OTIS Q4 Deep Dive: Service Segment Momentum and Modernization Backlog Shape 2026 Outlook

Elevator manufacturer Otis (NYSE:OTIS) missed Wall Street’s revenue expectations in Q4 CY2025 as sales rose 3.3% year on year to $3.80 billion. The company’s full-year revenue guidance of $15.15 billion at the midpoint came in 0.7% below analysts’ estimates. Its non-GAAP profit of $1.03 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Otis’s fourth quarter results reflected a negative market reaction as the company missed Wall Street’s revenue expectations, despite delivering year-on-year top-line growth and meeting profit consensus. Management attributed the underperformance primarily to softer-than-anticipated new equipment sales, particularly in China and The Americas, and a lower-than-expected trajectory in repair within the service segment. CEO Judith Marks highlighted the company’s robust modernization orders and strong cash flow as key positives, noting, “We secured record modernization orders, building an unprecedented backlog.” The operational focus remained on expanding margins and growing the service portfolio, but external headwinds weighed on total revenue.

Looking ahead, Otis’s guidance for 2026 is shaped by expectations of accelerating growth in service—especially maintenance, repair, and modernization—while new equipment sales are projected to stabilize or decline slightly. Management emphasized the durability of modernization demand, fueled by an aging global installed base and continued government stimulus programs in China. CFO Cristina Mendez commented that the company’s service-driven model would “continue to support margin expansion,” even as investments in service excellence are planned to further improve customer retention and value. Management acknowledged a conservative approach to earnings guidance given ongoing macroeconomic and regional challenges.

Key Insights from Management’s Remarks

Management credited service segment expansion, strong modernization demand, and operational changes in China as key drivers in the quarter, while highlighting ongoing headwinds in new equipment sales and selective investments in service excellence.

• Service-driven growth focus: The service segment, including maintenance, repair, and modernization, was the primary contributor to margin expansion, with service margins up 100 basis points. Management cited continued investments in service quality and field headcount as essential to sustaining this growth.
• Modernization backlog record: Modernization orders grew 43% year-over-year, and the associated backlog was up 30%, supported by both large-scale projects (like the London Underground) and phased modernization packages. Management expects this trend to drive a steady multi-year revenue tailwind.
• China market transformation: Otis completed a buyout of a minority partner in its Chinese joint venture and leveraged government-funded stimulus for modernization. While China remains challenging, the company shifted focus toward higher-value service contracts and connected units, aiming to improve portfolio quality despite lower conversion and retention rates in the region.
• Operational efficiency initiatives: The company completed its China transformation and uplift program, streamlining service centers and outsourcing spare parts distribution to reduce lead times. A one-time gain from asset sales contributed to service margin expansion in the quarter.
• Digital and AI enhancements: Otis continued to roll out its Gen3 and Gen360 product families, featuring IoT connectivity (Otis One) and AI-powered diagnostic tools. These initiatives increased the number of connected units and grew subscription revenue by 35% in 2025, supporting predictive maintenance and proactive service delivery.

Drivers of Future Performance

Otis expects service-led growth, modernization backlog execution, and targeted investments to drive 2026 performance, while ongoing headwinds in new equipment and regional markets add some risk to the outlook.

• Service acceleration and retention: Management sees mid- to high-single digit growth in service, driven by higher repair rates, improved maintenance pricing, and modest gains in retention—especially outside China. The company is adding field professionals and investing in customer satisfaction to strengthen these trends.
• Modernization cycle momentum: The backlog of modernization projects, especially in Europe and China, is expected to fuel revenue growth in the teens for this segment. The Chinese government’s stimulus program for elevator modernization is set to continue at 2025 levels, supporting demand in that key market.
• New equipment stabilization and margin headwinds: While new equipment sales are projected to be flat to slightly down, management expects margins to be pressured due to lower volumes, particularly in China, and the diminishing benefit from recent restructuring programs. Service margin expansion is expected to offset these headwinds.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be closely watching (1) the pace of service revenue acceleration, especially in maintenance and repair, (2) execution on the large modernization backlog, including conversion rates in key markets, and (3) stabilization or improvement in new equipment sales outside China. Additional attention will be paid to the effectiveness of ongoing investments in service excellence and digital integration, as well as evolving government stimulus programs in China.

Otis currently trades at $89, down from $90.55 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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