Otis Worldwide Corporation’s Mixed Q1 Results: A Closer Look at the Underperformance

On April 23, 2025, Otis Worldwide Corporation (OTIS) reported its first-quarter 2025 earnings, revealing a stark underperformance that sent shares down sharply on the day. While the company’s Service segment demonstrated resilience, a combination of geopolitical headwinds, elevated non-recurring costs, and a dramatic slump in its New Equipment business created a perfect storm of challenges. Below, we dissect the key factors behind the underperformance and assess the path forward.

The Financial Underperformance: A Triad of Challenges

Otis’s Q1 results were dragged down by three interconnected issues:

1. New Equipment Segment Weakness:
   Net sales in this segment fell 9% year-over-year, with China—a market accounting for over half of Otis’s New Equipment sales—plunging by greater than 20%. The Americas also saw a high-single-digit decline, while strong growth in Asia Pacific (20%) and EMEA (mid-teens) could not offset the drag from China. Orders for New Equipment dropped 1% at constant currency, and backlog declined 4%, signaling near-term weakness.

1. Non-Recurring Costs:
   GAAP operating profit margin contracted 350 basis points to 12.3%, driven by $133 million in decreased operating profit. Key culprits included:
2. UpLift Transformation Costs: $23 million tied to restructuring and outsourcing initiatives.
3. Separation-Related Adjustments: Including a German litigation ruling from 2024.
4. Litigation Settlements: $21 million in non-operational costs.

These one-time charges depressed GAAP earnings, with EPS dropping 29% to $0.61. However, adjusted EPS (excluding these items) rose 5% to $0.92, reflecting operational improvements in the Service segment.

1. Geopolitical and Macroeconomic Pressures:
   Elevated tariffs, FX headwinds, and China-U.S. trade tensions amplified the challenges. The company noted that tariffs could reduce adjusted operating profit by $45–75 million in 2025, while foreign exchange translation reduced net sales by 3%.

The Silver Lining: Service Segment Strength and Modernization Momentum

Despite the headwinds, Otis’s Service segment—accounting for 65% of total sales—provided a critical buffer:
- Organic sales grew 4%, driven by maintenance (3%) and modernization (10%), with orders for modernization surging 12%.
- Service backlog expanded 14% at constant currency, signaling robust future demand for upgrades to aging infrastructure.
- Operating profit margin in Service rose 40 basis points to 24.6%, reflecting pricing power and productivity gains.

The Service segment’s dominance underscores a strategic shift toward recurring revenue streams, which are less cyclical than New Equipment sales. CEO Judy Marks emphasized this strength, calling modernization a “key driver” of long-term growth.

Data-Driven Perspective: Stock Performance and Valuation

The market’s reaction to the report was swift: shares fell over 5% on the day, reflecting disappointment with New Equipment’s performance and non-recurring costs. However, the stock’s longer-term trajectory hinges on whether these challenges are temporary or structural.

Outlook and Risks

Otis revised its 2025 guidance to reflect the new reality:
- Net sales: Expected to grow 3–4%, driven by Service (5–7% organic growth).
- New Equipment: Organic sales projected to decline 1–4%, with China’s weakness likely to persist.
- Adjusted EPS: Raised to $4.00–$4.10, a 4–7% increase, though tariffs and FX could limit upside.

Key risks remain:
- Geopolitical Tensions: Escalating trade conflicts with China could prolong New Equipment’s slump.
- Inflation: Rising labor and material costs in the Service segment threaten margins.
- Execution Risks: Costs from the UpLift transformation may linger, though the program aims to save $200 million annually by 2026.

Conclusion: A Stock for the Long Run?

Otis’s underperformance in Q1 2025 stems from a combination of macroeconomic pressures and one-time costs, but its Service segment and modernization pipeline provide a foundation for recovery. The company’s $1.6 billion adjusted free cash flow target for 2025 and dividend growth (up for the fifth consecutive year) signal financial resilience.

However, investors must weigh near-term risks against long-term tailwinds: urbanization, infrastructure modernization, and Otis’s leadership in energy-efficient systems like its Gen2 elevator (which cuts energy use by 70%). If the company can stabilize New Equipment sales in China and execute its UpLift strategy, OTIS could rebound. For now, the stock’s P/E ratio of 22x—slightly above industrial peers—reflects both its ESG credentials and the risks embedded in its New Equipment exposure.

In short, Otis’s underperformance is a snapshot of short-term pain amid a longer-term story of infrastructure modernization. The path to recovery hinges on resolving China’s challenges and proving that the UpLift transformation can deliver sustained efficiencies. Until then, investors may need patience—and a long view—to capitalize on this undervalued play on global infrastructure trends.