Exhibit 99.1
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
June 3, 2003/9:00 a.m. EDT
Page 1
DYCOM INDUSTRIES, INC.
June 3, 2003
9:00 a.m. EDT
Moderator Ladies and gentlemen, thank you for standing by and welcome
to the Dycom Earnings conference call. At this time all lines
are in a listen-only mode. Later there will be a question and
answer session and instructions will be given at that time.
As a reminder, today's call is being recorded.
At this time I would like to turn the conference over to Mr.
Steven Nielsen. Please go ahead, sir.
S. Nielsen Thank you, Kent. Good morning, everyone. I'd like to thank
you for attending our Third Quarter Fiscal 2003 Dycom
Earnings conference call. With me, we have in attendance
Richard Dunn, our Chief Financial Officer; Tim Estes, our
Chief Operating Officer; and Mike Miller, our General
Counsel.
Now I will turn the call over to Mike Miller. Mike?
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
June 3, 2003/9:00 a.m. EDT
Page 2
M. Miller 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 10-K for the year ended July 27,
2002, the company's quarterly report on Form 10-Q for the
quarter ended October 26, 2002 and the company's quarterly
report on Form 10-Q for the quarter ended January 25, 2003.
Copies of these filings may be obtained by contacting the
company or are available on the SEC's Web site.
Additionally, during this call there will be references to
certain non-GAAP financial information. This information has
been reconciled to GAAP in
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
June 3, 2003/9:00 a.m. EDT
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the company's press release of yesterday that has been posted
on the company's Web site.
Steve?
S. Nielsen Thanks, Mike.
Yesterday we issued a press release announcing our third
quarter 2003 results. Please note that for the third quarter
of fiscal 2002 our GAAP results included a non-recurring gain
of $0.02 per share due to the settlement of a federal
employment tax issue relating to prior years. Consequently,
in order to ensure accurate comparisons, all references to
the year-ago quarter exclude this non-recurring gain.
Total contract revenues for the quarter ending April 26, 2003
were $139.7 million versus $169.7 million in the year-ago
period, a decrease of 18%. Net income for the quarter was
$2.8 million versus $6.8 million, a decrease of 59%, while
fully diluted earnings per share was $0.06 versus $0.15, a
decrease of 60%. Backlog at the end of the third quarter of
2003 was $996.4 million versus $789.4 million at the end of
the second quarter of 2003, a sequential increase of $207
million. Of this backlog,
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
June 3, 2003/9:00 a.m. EDT
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approximately $474.2 million is expected to be completed in
the next 12 months.
Our third quarter results demonstrated the soundness of our
business and were encouraging for several reasons. Sequential
revenue increased slightly from the prior quarter despite
difficult weather conditions in February and March. More
importantly, our outlook for our next quarter indicates a
further and more significant increase in revenue. In fact,
our forecasted fourth quarter revenue indicates
year-over-year, quarterly organic growth will resume for the
first time since our quarter ending January of 2001.
Backlog increased sequentially by over 26% from our January
quarter and included several new cable upgrade projects, as
well as several notable master contract additions and
extensions for a major telephone company.
Gross margin increased by 296 basis points sequentially from
the second quarter to 21.7%, despite weather impacts and
startup expenses for several new contracts.
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June 3, 2003/9:00 a.m. EDT
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Liquidity remained ample at $118 million in net cash despite
capital expenditures and other associated cash payments of
$15 million to start two noteworthy master contracts.
Days sales outstanding were 88 days, reflecting an expected
increase due to a mix shift in our business towards cable
customers, while working capital in our current ratio
increased sequentially from the prior quarter.
During the quarter we continued to experience the effects of
a slow overall economy, telephone company capital
expenditures below year-ago levels and the lingering impact
of Adelphia's withdrawal from the cable construction
marketplace. However, these factors were offset by sales to
Comcast, which accelerated throughout the quarter, and a
normal seasonal percentage increase in revenue with some
telephone company customers.
These developments appear to have confirmed our previous view
of firming and improving performance in the spring of
calendar year 2003. Sales to Comcast increased sequentially
in the quarter by over 35% to $56.7 million. Comcast was
Dycom's largest customer for the quarter at 40.6% of sales.
DYCOM INDUSTRIES, INC.
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June 3, 2003/9:00 a.m. EDT
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During the third quarter we were awarded two new contracts
for Sprint, which are expected to increase revenues by in
excess of $47 million per year. The first contract represents
a significant expansion of our construction and maintenance
services for Sprint in its mid-Atlantic region, including all
of Sprint's service territory in Tennessee and Virginia, as
well as the Fayetteville and Dunn districts in North
Carolina. It is for a period of five years. We mobilized over
500 in-house and subcontractor personnel and over 390 pieces
of capital equipment to start this contract within 45 days of
contract award.
Our second contract with Sprint covers underground locating
services throughout the entirety of its service territories
in Florida, North Carolina, South Carolina, Tennessee and
Virginia. For this contract we have mobilized 175 in-house
personnel. This contract is in effect through December of
2005.
Overall our employee headcount stabilized at 4,999.
Additionally, subsequent to the end of the quarter we were
encouraged by Adelphia's announced agreement with its debtor
in possession lenders to
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enable access to its full $1.5 billion facility. Adelphia
went on to further state its intent to rapidly implement a
network upgrade plan.
Perhaps most interestingly, and also subsequent to the end of
the quarter, Bell South, SBC Communications and Verizon
jointly announced their adoption of a set of common technical
requirements for a technology known as fiber to the premises
or FTTP. Each of the telephone companies involved went on to
state that these new standards would be integral to their
future plans to expand the deployment of fiber optic cable
deeper into their outside plant networks. This may indicate a
possible upturn in telephone company capital expenditures and
fiber deployments in calendar 2004.
To maintain a tight handle on our cost structure we have
continued several initiatives to help offset pressures on
operating margins. First, we will maintain a reduced level of
capital expenditures except for growth opportunities.
Excluding expenditures in support of our new Sprint
contracts, we had actual proceeds from disposals of capital
equipment, which exceeded our capital equipment additions by
over $300,000. Our fleet of capital equipment is in good
condition and significantly reduced investment will have
little or no impact on operational expenses.
DYCOM INDUSTRIES, INC.
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June 3, 2003/9:00 a.m. EDT
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Secondly, we will continue reductions in general and
administrative expenses to better align our administrative
costs with individual subsidiaries' anticipated levels of
activity. In fact, we consolidated the subsidiary corporate
G&A at an additional reporting unit during the quarter and
are continuously evaluating additional consolidations as
necessary.
In addition to the previously mentioned Sprint contract
additions, we enjoyed several new contract awards and
extensions during the quarter. For Comcast we received
contracts for system upgrade work in Ocean City, Maryland and
Gadston, Alabama; for Adelphia, upgrade projects for Ojai and
Santa Paula, California and central Kentucky; and for General
Communications, a locating contract in Anchorage, Alaska.
For telephone companies we received an 18-month master
contract extension from Qwest for Flagstaff, Arizona, and
from Sprint, a new four-year contract extending our work in
the Jefferson City, Rolla and Warrensburg districts of
Missouri. In addition, we extended our work in Rocky Mount,
North Carolina and South Carolina for Sprint for five years.
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As Dycom responded to a challenging environment this quarter
we demonstrated our continued stability and unparalleled
ability to profitably respond to growth opportunities. First
and foremost we maintained strong customer relationships
throughout our markets. In particular, growth with Comcast
and Sprint was encouraging. Net cash remained ample and we
maintained a strong working capital position.
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. If economic conditions begin to
ease, and perhaps improve, 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 as
growth opportunities return to our industry we will be the
first and best positioned to take profitable advantage of
that. We believe that this advantage, relative to other
industry participants, becomes more pronounced every day.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
June 3, 2003/9:00 a.m. EDT
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After weighing all of the factors we have discussed today we
have updated our forecast as follows: For the fourth quarter
of fiscal 2003 we anticipate earnings per share of $0.15 to
$0.20 on revenues of $150 million to $165 million. This
outlook anticipates a stabilizing economy in the U.S., normal
seasonal weather, continued increased spending by Comcast on
its acquired systems, firming seasonal demand from our
telephone customers and increased revenue from our new Sprint
contracts.
Looking beyond the fourth quarter we anticipate earnings per
share of $0.16 to $0.21 on revenues of $150 million to $165
million for the first quarter of fiscal 2004. This
expectation is based upon the continued impact of those
factors cited for the fourth quarter, along with a prudent
caution regarding the sustainable direction of intermediate
capital spending, particularly by telephone companies.
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 continue, even as customer demand
potentially increases.
At this point I will turn the call over to Dick Dunn, our
CFO. Dick?
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
June 3, 2003/9:00 a.m. EDT
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R. Dunn Thanks, Steve.
Before I begin my review, let me point out that we have
eliminated the following two items from our GAAP results for
the prior fiscal year. First, for the quarter and nine-month
period ended April 27, 2002 we recorded a non-recurring gain
of $0.02 per share related to the settlement of a federal
employment tax issue relating to years prior to fiscal year
2002. My discussion will eliminate the impact of this gain.
Second, the results for the nine-month period ended April 27,
2002 include an after-tax, non-cash impairment charge to
goodwill of $86.9 million or $1.97 per share. This goodwill
impairment is the cumulative effect of adopting accounting
standard 142 as required, thereby the first quarter of our
fiscal 2002 has been restated to reflect this charge. Again,
for purposes of my discussion of the financial results I will
eliminate this charge.
Our reconciliation of these non-GAAP financial measures to
the corresponding GAAP measures has been provided as a table
to yesterday's
DYCOM INDUSTRIES, INC.
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press release, which has been furnished to the SEC and is
available on our Web site.
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 $139.7
million, down 17.7% from last year's Q3 of $169.7 million.
Excluding revenues attributable to subsidiaries not owned for
the entire Q3 of fiscal year 2002, revenues for the current
quarter would have been $111.7 million compared to $143.2
million for the same period last year, a decline of 22%.
Total revenues for the nine-month period ended April 26th
declined 8.5% to $435.3 million versus fiscal year 2002
revenue of $475.8 million. Excluding revenues attributable to
subsidiaries not owned for the nine months of fiscal year
2002, revenues for the nine-month period would have been
$342.3 million compared to $449.3 million for the same period
last year, a decline of 23.8%.
For the quarter, the top five customers accounted for 71.6%
of total revenues versus 64.2% for the prior year's third
quarter. For the nine months ended April 26th, sales to the
top five customers, as a percent of
DYCOM INDUSTRIES, INC.
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the total, was 61.9% versus 59.7% for the prior year. The top
five customers and their respective percentages for Q3 of
fiscal year 2003 and 2002 are as follows:
For Q3 of 2003 the top five customers were Comcast at 40.6%;
Bell South at 13.8%; Sprint at 6.4%; Quest, 6%; and Adelphia
at 4.8%. The top five for fiscal year 2002 Q3 were Adelphia
at 18.5%; Bell South, 16.6%; Comcast, 15.5%; Direct TV, 6.9%;
and Charter Communication, 6.7%.
Net income for the third quarter was $2.8 million versus $6.8
million in fiscal year 2002, representing a decrease of
58.8%. Net income for the nine months ended April 26th
decreased 70.7% to $5.8 million versus last year's $19.8
million.
Fully diluted earnings for the quarter were $0.06 per share,
a 60% decrease from last year's $0.15 per share results. EPS
for the nine-month period ended April 26th decreased 73.3% to
$0.12 per share versus last year's $0.45 per share.
Operating margins for the third quarter declined 375 basis
points, coming in at 2.68% versus last year's 6.43%. This
decrease was due to a 247-
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basis-point increase in cost of earn revenues, a
93-basis-point increase in general and administrative cost
and a 35 basis point increase in depreciation and
amortization.
Operating margins for the nine-month period declined 481
basis points coming in at 1.71% versus last year's 6.52%.
This decrease was due to a 225-basis-point increase in cost
of earned revenues, a 150-basis-point increase in general and
administrative costs and a 106-basis-point increase in
depreciation and amortization.
Depreciation expense for the third quarter declined $1.3
million from the prior year. This decline was primarily due
to the run-out of depreciation associated with the fiscal
year '98 capital additions and the sale of assets during the
current fiscal year.
The effective tax rates for the quarter and nine-month
periods were 41.2% and 46.2% respectively, versus 43.3% and
42.5% respectively for the prior year's periods.
Net interest income for the quarter and nine months was
$346,000 and $991,000 respectively versus $505,000 and $2.1
million for the prior year.
DYCOM INDUSTRIES, INC.
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June 3, 2003/9:00 a.m. EDT
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This decrease was primarily a result of declining short-term
interest rates and reduced cash balances as a consequence of
the repayment of the debt acquired in the Arguss acquisition.
Our interest income is generated through investments in
high-quality municipal and corporate instruments.
For the quarter, our cash flow from operating activities was
a negative $4 million. The primary components of this cash
flow were a net income of $2.8 million, depreciation and
amortization of $8.9 million offset by increases in working
capital of approximately $15.7 million.
Investing and financing activities for the quarter used $9.3
million. This use of cash consisted of capital expenditures
of $10.6 million, partially offset by proceeds from the sale
of assets of $1.3 million.
Cash and cash equivalents at the end of the quarter were $118
million, down $13.3 million from the prior quarter.
During the quarter net receivables increased from $99.9
million to $105.3 million resulting in a DSO of 68.6 days
versus 66.3 at the end of the second quarter, an increase of
2.3 days. Net unbilled revenue balances increased in the
quarter from $22.9 million to $29.9 million, resulting in a
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June 3, 2003/9:00 a.m. EDT
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DSO of 19.5 days, an increase of 4.3 days from Q2's figure of
15.2 days. On a cumulative basis the combined DSO for our
trade receivables and unbilled revenue increased from 81.5
days to 88.1 days, an increase of 6.6 days.
At April 26th the accrual for our self-insured casualty
program was unchanged at $21.6 million. Of this $21.6
million, approximately $12.1 million represents incurred, but
not reported, claims.
Steve?
R. Dunn Thanks, Dick.
Now, Kent, we will open the call for questions.
Moderator Great. Thank you. Our first question comes from Joe Gladue
with Chapman. Please go ahead.
J. Gladue Hi. Congratulations on a positive quarter.
S. Nielsen Thanks, Joe.
DYCOM INDUSTRIES, INC.
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June 3, 2003/9:00 a.m. EDT
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J. Gladue With the two Sprint contracts, I'm just wondering if you
could tell us whether these were contracts that were, I
guess, taken from another incumbent and...
S. Nielsen Yes, they were gains in market share from a couple of private
competitors.
J. Gladue And along those lines, do you think you'll be seeing more of
the same with that?
S. Nielsen Joe, as we've said before, we are very careful about the
market share we gain because we've been in a no- or
slow-growth environment. We don't want to build in bad, poor
margins in our backlog, but in this particular case, and
others that we're looking at, when we see an opportunity to
grow, we think we do have an advantage based on the balance
sheet and the strong subsidiary management that we have.
J. Gladue One other customer question: You had said you got some new
contracts with Comcast. Are there still additional contracts
that they have to let that you're aware of?
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S. Nielsen I think there are some, but I think that the significant
majority of their upgrade plan has been allocated, as we've
talked about previously.
J. Gladue All right. Thank you.
Moderator Thanks. We do have a question then from Alex Rygiel with
Friedman, Billings, Ramsey. Please go ahead.
A. Rygiel First, congratulations on a nice quarter. It's nice to hear
that business opportunities appear to be improving.
S. Nielsen Thank you.
A. Rygiel A couple of quick questions: First, can you confirm that you
said that Comcast revenues will increase sequentially going
forward?
S. Nielsen Yes. I think we can look at this quarter and that when we
swap May for February that those revenues are going to be up,
so we think sequentially they will be up.
DYCOM INDUSTRIES, INC.
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A. Rygiel Secondly, with regards to the two Sprint projects, when did
you start them in the quarter and how much of the $47 million
of annual revenues did you actually book in the quarter? Was
it a very small amount or was it a fair 25% of that $47
million?
S. Nielsen That $47 million is a run rate. I think we probably booked in
the neighborhood of $3 million/$3.5 million on the one
contract, which had started the first of April, so only four
weeks in the quarter, and that the other contract started
actually on the 26th or 27th of April, so it did not have any
impact on the quarter, other than some start-up expenses.
A. Rygiel Great. With regards to the two interesting opportunities,
both Adelphia and the RBOCs, first with regards to Adelphia,
you did mention one or two markets where you are starting
rebuild activity. How fast do you expect the Adelphia
opportunities to ramp up? Is that a July quarter opportunity
or is that an October opportunity?
Then with regards to the RBOCs and their announcement last
week regarding fiber to the premises, can you talk about
activities that you've performed for the RBOCs in the past of
a similar nature, and what type of revenues and margins you
had from taking fiber to the home in the past,
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June 3, 2003/9:00 a.m. EDT
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and what your visibility is going forward in '04 and '05 with
regards to that opportunity?
S. Nielsen I think we are seeing Adelphia ramp up in this quarter, but I
would think the more significant impact is more likely in the
first quarter of fiscal 2004. With the new management team
coming in and getting their financing in place, they've also
gone back and looked at some of the design criteria so that
there are a significant number of projects that are in
redesign. So that tells us that they are coming, but they are
not quite here yet.
In terms of the fiber to the home, we have participated in
putting in fiber to the curb, particularly for Bell South,
going back to 1995, and I think we've always experienced
solid margins in that work activity that generally consist of
underground trenching and placing of fiber cable in
enclosures. That's exactly what we know how to do and have
done for a long time.
A. Rygiel One last question with regards to G and A; since your cap ex
has come off from the very high levels of '98 and '99 and
2000 do you expect
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depreciation and amortization to continually show sequential
declines over the next four quarters or so?
R. Dunn Not for the next couple, Alex.
S. Nielsen Because the offset, you have about the $10 million that we
spent on Sprint, so that's rolling in and that offsets some
of the decline. We may have to take a look at it again a year
from now when there were other substantial purchases in '99.
A. Rygiel Great. Thank you.
Moderator Thanks. We do have a question then from private investor
Scott Moore. Please go ahead.
S. Moore Hi, Steve. Congratulations on the quarter. During the last
conference call you stated that three under-performing
subsidiaries would cease operations during the quarter just
ended. Did this happen, and if so, which subsidiaries were
shut down?
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S. Nielsen What we did, Scott, is in one case we actually did shut down
a couple of them. In the other case we took the field
activities and reallocated those to two other subsidiaries.
Because of the way our legal structure is, those subsidiaries
are still active companies, so you're not going to see us
take them off the list, though functionally they have been
consolidated.
S. Moore Okay. What is the status of Conceptronic, a former subsidiary
of Arguss, which Dycom acquired when it bought Arguss?
R. Dunn Scott, they've been disposed of for about a year now.
S. Moore Okay.
S. Nielsen It was a very immaterial piece of the Arguss transaction. We
got out of that business as quick as we could.
S. Moore Great. And finally, would you please comment on where you
stand regarding recovery of money owed Dycom by Adelphia for
work done prior to the Adelphia bankruptcy? I think it was
originally about $40 million that they owed Dycom.
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S. Nielsen That's correct. If you follow the Adelphia bankruptcy, they
have filed for several extensions to get in there for the
company to propose a plan of reorganization. The next
deadline, I believe, is in August, and so we are just
monitoring the situation. Between now and when that plan is
reorganized there is really nothing that can be done in the
bankruptcy process.
I think we are encouraged that WorldCom has been able to at
least get a plan out there that most folks have agreed with,
and also that Adelphia continues to perform relatively well
and actually generate some cash, but between now and August
there is really no news of any importance.
S. Moore All right. Thank you very much.
Moderator Thanks. We do have a question then from Steven Fox with
Merrill Lynch. Please go ahead.
S. Fox Good morning. Can you talk a little bit about, first of all,
when you look at the Sprint contract, when do you hit a full
run rate for it?
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S. Nielsen The first contract, the construction and maintenance
contract, we are there for the entirety of this quarter. On
the locate contract a portion of it was just phased in last
week, so I would say full run rate by mid-June to first of
July.
S. Fox Great. Then, Steve, can you talk a little bit about the
effect that DSL price declines could have on your business
near term, say the next couple of quarters, and then maybe
longer term?
S. Nielsen You know, it's a very interesting question. Obviously, as
they make DSL more attractive, the phone companies are hoping
for higher penetration rates. To the extent that that taxes
their in-place infrastructure, they are going to have to
support that growth with at least stable cap ex, if not
growing cap ex. If you tie the Verizon pricing move on DSL
with this fiber to the premise announcement, it appears that
the RBOCs are going to be more active in the residential data
market.
The second half of your question, Steve?
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S. Fox I guess what you're saying about DSL is that it makes you
feel a little bit better, that '04 capital spending number,
but it doesn't give any near-term impact to your business
really?
S. Nielsen I wouldn't say that it's significant. I think it's a firming
of cap ex rather than a significant change and I think, in
part, if you were an RBOC and you are becoming increasingly
comfortable that the cost of fiber to the premises is going
to come down and be more economic, that they are going to
weigh that opportunity versus significant major investments
in DSL.
S. Fox Okay. Then two quick financial questions: Are you still
targeting 25% to 26% gross margins and what type of revenue
run rate do you need to achieve that?
S. Nielsen I think if you look at the revenue targets that we've
provided, Steve, and you take a look at the EPS guidance and
you model it out, that we're still there.
S. Fox Okay. The last question would just be on cash usage going
forward. It sounds like you're going to have some working
capital requirements. On
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incremental sales how much working capital do you think you
need these days?
S. Nielsen Well, if DSOs are running 85 to 90 days and we have a
sequential quarterly increase of, call it, $20 million or
better, then we will probably use up about $20 million in
cash. Now we work every day to drive that down, but that's a
good thing. It's like spending money for capital equipment to
support new contracts. When you have customers like Sprint
and Comcast, spending money is a good thing.
S. Fox Thank you.
Moderator Thanks. We do have a question then from Barry Posternak with
Kensico Capital. Please go ahead.
B. Posternak Good morning.
S. Nielsen Good morning.
B. Posternak Do you have the mix between cable, telco and utility?
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R. Dunn Yes, I do, Barry. For telco we had 34.6%; cable, 53.6%;
utility locating, 8.9%; and electrical and other, 2.9%.
B. Posternak Okay. With regard to several new cable upgrade projects that
were mentioned, could you review those, who they are with
or...?
S. Nielsen Yes. We talked about two projects with Comcast - one for
Ocean City, Maryland, another in Gadston, Alabama - and then
we talked of a couple of cities, a related project in
southern California for Adelphia, and then a project for
Adelphia in central Kentucky in the Lexington area.
B. Posternak What kinds of projects are the Adelphia ones?
S. Nielsen They are upgrade projects. I don't know if they are 450 or
550 upgrades, but they are traditional upgrade projects.
B. Posternak All right. Thanks.
Moderator Thank you. We do have a question then from Michael
Christodolou with Inwood Capital. Please go ahead.
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M. Christodolou Good morning, gentlemen. I wanted to further explore the
Comcast and Sprint new business wins to better understand the
future. If you could characterize those wins, would you view
that they were wins because the competitors - and I don't
know also if you could quantify, was it two or three private
competitors you won the business from or was it 15?
I'm going to explore that because I'd like to understand; are
these private companies? Were they viewed as either too
regional, too under capitalized or incapable of mobilizing as
fast as you did, or that the vendors want to reduce the
number of contractors they're working with, or was it price?
S. Nielsen Or was it all of the above.
M. Christodolou All of the above.
S. Nielsen We'll work through it. On the cable side, those Comcast
projects and the Adelphia projects are in markets where we
are traditionally strong, and I think we were, through past
performance and competitive pricing, the right folks for
those jobs. So we did not take those projects from anybody.
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We like to think we earned them with what we've done for
those customers in the past.
On the Sprint opportunities, the construction and maintenance
agreement, the work was shifted from a private competitor. It
did result because it combined with some areas in North
Carolina and South Carolina that we had previously already
had contracts for and did give the customer greater mass in a
particular region so that, in fact, you could look at it as
trying to deal with larger vendors in less than a region.
On the locate opportunity, once again, that was a single,
private competitor and we just think that that was one of
those competitive opportunities where we were at the right
place at the right time with a good price.
M. Christodolou Great. What are you seeing for pricing on these contracts
over time? Are there step-ups built in for costs or
inflation?
S. Nielsen There are kind of traditional telephone industry, CPI-related
index increases at various points in the life of the
contracts.
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M. Christodolou And lastly, what are you seeing in terms of labor and
capacity out there in the system, in terms of, perhaps,
additional wins that you may get? Are there trained bodies
out there or could we see some constraint in talent such that
it may help pricing over the next year or two?
S. Nielsen Sure. I would think, right now, we did not have difficulty in
mobilizing the labor for these projects, so I think there is
labor that's available. We haven't seen any significant
pricing pressure to our labor, although we'd certainly be
happy because that would generally be a good thing in the
labor business.
M. Christodolou Great. Thanks very much. Great quarter.
S. Nielsen Thank you.
Moderator I am showing a question from Alan Mitrani with Copper Beech.
Please go ahead.
A. Mitrani Hi. Thank you. Did you repurchase any shares this quarter?
S. Nielsen No, we did not.
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A. Mitrani Can you give us the status of your stock buyback? Are you
putting it towards, I guess, getting new business or are you
still looking, potentially, to buy back some stock?
S. Nielsen At the right price - and there is a number that we can't
share - we would be buyers of the stock. We think that the
cash that we put to work and the cap ex and the working
capital to grow the business out of the third quarter into
the fourth quarter had a higher return than in repurchasing
shares.
A. Mitrani Also, you talked about Adelphia post your quarter. Obviously
they came out and got access to the $1.5 billion of ...
financing and they've put some new management in. If I work
through some numbers it seems like they could have
potentially 30,000 plus miles to upgrade, based on trying to
get to their 90% of their miles upgraded by sometime next
year. Any idea what kind of pricing it could be for them for
mile?
If you use Comcast's numbers, using roughly 30,000, it seems
like there could be at least $0.5 billion plus of work coming
out of Adelphia. Do those numbers make any sense over the
next 15 to 24 months, depending on when they finally get out
of bankruptcy?
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S. Nielsen I don't think that they're going to wait to get out of
bankruptcy and pursue the upgrade plan, at least that's not
the indications that we're getting. The difficulty to compare
mile to mile between different cable operators is the mix of
rural and urban systems, and so I would generally expect that
Comcast would be a little bit more than Adelphia just because
of a greater percentage of the Comcast systems being urban.
On the other hand, it also is contingent upon the condition
of the systems and how much work has to get done. So there
are a few moving pieces, but directionally I would say
somewhat slightly less.
A. Mitrani Also, how much was Direct TV in the quarter, in terms of
revenues?
S. Nielsen It was a little less than $4 million, Alan. Dick will get the
exact number.
A. Mitrani How much of the sequential gross margin expansion was, as you
said, basically the Direct TV effect, going from jettisoning
some of the low-margin business that you had renegotiated
versus just executing your business better and chopping heads
and just making sure your ...?
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S. Nielsen I would say more of the sequential increase was the pickup in
the cable business, a normal seasonal up-tick in April on the
telephone side, rather than any driving effect, because you
can't have that margin impact on a little less than $4
million in business and drive the overall significantly.
A. Mitrani To Steve's question, it sounded like 24% to 26% gross
margins; we should start seeing some of those in the next
couple of quarters then?
S. Nielsen We would expect that. In the last quarter we did see some
credible, and, we think, sustainable, margin expansion from
March to April. So given that trend line, we think that's
reasonable.
A. Mitrani Then lastly, if I can, on the telco side I was actually
impressed that Bell South increased, sequentially, a few
million dollars, given that they spent so little of their cap
ex budget in the first quarter. Are you hearing from some of
your Bell companies that it looks like cap ex spend will be
up in the second half, from a calendar basis, of '03 versus
the first half?
S. Nielsen I think it's difficult to say, Alan. I think everybody has
noted that they did not spend what they had budgeted for the
first quarter, yet they didn't change full-year guidance and
that the question is there will be a year
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when that gets resolved by them spending all of their budget
money. That hasn't been the pattern for the last two years,
so we're optimistic, but we don't have any direct information
on the subject.
A. Mitrani Do you expect to continue to build backlog?
S. Nielsen When we have large master contracts that come in for multiple
years, they tend to build backlog the way that we have here.
As we continue to bid work we will hope to drive it, but I'm
not sure that we will see those kinds of magnitude jumps in
the near future. It's also a function of the economy.
A. Mitrani Okay. Thank you very much.
R. Dunn Alan, just to confirm, Steve's recollection of the $4 million
was right on.
A. Mitrani Four million. Great.
Moderator Thanks. At this time I am showing no further questions in
queue.
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S. Nielsen Kent, thanks for moderating the call. We thank everybody for
their attendance and we look forward to speaking with you
again, with our fourth quarter numbers, towards the end of
August. Thank you. Have a good day.
Moderator Thank you. Ladies and gentlemen, that does conclude our
conference for today. Thanks for your participation and for
using AT&T's Executive Teleconference. You may now
disconnect.