XPO Q3 Deep Dive: Pricing Power and AI-Driven Efficiency Boost Margins Amid Soft Freight Environment

Freight delivery company XPO (NYSE:XPO) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 2.8% year on year to $2.11 billion. Its non-GAAP profit of $1.07 per share was 5.3% above analysts’ consensus estimates.

Is now the time to buy XPO? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

XPO’s third quarter results drew a strong positive response from the market, as the company delivered above-consensus revenue and non-GAAP earnings despite ongoing softness in the freight sector. Management attributed the outperformance to continued operational improvements, particularly within its North American less-than-truckload (LTL) business, where proprietary technology and process optimization drove both cost reductions and yield gains. CEO Mario Harik highlighted that XPO’s “service product has never been better,” citing record improvements in damage frequency and on-time performance. The company also benefited from a rising share of high-margin local and premium shipments, reflecting the success of targeted sales and service initiatives.

Looking ahead, XPO’s guidance is anchored by expectations for ongoing yield growth, continued margin expansion, and accelerated adoption of AI-driven operational tools. Management emphasized that even without a broader economic rebound, the business is positioned to improve profitability through steady gains in pricing and productivity. Harik explained, “We still have a lot of runway in terms of all the initiatives that we are driving to deliver that above-market yield growth,” adding that new AI capabilities are only beginning to impact network efficiency. While management acknowledged customer optimism for a macro recovery in 2026, the company’s strategy remains focused on controllable levers, including premium services and network optimization.

Key Insights from Management’s Remarks

Management credited margin gains to investments in technology, a growing mix of local and premium accounts, and disciplined cost control, while soft freight volumes limited shipment growth.

• AI-driven productivity: XPO leveraged proprietary artificial intelligence tools to optimize linehaul, dock, and pickup operations, leading to measurable gains in cost efficiency and a 2.5-point improvement in labor hours per shipment.
• Local and premium mix shift: The company increased its share of high-margin local shipments to 25% of the total, up from 20% several years ago, and expanded premium service offerings, both of which contributed to higher yields.
• Network and fleet investment: Significant capital deployment lowered the average tractor age to 3.6 years and provided 30% excess door capacity, supporting reliability and positioning XPO for future growth as demand recovers.
• Cost control through in-sourcing: In-sourcing formerly outsourced linehaul miles reduced purchase transportation expense by 48% year-over-year, insulating XPO from third-party cost pressures and supporting margin resilience.
• European performance and outlook: The European Transportation segment grew revenue 7% year-over-year, with management highlighting progress in gaining wallet share and a growing sales pipeline, though the segment’s profit contribution remains limited compared to North America.

Drivers of Future Performance

XPO’s outlook is underpinned by sustained yield improvement, ongoing productivity gains from AI, and disciplined expansion of high-margin business segments.

• Yield and pricing momentum: Management expects above-market yield growth to continue, supported by premium services and a rising share of small and medium-sized business accounts, which typically command higher margins and offer a multiyear pricing runway.
• AI and tech-driven cost savings: The deployment of new AI models and optimization tools is expected to drive further improvements in productivity and network efficiency, offsetting inflationary pressures and providing incremental margin expansion even without volume growth.
• Selective capital allocation: CapEx is projected to moderate, with investments focused on network reliability and efficiency, enabling higher free cash flow conversion and greater flexibility for potential capital returns while maintaining balance sheet strength.

Catalysts in Upcoming Quarters

Looking ahead, our analyst team will be tracking (1) the pace of adoption and impact of new AI-driven productivity tools, (2) further gains in high-margin local and premium service mix, and (3) the trajectory of free cash flow improvement as capital expenditures moderate. Execution against these milestones, as well as progress toward eventual divestiture of the European business, will be important markers of management’s ability to deliver on long-term targets.

XPO currently trades at $135.59, up from $124.78 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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