XPO Logistics reports strong Q2 earnings, with 151.4 percent total revenue gain

Non asset-based 3PL XPO Logistics reported second quarter revenue of $137.1 million yesterday, marking a 151.4 percent annual increase. The company added that gross margin dollars rose 128.4 percent annually to $19.3 million, with gross margin percentage 14.1 percent.

XPO had a quarterly net loss of $17.4 million compared to a net loss of $5.2 million during the second quarter of 2012, which company officials said reflect “the positive impact of acquisitions from prior periods and significant organic growth, offset by planned strategic investments long-term value creation, transaction-related costs and litigation costs.

The company recently announced it plans to acquire 3PD Inc., the largest non-asset, third party provider of heavy goods, last-mile logistics in North America, for roughly $365 million, with the sale price comprised of $357 million in cash and $8 million in restricted XPO stock. The deal is expected to be made official by the end of the third quarter.

XPO’s Freight brokerage group had a very strong quarter, with total revenue of $95.4 million for a 587.2 percent annual gain, with a gross margin percentage of 13.2 percent, topping 11.0 percent during the second quarter of 2012. These increases, said XPO, were largely due to acquisitions and the ongoing expansion of its brokerage cold-start locations (which are defined by XPO as opening up new offices in new locations). Freight brokerage had a quarterly operating loss of $5.0 million compared to $825,000 last year, which it said was due to an increase in SG&A costs for sales force expansion, technology and training.

Other business groups at XPO also had strong quarters, including:
-Expedited transportation with revenue at $26.4 for a 2.8 percent annual gain, and gross margin at 15.9 percent, down from 20.0 percent, which XPO said was due to a soft expedited market environment and revenue from air charter. Quarterly operating income was 1.2 million, down from $2.6 million last year, due to the impact of a lower gross margin percentage; and
-Freight forwarding had $19.3 million in total revenue for a 17.4 percent annual increase, due in large part to the growth in company-owned locations and higher international volume shipments, with gross margin at 13.3 percent compared to 11.0 percent last year. Quarterly operating income—at $478,000—was up 119.3 percent, with XPO saying it was due to a higher gross margin that was partially offset by SG&A expenses related to previous cold-start openings.

“We delivered some exceptional growth,” said XPO Chairman and CEO Brad Jacobs said on an earnings call today. “Some of it came from acquisition, and we are also driving outside organic growth in our freight brokerage business…with organic growth in brokerage up 55 percent year-over-year. The investments we are continuing to make in long-term growth, particularly sales head count resulted in a loss as expected.”

Jacobs also said that XPO’s full-year outlook remains on track for an annual revenue run rate as of December 31 as well as positive EBITDA for the fourth quarter of this year.

During his comments, Jacobs outlined five avenues of growth embedded in XPO’s existing business:
1-continuing to scale up the XPO network of 62 locations by adding sales people and providing world-class training and empowering them with cutting-edge technology to make them as productive as possible;
2-building up the strategic and national accounts program, which he said is getting a great response from the industry and shippers, with recent wins from 26 large accounts representing the potential for more than $75 million in annual revenue, including wins in truckload, cross-border, LTL, and expedited, as well as actively bidding on 82 additional accounts with more to come;
3-the continuation of its cold start program, which cumulatively have an annual run rate of more than $90 million for its eight cold starts, with plans to open a ninth one in Cincinnati, which Jacobs said will be XPO’s fifth “mega branch” and has the potential for exceptional growth as it can recruit from a large group of sales talent there;
4-the acquisition pipeline which is very active, with many targets in truckload brokerage and attractive opportunities in expedite, managed transportation, intermodal, LTL, and last-mile; and
5-the acquisition of 3PD, which Jacobs said will immediately accelerate XPO’s growth rate, which will help bolster XPO’s presence on the heavy-goods, last-mile side

“We are very bullish about the opportunities embedded in these five areas of growth,” said Jacobs. 

Morgan Stanley analyst Bill Greene recently noted in a research note that XPO is “largely on track with its revenue goals,” but added the company has the widest risk-reward skew in his firm’s coverage, given its lack of operating history and bold growth plans.

“However, [XPO management] has a history of successfully executing roll-ups and, on paper, XPO’s strategy fits well into our preferences across logistics, given high potential for organic rev growth, margin expansion, and accretive M&A,” wrote Greene.