KE Holdings (NYSE:BEKE) reported second-quarter financial results on Friday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

KE Holdings reported a 6.3% year-over-year increase in GTV for Q2 2026, while revenue declined by 5.7% due to adjustments in the home renovation and furnishing business and changes in revenue recognition for home rental services.

Non-GAAP net income rose by 74.9% year over year to 3.185 billion RMB, with the non-GAAP net margin reaching 13%, the highest in three years.

Significant profit growth was attributed to a healthier cost structure, improved operating efficiency, and expanded contribution margins across all core business lines.

Existing home transaction services saw an 8% year-over-year increase in GTV, with a 46.1% contribution margin, supported by refined operations and a shift towards higher-margin platform service revenue.

The new home business maintained stable scale with improved profitability, and a 1.2% year-over-year GTV increase, driven by collaboration on high-quality projects and cost optimizations.

Home renovation and furnishing revenue decreased by 30.1% year over year due to strategic exits from inefficient markets, while contribution margins improved to 39.6%.

Home rental services revenue declined by 14.8% year over year, but managed rental units grew by 34%, with improved contribution margins reflecting a shift towards net-basis revenue recognition.

Management emphasized a shift towards consumer-centric operations, with AI playing a significant role in enhancing operational efficiency and decision-making support.

Looking forward, KE Holdings aims to maintain a solid balance sheet, focus on structural market opportunities, and enforce financial discipline to ensure sustainable growth.

The company has also demonstrated a commitment to shareholder returns with significant share repurchases, totaling approximately US$2.99 billion since September 2022.

Full Transcript

Siting Li, Investor Relations Director

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings' second quarter 2026 earnings conference call. I am Siting Li, our Director at KE Holdings. Please note that today's call, including management's prepared remarks and Q&A session, will all be in Chinese. Simultaneous interpretation in English will be available on a separate line for the duration of the call. To access the call in Chinese, you will need to dial into the Chinese-language line.

At this time, all participants are in listen-only mode. Today's conference call is being recorded. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call we have Mr. Stanley Peng, our Co-founder, Chairman and Chief Executive Officer, and Mr. Tao Xu, our Executive Director and CFO. Mr. Xu will provide an overview of our business update and financial performance.

Then Mr. Kong will share more on the progress of our strategic transformation. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please note that KE Holdings' earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the company's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Lastly, unless otherwise stated, all figures mentioned during this call are in RMB. Certain statistical and other information relating to the industry in which the company is engaged to be mentioned in this call has been obtained from various publicly available official or unofficial sources. Neither the company nor any of its representatives has independently verified such data, which may involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information and estimates.

For today's call, management will use Chinese as the main language. Please note that English translation is for convenience purposes only. In case of any discrepancy, management statements in the original language will prevail. With that, I will turn the call over to our CFO, Mr. Tao Xu.

Tao Xu, Executive Director and CFO

Thank you, Siting. Hello everyone. Welcome to our Q2 2026 earnings call. Let me begin with the key financial takeaways. Our total GTV returned to growth. Despite a modest year-over-year revenue decline, profits increased significantly, materially outperforming both GTV and revenue in Q2. GTV increased 6.3% year over year, while revenue decreased 5.7% year over year. This revenue decline stemmed primarily from adjustments in our home renovation and furnishing business and revenue recognition impacts from iterative product modeling in home rental services.

Non-GAAP net income grew 74.9% year over year to 3.185 billion. Non-GAAP net margin reached 13%, up 6 percentage points year over year, a 3-year high. Profit improvements were driven by a healthier cost structure, strict financial discipline, and higher operating efficiency. Contribution margins across all core business lines improved year over year and quarter over quarter, driving the group's gross margin up 6.7 percentage points year over year to 28.6%.

Simultaneously, GAAP operating expenses fell 14.1% year over year. This combination of gross margin expansion and lower operating expenses fueled our profit growth. Next I'll review our segment financial performance. First, existing home transaction services. Q2 scale returned to growth and profitability improved significantly. GTV reached 629.89 billion, up 8% year over year and 17.9% quarter over quarter. Revenue was 7.02 billion, up 4.5% year over year and 14.5% quarter over quarter.

GTV outpaced revenue growth year over year primarily because non-Lianjia GTV, where platform service fees are recognized on a net basis, accounted for a larger share this quarter. Non-Lianjia platform service revenue increased 27.8% year over year and 29.8% quarter over quarter. With a stable network scale, we advanced refined operations to boost per-store output, helping connected stores outperform the market and enhancing overall platform efficiency.

Q2 contribution margin reached 46.1%, up 6.1 percentage points year over year, driven by lower fixed labor cost and a structural shift toward higher-margin platform service revenue. It also rose 4.8 percentage points quarter over quarter, benefiting from operating leverage amid revenue recovery and further business mix improvements. Second, the new home business. Q2 scale remained stable year over year while profitability continued to improve. GTV reached 258.39 billion, up 1.2% year over year and 77.1% quarter over quarter.

Revenue reached 8.095 billion, up 3.8% year over year and 75.9% quarter over quarter. Despite a pressured market, we maintained stable scale by collaborating on high-quality projects, improving customer conversion, and optimizing costs. Q2 contribution margin reached 28.8%, up 4.4 percentage points year over year, driven by cost structure optimization from refined operations. It also rose 3.1 percentage points quarter over quarter, benefiting from the same factors plus operating leverage from revenue growth.

Third, home renovation and furnishing. Q2 revenue was 3.19 billion, down 30.1% year over year and up 36.5% quarter over quarter. The year-over-year decline reflects our proactive adjustments of inefficient customer acquisition channels and exits from cities with weak unit economics. New home market pressures also dampened renovation demand. The quarter-over-quarter revenue increase reflects seasonal business recovery. Q2 contribution margin was 39.6%, up 7.5 percentage points year over year and 3.4 percentage points quarter over quarter, driven by lower material costs through centralized procurement and refined cost management.

Fourth, home rental services. Q2 revenue was 4.83 billion, down 14.8% year over year and 3.6% quarter over quarter. This stemmed from transitioning Carefree Rent to a lighter, lower-risk product model utilizing net-basis revenue recognition. While this reduces reported accounting revenue, managed rental units continued rapid growth. By end of Q2, managed units exceeded 790,000, up approximately 34% year over year, with the net-basis product comprising over 50%.

Q2 contribution margin reached 15.3%, up 6.9 percentage points year over year. This reflects a favorable product mix shift and operating improvement from lower labor, installation, and post-lease costs. Quarter over quarter, contribution margin rose 0.5 percentage point, driven by continued increase in net-basis products. Fifth, emerging and other businesses. Q2 revenue reached 550 million RMB, up 26.4% year over year and 70% quarter over quarter.

Next, turning to costs, expenses, and profits. Q2 store-related costs were 560 million RMB, down 25.9% year over year and broadly stable quarter over quarter. The year-over-year decline reflects Lianjia's rent cost optimization and network adjustments. Total Q2 GAAP operating expenses were 3.989 billion RMB, down 14.1% year over year, driven by improved organizational efficiency, optimized marketing spend, and continued financial discipline. Operating expenses rose 21.3% quarter over quarter due to higher selling expenses from the home renovation seasonal recovery and the bad debt provisions in the new home business.

Specifically, G&A expenses were 2.04 billion, down 2.1% year over year. The 18.9% quarter-over-quarter increase resulted from a full bad debt provision of around 280 million following a prudent assessment of SUNAC-related receivables and collateral. Sales and marketing expenses were 1.4 billion, down 26.1% year over year due to optimized sales personnel costs and refined marketing spend, but rose 29.6% quarter over quarter from seasonally higher rental home renovation selling expenses.

R&D expenses were 550 million RMB, down 13.4% year over year due to lower labor and technical service costs, but up 11.4% quarter over quarter due to increased technical service fees. On the bottom line, Q2 GAAP operating profit reached 3.026 billion RMB, up 185.6% year over year. Non-GAAP operating profit was 3.592 billion, up 123.6% year over year. GAAP operating profit rose 137.8% quarter over quarter, with a 12.3% margin, up 8.3 percentage points year over year and 5.6 percentage points quarter over quarter.

Non-GAAP operating profit grew 115.7% quarter over quarter, with a 14.6% margin, up 8.5 percentage points year over year and 5.8 percentage points quarter over quarter. This year-on-year and quarter-on-quarter margin expansion was driven mainly by higher gross margins and lower operating expense ratios. Q2 GAAP net income was 2.624 billion, up 100.8% year over year and 109.1% quarter over quarter. Non-GAAP net income was 3.185 billion RMB, up 74.9% year over year and 97.6% quarter over quarter.

Finally, turning to cash flow, balance sheet, and shareholder returns. Our Q2 net operating cash inflow was 6.61 billion RMB. New home accounts receivable turnover was around 39 days, down around 12 days YoY, reflecting effective risk management. Excluding customer deposits, our end-of-Q2 broad cash balance remained at around 67.3 billion RMB. This ample liquidity strengthens our risk resilience while supporting business development and shareholder returns.

In Q2, we spent around 250 million on share repurchases, including our first buyback in the Hong Kong market. In the first half, we spent around US$460 million on repurchases, up around 14% year over year, representing around 2.4% of our year-end 2025 outstanding shares. Since the launch of this share repurchase program in September 2022 through Q2 2026, we have repurchased around US$2.99 billion in shares, representing around 14.8% of outstanding shares prior to the program start.

In summary, Q2 profitability improvements reflect combined cost optimizations, operating enhancements, and a favorable business mix. Looking ahead, maintaining a solid balance sheet and ample liquidity will anchor our long-term growth across all core, new, and technical investments. We will enforce strict ROI discipline and take customer value, operating efficiency, and sustainable returns as our key metrics. Ultimately, we will balance business development with shareholder returns to consistently create long-term benefits.

Next, I'll turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead.

Stanley Peng, Chairman and CEO

Thank you, investors and analysts. Good evening. So last quarter we discussed our shift toward a consumer-centric transformation. This quarter I will talk about how the changes translate into our operations. In Q2, I observed two trends. Our operational foundation stabilized and our organizational change truly mobilized. This foundation enables long-term change. I will address five key questions. The first one, what changes as transformation enters daily operations?

Second, does being consumer-centric mean bypassing agents? Third, as AI advances, will agents become obsolete? Fourth, how is AI applied in our business and with what results? Fifth, how do we know we are on the right track moving forward? So for the first question, what changes as transformation enters daily operations? In this quarter I spent a lot of time on the front line visiting stores, properties, construction sites and discussing issues with clients, agents and store owners.

The changes boil down to three areas. First, refined operations while shifting from the one-size-fits-all approach to district-specific and project-specific strategies. Rather than tracking a single citywide metric, we analyze specific districts or projects to tailor solutions. And what is the solution for each? For example, in a high-end community where clients view property across districts, our legacy geographic-bound model failed. We regrouped operational units based on actual clients’ viewing paths, assigning project experts for professional presentations and client experts to address specific family needs.

With 600 projects driving half the city's volume, standardizing these professional judgments into a clear division of labor allows us to replicate this model in other cities with similar operational explorations. Second, a shift in metrics: scale and market share still matter, but now we focus more on consistent agent transactions, rising agent efficiency and income, healthy store profitability, and stable service quality. Leasing illustrates this perfectly.

In 2025, we had at most 700 agents for leasing at the peak and the average agent efficiency fell below two transactions. Instead of adding headcount, we divided the city into smaller blocks, rematching properties, clients and agents based on familiarity and capabilities. From April to July, average agent efficiency jumped from 3 to 5.6 transactions and the zero-transaction ratio dropped from nearly 25% to under 10%. What matters is that effective organization matters more than mere headcount.

Third, mobilized people: managers have left meeting rooms for the front line. This quarter, managers personally sold stale listings, revisited dead leads and accompanied agents to signing centers. And my only requirement for managers is presence. You cannot learn to swim without getting in the water. In short, operationalizing transformation means refined operations, shifted metrics and mobilized people. This stems from a single approach: solving real consumer and frontline problems first, then reorganizing our people, resources and platform.

We are moving toward changes, and they are now being seen in operational units. The second question is: does being consumer-centric mean bypassing agents? This assumes that if the platform moves closer to the consumer, it must pick from the agent. Historically we only split a single transaction commission, which is a zero-sum game. This is what we did in the past. But to break this equation, we must create more light, create more high-value tasks, not just redivide the same money.

Consumers are changing. Good used to be a static property attribute. Today I think good means a proper match. The variables determining good expanded from one to three: the property, the family situation and also the service provider. The service provider is now a vital variable, not just a conduit. As decisions become harder, tasks must be segmented. There are three reasons. First, the required knowledge exceeds one’s personal capacity. For example, we need to know the properties, client circumstances, mortgage, renovations and furnishing business.

This exceeds one person's capacity. Second, building expertise requires mutually exclusive paths. You must either deeply root yourself in one project or follow a group of clients; you cannot do both simultaneously. Third, the most valuable action has shifted from providing options to confidently eliminating them. We are not only offering more choices to consumers; instead we need to help them filter. However, filtering does not mean transaction. As long as income relies solely on closings, true professionalism won't develop.

Professionalism must be financially viable. Therefore we are untethering the role's income from closed deals, aligning them entirely with the buyer or seller. This AI-assisted role is the client manager. Previously, platform insights stopped once a lead reached an agent. The client manager ensures continuity: AI organizes data, and a human assesses the client’s stage and needs. The agent receives fully profiled clients. Because the client managers are not paid per transaction, they remain purely objective.

As I have mentioned, managers are not paid per transaction. From May to July, this role handled over 50,000 leads, achieving a 7.4% lead-to-showing conversion rate, outperforming the broader market's 5%. The platform's mission is evolving from splitting commission to building a structure where every specialized skill is independently verified and compensated. KE Holdings is shifting from a single listing workflow to a modular ecosystem which includes consulting, showing, contracting, reporting, marketing materials, renovation and leasing, and so on.

Anyone creating incremental value is a service provider. This is our expanded definition. The main goal is enabling professional service providers to win in the long term. Being consumer-centric means transforming a single agent into a group of independently valuable, specialized roles. And now we have the help of AI, which gives us more impetus. So the question: as AI advances, will agents become obsolete? This assumes agents only sell static information easily fetched by AI.

However, technology reshuffles value; some things depreciate while others become scarce. We should ask what is depreciating and what is becoming more scarce. For the scarce part, what kind of progress can the platform and service providers make? What is depreciating: static information—bedrooms, price, year built, and layout of the house. This kind of information cannot support decision-making and it is very easy to get. If we only transmit information, then we may have no more opportunities going forward.

What is scarce: dynamic, deep, inspiring insights, and they cannot be fabricated. For example, the reason for selling, renovation potential, or local market assessment from seasoned managers—how is the situation in the communities, what were the closings, and how was the last deal? This information lives in people's minds, and the industry lacks the pipeline to capture and reuse it. Fundamentally, AI does not bear the consequence of poor decisions and may not take any accountability.

As the cost of housing mistakes rises, consumers need to reduce uncertainty in growth. Therefore, three things will happen. First, the industry becomes more valuable by mitigating uncertainty. Second, grading value is hard, requiring deep data and deeper surveys. Third, those who transform in this direction become more valuable, including platforms and managers. We do not need information replayers; we need professionals who dare to make judgments and take responsibility.

The previous question is about the industry and the service provider. If we look around and look inward, then we come to the question: how is AI applied in our business and with what results? Actually, the business itself is a production function. What is our input and what is the output? There is human capital, labor, capital and technology in a function. In today's AI, we should know the situation of AI in the industry. Is AI a sub-item or a direct variable?

If it’s a sub-item, it is an efficiency tool; if it is a direct variable, it requires a total rewrite. We needed to change attitudes first. We now also open some of the foundational data and we are lowering the threshold. We are not worried about whether there will be disruption; we are thinking about how AI can be a new production factor rather than an opponent—it enables innovation. Consumers finally pay for value. Consumers need a better experience and we need to solve their problems.

Second, it changes management. In the recent 200 years, we have improvements in science and management, and we need quantifiable data in management. We all benefit from this methodology. In KE Holdings and also Lianjia, we need standards and we also need tools for improvement. However, the unquantifiable cannot be measured. This is also a big problem. Sometimes we may only focus on the numbers and we find that the numbers are too abstract and that consumers now become numbers and also become the number one in the standard.

However, with the help of AI, AI brings unstructured data and language, and numbers are totally different information and signals. The granularity shifts from managing averages to managing individual properties, clients and agents. Previously we managed the average, but now we have the computing power and the knowledge and we can have tailored solutions for each individual. The third part is about how AI changes the division of labor. When you talk about the segmentation of tasks in the company by AI, now we have these scenarios which include finance, human resources, product, technology, and also from the front stage to the back stage and computing power. Now we have AI breaking down the threshold, and all of them are within the computing power of AI. The old divisions vanish and new ones emerge.

So in our changing new home business, we shifted labor between humans and AI. AI helps agents compare proposals using a dynamic knowledge base, allowing agents to focus on understanding clients. So the agents could, you know, fine-tune their understanding of the client. This produces both closed deals and also reusable organizational capabilities. These only come from the front line. But this disruption reshapes the organization. So it concerns four things.

First is cost. You know, AI lowers fixed costs and increases variable cost, enabling rapid iteration. So whoever iterates fast creates more value. And the next is trial and error. So in the past it takes a lot of effort. Right now, throughout the, you know, it takes a long path to evaluate, test, validate a proposal. So the bigger the organization, I mean, the longer the chain is, many people just hesitate. So right now AI shifts innovation from heavy, slow investments into high-frequency and low-cost probability games.

This allows us to trial and test multiple models at the same time, and we have a higher probability of winning out the game. Next is the frontline and the middle office. So the frontline workers, armed with the rapidly built and tested solutions, the middle office can then scale stuff. Last but not least, managers. So in the past, the bigger the organization, the lower the efficiency is. Right now, I actually talked to a lot of managers. They don't feel a lot of a sense of value right now.

AI flattens the organization, exchanging the role, handling the reporting, forcing managers to stop being megaphones and start creating real business value. So they're not just simply presenting the numbers, they are actually creating real, genuine value from the front line because they're in the process of creating the value last. Finally, the bottlenecks shift to humans. Look at KE Holdings. We have a long, you know, industrial process. AI can perfect a lot of the workflows, and those that need human intervention become the bottleneck.

So there is this human and human interaction that AI cannot replace. So whether we can unite people together and provide them with the training, allow them to work efficiently with AI. So one is culture, the other is evolution. So this is essentially a change we're talking about towards the whole industry. Now back to the very first question, whether AI is a direct variable because it changes who we serve, our judgments, our process and our organization.

So this is a direct variable. That means we're not simply installing AI into the company, we are regrowing the company with AI, looking into the next phase, how we will know we're on the right track moving forward. Now we must separate two things: where we need to place heavy bets from where we seek answers. I think there are three areas where placing heavy, deep service, deep data and the platform ecosystem, as information democratizes. Deep data becomes scarce, and the harder the decision-making becomes, the deeper service becomes more valuable.

As labor specializes, a platform is needed to orchestrate it. While we're still seeking answers, AI's final form and the ultimate structures of management and expertise remain uncertain. Directional matters require unwavering bets. So how do we capture users' evolving needs? So management of course carries this value more. For logical matters, require small investments, rapid testing and cutting losses early. So why do we need to separate these things by certainty?

Because again, we have already proven that directional matters require unwavering bets, whereas the morphological matters require more investment in rapid testing. Looking back at the past two quarters, we have proved in some areas that keeping investment in areas with low marginal returns is meaningless. The purely scale-driven model is dead. We should stop those meaningless investments. Moving forward, we must validate four things. First, professionals facing AI: whether they can use it directly or indirectly to create value.

Do they have new definitions for what professionalism is and whether they're committed to this concept? Second, for managers, whether they can return to the front line and produce high-quality judgments to recreate this sense of value. The third is the processes and judgments. With the deeper services, can they earn the trust from their customers? Whether they can earn broader recognition, a better recognition or trust? Number four, organizational capabilities.

Can we turn a single success into a replicable capability? So in such a discontinuous transformation, for many industries, they are pretty much faced with the same challenge. The way I see it, human conviction is the leading indicator. Numbers are the lagging indicator. Many of the management tend to hide their expertise within themselves. Without the open sharing, we cannot make that into a replicable successful model. So our core test is whether we can consistently execute consumer centricity and enable professionalism to win.

This must be embedded in our culture and our workflows. So we will measure these successes across four pillars: customer service, provider operations and replicability. If you look at these five things, we have to redefine our playbook. Consumers are facing harder decisions to make, so that is driving deeper specialization. AI is depreciating role info while elevating true expertise and reorganizing internal work. So our direction is certain: deep service, deep data and a platform ecosystem.

So Q2 is not the conclusion, it is just the beginning. Thank you. I will now turn the call to the analysts for Q&A.

OPERATOR

Thank you, Stanley. As a reminder, we only accept questions on the Chinese language line. If you would like to ask a question, please press star one. If you would like to cancel your request, please press the key. For the benefit of all participants on today's call, please limit yourself to one question, and if you have additional questions, you can re-enter the queue. The first question comes from Timothy Zhao from Goldman Sachs. Please go ahead.

Timothy Zhao, Analyst at Goldman Sachs

Thank you management for taking my question. Congratulations on the strong Q2 results. My question is on the overall property market. It saw a diverging trend in volume and price in Q2 with some fluctuations in momentum in Q3. Given the uncertainty ahead, what controllable levers does the company have for Q3 and the full year?

Tao Xu, Executive Director and CFO

Thank you, Timothy. In the first half, the existing home market showed a structural recovery in transactions with prices bottoming. In Q2 this recovery became more evident, though the pace varied across cities and price segments. By city, Q2 transaction volumes recovered faster in tier 1 cities, where the first-half prices also showed greater sequential resilience. In Q2, year-over-year growth in registered existing home transactions in tier 1 cities outpaced other cities according to Beike Research Institute.

In the first half, tier 1 existing home prices rose cumulatively by 3.6% quarter over quarter, while national prices remained broadly stable. Stable year-over-year prices across all tiers remain in an adjustment phase. For our platform, volume for lower-priced homes grew faster than mid- to high-priced homes. However, the transaction mix across unit sizes remains stable, indicating housing demand hasn't broadly downgraded to smaller homes. Instead, this reflects a downward shift in transaction price bands as prices adjusted.

Meanwhile, higher-priced homes saw smaller year-over-year price declines, showing resilience in core upgrade-oriented and high-quality residences. In the new home market, overall Q2 volume remained under pressure. The projects in core cities with strong product offerings showed better support. Structurally, existing homes accounted for over 50% of the total national residential transaction area in the first half, becoming the market mainstay for housing demand.

Overall, we see a structural transaction recovery while prices continue to bottom. Core cities and high-quality supply are more resilient, but the market remains polarized with more property choices. Customers are deciding cautiously, valuing professional judgment and transaction certainty. They need professional decision support, not just transaction matching or facilitation. This highlights our platform's accumulated service capabilities. Based on this, we will focus on three areas.

First, capturing structural market opportunities to strengthen revenue. We will allocate resources based on market performance across cities, customer groups and property types. Reinforcing coverage in higher-tier cities, meanwhile centered around content-driven engagement, precise matching and professional execution will help customers make better decisions and convert genuine demand into transactions. Second, we'll continue to reinforce financial discipline and flexible resource allocation.

Our leaner cost structure improves our ability to hedge against or fend off market volatility. If pressure persists, we will dynamically allocate resources, prioritizing our core professional service provider network over short-term profits. Even if the market improves, we will not return to extensive expansion. New investments must pass stage-gated ROI and service validations before scaling, ensuring transactions translate efficiently into profit and cash flow.

Third, we'll also prioritize cash flow and a solid balance sheet. We'll strictly manage receivables and collections, control risk exposure and limit non-efficiency investments to preserve flexibility. Therefore, our second-half operations will not rely on market bets. On the revenue side, better decision support will help us win more customers. On the financial side, our healthier cost structure will protect cash flow and core capabilities. Thank you.

OPERATOR

Thank you. Our next question comes from Zhonglan from UBS. Please go ahead.

Zhonglan, Analyst at UBS

Thank you, Mr. Tao, for your answers. So my question is that in Q2 the profit outpaced revenue growth significantly. Could the management break down the impact of business performance, operating efficiency, expense baselines, and if there were any one-off factors? And for those improvements, how sustainable are they in the long run?

Tao Xu, Executive Director and CFO

Thank you for your question. In Q2, the profit improvements were mainly driven by higher contribution margins across the core business and lower operating expenses. For the core business contribution margins, they improved year on year and quarter on quarter, driving the group's gross margin up 6.7 percentage points year on year to 28.6%. At the same time, GAAP operating expenses fell 14.1% year on year. There are three drivers. First, a lower cost and expense baseline.

Over the past year, we optimized Lianjia store and aging structure by expanding management span, consolidating resources, and reducing low-productivity investment. This lowered the fixed labor cost and our breakeven point, so we also have a persistent baseline. Second, improved operating efficiency. In housing transactions in new homes, strengthening coverage of high-quality projects and improving customer conversion enhanced transaction resilience.

We also have stable monetization, and better channel efficiency drove profit growth. For existing homes, focusing on priority listings and refined operational support for connected stores significantly boosted connected store revenue and profit contribution. Third, improved unit economics and the business mix in new business. We have centralized procurement and refined cost management, lowering material cost ratios in home renovation. In rental services, the contribution margin improved due to a mix shift toward net-basis revenue products alongside general operating improvements in labor installation and post-lease costs.

Looking ahead to the next two quarters under a neutral market assumption, the lower cost baseline will contribute to support profits. However, marketing channel incentives and certain frontline sales costs may fluctuate quarter on quarter due to revenue scale mix and seasonality. We will not simply extrapolate a single quarter's profit, but focus on achieving balanced revenue and profit growth. If the market improves, incremental revenue will release stronger operating leverage from the lower baseline, creating greater profit upside.

If pressure continues, our healthier cost structure reduces profit sensitivity to market volatility. Simply put, our current structure increases both upside potential and downside protection. In the long run, this optimization builds a healthy operating foundation. This is step one of our strategic transformation: optimizing resource allocation for the current market, and this is how we can cope with uncertainty. Step two is directing limited resources toward initiatives that create customer value rather than just cutting cost.

Ultimately, through workflows, evaluations, incentives, and platform tools, we will embed efficient allocation into our daily organizational capacities to support sustainable growth.

OPERATOR

Thank you, Mr. Tao. The next question comes from Xiaodan Zhang from CICC. Please go ahead.

Xiaodan Zhang, Analyst at CICC

Good evening, Mr. Tao. Thank you for taking my question. Congratulations on your strong performance in Q2. The question is about existing homes. In Q2 the existing home GTV increased 8% year on year with contribution margin up 6.1 percentage points. How much of this stems from market recovery versus company operations, and what metrics demonstrate this operating alpha?

Tao Xu, Executive Director and CFO

Thank you. Thank you, Xiaodan. I am happy to hear your voice. In short, while the market recovery provided a foundation for transaction volume, our existing home operating alpha didn't come from expanding our network or rising prices. It came primarily from higher unit productivity within a stable network and a better conversion of platform service value into revenue. The simultaneous margin improvement confirms we didn't sacrifice profitability for growth.

Specifically, in Q2, the existing home transaction volume in our key cities recovered moderately, with sequential price stabilization providing some external support. However, the average transaction price remained in adjustment, offering no price tailwind. In this backdrop, our Q2 existing home GTV grew 8% year on year and the transaction volume grew nearly 25% year on year, significantly outperforming the market. The more direct alpha source was higher unit productivity in our connected store network.

In Q2, the connected store transaction volume grew nearly 30% year on year. Network scale didn't expand. The active stores and agents remained broadly stable year on year, but average transactions per active connected store rose 26%. This shows that our network is shifting from expansion to high-quality operation as earlier connected stores mature and platform collaboration deepens, and that network volume translates directly into higher per-store output and high efficiency.

The second alpha was improved conversion of platform service value into revenue. Q2 non-Lianjia platform service revenue grew 27.8% year on year, outpacing non-Lianjia GTV. In a buyer's market, professional marketing, property presentation, and transaction facilitation created clear value and are increasingly chosen by homeowners. At the same time, the existing home contribution margin rose 6.1 percentage points year on year to 46.1%, confirming growth wasn't brought at the expense of profitability.

Going ahead, we will monitor if connected store output and platform service revenue conversion remain stable across different markets. Going forward, we will focus more on the output of connected stores and whether the conversion remains stable across different markets to validate the sustainability of this alpha.

OPERATOR

Thank you, Mr. Tao. Our next question comes from Alvin from CLSC. Please go ahead.

Alvin, Analyst at CLSC

Thank you for taking my question. For the new home business, it is also amazing. What drove the Q2 new home alpha as the operation upgraded from traditional channel collaboration to integrated marketing and project service? What capabilities sustainably create value, and in the process how do you balance growth, contribution margin, collection cycles, and developers' credit risk?

Tao Xu, Executive Director and CFO

Thank you, Alvin. Good evening. In the first half of this year, the new home market remained under pressure, but in Q2 there was improvement, with the year-on-year sales decline among top-100 developers narrowing to 9.3%. Demand and new supply increasingly concentrated in core cities, high-quality projects, and upgrade-oriented products. In this backdrop, our Q2 new home GTV grew by 1.2% year on year, driven mainly by improved coverage of high-quality projects and higher conversion efficiency.

Firstly, we identified and collaborated with high-quality and newly launched projects earlier, improving our coverage and performance in market-leading projects. Secondly, we refined needs identification and project matching. We effectively allocated resources to high-potential projects, boosting conversion rate. For the second half of this year, we assume the market will remain in adjustment with cautious customers, focusing on optimizing project mix and conversion to improve controllable operating efficiency.

In the long run, our new home business aims to solve customer housing decisions, not just extend the service chain. In a buyer's market, consumers face complex choices and multiple choices, and they need more than just access to the project. They need to understand a project's scalability, product value, and comparisons with nearby options and alternatives in terms of price, layout, and amenities, and whether their needs can be met. We are evolving from a transaction channel to customer-centric, full-cycle project services.

We want to be consumer-centric, provide full-cycle services, and integrate consumer insights into project research, positioning, sales, and decision-making to support consumers. Consumer value drives this upgrade. Developer value follows from us serving consumers better. In this direction we are building three capacities. Firstly, earlier consumer insights and matching. Using data from existing home transactions, searches, and viewings, we understand demand to aid project positioning and marketing, reducing the mismatch between developer products and actual demand.

Secondly, we translate product value into comparable decision metrics. We turn complex factors like location, layout, natural light, and amenities into intuitive content, with explanations and other services to help decision-making. For example, at Guangzhou Star River Mid-levels we have 3D community presentations and layout analysis which help consumers intuitively understand the products, improving on-site conversion. Thirdly, we have end-to-end project operating capacities.

Based on customer feedback, we now link customer analysis, content, and channel sales for projects, with timely adjustments and resource allocation. For example, for a project in Shangyao, the developer helped us gain local market knowledge. We reanalyzed target consumers, adjusted based on market feedback, and adjusted the sales strategy and linked channel acquisition with on-site conversion, boosting sales efficiency. These capacities remain in early validation.

We will tailor them per project, validating consumer value, operating results, and economics before scaling. As our service scope deepens, we will manage payment terms and developer credit risk even more prudently, avoiding unreasonable risks just to expand GTV. In the long term, growth will be built on deeper consumer understanding and accurate matching, ultimately translating into high-quality revenue, healthy profitability, and strong cash collection.

Thank you.

Siting Li, Investor Relations Director

Thank you, Mr. Xu. The last question comes from Griffin from CITIC.

Griffin, Analyst at CITIC

My question is on home renovation and Carefree Rent. So our future home renovation revenue declined faster year over year, but contribution margins improved significantly. What drove this decline and are earlier adjustments largely complete? When will revenue recover and how do you balance scale, contribution margin and delivery quality? Carefree Rent profitability or margin significantly improves, and how do we ensure the sustainability?

Tao Xu, Executive Director and CFO

Thank you, Griffin, for your question. The industry is undergoing a profound supply-demand restructuring as property adjustments feed into renovation. New home deliveries have dropped, so companies that previously focused on new homes are flooding into the existing home market, intensifying the competition. In such an environment, navigating the cycle depends on the operating quality, product competitiveness and delivery quality, not just scale. So the Q2 revenue decline stems from two factors.

First, we proactively exited inefficient cities, stores and acquisition channels over the past year. Second, overall demand remains pressured due to fewer new home deliveries, which directly weighs on the home renovation business, while competitors use price cuts and high channel incentives to fight for existing home customers. This proactive adjustment is now largely complete. We expect no further broad-based contractions this year. Despite pressured revenue, contribution margins improved significantly.

Centralized procurement and supply chain optimization meaningfully lowered material costs. Service provider productivity per store also improved year over year, and store costs were optimized, indicating a healthier retained capacity and cost structure. Regarding revenue recovery, the contract value is a leading indicator, while reported revenue lags due to construction cycles. Positively, front-end metrics like July showroom visits improved quarter over quarter due to restored internal collaboration incentives.

Though it will take time to translate to revenue, going forward we will not trade profitability for scale. Growth relies on delivery quality via frequent inspections and enhanced user experience, and product competitiveness will be achieved through tailored renovation packages as well as integrated showrooms at transaction centers. We are pursuing quality products and healthy profitability as three pillars, a growth strategy that will drive our deep growth in revenue and profit.

On Carefree Rent, the units under management gradually grew steadily to less than 790,000, up 34% year over year. Revenue was around 4.83 billion RMB with a 15.3% contribution margin, up 6.9 percentage points year over year. The year-over-year revenue decline reflects Carefree Rent iteration toward a lighter net asset base revenue. Product profitability improved due to the structural shift and genuine operating optimizations in labor, installation and post-lease costs.

On top of this, whether we can sustain this profitability, I think that requires more than just acquiring more units. It requires managing an asset pool with a low churn, fewer re-leases and higher renewals. This way the costs related to labor and channel will grow slower than actual revenue. Going forward, I think we will focus on three areas. First, stabilizing the units under management portfolio to reduce the re-leasing channel costs. As we see more units under management, more units are entering renewal.

Our existing homes are going for re-leases. We're going to take proactive lease management and deliver quality service. This will boost renewal and also boost retention. In Q2, the owner renewal rate hit 74%, up 4 percentage points, and the tenant renewal rate hit 56%, up 1 percentage point year over year. Second, improving efficiency to lower per-unit delivery cost. Q2 managed units per asset manager rose 40% year over year to around 170. Going forward, we will pilot separating transaction tasks such as sourcing and leasing from management tasks such as renewal and post-lease to boost specialization and per-personnel efficiency.

AI also can come into play. We can use AI planning to manage scale complexity by optimizing service areas, matching task scheduling as well as many other refined operational measures. Third, improving incremental scale quality. We will increase asset-light products to withstand rental fluctuation. Additionally, tailored to different cities, we're going to adopt differentiated product solutions that will achieve healthier unit economics. Most importantly, service quality underpins all of these improvements.

Whether tenants or owners decide to renew hinges on the reputation, repurchase and also the channel cost. So we're going to pay special attention to reputation and lower channel costs. We believe profitability is only sustainable when service experience, renewal and efficiency form a positive cycle. So we're solidifying this foundation to translate our scale growth directly into profit growth. Thank you.

Siting Li, Investor Relations Director

Thank you. Thank you, Mr. Xu. That concludes our Q&A session. Thank you once again for joining us today. If you have further questions, please feel free to contact KE Holdings' IR team through the contact information provided on our website. That concludes today's call, and we look forward to speaking with you next time. Thank you and goodbye.

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