Q2 2020 Pinduoduo Inc Earnings Call

Hello, Ladies and gentlemen, welcome to mean, you will do well.

Second quarter 2020 earnings conference call at this time, all participants are in listen only mode.

After managements prepared remarks, there will be acuity sessions today's conference call is being recorded I wouldn't like to trying to conference over to your speaker today Mr. flopping. Thank you. Please go ahead.

Thank you Rachel Hello, everyone and thank you.

You know those earnings release.

Got it earlier.

But I always thought.

The call.

Through global Newswire services.

This call with your Tonight will make some general remarks I'll.

In quarter, all 20 Twond.

The primary areas of focus going forward.

Oh VP of strategy given the deal we'll go to elaborate further on holiday specific strategic initiative.

Last but not.

Oh, you feel finer only mile or pick up through all financial results second quarter ended June 30.

20.

Before we begin I like to remind you that this conference all looking statements within the meal second fund what you often U.S.

These exchange October 1974 at the amended and I'd be finding the U.S. Private Securities Litigation Reform Act on 1995.

These forward looking statements can be identified by somebody else knowledge is such as well as anticipated.

Such statements are based upon management's current expectations. The current market operating completions and relate to events that involve known or unknown risks uncertainties and other factors.

All of which are difficult to predict that many of which out beyond the company's control.

Which make up the company's actual results performance and achievements to differ materially from dosing. The forward looking statements further information regarding these and other risks uncertainties all factors, including the company's falling.

Securities and Exchange Commission the company does not undertake any obligation to update on are forward looking statements.

<unk> formation future events or otherwise exactly.

Required under applicable law knowledge as my pleasure to introduce our Chief Executive Officer, Chile. They please go ahead.

Oh, it's appropriate to work off you all second quarter, two dozen couldn't be results announcement.

This is my first try communicating to you faster. This grant award field, even though I made that many of you two years ago I feel <unk>.

It's great for we connect and I look forward to what people get again and beauty ongoing dialogue.

I'm joined today by all Vice President strategy doesn't do it all as president of Finance Tanya.

Let's talk Moca how.

Would it be the user management transition no no some drivers.

You want to evolving process, the stabbings three years ago, and the reason because you're getting some made with the full support of our board.

We've always be thinking about halted Kuwait more opportunities to grow the next generation nobody knows how to keep this organization, yeah, I agree and its income increasingly execution.

This is especially important Fox engine technology.

Turning to actually have a continuously and to incorporate fresh perspective, so cost fighting through our users.

But it didn't cause you to view the phone they usually for long term sustainable development of the organization.

I mean people to PD, one wanting to be good proposal.

And I think a numerous nisha appears to be dependent.

Do you feel economy was likes to talk home a younger than that we shouldn't be there's more responsibility.

People go high school extraordinarily pay you pod five years.

Well at least a full cruise off the Bible and ago.

Your next few years my goal truncated personnel, including that's no.

One that is why Didnt you know they did energetic and 52 for the life.

The management and a board, hoping laid a strong foundation over the next few years to create a loan losses completion and equals Houston, that's the officer.

Colin has seen big step back somewhat due to be management responsibility.

But he continues to be fully engaged and I'd be working closely with a cool and amendments to explore culturally future strategic coffee.

But at the regional structure.

Calling it will also be multi more time to do that teed. It support foundation. The other medical research areas called a future driver company.

Sure I can attack.

We believe this new did lose your own they will allow coincide caltrain efficiently as you called me net fleet growth and development.

With although one city I'd be Oaktree, NV, and it's 680 83 million.

Active buyers.

<unk> operating execution, you seem to be larger scale, which is much greater complexity today.

We have assembled trade that all user centric strategy works.

And we will continue to do what we do well.

Also better for money pet dogs.

There's two o'clock and interactive experience.

But do we continue to be significant potential.

Okay. That's all my Paul do you see all only batteries internal and external can be trying to it would be necessary to support and generate long, putting the bendable bad news all capital.

Internally, it's important that we could people make operational decisions efficiently fees, but all growing number isn't the units and improving.

I'm working with our team to leverage more technology to stream, our internal processes and institutionalize the best practices.

Well, although folks all hiring the best talent I think we put something bad.

We couldn't team in college and mobility, we've always been organization and the motivate employees.

Anyway, new ideas and compete for resources.

Externally welcome to increase strategic investments ecosystem.

Typically echo culture that entry.

Oh, well that's been in the top five years high speed, primarily are useless, but our sales and marketing expenses.

And that we have successfully do the battery substantially he said things are nearly 600 million he recalled.

On average daily possible cultural approximates 20, Bucks and I'm trying to us baby topic it.

However, interest I'm spending active buyers, we do see substantial upside potential.

Well you continue to be very NPV user engagement and my sure to do all use the frequency of countries. It's an average order value.

And the same time.

Turning to pursue more teach me regimens and partnership opportunities.

Our especially great because so you shouldn't have a supply chain.

Being hockey efficiency at values, there could be shred it we all consumers.

In particular, we started off with dignity agriculture, and we plan to continue our focus he I think culture, Oh that strategic product.

Our culture in the sector touches largest member people a yet has had the least amount off because he should pop Becky.

And in technology, like <unk> pool productivity and efficiency agriculture, Godot trends well have a huge impact.

People do is already one off and try and that's leading Oh, Mike extrusion platform.

Agricultural could use agricultural products.

Well uniquely positioned to drive trends in China agriculture system.

We have come cry consumer demand all platform to create scale.

And we can leverage consumer insights, we get to help bomber make them more informed decisions across comping cycle, including what coupon and it went to harvest.

Well, it apparently investing technology and operations across different parts and agricultural about to trim article assessed the good ecommerce penetration for the category.

The generate more value for both of the fibers and the consumers.

Our aim is to further consolidate oxygen.

China number one or likely culture crackle attribute a worldwide presence agriculture.

Let me know overtime.

It's Scott So I'll ask the Pacific sought our agriculture.

Turning to it.

Well I mean afford Chinese workers, working agriculture, but industry makes up less than 10% of China's GDP.

This is because agriculture black behind other industries and conservation.

Nearly 90% of farmers in China work on farm smaller than two factors, it's difficult to standardize growing practices and achieve economies of scale.

The rural Workforces agent anything decline as young people choose to work in the cities.

Lockup coordination for crude production Beast farmers vulnerable to price swings well waste pitch in highly incremental distribution costs actually consumers burden.

Those are the challenges.

The opportunity you've got agriculture E commerce can solve a number of these problems.

Based on figures on the Ministry of Commerce, the implied total addressable market in 2019 for PBC agricultural goods sales in China was 8.1 trillion RMB.

With less than 7% of these sales taking place on line.

In contrast.

Her Fischer for physical goods in total was 23% in 2019.

Peter goes already one of the leading man E Commerce talk wants where agriculture.

In 2019, we generated.

136.4 billion RMB, 13.6% or do you have you for agriculture, Podiatrists and related groups.

Over 240 million or 38% of our annual active buyers purchased in this category last year with a 30% repurchase written.

[noise] Pandora has become the go to destination for high quality Revalue agriculture products.

This recognition deep and through the pandemic.

During the six anything we saw orders for agriculture products grew 136% two or 380 million.

Three quarters of the orders came from tier one tier two cities users.

We expect to continue to gain market share any on our agriculture, and we see potential for agriculture TMB to exceed one trillion I'm busy in five years.

Why do we think agriculture E commerce can tackle can tackle the challenge is outlined earlier.

Well put simply.

Oh anyway, you Theres, a nice demand and supply Ben can you drive efficiency gains through the value chain between.

Hi, My retail has an advantage in terms of greater visibility.

Production all the way through distribution, we have a unique position to makes it very much anymore inhibition and pretty more value to producers and consumers who your best friend that partnership that can also a lot commercial opportunities.

Our vision is to realize the economic potential to try to fast agriculture resources by improving its overall quality in production efficiencies.

Starting with production.

First as far have centered around the development of human capital through farmer training as well as initiation of pilot farms.

Our total farms program.

Together with Honda institutions, such as China, Agriculture University, we have been part of farming knowledge and business training to almost 90000, new farmers, thus far who tend to be younger and more digitally savvy.

We see this initiative as a way to see a new generation farmers, who are more adaptive to new technologies.

So far this is a demonstration of how reorganizing resources through cooperatives, and bringing our economic expertise can help farmers living impoverished regions sustainably improving their productivity and household income.

Total farm serves as a test that for us to introduce technologies to farmers such as drip irrigation. We're also introducing changes to existing farming practices to drive meaningful change.

Building upon these expenses, we plan to invest in king knowledge necessary to implement precision farming, such as robotics, I ought to be sensors and low power data transmission.

This is Jim farming can help optimize inputs better control diseases and reduce production costs.

I'm going smart agriculture competition jointly organized with the Agriculture University of China now with the support of U.S. food and Agriculture organization exemplifies our interest identified cost efficient and scalable technology that can be promoted a standardized solution across China.

Global teams are competing over 14 weeks to remotely close robberies shooting sensors that machine learning algorithms. The objective is to derive the most cost efficient techniques to improve yield by integrating technology, what traditional growing practices.

We also plan to further investing and develop our proprietary agriculture analytics system.

Like I was wondering if historical and projected data such as price quantity geographic distribution and logistical availability the system, what that advice farmers, which crops of highly economic value. So plant how to optimize quality over quantity or how to achieve more timely distribution.

The system will also help refine our recommendations for consumers to reduce mismatch in supply and demand.

Traditionally agriculture, Purdue pros produce go through at least five merits distribution before reaching consumers.

Industry research estimates as much as 105% added costs, 37% waste touch across the chain for vegetables.

Into routine purchase model aggregate scatter interest into a sizable coordinate the man and collect sellers directly with consumers to eliminate unnecessary costs.

The next step is to five corridor. This further optimize logistics for agriculture approaches.

Hi, this packaged handled and route it they are hardly any cost effective specialized solution for agriculture produce today.

We plan to partner up with logistics services providers to allow us develop logistics dedicated to agriculture.

So we can't forecast demand by region, we can develop technology solutions with logistics partners to optimize delivery routes coordinate delivery schedules implement better quality service standards and optimize loading to and from the rural areas of China.

We're also looking at advanced packaging solutions to offer our sellers and considering opportunities and warehousing technology and temperature controlled logistics.

We were also investing technology for quality control and food safety.

I like manufactured goods. It is more difficult to provide assurance on the quality of safety of agriculture partners as consumers in China become more help cautious we expect more would be willing to pay a premium for quality and safety.

We intend to address such needs through a combination of technology and certification back that critical platforms.

We started collaborating this year with a research institution to develop a cost effective robust methods for ti testing, especially produce for contaminants like pesticides.

When your vision deploying such tests across a wide array of produce and at various points of the supply chain to provide greater assurance on food safety.

We can offer such testing solutions and certification as value added services to our farmers and merchants.

Certified products would receive per passenger traffic support and command a premium from our users.

Our ability to differentiate such products will allow us to cure rate and price as to use based on quality I recommend them to the relevant harder users.

But better quality products, it is equally or perhaps more important to invest in marketing to grow brand awareness.

Take the French regional shopping as an example.

Sparkling wines braving shopping our tightly regulated and must be made from a few prescribers rtos using traditional methods to ensure a consistent quality.

It's sterling rigorously defend their reputation fuels consumers' willingness to pay a premium.

Similarly in China, given its bass agricultural resources, we see opportunities just help create new brands for consistently high quality produce for the various geographic indications around the country.

One of our total farm projects, you're getting on is working to establish a nationally recognized spread that's a nation for yakov growing there to meet the best nation promise, we'll have to standardize improved their farming practices farmers that incentivized to improve their practices in exchange for their products such as a premium.

Now we as a platform can provide more visibility the farmers on sales volume and pricing.

Hi, Bill awareness of promo origins stories to marketing, including virtual live streaming tours. The recognition of a quality provides for the opportunity to develop relate to some industries for selling one just to making marmalade and far selling teachers to the valley King Eco tourism.

We see potential to work with farmers and distributors to develop renting for the approaches and to address other value add opportunities leveraging our consumer insights.

Well this maybe a long journey, we're committed to investing agriculture and accurate tech as it enables us to truly benefits all of our problems Ics participants.

Now, let me pass it to Tony to discuss our financial results for the second quarter.

Hi.

Thank you David.

For the 12 months ended June Thirtyth, Twentytwenty allergy and the increased 79% to RMB 1.27 trillion from R&D several hundred 9 billion a year ago.

As a result of higher user engagement and increase the spending per use it.

We report G.N.V. on the same basis and other industry players to provide a meaningful comparison with that of our peers.

The industry definition includes cancel it ends we turned orders <unk>.

Comparing our dnbi in Q2 versus Q1, the level of cancel than recent orders has returned to normal historical level, that's kinda recovers from the pandemic.

Our average monthly active users in the second quarter increased by 81 million from the previous quoted so 569 million.

Or an increase of 55% from a year ago.

Our annual active buyers for the 12 months ended June Thirtyth grew 41% year over year to reach 683 million.

This week the 10 net adds.

Of more than 200 million in the past 12 month.

The any spending per active buyer in the 12 month period ended June Thirtyth Twentytwenty increased to 27% to RMB, one eight Fife Vice.

5857.

From RMB 1468 for the same period in 2019.

The increase in annual spending per active buyer with moderated by significant number of new user habits.

Who contributed less than 12 months of purchases to our DMV.

During Q2, China's economy continues its recovery from the disruption caused by the pandemic.

According to National Bureau of Statistics online sales growth of physical goods accelerated into second quarter.

Resulting in a 14.3 increase for the six months ended June Thirtyth 2020 from a year ago.

This is up significantly from 5.9% growth for the three month period ending in launch.

Consumer Staples and household goods was significant growth contributed us doing this period.

We observed a similar recovery trend on our platform.

In Q2, I will use it had strong demand for household the necessity and agriculture products.

And continue to be more selective and cautious on their discretionary discretionary spending.

To address their needs, we extended our promotion to offering under the June 18 campaign to cover more households in necessities food and beverage products and the equity Counterparties.

We're continuing our efforts to provide compelling value in these categories together with China Consumer Association in early July.

Our total revenue in June quarter, or RMB 12.2 Gideon.

Representing an increase of 67% from RMB 7.3 billion in the same quarter last year.

The increase was driven primarily by the strong momentum in online marketing services.

Our online marketing services revenue growth, 71% to RMB 11.1 billion and our transaction service revenue increased 38% to RMB 1.1 billion.

We continued our support for certain FMG elections in Q2, I offering discounts transaction fees.

But in general observed a healthy recovery in merchant advertising activity.

They benefited from lecherous pent up demand and deferred marketing budget from the previous quarter.

We also attribute higher advertising activities, Tibet and merchant ally.

Due to higher user engagement on our platform and more compelling advertising products.

The implied the monetization rate defined as total revenue divided it by GMB for the last 12 month ended June Thirtyth Twentytwenty was 2.2, 0.9% inline with the same period in 2019.

Now moving onto costs.

I will total cost of revenue this quarter increased to 67% from RMB 1.6, 50 added in the same period last year to RMB two politics at 2.7 billion this quarter.

Translating to a gross margin of 78%.

Total cost of revenues increased mainly due to the higher costs, but cloud services costs enter and much and support services.

Total operating expenses this quarter were RMB 11.2, Gideon as compared to RMB 7.2 billion in the same quarter in 2019.

Our sales and marketing expenses this quarter increased to 49% to RMB 9.1 billion from RMB 6.1 billion in the third quarter 2019.

On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue was 73% as compared to 81% for the same quarter last year.

We manage our sales and marketing spending dynamically based on expected I'll I'll.

Recognizing the fiat's market dynamic in this years 618 promotion events, we decided to moderate our investment during the second quarter.

We continued with our 10 billion program and extended our offering to cover household to staples that I will use as we're looking for.

Looking ahead, we see significant potential to improve our users annual spending on our platform, including more use of my here and trust.

We expect to continue our sales and marketing investment into second half of Twentytwenty to drive more user engagement.

We will continue to spend whenever we see attractive opportunities that meet our internal I'll life hurdles.

General and administrative expenses.

The 395 million an increase of 42% from RMB 207 to immediately in the same quarter of 2019.

Primarily due to an increase in headcount.

On a non-GAAP basis, which again expenses as a percentage of our revenue was 1.1% in Q2.

Research and development expenses were RMB 1.77 billion.

An increase of 107% from RMB 804, maybe in the same quota of 2019.

The increase was primarily due to an increasing headcount and the recruitment of more experienced R&D pattern that.

And an increase in R&D related cloud service expenses.

On a GAAP basis, our R&D expenses as a percentage of our revenues was 10.4% in Q2.

Technology is fundamental to our operations and we plan to increase I was spending on engineering talent and technological capabilities going forward.

So some of our key R&D initiatives include Gilats, developing our demand forecasting system for agriculture.

Database, 42, and manufacturers and the logistics planning systems.

As a result.

Operating loss for the quarter was RMB 1.6 billion on the GAAP basis, compared with operating loss of RMB 1.5 billion in the same quarter of 2019.

Non-GAAP operating loss for the quarter was RMB 725 million compared with RMB 890 ingredient in the same quarter of 2019.

Well the quota ended June Thirtyth Twentytwenty, we recorded net non operating income of RMB 740 million compared with RMB 487 million in the same quarter in 2019.

The increase primarily reflects the net impact of high interest income.

Interest expenses from the position of our outstanding convertible bonds.

And the gain on fair market value change from long term investments.

We excluded the later two items in addition to share based compensation in our presentation of non-GAAP metrics.

To sum up.

Our net loss attributable to ordinary shareholders was RMB 899 million on a GAAP basis.

That's compared to net loss of RMB, one bps in the same quarter of 2019.

Basic and diluted net loss per ATM was RMB 0.75 on a GAAP basis, compared with RMB zero point 88 in the same quarter of 2019.

Non-GAAP net loss attributable to ordinary shareholders was RMB 77 million compared with RMB 411 million in the same quarter last year.

Non-GAAP basic and diluted net loss to 80, as well and be 0.06, compared with RMB zero plus 10.36 in the same quarter of 2019.

That completes the profit last payment for the second quarter.

Now on the cash flow.

Our net cash flow generated by operating activities was RMB 5.5 billion as compared to RMB 4.1 billion in the same quarter of 2019, primarily due to an increase in online marketing service revenues.

As of June Thirtyth Twentytwenty, the company's cash reserve comprising of cash cash equivalents and short term investment was RMB 49, PBM as compared to RMB 41.1 billion at the end of December 29 King.

We allocated and most of our cash reserves to highly liquid short term investment to receive better cash yield and to maintain flexibility to withdraw and deploy capital strategically that's necessary.

Finally, let me touch on be ongoing development in the U.S. to prohibit flooring issuers accessed the U.S. capital market.

If sufficient audit access cannot be provided to the U.S. public company accounting oversight board.

On August six the precedence working group on financial market released a report recommending FCC to implement rules that would require issue as to grant PC it'll be access to walk papers off the printer principal audit firm in order to maintain listing by January 1st to 2022.

They recommendations also provide an option for companies to provide a co audits from an audit firm that lease PC obese inspection requirements.

The administration's recommendation if adopt it was still require FCC to design and put in place detailed implementation for the rules.

We continue to monitor the situation closely and the I prepare to walk away, it's relevant regulators in China and the U.S. to address these concerns when there's more clarity.

We completed our Sox internal control audit for 2019 with no material deficiency identified.

We are confident of the quality.

I would just kosher and the financial reporting.

And we're committed to continuing our efforts to provide a high degree of integrity in our company.

This concludes our prepared remarks, operator, we're ready for questions.

Ladies and gentlemen, I'll begin the question and answer session. If you wish to ask a question. Please press star one on your telephone and wait for you need to be announced if you wish to cancel your request. Please press the about <unk>.

Your first question comes from the line.

Yes.

[noise] anyone.

Once again, if you wish to ask a question. Please press star one on your telephone.

Your first question comes from the line they Gregory Zhao of Barclays. Please ask your question.

Mr., Greg Joel you line is now open.

Hi, sorry, I wish there so thanks for taking my question.

So what we saw a few did you make some masters to move up to the high end market started yourselves from luxury products, including passion that occurs so just a wanting to understand if it's more about how the severe healthier improve.

ARPU and help your cheered, okay expanded into into the high end markets.

Quick one quick one.

Your groom software Jim May groups. So we know last year and we're the first time or you're going to succeed in promotion.

Jason.

So how shall we think about relatively high pace.

Hey impacts to your Twoq can be gross sentence.

Ah Gregory Thanks for the question, let me take your first question around brands and products.

Our product and brand strategy is actually more oriented around giving users what they want and serving what I'm doing well. So it is now our intention some to field.

Or are engaging the hyper promotional you have seen the intention is not to drive.

There will be there is actually took their pandora into a destination for quality authentic and value for money product across categories and price points. So we are continuing to grow the depth and breadth of S.K. you across the problem I'm, whether they are branded or unbranded I'm back as I highlighted in my comments earlier, we are highlighting agriculture as a part.

Our category, where do we think we can strategically out a lot of value over the next few years by investing in our supply chain, they're making available higher quality getting better products for our users.

[noise] [noise] and with regard to your question on T.N.V. [noise].

First of all I would like to just remind the audience that did comparing.

Jimmy growth in the second quarter versus the first quarter is a meaningful because of the impact of a pandemic. In fact, we're very pleased with our Jamie growth this quarter.

And particularly in the context of having added 100 million of active buyers since the beginning of this year our focus as to accompany this year enters our strategy is to continue to invest in user engagement.

And to build our mindshare, because as you look at be scaled the user base, we have accumulated like 683 million active buyer we believe.

What we need to do is continuing to improve engagement with them and to grow down mindshare.

But you only for the second quarter are impacted I will also note that.

Changes in consumer spending we saw a pickup in consumer activity since the first quarter as they cannot economy recovered. However, we did notice that consumer spending was much more value conscious consumers are looking for more helpful necessities, such as FMCG isn't agriculture produce.

On our platform. So as you saw our six why many campaign, we actually expanded our coverage during the campaign to cover more products in these categories and we're continuing to support the consumers in these efforts.

Okay. Thank you.

Your next question comes from the line of see you should move body of Goldman Sachs. Please ask your question.

Well, it's usually taking my question.

I just asked a couple of do deals and how how the transaction Commission revenues marketing services revenues are progressing and how that take rates has evolved remote can you say mystic prudent seems to have gone up to 3.2% during the quarter, which is a huge.

The huge improvement.

Your name your own did any of the metric probably the highest level should be done syncrude baptism them. They did we do expect who you to continue to maintain in the future and also when you look at a b growth rates in transaction commissions, which was 76% and want to that's laid down to 38% is it is there anything there that still for.

And that would lead us to lead to that slowed growth rate.

And in in a similar amount of the marketing services revenue, which is at 70, 871% is meaningfully higher than the pace of growth that you're seeing in the gym be well go to quote. It. So if you could just to get through what's going on there then I have a few questions in aggregate use on my thank you.

Okay.

76 is one that.

When do do so a stronger than expected recovery in a month or merchants advertising in Q2.

Our merchant.

Had more budget suspend given limited activities in Q1.

And they were eager to make up for their loss in Q1 and higher user.

Activities and better hiking product also helped to improve the advertising returns.

Uh huh.

Our higher take rate in Q2 reflects the ER visits to supply demand dynamic posted the pandemic free.

The level of returned and unpaid order also returned to the normal level.

If we take together.

Our Q1 in Q2 number at an aggregate level the take rate for the first half of the actually is 2.9% inline with our historical results.

To create for US it's enough output not NK P.I. I and we tried to optimize our top priority based on our user engagement.

With a stronger user engagement listens would naturally lunch I just high school.

And we'll continue to supports.

Good quality merchants and incentivize them to improve the service and provide better snapdeal probably users.

And regarding the second question or the question on on the transaction service revenue.

The transaction service revenue comprised primarily.

What we previously timed commission piece, the payment processing fees, which we charge I understand that record rates of 0.6%.

However, we continue to offer a preferential rates for certain mentioned.

As the incentive.

And maybe I was just to follow up question.

Just wanted to understand where what percentage of the Dnbi today is agricultural Sue for the second quarter and when you talk about two trillion five years that we presume that it's about 15% to 20% new Januvia, that's going to time that'd be the rough mix to think through.

For agriculture, and if you could just give us is food and so with the sort of take rate that we couldn't from a business would it be commensurate to comparable to the 3.2 crews and below you've shown us into too.

But for five years down the line I mean, thank you.

[noise] Peter's Thank you for the.

Let me just also add a little bit to around contracts are under take rate.

That's where you have communicated to the market previously a the take rate really is are now puts its a function, though for the merchants advertising on platform and seem to write a levels or return. So we actually saw a in the second quarter very strong merchant activities as much and try to or somewhere you I'm going to move more inventory.

He's been goods in the second quarter, there and as a result, we saw very strong advertising demand, which when you think actually contributed to that put grid, Similarly, where you're I would note that platform.

It's a.

On the platform, we are seeing advertising or the activities really across the broader if I'm doing a many different sectors. So even if it's in any particular categories per se and similarly, we do believe they are potentially getting agriculture merchants I mean distributors to contribute to advertising.

Yes. It takes phones they are able to actually offer the type of premium product that allows them to generate the type of return. So while we are seeing is given the low on ecommerce penetration rate in agriculture, we actually see substantial opportunity first thing background, you invest in our supply chain and to drive more value creation down the road. So yes.

We do believe that.

Certainly your generating the type of a return commensurate way what the problem is generating today as possible in agriculture, but I'm, calling a former both advertising and also us providing technology solutions to the participants in our ecosystem.

Thanks.

Your next question comes from the line of the Alicia Yap of Citigroup. Please ask your question.

Hi, I'm good evening banishment, thanks for taking my questions.

I have a question related to more medium longer term upsell, how we'll pee dee attracts brought out varieties of merchants and brands to joint apart from a when you eat now half a larger base off merchant and then you also have that you'll use up it's also reaching.

Quite large number of so how do you balance and shore order much trends, we see the relevant exposure.

And what that TDD need to do to southeast, Florida range of that much.

How well you know the team per case model evolves.

If we got more friends that product sell Brent that much and on our platform. Thank you.

Thank you Alicia.

Our strategy.

Around brown products and brands have not changed in fact, I as I mentioned earlier on today. The idea is to continue to focus on providing what the users want.

[music].

Oh, so from that perspective.

What we're seeing is the team purchase model working and this is the reason why we have been able to accumulate several hundred million users.

Since our short period of time and this continues to work because we are a recommendation based business model focusing on the specifics couldn't use I suppose on brands right. So when you do believes that the yeah. It's every once the.

Demand on the platform really ranges across different price points on for different categories and through as we continue to get better our recommendation, we understand that users better were able to push them. The most relevant products at their most relevant price points and that's the user activities and user newsroom grows the merchants.

Naturally are coming to our popham seeking for growth there more opportunities and the merchant themselves I wouldn't be able to get.

Yeah, I get the right level of traffic if they are able to offer the right value for their customer base. So well we are doing is through the algorithms or through our recommendation working with the merchants to help them provide more suitable products that are targeted at that you are at the users and we believe.

Okay, I would assume is working and continuing overtime law recommendation will get better and Mirage through a combination about putting the right product and also advertising on the platform. We believe the merchants were continuing to see the attractively turns on the investments.

I see okay. Thank you.

[music].

Next question comes from the line of Thomas Chong of Jefferies. Please ask your question.

[noise] I'm sorry, Terry.

I'm sorry.

The question around our strategy order trends, we're seeing across different categories.

Operator, maybe we can take the next question first before we take comments that.

Certainly your next question comes from the line.

Do you know long of credit Suisse. Please ask your question.

Hi, Hi management. Thank you for taking my questions I have two questions. The first one is on the sales marketing because you have the terribly much you mentioned that you intentionally moderates yourself marketing funding.

Due to I think probably adds appears actually being aggressive.

And also extended said depending on programs some Danny.

I wanted to know in the next two quarters same quarter and Slickwater what are the upside Marty.

Under what circumstances you actually.

Hi. This is nothing that's my first question.

I'll do the second one happiness. Thanks.

Sure to now let me ask Tony to address the question.

First of all the Q2 on sales and marketing expenses, we say.

The moderate our sales and marketing spending.

When we observe.

This aggressive promotion spending by our kids on electronics relative to that we saw household goods as more attractive opportunity to advance user engagement. Therefore.

Houses has actually has a higher purchase frequency than electronics so.

We choose a different strategies investing in Q2.

Actually planned to deepen our user engagement going forward. So that we will continue to spend on sales and marketing thing in the coming quarters to grow the mindshare and trust them on our users we expect to.

Increase telesales and marketing investment in second half of the tiny tiny in a prudent manner.

Okay.

As I as we spend whenever we see opportunity meets our internal our hotels.

Our net interest.

Any spending per active user to us to let next behind our peers. We believe we we can we can narrow that difference by growing our money share with users and getting great Hey, just to get more wallet share. That's why we have to continue this type of investments.

Okay. Thank you Tony Yeah, not my first question is sort of related to that because I I think based on the public data the.

So volume.

Actually very strong from Ti So I I've had the JV actually was.

Yes, hi slower on so does that imply average order size I thought the actual trending now I can you share a little bit more about yeah average order size and also I look because if you continue to.

Allocating more traffic.

So when we're continuing to see the average order size can be I'd, just say animal level. Thank you.

[music].

And.

And let me take this users.

Tends to assume say Pinto as they go to platform Oh, great savings every day.

And.

So for US we also tend to have a less off a concentrated spike in GMB.

In the U.S activities around shopping promotion, unlike how we use our peers.

Our user engagement tends to trends.

In a in a steady fashion and reflective which is reflective of how looking in building a nice yes.

We're continuing to investing in the U.S am I shared the viewed on high frequency of engagements.

And in fact, that's what we did in Q2, we notice the consumer spending was more value cautious and.

The consumer we're looking for more household necessity and including FMCG agriculture produce that's why we could dedicated our promotional programs. During the June 18th to include more products. In these categories. This definitely they have an impact on that you'll be.

Also we add almost 100 million active buyers since beginning of this year and these users are just getting to know can go through and actually their contribution to the G.N. V is less than 12 months.

Also they are still developing this spending behavior on that with samples.

Okay. So it doesn't mean the outlook on sale, we know view of what we're saying at a lower level for a long cookie was nice.

So what we have seen in the second quarter is a growth across the categories, but as I mentioned, the consumer behaviors in the second quarter or more value conscious that we adopted a marketing strategy accordingly.

So we do believe that seem to have not many users associated seem to go as a pop on where they would go for great value product and we have seen people coming to us.

Second quarter, particularly looking for that pro photos products, where you find this product categories to be quite compelling sense, because they're very high frequencies high engagement than we do believe that over time to it'll be will continue to grow as they build their they're shopping behavior. The spending behavior is on top of overtime.

Okay got it thank you very much.

[music].

Your next question comes from Thomas Chong of Jefferies. Please ask your question.

Hi.

[noise] [noise] Hum up in sensor live streaming we have seen trial changing adoption of our merchants using go live streaming as a teacher to creep.

Engagement with.

There you out whatever consumers on our platform although as.

We do not position, though it does not consider lives training to be a separate.

Marketing tool, we consider really as part of the integrity of a expandable our platform. So.

Also on Pandora through a note that we don't have actually a better case because it is trying to know what entrance for live streaming instead you actually are.

Our users come in contact or coming access to the livestream in a row through their browsing experiences.

Say explored that can you say you will notice that does particularly as 'cause your main thing I live streaming and they will create into live streaming.

The product being introduced saying about contact they may choose to purchase or they may choose to book block the seller actually maybe I've seen something and it through their broadly makes time they end up purchasing so we do and reposition intentionally live streaming to be part of the holistic expenses, our merchant can offer to our users and through continuing to add to that.

Exploration exploratory.

Experiences are our users have on the platform.

No one more thing I'd like to add as.

Yes remain will be one of the easy month, all comfortable as opposed to in this year I'd actually like many others.

We try to have a 4% perspective spending about all customers and we actually you have more than just one feature is try to capture a different kind a knees difficulty, but our customer has.

Has hasn't had a seeking to the starting up this year so.

Oh I believe last one just Q1 of them, but not all of this.

Thanks.

[music].

But if I'm a operator next question please.

Your last question comes from the line of Binnie Wong of HSBC. Please ask your question.

Hi, Good evening management, congrats on a strong improvement in the bottom line I've two questions. Here first question is on the monetization make it's true that seek I mean, the second quarter at sea monetization rate shopping features 3.2%, but if we look good on the half year basis right. Then only that's around a 2.5, which is similar.

To what we had set in the past years. So she was just think of it. This is more on file a rising and spending from the pent up demand what should we think about second quarter in some structural positive drivers that can't last into the second half of the he or she is just directionally I'm thinking about it and then following on that is.

That even thinking about.

Appetite and the rising online marketing, some which pool, which appetizing a category is it because now we also do more management said about the cultural appetizer and FMCG do they tend to see <unk> spending like today the pick the at pockets. Thank you and I just have a quick follow up thank you.

Hey, Bill. Thank you for the question. Your question around the take rate I will say died and as I or I would say that pick where yourself really is a function of our merchant investing.

Our pay on buying advertising.

Through January return for their cells and as many of you have noted in your interviews are merchants.

Advertising return on our platform are better than that on a relative to a more appears so it is I would consider I want you to consider the advertising then fall merchandise job from that perspective of course, it is true that because in the first quarter the merchants worn in a position to spend the advertising budget. So we depend.

That said the from some of that pent up demand, but our conviction as I was always continue to deliver or better or a good solid attractive advertising returned to the merchants. They will continue to advertise. So we're doing this both in terms are improving our recommendation algorithm, but also improving better.

Advertising products. So I'm as an example, we wrote out in the last year and product that helps.

A smart tour that helps merchants or optimize their advertising return as an example, so many of them matches on platform may not be a savvy and they don't really understand how to optimize for T. awards will for better up harbor by using our automated system. They at least our guaranteed minimum threshold in turn so they are everything a better.

Position or more willing to spend so we do think that part of that pick our has to do with the better advertising products. So we are providing and also of course you know you cannot do this without very very active users. So as I mentioned on our call. Our strategy. This year is to continue to invest and user engagement and with use.

The engagement, we believe the return to merchants advertising will continue to be attractive and they will continue to have that demand overtime.

As your question specifically around advertising tools.

As you know when you started our business advertising business in primarily research.

As our business model focus of the song a recommendation we have seen pick up and we expect to can seem to see pickup feed advertising.

As a contributor to the online marketing.

Services revenue.

HM Okay. Thank you so much and it just a.

Quick question here is that is every I mean isn't very good quarter that we see the operating margin is historically the the the newness in terms of the losses is a significant improvement in operating margins I.

Do you think this is something that we can extrapolate because of this efficiency and we wish kind of like and you could tell equilibrium as to how much we spend and then how much we can grow our top line or is it that we should expect some quarterly fluctuations because I do understand sensor marketing is there's quite a impacted by seasonality.

So should we think about this to extrapolate into the second half and if that's something that is kind of like we wish that inflection point already.

Thank you.

Yeah, I think you're talking about the the profitability a crushing.

Our Q2 results and do demonstrate how leverageable our business model is and how we could deliver profitability in it in the short sense, but we don't don't believe it is the right strategy to focus on a short term profits over a sustainable long term value.

Our vision is to offer value for money products to all users.

Funding into active shopping experience and we still need to continue our investment to grow use a nice yet and engagement as you know we mentioned previously several times in the into in the.

Prepared remarks.

No we are not considering profitability in this case.

Actually we also plan to step up how investing in our ecosystem. So a strategic partnership and the capital investment to better support Allergan in offering better value in medicine is probably uses.

HM Okay. Thank you mr. nucleus typically thank you so much.

Thank you gentlemen.

I'd now like to handle conference back to the presenters for closing remarks. Please go ahead.

Thanks, operator, thanks, everyone for joining us on a conference call. Today. If you have any further follow up question. Please feel free to recounted I actually well with here for you. Thank you I have a weekend.

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

[music].