WSO Q3 Deep Dive: Product Transition and Technology Investments Shape Results

Equipment distributor Watsco (NYSE:WSO) fell short of the markets revenue expectations in Q3 CY2025, with sales falling 4.3% year on year to $2.07 billion. Its GAAP profit of $3.98 per share was 7.3% below analysts’ consensus estimates.

Is now the time to buy WSO? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Watsco’s third quarter was marked by a notable decline in sales, but the market responded positively as management attributed the performance to the industry-wide transition to next-generation A2L refrigerant products. CEO Albert Nahmad emphasized that this transition, which disrupted roughly half the product portfolio, was largely complete by quarter’s end and described the period as one of “volatility” but not long-term weakness. Management pointed to increased pricing on new products, growth in non-equipment and commercial refrigeration sales, and record cash flow as key factors helping to offset subdued unit volumes.

Looking ahead, Watsco’s outlook is anchored in the expectation that industry volatility will subside as the regulatory-driven product shift concludes. Management highlighted ongoing investments in digital platforms and artificial intelligence tools to drive operational efficiency and higher margins. As Nahmad noted, “Our technology advantages remain immense,” and the company is focused on leveraging these strengths to expand gross margins and capture share, particularly by targeting institutional customers and growing non-equipment sales.

Key Insights from Management’s Remarks

Management cited the A2L refrigerant transition and related disruptions, along with strategic technology investments, as key influences on the quarter and future guidance.

• A2L refrigerant transition: The shift to next-generation refrigerants affected over half of Watsco’s product offerings, leading to operational inefficiencies and lower volumes. Management expects this regulatory change to benefit the company longer term as the transition is now mostly finished.
• Non-equipment and commercial refrigeration growth: Despite softer equipment demand, sales of non-equipment products and commercial refrigeration grew, supported by double-digit price increases in new categories. These segments offer higher gross margins, helping mitigate the volume declines in core equipment.
• Technology adoption gains: E-commerce penetration climbed to 34% of overall sales, with some markets reaching 60-70%. The OnCallAir digital platform for contractors increased its annual run rate by 19%, driving higher-value and higher-efficiency sales, and now represents $1.7 billion in gross merchandise value.
• Gross margin expansion: Gross margins improved by 130 basis points, driven by a favorable sales mix, ongoing pricing initiatives, and the use of optimization tools—some powered by artificial intelligence—to enhance pricing discipline in the field.
• Operational focus and cash generation: Watsco generated record third-quarter cash flow and continued to reduce inventories, with management targeting improved inventory turns and working capital efficiency. The company’s debt-free balance sheet positions it for potential acquisitions and continued investment in growth initiatives.

Drivers of Future Performance

Watsco’s guidance centers on stabilizing demand as the A2L transition wanes, with technology and product mix shifts expected to support margins.

• Normalization after transition: Management anticipates the market will stabilize in 2026 as the disruptive effects of the A2L refrigerant change fade. They expect a simpler operational environment, which could unlock efficiencies and support a return to more typical demand patterns.
• Technology-driven margin expansion: The company is accelerating adoption of digital sales platforms and AI-powered pricing tools, aiming to boost gross margins above 30%. These investments are expected to enhance customer engagement, streamline operations, and provide a competitive edge as contractors increasingly embrace digital tools.
• Growth in non-equipment and institutional segments: Watsco is targeting expansion in the non-equipment category and developing solutions for large-scale institutional customers. Management views these areas as underpenetrated and higher-margin, with new initiatives designed to capture a greater share of this fragmented market. However, macroeconomic risks around housing activity, interest rates, and consumer sentiment remain headwinds.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be monitoring (1) the pace at which demand normalizes following the A2L transition, (2) further improvements in gross margins and inventory turns as technology initiatives scale, and (3) progress in non-equipment and institutional sales channels. Additionally, any strategic acquisitions or acceleration in digital adoption will be important markers for Watsco’s ability to execute its growth strategy.

Watsco currently trades at $368.29, up from $358.52 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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