Energy recovery device manufacturer Energy Recovery (NASDAQ: ERII) fell short of the market’s revenue expectations in Q2 CY2026, with sales falling 57.2% year on year to $12 million. Its non-GAAP loss of $0.03 per share was in line with analysts’ consensus estimates.
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Energy Recovery (ERII) Q2 CY2026 Highlights:
- Revenue: $12 million vs analyst estimates of $18.83 million (57.2% year-on-year decline, 36.3% miss)
- Adjusted EPS: -$0.03 vs analyst estimates of -$0.04 (in line)
- Adjusted EBITDA: -$2.6 million (-21.7% margin, 159% year-on-year decline)
- Adjusted EBITDA Margin: -21.7%, down from 15.7% in the same quarter last year
- Free Cash Flow Margin: 128%, up from 14.3% in the same quarter last year
- Market Capitalization: $470.1 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Energy Recovery’s sales grew at a sluggish 3.1% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a tough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Energy Recovery’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 5% annually. 
This quarter, Energy Recovery missed Wall Street’s estimates and reported a rather uninspiring 57.2% year-on-year revenue decline, generating $12 million of revenue.
Looking ahead, sell-side analysts expect revenue to decline by 19.2% over the next 12 months, a deceleration versus the last two years. This projection doesn’t excite us and implies its products and services will see some demand headwinds.
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Operating Margin
Energy Recovery has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Energy Recovery’s operating margin rose by 3.8 percentage points over the last five years, as its sales growth gave it operating leverage.
In Q2, Energy Recovery generated an operating margin profit margin of negative 49%, down 54.3 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like marketing, R&D, and administrative overhead.
Earnings Per Share
Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth — for example, a company could inflate its sales through excessive spending on advertising and promotions.
Energy Recovery’s EPS grew at 11.2% compounded annual growth rate over the last five years, higher than its 3.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
We can take a deeper look into Energy Recovery’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Energy Recovery’s operating margin declined this quarter but expanded by 3.8 percentage points over the last five years. Its share count also shrank by 12.8%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
For Energy Recovery, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.
In Q2, Energy Recovery reported adjusted EPS of negative $0.03, down from $0.07 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Energy Recovery’s full-year EPS to shrink by 56.9% from $0.51 to $0.22.
Key Takeaways from Energy Recovery’s Q2 Results
It was encouraging to see Energy Recovery meet analysts’ EPS expectations this quarter. On the other hand, its revenue missed and its EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 6.4% to $8.28 immediately after reporting.
Energy Recovery may have had a tough quarter, but does that actually create an opportunity to invest right now? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here (it’s free).
