A subscription business wearing a hard hat

Today, I'm digging into Otis Worldwide (OTIS).

They make, install, and service elevators and escalators. About 2.5 million units worldwide sit under an Otis maintenance contract, working on by roughly 34,000 technicians out of 1,400 branches.

My last report was on Heico. They make aircraft parts and they able to compete against the likes of GE because GE (and others) sell new engines at very low margins in order to secure more lucrative parts and service revenue. Otis is like GE and other aircraft engine OEMs in that regard.

A few things that stood out to me:

• New Equipment is really a customer acquisition channel. It's 35% of revenue and shrinking. Service is 65% and growing. Their maintenance business is annuity-like given the life of elevators (but they do have ~5% annual maintenance churn).

• The two halves are moving in opposite directions. New Equipment went from $6.4B in 2021 to $5.0B in 2025, down 22%. Service went from $7.9B to $9.4B, up 20%. Total revenue barely moved. The mix underneath moved a lot.

• China is a drag in recent years. Revenue there fell 43% since 2021, from $2.9B to $1.65B, as the property market went sideways.

But it's not all clean and perfect:

• Service margins contracted 160 basis points in Q1 2026 due to growth in lower-margin markets like China as well as investments aimed at improving retention.

• Equity is negative $5.4B and net debt is $7.4B. Part spinoff artifact, part $4.6B of buybacks. Either way, no cushion.

• The stock is down 25.7% this past year, worse than both competitors I compared it against.

Otis sells capital equipment at a modest margin, and that machine then sits in someone else's building throwing off a maintenance contract for two or three decades. The install is the CAC (Customer Acquisition Cost). The service contract is the LTV (Lifetime Value). When construction dried up in their biggest growth market, the top of the funnel narrowed, but the base they'd already built kept paying the bills.

In addition, their brand and location density are powerful moats. Unfortunately, these are hard moats to replicate for those of us looking to build new ventures.

With that said, my future elevator rides will come with a bit of a different perspective. And being the numbers nerd I am, I’ll likely pull up my phone to see if their service margins have continued eroding…...

With that, I'll see you in a few days!

Nick

TL;DR

• Otis makes, installs, and services elevators and escalators, with ~2.5 million units under maintenance contract worldwide.

• Service is 65% of revenue ($9.4B of $14.4B) and is the profit engine. New Equipment is 35%, lower margin, and mostly a way to buy future service contracts.

• New Equipment has shrunk 22% since 2021 (China down 43%) while Service grew 20%, keeping revenue flat around $14.4B.

• Cash machine, stretched balance sheet: ~30% gross margin, ~15% operating margin, $1.7B TTM free cash flow, but $7.4B net debt and negative book equity.

• The stock is down 25.7% this past year against KONE at -12.6% and Carrier at -8.4%.

• Operator takeaway: if the visible product is what customers notice but the recurring service is what pays, price and protect the service.

The 30,000-Foot View

The new equipment sale is competitive and price-sensitive. Developers take bids, margins are thin. But that sale bolts an asset into a building that legally has to be inspected and maintained for as long as it runs, and whoever holds that contract collects for decades. Elevators are also one of the few products a customer cannot let fail. Nobody defers elevator maintenance the way they defer a paint job.

So the game is portfolio. Win the install, convert it to a maintenance contract, keep it, then layer repair and modernization on as the unit ages. Otis services other manufacturers' units and they service Otis units, so the portfolio is contested at every renewal.

Route density is the quiet advantage. If a technician covers eight buildings a day instead of five because Otis has more units nearby, cost per call drops and nobody can match the price. You don't buy density quickly. You get it by having installed machines in that city for a hundred years.

Revenue mix (FY2025):

• Service: ~65%

• New Equipment: ~35%

Geographic mix (FY2025):

• Other international: ~60%

• United States: ~29%

• China: ~11%

Key Stats

• Market cap: $28.2B

• TTM revenue: $14.6B

• TTM gross margin: 30.4%

• 1Y total return: -25.7%

• Employees: ~72,000 (including ~34,000 technicians)

• Industry: Industrial - Machinery

Company History

• 1853: Elisha Otis invents the elevator safety brake in Yonkers, New York. The elevator already existed. The thing that made people willing to ride one did not.

• 1854: Otis demos the brake at the New York World's Fair by standing on a raised platform and having the rope cut. The platform holds. The category is born.

• 1889: First electric elevator, which made tall buildings practical.

• 1976: Acquired by United Technologies, run as a division for 44 years.

• 2020: Spun off from UTC, trading independently on March 19. It leaves the spin with real debt and negative book equity.

• 2021: China revenue peaks around $2.9B. It has fallen every year since.

• 2022: Buys out the Zardoya Otis minority shareholders, consolidating the Spanish business. [VERIFY]

• 2024: Launches the UpLift restructuring program as China new equipment falls more than 20%.

• 2025: UpLift reaches ~$230M run-rate savings. Connected units hit 1.1 million. Service revenue reaches $9.4B.

• 2026: Takes a majority stake in WeMaintain, an AI-native elevator service provider. Modernization backlog up 30% at constant currency.

Show Me the Money

Standout financial features:

• Revenue has been almost perfectly flat for three years ($14.2B, $14.3B, $14.4B) while the mix underneath shifted hard from equipment to service. Flat top line, different company.

• Gross margin crept up every year (29.5% to 30.4% TTM) purely on that mix.

• CapEx is roughly 1% of revenue. An industrial company that barely needs factories, because the asset it monetizes sits in someone else's building.

• Net debt jumped from $6.4B to $7.7B in FY2025 while they spent $809M on buybacks and $647M on dividends.

Financial Data

Stock Performance

10Y is unavailable because Otis only started trading on its own in March 2020. Note the gap between 1Y and 5Y: the last twelve months did almost all the damage.

1Y comparison:

The whole group is down, so this isn't only an Otis problem. But Otis fell twice as hard as KONE and three times as hard as Carrier, the sibling spun out of the same UTC breakup in 2020 running the same install-then-service model in a different product. When you underperform the company running your exact playbook elsewhere, the market is saying something about you, not the category.

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3.1/5 - a moat built on installed base and field density, earned slowly and defended one contract at a time, rather than anything structural or technological.

Memorable Marketing

Otis doesn't run consumer campaigns. It never had to, because it pulled off the best product demonstration in industrial history and has lived off that position ever since.

Notable tactics:

• The 1854 World's Fair demo: Elisha Otis stood on a platform hoisted above a crowd and had an assistant cut the rope. The brake caught. He didn't sell lifting capacity, he sold not falling.

• The nameplate (ongoing): Every Otis unit carries the logo at eye level in front of a captive audience several times a day for 25 years. Nobody else in industrials gets that impression volume free.

• Made to Move Communities (2020 to present): A global STEM student challenge, 1,000+ students and $1.25M+ in grants. It reads like CSR. It works like a recruiting funnel for a company whose real constraint is finding technicians.

Tactical takeaways:

1. Demonstrate the risk you remove, not the feature you added. Otis didn't describe the brake, he bet his life on it in front of an audience.

2. Put your brand where the customer is already forced to look.

3. If your constraint is skilled labor rather than demand, aim brand spend at future employees.

4. Use your own operating data as sales collateral. Cheaper than a pitch and harder to argue with.

AI Uses & Opportunities

Current exposure:

• ~1.1 million units connected through Otis ONE across 34 countries, feeding remote monitoring and predictive maintenance. Target is 60% of the portfolio.

• Connected subscription revenue grew 35% in 2025, off a small base but far faster than the company.

• Q1 2026: a majority stake in WeMaintain, an AI-native service operator. A build-versus-buy answer on whether the incumbent could get there itself.

Future opportunities:

• Kill the truck roll. The dominant cost here is sending a human to a building, so every fault resolved remotely drops straight to margin. It's the most direct answer to the 160bps of service margin they just gave back.

• Convert emergency callbacks into scheduled work. Predicting a failure two weeks out turns an expensive unplanned visit into a cheap planned one already on the route.

• Modernization lead gen. Otis has sensor data on how badly a 25-year-old unit performs. That data is the pitch to replace it, and the backlog is already up 30%.

Bumps in the Road

• China is still falling. Down 43% from 2021, with new equipment orders off low double digits again in Q1 2026. At ~11% of revenue it's contained, but it hasn't stopped.

• Service margins contracted 160bps in Q1 2026 on field investment and mix shift. If service margin continues to erode, the whole thesis weakens.

• No balance sheet cushion: negative $5.4B equity, $7.4B net debt, shareholder returns above free cash flow.

• The portfolio is contested at every renewal. Independents service the same units, and the Otis nameplate doesn't guarantee the Otis contract.

• New Equipment is a leading indicator. Today's install is tomorrow's maintenance contract, so four straight years of shrinking installs constrains the service base a decade out.

Your Swipe File

• Combining lower-margin upfront sales with higher-margin required service contracts is a powerful business model. But one that can invite competition on the higher-margin service side of the offering.

• Route density is a quietly powerful moat. And unfortunately for those of us getting started, one that’s hard to replicate.

• Otis is just as much in the service tech recruitment and retention business as it is the elevator manufacturing business. Employee satisfaction is critically important and can be a valuable source of competitive advantage.