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ECHO Beats Earnings On Managed Transportation Growth

FreightWaves
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Echo Global Logistics, Inc. (NASDAQ: ECHO) beat Wall Street's consensus estimates on earnings per share by $0.09 as it reported non-GAAP adjusted EPS of $0.47 for the fourth quarter of 2018. Echo's Q4 revenues of $583 million, up 6.4% year-over-year, missed analysts' expectations by $4.13 million.

"This quarter capped a fantastic year for Echo with records in revenue, volume and profitability. In a fast changing freight environment, we demonstrated the flexibility of our model and the ability to gain operating leverage while bringing great value to our shippers and carriers," said Doug Waggoner, Chairman of the Board of Directors and Chief Executive Officer at Echo, in a statement.

Echo grew its Transactional revenue by 3.7% to $449.3 million, but the standard was Managed Transportation revenue, which jumped 16.7% year-over-year to $133.6 million. In terms of absolute revenue dollars, ECHO's transactional business took in an additional $16.1 million dollars compared to the fourth quarter of 2017, while the managed transportation revenue grew by $19.1 million dollars.

Echo's Q4 2018 earnings and YOY comps. ( Table: FreightWaves )

Echo's Q4 2018 earnings and YOY comps. (Table: FreightWaves)

During Echo's earnings call, President and COO David Menzel said that the company's ability to expand margins as its truckload costs fell against high, re-priced contract prices in the second half of 2018 spoke to the strength of Echo's business model.

Echo's acquisition of Command Transportation in 2015 biased the brokerage's mix of business toward the spot market, and some analysts thought that a heavier exposure to spot prices—i.e., buying and selling spot—could hamper net revenues in a downturn. That proved not to be the case as ECHO successfully pivoted from spot to contract over the course of 2018. In the fourth quarter of 2018, Menzel said, spot business represented 52% of ECHO's total revenues, down from 59% a year earlier. 

The chart below shows how national average dry van spot rates (DATVF.VNU) fell alongside national tender rejections (OTRI.USA). Falling turndowns indicated carriers' satisfaction with increasingly richly- and re-priced contract freight, while allowed shippers to stay in their routing guides and starved the spot market of demand. Echo benefited from that trend in the second half of 2018.

( Chart: FreightWaves SONAR )

(Chart: FreightWaves SONAR)

Brokerages have different operational key performance indicators (KPIs) than truckload carriers: in asset-light businesses that are labor-intensive rather than capital-intensive, sales force head counts and commission expenses matter much more than operating ratios. 

ECHO's commission expenses grew 5.3% year-over-year to 31.1% of net revenues, up from 29.5% in the fourth quarter of 2017. Meanwhile, net revenue margin stayed flat at 17.6%, while sales employees and agents grew 5.8% to 1,716.

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"We expect full year 2019 revenue to be in the range of $2.35 billion to $2.55 billion," said Kyle Sauers, Chief Financial Officer of Echo. "We also expect first quarter revenue to be between $530 million and $570 million."

FreightWaves will follow up this earnings announcement with equities analysts' reactions.

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