Dycom Industries, Inc. (NYSE:DY) Q3 2024 Earnings Call Transcript

Dycom Industries, Inc. (NYSE:DY) Q3 2024 Earnings Call Transcript November 21, 2023

Dycom Industries, Inc. beats earnings expectations. Reported EPS is $2.82, expectations were $1.77.

Operator: Good day, and thank you for standing by. Welcome to the Dycom Industries, Inc. Third Quarter Fiscal 2024 Results Conference Call. [Operator Instructions] Today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Steven Nielsen, President and Chief Executive Officer. Please go ahead, sir.

Steven Nielsen: Thank you, operator. Good morning, everyone. Thank you for attending this conference call to review our third quarter fiscal 2024 results. Going to Slide 2. During this call, we will be referring to a slide presentation, which can be found on our website’s Investors Center main page. Relevant slides will be identified by number throughout our presentation. Today, we have on the call Drew DeFerrari, our Chief Financial Officer; and Ryan Urness, our General Counsel. Now, I will turn the call over to Ryan Urness.

Ryan Urness: Thank you, Steve. All forward-looking statements made during this conference call are provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events. These forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from current projections, including those risks discussed in the company’s filings with the U.S. Securities and Exchange Commission. Forward-looking statements are made solely as of the original broadcast date of this conference call, and we assume no obligation to update any forward-looking statements. Steve?

Steven Nielsen: Thanks, Ryan. Now moving to Slide 4 and a review of our third quarter results. As we review our results, please note that in our comments today and in the accompanying slides, we reference certain non-GAAP measures. We refer you to the Quarterly Reports section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures. In addition, the impacts of the change order and the closeout of several projects increased contract revenues by $26.5 million during this quarter. After the impacts of certain other costs, all of these items contributed $23.6 million to both gross margin and adjusted EBITDA. As a result, reported gross margin was increased by 1.6% and reported adjusted EBITDA was increased by 1.8%, both as a percentage of contract revenues.

On an after-tax basis, these items contributed approximately $17.5 million to reported net income or $0.59 per common share diluted. Now for the quarter. Revenue increased year-over-year to $1.136 billion, an increase of 9%. Organic revenue grew 4.6%. As we deployed gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from 4 of our top 5 customers. Gross margin was 22% of revenue, increased 358 basis points compared to the third quarter of fiscal 2023. General and administrative expenses were 7.7% of revenue, and all of these factors produced adjusted EBITDA of $166.8 million or 14.7% of revenue and earnings per share of $2.82 compared to $1.80 in the year ago quarter.

Liquidity was ample at $464.1 million. And finally, during the quarter, we completed the acquisition of Bigham Cable Construction. Now going to Slide 5. Today, major industry participants are constructing or upgrading significant wireline networks across broad sections of the country. These wireline networks are generally designed to provision gigabit network speeds to individual consumers and businesses either directly or wirelessly using 5G technologies. Industry participants have stated their belief that a single high-capacity fiber network can most cost effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment. This view is increasing the appetite for fiber deployments, and we believe that the industry’s effort to deploy high-capacity fiber networks continues to meaningfully broaden the set of opportunities for our industry.

Increasing access to high-capacity telecommunications continues to be crucial to society, especially for rural America. The infrastructure investment and Jobs Act includes over $40 billion for the construction of rural communications networks in unserved and underserved areas across the country under the BEAD program. This represents an unprecedented level of support and meaningfully increases the rural market that we expect will ultimately be addressed. States are progressing through the requirements to submit their BEAD initial proposals by the December 27 deadline. As of last week, 55 of 56 states and territories have commenced the planning process, with 2 having completed 7 of 8 steps required before commencing spending, and 19 completing 5 of 8.

Once all 8 steps are completed, a state can request 20% or more of its allocated funding. In addition, substantially all states have commenced programs that will provide funding for telecommunications networks even prior to the initiation of funding under the Infrastructure Act. We are providing program management, planning, engineering and design, aerial, underground and wireless construction and fulfillment services for gigabit deployments. These services are being provided across the country in numerous geographic areas to multiple customers. These deployments include networks consisting entirely of wired network elements and converged wireless/wireline multi-use networks. Fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal initiatives.

We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants. Macroeconomic conditions, including those impacting the cost of capital may influence the execution of some industry plans. In addition, the market for labor remains tight in many regions around the country. Automotive and equipment supply chains remain challenged, particularly for the large truck chassis required for specialty equipment. Prices for capital equipment continue to increase. It remains to be seen how long these conditions may persist. We expect demand may fluctuate less amongst customers as increases in the cost of capital slow. For several customers, the pace of deployments is increasing into next year, including for those customers whose capital expenditures were more heavily weighted towards the first half of calendar year 2023.

For these customers, we are pleased that some activity may already be increasing. We are encouraged by recent longer-term industry financings. These financings have expanded the pool of capital available to fund future industry growth. Within this context, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers. Moving to Slide 6. During the quarter, revenue increased 9%. Our top 5 customers combined produced 54.4% of revenue, decreasing 8.8% organically. Demand increased from 4 of our top 5 customers. All other customers increased 29.8% organically. Lumen was our largest customer at 16.5% of revenue or $187.6 million. Lumen grew organically 47.1%, excluding operations sold to Brightspeed from the year ago period.

This was our seventh consecutive quarter of organic growth with Lumen. AT&T was our second largest customer at 12.8% of total revenue or $145.1 million. Revenue from Comcast was $111.2 million or 9.8% of revenue. Comcast was Dycom’s third largest customer and grew organically 2.2%. Verizon was our fourth largest customer at $104.8 million or 9.2% of revenue. Verizon grew 10.3% organically. And finally, a customer who has requested their name not be disclosed was our fifth largest customer at $69.8 million or 6.1% of revenue. This customer grew 94.9% organically. This is the 19th consecutive quarter where all of our other customers in aggregate, excluding the top 5 customers, have grown organically. It is the first quarter in 20 years where our top 5 customers have represented less than 55% of total revenue, an encouraging sign of increasing customer breadth and opportunity.

Of note, fiber construction revenue from electric utilities was $98.9 million in the quarter. We have extended our geographic reach and expanded our program management and network planning services. In fact, over the last several years, we believe we have meaningfully increased the long-term value of our maintenance and operations business, a trend which we believe will parallel our deployment of gigabit wireline direct and wireless/wireline converged networks, as those deployments dramatically increase the amount of outside plant network that must be extended and maintained. Now going to Slide 7. Backlog at the end of the third quarter was $6.613 billion versus $6.207 billion at the end of the July 2023 quarter, an increase of $406 million.

Of this backlog, approximately $3.831 billion is expected to be completed in the next 12 months. Backlog activity during the third quarter reflects solid performance as we booked new work and renewed existing work. We continue to anticipate substantial future opportunities across a broad array of our customers. During the quarter, we received from AT&T construction and maintenance agreements in Wisconsin, Kentucky, Tennessee, Alabama, North Carolina, South Carolina and Georgia. From Frontier, a fiber construction agreement for Ohio; for Charter, construction agreements in California, Ohio and New York; various rural fiber construction agreements in Arizona, Illinois, Kansas, Arkansas, Tennessee, South Carolina and Georgia; and various utility line locating agreements in Tennessee, South Carolina and Georgia.

Headcount was 15,401. Now, I will turn the call over to Drew for his financial review and outlook.

Drew DeFerrari: Thanks, Steven. Good morning, everyone. Going to Slide 8. Contract revenues were $1.136 billion, and organic revenue increased 4.6%. Revenue from our recently acquired business was $45.2 million in the current period. Adjusted EBITDA was $166.8 million or 14.7% of contract revenues compared to $114.6 million or 11% of contract revenues in Q3 ’23. The impacts of a change order and the closeout of several projects increased contract revenues by $26.5 million in Q3 ’24. After the impacts of certain other costs, these items contributed $23.6 million to both gross margin and adjusted EBITDA. As a result, reported gross margin was increased by 1.6% and reported adjusted EBITDA was increased by 1.8%, both as a percentage of contract revenues.

On an after-tax basis, these items contributed approximately $17.5 million to reported net income or $0.59 per share. Compared to Q3 ’23, gross margins increased 358 basis points, resulting from the 160 basis point impact of the change order and the close out of several projects and from improved operating performance. G&A expense was 7.7% of revenue compared to 7.6% in Q3 ’23. Net income was $2.82 per share compared to $1.80 per share in Q3 last year. The increase in earnings reflects higher adjusted EBITDA and higher gains on asset sales, partially offset by higher depreciation and amortization, stock-based compensation, interest expense and taxes. Going to Slide 9. Our financial position and balance sheet remains strong. We ended Q3 with $500 million of senior notes, $319.4 million of term loan and $154 million of revolver borrowings.

Cash and equivalents were $15.7 million and liquidity was ample at $464.1 million. Our capital allocation prioritizes organic growth, followed by M&A and opportunistic share repurchases within the context of our historical range of net leverage. Going to Slide 10. Cash flows used in operating activities were $37.3 million in Q3 to support organic growth. The combined DSOs of accounts receivable and net contract assets were 121 days, an increase of 10 days sequentially. Capital expenditures were $57 million, net of disposal proceeds, and gross CapEx was $67.2 million. During Q3, we acquired Bigham Cable Construction for $122.9 million net of cash and debt amounts. Going to Slide 11. Each year, our January quarterly results are impacted by seasonality including inclement weather, fewer available workdays due to the holidays, reduced daylight work hours as well as the restart of calendar payroll taxes.

These and other factors may have a pronounced impact on our actual results for the January quarter. As we look ahead to the fourth quarter ending January 27, 2024, we expect organic revenues to be in line with Q4 of last year. In addition, we expect approximately $50 million of contract revenues from our recently acquired business. We also expect non-GAAP adjusted EBITDA percentage of contract revenues to increase 75 to 125 basis points compared to Q4 ’23. Additionally, we expect $6.8 million of total amortization expense, $15.1 million of net interest expense, a 26% effective income tax rate and 29.7 million diluted shares. Now, I will turn the call back to Steve.

Steven Nielsen: Thanks, Drew. Moving to Slide 12. This quarter, we experienced solid activity and capitalized on our significant strengths. First and foremost, we maintained significant customer presence throughout our markets. We are encouraged by the breadth in our business. Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities. Telephone companies are deploying fiber-to-the-home to enable gigabit high-speed connections. Rural electric utilities are doing the same. Dramatically increased speeds for consumers are being provisioned and consumer data usage is growing, particularly upstream. Wireless construction activity in support of newly available spectrum bands continues this year.

Federal and state support for rural deployments of communications networks is dramatically increasing in scale and duration. Cable operators are increasing fiber deployments of rural America. Capacity expansion projects are underway. Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business. As our nation and industry navigate economic uncertainty, we remain encouraged that a substantial number of our customers are committed to multiyear capital spending initiatives. We are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team. Now, operator, we will open the call for questions.

Operator: [Operator Instructions] And our first question will come from Adam Thalhimer from Thompson Davis.

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Q&A Session

Adam Thalhimer: Steve and Drew. Great quarter. Steve, did I hear you say at a high level, it feels like the concerns around cost of capital are easing?

Steven Nielsen: Yes. I think what I would say, Adam, is if we roll it back a year ago, I don’t think people anticipated as significant an increase in interest rates. I think that’s basically baked into people’s outlooks today. And because they have a clearer view and less uncertainty about where that is and perhaps where it may be in the future, hopefully lower, that things just feel better.

Adam Thalhimer: Okay. And then is Bigham Cable performing better than expectations? $50 million of revenue in the winter quarter seems significant. I wonder if you acquired that while they also had a program ramping up?

Steven Nielsen: Well, look, we were pleased with their performance in the October quarter. They came in a little bit better than what we expected when we talked in August. The momentum in the business continues. I think the 1 thing to keep in mind is their service territory is primarily Southeast, so somewhat less seasonal. Not totally immune to seasonal FX, but certainly probably a little bit less than if they were in Minnesota.

Adam Thalhimer: Okay. And you’re probably going to punt on this, but for modeling purposes, I’m curious where the change order closeout revenue had an impact by customer?

Steven Nielsen: Good prediction, Adam. We’re not going to break it down by customer, but I think what we would say is that we’ve been working through closing out a large customer program, that’s been a challenge. And that as we close it out, we think we’re going to — hopefully, we’re going to perform better and hopefully, we’re going to see less volatility.

Adam Thalhimer: Great. Congrats again.

Steven Nielsen: Thank you.

Operator: And our next question will come from Brent Thielman from D.A. Davidson.

Brent Thielman: Great quarter as well. Steve, the gross margin’s still up 200 basis points. In fact, we called out change ordering close out this quarter on relatively modest…

Steven Nielsen: Brent, we’re having a little difficulty hearing you. If you could speak up a little bit?

Brent Thielman: How’s that?

Steven Nielsen: Much better. Yes, Brent, go ahead.

Operator: It looks like Brent is actually disconnected, so we will move on to our next question. And our next question will come from Frank Louthan from Raymond James.

Frank Louthan: A couple of quick questions. What are you seeing from preorders and so forth from the BEAD programs? Any color there? Anyone feeling confident about that? And then I’m not sure if you’ll go into this detail, but Lumen had said they intend to sort of flatline their fiber overbuild at the current rate. If you were — that’s obviously ramped as the year has gone on. What would you consider to be sort of a normalized level of business for them if they were keeping it relatively flat with this year? Would this past quarter be a good baseline for that?

Steven Nielsen: Yes. Frank, with respect to BEAD, we’re having lots of conversations with customers about the demand for resources that BEAD will create. I think it’s a little premature to get into details. Only a couple of states have kind of navigated their way all the way through the initial process, but it’s certainly a topic for conversation. I think the other thing that I would add more broadly about government funding is we continue to see more federal and state dollars committed to the space. I’m sure you’re following this enhanced A-CAM program where it looks like the FCC is going to be a fairly substantial amount of capital, something like $17 billion, $18 billion, into at least what we’ve seen is something like 6,000 or 7,000 additional homes.

So I think there’s lots of opportunity on the federal and state side not only with BEAD but more broadly. And then I guess what I would say with Lumen, we’re not going to go into detail on any particular customer. But based on what they’ve said publicly in our activity levels, we feel good about next year. There’ll be plenty to keep us busy on current plan.

Operator: And our next question will come from Alex Waters from Bank of America.

Alex Waters: Steve and Drew. Maybe just the first one. With the $26.5 million of the kind of onetime revenue bump, any puts and takes you can provide? And was it a specific customer? Could you give us a little bit more color there? And then maybe just looking into 2024, I think Frontier noted CapEx spend kind of 1 half weighted. Should we expect that as well from some of the other customer conversations you’ve been having?