ERII Q2 Deep Dive: Desalination Demand and Wastewater Expansion Drive Outperformance

Energy recovery device manufacturer Energy Recovery (NASDAQ:ERII) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 3.1% year on year to $28.05 million. Its non-GAAP profit of $0.07 per share was significantly above analysts’ consensus estimates.

Is now the time to buy ERII? Find out in our full research report (it’s free).

StockStory’s Take

Energy Recovery's second quarter results were met with a positive market reaction, as the company delivered sales and profitability that exceeded Wall Street expectations. Management attributed the quarter’s performance to continued strength in its core desalination business, noting several large deal signings and a resilient project pipeline. CEO David Moon highlighted that the company’s focus on both contract execution and new market opportunities helped offset macroeconomic volatility, stating, “Our core desalination business is proving resilient to the macro environment.” The leadership team also pointed to nimble operations in China, where a reduction in tariffs allowed delayed projects to proceed, further supporting revenue growth.

Looking ahead, Energy Recovery’s forward guidance is shaped by a combination of robust demand for desalination and a renewed focus on wastewater solutions. Management believes that the growth in contracted desalination capacity and water reuse projects, combined with ongoing product development in CO2 refrigeration, will remain major growth drivers. CFO Mike Mancini noted, “We are poised to capture the upside of these trends as we march toward our 2029 goals.” However, the company acknowledged ongoing tariff uncertainties and the early stages of exploring adjacent markets, such as heat pumps and data centers, which may influence future results.

Key Insights from Management’s Remarks

Management credited large desalination contracts, improved tariff conditions, and expansion in wastewater verticals as primary contributors to the quarter’s performance.

• Desalination contract momentum: Energy Recovery signed multiple large desalination contracts, which management cited as a key driver for the quarter. This reflects the company’s ability to secure business despite ongoing macroeconomic challenges and supports their confidence in achieving full-year revenue targets.
• Positive tariff developments in China: The reduction of tariffs on products shipped to China reopened previously stalled projects, resulting in over $2 million of shipments in the quarter. Management attributed this outcome to a persistent sales team and favorable external policy changes.
• Wastewater market expansion: The company broadened its reference base across five targeted wastewater verticals: municipal, chemical, textile, manufacturing, and mining. This focused approach has already yielded new reference cases, which management expects to support future growth and geographic expansion.
• CO2 refrigeration site growth: Energy Recovery continued to add new test and deployment sites for CO2 refrigeration applications, with seven new sites added in the quarter. Management sees high engagement from original equipment manufacturers (OEMs) and expects further progress during the ongoing summer testing season.
• Next-generation product pricing: The upcoming next-generation PX device is expected to command higher pricing based on capacity, rather than unit count. Management believes this approach will help sustain margins as customers require fewer, higher-capacity devices per project.

Drivers of Future Performance

Management expects future growth to be driven by demand for desalination and water reuse, as well as new product adoption amid regulatory and market shifts.

• Desalination demand and project pipeline: Management highlighted a growing pipeline of desalination projects fueled by global water scarcity, with a $550 million project pipeline and increasing contracted capacity. These trends are expected to drive medium-term revenue growth, but the exact timing of project completions remains uncertain due to long lead times.
• Wastewater sector opportunities: The company is focusing on five key wastewater verticals and is on track to establish multiple reference cases in each by year-end. Management indicated that municipal potable reuse and industrial water treatment—driven by regulatory and economic incentives—are expanding the addressable market.
• CO2 refrigeration and new adjacencies: Continued testing and site additions for CO2 refrigeration, as well as exploration of heat pump applications, are seen as longer-term growth drivers. However, the potential for data center applications remains limited unless market adoption of CO2 technology accelerates.

Catalysts in Upcoming Quarters

Looking forward, the StockStory team will be monitoring (1) the conversion of the desalination project pipeline into signed contracts, (2) progress in achieving reference cases across targeted wastewater verticals to support broader market adoption, and (3) the outcome of CO2 refrigeration testing and commercial agreements with OEMs. The pace of regulatory change and tariff developments will also be important factors to watch.

Energy Recovery currently trades at $14.08, up from $13.61 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free).

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