Executive Summary / Key Takeaways

• Service-Driven Resilience: Otis's core investment thesis is anchored in its resilient, high-margin Service segment, which consistently drives operating profit growth and offsets cyclical headwinds in New Equipment sales. The Service portfolio, now approaching 2.5 million units, is expanding, fueled by an aging global installed base and strategic investments.
• Modernization Momentum: The company is in the early stages of a multi-year modernization growth cycle, driven by 8 million aging units globally. Strong order growth (up 27% in Q3 2025) and a robust backlog position modernization as a significant future revenue and margin contributor, with targets for double-digit margins in the medium term.
• Strategic Transformation in China: Otis is proactively transforming its China operations, pivoting from New Equipment dependency to a service-driven model. This involves consolidating operations, rationalizing products, and targeting low-teens annual service portfolio growth and over 20% annual modernization order growth, aiming for improved profitability in this mature market.
• Operational Efficiency & Innovation: Initiatives like the UpLift program (targeting $200 million in annual run-rate savings by H2 2025) and the China transformation are enhancing cost structure and customer centricity. Technological differentiators like Gen3, Compass Infinity AI, and Otis Arise MOD packages are improving safety, efficiency, and customer value.
• Solid Financial Outlook: Despite macroeconomic uncertainties and tariff impacts, Otis projects 2025 net sales of $14.5 billion to $14.6 billion (organic growth of ~1%), adjusted operating profit of $2.4 billion to $2.5 billion (up $75 million to $95 million at actual currency), and adjusted EPS of $4.04 to $4.08 (5% to 7% growth). The company remains committed to returning capital to shareholders through dividends and share repurchases.

Otis's Enduring Ascent in Vertical Mobility

Otis Worldwide Corporation, founded in 1853, stands as the global leader in the manufacturing, installation, and servicing of elevators and escalators. Its journey as an independent public company began in April 2020, following its spin-off from United Technologies Corporation. This strategic separation allowed Otis to sharpen its focus on its core vertical mobility business, a move that has since underpinned its strategy of consistent, resilient performance. The company operates through two primary segments: New Equipment, which designs, manufactures, and installs a wide range of vertical transportation solutions, and Service, which provides maintenance, repair, and modernization for both its own and other manufacturers' products.

The industry landscape is shaped by powerful secular trends, including global urbanization, the increasing demand for smart building infrastructure, and the significant aging of the world's installed elevator and escalator base. Otis's strategy is deeply intertwined with these drivers, particularly leveraging the expanding global installed base, which reached approximately 22 million units by the end of 2024 and is projected to grow to 23 million units by year-end 2025. This growth provides a fertile ground for its high-margin Service segment, which is the cornerstone of its investment thesis.

The Service Flywheel: Otis's Enduring Moat and Growth Engine

The Service segment is Otis's core earnings driver, consistently contributing approximately 90% of the company's total operating profit. This segment's strength lies in its annuity-like revenue streams derived from maintenance contracts, a vast and growing installed base, and the increasing demand for modernization. Otis has a proven track record, having increased Service's adjusted operating profit dollars for 23 consecutive quarters since its spin-off.

The Maintenance portfolio continues its robust expansion, growing 4% in Q3 2025 and on track to approach 2.5 million units globally by year-end. This portfolio growth is critical, as it builds density, which in turn drives operational efficiencies and higher profitability. Complementing maintenance, the Repair business has shown significant acceleration, growing 7% in Q3 2025 and projected to ramp up to 10% or above in Q4 2025. This acceleration is driven by the aging of the installed base, with over 8 million units globally now exceeding 20 years old, leading to more frequent repair needs.

Modernization is emerging as a powerful multi-year growth cycle for Otis. Modernization orders surged 27% in Q3 2025, with the backlog increasing 22%. This momentum is supported by the vast aging installed base and strategic initiatives like the launch of Otis Arise MOD packages in EMEA. These flexible, phased modernization solutions are designed to reduce disruption for building owners and offer predictable budgets, positioning Otis to capture long-term demand. Modernization margins are also improving sequentially, with a clear path to reaching a 10% margin rate in the medium term. To support this growth, Otis made a strategic investment in 2024 by adding 2,000 field mechanics and professionals, increasing its direct field workforce by 5%. This ensures the necessary capacity and expertise to meet the growing demand in both Service and Modernization.

Technological Differentiation: Elevating Performance and Customer Value

Otis's competitive edge is significantly enhanced by its continuous investment in technological differentiation and innovation. The company's core technology revolves around its digitally connected elevator platforms, such as Gen3, Gen360, and SkyRise systems. These platforms are integrated with advanced features that deliver tangible benefits to customers.

For instance, the Compass destination dispatching and Compass Infinity AI dispatching systems are designed to continuously learn and optimize passenger flow, significantly reducing wait times and improving building efficiency. The EMS 2.0 Elevator Management System provides comprehensive oversight and control, enhancing operational management for facility managers. In specific applications, Otis has integrated AI-enabled safety cameras to prevent unauthorized entry, such as e-bikes in residential communities, demonstrating a commitment to enhanced safety and security. The Otis Arise MOD packages, a new suite of modernization solutions, exemplify how technology translates into customer value by offering less disruptive, phased project options with predictable budgets.

While specific quantitative performance metrics like "X% lower degradation" are not explicitly detailed, the strategic intent and qualitative benefits are clear: these technologies contribute to optimized passenger journeys, enhanced safety, improved building functionality, and reduced operational disruption. Otis's R&D spending, maintained at approximately 1.4% of sales, supports these innovations. Recent product launches, including the enhanced Public Escalator and the rollout of Gen3 across Asia Pacific, underscore the company's commitment to staying at the forefront of urban mobility solutions. For investors, these technological advancements strengthen Otis's competitive moat, improve customer retention by offering superior service and efficiency, and contribute to better financial performance through higher value offerings and operational cost reductions.

Strategic Initiatives: UpLift and China Transformation

Otis is actively executing two major strategic initiatives: the UpLift program and the China transformation, both designed to enhance operational efficiency and capitalize on market opportunities.

The UpLift program, initiated in 2023, is a comprehensive effort to transform Otis's operating model. It focuses on standardizing processes, improving supply chain procurement, and implementing organizational changes. This program is on track to generate approximately $200 million in annual run-rate savings by the second half of 2025. These savings are crucial for maintaining a competitive cost structure and funding investments in growth areas, ultimately driving greater customer centricity.

Simultaneously, Otis is undertaking a significant transformation of its China business, announced in January 2025. This strategic pivot acknowledges the structural shift in the China New Equipment market, which has transitioned from a high-growth environment to a more mature one. The transformation involves consolidating operations, rationalizing the product portfolio, and right-sizing New Equipment activities to adapt to the new market reality. Crucially, it emphasizes a shift towards a service-driven model, leveraging China's vast installed base. Otis is targeting low-teens annual service portfolio growth and over 20% annual modernization order growth in China. This strategic realignment is expected to yield approximately $30 million in annual run-rate savings by year-end 2025, primarily from New Equipment operations, and is designed to improve China service margins by increasing density and leveraging standardized modernization packages. This proactive approach positions Otis to capture long-term value from China's evolving vertical mobility needs.

Financial Performance and Liquidity: A Resilient Foundation

Otis's financial performance in the first nine months of 2025 demonstrates the resilience of its service-driven model, even amidst a challenging New Equipment market. For the quarter ended September 30, 2025, Otis reported net sales of $3.69 billion, with organic sales up 2% year-over-year. This growth was primarily driven by the Service segment, which saw organic sales increase by 6%. The New Equipment segment, however, experienced an organic sales decline of 5% in the same quarter. For the nine months ended September 30, 2025, net sales totaled $10.64 billion, with organic sales remaining flat compared to the prior year.

Profitability metrics highlight the strength of the Service segment. In Q3 2025, adjusted operating profit reached $586 million, with the adjusted operating profit margin expanding by 20 basis points to 17.1%. This expansion was largely attributable to a 70 basis point margin increase in the Service segment, which recorded an operating profit of $621 million. For the nine-month period, adjusted operating profit was $1.54 billion, with a margin of 14.5%. Diluted adjusted EPS for Q3 2025 was $0.95, and $2.55 for the nine months.

While the Service segment thrived, the New Equipment segment's operating profit declined due to lower volumes, unfavorable pricing, tariff headwinds, and regional/product mix. Selling, general, and administrative expenses increased, driven by higher restructuring costs and wage increases, though partially offset by UpLift savings. Interest expense also rose, primarily due to new debt issuances and the absence of significant interest income from the German tax litigation recorded in 2024.

Otis maintains a solid liquidity position. As of September 30, 2025, cash and cash equivalents stood at $840 million, with approximately 97% held by foreign subsidiaries. The company has access to a new $1.50 billion revolving credit facility, which remained undrawn.

Debt management has been active, including the repayment of $1.30 billion in notes and the issuance of $500 million in new ten-year notes.

Cash flows from operating activities for the nine months ended September 30, 2025, decreased year-over-year, primarily due to working capital dynamics, including a larger increase in accounts receivable and a decrease in accounts payable. This temporary shift in business mix, with Service growing faster than New Equipment, impacts working capital as Service collections occur after service delivery. Otis anticipates returning to a 100% cash flow conversion rate by 2026 as New Equipment stabilizes. The company remains committed to returning capital to shareholders, having completed approximately $800 million in share repurchases by Q3 2025 and increasing its dividend payout by 8% in Q1 2025. Strategic bolt-on M&A activity, with over $100 million invested year-to-date in Q3 2025, further enhances the maintenance portfolio and density.

Competitive Positioning: Leading in a Dynamic Market

Otis holds a leading position in the global elevator and escalator market, characterized by its extensive global brand recognition, robust service network, and deep expertise in installation and maintenance. Key direct competitors include Schindler Group (SCHN), KONE Corporation (KNEBV), Thyssenkrupp AG (TKAMY), and Mitsubishi Electric Corporation (MIELY), all vying for market share across new equipment, maintenance, and modernization.

Otis's competitive advantages are particularly pronounced in its Service segment. Its extensive global service network, comprising 44,000 field professionals, allows for rapid response times and comprehensive coverage, providing a qualitative edge in customer satisfaction and operational execution. This network, combined with its strong brand, fosters high customer loyalty and generates recurring, high-margin revenue from long-term service contracts. While competitors like Schindler and KONE are recognized for their innovation in digital solutions and energy efficiency, respectively, Otis leverages its own technological offerings, such as Otis ONE and AI-driven dispatching systems, to enhance service delivery and customer value, thereby strengthening its competitive moat. The company's focus on density within its service portfolio, particularly in regions like China, is a strategic response to competitive pressures, aiming to improve profitability and market penetration.

In the New Equipment market, particularly in China, the competitive landscape is intense, marked by significant pricing pressure. Otis's China transformation strategy is a direct response to this, aiming to right-size its New Equipment operations and pivot towards the more profitable Service and Modernization segments. While the market for new installations in China is highly competitive, the modernization segment presents a different dynamic. Otis notes a limited presence of independent service providers (ISPs) in the Chinese modernization market, largely due to the specialized construction skills required. This creates a significant opportunity for OEMs like Otis, which can leverage their existing manufacturing capabilities and installation efficiencies to serve this growing demand. Globally, the high capital requirements and stringent regulatory approvals act as significant barriers to entry, protecting established players like Otis from new entrants.

Outlook and Guidance: Sustained Growth Amidst Evolution

Otis's outlook for 2025 reflects a continued focus on its service-driven growth strategy, underpinned by strategic transformations and a disciplined approach to capital allocation. The company projects full-year net sales of $14.5 billion to $14.6 billion, representing organic sales growth of approximately 1%. Adjusted operating profit is anticipated to be between $2.4 billion and $2.5 billion, an increase of $75 million to $95 million at actual currency. This is expected to drive adjusted EPS to a range of $4.04 to $4.08, representing 5% to 7% growth compared to 2024. Adjusted free cash flow is projected to be approximately $1.45 billion.

The market outlook for New Equipment remains mixed. The Americas market is expected to grow at a low single-digit rate, an upgraded outlook driven by strength in infrastructure, residential, and data center segments. EMEA is projected for low single-digit growth. Asia, however, is expected to decline by high single digits, primarily due to a projected low-teens decline in China, though the market is anticipated to stabilize later in 2025 between 350,000 and 400,000 units. Overall, the global New Equipment market is expected to see a mid-single-digit decline in units.

Conversely, the Service segment is poised for robust growth. Maintenance and repair organic sales are expected to grow mid-single digits, with repair activity accelerating to 10% or above in Q4 2025. Modernization organic sales are projected to grow approximately 10% for the full year, supported by a strong backlog. The global installed base is expected to expand by mid-single digits, reaching approximately 23 million units by year-end 2025, providing a strong foundation for future service growth.

Strategic initiatives like the UpLift program are on track to deliver $200 million in annual run-rate savings by the second half of 2025, while the China transformation is expected to contribute $30 million in annual run-rate savings by year-end 2025. These savings are crucial for offsetting headwinds and driving margin expansion, with adjusted operating margin expected to expand by approximately 30 basis points. The company anticipates a tariff impact of approximately $30 million for 2025, primarily affecting its pre-2025 backlog, but mitigation efforts and adjusted contract terms for new orders are expected to largely offset future impacts.

Risks and Challenges: Vigilance in a Dynamic World

Despite a strong strategic foundation, Otis faces several risks and challenges. Macroeconomic conditions, including inflationary pressures, higher interest rates, and tighter credit conditions, continue to pose a threat to customer demand and operational costs. Geopolitical conflicts, such as those in Russia/Ukraine and the Middle East, introduce uncertainties that could disrupt supply chains and impact global trade policies.

Tariffs, particularly those affecting imports from China, are expected to have a material impact on the company's New Equipment business, with an estimated $30 million impact in 2025. While mitigation efforts are underway, the resolution of these trade policies remains fluid. Furthermore, the ongoing dispute with RTX (RTX) regarding the German tax litigation indemnity introduces an element of financial uncertainty. Maintaining customer trust and improving retention rates, particularly in the Service segment, remains a critical operational focus, as any deterioration could impact the long-term profitability of the service flywheel.

Conclusion

Otis Worldwide Corporation is demonstrating remarkable resilience and strategic foresight in a dynamic global market. The company's unwavering focus on its high-margin, recurring Service business, driven by an expanding global installed base and a burgeoning modernization cycle, forms the bedrock of its investment thesis. Strategic transformations in both its global operating model through UpLift and its targeted approach in China are enhancing efficiency and competitive positioning, leveraging technological differentiators to deliver superior customer value.

While the New Equipment segment faces near-term headwinds, particularly in China, the robust performance and strategic investments in the Service segment, coupled with a disciplined capital allocation strategy, position Otis for sustained earnings growth. The company's ability to adapt to market shifts, innovate through technology, and execute on its strategic initiatives underscores its potential to generate attractive long-term shareholder value, making it a compelling consideration for discerning investors.