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Higher Revenue, Somewhat Tighter Net Margins At 3PL Echo Global Logistics

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Higher Revenue, Somewhat Tighter Net Margins At 3PL Echo Global Logistics
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Revenue at Echo Global Logistics, Inc. (NASDAQ: ECHO) in the second quarter soared 35 percent, with a slight "compression" of margins that the company's management said on its earnings call with analysts is not a development to be concerned about.

According to Echo's second quarter earnings statement, revenue in Echo's transactional transportation division was up 35.4 percent to $502.8 million, while managed transportation revenue was up 33.8 percent, to $132 million, for the total 35 percent increase. But net revenue after transportation costs was up 30.8 percent to $106.8 million, so the margin was compressed in the sense that the net did not rise in unison with revenue. 

CEO Doug Waggoner, who earlier in the call had touted the company's technology solutions for their customers, said the company's "real strategy...is to leverage the technology we have to provide services to larger shippers."

"Our operating margins and profitability are just as good (with the larger shippers) as the smaller ones, because we are able to automate much of the transaction flow and provide a transportation management solution to those customers," Waggoner said. "That adds a tremendous amount of value to their business, and it's efficient on our side. It could cause margin compression but at the end of the day, it's providing operating profitability to the business. We're going to look at those opportunities to go upmarket. It could cause margin compression, but at the end of the day we will look at opportunities from a bottom line perspective."

A tight shipping market has the potential to benefit a 3PL like Echo, and Waggoner talked about that in his opening remarks. "As tight capacity and strong demand has persisted, shippers are thinking about the impact of transportation in a strategic way," he said. Carriers also are adopting to the market, Waggoner said, and Echo says its technology capabilities "are allowing us to outpace the market and improve profitability."

One analyst questioned whether the inevitable pullback in the tight market would lead to an exodus of new customers that may be signing up for Echo's services in the current market. Waggoner said he believed they might stick around. "There's a relationship component so as much as we tout technology, we know that relationships matter," he said. "So when we get an opportunity to service a new account, whether it came from the failure of a competitor or just good hard sales work, it's an opportunity to latch on to an account and keep it."

David Menzel, Echo's president and COO, said Echo had signed deals in its managed transportation group worth about $65 million through the first half of the year, with about $36 million of that in the second quarter.

Waggoner, like virtually all executives on analyst calls this earnings season, said there were no signs that the strong freight market was waning. He said the strong numbers on new purchases of tractors are, "from all the carriers I am talking to, almost entirely to replace aging equipment. Most carriers tell us that even if they wanted to add capacity, they couldn't. They don't have the drivers."

Waggoner was asked about his view of freight futures, an initiative of FreightWaves, though FreightWaves was not specified by the analyst asking the question. "I guess I've been a student of that idea for a long time and I am interested that somebody is coming out with it," Waggoner said. "It remains to be seen how it will be done and how liquid the market will be. Certainly we will have an interest in it and we think we have a good pulse on the market on it. I'm interested to see the mechanics of how it is going to work."

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