Executive Summary / Key Takeaways

• RXO is undergoing a significant transformation driven by the strategic acquisition of Coyote Logistics, aiming to leverage increased scale and technology integration to enhance long-term earnings power and free cash flow generation despite a soft freight market.
• The integration of Coyote is progressing ahead of schedule, particularly the migration of carrier and coverage operations onto the unified RXO Connect platform, which is expected to unlock substantial synergies, including over $70 million in total cash synergies identified to date.
• RXO's proprietary technology, including AI and machine learning, is a key differentiator, driving significant productivity improvements (up ~17% in the last 12 months, ~40% in the last two years) and positioning the company for more effective purchase transportation procurement with the expanded dataset.
• While near-term financial results reflect the prolonged soft freight environment and lower gross profit per load (~30% below the five-year average), the company's disciplined cost management, momentum in complementary services (24% Last Mile stop growth in Q1 2025), and strategic investments are expected to drive sequential EBITDA growth.
• Management guidance for Q2 2025 Adjusted EBITDA is $30 million to $40 million, with expectations for full-year 2025 combined brokerage volume growth, signaling confidence in the company's ability to outperform the market and realize integration benefits as the cycle potentially inflects.

A Transformed RXO: Leveraging Scale and Technology in a Soft Market

RXO, Inc. emerged as a standalone entity in November 2022, following its spin-off from XPO, Inc. (XPO). Established as an asset-light brokered transportation platform, its initial foundation rested on a core truck brokerage business complemented by managed transportation and last mile services. This structure was designed for agility and efficiency, leveraging technology to connect shippers with carriers. In its early history as an independent company, RXO demonstrated organic strength, particularly in Less-Than-Truckload (LTL) volume growth, which saw increases of 13% and 40% year-over-year in Q3 and Q2 of 2024, respectively, contributing to profitable expansion. The Last Mile segment also showed accelerating momentum, with stops growing 7% year-over-year in Q2 2024, accelerating to 11% in Q3 2024, and a remarkable 24% in Q1 2025, driven by strong customer relationships and service quality.

The trajectory of RXO fundamentally shifted with the transformative acquisition of Coyote Logistics from UPS (UPS), completed on September 16, 2024, for $1.04 billion in cash. This strategic move was aimed at significantly enhancing RXO's competitive standing by adding scale, broadening service capabilities, and strengthening its presence across diverse end markets. The acquisition more than doubled RXO's truckload volume, providing greater lane density and creating a larger pool for optimizing purchase transportation costs—a key area of focus for future profitability.

The integration of Coyote has been a central theme since the acquisition, with management reporting that the process is ahead of schedule. Key integration efforts span people, customer and carrier relationships, and crucially, technology. This focus on seamless integration is not merely operational; it is viewed as a direct lever for realizing substantial synergies and enhancing the combined entity's long-term earnings power and free cash flow generation potential, particularly as the freight market navigates a prolonged soft cycle.

The Technological Backbone: Driving Efficiency and Competitive Edge

At the heart of RXO's strategy is its proprietary, cutting-edge technology platform, RXO Connect. This platform is designed to provide highly efficient access to capacity for shippers and optimize freight placement with carriers. The company's technology is a major differentiator, leveraging AI and machine learning within its pricing algorithms and employee-facing software to drive continuous productivity improvements.

The impact of this technological focus is quantifiable. RXO has reported significant gains in productivity, measured by loads per person per day, increasing by approximately 17% over the last 12 months and nearly 40% over the last two years. These improvements demonstrate the tangible benefits of the company's investment in its digital tools, enabling employees to handle more volume efficiently.

The integration of Coyote's technology into the RXO Connect platform is a critical strategic priority. A major milestone was achieved in Q1 2025 with the successful migration of Coyote's carrier and coverage operations onto the unified Freight Optimizer system within RXO Connect. This unification provides the combined carrier network access to significantly more freight and RXO's representatives access to a larger pool of carriers, facilitating better load matching and enabling opportunities for optimizing purchase transportation costs. Early results from this migration have been encouraging, demonstrating the scalability of the tech and faster-than-expected integration of carrier operations, with approximately 20% cross-coverage already observed between legacy teams.

The strategic decision to make RXO Connect the primary operational system is expected to yield significant savings, particularly given that Legacy Coyote was spending approximately $50 million per year on technology. The bulk of the technology integration is anticipated to be complete by the end of Q3 2025. This technological convergence is not just about cost reduction; it's about leveraging a unified, larger dataset for more powerful pricing and network decisions, further enhancing the competitive moat provided by RXO's digital capabilities. The company's next-generation AI/ML models are already running on this expanded dataset, promising further benefits.

While specific R&D targets or timelines for new technologies beyond the current integration efforts are not detailed, the ongoing investment in AI and machine learning within the platform underscores a commitment to continuous innovation. The "so what" for investors is clear: RXO's technology is not merely a tool but a core competitive advantage that drives operational efficiency, enhances pricing power, supports margin expansion, and is foundational to the company's strategy for gaining market share and increasing profitability, especially as the market recovers.

Navigating the Competitive Currents

The North American truckload and logistics market is highly competitive, featuring a mix of asset-based carriers, other asset-light brokers, and diversified third-party logistics providers. RXO positions itself as a technology-driven, asset-light leader, emphasizing service, solutions, innovation, and relationships as key differentiators.

Key publicly traded competitors operating in overlapping segments include J.B. Hunt Transport Services Inc. (JBHT), Schneider National Inc. (SNDR), and Ryder System Inc. (R). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, RXO operates as a mid-tier player in the brokerage space.

Comparing RXO to these rivals reveals distinct competitive dynamics. Asset-heavy players like JBHT and SNDR often possess strong network effects, particularly in intermodal, and benefit from scale in cost absorption. Ryder offers a broad suite of supply chain and fleet management services. RXO, with its asset-light model, contrasts by emphasizing agility and technological efficiency.

Quantitatively, RXO's asset-light structure contributes to a higher Return on Invested Capital (ROIC) compared to asset-heavy peers, as it requires less capital deployment for growth. However, in the current soft market, RXO's profitability margins (e.g., Net Profit Margin TTM at -6.04%) are pressured, lagging behind the typically higher margins seen by more established, larger competitors like JBHT (Net Profit Margin 2024 at 5%) and SNDR (Net Profit Margin 2024 at 2%). Ryder's gross margins (20% in 2024) also appear stronger than RXO's (15.8% TTM).

RXO's technological edge provides quantifiable operational benefits, such as the significant productivity gains mentioned earlier. This efficiency is a critical tool in competing against rivals, potentially leading to lower operating costs per unit in brokerage services compared to competitors relying on more manual processes. In the Last Mile segment, RXO is the largest provider of outsourced heavy goods delivery in the U.S., leveraging its scale, technology, and service reputation to gain market share from competitors.

Customer relationships are a vital aspect of competition. RXO highlights long-tenured relationships with its top customers (over 15 years on average). In the current environment, customers are reportedly shrinking the number of carriers they work with, a trend that RXO sees as an opportunity to grow with its largest clients. The company's ability to offer a broader portfolio of services post-Coyote acquisition also enhances its competitive appeal, enabling cross-selling opportunities that were not possible for the standalone entities.

While brokerage has historically gained share from asset-based carriers (growing from single digits to over 20% of the market in the last decade), RXO believes this trend will continue, potentially reaching 30% in the next five years. RXO aims to be a primary beneficiary of this shift, leveraging its technology and service to capture market share.

Segment Performance and Financial Health

RXO operates as one reportable segment but provides insights into its key service offerings: Truck Brokerage, Managed Transportation, and Last Mile.

The Truck Brokerage business, significantly expanded by the Coyote acquisition, is the largest contributor to revenue. In Q1 2025, brokerage revenue was $1,067 million, a substantial increase from $564 million in Q1 2024, primarily due to the acquisition. Combined brokerage volume declined 1% year-over-year in Q1 2025 but outgrew the market. LTL volume continued its strong trajectory, growing 26% year-over-year in Q1 2025, while full truckload volume decreased 8%. Brokerage gross margin was 13.3% in Q1 2025, impacted by lower freight rates not fully offset by purchased transportation cost reductions and mix changes. Productivity gains driven by technology remain a key operational highlight.

Managed Transportation revenue was $137 million in Q1 2025, down 10% from $152 million in Q1 2024, primarily due to lower expedite ground volume, particularly in the automotive sector. Despite this, the segment is a source of synergy loads for brokerage and boasts a growing sales pipeline, reaching nearly $2 billion in Q4 2024, indicating potential for future growth and cross-selling opportunities.

Last Mile continues to be a strong performer, with revenue of $278 million in Q1 2025, up 20% from $232 million in Q1 2024. This growth was driven by an impressive 24% year-over-year increase in stops, accelerating from previous quarters. RXO is gaining significant share in the big and bulky delivery market, winning business from both existing and new customers due to its scale, service, and technology. Profitability initiatives in this segment are expected to yield over $20 million in annualized Adjusted EBITDA when fully implemented.

Consolidated financial performance in Q1 2025 reflected the challenging market and integration costs. Revenue was $1,433 million, up significantly year-over-year due to the Coyote acquisition. However, the company reported an operating loss of $30 million and a net loss of $31 million, compared to losses of $12 million and $15 million, respectively, in Q1 2024. This was influenced by higher costs of transportation (due to market rates and mix), increased depreciation and amortization (partially from the acquisition), and transaction/restructuring costs. Adjusted EBITDA in Q1 2025 was $22 million, within management's guidance range.

RXO maintains a strong liquidity position. As of March 31, 2025, total current assets were $1,255 million, with total current liabilities of $964 million, resulting in a current ratio of approximately 1.30. Cash and cash equivalents were $16 million, lower than the prior quarter due to timing of acquisition-related payments. The company had over $575 million of total committed liquidity at the end of Q1 2025, with its $600 million revolving credit facility undrawn. Net leverage stood at 1.9 times trailing 12 months bank-adjusted EBITDA.

While operating cash flow was modest ($2 million provided in Q1 2025) and adjusted free cash flow conversion was impacted by lower profitability (27% in Q1 2025), the company remains confident in its long-term conversion target of 40% to 60% through market cycles, supported by its asset-light model. Capital expenditures are focused on strategic technology investments and real estate, with lowered estimates for 2025 ($65M-$75M) and 2026 ($45M-$55M) reflecting anticipated synergies.

Outlook and Risks

Management's outlook reflects a balance between the ongoing soft freight market and the anticipated benefits from the Coyote integration and internal initiatives. For Q2 2025, RXO expects Adjusted EBITDA between $30 million and $40 million, a significant sequential increase from Q1 2025. This outlook assumes truckload volume and gross profit per load remain consistent with April levels at the high end and a material decline at the low end, notably excluding material purchase transportation benefits from the recent carrier migration.

Looking ahead, RXO expects combined brokerage volume to grow on a year-over-year basis for the full year 2025, signaling confidence in its ability to capture market share and leverage the expanded network. The company anticipates sequential improvement in gross profit per load in Q2 2025 and expects EBITDA to grow significantly compared to Q1.

Key risks to this outlook include the continued uncertainty in the macroeconomic environment and freight market recovery. While some industry metrics show potential signs of improvement, the timing and pace of a robust recovery remain unknown. Changing trade policies and tariffs could also impact near-term truckload demand as customers adjust strategies. The competitive landscape remains intense, with potential pressure on pricing. Additionally, the company faces ongoing legal proceedings, including misclassification claims in the Last Mile business, which, while believed to be without merit, could have a material adverse effect if resolved unfavorably, as they are not covered by standard insurance policies.

Despite these risks, RXO highlights several company-specific drivers expected to support performance. The successful integration of Coyote, particularly the unified technology platform, is expected to unlock significant purchase transportation synergies (potentially large given the $4 billion combined spend). The repeated upward revisions to synergy estimates (now over $70 million total cash synergies) underscore management's confidence in realizing cost efficiencies. Momentum in Last Mile and Managed Transportation provides more stable revenue streams and cross-selling opportunities. The company's agile, asset-light model allows for quick cost adjustments in response to market shifts, and its strong balance sheet provides flexibility for organic and inorganic growth opportunities.

Conclusion

RXO is navigating a challenging freight market from a position of transformation. The strategic acquisition of Coyote Logistics has fundamentally altered its scale and market position, creating a larger, more diversified entity poised for enhanced long-term earnings power and free cash flow generation. While near-term financial performance is pressured by the prolonged soft cycle and lower gross profit per load, the company's disciplined execution, particularly the ahead-of-schedule integration of Coyote and the realization of significant cost synergies, provides a clear path to improved profitability.

The company's proprietary technology is a critical enabler, driving operational efficiency and positioning RXO to capitalize on purchase transportation optimization opportunities with its expanded network and data set. Momentum in complementary services further strengthens the business model, adding stable growth vectors and cross-selling potential. Despite macroeconomic uncertainties and competitive pressures, management's outlook for sequential EBITDA growth and full-year brokerage volume growth reflects confidence in the company's strategic direction and ability to outperform. For investors, the story of RXO is one of a company leveraging scale, technology, and operational discipline to build a structurally stronger business, positioning itself for significant upside when the freight cycle eventually inflects. The successful realization of integration synergies and the effective deployment of its technological edge will be key factors to watch as RXO aims to deliver on its long-term potential.