Xylem Inc. reported second-quarter 2026 earnings, highlighting a strategic shift toward high-growth industrial verticals where water is becoming a strategic input for operational performance and reliability, according to management's comments during the earnings call.
The AI ecosystem is a primary growth catalyst, with demand expanding from data centers and semiconductors into power generation and mining infrastructure, management said. Data center orders surged over 300% in the quarter, and data center revenue is projected to increase by approximately 200% in 2026, exiting the year at roughly 2% of total company revenue.
Increase in data center orders in Q2 2026 compared to the prior-year period.
The Evoqua acquisition has significantly expanded Xylem's capabilities in treatment, reuse, and services, allowing the company to secure large-scale, long-term integrated contracts, management noted. The Dow contract expansion and a new 20-year chemical company agreement represent a shift toward large-scale, services-led 'build-own-operate' models, according to the company.
Xylem executed portfolio sharpening through over $400 million in divestitures and strategic acquisitions including TriOS and WaterFleet. The WaterFleet acquisition strengthens the services-led recurring revenue base and expands mobile water treatment capabilities for AI infrastructure, management said. The company remains on track to deploy approximately $1 billion toward M&A this year, focusing on accretive assets that fill technology gaps.
Operational discipline and 80/20 simplification efforts drove a 150 basis point EBITDA margin expansion despite volume headwinds and regional volatility, according to management. The overall margin improved by 480 basis points, driven by 80/20 simplification, optimized overhead, and a selective bidding strategy for high-value projects. The 80/20 simplification strategy is expected to reach its peak 'walkaway revenue' impact of nearly 2% this year before shifting to a growth-enabling phase in 2027.
Performance in China declined 27% as the company selectively walks away from lower-quality business while facing broader economic headwinds. Xylem's total backlog is $5.3 billion, supported by steady infrastructure spending in municipal markets. Full-year organic revenue growth guidance was narrowed to 2% to 3% due to near-term electric metering project delays in the MCS segment, which management attributed to utility affordability concerns and political pressure regarding electricity rate increases. However, the water metering side remains strong with double-digit order growth.
Management expects a strong exit to the year with mid-single-digit organic growth in Q4, building momentum for fiscal year 2027. The guidance assumes continued strength in water infrastructure and transport, offsetting cautious capital spending by electric utilities ahead of upcoming elections. Management expressed confidence in a Q4 step-up based on a 30% increase in the water funnel and the ongoing AMI 2.0 refresh cycle.
Management noted no material impact from recently announced tariff changes or refunds on the projected results. While some private market valuations are slow to adjust to public market softening, their acquisition funnel remains very active, they said.