Otis (OTIS) Q4 2025: Modernization Orders Jump 43%, Unlocking Multi-Year Service Tailwind
Otis delivered a record 43% surge in modernization orders, fueling a 30% backlog increase and affirming a durable, service-centric growth cycle. Service margin expansion and robust cash generation underpin Otis’s transformation into a higher-value, recurring revenue model, even as new equipment faces China-driven headwinds. Guidance signals continued operational leverage, with modernization and repair accelerating as the next wave of profit drivers.
Summary
- Modernization Backlog Sets New High: 43% order growth and a 30% larger backlog position Otis for sustained revenue conversion.
- Service Margin Expansion Accelerates: Record service margin improvement and disciplined portfolio management drive core profitability.
- Recurring Revenue Focus Deepens: Investments in digital, AI, and field force productivity signal a shift toward higher-value, sticky service streams.
Performance Analysis
Otis’s Q4 results highlight a decisive pivot toward modernization and service-driven growth, with organic sales up 1% and service revenue advancing 5%. Notably, modernization revenue grew 9% organically, led by China’s 100% surge, and the company ended 2025 with the highest modernization backlog since the spin-off. Service margin expanded 100 basis points to 25.5%, delivering the strongest quarterly improvement of the year and matching record levels. This margin expansion was supported by higher volumes, smart pricing, and productivity gains, partially offset by labor costs and mix.
New equipment sales declined 6% organically, with China and the Americas offsetting gains in EMEA and Asia-Pacific. New equipment backlog, however, grew 2% globally and 9% ex-China, signaling stabilization outside China. Operating profit in new equipment fell, with margin compression driven by lower volume, pricing pressure, and commodity headwinds. Cash generation remained a standout, with adjusted free cash flow reaching $817 million for the quarter and $1.6 billion for the year, supporting $1.5 billion in shareholder returns and targeted bolt-on acquisitions.
- Modernization Orders Outpace Expectations: Orders grew 43% in Q4, with EMEA and Americas leading, and backlog up 30%—a multi-year revenue tailwind.
- Service Portfolio Quality Over Quantity: Portfolio grew 4% to 2.5 million units, but management is shifting focus to high-value, profit-contributing units.
- China Remains a Drag on New Equipment: Market decline moderated but still pressured margins; service mix in China now at 47% of sales, up from mid-teens at spin.
Otis’s performance underscores the resilience of its service model, with recurring revenue and modernization now driving the majority of profit growth. The company’s ability to expand margins and cash flow despite macro and segment headwinds signals a sustainable shift in business quality.
Executive Commentary
"We secured record modernization orders, building an unprecedented backlog, and our new equipment backlog grew. We achieved record adjusted free cash flow of $817 million in the fourth quarter, reflecting our continued focus on working capital efficiencies and collections. We continued to grow the largest maintenance portfolio in the industry."
Judy Marks, Chairman and Chief Executive Officer
"This acceleration of top line should also flow through profit, and we expect an acceleration of service contribution in the year. In 2025, we contributed PPI versus previous year $150 million at constant currency. In 2026, this is going to be $200 million. We are expecting margin expansion again in 2026."
Christina, Chief Financial Officer
Strategic Positioning
1. Modernization as a Structural Growth Engine
Otis is capitalizing on an aging global install base, with nearly 9 million units now in the prime age for modernization. The company’s industrialized approach—integrating modernization into new equipment factories, streamlining supply chains, and deploying specialized installers—has enabled scale benefits and margin improvement. Modernization margins are now more than double those of new equipment, with China’s government stimulus providing a further catalyst. Management sees modernization revenue growing in the teens for 2026 and beyond, underpinned by a record backlog and phased, customer-centric offerings.
2. Service Model Transformation and Digital Leverage
Otis’s shift to a service-driven business model is accelerating, with a focus on high-value portfolio units, predictive maintenance, and AI-enabled tools (such as the Otis AI Inspection Robot and Otis One IoT platform). Subscription revenue from connected units grew 35% in 2025, and the company now has nearly 1.1 million connected units globally. This connectivity not only improves uptime and customer satisfaction but also enhances retention and recurring revenue streams.
3. Portfolio Quality and Retention Discipline
Management is prioritizing profitable growth over raw unit expansion, especially outside China. Retention rates stabilized ex-China, and Otis is selectively investing in service excellence and field force expansion to drive incremental value from its existing base. In China, structural churn remains high due to contract dynamics, but Otis is focusing on density and high-contribution units, accepting lower conversion rates to optimize long-term profitability.
4. Operational Efficiency and Capital Allocation
Otis continues to drive working capital efficiency, delivering record free cash flow and maintaining a disciplined capital allocation framework. The company returned nearly all free cash flow to shareholders while also investing in bolt-on acquisitions and digital capabilities. Asset sales and outsourcing of service centers contributed to margin gains and are expected to yield longer-term retention benefits through improved spare parts logistics.
Key Considerations
This quarter marks a clear inflection in Otis’s business model, with modernization backlog and service margin expansion outpacing legacy new equipment growth. Investors should assess the durability of these trends and their implications for long-term value creation.
Key Considerations:
- Modernization Cycle Is Early-Stage: Backlog signals multi-year growth, but conversion rates depend on project mix and execution speed.
- Service Excellence Investment Continues: Additional field force and digital tools will support retention and value per unit, but may dampen near-term margin expansion.
- China Headwinds Remain Structural: Market decline is moderating, but high churn, price pressure, and lower conversion rates persist; Otis is actively managing for profitability over scale.
- New Equipment Stabilization Ex-China: Backlog growth in EMEA and Americas offers visibility, but global new equipment remains a smaller, lower-margin contributor.
- Capital Allocation Remains Shareholder-Focused: Dividends and buybacks absorb most free cash flow, with flexibility for bolt-on M&A as modernization and service scale.
Risks
China remains a persistent risk, with ongoing market contraction, intense price competition, and structurally higher churn in the service portfolio. Modernization conversion rates could lag backlog growth if project execution slows or major projects extend over multiple years. Labor inflation and resource allocation to service excellence may pressure near-term margins, while commodity volatility and tariff shifts could impact new equipment profitability.
Forward Outlook
For Q1 2026, Otis guided to:
- Service organic sales growth of approximately 6%, led by repair and modernization execution
- New equipment top line down in line with Q4, with improvement expected as the year progresses
- EPS to be roughly flat year-over-year in Q1
For full-year 2026, management maintained guidance:
- Organic sales growth of 3% at the midpoint, with service up mid to high single digits
- Adjusted EPS growth in the mid to high single digits
- Free cash flow of $1.6 to $1.7 billion
Management emphasized:
- Acceleration in service and modernization will drive profit growth, offsetting new equipment headwinds
- Portfolio growth will focus on value, not just unit count, with selective retention and customer-centric investments
Takeaways
Otis’s modernization flywheel is now a structural revenue and margin driver, with backlog and order momentum providing multi-year visibility. Service is increasingly the core profit engine, supported by digital investments and a disciplined focus on high-value retention. China remains a drag, but management is prioritizing quality over quantity and actively managing for profitability.
- Modernization Backlog Drives Visibility: Record order and backlog growth positions Otis for sustained revenue and margin expansion, even as project timing varies.
- Service Quality and Digital Tools Underpin Retention: Investments in AI, IoT, and field force productivity are already stabilizing retention rates and should support incremental margin gains.
- Investors Should Watch Execution on Conversion and Retention: The next phase of value creation will hinge on timely modernization revenue conversion and continued improvement in service portfolio quality.
Conclusion
Otis enters 2026 with a record modernization backlog, accelerating service margins, and a clear focus on recurring, high-value revenue streams. Execution on backlog conversion and retention will determine the pace and sustainability of profit growth as the business model shifts further from new equipment to service-centric value creation.
Industry Read-Through
Otis’s results highlight a secular shift in the elevator and escalator industry toward service and modernization, as aging global infrastructure and digital transformation create durable demand. Competitors with scale, digital connectivity, and a disciplined approach to portfolio quality are best positioned to capture recurring revenue and margin expansion. The ongoing challenges in China underscore the need for geographic and segment diversification, while the success of AI-driven maintenance and modular modernization packages signals broader adoption potential across building services and industrial equipment sectors.