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Echo Global Logistics (NASDAQ:ECHO)

Q3 2013 Earnings Call

October 24, 2013 5:00 pm ET

Executives

Suzanne Karpick - Vice President of Investor Relations

Douglas R. Waggoner - Chief Executive Officer and Director

Kyle Sauers - Chief Financial Officer

David B. Menzel - Chief Operating Officer

Analysts

Jack Atkins - Stephens Inc., Research Division

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

Daniel Schuster

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

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

William J. Greene - Morgan Stanley, Research Division

David P. Campbell - Thompson, Davis & Company

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

Robert Dunn - Sidoti & Company, LLC

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Operator

Thank you for standing by, and welcome to the Echo Global Logistics Third Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for today, Thursday, October 24, 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 third quarter 2013 earnings call. Hosting the call are Doug Waggoner, Chief Executive Officer; Dave Menzel, Chief Operating Officer; and Kyle Sauers, Chief Financial Officer.

We have posted presentation slides to our website that accompany management's prepared remarks and these slides can be accessed in the Investor Relations portion of our site, www.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.

With that, I'd like to turn the call over to Doug.

Douglas R. Waggoner

Thanks, Suzanne. Good afternoon, everyone.

On October 2, we entered our fifth year as a public company. Some may recall that on our first quarter operating as a public company, we reported revenue of $320 million and non-GAAP net income of $1.6 million on an annualized basis. Today, we reported quarterly revenue and non-GAAP net income that, on an annualized basis, totaled $940 million and $17.5 million, respectively. In our first 4 years as a public company, we've delivered revenue growth of 193% and earnings growth of 971%, all while delivering profits to our stockholders in each of those 16 quarters. During these 4 years, we've completed 11 acquisitions, added approximately 550 employees and produced positive operating cash flow in each of the last 14 quarters, all the while not needing to take on debt or issue additional equity.

I'm extremely proud of the entire team at Echo and what we've accomplished. Our growth and our success in helping to make transportation management less complicated for our clients has earned us a lot of positive recognition. You may recall that in August, we were named #8 on the Inbound Logistics Top 10 3PL List and, most recently, Forbes ranked us as one of the best-performing public companies in the U.S., among those with sales under $1 billion, on their list of the 100 Best Small Companies in America.

As Echo rapidly approaches $1 billion in annual revenue, we are strategically planning for the $2 billion mark. This includes putting the right leadership structure in place to grow our business and continue to serve the multimodal shipping needs of our clients. To ensure this is the case, we recently announced changes to our executive team and expanded the senior level talent that will be driving our growth in the years to come. We recently promoted Dave Menzel from Chief Financial Officer to Chief Operating Officer. Most of you know Dave well and are familiar with his extensive insight into Echo's operations. We're excited to have Dave focusing, full time, on the operational aspects of our business.

As well, we promoted Kyle Sauers from Senior Vice President, Finance & Controller to Chief Financial Officer. Kyle has been with Echo since January of 2011, as a key part of my executive leadership team and, most recently, before joining Echo, Kyle ran a division of Varian Medical Systems and held the CFO role at 2 other technology companies.

Finally, we promoted Evan Schumacher from Senior Vice President, Truckload, to the newly created position of Chief Commercial Officer. In this role, Evan is responsible for our sales and marketing efforts across all channels. Evan comes to us through the acquisition of Open Mile in March of 2013, where he was a founder and the CEO. Evan is a 4-time technology entrepreneur bringing significant transportation and supply chain experience to bear.

I'm excited about and very confident in the team we've assembled and their ability to drive our revenue and profitability, as we continue to execute our strategic growth plans.

Turning to our results. Despite a tepid truckload demand market and significant pricing headwinds, we're reporting another record quarter of both double-digit revenue growth and non-GAAP net income, with total revenue increasing 21.8% and non-GAAP net income increasing by 15% over Q3 of 2012. Our results reflect the continued gains in sales, employee productivity as new sales employees graduate from our sales training program, they're making more calls, generating more leads, closing more new business and penetrating more truckload opportunities. As evidence of the success of our evolving training model, productivity of our new sales employees in the job for 1 to 9 months has increased by a substantial 30% over their counterparts 2 years ago at the same point in their development. We continuously find ways to improve our training program and shorten the length of the time from hire to production. These productivity increases are driving continued improvements in our organic growth rate, which was 12.5%, up 265 basis points from the second quarter of 2013.

Net revenue margins compressed during the third quarter due to increases in the cost of truckload capacity, which are, in part, related to new government regulations, primarily around hours of service. However, I'm pleased to report sequential improvement in our operating leverage. We controlled operating costs and increased non-GAAP operating margins by 141 basis points over the second quarter of 2013.

The third quarter saw a continued success in the signing of new enterprise contracts. During the quarter, we signed 7 new contracts, with expected annual gross revenue of $31 million. This annual average deal size far exceeds what we have typically seen and is continued evidence of the value proposition Echo brings to clients. Some of these new clients are already up and running, but all are expected to be implemented by the end of this January.

Broadly speaking, we do not see significant signs of the market conditions changing from the current economic and pricing environment. Having said that, we are excited about our continued revenue and profitability and growth despite these challenges. We are confident that our established infrastructure of talent and technology will allow us to gain significant leverage when the broader brokerage market turns more favorable.

I now want to turn the call over to Kyle, who will discuss our financial results in greater detail.

Kyle Sauers

Thanks, Doug. On Page 3 of the supplemental materials, you'll find the summary of our key operating statement line items.

Total revenue increased 21.8% to $234.8 million in the third quarter of 2013 from the third quarter of 2012. The increase was driven by growth in both our Transactional and Enterprise businesses. Net revenue increased 10.9% to $40.6 million from the third quarter of 2012. This increase was driven by the overall growth of our business. Our net revenue margin was 17.3%, a 170-basis point decrease on a year-over-year basis. This compression was due to both a shift in mode mix and, as Doug mentioned, the effect of a difficult pricing environment, largely due to increased cost of capacity.

Commission expense was $10.2 million in the third quarter, decreasing 2.2% year-over-year. Commission expense was 25.1% of net revenue, representing a 336-basis point decrease over the third quarter of 2012 and a 9-basis point decrease, sequentially.

As we have discussed on previous calls, this reduction is the result of changes to commission plans made at the beginning of 2013, as we add additional operational support to continuously improve service to our clients.

G&A expense was $20.6 million in the third quarter of 2013, up 17.3% from the third quarter of 2012. As a percentage of revenue, G&A was down 130 basis points, sequentially, from the second quarter of 2013. Consistent with prior quarters, this year-over-year increase is due to the continued investments in our sales and service personnel and the acquisition of Sharp, which occurred in the fourth quarter of 2012.

Depreciation and amortization expense was $2.7 million in the third quarter of 2013, increasing 17.5% year-over-year. The majority of this increase is driven from continued investment in our proprietary technology and the overall growth of the business. Our effective income tax rate was 38.0% for the third quarter of 2013, compared to 38.8% in the prior year.

Non-GAAP operating income increased in the third quarter 12.4% year-over-year and 11.2% sequentially to $7.1 million in the third quarter of 2013, driven by a year-over-year increase in net revenue. Non-GAAP net income was increased 15% from the third quarter of 2012 to $4.4 million. Both non-GAAP and GAAP fully diluted earnings per share were $0.19 in the third quarter of 2013.

Slide 4 contains selected cash flow and balance sheet data. In the third quarter of 2013, we generated a significant $10.8 million in positive operating cash flow. This was an increase of 46.2% over the third quarter of 2012, primarily due to increased earnings and timing differences and changing -- changes in working capital. Capital expenditures totaled $2.7 million in the quarter, an increase of 4.6% from the third quarter of 2012.

There were no new acquisitions during the quarter and we made $1.75 million in payments under our contingent obligations related to prior acquisitions. Our contingent obligation to sellers, as reflected on our balance sheet as $9.1 million, which is its estimated fair value. As of September 30, 2013, we had $53.3 million in cash.

I will now turn the call over to Dave, who will discuss our operating performance in greater detail.

David B. Menzel

Thanks, Kyle. Our operational focus remains to drive growth by increasing the size and productivity of our sales organization, invest in our truckload sourcing operation, build out our multimodal capabilities to support the needs of our clients and gain operating leverage as our business grows.

Please turn to Slide 5, which summarizes our revenue by mode of transportation. As you can see, our LTL revenue increased 8.7% year-over-year to $95.8 million, driven by a 9.7% increase in volume and offset by a 0.9% decrease in rates. The decline in rates was partially attributable to rate reductions across several enterprise clients, as discussed last quarter.

Truckload revenue increased 25.5% year-over-year to $108.1 million for the quarter, driven by a 23.2% increase in volume and a 1.8% increase in rates. Our intermodal revenue increased by 164.4% year-over-year to $15.9 million for the quarter. This growth was driven primarily by the acquisition of Sharp Freight in October 2012.

Other revenue increased 20.4% in the third quarter, over the same period in 2012, totaling $15 million. Other revenue includes Small Parcel, International and Expedited revenue, and this growth was driven primarily by increases within our Enterprise business.

Please turn to Slide 6 for a breakdown of revenue by client type. Our transactional revenue increased 23.5% year-over-year, contributing $163.7 million for the quarter. This increase was driven by the acquisition of Sharp last year, and improvements in salesperson productivity. As we've highlighted over the past several quarters, our transactional sales force includes client sales -- which includes both employees and agents, carrier sales and dedicated operations staff focused on our transactional business. The sales force totaled 820 at quarter end. For clarity, we have 595 client-facing sales people, which includes both employees and agents. For comparison purposes, we had 516 client-facing sales people at the end of Q3 2012.

Average transactional revenue per sales person increased 23.5% on a year-over-year basis. This is a reflection of the progress we are making with our training program and the effectiveness of the additional operating resources, we have added this for our clients. We continue to recruit new sales reps and expect to hire between 50 and 70 new people in Q4.

Our revenue from Enterprise clients increased 18.1% year-over-year, contributing $71.1 million in the third quarter of 2013. This increase was primarily due to the continued growth in the number of clients.

Turning to Slide 6 (sic) [ Slide 7 ], I'll review our net revenue and net revenue margin. Net revenue increased by 10.9% year-over-year to a total of $40.6 million in the third quarter. Our net revenue margin was 17.3% in the third quarter, representing a 170-basis point decrease over the same period in 2012. This decline in net revenue margin is a function of modal mix shift, as we've discussed in the past, as well as compression due to market conditions. From a mix shift perspective, truckload and intermodal represented 52.8% of total revenue, Q3 2012, as compared to 47.8% in Q3 -- excuse me, Q3 2013, as compared to 47.8% in Q3 2012. This mix shift alone, accounts for about 40 basis points of compression.

In addition, our truckload net revenue margins decreased by 141 basis points compared to the same period last year.

Looking more closely at the sequential change in our Truckload margin, our Q3 2012 -- in Q3 2012, our Truckload net revenue margin improved, sequentially, by a 111 basis points, and in Q3 2013, our Truckload net revenue margin decreased by 30 basis points. This contrast highlights the more typical seasonal bounce back experienced in 2012, which did not occur in 2013. At the same time, our LTL net revenue margin compressed by 152 basis points year-over-year, the majority of which was due to, previously mentioned, Enterprise renewals.

With that, I'd like to turn it back over to Doug for his concluding remarks.

Douglas R. Waggoner

Thanks, Dave. Through the first few weeks of October of 2013, our total revenue was up approximately 11% over the same period in the prior year. As a reminder, fourth quarter of 2012 included a full quarter of results from our acquisition of Sharp Freight, so this growth is largely organic.

Based on the current pricing environment and economic conditions, we anticipate our fourth quarter revenue to be in the range of $230 million to $240 million and non-GAAP fully diluted earnings per share between $0.17 and $0.19, which excludes an estimated $0.02 effect of separation costs associated with changes in senior management.

For several quarters, we've talked about our expectation for improved profitability on the ongoing investments in our business begin to take hold. In an environment where net revenue margins have been compressed, we made annual and sequential improvements in operating leverage, through increased productivity and prudent management of our costs, while continuing to invest in our growth strategy. Operationally, we remain focused on providing the highest levels of service to our clients, in any pricing environment. This means continuing to improve productivity, meeting our hiring objectives and managing pricing to our clients. I'm very pleased with our development of our in-site sales organization, as our training and development programs are enabling our people to be even more successful which will continue to improve productivity and reduce attrition over the long term.

In addition, our truckload capabilities continue to expand. We have had integrated our acquisitions effectively and our improved operations are evident in an increasing growth rate in Truckload, along with strong client satisfaction. All of this, combined with our evolving proprietary technology, has enabled us to continue to add enterprise clients and renew our accounts at a very high rate, which is providing a strong foundation for future growth and profitability.

Given the current operating environment, we are pleased with our operational results for the quarter. I'm also excited about the team we have put in place to execute and I look forward to the significant opportunities we have ahead. And with that, we'll open it up for questions.

Question-and-Answer Session

Operator

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

Jack Atkins - Stephens Inc., Research Division

So I guess, just to start off, Doug and Dave, could you maybe walk us through the puts and takes of the guidance reduction for the full year and the implied guidance for the fourth quarter? Specifically, could you maybe touch on how your outlook for net revenue margins and then net operating margins have changed versus the last time you guys updated us in July?

David B. Menzel

Yes, Jack, I'll take a stab at that. I think that, as I mentioned in the prepared remarks, one of the things that our original guidance had contemplated was a relatively consistent margin performance, relative to 2012. Specifically, we saw quite a pretty healthy bounce-back coming out of the produce season and into Q3 and, actually, some steady -- some consistency through Q4, albeit the acquisition of Sharp had a small impact on margins in Q4. And so our original guidance had anticipated that we'd see similar results through the second half of the year. And, obviously, what we experienced in Q3 was a margin degradation, as opposed to the bounce-back. And so, as we thought out the final quarter of the year, we are anticipating, again, kind of a, I'll call it a flat margin environment as we progress through the fourth quarter, where that ends up is yet to be seen.

Jack Atkins - Stephens Inc., Research Division

And so, when you say flat, you mean, flat, sequentially, on net revenue margins?

David B. Menzel

Correct.

Jack Atkins - Stephens Inc., Research Division

Okay, that's helpful. And then, I guess, just to kind of dive a little bit deeper into the net revenue margin side for a moment. Could you maybe talk about how the quarter progressed from a net revenue margin perspective? And then, if you were to single out any particular sort of macro theme, whether it's hours of service or increased competition, to help us understand sort of the changes in net revenue margin through the quarter? And did you -- would you expect, given the substantial portion of your business that's transactional versus contractual, for that to either have an opportunity to pass through this higher price to your customers here in the next couple of months?

David B. Menzel

Yes, Jack. I mean, I do think that, because of our mix of business, there is an opportunity to kind of reverse this trend and get the -- stabilize the margins. But again, because of all of the uncertainty, I'll say, in the capacity environment, it's difficult to project the timing and the magnitude of that effect. Specifically, relative to your questions, couple of things that we saw. On the Truckload side, we saw that the cost of capacity rose in Q3, and there's a couple of different data points. When we look at the cost of capacity on a per shipment basis, it was up roughly 3%. It was up higher than that on a per mile basis. And when we look at spot market indexes across the sector, they are up on average by 7%. So it's difficult to pinpoint how much of that is new regulation-driven versus other capacity constraints and constraints in the truckload sector. But the fact of the matter is, in the dry van space, particularly, the cost of capacity has definitely risen. And then in terms of the ability to adjust rates, there are 2 or 3 factors going on. The main being, to the extent that we've got large accounts or award business, their sluggish environments create very little spot market business. So it is very difficult to extract additional margin from spot market business because demand is just not robust. Secondly, there may be a slight impact of conversion from over-the-road to intermodal. And so that could also be having some effect on the ability to drive price, consistent with the cost to capacity, in the marketplace today. So that's the color I'd give you on those pieces of the puzzle.

Jack Atkins - Stephens Inc., Research Division

Okay, great. And the last question for me is more of a housekeeping item. The organic growth rate in the quarter, could you supply that for us?

Kyle Sauers

It's 12.5%.

Operator

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

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

I wanted to talk a little bit just in terms of the sales force count and also the productivity benefits. Just first, on the count. If we go back to last quarter, I think you guys were targeting still -- in the third and fourth quarter, to hire approximately 80 to 100 people, if I have my notes right. And I think you said, now, you're kind of looking kind of more in the 50-or-so range for the rest of the year. It looks like it was only up a little bit sequentially. Could you talk about the dynamics there, in terms of what some of the hang ups might be? Whether it's finding the right people or whether it's just because of the net revenue margin pressure that you're seeing, that you've kind of put the brakes on that a little bit?

David B. Menzel

Well, I think that the -- we're still aggressively pursuing our hiring goals. So I'll start with that. I would say, as I mentioned on the last call, it does appear that the job market is a little bit better this year than it probably has been over the last couple of years. And so, while we continue to aggressively pursue the high-end goals, we're also increasingly selective to make sure that we get candidates that are going to be good fits and that we think will have a high likelihood of being a long-term successful salesperson here at Echo. With respect to the headcount, while the headcount across this entire sales force, so to speak, is almost relatively flat, when you consider carrier sales and operations. On the client-facing side, we'll probably be up, like you said, between 50 and 75 people by the end of the year. So we'll be off the 100-person mark but we'll still make good progress in terms of growing that sales organization and we'd anticipate continuing to execute that next year.

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

Okay, fair enough. And then in terms of just the productivity, obviously, congratulations on getting the training program in place. I would've thought that -- obviously, we saw some great initial results last quarter and still saw good results this quarter. I would've thought that might have accelerated a little bit, though, in terms of this. We got more people out of that program even a little bit further, and again, I'm not diminishing the results that you put up. But I thought maybe it might have been a little bit better. I mean, could you talk to -- is it just the macro headwinds that are kind of holding that back, in terms of going out there after the Transactional business, with some of the headwinds that you've already cited? Or is there anything else going on with that?

Douglas R. Waggoner

Well, I think that the productivity has actually exceeded our expectations, but there's some headwinds in the form of gross margins that we're bucking up against that tracks a little bit from that.

David B. Menzel

Yes, the transactional sales force productivity, across the entire business, of course, was up 24% -- or 23.5%. I believe, last quarter, it was up by a year-over-year basis, 14%, so it actually accelerated. And some of that acceleration is due to the fact that the headcount numbers are relatively flat period-over-period. And so the revenue growth is there but the headcount is not growing at the same rate. So I think that, overall, we're very pleased with the productivity growth. And if there's anything that we want to push on a little bit harder, it's getting our headcount growth back in check.

Operator

The next question is from the line of Allison Landry of Crédit Suisse.

Daniel Schuster

This is Danny Schuster filling in for Allison and congratulations on your new roles. I just wanted to ask, first, I think you said back at your Analyst Day in June, that about 1/3 of your Enterprise revenues were coming from your branch offices. And I was just wondering, has this mix started to change at all? And as you look at the market for acquiring branches now, what makes a new branch attractive to you? And since the environment's been kind of sluggish, are you seeing any sort of more attractive branches that are approaching you, maybe now, at more attractive multiples that you would potentially look at acquiring?

Douglas R. Waggoner

I think you're referring to our acquisitions?

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Yes.

Douglas R. Waggoner

And we've got an acquisition, M&A pipeline that's pretty consistent with what we've always had. We're been pretty selective on the deals that we do. We continue to be active. So nothing's really changed in that regard. The -- you mentioned the Enterprise deals?

David B. Menzel

Yes, I think that the -- one of the things we had a lot of success with is, subsequent to our acquisitions, our branches have experienced significant growth, partially due to their ability to sell bigger deals to bigger customers, based on our capabilities. And we've seen great success with that on the Enterprise side. So I think that we -- as Doug mentioned, we are sticking kind of to our knitting. I mean, we want to buy companies that we think really fit well culturally and are easy for us to integrate with our technology platform, so that we can go to market effectively. So we've been sticking with that, truckload brokerages and non-asset-based brokerages that kind of fall into that sweet spot are really the focus that we have. Of course, if somebody -- if we see a business that we think, opportunistically, brings additional capabilities that we can leverage, we certainly would consider that, as well. But the core focus is we find those non-asset-based logistics and brokerage businesses that are going to fit nicely with our strategy.

Daniel Schuster

Okay, great. I guess, for the second question, you talked a lot about kind of pressure on the buy side when it comes to acquiring capacity and how you're not really able to pass that pricing off to customers right now. I guess, what's really holding back your ability to pass those prices along -- those rate increases along to customers? And is there any sort of shift in the competitive landscape that you've seen that either would help you going forward? Or is it going to continue to hold you back there?

Douglas R. Waggoner

I don't think there's really been any change in the competitive arena. It's always been competitive. And it was competitive a year ago and it's competitive now. It's just been a somewhat volatile market. I mean, it's generally in balance. If shippers want to shop, they'll probably find a good price. They may or may not need a broker to do that. And I will tell you that the produce season started a little later this year, so some of the effects of that pushed into the second quarter more than you would normally see. So that probably added some tightness. And then the truckload carriers themselves have lost some of their equipment utilization from the hours of service regulations. And that tends to vary on a carrier-by-carrier basis.

Operator

Our next question comes from the line of David Tamberrino from Stifel Nicolaus.

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

I wanted to just start off with the Transactional headcount. It looked like this is a decline year-over-year, which would probably be the first in your history, if I'm looking at the historical results accurately. How much of that was forced attrition? How much of that was underperforming sales? Headcount being -- walking out the door or being forced out the door? Just maybe little comments behind that year-over-year decline.

Douglas R. Waggoner

I'll give a subjective answer while Dave looks up the numbers. I think our turnover rates are pretty much on a par with what they were, historically. But I think there's a larger portion of that turnover has been caused by the company. So we've been, I think, driving productivity and performance and we did eliminate some people that were not hitting our productivity measures.

David B. Menzel

So I think there's 2 pieces, and then there's also internal transfers into operational units within Echo that drives down that transactional headcount number. The thing that I would kind of go back to and point to is that the client-facing sales positions has, in fact, grown, relatively significantly. 516 was the number of employee sales people, client-facing sales people and agents, at the end of Q3 2012. And that number was 595 at the end of Q3 2013. So we've actually had some good success growing our client-facing sales positions. But moving people into operating positions and other shifting roles within the business has been a part of -- in addition to, what I would call the normal attrition rates.

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

Okay. So for the folks that are being forced out, how long after the training program does that usually take, to make a decision whether they're going to be a productive employee and stay with the company or if it's time to part ways? Is that 9 months? Is that 18 months? Is that a year?

David B. Menzel

I wouldn't use those words, forced out. I mean, I think that what happens, in some cases if the new hires might join the company and a better term might be just we determine that a client-facing sales position is maybe not the career trajectory that they would desire. Typically, the majority of our turnover occurs, I'd say, in the first 18 months, or so, of employment, as folks get accustomed to the job and have varying degrees of success. So and we definitely see higher turnover rates in the first 2 years than we do subsequent to that. And I think that's -- the primary driver is that folks decide that maybe a client-facing sales job is not exactly what they want to pursue long-term.

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

Okay. And then, maybe, just the broader one, which I think has been touched on a little bit, but not asked directly, within terms of how much the private brokers and another publicly-traded logistics company is looking to grow and any additional headcount hires that everyone is been seeing or you could tally it up, maybe there's another 2,000 or 3,000 almost per year and headcount being added in industry, and marry it up with a backdrop of supply and demand being in the balance and not really a lot of freight overflow into the spot markets. Do you feel as if the brokered market is becoming saturated, as a result?

Douglas R. Waggoner

No, not at all. I mean, if you look at the size of the market, the truckload market, by itself, relative to our volume and the volume of our competitors, adding a few hundred extra sales people here and there isn't going to make a big difference. And then, you couple that with the fact that we're multimodal and most brokers aren't, like I said earlier, I think there's always been competition and we've never hesitated to take market share. So I don't really see that as a reason.

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

And do you feel like you're taking market share from the other larger players or from the smaller mom-and-pop shops?

Douglas R. Waggoner

Both.

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

Interesting. One last one and I'll jump off. Did you note how many enterprise clients you had for the quarter?

Douglas R. Waggoner

It is 7 for the quarter.

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

So the 217 at the end of the last quarter plus 7, so 224?

Douglas R. Waggoner

Yes. And as we mentioned in the prepared remarks, I think our average size went up. The total is about $31 million in this quarter.

Operator

Our next question comes from the line of William Greene of Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

In the past, I think, we'd talked about hours of service having a potential positive impact on brokers, just because the idea was that it would make it a little bit harder for some of the smaller shippers to source some capacity, and so they might come to you. Did you see any evidence of that? I think that was something that you mentioned at the Investor Day. But I'm just curious how this played out here so far in the third quarter?

David B. Menzel

I think that, generally speaking, I'd say, longer-term, one of the benefits that can occur, as capacity tightens, is that it is harder for smaller companies, and that may be all companies, really, to find capacity. And so, our role as a broker becomes valuable on that side and it can become a demand driver. I would say, specifically, the third quarter, it's hard to pinpoint whether the short-term effects drove additional demand in that way. Because as we looked at the market, we felt that it was pretty soft. So it'd be difficult to say that I thought that it did that in this short period of time. But what it -- and again, we saw that the cost of capacity rose and were maybe we're making a little bit of a leap that these new regulations had some impact on that. But it seems to be that it's moved the needle a little bit and especially as the quarter went on.

William J. Greene - Morgan Stanley, Research Division

Okay. When you think about some of the changes you made to the compensation, for the sales force, do you think that had any impact on kind of some of the turnover numbers?

David B. Menzel

No, I don't think so. I mean, I think that we've rolled out some, what I'd call, modest changes. And maybe back in January, February, we might have lost a few people that thought that it might have had a short-term negative impact. But I would say that absolutely not, as we move forward. The program's been well accepted and we find that it's actually producing higher income for our top reps, the way we've got it structured today. So I think that it's actually a positive, not a negative.

William J. Greene - Morgan Stanley, Research Division

And then just the last question. I'm sorry if you mentioned this, I might have missed it. But can you share at all with sort of what kind of gross margin you might have embedded into your EPS assumption?

David B. Menzel

Into 4Q?

William J. Greene - Morgan Stanley, Research Division

Yes. Sorry, for fourth quarter.

David B. Menzel

Yes. We've mentioned that embedded in that assumption is a relatively flat sequential margin. It's hard to predict where it's going to end up, but we've embedded kind of a low 17s assumption there.

Operator

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

David P. Campbell - Thompson, Davis & Company

Yes. I've just wanted to ask a couple of questions. One is, if we -- when we look at the fourth quarter, based upon your sales employee plans, should we see an increase in the company's employees that are in training, and therefore, not in sales yet? The 461, for example, employees in the third quarter that were not listed as sales employees, should that number go up? And then the sales employees -- sales agents being relatively flat? Is that the way you want -- that we look at it?

David B. Menzel

Well, I don't have a specific forecast on that, but I would say there'll be people coming out and people coming in. And so there might not be a significant change in that number. And it may be, in fact, that year-over-year, the number of people in that training program might be slightly less. So because it was a relatively high, the tail end of last year, as I recall.

David P. Campbell - Thompson, Davis & Company

Right. But in these trainings -- people in training are in these so-called other employees not in sales or a sales agent, is that right?

David B. Menzel

When I talk about client-facing sales people, and I gave some numbers, they're not included in that number. So as an example, we have 595 client-facing sales people, and we had 820 people that we had classified as transactional sales, carrier sales and operation. And included in that 820 number would be people that are in the training category.

David P. Campbell - Thompson, Davis & Company

Okay, okay. Good. And the last question is -- and Dave, I appreciate the fact that the company has always been built on technology and the benefits of leading the way in industry technology to get new business and to get lower costs and improve profit margins. So in the third quarter, you promoted Evan, from basically from Open Mile to the company chief sales job. How does that fit into your plan to increase revenues and profit margins over the long term? Can you identify specific revenues that this will achieve? And therefore, lower -- therefore, higher profit margins?

Douglas R. Waggoner

Well, we have an ongoing strategic planning process, and part of that includes looking at the management team, looking at this, the organizational structure, and deciding what's going to be the most effective, in taking us forward. And I'm real pleased with what we've done up into this point. But my job is to look at the next $1 billion. And so we made the acquisition of Open Mile earlier this year and they had a little bit of brokerage business, they had some really slick technology. But what's important to us, they had a very talented management team, at all levels of their company. And a number of those employees have been promoted within Echo and occupy some key roles. In Evan's case, he's a very smart guy. He's a serial entrepreneur. He's got very strong sales and marketing skills in the supply chain space and he has a very high level of energy and I think it's a leadership that's going to serve us well, that's going to build upon what we've already done well. He's going to continue to grow our Enterprise segment, we're going to shore up on our transactional brokerage business, we're going to get better implementation of technology to take cost out of our operations and make us more efficient. So I think he's just a great addition to our team.

David P. Campbell - Thompson, Davis & Company

It certainly sounds like it. And the last question is, what this -- Open Mile technology was being implemented throughout the company. Is that on target to be 100% implemented by the end of the year?

Douglas R. Waggoner

Well, that's not entirely right. We've got a -- Echo's got a very robust technology platform in place today, already. We've -- in the 7 years, 8 years we've been in existence, we've written 23 million lines of code, in-house. So that's a pretty robust legacy system to integrate with. What we found in Open Mile was technology that was really focused on operational execution, although it's on a different technical architecture than what we used. And so what we've been doing is porting over a lot of that functionality onto our platform and it comes in pieces. Basically, we'll take a piece of functionality and we'll generally not use the same code but we'll take that functionality and put it into our platform, in our code base. So that's going on. We have releases every week and that will continue into next year.

Operator

Our next question comes from the line of Ryan Bouchard with Avondale Partners.

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

Doug, I have a clarification. When you spoke earlier about the new Enterprise clients revenue, you were saying that the next 12 months' worth of revenue from these new 7 clients should approximate $31 million, right?

Douglas R. Waggoner

Yes.

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

Okay. And that's total among all 7, that's not $31 million per client?

Douglas R. Waggoner

Right, that was -- so about half of that is going to come from one large one and the remaining 50% from the other 6. But if you did the math and looked at our previous average deal size it's -- for all 7 of these, it's considerably larger than what we've traditionally secured.

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

Yes. And is it -- and that's my next question. Is it wrong to say that it's about 4x the size of the historical amount?

Douglas R. Waggoner

Well, remember, averages are dangerous. But, historically, we average about $1 million per Enterprise account. So this is $31 million on 7 accounts.

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

Yes, okay. That's what I thought. Okay. And Dave, you talked about the cost of capacity in Truckload being up 3%. Can you tell us how that progressed during the quarter, month-wise? I mean, did it bump up right after the 1st of July?

David B. Menzel

Yes. Well, it's -- on a year-over-year basis, I don't have that specific comparison handy, on a monthly basis. So what would actually happen is the cost of capacity, sequentially, didn't come down as much as it did last year. So I would say that, throughout the quarter, it stayed kind of at a higher level. So it's pretty consistent. Probably across the 3 months in the prior year. And I don't have the specific months data in front of me so I don't want to give a specific answer on that one.

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

Okay. But you were saying that gross margins -- because you ran through some of these numbers kind of fast. You were saying Truckload gross margin was down 141 basis points and that was year-over-year, right?

David B. Menzel

That's correct.

Robert Dunn - Sidoti & Company, LLC

And then, that the down 30 basis points was sequentially?

David B. Menzel

That's correct. Yes, I compared to sequential change in 2012 to the sequential change in 2013, in my prepared remarks.

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

Okay, so that down 30 basis points, sequentially, was the down last year third quarter from second quarter?

David B. Menzel

Correct. So let me repeat that for you, just to clarify those numbers. So last year, Truckload net revenue margin improved sequentially by 111 basis points. In 2013, the Truckload's net revenue margin decreased sequentially by 30 basis points. So there's your 141.

Operator

Our next question comes from the line of Kevin Steinke of Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

It looks like, at the midpoint, the full year revenue guidance has come down by about $20 million to $25 million. I'm just wondering how much of that you might attribute to the pricing and demand environment versus how the sales force is ramping up in terms of headcount and productivity?

David B. Menzel

So I think that the -- if I recall, the midpoint, Kyle, comes in like right around...

Kyle Sauers

Right around $900,000..

David B. Menzel

Right around $900,000. Or maybe just slightly below that. So I think it's coming in right at the low end of the range and I would say that the primary driver that's just soft market conditions. We just haven't seen the uplift that we would normally see -- actually we didn't in August and September. So if you look at -- if you look at -- even if you look at Q3, we reported a higher growth rate in July than we delivered through the quarter. So we've seen a little -- it seems to be a little softening in the economy. Certainly in our business. It just seems like a soft environment and I think that's bringing us in closer to the bottom end of the range. I think on the productivity numbers, we're seeing excellent performance on the productivity numbers. And I'm seeing -- we're seeing good growth on the Enterprise business as well. So I would point to those 2 things as a -- just think of it as just a softer environment that's bringing us in toward the bottom of that revenue range.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay, no, that's very helpful. And so it sounds like you're not really seeing anything in the way of a peak shipping season materializing here, going into the end-of-year holidays, is that correct?

Douglas R. Waggoner

Yes, we're not really seeing it.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And just lastly, how does your acquisition pipeline look now? And have you seen any stepped-up competition for acquisitions out there?

Douglas R. Waggoner

We're pretty selective about what we look for and there are multiple companies looking at deals. The deals that we look at are typically not large enough to be platform companies for private equity. So we tend to look at companies that potentially other strategics are looking at as well. And even though I think there are more people looking at those deals, I don't think that's got in the way of us doing any. And we still have a pipeline that's equivalent to what we've always had.

Operator

Our next question comes in the line of James Vosh [ph] of EdCap [ph]

Unknown Analyst

In relation to a couple of the questions before, regarding overall revenue outlook. You guys, you're guiding the current quarter, so I think the first flat sequential number on top line that I can remember since you were public. And the overall economic environment, I totally understand where you guys are coming from, in seeing softness. But if you're at it at least seems from overall companies that are reporting, that are cyclically tied, that it's not getting worse. If anything, it's kind of stable to marginally improving. So the bigger concern I have is kind of in a going forward, flat economic environment. And let's, theoretically, say, you have a flat tenured sales force, is this a -- what would be your organic growth rate of this business, since this coming quarter, the midpoint of the guidance is up around 10% year-over-year, following multiple quarters of over 20% revenue growth? Granted, a lot -- some of that was not organic?

David B. Menzel

I'll jump in and cover part of it. And then, Doug, I'll let you add on, if you like. A couple of things. Over the past couple of years, sequentially, we've seen Q4 and Q3 to be relatively consistent, due to less business days in Q4. You do get some spike through the holidays, obviously, but as you approach both the Thanksgiving holidays and Christmas holidays, we see some pretty significant drop-off. So we've seen -- if you pull the acquisitions out of the numbers, so the performance actually in Q4, from a top line revenue perspective, is probably more consistent than it first appears, when looking at the historical trend of the business. Last year, we acquired Sharp Freight on October 1, and that had a pretty good impact on those numbers. Second point, I would highlight is, we've talked a little bit about Sharp, organically, being a little bit off of expectations. If I pull Sharp out of the Q4 growth rate in October, the organic growth rate's around 13%. So we mentioned an 11% year-over-year growth rate?

Douglas R. Waggoner

Sorry, quarter-to-date.

David B. Menzel

Quarter-to-date, through the first few weeks of October. Organically, it's actually a little higher than that. So our organic growth rate, by a small amount, has increased over the last 3 quarters and it appears to be on a trajectory to increase again in Q4. So I just want to kind of clarify a couple of those observations. And I do think that -- so I had comment that we're mentioning a soft economy. I wouldn't -- I didn't want to project that it was in retreat, so to speak. I wouldn't say that either. I would agree with what you say on that.

Unknown Analyst

And then, if you gentlemen could remind me, Open Mile, was there -- is there a material revenue contribution from Open Mile? Either in the quarter or for the year? Or was it more of a technology buy?

David B. Menzel

It's about a $10 million -- it's more of a technology play, about $10 million annually. So in each quarter, you're looking at about $2.5 million there.

Unknown Analyst

Yes. And last question. I think people have been waiting for -- hoped for signs of operating leverage. And even though there is some organic growth, we just really haven't seen it. What do you think -- can you guys kind of paint an environment where we actually are going to see some operating leverage at some point? What kind of has to happen? Is it mainly sales force-related and having more tenured sales force, instead of just kind of being in a hiring mode? Or is it just kind of endemic to this business that it's tough to have operating leverage?

Douglas R. Waggoner

You would've seen -- first of all, you saw margin improvement this quarter, and you would've seen a lot more had gross margins been at the 18% range that we believe them to be when we gave guidance in the first part of the year. So that was a bit of an unforeseen. I think that if you look at our incremental margins this quarter, we've delivered a lot more operating income for the marginal net revenue that we brought in. And we look at all the business on the margin as we acquire it and it contributes at our target ratios. And so it's just a matter of continuing to scale our net revenue over our G&A cost.

Operator

[Operator Instructions] Our next question comes from the line of Robert Dunn of Sidoti.

Robert Dunn - Sidoti & Company, LLC

I apologize if you touched on this, but in terms of maybe some anecdotal commentary on the operating margin, I think in the last conference, you saw it kind of trending up towards 20%. And I understand about the gross margin pressure but maybe could you talk about this, is that a maybe a level that's achievable in 2014? Or kind of how do you see that trending into next year?

David B. Menzel

Well, I think that, obviously, we'll reserve the right to address 2014 probably on our next quarterly conference call. But there's no reason to think that it can't trend to those levels. Obviously, as Doug mentioned the net revenue margins in the quarter and, currently, they're implied in our guidance for Q4, have presented a bit of a setback to the 20% level, or the high-teens, as I think we might have said, in the back half of this year. But again, dependent on the outcome of net revenue margins, there's no reason to believe we can't continue to leverage -- we're beginning to leverage and I think, to accelerate that, as we go into 2014. But we'll, obviously, assess market conditions and our -- and the outlook in a more formal way on our next conference call.

Operator

I'm not showing any further questions in the queue at this time. I'd like to turn the program back to management for closing remarks.

Douglas R. Waggoner

All right. Well, I'd like to thank everybody for joining us on our third quarter call and we will see you round and about and, for sure, next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does complete the program and you may all disconnect. Everyone, have a good day.

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