Xylem raises 2025 revenue and EPS outlook, signals strong margin expansion through portfolio optimization

Earnings Call Insights: Xylem Inc. (XYL) Q3 2025

MANAGEMENT VIEW

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CEO Matthew Pine opened the call by highlighting, "Revenue grew in all segments and most end markets with double-digit growth in Measurement and Control Solutions and Water Solutions and Services. We also achieved record quarterly EBITDA margin north of 23%, expanding 200 basis points year-over-year and delivering 23% EPS growth." Pine noted strong demand for the company's mission-critical solutions and ongoing simplification efforts, particularly the 80/20 implementations, which are "enabling faster decisions, clear accountability and better service."

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Pine announced the divestiture of the international metering business, stating, "The sale concentrates our focus on AMI technologies in markets where we have the strongest differentiation and are best positioned for profitable growth."

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Pine stated, "Given our performance and resilient market demand, we're raising our full year guidance for revenue, margin and EPS. Our guide reflects confidence in the team's ability to deliver our commitments even as we manage through continuing macro uncertainty."

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CFO William Grogan emphasized organizational agility, saying, "Ongoing simplification efforts have improved our organizational agility and risk management effectiveness, positioning us to navigate uncertainty with confidence." Grogan highlighted strong revenue growth of 7% in the quarter, robust backlog at approximately $5 billion, and a Q3 EPS of $1.37, up 23% versus the prior year.

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Grogan elaborated on the Measurement and Control Solutions segment: "Demand for our AMI solutions remains robust as orders grew 11% organically with strength across water and energy metering. Backlog remains healthy at $1.5 billion. Revenue was also up 11%." He noted the international metering business divestiture, expected to close in early 2026, with a selling price of $125 million, which "will drive a 100 basis point margin improvement in the MCS segment on a run rate basis."

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Pine highlighted new partnerships, stating, "Together with Amazon, we're deploying Xylem's Vue advanced analytics in Mexico City on Monterrey, helping these cities save more than 1 billion liters of water each year."

OUTLOOK

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Grogan raised guidance: "We now expect full year revenue of roughly $9 billion, representing 5% to 6% total growth and 4% to 5% organic growth. EBITDA margin is expected to be 22% to 22.3%, reflecting 140 to 170 basis points of expansion versus prior year, up from the previous guide of 21.3% to 21.8%. We are further raising our EPS guide to $5.03 to $5.08, up from $4.70 to $4.85."

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For Q4, Grogan stated, "We expect revenue of approximately $2.4 billion with 2% to 3% organic growth. EBITDA margin is expected to be roughly 23% and EPS is expected to be $1.37 to $1.42."

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Management expects the international metering divestiture to improve margins and is confident in "meaningfully outperforming our initial guidance set out in February."

FINANCIAL RESULTS

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Revenue growth was 7% in the quarter, with strength in Measurement and Control Solutions and Water Solutions and Services.

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EBITDA margin expanded 200 basis points year-over-year, reaching north of 23%.

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Q3 EPS was $1.37, up 23% versus the prior year.

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Year-to-date free cash flow was down modestly, primarily due to outsourced water projects and restructuring payments, mostly offset by higher net income and improved net working capital.

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Measurement and Control Solutions saw 11% organic order and revenue growth. Water Infrastructure revenue grew 5%, and EBITDA margin expanded 400 basis points to 24.4%.

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Applied Water revenue increased 1%, with EBITDA margin up 310 basis points to 21.7%. Water Solutions and Services revenue grew 10% and EBITDA margin expanded 160 basis points to 26.3%.

Q&A

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Andrew Kaplowitz, Citigroup, asked about the sustainability of margin improvements: Pine responded that the company is "ahead of schedule" and sees "likely some upside to our long-term targets," with the next phase focusing on leveraging simplification to drive growth.

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Kaplowitz, Citigroup, inquired about MCS order growth and visibility for 2026. Grogan answered, "Our pipeline is strong and the fundamental growth drivers for AMI adoption are still solid... This order strength in Q3, up 11%. It was across both water and energy meters."

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Deane Dray, RBC, queried about potential shutdown impacts. Pine stated, "We haven't seen anything meaningful. Funding mechanisms have always been slow to move... I don't see that, that's going to have any material impact on Q4 or... on the full year of 2026."

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Scott Davis, Melius Research, probed about structural changes. Pine explained, "We pivoted to more of a... segment orientation, but more with discrete divisions under the segment, 16 P&Ls with discrete leadership GMs. And it just drives better accountability."

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Nathan Jones, Stifel, asked about MCS backlog and 2026 growth. Grogan noted, "The $1.5 billion that we're at right now... is still elevated relative to historical."

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William Grippin, Barclays, asked about the international metering divestiture's margin impact. Grogan replied, "On a run rate about 100 basis points."

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Andrew Buscaglia, BNP Paribas, inquired about margin comparisons to peers. Grogan stated, "Our core water business within smart metering is at or above our peer set."

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Michael Halloran, Baird, asked about China. Pine explained, "We're taking restructuring actions as we speak in China to the extent of around 40% of the workforce is coming out."

SENTIMENT ANALYSIS

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Analysts maintained a positive to slightly cautious tone, focusing on sustainability of margin gains, backlog normalization, and exposure to macro uncertainties. Questions reflected interest in execution risks, potential for further margin expansion, and portfolio optimization.

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Management's tone was confident during prepared remarks, repeatedly expressing execution momentum and optimism: "We are well on track to deliver our long-term financial framework, and we are strongly positioned to drive sustainable growth and value creation over the cycle." In Q&A, management was direct and provided detailed answers, with Pine emphasizing ongoing transformation, "We're going to continue to walk away from revenue... but just to remind everybody, that comes with higher quality earnings."

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Compared to the previous quarter, sentiment improved, with management raising guidance and expressing increased confidence in simplifying the business and delivering above-plan results. Analyst questions continued to focus on execution and structural changes, but with more emphasis on long-term margin sustainability and strategic moves.

QUARTER-OVER-QUARTER COMPARISON

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Guidance has been raised for revenue, EBITDA margin, and EPS, compared to the previous quarter's outlook.

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The margin expansion target increased to 140-170 basis points, up from 70-120 basis points in Q2.

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Strategic focus shifted further toward portfolio optimization, highlighted by the announced divestiture of the international metering business.

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Management's confidence and tone strengthened, with more assertive statements about progress and upside potential.

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Analyst focus shifted slightly from short-term tariff and order book risks to longer-term margin and portfolio quality.

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Progress in the 80/20 implementation and simplification efforts was reported as accelerating compared to Q2.

RISKS AND CONCERNS

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Management cited ongoing macro uncertainty, particularly around tariffs and FX movements.

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China remains a headwind, with management taking significant restructuring actions, including a 40% workforce reduction in that market.

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There is a watch on the timing of large capital projects, as conversion from commercial funnel to orders is "taking a little bit longer."

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No meaningful impact from potential U.S. government shutdowns or delays in municipal funding has been observed.

FINAL TAKEAWAY

Xylem management communicated strong execution momentum in Q3 2025, raising full-year guidance for revenue, margins, and EPS, while advancing portfolio optimization through the announced divestiture of its international metering business. Margin expansion was a central theme, with management highlighting the accelerating benefits of simplification and 80/20 initiatives. The company remains confident in sustaining growth despite macro uncertainties, supported by robust backlog, disciplined capital deployment, and strong demand across most segments. The outlook for the remainder of 2025 and into 2026 is positive, grounded in a systematic approach to driving operational excellence, margin improvement, and long-term value creation.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/xyl/earnings/transcripts]

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