, you know, in terms of the foreseeable future, certainly for next year, we are gonna continue to prioritize user engagement, i.e., how to increase users' frequency on platform, increase the number of product categories that they purchase and explore on our platform and to increase our wallet share with these users. From there, we believe the network effect will drive the user base growth. I wanna add a little bit to David's answer. As I constantly receive questions like yours. I really wanna emphasize that when I wrote in the letter to shareholders, we focus on the long term, I really mean it. When we talk about the growth strategy and the trade-offs between growth and monetization, I think if you read through my letter to shareholders, In my mind, there is no trade-off between growth and monetization. We really don't think it's a trade-off. We always think the money we spend is a investment. We are always looking at long-term investment opportunities where we can spend the money. When there is opportunity, we should spend our money aggressively. We shouldn't put our money into the piggy bank. With that said, we will be often in a seemingly ironic situation where numbers are very beautiful, it usually means we didn't grab the opportunity good enough, and we were being too conservative. While on the other hand, when the numbers are not so shiny, probably means we seized the opportunity, we're aggressively expanding. Just like, when we put up the slogan, 10 Billion Subsidy, we really mean it. It's not just a marketing slogan. It's actually the actual dollars we're spending, and we see this is a very good opportunity. We think every penny we spend on behalf of our investors, it's a worthwhile investment. Thank you. Our next question is from the line of Jerry Liu of UBS. Please go ahead. Hi. Yes. Thank you. My question is around the brands. Could we get an update on Pinduoduo's traction with brands? We've seen, you know, significant increase in GMV mix from the high-tier cities. We've seen more incentives to drive the brands to come here, and also, we've seen the promotional program. When we look at both brands and C2M, how has the GMV mix trended in recent quarters? How does that look going forward in the context of competition? Thanks. Sure. Thank you, Jerry, for that question. As we have mentioned, we don't. Statistically, Pinduoduo has always been a platform designed to address all user base across both geographic and socioeconomic standings. Our focus on brands, in recent promotions, is a result of us trying to fill up the holes or the gaps in terms of product portfolios on our platform. We have noticed that with increasing demand, as we bring in more users, I would say, from tier 1, tier 2 cities, there are demand and interest in product or categories where brands are important. These have been historically areas where Pinduoduo hasn't been very strong at. As such, we have focused on bringing brands onto the platform. We also are very effective to run promotional campaigns with these brands in terms of creating a recognition of the quality of experiences, in terms of letting people understand that great value and authenticity of the products are not in direct contradiction of each other. That help us to build trust very quickly with that cohort of users. This is why I think from our perspective, we will continue to explore opportunity to work with more brands. That said, of course, as we have discussed in our prepared remarks, of course, exclusivity continues to be a factor at play. Whilst we have merchants willing to work with us, we have found that, you know, a lot of times we need to explore alternate ways of bringing on to our platform products, which could have otherwise been made available to us much more directly. From our perspective, we're seeing the experiences of consumers being impaired through that process, and that additional friction is creating additional costs. Nevertheless, I think our interest remains in making sure that the product our users are interested in are available, and we will do our best to continue to source and work with merchants to bring those products onto our platform. In terms of C2M, as you asked, it is still small, and it's gonna take a long time before they become a meaningful GMV contributor. Put differently, I think the way that Pinduoduo as a platform is differentiated is the fact that we are very much thinking from the perspective of the consumers. Our slogan of, you know, more saving, more fun, it is a consumer-oriented approach to e-commerce. Not only are we trying to make it easier for all the merchants to do business on our platform, we also want to make sure that our consumers are able to get the best value. C2M is an example where we try to basically create value in the existing supply chain by eliminating, improving existing supply chains. In terms of C2M and in terms of monetization of C2M brands, we are not gonna be. Well, put differently, because we have the ability to aggregate demand and to provide our manufacturing partner with insights into consumer preferences, we believe Pinduoduo is better equipped than other our competitors to drive demand for these C2M brands. At the same time, it is important that we allow the C2M brands to have enough, you know, exposure opportunities on our platform. This is why we cannot off the bat work with thousands of manufacturers and try to bring them all onto the platform at once. We're working with these vendors one by one. You know, in the first batch, we had around 20 manufacturing partners across a couple of major categories. We are now, you know, up to around 65 partners in our new brand and C2M program. We will continue to invest in our C2M initiative. We believe in the longer term, that's what's gonna provide sustainable value to, and differentiate value to our users. In the near term, we will not be ascribing a lot of GMV to it. Well, just add a couple of sentences to David's answer. The competition around brands is pretty severe in the past few quarters, and therefore the old weapon of forced exclusivity has been adopted again. It has an interesting effect in the industry, and it also has a long-term profound impact in an ecosystem. In a way, it also affects the dynamics with dynamics between different departments within the brand owners or between the China branch and headquarter and so on and so forth. It is a very interesting phenomenon to observe and it's an interesting battle to attend actually. If we step back a little bit, I think the overall trend is very obvious. It's just like looking at a river running down a mountain. You will see big stones in its way. Therefore the path, you may observe some zigzag path of the river. Overall, it's running down. It's inevitable. I think that pretty much describes the current situation of the competition around brands and around the topic of forced exclusivity. Okay, next question. Thank you. Yes. Thank you. Your next question is from the line of Gregory Zhao of Barclays. Please go ahead. Hi, management. Thanks for taking my question. The first one is about your user acquisition. We saw your users still maintain both MAU and annual buyer still maintain very strong growth momentum. Just want to understand in terms of your user acquisition channel, like by a percentage, how many of the new users who come from WeChat or from your native app or from other media platform channels. Also very quick one on sales marketing. Just want to understand more, how do you measure the marketing campaign and the promotional events ROI, right, to drive your operating leverage going forward? I'll answer your question first. David will follow. I'll answer it very quickly. I think the vast majority of our users are on our apps. Speaking of the high growth of the active annual users and also MAUs, I think instead of thinking of a new user acquisition, I would rather think it's actually a result of high retention of old users. If you look at the number of annual active buying users, it's actually sort of active users in the past 12 months. More importantly, more important than acquiring new users is actually we have to maintain the majority, vast majority of the existing users to stay on our platform and remain active. That's a necessary condition for the growth of yearly active users. David? To add on to Colin's comments. First of all, in terms of users acquisition, as Colin mentioned, related to that is again our focus on user engagement, right? In order to make sure that our, the vast majority of our user base are, have a good and solid experiences, and more importantly, in terms of trying to drive growth, it's more important that we increase. The one thing we can do is help induce and increase the frequency of the activities on our platform, both in terms of making purchases, but also in terms of having great experience, and therefore helping to share and helping to draw in new users. As we have talked about, you know, our sales and marketing spend really encapsulates a few different parts. You know, offline advertisement aside, really comes from both in terms of online user acquisition, but more importantly, on promotional activities and coupons. As we mentioned before, we evaluate the ROI of these promotions and coupons by looking at the behavior change of our users after they receive the coupon. For example, we would observe our users' time spent, whether they share with their friends and invite new users, as well as their AOV, order frequency, and product categories purchased. If we observe that some users only purchase when they have a coupon and do not do anything else, then these would be low-value users that do not meet our ROI thresholds for investment. On the other hand, you know, if our, we see our users are, you know, responding to a program the way we expect it to and are sharing, then we would choose to continue those programs, you know, above and beyond a certain shopping holidays or festivals. As Colin had mentioned at the last earnings call, Pinduoduo is not a platform designed specifically to have peaks around shopping festivals, but instead, we want our users to be able to come to our platform all the time and be able to find the best the hi- value for money products. We believe that, you know, the spending pattern that we're seeing with our tier 1 users on our platform, you know, over, well over CNY 5,000 based on Q3 annualized figure, is a good testament to the quality of their experiences and the quality of the user base that we're seeing, similar to our larger peers. Thank you. Operator, we have time for one last question. Yes. Our last question is from the line of Natalie Wu of CICC. Please go ahead. Hi. Good evening. Thanks for taking my question, and congratulations on a very solid quarter. My question is regarding the shopping pattern for the newly added users. Just wondering if they are acquired by those subsidized brand commodities, how many of them will be still sticking to those high ticket size brand commodities in the future? How many of them will diversify their shopping choices on our platform to those value for money products? Is there any notable differences regarding the let's say, retention rate or spending pattern for those newly acquired users, whose maybe the first purchase on our platform is the brand commodities? Thank you. Thank you, Natalie. The way we think about high value users who came to our platform initially maybe to, you know, buying a Dyson hair dryers or buying the new latest iPhone is actually to deliver them and really Well, we see them actually as an investment in their user experiences on our platform. Again, you know, if they come to our platform and are spending the money to buy an iPhone and have great experiences, in terms of quality and authenticity, it gives them actually a lot more confidence. You know, this actually plays out in a number of different ways. First of all, we don't think it is, you know So value for money for us. The way we think about it is always, we think of it as a universal concept, right? Across different product or categories. If you're looking for the premium, you know, these items like iPhones and Dysons, working with our merchants, we make sure that you have the lowest available price and the highest quality product in terms of authenticity. At the same time, you know, this lowers your barrier psychologically to try other things on our platform, right? I mean having bought an iPhone gives you greater comfort to try other categories, for example, like cosmetics, you know, which are not, you know, the ASPs are also fairly high, but, you know, this is something that you can potentially buy with higher frequency. At the same time, you might have heard that, you know, Pinduoduo offers great fruits, great household products, high value for money products. We actually, we Well, in terms of user experience, we have seen is, you know, these high-value customers come to our platform, they end up actually spending a lot more time exploring and started buying products across other categories a lot faster. Well, just to add to David's answer a little bit, when I guess you may have seen some investor friends around you are buying some of these high-valued products, but at the same time, objectively, you really need to bear in mind that the vast majority of the users who are buying the subsidized products are old users. They are not newcomers. The majority of them actually are the old ones. They are here, and they have this side of their need. Although they are buying cheaper products before, but they also need a cheaper iPhone. Our ten billion subsidy program just to sort of jump-started their, this side of their need. It's not that this program targets a different set of users. The fact that you're seeing some investor friends around you buying this, it's just a very, very minor side effect. It's not the main purpose, and it's not sort of the big picture or, it's not even close to the effect. Got it. I have a very quick follow-up, if I may. Just in terms of the subsidy part in your sales and marketing spending, I am just wondering if there are operating metrics that plays as a key parameter after which reaches to a certain level, you will decide to reduce the level of subsidizing the existing users. Thank you. Yes, we do have a metric, but obviously we cannot disclose the metric to you. Probably, yes. I basically cannot comment on when we will stop and when we will increase the investment. What I can say now is that we are pretty happy with the money, every penny we spent, and we're very happy with reactions of the users. When you're worried about whether the users are actually coming to buy a iPhone and then never come again, then probably the best time to answer your question is next quarter and the quarter after next when you see the numbers, the question goes away. Understood. Natalie, just to wrap this question up, I will also make references to the fact that a lot of these so-called deals that we offer are actually only available in limited quantities. Right? In terms of our actual investment exposure, that is actually within our control. Rather the knock-on effect of people sharing their experiences is what we are looking to do. For people who have managed to buy these products, it's important that they get a good experiences, and they will continue to help us to pass the word of mouth. Got it. Thank you. Thank you. Ladies and gentlemen, this is the end of our question and answer session. I'd like to hand the conference back to our management. Please go ahead. Thanks, Annie. Thank you everyone for dialing in to our earnings call. If you have any questions, feel free to just reach out to Ira. Thank you very much. Thank you. Thank you. Thank you. Ladies and gentlemen, that does it to the conference for today, and thank you for participating. You may now all disconnect.