On Monday, Seattle-based freight forwarder Expeditors International (NYSE: EXPD) released another lackluster quarterly earnings report, this time for the fourth quarter of 2023. Compared to Q4 2022, top-line revenue was down 34%, to $2.3 billion, operating income was down 40%, to $199 million, and net earnings were slashed by 28% to $159 million.
Similar large drops in year-over-year revenues and profits have become a common sight in the transportation industry as providers and intermediaries in all modes have had to deal with the double whammy of receding volumes and excess capacity in the come-down from the pandemic highs of 2021 and 2022. Indeed, Expeditors President and CEO Jeffrey Musser was quick to blame COVID and more recent geopolitical uncertainty for his company’s performance.
“While ocean and air markets have been recovering from the massive disruptions brought on by the global Covid-19 pandemic, we continue to face further market uncertainty due to the current conflicts in the Middle East and on the Red Sea,” Musser said in the earnings release.
Unfavorable year-over-year numbers are forgivable in the context of the aftermath of a pandemic when goods spending and shipment volumes were inflated to historic levels, transportation capacity was strained, and rates soared to the moon. The problem is that blaming COVID doesn’t tell the whole story of what’s happening inside the Expeditors organization.
In fact, Expeditors is underperforming where the company was five years ago, in the fourth quarter of 2018, well before the pandemic began. Since then, the forwarder has barely grown top-line revenue, from $2.24 billion in Q4 2018 to $2.3 billion in Q4 2023. Through generally higher rates charged to customers and better buying power, Expeditors generated significantly more net revenue, which increased from $681 million in Q4 2018 to $764 million in Q4 2023.
That net revenue number is important because it indicates how Expeditors is performing in the freight market itself — it’s the top-line revenue of the freight services that Expeditors has sold to shippers minus the cost of purchased transportation, or what Expeditors has to pay steamship lines to actually move the freight. If “market volatility” or the “depressed rate environment” were causing poor results, it’d show up in net revenue, but net revenue has grown by $83 million over the past five years.
Expeditors is making more money by selling high and buying low in the freight market, but its bloated organization is consuming more and more of its margin. In the fourth quarter of 2018, $681 million of net revenue was good for $217 million in operating income and $179 million in net earnings. But in the fourth quarter of 2023, $764 million of net revenue yielded just $199 million in operating income and $159 million in net earnings. In other words, $83 million in additional margin resulted in profits that were lower by $20 million.
Musser addressed higher costs at Expeditors in the earnings release.
“As a company we have continued to remain focused on bringing expenses in line with revenue, as shown by headcount reductions,” he said. “Compensation remains our second largest expenditure behind freight costs and is the area where we know we can have the largest impact from the standpoint of controlling expenses. We also know that there is more work that we can and will do to control expenses moving forward.”
It’s worth looking at how Expeditors’ workforce has evolved over the past five years. Total head count has been almost flat, growing by just 2%, from 18,081 full-time employees at the end of 2018 to 18,452 full-time employees at the end of 2023. But there are proportionally larger technology and administrative — i.e., non revenue-generating — workforces: “Corporate” grew by 15.6%, from 352 employees in 2018 to 407 in 2023. Most strikingly, head count in “information systems,” which presumably represents highly compensated data scientists and software engineers, ballooned by 38%, from 912 employees in 2018 to 1,259 in 2023.
It appears that Expeditors’ rapidly growing technology organization is eating its margins. Yet this is one area where Expeditors is not right-sizing head count, but continuing to invest: At the end of 2022, there were 1,173 information systems employees. Current job postings at Expeditors support the notion that the firm is leaning into a tech-heavy workforce balance: There are 57 sales roles currently posted on the Expeditors website, some of which are more than six months old. But there are 32 openings in information systems currently posted on the website — many of them amorphous project management jobs requiring “Scrum Master” certifications — and 28 of those were posted in the past month. Expeditors leadership is hell-bent on filling its roster with more middle managers in its already-bloated tech organization, to the detriment of the shareholders’ earnings.
Expeditors is making less money than it did five years ago and should at some point consider that there are reasons for that other than the COVID-19 pandemic, which is receding in the rearview mirror. Other large third-party logistics providers have made bets on technology that yielded poor returns; a failed $1 billion initiative at C.H. Robinson ended up costing CEO Bob Biesterfeld his job at the beginning of 2023. A renewed focus on revenue generation and operational efficiency might have a bigger impact on earnings growth than another class of newly hired Scrum Masters.
Scott Weckbaugh
What John doesn’t share is that investment in technology has a high cost, and Freight Forwarding business, which has been a traditionally service based operation has evolved into Hybrid service/technology machine. Expeditor’s excels in customer service probably better than most companies in this industry, and largely the success has been attributed to its investment in service support. However, if we understand the Darwinian dynamics in play in our economical world, and we continue to rely on service oriented approach without keeping in pace with technological progress (like AI), then you fall by the way side, and are eaten alive by other competitors who can compete in this service/technical paradigm shift. Expeditors has learned a sharp lesson after the cyber attack, and as such has invested in defense to protect itself from nefarious actors ruin on destroying the bottom line by cyber terrorism. Yes, technology is expensive, but there is a cost to success. Investing in the future is not a bloated strategy. No pain, no gain.
Stephen
@John Bryden, I worked at Expeditors for a time (no longer), and I never saw anything like that in any of the offices I worked at or visited. Maybe a specific sales manager at a specific branch, but as a company-wide culture, that’s not how they work. Expeditors is not a truckload broker, they aren’t cold calling shippers trying to score one-off loads and ringing gongs and bells when they get a “yes”. Their sales strategy is designed around global supply chain solutions, getting on long-term (6 months to 1 year) RFQ’s and bids. Very little competitive live spot quoting.
This is a very interesting 8K. Their business was basically cut in half. Volumes down only marginally y/y, yet revenues cratered, telling us that rates are the problem. Their client base is still moving freight at a decent clip, but the rate softness we’ve all seen has hurt them badly.
Of the 8 staffing categories they list (6 geographical regions, IT, and CHQ), only IT increased headcount, everyone else cut, which i find interesting. This makes sense in light of the recent hack that both embarrassed them and caused a loss of trust in the market. Yes, I know it was a year ago, but EXPD thinks long term. And Jeff Musser was the IT head before becoming CEO, so it’s an important part of their culture.
I agree, too much bloat, too top-heavy, way too many middle managers who add little value but spend a lot of time (and cost a lot of money) to produce internal reports and internal operational programs. One of my former managers went from a value-add operational position that drove revenue and profitability, then “promoted” into another generic internal-process-optimization word-salad position corporate nothing position; a job title that simply didn’t exist when I joined 10 years ago. I respect Expeditors, they are well managed and have a fortress balance sheet, but they really need to slim down, get hungry and go after market share.
Peter D Kerr
Well, they got hacked and literally shut down and we had had do things by hand and fax in 2022 feb. because any other media was locked by hackers for 2 months or so. I’m sure the corporate structure not paying enough attention (or money, they only were spending a tiny amount on network security), had a bit to do with it. Then suddenly their security cost goes up? Well, duh.
S Kells
Another reason for bloat is the seven-level management structure throughout, which they consider necessary due to the absence of an HR department.
John Bryden
One of their sales people once told me they had a bell in their office their sales people would ring when they scored, presumably triggered by one of those outsized buy-low sell-high scenarios mentioned in the article. Struck me as pretty juvenile at the time, didn’t sound like they had the interests of their customers in mind. Not that this differs from the majority of their competitors, sad to say.
Shrek
Using covid and geopolitical events as an excuse is a total cop out. A good Forwarder is creative and adapts to any situation thrown at them. Making excuses rather than addressing the expense side of the ledger should raise a red flag to the board.