Transcript of Dycom Industries, Inc. second quarter earnings conference call
that was held on Tuesday, February 19, 2002.
DYCOM INDUSTRIES, INC.
2002 Second Quarter Earnings Conference Call
February 19, 2002
SPEAKERS: Steven E. Nielsen, President and Chief Executive
Officer Marc R. Tiller, Esq., General Counsel and
Corporate Secretary Richard L. Dunn, Senior Vice
President and Chief Financial Officer
OPERATOR: Ladies and gentlemen, thank you for standing by.
Welcome to the Second Quarter Earnings Call. At this
time, all participant lines are in a listen-only
mode. Later there will be questions and answers;
instructions will be given at that time. If you
should require assistance during the call, please
press zero, then star. As a reminder, the call is
being recorded. I would now like to turn the call
over to the President and CEO, Mr. Steven Nielsen.
Please go ahead.
Nielsen: Thank you, Rita. Good morning, everyone. I'd like to
thank you for attending our Second Quarter Fiscal
2002 Dycom Earnings Conference Call. With me, we have
in attendance Marc Tiller, our General Counsel, and
Richard Dunn, our Chief Financial Officer. Now I will
turn the call over to Marc Tiller.
Tiller: Thanks, Steve. Statements made in the course of this
conference call that state the company's or
management's intentions, hopes, beliefs, expectations
or predictions of the future are forward-looking
statements. It is important to note that the
company's actual results could differ materially from
those projected in such forward-looking statements.
Additional information concerning factors that could
cause actual results to differ materially from those
in the forward-looking statements is contained from
time to time in the company's SEC filings, including
but not limited to, the company's report on Form 10K
for the year ended July 28, 2001, and the company's
reports on Form 10Q for the quarters ended January
27, 2001, April 28, 2001, and October 27, 2001.
Copies of these filings may be obtained by contacting
the company or the SEC. Steve.
Nielsen: Thanks, Marc. Yesterday we issued a press release
announcing our second quarter fiscal 2002 earnings.
Please note that for fiscal 2002, we adopted FAS 142,
which eliminates goodwill amortization. Consequently,
in order to insure accurate
DYCOM 2002 Second Quarter Earnings Conference Call 1
comparisons, all references to prior periods are pro
forma, as if we had not amortized goodwill.
For the quarter ending January 26, 2002, total
contract revenues were $138.3 million versus $195.8
million in the year ago period, a decrease of 29
percent. Net income for the period was $5 million
versus $14.1 million in the year-ago period, a
decrease of 65 percent, while fully diluted earnings
per share were $.12 cents versus $.33 cents, also a
decrease of 64 percent.
Backlog at the end of the second quarter was $953.8
million versus $914.8 million at the end of the first
quarter, a sequential increase of $39 million. Of
this backlog, approximately $428.5 million is
expected to be completed in the next twelve months.
Our first quarter results continue to demonstrate the
prudent management of our business and our balance
sheet during a very challenging period for our
industry. During the quarter, we were able to
generate operating cash flow of over $29 million and
pre-cash flow after capital expenditures of over $25
million. Day sale outstanding decreased sequentially
four days from the first quarter to 75.2 days, and
our net cash position increased to $165.4 million at
the end of the quarter. Additionally, working capital
and our current and quick ratios all improved
sequentially. Total head count was reduced by
approximately 500 without taking any special charges.
During the quarter, we continued to experience the
effects of a slow overall economy, reduced capital
expenditures by telephone companies, and the relative
absence of a major cable operator from the
marketplace. Yet despite these factors, some industry
indicators have begun to stabilize or show potential
for slight improvement, particularly during the
latter half of calendar 2002.
First, the year-long slowing of economic activity
showed signs of moderating during the quarter. For
telephone companies, while capital expenditures by
customers continued at reduced levels, and budgets
were executed with less urgency, customers, with the
exception of those most heavily indebted, appear to
have stabilized their spending plans for 2002. For
cable operators, anticipated new projects began to
commence and in some instances, accelerate. A leading
cable operator indicated publicly its return to the
market for system upgrade services, and its intention
was evidenced through increased bidding
opportunities.
Additionally, a customer's uncertainty regarding
potential merger
DYCOM 2002 Second Quarter Earnings Conference Call 2
alternatives, which had sharply impacted our first
quarter performance, moderated during the quarter,
resulting in increasing demand for our services.
While all of these factors point to a potentially
stabilizing environment, the quarter and the
near-term environment remain challenging.
To manage these challenges, we have continued several
initiatives to help offset pressures on operating
margins.
First, we have eliminated essentially all capital
expenditures going forward with two exceptions:
continued investments in information technology,
which will have direct impact on our costs, and
maintenance replacement of limited amounts of
equipment. Capital expenditures net of disposals were
just $3 1/2 million during the quarter. Generally,
our fleet of capital equipment is in good condition
and significantly reduced investment will have little
or no impact on operational expenses.
Second, we continue to sell idle assets as we reduced
field head count, and thirdly, we continue
significant reductions in general and administrative
expenses, to better align our administrative costs
with our near-term anticipated activity. While we
sincerely regret the adjustments to our employee head
count that we have made and will continue to make,
they are necessary to maintain our financial strength
and better position Dycom for the current
environment.
On a positive note, backlog was up sequentially from
the first quarter, yet we maintained a disciplined
approach to new business, only booking new work so
long as it meets our margin targets. In our industry,
during periods of reduced demand, it is extremely
important to avoid prolonging reduced margins through
low margin backlog.
During the quarter we received several new projects
and a significant number of contract extensions. For
BellSouth, extensions of our master contracts in
South National, Tennessee; Knoxville, Tennessee;
Chattanooga, Tennessee; Pikeville, Kentucky;
Birmingham, Alabama; and Montgomery, Alabama. For
Verizon, an extension of our Lexington, Kentucky
master contractor. For Qwest, an extension of our
Utah/Northern Arizona master contracts. And for
Citizens, extensions of our master contracts for West
Virginia and Tennessee. During the quarter, we also
received a contract from Charter for an upgrade of
Reno, Nevada, and from Insight, a contract for
engineering services in
DYCOM 2002 Second Quarter Earnings Conference Call 3
Louisville, Kentucky. Finally, we also received new
locating contracts with Texas Utilities and
Philadelphia Electric Company.
As Dycom continued to respond to a challenging
environment this quarter, we amply demonstrated our
strengths. First and foremost, we continued to
maintain strong customer relationships throughout all
of our markets; we possess an unparalleled blue chip
customer base, which has minimized our credit risk
during a difficult economic period. Our experienced
management team successfully and significantly
reduced our work force, and cash increased by over
$25 million dollars, strengthening what was already
the most robust balance sheet in our industry. Day
sale outstanding increased sequentially in a time
when other industry participants have experienced
more pronounced working capital issues, and while our
pricing environment remains tight, we remain focused
on time-tested cost controls and productivity
improvements as we continually evaluate appropriate
staffing and capital equipment levels.
In these difficult economic times, we firmly believe
that Dycom's superior financial health will
increasingly allow us to differentiate ourselves from
our competitors in the eyes of our customers,
employees, and suppliers. Dycom's financial strength
is key to our belief that when growth opportunities
return to our industry, we will be the first and the
best positioned to take profitable advantage of them.
We believe that this advantage relative to other
industry participants becomes more pronounced every
day. After weighing all of the factors we have
discussed today, we have updated our forecast as
follows.
For the third quarter fiscal 2002, we anticipate
earnings per share of $.10 to $.15 cents on revenues
of $128 to $138 million. This outlook anticipates a
continued slow economy in the U.S., customer budget
pressures which only begin to moderate at the end of
the first calendar quarter of 2002, and a continued
return to the marketplace by a major cable operator.
Looking beyond the third quarter, we are not
currently in a position to provide specific guidance
for the fourth quarter fiscal 2002, as macro-economic
conditions, capital market volatility and customer
plans generally remain uncertain in the intermediate
term and have reduced visibility. That being said, we
have three observations as to what factors will be
important to track during the next 12 months.
DYCOM 2002 Second Quarter Earnings Conference Call 4
For telephone companies, it appears that current
capital spending run rates are below those necessary
to ensure that their networks operate efficiently in
the intermediate and long term. To the extent that
reduced levels of activity are maintained through the
first calendar quarter of 2002, as we are observing
currently, we believe somewhat counter-intuitively
that this will ensure a more sustained rebound in the
second half of 2002, when necessary expenditures can
no longer be delayed.
For cable operators, final resolution of the
AT&T/Comcast merger is key. AT&T or its eventual
owners continues to have a significant backlog of
plant to upgrade. Interestingly, AT&T was 4.2 percent
of our revenue this quarter, an increase from 3.3
percent for the first quarter. And finally, recent
developments continue to indicate that substantial
competitive capacity may be less able to respond to
increased future customer demand, due to capital
constraints. This trend may accelerate. At this
point, I will turn to call over to Dick Dunn, our
CFO. Dick.
Dunn: Thanks, Steve. Before I begin with my review, let me
remind everyone that we have adopted FAS 142,
effective in the first quarter of this fiscal year
2002. In accordance with the provisions of this
statement, we have not recorded an amortization
charge for our goodwill balance during the current
year. In order to give you a true apples-to-apples
comparison, I will provide you with prior period
information on a pro forma basis, as if we had
adopted FAS 142 in last year's first quarter. With
that in mind, I will begin my overview of our
quarterly financial performance, starting with the
income statement.
Contract revenues for the current quarter were $138.3
million, which is down 29.4 percent from last year's
Q2 of $195.8 million. Revenues for the quarter on a
same-store basis were down 32.9 percent. Total
revenues for the six-month period ended January 26
declined 28.9 percent to $306.1 million, versus
fiscal year 2001 revenue of $430.5 million. Organic
revenue activity for the six-month period was down
33.9 percent. For the quarter, the top five customers
accounted for 53.8 percent of total revenues, versus
49.8 percent for the prior year second quarter.
For the six months ended January 26, sales to the top
five customers as a percent of the total were 53
percent versus 49 percent for the prior year. The top
five customers and their respective percentages for
Q2 of fiscal year 2002 and 2001 are as follows.
DYCOM 2002 Second Quarter Earnings Conference Call 5
In Q2 fiscal year 2002, our top five customers are as
follows: BellSouth, 16.9 percent; Comcast, 15
percent; Adelphia, 11.1 percent, DirecTV, 6.1 percent
and Qwest, 4.7 percent. And turning to Q2 of fiscal
year 2001, the top five were as follows: BellSouth,
17.8 percent; Comcast, 12.2 percent; Qwest, 7.6
percent, Williams Communication 6.3 percent, and
Charter Communications 5.9 percent.
Net income for the second quarter was $5 million
versus $14.1 million in fiscal year 2001,
representing a decrease of 64.6 percent. Net income
for the six months ended January 26 decreased 64.3
percent to $13 million versus last year's $36.6
million. Fully diluted earnings for the quarter were
$.12 cents per share, a 63.3 percent decrease in last
year's $.33 cents per share results. CPS for the
six-month period ended January 26 decreased 64.7
percent to $.30 cents per share versus last year's
$.85 cents per share.
Operating margins for the second quarter declined 569
basis points, coming in at 5.51 percent, versus last
year's 11.2 percent. This decrease was due to a 197
basis point increase in cost of earned revenues, a
175 basis point increase in general and
administrative costs, and a 197 basis point increase
in depreciation and amortization. Operating margins
for the six-month period declined 679 basis points,
coming in at 6.56 percent, versus last year's 13.35
percent. This decrease was due to a 302 basis point
increase in cost of earned revenues, a 180 basis
point increase in general and administrative costs,
and a 197 basis point increase in depreciation and
amortization.
The effective tax rates for the quarter and six-month
periods were 42.7 percent and 42.0 percent,
respectively, versus 40.2 percent and 39.8 percent
respectively for the prior year's period. This
increase was primarily attributable to the mix of
income among our subs and the impact that had on our
state tax rate.
Net interest income for the quarter and six months
was $679,000 and $1.6 million respectively, versus
$1.1 million and $2.4 million for the prior year.
This decrease was primarily a result of declining
short-term interest rates, partially offset by
positive operating cash generation throughout the
period. The interest income is generated through
investments in high quality municipal and corporate
instruments.
For the quarter, our cash flow from operating
activities was $29.1 million. The primary components
of this cash flow were net
DYCOM 2002 Second Quarter Earnings Conference Call 6
income of $5 million, depreciation and amortization
of $8.7 million, and reduction to working capital of
approximately $15.4 million. Offsetting the operating
cash flow for the quarter were investing and
financing activities of $3.7 million, primarily
consisting of net capital expenditures of $3.5
million. Cash and cash equivalent at the end of the
quarter were $173.3 million, up $25.4 million from
the prior quarter. During the quarter, net
receivables dropped from $106.7 million to $89.8
million, resulting in a DSO of 69.1 days versus 67.9
at the end of the first quarter, an increase of 1.2
days. Net unbilled revenue balances dropped from the
quarter from $39.8 million to $24.5 million,
resulting in a DSO of 16.1 days, a reduction of 5.4
days from Q1's figure of 21.5 days.
On a cumulative basis, the combined DSO for our trade
receivables and unbilled revenues decreased from 79.4
days to 75.2 days, a decrease of 4.2 days. At January
26, our accruals for our self-insured casualty
program increased to $14.4 million from $13.1 million
at October 27. Of the $14.4 million, $8.7 million
represents incurred but not reported claims, an
increase of $771,000 from the first quarter. Steve.
Nielsen: Thanks, Dick. On a final note, our tender offer for
Argus Communications is proceeding as expected. Now,
Rita, we will open the call for questions.
Chris Gutek, Morgan Stanley
Gutek: Thanks, good morning, guys.
Nielsen: Good morning, Chris.
Gudek: Steve, just a quick question to follow up on the
Argus situation. I guess we have a couple days before
the tender offer should expire and seems likely that
the deal will close then. Could you elaborate on, or
give us some sense on, what you guys have done and
what their management team has done to prepare for
the closure of this deal, in terms of any integration
risks over the next couple of months? Have there been
any plans put in place in advance of the closing?
Nielsen: Yeah, Chris, we've done all the normal integration
planning and we've been hard at it, ever since we
announced the deal. It's hard for us to go into a lot
of detail, given the fact that we're still in
DYCOM 2002 Second Quarter Earnings Conference Call 7
registration for the tender offer. But we've been
hard at it.
Gudek: Okay, great. Switching gears, Steve, in your prepared
remarks you mentioned that it sounds as if AT&T
broadband has an increase in their cap ex, modestly,
and there are certainly expectations that if the
acquisition by Comcast closes, that would increase
more substantially. Could you elaborate just a bit
more on the comment that the cap ex has been
increasing here in the short term, what's driving
that and if you could quantify it? I know you did
mention the percent of your company's revenues, but
just a better sense for what they're up to?
Nielsen: I think you can think about it in a couple ways. One,
they've publicly announced that in certain of their
major markets that they plan on increasing their
spending this year significantly at a rate that I've
seen published at two to three times what they spent
in 2001. Now, that was a small base but that's still
a pretty significant increase. I think we're seeing
that both in renewed opportunities, where they're
beginning to start the process to hire contractors to
get work done, and also in a couple instances where
we have had projects that had been dramatically
slowed last year, we're seeing them come back to us
and tell us to plan to turn up the production rates
on those particular projects.
Gudek: Okay, very interesting. And then finally, if I could,
Steve, you also mentioned in your prepared remarks
about you then reducing SG&A expenses and reducing
head count further. Could you quantify the head count
reductions and also elaborate a bit more on other
SG&A reduction initiatives, and potentially how much
more costs could be cut if it is necessary?
Nielsen: At the end of the first quarter, Chris, we disclosed
that we had almost 5,969 employees. We finished the
second quarter with 5,445. So we're down about 500
employees. So we were able to manage that very
effectively. We're continuing to do what contractors
have to do in a slow environment, which is just make
sure that the G&A support staff matches the revenue
streams on a market by market, project by project
basis. And that's something that we're continuing to
do throughout the company every day.
Gudek: Okay. Great. Thanks, Steve.
DYCOM 2002 Second Quarter Earnings Conference Call 8
Stacy Devine, Deutsche Bank
Devine: Just following up somewhat as far as some of the
margins and so forth. In the first quarter, you had
some issues with DirecTV on your margins. Was that
completely out of the picture in the second quarter
or was there still a little bit of that flowing into
the second quarter?
Nielsen: I think, Stacy, as we had talked about on the
November conference call, we still had some of that
impact trailing into the first half of this quarter.
But it performed as we had expected, and that impact
has reversed itself and we're looking to a more
stable relationship going forward.
Devine: So would you expect -- even though it sounds like
revenue is relatively flat sequentially to down --
that you might have a little bit of an uptick in
gross margin because you won't any of that DirecTV
impact in the third quarter?
Nielsen: I think when you model out our EPS guidance, Stacy,
that would be indicative given the kind of flat to
slightly down revenues that we'll see an uptick in
margins.
Devine: Okay. And on the activity from AT&T broadband, you
mentioned that it sounds like at least the bidding
has picked up and so forth. When do you expect that
activity to really start to ramp up?
Nielsen: I think it's probably, for our fourth quarter, which
would be kind of the latter part of calendar second
quarter, there's a lot of engineering work that needs
to be done, or engineering that was performed in
2000, has to be what the industry calls re-walked out
for changed conditions. And also they've got to build
up some material inventory to support it. But we're
seeing activity on the engineering side; we're seeing
or hearing reports of increased material ordering,
and we're seeing projects that were slowed almost to
a standstill have some interest from AT&T to get
those up and going again.
Devine: Okay. So it sounds like it's more fiscal '03 before
we really see that.
Nielsen: You know, we'd always like these things to happen
sooner rather than later, but I think for a sustained
push, I think it's going to take them that long to
get the machine running again. It's a big system,
DYCOM 2002 Second Quarter Earnings Conference Call 9
a lot of moving pieces, and I think that's a
reasonable expectation.
Devine: Okay. Thank you.
Ram Kasargod, Morgan Keegan
Kasargod: Steve, I've got several questions for you. The first
one, I'm curious when you gave your third quarter
guidance, which shows no pick-up from the second
quarter in spite of backlogs increasing modestly --
can you give us your thoughts on that? How
conservative are you being, or?
Nielsen: Well, I think there's a couple things going on, Ram.
One, the backlog increased particularly because of
the contract extensions that we had on several of our
master service agreements that we outlined in our
comments. And so what that speaks to is, obviously, a
reaffirmation of kind of our current term business,
because those are contracts that were expiring that
we have gotten renewed, but it also gives us
visibility out two, three, four years, depending on
the length of those extensions. So I think it helps
reinforce our current spend rate and indicates that
we'll have a good long-term outlook on those
contracts.
I think, secondly, we are certainly being
conservative in our views, given that while the
customers are beginning to stabilize their fiscal
2002 plans, it's still late for our industry,
generally, for customers to still be figuring that
out. And we just don't want to be getting ahead of
ourselves, anticipating more vigorous spending when
there is still some uncertainty out there.
Kasargod: Secondly, Steve, one of your peers reported last
week, kind of provided some guidance or thought
process, on what they see going forward. I think they
were looking for the electric utility maintenance
business to be strong for them from outsourcing. They
really thought the telecom cap ex markets were still
going to be down in the high single digits with CATV
being flat. Can you give us your thoughts? I'm
particularly curious about CATV because last week we
had several major cable companies report, and the
trend there seems to be mixed, with some cable
companies doing well, and then some cable companies
investors seem to be concerned about liquidity
issues. And since I don't follow cable service
providers as closely as I do telecom, I would like
your thoughts on that.
DYCOM 2002 Second Quarter Earnings Conference Call 10
Nielsen: Yeah, I think there's definitely a mixed performance
with the cable operators. There are some that have
very ambitious plans for this year, and certainly
AT&T's portion, or dominant market position, is key.
You know, they represent about a third of the
[passings] in America and their spending can have a
significant impact on overall industry spending. I
think, on the telecom side, what we're seeing is run
rates, as best we can tell currently, that are at or
maybe slightly better than the fourth quarter --
calendar quarter -- of 2001, that are being
forecasted to continue for a period of time. So we're
not seeing any real marked deceleration. We're just
not seeing a re-acceleration, given full year 2001
run rates. The only exception that I would note there
is that the situation at Qwest, in particular, is
still somewhat fluid given their widely-known issues
with the commercial paper markets. So I think that's
probably the situation that's probably the most fluid
on the telecom side. But it appears like run rates
are settling in, you know, at rates that are not a
deceleration, for the most part, from the fourth
calendar quarter.
Kasargod: I have two more, if you don't mind, Steve. The one
before the last is, can you give us your thoughts on
some of these bills before Congress on the telecom
sector -- Tauzin Dingle, what it does for last-mile
spending and how you guys are going to play into
that?
Nielsen: Sure, I think, Ram, anything that happens that
effectively reduces the cost to capital for new
telecom build-outs or expansion of existing services
to wider markets is going to be good for the
business. I'm not specifically aware of all of the
bills there, but I know that several of them either
offer tax credits or rapidly accelerated depreciation
on new telecom build-outs. And certainly anything
that can re-ignite capital spending is going to be
good for our business.
Kasargod: And then finally, you know, you made some comments
about the Arguss merger, how it was going along. When
you announced that merger, you talked about the
synergies; hopefully it would be neutral to your
results this year and then accretive in your next
fiscal year. Can you give us an update on that based
upon further due diligence you might have done?
Number one, is there any more exposure at both
companies to emerging carriers or riskier
receivables? And then secondly, what happens to the
status of their Conceptronic manufacturing business?
Have any been decisions been made yet? And then when
do you hope to close that merger?
Nielsen: We'll start with the emerging carrier comment, Ram. I
think from
DYCOM 2002 Second Quarter Earnings Conference Call 11
the Dycom perspective, if you look at the list of
customers that Dick provided as the top five, these
are all good, solid customers. They represent a
little bit over 50 percent of our business, and so I
don't think Dycom's risk profile has materially
changed at all this quarter. We're hesitant, Ram, to
give a lot of details about the status of the Argus
transaction because we are in registration and what
we plan to do is when we close that transaction --
which will hopefully be shortly -- we will certainly
have a call and provide our latest views at the time
of that call on where we see our forward numbers,
synergies, and what we'll do to look at Conceptronic.
But at this point, until we close it, we don't have
any new views that we can share with you.
Kasargod: Thanks a lot.
Greg Myrtle, Advantage Capital
Myrtle: Hi, Steve, how you guys doing?
Nielsen: Very good.
Myrtle: Just a quick question. Did you guys buy any stock
back this quarter and Q1 as well?
Nielsen: We did not buy any shares back in this quarter.
That's not something to do when you're in the midst
of a tender offer. And we did buy about $1.1 million
dollars worth of shares back in the first quarter.
Myrtle: Thank you very much.
Alex Rygell, Friedman Billings
Rygell: Good morning, Steve. Couple quick questions. Number
one, is Argus going to report their fourth quarter
results, and if so, when?
Nielsen: At this point, I think if you look at the
registration statement, they have not pulled together
their fourth quarter numbers, and so we don't have
any further information than what's in the
registration statement.
Rygell: Great. And with regards to your G&A in the quarter
improved nicely sequentially, can you provide us an
update as to what the
DYCOM 2002 Second Quarter Earnings Conference Call 12
current run rate G&A expense is?
Nielsen: I think it's in line with what we reported for this
quarter, although that we had, at a couple of
subsidiaries, made further cuts in the January
period. So we would hope that we would continue to
have a downward bias until business picks up. We'll
be very happy when our G&A, in an absolute dollar
sense, starts to trend upwards, because that means
revenue will be going the other way, too.
Rygell: Sure. And one other question. With regards to the
contract extensions with BellSouth, Verizon and
Qwest, could you comment on the pricing trends on
those? I apologize if I missed your answer earlier.
Nielsen: Yeah. There were no negative trends whatsoever. They
were renewed at essentially flat to increasing
prices, so we do not incur any real negative
renegotiations in the quarter.
Rygell: Great. Thank you.
Eric Warren, Kaufman Brothers
Warren: Good morning.
Nielsen: Good morning.
Warren: Just a quick question on your IT spending, if you
could go into detail, exactly what you're doing -
financial or field work? And does Argus have the same
or similar systems?
Nielsen: What we have been doing is, we continue to go through
an upgrade process, subsidiary by subsidiary, on our
field accounting systems, with a primary focus on
improving their ability to manage their labor costs
and equipment costs. We went through an upgrade last
year of our Dycom Corporate Systems by implementing
Hyperion, which gives us excellent capabilities to
consolidate numbers and do analytics. And
furthermore, we've also introduced several
initiatives on our Dycom Corporate Internet site,
which allows us for timely requisition activities so
that we keep a real pulse on the cap ex spending and
disposals. So those are the areas that we're focused
on right now.
DYCOM 2002 Second Quarter Earnings Conference Call 13
Warren: Okay. And Argus using similar systems or do you see
that continuing as you integrate the businesses?
Nielsen: Eric, once again, we can't comment specifically on
Argus given the status of the tender--
Warren: Okay.
Nielsen: But I can tell you this, that in all of our
operations, as we've taken ownership, we have put an
increased emphasis on job tracking and productivity
enhancements that we think we can get through the use
of IT, and I'll just leave it at that.
Warren: All right Thank you.
Chris Gudek, Morgan Stanley
Gudek: Thanks. Dick, do you have the revenues broken out by
the four different segments, and would you also have
the same-store revenue growth by the segments for the
quarter?
Dunn: No, I don't have that, Chris, but I do have the
breakout of each category. For the quarter, we had
telecom came in at 40.7 percent; cable TV at 48.7,
utility locating at 8 percent, and electrical
installation at 2.6, versus last year, telecom at
52.4, cable at 41.2, utility at 4.5, and electrical
at 1.9.
Gudek: Okay.
Nielsen: I think what you'd see, Chris, overall -- Dick
disclosed that we had negative organic growth of
about, a little more than 30 percent. I think what
you'd find is the utility locating business grew year
over year on an absolute basis, so that obviously we
had some good growth there. And that the cable
business probably declined somewhat less than the
telecom spending.
Gudek: Okay. And Steve, a follow-up on your comments earlier
about a strong balance sheet. The company arguably is
over-capitalized. Are you -- in the context of
hopefully closing the Argus acquisition within a
couple days -- considering or open to the
considerations for additional decent-sized
acquisitions potentially through the payment of cash?
Or what is your thinking with the use of the cash on
the balance sheet?
DYCOM 2002 Second Quarter Earnings Conference Call 14
Nielsen: I think, Chris, we have no specific plans other than
closing the Argus tender right now. I think generally
what we've said, you know, repeatedly over the past,
is that we look at that cash as an opportunity to
profitably respond to new growth opportunities that
other more strained companies may have difficulty
doing. And also, you know, we've always said we're
going to look at the external returns for the use of
that cash versus the share buy-back.
Gudek: And any interest in commenting on what price you'd be
interested in buying back stock more aggressively?
Nielsen: How many times have you had a company comment on that
one, Chris? Other than to say that we're continually
evaluating it versus the alternatives.
Gudek: Okay, fair enough. Thanks, guys.
Nielsen: Thanks, Chris.
Toby Summer, Sun Trust
Summer: Good morning. Could you comment on some of the
factors that you listed going forward that'll impact
the business, specifically telecom and the run rate
for network maintenance if that extends itself out
another quarter or so, may imply a more sustained
rebound? What sort of metrics should we look at? Is
it, typically speaking, in the RBOC space, a
percentage of revenue that is typically spent on cap
ex?
Nielsen: That's certainly only proxy that you can look at. I
think the other more granular approach is to take a
look at where they're in trouble with state
regulatory commissions, where they're having trouble
meeting service requirements, average intervals for
them to clear out-of-service customers and all of
those things that tend to expand when they invest
less than kind of the long-term run rate in their
infrastructure.
Summer: And lastly, I had one follow-up question. Could you
go over the percentage of revenue for your top five
customers? I missed that.
Nielsen: Yeah. Dick?
Dunn: Sure. For this quarter, it was BellSouth at 16.9;
Comcast 15
DYCOM 2002 Second Quarter Earnings Conference Call 15
percent; Adelphia 11.1; DirecTV 6.1 and Qwest 4.7.
And for the comparable quarter last year it was
BellSouth at 17.8; Comcast at 12.2; Qwest at 7.6;
Williams Communications at 6.3 and Charter
Communications at 5.9.
Summer: Thank you.
Nielsen: Thank you.
Rom Kasargod, Morgan Keegan
Kasargod: Steve, I'm kind of curious to get your thoughts on
this, you being in this business a long time and
seeing all the different cycles come and go. You
know, the last couple of calls you're still being
very hesitant to go beyond one quarter in giving your
guidance. And right now, you're starting to say
things are stabilizing. When do you think you're
going to be in a position to start being more
specific about your growth outlook, or what you
believe will be a growth outlook for the company
going forward? I'm just curious to get your thoughts.
What are you waiting to see happen? I mean, are your
customers going to start increasing their cap ex
budgets, or?
Nielsen: I think on the telephone side, Ram, we always look at
the macro economy, with somewhat of a lag, so that
they don't respond to an immediate upturn but they
generally do with a lag. I think this is a year --
and this is just from experience, not based on
anything we're seeing now -- but this will be a year
where we should watch cap ex budgets and not
necessarily look for cap ex increases, but look for
disclosures where they've overspent budgets. I think
historically the pattern has been that there's a
transition period where customers overspend budgets,
then reflect that overspending in the next year's
budget. So I think that this normally would be a year
where we would look for that. And then clearly, it's
hard to underemphasize the role of AT&T. You can't
have a third of the cable business sitting on the
sideline and have any real strong visibility with
them there. So as they get off the sideline and get
back into procuring services, that certainly will
strengthen up trend lines and help provide
visibility.
Kasargod: The RBOC's, in reporting fourth quarter results,
have all talked about aggressively pushing DSL
deployment this year. And in fact, The Wall Street
Journal last week, on Monday, had a cover story on
SBC and them trying to hold the regulators hostage
before increasing their DSL deployment. Do you have
any thoughts on
DYCOM 2002 Second Quarter Earnings Conference Call 16
that?
Nielsen: I mean, we continue to see some activity where there
is quite a bit of DSL activity ongoing, so I think we
see that in the marketplace, in line with what our
customers have disclosed. I mean, clearly -- and this
goes back to your prior question on the overall
political and regulatory environment -- there is some
desire on the path of our telephone company customers
to have more certainty that the money that they spend
for increasing bandwidth will earn them a return
similar to those that the cable operators can earn.
And anything that resolves that situation will
certainly accelerate their spending. I think the
other thing, on the cable side of the business, is
that we're beginning to see several new applications
that are being rolled out by our customers, all of
which are going to help their cash flows. And I think
anything that helps customer cash flow will enable
them to spend some more money. So I think that's also
a positive.
Kasargod: And then finally Steve, if you don't mind, could you
review what your cap ex budget is going to be for
this fiscal year? And then, has any cap ex budget
been set for '03 going forward?
Nielsen: You know, our budget this year, Ram -- and Dick, you
can get the exact numbers where we stand year to date
while I'm answering the question. We disclosed on the
last call that we were looking at $12 to $15 million.
I think that's still where we are able to bring the
budget in, maybe a little bit less, and I think we're
able to do that because we have not had any -- you
know, we invested in good equipment for a long period
of time and so we've got a good, well-performing
fleet.
Dunn: Right. We're on track -- I mean, we're at $6.8
through the second quarter, so pretty much right on
line with that $12 million figure, and probably, if
anything, we could squeeze down the second half of
the year a bit.
Nielsen: We'll be happy to report back that our cap ex has
gone through our original budget, Ram, because
that'll indicate that we've got a bullish outlook to
our growth. In the meantime, we're going to be as
cost efficient and effective as we can be.
Kasargod: And then finally, on your sale of idle assets, are
you making money on them, breaking even, or is it
hurting your Other Income line?
DYCOM 2002 Second Quarter Earnings Conference Call 17
Nielsen: If you look at the Other Income, Ram, that's
basically our interest income in our proceeds from
the sale of assets, where we have shown a slight
profit on the sale of those assets. So we have not
hesitated to surplus idle assets based on any concern
about the impact. So I think generally it's either
been -- you know, one quarter it's a slight positive,
one quarter it's a slight negative, but generally
it's been a good number. I think the one that's
probably impacted us the most, as everybody's aware,
is while we have a lot of cash, our interest income
is down just based on the overall pronounced decline
in short-term rates.
Kasargod: Okay, thanks a lot.
OPERATOR: And there are no further questions queued up at this
time.
Nielsen: Well, Rita, we thank everybody for attending the
call, and we'll look forward to speaking to you at
our next call. Thank you.
OPERATOR: Ladies and gentlemen, that does conclude your
teleconference for today. Thank you for your
participation. You may now disconnect.