Xylem (XYL) Q2 FY26 earnings call: guidance and Q&A

What were the key industrial non-municipal drivers for the 9% organic revenue growth in Applied Water, and what is the outlook?

The growth in Applied Water was largely driven by data centers, with orders up over 300% in Q2. The North America commercial building services business also performed well. Data centers are expected to contribute about 2% of total revenue by the end of the year.

“Primarily, it was, I would say, in Applied Water, it was largely data center-driven. Although in North America, our commercial building services business has done well across multiple verticals.”

asked by Deane Dray · answered by William Grogan

Following the milestone Dow deal, what is the pipeline for outsourced contracts, especially given the premise of the Evoqua acquisition?

Municipal markets remain a core strength, but the Evoqua acquisition expanded capabilities in high-growth verticals like high-tech power and life sciences. Examples include a win with the world's largest lithium battery cell manufacturer for a novel wastewater treatment solution and a data center project in Pennsylvania for treating river water.

“We recently won a job in the lithium battery space. So we secured a win with the world's largest lithium battery cell manufacturer.”

asked by Deane Dray · answered by Matthew Pine

What is causing the electric metering project push-outs, and how does the long-term view compare to the strength seen in water utility demand?

Electric metering delays are due to affordability concerns and cautious capital spending ahead of elections, causing utilities to pull back on short-term investments. Long-term demand remains healthy due to the AMI 2.0 refresh cycle. The water side of MCS shows continued strength with double-digit order growth in Q1 and Q2, expected to continue.

“Our revenue take down from 4 to 3 on the high end is really all around MCS, and that's really directly attributable to the slowdown in electric meter deployments.”

asked by Michael Halloran · answered by Matthew Pine

How do various segment dynamics (Applied Water, 80/20, water/electric timing) combine to inform Xylem's long-term growth outlook?

Revenue progression is building momentum, with Q4 expected at mid-single digits. Applied Water has strong orders (data centers, U.S. commercial). Water Infrastructure expects positive orders growth in H2 despite China/80/20 headwinds. WSS has strong backlog from outsourced water. MCS water momentum continues. Overall, confidence in the commercial outlook for next year is high.

“I think we're building momentum leading into next year. And if you break it down by segment, obviously, Matthew highlighted, again, strength in Applied Water, right?”

asked by Michael Halloran · answered by Matthew Pine

What were the main drivers of the 480 bps margin expansion in Water Infrastructure, and why is the Q3 margin guidance lower (30-80 bps)?

Water Infrastructure benefited from simplification efforts, 80/20 optimization, and selective bidding strategies. They are refocusing resources on transport to drive growth. Q3 margin expansion will be lower due to balancing transport mix and other factors, but the overall margin outlook remains strong with continued operational productivity and 80/20 benefits.

“I think they're definitely seeing increased benefits from their simplification efforts. They've kicked off 80/20 and have been doing this now for over 2 years.”

asked by Andrew Kaplowitz · answered by Matthew Pine

How does the 80/20 strategy evolve beyond initial 'walk-away revenue' to become a growth driver by 2027?

This year is the height of walk-away revenue (close to 2%), which will be significantly lower next year. 80/20 is becoming a fundamental operating model, enabling resource shifts to drive growth in underpenetrated areas like U.S. transport, data centers, mining, and outsourced water, acting as a catalyst for incremental growth in 2027.

“I think you're exactly right. We're shifting from it being a significant lever from a margin perspective. We're going to wash through the majority of our walkaway revenue here this year. And then next year, it's all going to be how it's enabling our growth algorithm.”

asked by Scott Davis · answered by Matthew Pine

Can you clarify the nature of the declines in China and Xylem's commitment to the market as it reevaluates 80/20?

China remains a challenging market with orders and sales down almost 30% in Q2 due to economic headwinds, competition, and 80/20 selectivity. It represented 3% of sales last year and 2% this year. The company believes it has bottomed out, with some data center wins, and is rightsizing its presence, focusing on differentiated technology, while consistently evaluating its participation.

“I think our commentary with China has been pretty consistent over the last few quarters. It remains a challenging market for us, both on the orders and revenue side.”

asked by Andrew Buscaglia · answered by Matthew Pine