WSO | Q3 2025

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Overview

• Non-GAAP EPS of $3.98 misses by $0.31.

• Revenue of $2.07B (-4.2% Y/Y) misses by $70M.

KEY Takeaways

• Sales were down 4% overall (3% in the U.S.) as unit volumes stayed weak.

• Despite lower sales, pricing held strong, leading to a record 27.5% gross margin.

• The A2L refrigerant transition, which disrupted operations for much of 2025, is now largely behind them and should make 2026 a simpler operating year.

• Operating cash flow hit a record $355 million in Q3 and Watsco still has no debt on the balance sheet.

• New construction was the biggest drag on unit volumes, while replacement demand held up but became more discretionary given higher rates, low housing turnover, and weaker consumer sentiment.

• OnCallAir now drives nearly $2 billion in gross merchandise value, with over 70% of sales above the minimum efficiency standard.

• E-commerce penetration reached 34% of total sales (60–70% in some markets), and mobile app users climbed 18% to 72,000 technicians.

• Share buybacks are taking a back seat to M&A opportunities, consistent with Watsco’s long-term playbook of using its balance sheet strength to consolidate quality distributors when opportunities allow.

NOTES

Watsco’s (WSO) Q3 was basically a continuation of the last couple quarters: a bit messy because of the A2L transition and still softer demand, but fundamentally strong where it counts—areas like cash flow, margins, and tech adoption.

Revenue was down 4% overall (3% in the U.S.) as unit volumes were still down, but pricing on next-gen equipment held up, and non-equipment categories and commercial refrigeration grew.

With that, gross margin expanded 130 bps to 27.5%—a record for Q3—helped by higher margin sales and Watsco’s pricing optimization tools, which management says are getting better with AI and staying resilient even in a down market.

SG&A rose 5%, largely a result of the product transition and new/acquired locations, but they expect efficiency to improve now that the transition is almost complete heading into 2026.

The headline number for the quarter was operating cash flow — a record $355 million in Q3. With that strong cash generation, the balance sheet stayed clean with no debt, giving them the flexibility to take on any opportunities that present themselves.

Going back to the inventory transition, the A2L changeover touched more than half of what they sell and made 2025 one of the noisiest years management can remember. Still, they view it as a temporary situation, and one that is mostly behind them.

Under the surface, the biggest pressure point this year has been new construction. That was called out as the largest culprit of unit declines.

With that, replacement demand is still there, but is more discretionary when a homeowner is staring at a $10–12k install. Replacement feels even less urgent when you add higher rates, low existing-home turnover, weak consumer confidence, and tariffs into the mix.

Overall, the “repair vs. replace” question isn’t a straight up either/or situation. Larger dealers with in-home salespeople tend to skew to replacement, while smaller contractors and cooler-climate geographies skew to repair.

Moving forward, management didn’t give guidance for Q4, but they did say October revenue was down mid-single digits (roughly 5–10% in dollars). They acknowledged OEM commentary about steep unit declines into year-end but clarified that those figures refer to units, not dollars, and that Watsco’s own trends aren’t nearly that severe.

OnCallAir—a contractor sales platform Watsco built—continues to lift ticket and efficiency mix. Over 70% of the proposals closed using that tool come in above the minimum standard, and it’s approaching ~$2 billion of customer sales flowing through it.

OnCallAir is part of a broader digital edge. E-commerce penetration reached 34% of sales overall (as high as 60–70% in some markets), mobile-app users grew 18% to 72,000 techs, and OnCallAir GMV is up about 19% with around $1.7 billion over the last twelve months.

Watsco is also leaning into price optimization, data science, and new tools aimed at large, multi-location “institutional” contractors—still under 10% of the market but growing—and expect to roll out a unified buying experience across the company early next year.

Regarding capital allocation, buybacks came up but took a back seat to M&A optionality. With cash piling up and no debt, Watsco wants the dry powder if industry conditions create openings to acquire or JV with high-quality distributors—which is consistent with Watsco’s usual playbook.

Even though the surface level financials weren’t outstanding, Q3 reinforced the main premise of the Watsco story: increasing margins, ample cash creation, and technology deepening their moat. Watsco seems to be doing what they can to ensure 2026 will be a better year than this one.

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