Q3 2025 Earnings Call: Contradictions Emerge on BTO Strategy, Gross Margins, and Pricing Adjustments

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $1.62B total revenue; housing revenue $1.61B, down 8% YOY
• EPS: $1.61 per diluted share, benefiting from a 12% YOY reduction in weighted average diluted shares
• Gross Margin: Adjusted housing gross margin 18.9% (excl. inventory charges), above guidance high end, down 180 bps YOY; reported 18.2%
• Operating Margin: Adjusted homebuilding operating margin 8.8%; reported 8.1% of homebuilding revenues

Guidance:

• Q4 housing revenues expected at $1.6B–$1.7B; FY25 at $6.1B–$6.2B.
• Q4 ASP $465K–$475K; FY25 ASP ~ $483K (primarily regional mix).
• Q4 housing gross margin (excl. charges) 18.0%–18.4%; FY25 19.2%–19.3%.
• Q4 SG&A ratio 9.3%–9.7%; FY25 10.2%–10.3%.
• Q4 homebuilding operating margin 8.5%–8.9%; FY25 ~8.9% (excl. charges).
• Effective tax rate slightly above 23% for Q4 and FY25.
• End FY25 with ~260 active communities; ramp in early 2026 for spring.
• Expect Q4 share repurchases of $50M–$150M; plan to continue repurchases in FY26.
• Emphasis on shifting mix toward built-to-order; not chasing year-end spec discounts.

Business Commentary:

• Strong Financial Performance:
• KB Home reported revenue of over $1.6 billion for Q3, with diluted earnings per share of $1.61, meeting or exceeding guidance across key metrics.

• The strong performance was attributed to a healthy balance sheet, significant cash flow, and a flexible approach to new community investments and share repurchases.

• Share Repurchase and Dividend Strategy:

• KB Home returned more than $490 million to shareholders in the first nine months of fiscal 2025, including $440 million in share repurchases.

• This strategy was driven by a focus on shareholder value, as the repurchases were made at a price below current book value.

• Cost Management and Build Time Reduction:

• The company successfully reduced build times by 10 days sequentially to 130 days, contributing to a more compelling selling proposition for built-to-order homes.

• This achievement was due to strong operational execution, allowing for a shift back to a higher mix of built-to-order homes.

• Stable Demand and Market Outlook:

• KB Home produced 2,950 net orders in the third quarter, maintaining pricing stability with 70% of communities experiencing steady or increased prices.
• The stabilization in demand was driven by a decline in mortgage interest rates, which supports greater demand for homeownership and improved affordability.

Sentiment Analysis:

• Management met/exceeded margin guidance and highlighted strong cost control and buybacks, but net orders fell 4% and ending backlog declined 24%. Quotes: “We produced total revenues of $1.62 billion and diluted EPS of $1.61.” “Adjusted housing gross profit margin…18.9%, above the high end of our guided range.” “Net orders totaled 2,950, a 4% decline…ending backlog…down 24%.” “We do not intend to sell at any price…not chasing incremental volume.”

Q&A:

• Question from Stephen Kim (Evercore ISI): How to reconcile sequential decline in order ASP with stable/increasing pricing in 70% of communities, and how will lower mortgage rates influence price vs. volume strategy?
  Response: ASP decline is largely mix; pricing stable; strategy will vary by community—prioritize volume in long-runway sites and price in scarce infill; demand steady with no big uptick yet; BTO with float-down option emphasized.

• Question from John Lovallo (UBS): Did delivery timing/mix drive the Q3 gross margin beat and slightly lower Q4 guide, and how will land and construction costs trend into Q4 and 2026?
  Response: Q3 margin outperformance was driven by construction execution, not timing; expect similar land/sticks-and-bricks trends into Q4; productivity and pricing at the community level should continue to offset cost pressures.

• Question from Rafe Jadrosic (Bank of America): Any preliminary 2026 revenue outlook as you pivot back to BTO, and what’s behind implied SG&A improvement in Q4?
  Response: No 2026 guidance; expect higher community count and improved affordability to support a solid year with margin uplift from more BTO; Q4 SG&A improves due to fixed-cost reductions and compensation dynamics, not leverage.

• Question from Alan Ratner (Zelman & Associates): Progress toward lifting BTO mix and current margin differential vs. spec; drivers of sequential Q4 margin decline?
  Response: BTO mix to trend back toward ~70/30 by early 2026; BTO margins run ~250–400 bps above spec; Q4 margin step-down reflects lag from spring competitiveness and mix, not new discounting—no inventory dumping planned.

• Question from Elizabeth Langen (Barclays): Which direct costs are coming down and will reductions persist into 2026?
  Response: Cost declines are broad-based, notably lumber; weaker starts aided renegotiations and value engineering; recent lumber benefits hit early next year; if starts rebound, cost gains may moderate but pricing should improve.

• Question from Michael Dahl (RBC Capital Markets): Current demand cadence and risk that shifting to BTO with a smaller backlog creates a 2026 revenue gap if rates don’t fall?
  Response: Q3 demand was stable; September similar so far; backlog down roughly in line with shorter build times, supporting similar pull-through; not expecting a trough and staying focused on BTO rather than pivoting back to heavy spec.

• Question from Andrew Aldion (JPMorgan): Land environment and ability to secure lots; market-level demand and resale competition impacts?
  Response: Land terms/pricing are easing; canceled ~6,800 lots to pursue better economics; strength in Inland Empire, North Bay/Central Valley, Las Vegas, Houston, Charlotte; coastal CA/Denver softer; FL/TX stabilizing after targeted price cuts and cost reductions.

• Question from Trevor Allinson (Wolfe Research): Southeast saw lower order ASP but higher volumes—was that inventory-driven; and how broad/magnitudinal is land price softening?
  Response: In the Southeast, proactive price cuts addressed rising inventory, boosting orders; costs also fell and some prices are now lifting; land pricing is modestly easing across markets—small declines, better terms via walking from deals.

• Question from Susan Maklari (Goldman Sachs): Role of design studios in the shift back to BTO and capital-return magnitude outlook?
  Response: No change to studio strategy—use it to personalize off a competitive base price to drive BTO; expect continued buybacks at a similar pace with flexibility based on land opportunities; precise magnitude TBD.