DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 1
DYCOM INDUSTRIES, INC.
February 24, 2004
8:00 a.m. CST
Moderator Ladies and gentlemen, thank you for standing by and
welcome to the Dycom earnings call. At this time,
all participant lines are in a listen-only mode.
Later, there will be an opportunity for questions.
Instructions will be given at that time. As a
reminder, today's call is being recorded. I would now
like to turn the conference over to Mr. Steven
Nielsen. Please go ahead, sir.
S. Nielsen Good morning, everyone. I'd like to thank you for
attending our second quarter fiscal 2004 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.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 2
M. Miller 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 26, 2003 and the company's quarterly report on
Form 10-Q for the quarter ended October 25, 2003.
Additionally, during this call there will be
references to certain non-GAAP financial information.
This information has been reconciled to GAAP in the
company's press release of yesterday that has been
posted on the company's Web site.
S. Nielsen Yesterday, we issued a press release announcing our
second quarter 2004 earnings. Included in those
earnings, was a non-recurring gain of $11.4 million
before taxes, related to the sale of a long-term
accounts receivable. To ensure meaningful
comparisons, all references I will now make to the
second quarter will exclude this gain. A
reconciliation of our earnings,
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 3
with and without this gain, is attached to
yesterday's press release that has been posted to our
Web site.
For the quarter ended January 24, 2004, total
contract revenues were $196.4 million versus $137.2
million in the year ago period, an increase of 43%.
Net income was $9.6 million versus a loss of $1.1
million. Fully diluted earnings per share was $0.20
versus a loss of $0.02.
Backlog at the end of the second quarter was $1.174
billion versus $900.4 million at the end of the first
quarter of 2004, a sequential increase of $274
million. Of this backlog, approximately $545 million
is expected to be completed in the next 12 months.
These estimates include approximately $254 million of
total backlog and $118 million of 12-month backlog
derived from our recently completed acquisitions of
First South and UtiliQuest. They include no backlog
from our announced participation in Verizon's
Fiber-to-the-Premises buried plant installations.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 4
Our second quarter results continued to demonstrate
the fundamental health of our business. Growth
remains strong. Internal growth for the quarter was
25.8% and 24.8% for the first six months of fiscal
2004. In addition, our forecasted third quarter
revenue indicates continued year-over-year organic
growth.
Gross margin increased by 418 basis points from the
year ago quarter, while G&A decreased 312 basis
points and depreciation and amortization decreased
202 basis points. Both the G&A and depreciation and
amortization percentages continued to be favorably
impacted as relatively fixed costs were leveraged by
increased quarterly revenue.
Overall, improved results were driven by tight cost
controls, solid field productivity, despite difficult
weather in January, good safety performance and
active claims management and expected performance
from the newly acquired operations of First South and
UtiliQuest.
Liquidity remained ample with over $20 million in net
cash, despite acquisition cash expenditures of $175
million during the quarter. Capital expenditures to
support our growth totaled $4 million, net of
disposals.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 5
Excluding balances and revenues from companies
acquired during the quarter, day sales outstanding
was 73 days, a sequential decrease of two days from
the first quarter.
Cash flow from operations totaled $60.8 million,
including a non-recurring gain related to the sale of
a long-term accounts receivable. Excluding this gain
and the taxes associated with it, operating cash flow
was $32.4 million in the quarter, a sequential
improvement of $11.2 million from the first quarter.
During the quarter, we continued to experience the
effects of a growing overall economy, major telephone
expenditures, which grew substantially year-over-year
and continued robust spending by several cable
customers. Revenue from Comcast was $59.2 million.
Comcast was Dycom's largest customer for the quarter
at 30.1% of revenue, down from 34.8% in the previous
quarter. Additionally, revenue from Adelphia and
Charter increased year-over-year and sequentially.
Revenue from our major telephone company customers,
Sprint, Bell South, Alltel and Qwest, all increased
significantly compared to the year ago quarter.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 6
Employee headcount increased to 7,590 at the end of
the second quarter from 5,470 in the previous
quarter, reflecting normal seasonal patterns offset
by the addition of the employees of First South and
UtiliQuest.
Perhaps, most significantly, Verizon recently
notified us that Verizon intends to enter into a
contract with Dycom, whereby, we will perform a
portion of Verizon's Fiber-to-the-Premises buried
plant installations.
During the quarter, we continued to book new work.
For Comcast, we received system upgrade contracts for
Montgomery County, Pennsylvania, the Pittsburgh
tri-state area, Grass Valley, California, South
Chicago, Sacramento, California, San Mateo,
California and a new build betterment contract for
the southern half of metropolitan Denver.
For Time Warner, an electronics betterment project in
Memphis. For Charter, a new build betterment contract
for Jackson, Tennessee. For James Cable, upgrades in
Georgia, Florida, Louisiana, Texas and Oklahoma. For
Insight, an installation contract in Louisville,
Kentucky.
In addition, we extended several locating contracts,
including those for Atlanta Gas Light, Bell South and
Comcast in Atlanta and with Puget
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 7
Sound Energy in the Seattle area. Finally, in Florida
we were awarded a three-year master contract for
underground power installations for Sumter Electric
Cooperative.
As Dycom grew this quarter, we demonstrated our
continued stability and ability to profitably respond
to growth opportunities, both organically and through
acquisition. First and foremost, we maintained strong
customer relationships throughout our markets. This
view has been clearly demonstrated in multiple
discussions with our customers arising from our two
recent acquisitions. Secondly, the strength of those
relationships and the value we can generate for our
customers has allowed us to be at the forefront of
rapidly evolving industry opportunities. Finally,
while growing, we have maintained tight margin
discipline, solid cash flows and our superior
financial strength.
As economic conditions continue to improve, Dycom's
fundamental strength has allowed us to differentiate
ourselves from our competitors in the eyes of our
customers, employees and suppliers. Dycom's financial
strength and strong customer relationships have
allowed us to generate industry-leading organic
growth, while simultaneously pursuing significant and
strategic acquisitions. Over the last several
quarters, we
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 8
have repeatedly stated our belief that as profitable
growth opportunities return to our industry, we will
be one of the first and the best positioned firms in
our industry to take advantage of them. We believe
that this advantage, relative to other industry
participants, continues to become more pronounced
everyday.
After weighing all of the factors we have discussed
today, we have updated our forecast as follows. For
the third quarter of fiscal 2004, we anticipate
earnings per share of $0.18 to $0.24 on revenues of
$185 million to $200 million. This outlook
anticipates continued growth in the U.S. economy and
easing of February's difficult weather, continued
spending by Comcast on its acquired systems, expected
performance for our First South and UtiliQuest
acquisitions and only modest incremental revenues
from our new Verizon opportunity. Looking beyond the
third quarter, we anticipate earnings of $0.24 to
$0.30 per share on revenues of $205 million to $225
million for the fourth quarter of fiscal 2004. Please
note that Dycom utilizes a 52/53-week fiscal year,
which ends on the last Saturday in July.
As a result, the fourth quarter of fiscal 2004 will
contain 14 weeks. Our expectation for the fourth
quarter is based upon the continued impact of
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 9
those factors cited for the third quarter, with the
exception that we do expect revenues from Verizon to
increase throughout the fourth quarter to meaningful
levels; although a precise expectation of this impact
is difficult to determine at this early stage of the
project.
At this point, I will turn the call over to Dick
Dunn, our CFO.
R. Dunn During the current quarter, we recorded an after tax
gain on the sale of certain long-term receivables of
$6.8 million or $0.14 per share fully diluted. Unless
otherwise noted, my discussion will eliminate the
impact of this gain. A reconciliation of these
amounts to our GAAP net income including the gain has
been provided as a table to yesterday's press
release, which is available on our Web site.
Turning to the income statement, contract revenues
for the current quarter were $196.4 million, up 43.1%
from last year's Q2 of $137.2 million. Revenues for
the quarter on a same store basis were up 25.9%.
Total revenues for the six-month period ended January
24th increased 32.7% to $392.4 million versus fiscal
year 2003 revenue of $295.6 million. Organic revenue
activity for the six-month period was up 24.8%.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 10
For the quarter, the top five customers accounted for
67.4% of total revenue, versus 63.4% for the prior
year second quarter. For the six months ended January
24th, sales to the top five customers, as a percent
of the total, were 68.5% versus 58.3% for the prior
year.
The top five customers and their respective
percentages for Q2 of fiscal year 2004 and 2003 are
as follows. For the current year Q2, Comcast, 30.1%;
Bell South, 13.2%; Sprint, 11.0%; Adelphia, 7.2%; and
Qwest, 5.9%. For the Q2 of fiscal year 2003, Comcast,
30.6%; Bell South, 11.6%; Direct TV, 9.5%; Sprint,
6.1%; and Qwest, 5.6%.
Net income for the second quarter was $9.6 million
versus a $1.1 million loss in fiscal year 2003. Net
income for the six months ended January 24th
increased $20.6 million to $23.6 million versus last
year's $3.0 million.
Fully diluted results for the quarter were $0.20 per
share versus a loss of $0.02 per share in the prior
year's second quarter. EPS for the six month period
ended January 24th increased to $0.48 per share
versus last year's $0.06 per share.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 11
Operating margins for the second quarter increased
932 basis points coming in at 7.78% versus last
year's negative 1.54%. This increase was due to a 418
basis point decrease in cost of earned revenues, a
312 basis point decrease in general and
administrative costs and a 202 basis point decrease
in depreciation and amortization. Operating margins
for the six month period increased 828 basis points
coming in 9.53% versus last year's 1.25%. This
decrease was due a 345 basis point decrease in cost
of earned revenues, a 281 basis point decrease in
general and administrative costs and a 202 basis
point decrease in depreciation and amortization
The effective tax rates for the quarter and six-month
periods were 38.2% and 39.4% respectively, versus
1.2% and 50.2% respectively for the prior year's
period. The prior year's period's effective rates
were impacted by the prior year's loss in the second
quarter, which resulted in non-meaningful rates.
Net interest expense for the quarter was $284,000 and
net interest income for the six-month period was
$34,000 versus net interest income of $370,000 and
$645,000 respectively for the prior year. This
decrease was primarily the result of the use of cash
on hand and increased borrowings in connection with
the two acquisitions closed during the quarter.
Interest
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 12
income is generated through investments in
high-quality municipal and corporate instruments.
For the quarter, our cash flow from operating
activities including the sale of long-term
receivables was $60.8 million. The primary components
of this cash flow were net income of $16.4 million,
depreciation and amortization of $11 million and
reductions of working capital and other assets of
approximately $33.4 million.
Investing activities consisting of acquisition
expenditures net of cash acquired of $175.1 million,
capital expenditures of $5.1 million partially offset
by proceeds from the sale of assets of $1.1 million,
resulted in net investing activities of $179.1
million.
Financing activities for the quarter generated $86.8
million. The components of this amount were
borrowings under our revolving credit agreement of
$85 million and proceeds from the exercise of the
employee stock options of $1.8 million.
Cash and cash equivalents at the end of the quarter
were $118.3 million, down $31.5 million from the
prior quarter.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 13
During the quarter, receivables net of acquired
receivables dropped from $124.8 million to $110.1
million, resulting in a DSO of 55.7 days versus 57.9
at the end of the first quarter, a decrease of 2.2
days.
Net unbilled revenue balances, excluding acquired
balances, dropped in the quarter from $36.6 million
to $33.4 million, resulting in a DSO of 16.9 days,
essentially unchanged from the Q1 figure of 17.0
days. On a cumulative basis, the combined DSO for our
trade receivables and unbilled revenues, again
excluding acquired balances, decreased from 74.9 days
to 72.6 days, a decrease of 2.3 days.
At January 24th, our accruals for self-insured
casualty program increased to $28.8 million from
$24.9 million at October 25th. Of the $28.8 million,
$18.6 million represents incurred, but not reported
claims, an increase of $3.1 million from the first
quarter.
S. Nielsen Now John will open the call for questions.
Moderator First we go to the line of Steven Fox with Merrill
Lynch. Please go ahead.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 14
S. Fox Could you talk a little bit about the gross margins
of 23%? I think you've been targeting 24% to 25%. Is
that still a realistic assumption over the next few
quarters, given the mix? Then I have a follow-up.
S. Nielsen I think the 23% was right in line with what we
expected, given the seasonal weather impacts and the
holiday impacts in the second quarter. I think we
don't see anything here. In fact, if you look back
historically, 23% in the second quarter is a pretty
solid number.
S. Fox From the standpoint of Verizon, I'm sure you're
limited on what you can say, but can you talk about
how many other contractors are involved or what type
of split you have and generally, can you give some
color on the ramp? Are you going to be fully ramped
with this project in two quarters? How else can you
describe it?
S. Nielsen What we're permitted to say, Steve, is that Verizon
has publicly disclosed that in 2004, they wanted to
deploy in nine states. They have not disclosed those
nine states. We're awarded and are in final
documentation on the project in a substantial number
of those states. We feel like in order to hit the
objectives that Verizon has for 2004, that we will
need to be very fully deployed by mid-summer at the
latest.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 15
Moderator Our next question is from the line of Tobey Sommer
with SunTrust Robinson Humphrey. Please go ahead.
T. Sommer I have a question regarding what you think is driving
the competitive force with Verizon and
Fiber-to-the-Home. Is it strictly the cable, or do
you think the wireless and the opportunity to
maintain your home phone number and shift it to
wireless is another nail that is helping to drive
this shift for them?
S. Nielsen As I've understood it, they're looking at
Fiber-to-the-Home as an opportunity to increase their
revenues, at the same time, Passive Networks
will have significantly lower operating and
maintenance costs going forward. I think they see it
as an opportunity to increase the top line and expand
margin by reducing the cost of operating the network.
Clearly, there may be some ability to bundle the data
offering and the voice offering enabled by the fiber
with wireless. Certainly, given Verizon wireless's
leading market position, that may be attractive to
them also. I think it's pretty simple; they want to
grow revenue and be able to reduce their future costs
to maintain the network.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 16
T. Sommer Two quick follow-ups, if I could. If you could
refresh my memory, I don't think there is any
incremental capex, but are there any different things
involved that you currently don't have? I was
wondering if you could comment about where you see
your long-term revenue mix. Are you comfortable where
it is now, or could you see it shifting a little bit
over time?
S. Nielsen On an incremental capex basis, this is business that
we understand and do everyday. We have assets in hand
to do it. It's a growth opportunity, so we may have
to spend some capex to support it. That will be a
good thing because it will reinforce our future
growth.
Your second question, Toby?
T. Sommer It was regarding your revenue mix and longer-term,
where your goal was and what your vision was for the
company.
S. Nielsen Dick has the revenue mix for the quarter here, why
don't you go ahead and share it?
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 17
R. Dunn For this quarter, telecom was 34.7%, cable TV was
46.3%, utility locating was 15.2% and other and
electrical was 3.8%.
S. Nielsen Tobey, we've set up the business for a long time here
to primarily focus on the cable and telephone
industries. It's been in the action and reaction
between the two industries that we've seen growth
opportunities. We think with the Verizon opportunity,
this is just another example of why that strategy has
been sound in the past and will be going forward. We
may see a shift from some of our cable business as
the upgrades with Comcast are winding down, but
that's going to be picked up on the telephone side of
the business, hopefully plus some. We're comfortable
with our revenue mix.
Moderator Our next question is from the line of Alan Mitrani
with Copper Beech Capital. Please go ahead.
A. Mitrani Steve, did I hear you correctly? As it relates to
Verizon, it is not in your backlog right now?
S. Nielsen Yes, we have not signed the contract, Alan, and our
policy is that we don't put contracts in backlog
until they're finally documented. That would be
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 18
in this quarter, which is our third quarter. It will
be reflected in our third quarter backlog.
A. Mitrani Is there a reason why the contract was not signed
yet? Are certain regions still up from grabs, or is
it just dotting the I's and crossing the T's? Can you
just give us a little more color on that?
S. Nielsen We're in the documentation phase. Because it is a
substantial project, there was obviously need to
communicate to our people. It's also fair to say,
because we've had some folks call us, that some of
the other competitors had been notified that, if they
wanted to participate, they needed to talk with us.
Given that there was some chatter in the industry
about it, we felt like and Verizon concurred, that it
was prudent to put out an announcement.
A. Mitrani Just to understand, my understanding of when you were
running through your revenue guidance and your
estimated earnings guidance for the next two
quarters, you did include some contribution from
Verizon and sort of a meaningful one, in your mind,
for the fiscal fourth quarter.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 19
S. Nielsen Primarily for the fourth quarter. Now, if we can earn
some revenue in this quarter, we're going to hit it
as quickly as we can, but it is in the start-up
phase.
A. Mitrani With that said, you raised guidance a bit for fiscal
third quarter. The fiscal fourth quarter, I know you
haven't put estimates out there before; but relative
to what some people were looking for in terms of
earnings contributions or others, seemed a little
light. Are there certain start-up costs in that
fourth quarter that would result in a lower margin
initially, but then ramping up, or are the acquired
assets that you bought this past quarter coming in
less than expected? Can you give some insight in
terms of that or is it just you being conservative?
S. Nielsen We're always going to be prudent with the guidance,
particularly when we're starting a contract that is
potentially this large. We're happy with the
acquisitions. They are producing according to the
plan. It's for us to make sure that we execute on the
guidance we provide and, hopefully, do better, but
right now, this is our best estimate, given
particularly the newness of the Verizon opportunity.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 20
A. Mitrani I'll ask two quick ones and then I'll get back in
queue. Were there any one-time costs or deal-related
costs in the quarter or anything that was related
just to closing the books on the other two businesses
in having owned them for about a month or two?
S. Nielsen Certainly, there is travel expenses and integration
expenses. G&A was probably higher. We did have those
types of expenses, but we just took those through
ordinary expense. We didn't have any charges.
A. Mitrani Also, the tax rate this quarter, by my estimation,
came in about 38%. I know, Dick, you guys have been
doing a lot to try to lower your tax rate from
previous years. Most people, and I myself, have been
using about 40%. Can you give us some guidance on the
tax rate going forward? Was there something special
this quarter and should we use a lower rate going
forward?
R. Dunn Nothing particularly special, Alan. One thing, as our
income goes up, our permanent unfavorable schedule
M's get diluted down as a percent. We were at about
38.5% or there about.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 21
A. Mitrani That's a lot of tax talk for a guy who is not a CPA.
Here is my quick question. What kind of estimates
should I be using the next 12 months or for fiscal
'05 or something like that?
R. Dunn Probably in the 39% range.
Moderator Our next question is from the line of Alex Rygiel
with FBR. Please go ahead.
A. Rygiel Congratulations, gentlemen. Nice quarter and
congratulations on the Verizon work. A couple of
questions: Steve, you used the term meaningful and
large several times. Can you compare those terms and
define those terms relative to Comcast, which I
suspect is a meaningful and large customer of yours
right now?
S. Nielsen The agreement, and I think this is known in the
marketplace that Verizon is anticipating entering
into is a five-year contract. So by definition, it's
going to be significant. Clearly, with their stated
goals of passing a million homes and presuming
success there, doubling that, we certainly have
pretty significant growth opportunity, based on what
they've disclosed publicly. We love all of our
customers. I don't know if I would
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 22
want to compare it on a relative basis to Comcast. We
continue to have good business with Comcast and value
them as a customer. Clearly, it's a nice opportunity
for us to participate in, really, the initial
deployment of what could be a pretty revolutionary
network technology for the largest RBOC in the
country.
A. Rygiel How many subsidiaries do you anticipate working with
Verizon on this FTT opportunity right now?
S. Nielsen Probably five, six, seven.
A. Rygiel Can you comment on how your recent acquisitions
helped you to be successful in getting this business?
S. Nielsen The acquisitions really were entered into, Alex,
separately from any discussions we had on the
opportunity. Clearly, particularly in UtiliQuest's
case, they had a significant piece of business with
Verizon across the country and also were located in
serving some other utilities and markets that Verizon
is the local phone company. Clearly, there will be
some impact on the locating business, based on not
only the buried
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 23
construction, but also the aerial construction to the
extent that requires grounding systems and other
deployments that require locating services.
A. Rygiel When I look at this entire opportunity, is this all
new business or is there some cannibalization going
on, or are you taking some market share from some of
your smaller competitors that could have had
relationships with Verizon?
S. Nielsen It's all new business, Alex. This is really an
overlay project, so it's replacing existing
facilities. I see it as all incremental. Over
time, as the network is fully deployed, there may be
less local maintenance opportunities for some of the
smaller contractors, but right now, it's all
incremental.
A. Rygiel You went through a number of new job awards during
the quarter. Can you throw out, was half of that from
new opportunities and half from market share gains or
75/25? How much is new opportunity versus market
share gains?
S. Nielsen Some were clearly market share gains. We mentioned
the extension, so those were not. We have been
relatively successful in adding mileage,
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 24
particularly with Comcast as they continue their
upgrade process. I wouldn't say that was a market
share gain, that was just mileage that was unassigned
and available for folks who could get it done. We're
proud of the job the subsidiaries have done so that
we were entrusted with more to do.
A. Rygiel One last question. You've obviously worked with
Verizon in the past; is there anything different
about this contract or the language with this
contract versus other traditional MSA work for
Verizon or other RBOC's?
S. Nielsen I don't think we're in a position to get into
specifics of the contract language, other than to say
that we're very comfortable signing it. It's not
anything that would give us pause, based on long
experience of working with telephone companies.
Moderator We'll go to the line of Chris Lytle with Don Levin
Company. Please go ahead.
C. Lytle Just a question. Is it your understanding that
Verizon is going to be focused more on the buried
plant installations or the above ground installations
in the start-up of the build?
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 25
S. Nielsen I think they publicly disclosed that they're serious
about working on both. Historically, Verizon has done
the majority of their aerial construction with their
own employees. They're very capable of jumping on
that. We're going to be very active on the buried
construction side.
Moderator We do have a follow-up from Alan Mitrani. Please go
ahead.
A. Mitrani Dick, can you just give us a little more detail on
some customers? I saw Charter's capex in the quarter
really jumped in their calendar fourth quarter, and
they're indicating they need to spend a lot or they
lose basic subs. I saw they didn't make your top
five. Can you give us what Charter was in the
quarter, as well as Direct TV?
S. Nielsen They were number six. Basically, Alan, they were
3.5%, which is a little more than a year ago,
although our revenue is up 43%. I guess you could
figure out how much they increased in the quarter.
A. Mitrani It keeps going up, it seems. You expect them to
continue to go up this coming year.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
February 24, 2004/8:00 a.m. CST
Page 26
S. Nielsen They are spending lots of time on the new build and
betterment side of their business and we see
opportunities there. Also, they're doing some things
on the installation side. They seem to be proactive
in bettering the way they operate the business.
A. Mitrani Dick, if you could round out with Direct TV and
Alltel, if you don't mind?
R. Dunn Well, we go to seven, I guess for Direct TV at 2.99%.
A. Mitrani Alltel?
R. Dunn Number eight at 2.5%.
S. Nielsen Alan, Direct TV was down from 9.4% last year.
A. Mitrani That's because you exited some contracts, correct?
S. Nielsen Right. That's all organic offset.
A. Mitrani I have a couple of questions on this Verizon deal,
but I want to focus on Comcast a bit. The weather in
the calendar fourth quarter was pretty
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good, January looked bad. Your revenues were not down
nearly as much, sequentially, from Comcast, about 13%
relative to what Comcast capex was sequentially, 18%.
Can you give us a sense as to what you think Comcast,
how much it's going to be down for calendar '04
versus calendar '03, given their rhetoric that their
upgrade cycle is mostly done and they're just trying
to finish up a bunch of cities?
S. Nielsen I think there is a couple of things, Alan. We haven't
provided guidance out past the fourth quarter. We're
not going to comment on the calendar year, other than
to say that Comcast continues to indicate that
they're going to be substantially complete by
mid-year.
The other thing is that we are on the locating side
of the business. With some of these new build
betterment contracts, there is a recurring piece of
that business that may not be as sensitive to their
overall capex number. That's part of the impact that
you see in the second quarter.
A. Mitrani Then on Verizon again. I'm trying to reconcile a
little bit. I'm hearing, obviously, the job is going
to be pretty good. If I run through a million homes
and I realize they're not necessarily going to hit a
million homes and I have to assume a certain
percentage. If Verizon ramps the way you
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expect it and hopefully the way they expect it or
they've said, your fourth quarter numbers and the
second half of '04 numbers should be substantially
higher than what you're saying, unless the rest of
your business is really going to come down. I'm
trying to reconcile with what I know about how big
this contract is or my assumptions are versus your
conservatism. Can you just help me out there?
S. Nielsen It's going to be a large project, but we want to
make sure that we understand exactly what the
magnitude of the project is. It's been a very
detailed process and some of the numbers have changed
over time, and we just want to make sure that when we
commit, that we understand. It also included some
engineering phases as part of the tasks and those may
be self-performed by Verizon. We're happy to do them,
if they want us to, but they may choose to do them
themselves. That's not a major portion of the revenue
opportunity, but it is some volatility in coming up
with an estimate. It's a large project.
A. Mitrani Can I assume that if other contractors have to come
to you, then this contract is a little bigger than
your guidance, potentially?
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S. Nielsen No. Our guidance is our best expectation, given what
we know today. As that changes, we will update it.
A. Mitrani Do you expect Verizon to make your top five next
fiscal year?
S. Nielsen Clearly.
A. Mitrani Lastly, you had talked about the acquired properties
that you bought to have higher margins, probably over
time a bit, than your existing business as you
integrate it and as you start going through their
markets. It sounds like your answer to Steve's
question in the beginning was, initially you just got
you it. As you work through it, we could see a couple
of quarters where the margins are much higher as we
get to seasonally stronger quarters. Is that the way
it's likely going to play out as you integrate them
and as you start bidding and put the Dycom model into
them?
S. Nielsen I think there are a couple of things. One, both were
large businesses, particularly UtiliQuest. The EBITDA
margin expectation that we set was that we would be
at the average or higher and we don't see any
indication that that's not going to be the case.
We're enthusiastic about what these acquisitions
provide to us in terms of both growth and margin
expansion.
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It may only be the bottom of the second inning, but
so far we haven't had any strikeouts.
A. Mitrani Dick, I missed what percentage Qwest was in the
quarter. Was it 5.9%?
R. Dunn Yes, that's it.
Moderator We do have a follow-up from Toby Sommer. Please go
ahead.
T. Sommer I was curious what you think the other RBOC's,
particularly Bell South, who has historically been a
good customer, what their plans are for
Fiber-in-the-Home and if you see that spreading among
the other RBOC's; or do you think some of them may
take a wait and see attitude and see how the first
leg of Verizon's project goes?
S. Nielsen In Bell South's case, they have the largest install
base of Fiber-to-the-Curb, I believe, of any of the
major carriers in the country. I think they are still
working through some regulatory issues, as to whether
Fiber-to-the-Curb is the regulatory equivalent of
Fiber-to-the-Premise. Once they resolve those issues,
Bell South has always been at the forefront of
deploying new network technologies and we don't see
any reason to
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Page 31
expect that they're going to fall very far behind on
this one once they get comfortable with the
regulatory environment so that they can earn a return
on their investments.
T. Sommer Would you put Qwest and Alltel in the same category?
S. Nielsen Yes. Qwest has not indicated that they are going to
participate at this point with any
Fiber-to-the-Premise. Alltel is in a little more
rural environment, so I don't think that they have
any plans at this point.
Certainly, we do some business for SBC and they are
also a participant, along with Verizon and Bell South
in the technology portion of the Fiber-to-the-Premise
procurement process. They certainly have shown
interest, if not for overlay, certainly for
Greenfield environments.
Moderator We have a follow-up question from Alex Rygiel. Please
go ahead.
A. Rygiel Steve, what percent of your revenues from Comcast are
what you would classify as reoccurring?
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S. Nielsen The locate business, this new build betterment work,
some of the minor construction activities, it could
be $10 million to $15 million a quarter. Hopefully,
we're trying to grow that business as we've talked
about previously.
A. Rygiel Could you generally speak about the directions of
your gross margins over the next 12 to 24 months,
taking into consideration the Verizon FTTP work?
S. Nielsen Alex, it's interesting. We're probably in about the
same position we were a year ago with a significant
amount of work coming from an existing customer, but
with a new opportunity. We're not going to speculate,
other than what our general trend line has been with
gross margins that it's going to be any stronger than
that until we get farther into the project. Our first
focus is creating value for the customer and getting
the project going. We're confident that if we do
that, that we'll earn satisfactory returns for the
shareholders.
A. Rygiel Given that you mentioned that you feel comfortable
that you've been awarded a number of the nine states
that they're looking to be active in,
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are the remaining states still available
opportunities for you or have they been pulled off
the table?
S. Nielsen All I can say is, of the nine states, we will be
participating in a substantial number. That's for
Verizon to comment, as to what their plans are for
the balance, not for us.
Moderator We have a question from Rick Grubbs with Kaufman
Brothers. Please go ahead.
R. Grubbs My question just concerns what you can talk about
regarding the structure of the contract with Verizon.
I hate to beat that too much, but just interested in
the comment you made about Dycom being in the drivers
seat in the sense of ...
S. Nielsen I don't remember saying that.
R. Grubbs ... I guess what I'm looking for is other vendors,
perhaps, getting some direction from you guys on
coordinating this effort. Is that the way I heard
that or did I understand it ... ?
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S. Nielsen No. What we said is we felt like we needed to make an
announcement because as part of the award process,
some of the other potential participants had been
notified that they were not going to directly
participate, but that if they'd like to continue to
contact us. We've received several calls.
R. Grubbs They would operate in the fashion, the subcontractor?
S. Nielsen At this point, if we choose to go that way that would
be the relationship.
Moderator We have a follow-up from Alan Mitrani. Please go
ahead.
A. Mitrani Depreciation and amortization about $11 million this
quarter. Dick, can you give us your sense, as to what
D&A is going to be on our annual basis? I realize due
to the acquired properties and also there may have
been some purchase accounting adjustments for
something, can you just help us out there for
percentage of revenues or what dollar amounts should
we look at?
R. Dunn We see that run rate continuing through the remainder
of the year.
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A. Mitrani The run rate of about $11 million a quarter?
R. Dunn Right.
S. Nielsen Yes. There is some intangibles amortization that's
new to the income statement, as well as a result of
the acquisitions.
A. Mitrani Also, capex continues to be pretty low, about $19
million last year, maybe $25 million for the calendar
year, roughly. Can you give us a sense of what
calendar '04 is going to look like on a gross capex
basis?
S. Nielsen I think it's probably $20 million to $25 million with
an upward bias as we get busier, which is a good
thing.
A. Mitrani Lastly, you guys paid off, it seems, almost 25% to
30% of the deal costs with only two months of having
this deal done. What's your outlook, as it relates to
the use of cash, given interest rates really being at
historic lows? Are you done making deals for the next
six to twelve months, or are you going to pay down
the debt quickly? Can you talk about uses of cash?
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Page 36
S. Nielsen Certainly, we're going to have some working capital
needs as we ramp up on the Fiber-to-the-Premise
project, so we certainly have that. We talked a
little bit about our capex needs. As always, we're
going to be looking for strategic opportunities when
we see the right target and the right set of
customers.
A. Mitrani Once you've integrated the acquisitions, do you
expect consolidated DSO's to come down as you shift
towards the telco customers, which can help support
some of that increased working capital needs?
S. Nielsen The acquired companies both had lower DSO's than our
average. As we get full quarter results, we'll
certainly have some DSO impact there. It's hard to
speculate on the exact DSO profile for the new
opportunity because we haven't done any billing yet,
but we would expect generally that that would be in
line or a little better.
A. Mitrani Lastly, I haven't heard you speak of James Cable in
years. Can you tell us, were they a meaningful
customer in the quarter? What percentage of revenues?
How big can this contract be over time?
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Page 37
S. Nielsen It's a significant $5 million to $10 million
contract. It's a customer that we've done work for on
and off. They're primarily a rural cable provider in
the Southeast and Southwest. As the larger MSO's
continue to work through their upgrades, there are
other opportunities with some of the rural providers.
A. Mitrani In response to your answer to someone else's question
regarding the other RBOC's Fiber-to-the-Premise or
Fiber-to-the-Home initiatives, obviously Bell South
and SBC have been a little slow dragging their feet,
Verizon has taken the lead. It seems like SBC will
likely be next. Can you talk to us about the
opportunities in terms of, if you're working for
Verizon and you're doing all of this work, could you
possibly still bid on other Fiber-to-the-Premise
opportunities? Does this preclude you from looking at
the other RBOC's and what's your outlook there?
S. Nielsen Our first focus is going to be to start the job and
do a good job for Verizon and build our value there.
To the extent that there are other opportunities, as
long as we're doing what we need to for Verizon and
they're comfortable, then we'll leverage that.
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Page 38
Our focus right now, unlike Wall Street, which is
always thinking two moves ahead, is we need to do a
good job with what we've got in hand. This has been
a long process. We've spent a lot of work on it.
We've had a good working relationship with the
customer and we want to take that right out of the
RFP process and put it into the field and start
getting some conduit into the ground.
A. Mitrani Was my understanding this Verizon contract, obviously
this is not just a one-year contract, this is a
multi-year contract you're going to sign, right?
S. Nielsen The expectation is for a five-year agreement, which
is similar to what I understand they've issued to
other equipment suppliers.
A. Mitrani If that's the case, the amount goes up in the
subsequent years, as they get further along? It
doesn't start at peak and stay with peak. It starts
low and moves up. Is that a good understanding of it?
S. Nielsen As I understand what's been publicly disclosed by
Verizon and the equipment vendors is that there is a
bias that successful deployment will generate an
increase in the out years.
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Moderator We do have a follow-up from Alex Rygiel. Please go
ahead.
A. Rygiel Steve, are you working with SBC in any markets right
now? Are you working with SBC in Wisconsin where
they're trailing a Fiber-to-the-Premise network?
S. Nielsen We are not working in Wisconsin that I'm aware of. We
do some construction work for them in the Missouri,
Kansas area. We do locates for them in Texas and one
or two other locations as needed, but we certainly
understand who the customer is and how to speak with
them. They have historically used smaller vendors,
not unlike what historically Verizon has done.
Moderator We do have a question from the line of John Frank
with Miller Asset Management. Please go ahead.
J. Frank If you could just share some of the drivers that lead
to Verizon's decision to go with you guys. Is it
their relationship with you; your experience with the
technology; your geographic footprint relative to the
nine states? Just any type of color please.
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Page 40
S. Nielsen I really think that that's a question for Verizon to
answer. What we presented to them and what we thought
was important was that we have lots of experience in
large deployments, arising both from the telephone
and the cable industries. The magnitude of the
opportunity was something that we've been through
before and we've to some good experience.
We have a large geographic footprint. I think we're
in 44 or 45 states, had a presence in each one of the
markets that they identified initially. We had pretty
good experience, even on a county-by-county basis, as
to what the conditions would be. Generally, we just
did our best to present our ability to help them be a
success because at the end of the day, for us to be
successful, our customers need to be.
Moderator Mr. Nielsen, there are no further questions in queue.
S. Nielsen Thanks, John. We appreciate everybody's time and
attention today. We look forward to speaking with you
on our next conference call. Thank you.
Moderator Ladies and gentlemen, that does conclude your
conference for today. Thank you for your
participation and you may now disconnect.