Energy Recovery's Q3 2025: Contradictions Emerge on OEM Partnership Timelines, Desalination Growth, and Data Center Opportunities

Business Commentary:

* Strong Sales Execution and Revenue Guidance: - Energy Recovery, Inc. had a strong quarter of sales execution, with mega-project shipments improving and wastewater revenue rebounding. - The company reiterated its full-year revenue guidance, driven by improved sales execution and a rebound in wastewater revenue.

• Operational Efficiency and Cost Control:
• The team at Energy Recovery has done a nice job of controlling costs, reducing the full-year OpEx guidance even further.

• Cost control measures were taken while still investing in the growing wastewater business, allowing for modest increases in operating expenses.

• CO2 Business and OEM Partnerships:

• The CO2 business had a successful summer season of testing, validating energy and water savings, and increased performance during high heat loads.

• OEM engagement is strong, with plans to sign commercial agreements likely by 2026, after successful testing with large customers.

• Long-term Water Trends and Infrastructure Investments:

• The U.S. administration's efforts across various industries, such as desalination, are seen as a long-term positive for Energy Recovery's water trends.
• While long-term trends are positive, the company is cautious about near-term results due to the time to build infrastructure.

Contradiction Point 1

OEM Partnership and Commercial Agreement

It involves expectations and timelines for securing commercial agreements with OEMs, which are crucial for Energy Recovery's market penetration and growth in the CO2 refrigeration segment.

Can you provide an update on your progress with OEMs and your confidence in securing a commercial agreement with an OEM partner in the near future? - Ryan Pfingst(B. Riley Securities, Inc., Research Division)

2025Q3: Progress with OEMs is strong... Expect another summer season of testing before a commercial agreement is signed, likely in 2026. - David Moon(CEO)

Can you update on your collaboration with Hillphoenix and other OEMs for CO2 refrigeration? - Ryan Pfingst(B. Riley Securities, Inc., Research Division)

2025Q2: Discussions with Hillphoenix are ongoing, and progress is being made. - David Moon(CEO)

Contradiction Point 2

Desalination Market Growth and Revenue Expectations

It relates to the company's revenue projections and market growth expectations in the desalination segment, which is a key growth area for Energy Recovery.

Could the company consider initiating desalination projects? - Ryan Pfingst(B. Riley Securities, Inc., Research Division)

2025Q3: Desalination trends are positive for long-term growth, but infrastructure builds take time. Be cautious about near-term expectations, as the long-term trends remain solid. - Michael Mancini(CFO)

Does expected desalination capacity growth and recent awards support confidence in hitting the higher end of long-term desal revenue targets by 2026? - Ryan Pfingst(B. Riley Securities, Inc., Research Division)

2025Q2: It's too early to tell, but the awards and pipeline are giving confidence for 2026. - David Moon(CEO)

Contradiction Point 3

Data Center Market Opportunities

It involves the company's strategic focus and growth expectations in the data center market, which presents potential opportunities for Energy Recovery's products.

Regarding the data center opportunity, are there any new developments in either wastewater or refrigeration? - Ryan Pfingst(B. Riley Securities, Inc., Research Division)

2025Q3: CO2 refrigeration is still small, with no near-term opportunities. Water reuse and treatment is an emerging opportunity, and we'll have a better understanding over the next few quarters. - David Moon(CEO)

Has there been progress on the data center market business case? - Ryan Pfingst(B. Riley Securities, Inc., Research Division)

2025Q2: CO2 is still a small part of data centers, not expected to grow significantly. Focus remains on heat pumps, with more updates to come later. - David Moon(CEO)

Contradiction Point 4

OEM Partnership Timeline

It involves the expected timeline for securing a commercial agreement with an OEM partner, which is crucial for the company's growth strategy in the CO2 refrigeration market.

Can you update us on your progress with OEMs and your confidence in signing a commercial agreement with an OEM partner in the next few months? - Ryan Pfingst (B. Riley Securities)

2025Q3: Progress with OEMs is strong, with successful summer testing leading to conversations between OEMs and their large customers. Expect another summer season of testing before a commercial agreement is signed, likely in 2026. Hillphoenix is on track for a commercial agreement in 2026. - David Moon(CEO)

Does the wastewater business have upside potential if trade issues are resolved, or does it pose a risk to the 2025 guidance? - Ryan Pfingst (B. Riley Securities)

2024Q4: We are actively working with a number of OEMs. We expect that you'll start to see skid installations, and I think, over the course of the next year, you'll start to see skid installations. - David Moon(CEO)

Contradiction Point 5

Water Savings in Desalination

It relates to the potential impact of desalination trends on long-term growth, which is an important consideration for investors.

Is there a possibility of initiating water-related projects, such as desalination? - Ryan Pfingst (B. Riley Securities)

2025Q3: Desalination trends are positive for long-term growth, but infrastructure builds take time. Be cautious about near-term expectations, as the long-term trends remain solid. - Michael Mancini(CFO)

What other commercial applications might the PX cost reduction validate? - Jeffrey Campbell (Seaport Research Partners)

2024Q4: We currently have a value proposition in that we can significantly reduce the energy consumption and increase the amount of water that gets produced, which is the primary metric that plants are judged by. - David Moon(CEO)