Echo Global Logistics Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: Echo Global (ECHO)

Echo Global Logistics (NASDAQ:ECHO)

Q1 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Suzanne Karpick - Vice President of Investor Relations

Douglas R. Waggoner - Chief Executive Officer and Director

David B. Menzel - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Jack Atkins - Stephens Inc., Research Division

John R. Mims - FBR Capital Markets & Co., Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

William J. Greene - Morgan Stanley, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

David P. Campbell - Thompson, Davis & Company

Matthew Young - Morningstar Inc., Research Division

Operator

Thank you for standing by, and welcome to the Echo Global Logistics First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, April 25, 2013. Now it is my pleasure to turn the call over to Suzanne Karpick, Vice President, Investor Relations. Please go ahead.

Suzanne Karpick

Thank you for joining us today on our first quarter 2013 earnings call. Hosting the call are Doug Waggoner, Chief Executive Officer, and Dave Menzel, Chief Financial Officer.

We've 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 at 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 for the quarter, both of which are also posted on our website.

Finally, I would like to announce that we will be hosting an Investor Day on Monday, June 10. A press release containing additional information about this program will be forthcoming shortly. With that, I'd like to turn the call over to Doug.

Douglas R. Waggoner

Thanks, Suzanne. I'd like to kick off today's call by highlighting another quarter of double-digit growth in revenue and earnings. We delivered $204 million in total revenue in Q1, which was 21% ahead of the prior year and $3.5 million in non-GAAP net income, which was 11% ahead of the prior year.

While our growth rates remain strong, our revenue did come in slightly below our internal expectations, due in part to a sluggish overall economic environment and weak intermodal demand in markets where our recently acquired Sharp Freight unit operates.

Additionally, we have seen some impact due to the timing in our ramp-up of additional staff to our inside sales team. Before we cover operating performance in greater detail, I would first like to highlight the acquisition of Open Mile, which we completed on March 11.

Open Mile is a technology-based truckload brokerage that focused exclusively on the Northeast. Specifically, this acquisition delivers cutting-edge technology that, in concert with our existing systems, helps to bring additional efficiencies to our truckload operations and carry procurement capabilities. We're enthusiastic about the talent we've acquired in connection with this transaction.

The leadership of Open Mile has already been deployed within our organization to help us achieve our near- and long-term growth objectives. The acquisition also added a group of talented people to our sales, truckload sourcing, operations and IT development teams.

All in, we added 22 new employees in connection with this transaction. Open Mile had an annual revenue run rate of about $14 million and was making investments to drive growth but lacked the scale to operate profitably.

We acquired the assets of this business for $2 million in cash, and there are no contingent obligations associated with the acquisition. We've already combined the Open Mile Boston office with our existing Boston location and are implementing cost synergies to leverage the profitability of our existing Boston branch.

We're very excited about the additional capabilities we have acquired in this transaction.

So now, let's move on to our first quarter results. On Page 3 of the supplemental materials, the key metrics and results are as follows. Total revenue increased 21.0% to $204 million in the first quarter of 2013 from the first quarter of 2012. The increase was driven by growth in both our Transactional and Enterprise businesses.

Net revenue increased 17.7% to $38.5 million from the first quarter of 2012, and this increase was driven by the overall growth of our business.

Our net revenue margin was 18.9%, a 53-basis-point decrease on a year-over-year basis. This compression was largely attributable to a mix shift as our LTL business represented a smaller percentage and our intermodal business represented a larger percentage of our overall revenue in Q1 2013 when compared to the same period in 2012.

Specifically, our LTL business was 46.3% of total revenue in Q1 of '12 and 42.4% of total revenue in Q1 of '13, while our intermodal business increased from 3.9% to 8.0% during the same period. Non-GAAP operating income increased 11.5% to $5.6 million from the first quarter of 2012, driven by the year-over-year increase in the net revenue and offset by higher G&A.

Non-GAAP net income increased 11.2% from the first quarter of 2012 to $3.5 million. Non-GAAP fully diluted EPS was $0.15 in the first quarter.

And now, I'd like to turn the call over to Dave.

David B. Menzel

Thanks, Doug. Please turn to Slide 4, which summarizes revenue by mode of transportation.

As you can see, our LTL revenue increased 11% year-over-year to $86.6 million, driven by an 11.1% increase in volume, and rates were relatively flat.

Our truckload revenue increased 22% year-over-year to $88.2 million for the quarter. Truckload revenue growth was driven by an 18.2% increase in volume and a 3.2% increase in rates.

Our intermodal revenue increased 146.8% to a total of $16.3 million for the quarter. This growth was driven primarily by the acquisition of Sharp Freight in October 2012.

Other revenue increased 11% in the first quarter over the same period in 2012, totaling $13 million. Other revenue includes Small Parcel and International revenue, and the growth was driven by increases in both modes within our enterprise clients.

Please turn to Slide 5 for a breakdown of revenue by client type. Our transactional revenue increased 23.5% year-over-year, contributing $143.1 million for the quarter. This increase was due to both an increase in the number of transactional salespeople and an increase in productivity.

Our sales force includes client sales, carrier sales, as well as operation staff dedicated to supporting our transactional sales organization.

Our sales force totaled 147 at quarter end, increasing by 99 people over the last year. Our average transactional revenue per salesperson increased 7.9% on a year-over-year basis.

Sequentially, our sales force declined by 23 people due to attrition and slower hiring in the first quarter.

Our revenue from enterprise clients increased 15.5% year-over-year, contributing $60.9 million in revenue in the first quarter of 2013. This increase was primarily due to the growth in the number of clients.

Turning to Slide 6, I'll review our net revenue and net revenue margin. Net revenue increased by 17.7% year-over-year to a total of $38.5 million in the first quarter.

Our net revenue margin was 18.9% in the first quarter, representing a 53-basis-point decrease over the same period in 2012.

As we've discussed in the past, our net revenue margin is a function of client mix, mode mix and changing market rates. In the first quarter of 2013, we saw expansion in our truckload net revenue margins and compression in our LTL and intermodal net revenue margins.

Consequently, the main driver of net revenue margin compression was mix.

If you turn to Page 7 of the slide we'll review our operating expenses and operating income. Commission expense was $9.9 million in the first quarter, increasing 5.1% year-over-year. Commission expense was 25.9% of net revenue, which was a 311 point base of decrease over Q1 2012.

As discussed last quarter, this decrease is attributable to modest adjustments in our commission plans. These adjustments reflect the increased operational support we now provide our sales force, which we believe will better enable them to continue to grow their business and increase their productivity while improving client service.

SG&A expense was $20.4 million in the first quarter of 2013, up 25.8% from the first quarter of 2012. This increase was due to the acquisition of Sharp Freight, the additional operating support I mentioned previously, which has essentially shifted a portion of our commission expense to SG&A, our investments in growing our truckload business and longer training cycles for our salespeople. The acquisition of Open Mile increased G&A expense by $200,000 in Q1 2013.

Depreciation and amortization expense was $2.6 million in the first quarter of 2013, a 28.2% increase year-over-year. This increase is driven from higher levels of investment in our proprietary technology, resulting to increases in the depreciation of capitalized software and increased amortization expense attributable to the acquisition of Sharp Freight.

Our effective income tax rate was 37.4% for the quarter -- first quarter of 2013 compared to 36.9% in the prior year. Our effective tax rate was modestly lower than we previously guided for the full year due to timing issues related to the reenactment of the research and development tax credit. We anticipate our rate to be between 38% and 38.5% for the rest of the year.

As Doug mentioned, non-GAAP net income was $3.5 million for the quarter, an increase of 11.3% over the first quarter in 2012.

Non-GAAP EPS was $0.15 for the quarter. Our GAAP EPS was $0.13 for the quarter as we incurred a $759,000 charge to increase our contingent consideration payable obligation. This increase was primarily attributable to improved performance in 2 of our acquired branches that are operating fairly close to their respective earn-out targets.

Slide 8 contains selected cash flow and balance sheet data. In Q1 2013, we generated $6.2 million in positive operating cash flow. This was an increase of 41.1% over the first quarter of 2012.

Capital expenditures totaled $2.2 million in the quarter, the same outlay as in the first quarter of 2012.

Acquisition-related payments during the quarter included a $2 million outlay for the acquisition of Open Mile, and we don't make any payments under our contingent obligations related to prior acquisitions.

Our contingent obligation to sellers is reflected on our balance sheet at $11.4 million, which is its estimated fair value. As I mentioned previously, this obligation was increased during the quarter by $759,000. As of March 31, 2013, we had $44.1 million in cash.

To the first few weeks of April 2013, our revenue was up approximately 18% over the same period in the prior year. As mentioned in our press release, we are updating our annual guidance to reflect our performance and overall economic conditions experienced in the first 4 months of the year. As such, we anticipate gross revenue in the range of $900 million to $940 million, and fully diluted EPS in the range of $0.78 to $0.84. With that, I would like to turn it back over to Doug.

Douglas R. Waggoner

Thanks, Dave. I want to remind everybody that our outlook for the remainder of 2013 does not include the impact of any future acquisitions. Despite our slightly more conservative outlook for the remainder of the year, we remain very excited about our ability to continue to grow and generate improved operating leverage over the long term.

We recognize that our extension of the time line to train our new employees has resulted in a modest slowdown in our growth trajectory, but we believe this is temporary. We have new reps hitting the ground and their productivity levels are exceeding those of reps with similar tenure over the past few years. And this is strong evidence that our commitment to training will be effective over the long term, and in fact, reduce our attrition rates as our people are better prepared to compete in this market.

Additionally, we continue to sign new enterprise accounts at a consistent rate, and our client satisfaction and renewal rates remain high.

We're having success building and growing our truckload business, and we have a solid intermodal offering that enables us to deliver effective solutions to our clients. We continue to invest in our proprietary technology, and the acquisition of Open Mile will accelerate our advantage in the marketplace. I also want to address the long-term targets for revenue growth and operating margin expansion that we set in June of 2011 and reaffirmed in June of 2012. As you recall, we targeted gross revenue in the range of $1.3 billion to $1.5 billion, and non-GAAP operating margins, as a percent of net revenue, in the range of 30% to 35% by 2015.

The non-GAAP measures are before changes and contingent consideration payable. The targets that we set are goals or objectives, they're not explicit guidance and they are based on a set of assumptions about how our business will progress through 2015, including assumptions related to a combination of organic growth and our ability to grow through acquisitions.

Since we reaffirmed those targets in 2012, our actual organic growth has been slightly lower than anticipated, while our acquisition-related growth has slightly exceeded expectations. Consequently, we are generally on track with respect to our top line 2015 target.

From an operating margin perspective, however, the investments we are making in our people and additional resources deployed against truckload and intermodal opportunities have offset operating leverage gain from increased scale.

Additionally, truckload and intermodal growth resulted in an expected decline in revenue margins -- net revenue margins, which have the effect of lowering operating margins. Despite this impact, and as previously indicated, we expect to begin to see operating margin improvements in the back half of 2013, and that such margins will continue to improve as we grow.

We're planning to update our targets at our upcoming Investor Day in June. It is likely that we will extend the time frame or lower our 2015 operating margin target in light of these facts.

Of course, our achievement of these objectives will depend on our execution, the impact of specific acquisitions that we complete, additional investments in our business that we may choose to make, as well as external market conditions. We remain confident in the market opportunity for Echo, and we remain very optimistic about both our long-term growth trajectory and our ability to compete successfully in this large and growing market as we take the complicated out of transportation management for our clients.

I would like to remind everyone that we will host our third annual Investor Day in our corporate offices on June 10, and I hope that you will attend. And with that, I'll open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jack Atkins from Stephens.

Jack Atkins - Stephens Inc., Research Division

So I guess just to start off, Dave, just to go back to the sales employees and agents breakout, because I missed some of the numbers there, could you maybe go over the number of sales employees you had at the end of the quarter and the number of agents, just so we can have that breakout?

David B. Menzel

Sure. Hang on just one second so I can get you those actual numbers. We did not put that in the press release. I don't think we've typically done that. The actual sales employee headcount is 601, and the agent sales headcount is 246, totaling 847.

Jack Atkins - Stephens Inc., Research Division

Okay, great. And when we think about the number of those 601 sales employees that are currently in the training program versus the number that have just recently graduated, could you maybe give us a sense for those numbers, just so we can kind of understand the ramp that we're going to expect to see in the back half of the year?

David B. Menzel

Yes, we've got -- at the end of the quarter, we had, I think, 30 people in the training program. And we had, I don't have an exact figure handy, but we had graduated, so to speak, or brought out to the sales floor in the neighborhood of 100 to 120 new sales reps that came out of the program between December 31 and March 31. So that's quite a large amount of people that joined the sales force, so to speak, in actual selling capacity in the first quarter.

Jack Atkins - Stephens Inc., Research Division

Okay, okay. That's really helpful. And then, I guess, maybe if you could just kind of, Doug, expand a little bit on your comments around the productivity improvements that you've seen thus far with the guys that have graduated from the sales force, guys and gals, I guess, that have graduated from the new sales force training program. Just if you could expand on that, just sort of quantify the level of improvement that you've seen so far, I think that would be helpful.

Douglas R. Waggoner

Sure. So if we look at the people that have graduated from the new training program, they range in tenure from as little as 1 month to as much as 9 months. And the farther that you go out, the fewer there are in that category. But we're very happy with what we're seeing in terms of increased productivity. After 1 month, compared to historical averages that we're seeing, productivity that's 7% greater than what we experienced in 2011, all the way up to -- in 6 months, we're seeing 32% improvement in productivity. So we're confident that this was a good decision, we think that it's got long-term ROI and it seems that the early indications on the productivity are bearing that out.

Jack Atkins - Stephens Inc., Research Division

Okay, great. And then last question for me and I'll jump back in the queue. But when you think about the revision to both the revenue and the earnings guidance for 2013, how much of that was related to the macroeconomy being a little bit softer than expected so far this year, and then maybe some other items that are flowing through there? Just to sort of help us understand the different puts and takes there if you could.

David B. Menzel

Sure. I would say it's difficult to be precise with that analysis, but I would say at least half of that is macroeconomy, maybe a little bit more than half. And I can actually break that down a little bit for you. If you look at the change in the revenue guidance, the -- we reduced our guidance roughly about $45 million from the midpoint of the range. And that $45 million, $15 million of it is directly attributable to our recently acquired business, Sharp, which had a pretty strong fourth quarter and a pretty weak first quarter. And as Doug mentioned in his comments, we believe a lot of that has been due to excess capacity in the markets that he operates, typically operates. And so we had a little bit of growth forecasted for that business, and at the current stage, we've decided to take that down pretty conservatively. And that represented about a $15 million reduction in revenue. So that was a pretty big piece of it. And the second big piece was related actually to our inside sales. And it has a little bit to do with the timing and the impact of having new sales employees hit the floor, didn't have a lot of new sales. Client-facing salespeople hit the floor in the first half -- or the second half, I should say, of 2012. And also, we added a lot of operating support, which was anticipated to boost productivity of more experienced reps. It did, in fact, do that, but probably not quite to the level that we had hoped. So we brought that piece of our revenue forecast down. Now, some of that may be economic and it's hard to peel that back and decide how much of that is our own, maybe shifting our model a little bit and how much of that is the economy. But based on the numbers that we're seeing, we think it's prudent to pull it back. But as Doug mentioned earlier, we remain very confident that as those reps continue to mature and as our business model continues to evolve in this way, that we've made the changes that we've made and we're going to get good growth, certainly in the second half of the year out of the people that are hitting the floor and starting to grow now.

Operator

Our next question comes from John Mims of FBR Capital Markets.

John R. Mims - FBR Capital Markets & Co., Research Division

Let me just ask that same question a little bit or expand that question a bit. Do you need to see or are you expecting any kind of peak season or ramp-up in volumes in the back half of the year to hit these numbers? Or is that more a product of just the additional salespeople coming on? I'm just trying to get a sense...

David B. Menzel

[indiscernible] of the additional salespeople come on. We'd expect some level of normal seasonality, I would say, consistent with what we saw in 2012. So that's probably the baseline for our expectation, but we're not -- our forecast or our thinking is not that there's a superstrong economic rebound in the second half of the year.

Douglas R. Waggoner

And John, I would just add, we haven't seen a peak seasons in 6 years, so we're not planning on one anytime soon.

John R. Mims - FBR Capital Markets & Co., Research Division

Right, right. Okay, that's helpful. Yes, that's what I was afraid of. I didn't want to -- that's what I was trying to gauge if there was a -- if there could be another step-down if '13 ends up looking a lot like '12. Let's see, on the enterprise side, did you say the number of enterprise clients that you have now or added in the quarter?

Douglas R. Waggoner

We added 7 new enterprise accounts in the quarter, and we had a 100% renewal, and in fact, we renewed our #1 and #2 accounts in late March and early April.

John R. Mims - FBR Capital Markets & Co., Research Division

So you're at 210 now?

Douglas R. Waggoner

That's correct.

John R. Mims - FBR Capital Markets & Co., Research Division

Great. Okay, cool. Okay, I had 211, that's perfect. Is that -- when you look at enterprise now in this kind of sluggish environment, I mean is it easier to attract some of these guys when you're talking to new enterprise customers? They're trying to save more given the sluggish environment, et cetera. Is that an easier product to sell in this environment or is it getting tougher as people are focused more on price?

Douglas R. Waggoner

Well, for us, John, it's really -- we grow that segment pretty consistently in good times and bad. And I think it's really just a function -- we're convincing companies generally to outsource that have never outsourced before. So it's really about getting them to make that decision, showing that we add value. And I suppose there are cases where it's easier in a tough economy because people are looking for cost savings, but our growth rate has been pretty consistent throughout.

John R. Mims - FBR Capital Markets & Co., Research Division

Right. Okay. No, that's fair. And then, Dave, do you mind -- I missed part of your comments as far as the directional comments on the different segments in terms of net revenue margin on LTL and TL?

David B. Menzel

Sure. I indicated that we had an improvement in truckload gross margins year-over-year. And that LTL margins and intermodal margins were actually down slightly year-over-year.

John R. Mims - FBR Capital Markets & Co., Research Division

How much was TL down? And was that -- or how much has TL improved and how was it versus fourth quarter?

David B. Menzel

Let's see here. Gross margin in truckload -- hang on just one second. The -- we were up both sequentially by roughly -- we're up sequentially by, I think, 43 basis points, up year-over-year by 12 basis points. And in the LTL, we were down both sequentially and year-over-year as well.

John R. Mims - FBR Capital Markets & Co., Research Division

Okay. And then the TL market, is that more a product of different accounts that you're targeting or is something -- have you seen a shift in the environment?

David B. Menzel

Well, I think that the -- I wouldn't say it's different accounts. I think that we're doing the same thing. I think that we're getting better with the way we operate our truckload business. We like to think that we're making improvements in our sourcing capabilities and our -- the network that we're running. But at the same time, it did seem a little soft in the first quarter this year. So I think that access to capacity was probably easier.

John R. Mims - FBR Capital Markets & Co., Research Division

Right. Okay. I'm just trying to get a sense, I mean most people have been saying margins were still terrible and yours are getting better. So I don't know if that's -- if there's more to read into that from an environmental standpoint or just you're all doing a good job. And just lastly, on the margins, then I'll get back in it. Directionally, from fourth quarter to first quarter, margins were better, 50 basis points, I think, if I'm right. Is that just a product of mix or were there any noticeable changes from fourth quarter into first quarter -- we touched on TL, but just across the franchise? And then any comment that you could carry on that into April, kind of what you're seeing from a margin trajectory would be helpful.

David B. Menzel

So I would just say it's normal seasonality, John. Things tend to loosen up a little bit in the first quarter, especially in January and February. And while we don't-- we're not -- we don't specifically want to comment on what we've seen in April from a margin perspective, but I would anticipate things to tighten up in the second quarter from a sequential perspective, as they typically do. So that would be my expectation. But again, it's hard to predict.

John R. Mims - FBR Capital Markets & Co., Research Division

Right. Actually, let me throw one more in there and then I'll jump off. But on that same trend, when you're looking at the new guidance for '13, is it safe to assume then just you're kind of a little bit of mix shift, a little bit of seasonality in the net revenue margin? And the rest -- at the midpoint, I think, you need to get some margin improvement somewhere. So you should be able to see some real EBIT margin improvement in the back half and just sort of flattish net revenue margin?

David B. Menzel

That's exactly correct. I think that the net revenue margins, you'd expect that at a minimum, the mix shift impact. And then on the operating margins, you'd expect, as we've guided, to start to see operating leverage improvements in the back half of the year as we -- our growth rates again start to exceed -- growth rates and -- gross and net revenue exceed that of our operating costs.

Operator

Our next question comes from Nate Brochmann of William Blair & Company.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I wanted to talk a little bit -- just obviously, totally understand about some of the original assumptions coming down, and certainly, the macro hasn't gotten any better, remains pretty sluggish. But obviously, a lot of the brokers out there are talking about competition. And clearly, I know the niche that you guys are targeting, that small-medium size shipper niche is kind of a wide open space. But can you talk about the competitive dynamics in terms of whether you're seeing any change there in terms of running up to -- against some people that might make it a little bit harder to just gain the level of share that maybe you gained over the course of the last 12 months? And if that's having any impact, again, I think relative to John's comments, you guys are doing great on the gross margin side in TL. But whether that's having any impact at all in terms of whether it's a little bit -- whether you got to make an extra phone call to find an extra carrier or not to cover a load?

Douglas R. Waggoner

No, Nate, I mean, that's one of the reasons why we like our target market, which is small and midsize companies. There's no shortage of opportunities. In our case, it's more how do we deploy against the opportunity. And we've talked about sales headcount and how that impacted revenue in Q1, but we all know that, that's ramping up. There is a lot of competition. There's always been a lot of competition, and we win some and we lose some, but it's a numbers game, and as long as we're putting up the effort and the execution, we feel confident we can continue to grow in our chosen market.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. And then going back to the Sharp issue of some of the growth coming off of what you expected, could you kind of remind us a little bit more specifically about the markets that, that serves and what might have fallen off? And if there's a game plan in terms of organically to kind of rebuild that in terms of above and beyond whatever the macro's doing?

Douglas R. Waggoner

So Sharp operates out of Southern California. They offer a very high-service, high-value product to their customers. They've always been good at finding capacity when it was tough to find. And frankly, the market out there coming off the West Coast has been a little bit loose lately, and so there's been more competition for the loads on intermodal. And it's caused them to probably have more competition in that segment of the market than what they traditionally experience. We have an East Coast intermodal office in Rochester that really hasn't experienced that same thing. So it seems to be more of a regional impact.

David B. Menzel

So just to [indiscernible] add, to the second part of your question on the strategy. So I think that one of the things that we mentioned last quarter when we -- after the acquisition of Sharp is that we're in the process of integrating and utilizing some of their intermodal technology and integrating it into our core technology. And we hope to complete that in the second half of this year. And when we do that, we think we're going to be much better positioned to roll out kind of intermodal sales to our existing sales force of over 800 people. So today, Sharp's operating to some extent as kind of a stand-alone business with their existing clients. We're doing some work to cross-sell, but -- and support our existing large enterprise clients with their capabilities. But we really haven't turned on, so to speak, our transactional sales force to the opportunity. And the strategy for us will be to do that probably in the back half of this year. And we would expect that would have positive impact in 2014 and beyond.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay, that's helpful. And then just final question and I'll turn it over. But in terms of your hiring plans for the rest of the year, could you update us with kind of what your current thinking is there, where you stand and whether kind of maybe the prolonged ramp, a little bit relative to your expectations, kind of on the training program changes any of those expectations?

David B. Menzel

Actually, it doesn't change them. We intend to continue to target adding 100 to 120 people throughout the course of the year. I do -- I would say that -- I've mentioned this in the past that the training program combined with the ramp-up that we did in 2012 resulted in our G&A costs increasing. And so that cost is kind of built into the comparables, if you will, in the second half of the year, but it's not fully baked into the first half of 2013. So I don't see that continued ramp-up materially driving up our G&A costs in 2013. But we -- and that's part of the reason we should -- we anticipate seeing some operating leverage gains as we move into the second half of the year. So the game plan is to continue to add to our sales organization. And today, it's to continue to do so at a fairly consistent pace.

Operator

Our next question comes from William Greene of Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

I was curious since you lowered your revenue targets by $40-ish million or so. In theory, you could make that up with acquisitions, but do you look at acquisitions of that size? Or is that a little bit bigger than what you're typically looking at?

Douglas R. Waggoner

Well, we've done deals that are smaller than that, we've done deals that are bigger than that. So we're continuing to look at a pipeline of opportunities that's very similar to what we've had in the past, and I would say there are deals on both sides of that number.

William J. Greene - Morgan Stanley, Research Division

So is -- I guess, I was sort of under the impression that most of the brokerages out there were really quite a bit smaller. But I guess what you're saying is you have a pipeline that has enough in there that in theory, in 3 or 4 months, we could wake up and you'd basically return to this level.

Douglas R. Waggoner

Yes.

William J. Greene - Morgan Stanley, Research Division

Okay. And when you sort of look out there at the landscape, do you see anything that is sort of transformative? In other words, maybe would even require sort of a merger, but you look at it and say, this could really sort of catapult us into a whole new realm? Or is it really just going to continue to be sort of tuck-ins?

Douglas R. Waggoner

Well, our strategy thus far has been tuck-ins, and we like the conservative nature of those. They're easy to integrate, and we continue to look at those deals. As we get more experienced doing acquisitions, and we've done 16 of them now, we do look at bigger opportunities that could be transformative. But that's really a little outside our bailiwick, and we'll always look at them. And if we think they make sense, we'll consider them, but we do like the small tuck-ins that give us a book of business, a sales force and geographic coverage.

William J. Greene - Morgan Stanley, Research Division

Yes. Obviously, if something came at you, you'd have to sort of look at it. I'm curious, how do you feel about the concept of mergers? Is that too much to bite off for you? Or if you'd just sort of say like we would look at it if it came?

Douglas R. Waggoner

Yes, we'd look at it if it came, but we haven't really given it any thoughts.

William J. Greene - Morgan Stanley, Research Division

Okay. Fair enough, fair enough. Can I just ask one -- sort of changing topics here. We know hours of service coming in this summer, or we assume it is. How do you think that may affect your second half? Do we have to worry about that having a negative impact on the gross margins?

Douglas R. Waggoner

I don't think so. I don't see an economic recovery coming along that would exacerbate the hours of service regulations. So I think as it rolls in, the effect will be minimal in the short term.

Operator

Our next question comes from Chris Ceraso of Credit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

So okay, let's talk about my favorite topic, Dave, the G&A leverage, which was negative 338 basis points in the quarter. Map out for me, if you can, the progression here. Is it still a big negative in Q2? You mentioned in response to a previous question that the comps on that front get easier in the back half. So will we actually see that become a positive number in the back half?

David B. Menzel

Yes. I believe that it will approach that. You've got to remember, I look at operating expenses in total, so I don't have a perfect breakout of how much the G&A versus commission, because our commission rates are down a decent amount. But I would say that I believe G&A, you'll start to see a trend, that G&A is starting to come down as a percentage of net revenue. We obviously have had a trend in the other direction, partially due to some shifting of -- out of commission expense and into G&A, and also partially due to the investments we've made in the training and in the operation support, which have really come out in front of sales to some extent. To the extent that the training investment is 100% in front of sales growth, that's a reality. And the operational support that we've made adding people to support our more experienced reps has helped us, but probably not as much as we would like. So I think that's going to be longer-term to get the full leverage on that, but we do see leverage coming on that as well. So the short answer is I would expect that we see some improvement in operating margins in the next quarter sequentially, but still maybe down year-over-year due to the comps that I mentioned. But then in the third quarter and fourth quarter, we expect to start to show that improvement, show that leverage.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. Is it just turning out to be a little bit more expensive than you thought to generate the kind of growth that you've generated, and this is why Doug is speaking about the longer-term margin target being maybe a little bit lower or a little bit further out?

David B. Menzel

I think that the -- yes, I mean, I think that's a combination, as Doug mentioned. The organic growth rate has not been quite as high as would be necessary to kind of get the operating leverage. So more of the growth has come from acquisitions, which tend not to have the same -- they don't have as high of an operating margin profile the day we make the acquisition. They can grow into it over time, but not right away. And so as we've made those investments and the economy hasn't helped a lot, and we've reassessed kind of our revenue performance, I think it's logical that the time frame is likely to extend to get to those goals. It will depend on -- of course, it's going to depend on what happens in '14 and '15, and that's a lot of time. So we're still -- we're very confident about the investments that we're making, I think we've proven to make good investments over time. But the reality is those investments have come at the expense of some operating margin over the last few quarters.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then last question. To the extent that you are relying a little bit more on acquisitions than you had expected, what does the pipeline look like in that regard? Is it getting harder to find good targets?

David B. Menzel

I would say, in some cases, we're seeing a little competition on larger deals. That would be like -- mention that Bill mentioned, the $50 million to $100 million-size company. Maybe there's a little more there, but that's not been our bread and butter. But at the same time, we've got a strong pipeline. We got a lot of companies we're talking to, good companies, companies -- we think we have a lot to offer the small to midsize brokerage. We've proven that our technology platform is something that they can integrate into. And then through both our enterprise offering, as well as our multimodal offering, they can grow. So we've got an attractive offering to these smaller brokerages. And for that reason, I think we've got a good, nice, strong pipeline. But at the same time, like an enterprise deal, it's hard to predict the precise timing of closing any given acquisition. We do anticipate the organic growth rate to reaccelerate as our sales reps come online. So looking backwards, I think the acquisitions have been strong. But looking forward, we do expect organic growth to kick in and contribute to the overall objective.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

So even if the macro remains sluggish, you should be able to speed up the organic rate as the salespeople start to come on and mature?

David B. Menzel

Absolutely.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And that happens as soon as when? Q3?

David B. Menzel

I think Q3 is when I see them more notable. I mean, as I mentioned, the growth rate through the first few weeks of April is 18%. So that doesn't indicate that we've kind of got it yet. And I think that to the extent we added 100 reps or so in the first quarter, it takes a little time for those guys to gain -- to build their books of business and to gain maturity. And so I think that you'll see that, again, much more strongly in Q3 and Q4 than you're going to see it in Q2. But we've got a lot of new reps that have hit the floor and we got a good -- so we've got people now maturing and we're seeing our client sales component of our overall sales group grow again, and over the past 9 months that's actually been in decline because of the way we've put people into a training program and moved people into operational support. So now that's growing. We've got new people on the floor, they're going to be growing. So that will drive -- will, in fact, drive organic growth in our judgment.

Operator

Our next question comes from Ryan Bouchard of Avondale Partners.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

First, just a housekeeping item. I didn't hear or see the number of transactional clients served during the quarter. Do you have that?

David B. Menzel

We've -- I don't give you that number. That's a number we've -- I'm not sure how meaningful it is, but I think it's in the -- if you give me a second, I will look that up. It's probably...

Douglas R. Waggoner

16,375.

David B. Menzel

There you go.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. And then secondly, if I've done the math correctly, it looks like the average tenure fell sequentially along with the number of sales agents. Did you have some more tenured people leave this quarter or was there something else there that we can't see that pulled that average tenure number lower?

David B. Menzel

How did you ascertain average tenure from that information?

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

So I've got the transactional revenue per salesperson divided by a 500 number.

David B. Menzel

I got you. Just trying to -- just to kind of back into it, so to speak. Our average tenure, it was -- I think it's actually up a little bit, up a couple of months. But it's kind of interesting because it's such a weighted average. We added a lot of new reps onto the floor and so then we had a lot of experienced reps. So I think our average tenure hasn't moved significantly. I actually think it edged up in the quarter by 1 month or so. So that's where that number is right now. And it's about 19 months actually. 19 months average.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. And then it looks like truckload has kind of settled into this 43% of revenue mix range. Do you expect that to stay at around that level? Or should it move higher going forward?

David B. Menzel

I would say it's fair to think that it's going to stay very close to that. It's hard to predict, obviously. If we close a large enterprise deal or if we close -- start doing business with a large truckload shipper, it can move the needle. So it can move around. I'm not going to give a precise prediction, but absent an acquisition, I wouldn't expect it to move around too materially over the course of the next couple of quarters.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. And then the last one for me. The LTL rates down 0.2%. Was that due to mix or is that sort of across the board?

Douglas R. Waggoner

It's actually, I think, tied to average weight per shipment being down a little bit.

Operator

Our next question comes from David Tamberrino of Stifel.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Went through a little bit of a question-and-answer there in terms of organic growth rate. I was wondering what your organic growth rate was year-over-year for the quarter.

David B. Menzel

It was 9% in the quarter.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So that is sequentially down and continuing that trend. And then, so I'm looking at this correctly. Sharp, the acquisition, the run rate revenue was $71 million and you're pulling about $15 million out of that from your forecast. So that's about a 20% decline in revenue?

David B. Menzel

Yes. So we had -- well, I don't want to say pulling it out. We were probably forecasted closer to $80 million because they had a strong Q4 and anticipated some growth in 2012. So they're not down quite as materially over the run rate when we acquired them, so to speak, but down probably from the guidance that we had originally anticipated, I'll say.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So the enterprise accounts average revenue per client was down 10% sequentially from 4Q '12 to 1Q '13, whereas it was only down about 4% from 4Q '11 to 1Q '12. So kind of take into account maybe a normal seasonality. What do you think the drivers were, absent seasonality, for that decline kind of over and above where it had the year before?

David B. Menzel

Yes, I'd say that the biggest driver of that -- our largest client, which we have 100% of their business, was just -- was down $5 million, I think, sequentially. So it was a fairly large number. They do have seasonality, so they're typically down a couple of million. So that was a -- that's probably the reason for that decline.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Is that a company-specific, was that a specific end market? Is that expected to be made up later on?

David B. Menzel

Yes, more company-specific with their specific business, I would say.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then in terms of your sales force, I know we talked a little bit about average tenure just now. How have your attrition rates trended so far in 2013 and into April?

David B. Menzel

So the attrition rates have been pretty good. The -- I looked at the average, over the last 9 months, was about 30%. And over the previous 9 months, it was just over 40%. So I think it was a little higher than the average in Q1, which is typical. Q1 is a time when you tend to have a little more turnover. So we feel pretty good about that they've come down. And hopefully, we can continue to maintain that or improve that over the course of the next 12 months.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

And is that kind of a forced attrition? Is that self-selection? Are they going to different competitors? Or where have you found most of your employees that are leaving kind of going?

David B. Menzel

I think most -- in our case, it's a combination of items. You've got people that decide -- it's probably mostly people that either think they want to be in sales and decide they don't, or -- that's probably half of it. And then -- in some cases, it's more experienced guys that want to go do something else, that made a decision that they just want to make a change. Because when we hire a lot of people straight out of school, it's a first job, over the course of the next 3 to 5 years, you're going to see a decent amount of people that want to move on and do something different. So it's a little bit of all those things, I'd say. It's not so much people running to another competitor. I would say that's the least of the attrition that we see.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then one more and I'll turn it back. In terms of your historical acquisitions, you had much smaller acquisitions than say, the Sharp, which was kind of the most recent large acquisition. What's your typical IT kind of time line for integrations, either bringing your acquisitions onto your systems or taking the IT from a system, say Sharp, and bringing it in and giving your teams the functionality? Because it's been about 6 months, I think, from the Sharp Freight closing.

Douglas R. Waggoner

So it's normally -- if the acquisition is a pure brokerage business, it's going to be inside of 90 days. In the case of Sharp where we had new intermodal functionality, which requires essentially a different rating engine that encompasses rail contracts and drainage contracts and a whole different approach to calculating rates, we have to essentially build that functionality into our system to replicate what our acquired companies already had, along with railroad EDI and some other functionality that we didn't exactly have. So that's going to take a little bit longer. And as Dave mentioned earlier, we anticipate having that done in the second half of this year. And that does open up the door then for our entire sales force to sell conversion from highway to intermodal.

Operator

Our next question comes from David Campbell of Thompson, Davis & Company.

David P. Campbell - Thompson, Davis & Company

I don't want to belabor the point, but as far as general administration expenses, some of it was related to the commission rate change. How much of it was related to that change year-to-year? Can you give us any round figures on that?

David B. Menzel

Sure, I can. From an operations perspective -- I'm going to give you dollar numbers. I looked at the -- it's about $500,000, I would say, that in the quarter -- I can't -- was -- the commission rate change -- let me put it this way. The G&A expenses increased by about $500,000 year-over-year relative to additional operating support. And some of that savings was offset by commission, but not the entire amount.

David P. Campbell - Thompson, Davis & Company

Okay. And obviously, you mentioned the $300,000 from Open Mile in the first quarter. Did -- would you say that was a non-recurring acquisition cost or part of their continuing expenses?

David B. Menzel

I mentioned $200,000, just to clarify that. Yes. And I think about $50,000 was transaction costs. It wasn't a large amount. And so -- but the rest of that was continuing increase in G&A. It's about 1 month's worth of G&A for that business.

David P. Campbell - Thompson, Davis & Company

Okay. And obviously, some of this G&A increase in cost this year is your decision. I mean, seeing that the revenues were -- that you had to reduce your revenues, it doesn't look like it reduced your G&A costs. It's almost like you need to have that G&A increase to generate long-term revenue growth. Is that the way to look at it?

David B. Menzel

Well, I think that we've made a lot of increases, again, by -- we've got a business model where we hire a certain amount people, we train them. We did make conscious decisions to train people longer, which did increase G&A and did not have a corresponding impact in the current period on revenue. So in that example, that was the case. The operational support was also conscious. We believe it supports our existing reps, reduces turnover and will be very positive as our company continues to mature. So again, that was conscious, didn't cut it back. Some of the other G&A increases, big pieces, the acquisitions, of course, when you look at a year-over-year change. We've added about $1.5 million in G&A relative to the Sharp and Purple Plum acquisitions over the last 12 months. So we are not -- we're cognizant of the market conditions and the -- and our G&A spend. And we're definitely in the mode of controlling any excess investment, but we want to continue to make the investments where they're prudent that we think drive our long-term model. So I do think that the growth rate of G&A is going to subside here a little bit because we've done all these things that we've explained. These aren't new things, they're the things we've talked about back in January of last year actually. So these were planned. We've not turned our back on them. But at the same time, we will, in fact, be smart about the G&A that we spend as we continue to grow the business.

Operator

Our next question comes from Matt Young of Morningstar.

Matthew Young - Morningstar Inc., Research Division

Just another quick question on the commission, just to clarify. Would you then expect the commissions as a percentage of net revenue to tick up slightly as we go through the year as that first phase of new reps kind of amortize into the system and get on the commission schedules and so forth? I mean, because that -- it's pretty low now, still at 25.5%. 25.5% of net revenue is fairly low for you guys. And I don't want -- I'm just trying to figure out if it should stay that low or tick up a little bit?

David B. Menzel

Well, that is a good question actually, Matt, and I think it's going to be relatively imperceptible. But it does have the effect and I would think it would be more evident probably as we move into Q4 and not before that. But -- and I think it's 20 or 30 basis points. But there are so many other moving parts within commission expense that I hesitate to try to factor that in too specifically. But you are correct. As those guys ramp up and actually come off salary and onto commission, it could have a small impact, small increase in commission expense. But again, I don't think it's going to be significant and you've always got people kind of rotating in and out. So you've got enough moving parts there that I don't think it's going to be a big number.

Matthew Young - Morningstar Inc., Research Division

Okay. So no big change. And then you mentioned that your tenure was at 19 months. I think in the past, you said that your goal was to get to that revenue per rep at about $1 million. And I think you said, this might have been a few years ago, that you felt you needed the average tenure to be at about 2 years to get to those point. Do those numbers still work now that you're getting closer to that 2-year mark?

David B. Menzel

Yes, I think we've given a range of 24 to 30 months, so I don't think it's exactly 2 years. And we've introduced some operating support and carrier sales guys into that equation. So I think again, as I've said this before in the past, we had our sales reps were doing a lot of these different activities. And to keep those productivity numbers kind of true on an apples-to-apples basis, we've continued to talk about productivity across both client-facing salespeople, carrier-facing salespeople and operations folks. So I'm confident that on a client-facing person, we'll get to those numbers quite easily. But because we've added operational support and carrier sales support, it might take a little longer to get to that full productivity level as the sales force matures across all those groups.

Operator

I'm showing no further questions in the queue at this time. I'll hand the call back to Doug for closing remarks.

Douglas R. Waggoner

Well, thank you for joining us on our first quarter 2013 call. I will remind you one more time of our Investor Day on June 10, and hope you can join us to get a close-up look of what we're doing here at Echo. And if not, we'll see you on our second quarter call. Thanks for joining us.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!