Johnson Controls International Q3 2026 Earnings Call Transcript

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Provided by Quartr
July 29, 2026

Key Takeaways

  • Positive Sentiment: Johnson Controls reported strong Q3 results, with organic revenue up 10%, adjusted EBIT margin expanding 260 basis points to 17%, adjusted EPS rising 35% to $1.42, and backlog increasing 32% to a record $21 billion.
  • Positive Sentiment: The company raised fiscal 2026 guidance, now expecting approximately 8% organic revenue growth and adjusted EPS of about $5.05, while maintaining its expectation for roughly 100% free-cash-flow conversion.
  • Positive Sentiment: Data-center demand remains a major growth driver: Americas orders rose 37%, Applied HVAC posted high-teens growth, data-center revenue is expected to represent a high-teens percentage of fiscal 2026 sales, and the company expects the mix to reach roughly one-third of revenue over the next three to five years.
  • Positive Sentiment: Johnson Controls said its proprietary business system is improving productivity and capacity, including quadrupling computer-room-air-handler capacity without significant capital investment, while new cooling technologies such as absorption chillers and CDUs could expand its value per data-center megawatt.
  • Negative Sentiment: Management expects continued pressure in the Middle East, leaving EMEA growth at flat to low single digits in Q4, while security-related service orders have faced competitive volume pressure; the company expects improvement but characterizes the fire and security market as broadly flat.
AI Generated. May Contain Errors.
Earnings Conference Call
Johnson Controls International Q3 2026
00:00 / 00:00

There are 13 speakers on the call.

Operator

Hello everyone, and welcome to the Johnson Controls Q3 2026 earnings conference call. My name is Ryan, and I will be coordinating the call today. If you would like to ask a question at the end of the presentation, please use the following method based on how you are joining us today. If you are attending via the webinar, please click the raise hand icon at the bottom of your screen to be added to the question queue. If you are dialing in by phone, please press star followed by 5 on your telephone keypad. I would now like to turn the call over to Mike Gates, Senior Director of Investor Relations, to begin. Mike, please go ahead.

Speaker 1

Good morning, and thank you for joining Johnson Controls Fiscal Third Quarter 2026 earnings conference call. Joining me on the call today are Johnson Controls Chief Executive Officer, Jochem Wouters, and Marc Vandiepenbeeck, our Chief Financial Officer. Before we begin, please note that today's discussion will include forward-looking statements regarding our future performance and financial results. These statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for additional information regarding these risks. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures are included in our earnings release in the appendix to today's presentation, both of which are available on the investor relations section of our website. I will now turn the call over to Jochem.

Speaker 2

Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. Johnson Controls delivered another solid quarter, extending the momentum we established in the first half and reflecting continued strength across the business. Let's begin with slide four. Customer demand remained healthy across our portfolio, driven by the increasing need for high performance, precise, and energy-efficient operating conditions. Order momentum sustained above 25%, revenue grew 10%, adjusted EBIT margin expanded 260 basis points to 17%, adjusted EPS increased 35%, and backlog grew more than 30% to a record $21 billion. Based on this performance, we are raising our full-year guidance. Marc will cover the numbers in detail. Before he does, I want to discuss what is driving these results and why we believe Johnson Controls is increasingly well-positioned to deliver sustained, profitable growth over time.

Speaker 2

The answer starts with the customers we serve and the role they play in the global economy and greater society. Every era is defined by the infrastructure it demands, and this is the age of thermal management. AI factories, advanced and biopharma manufacturing, large research hospitals and universities require thermal management solutions capable of delivering performance, precision, and energy efficiency at unprecedented scale. As AI infrastructure scales, customers are increasingly focused on maximizing computing capacity from available power. Yesterday, we introduced our AI factory absorption chiller reference design guide, which demonstrates how advanced thermal management can reduce cooling electrical demand by approximately 44% by converting waste heat into productive cooling. These efficiency gains support additional AI computing capacity without increasing on-site power generation, creating the potential for billions of dollars of additional revenue over the life of a 1-gigawatt facility.

Speaker 2

While this represents a new approach for many data centers, it builds on more than 65 years of YORK absorption innovation and decades of experience deploying the technology in demanding environments. This is yet another example of how Johnson Controls is helping customers get more value from existing power infrastructure while addressing one of the most significant constraints to scaling AI capacity. It also expands our capabilities as we continue to innovate across the entire thermal management chain, enabling us to play an even greater role in next generation AI facilities. We are winning with customers by focusing where our technology differentiation matters the most, turning manufacturing into a competitive advantage and meeting our customers' need for flawless, uninterrupted operations.

Speaker 2

Our lifecycle service franchise continues to benefit from the increasing importance of uptime, reliability, protection, and energy efficiency, supported by an unmatched global field presence that allows us to serve customers wherever they operate and throughout the life of their assets. Our proprietary business system that defines how we work and deliver is beginning to translate into more predictable execution, giving us an increase in confidence in our long-term potential. Let me walk you through this on slide five. Johnson Controls was built for this time because of two competitive advantages. For 140 years, we've shaped and protected indoor environments where the world's most important work gets done. That track record is built on two strengths that are difficult to replicate.

Speaker 2

First, our deep proprietary technology know-how, and second, an unmatched global field presence with sales solution architects and field technicians that are roughly twice the scale of our nearest competitor. Together, those capabilities give us a differentiated position in markets where performance, precision, and speed increasingly matter. We amplify these strengths through three growth accelerators. First, our strategic pillars provide clarity on where we focus our resources. Our solutions directly address the growing need for high performance, precision, and energy efficiency across some of the fastest-growing areas of the economy: AI, mission-critical environments, and decarbonization. By aligning our organization around these opportunities, we can direct innovation, commercial, and operational resources toward the segments where we see the greatest potential to create value. Our proprietary business system, which we continue to embed throughout the organization. This is how we run the company.

Speaker 2

It provides a common language and methodology for how we communicate, collaborate, and continuously improve. The objective is straightforward: Win more customers by solving their biggest problems faster and more consistently than anyone else. That requires both winning behaviors as well as standard approaches that elevate and continuously improve the way we work. It is how we accelerate rate and speed of innovation, turn manufacturing into competitive advantage, and improve execution across our commercial and field operations. Third, we bring together our strategic pillars and business system to translate these advantages into growth, productivity, and shareholder value. It is about accelerating speed by limiting waste and processes, focusing resources on the highest value opportunities, and driving better outcomes for customers and shareholders alike. Moving to slide six.

Speaker 2

On June 1st, we hosted Going to Gemba Day, providing a first-hand look at how strategy is translating into execution across Johnson Controls. You heard directly from the teams closest to our customers and day-to-day operations and saw how the business system is better enabling those colleagues to deliver for customers in targeted areas of the business. Our first stop was JADEC, our Advanced Development Engineering Center and home of YORK, where 150 years of leadership in HVAC and thermal management demonstrated the increasing importance of innovation, performance, and precision. You saw how our technology depth and R&D talent, combined with the business system, are unlocking a new level of speed and innovation capacity. In one example, the team accelerated the speed to market on a key product by 40%, helping us win a major customer opportunity.

Speaker 2

Second, we went to our Airside Center of Excellence, or ACE, where for more than 50 years, we've manufactured critical airside technologies. ACE is one of approximately 40 manufacturing facilities around the world where we are turning manufacturing into a competitive advantage. At ACE, we showcased how the team applied the business system to more than quadruple capacity on the computer room air handler line without significant capital investment, achieving 100% on-time delivery, reducing customer lead times by half, shrinking required manufacturing floor space by more than 30%, and cutting inventory by 50%. Our final stop was our local market office in Baltimore, where for the last 100 years, the team has built deep relationships with owners, contractors, and consultants. You saw how these same business system approaches and mindsets are improving customer-facing execution across system sales, system project execution, service sales, and service operations.

Speaker 2

The team demonstrated how they're doubling customer-facing selling time, accelerating project engineering, improving service attachment rates, and reducing non-value-added activities, helping strengthen long-term relationships across the customer life cycle. These examples demonstrate what is possible as we continue to deploy our business system across the enterprise. While scaling takes time, we're already seeing improvements in performance and the customer experience on targeted areas of business, highlighting what's possible as this becomes how we work everywhere. That opportunity reinforces our confidence in the updated long-term algorithm we introduced that day. We outlined a clear path to high single-digit revenue growth, operating leverage of more than 30%, double-digit adjusted EPS growth, and adjusted free cash flow conversion of approximately 95%-100%. In summary, we are building momentum across the business. Our capabilities are critical to the high-growth sectors we serve, which are becoming more demanding, more energy intensive, and more consequential.

Speaker 2

Customers increasingly require thermal management solutions that deliver performance, precision, and energy efficiency while helping them manage cost, capacity, and energy usage. Our ability to meet these evolving customer requirements will be a key driver of sustainable growth. Our business system is helping us translate our competitive advantages into better customer outcomes, more predictable execution, and improved productivity. Together, our technology innovation, manufacturing capability, global field presence, customer relationships, and business system position us to create value for customers and shareholders for years to come. With that, Marc will now walk you through the details.

Speaker 3

Thanks, Joakim, and good morning, everyone. We delivered another solid quarter with broad-based growth, continued margin expansion, and stronger earnings. Our third quarter results reflect the momentum we have built throughout the year, supported by healthy customer demand, disciplined execution, and continued productivity gains across the business. Let's turn to results on slide seven. Organic sales increased 10% in the quarter, led by strength in Applied HVAC and continued growth across both systems and service. System sales increased 11%, service increased 7%, and Applied HVAC delivered high teen growth supported by data center demand. This performance drove meaningful margin expansion. Adjusted segment EBITA margin expanded 220 basis points to 20%, while adjusted EBIT margin expanded 260 basis points to 17%. Adjusted EPS was $1.42, up 35% year-over-year, and ahead of our guidance. Let's discuss our regional performance in more details on slide eight and nine.

Speaker 3

Orders increased 27%, extending the strong order momentum we have seen throughout fiscal 2026. Systems order grew 40%, service order increased 4%, and customer activity remained healthy across our key end markets. From a regional perspective, the Americas continued to lead our performance, with orders increasing 37%, led by sustained demand from data centers and other mission-critical environments. EMEA orders increased 6%, driven by high single-digit system growth. In APAC, orders grew 12%, reflecting growth across several regions, including Northeast Asia and India. Across our end markets, demand remained healthy as customers continued to invest in high-performance, reliable, and energy-efficient operating environments. Turning to revenue performance by region. In the Americas, organic revenue increased 11%, led by high teens growth in Applied HVAC and solid double-digit growth in service. In EMEA, sales increased 1% despite the ongoing conflict in the Middle East.

Speaker 3

APAC grew 15%, led by 20% growth in System and continued strength in Applied HVAC. Turning to margins by region. In the Americas, adjusted segment EBITA margins expanded 260 basis points to 21%, driven by strong operating leverage on higher revenue. In EMEA, margin expanded 20 basis points to 14%, as growth was largely offset by the impact of a recent divestiture. In APAC, margin expanded 180 basis points to 21%, supported by productivity improvements, favorable business mix, and higher revenues. Backlog increased 32% year-over-year to a record $21 billion. The strength in backlog supports our confidence in both our near-term outlook and our ability to deliver against the long-term growth algorithm we outlined at Going to Gemba Day. Turning to our balance sheet and cash flow on slide 10. We ended the quarter with approximately $600 million of cash on hand.

Speaker 3

Net debt declined to 1.9 times below our long-term target range. Year-to-date, adjusted free cash flow increased to $2.1 billion, driven by earnings growth and disciplined cash conversion. We are in a better position to invest in the business while maintaining balance sheet flexibility. Let's now discuss our fiscal fourth quarter and full year guidance on slide 11. For the fourth quarter, we expect organic revenue growth of 9%-10%, operating leverage of 45%-50%, and adjusted EPS of approximately $1.55. Our strong third quarter result and record backlog gives us the confidence to raise our fiscal 2026 guidance. We now expect organic revenue growth of approximately 8%, up from our previous expectation of approximately 6%. We expect full-year operating leverage of 45%-50%, consistent with our focus on profitability and disciplined execution while delivering stronger revenue growth.

Speaker 3

As a result, we are raising our adjusted EPS guidance to approximately $5.05, representing hopefully 35% growth and $0.50 higher than our original guide at the beginning of the year. We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, demonstrating that the higher earnings we are delivering continue to translate into strong cash flow generation. As Joakim mentioned, while we remain early in our business system journey, we are beginning to see benefits in targeted areas of the organization. As we continue to embed our business system across the enterprise, we expect further opportunity to improve productivity, execution, and customer responsiveness over time. Operator, we are now ready for questions.

Operator

We will now begin the question and answer session. As a reminder, to ask a question, please click the raise hand icon at the bottom of your screen if attending via the webinar, or press star followed by five if dialing in by phone. Please also ensure your phone is unmuted locally when preparing to ask your question. We ask you please limit yourselves to one question and one follow-up. We will wait one moment to allow the queue to form. Our first question will come from Nigel Coe with Wolfe Research. Your line is unmuted.

Speaker 4

Good morning, everyone. Great. Thank you.

Speaker 3

Good morning, Nigel.

Speaker 4

I have a question. Good morning. Just wanted to maybe randomly start off with supply chain, just given it seems to be a growing issue for some of the data center infrastructure suppliers. I'm just curious, Joakim, how you're feeling about the resilience of the supply chain, any bottlenecks you're experiencing, and confidence on sort of delivering on plan from here.

Speaker 2

Yeah. Supply chain is always an issue when you're in a high growth environment, and that's the headline. Let's dig into that. If you remember from the Going to Gemba Day, we were talking about how our deep technological know-how spans the five subsystems that make up an HVAC chiller. We also talked about the fact that we control the manufacturing and the cogs of those five subsystems. In a high growth environment, that of course means that we control more of our own supply chain. I feel very good about where we are on many of our product lines. Then of course, we don't make every single thing. We don't dig iron ore out of the parking lot. Of course, we depend on external vendors as well.

Speaker 2

Occasionally, there are some bottlenecks. We try to get ahead of that. Very occasionally, I will have to get involved myself personally. That is just, I think, an element of operating in a higher growth environment.

Speaker 4

Okay. That's great. Thanks, Joakim. Obviously, it's really encouraging to see the double-digit organic growth, minus 10% in the fourth quarter. I know it's a little bit early for FY 2027 color, but you've got really good visibility of the backlog, and I'm just curious how you're thinking about top line growth in FY 2027.

Speaker 3

As you mentioned, Nigel, it's a bit too early to provide real specific fiscal year 2027 guidance. I'll tell you, we remain extremely confident in the way we've laid out the long-term algorithm at Going to Gemba Day of high single-digit top line growth, and at least 30% of incremental. You will see quarters that perform at or above that level over the next couple of quarters. That's really supported by our record backlog and the fact that our pipeline continued to grow in a very healthy manner. The business system allows us to kind of improve the execution on that pipeline, the backlog, and position as well for the future. We'll provide you details on how we look at 2027 at the next earnings call.

Speaker 4

That's great. Thank you.

Operator

Our next question will come from Amit Mehrotra from UBS.

Speaker 5

Morning, gentlemen. Appreciate the question. I wanted to ask about the outlook for growth in Applied HVAC. Obviously, huge step up in the quarter from sort of high single-digits to high-teens growth. Orders are sort of running well ahead of that. I guess the question is, could you just offer any thoughts on sort of where we go? Can we further accelerate or are there just capacity or supply chain constraints and high-teens is very good and sort of that's the expectation going forward?

Speaker 2

Good morning, Amit. The way we think about it, we look at our pipeline. Our pipeline continues to grow at a very healthy rate. As you would suspect, data centers is an important part of that. The non-data center pipeline actually is growing almost double digits. We feel very good about the continued strength here in our business from the demand side. From a supply chain and capacity point of view, we made meaningful physical plant investments about 2 years ago. I think we had mentioned on a prior call earlier this year that we were ramping in those new facilities or expanded facilities. We continue to do that, and we actually had a very good quarter. We're ramping a little bit ahead of what we thought.

Speaker 2

That's really our proprietary business system at work, combined with some strengthening of the leadership that we have that's in charge of that part of the company. The business system is going to continue to, as you saw since you were there at the Go to Gemba Day, help us create more capacity in the physical space that we already have. Of course, with this kind of growth, we're also going to have to add some new physical capacity. The business system will help us stay ahead of that so we have some time to ramp other physical capacity expansions. We feel pretty good at where we're at right now.

Speaker 5

Got it. Just trying to understand what you're saying beneath the surface. It doesn't seem like there's any impediment to sort of further accelerate growth in Applied HVAC. I guess my follow question on that is around margins and operating leverage, because you have this long-term framework of 30%+. Obviously, you're punching way above that this year as you start this business model kind of evolution. As we think about 2027, 2028, the backlog, I assume, as it converts, is accretive to margins. Do we have another year or 2 where we're sort of punching above that 30%+ long-term target? How do we think about the slope of the operating leverage as we sort of further progress through this evolution?

Speaker 3

Amit, as you see the growth accelerating beyond the mid-single digits, you've seen that we've been able to maintain this year, what I would call a very healthy operating leverage, between 45%-50%. That incremental revenue that we see is converting at rates that is extremely healthy. It's closer to the long-term operating leverage framework we had laid out of 30%+. Dynamically, you will see still higher than 30% operating leverage over the next 12-18, maybe 24 months. The way you need to think about that is that the margin that we see in that incremental growth comes mostly from our data center revenue, which becomes a very large portion of our mix.

Speaker 3

That means systems business is growing ahead of our service business in the near term, and that creates a small equipment mix margin, a small headwind, I would call it. Nothing that would prevent us from continuing to commit well above the 30% incremental we laid out in Go to Gemba Day as part of our long-term algorithm.

Speaker 5

Got it. Okay, that makes a lot of sense. Thank you very much. Appreciate it.

Speaker 2

Thanks, Amit.

Operator

Our next question will come from Scott Davis with Melius Research.

Speaker 6

Hey, good morning, fellas.

Speaker 2

Hey, Scott.

Speaker 3

Hey, Scott.

Speaker 6

Congrats again on putting together some solid numbers here. Not looking to blow sunshine up your tail, but these are good results.

Speaker 3

Thank you.

Speaker 6

Anyway, I wanted to ask you guys a little bit about market share shifts and potential. How do the hyperscalers think about working with you guys and your peers? Do they think in terms of de-risking and kind of peanut butter spreading around kind of their supply base? Do they think in terms of who has the best capabilities and capacity, delivery, and quality? How are they thinking about it, and are you seeing any supply chain shifts that either benefit you guys or maybe perhaps don't benefit you guys?

Speaker 2

I think the way it works, Scott, is our large data center customers, they design or architect their data centers. In certain ways, they make certain equipment choices as part of that overall architecture. They are engaging with vendors as they do that. I think you've heard that many times our large data center customers will send groups of engineers to sit with our engineers for a week, 10 days. Think of that as you're designed in, and they will rarely just pick one partner that they design in with. There might be more, two, there might even be three. When it comes to this particular version, this architecture of a data center that they might build, let's just pick a number 10 of over the next two to three years.

Speaker 2

They will then ask for or sit down with these couple of vendors that they've decided to work with from a design point of view. Typically what happens is no one will rarely get all of it. It's usually split, but someone will get a little more of their purchases. Even if initially you were awarded a certain amount by executing better, for example, lead times, having less supply chain issues, and so on, you might actually, in reality, secure more over time than you thought initially in the dialogue with the customer. That's kind of broadly how it works.

Speaker 6

Okay.

Speaker 2

The conclusion is you need to be very actively involved on the design side when they're architecting the overall data center. That's a very collaborative approach. Obviously, you need to then be competitive in their initial selection, and then you need to execute competitively to perhaps punch a little bit beyond the initial award, if you will.

Speaker 6

Is the service side of it a similar kind of situation?

Speaker 2

Yeah, it's the service.

Speaker 6

Oh, yeah.

Speaker 2

Good point. That's usually part of the initial selection is your capability to be able to support the customers in the locations where the data centers are being built. Typically what we do is as we get closer to actual selection of equipment for a particular site, of course, we will make sure that we make the customers very well aware of our local footprint. As I think, Amit, you know, our footprint is comprehensive across the U.S. and many countries around the world. Because historically we've had a focus of having our own people serve our customers, we have a few more feet on the ground than some of the other players in the industry. We have multiple opportunities here to win. But you need to win on the design side to have a value prop that's strong.

Speaker 2

You need to, of course, part of the value prop, benefits versus cost, be competitive. You need to execute well from a, let's call it supply chain and delivery side. You need to have the ability, and then later on the proof point that you can execute on service. When you can orchestrate all of that together, that's when you start to see market-winning growth.

Speaker 6

The question, I guess really was net, that was a fantastic answer, net, do you think you are gaining share then, Joakim?

Speaker 2

We think we are for the categories that we focus on. Absolutely.

Speaker 6

Okay. Fair enough. Okay. Thank you. Best of luck. I'll pass it on.

Speaker 2

Thank you.

Operator

Our next question will come from Andrew Obin with Bank of America.

Speaker 7

Good morning.

Speaker 2

Good morning.

Speaker 3

Andrew.

Speaker 7

Just a question. I think, you were highlighting at a recent industry event, you were highlighting your product together with Armada, the modular product. I was just wondering if you could comment on how much interest you're getting from the customers and what kind of TAM it represents, and also when and if it starts flowing through your revenue. Is it margin accretive or is it margin diluted because of passthrough? Thank you. That's the first question.

Speaker 2

Great question, Andrew. We believe that the future data centers are not all going to be these mega data centers, the one gigawatts and maybe larger. We believe that what we have seen when other human systems, leveraging new technologies, have been deployed across society, that there's not just one approach and that there will be a decentralization. There will be a world where there are smaller, closer to the edge, closer to the end users, different kinds of models of data centers. It's really in that context that we collaborate with Armada, and as you know, we also have an investment in that company. That application, it's not brand new.

Speaker 2

These are, by the way, think of them as data centers in a shipping container that we build in our factories, and essentially has everything, all the products that we sell at Johnson Controls in that shipping container. These are a couple of megawatts, and they get deployed, and megawatts are increasing as we continue to innovate. They are forward deployed. The traditional applications would think of oil and gas, very remote locations, but there are also defense applications. We believe that those decentralized, close to the edge types of applications are going to continue to grow. We're very excited about the potential here. The TAM, this is an earlier stage of the market, so the TAM is significant. It's in formation, so I hesitate to throw numbers out there. There are people who speculate around very significant numbers.

Speaker 2

We're working on a number of opportunities as we speak, very meaningful ones, and I think within the next couple of quarters, we'll be able to talk a little bit more about this opportunity.

Speaker 7

Thank you.

Speaker 2

As I mentioned on the call, where we've taken a step back and we've basically, as a company said, "Look, what's happening in human society, and where can we bring our technological know-how to bear to advance human society?" We're taking a broader look at the AI opportunity and how we can help human society accelerate the advancements there.

Speaker 7

Thank you. Just a follow-up question. Where are we on sort of strategic review for some of the portions of your portfolio? Any update on timing where we could hear something from you? Thank you.

Speaker 2

We continue the work on that. As you've heard before, the guiding principle here is to create shareholder value. We continue to make progress, and we will keep you posted. Progress is good.

Speaker 3

You've seen we've taken some portfolio action in the quarter. We continue to divest our residential subscriber business around the world quite successfully. We have a few more to go, and we are making a lot of progress on actioning the commitment we've made in prior quarter in readjusting our portfolio adequately.

Speaker 7

Thank you very much.

Operator

Our next question will come from Chris Snyder with Morgan Stanley.

Speaker 8

Thank you. I wanted to follow up on some of the commentary around data center. Specifically, I wanted to talk about your content within the data center. I think on the last conference call, you guys said that your net content would go higher, but there was moving parts under the surface. I think you said chillers could go down, but air handling goes up, and then the CDU business certainly goes up. I was just maybe hoping to get a little bit more of a magnitude of those respective moves. Really, the heart of the question is the legacy content going higher when we think about chillers and air handlers? Just versus how much of it is coming from CDU being a new product where you guys are gaining share? Thank you.

Speaker 2

I think, broadly, as we've commented before, as rack densities increase, new chips are launched and put into use. The amount of heat generated in data centers continues to increase. By the way, there are other things that generate heat, too. Think the 800 volt DC, but not only. The amount of heat that needs to be extracted out of a data center will continue to increase. Therefore, thermal management becomes even more critical for the data center. Obviously, to do that energy efficiently is essential. We really see the speculation around the reduced demand for chillers as, that's going to be a very nominal impact, if any. We see the need for air handling units. Our Silent-Aire franchise, for example, continues to increase. The CDUs, as you pointed out, will become more important as more and more liquid cooling is implemented.

Speaker 2

Of course, we have our Alloy investment here from a couple of quarters ago where we're making great progress in pilots and some early orders now. Then our controls. Then, as you heard earlier today or the announcement we made yesterday, we now have an absorption chiller portfolio geared to the data center space that will allow our customers who generate power locally to capture a meaningful part of that excess heat and put it to use within the thermal management architecture, allowing them to reduce the power needed for thermal management by up to more than 40%. Actually, very meaningful value prop. We're going to continue to work on increasing our $ per megawatt, if you will.

Speaker 2

Even the Armada example that Andrew was asking about, as I mentioned, that data center in a container, it is loaded with everything that we make in this company. We are going to continue to drive the $ value up per megawatt here. That's an essential part of our strategy.

Speaker 8

Thank you. One thing that you've also talked about more is bringing a more comprehensive solution to market rather than maybe having the data centers piecemeal the various equipment together. I imagine that that would lead to better energy efficiency for the data center. Is there any numbers or data or anything you could talk about the level of efficiency savings? Maybe just the second point is, do the hyperscaler customers care more about energy efficiency than they did a year ago? It's very obvious they should care given how much electricity they consume. Is there any difference between the type of customers and do they care more than they used to? Thank you.

Speaker 2

I think, Chris, they've always cared, and I think they care a little more now. You read the same news that we read, right, around the headlines we hear about local communities being concerned about the impact on power prices and things like that. Really leads the data center customers to make more careful choices about where they go build data centers, as we haven't actually seen any impact on demand at all from what you see in the news. It's more a matter of where they get deployed. The where has a lot to do with how much power is available. There are constraints around power availability today. Of course, when they design a new data center that they're going to build 10 of over the next couple of years, it's easier to find more locations, the less power you need, right?

Speaker 2

Obviously the value prop of operating a data center. If you run thermal management, that today uses maybe think of it as a third of all the power that goes into a data center. Whoever can eke out multiple percentage points of savings of energy not needed for thermal management the value prop for that for our customers is very meaningful. What we're working on is well beyond a couple of percentage points, and we'll talk to you more about that when we're ready to launch some of the solutions that we're working on right now. It's really exciting. It's going to be very meaningful what we're working on.

Speaker 8

Thank you. I appreciate that.

Operator

Our next question will come from Jeffrey Sprague with Vertical Research.

Speaker 9

Thank you. Good morning, everyone.

Speaker 2

Hey, Jeff.

Speaker 9

Good morning. Let me ask even a bigger picture one if I can. Probably just more your opinion, Joakim, as opposed to something that could be truly answered. Obviously there's a lot of hand-wringing out here in the market and investor sentiment about whether your end customers can really earn a susceptible return on all this investment, looking out a ways. Against that, obviously, you've got to commit capital and you're adding capacity and the like. Just where do you stand on the sustainability of this demand, and do we have sustainable demand looking out two or three years that really supports the investments you're making and the confidence that we see apparent in the orders, et cetera?

Speaker 2

Yeah. You asked for an opinion, I'll give you an opinion. As you know, I spent the 5 plus years before taking on this assignment in medical diagnostics. What's holding back the acceleration of the development of new therapies, vaccines, medicines, and diagnostics is our ability to make sense of all the data that exists already around human biology. Those industries are using AI already. If you think about versus what they could be using it, how they could be using it, we're still in the very early innings of usage. I think the demand, it's not just that there are more researchers, this is a longer discussion now than there were 20 years ago, doing research on human biology. It's the availability of compute, the cost of it, and so on.

Speaker 2

The economics are very different, which means that more researchers have more access to AI. Super early innings. Then I just look at a corporation like our own, for what we're using AI today, I think we're making some good progress internally here. It's part of our proprietary business system that we're rolling out. We're still single digits % usage versus what we could be using it for and what I anticipate we'll be using it for over the next couple of years. I think the demand for the output of the data centers is going to continue to grow meaningfully. We're just starting to understand, and many large organizations, how we can really use this capability at scale. I'm optimistic.

Speaker 2

I know there's a lot of speculation about CapEx and so on, I think about it from a demand point of view and where it's going to be put to use, I'm optimistic.

Speaker 9

Yeah, no, helpful. Then just looking at maybe another little bit bigger picture question, just looking at kind of the rising power demand and heat loads and the like. It would seem sort of the thermal and electrical solution need to clearly work in concert. Not that they're not today, just looking at your portfolio or who you partner with on the electrical side, is there an avenue for JCI to play more on the electrical side, or would this be sort of just a continued partnering relationship with whoever your hyperscale customer may choose to pick up that part of the equation?

Speaker 2

Yeah, I'd answer that. It's a good question. I'd answer that in a couple of ways. If you look at our materials from the Go to Gemba Day where we talked about the five subsystems of a chiller that are part of our core proprietary technological knowhow. There are electrical aspects there, one of the subsystems. We've clearly chosen there to own a subsystem that creates a whole system that performs at a higher level. We have looked at that beyond the five subsystems that make a chiller. You could make some arguments around synergies, power and thermal. I think one has to think very carefully about that. We're not very interested in, let's call it, creating procurement synergies for customers. That might be helpful for customers. It's actually not going to advance how data centers perform.

Speaker 2

The way we think about it is how can we help improve the performance of the data centers? We're in multiple explorations trying to see what we could do there. It's possible that we will very surgically expand our capabilities there. That could be through partnership, or it could be surgical in organic moves. I think on a big picture today, I think more of the synergies from a customer point of view are probably on the procurement side. We will choose to focus our efforts more on the technology development than the value prop side.

Speaker 9

Thanks for that perspective. Appreciate it.

Operator

Our next question will come from Joe Ritchie of Goldman Sachs.

Speaker 10

Hey, guys. Good morning.

Speaker 2

Good morning.

Speaker 10

I was hoping you guys could help level set. Embedded in your revenue guidance for the year, how much is embedded for data center revenues this year? Then also as you think about the backlog build, and the visibility that you have for FY 2027, how much is already guaranteed that you would expect to ship in the FY 2027 timeframe?

Speaker 2

Yeah. Data center revenue is probably going to land in the high teens as a mix of percentage of revenue for fiscal year 2026. We continue to see that sub-segment grow much faster than the rest of the portfolio. Very healthy, double digits, for some sub-segment even higher than that in terms of growth. As we shape out the following years, and as we discussed at that Going to Gemba, we see that mix over the next three to five years becoming a third of the company from a revenue standpoint, and continue to be extremely accretive to the overall enterprise. I think Joakim mentioned it a little bit earlier on another question.

Speaker 2

As we continue to expand our install base because of the system growth we've seen the last couple of years, we're going to see the next three or four years, we continue to improve our service attachment rate, and that install base will generate a very nice service growth mix over the next few years that will continue to fuel that data center mix and do it very profitability.

Speaker 10

That's helpful. Thanks, Marc. I guess just to follow on, maybe sticking with data centers, how big is your CDU backlog today? Have you guys gotten through some of the key final milestones in terms of testing and validation to start shipping your CDUs?

Speaker 3

Yeah. We're going to start shipping actually this quarter. Most of the testing and validation is through. We're still working through some of the hyperscaler validation. The pipeline for that business is well beyond the hundreds of millions and has now reached $1 billion. We think the opportunity here is enormous. Again, it's allowing JCI to continue to expand the total addressable market we have per megawatt, and it will continue to do so, part of a bigger, broader solutioning for thermal management in the data center.

Speaker 2

Yeah. We had the recent NVIDIA certification as well, just a little while ago. Good progress here.

Speaker 10

Great. Thanks, guys.

Speaker 2

Thank you.

Operator

Our next question will come from Nicole DeBlase with Deutsche Bank.

Speaker 11

Yeah, thanks. Good morning, guys.

Speaker 3

Good morning, Nicole.

Speaker 11

Good morning. Just wanted to start on if you guys could talk a little bit about what you're seeing with respect to the Middle East and how much of an impact that had on the third quarter, and I guess what you've embedded from a fourth quarter perspective for EMEA growth, and maybe when that business can return to more material growth.

Speaker 2

Yeah. Great, we can't predict the Middle East any better than you can, I think. It's about 10% of our EMEA business, and as you can imagine, it's very challenging, the business environment in the Middle East right now. Building pent-up demand for sure. We have assumed that there will be no material change here in the next quarters to what we've seen here in the recent quarters.

Speaker 3

Build up enough gas, Nicole. You'll see EMEA land in very low single digit to flat in Q4, and that's a couple of points of pressure vis-a-vis a normal run rate if the Middle East would have returned to normal, which I think we know for this quarter is not going to happen. This fourth quarter is not going to happen. Beyond, it's all about crystal ball.

Speaker 11

Sure. Yeah, makes total sense. APAC came in above your expectations pretty significantly in 3Q, I think, both revenue and margins pretty robust. I guess can you dive into what drove that, and any thoughts on if that's sustainable into the fourth quarter?

Speaker 2

Yeah, I think there are a number of markets, geographical markets, that are quite healthy. India in particular, but not only. There are some data center markets, but also significant investments in, for example, what we refer to as advanced manufacturing, biopharma, semicon, et cetera. Even a country like Japan that you'd think is more a slow-growing market is actually very strong right now on the back of investments in more advanced industries beyond data centers. We've made some good progress. We've been fortunate to strengthen our team in Asia Pac, we're seeing I think some traction here from these very talented leaders who we're super happy to have on board now, who are doing a good job. I think we're still in the early innings of that.

Speaker 11

Thank you. I'll pass it on.

Speaker 2

Thanks, Nicole.

Operator

Our next question, final question, will come from Andy Kaplowitz with Citigroup.

Speaker 12

Going.

Speaker 3

Hey, Andy.

Speaker 12

Service at +7% revenue growth and orders at +4% in Q3, I think were both slightly better than Q2. I'm sure you think Johnson Controls could still do better than that 4% orders in North America that you have. Maybe just update us on where you are on your initiatives to improve service, particularly in areas such as security, which you've talked to us about before, and should we expect a bigger turn in service growth as you go into 2027?

Speaker 3

No. You're right. We remain very confident in kind of the long-term service opportunity and how profitable that business has been. Returning to mid to higher single-digit growth is the focus. HVAC and fire are performing well within that range. As you mentioned it, we saw a bit of a decline in the American service backlog mostly associated with the security business. It's not at all a profitability issue. It has to do really with pivoting towards growth, and the dynamic of pricing that market. As you know, our security business a little bit less differentiated than, for example, our HVAC business. That has created a little bit of a competitive volume pressure, and we're taking very targeted action.

Speaker 3

You saw an improvement in the quarter, you're going to continue to see improvement in the performance as we drive a little bit of greater consistency across the business, both in Americas and EMEA. We still think there's a large opportunity to continue to drive our install base, especially when you see the system growth being in the double-digit. One of the big priority we talked about at Going to Gemba Day is the productization of our service offering and doing a better job at taking a differentiated go-to-market approach to be able to drive really better value proposition for our customers. It's a small bump right now, but we think we've seen an inflection point.

Speaker 12

Very helpful, Marc. Maybe I could just double-click on fire and security then. It's flat, I think, in revenue in Q3. Is that kind of sort of your targeted initiatives that you're doing? What's the underlying market doing? Again, what's embedded in the expectations for Q4 and beyond?

Speaker 3

Yeah. We're keeping up with market, right? The underlying market globally is flat, the way we have been. We intend to do better than the market. A refocus of that organization, both from fire detection, fire suppression, as well as our core security businesses, as we pivot into next year, is going to be a core focus to kind of lift up the growth of that business. Now, in all transparency, Andy, this is not going to be a high single-digit or double-digit growth market. We think we can drive performance in that business in a more high single-digit to mid-single-digit kind of level over time.

Speaker 12

Appreciate the color.

Operator

This concludes our Q&A session. I will now hand the call back to Joakim Weidemanis for any closing comments.

Speaker 2

Thank you. Thank you for all your questions today. We delivered another strong quarter, driven by sustained order momentum, broad-based growth, and continued margin expansion. The combination of our differentiated technology, unmatched field presence, and the early proof points we're seeing from our proprietary business system reinforce our confidence in the opportunities ahead. I want to thank our more than 90,000 colleagues around the world for their dedication to our customers, and for embracing new ways of working that help us serve them better every day. I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.

Operator

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.

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