Emerson (EMR) Q4 2025 earnings review
Strong Finish to FY25, but Guidance Obscured by Software Accounting
Emerson closed fiscal 2025 with strong momentum, delivering accelerating underlying sales growth of 4% and a robust 6% increase in orders for Q4. Adjusted EPS of $1.62 topped guidance, driven by strong operational execution and record margins. However, the FY2026 outlook, while fundamentally solid with 4% underlying growth and margin expansion to ~28%, is complicated by a significant, non-cash accounting headwind. A $120 million reduction in GAAP revenue is expected due to the timing of multi-year software contract renewals, which disproportionately impacts the first half of the year. This dynamic masks the healthy underlying growth in the business, which is better reflected in the strong free cash flow guidance of $3.5-$3.6 billion.
🐂 Bull Case
Underlying orders grew 6% in Q4, the third consecutive quarter of acceleration, driven by a sharp rebound in Test & Measurement (+27%) and continued strength in process markets like LNG and Power.
FY25 Free Cash Flow was a robust $3.24 billion. The FY26 guidance for $3.5-$3.6 billion, representing ~10% growth, underscores the business's high quality of earnings, which is unaffected by the software renewal accounting issue.
🐻 Bear Case
The $120 million software renewal headwind will cause reported sales growth to look weak, particularly in H1, with Q1 underlying sales guided to just 2% growth. This accounting complexity could obscure the company's strong underlying performance for investors.
Management continues to see soft demand in Europe and China and has guided for flat performance in both regions for FY26, creating a drag on overall growth that must be offset by strength elsewhere.
⚖️ Verdict: 🟢
Bullish. The underlying operational trends—accelerating orders, strong project funnel, and excellent cash generation—are very positive. The primary headwind for FY26 is a temporary, non-cash accounting issue that masks the true health of the software business and will reverse in future years. The operational momentum is clear and compelling.
Key Themes
Software Renewal Headwind Clouds FY26 Outlook
The primary concern from the report is a newly disclosed accounting dynamic that will create a $120 million revenue headwind in FY26. This is due to fewer multi-year term license contracts coming up for renewal compared to a strong FY25. This non-cash issue significantly impacts reported growth, causing guided Q1 underlying sales to decelerate to just 2% and depressing adjusted EPS growth. While management noted this dynamic reverses in FY27/28 and does not affect cash flow or Annual Contract Value (ACV) growth, it creates a confusing narrative that contradicts the strong underlying operational momentum.
Test & Measurement Rebound Signals Discrete Recovery
A key positive development was the sharp rebound in the Test & Measurement business, with orders surging 27% in Q4. Management cited broad-based strength across semiconductor, aerospace & defense, and the general 'portfolio business'. This strong inflection suggests the prolonged downturn in discrete end markets is bottoming out and provides a significant growth engine for FY26, with the segment guided to grow high-single-digits.
Secular Strength in Process & Hybrid Markets Continues
Demand from process and hybrid end markets remains resilient, supported by a constructive capital cycle. The company highlighted major wins and continued investment in Power (Ovation orders +30% in FY25), LNG (automation provider for Woodside Louisiana LNG), and Life Sciences. These secular trends support a healthy $11.1 billion large project funnel and provide a stable base of mid-single-digit growth.
Capital Allocation Shift to Shareholder Returns
With the major portfolio transformation now complete, Emerson is increasing its focus on returning capital to shareholders. The company announced a 5% increase in its dividend per share and a plan to repurchase $1 billion of shares in FY26. This signals management's confidence in future cash generation and a more mature capital allocation policy.
Persistent Geographic and End-Market Softness
Management explicitly stated that demand in Europe and China remains soft and is forecast to be flat in FY26. This macro pressure is most acute in discrete end markets like automotive and factory automation, which continue to show 'lingering weakness'. Strength in the Americas, India, and the Middle East will need to continue to offset these headwinds.
AI & Software Innovation as a Growth Vector
Emerson continues to invest in its software portfolio, which remains a key growth driver independent of hardware cycles. Annual Contract Value (ACV) grew 10% in FY25 to $1.56 billion and is projected to grow over 10% again in FY26. The company is embedding AI into its offerings, launching 'Guardian Virtual Adviser' for its DeltaV platform and 'subsurface intelligence' via AspenTech to accelerate customer decision-making.
Other KPIs
Stable. Free cash flow grew 12% in FY25, reaching an 18% margin. FY26 guidance of $3.5-$3.6 billion implies another ~10% growth. This strong and growing cash generation highlights the quality of earnings and is unaffected by the accounting headwinds impacting reported revenue and EPS growth in FY26.
Accelerating. ACV, a key metric for recurring software revenue, grew 10% in FY25 and is guided to grow 10%+ in FY26. This metric provides a clearer picture of the health of the high-margin software business than GAAP revenue, which is subject to the volatility of multi-year renewal timing.
Stable. The backlog grew 3% year-over-year, providing solid visibility into FY26 revenue. The growth was driven by a strong 5% increase in orders during the second half of the year.
Guidance
Stable. This guidance is consistent with the 4% underlying growth delivered in Q4 2025. However, it reflects a significant deceleration in H1 (2% reported) and an acceleration in H2 (6% reported), primarily driven by the timing of software renewals.
Stable. The midpoint of $6.45 implies 7.5% YoY growth over FY25's $6.00. This solid earnings growth is driven by positive price/cost, operational improvements, and synergy benefits, partially offset by the software renewal headwind.
Decelerating. This represents a sharp slowdown from Q4's 4% growth. Management explicitly attributes this to the $110 million H1 headwind from software contract renewals. Excluding this impact, underlying growth would be approximately 4%.
Decelerating/Reversing. This implies only ~1.5% YoY growth compared to Q1 2025's $1.38, a significant slowdown. This is due to both the software renewal impact on high-margin revenue and a difficult comparison against a prior year quarter that benefited from favorable project closeouts.
Key Questions
Quantifying Underlying Software Growth
The $120 million software renewal headwind is a significant factor. Can you provide the underlying growth rate for the Control Systems & Software segment, excluding this accounting dynamic, to help us better understand the true operational momentum?
Sustainability of Test & Measurement Rebound
The 27% order growth in Test & Measurement is a very strong signal. How much of this is driven by easier comps versus a fundamental recovery in semiconductor and other end markets? What gives you confidence this is sustainable through FY26?
Catalysts for Europe & China
You're guiding for flat performance in Europe and China for FY26. What specific catalysts or economic indicators are you watching that could change this outlook, particularly in the challenged factory automation and automotive sectors?