Energy recovery device manufacturer Energy Recovery (NASDAQ: ERII) missed Wall Street’s revenue expectations in Q4 CY2025, with sales flat year on year at $66.87 million. Its non-GAAP profit of $0.53 per share was 20.9% below analysts’ consensus estimates.
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Energy Recovery (ERII) Q4 CY2025 Highlights:
- Revenue: $66.87 million vs analyst estimates of $82.59 million (flat year on year, 19% miss)
- Adjusted EPS: $0.53 vs analyst expectations of $0.67 (20.9% miss)
- Adjusted EBITDA: $33.6 million vs analyst estimates of $39.8 million (50.2% margin, 15.6% miss)
- Operating Margin: 46.8%, up from 41.9% in the same quarter last year
- Free Cash Flow Margin: 9.6%, down from 13.2% in the same quarter last year
- Market Capitalization: $851.3 million
Company Overview
Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ: ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.
Revenue Growth
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Energy Recovery’s 2.6% annualized revenue growth over the last five years was sluggish. This wasn’t a great result, but there are still things to like about Energy Recovery.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Energy Recovery’s annualized revenue growth of 2.6% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak. 
This quarter, Energy Recovery missed Wall Street’s estimates and reported a rather uninspiring 0.3% year-on-year revenue decline, generating $66.87 million of revenue.
Looking ahead, sell-side analysts expect revenue to grow 17% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and indicates its newer products and services will catalyze better top-line performance.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Energy Recovery has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.4%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Energy Recovery’s operating margin rose by 4.8 percentage points over the last five years, as its sales growth gave it operating leverage.
This quarter, Energy Recovery generated an operating margin profit margin of 46.8%, up 4.9 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.
Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Energy Recovery’s weak 2.9% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
Energy Recovery’s two-year annual EPS growth of 25.1% was fantastic and topped its 2.6% two-year revenue growth.
We can take a deeper look into Energy Recovery’s earnings quality to better understand the drivers of its performance. Energy Recovery’s operating margin has expanded over the last two yearswhile its share count has shrunk 7.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
In Q4, Energy Recovery reported adjusted EPS of $0.53, up from $0.50 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Energy Recovery’s full-year EPS of $0.58 to grow 51.9%.
Key Takeaways from Energy Recovery’s Q4 Results
We struggled to find many positives in these results. Its revenue missed and its EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 18.7% to $13.11 immediately after reporting.
Energy Recovery didn’t show it’s best hand this quarter, but does that create an opportunity to buy the stock right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here (it’s free).
