Echo Global Logistics, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call maybe recorded. I would now like to introduce your host for today's conference, Mr. Kyle Sauers, CFO. Please go ahead, sir.

[Kyle Sauers:]

Thank you. And thank you for joining us today to discuss our third quarter 2015 earnings. Hosting the call are Doug Waggoner, Chairman and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Kyle Sauers, Chief Financial Officer. We have 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 expectations. 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, both of which are also posted on our website. With that, I'm pleased to turn the call over to Doug Waggoner.

[Douglas R. Waggoner:]

Thanks. And good afternoon to everyone. This quarter marks the first full quarter of Command results and we're once again able to announce record quarterly revenue, net revenue, and profitability. In a relatively flat freight market with little spot market opportunities, we executed well and expanded our net revenue margins to achieve our best-ever profitability. The integration with Command continues to go very well, and we've developed a very thoughtful strategy that will leverage the best of both companies, including process, technology, and culture. The feedback and anticipation that we continue to receive from our clients and carriers is fantastic. Clients understand that this combination allows us to provide more capacity, more consistently and at higher service levels. Carriers realize that it means more freight to fit their networks from a combination of two truckload brokers that were already at the top of their list of key partners. We've already fully integrated our IT and HR teams, and we have combined our recruiting and training efforts to provide consistency in our talent acquisition and onboarding, which are a key component to our long-term organic growth story. We are on schedule to have the two technology platforms completely integrated by next summer, bringing together the capabilities of two industry-leading brokerage technologies. We plan to combine both the Echo and Command Chicago-area employees under one roof in downtown Chicago during 2016. This colocation will correspond with the technology integration and facilitate the complete integration of truckload operations. Once truckload operations are integrated, we anticipate productivity benefits for our best-in-class technology platform and revenue synergy by achieving increased wallet share from our clients, given the complementary nature of the net Echo and Command truck load networks. Now, I'll take you through a few of the key financial highlights from our third quarter. Revenue grew 40% to $450 million. Net revenue grew to $87 million, up by 50%. Our net revenue margin increased by 119 basis points, with our mode mix continuing to shift towards the traditionally lower margin truckload service. Truckload now comprises 67% of our total revenue, up from 61% last quarter and 53% a year ago. Reported non-GAAP EBITDA grew by 46% to $21 million. After affecting for Command integration costs of $1.5 million during the quarter, non-GAAP EBITDA grew by an impressive 56%. While certain headwinds and a less than ideal environment impacted our total revenue growth during the quarter, this did not impede the solid growth in our net revenue and EBITDA lines. While the freight market is currently soft and capacity is looser than we expected going into the year, we remain committed to building a world-class business, and here's what I can confidently tell you. We're growing our capacity and capabilities to service customers every day. Our technology continues to improve, which increases our efficiencies and our profitability. We have been and intend to continue to take large share in a huge truckload brokerage market. And the acquisition of Command will bring us great advantages and synergies in the coming years, whatever the freight environment may be. I now want to turn the call over to Dave, who will discuss our Q3 results in more detail.

[David B. Menzel:]

Thanks, Doug. On slide four, we have revenue growth broken down by mode. Our truckload revenue grew 77% to $302 million in Q3 on a year-over-year basis. The acquisition of Command added 67% growth over the prior year while the historical Echo truckload growth rate was 10%. Echo's historical growth was driven by a 24% increase in volume and was offset by a 12% decrease in revenue per shipment. The decrease in revenue per shipment was driven by both lower fuel prices and lower line-haul rates. Command's truckload volumes were up 2% year-over-year, while their total revenue was down 12%, on a 13% decline in revenue per truckload shipment. In our LTL mode, our revenue decreased to $119 million in Q3, 2015 reflecting a 1% decrease over the prior year. The relatively flat year-over-year revenue can be attributed to the restructuring of a significant client contract to a fee-based structure that's had about a $5 million year-over-year impact, and a decrease in revenue per shipment of 1% due to lower fuel rates that were – exceeded increases in line-haul rates. Intermodal revenue was up 17% at $22 million for the quarter. This increase was attributable to intermodal revenue from Command offset by a 5% decrease in revenue per intermodal shipment on Echo's historical intermodal business. Page five breaks out revenue by client type. Our transactional revenue grew by 55% on a year-over-year basis, totaling $375 million in Q3 2015. Transactional was up 4% year-over-year, excluding the impact of the Command acquisition. Again, volume gains were offset by lower rates primarily due to fuel prices. We closed out the quarter with 1,671 sales reps, which include client sales and carrier sales, reflecting an increase of 545 people from a year ago. The majority of that increase was from our acquisition of Command. Our transactional revenue per sales rep stayed flat on a year-over-year basis despite current market conditions. Our Managed Transportation revenue declined 4.7% to $75 million in Q3, 2015. We re-signed another important large customer to a multi-year contract with a fee-based structure, which impacted total revenue growth. Two large contract changes in the past year account for roughly 13% decline in total revenue on a year-over-year basis. Consistent with the theme of lower rates and lower fuel prices, our Managed Transportation business – the net revenue actually increased by 11% year-over-year. Overall, as Doug mentioned, our revenue growth rate was 40% on a year-over-year basis, driven largely due to the acquisition of Command. Organically, our revenue was up 2%, and this was driven by volume gains which were offset by lower rates, primarily due to fuel. The headwind from fuel alone was about 9% of total revenue or about $40 million. On top of that, we have $10 million headwind due to the Managed Transportation fee-based business. The good news is that in the face of these headwinds, we've been effective at expanding our net revenue margin, and driving both organic and acquired net revenue growth to coincide with our volume gains. Slide six breaks down our net revenue and displays our mode and client mix. In Q3, we delivered net revenue of $87.4 million, up 50% from a year ago last year's quarter. 42% of that was due to our acquisition of Command and 8% was organic. Our net revenue margin was up 119 basis points year-over-year, at 19.4% for the quarter. This change came while substantially increasing our business mix toward truckload. Truckload and intermodal revenue represented 72% of total revenues compared to 59% last year. Our LTL margins were relatively flat. We saw a 9 basis point improvement on a year-over-year basis. Turning to truckload, both Echo and Command truckload operations improved their truckload net revenue margins on a year-over-year basis. Echo's historical truckload margin improved by 226 basis points and Command's truckload margin improved by 149 basis points. All in, our truckload margin was up 381 basis points year-over-year. I'd like to take this opportunity to reiterate a few important points around truckload net revenue margins and the impact of different market conditions. First off, a softer spot market tends to have a negative impact on margins, as spot rate has typically slightly higher margin than contract rate. Another factor is fuel, and lower rates mathematically drive higher net revenue margins. This of course assumes that fuel prices are moving in lockstep on the buy side and the sell side. Finally, routing guides rate and contract freight margins may also move up and down depending on market conditions. When truckload rates are softer and decline, contract freight margins tend to improve, and conversely, in periods of rising rates, contract freight margins may erode. The net of all this is that both Echo and Command were able to expand net revenue margins by focusing on service, leveraging backhaul opportunities in our respective networks, and benefiting where we had committed pricing, which enables us to procure truckload at lower rates due to loose capacity. It's difficult to isolate all of these variables, but it does highlight the strength of our business model which, in times of loose capacity and lower fuel, both of which have a negative implication on the top-line revenue growth, we're still able to deliver meaningful net revenue growth. Finally, we believe that our continued improvement in execution, the benefits of a larger truckload network with increased network density, and our constant focus on providing reliable service to both our clients and our carriers are equally important factors contributing to margin expansion. The great news is the best is yet to come. In 2016, we expect to launch new technology that integrates Command's truckload brokerage capabilities with Echo's multimodal platform. This will be the critical component to drive the synergy from our respective truckload networks, enabling a much higher level of cross-selling of our services. Now, I'd like to turn it over to Kyle to review more details of our financial performance.

[Kyle Sauers:]

Thanks, Dave. On page seven of the supplemental materials, you'll find a summary of our key operating statement line items. Commission expense was $26.5 million in the third quarter, increasing 56% year-over-year. Commission expense was 30.3% of net revenue, representing a 133 basis point increase from the third quarter of 2014. This increase is the result of our continued shift towards truckload particularly with the addition of Command. Non-GAAP G&A expense was $39.9 million in the third quarter of 2015, up 47% from the third quarter of 2014. However, this amount includes $1.5 million of integration costs that we had previewed on our last call. Without those costs, G&A expense would have been $38.4 million, increasing 42% over the prior year. The increase is primarily due to the Command acquisition, but also due to the continued investments in growing our sales and operational head count. Depreciation expense was $3.4 million in the third quarter of 2015, increasing 31% year-over-year. That increase is largely attributable to the added depreciation costs from the Command acquisition. Our non-GAAP effective income tax rate was 36.2% for the third quarter of 2015 compared to 38.4% in the prior year. Non-GAAP EBITDA increased 46% from the third quarter of 2014 to $21.0 million, or it increased 56% after considering integration costs mentioned earlier. Non-GAAP net income increased 41% from the third quarter of 2014 to $10.2 million, or increased 54% after integration costs. Non-GAAP fully diluted earnings per share were $0.34, increasing 10% from the third quarter of 2014, or $0.37 and increasing 23% after considering the integration costs. GAAP fully diluted EPS was $0.11 a share in the third quarter of 2015. The primary differences from our non-GAAP EPS are $4.1 million of amortization of intangibles from acquisitions, $1.8 million of non-cash interest expense, and $4.7 million of stock compensation expense. Slide eight contains selected cash flow and balance sheet data. In the third quarter of 2015, we generated $18.1 million in operating cash flow and $14.7 million in free cash flow. During the trailing 12 months, we've generated $58 million of operating cash flow and $45 million of free cash flow. Capital expenditures were $3.4 million in the quarter, a decrease of 14% from the third quarter of 2014. We ended the quarter with $43 million in cash, $226 million of accounts receivable, and nothing drawn down on our $200 million ABL facility, and so during the quarter, we paid off the entire amount of the ABL borrowings that we used to close the Command acquisition. Considering the continued lower fuel rates and the current market conditions, we're offering fourth-quarter revenue guidance in the range of $410 million to $430 million. Through the first few weeks of October, our total revenue is up 37% year-over-year. We expect our total growth rate to increase during the quarter, as Command's historical seasonal trends are different than Echo's. In addition, the strong gross margins that we achieved in the third quarter have continued throughout the month of October. We expect commission expense for the fourth quarter to be in the range 30% to 31% of net revenue. SG&A expense should be between $39 million and $41 million, not including costs associated with the Command integration. In the fourth quarter, we expect depreciation expense to be approximately $3.6 million, cash interest expense of $1.7 million, a tax rate of about 37%, and shares outstanding of 30.6 million. Excluded from the non-GAAP calculations, we expect approximately $4.2 million of amortization expense, $4.8 million of stock comp expense, and $1.8 million of non-cash interest expense. I'd now like to turn it back over to Doug.

[Douglas R. Waggoner:]

Thanks, Kyle. So in closing, we had a very strong quarter in a relatively soft market. Our net revenue margin equaled where we were in 2011, and that was a time when our LTL business represented 48% of our total business compared to 27% in Q3 of 2015. Additionally, we achieved not only record earnings with quarterly non-GAAP net income over $10 million, but also record EPS delivering non-GAAP EPS of $0.34 this quarter after our recent capital raise to fund the acquisition of Command. This all comes in a soft market and only one full quarter into this transformational acquisition. And before we've integrated our technology, our truckload sourcing teams, and yet to realize the numerous cross-selling opportunities that exist. This all gives me tremendous optimism about the future. I've got confidence that our business model will flourish regardless of market conditions and our position in the market will continue to strengthen as we realize all of the benefits of our recent acquisition. I would also like to take this opportunity to reiterate our long-term targets of $3 billion of revenue and $150 million of EBITDA in 2018. And with that, I would like to open it up for questions.

[Operator:]

Thank you. Our first question comes from the line of Jack Atkins of Stephens. Your line is open.

[Jack Atkins:]

Good afternoon, guys. Thanks for taking my questions, and congrats on a real strong quarter here.

[Douglas R. Waggoner:]

Thanks, Jack.

[Kyle Sauers:]

Thanks, Jack

[Jack Atkins:]

So Kyle, one quick housekeeping item before I dive into my questions. The – could you go through the commission expense that you're expecting in the fourth quarter one more time? I didn't catch that.

[Kyle Sauers:]

Sure. We're expecting the fourth quarter commission expense to be in the range of 31.0% – I'm sorry, 30.0% to 31.0% in net revenue.

[Jack Atkins:]

Okay. Okay. That's great. Thank you. And then, when we think about the guidance for the fourth quarter, I think that the full year range was lower by about $25 million at the midpoint, if I'm doing my math right. How much of that reduction was tied to lower fuel prices, the conversion of one of those customers to more of a fee-based model, and then just overall challenging end market? If you could break – can you kind of roughly break that down for us?

[Kyle Sauers:]

Sure. So your math is right that the midpoint is down about $25 million for the full second half of the year, and about half of that comes from continued fuel decline and the re-signing of those contracts to fee-based, and the rest are really market conditions.

[Jack Atkins:]

Okay. Okay. Makes sense; and the re-signing with the fee-based contracts, does that have any impact on net revenue dollars with those contracts? Or is that just more of a change in the revenue recognition, basically?

[Kyle Sauers:]

It's really more of a change in the way the revenue is recognized and the accounting for that. And – still a great customer and still a really good partnership, and profitable for Echo.

[Jack Atkins:]

Okay. Great, great. And then, you guys gave a lot of great detail on the integration timeline before that, kind of putting everybody under the same roof. When you all think about going into truckload bid season early next year, will you guys sort of combine efforts, Echo and Command, I guess before the full technology integration is complete to kind of go after a bigger slice of that routing guide business? How will you guys approach that, I guess, looking out to next year?

[David B. Menzel:]

So, Jack, this is Dave, because our networks won't be operating together at the beginning of the year, for the most part unless a customer specifically requests that we work together on a bid or we'll work independently because we do as you know from our discussion on the acquisition, Echo has strengths in different markets than Command does, and so we'll continue to service our mutual accounts, kind of separately, if you will. And once those networks have been integrated, we'll obviously come together on that and approach them together.

[Jack Atkins:]

Makes sense, Dave, I guess, to ask you a little bit different way, yeah, I know that Command had not been active on routing guide, freight in the past, if my memory serves me correctly, I mean, do you guys think that overall that you'll be a little bit more active going after routing guide, freight in 2016 than you were in 2015?

[David B. Menzel:]

So, I think it's fair to say that we both believe that we can go up-market and service very well, larger shippers today. The majority of both Echo and Command's business is with small-to-midsize companies. We do have – each of us have a handful of key accounts and have done a great job with that, but we'd expect to continue to kind of go up-market as we get bigger and leverage the benefits that we do have in serving larger clients. And so we'll work together on a strategy to do that as we approach 2016.

[Jack Atkins:]

Okay, great. And the last question, I'll turn it over and hop back in queue, but we heard a public LTL this morning talk about 3PLs seeing more freight routed through them, shippers look to lower transportation costs. Have you guys seen similar trends out there and would that be a net positive or a net negative for Echo? My sense is that would benefit you guys?

[Douglas R. Waggoner:]

I think there's been a longer term trend where small and mid-sized companies are finding value through a third-party logistics company or a broker that can aggregate LTL capacity, and so I think that that continues and that does benefit us.

[Jack Atkins:]

Okay, great. Thanks again for the time.

[Douglas R. Waggoner:]

Thanks, Jack.

[Operator:]

Thank you. Our next question comes from the line of John Mims of FBR Capital. Your line is open.

[John R. Mims:]

Great. Thanks, guys. Congrats on a great quarter.

[Douglas R. Waggoner:]

Thanks.

[John R. Mims:]

So, let me ask the revenue question one other way. When – there's a lot of noise and I appreciate you calling out the different puts and takes on the gross revenue line, but when we look at the fourth quarter outlook in terms of a net revenue, either growth number or margin number, should we expect sort of similar numbers that we saw in third quarter or is there anything material that would change where you are from a revenue or gross standpoint there?

[David B. Menzel:]

So, John, just to clarify your question, you're saying in terms of margin expectations for Q4, or just help me understand exactly...

[John R. Mims:]

Right. No, no, because – I mean, you've given a lot of detail on where you expect things to shake out. The one big wild card there is where net revenue margins would shake out in relation to all of the noise on the top-line.

[David B. Menzel:]

Yeah. I mean, I think that we've always been hesitant to kind of be very specific about what we expect net revenue margin to be, because as you guys all know they can be difficult to predict and the market can change quickly. Certainly through October we continue to deliver strong net revenue margins, given the current environment. We anticipate that to continue, but we would just probably fall one step short of trying to make a prediction for the next two months. Where we're sitting today, we continue to see relatively strong net revenue margins relative to our historical averages.

[John R. Mims:]

Right. Okay. Yeah, that's helpful. And then in terms of the integration bringing people under one roof, et cetera, what should we be thinking about in terms of CapEx cadence, I guess non-excludable expenses or CapEx that you'll incur over the next several quarters or next year.

[Kyle Sauers:]

John, this is Kyle. So, there's nothing to expect there in the short term. There's certainly a process to go through to execute on an expansion like that and get everyone under one roof. So, those costs will be incurred and start to work their way into the income statement and CapEx second half of 2016 most likely. So, as we go into the next call and start giving you guidance on what we see for 2016, we'll make sure that that's very clear that the cadence and the magnitude of any change is related to that initiative.

[John R. Mims:]

Sure. No, that's fair. Thank you. And then, one last one for me and I'll turn it back, because you covered most of my questions in prepared comments. But when you look at the combination of the employees from Command and Echo, is there any key losses or has there been any sort of shakeup in terms of agents, in terms of tenure, integration and from a cultural standpoint, or is everything running as you had anticipated?

[David B. Menzel:]

I'd say that everything is running as we anticipated. As you know, Command continues to operate relatively independently. We're certainly working together from an integration perspective. Our teams are there working together. It's pretty deep throughout both organizations. There's been a fair amount of sales integration already in terms of just resolving any account conflicts that may come up, and we're developing that integration plan. So things are really going very well – according to plan. I'd say the culture and the energy is very, very positive, and people on both sides of the table are really excited about the integrated technology and the opportunity that that's going to bring for both our salespeople and our carrier salespeople.

[John R. Mims:]

Sure. Okay. Great. And actually, I do have one more for Doug. The long-term targets of $3.150 billion in EBITDA, it's 5% gross EBITDA margins where you are right now. Is there anything – I mean, I know that's a long way out there, but should we be thinking of that as sort of a low watermark in terms of what you could do from a margin improvement standpoint, or is there a reason at this point to expect that EBITDA margin to sort of stay flat and we just ride that up with growth.

[Kyle Sauers:]

Hey, John, I'll jump on this one. So I think one thing to consider is that as we grow to $3 billion, that a large portion of that growth will be in truckload, and truckload does traditionally have a lower margin percentage. So as we think about our EBITDA margin, it's really over the net revenue dollars that we generate. I know that your comments relates to that EBITDA margin relative to gross revenue. But we do expect to continue to expand the EBITDA margin as a percentage of net revenue over these coming years as we get leverage over the fixed costs and infrastructure that we've built out, these synergies that we're expecting from the Command integration. So, we do definitely expect those to expand over that period of time.

[John R. Mims:]

All right. That's all I wanted to hear. Thanks a lot, guys.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Tom Wadewitz of UBS. Your line is open.

[Thomas Wadewitz:]

Yeah. Good afternoon. I wanted to ask – I mean, you talked a little bit about the culture and the integration. How do you think about retention of salespeople and brokers at Command? Do you expect that to be at a very high level of retention, or do you say well, there's naturally some kind of attrition that you just have to work through, or how do you think that will play out? And is that something that you keep people for a while, and then you ask them to go downtown versus being in Skokie that you'd have concern about kind of a bit more attrition?

[Douglas R. Waggoner:]

Well, first of all, probably 75% of the Command employees live downtown. So, they're, I think, excited about the opportunity to work closer to home.

[Thomas Wadewitz:]

Okay. That's good.

[Douglas R. Waggoner:]

Secondly, there's always some amount of turnover in both companies. And we managed through do that and do fine. Thirdly, both companies, we pay our salespeople commission, and we have a lot of salespeople in both the companies that make a lot of money. And I think it's a culture where if you work hard and hustle you can make money, and people like that. And the winners stay and keep growing.

[Thomas Wadewitz:]

Okay, great. Yeah, that sounds like there's not a lot of concern on that. Doug, would you think that the – we've heard a lot about soft freight going through the third quarter earnings reporting season, soft truckload freight and then some softness in LTL. If freight stays soft in 2016, how do you think your model in a brokerage market respond to that? Would you expect to keep a strong gross margin and to see a lower top-line, lower gross revenue growth for a number of quarters into 2016, or do you think that the competitive pressures in brokerage are going to move up pretty quickly as loads are a little tougher to find and the gross margin does start to deteriorate fairly quickly? How do you just think about that would evolve in 2016 if freight stays weak?

[Douglas R. Waggoner:]

So, I think the uniqueness of our business model is we can adapt. So, in a soft market, the cost of the transportation drops and we've got great sourcing capabilities in both companies. When we combine them and when we combine the technology, we'll have even better sourcing capabilities, and we'll have better density from a broader network of carriers. So, I think, we'll be able to do just fine in a soft market on the buy side. When things tighten up and we know that that's going to happen with the future of regulations and electronic recorders and driver shortages and everything else that's looming somewhere in the future, it comes down to being able to find capacity in the tight market. And both Echo and Command are known for being good spot market brokers and being able to find that capacity when shippers really need it. And so, you sort of adjust your resources on the sell side or the sourcing side depending on market conditions, so we've got a very flexible model that I think will be successful in either condition.

[Thomas Wadewitz:]

Okay. Just one more for you. What's your best sense of what truckload contract rates end up doing next year? Do you think they're going to be as good as kind of 3% to 4% like some of the asset guys think or given the weakness in freight, you think it will be a bit more muted than that?

[Douglas R. Waggoner:]

No, I think, there's competing forces right now. You've got shippers that recognize that the market is soft and trying to get a better price, but they're also concerned about locking in capacity, and so, I'm not quite sure how that's going to play out yet, but the market will dictate it and the competitive forces will dictate it.

[Thomas Wadewitz:]

Right. Okay. Thank you for the time.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Allison Landry with Credit Suisse. Your line is open. Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker) Thanks. I was wondering if you could talk a little bit about the underlying organic growth rates for Echo and Command that you're embedding in the updated revenue guidance for the fourth quarter and particularly, given your comments about the variability and seasonality for the two businesses.

[Kyle Sauers:]

Yeah. So, Allison, we didn't really comment on the specific growth rates for each of them. What we did say was that because of the seasonality of the Q4 business for Command hasn't historically declined relative to Q3 the way the Echo business has. So, we'll get more growth out of that underlying business. But we didn't give a specific forecast by mode or by Command or Echo for that total revenue growth in Q4. Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker) Okay. And then, I had a question that's sort of like a hot button topic, but just given sort of all the news and hype recently, I was wondering if you had any views on the potential impact that new entrants in the market like the Convoy example could have on competitive dynamics in the industry over the longer term?

[Douglas R. Waggoner:]

I didn't quite hear that, Allison. Are you talking about the Uberization of truckload? Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker) Yes. Exactly.

[Douglas R. Waggoner:]

Well, look, first of all, we consider ourselves a strong technology company, and we invest heavily in it, and we keep our eye on the trends in the emerging technologies and the emerging players. That being said, it is a market, where having customers matters, having capacity matters, having relationship matters, having working capital matters. And so we have all those things and we have the technology. And whether or not a new entrant can make a new marketplace, I think, remains to be seen, because you've got to have those other ingredients that I already mentioned. But we're keeping eye on it, we intend to look around the corner at every bend, and we're continuing to invest in our new technology. And I think we'll be fine. Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker) Okay. And then my last question is just more sort of housekeeping, the reported non-GAAP number was $0.34, but that excluded some of the integration costs. So, are you guys thinking about sort of the adjusted EPS number in Q3 as $0.37?

[Kyle Sauers:]

That's certainly the way we view it, all the guidance that we've talked about and the analysts who built their models. Best of my understanding, they've built them around the other guidance that we had given for the second half of the year, including that G&A. And we had called out separately some integration costs that obviously we incurred. So we certainly view it as a $0.37 number. Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker) Okay. Perfect. Thank you.

[Douglas R. Waggoner:]

Thanks, Allison.

[Operator:]

Our next question comes from line of Nate Brochmann with William Blair. Your line is open.

[Nate J. Brochmann:]

Good evening, everyone, and echo my sentiments on a positive quarter in a tough environment.

[Douglas R. Waggoner:]

Thanks, Nate.

[David B. Menzel:]

Thanks.

[Kyle Sauers:]

Thanks, Nate.

[Nate J. Brochmann:]

And then, Kyle, too thank you for calling out the very specific numbers in terms of all the puts and takes in adjustments, appreciate that clarity. Hey, Doug, I wanted to talk a little bit more – I mean, obviously, you did a nice job in terms of just kind of saying in terms of having your people out there pushing it every day in terms of operating and what had been a softer spot environment, and everybody who has more exposure has certainly cited some weakness and granted you guys set your expectations that you didn't expect to start to pick up, so congratulations on having that foresight. But could you talk a little bit more in terms of other than, obviously, your people being motivated out there to sell every day, what it might have helped you guys buck the trend a little bit in terms of either where you play or where the opportunities are in terms of fostering that growth?

[Douglas R. Waggoner:]

Well, I think on these calls – in this industry, we talked a lot about spot business and contract business really as it pertains to routing guides, but I also consider there's a third category of business, which I would consider transactional relationship business, and it is spot market business, because you get it every day and it's not contracted to you. But it's based on relationships with carriers and relationships with shippers and doing a good job and servicing them and having them come back repeatedly to do business with you. So, I think both Command and Echo excel at serving our customers in having great relationships with them, and if they're not big enough to run a routing guide, it probably doesn't get categorized by those previous two classifications.

[Nate J. Brochmann:]

Okay. Fair enough. And then in terms of just your own view on kind of capacity and in terms of tightness or softness, obviously, clearly it's softer. But where do you think we lie in terms of the magnitude of softness at least from your point of view? And in terms of, obviously, it sounds like your expectation is things easily could get a little bit tighter, but just kind of where you're seeing that?

[Douglas R. Waggoner:]

Well, I mean, I would say that if you look at the big routing guides right now, the freights getting easily covered by the top carrier broker and it's not going very deep into the routing guide. So that essentially means there's no spot rate. On the other hand, I think the business between a loose market and a tight market is a lot narrower than it used to be. So I can't predict, when we go from loose to tight, but I think that bad weather, disruption in the national network of transportation capacity isn't always that far away, and we saw that happen in the first half of 2014.

[Nate J. Brochmann:]

Fair enough. And then, obviously what's on your plate for the next couple of years is certainly the integration with Command and leveraging that and leveraging the technology, et cetera, and a little bit of your current cross-sell. Where do you see the next big opportunity for Echo, in terms of, whether it's a new mode or bigger expansion, or again I'm not saying anytime soon, but in terms of looking a little bit into the future, where you want to take this?

[Douglas R. Waggoner:]

Well, it's a huge market. We've always been true to our strategy of not getting distracted by going too far out of the guard rails. So we want to continue to build scale and density in our chosen markets. But I go back to Allison's question, I do think there is a role for technology both on the shipper side and on the carrier side to increase our productivity and to increase the value that we provide to customer. So we're going to continue to look at technology as a differentiator.

[Nate J. Brochmann:]

Fair enough. Thanks for the time. I'll turn it over.

[Douglas R. Waggoner:]

All right. Thanks.

[Operator:]

Our next question comes from the line of Alex Vecchio with Morgan Stanley. Your line is open

[Alexander Vecchio:]

Good evening. Thanks for taking the time to answer my questions. I wanted to ask about the difference in the organic TL growth rates between Echo's legacy – the legacy Echo business and Command, the 24% organic TL volume growth at Echo is really impressive considering how soft the environment is, but Command is up 2%. Now, I know Command is largely spot, but I also remember Echo historically also being predominantly spot. Can you maybe talk to a little bit the difference in the growth rates there?

[David B. Menzel:]

Yeah. Alex, this is Dave. There's a couple of things. As Echo has continued to invest and build our business, we've continued to go up market probably a little more aggressively in 2014 than Command did. I mean, Command prospered significantly when the market was disrupted due to bad weather and tight capacity, delivered fantastic results. But it was probably a bit more conservative in terms of bidding in on routing guides than Echo was. We've always been a growth story and it's been important for us to kind of balance our ability to control margins, provide service to clients, but to continue to drive that top-line growth. So I think to some extent, it comes just a little bit from our culture of driving growth versus operating the model that harvests its profitability and kind of just takes what the market gives you. And I think that Command – we knew that about Command, and the beauty of it was they delivered fantastic service to their clients and they had a very, very strong carrier network that was really happy to work with them and pleased with the freight that they can deliver. And I think that we'll be able to combine our cultures and we'll be able to enable Command to be a little more aggressive in the marketplace, not to necessarily change the way they do business, but really kind to take the best of what they do, the best of what we do, and drive growth in, in any market condition. But going into 2015, the reality was they were much more focused on spot. They've done really tremendous in having kind of a flat year-over-year volume in a much, much weaker market. So that tells you that despite the weaker spot market, they actually are winning clients, winning market share and growing their business. We just happen to have probably more larger accounts that we've made commitments on as a part of our growth strategy. But again it was probably 25% of what Echo did, because we have such a multichannel model with lots of inside sales reps and branches around the country with relationships in small- to mid-sized markets. So hopefully, that gives you a little color on those differences, but I think that the important point from our perspective is that both businesses are doing very well in this environment in our view in terms of both volume and net revenue growth.

[Alexander Vecchio:]

Yeah. That's great, that...

[David B. Menzel:]

(41

[Alexander Vecchio:]

Sorry, go ahead, Dave.

[David B. Menzel:]

I just want to say, you can't underestimate the network effect of combining our complementary networks and how that makes us both stronger with our carriers and with our shippers.

[Alexander Vecchio:]

Yeah. That makes sense. Very helpful color there. Thank you. And another higher level kind of question I had, is there is this increasing debate between what's the best model to have. Do you want just assets? Do you want to be completely non-asset? Do you want to be a little bit of both and have a mixed model, and obviously a large competitor out there has endorsed the latter strategy. Can you remind us again why you think the actual pure-play non-asset broker model is the best at the end of the day? Because a lot of the time these asset-light or asset-heavy guys are both saying, at the end of the day, you need access to capacity and you need to own the assets when things get tight. So maybe just Doug, maybe you can remind us why the pure-play model in your view is the best?

[Douglas R. Waggoner:]

Well, first of all, I grew up in the asset-based trucking business and – for many years, and I can tell you it's a very hard business. And the beauty of this business is that we essentially outsource that part of it. We buy the capacity from other people that are running the trucks and managing the labor and dealing with fuel and maintenance and accidents and all of those things that asset-based companies have to do. That's a huge distraction for us that we don't want to deal with. We want to focus on sales. We want to focus on sourcing. We want to focus on maximizing our margins and delivering shareholder value and we don't want to have to reinvest our EBITDA in replacing aging assets.

[Alexander Vecchio:]

Okay. That makes sense. Thanks very much for the time.

[Douglas R. Waggoner:]

Thank you.

[David B. Menzel:]

Thanks, Alex.

[Operator:]

And our next question...

[Douglas R. Waggoner:]

I'll just add one – go ahead.

[Operator:]

And our next question comes from the line of Jason Seidl of Cowen. Your line is open.

[Jason H. Seidl:]

Hey. Thank you, operator. Hey, guys. A couple of quick things. Just wanted to clarify something that you said in relation to Allison's comments, but I thought I heard you say that your net revenue margins in October were on par with what you've seen in 3Q. Is that correct?

[David B. Menzel:]

That is correct.

[Jason H. Seidl:]

Okay. I'm just wanting to make sure that was okay. You also mentioned you guys are taking share in the marketplace, and it's kind of evident by your numbers. CH obviously is taking market share as well. What type of competitors are you taking market share from? Is it just the smaller mom-and-pops that you guys are winning business from? I'm just trying to figure out who's winning market share from who here.

[Douglas R. Waggoner:]

Well, it comes from a variety of sources. First of all, we – in our Managed Transportation business, most of the time we're taking small companies that have never outsourced transportation before and for the first time are using a third party logistics company to manage their transportation for them, so that's one source. We don't really measure who the business comes from. We've had success this last year in routing guides getting a more contracts rate. When the capacity was tight last year, we had a lot of success in the spot market. So, I would really sum it by saying we're an aggressive sales organization and we try to have a multichannel, multimodal strategy. We think about the market segmented by size of customers, and the size of customers essentially correlates to their complexity and the needs that they have. And I think our sales strategy has been proven to be successful.

[Jason H. Seidl:]

Okay. Question regarding your carrier group and the ELD mandate that's pending. How do you guys tend to monitor that in terms of enforcement with your carrier group? And do you think shippers are going to start requiring you guys to monitor that?

[Douglas R. Waggoner:]

Probably haven't given that a lot of thought at this point. First of all, I'll believe the ELDs when I see them. I know they're coming, but it seems to keep getting postponed. But we do have good compliance processes in place today, and of course ELD is not part of that. But once it becomes the law, we'll figure out a way to include it.

[Jason H. Seidl:]

Okay. Fair enough. Gentlemen, thank you for your time as always.

[Douglas R. Waggoner:]

Thank you.

[David B. Menzel:]

Thanks, David.

[Operator:]

Thank you. And our next question comes from the line of Tom Albrecht of BB&T. Your line is open.

[Thomas S. Albrecht:]

Hey, guys. Really nice results here. I wanted to kind of go slightly different direction on a couple of the themes that have been identified. So first off, on the Command Q4 seasonality, I'm trying to understand, are you basically saying that their seasonality is favorable in a way where their revenues may be greater than the $124 million they had in the third quarter?

[Kyle Sauers:]

I'm saying that it has a – since their seasonality is a little different than ours, that it'll have a bigger impact on our total growth in Q4 than it might otherwise.

[David B. Menzel:]

Or another way to say it, Echo's traditionally had a little more decline November, December, and Command tends to be a little steadier through Q4. So when you look at October growth rates, you would anticipate that if they're a year-over-year comparison to Echo's averages, they would improve throughout the quarter due to the fact that they're more steady in the back half of the quarter.

[Thomas S. Albrecht:]

Okay. That's helpful. And then, secondly, on the October comment, I get the margin comment. The other big dog that was out earlier today talked about that while they saw even better margins in October, their volume levels were down a little bit from what they had experienced in Q3. Is that what you've experienced – even better margins, but maybe slightly softer volumes?

[David B. Menzel:]

Yeah. I think that's pretty consistent on our part. Our truckload year-over-year growth rate was just over 21% in October, so that was down a little bit from the 24% that we'd talked about organically in Q3. So I'd say that that's a consistent theme that we're seeing.

[Thomas S. Albrecht:]

Okay. And then, long-term, why do you want to get on to the route guide given the lucrative nature of the spot market? Is it because the route guide is such a bigger book of business and will allow you as a public company to attain some important growth goals that you've set for yourselves and investors? And then ultimately, I'm wondering if you're going to have a kind of a bifurcated approach where Command continues to be the spot specialist but the combination of you and them allows the Echo side to better penetrate the route guide?

[David B. Menzel:]

Well, I think, Tom, the way we think about it is that first off, we're going to combine the organizations, and we really will act as one in the back half of 2016, certainly into 2017 and beyond. And there's no doubt that there's many large shippers out there that have a tremendous amount of freight and they are very desirable of having relationships with the company like ours. They can provide them an access to capacity, can kind of reduce the number of brokers that they're working with on a day-to-day basis. And we believe that there is plenty of opportunities where we can service those customers in an effective way, in a way that works for them and a way that works for Echo. So on the one hand, we don't want to be overly aggressive, competitive, bidding into situations that don't provide value. But at the same time, those customer relationships are very, very valuable to us both in terms of potential contract and route guide business that we might get, but also spot opportunities when the market changes. So we get a balance of the commitments that we make so that we can serve our entire customer base. It's absolutely a bit of a chicken out of the egg sometimes on the truckload business. But with the capacity environment the way it is today, if we can build those client relationships and provide the service that they need, we think we can offer a great value proposition, and that works for us. So that's our strategy going forward, and it'd be difficult to predict what percentage of our business is going to come from one source or another. The market's going to dictate that over time.

[Thomas S. Albrecht:]

Doug, would you ever consider taking a $1 million or $2 million stake in one of these Uber-like companies? I think they're getting way more credit than they deserve, but it seems to me like the industry is not going to be like the taxi industry and snub their nose at an emerging competitor like they did with Uber six years ago. I'm just curious what your thoughts are. I mean I'm sure you're going to be trying to Uberize Echo, but would you ever take a small investment just to see what else is out there?

[Douglas R. Waggoner:]

So the problem – in my opinion, the problem that you have with the Uber strategy is a couple of things. One, truck drivers don't pick their next load; their dispatchers do, unless of course they're an owner-operator. But owner-operators comprise a fairly small portion of the capacity market. So the real audience is dispatchers, not truck drivers. There are certain convenience items that a truck driver would enjoy. Our interest in mobile apps has more to do with tracking and productivity, documents and that sort of thing. The ability to make a marketplace using an Uber app, I think, really requires that you control customers. And so, if you're a start-up tech firm with a slick mobile app, you've got to get enough shippers and you have to get enough carriers to get to critical mass and make a marketplace. And it's a big market. And I think there are some of these apps – I keep an eye on them – that are having some success, limited success, getting a market of capacity. But shippers are price-sensitive. So any day I can beat that price, the shipper is going to rather go with us. And I think you have to have a lot of scale, size, and density in truckload brokerage to command the best prices and be competitive, and I just can't see a start-up doing that.

[Thomas S. Albrecht:]

And I last – I appreciate that. I've been thinking a lot about that. Last question, it looks like sequentially, the total number of employees declined about 43. Can we expect that for a couple more quarters? And what did you say the timing was for the integration on the sales front, Doug?

[Douglas R. Waggoner:]

Well, we're talking about the integration in being in the second, middle of 2016.

[Thomas S. Albrecht:]

Okay. Any comments on the head count?

[David B. Menzel:]

Yeah. I mean on the head count, we would likely – on the sales side, you'll probably see a modest decline in Q4. We've typically seen that historically because that's not a big hiring quarter for us, so it'd be normal to get a slight decline in Q4. And then that probably translates through the total head count as well, I would say.

[Thomas S. Albrecht:]

Okay. And I said last question, but then I thought of something. I keep hearing everybody obsessed over shippers and contract rates, and I just feel like people don't understand the broker model. I don't think that really matters to you as much as – maybe it can, at a certain point when the market is inflecting back in the tight capacity. But I think right now, how loose does this feel to all of you compared to, let's say, the fall of 2008? I mean it feels unbelievably loose to me.

[Douglas R. Waggoner:]

Well, we don't really worry about it. I mean, we – the market is what the market is, and we get up every day and we go find as much freight as we can and then we cover it. If the market's soft, we can cover it at better price, we can get better margins. And when the market tightens, we find competitor – we find capacity when our customers can't. So if you look back at the history of Echo, we really came into being during the great recession. And of course, we were much smaller then, but we had no difficulty in growing in 2008 and 2009. And it was a slight bump in the road, but we were covered within a quarter or two and resumed our trajectory. And I think that that's kind of in our DNA. We'd like to think that we're fast on our feet and agile and we'll adapt to any market condition.

[Thomas S. Albrecht:]

Okay. Thank you. Appreciate it, Doug.

[Douglas R. Waggoner:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Matt Young with Morningstar. Your line is open.

[Matthew J. Young:]

Good evening, guys. Thanks for taking my question. Most of my questions have been answered. I might have missed it, but I just wanted to clarify what kind of – or what magnitude of integration costs you're looking for in the fourth quarter, and maybe perhaps into next year?

[Kyle Sauers:]

Sure. Matt, this is Kyle. So, we probably expect the similar amounts of integration costs in Q4 that we had in Q3 and that put us right in the middle of the range that we've previewed on our last call, which was – which is $2 million to $4 million in the back half of 2015. And we – as we go through the integration process through the next quarter, we'll offer some more color on the next call about the costs that we'll incur leading up to the completion of the integration in the middle of next year.

[Matthew J. Young:]

Fair enough. But overall, the costs have been running about where you've expected?

[Kyle Sauers:]

Yes. Yeah. Absolutely.

[Matthew J. Young:]

And then, just a question on the – what you used to refer to as the enterprise customers, which would now be mostly in your Managed Transport, I guess. How does the pipeline of the enterprise customers looking? You used to be adding, I don't know, call it a few dozen a quarter. You still seeing that kind of opportunity?

[Kyle Sauers:]

We are. We had 30 new accounts this quarter. We've got a good pipeline, nice strong pipeline. I think the total business was about a $20 million top-line in Q3. So we feel great about the pipeline and would anticipate continuing to add accounts and grow that business for sure.

[Matthew J. Young:]

Great.

[Douglas R. Waggoner:]

We're going to teach the Command sales reps how to sell it to their customers.

[Matthew J. Young:]

Great. Appreciate it. Thanks.

[Kyle Sauers:]

Thanks, Matt.

[David B. Menzel:]

Thanks, Matt.

[Operator:]

Our next question is from Jack Atkins of Stephens. Your line is open.

[Jack Atkins:]

Thanks for the follow-up, guys. Just one quick question. The stock has been under significant pressure over the last several months and pressure over the last couple of days. And I'm curious given your strong cash flow profile, to what degree the board and senior management is considering potentially putting in a share repurchase authorization? Because it seems like at 8 times to 9 times EBITDA, perhaps the best acquisition you could make is your own stock.

[Douglas R. Waggoner:]

So yeah Jack. We're continually looking at our capital allocation in terms of our M&A pipeline as well as investing in our own stock or convertible debt. So we think there are opportunities. We're looking at it. And as that develops we'll make sure that you're informed.

[Jack Atkins:]

Okay. Great. Thanks again for the time.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. Our next question is from Kevin Steinke of Barrington Research. Your line is open.

[Kevin M. Steinke:]

Good afternoon. And you just touched on this a little bit here, but I'm just wondering, as you have incorporated in your 2018 target another $200 million to $300 million of acquired revenue, if that's something you're looking to may be put off till the 2017-2018 timeframe or if you're still out there actively looking and open to doing acquisitions over the next year even as you're integrating with Command.

[David B. Menzel:]

Kevin, we're definitely continuing to have conversations with companies and looking to make acquisitions when they make sense, we're – we would say that we're little more focused probably on the integration of Command, the completion of the technology integration, and all that comes with that. And so on one light, once we've completed that, it's going to open up a whole new world of opportunity with all the new technical capabilities we'll have to integrate a brokerage under one common system. So there's some sense that activity might be greater, say, middle of 2016 and beyond, but certainly would not preclude potentially doing something that made sense before that. And so it's still on our radar screen for sure.

[Kevin M. Steinke:]

Okay. Perfect. And just one more question. I noticed earlier in the quarter, you announced that you hired a new Senior VP of Marketing, and just wondered do you have any comments on what that means for the direction you're taking Echo's marketing organization and strategy?

[Douglas R. Waggoner:]

Yeah. We think that marketing works, we have a lot of audiences that we need to market to and tell them our story, we market ourselves to our shippers, obviously, but we market ourselves to carriers. We work hard at managing the morale of our employees, and there is a marketing component to that. We brought a fellow in that's got great marketing leadership experience outside the industry, and we think that those marketing concepts kind of apply within Echo, not just from a (01

[Kevin M. Steinke:]

Okay. Great. Well, thanks for taking my questions.

[Douglas R. Waggoner:]

Thank you.

[David B. Menzel:]

Thanks, Kevin.

[Operator:]

Thank you very much. I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Doug Waggoner for any further remarks.

[Douglas R. Waggoner:]

Thank you. I would like to take a moment just to acknowledge the efforts of our team. I think the employees of both Echo and Command have delivered outstanding results despite a tough market and with the added duties associated with integration. So hats off to everybody. And I appreciate your efforts and look forward to the coming quarters. And finally, thanks to everybody on the call. We appreciate you listening in and hearing our Q3 results, and we will talk to you later. Thank you.

[Operator:]

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