Echo Global Logistics, Inc.
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Third Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Ms. Suzanne Karpick, VP of Investor Relations. Ma'am, you may begin.

[Suzanne Karpick:]

Thank you, and thank you for joining us today on our third quarter 2014 earnings call. Hosting the call are Doug Waggoner, Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Kyle Sauers, Chief Financial Officer. We've posted presentation slides to our website that accompany management's prepared remarks, and these slides can be accessed in the Investor Relations section of our site, echo.com. During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectation. We will also be discussing certain non-GAAP financial measures. The reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release and supplemental 8-K filings for the quarter, both of which are also posted on our website. With that, I'd like to turn the call over to Doug.

[Douglas R. Waggoner:]

Thanks, Suzanne, and good afternoon, everyone. I'm pleased to announce that Echo has completed another record-setting quarter of financial results. In a favorable environment for non-asset-based transportation providers, we continue to leverage the strength of our business model to add value to our clients and our carrier partners. As transportation capacity remains tight, we're able to tap in to the community of small to midsized carriers to provide reliable capacity to shippers, while matching attractive freight to improve the operating performance of our carriers. It's rewarding to see our execution capabilities match up in a market where we can deliver value to all of the participants, which is in turn, creating opportunities for our employees and value for our stockholders. The combination of these market conditions, with the execution capabilities we have been investing in, has enabled us to deliver gross revenue for the quarter of $321 million, net revenue of $58 million and $0.25 of non-GAAP earnings per share. This is the third sequential quarter of strong performance, reflecting the previous investments that we've made in growth. These investments include additions to carrier and client sales headcount over the last year, improvements in training and development and the continued refinement of technology-enabled processes. We had the highest net revenue margins that we have seen in 6 quarters, despite having a much higher proportion of truckload revenue in the mix. This reflects the cyclical nature of truckload brokerage and is also a testimony to Echo's ability to execute as a significant and competitive truckload broker as we serve our clients. Turning to Page 3 of the slides. You will find the review of the numbers for the third quarter of 2014. For the quarter, we delivered total revenue of $320.6 million, which represented 37% growth over Q3 2013. Our organic growth rate during the quarter was 20%, which is now our second quarter in a row with organic growth of 20% or better. We continue to see excellent performance in the truckload portion of our business and strong growth in both Transactional and Enterprise clients. Our net revenue was $58.4 million, a 44% increase from the prior year. This growth was driven by increased volume and a sharp increase in our net revenue margins despite a significant shift in our mode mix towards our truckload business. Our non-GAAP EBITDA was $13.5 million, up 37% from the prior year. We continue to make significant investments in the growth of our business, both through the technology and additional headcount and these investments are driving our top line growth, which is in turn, increasing our profitability. While we had a very strong organic growth again this quarter, equally impressive was the growth in our recently acquired businesses. As you will recall, we completed 3 acquisitions during the first half of this year. The integration of these businesses is on schedule, and in fact, we plan to have our most recent acquisition, One Stop Logistics, fully integrated by the end of this year. As we reported last quarter, the annualized acquired revenue from these businesses at the time of acquisition was $115 million. These businesses contributed over $38 million to Echo's revenue during the third quarter, demonstrating the ongoing success of our tuck-in acquisition strategy. I now want to turn the call over to Dave who will discuss some of our operational results in more detail.

[David B. Menzel:]

Thanks, Doug. I'd like to start by reviewing our performance by mode of transportation. The supporting chart is on Page 4 of our supplemental materials. Consistent with the last 3 quarters, we delivered significant year-over-year growth in our truckload revenue, which increased by 57% to $170 million. This increase was driven by a 35% increase in volume and a 17% increase in revenue per shipment. As a reminder, we include partial loads as a component of our truckload revenue, as these loads are sourced in a consistent manner as our full truckloads. As everyone is well aware, a full truckload market capacity has tightened up in 2014, driving rates up [indiscernible] to many shippers' supply chains. Given these market conditions, I'd like to give a little more color on our full truckload business. During Q3, our full truckload business, which represented over 80% of our truckload business, grew by 69% overall and 30% [ph] organically. The organic growth was driven by both increases in rates and volume. From a rate perspective, full truckload carrier costs were up 11% on a year-over-year basis, consistent with the rating increases we experienced in Q2. However, rate increases sequentially were only 1%, indicating that the rise in rates experienced in the first half of the year have stabilized in Q3. Our shipment volume and full truckload business was up 47% in Q3 year-over-year. This volume gain was achieved by growing our market share in both existing and new customers, as we leveraged our continued growth and capacity with a strong emphasis on delivering reliable service in a tough market. Shifting gears, our LTL revenue increased 26% year-over-year to $120.7 million, driven by a 13% increase in volume and a 12% increase in revenue per shipment. Overall, our LTL revenue grew organically in both our Transactional and Enterprise businesses, and our transactional growth rates were enhanced by a recent acquisition of One Stop Logistics. Our intermodal revenue increased 16% year-over-year, totaling $18.4 million for the quarter. This increase was driven by volume increases in spite of the challenges associated with the continued congestion in the rail networks. Other revenue decreased 25% in the third quarter over the same period in 2014 totaling $11.3 million, due to a decline in small package revenue from 2 of our enterprise clients. Next, I'd like to review the results by client type, so please take a look at Slide 5 that breaks down the revenue by transactional and enterprise clients. Our transactional revenue increased 48% year-over-year, contributing $242.3 million for the quarter. This growth was the result of an increase in our sales headcount as well as an increase in overall sales productivity. Our sales headcount increased by 306 people on a year-over-year basis, both due to our hiring strategy over the last 12 months as well as the increase in salespeople resulting from recently completed acquisitions. In fact, 198 of the new salespeople were recruited and hired through the efforts of our internal talent organization. In addition to the continued expansion of our sales force, both organically and through acquisition, we saw an improvement in productivity as measured by revenue per sales rep. That increase was 12% on a year-over-year basis. This productivity improvement was driven by an increase in the average revenue per transactional client of roughly the same percentage. The aggressive ramp-up in headcount has decreased to our average tenure per sales rep in our inside sales organization, so our productivity gains are coming despite the reduction in tenure. Bottom line, we had more salespeople doing more business with more clients at greater levels, and this combination of factors drove the 48% increase in transactional revenue this quarter. Our revenue from enterprise clients increased 10% year-over-year, contributing $78.3 million in the third quarter of 2014. This growth is the result of an increase in the number of our clients and was modestly reduced by a 2% decrease in average revenue per client. The decrease in revenue per client was due to a decline in revenue from a large client caused by changes in their business and the loss of small package revenue from another client mentioned earlier. These declines together represented about 5.5% indiscernible] in revenue on a year-over-year basis or about 8%. Fortunately, over the last 12 months, we've added 29 new clients, 10 of which were added in Q3, and these clients have more than offset the reduction in business. Moving on to Slide 6. Net revenue is a key driver of our financial results, and we were pleased with the continued expansion in our net revenue margins. So I'd like to move on and highlight a few of those details. Our net revenue increased 44% year-over-year to $58.4 million in the third quarter. This is a result of a 37% gross revenue growth and expansion in our net revenue margins year-over-year. Our net revenue margin was 18.2% in the third quarter, up 95 basis points over Q3 '13. The improvement in margin was driven by expansion across all major modes of transportation, partially offset by changes in mode mix. Quickly, with respect to the mode mix, our truckload and intermodal mix increased from 53% to 59% of total revenue in Q3 on a year-over-year basis. As we've discussed previously, this shifting of revenue drives our overall gross margin down. However, in Q3 '14, our other revenue, which mainly includes lower margin small package, went from 6.4% of the total to 3.5% of the total. This shift, truckload increasing and small package decreasing largely offset each other during the quarter. Our truckload net revenue margin increased by 160 basis points on a year-over-year basis. This year-over-year improvement is up from the 93-basis-point increase into Q2 and is attributable to our continued focus on delivering high service level to our clients in this period of tightened truckload capacity. Our LTL net revenue margin was up 70 basis points over the prior year, driven by higher margins in our Transactional and Enterprise business. I'd like to now turn it over to Kyle to review the additional elements of our financial performance.

[Kyle L. Sauers:]

Thanks, Dave. On Page 7 of the supplemental materials, you'll find a summary of our key operating statement line items. Commission expense was $16.9 million in the third quarter, increasing 66% year-over-year. Commission expense was 29.0% of net revenue, representing a 385-basis-point increase from the third quarter of 2013. This increase was the result of significant growth in our truckload revenue, which has a higher commission expense as well as changes in our sales channel mix, which is largely due to our 2014 acquisitions. We expect commission expense to come in between 27.7% and 28.3% for the full year. Non-GAAP G&A expense was $28.0 million in the third quarter of 2014, up 36% from the third quarter of 2013. Sequentially, G&A expense increased $1.3 million. Approximately half of this increase was related to having a full quarter of our most recent acquisition reflected in G&A and the rest is largely related to continued growth in headcount. This additional increase in G&A was driven by our decision to continue to invest in our growth by adding the personnel necessary to take advantage of the current market conditions, as well as performing at the service levels we provide to our clients. We expect to moderate our personnel additions in the fourth quarter and don't anticipate a continued escalation in G&A expense sequentially in Q4. As such, we expect full year G&A cost to be in a range of $104 million to $106 million. Depreciation and amortization expense was $3.7 million in the third quarter of 2014, increasing 39% year-over-year. The majority of the increase is related to our 3 new acquisitions completed during 2014. We expect this amount to increase modestly to approximately $3.9 million in the fourth quarter, consistent with our guidance from the last quarterly call. Our effective income tax rate was 38.4% for the third quarter of 2014, which compares to 38.0% in the prior year. For the fourth quarter, we expect our effective tax rate to be near 41.0%. And this assumes that the federal R&D tax credit is not renewed by fiscal year end. Our non-GAAP EBITDA increased 37% from the third quarter of 2013 to $13.5 million. Non-GAAP net income increased 36% from the third quarter of 2013 to $6.0 million. And non-GAAP fully diluted earnings per share was $0.25, increasing 34% from the third quarter of 2013. GAAP fully diluted earnings per share were $0.23 in the third quarter of 2014 due to changes in our contingent consideration payables. Slide 8 contains selected cash flow and balance sheet data. In the third quarter of 2014, we generated $8.7 million in positive operating cash flow. This was a decrease of 20% from the third quarter of 2013, as operating earnings were offset by working capital required due to higher organic growth rates. Capital expenditures totaled $4.0 million in the quarter, an increase of 51% from the third quarter of 2013. This increase is related to continued investments in technology and the expansion of our facilities to accommodate our growth. We also made $1.75 million in payments under our contingent obligations related to prior acquisitions. Turning to the balance sheet. At the end of the quarter, our contingent obligation and notes payable to sellers is reflected on our balance sheet at $24.4 million, which is its estimated fair value. Also, as of the end of the quarter, we had $30 million in cash. I will now turn the call back over to Doug for closing comments.

[Douglas R. Waggoner:]

Thanks, Kyle. Recently, the Inbound Logistics magazine shipper's survey once again recognized Echo as a top 10 3PL. Last year, we were #8 on the list. I'm proud to tell you that we moved up to the #4 spot this year. It's exciting to see Echo's brand awareness grow and our commitment to client service recognized by those who matter the most, our shippers. This type of recognition, our continued operational success and our highly successful acquisition strategy, continue to drive confidence in our ability to achieve our 2017 targets of $2 billion in revenue and non-GAAP EBITDA of $100 million. Our revenue growth thus far in the quarter continues to show strong year-over-year improvement. Through the first few weeks of October, we've experienced 36% revenue growth over the prior year, with 18% of this coming organically. With our continued success in the third quarter and our prospects for the current quarter, we are updating our full year revenue guidance to a range of $1.16 billion to $1.18 billion, not including the potential impact of any new acquisitions throughout the remainder of the year. Continuing to support our growth, we are also updating our full year SG&A guidance to $104 million to $106 million. After another record-setting quarter of results, we remain confident in the tremendous opportunity that lies ahead of us in a growing market where we continue to invest in adding people and technology to a proven business model. We are servicing clients better than we've ever had before and we're adding great people to the Echo team. And we're enabling them with more powerful technology, training and tools to improve productivity. With that, I'll open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Nate Brochmann of William Blair & Company.

[Nathan Brochmann:]

I wanted to talk a little bit -- I mean, obviously, you talked about the environment, and everybody else has been pretty positive on it so far throughout the reporting season. And it sounds like we're going to kind of keep the lid a little bit on hiring in the near term. But just wanted to talk about in terms of what kind of leverage you're thinking going into next year. I'm not looking for exact numbers but in terms of how much you now invest given this success, in terms of to keep that engine going versus how much you're kind of thinking about letting drop to the bottom line.

[David B. Menzel:]

So Nate, this is Dave. Our primary goal right now is to achieve the growth and the long-term targets that we outlined in our Investor Day a couple of months ago. And so we remain focused on both the top line objective of $2 billion and $100 million in EBITDA by 2017. So we're going to continue to make the investments necessary to grow the business. At our call next quarter, we'll give a little more specifics around our guidance for the year. We'll have an opportunity to evaluate the market conditions through the course of the bulk of the winter here and evaluate the continued investments that we think might be necessary to make in 2015. So I think it's a little premature for us to talk today about operating leverage expectations for 2015.

[Nathan Brochmann:]

Okay, that's fair. And then just a second question, and then I'll turn it over. It wasn't all that long ago at the end of last year that we were talking about all this competition out there. It was a tough environment, we were kind of in a stable kind of economy and stable supply and demand balance and brokers were kind of maybe beating each other up a little bit. It feels like that pricing competition has come off now that the market is so robust. Just wondering what you guys are feeling out there, and if it's just the macro that's really taking hold right now.

[Douglas R. Waggoner:]

Well, Nate, it's a tight market. I think the tightness peaked in Q1 but it's remained tight all year. And our clients need capacity to move their freight and that's where we can really add value for them. So we've just been trying to execute against that plan.

[Operator:]

Our next question is from Bill Greene of Morgan Stanley.

[William J. Greene:]

Just sort of following up on that question. We've gotten some big Class 8 orders recently. We've seen driver wages on the carrier side. So it's probably fair to assume that that's having some impact on supply. But I would guess, Doug, your comment there at the end is just meant to say, like, you really can't see it in the numbers at this point, that the supply dynamic really isn't changing in any meaningful way.

[David B. Menzel:]

Yes, Bill, I would say that that's pretty accurate. It's -- like I mentioned in my prepared remarks, certainly in the first half of the year, we felt the tightening, if you will. And so on the one hand, in the last 2 or 3 months, there's a feeling a little bit of stabilization in terms of the capacity. But I still -- but it still remains tight in comparison to kind of year-over-year comparison. And it's hard to say as we approach the winter, how that might shape out. So we're trying to pay close attention, obviously, to that. But I wouldn't say that we've seen any signs yet of meaningful change.

[William J. Greene:]

And when things stabilize for you, do you feel like that means that your pricing growth on your contract side is going to start to stabilize or slow as well? Or are we sort of still behind and kind of catching up just on how that plays out in a normal kind of cyclical way?

[David B. Menzel:]

Yes. I think that -- it varies. I think it does obviously begin to stabilize. I mean, rates -- when rates are going up, and the capacity is very tight. It's important that the prices increase along with that to provide reliable capacity to the shippers. As things stabilize, I think the rate environment will stabilize to some extent. And -- but we'll see how that shapes out. I think that -- but I would think your assumption about it's stable -- or your question about whether it stabilizes, I would say, yes, it probably does stabilize. But again, we'll see what the winter holds, we'll see what happens as we kind of move into this season. That -- last year, we got a lot of rate changes in December and January. And so it's to be determined as to whether we see that again this year.

[William J. Greene:]

Yes. And you're still more exposed to spot than you are at contract, right? So it's -- so for you, it's probably more about the spot market and how things go there than it is -- that you're behind on contracts or something?

[David B. Menzel:]

That's correct.

[William J. Greene:]

Yes. Okay, just one last question. So given the good environment for brokers right now, as evidenced by the strong third quarter for you, do you feel like that means that it's getting a little tougher to have conversations with potential folks to acquire just because things are good for them too?

[Douglas R. Waggoner:]

No. I mean I would say that our M&A activity is pretty typical. We've got a good pipeline. We're having conversations all the time, and we feel good about it.

[Operator:]

Our next question comes from Jack Atkins with Stephens.

[Jack Atkins:]

So I guess, David, if we could -- just to go back because I sort of missed your comments or I guess didn't get them down on time, the comments around productivity measures that you guys track in terms of revenue per transactional rep and the average tenure. Could you maybe go through that with us real quick just so I can have those numbers?

[David B. Menzel:]

Yes, sure. The productivity, as you mentioned, the transactional revenue for the average sales rep and that was up 12% on a year-over-year basis. And so that was the case despite the fact that we added 306 sales reps on a year-over-year basis. So some pretty significant growth in our sales force during that same period of time. 198 of which, of course, were from our hiring -- organic hiring, so to speak. I didn't give details on the average tenure but that hiring did in fact lower our average tenure. We were running at around 21 months last quarter. And last year, it was actually right at 21 months, and we're closer to 19 with the hiring that we've done. So it's come down a little bit in Q3.

[Jack Atkins:]

Okay, that makes sense. And then on the -- and I guess, you guys have made significant investments in your capacity procurement group. Could you maybe give us some details around the productivity that, that group is seeing in terms of are they being able to go out and fill more loads per day and things like that. Is there any -- are there any noticeable trends there you guys would like to share?

[David B. Menzel:]

I would say this, I'd say, we've, on the one hand, invested pretty significantly. So when I mention the ramp-up of the sales force, the majority of that has come in the area of carrier sales or sourcing. So we've made a slightly greater investment on the sourcing side than we have on the client sales side. And a lot of that's been this year. So the good news is we've got a lot more people that we can tap into to access capacity, build relationships with carriers, provide reliable service. From a productivity perspective, that increase has kind dropped our production on the carrier sales side, in terms of loads per day per person. And that's okay. I mean, that's what we expected. So we;\'re not -- we're certainly not at our peak levels, we're probably at about 60% of where we were a year ago. But it ebbs and flows with those new classes as they come in. And to some extent, we're getting our folks trained up for the busy season next year at this point.

[Jack Atkins:]

That makes sense. And then I know you guys don't like to get in the business of forecasting net revenue margins. But I guess I'm going to ask it this way, maybe you'll be willing to share with us. But when I think about typical seasonal trends with net revenue margins, typically the fourth quarter is up modestly from the third quarter on a sequential basis. With that being said, this is anything but a normal year. So would you guys expect this year to see normal seasonality in terms of net revenue margins, or is there something else that maybe we should be cognizant of when we're thinking about that?

[David B. Menzel:]

I think that -- one of the things that we saw during the year was that in the first half of the year, our net revenue margins were expanding quite a bit. And not only did rates kind of stabilize in the last few months, I'd say that our net revenue margins seemed to have stabilized a bit in the last 3 months. So we're not in the business of forecasting our net revenue margins like you mentioned for Q4, so we want to be careful not to get out ahead of ourselves. It's a difficult environment to provide a meaningful forecast in. So my expectation is kind of neutral. But I do see -- I would say that they've stabilized. And I think the second factor to think about, which we're not sure how it's going to affect our business in a couple of different ways is fuel rates are coming down. So that's another factor to think about in terms of both gross revenue and net revenue margins in the fourth quarter.

[Jack Atkins:]

But how would you -- just to kind of think about, out loud for a moment, I mean, how do you anticipate that declining fuel expenses will impact your business? I mean is that apparent?

[David B. Menzel:]

Yes, in the ward truckload business, in a lot of cases, you're on a fuel schedule and so the changes in fuel prices affect your sell rate immediately. They don't always affect your buy rate immediately because you're negotiating with carriers, and buy rates may not change quite as quickly. So on the one hand, you've got some business where it would be -- you'd be a little more difficult to yield the cost savings on the declining fuel. On the spot market, you would hope to adjust timely. And then on the LTL side, your cost basis is adjusting quickly and then the kind of the opposite issue, which is you got a lot of spot pricing going on, and you got to adjust sell price quickly. So you kind of get 2 moving parts there. And so it's difficult, in advance, to say exactly how those 2 moving parts are going to kind of work together. So there could be a view that it's kind of a neutral impact. But those are the factors to consider.

[Jack Atkins:]

Okay, okay, that's helpful. Last question for me. When I think about the organic growth this quarter, it was 25%, if my math is right from a gross revenue perspective. A big chunk of that's coming from price per load, naturally, but you're also seeing significant load count growth. I mean, how do you sort of think about this in terms of market share gains versus the overall brokerage market growing as you look at the growth that you've seen in your business this year?

[Douglas R. Waggoner:]

Well, I think we've had a lot of success with truckload. And of course, we've been focused on that for the last several years. We've invested heavily in the last year in our truckload sourcing capacity, and we've also invested in our truckload technology. So I think we're just executing well. It's a big market, there's plenty of business out there for everybody, but we're taking more than our fair share.

[Operator:]

And our next question comes from George Sutton of Craig-Hallum.

[Jason Kreyer:]

It's Jason on for George. I wanted to piggyback on one of the last questions that was asked and it related to the headcount changes. And I'm just wondering if you can talk a bit about your expectations for the breakdown going forward on sales headcount versus carrier sourcing.

[David B. Menzel:]

Sure. This year, let me flip around here a second, get perspective on some of these numbers. This year, we've added -- let me, just give me one second. So this year on the addition side, we've added 150 people year-over-year on the sourcing side and that's been all organic, so to speak. And we've added about 120 people or so on the client-side. 25 of those are in operational roles and just under 100 are in client roles. So when you think about it, in 2014, our hiring has been about 2/3 carrier, 1/3 client-related. And so it'll probably look something like that. Maybe a little more balanced in the fourth quarter, kind of 50-50. But those are smaller numbers. I think that we're going to evaluate. As we go into 2015, we're going to evaluate whether that ratio or that mix still makes sense. I would say they'll be -- there's likely to be slightly more weighting towards the carrier said but it not might not be quite as dramatic as it was in 2014, be my initial thoughts on that.

[Jason Kreyer:]

Okay, perfect. And just wondering heading into the, like, the holiday season, and if you can give us any idea of the metrics or any key indicators that you're looking at to kind of get a forecast of what demand looks like for the holidays.

[Douglas R. Waggoner:]

In recent years, it's just so hard to forecast the fourth quarter. What we used to see is peak season is unpredictable. So we're really not able to predict that.

[Jason Kreyer:]

Okay, that's fair. One last one, if I can. Dave, just wondering, you talked about the one client on the enterprise side that declined a little bit this quarter, and just curious, if you can talk about if you expect that to come back or if that trend to continue with that client?

[David B. Menzel:]

I think in the short term -- I mentioned 2 clients. On one, [indiscernible] small parcel revenue direct and so that won't come back on that side. And there was another one that's just in a slight decline. I think it will come back over time but maybe not within the next quarter or 2. But that's difficult for us to forecast from that perspective.

[Operator:]

Our next question comes from Tom Albrecht of BBT.

[Thomas S. Albrecht:]

So a quick question on intermodal loads. I know you -- noticed you didn't give a percentage on that, even though you had good revenue growth. Dave or Doug, can you give us a little bit of sense on the load growth?

[David B. Menzel:]

Yes. So the shipment growth was up 20% year-over-year. 21%, actually.

[Thomas S. Albrecht:]

And then on the organic growth, Doug, in your opening comments, you mentioned 20%, was that a gross or net revenue organic figure?

[Douglas R. Waggoner:]

That's a gross revenue figure.

[Thomas S. Albrecht:]

Okay. And then I was wondering, on the acquisition front, kind of take the opposite side of someone's question earlier. I wonder if -- as potential targets are experiencing a recovery. If it doesn't make them a little bit more willing to sell because they know they're finally going to get a healthy multiple on a decent book of earnings but they still recognize that it's kind of a consolidating market. Do you see any of that? That the healthiness may lead to more consolidation?

[David B. Menzel:]

I'll take a cut at that. Because I think we've seen both in our pipeline. We've seen some companies that are having a great year and expect to have a great year next year, and so they would kind of evaluate whether now's the right time. And you see other companies that might think, "Hey, this is a great year. This would be a good time to sell." So the market has been pretty good for a lot of the targets that we've looked at. And it's hard to net out. I don't know that it's because you got people in both camps, hard to net out, which one, I would say, is greater.

[Douglas R. Waggoner:]

And I would add to that, Tom. I think there is an awareness in the marketplace. That there is some element of consolidation going on. And that the big are getting bigger and technology matters and scale matters and working capital matters. And so those are all potential motivators for somebody to contemplate and exit it at this time.

[Thomas S. Albrecht:]

Okay. Yes, I mean, that's helpful. And then when you look at the market today, I think the assumption with your business mix has been maybe 70% or so spot. But as you've developed your truckload capabilities, particularly trying to get on the route guide, is that still about your exposure to spot, and how do you see that playing out over the next couple of years?

[David B. Menzel:]

Yes, that hasn't dramatically changed. We do have an effort. I mean, as we continue to build capacity to go after some larger shippers, and we think we can add a lot of value in that market. So it wouldn't surprise us if that percentage grew a little bit over time. But -- so it hasn't -- I wouldn't say that it's moved meaningfully to date. But we're having good success with larger shippers. And like I said, we've got the ability to provide good service there. As that changes, there's still always going to be a percentage of our business that might be under a ward, it might be spot. And so it would be difficult to kind of forecast how that percentage -- because the mix of our business is quite different than a lot of the other third parties out there with the amount of LTL that we have and the amount of small and midsized companies that we have. So as long as those continue to grow at a high rate as well, the overall mix might not shift quite that much.

[Thomas S. Albrecht:]

Okay. And my last question. Like, Dave, on the LTL gross margin, you said that it improved 70 bps year-over-year. But I don't think I heard a sequential description.

[David B. Menzel:]

Yes, I didn't give it. But we were up about the same, actually, on a sequential basis. So we had a actual 67 bp -- basis-point increase sequentially on the LTL as well.

[Operator:]

And our next question comes from David Campbell of Thompson, Davis & Company.

[David Pearce Campbell:]

Doug, I think as you did mention at the beginning of your presentation about the fact that when you -- these 3 acquisitions you made in the first 6 months of the year, at the time of the acquisition, the annual revenue was $115 million. Is that correct?

[Douglas R. Waggoner:]

Yes. The annualized revenue at the time that we acquired them was --

[David B. Menzel:]

For a trailing 12 months.

[Douglas R. Waggoner:]

Trailing 12 months was -- let me make sure I get you the right number. $115 million.

[David Pearce Campbell:]

Right. And then you said that in the third quarter, they -- these 3 companies generated $38 million in gross revenues?

[Douglas R. Waggoner:]

Right. $38 million and it should be a run rate of $152 million.

[David Pearce Campbell:]

I mean, that's just incredible. That in a short period of time, that you've got that much revenue. Is that revenue included in your organic, or do you still attribute those revenues to the original companies?

[Douglas R. Waggoner:]

Well, part of our whole integration process is to jump in and help them sell additional modes, get them up on our technology and teach them how to sell enterprise deals. So we like to think that we help them with that.

[David B. Menzel:]

So just a point of color. First off, it is incredible. We're really proud of it, they're doing great. And we -- and as Doug mentioned, we've got them integrated. Q3 is a pretty seasonally high quarter. So the annualized run rate of $152 million is not necessarily the trailing 12. So they're definitely -- we've got great growth there. They're doing really well, and the third quarter is a seasonally peak-looking quarter. So it's important to remember that as well.

[David Pearce Campbell:]

But that growth is included in your organic calculations?

[David B. Menzel:]

Not in the organic. That's actually separate.

[Kyle L. Sauers:]

Yes, David, so the way we handle organic when we present our organic, it's anything that's been in the business 12 months or longer. So these acquisitions, once they flip over a year, their growth from that point on would be included in our organic numbers.

[David Pearce Campbell:]

Right, right, right. But after that, it'll be organic, okay. So I mean, do you attribute that growth to the synergy of them being able to sell more modes of transportation. Is that the basic -- the biggest part of it?

[David B. Menzel:]

I think it would be more about this early stage penetrating existing customers with a better coverage and better capacity. The second part of the puzzle here is that we bought companies that have great people, they're motivated and they want to be successful within Echo. And so they're thriving out of the gate, and they enjoy being a part of our culture. And it's -- they're motivated to be successful, and we're taking a lot of the back office headaches off their hands. And that's liberating.

[David Pearce Campbell:]

And my last question is in terms of salespeople. You included, of course, the agents that came with those companies and that turned 1,126 people. Are you just discriminating, or I think you had 270 so-called sales agents at the beginning of the year. Is it still 270, or what do you -- how do you describe that now?

[David B. Menzel:]

It's 233 at the beginning of the year, it's now 272. After the acquisition of online freight systems, which was a little more of an agent-based model. It jumped from 233 to 270. So none of the acquisitions that have made subsequent to Q1 have really brought any agents with them. So that agent total, while it's grown from, like I said, by, 36 people, basically, since the beginning of the year, it has not grown at end of quarter for the last 3 quarters. Significantly, grown by 2 people.

[Operator:]

[Operator Instructions] Our next question comes from Matt Young of Morningstar.

[Matthew Young:]

Looking at the commission line as a percentage of net revenue, would that -- if I'm looking at it right, the 28% to 29%, would that be kind of what we should look at for a new run rate following all the acquisitions this year and the channel mix, or does that come down a bit?

[Kyle L. Sauers:]

This is Kyle. I'd expect that commission rate to continue to move around as it has. And there's a bunch of different factors. Obviously, if you look at the year-over-year change, a lot of that is based on the fact that we've added a significant amount of truckload to our mix, which has a higher commission rate, and it's been impacted by these most recent acquisitions that have different compensation structure in place with a higher inherent commission expense. So it's going to depend on which sales channel of the business is coming through or whether it's Transactional or Enterprise. And it'll continue to move around from where it is today. But we'll certainly keep you updated on what we're expecting in the coming quarters.

[Matthew Young:]

Okay. Would the acquisitions have had the biggest impact on that, though?

[Kyle L. Sauers:]

I think that's certainly an impact. But the change in truckload impacts it as well, but those acquisitions were the larger part.

[Matthew Young:]

And just a quick question back on the Enterprise business -- the soft Enterprise business. The small parcel service, is that by nature fairly variable with those customers?

[David B. Menzel:]

So we've got a handful of accounts that we manage small parcel on. It's not a core part of our offering, it's something that we've done for a long time for those clients. So in some cases, it hasn't grown very significantly over the years, as you've probably noticed. That other revenue category has been relatively a slower grower. So it's a service that we offer. And in some cases, our clients take advantage of that. But our core over the road truckload LTL leverage in the TMS, that's a little more what we're focused on today.

[Operator:]

And our last question comes from Allison Landry of Crédit Suisse.

[Daniel Schuster:]

This is Danny Schuster on for Allison. So we were just wondering if you could talk about any technology-enhancing initiatives you might have in the pipeline that you're working on and plan to roll out over the next few quarters because this seems to have been a pretty big topic at your Analyst Day as well as something we've heard about from your competitors since then. So I was just wondering if you could elaborate on that. Thank you.

[Douglas R. Waggoner:]

We have a variety of initiatives and a pretty robust roadmap, as we call it. One of the things we've been working on is integration of our intermodal capabilities onto our core platform, and that's an ongoing process based on 2 acquisitions we've made of IMCs. The other enhancements, I would say, are more -- less, sexy. They're more kind of productivity-based things that make us more productive, whether it's on the sourcing side or the selling side or coming up with the right price or figuring out the right carrier to use. It's really along those types of enhancements to the core system.

[Daniel Schuster:]

Well, productivity is good. And then kind of moving on to your contractual book of business, which we know is not the majority of your business. But thinking about some of the contracts that maybe you've renewed over the past few months, we were wondering if you could share with us what your customers are looking for in terms of overall transportation spend increases for next year. And if you have any early sense on what kind of rate increases they might be looking for.

[David B. Menzel:]

So I don't know that -- when I think about rate increases, that's not the kind of conversation we're typically having on a contract renewal. If you referring to our managed transportation business or our Enterprise business, the -- we're typically a sole-source transportation provider. So typically, we'll roll over a contract that, under similar -- kind of similar pricing terms that exist today. Now obviously, one of the things that we're doing is talking to our clients about price changes that we're seeing in the marketplace. And one of the things that was notable is we saw some pretty steep increases on the LTL side. And so that's one area in which we're seeing price increases that our customers are aware of, and we're helping them manage. And then on the truckload side, [indiscernible] had rate increases throughout the year. And depending on how 2015 shapes up, if the economy kicks in, we would anticipate continued rate increases there. And one of the things we're most proud of, as we've talked about before, is our renewal rate on these large contracts. And our enterprise renewal rate was again 97% in the third quarter. So we're having great success on these enterprise renewals as we move forward.

[Operator:]

At this time, I see no other questions in queue. I'd like to turn it back over to Mr. Waggoner for any closing comments.

[Douglas R. Waggoner:]

Well, thanks for joining us on our third quarter call. We're pleased with the results, and we will talk to you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may all disconnect. Everyone, have a great day.