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DY - Q4 2004 Dycom Industries Earnings Conference Call
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Conference Call Transcript
DY - Q4 2004 Dycom Industries Earnings Conference Call
Event Date/Time: Aug. 31. 2004 / 9:00AM ET
Event Duration: N/A
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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CORPORATE PARTICIPANTS
Steven Nielsen
Dycom Industries, Inc. - President, CEO
Mike Miller
Dycom Industries, Inc. - General Counsel
Dick Dunn
Dycom Industries, Inc. - SVP, CFO
CONFERENCE CALL PARTICIPANTS
Alan Mitrani
Copper Beech Capital - Analyst
Celeste Laurenzano
Merrill Lynch - Analyst
Alex Rygiel
Friedman, Billings, Ramsey - Analyst
PRESENTATION
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Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Dycom earnings
conference call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session, with instructions given at
that time. (OPERATOR INSTRUCTIONS) As a reminder, our conference is being
recorded this morning. I would now like to turn the conference over to our host,
President and CEO, Mr. Steven Nielsen.
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Thank you, Dave. Good morning, everyone. I would like to thank you for
attending our fourth-quarter fiscal 2004 Dycom earnings conference call. With me
we have in attendance Richard Dunn, our Chief Financial Officer, and Mike
Miller, our General Counsel. Now I will turn the call over to Mike Miller.
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Mike Miller - Dycom Industries, Inc. - General Counsel
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 ending July 26, 2003, the Company's
quarterly report on Form 10-Q for the quarter ended October 25, 2003, the
Company's quarterly report on Form 10-Q for the quarter ended January 24, 2004,
and the Company's quarterly report on Form 10-Q for the quarter ended April 24,
2004.
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 and has been posted on the Company's
website under the heading "Corporate" and the subheading "Corporate News."
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Thanks, Mike. Yesterday, we issued a press release announcing our
fourth-quarter 2004 earnings. Please note that the year and quarter ending July
31, 2004 contained 53 and 14 weeks, respectively, compared to 52 and 13 weeks
for the prior year's
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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periods. All call participants should consider these differences when making
sequential or year-over-year comparisons of the reported results.
For the quarter ended July 31, 2004, total contract revenues were 260.8 million
versus 182.9 million in the year-ago period, an increase of 43 percent. Net
income was 17.1 million versus 11.4 million, an increase of 50 percent, while
fully diluted earnings per share was 35 cents versus 24 cents, an increase of 46
percent. Backlog at the end of the fourth quarter was 1.243 billion versus 1.285
billion at the end of the third quarter, a sequential decrease of 42 million. Of
this backlog, approximately 684.9 million is expected to be completed in the
next 12 months.
Our fourth-quarter results continued to demonstrate the fundamental health of
our business. Overall growth remained strong, internal growth for the quarter
was 13.1 percent, and our forecasted first-quarter revenue indicates continued
year-over-year moderate organic growth. While gross margin declined slightly
from the year-ago quarter, G&A decreased 92 basis points and depreciation and
amortization decreased 41 basis points. Both the G&A and depreciation and
amortization percentages continue 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, good safety performance, and active claims management, and
expected start-up performance from our new fiber-to-the-premise initiative.
Liquidity remained ample, with over $40 million in net cash, increasing 3.9
million sequentially from the third quarter. Capital expenditures to support our
growth totaled 16.1 million net of disposals. Days Sales Outstanding was 71
days, essentially unchanged from 72 days for the third quarter, while cash flow
from operations totaled a solid 19.9 million.
During the quarter, we continued to experience the effects of a growing overall
economy, major telephone company expenditures which grew substantially
year-over-year, and continued robust spending by several cable customers.
Revenue from Comcast was 61.6 million. Comcast was Dycom's largest customer for
the quarter at 23.6 percent of revenue, down from 28 percent in the previous
quarter. Additionally, revenue from Charter continued to increase
year-over-year.
Organic revenue from BellSouth and Qwest increased compared to the year-ago
quarter, and employee headcount increased during the quarter by 237 to 7,769 at
the end of the quarter. And perhaps most significantly, we continued work begun
during the third quarter for Verizon's fiber-to-the-premise buried plant
initiative in two distinct locations, including Tampa, Florida.
Additionally, we started installations in three new locations and expect to
commence work in two additional locations during our first quarter. We have
currently mobilized over 1500 in-house and subcontractor personnel for this
project and are adding resources daily. Sales through Verizon were 21.8 million
during the quarter, up from 778,000 in the year-ago period. At over 8 percent of
revenue, Verizon has now become a top five customer.
During the quarter we continued to book new work. For Charter, new build
betterment contracts for St. Louis, Birmingham, and St. George, Utah; in our
locating business, a new locating contract in Oregon for Sprint; and extensions
with Qwest in Denver and BellSouth in Mobile, Alabama. Additionally for Qwest, a
large fiber construction project in northern Arizona, and also an additional
RUS-type fiber deployment contract for Farmers Telephone in South Carolina.
As Dycom grew this quarter, we demonstrated our continued stability and ability
to positively respond to growth opportunities. First and foremost, we maintained
solid customer relationships throughout our markets. 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.
We are encouraged by several recent public statements by two regional Bell
operating companies indicating a growing and accelerating commitment to deploy
fiber deeper into their networks. We see these announcements as evidence that a
sustained cycle of dramatic increases in capital expenditures may be just
commencing. In fact, we may very well be seeing the real beginning of the
oft-foretold rewiring of the nation's telecommunications infrastructure in order
to dramatically expand the provisioning of bandwidth and the delivery of new
service offerings.
And finally, while growing, we have maintained tight margin discipline, solid
cash flows and our superior financial strength. As the economy continues to
expand and our industry possibly begins its own upsurge in growth, we believe
Dycom's fundamental strength will continue to allow us to differentiate
ourselves from our competitors in the eyes of our customers, employees, and
suppliers. Over the last several quarters, we 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 be more pronounced every day.
Having been prudently managed during our industry's downturn, we look forward to
further potentially significant growth opportunities. After weighing all of the
factors we have discussed today, we have updated our forecast as follows. For
the first quarter of fiscal 2005, we anticipate earnings per share of 31 to 39
cents on revenues of 240 to 260 million. This outlook anticipates continued
solid growth in the U.S. economy, normal seasonal weather, declining spending by
Comcast as it substantially completes its AT&T Broadband upgrades, and a prudent
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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assessment of revenues from our Verizon fiber-to-the-premise opportunity.
Looking beyond the first quarter, we anticipate earnings of 19 to 26 cents per
share on revenues of 200 to 220 million for the second quarter of fiscal 2005.
Our expectation for the second quarter is based upon the continued impact of
those factors cited for the first quarter, with some increased relative emphasis
on winter weather impacts. Both our Verizon buried FTTP installations and our
locating operations are expected by their very natures to be somewhat more
sensitive to normal winter seasonal patterns than the rest of our business.
Given the increased portion of our business we expect during the second quarter
from these two areas, we believe forecasting prudence is warranted.
At this point, I will turn the call over to Dick Dunn, our CFO.
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
Thanks, Steve. Before I begin with my financial review, let me reiterate that
the current year and quarter ending July 31, 2004 contained 53 and 14 weeks,
respectively, compared to 52 and 13 weeks for the prior-year's period. All
participants should consider these differences when making sequential or
year-over-year comparisons of the reported results.
In addition, you should be aware that for purposes of this call, we have
eliminated the following two items from our GAAP results for the current fiscal
year ended July 31, 2004. First, in Q3 of fiscal year 2004, we reported an
after-tax charge of 1.4 million related to a reserve recorded in connection with
an ongoing federal employment tax audit relating to years prior to fiscal year
2003. Second, the results for Q2 of the current fiscal year include an after-tax
gain on the sale of certain long-term receivables of 6.8 million. Unless
otherwise noted, my discussion will eliminate the impact of these items. A
reconciliation of these amounts to our GAAP net income has been provided as a
table to yesterday's press release, which is available on our website under the
heading "Corporate" and the sub-heading "Corporate News."
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 260.8 million, up 42.6 percent from last year's Q4 of 182.9
million. Excluding revenues attributable to subsidiaries not owned during Q4 of
fiscal year 2003, revenues for the current quarter would have been 206.8
million, an increase of 13.1 percent.
Total revenues for the year ended July 31 increased 41.2 percent to 872.7
million versus 2003's revenue of 618.2 million. Excluding revenues attributable
to subsidiaries not owned during fiscal year 2003, revenues for the year would
have been 749.0 million, an increase of 21.2 percent.
For the quarter, the top five customers accounted for 62.7 percent of total
revenues versus 71.8 percent for the prior year's fourth quarter. For the year
ended July 31, sales to the top five customers as a percent of total was 63.7
percent versus 63.9 percent for the prior year. The top five customers and their
respective percentages of revenue for Q4 fiscal year 2004 and 2003 are as
follows, beginning with Q4 of '04. Comcast was 23.6 percent; BellSouth came in
at 15.6 percent; Sprint at 8.6 percent; Verizon, 8.4 percent; and Qwest, 6.5
percent. Turning to Q4 fiscal year '03, Comcast was 38.1 percent; Sprint was
11.6 percent; BellSouth, 10.9 percent; Adelphia, 5.7 percent; and Qwest, 5.5
percent.
Net income for the fourth quarter was 17.1 million versus 11.4 million at fiscal
year '03, representing an increase of 50 percent. Net income for the year ended
July 31 was 58.6 million. Excluding the two items mentioned in my opening
remarks, net income was 53.2 million, an increase of 210.1 percent from last
year's 17.1 million. Fully-diluted earnings for the quarter were $0.35 per share
versus $0.24 per share for fiscal year '03, an increase of 46%. Diluted EPS for
the year ended July 31, 2004 was $1.20. Excluding the two items mentioned in my
opening remarks, diluted EPS for the year increased 202.8 percent to $1.09 per
share versus last year's 36 cents per share.
Operating margins for the fourth quarter increased 20 basis points, coming in at
10.45 percent versus last year's 10.25 percent. This increase was due to a 92
basis point decrease in G&A cost, a 41 basis point decrease in depreciation and
amortization, partially offset by 113 basis point increase in cost of earned
revenues. Included in G&A for the quarter was a charge of 1.2 million associated
with a judgment and its related expenses. This judgment resulted from a contract
dispute which arose from Arguss Operations prior to our February '02 purchase of
Arguss.
Operating margins for the year were 9.37 percent. Excluding the charge for
payroll tax mentioned in my opening remarks, operating margins for the year
increased 540 basis points, coming in at 9.63 percent versus last year's 4.23
percent. This increase was due to a 120 basis point decrease in cost of earned
revenues, a 270 basis point decrease in general and administrative costs, and a
150 basis point decrease in depreciation and amortization.
Depreciation expense for the fourth quarter increased 1.8 million from the prior
year. This increase was primarily due to the capital additions associated with
the acquisitions of First South Utilities and UtiliQuest, partially offset by
the runout of depreciation associated with fiscal year '99 capital additions and
the sale of assets during the current fiscal year.
The effective tax rate for the quarter and year-end periods were 39.45 percent
and 39.7 percent, respectively, versus 42.3 and 43.7 percent respectively for
the prior year's period. These differences were attributable to the mix of
income among our subs and the impact that had on our state tax rates.
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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Net interest for the quarter and year were 37,000 and expense of 189,000,
respectively, versus 310,000 and 1.3 million of income for the prior-year
periods. For the quarter, our cash flow from operating activities was 19.9
million. The primary components of this cash flow were net income of 17.1
million, depreciation and amortization of 11.6 million, offset by increases in
working capital of approximately 8.8 million.
Investing and financing activities for the quarter used 17.1 million. This use
of cash consisted of capital expenditures of 17.1 million and principal payments
on notes of 1.5 million, partially offset by proceeds from the sale of assets of
1 million and proceeds from the exercise of employee stock options of 1 million.
Cash and cash equivalents at the end of the quarter were 51.4 million, up 2.8
million from the prior quarter.
During the quarter, net receivables increased from 127.4 million to 131.9
million, but DSO declined 3.2 days to 49.6 versus 52.8 at the end of the third
quarter. Net unbilled revenue balances increased in the quarter from 47.3
million to 58.2 million, resulting in a DSO of 21.8 days, an increase of 2.7
days from Q3's figure of 19.1 days. On a cumulative basis, the combined DSO for
our trade receivables and unbilled revenues decreased from 71.9 days to 71.4
days, a decrease of 0.5 days.
At July 31, the accrual for our self-insured casualty program decreased to 44.7
million from 48.5 million at the end of the third quarter. During the fourth
quarter of fiscal '04, current quarter revenues from multi-year master service
agreements represented 55.7 percent of contract revenues versus 43.7 from Q4 of
the prior year. Revenues from long-term contracts and multi-year master service
agreements represented 88.1 percent of contract revenues versus 86.9 percent for
Q4 of the prior fiscal year.
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Thanks, Dick. Now, Dave, we will open the call for questions.
QUESTION AND ANSWER
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Operator
(OPERATOR INSTRUCTIONS) Alan Mitrani of Copper Beach Capital.
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Alan Mitrani - Copper Beech Capital - Analyst
Dick, did I hear you right? Was there a charge this quarter buried in SG&A
regarding to Arguss? Can you break that out with the pre-tax and after-tax issue
- -- the pre-tax and after-tax number?
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
The pre-tax, Alan, was 1.2 million. It is included in the numbers we have
given. The tax would be the same effective rate for the quarter.
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Alan Mitrani - Copper Beech Capital - Analyst
That's roughly 2 cents a share that you took in SG&A expense.
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
Well, it's a little less than that after-tax, Alan. I think it's probably --.
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
About 1.5, I would --
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Alan Mitrani - Copper Beech Capital - Analyst
1.5, 1.8, right -- yes, I was rounding. So are you finished with that issue?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
What happened, we had assumed the defense of a lawsuit as part of that
transaction that we were advised to be highly confident that it would not result
in any payment. And we had a jury trial and so far we did not prevail. Now, we
have appeals underway, but at this point it can't get any worse.
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Alan Mitrani - Copper Beech Capital - Analyst
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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That's fine. So the issue is resolved, at least right now, against you. If
somehow you appeal or do something later on, we could see some money back?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
That is correct.
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Alan Mitrani - Copper Beech Capital - Analyst
So with that said, just to move on, your CapEx was pretty high this quarter.
How much of that was related to the ramp-up of Verizon?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
There was a significant portion there, Alan. There were also just some
scheduled replacements. We had strong acquisition years for capital equipment in
'98/'99, and given the bonus depreciation that we have for tax purposes this
calendar year, we just thought it was a good time to do it.
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Alan Mitrani - Copper Beech Capital - Analyst
That's good. And do you have any sense of what CapEx could be this coming year?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
We're thinking about from a budget standpoint at 35 to 40 million. It's clearly
contingent upon the magnitude of the Verizon ramp-up, which we are continuing to
buy assets for every day.
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Alan Mitrani - Copper Beech Capital - Analyst
I will ask one more question and jump back in. Verizon tripled this quarter for
you, and actually, Comcast didn't even decline, it seems. How much is in your
backlog for Verizon for the next 12 months? In the past, you've talked about
100, 125 million. Can you give us a sense, is Verizon's ramp-up going to take
away some of the pain of Comcast's decline?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
We're not going to comment directly on the backlog, other than to say that it
was up pretty significantly in the quarter as they continue to bring projects
online and we get more visibility into their build. And our view, as we
indicated in the comments, is that the potential magnitude of these
fiber-to-the-prem or other fiber deeper deployments by the phone companies could
be very significant in size.
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Alan Mitrani - Copper Beech Capital - Analyst
Thanks. I will jump back in queue.
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Operator
Steven Fox with Merrill Lynch.
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Celeste Laurenzano - Merrill Lynch - Analyst
Actually, this is Celeste Laurenzano for Steven Fox. Good morning. Quick
question on the gross margin. If you can maybe talk about what puts and takes
you saw during this quarter, some things that may have helped or hurt on that
line.
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
I think what we saw, Celeste, in the quarter was that of the three months, June
was a little wetter. And so when you looked at returns generally in the business
in June, it was a little bit depressed from either May or July. And so I think
that was a good portion of the difference. Clearly, we continue to ramp up
essentially during the quarter to well over 1000 folks at Verizon. Certainly we
had some expenses there to get that number of people in the field.
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Celeste Laurenzano - Merrill Lynch - Analyst
Okay. And then looking at G&A, X the judgment, the 1.2 million, going forward
on that 20 million, should we assume that that should creep up as more Verizon
projects roll out?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
As we grow the Company, hopefully G&A will grow, but at a slower rate. We do
have an extra week, when you look at the absolute numbers, and we leave it to
you to make that adjustment on a more normal basis. We did have a good quarter,
so we had some bonus expense that is recorded as G&A. But we don't see anything
about the new business coming on that would indicate that it had a higher
percentage margin -- overhead profile than the business that we have now.
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Celeste Laurenzano - Merrill Lynch - Analyst
Okay, thank you.
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Operator
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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Alex Rygiel with Friedman, Billings.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Outstanding quarter and outstanding year again. With regards to backlog,
historically your backlog is down 10, 15 percent sequentially from the April
quarter to the July quarter. Your backlog for the next 12 months is actually up
from April. Can you just address that and talk about how this year it is a
little bit different than your historical seasonal patterns?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
I think clearly there was the ramp-up of Verizon, and we're still taking the
same prudent position we did on recording the out-year backlog, as we get more
visibility there. But at this point, the vast majority of that backlog is
recorded in the next 12 months, and so that offsets some of the normal seasonal
pattern where this quarter is not a strong one for booking backlog, just because
it's the summer.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Some more clarity on Verizon -- you mentioned you have 1500 crew members or
subcontractors working on that. It sounds like it's about 20 percent of your
work force. Does that mean that in the fiscal first quarter of '05, 20 percent
of your revenues are going to be coming from Verizon?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
No, I don't think that's exactly the right way to look at it, because we are
able to use a larger percentage of subcontractors in that 1500 than we have in
the rest of our business, as we have talked about before. For example, our
locating business is all performed in-house, which remains unaffected by that
mix shift. So we feel comfortable that we're going to continue to grow the
people deployed there, but I don't think that it would necessarily get to that
level as quickly as you had indicated.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Does that 1500 tie perfectly to the five markets that you are currently active
in?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Yes, absolutely. That's where we are.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
And with regards to the other two markets that you have mentioned in the past,
are those two markets included in your backlog?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Absolutely, they're all included. Estimates that we have for the backlog
include all the markets where we have visibility.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
And have you included any other markets over and above the seven in your
backlog with regards to Verizon at this point in time?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
No, there has been no change.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Okay. When you think about Verizon, Verizon was out there last week talking at
a conference, suggesting that maybe they would consider accelerating their
fiber-to-the-premise deployment activities in 2005, maybe such that they passed
4 million homes rather than 2 million homes. When you think about your backlog,
can you kind of help us to understand what plan your backlog is relative to
their thinking?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
We are taking a conservative view that the public statements that I have seen,
Alex, indicate that they're thinking strategically about a bigger build and
accelerating the number of homes passed next year. But I still think -- at least
the comment that I read said "could." And until "could" becomes a little bit
more definite, we are not altering our view on the backlog.
That being said, the bias that we have based on their public statements, that
you can read as well as we can, indicates that they are thinking about bigger
rather than smaller and quicker rather than slower.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
One last question. You referenced fiber-to-the-premise and then you suggested
fiber deeper to networks by some of your telco customers. BellSouth's revenues
on a sequential basis were up again pretty substantially, back to a pretty high
level that we saw a few years back. Is that what you're suggesting with regards
to that comment about fiber going deeper into the RBOCs' networks? And the
follow-on was that can you discuss SBC and whether or not
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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you're seeing any new incremental activity or bidding activity coming out of SBC
with regards to their fiber-to-the-neighborhood strategy?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
With regards to BellSouth, the pace of activity there is just picking up
generally. While they have publicly stated that they are considering various
ways to expand the capacity of the network for residential broadband, we are not
seeing at this point anything other than just a normal return to spending
patterns, the way we have seen them prior to the last downturn. Clearly, SBC in
June talked about pushing fiber to the neighborhood or fiber to the node. At
this point, we have not seen any significant activity come out of that, although
we're certainly monitoring that situation and paying attention.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Thank you.
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Operator
Alan Mitrani.
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Alan Mitrani - Copper Beech Capital - Analyst
Thanks. Dick can you run through some of the customers for us? Can you just
give us the break down from telco, electric utility, and underground utility
line locating?
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
Yes. During this quarter, Alan, telco was 39.6 percent versus 33.8. Cable TV
was 34 versus 53. Underground locating was 23 versus 9. And all other was 3.4
versus 4.2.
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Alan Mitrani - Copper Beech Capital - Analyst
Great. And could you give us a couple of the other customers that you normally
give us -- Directv -- some of the round up of the top 10 -- Directv, Charter,
Adelphia, and Alltel?
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
Directv was about 8.8 million. Charter was about 9.1. And Adelphia was about
9.4.
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Alan Mitrani - Copper Beech Capital - Analyst
And Alltel?
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
They're at 6.9.
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Alan Mitrani - Copper Beech Capital - Analyst
And Adelphia is up for being sold. We know they have not -- it's typical when a
company could get sold or in the process may underspend their capital. Are you
seeing anything out of Adelphia right now that indicates they are a bit on hold
with some of their capital spending plans, and then maybe can pick it up once
they figure out who is going to own them in a year?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
I don't know if it would be fair to say that they are underspending, Alan. I
just think when you're in the stage of corporate life that they are in, that
they are taking a prudent view as to what capital dollars they should spend.
Because in the event -- which they still have stated they would love to stay
independent -- but in the event that they are sold to a different entity or
multiple entities, they may have different views as to what kind of architecture
they want to deploy. So you don't want to spend a bunch of money one way when
perhaps somebody next year may spend it a different way.
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Alan Mitrani - Copper Beech Capital - Analyst
That's fair. On depreciation, now that you just spent 17 million this quarter,
which is like half of the past year's depreciation, I know last quarter there
was some amount of money, I think, that was a one-timer, Dick, or was related to
some equipment that had rolled off. This quarter, the depreciation seemed high.
I know it was helped by the extra week to put the number higher, but what is a
good rate to use for depreciation going forward?
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
This current run rate is probably pretty good. Last quarter, it came down a bit
because of the rolloff of some '99 additions. That rolloff happened in that
quarter. So this run rate, at least for the next four quarters, I think, with
the exception of how we end up with the CapEx spend, is a reasonable level base
to start from, I guess.
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Alan Mitrani - Copper Beech Capital - Analyst
Adjusted for the 14th week, so more like 10.8?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
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FINAL TRANSCRIPT
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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What we are saying is that the net additions versus the rolloff of the '99 nets
to about a 14th week.
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Dick Dunn - Dycom Industries, Inc. - SVP, CFO
Alan, the depreciation is on a monthly basis; it's not done on a weekly basis.
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Alan Mitrani - Copper Beech Capital - Analyst
Got it. Also, if I adjust your SG&A for the extra week and as well as the
charge, if I pull it out, I get roughly 18.5 million, which tells me for the
last couple years you have had almost no increase in SG&A, while revenues have
been up about 60 percent. I know you feel you don't need to pick up SG&A that
much unless you are going to get a lot of leverage. Is that still true
for the next 1.5 years?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
I think it depends on the growth rate. We would love to add some SG&A if we can
continue to grow, and we see some opportunities that may let us, then that may
go up some. But I think what we're seeing is the dividends of the way we managed
through the recession, that we maintained the core management group that is
absolutely crucial to us making money every day. And we are all working hard,
but we still have good capacity for growth.
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Alan Mitrani - Copper Beech Capital - Analyst
Okay. And just to understand, which markets exactly, which states are you
working in with Verizon? You referenced Tampa, which is Florida. I assume you
probably didn't get that much work done, given what the weather was this past
quarter, but can you tell us what states typically you're working on with
Verizon?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Alan, we are in a position where we have a nondisclosure and confidentiality
agreement with Verizon which allows us to talk about markets that they publicly
disclosed, but does not allow us to talk about anything else until they disclose
it. So they are on the record as being in process in Tampa, and so we can
confirm that. But we just can't get ahead of the customer on any other
disclosure.
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Alan Mitrani - Copper Beech Capital - Analyst
And could you remind us how much of your Comcast work is typically maintenance
work?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
We have set an expectation over the last several quarters of 15 to $20 million
of business that we can see going out three or four quarters, and we're still
comfortable with that.
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Alan Mitrani - Copper Beech Capital - Analyst
Are you finished with the upgrades or are you still working on some markets on
upgrades?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
There are a few markets that are, on a limited basis, that are still
continuing. And clearly, there was more of that activity in May and June than
there is now, which is reflected in our guidance.
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Alan Mitrani - Copper Beech Capital - Analyst
Thank you.
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Operator
(OPERATOR INSTRUCTIONS) We will return to the line of Alan Mitrani.
- --------------------------------------------------------------------------------
Alan Mitrani - Copper Beech Capital - Analyst
Guess I'm the inquisitive guy today. SBC a few months ago put out a release
where they talked about looking at equipment vendors for FTTP. I know Alex's
previous question referenced FTTP, but can you talk about whether you think
there will be a construction RFP out in the next few months? It seems like SBC
is about six months behind Verizon and BellSouth is a few months behind them.
What is your view on that and where do you see that playing out and are you
positioned to pick up work in the next 12 months from other vendors?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
I don't know that I am in a position to say who's behind who. All I can say is
that SBC has indicated that they see, with their fiber-to-the-prem for
greenfield and fiber-to-the-node for overbuilds, that they see an incremental
spending of 4 to $6 billion over the next four or five years. I think they are
still settling down exactly the equipment vendors and the architecture, and I
think after that, you will see some more construction activity. Historically, we
have not done a lot of work for SBC, but we certainly see them as a key
prospect.
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Alan Mitrani - Copper Beech Capital - Analyst
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FINAL TRANSCRIPT
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DY - Q4 2004 Dycom Industries Earnings Conference Call
- --------------------------------------------------------------------------------
Lastly, just returning to the margins again, that Celeste asked on the gross
margin side. Was that clear that you don't think any of the work you're doing
for the next 12, 18, 24 months has any different margin profile than the work
you have done in the last 12-plus months?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
No, I think the issue, Alan, is where we are. If we look a year ago, we were
about three quarters into the AT&T upgrades. We were busy across multiple
markets and we had good margins, and we think when we get to the same stage with
the current upturn in the business from Verizon that the margin profiles are
going to be very similar.
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Alan Mitrani - Copper Beech Capital - Analyst
So it is just a question of building wire centers and putting in conduit --
being able to have all your men deployed on the job?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
I don't want to minimize the effort of our folks. When you go from 0 to 1500
people in four months, there is a lot of work there, and there is a lot of
investment in overhead and job overhead and in systems and structures that you
have to build in upfront. And while we're doing that, that may have some impact
on margin, but it is all good money because we're going to get it back as the
projects continue to build.
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Alan Mitrani - Copper Beech Capital - Analyst
I would be remiss if I didn't ask about -- in Florida, I am watching TV and I'm
seeing hurricanes coming towards Florida one after the other. Can you give us a
sense as to how much weather impacted you see this quarter and where it is for
this coming quarter?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
We have had limited impacts in terms of any reduction in production. We did not
have substantial ariel, substantial construction in the Fort Myers to Orlando
area. We are picking up some storm restoration work, a minor amount on power and
some also on the cable side, but not probably net not a significant number
either way.
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Alan Mitrani - Copper Beech Capital - Analyst
Okay. And then as well, acquisitions, can you talk about that? You have net
cash again. You have paid down most of your debt. It looks like there's going to
be more work the next 12 months and some of your competitors are still
dislocated. What you seeing in that market? Do you expect to make acquisitions
in the next 12 months?
- --------------------------------------------------------------------------------
Steven Nielsen - Dycom Industries, Inc. - President, CEO
We are always looking at the right acquisitions at the right time. We want to
make sure that we remain focused on running our business, because we are rapidly
picking up some business with the telcos. But at the same time, if there's a
good opportunity out there, we maintain the balance sheet that will support
acquisitions and we've done them before and we will most likely, at the right
time and with the right companies, do them again.
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Alan Mitrani - Copper Beech Capital - Analyst
Lastly, one of your competitors is having problems in Florida. Are you seeing
any employee -- more resumes towards you? Are you picking up any workers or
picking up any work from competitor dislocation?
- --------------------------------------------------------------------------------
Steven Nielsen - Dycom Industries, Inc. - President, CEO
We are just not in a position to comment about competitors with any specific
details, other than to say that we feel comfortable that the way we have run the
business that we will be able to attract the talent that we need to continue it
growing.
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Alan Mitrani - Copper Beech Capital - Analyst
Thanks a lot.
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Operator
Thank you very much. Alex Rygiel.
- --------------------------------------------------------------------------------
Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Thank you. Steve, with regards to the five Verizon markets that you're in right
now, can you help us understand the three most recent ones that you've started,
when did you start them in the quarter? Was it front-end loaded or back-end
loaded?
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
It was more loaded to the back end.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
And are all Verizon markets created equal?
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publication may be reproduced or transmitted in any form or by any means without
the prior written consent of Thomson Financial.
FINAL TRANSCRIPT
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DY - Q4 2004 Dycom Industries Earnings Conference Call
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Steven Nielsen - Dycom Industries, Inc. - President, CEO
Once again, it is not for us to get ahead of our customer. They have a lot of
access lines in a lot of different places.
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Alex Rygiel - Friedman, Billings, Ramsey - Analyst
Thank you.
- --------------------------------------------------------------------------------
Operator
Mr. Nielsen, we have no one else queued up for questions at this time.
- --------------------------------------------------------------------------------
Steven Nielsen - Dycom Industries, Inc. - President, CEO
Okay, Dave. We thank everyone for their interest and participation and we will
talk to you on our next quarter's conference call towards the end of November.
Thank you.
- --------------------------------------------------------------------------------
Operator
Ladies and gentlemen, that concludes our conference for today. Thank you for
your participation and for using AT&T Executive Teleconference. And you may now
disconnect.
- --------------------------------------------------------------------------------
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