OTIS Q1 Earnings Call: Service Business Offsets New Equipment Declines, Tariffs Shape Outlook

In its first quarter of fiscal 2025, Otis Worldwide Corporation (OTIS) demonstrated the resilience of its high-margin service business, which helped offset a sharp decline in new equipment sales. While the company’s dividend hike and strong cash flow underscore its financial stability, challenges in key markets like China and lingering tariff-related costs highlight the need for strategic agility. Here’s a deep dive into the results and what they mean for investors.

Service Segment Shines Amid New Equipment Slump

The star of the quarter was Otis’s service business, which generated 4% organic sales growth despite a 1% decline in reported net sales (due to currency headwinds). This segment, accounting for 85% of revenue, is the engine of Otis’s profitability. Management emphasized that service operating profit margins expanded significantly, though GAAP margins dipped due to one-time costs. This contrast reflects the segment’s “recurring revenue moat,” as maintenance and modernization contracts provide steady cash flow even during economic soft patches.

In stark contrast, new equipment sales plummeted 9% year-over-year to $1.16 billion. The Americas saw a high-single-digit decline, while China’s slowdown—a result of weak property development—caused a staggering >20% drop in sales. These figures highlight the cyclical nature of the equipment business, which is tied to construction cycles and economic confidence. Orders for new equipment also fell 1% at constant currency, with China and EMEA lagging, though Asia Pacific and the Americas saw strong demand.

Tariffs and Trade: Navigating Global Headwinds

CEO Judy Marks stressed that supply chain inflation remains a concern, particularly due to ongoing tariff negotiations. To mitigate costs, Otis is pursuing alternative suppliers and operational efficiencies, including productivity gains and commodity cost reductions. These efforts partially offset margin pressures in the equipment segment, where operating profit fell by $5 million.

The China market’s struggles are a double-edged sword: while new equipment sales are weak, the service business there remains robust, as elevators in existing buildings require ongoing maintenance. Management expressed cautious optimism about infrastructure spending and urbanization trends in China, though the timing of a rebound is unclear.

Financial Fortitude and Capital Returns

The dividend increase to $0.42 per share (up 8%), paired with a $2 billion share repurchase program, signals confidence in Otis’s cash flow. Full-year 2024 results—$14.26 billion in revenue and a 17% surge in earnings to $1.65 billion—support this move. Analysts, while maintaining a “Hold” rating, see an 8.75% upside to the stock, with a 12-month price target of $101.

Analyst and Market Outlook

Investors appear split. While Seeking Alpha recently upgraded OTIS to “Buy” citing its defensive qualities and high-margin service model, some analysts remain cautious on near-term growth given the China slowdown. Notably, Josh Brown of Ritholtz Wealth Management praised OTIS as a “boring dividend growth stock” with durable cash flows—a testament to its recession-resistant profile.

Key Risks and Considerations

• Geopolitical Uncertainty: Tariff negotiations and China’s construction recovery remain major variables.
• Margin Pressures: The equipment segment’s profitability hinges on cost controls and order execution.
• Service Growth Limits: While the service business is stable, its organic growth (4%) must accelerate to offset equipment headwinds.

Conclusion: A Dividend Dynamo with Near-Term Hurdles

Otis’s Q1 results reveal a company navigating a tough macro environment with relative grace. The service segment’s strength and dividend discipline position OTIS as a defensive holding in a volatile market. However, investors should monitor two critical factors:
1. New Equipment Turnaround: A rebound in China and EMEA orders is essential to stabilize top-line growth.
2. Margin Stability: Sustaining service profit expansion while managing equipment costs will determine long-term profitability.

With a 1.9% dividend yield and a track record of cash generation, OTIS offers a compelling risk-reward profile. For now, the stock’s valuation—supported by its service-led model—appears reasonable, but near-term progress on tariffs and China’s recovery will be decisive.

In the words of CFO Cristina Mendez: “Our service business is the anchor, but we’re not complacent—we’re retooling for the next cycle.” For investors, that balance of resilience and adaptability makes OTIS a name to watch in industrial equities.