Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Eco Global Logistics fourth quarter 2019 earnings Conference call.
This time, all participants are gonna listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during that period, you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance please press star in cereal.
I'll now hand, the conference over to the Chief Financial Officer, Mr. Gao salary. Please go ahead.
Thank you and thank you for joining us today to discuss our fourth quarter and for your 2019 earnings hosting the call or Doug Wagner, Chairman and Chief Executive Officer, Dave Manzo, President and Chief operating Officer, and Kyle Sauers, Chief Financial Officer, We've posted presentation slides our website that accompany management's prepared remarks.
And these slides can be accessed in the Investor Relations section of our site Echo Dot 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.
We see filings contain additional information about factors that could cause actual results to differ from management's expectations, you ought to be discussing certain non-GAAP financial measures. The definition of a reconciliation of each non-GAAP financial measure with most directly comparable GAAP financial measure is contained in the press release, we issued earlier today and form 8-K, we filed earlier today.
With that Im pleased to turn the call over to Doug Wagner.
Thanks, and good afternoon, everyone.
Well it won't be surprised to many of you to hear me say, what a difference or your makes.
Cyclical nature of the freight business has been working it's like we had throughout 2018 in Q4 was not an exception.
The continuation of the excess capacity.
The soft spot market continue through up throughout Q4.
Despite these conditions I'm proud of our execution, our ability to drive high levels of client to care satisfaction.
Our deployment of new technology, and the continued commitment of all of our employees.
And how that translates into strong relationships that make echo even better.
On a year over year basis, many of our key metrics are flat or down.
The main driver of that is more about the robust environment in 2018, followed by a period of softer economic demand and probably more importantly, excess truckload capacity.
Well absolute volumes remain a bit soft volume trends.
Volume trends are improving and it back to have shown a decent upswing late in December and accelerating in January.
Now on slide three I'll highlight some of our Q4 results.
Total revenue was 532 million, representing an 8.8% decrease from last year.
Net revenue was 89.7 million, representing a 12.4% decrease from last year.
Adjusted EBITDA was 17.5 million, representing a 31.5% decrease from the prior year.
Non-GAAP fully diluted EPS was 26 cents compared to 47 cents in the year ago period.
Years ago, I added a slide to our investor deck that I've used many times to talk about the nature of the freight cycle.
To oversimplify.
Our rates tend to move faster than shipper rates, so depending on where we are in the cycle.
Our net revenue margin can either expand or contract depending on which direction rates are moving.
2018 was a unique year because rates moved up very quickly.
Capacity was hard to come by shippers were forced into the spot market and both contract in spot rates rose quickly.
In response to this phenomena.
Shippers pursued shoring up their contract strategies with the hopes of avoiding the spot market in 2019 and carriers added capacity.
This basically flip to the market and we were left with a freight environment that is much more in balance.
And in Dallas means less spot business.
This balanced market typically puts some downward pressure on net revenue margin. We saw some of that in Q4 and are likely to see a bit more in the first half of 2020. This is the nature of the freight cycle.
Our strength in the market remains to be our unique combination of technology talented people with strong client and carrier relationships and our carrier network, which includes our skill in domestic transportation.
We continue to make significant progress rolling out new elements to our technology platform and applying data science to improve our business.
Over the past few months, we've continued that trend by enabling our carrier partners access to available loads online and via our mobile apps and we enable truckload quoting via eco ship.
We continue to provide enhanced automation across the business through our Echo accelerator platform, which includes a state of the our technical architecture proprietary code and algorithms that empower and optimize process and workflow.
We also continue to integrate certain third party data sources and technology utilities for those features that make more sense to buy rather than to build.
Together. These advancements are positioning echo to make significant productivity gains over the next few years, we're confident when the market blips again, we will see strong growth the drives incremental operating leverage resulting from these technological innovations and now I'd like to turn it over to Dave to go into more detail on our performance.
Thanks, Doug.
As indicated on slide four Q4 truckload revenue was 352 million.
Which is a decrease of 11% compared the prior year decline was entirely due to lower rates as we experienced a 12% decline in truckload revenue per shipment in the quarter.
Truckload volume was up 1%, which is an improving trend over the last several quarters.
Our growth in primary award volume continued to be strong as we were up 14% in Q4.
Our spot decline of 13% offset the majority of the contract volume game.
Year over year spot declines have subsided in January resulting in further acceleration of our truckload growth early into 2020.
Our contract strategy in our relationships with larger shippers continue to be important component of our growth plan and we feel good about the success, we're having in the marketplace on this front.
Our contract to spot mix was 57% contract 43% spot in Q4 as a reminder contract was 48%.
Of the total in Q4 2018.
The 12% year over year decrease in revenue per load reflects the market dynamics, Doug described earlier.
One of the lessons we've learned over the years is that it doesn't take much to throw the market out of balance.
There are a handful of factors that may drive a market shift in 2020, including the final stage of the L.D. mandate, which required the sunsetting of the itll be our de devices, the new federally mandated drug and alcohol clearing house and the Sky Rocketing insurance rates facing hasn't based carriers.
Lower rates caused by excess capacity has already driven carrier is large and small out of the market in 2019, and it's certainly feasible to believe the market is setting up for another shift in 2020.
We did see carrier rate spike up during the holidays as mid week Christmas and new year's caused a mini capacity crunch.
Basically the market is pretty fragile, even when it's characterized as imbalance.
Shifting gears a bit I'd like to talk about a few of our automation initiatives impacting our truckload business.
As I've highlighted previously the majority of her contract business is awarded based on the results of multistage bid processes and it's not quoted on the shipment by shipment basis.
Our bid strategy is based on matching our shippers needs to our network and finding opportunities to deliver value to both clients and carriers.
Once the reward is determined it shouldn't has tendered electronically and automatically entered into our systems.
It's a highly efficient process and represents a significant portion of our truckload transactions.
In Q4, we enable our transactional truckload quoting through eco ship or self service shipping platform and we're now quoting and booking shipments online with a select group of SMB clients.
We anticipate a broader scale roll out the first half a 2020 as well as offer an automated truckload quoting via direct connection to larger shippers.
We've also continued to enhance echo driver carrier portal and mobile App Q4, when able to our relationship carriers with access to our open board combined with a proactive notification system to alert carriers of loads likely to be desirable and their network on top of that we launched the care Awards program designed to attract new carriers to our network in the hands the benefits offer.
Door partners. These capabilities have been well received and we're seeing increased activity in terms of Echo drive usage mobile downloads active searches and bell offers and bookings.
Lastly, we continue to improve electronic tracking complex. The majority of our loads are seeking location updates and were brought in access to data online via eco ship into direct data exchange with large shipper.
Shippers for use in their visibility solutions.
Turning to LTL, we generated total revenue of 159 million in Q4, a decline of 3% compared to the prior year, our LTL shipment volume was down 2% well revenue per shipment was down 1%. The decline in LTL volume was due to our managed transportation business as we had a significant decline from a large retail clients was a few other specific.
Customer specific declines the transactional business showed volume gains of 3% and we've continued to see acceleration in January.
Automation on our LTL based business is also significant over 60% more than $100 million of our Q4 LTL business was quoted in booked online the remainders through interaction with our salespeople over 90% of our shipments are tendered automatically tour carriers via both Apiay media integrations. The majority of our invoices are process.
Without manual intervention.
So on the automation front excited about our future for two primary reasons first we're applying technology and data science to a shipper and carrier interactions and it's working making our people more efficient and enabling us to leverage our network a profitable way, while we deliver exceptional service second we're not all the way there yet which means continued improvements.
And the capabilities and price intelligence will drive further adoption you anticipated productivity gains over the next several years will be so substantial.
Turning to slide five or transactional revenue of 411 million declined 8% driven primarily from the decrease in truckload rates or sales productivity as measured by transactional volume over full time sales equivalents improved by 5% in Q4, I say that knowing we have excess capacity with our existing workforce to continue to grow.
And we remain committed to driving ongoing productivity increases as we deploy higher levels of automation. This strategy will benefit our employees, our shippers and carriers as we continue to drive efficiency in the aggregation of capacity.
In a complex market.
Our managed transportation revenue was 120 million in Q4 decrease of 10% over the prior year combination of lower truckload grades and the client specific business declines are referred to earlier with the primary drivers of the decrease we had a very successful fourth quarter in terms of new deal closings will be closed 15, new accounts with anticipated revenue of 59.
$1 on an annualized basis, our teams continue to do an outstanding job delivering client satisfaction.
Showing up in our ability to win in the marketplace.
We anticipate stronger growth in 2020 as much of this new business will come online and we expect the truckload rates to stabilize and likely increase in the second half of the year.
Turning to slide six we generated 89.7 million and that revenue and our net revenue margin was 16.9% was down 70 basis points compared to the prior year.
Our LTL margins were down modestly at eight basis points year over year, well, our truckload net revenue margin was down 86 basis points.
Margin decline in truckload was caused by pricing declines outpacing cost declines as our revenue per mile was down 13% no carry cost per mile word declined 12% carry cost per mile had been relatively flat over the last three quarters.
I'd like to now turn it over to Kyle through additional Q4 financial details afford outlook.
Thanks, Dave.
On page seven of the slides, you'll find a summary of our key operating statement line items Commission expense was 26.8 million in the fourth quarter of 2019, decreasing 14% year over year Commission expense was 29.9% of net revenue compared to 30.4%.
For the fourth quarter last year non-GAAP DNA expense was 45.3 million in the fourth quarter down 1% from the year ago fourth quarter of 2018 during the fourth quarter as well as the year, we continue to invest in technology and data science teams, but offset those increased costs with lower headcount throughout the rest of the organization.
As we continue to find ways to drive efficiencies through technology.
Depreciation expense was 6.7 million in the fourth quarter of 2019 up from six to 1.2 million in the year ago period, and the increase in depreciation continues to be associated with our investments in new technology development.
Cash interest was 1.3 million during the fourth quarter of 2019 compared to 1.5 million.
A year ago. The decrease is due to the lower amounts outstanding on our convertible debt during the quarter.
Our non-GAAP effective income tax rate was 27.5% for the fourth quarter of 2019, a rate was a little higher during the quarter due to a valuation reserve taken against an Illinois state tax credit.
As Doug Man mentioned non-GAAP fully diluted EPS was 26 cents.
Decreasing from 47 cents in the fourth quarter of 2018, and the primary differences between our GAAP and non-GAAP fully diluted EPS in the fourth quarter 2019, our 2.8 million of amortization of intangibles 1.6 million of noncash interest expense and 2.4 million of stock comp expense.
Slide eight contains cash flow on balance sheet data in the fourth quarter of 2019, we had free cash flow of 10.9 million and operating cash flow of 16 million or free cash flow for the full year was 60.6 million.
Capital expenditures totaled 5.1 million in the quarter compared to 4.6 million in the prior year and our Capex for the full year was about 24 million.
We ended the quarter with 34.6 million in cash and 287 million in accounts receivable at the ended the quarter. We had nothing drawn on our 350 million dollar ABL facility.
We did repurchase 176000 shares of our common stock during the quarter for 3.5 million or an average of $20.22 and this leaves us with approximately 20 million still available on our repurchase authorization.
Now I'll walk you through guidance for the first quarter and the full year 2020, which we've highlighted on slide nine but I first want to give so a couple of updates on the trends we've seen for the month of January.
Per day revenue is up 1%.
Over 2019, which is a solid increase from the down nine person that we saw during the fourth quarter truckload shipments per day or up 7% again, a strong start to the quarter when compared to the 1% growth we saw in the fourth quarter.
Net revenue margins are running at about 16.3% compared to the 16.9% we saw in the fourth quarter.
So now for the guidance for Q1, we expect to the following revenue of 530 to 570 million up 2% over the prior year at the midpoint.
Commission expense to be between 30 and 30.5%.
DNA costs to be between 46, and a half and 49 in the half million up 2% at the midpoint depreciation of about 6.9 million.
Cash interest of approximately 1.3 million a tax rate of approximately 25% in a share kind of approximately 26.6 million shares excluded from our non-GAAP calculations in the first quarter. We should have amortization of approximately 2.8 million noncash interest of about 1.6 million and stock compensation.
Expense of about 2.8 million, so now guidance for the full year 2020.
Revenue of 2.25 to 2.4, or 5 billion or up 7.5% at the midpoint.
Commission expense between 29 in three quarters and 30 in a quarter percent of net revenue.
DNA costs of between 197 in 207 million up 9% at the midpoint.
Depreciation of approximately 28 and a half million.
Cash interest of approximately 6 million. So a quick note on the cash interest expense. So if you recall our remaining convertible notes coming due at the end of April this year and our current plan is to use our ABL facility to pay off the remaining balance.
We're paying the cash interest rate of 2.5% on the convertible notes, which will move to an effective rate of approximately 3.5% at current rates. Starting in May. This also means that our noncash interest expense, which is separated out as a non-GAAP adjustments will go away at that time.
Our tax rate for full year should be approximately 25%.
And we expect to have again about 26.6 million shares outstanding for the full year.
So excluded from the non-GAAP calculations for 2020, we should have an amortization of 11 million noncash interest of 2.4 million and stock compensation of 10.6 million.
Lastly, I want to comment on his net revenue margin as we and other industry participants have felt over the last couple of years, the direction of truckload pricing and status of supply and demand and have a big impact on net revenue margins and how quickly they might move in either direction as Dave commented on earlier, we're seeing that in both our Q4 results and.
January results to date.
Having said that we think it's still appropriate to stick to guidance only on those areas, where we have more direct control while keeping you updated best we can on current trends in our net revenue margins.
The combination of some contracts resetting it lower pricing and rising carrier cross has put pressure on truckload margins and therefore, our overall net revenue margins if that continues or if the cost of capacity increases further we believe there will ultimately be more spot market freight available in the marketplace, which has historically had a positive impact on both our true.
Hello margins and volumes, we've ever think that our margins are largely reflection of where we are in the cycle and will move back on the other direction. After the market tightens in a more meaningful way.
I'd now like to turn it back over to Doug.
Thanks Kyle.
I would like to conclude our prepared remarks by acknowledging the hard work dedication and strong execution from all the folks on the echo team.
They bought through the trough of the freight cycle by continuing to provide the highest level of service to our clients and carriers.
This back was driven home recently, when we achieved the highest ever ratings in our annual client satisfaction survey.
We also surveyed our carriers. In addition to continue high marks for being the broker of choice and being easy to do business with.
We saw an acceleration in the willingness to adopt technology and I think this plays right into our strategy.
Our sales and operational people spend their time engaged and for general activities.
The first activity as managing relationships this includes selling and servicing clients and procuring capacity from our carriers.
The technology, we can deploy with any given partner depends entirely on their capabilities and or willingness to interact in an automated fashion.
In the absence of that desire capability, we rely on relationships.
The extent that their adoption accelerates our people can spend less time on administrative activities and more time on the relationships that manner.
While managing more relationships and more load volume per echo ft.
The second activity is pricing and booking freight.
This means deciding what price to quota shipper and.
In summary, simultaneously how much we will have to pay the carrier.
Inherent in this is the task of matching the right carriers capacity at the right by price with the right shippers load at the right sell price.
Historically in our industry. This was done via seasoned rate brokers with lots of tribal knowledge.
Increasingly over the past few years, we have assisted this process with technology and tools that make our people smarter and bring them up to speed faster.
The human interaction that combines relationships with negotiation has been important because it allows us to maximize our net revenue margin in all market conditions.
It is telling that some so called digital brokers can't seem to find a path to profitability and would even appear to have negative gross margins.
In contrast, I would remind you that echo has been profitable every year since 2006, when our revenues were $33 million.
Looking forward, our newest technology and data science will allow us to conduct business in a much more efficient way.
This is a slow deliberate transition of our business model that is made possible by shipper in carrier willingness to adopt technology and will only improve our profitability.
The third area of activity is administrative and includes rate tracking and payment processing.
This is an area, where we've already made a lot of progress through automation and we're seeing lower costs. As a result, we expect continued progress in this area in 2020.
And finally, our fourth activity is managing exceptions as you can imagine when you move thousands of shipments everyday using other people's trucks things can go wrong and if you want to provide the highest level of service to your customers you have to step in and excellent.
I believe that our technology roadmap will continue to bring efficiencies to exception management.
So in summary, I feel very good about that path that echo is on we weathered a tough market in 2019, and we're well prepared for what I believe will be a better part of the freight cycle in the second half from 2020.
We've never let up on our strategy, which includes enhancing our technology and I believe that we will be very well positioned to make a lot of pay when the Sun shines later this year and with that I'd like to open it up for questions.
Thank you NSR reminder, ladies and gentlemen to ask the question you would need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile Dick you in a roster.
And our first question is from Jason Segel with Cowen. Please go ahead. Your line is open.
Thank you operator.
Thank you gentlemen, appreciate you guys, taking the time.
He spent a lot of time, explaining automation on this call it much appreciated.
Give us a sense as we look out how we sheet.
You automation is this going to be.
Short productivity is it's going to be productivity, followed by some headcount reductions with increased scalability, because you're relying more on automation as a sense of how we should look at that as we move to user.
Jason I'll take a stab that I think you know as we continue to.
Automate many of the processes that Doug kind of highlighted and things that I highlighted.
We would anticipate to be able to grow the volume of the business faster than we grow the head count of the business simply put today we've got.
Close to 1600, or so sales and operational people in our business and.
We would anticipate to grow significantly without too meaningful of a headcount addition in those areas. So while we weren't we're not going to quantify kind of short and medium term I think over the next several years you'll see.
Our ability to drive and improved productivity, primarily as measured by volume.
The business relative to head count.
Overtime.
So so we're really looking it increased productivity, which will likely lead to lower cost but increased scalability.
Okay perfect.
And Doug I appreciate you.
Talking about.
Cyclical nature of the business because there are many who will argue that some of this the past let's call. It 12 months had been more structural in nature.
For the for the brokerage business have you really seen any impact from the the newer electronic entrance to the marketplace.
We see them in the marketplace, but I don't know that.
We see anything that we would classify as impacting margins are volumes.
We attribute everything to the cycle.
Okay, that's what I figured.
And last one on I'll turn it over to somebody else here.
I mentioned it about.
Increased insurance rate for some of the truckers, we've heard some skyrocketing numbers up 30, 40% from some carriers.
It was that affecting the brokerage industry and what should we expect from insurance cost for the brokers going forward.
Jason This is Kyle we hear the same same thing from carriers directly and then from the.
The the insurance brokers in insurance carriers that we that we talked to about the asset based carriers and those increases.
I can't speak for the brokerage community at large necessarily but I don't think it's impacted the brokerage community at all like it has the asset based carriers and it hasn't impacted us in that way, our our insurance costs have not had not increased in any any significant way over the last few years.
Do you think there's a danger that debt.
The brokerage industry might be next to the insurance company.
I think they assess the industry and I think there.
It's not it's not a different set of insurance providers that are covering.
Carriers and brokers necessarily so I think they have a very good grasp of.
Of the industry in the risks and thinking about.
Where they need to get their premium and cover their their costs than their losses. So I don't know that I.
Ken suggest what their plans are for the future, but we havent heard that from them to date.
Okay, gentlemen, I appreciate the time zones.
Thank you Jason.
Thank you. Our next question comes from Allison Landry with Credit Suisse. Please go ahead.
Thanks. Good afternoon. So just wanted to ask another question about the digital freight marketplace.
So what are some of your competitors had have talked about the level of scale that is required for the digital freight market place as being substantially higher relative to traditional brokerage. So just curious to get your thoughts on that and how you think this may impact industry net revenue margins overtime.
Well I think that.
It does take scale to be successful broker.
Whether your digital or not you've got to have.
The depth and a lot of different lanes, you've got to have the right carriers that have backhauls in those lanes.
In some cases, you have to have relationships with those carriers because they don't have technology capabilities. In other cases, you can connect with them electronically. So I think skills important regardless of what your go to market strategy is.
To the extent that technology brings more velocity and more transparency I suppose that it can overtime.
Reduced gross margins somewhat but.
I think you've heard a lot of the theme of our call is that we believe over time, we're going to become more efficient for those same reasons.
Right Okay.
And then could you just tell us what you expect to spend on technology and 2020 in terms of both Opex and Capex and if you could remind us what those figures arfert for 2019.
Sure. So for for 2019, we were around 23 million and we expect Capex in 2020 to be in the $25 million to $27 million range.
Okay is that all for technology or can you sort of parse that out what that specific piece Oh sure.
Sorry, Allison so I think that is primarily going to be technology. If you look at 2019 and the expectations for 2020.
We really don't have.
Expenses or capex that we need to make for building out.
Facilities, and we're a technology and people business, we have the facilities and infrastructure to to continue to build the business and have plenty of space for for our people. So really all that capex is related to his technology, probably in the neighborhood of 70% to 75% is in internally develops.
Off where or other software that comes from our partner providers and the rest of it is primarily related to.
Infrastructure and and hardware refresh.
Okay.
And then.
Just one quick one what do you think drove the the upswing in volumes in late December and the acceleration in January I think you maybe mentioned there was something to do with with the comparisons, but just helping kids.
Excuse me clarify that.
Yes, we didnt.
Talk a lot about the comparables, but that is a factor the comparable start to get a little bit easier, especially on the spot side. So I think that what we've got is on the one hand continued success on the contract side of the business and we're seeing kind of double digit growth on that front and we're starting to run into a little bit of a better easier comp call. It on the spot side.
So the growth rates are improving there is not as much of a deterrent against the overall growth rate of the business.
And I think thats kind of the that we haven't seen a fall off in any way of volumes, but thats I'd say, that's probably the bigger impact on the year over year growth rates.
Okay. That's helpful. Thank you guys.
Thank you also.
Thank you. Our next question is from Bascome majors with Susquehanna. Please go ahead.
Yes, thanks for taking my question.
Can we talk a little bit about the typical seasonality and your net revenue margins I know.
For Q1, Q is usually a bit will lift on a weaker market and cheaper cost capacity clearly.
The way this market is turned out his has pressured that relationship for you and your competitors that have already reported here, but.
Yes, the January number you put out there.
Trying to kind of walk that for does it feel like thing.
Starting to stabilize after some of the volatility you saw in December and January and within the first quarter.
Does the ended the quarter tend to be targeted in the beginning.
Yes, good okay.
A couple.
Thoughts I have on on that question good question.
You know typically.
All things being equal you do I think just kind of described it correctly you tend to see a little margin expansion in January February and ill contraction call at March through the summer months as volume picks up new contracts go live and you can get a little.
Contraction.
Due to the contract business.
Going live with new rates things of that nature now the thing that I think is.
Makes this a really hard.
Hard question and hard to model, sometimes is what's going to be more powerful the typical seasonal seasonality of the business or the actual longer term freight cycle I think in this case.
What I.
I think we've said and what we see is that the the freight cycle might outweigh some of those normal patterns of seasonality in that we've got compressed margins in January resulting from being in a balanced market for maybe.
A bit longer period of time last three quarters really rates haven't moved a whole lot.
Either on the on the bill rate side or the.
The cost side sharing a balanced market a little bit we are having success on the contract side of the business. So we've got some of that business coming online as well. So that's putting some pressure on margins and we would end the saw the saw the spot market hasn't hasn't moved a lot. So I think what we see is that as we move through.
We always caveat to say, we're not forecasting margins going forward because we've learned we can't do it very well so we're not going to try to do it but the.
If you are saying like what we see happening here is probably continued contraction or.
I will lower than last years level, and then were in more of a hey, let's see what happens when the summer hits, what happens to the spot market what happens to capacity what rates are adjusting which ones aren't so I think that I think in the near term, we expect a little bit a compression and then.
We'll see what happens as the year rolls on.
Bask modest add to that little bit of context for you you.
You remember back in October we were on our last call, we talked about running kind of low 17%. We ended up at 16.9% kind of indicates that margins were a little bit lower in November December than they were earlier in October and that same pressure kind of continued into January as you've seen.
But our margins just to break it down even a little bit further there were a little better in the back half a january so far than they were in the first half.
Probably a reflection of what you would've seen in.
The spot rates in the industry, where spot rates were a little bit higher early January so that put a little bit of pressure on that on the contract freight. So there's hope that adds a little bit of context as well.
So as we're diagnosing kind of whats put incremental pressure on on that particular number.
It sounds like it's much more about the cost of capacity than it is incremental rebidding of contractual pricing at this point is that fair.
Yes, I mean, I think it's a little bit of both I mean, yes, I'm not sure how that I'd wait those too but.
Yes, I think in the third piece of it bascome to throw in the Dave mentioned is your mix of spot versus contract and.
When when does the spot market come alive, a little bit more what causes that to happen.
Our other participants in the third party participants in the industry.
When when do they.
Turned down a little more freight than they than they have been.
Which puts things into the spot market.
Thank you for your time.
Thank you.
Thank you and our next question comes from Bruce Chan with Stifel. Please go ahead.
Bruce Please check your mute button.
Yes, Thank you operator and jets good evening and appreciate the time as always.
Another quick one on the digital marketplace.
We understand it some of the load boards are starting to get involved I mean that digital marketplace or digital booking, which maybe make sense and that seems like some of the natural extension of what they've been doing.
Trying to understand competitively what the impact of that is how do you think about that with regard to your business is that a threat for you is that an opportunity relative to maybe some of the new entrance.
Anyway that.
I guess I don't want to cast to wider than that because it could be specific companies that have different strategies that are more long term, but I think in terms of the digital load boards that have a.
Wider scale adoption I see that more as an opportunity for us I mean, there's many brokers carriers and participants in the market utilizing those load boards for a variety of reasons to access freight in general while they may provide the ability to book freight through a partner to asset.
Provider or a broker online they're not in essence.
Likely to try to move that freight trying to recover that freight if there's a problem and try to perform all the other freight management services that go with it which is huge huge part of what we do so I think it does.
But an opportunity to extend reach overtime and we see it that way more so than we see it as a as a threat.
Okay, great appreciate it.
Thank you. Our next question is from Stephanie Benjamin with Suntrust Robinson Humphrey. Please go ahead.
Hi, Thank you so much.
Let me ask question.
Hi, Stoping.
I just wanted to touch a little bit on the DNA guidance for the year I think at the midpoint you're looking.
Nice kind of high single digit increase year over year.
Two drivers of that.
Increase and and as we kind of look forward and kind of start to layer in somebody's and technology investments over the last couple of years, when we should start to see kind of leverage or improvements to margin. The overall model.
Overall, especially with.
Increases this year.
Sure Southern so that really that two big drivers of the increase in Gionee costs. This year. It's it's the continued investments in technology and data science.
And then the year over year headwinds from incentive comp costs.
Compared to a lower year in 2019.
So to give you a little more detail on that the tech in the data science, we invested approximately 43 million in technology in 2019, and some of which gets capitalized as we referenced on an earlier question, but we're increasing that number two around 50 million this year.
We continue to drive the initiatives, we've talked about earlier on the call.
Most of the rest of the increasing cost is related to the year over year headwinds and incentive comp.
Well, we have some other kind of typical annual increases, but those are really largely offset by the productivity improvements throughout the business that we referenced and thats, even as we intend to grow volumes pretty nicely this year.
In terms of how that plays out over time I think we've commented some already we see a lot of opportunities for efficiencies throughout the business in the sales side, the operation side and the back office side.
So we would expect to be able to get leverage over those efficiencies and drive increased profitability.
Through throughout the cycle, we certainly saw that in a better 2018, a little tougher in 2019, but as we go through a cycle, we expect to get incrementally better.
Got it that's it for me.
Much.
Thanks, Stephanie.
Thank you. Our next question comes from Jack Atkins with Stephens. Please go ahead.
Hey afternoon, guys you get weighed on for Jack Thanks for taking the questions.
Great.
Just wondering to start if you could talk about what you're seeing on the M&A front.
Give us an idea on what you're looking for.
CHS acquired Prime and have acquired taste.
Something in the contract logistics or value add consolidation space makes sense.
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Yes, I think we like the consolidation business Theres a lot of synergies with our core competencies. So I think those are interesting opportunities, where there's still opportunities for us too.
Look at.
Brokerage businesses that can go onto our technology platform and the great quickly and easily.
And then as we want to go outside the guardrails, a little bit there's opportunities to diversify.
Warehousing freight forwarding other things that are close to what we do but not exactly what we do.
Okay.
And then just one quick follow up.
As we look out to the second half 2020.
It seems to be setting up for a.
Pretty different market.
We are today.
Just wondering how you guys are approaching it season.
What your appetite is to start to take on additional contract freight at fixed rates at this point in the cycle.
Yes, I mean I think that.
I think your points valid in terms of Theres, a good chance that the market will change as the year goes on as we've gone through the year, though.
We've recognized the value of scale and density and we want to continue to grow our relationships with shippers.
So we're approaching the bid season, I think that with the with the intelligent mindset of trying to as we always do in essence understand the characteristics of our clients freight and look at our network and try to find good fits and strategic fits that makes sense and we've been able to do that with a kind of a service first mentality and.
As I mentioned in the and the and the.
Prepared remarks, you've seen our contract business grow double digits for the second half of the year. Our mix is 57% contract today. So it is a growing part of our business.
Yes, it's possible that we'll see.
Some some margin pressure if the market changes dramatically in the back half of 2020, but at the same time typically that pressure gets offset within an influx of spot business that helps us kind of manage that cycle. It's part of the you know the attractiveness of the business model that we do have is that you know theres a few counterbalancing effects.
And as you might expect our LTL and managed trans business, which is significant based that we have is typically not affected by that same dynamic.
All right that's it for me thanks, guys.
Thank you.
Thank you. Our next question comes from Jeff Kauffman with <unk> capital markets.
Okay. Thank you very much Hello, everybody.
So I just a lot of questions have been asked already I just wanted to ask some details here you spoke Kyle about the non-GAAP tax rate because your forecast as non-GAAP do you know how that translates into a GAAP tax rate should I take that at face value.
Yes, I don't have that in front of me the GAAP tax rate I can get that to you.
Okay round back with you.
So on the DNA side.
You mentioned, it's a smaller increase now, but a larger increase on a percent of net revenue basis. As we go through the year is that a function of anything going on within DNA or is that a function more of the declining net revenue margin that you were speaking about.
Jeff I missed the first part of your question what was it in relation to the DNA.
Well, if I look at the Gionee and take the midpoint on the cost increase and I'm going to throw the stock compensation in there.
Because I want to look out on a GAAP basis.
It seems like it's increasing on a percent of net revenue basis as we go through the year is there anything happening in DNA, causing that or is that more a function. As you were talking about the net revenue margins coming down.
Got it just because the market.
And you're referring to 2020 are you referring to 2019 2020.
Okay. So.
I think heart hard for me to compare it to the the net revenue numbers, because we haven't guided to a net revenue number or a.
Gross margin percentage.
Maybe it's that Youre your extrapolating extrapolating out to the current margin I.
I think when we talked about the continued investments that we plan to make in technology and data science. That's that's driving those increases so I think that's important.
I think if when we think about how the market might play out for the year as we've talked about the different things shifting and the pressures on.
The cost of capacity, they're likely to come I think we're expecting that net revenue would grow throughout the year.
From where we would be in Q1.
Or where we were in in Q4, but but im not sure how to answer without having some sort of guidance out there for net revenue as a percentage okay. We'll couldn't her to ask right [laughter].
And then thank you for clarifying about the use of the credit line for the convertible notes on the interest guidance that was very helpful.
Hey outside of some of the January trends you spoke about.
And getting back to I think Jason.
His question about cyclical versus secular.
How does this cycle feel relative to say the last couple mini cycles that we've had to endure the last one being just a few years ago. It feels like there was the correction in.
Spot and contractual revenues happen faster this cycle, maybe I'm wrong, but.
It sounds to me like you're feeling the processes healing and you're seeing some cyclical green shoots.
Yes, I think Thats right. This is Doug.
I had to find a comparable timeframe I would probably look at the last part of 2016 in the first part of 2017, <unk> I think the conditions conditions feel pretty similar to that.
The only thing I would add is and is obviously 2018 was such a dramatic increase and with such a hot call it or tight capacity and ill.
Catalysts catalyst prices rose really quickly and and you know.
Pretty quickly we found ourselves in a world of excess capacity and I feel like that the change was a little more dramatic in this cycle and so as it runs its course it be it starts to look and feel a little bit more normal.
HM Okay, well, that's all my questions. Thank you.
Thanks, Joe.
Thank you.
Our next question comes from Kevin Steinke.
Research. Please go ahead.
Hey, good afternoon, just wanted to ask about your sales force hiring plans for 2020.
In light of it sounds like an expectation that.
The market is going to improve as the year progresses.
Yes, Kevin we.
Our hiring plans will look a lot like.
2019, which means that.
Internally, we're kinda estimating that our sales head count remains pretty static throughout the year. Obviously, you know it may be up or down depending on attrition and the timing of bringing in some new classes and things of that nature. So we'll still we're still going to proceed and bring in significant amount of new new folks, but not to the point where.
Are we would anticipate growing the head count by say 100, 125 people like Weve.
Foreshadowed in the past.
Okay. That's helpful. And then the second question for me in terms of the.
Revenue guidance for 2020.
The range top to bottom implies 3% to 12% growth maybe just touch on.
The factors that.
You are thinking about when you think about the bottom end to the top end of that range. I mean is just kind of maybe how the market plays out.
That's that's going to be the difference and where you could potentially end up in that range.
Yes.
Good question, Kevin I think it's it's a combination of.
Like you say, how the market plays out.
What sort of volumes are available in the spot market and then what happens with rates. So that I think as you as you say that full year guidance points, you do about a 7.5% growth at the midpoint.
Which clearly indicates our expectation for acceleration in growth after the first quarter since our first quarter guidance is 2% at the at the midpoint.
The year over year comps get quite a bit easier on the on the revenue per load metric in truckload.
Starting in Q2, and so kind of an all in basis, we could depending on where rates go from here in the spot market, we could see it actually see an increase in revenue per load.
Sometime in the second quarter.
And the midpoint of the range, we're thinking about kind of mid to high single digit growth in shipments for the full year.
Okay. That's very helpful. Thanks for taking the questions.
Thanks, Kevin.
Thank you.
Question comes from David Campbell with Thompson Davis and company. Please go ahead.
Yes, hi, Thanks for taking my question I doubt that just any impact, but just wanted to make sure.
What about the virus in China.
Well, we've seen any impact on.
Manufacturing.
That's a well when do you expect any to be have any impact in the first quarter.
No David we really haven't seen anything.
Obviously, the there's all the chatter in the news and.
Seemed a lot of the research reports put out by the analysts.
But we havent heard from our shippers or cares anything thats impacting them.
Thats impacting us.
Yes.
I mean is that is that.
I mean do your manufacturing they see or businesses that is that a significant part of your business or is it.
Well clearly another.
We do have a lot of manufacturing and industrial type products that we all but to the extent that were predominantly a north American transportation company.
You know, even though some of it might originate in the Pacific rim for the time, we get our hands on it it's sitting in a U.S. warehouse somewhere so we don't really have a lot of exposure to the end.
Import market directly.
Tends to be more indirectly and like I said, we haven't heard from any any of our customers that ship those types of products that their inventories are being impacted.
Again, Kyle He said just first quarter gross first Warner margin was 16.3% is that what you said the first quarter.
Just to clarify that's what the margin the gross margin is through January.
We didnt given.
Specific expectation for the full quarter, though.
You didn't estimate that now okay correct, yeah, we didnt, we don't just a reminder, we don't give the guidance on.
The gross margin, but but it is running around 16.3 for January.
Right Okay.
Okay. Thank you very much at all my questions.
Thanks, David.
Thank you.
Im not showing any further questions from the Q I would like to turn the call back to talk Blogrunner, Chairman and CEO for his final remarks.
Thanks for joining us today I'm pleased with how we're executing on a tough market and as we.
As indicated in this call, we anticipate things will get better sometime in 2020, and we will have done our work.
Be prepared to make the most of it so thanks for joining us and we'll talk to you next quarter.
And with that ladies and gentlemen, we thank you for participating in today's conference.
May now disconnect.
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