XYL Q3 Deep Dive: Margin Expansion and Portfolio Streamlining Drive Outlook Upward

Water technology company Xylem (NYSE:XYL) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 7.8% year on year to $2.27 billion. The company’s full-year revenue guidance of $9 billion at the midpoint came in 0.5% above analysts’ estimates. Its non-GAAP profit of $1.37 per share was 11.1% above analysts’ consensus estimates.

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

StockStory’s Take

Xylem’s third quarter delivered above-expectation results, buoyed by broad-based revenue growth and ongoing operational improvements. Management credited the quarter’s outperformance to robust demand in Measurement and Control Solutions and Water Solutions and Services, as well as successful implementation of its 80/20 resource allocation strategy. CEO Matthew Pine highlighted substantial progress in restructuring and simplifying the business, noting, “We’ve again set new Xylem benchmarks for on-time performance,” which has bolstered customer trust and margin expansion. The quarter’s gains were also aided by strong execution in North America and ongoing productivity initiatives across divisions.

Looking ahead, Xylem’s updated guidance is underpinned by continued demand for advanced metering infrastructure, ongoing simplification efforts, and a sharpened focus on high-margin segments. Management expects the company’s divestiture of its international metering business to further improve margins, while cautioning that macro uncertainties, including tariffs and China market softness, remain headwinds. CFO Bill Grogan emphasized, “We have confidence in our ability to meaningfully outperform our initial guidance,” citing strong backlog and accelerated benefits from operational changes. The company plans to leverage portfolio optimization and disciplined capital deployment to sustain its growth trajectory into next year.

Key Insights from Management’s Remarks

Management attributed margin expansion and revenue growth to strong demand in core segments, ongoing operational simplification, and strategic portfolio actions, including the divestiture of lower-margin businesses.

• 80/20 operational focus: The company’s resource allocation strategy, known as 80/20, continues to drive improved margins and customer service by prioritizing high-value opportunities and streamlining organizational complexity. Management reported record-high on-time performance and enhanced accountability across business units.
• Segment performance divergence: Measurement and Control Solutions (MCS) and Water Solutions and Services (WSS) experienced double-digit revenue growth, with MCS benefiting from robust demand for smart metering and WSS seeing strength in capital projects and dewatering. Applied Water, although slowed by China’s decline, extended its turnaround with positive order trends in the U.S. and Western Europe.
• Portfolio optimization progress: The divestiture of the international metering business allows Xylem to focus on North American advanced metering infrastructure (AMI) markets, where it holds a proprietary technology advantage. Management expects this action to deliver a 100 basis point margin improvement in the MCS segment on a run-rate basis.
• Resilience despite macro headwinds: While global orders were slightly down due to tough comparisons and China’s market softness, demand in North America and Western Europe remained strong. Management emphasized robust backlog levels and continued momentum in core markets.
• Tariff and supply chain impacts: Management updated its outlook for annualized tariff impacts to $180 million, but stated that pricing and supply chain actions are expected to largely offset these costs. They noted that tariffs have led to longer customer decision timelines but have not meaningfully affected volumes.

Drivers of Future Performance

Xylem’s outlook for the coming quarters is driven by resilient demand for smart metering, ongoing cost discipline, and a refined focus on higher-margin markets.

• Margin improvement from portfolio actions: The sale of the international metering business is expected to enhance profitability by shifting focus toward North American AMI solutions, which command higher margins due to proprietary technology and customer differentiation.
• Macro uncertainty and China exposure: Management acknowledged continued macro headwinds, particularly from tariffs and a significant sales decline in China, where restructuring is underway. They plan to rightsize operations in China while maintaining long-term market presence, and emphasized that North American demand remains a stabilizing factor.
• Self-help initiatives and disciplined capital deployment: Xylem’s simplification efforts, including the 80/20 strategy and targeted M&A, are intended to drive operational agility and free up capital for growth. Management reiterated plans to deploy $1 billion annually in small-to-medium acquisitions that fit strategic priorities, while maintaining flexibility to pursue larger opportunities if they arise.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be watching (1) the impact of the international metering divestiture on segment margins and overall profitability, (2) the pace of backlog conversion and new project wins in Measurement and Control Solutions and Water Infrastructure, and (3) the effectiveness of restructuring actions in China amid ongoing market weakness. We will also track tariff-driven cost pressures and the company’s ability to offset them through pricing and supply chain adjustments.

Xylem currently trades at $147, down from $149.40 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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