Echo Global (ECHO) blew through most of the street’s earnings predictions with a 1Q earnings of $0.40 EPS, which was $.0.06 -$0.10 above what most were predicting. The 3PL’s leadership attributed most of its success to a very favorable spot market environment and higher volumes across all business models. The company’s leadership also stated a big factor in the continuing success was their improving attrition rates and their ability to add to their employee sales roster, a big issue in the 3PL world.
Echo posted a 39% growth in revenue year over year for the quarter. Doug Waggoner, the CEO, stated it was “our highest organic growth rate since 2010.”
While revenue growth was strong revenue margin experienced a slight degradation, dropping 61 basis points to 17.3% versus 17.9% 1Q17. Waggoner states the small decline “is entirely attributable to the rising cost of fuel and the growth of our Managed Transportation business.” This decline in margin is not necessarily a bad sign as it pertains to the Managed Transportation.
Echo Global is segmented primarily into Transactional Brokerage and Managed Transportation. The Managed Transportation segment consists of longer term deals with accounts who are outsourcing. The transactional business deals more with the daily volatility of freight as customers call Echo to help find short term solutions to transportation problems that are outside the norm. Most of the issues require quick coverage of loads on the spot market in both the truckload and less than truckload (LTL) markets.
Managed Transportation comes in at lower margins because the volume is more consistent and long-range planning is the main function. On the transactional side you do not get the luxury of time to solve the issues therefore higher margins are required to solve the more pressing problems. Echo has capitalized on the tightening market capacity while still growing the more stable Managed Transportation, which is a sign of long term health. The managed accounts tend to represent bigger chunks of revenue but at lowered margins.
David Menzel, president and COO at Echo, commented on the increased portion of their truckload business coming from the spot market in the 1st quarter, “[spot market] volumes grew to 60% of truckload [revenue], up from 58% during the 4th quarter.” The general consensus among the executives was this increase was due to market conditions being more volatile as Menzel points out they saw “bid cycles run a little bit later this year, due to the higher rates that persisted at the end of Q4 and early into Q1.” Truckload business represented 69% of Echo’s total revenue in Q1 at over $400M.
Menzel stated the truckload business increased in volume throughout the quarter even as prices were dropping on the spot market as “truckload shipments per day were up just over 4% in January and over 9% in March,” a sign that the market had found its price point.
Echo’s second largest revenue segment by mode, LTL, showed large gains as well, up 29% compared to previous year. The COO attributed the main gains to additional Managed Transportation accounts with a 14% increase in volume and 13% increase in revenue per shipment. The revenue per shipment increases coming from increases in fuel, shipment size, and linehaul costs related to the truckload market conditions.
In terms of expenses, outside the cost of transportation, showed commissions being up slightly as a percentage of net revenue from 30% to 30.2%. The increase is marginal but implies the company is potentially investing in its employees to reduce attrition rates that plague the brokerage industry. Menzel speaks to this and states, “We had a strong hiring quarter, but also enjoyed our second consecutive quarter of sales attrition under 30%.” Attrition in the 3PL business is a productivity killer. He goes on to mention, the primary driver of our Transactional revenue growth was productivity, as Transactional revenue per client sales rep increased 36%.”
In terms of looking forward to the remainder of 2018 the executive team had a positive but tempered outlook. While acknowledging the incredible success of the quarter they alluded to an inevitable softening of market conditions in comparison. Menzel responded to a question about margin moving forward stating, “it’s going to depend a lot on market conditions and those are difficult to predict.” He alludes to the heated spot market conditions being unsustainable as that have already noticed early in the 2nd quarter.
The message was overwhelmingly positive as Waggoner closed with the remarks, “I think it is actually a very constructive atmosphere right now and the reality of the market has sunken in and people are trying to pull together and make it work for them.” It appears Echo is certainly accomplishing that in early 2018
Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.