PDD signals ongoing profit volatility as intensified merchant support reshapes platform ecosystem

Earnings Call Insights: PDD Holdings Inc. (PDD) Q2 2025

MANAGEMENT VIEW

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Co-CEO & Chairman Lei Chen emphasized intensified commitment to high-quality development through the RMB 100 billion support program, stating, "Through this program, we have invested and will continue to invest substantial resources to support the merchant ecosystem." Chen pointed to significant ecosystem investments reflected in Q2 performance, with revenue growth moderating and operating profit declining by 21% year-over-year. Chen reiterated, "We prioritize long-term value creation over short-term financial results."

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Co-CEO Jiazhen Zhao described the company’s willingness to "accept lower profits to consistently reinvest in the platform ecosystem in the long run," noting broad-based merchant support initiatives, fee reductions, and logistics improvements. Zhao detailed support for agriculture and manufacturing, highlighting, "By enriching product offerings and store metrics, we helped fresh produce merchants overcome seasonal shortages and achieve sustainable growth."

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VP of Finance Jun Liu reported, "total revenues increased 7% year-over-year to RMB 104 billion" and noted, "Revenue growth further moderated as competition intensified and as we help merchants increase efficiencies." Liu cited increased costs and a "year-on-year decline of operating profit" stemming from expanded merchant support.

OUTLOOK

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Management highlighted a continued focus on long-term value creation and high-quality growth, with Lei Chen stating, "As we ramp up our investments, profitability will inevitably fluctuate and this quarter's results may not represent future earnings trends."

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Zhao reiterated, "We will continue to deepen the RMB 100 billion support program investing substantial resources in improving user experience, merchant services and industrial upgrades to build a win-win ecosystem."

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Management suggested that short-term financial results will remain volatile, and "fluctuations in profitability is likely to continue in the coming quarters." The company does not view current profit levels as sustainable.

FINANCIAL RESULTS

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Jun Liu reported, "total revenues increased 7% year-over-year to RMB 104 billion" for Q2. Revenues from online marketing services and others were RMB 55.7 billion, and transaction services revenue was RMB 48.3 billion, up 1% from the same quarter last year.

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Total cost of revenues increased 36% to RMB 45.9 billion, "mainly due to increase in fulfillment fees, bandwidth and server costs and payment processing fees." Non-GAAP operating profit was RMB 27.7 billion compared to RMB 35 billion the year before, with a non-GAAP operating profit margin of 21% versus 36%.

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Net income attributable to ordinary shareholders was RMB 30.8 billion for the quarter. Basic earnings per ADS was RMB 22.01, and diluted earnings per ADS was RMB 20.75. Non-GAAP net income was RMB 32.7 billion, and non-GAAP diluted earnings per ADS was RMB 22.07.

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Net cash generated from operating activities was RMB 21.6 billion, and as of June 30, 2025, cash, cash equivalents, and short-term investments were RMB 387.1 billion.

Q&A

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Alicia Yap, Citigroup: Asked about the narrowing lead in revenue growth compared to peers due to intensified investment in instant retail and e-commerce competition, and the outlook for global business. Zhao responded that "industry competition intensified further as the major market participants invested heavily in new business models," resulting in "slowed further in Q2, while operating profit declined meaningfully for the second consecutive quarter." Zhao emphasized a long-term approach and continued investment in merchant support. On global business, Chen Lei stated, "We observed steady consumer demand and consumer trust in our platform is gradually growing," while acknowledging ongoing volatility and the need for regional adaptation.

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Thomas Chong, Jefferies: Inquired about changes since launching the RMB 100 billion support program and future plans for Duo Duo Grocery. Zhao reported early effects in agriculture and manufacturing, expanded logistics support, and that "investments made over the past quarter have resulted in slower revenue growth and year-on-year profit decline." Regarding Duo Duo Grocery, Zhao described it as requiring ongoing investment, stating, "we believe it is quite meaningful that we will continue to increase our investments."

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Lixin Ju, Bank of America: Asked about signs of stabilization in expense ratio and profit margin, and consumer demand trends. Jun Liu noted Q2 profits "benefited from e-commerce seasonality" and are not expected to represent future performance. On consumer demand, Zhao highlighted "remarkable potential and resilience" in China’s market but acknowledged escalating competition and the need for continued investment to support both merchants and consumers.

SENTIMENT ANALYSIS

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Analysts expressed concerns about slowing revenue growth, narrowing lead over competitors, profit volatility, and sustainability of current profit levels, with a neutral to slightly negative tone and a focus on competitive pressures and financial headwinds.

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Management maintained a consistent, long-term focus and confidence in platform investments, but repeatedly cautioned about ongoing profit volatility and stated, "We do not believe this quarter's profit level are sustainable and fluctuations in profitability is likely to continue."

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Management’s tone remained steady and confident in prepared remarks but shifted to more caution and defensiveness during Q&A, particularly regarding profitability and competition. Compared to the previous quarter, both analysts and management sustained their focus on ecosystem investments and profit headwinds, though management’s language reflected a greater acknowledgment of continued volatility.

QUARTER-OVER-QUARTER COMPARISON

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Revenue growth moderated from 10% year-over-year in Q1 to 7% in Q2, while non-GAAP operating profit margin decreased from 19% in Q1 to 21% in Q2, reflecting a slight sequential improvement but still down from the previous year's levels.

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Both quarters emphasized the RMB 100 billion support program, but Q2 remarks highlighted its broader reach and early effects in agriculture, manufacturing, and logistics.

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Analysts maintained focus on competitive intensity, profit margin pressures, and investment cycles, while management reiterated the message that short-term profit fluctuations are expected as a result of long-term investments.

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The tone of management remained focused on long-term value creation and ecosystem health, with continued caution regarding near-term profit and revenue trends.

RISKS AND CONCERNS

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Management acknowledged that "profitability will inevitably fluctuate" due to the scale and scope of the merchant support program.

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Intensified industry competition and rising costs, including fulfillment and payment processing, were identified as headwinds affecting both revenue and profits.

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Analysts flagged narrowing revenue growth versus peers and the sustainability of profit margins as key concerns.

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Management’s mitigation strategy centers on continued investment in ecosystem health, merchant support, and supply chain improvements, even at the expense of near-term profit.

FINAL TAKEAWAY

PDD Holdings signaled that its strategic choice to prioritize ecosystem investments and merchant support over short-term profit has resulted in moderated revenue growth and continued profit volatility. Management remains committed to the RMB 100 billion support program, believing that these initiatives will create a stronger, high-quality platform ecosystem in the long run, but cautioned that near-term financial results will continue to fluctuate as the company navigates intensifying competition and evolving market dynamics.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/pdd/earnings/transcripts]

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