Energy Recovery's Q3 2025: Contradictions Emerge on OEM Timelines, Desalination Visibility, and Wastewater Expansion

Guidance:

• Reiterated full-year revenue guidance.
• Reduced full-year operating expense (OpEx) guidance.
• Expect growth in Q4 and in 2026 with only modest increases in OpEx.
• CO2 commercialization progress expected over 2026–2027; company will provide updates as traction develops.

Business Commentary:

* Strong Sales Execution and Revenue Guidance: - Energy Recovery, Inc. reported a strong quarter of sales execution, with mega-project shipments improving and wastewater revenue rebounding, allowing the company to reiterate its full-year revenue guidance. - This performance was driven by effective sales strategies and cost control measures implemented throughout the year.

• OpEx Reduction and Cost Control:
• The company has reduced its full-year operating expenses (OpEx) guidance further, showcasing its ability to manage costs while investing in growth areas like wastewater treatment.
• This outcome is the result of strategic decisions to optimize efficiency and lower costs without compromising investments in key business areas.

• CO2 Business Advancements and Commercialization Timeline:
• The CO2 business had a successful summer testing season, validating significant energy savings and water conservation capabilities, particularly during high heat load days.
• Commercialization for the CO2 business is now anticipated in 2027, following additional testing seasons and OEM collaboration, as large retailers and OEMs work together to adopt new technology.

• Wastewater Business Growth and Hiring Strategy:
• The wastewater business continues to rebound, and the company expects growth in Q4 and next year with only modest increases in operating expenses.
• Investment in the wastewater segment is supported by strategic hires of experienced professionals who bring expertise and relationships within key verticals, facilitating business expansion.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management: "we had a strong quarter of sales execution...we are reiterating our full year revenue guidance" and "the team has done a nice job this year controlling costs, and we are reducing our full year OpEx guidance." Wastewater revenue "continued to rebound."

Q&A:

• Question from Ryan Pfingst (B. Riley Securities, Inc., Research Division): What were the main takeaways from the recent CO2 white paper?
  Response: White paper validated the PX G value proposition: up to ~15% peak energy savings, significant water savings in adiabatic-cooler regions, and improved capacity/performance during high-heat periods.

• Question from Ryan Pfingst (B. Riley Securities, Inc., Research Division): Progress with OEMs and confidence in signing a commercial OEM agreement in the next few months?
  Response: OEM commercial agreements are unlikely in the next few months; expect another summer of field testing and commercial agreements to follow—MOU with Hillphoenix on a path to a likely 2026 agreement; large OEM deals likely about a year out.

• Question from Ryan Pfingst (B. Riley Securities, Inc., Research Division): Could U.S. administration actions kickstart desalination infrastructure similar to other industries?
  Response: Long-term desalination trends are favorable and helped by AI/energy trends, but near-term impact is unlikely because infrastructure buildout is slow; cautious on near-term expectations.

• Question from Ryan Pfingst (B. Riley Securities, Inc., Research Division): Any update on the data-center opportunity for wastewater or refrigeration?
  Response: No near-term refrigeration opportunity given CO2's small role; monitoring water reuse/treatment opportunities for data centers and expect clearer visibility over the next few quarters.

• Question from Lawrence Solow (CJS Securities, Inc.): Does adoption require OEM and large customer alignment and what is holding up adoption timing?
  Response: Large retailers rely on OEMs for design/install/service, so adoption runs through OEMs; OEMs and retailers must act in lockstep—expect Hillphoenix to promote tests to large retailers (e.g., Walmart) next year.

• Question from Lawrence Solow (CJS Securities, Inc.): Has your confidence in the CO2 program changed despite timing slips?
  Response: Confidence remains; successful summer testing and OEM interest persist, but another 2026 testing season is expected and real commercialization is likely shifted toward 2027.

• Question from Lawrence Solow (CJS Securities, Inc.): Will visibility and backlog for desalination begin to fill in for 2026?
  Response: Yes—expect some backlog entering 2026 but likely modest; historical pattern of slow H1 and heavy H2 should continue, with the second half telling the story.

• Question from Jeffrey Campbell (Seaport Research Partners): Did operating cost reductions benefit from establishing an international footprint?
  Response: No—OpEx reductions came from deliberate cost controls and rapid actions against tariff impacts; these savings occurred without halting investments in wastewater or tariff-avoiding manufacturing.

• Question from Jeffrey Campbell (Seaport Research Partners): Is the announced lithium extraction project meaningful for wastewater treatment as a niche?
  Response: The Argentina lithium project ($350k) and prior China wins indicate growing opportunities—lithium extraction could become a meaningful niche with more projects expected.

• Question from Jeffrey Campbell (Seaport Research Partners): What attributes are you seeking when hiring for the wastewater effort?
  Response: Candidates with proven wastewater track records and experience/relationships in one or two of the company's five focus verticals, including OEM and end-user relationships.

• Question from Jeffrey Campbell (Seaport Research Partners): Will the retailer CO2 tests next year be skid installations?
  Response: Yes—majority of retailer tests are expected to be skid installations at existing CO2 locations.

Contradiction Point 1

Commercial Agreement Timeline with OEMs

It involves differing expectations regarding the timeline for signing commercial agreements with OEMs, which is crucial for the adoption and revenue growth of the PXG technology.

Where are you in discussions with OEMs, and how confident are you in finalizing a commercial agreement with one in the next few months? - Ryan Pfingst (B. Riley Securities, Inc. Research Division)

2025Q3: OEMs are now having conversations with their largest end users about the PX G. Expect another summer season of testing in 2026 before commercial agreement signing. - David Moon(CEO)

What is your progress with OEMs and confidence in signing a commercial agreement in the next few months? - Ryan Pfingst (B. Riley Securities)

20251106-2025 Q3: We checked the box on summer testing, and now OEMs are discussing PX G with their customers. Expect another testing season next summer, and a commercial agreement likely in 2026. - David Moon(CEO)

Contradiction Point 2

Desalination Project Visibility

It involves differing expectations regarding the visibility and timing of desalination projects, which impacts revenue forecasts and operational planning.

Does your visibility for 2026 start to improve on a 12-month rolling basis, despite potential quarterly shifts? - Lawrence Solow (CJS Securities, Inc.)

2025Q3: Backlog should start to build for 2026, with a pattern of slow first half and heavy second half. - David Moon(CEO)

Is your visibility on desalination improving on a 12-month rolling basis? - Lawrence Solow (CJS)

20251106-2025 Q3: We expect backlog building now for 2026, with a slow start and heavy backlog in the second half as usual. - David Moon(CEO)

Contradiction Point 3

Desalination Revenue and Capacity Growth

It involves expectations regarding desalination capacity growth and its impact on revenue, crucial for assessing the company's growth trajectory and financial performance.

Does the expected desalination capacity growth and recent awards give confidence to reach the upper end of the long-term desalination revenue range by 2026? - Ryan Pfingst (B. Riley Securities, Inc. Research Division)

2025Q3: We expect 2026 to be a year of course correction with some recovery in desalination. - David Moon(CEO)

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

2025Q2: It's too early to tell, as contracted capacity projects may take 2-3 years to become tendered. However, recent awards and early '26 outlook are positive for '26 performance. We'll provide guidance in Q3. - David Moon(CEO)

Contradiction Point 4

Wastewater Footprint Expansion

It involves the progress and expectations regarding the wastewater footprint expansion, which impacts the company's growth strategy and market diversification.

Given Argentina's success, what's the next major initiative for global wastewater? - Ryan Pfingst (B. Riley Securities, Inc. Research Division)

2025Q3: We're very happy with the progress here, and we will have reference customers in pretty much all the 5 target verticals. - David Moon(CEO)

Did wastewater footprint expansion meet expectations? - Jeffrey Leon Campbell (Seaport Research Partners)

2025Q2: Focus on 5 key verticals in wastewater. Goal to have 2 reference cases per vertical by year-end is on track to be met. - David Moon(CEO)