Energy Recovery Rides Clean Water Wave

Overall, Energy Recovery's revenue and profit has grown steadily. Revenue grew 77% last year to $35.4 million, following an 88% growth rate the year earlier. Meanwhile, operating margin fell to 25% of revenue last year from 18% in 2006 and 11% in 2005.

The exception to those trends is in the most recent quarter. Operating expenses surged to 50% of revenue, up from 33% in the year-ago quarter. The culprit appears to be a temporary one: Costs to prepare for the IPO caused general and administrative expenses to balloon by 244%; they rose to 29% of revenue last quarter from 11% a year earlier.

That's a big gain, but Energy Recovery seems to spend money frugally. The top earner is CEO G.G. Pique, who drew a $250,000 salary, relatively modest for a Bay Area startup. And remember: This is a manufacturer that had a 26% operating margin last year, which is higher than some regional software companies.

The company has been benefiting from a weak dollar, since well over 90% of its revenue has been coming from overseas in the past couple of years. Much of its sales have been coming from Spain, Saudi Arabia and Algeria.

But here's the thing with Energy Recovery: Its revenue is recorded in fits and starts. One completed order can bump up revenue in a single quarter. In the next quarter, revenue could drop, while all along operating costs remain relatively stable.

What's more, clients usually make payments in the fourth quarter to meet year-end budgets. Such turbulence can make investors queasy.

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