Temu Parent PDD Cautions Profit Sustainability Despite Q2 Earnings Beat

TMTPOST -- PDD Holdings Inc., operator of low-cost e-commerce platforms Pinduoduo in China and Temu internationally, on Monday cautioned sustainability of its profit despite earnings beat for the second quarter of the year.

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PDD’s co-chief executive Zhao Jiazhen said investment in increasing and targeted merchant support initiatives led to revenue slowdown and profit decline over the past quarter, and the company expected to further ramp up such investment, thus could result in significant fluctuation of profit levels in the coming quarters.

“We remain steadfast in our commitment to supporting the vitality of the ecosystem, prioritizing long-term impact over short-term results,”Zhao said in a statement outling the financial results for the second quarter.

Going forward, PDD will continue to increase investment to create space for merchants' growth and foster a healthier platform ecosystem in the long term,Zhao told analysts at an earnings call. "We do not believe this quarter's profit levels are sustainable and expect fluctuations in profits in future quarters," he continued.

PDD’s Chairman and co-CEO Chen Lei also stressed the potential of material profit change. Looking ahead, as the external environment continues to evolve and competition intensifies, PDD remains committed to long-term value creation over short-term financial performance, said Chen. Then Chen said as his company increases investments, profitability will inevitably fluctuate, and results for the second quarter may not be indicative of future performance.

PDD on Monday reported revenue for the quarter ended June 30 rose 7.1% year-over-year (YoY) to RMB103.98 billion ($14.5 billion), roughly in line with analysts estimates. The top line further slowed down and delivered the slowest growth rate since fourth quarter of 2021, compared with a 10% YoY increase in revenue three months earlier.

PDD’s two segments saw continuing sales slowdown for the June quarter despite deep discounts and Chinese government’s fiscal stimulus to boost consumption.

Revenue from online marketing services and others climbed 13% YoY to RMB55.70 billion after a 15% YoY gain for the previous quarter. Transaction services, the charges the company collected from merchants for transactions on its platform, hauled RMB48.28 billion with a 0.7% YoY increase, compared with a 7% YoY rise from January to March. That slightly YoY gain reflected hit by the Trump administration’s new tariffs and the end of the de minimis provision that allowed goods worth less than $800 to enter the U.S. duty-free--a tariff exemption since 2016.

However, PDD posted less-steeper-than-expected decline in bottom line. Net income shed 3.9% YoY to RMB30.75 billion, beating analysts projection of a 40% decline polled by FactSet. The previous quarter saw a 47% YoY crash in profit. On non-GAAP basis, adjusted net income fell 5% YoY to RMB32.71 billion while analysts anticipated the profit to be RMB22.39 billion. Adjusted diluted earnings per American depositary share (ADS)was RMB22.07 with a 5% YoY decrease following a drop of 44.9%. That was ahead of the estimated RMB15.53.

“Revenues growth further moderated this quarter amid intense competition,” PDD VP of Finance Liu Jun commented in a statement. "As we remain focused on long-term value creation, the sustained investments may continue to weigh on short-term profitability.”

The American depositary receipts (ADRs) of PDD edged up nearly 0.9% after soaring as much as 4.9% on Monday. Analysts believe that one of factors weighing on profitability is that PDD had to lower fees for merchants amid the growing competition in China.

"On top of merchant fee reduction, we think the lower margin was also dragged down by PDD's supply chain investments to improve access to remote regions of China," CFRA analyst Jian Xiong Lim wrote in a note following PDD’s earnings. " Looking ahead, management emphasized that long-term value creation will take precedence over short-term profits, with potential near-term profit volatility as PDD continues to invest in its business amid intensified competition."