Q2 FY2026
Filed Aug 5, 2026Energy Recovery Reports its Second Quarter 2026 Financial Results
Q2 revenue declined 57% year over year to $12.0 million and the company reported a GAAP net loss of $3.2 million, versus net income of $2.1 million in Q2’2025. Gross margin improved to 74.7% and operating expenses declined 10.0%, but these improvements did not offset the lower revenue attributed primarily to the war in Iran.
Key metrics
as reported| Metric | Value | q/q | y/y |
|---|---|---|---|
| Revenue, Q2’2026GAAP | $12.0 million | – | down 57% |
| Gross margin, Q2’2026GAAP | 74.7% | – | up 1070 bps |
| Operating margin, Q2’2026GAAP | (49.0%) | – | NM |
| Income (loss) from operations, Q2’2026GAAP | loss from operations of $5.9 million | – | a decrease of $7.4 million |
| Net income (loss), Q2’2026GAAP | ($3.2 million) | – | down 256% |
| Diluted earnings (loss) per share, Q2’2026GAAP | ($0.06) | – | down $0.10 |
| Effective tax rate, Q2’2026GAAP | 19.1% | – | – |
| Cash provided by operations, Q2’2026GAAP | $16.3 million | – | – |
| Adjusted operating margin, Q2’2026non-GAAP | (30.4%) | – | down 4260 bps |
| Adjusted net income (loss), Q2’2026non-GAAP | ($1.4 million) | – | down 136% |
| Adjusted earnings (loss) per share, Q2’2026non-GAAP | ($0.03) | – | down $0.10 |
| Adjusted EBITDA, Q2’2026non-GAAP | ($2.6 million) | – | – |
| Free cash flow, Q2’2026non-GAAP | $15.4 million | – | – |
| Revenue, six months ended June 30, 2026GAAP | $21.7 million | – | down 40% |
| Gross margin, six months ended June 30, 2026GAAP | 53.7% | – | down 840 bps |
| Operating margin, six months ended June 30, 2026GAAP | (95.6%) | – | NM |
| Net income (loss), six months ended June 30, 2026GAAP | ($15.4 million) | – | down 97% |
| Diluted earnings (loss) per share, six months ended June 30, 2026GAAP | ($0.30) | – | down $0.16 |
| Cash provided by operations, six months ended June 30, 2026GAAP | $37.3 million | – | – |
| Adjusted operating margin, six months ended June 30, 2026non-GAAP | (54.0%) | – | NM |
| Adjusted net income (loss), six months ended June 30, 2026non-GAAP | ($7.1 million) | – | down 116% |
| Adjusted earnings (loss) per share, six months ended June 30, 2026non-GAAP | ($0.14) | – | down $0.08 |
| Adjusted EBITDA, six months ended June 30, 2026non-GAAP | ($9.7 million) | – | – |
| Free cash flow, six months ended June 30, 2026non-GAAP | $35.7 million | – | – |
What drove it
- Q2’2026 gross margin of 74.7% was primarily due to indirect manufacturing costs and channel mix, partially offset by lower volume.
- Operating expenses declined 10.0% primarily due to lower employee compensation costs, including stock-based compensation expense, and lower consulting costs, partially offset by restructuring charges incurred in Q2’2026.
- The loss from operations was due primarily to lower revenue due to the war in Iran.
- The six-month statement of operations included a restructuring - inventory reserve of 1,632, restructuring charges of 2,391, and impairment of goodwill of 1,662. (In thousands)
Concerns
- Revenue was down 57% in Q2’2026 and down 40% for the six months ended June 30, 2026.
- Q2’2026 GAAP operating margin was (49.0%), compared with 5.3% in Q2’2025.
- Q2’2026 adjusted EBITDA was a loss of $2.6 million, compared with adjusted EBITDA of $4.4 million in Q2’2025.
- Six-month gross margin was 53.7%, down 840 bps from 62.1% in 2025.
- The filing identifies risks relating to future demand, customer and third-party partner performance, and the timing of revenue.
What to watch
- Revenue recovery following the lower revenue attributed primarily to the war in Iran.
- Whether gross-margin benefits from indirect manufacturing costs and channel mix persist while volume remains lower.
- The impact of restructuring charges, the restructuring - inventory reserve, and impairment of goodwill on operating results.
- Revenue timing and customer and third-party partner performance.
Balance sheet and cash flow
- Cash and investments of $98.1 million, which includes cash, cash equivalents, and short- and long-term investments.
- Cash, cash equivalents and investments were $98,074 at June 30, 2026 and $83,283 at December 31, 2025. (In thousands)
- Accounts receivable and contract assets were 14,237 at June 30, 2026 and 78,286 at December 31, 2025. (In thousands)
- Inventories, net were 38,242 at June 30, 2026 and 24,260 at December 31, 2025. (In thousands)
- Total assets were $197,736 at June 30, 2026 and $231,514 at December 31, 2025. (In thousands)
- Total liabilities were 25,258 at June 30, 2026 and 25,322 at December 31, 2025. (In thousands)
- Stockholders’ equity was 172,478 at June 30, 2026 and 206,192 at December 31, 2025. (In thousands)
- Net cash provided by operating activities for the six months ended June 30, 2026 was $37,343, versus $14,824 in 2025. (In thousands)
- Capital expenditures for the six months ended June 30, 2026 were ($1,689), versus ($326) in 2025. (In thousands)
- Net cash used in investing activities for the six months ended June 30, 2026 was ($2,979), versus net cash provided by investing activities of $33,566 in 2025. (In thousands)
Analysis
Energy Recovery reported a sharp year-over-year deterioration in Q2 results. Revenue was $12.0 million, down 57% from $28.1 million in Q2’2025. Management attributed the operating loss primarily to lower revenue due to the war in Iran. The company moved from income from operations of $1.5 million to a loss from operations of $5.9 million, while GAAP net income moved from $2.1 million to a net loss of $3.2 million.
Margins showed a split picture. Q2 gross margin increased to 74.7% from 64.0%, primarily due to indirect manufacturing costs and channel mix, partially offset by lower volume. However, the revenue shortfall drove operating margin to (49.0%) from 5.3%. Operating expenses declined 10.0% to $14.8 million, reflecting lower employee compensation costs, including stock-based compensation expense, and lower consulting costs, partly offset by restructuring charges.
Non-GAAP results also weakened. Adjusted operating margin was (30.4%), compared with 12.2% in Q2’2025, and adjusted EBITDA was a loss of $2.6 million, versus $4.4 million. For the six-month period, revenue was $21.7 million, down 40%, and gross margin was 53.7%, down 840 bps. The six-month operating result included a restructuring - inventory reserve, restructuring charges, and impairment of goodwill.
Cash generation was positive despite the reported losses. Cash provided by operations was $16.3 million in Q2 and $37.3 million for the six months ended June 30, 2026, while free cash flow was $15.4 million in Q2 and $35.7 million for the six-month period. Cash and investments were $98.1 million. The filing did not provide forward financial guidance, leaving the timing of revenue recovery, demand, partner performance, and the effects of the Iran-related disruption as the central reported items to monitor.
Not in the filing
stated, not guessed- Forward financial guidance for 2026, including revenue, gross margin, operating expenses, tax rate, and other outlook metrics.
- Previous-period outlook for comparison with actual results.
- Segment revenue, segment growth rates, and segment drivers.
- Quarter-over-quarter comparisons for reported metrics.
- Debt balance.
- Share repurchases, dividends, or other capital-return activity.
- Named executive commentary or CFO commentary in the provided filing text.
- The remainder of the financing activities section of the condensed consolidated statements of cash flows, which is truncated in the provided filing text.
AlphaAI analysis generated from the company’s SEC earnings filing (Form 8-K Item 2.02, or Form 6-K for a foreign private issuer). Every figure was cross-checked against the filing text; consensus estimates, price targets and share-price reactions are not shown because they are not in the filing. AI-generated research, not investment advice.