ERII Q1 Earnings Call: Tariffs, Delayed Orders, and Commercialization Efforts Shape Outlook

Energy recovery device manufacturer Energy Recovery (NASDAQ:ERII) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 33.3% year on year to $8.07 million. Its non-GAAP loss of $0.14 per share was significantly below analysts’ consensus estimates.

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StockStory’s Take

Energy Recovery’s first quarter performance was shaped by several key factors discussed by management. CEO David Moon highlighted that revenue was in line with internal expectations but confirmed the company continues to experience a heavily back-end-weighted year, with a significant portion of revenue expected later. The desalination segment remained a primary focus, with management emphasizing ongoing strength in the Middle East and North Africa despite tariff headwinds. Moon noted, “We continue to be very bullish on the desal market,” attributing stable project pipelines and quoting activity as supporting factors. The quarter also reflected the impact of delayed revenue recognition from a megaproject order and growing costs tied to tariffs. CFO Mike Mancini explained that ongoing efforts to offset tariff effects are underway, while the company is prioritizing quality in manufacturing despite considering international production options.

Looking forward, Energy Recovery’s guidance emphasizes the importance of commercial execution in its desalination and CO2 businesses, as well as continued margin management. Management indicated that progress in integrating the PX energy recovery device with refrigeration OEMs, such as Hillphoenix, could lead to broader deployments in the coming quarters. Moon outlined milestones for the CO2 business, stating, “We now have three 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.” The company is also evaluating expansion into new geographic markets and alternative production strategies to address ongoing tariff pressures. Management reiterated confidence in achieving gross margin targets for the year, supported by contracted projects and a visible pipeline, while remaining cautious on wastewater segment guidance.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to timing of project deliveries, tariff-related cost pressures, and ongoing investment in new product commercialization, particularly in CO2 refrigeration.

• Desalination pipeline stability: The company described the desalination market pipeline as strong, particularly in the Middle East and North Africa. CEO David Moon emphasized robust quoting activity and project engagement in these regions, maintaining confidence in the segment’s full-year trajectory despite a slow start to revenue recognition.

• Tariff impact mitigation: Management discussed the expanded scope and magnitude of tariffs affecting the business, especially in recent months. CFO Mike Mancini outlined ongoing initiatives to offset tariff impacts through operational adjustments, with the goal of minimizing net financial effects for the remainder of the year.

• CO2 product commercialization progress: The company continues to advance its PX (Pressure Exchanger) device in CO2 refrigeration applications. Moon highlighted active collaborations with three original equipment manufacturers (OEMs), aiming for pilot deployments in the summer, and announced a new public partnership with Hillphoenix targeting integration of PX into their rack designs.

• Manufacturing strategy flexibility: Management is considering various approaches to international production, driven by tariff dynamics. While the preference is for fully owned and operated facilities, the company is open to short-term partnerships if necessary to ensure product availability and quality, especially in key growth regions like China.

• Wastewater segment recalibration: The company acknowledged setbacks in the China wastewater market and is focusing on alternative geographic markets, notably India and North America. Moon noted early success in India and new resource investments in the U.S., while pulling formal guidance for wastewater due to ongoing uncertainty.

Drivers of Future Performance

Energy Recovery’s outlook is shaped by tariff mitigation efforts, commercial milestones in CO2 refrigeration, and expansion into new geographic markets.

• Tariff mitigation and cost structure: Management is actively working to offset the financial impact of recent tariff increases. These efforts include exploring manufacturing options outside the primary production region and operational changes to maintain gross margins and overall profitability targets.

• CO2 business commercialization milestones: The company’s near-term growth depends on successful pilot tests and commercial agreements with major refrigeration OEMs, particularly Hillphoenix. Broader adoption of the PX device in CO2 refrigeration is expected to drive incremental revenue once integration and field testing milestones are met.

• Geographic market diversification: Energy Recovery is expanding its presence in regions such as India and North America, with dedicated sales resources and new leadership hires. Management views these markets as key to offsetting revenue volatility in China and supporting long-term growth, especially in water reuse and municipal projects.

Catalysts in Upcoming Quarters

In coming quarters, the StockStory team will track (1) progress toward commercial agreements and pilot deployments for the CO2 PX device with Hillphoenix and other OEMs, (2) the company’s ability to mitigate tariff-related cost pressures through manufacturing adjustments and operational initiatives, and (3) expansion efforts and early traction in India and North America for both desalination and wastewater solutions. Execution in these areas will be critical for achieving Energy Recovery’s full-year goals.

Energy Recovery currently trades at a forward P/E ratio of 15.7×. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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