Watsco Q4 earnings tell two stories, and neither one cancels the other out.
On the surface, Watsco Q4 earnings paint a rough picture. Revenue fell 10%. HVAC equipment sales dropped 13%. Earnings per share declined 29%. When you back out the 11% domestic pricing increase, implied equipment volumes were down more than 20%. That is not a soft patch.
But Watsco’s own framing of the results was strikingly different. Record full-year gross margin. Record fourth-quarter cash flow. A 30% reduction in inventory from its peak. SG&A down in dollar terms. A 10% dividend increase. A balance sheet carrying $733 million in net cash and zero debt. And a technology platform that, based on what the company presented at its December Investor Day, is years ahead of anything else in the HVAC channel.
Both versions are true. The volume weakness is real and it matters. But the operating execution and the platform Watsco is building around itself tell a story that goes well beyond one quarter. For contractors, distributors, and rep firms, both realities demand attention.
Watsco Q4 Earnings: Volumes Fell Hard, but Look at the Margins
Watsco reported Q4 revenue of $1.579 billion, down 10% year over year. HVAC equipment, which represents 67% of sales, declined 13%. Other HVAC products (parts and supplies, 29% of sales) fell 4%, reversing prior-quarter growth. Commercial refrigeration (4% of sales) grew 5% but is too small to move the overall picture.
Diluted EPS came in at $1.68 versus $2.37 in the prior year. Operating income declined 25% to $102 million, and operating margin compressed to 6.4% from 7.8%.
But the margin story underneath those numbers runs counter to the revenue story. Q4 gross margin expanded 40 basis points year over year to 27.1%. For the full year, gross margin hit 28.0%, a record, up 120 basis points from the prior year and up 370 basis points from 2019. That expansion came from continued scaling of Watsco’s pricing optimization technology and OEM pricing actions. Watsco is generating more margin per dollar of revenue even as volume contracts.
On the expense side, SG&A declined 2% in dollar terms despite higher labor, facilities, and transportation costs tied partly to the A2L transition and three acquisitions completed during 2025. As a percentage of revenue, expenses rose because the denominator shrank faster than the cost structure. That is a math problem, not a management problem.
Q4 operating cash flow was $400 million, which Watsco described as a fourth-quarter record. That number was driven by a deliberate and sharp reduction in inventory. Inventory peaked at $2.1 billion during the A2L transition and declined 30% to $1.4 billion by year end. Full-year operating cash flow was $570 million, converting at 97% of net income, consistent with the company’s long-term track record.
The A2L Factor: Why This Quarter Needs Context
The Watsco Q4 earnings volume decline cannot be evaluated without understanding the A2L refrigerant transition that dominated 2025. This was the second regulatory-driven product change in three years, and it impacted approximately 55% of products sold across 650 domestic locations. Watsco converted over $1 billion of inventory to new A2L-compliant products during the year.
The comparison period makes the decline look worse than underlying demand alone would suggest. Q4 2024 included 22% domestic residential HVAC equipment sales growth, with 20% unit growth, driven by contractors buying 410A systems before the transition deadline. The Q4 2025 decline is partly a normalization off that artificially inflated baseline.
Parts and supplies softening at the same time equipment volumes dropped suggests the weakness goes beyond just a regulatory pull-forward unwinding. But the magnitude of the volume decline overstates the demand picture when you account for the comp dynamics. Watsco CEO Albert Nahmad acknowledged the period as among the most complicated in memory, while expressing expectations for a more conventional industry environment as 2026 unfolds.
Watsco Q4 Earnings in Full-Year Context
Putting Watsco Q4 earnings in full-year context changes the picture considerably. For the full year, Watsco reported revenue of $7.24 billion (down 5%), gross profit of $2.0 billion (down 1%), record gross margin of 28.0%, operating income of $720 million (down 8%), and EPS of $12.25 versus $13.30 in the prior year.
The longer view is more telling. Since 2019, revenue has grown 52%, operating income has nearly doubled (up 96%), gross margin has expanded 370 basis points, EPS has grown 88%, and the balance sheet has swung from $81 million in net debt to $733 million in net cash. Watsco has delivered those results through a period that included a pandemic, supply chain disruptions, two regulatory product transitions, a housing slowdown, and volatile commodity costs.
The company raised its annual dividend 10% to $13.20 per share, marking 52 consecutive years of dividend payments. That is not the behavior of a company worried about its trajectory.
The Other Side of Watsco: A Platform the Channel Cannot Match
On December 11, 2025, Watsco held an Investor Day that laid out the technology and supply chain infrastructure behind its long-term ambitions. The targets: $10 billion in sales, 30% gross margins, and 5x inventory turns. Every initiative presented feeds one or more of those numbers.
E-commerce sales totaled $2.5 billion in 2025, comprising 35% of overall sales. Outperforming regions exceed 60% e-commerce penetration. The authenticated user community of Watsco’s HVAC Pro+ mobile apps grew 15% to approximately 73,000 users. Lines per invoice on e-commerce orders run 26% higher than standard orders, and customer attrition among digital users is approximately 60% lower.
Pricing optimization has delivered roughly 200 basis points of transactional margin improvement over five years, processing 266,000 supplier cost changes and 3.8 million customer pricing record updates in 2025. The system provides segment-specific pricing guidance based on customer size, geography, purchase frequency, and competitive dynamics. The next phase includes AI-driven pricing agents that scan for outliers and opportunities and eventually automate routine maintenance within defined guardrails.
OnCall Air, Watsco’s contractor sales platform, generated $1.8 billion in gross merchandise value for the full year, a 20% increase, with $400 million in Q4 alone. Approximately 329,000 households received quotes through the platform in 2025. Contractors using OnCall Air sell twice the volume of high-efficiency equipment, see 44% close rates, 25% attachment rates on accessories, and 17% higher ticket sizes when presenting with financing.
Hydros, launched in January 2025, is Watsco’s centralized supply chain platform for parts and supplies. It serves 550+ locations, runs at six inventory turns, delivers 98% shipment accuracy, and has generated 200 basis points of margin expansion on the Hydros assortment. The opportunity set is roughly $1.5 billion in total non-equipment spend across Watsco.
SupplySync.com, targeting enterprise customers including contractor consolidators, institutional buyers, home warranty companies, and property management groups, is set for pilot launch in Q2 2026. It unifies pricing, billing, logistics, and procurement visibility across 600+ Watsco locations. Watsco described it as the first platform in its history planned, designed, and developed using AI.
AI is also embedded across customer onboarding (reducing activation from weeks to minutes across 18,000 new accounts annually), technical support (170,000 cases with AI-assisted resolution), and direct customer engagement (targeting 60%+ of 5 million annual phone calls for AI handling).
Watsco has invested more than $250 million in technology over the past five years, with a current annual run rate of approximately $60 million and close to 300 technologists. Only 30% of its customers are currently using the core technology platforms. The benefits compound as adoption increases, and the long tail of customers who have not yet adopted represents both growth upside for Watsco and a widening competitive gap for everyone else.
Why the Contrast Matters
Watsco holds an estimated 18 to 20% share of a highly fragmented market with more than 2,100 independent distributors. Its $7.2 billion in revenue dwarfs the next largest competitor. It operates 698 locations. It carries zero debt against $3.2 billion in shareholders’ equity. Over 30 years, it has delivered 17% compounded annual total shareholder returns. Since 2019, it has acquired 12 companies representing approximately $1.6 billion in annualized sales and 120 locations.
The technology investments do not exist in isolation. They reinforce each other. Higher digital adoption drives higher lines per invoice and lower attrition. Better pricing tools drive margin expansion. Centralized supply chain operations drive inventory efficiency and margin on parts and supplies. OnCall Air drives richer mix and higher close rates for the contractors who use it. Each layer compounds the advantage of the others.
What This Means for the HVAC Channel
For independent distributors, Watsco Q4 earnings reveal a paradox. The volume environment is weak, and Watsco felt it just like everyone else. But the company’s response to that weakness, including record margins, record cash flow, deliberate inventory reduction, and continued technology investment, illustrates the structural advantages of scale and platform in a downturn. When volumes contract, the companies with pricing optimization, digital adoption, and supply chain efficiency lose less. The gap does not close in a soft market. It widens.
That does not mean the answer is to replicate Watsco. Most independents cannot and should not try. But the underlying disciplines, including digital adoption, pricing rigor, supply chain efficiency, and customer data leverage, are not proprietary concepts. The question is whether smaller players can find their own version of these capabilities at a scale that works for their business.
For contractors, the OnCall Air data is worth studying regardless of where you buy. Twice the high-efficiency mix, 44% close rates, 17% higher tickets with financing, 329,000 households quoted in a single year. Those are contractor performance numbers enabled by a platform. The lesson is that sales enablement tools, when adopted and used consistently, change outcomes at the point of sale. If your distributor is not offering something comparable, ask why.
For rep firms, the consolidation of purchasing power, pricing intelligence, and enterprise procurement into platforms like SupplySync shifts the influence equation. As enterprise customers route more volume through centralized platforms with negotiated national pricing, the local relationship that has historically been the rep’s primary value proposition faces a different competitive dynamic. It does not eliminate the role, but it changes the nature of the influence.
Watsco expects a more conventional industry environment as 2026 unfolds. Whether that proves true will depend on housing, interest rates, and the tail end of the A2L transition. But the structural story does not depend on one quarter’s demand trends. The platform is being built regardless of whether Q1 is up or down.
Volume declines expose what your cost structure and competitive position actually look like. Distributors reassessing their branch strategy, growth priorities, or market position should look at CMG’s GPS for Distributors. Manufacturers who need to understand how their channel partners view their support before the competitive landscape decides for them should consider PartnerCare. Either way, the time to do the work is now. Reach out and let’s talk through what you are trying to build.
About the Author
Chuck Labow is Vice President and HVAC Market Leader at Channel Marketing Group and editor of HVACR Trends. He works with manufacturers, distributors, and rep agencies on channel strategy, go-to-market planning, and sales performance across the HVAC and refrigeration industries.
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