RXO Q3 Deep Dive: Margin Squeeze Driven by Regulatory Capacity Exits and Weak Demand

Freight Delivery Company RXO (NYSE:RXO) met Wall Streets revenue expectations in Q3 CY2025, with sales up 36.6% year on year to $1.42 billion. Its non-GAAP profit of $0.01 per share was $0.03 below analysts’ consensus estimates.

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

StockStory’s Take

RXO’s third quarter was marked by a significant margin squeeze and weaker-than-expected profitability, which led to a sharp negative market reaction. Management attributed the underperformance to a sudden tightening of trucking capacity caused by new regulatory enforcement actions, resulting in higher transportation costs that outpaced RXO’s contractual sale rates. CEO Drew Wilkerson acknowledged, “Buy rates increased faster than our contractual sale rates with no meaningful corresponding increase in accretive spot opportunities,” emphasizing how this dynamic compressed margins. The company also highlighted ongoing weakness in automotive freight and a muted demand environment as additional headwinds.

Looking to the next quarter and beyond, RXO’s guidance reflects further caution as management expects continued pressure from both soft demand and elevated transportation costs. The company’s outlook is shaped by the persistence of regulatory-driven capacity reductions and uncertainty regarding when freight demand might recover. As Wilkerson stated, “We’re assuming a muted peak season and weak demand trends across all our lines of business.” Management is banking on cost reduction initiatives, investments in artificial intelligence, and potential longer-term structural industry changes to position RXO for an eventual recovery. However, near-term profitability remains under pressure until demand rebounds.

Key Insights from Management’s Remarks

Management identified regulatory-driven supply exits, weak demand, and cost actions as core drivers of third quarter performance and near-term challenges.

• Regulatory enforcement impacts: The unexpected tightening in trucking capacity was driven by federal enforcement actions on non-domiciled commercial drivers and English proficiency requirements, which led to higher purchase transportation costs across key regions and pressured gross margins.
• Automotive sector headwinds: Ongoing weakness in the automotive vertical, especially managed expedite freight, continued to weigh on results, with management citing a $5 million year-over-year margin impact from this segment.
• Technology and AI investment: RXO emphasized its continued investment in artificial intelligence and proprietary technology, noting improvements in pricing models and automation that have delivered productivity gains and cost savings, such as a 38% productivity increase over two years.
• Cost structure improvements: The company has achieved over $155 million in annualized expense reductions through headcount optimization, automation, and integrating Coyote’s operations, with an additional $30 million in new cost actions announced in the quarter.
• Last mile demand decline: While last mile logistics saw year-over-year growth, demand for big and bulky goods weakened unexpectedly after Labor Day, diverging from normal seasonal patterns and further impacting complementary services profitability.

Drivers of Future Performance

RXO’s outlook is shaped by persistent macroeconomic headwinds, regulatory supply changes, and ongoing cost reduction efforts, with recovery contingent on a demand upturn.

• Sustained regulatory impact: Management believes that continued enforcement of federal regulations could result in a permanent reduction in trucking capacity, potentially leading to a “higher for longer” freight environment in the long run. However, near-term benefits are muted without a corresponding increase in demand.
• Demand uncertainty persists: The company’s guidance assumes weak freight volumes and a subdued peak season, with limited visibility on when consumer and industrial demand might recover. Management cited ongoing softness in sectors like automotive and big and bulky retail as major risks.
• Ongoing cost optimization: RXO is focused on further automating processes, consolidating its real estate footprint, and leveraging technology to reduce cost per load, aiming to maintain operational flexibility and capture margin expansion once market conditions improve.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the degree to which regulatory enforcement continues to reduce trucking capacity, (2) any early signs of freight demand recovery across key verticals, and (3) RXO’s ability to realize further cost savings and operational efficiencies, especially through technology investments. The pace of margin recovery and client retention in enterprise contracts will be additional markers of progress.

RXO currently trades at $12.11, down from $17.64 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free for active Edge members).

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