Johnson Controls International plc (JCI) Q3 2026 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Controls Q3 2026 Earnings Conference Call. My name is Ryan, and I'll be coordinating the call today. [Operator Instructions] I would now like to turn the call over to Mike Gates, Senior Director of Investor Relations to begin. Mike, please go ahead.

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, Joakim Weidemanis; 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 Joakim.

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 4. 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. But 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. 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 of 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. 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. Our life cycle 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 increasing confidence in our long-term potential. Let me walk you through this on Slide 5. Johnson Controls was built for this time because of two competitive advantages. For 140 years, we've shaped and protected the indoor environments where the world's most important work gets done. That track record is built on two strengths that are difficult to replicate. 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. Second, our proprietary business system, which we continue to embed throughout the organization. This is how we run the company. 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. And 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 6. On June 1, we hosted Going to Gemba Day, providing a firsthand 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%. And helping us win a major customer opportunity. Second, we went to our Airside Center of Excellence, or ACE, where for more than 50 years, we have 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 relationship 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. 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 are already seeing improvements in performance and the customer experience in 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% to 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. 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.

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 7. In 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% and service increased 7% and applied HVAC delivered high-teen growth supported by data center demand. This performance drove meaningful margin expansion. Adjusted segment EBITDA 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 8 and 9. 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 continue 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. 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 EBITDA 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. Net debt declined to 1.9x, 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 now better positioned 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% to 10%, operating leverage of 45% to 50% and adjusted EPS of approximately $1.55. Our strong third quarter results 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% to 50%, consistent with our focus on profitability and disciplined execution while delivering stronger revenue growth. As a result, we are raising our adjusted EPS guidance to approximately $5.05, representing roughly 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, demonstrated that the higher earnings we are delivering continued 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.

Our first question will come from Nigel Coe with Wolfe Research.

So 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?

Yes. So the supply chain is always an issue when you're in a high-growth environment. And that's the headline. But then 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 5 subsystems that make up an HVAC chiller. But we also talked about the fact that we control the manufacturing and the COGS of those 5 subsystems. So we are more vertically integrated than some in our industry and in a high-growth environment. That, of course, means that we control more of our own supply chain. And so I feel very good about where we are on many of our product lines. And then, of course, we don't make every single thing. We don't dig iron ore out of the parking lot. So of course, we depend on external vendors as well. Occasionally, there are some bottlenecks. We try to get ahead of that. Very occasionally, I will have to get involved in myself personally, and that is just, I think, an element of operating in a higher growth environment.

Okay. That's great. And then obviously, it's really encouraging to see the double-digit organic growth more than 10% in the fourth quarter. I know it's a little bit early for FY '27 color, but you've got really good visibility on the backlog. I'm just curious how you're thinking about kind of top line growth in FY '27?

Yes. As you mentioned, Nigel, it's a bit too early to provide real specific fiscal year '27 guidance. But 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 growth, 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, and that's really supported by our record backlog and the fact that our pipeline continues to grow in a very healthy manner. And the business system allows us to kind of improve the execution on that backlog and position us well for the future. But we'll provide you details on how we look at '27 at the next earnings call.

Our next question will come from Amit Mehrotra from UBS.

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. But orders are sort of running well ahead of that. And so 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?

Amit, well, the way we think about it, we look at our pipeline, our pipeline continues to grow at a very healthy rate. And as you would suspect, data centers is an important part of that, but the nondata center pipeline actually is growing almost double digits. So we're -- we feel very good about the continued strength there in our business from the demand side. And then from a supply chain and capacity point of view, we made a 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. And we continue to do that, and we actually had a very good quarter. So we're ramping a little bit ahead of what we thought. And that's really the -- 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. And the business system is going to continue to, as you saw, since you were there at the Go to Gemba Day (sic) [ Going to Gemba Day ] help us create more capacity in the physical space that we already have. But of course, with this kind of growth, we're also going to have to add some new physical capacity. But the business system will help us stay ahead of that. So we have some time to ramp other physical capacity expansion. So we feel pretty good at where we're at right now.

Okay. Got it. So just -- I mean, 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. And my -- I guess my follow-up question on that is around margins and operating leverage because you have this long-term framework of 30% plus. Obviously, you're punching way above that this year as you start this business model kind of evolution. As we think about '27, '28, I mean the backlog, I assume as it converts, is accretive to margins. Do we have another year or two, where we're sort of punching above that 30% plus long-term target. How do we think about the slope of the operating leverage as we sort of further progress through this evolution?

Yes. I mean 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% and 50%. And that incremental revenue that we see, is converting at rates that is extremely healthy, but is closer to the long-term operating leverage framework we had laid out of 30-plus percent. So dynamically, you will see still higher than 30% operating leverage over the next 12 to 18, maybe 24 months. But the way you need to think about that is that the margin that we've seen that incremental growth comes mostly from our data center revenue, which becomes a very large portion of our mix. And that means systems or systems business is growing ahead of our service business in the near term. And that creates a smaller equipment mix margin, a small headwind, I would call it, but nothing that would prevent us from continue to commit well above the 30% incremental we laid out in the Go to Gemba Day (sic) [ Going to Gemba Day ] as part of our long-term algorithm.

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

Congrats again on putting together some solid numbers here, not looking to blow sunshine up your tail, but these are good results. So anyway, I wanted to ask you guys a little bit about market share shifts and potential -- I mean, how do the hyperscalers think about working with you guys and your peers. Do they think in terms of derisking 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. I mean 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?

Yes. I think the way it works, Scott, is our large data center customers, they design or architect their data centers in certain ways, they'd make certain equipment choices as part of that overall architecture. And then -- and they are engaging with vendors as they do that. So 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. So think of that as you're designed in, and they will really just pick one partner that they design in with. There might be more -- two, there might even be three. And then 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 2 to 3 years. 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. And typically, what happens is someone will get -- no one will rarely get all of it. It's usually split, but someone will get a little more of their purchases. And even if initially you were awarded a certain amount executing better, for example, lead times, having less supply chain issues and so on, you might actually, in reality, secure more than over time than you thought initially in the dialogue with the customer. So that's kind of broadly how it works. So you need to be -- so the conclusion is you need to be very actively involved on the design side when they're architecting the overall data center. And that's a very collaborative approach. And obviously, you need to 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.

And is the service side of it, a similar kind of situation?

Yes. It's the service. A good point. So 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. And 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. And as I think you know, our footprint is comprehensive across the United States and many countries around the world. And 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. So we have multiple opportunities here to win. But you need to win on the design side to be -- to have a value prop that's strong. 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 and then you need to have the ability and then later on, the proof point that you can execute on service. And so when you can orchestrate all of that together, that's when you start to see market winning growth.

And the question, I guess, really was our net-net -- I mean, that was a fantastic answer. But net-net, do you think you are gaining share then, Joakim?

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

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

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 dilutive because of pass-through? That's the first question.

Yes. Great. Great question, Andrew. So we believe that the future data centers are not all going to be these mega data centers, the 1 gigawatt and may be 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. And 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. 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 in Johnson Controls in that shipping container. And these are a couple of megawatts, and they get deployed and megawatts are increasing as we continue to innovate. And they are forward deployed. The traditional applications would -- think of oil and gas very remote locations and -- but they are also defense applications. And so we believe -- but we believe that those decentralized, close to the edge types of applications are going to continue to grow. And so we're very excited about the potential here there. The TAM, this is an earlier stage of the market. So the TAM is significant, but it's in formation. So I hesitate to throw numbers out there. There are people who speculate around very significant numbers. 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. But think of it as an example -- as I mentioned on the call, where we've taken a step back and we 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. And so we're taking a broader look at the AI opportunity and how we can help human society accelerate the advancements there.

And 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?

So we continue the work on that. And as you've heard before, the guiding principle here is to create shareholder value. And -- but we continue to make progress, and we will keep you posted, but progress is good.

And you've seen we've taken some portfolio actions 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.

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

I wanted to follow up on some of the commentary around data center. And 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 service. 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. And really, the heart of the question is, like, is the legacy content going higher when we think about chillers and air handlers? And just first, how much of it is coming from CDU being a new product where you guys are gaining share?

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. And by the way, with -- there are other things that generate heat too, think the 800-volt DC and -- but not only. So the amount of heat that needs to be extracted out of a data center will continue to increase. And so therefore, thermal management becomes even more critical for the data center. And obviously, to do that, energy efficiently is essential. So we will -- we really see the speculation around the reduced demand for chillers as that's going to be a very, 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. And of course, we have our Alloy investment here from a couple of quarters ago that where we're making great progress in pilots and some early orders now. And then our controls. And 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%. So actually, very, very meaningful value prop. So -- and we're going to continue to work on increasing our dollars per megawatt, if you will. I mean even the Armada example that Andrew was asking about, as I mentioned, that container, a data center and a container, I mean, it is loaded with everything that we make in this company. So we are going to continue to drive the dollar value up per megawatt here. That's an essential part of our strategy.

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 kind of the various equipment together. I imagine that, that would lead to better energy efficiency for the data center. Is there any like numbers or data or anything you could talk about, about the level of efficiency savings? And then maybe 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. But is there any difference between the type of customers? And is there any -- do they care more than they used to?

I think, Chris, they've always cared. And I think they care a little more now. I mean, you read the same news that we read, right, around the headlines we hear about the local communities being concerned about the impact on power prices and things like that. So -- which really leads the data center customers to make more careful choices about where they go build data centers. 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. But the where has a lot to do with how much power is available. And there are constraints around power availability today. So 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? And then obviously, the value prop of operating a data center, if you -- on thermal management, but today uses maybe think of it as 1/3 of all the power that goes into a data center. So whoever can eke out multiple percentage points of savings of energy not needed for thermal management. I mean the value prop for that for our customers is very, very meaningful. And 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, but really exciting. It's going to be very meaningful what we're working on.

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

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. But obviously, there's a lot of hand-wringing out here in the market and investor sentiment about whether your end customers can really earn an acceptable return on all this investment looking out a ways. And against that, obviously, you've got to commit capital and you're adding capacity and the like. Just where do you stand on kind of the sustainability of this demand? And do we have sustainable demand looking out 2 or 3 years that really supports the investments you're making and the confidence that we see apparent in the orders, et cetera?

Yes. So you asked for an opinion. So I'll give you an opinion. So as you know, I spent the 5-plus years before taking on this assignment in medical diagnostics. And 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. And those industries are using AI already. But if you think about versus what they could be using it, how they could be using it I mean we're still in the very, very early innings of usage. So I think the demand -- and it's not just that there are more researchers, and this is a longer discussion now than there were 20 years ago doing research on human biology, but it's the availability of compute, the cost of it and so on. The economics are very different, which means that more researchers have more access to AI. So that's -- but super early innings. And then I just look at a corporation like our own for what we're using AI today, and I think we're making some good progress internally here. I mean it's part of our proprietary business system that we're rolling out. But we're still single digits percent 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. So I think the demand for the output of the data centers is going to continue to grow meaningfully. I mean, we're just starting to understand and many large organizations how we can really use this capability at scale. So I'm optimistic. I know there's a lot of speculation about CapEx and so on, but I think about it from a demand point of view and where it's going to be put to use and so I'm optimistic.

Yes, no, helpful. And then just looking at maybe another a little bit bigger picture question, but just looking at kind of the rising power demand and heat loads and the like, it would seem sort of thermal and electrical solution need to clearly work in concert, not that they're not today, but 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?

Yes. I mean, 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 (sic) [ Going to Gemba Day ] where we talked about the 5 subsystems of a chiller, that we -- are part of our core proprietary technological know-how. I mean there are electrical aspects there, one of the subsystems, right? So we've clearly chosen there to own a subsystem that creates a whole system that performs at a higher level. And we have looked at that beyond the 5 subsystems that make a chiller. It's -- you could make some arguments around synergies, power and thermal, I think one has to think very carefully because -- about that because -- and we're not very interested in, let's call it, creating procurement synergies for customers. I mean that might be helpful for customers, but it's actually not going to advance how data centers perform. So the way we think about it is how can we help improve the performance of the data centers. And so we're in multiple explorations trying to see what we could do there. So it's possible that we will very surgically expand our capabilities there, and that could be through partnership or it could be surgical inorganic moves. But I think a big picture today, and I think more of the synergies from a customer point of view are probably on the procurement side and -- so we will choose to focus our efforts more on the technology development and the value prop side.

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

I was hoping you guys could help level set embedded in your guidance -- your revenue guidance for the year, how much is embedded for data center revenues this year? And then also as kind of as you think about the backlog build and the visibility that you have for FY '27, how much of -- how much is already guaranteed that you would expect to kind of ship in the FY '27 time frame?

Yes. So data center revenue is probably going to land in the high teens as a mix of percentage of revenue for fiscal year or fiscal year '26. We continue to see that subsegment grow much faster than the rest of the portfolio, very healthy double digits for some subsegment even higher than that in terms of growth. As we shape out the following years and as we discussed that at Going to Gemba, we see that mix over the next 3 to 5 years, becoming 1/3 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, as we continue to expand our installed base because of the system growth we've seen in the last couple of years, and we're going to see the next 3 or 4 years. We continue to improve our service attachment rate and that installed 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, very profitably.

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

Yes. We are going to start shipping actually this quarter. Most of the testing and validation is through. We are 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.

Yes. And we had the recent NVIDIA certification as well just a little while ago. So good progress here.

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

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?

Yes. Great. So 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. But building pent-up demand for sure. So 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.

And buildup in our guidance, 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 it's not going to happen. But beyond it's sort of about crystal ball.

Sure. Yes, it makes total sense. And then 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?

Yes. I think there are a number of markets -- geographical markets that are quite healthy, India in particular, but not only. And there are some data center markets, but also significant investments. And for example, what we call referred to as advanced manufacturing. biopharma, semicon, et cetera. And so even a country like Japan that you 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. And then we've made some good progress. We've been able to -- fortunate to strengthen our team in Asia Pac. And so 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. And I think we're still in the early innings of that.

Our next question -- final question will come from Andy Kaplowitz with Citi Group.

So service at plus 7% revenue growth and orders at plus 4% in Q3, I think were both slightly better than Q2. But I'm sure you think Johnson Controls, could still do better than that 4% orders in North America that you have. So maybe just update us on where you are on your initiatives to improve service particularly in areas such as security, which you talked to us about before? And should we expect a bigger turn in service growth as you go into '27?

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. But 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 a pivoting towards growth and the dynamic of price in that market. And as you know, our security business, a little bit less differentiated than, for example, our HVAC business, and that has created a little bit of a competitive volume pressure, and we are taking very targeted action. You saw an improvement in the quarter, and 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 installed base, especially when you see the system growth being in the double digit. And 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. So it's a small bump right now, but we think we've seen an inflection point.

Very helpful, Marc. And maybe I could just double click on Fire and Security then like 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? And again, what's embedded in the expectations for Q4 and beyond?

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

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

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 reinforced 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.

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