Energy Recovery, Inc. (ERII)·Q1 2025 Earnings Summary

Executive Summary

• Q1 2025 came in line with management’s internal cadence for a back-end weighted year: revenue $8.1M (down 33% YoY), gross margin 55.3% (down 370 bps YoY), net loss $9.9M, adjusted EBITDA loss $8.7M, and free cash flow $10.5M .
• Management reiterated confidence in desalination and CO2 revenue guidance, citing contracted projects and a strong pipeline with visibility into more than 80% of expected 2025 desal revenue; they reaffirmed gross margin guidance .
• Tariffs have broadened in scope; ERII expects to offset the majority of the net tariff impact in 2025, with possible near-term manufacturing footprint actions to mitigate exposure .
• Significant consensus miss: Q1 revenue $8.07M vs S&P Global consensus $21.97M*, EPS -$0.18 vs $0.00*, driven by timing (including ~$2M shipped but not recognized) and fixed-cost absorption; sets up future quarters if shipments and mega-project revenue recognition catch up .

What Went Well and What Went Wrong

What Went Well

• “Q1 was in line with our expectations regarding revenue and profitability and consistent with another heavily back-end weighted year,” reinforcing the cadence narrative and multi-quarter visibility .
• Strong desalination pipeline and quoting activity, with continued bullishness on Middle East and North Africa demand, supporting 2025 visibility .
• CO2 refrigeration on track: three OEMs integrating the PX into rack designs, with pilot test sites expected for summer; Hillphoenix engagement advancing with a commercial agreement and integrated test site targeted as near-term milestones .

What Went Wrong

• Revenue declined 33% YoY to $8.1M due to timing of contracted projects; gross margin compressed to 55.3% on lower revenue over fixed costs .
• Wastewater faces potential China tariff exposure (~$9M of revenue), prompting efforts to offset with other geographies while holding guidance for now .
• EPS and revenue missed Wall Street consensus materially, reflecting timing and absorption impact; a shipped mega-project order (~$2M) wasn’t recognized in Q1, muting both revenue and margins .

Financial Results

Segment and Channel Mix

Balance Sheet Highlights (end of period)

Guidance Changes

Note: ERII did not disclose numeric ranges for desal and CO2 2025 revenue in the documents reviewed; management described status and confidence qualitatively .

Earnings Call Themes & Trends

Management Commentary

• “Q1 was in line with our expectations regarding revenue and profitability and consistent with another heavily back-end weighted year.” – David Moon .
• “We believe we'll be able to offset the majority of the net tariff impact with manageable impact to our financial results for 2025.” – David Moon .
• “We now have 3 OEMs working to integrate the PX into their rack designs and expect all these OEMs to have at least one pilot test site running for the summer season… we’re excited to be able to speak publicly about our work with Hillphoenix.” – David Moon .
• “We’re confident in our desal and CO2 revenue guidance… contracted projects plus high probability pipeline gives us visibility into more than 80% of the expected 2025 [desal] revenue.” – David Moon .
• “We’re comfortable with the gross margin guidance that we’ve given… we’ve reaffirmed gross margin guidance.” – Michael Mancini .

Q&A Highlights

• Desal market strength: pipeline and quoting “remain very strong,” with bullish outlook on Middle East and North Africa .
• Timing impact: a shipped mega-project order (~$2M) was not recognized as revenue in Q1, tempering revenue and gross margin .
• Manufacturing footprint: preference to establish 100% owned facility; short-term partnering possible to mitigate tariffs; ceramics manufacturing quality will remain in-house .
• Wastewater diversification: attempting to offset ~$9M China exposure via India and U.S. municipal reuse; building local teams .
• Hillphoenix roadmap: near-term milestones include a commercial agreement and an integrated PX G test site for the summer season .

Estimates Context

Q1 2025 vs S&P Global consensus:

• The magnitude of the miss reflects project timing and fixed-cost absorption; management reiterated the year is back-end weighted with strong desal visibility into >80% of expected 2025 revenue .

Values retrieved from S&P Global.*

Key Takeaways for Investors

• Back-end weighted year intact; Q1 was in line with management’s cadence, with >80% desal revenue visibility supporting execution into 2H 2025 .
• Tariff headwinds are real but largely mitigated per management; watch for manufacturing footprint announcements that could reduce exposure further .
• CO2 commercialization is progressing: three OEM integrations and Hillphoenix milestones (commercial agreement + integrated test site) are near-term catalysts .
• Wastewater exposure to China is being actively diversified (India, U.S. municipal reuse); sustained effort could stabilize segment risk over time .
• Despite a large consensus miss in Q1, free cash flow was strong ($10.5M), and cash/investments increased to $106.7M, underpinning capital return capacity (active $30M buyback) .
• Monitor channel mix normalization (megaproject recognition timing) and gross margin trajectory, which management reaffirmed for FY 2025 .
• Near-term trading: weakness on the miss could be offset by evidence of mega-project revenue recognition and OEM integration milestones; medium-term thesis hinges on desal durability, CO2 ramp, and tariff mitigation .