Dycom Industries : Q2 2024 Transcript

Dycom Industries, Inc. (NYSE: DY) Q2 2024 Results Conference Call August 23, 2023 9:00 AM ET

CORPORATE PARTICIPANTS

Steven E. Nielsen, President, Chief Executive Officer & Director, Dycom Industries, Inc.

Ryan F. Urness, Vice President, General Counsel & Corporate Secretary, Dycom Industries, Inc. H. Andrew DeFerrari, Senior Vice President & Chief Financial Officer, Dycom Industries, Inc.

OTHER PARTICIPANTS

Adam Thalhimer, Analyst, Thompson, Davis & Company, Inc.

Brent Thielman, Analyst, D.A. Davidson & Co.

Sean Eastman, Analyst, KeyBanc Capital Markets, Inc.

Frank Louthan, Analyst, Raymond James & Associates, Inc.

Alex Rygiel, Analyst, B Riley Securities, Inc.

Eric Luebchow, Analyst, Wells Fargo Securities LLC

Alan Mitrani, Managing Partner, Sylvan Lake Asset Management LLC

MANAGEMENT DISCUSSION SECTION

Operator

Good day, and welcome to Dycom Industries, Inc. Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Steven Nielsen, President and Chief Executive Officer. Please go ahead, sir.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Thank you, Operator. Good morning, everyone. Thank you for attending this conference call to review our second 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 investor 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 F. Urness

Vice President, General Counsel & Corporate Secretary, Dycom Industries, Inc.

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 or performance that do not relate to historical periods. These forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from current projections, including those risks described in our annual report on Form 10-K filed March 3, 2023, together with our other filings with the US 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 E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Thanks, Ryan. Now, moving to slide 4 and a review of our second 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.

Now for the quarter. Revenue was $1.042 billion, an organic increase of 7.1%. 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 20.3% of revenue and increased 234 bps compared to the second quarter of fiscal year 2023. General and administrative expenses were 8.1% of revenue and all of these factors produced Adjusted EBITDA of $130.8 million, or 12.6% of revenue, and earnings per share of $2.03, compared to $1.46 in the year-ago quarter. Liquidity was strong at $685.9 million.

Last Friday we acquired Bigham Cable Construction, a provider of telecommunications construction services in the southeastern United States for a purchase price of $127 million. Bigham generated revenues of approximately $140 million over the last year and expands our ability to further address significant growth opportunities in rural broadband deployments.

And finally, as our most recent share repurchase authorization has expired, our board has newly authorized $150 million in share repurchases.

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 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. This represents an unprecedented level of support. 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.

Macro-economic 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

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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 to continue to fluctuate amongst customers. For several customers, deployments are increasing into next year. For others, capital expenditures have been more heavily weighted toward the first half of this year and, accordingly, they appear to be managing budgets closely through the end of this year.

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 services to our customers.

Moving to Slide 6. During the quarter revenue increased 7.1%. Our top 5 customers combined produced 59.2% of revenue, decreasing 2.3% organically. Demand increased from 4 of our top 5 customers. All other customers increased 24.6% organically.

AT&T was our largest customer at 16.7% of total revenue, or $174.3 million. Lumen was our second largest customer at 15.6% of revenue, or $162.5 million. Lumen grew organically 56.5%, excluding operations sold to Brightspeed from the year ago period. This was our sixth consecutive quarter of organic growth with Lumen. Revenue from Comcast was $119.5 million, or 11.5% of revenue. Comcast was Dycom's third largest customer and grew organically 6.9%. Verizon was our fourth largest customer at $104.9 million, or 10.1% of revenue. Verizon grew 29.8% organically. And finally, a customer who has requested their name not be disclosed, was our fifth largest customer at $55.3 million, or 5.3% of revenue. This customer grew 68.6% organically.

This is the eighteenth consecutive quarter where all of our other customers in aggregate, excluding the top five customers, have grown organically. It is the first quarter since our October 2014 quarter where our top 5 customers have represented less than 60% of total revenue, an encouraging sign of increasing customer breadth and opportunity. Of note, fiber construction revenue from electric utilities was $82.7 million in the quarter and grew organically 3.6%.

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 second quarter was $6.207 billion vs. $6.316 billion at the end of the April 2023 quarter, a decrease of $109 million. Of this backlog, approximately $3.523 billion is expected to be completed in the next 12 months. Backlog activity during the second 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 Frontier, a fiber construction agreement for California, Texas, Illinois, Michigan, Indiana, Ohio, New York, Connecticut, Pennsylvania, and Florida. For Brightspeed, a fiber construction agreement for Pennsylvania, New Jersey, Virginia, and North Carolina. From Charter, rural fiber construction agreements in Missouri and Florida. For Windstream, fiber construction agreements in Georgia and from AT&T, a utility line locating agreement for Arkansas. Headcount was 15,147.

Now I will turn the call over to Drew for his financial review and outlook.

H. Andrew DeFerrari

Senior Vice President & Chief Financial Officer, Dycom Industries, Inc.

Thanks Steve and good morning, everyone. Going to slide 8. Contract revenues were $1.042 billion and organic revenue increased 7.1%. Adjusted EBITDA was $130.8 million, or 12.6% of revenue, compared to $104.7 million, or 10.8% of revenue. The Adjusted EBITDA percentage increased 179 bps compared to Q2 2023 from improved operating performance on the higher level of revenue in the quarter. Gross margin was 20.3% of revenue compared to 17.9% in Q2 2023. G&A expense was 8.1% of revenue compared to 7.5% in Q2 2023.

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Net income was $2.03 per share compared to $1.46 per share in Q2 last year. The increase in earnings reflects higher Adjusted EBITDA, lower amortization, and higher gains on asset sales, partially offset by higher depreciation, stock- based compensation, interest expense and taxes.

Going to slide 9. Our financial position and balance sheet remains strong. We ended Q2 with $500.0 million of senior notes, $323.75 million of Term Loan, and no revolver borrowings. Cash and equivalents were $83.4 million and liquidity was strong at $685.9 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.

Last Friday, we acquired Bigham Cable Construction for a purchase price of $127 million, and this week our board of directors approved a new $150 million authorization for share repurchases through February 2025. This authorization replaces the remaining amount from our prior authorization.

Going to slide 10. Cash flows provided by operating activities were $56.3 million in Q2. Capital expenditures were $40.0 million, net of disposal proceeds, and gross CapEx was $51.0 million. The combined DSO's of accounts receivable and net contract assets was 111 days, an increase of 5 days sequentially.

Going to slide 11. As we look ahead to the quarter ending October 28, 2023, we expect organic contract revenues to be in-line with Q3 of last year. In addition, we expect approximately $30 million of acquired revenues from Bigham Cable Construction in Q3 2024. We also expect Non-GAAP Adjusted EBITDA percentage of contract revenues to increase 50 to 100 bps as compared to Q3 2023

Additionally, we expect $6.1 million of total amortization expense, $13.3 million of net interest expense, a 26.0% effective income tax rate, and 29.7 million diluted shares.

Now, I will turn the call back to Steve.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

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 in 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.

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As our nation and industry navigate economic uncertainty, we remain encouraged that a substantial number of our customers are committed to multi-year 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.

Before we take questions, I want to welcome our new employees at Bigham Cable Construction. We look forward to growing together.

Now, Operator, we will open the call for questions.

QUESTION AND ANSWER SECTION

Operator

[Operator Instructions] And that will come from the line of Adam Thalhimer with Thompson & Davis.

Adam Thalhimer

Analyst, Thompson, Davis & Company, Inc.

Hey, good morning, guys. Congrats on the good quarter and the acquisition.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Thanks, Adam

Adam Thalhimer

Analyst, Thompson, Davis & Company, Inc.

Steve or Drew - for the customers that are going to be a touch weaker in the back half of this year, when do you think activity picks back up? Is it possible in your fiscal Q4?

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Yeah, Adam, I think we've seen other environments where people that had strong first halves, they closely manage their budget going into the end of the year and then as they look forward to more normalized activity in the following year, there's certainly a possibility that that activity could pick up. We've seen that before.

Adam Thalhimer

Analyst, Thompson, Davis & Company, Inc.

And then for Bigham - can you comment on do they have a specific top customer? Are there any large contracts that you're picking up? And maybe you can comment on the acquisition process.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Yeah. They have historically had a long, successful relationship with Charter in the Southeast. They also work for a number of electric co-ops. So, we think it's a good expansion of the business that we do with Charter. We've obviously done lots of work in the Southeast. There was not a process. These are folks that we've known for a long time and respected. It just made sense for both of us to get together when we did.

Adam Thalhimer

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