HOVNANIAN ENTERPRISES INC (HOV)·Q1 2025 Earnings Summary

Executive Summary

• Q1 FY2025 revenue grew 13.4% YoY to $0.674B with diluted EPS of $3.58; profitability exceeded internal guidance on adjusted pretax income ($40.9M) and adjusted EBITDA ($72.1M) despite margin compression from higher incentives and a pace-over-price strategy .
• Homebuilding gross margin declined to 15.2% (after interest/land), and 18.3% on an adjusted basis (near the top of guidance), as incentives rose to 9.7% of ASP and 74% of buyers used mortgage-rate buydowns to address affordability .
• Management guided Q2 FY2025 revenue to $675–$775M, adjusted gross margin 17.5%–18.5%, adjusted pretax income $20–$30M, and adjusted EBITDA $50–$60M; Q2 adjusted pretax is below Q1 due to a non-recurring ~$22.7M gain on the contribution of assets to a JV recorded in Q1 other income .
• Strategic catalysts: continued pivot to growth with 29% YoY increase in controlled consolidated lots (84% optioned) and early redemption intent for the remaining $26.6M 13.5% notes, supporting deleveraging and ROE/ROI durability .

What Went Well and What Went Wrong

• What Went Well

  • Profitability beat internal guidance ranges: adjusted EBITDA ($72.1M) and adjusted pretax income ($40.9M) both above the top end; SG&A leverage improved to 12.9% of revenue (down 160 bps YoY) .
  • Demand/pace resilience: consolidated contracts up 6.9% to 1,205; contracts per community 9.6, well above the long-term Q1 average of 8.0; community count +5.9% YoY to 125 .
  • Strategic positioning: controlled consolidated lots +28.8% YoY to 43,254 with 84% optioned; liquidity at $222.4M within target; share repurchases of 131,460 shares for $17.9M .
  • Representative quote: “Our results…were either within or better than the range of expectations… Despite persistently high mortgage rates and monthly sales volatility, we have experienced healthy demand” — Ara K. Hovnanian, CEO .

• What Went Wrong

  • Margin compression: homebuilding gross margin fell to 15.2% (from 18.3% LY) and adjusted gross margin to 18.3% (from 21.8% LY), driven by higher incentives and a pace-over-price approach .
  • Backlog and cancellations: consolidated backlog value down 16.1% YoY to $931.9M; gross cancellation rate rose to 16% (from 14% LY), partly reflecting high QMI sales and shorter backlog duration .
  • JV timing slippage: income from unconsolidated JVs ($9M) under internal expectations due to 40 delayed high-margin deliveries (utilities/code change), shifting profits to Q2 .
  • Operational frictions: utility hookups, permitting delays, and storm/fire recovery constrained openings and construction cycles (5 months vs ~4 pre-COVID) .

Financial Results

Segment breakdown – Q1 FY2025 (Consolidated, YoY)

Key operating KPIs across quarters

Non-GAAP and unusual items (Q1 FY2025)

• Adjusted pretax income excludes land-related charges and gain/loss on extinguishment of debt; Q1 adjusted pretax = $40.9M vs GAAP pretax $39.9M .
• Other income included ~$22.7M gain on contribution of assets to a JV (affecting GAAP results and complicating QoQ comparability) .

Guidance Changes

Notes: Management highlighted that Q1 other income included ~$22.7M JV-related gain; Q2 adjusted pretax guidance is below Q1 partly due to absence of this non-recurring item .

Earnings Call Themes & Trends

Management Commentary

• Strategic focus: “We remain focused on driving strong return on equity and return on investment… Our recently approved land acquisitions were underwritten at the current sales pace and with a high level of incentives… optimize capital allocation and maintain disciplined cost management” — Ara K. Hovnanian .
• Demand context: “Despite the challenges presented by persistently high mortgage rates and monthly sales volatility, we have experienced healthy demand… contracts per community were 9.6… significantly higher than our historical average” — Ara K. Hovnanian .
• Guidance framing: “Adjusted EBITDA was $72 million… adjusted pretax income was $41 million… above the high end of the range that we gave” — Ara K. Hovnanian .
• Capital/Liquidity: “We ended the first quarter with $222 million of liquidity… intend to pay off early the remaining ~$27M of the 13.5% notes” — Brad O’Connor .

Q&A Highlights

• Demand volatility: Management described a “flavor of the month” driver of choppiness (tariffs, rates, geopolitics), with website traffic solid but foot traffic softer; most recent week saw a pop in foot traffic .
• Incentives and rates: Incentives at 9.7% of ASP vs ~8.1% LY (+160 bps); promotional mortgage rates around 4.9% for older QMIs and ~5.75% elsewhere, reviewed continuously .
• QMI management: Finished QMI count at 319 (2.6 per community); moderating starts where QMI elevated to avoid overbuild .
• Margin outlook: Adjusted gross margin around 18.5% discussed as a possible near-term “normalized” level, but management emphasized uncertainty given month-to-month volatility .
• Regional view: Price increases concentrated in stronger East/Northeast/Mid-Atlantic markets; West remains more challenging on pace .
• External disruptions: California fire recovery and SE Florida hurricane recovery drew trades/utilities, creating temporary headwinds .

Estimates Context

• Wall Street consensus (S&P Global) for Q1 FY2025 EPS and revenue was unavailable at time of analysis due to data access limits. We could not compare reported results to SPGI consensus and will update when available. Management indicated results were within or better than internal guidance ranges, with adjusted EBITDA and adjusted pretax income above the high end .
• Note: Where analyst estimates are required, we default to S&P Global; none are shown here due to unavailability at query time.

Key Takeaways for Investors

• Margin/pace trade-off is working: Despite lower gross margins from elevated incentives, adjusted profitability exceeded internal guidance, validating the pace-over-price strategy and high inventory turns focus .
• Watch Q2 step-down in adjusted pretax: Guidance embeds lower adjusted pretax ($20–$30M) vs Q1, partly due to a non-recurring ~$22.7M JV gain in Q1; monitor JV timing and recurring margin run-rate through Q2 .
• Strong growth runway: Controlled lots +29% YoY (84% optioned) and community count expansion support double-digit delivery growth potential over the next few years; continued land-light pivot should sustain ROI .
• Liquidity/deleveraging catalyst: Liquidity within target and early redemption of high-cost 13.5% notes could lower interest burden and support multiple re-rating over time .
• Regional mix matters: Northeast/Mid-Atlantic strength offset West softness; Southeast deliveries/revenue declined YoY—monitor regional mix and pricing power in the West .
• Execution watchpoints: QMI absorption (finished QMIs at 319), incentive discipline (9.7% of ASP), construction cycle time (5 months), and supply/utility frictions are key to sustaining margins and turns .
• Backlog dynamics: Lower backlog value reflects higher QMI share and faster conversion; near-term visibility shifts from backlog to in-quarter pace, increasing sensitivity to monthly macro headlines .

Appendix: Additional Q1 FY2025 data points

• Total interest expense as % of revenue: 4.3% (vs 5.1% LY) .
• Share repurchases: 131,460 shares for $17.9M at ~$135.93 avg price .
• Liquidity composition at 1/31/25: $94.3M cash & equivalents, $3.1M restricted cash for LCs, $125.0M revolver availability .
• Balance sheet snapshot (1/31/25): total assets $2.533B; senior notes & credit facilities (net) $893.7M; equity $811.4M .