BEKE (Minutes): How to Reduce Costs and Increase Efficiency is the Absolute Focus
The following is a summary of the$KE(BEKE.US) FY25Q3 earnings call minutes compiled by Dolphin Research. For an interpretation of the earnings report, please refer to the article "贝壳: Is There Still Hope?"
I. Review of Core Financial Data
Performance Overview:
Total revenue of 23.1 billion yuan, up 2.1% year-on-year; gross margin of 21.4%, down 1.3 percentage points year-on-year, mainly due to a decrease in the proportion of new home business revenue (which has a higher contribution rate) and a decline in the contribution rate of the new home business itself.
Expense Optimization:
Management expenses decreased by 10.3% quarter-on-quarter (due to reduced debt provisions and lower equity incentive expenses); sales expenses decreased by 10.7% year-on-year (due to reduced personnel expenses and advertising promotion costs); R&D expenses were 648 million yuan, up 3.2% year-on-year (due to increased personnel expenses).
Repurchase Execution:
Repurchased $281 million in Q3, up 38.3% year-on-year; cumulatively repurchased approximately $2.3 billion since September 2022; repurchased shares accounted for 3% of the total issued shares by the end of 2024.
II. Detailed Information from the Earnings Call
1. Strategic Transformation: The company is strategically shifting its growth engine from scale to efficiency, enhancing operational and back-office efficiency through artificial intelligence technology, and optimizing its business structure under the strategic guidance of balancing scale and efficiency.
2. Broker Reform:
1) Adjusting Commission Structure and Incentive Mechanism: Transforming some senior brokers into "listing brokers" responsible for management and focusing on seller services, granting them the authority to form exclusive listing management teams; under the ACN (Agent Cooperation Network) commission distribution mechanism, increasing the commission share for seller brokers from 40% to over 50%,
while maintaining a stable market share, the income of these seller-focused brokers can increase by about 25%. Additional incentives are provided for high-scoring listings;
2) Providing Systematic Support and Digital Products: In the past, owner relationship management, listing display, and marketing relied heavily on brokers' personal experience, making it difficult to replicate and scale. An AI-driven listing scoring system has been built, capturing and quantifying the professional capabilities required for listing management from six key dimensions, including listing maintenance integrity, depth of owner communication, property condition (e.g., renovation status), cross-channel marketing performance, AI-driven pricing competitiveness, and buyer attention (e.g., online and offline listing views).
These indicators help brokers clearly understand the definition of high-quality listings and how to better display and market them;
3. AI Empowerment Results: Reduced labor costs by 10%; AR system accelerated the rental of 350,000 properties in 11 cities; price adjustment adoption rate of 9%, achieving cost savings of over 100 million yuan.
4. Home Decoration and Furnishing Business: Revenue of 4.3 billion yuan, roughly flat year-on-year; contribution margin of 32%, up 0.8 percentage points year-on-year. Reduced unit cost through centralized procurement; replicated modular solutions in multiple locations.
5. Residential Leasing Services: Revenue of 5.7 billion yuan, up 45.3% year-on-year; managed over 660,000 rental units (370,000 units in the same period of 2024);
contribution margin of 8.7%, up 4.3 percentage points year-on-year. Subsequently, newly signed rental properties will adopt a net service fee revenue recognition method.
In the second quarter, achieved city-level breakeven for the leasing business after deducting headquarters expenses for the first time; in the third quarter, this business is expected to contribute over 100 million yuan in profit.
6. AI Technology Implementation Results:
1) Review System: Processing time of 2 seconds per order, efficiency increased by 64 times; accumulated savings of 33,000 hours, intercepted 16,000 risky properties
2) Operation System: Signing efficiency improved by over 10 percentage points compared to Q2; the AI system has been replicated in 3 cities.
2.2 Q&A
Q: The company's new home business has historically outperformed the market, but now its advantage seems to be narrowing. What are the reasons for this? How should investors view the growth potential of this business?
A: The narrowing advantage of new home growth relative to the market in the third quarter was mainly influenced by three factors: First, customers on the platform generally compare new homes and second-hand homes simultaneously, recently, second-hand home prices have been significantly more attractive, leading customers to the second-hand home market; secondly, there is a base effect, many policy-driven pre-sale subscriptions in the second quarter of last year were concentrated in the third quarter, causing a mismatch with market data; additionally, the company's new home business has grown rapidly over the past few years, significantly increasing its scale. Currently, the channel penetration rate in our operating cities has increased from about 30% a few years ago to over 50%, and the coverage rate of cooperative projects has increased from about 39% in 2023 to over 70%.
To achieve sustained growth on a higher base, we are exploring opportunities through three initiatives: first, expanding to more cities, piloting lightweight B+ products in lower-tier cities, this business has covered 4 cities and plans to expand to over 30 cities by the end of the year; second, optimizing customer content operations and partner models for cooperative projects; third, focusing on improvement projects, accurately identifying and enhancing exposure, forming a closed loop of listings-brokers-customers, while helping brokers improve their ability to sell high-end products, narrowing the gap with the market average. China's channel penetration rate still lags behind mature markets, providing ample growth space for us.
Q: How did the leasing service business achieve a turnaround from a loss last year to profitability in the third quarter this year? What are the future improvement opportunities?
A: The profitability of the leasing service has significantly improved, achieving city-level profitability in the third quarter after excluding the impact of high-cost cities. This is mainly due to the rapid revenue growth brought by scale effects, with managed properties exceeding 650,000 units by the end of the third quarter, up 75% year-on-year.
Profit improvement mainly came from three aspects: first, the "worry-free lease" business with a light asset model contributed higher profit margins, with new and renewed properties in the third quarter recognizing revenue on a net basis, accounting for 25% of such properties, driving a quarterly profit contribution increase of 130 million yuan, and a profit margin increase of 3 percentage points;
second, improved operational efficiency reduced various cost ratios, with the average number of properties managed per property manager exceeding 100 units, significantly higher than the 90+ units in the same period last year, with monthly efficiency indicators improving by about 20%-28% in the first three quarters, driving a profit contribution increase of about 170 million yuan, and a profit margin increase of 1.5 percentage points;
third, improved back-office personnel efficiency, with the average number of properties managed per person increasing by 7.5% year-on-year, and the overall operating expense ratio decreasing year-on-year.
Future profit margins still have room for improvement: first, by diversifying rental channels to reduce unit customer acquisition costs and reduce reliance on centralized brokerage channels; second, the average number of properties managed per property manager is expected to increase towards the target of 200 units, further optimizing labor costs; third, continuously expanding value-added services within the leasing ecosystem and maintaining investment in AI and digital capabilities. As the business scale expands and the unit economic model optimizes, the leasing service is expected to continue to maintain a strong operating leverage effect.
Q: What are the reasons for the outstanding performance of the home decoration business in Beijing and Shanghai? How do you incentivize brokers to cross-sell the home decoration business in other cities with lower market share?
A: The home decoration business has significant strategic value in second- and third-tier cities. From a market perspective, housing costs are lower in these cities—our platform data shows that the average house price in Beijing and Shanghai is about 4 million yuan, while in other cities it is only about 1 million yuan, meaning customers can allocate more budget to decoration. Currently, only about 30% of decoration contract orders come from cities outside Beijing and Shanghai, with a conversion rate of less than 5%, far lower than 20% in Beijing and 10% in Shanghai, indicating significant growth potential.
We are taking three systematic measures to incentivize brokers: first, deepening the operational team's understanding and professional capabilities of the home decoration business, and establishing a professional collaborative ecosystem; second, launching innovative incentive plans, encouraging brokers to visit offline home decoration stores and showcase services through short videos, with over 50 videos uploaded by more than 30,000 brokers in over 30 cities since the end of April; finally, using AI technology to improve conversion efficiency, accurately identifying high-potential listings by analyzing key attributes such as house age and layout. These high-quality listings, although only accounting for a single-digit percentage, contribute over 20% of initial decoration contracts.
In the short term, we will maintain a relatively conservative strategy, and once the home decoration service meets the established high standards in customer experience, product competitiveness, and delivery quality, we will launch a more proactive traffic guidance strategy in cities outside Beijing.
Q: What measures has the company taken in cost control, and what results have been achieved? What are the future expectations for costs and expenses?
A: Under the strategic guidance of improving operational efficiency, each business line has implemented optimization measures and achieved phased results.
1) At the business level: The existing home business significantly reduced labor costs through organizational optimization, with fixed labor costs in the third quarter down more than 20% from the peak in the fourth quarter of last year.
The new home business streamlined the operational team structure, reducing fixed labor costs by more than 40% from the peak in the fourth quarter of last year, while focusing on single-project sales strategies, with non-NDA channel commission rates down more than 1 percentage point from the peak in the first quarter of this year.
The home decoration and furnishing business effectively reduced material costs through supply chain integration, expanding the number of centralized procurement categories from 4 in the second quarter to 13 in the third quarter, with the unit purchase price of some products down more than 20%, and the material cost-to-revenue ratio down about 1 percentage point from the average level last year.
The leasing service reduced operational labor costs as a percentage of revenue by about 1 percentage point year-on-year through technology application and business model optimization. Store costs were reduced by closing inefficient stores and negotiating lease renewals, with the number of active stores down from about 5,600 at the end of the fourth quarter last year to less than 5,200, and average rent down more than 10%.
2) In terms of operating expenses:
General administrative expenses were effectively controlled through organizational optimization, with non-GAAP expenses in the home decoration business down more than 100 million yuan from the peak in the third quarter of last year.
Sales and marketing expenses were reduced through marketing optimization and improved labor efficiency, with non-GAAP sales and marketing expenses in the housing transaction business down about 90 million yuan from the peak in the third quarter of last year, and advertising promotion expenses down more than 20% from the peak; sales and marketing expenses in the home decoration business were down more than 100 million yuan from the peak.
In terms of R&D expenses, non-GAAP R&D expenses increased by about 79 million yuan year-on-year, with the R&D team steadily growing, exceeding 2,300 people by the end of the third quarter, including over 600 AI-related R&D personnel, doubling year-on-year; AI-related R&D investment in the third quarter exceeded 150 million yuan, nearly doubling. As the market environment stabilizes, continuous operational optimization will fully release the operating leverage effect.
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