Otis (OTIS) Q3 2025: Modernization Orders Jump 27%, Accelerating Service-Led Margin Expansion
Otis’s third quarter saw a decisive acceleration in modernization demand and service-driven margin expansion, offsetting persistent headwinds in new equipment and China. Service outperformance, robust portfolio growth, and disciplined cost actions are shaping a more resilient earnings base, with management signaling continued service-led profit growth into 2026.
Summary
- Modernization Orders Surge: Modernization demand spiked, reinforcing Otis’s multi-year service cycle thesis.
- Service Margins Hit Record: Service margin expansion offset new equipment weakness, highlighting portfolio density benefits.
- China Stabilization Emerges: Sequential improvement in China provides early signals of a bottoming process.
Performance Analysis
Otis’s Q3 results underscore the company’s transition toward a more resilient, service-driven earnings model, as organic sales growth of 2% was anchored by a standout 6% gain in service revenue. Modernization, defined as the upgrade and retrofitting of existing elevator infrastructure, delivered a 14% organic sales increase, while orders in this segment soared 27%—the highest since the company’s spin-off. This surge, coupled with a 4% expansion in the maintenance portfolio, drove a 70 basis point increase in service operating margins to a record 25.5%.
New equipment sales, however, remain a drag, declining 5% on weak volumes in China and the Americas, despite robust growth in EMEA and Asia-Pacific ex-China. Notably, Americas new equipment orders returned to growth, supported by infrastructure and residential verticals, and the region’s backlog is now positioned for revenue recovery over the next several quarters. Free cash flow rebounded sequentially, but year-to-date conversion remains below historical levels due to the shift from new equipment to service mix.
- Modernization Momentum: Orders up 27% and backlog up 22% signal a multi-year runway for upgrades in the aging installed base.
- Service Outperformance: Service organic sales up 6%, with repair accelerating to 7% and poised for double-digit growth in Q4.
- New Equipment Drag: Persistent weakness in China (down 20%) and Americas (down 7%) offset gains elsewhere, but backlog growth is turning positive.
Margin expansion in service and cost discipline in China transformation initiatives are mitigating the impact of lower new equipment volumes and tariffs, supporting a 9% increase in adjusted earnings per share. The company’s focus on portfolio density and pricing is delivering tangible operational leverage.
Executive Commentary
"Modernization order growth accelerated to 27%, and backlog increased 22%. New equipment orders grew 4%, returning to growth for the first time since the fourth quarter of 2023, supported by moderating declines in China and good momentum across the other regions."
Judy Marks, Chair, President and Chief Executive Officer
"Service organic sales grew 6% with growth in all lines of business. This acceleration represents the highest organic service sales growth this year in line with expectations and demonstrates the fundamentals of our service flywheel."
Christina Mendez, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Service Flywheel Drives Resilience
Otis’s service flywheel, the recurring revenue engine built on maintenance, repair, and modernization, is now the company’s primary profit driver. With a portfolio approaching 2.5 million units and recurring maintenance revenue, management is leveraging portfolio density to expand margins and drive incremental repair and modernization opportunities. The company’s strategic investments in customer retention and recapture are designed to boost long-term retention rates and further strengthen this flywheel.
2. Modernization Cycle Accelerates
The aging global elevator base is fueling a structural modernization upcycle, as evidenced by the 27% surge in orders and 22% backlog growth. Otis’s launch of Arise Mod, a flexible, phased modernization offering in EMEA, is aimed at capturing this demand while minimizing disruption for customers. The company’s ability to win large-scale projects, such as the 106-unit Shanghai renewal and Dubai’s Shoba Seahaven, highlights its competitive positioning in both mature and emerging markets.
3. China Transformation and Cost Actions
Despite ongoing pricing and volume pressure in China, Otis is executing a transformation program targeting $40 million in annual savings. Year-to-date, over $20 million has been captured, with $30 million expected for 2025. The company is also merging service brands and focusing on Tier 1 and 2 cities to improve density and profitability. While new equipment pricing in China remains down approximately 10%, sequential stabilization and government bond stimulus for modernization are providing a floor for further deterioration.
4. Americas and EMEA Backlog Strength
Americas new equipment backlog growth and robust EMEA order momentum are positioning these regions for revenue recovery in 2026. The Americas region has now posted five consecutive quarters of order growth, with infrastructure and residential sectors leading demand. EMEA is benefiting from high-teens order growth, especially in Southern Europe and the Middle East, and is supported by urbanization and infrastructure investment.
5. Capital Allocation and Cash Discipline
Otis completed $800 million in share repurchases year-to-date, and is increasingly deploying capital to bolt-on M&A that expands its service portfolio and mechanic density. Free cash flow conversion is expected to return to historical 100% levels as the business mix stabilizes and working capital normalizes. Management remains disciplined on restructuring costs and is now targeting $220 million in total for 2025.
Key Considerations
Otis’s strategic pivot to a service-centric model is delivering margin durability and cash flow visibility, even as new equipment markets remain volatile. The company’s ability to sustain modernization momentum and improve retention will be critical to maintaining this trajectory.
Key Considerations:
- Retention and Recapture Focus: Management is investing in service excellence and customer retention, aiming to rebuild trust and drive portfolio growth above the current 4% rate.
- Repair Growth Acceleration: Repair revenue is set to accelerate to 10%+ in Q4, supported by improved backlog conversion and higher aging elevator penetration.
- China Stabilization Signals: Sequential improvement in China new equipment and strong modernization order conversion suggest the worst may be past, but pricing remains fragile.
- Cash Flow Recovery Path: Free cash flow conversion is expected to rebound as working capital headwinds abate and modernization mix increases advance payments.
- Margin Expansion Levers: Service margin expansion is being driven by density, pricing, and productivity, with modernization mix a modest headwind but offset by volume leverage.
Risks
Persistent weakness in new equipment, especially in China, remains a material risk to top-line growth. Service retention rates are still below target, and recovery will require sustained operational execution. Tariff impacts and restructuring costs, while managed, could pressure margins if macro conditions worsen. Any slowdown in modernization demand or delays in repair backlog conversion would challenge the service-led profit thesis.
Forward Outlook
For Q4 2025, Otis guided to:
- Service organic sales growth of approximately 6%, with repair set to accelerate to 10% or above.
- New equipment organic sales decline moderating, with Americas revenue positioned for recovery due to backlog strength.
For full-year 2025, management raised the midpoint of adjusted EPS guidance to $4.04–$4.08, reflecting 5–7% growth, and maintained free cash flow guidance at $1.45 billion. Margin expansion of 30 basis points is expected, with service driving profit growth and new equipment headwinds moderating. Key drivers cited include accelerating modernization, repair ramp, and disciplined cost actions, especially in China.
- Service segment to drive revenue and profit growth
- Modernization growth of approximately 10% for the year
Takeaways
Otis is executing a clear transition toward a service-led, modernization-fueled growth model, with margin and cash flow resilience increasingly decoupled from the cyclical new equipment market.
- Portfolio Density and Modernization: Multi-year modernization cycle and service density are delivering margin expansion, even as new equipment remains challenged.
- Operational Leverage in Service: Record service margins and accelerating repair growth validate the service flywheel strategy, but retention improvement remains a multi-quarter journey.
- Watch for China Inflection: Sequential stabilization in China and continued modernization stimulus could provide upside, but sustained improvement is not assured.
Conclusion
Otis’s Q3 results confirm the company’s shift to a service-first, modernization-driven model, with margin expansion, cash discipline, and capital deployment all reinforcing a more resilient earnings base. Sustained execution on retention and modernization will be essential to extend this trajectory into 2026 and beyond.
Industry Read-Through
Otis’s performance signals a broader industry pivot toward service and modernization as primary profit engines, especially as global elevator fleets age and new equipment demand remains volatile. The company’s experience in China—balancing cost-out, density, and modernization stimulus—offers a template for navigating challenging markets. Competitors with strong service portfolios and modernization offerings are likely to outperform, while those reliant on new equipment face continued headwinds. Capital allocation discipline and operational excellence in retention and repair execution will be key differentiators across the sector.