Xylem Sees Data Center Demand Boosting Growth as Metering Sales Soften

Key Points

• Xylem expects low-single-digit growth and modest margin expansion in 2027. Strong data-center and other water-product demand should be partly offset by flat-to-down metering sales and uneven project timing.
• Data centers are a growth bright spot: Applied Water orders rose 200% over the past two quarters, and Xylem is working to double heat-exchanger and pump capacity.
• Utilities are delaying some metering investments amid budget and affordability pressures, though Xylem said it is holding or growing market share. Third-quarter project orders increased 30%, but are expected to contribute mainly in late 2027 or early 2028.

Xylem NYSE: XYL executives expect low-single-digit growth and modest margin expansion in 2027, as strong demand for data center equipment and other water products is offset by softer metering sales and uneven project timing.

Chief Financial Officer Andrea van der Berg agreed with that characterization of the outlook during a question-and-answer session. She said the company’s metering business could be flat to down next year, while its other segments are expected to grow within a 4% to 6% framework.

Chief Executive Officer Matthew Pine said Applied Water could grow at the high end of that range, supported by its backlog and data center demand. Water Infrastructure and WSS are expected to be closer to the low end.

Metering demand faces an affordability squeeze

Pine said utilities are deferring some metering investments as inflation reduces how much they can purchase with existing budgets. Rather than a shortage of funding, he described the issue as a need to prioritize mission-critical spending, including wastewater pumping and treatment.

Electric metering has also faced pressure, which Pine attributed in part to restrictions on utility rate increases as consumers confront higher energy bills. He said the company expects to get through difficult comparisons in that business after the first half of 2027.

For the broader metering business, Pine said conditions seen in the fourth quarter are expected to continue into the first half of next year. Although third-quarter project orders rose 30%, he agreed that those projects are more likely to contribute late next year or in early 2028.

Pine maintained that the long-term opportunity for advanced metering infrastructure remains strong, citing potential savings on meter-reading labor and better information for utilities’ capital spending decisions. He also said third-party data show the metering market is down in both dollars and units, while Xylem is holding or growing share.

Margins and portfolio changes

Van der Berg said the metering business should benefit from the international metrology divestiture and from moving past a dilutive gas contract. But slower water meter volumes will make it harder to leverage fixed costs, creating a headwind to overall profitability.

Across Xylem, productivity from the company’s 80/20 initiatives should continue next year, though at a smaller magnitude than in prior years, she said. She also expects price versus material costs to be neutral for margins, rather than the tailwind seen this year.

The company has announced two additional divestitures representing about 9% of revenue and less than 5% of EBITDA, Pine said. It is also moving from four reporting segments to three: flow technologies, treatment, and measurement and analytics.

Pine said Xylem had closed the Cornell Roper acquisition. He described the business as a fit with Xylem’s pump portfolio and said it would expand the company’s exposure to industrial water applications, particularly mining. Van der Berg said Cornell Roper has an EBITDA margin of about 30%, although higher interest expense will offset its earnings-per-share contribution through at least the first year.

Data centers and capital allocation

Pine called data centers a bright spot for Applied Water, saying orders in that business were up 200% over the last two quarters. Xylem is working to double its capacity for heat exchangers and pumps as it exits the year, he said.

In WSS, van der Berg said third-quarter orders grew 6% and drove most of the company’s sequential backlog growth. Revenue conversion on larger capital projects can vary with activity at customer sites, contributing to the expectation that the segment will grow at the lower end of the company’s framework next year.

Pine said Xylem had repurchased $1.5 billion of shares so far this year and would continue balancing buybacks with acquisitions. He described the acquisition pipeline as healthy and said the company has a goal of deploying $1 billion toward mergers and acquisitions if opportunities are actionable and create value.

About Xylem (NYSE:XYL)

Xylem Inc. is a water technology company that develops equipment, software and services for managing water and wastewater. Its offerings include pumps and treatment systems, water-quality testing and analysis, smart meters, monitoring and control technologies, and services for detecting leaks and maintaining water infrastructure. The company serves water and wastewater utilities, industrial and commercial customers, and residential markets. Its technologies support the movement, treatment, testing and efficient use of water across municipal and industrial systems.

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