RXO's Q3 2025 Earnings Call: Contradictions Emerge on Market Conditions, AI Platform Impact, and Earnings Power

Date of Call: None provided

Financials Results

• Revenue: $1.4B total revenue; brokerage revenue $1.0B (70% of total); brokerage volume +1% YOY
• EPS: Adjusted EPS $0.01 (below expectations)
• Gross Margin: 16.5% overall gross margin; brokerage gross margin 13.5% (down 90 bps sequentially)
• Operating Margin: Adjusted EBITDA margin 2.3% (Adjusted EBITDA $32M, below expectations)

Guidance:

• Q4 adjusted EBITDA expected to be $20M–$30M (midpoint $25M).
• Brokerage gross margin expected ~12%–13% in Q4.
• Q4 CapEx ~ $20M; 2026 CapEx expected $45M–$55M.
• Q4 restructuring, transaction & integration expenses ~ $15M.
• Net interest expense ~ $9M; adjusted tax rate ~30%; diluted shares ~170M.
• Outlook assumes current market tightness persists; downside if squeeze intensifies, upside if accretive spot opportunities increase.

Business Commentary:

* Revenue and Market Dynamics: - RXO reported total revenue of $1.4 billion, with brokerage revenue contributing to 70% of the total, representing an 1% growth in brokerage volume year-over-year. - The growth was attributed to strong LTL volume growth of 43%, while full truckload volume declined by 11% year-over-year, impacted by market weakness and regulatory changes.

• Supply Chain Disruptions and Enforcement Actions:
• The market saw a significant tightening in September, with buy rates increasing and capacity exiting due to regulatory changes and enforcement actions such as nondomiciled CDL restrictions and English language proficiency requirements.

• Approximately 67% of RXO's freight in the quarter came from regions where buy rates increased, affecting overall results negatively.

• Cost Management and Operational Efficiency:

• The company achieved more than $125 million in annualized expense savings through strategic cost actions, including post-spin and acquisition synergies.

• These actions enhanced operational efficiency and productivity, with brokerage productivity increasing by 19% over the last 12 months and by 38% over the last two years.

• Earnings Outlook and Market Uncertainty:

• RXO anticipates adjusted EBITDA between $20 million and $30 million for the fourth quarter, impacted by higher costs of purchased transportation and weakening demand trends.
• Despite the current challenges, the company remains optimistic about its long-term growth prospects due to its strong balance sheet, improved cost structure, and strategic investments in technology.

Sentiment Analysis:

Overall Tone: Neutral

• Management: "EBITDA was $32 million...below our expectations" and guided Q4 EBITDA to $20M–$30M, signaling near-term weakness; simultaneously management repeated confidence in long-term drivers: cost reductions, scale, AI investments and 40%–60% adjusted free cash flow conversion, indicating cautious near-term outlook but constructive long-term view.

Q&A:

• Question from Stephanie Benjamin Moore (Jefferies): Do you think the enforcement actions are sustainable enough to structurally reduce market supply? If this is the final squeeze and demand doesn't recover near term, what actions can RXO take to manage gross profit per load over the next couple of quarters?
  Response: Enforcement likely removes substantial capacity and could be structural; near-term RXO will manage margin via >$30M of new cost saves, continued rightsizing, productivity gains from RXO Connect/AI and improved purchase-transport favorability over time.

• Question from Brandon Oglenski (Barclays): Looking back at the Coyote acquisition and 2025 execution, are there things you wouldn't have done (pricing call that impacted volumes)? Also, can you discuss leverage/covenants given the earnings outlook into Q4?
  Response: Management acknowledged a pricing mistake that hurt 2025 volumes but affirmed Coyote's benefits on people/customers/tech; leverage is comfortable (net 2.3x now, ~2.8x at Q4 midpoint) with covenant at 4.5x and significant 2025 cash outflows are nonrecurring.

• Question from Ravi Shanker (Morgan Stanley): Customers say your tech is best — how do you sell the platform, drive conversion and differentiate vs. other tech? Follow-up: Q4 guidance assumes the current demand-supply equation holds, correct?
  Response: RXO sells results: AI enhances pricing, carrier communication and last-mile automation driving productivity and margin; Q4 guidance assumes October-intensified market tightness persists—low end if squeeze worsens, high end if spot opportunities or easing buy rates materialize.

• Question from Chris Wetherbee (Wells Fargo): Can you rein in operating expenses further given flat direct OpEx/labor? What opportunities exist? Also, how do you view demand drivers for recovery over next quarters?
  Response: Company has more OpEx levers—automation, process improvement and footprint consolidation (announced $30M+ incremental savings); recovery depends on demand catalysts like lower rates/housing and automotive expedite normalizing.

• Question from Ken Hoexter (Bank of America): Is RXO's cost exposure or geography mix making you more impacted than peers (2/3 of freight from states with buy-rate increases)? Are you also seeing faster demand deterioration?
  Response: Impact reflects both weaker demand (notably automotive) and mix—~71% of truckload is contract with Tier‑1 enterprise shippers and ~2/3 of outbound freight experienced buy-rate increases—making RXO more exposed to the recent squeeze versus some peers.

• Question from Scott Group (Wolfe Research): Have you seen buy rates rise while sell rates don't move before; how long might this squeeze last? Any sensitivity of EBITDA to buy-rate changes?
  Response: Management views the current dynamic as potentially structural (duration uncertain); RXO estimates ~$2.5M of EBITDA per $0.01 change in buy rates.

• Question from Jordan Alliger (Goldman Sachs): Given rising purchase-transport costs, should we expect meaningful contract-rate increases in the upcoming bid season? Are customers receptive to rate increases?
  Response: Contract outcomes depend on customer-specific bid dynamics and overall demand; rates could rise but are not guaranteed—customers are aware and conversations are ongoing during bid season.

• Question from Thomas Wadewitz (UBS): How should investors view 4Q run rate and implications for 2026 EBITDA? On enforcement, can carriers avoid affected states or will federal enforcement be broad?
  Response: Cannot yet provide a 2026 run-rate given demand and PT uncertainties; RXO expects realized cost savings and buy-rate favorability over time but timing is uncertain; enforcement appears federal and broad—capacity exits are real and hard to avoid.

• Question from Jeffrey Kauffman (Vertical Research Partners): If the market stays static, how long to reprice so the squeeze no longer impacts the franchise? What level of tender rejections historically drives pricing power?
  Response: Key signal is tender rejections—material pricing power generally emerges when rejections reach the mid-teens (%); current rejections are ~6%, so more tightening would be needed to drive broad repricing; long-term effects of enforcement are positive for quality of capacity.

Contradiction Point 1

Market Conditions and Capacity Changes

It involves differing perspectives on the market conditions and capacity changes, which are crucial for understanding the company's strategic response to the industry environment.

Are federal enforcement actions sufficient to shift the supply-demand balance, and if demand doesn’t materialize soon, what actions can RXO take to manage gross profit per load? - Stephanie Benjamin Moore(Jefferies)

20251106-2025 Q3: The enforcement actions are significant and potentially structural, more so than past changes like ELDs. This is impacting capacity in a major way. - Drew Wilkerson(CEO)

Can you detail the strategy to improve book quality given truckload volume weakness, how long the process will take, and whether it relates to the Coyote acquisition? - Thomas Wadewitz(UBS)

2025Q2: We've just completed our bid season and have successfully improved our customer mix and margin profile. - Drew Wilkerson(CEO)

Contradiction Point 2

Demand Weakening and Pricing Strategy

It reflects differing views on the demand weakening across business lines and the strategic response to pricing, impacting investor expectations and operational adjustments.

Are federal enforcement actions sufficient to shift the supply-demand balance, and if near-term demand fails, what actions can RXO take to manage gross profit per load? - Stephanie Benjamin Moore(Jefferies)

20251106-2025 Q3: If demand returns, it will lead to a sharper market inflection. - Drew Wilkerson(CEO)

How does your strategy to optimize pricing, volume, and service for truckload impact the long-term outlook, and how are you preparing for the peak season? - Christian Wetherbee(Wells Fargo)

2025Q2: We've just completed our bid season and have successfully improved our customer mix and margin profile. - Drew Wilkerson(CEO)

Contradiction Point 3

Earnings Power and Mid-Cycle Growth

It highlights different expectations for the company's earnings power and mid-cycle growth, which are crucial for investor sentiment.

With the earnings outlook decline, what actions would you take differently in pricing decisions, and how do you assess leverage and cash flow expectations? - Brandon Oglenski (Barclays)

20251106-2025 Q3: The pricing decision was a mistake. We hope to return to being the market leader in growth. - Drew Wilkerson(CEO)

How have mid-cycle earnings changed since Coyote joined RXO? - Stephanie Moore (Jefferies)

2025Q1: Taking a strong business in Legacy RXO, the integration of Coyote dramatically improves long-term earnings power through purchase transportation, productivity gains, and technology enhancements. - Drew Wilkerson(CEO)

Contradiction Point 4

Market Tightness and Demand Expectations

It involves differing perspectives on the market tightness and demand outlook, which are crucial for strategizing and investor expectations.

How should the current market be viewed, and will buy rates remain sustainable? - Scott Group (Wolfe Research)

20251106-2025 Q3: This is a structural change. Previously, margins recovered quickly post-ELDs, but this time capacity is being removed from the market significantly and more permanently. - Drew Wilkerson(CEO)

What were the key RXO EBITDA changes over the past year and how did Coyote's contribution differ from initial expectations? Has there been a notable change in the recent market outlook? - Ken Hoexter (Bank of America)

2024Q4: Seasonally, from Q1 to Q2, we expect a positive uptick in volume and contract rates. Market tightening led to higher buy rates, resulting in improved gross profit per load. - Jared Weisfeld(CSO)

Contradiction Point 5

AI Platform Differentiation and Impact

It highlights varying expectations regarding the impact and strategic value of the AI platform, which is crucial for competitive positioning and growth.

How does RXO's AI platform differentiate itself, and how are its sales executed? - Ravi Shanker (Morgan Stanley)

20251106-2025 Q3: Our AI investments are hitting an inflection point, improving pricing algorithms and carrier communication. AI enables our team to focus on solutions rather than manual work. - Drew Wilkerson(CEO)

How has core RXO EBITDA changed year-over-year, and how does the Coyote contribution differ from initial expectations? Have you observed any shifts in recent market outlooks? - Ken Hoexter (Bank of America)

2024Q4: We expect 2025 contract rates to increase by low to mid-single digits year-over-year. - Jared Weisfeld(CSO)