Dycom Industries : Q2 2022 Transcript

Dycom Industries, Inc. (NYSE: DY) Q2 2022 Results Conference Call September 1, 2021 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 Robert Thalhimer, Analyst, Thompson Davis & Co., Inc.

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

Eric Luebchow, Analyst, Wells Fargo Securities LLC

Jon D. Lopez, Analyst, The Vertical Group

Noelle Christine Dilts, Analyst, Stifel, Nicolaus & Co., Inc.

Alex Rygiel, Analyst, B. Riley Securities, Inc.

Alan Mitrani, Managing Partner, Sylvan Lake Asset Management LLC

Alex Dwyer, Analyst, KeyBanc Capital Markets, Inc.

MANAGEMENT DISCUSSION SECTION

Operator

Good day and thank you for standing by. Welcome to the Dycom Industries, Inc. Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions].

I would now like to hand the conference over to your host today, Steve Nielsen, President and Chief Executive Officer. Please go ahead.

Steven E. Nielsen

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

Thank you, operator. Good morning, everyone. I'd like to thank you for attending this conference call to review our second quarter fiscal 2022 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 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 solely to historical periods. Forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from our current projections, including those risks described in our annual report on Form 10-K filed March 5, 2021 together with our other filings with the US Securities and Exchange Commission. 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.

To begin, I want to express my sincere thanks to our employees who have served our customers with real fortitude in difficult times over the last 18 months. Now, for the quarter.

Revenue was $787.6 million, an organic decrease of 4.4%. As we deployed 1-gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from two of our top five customers. Gross margins were 17.29% of revenue reflecting the continued impacts of the complexity of a large customer program and revenue declines year-over- year with other large customers.

General and administrative expenses were 8.2%, and all of these factors produced Adjusted EBITDA of $73.8 million, or 9.4% of revenue, and Adjusted Earnings Per Share of $0.60 compared to Earnings Per Share of $1.18 in the year-ago quarter. Liquidity was solid at $299.1 million and operating cash flow was $17.3 million.

During the quarter, we repurchased 631,638 shares for $50 million.

And subsequent to the end of the second quarter, we received a two-year award for fiber construction in a number of states valued at approximately $400 million to $500 million.

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 1-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 efforts to deploy high-capacity fiber networks continues to meaningfully broaden our industry's set of opportunities.

Over the last year, six of our top 10 customers have announced substantial new plans for deployments of fiber-to-the-home totaling over 40 million passings. In fact, one key customer recently announced plans for a strategic divestiture whose stated purpose is to increase fiber investment in both its divested and retained service territories.

Increasing access to high-capacity telecommunications continues to be crucial to society, especially in rural America. The wide and active participation in the FCC RDOF auction augurs well for dramatically increased rural network investment. In addition, an increasing number of states are commencing initiatives that will provide funding for telecommunications networks separate from the FCC RDOF program. We're providing program management, planning, engineering and design; aerial, underground and wireless construction; and fulfillment services for 1-gigabit deployments. These services are being provided across the country in numerous geographic areas to multiple customers, including customers who have initiated broad fiber deployments as well as customers who have resumed broad deployments.

These deployments include networks consisting entirely of wired network elements as well as converged wireless/wireline multi-use networks. Fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal incentives. We continue to provide integrated planning, engineering and design; procurement and construction; and maintenance services to several industry participants.

Macroeconomic effects and potential supply constraints may influence the near-term execution of some customer plans. Broad increases in demand for fiber optic cable and related equipment may impact delivery lead times in the short to intermediate term. In addition, the market for labor continues to tighten in regions around the country. It remains to be seen how extensive these conditions will be and how long they may persist. Furthermore, the automotive supply chain is currently challenged particularly for the large truck chassis required for specialty equipment. As we contend with these factors, 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, organic revenue decreased 4.4%. Our top five customers combined produced 65.7% of revenue, decreasing 18.0% organically. Demand increased for two of our top five customers. All other customers increased 39.9% organically.

AT&T was our largest customer at 22.5% of total revenue, or $177.5 million. AT&T grew 31.9% organically. This was our second consecutive quarter of organic growth with AT&T. Revenue from Comcast was $121.7 million, or 15.5% of revenue. Comcast was Dycom's second largest customer. Lumen was our third largest customer at 12.1% of revenue, or $95.4 million. Verizon was our fourth largest customer at $90.8 million, or 11.5% of revenue. And finally, revenue from Frontier was $31.9 million, or 4.0% of revenue. Frontier grew 161.4% organically and was a top five customer for the first time.

This is the tenth consecutive quarter where all of our other customers in aggregate, excluding the top five customers, have grown organically. In fact, the 39.9% organic growth rate with these customers is the highest growth rate in at least nine years.

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Of note, fiber construction revenue from electric utilities was $51.6 million in the quarter, or 6.6% of total revenue. This activity increased organically 92.1% year-over-year.

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 1-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 $5.895 billion versus $6.528 billion at the end of the April 2021 quarter, decreasing approximately $633 million. Of this backlog, approximately $2.655 billion is expected to be completed in the next 12 months. We continue to anticipate substantial future opportunities across a broad array of our customers.

For Windstream, a construction and maintenance agreement in Kentucky. From AT&T, construction and maintenance agreements in Wisconsin and Ohio. For Comcast, a fulfillment agreement for Washington, Illinois, Michigan, Massachusetts, New Jersey, and Pennsylvania. From Lumen, an engineering agreement for Washington, Oregon, Idaho, Montana, Wyoming, Utah, Arizona, Colorado, New Jersey, Virginia, and North Carolina. For DISH Network, a wireless construction agreement in North Carolina and South Carolina. From various electric utilities, fiber construction agreements in Missouri, Tennessee, Mississippi, and Georgia and various rural fiber deployments in Wisconsin, Indiana, Tennessee, South Carolina, and Georgia.

Headcount increased during the quarter to 14,674.

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 for Q2 were $787.6 million, a decrease of 4.4% compared to Q2 of last year. Adjusted EBITDA was $73.8 million, or 9.4% of revenue. Gross margins of 17.3% in Q2 decreased 285 basis points from the year-ago period. Gross margins were approximately 85 basis points lower than our expectations as revenue was lower than expected for several large customers, and this impacted our operating leverage.

G&A expense was at 8.2% of revenue, in line with Q2 2021. Non-GAAP Adjusted Net Income was $0.60 per share in Q2 2022 compared to net income of $1.18 per share in Q2 2021. The variance resulted from the after-tax decline in Adjusted EBITDA, higher interest expense and lower gains on asset sales, offset by lower stock-based compensation, depreciation and amortization.

Now going to slide 9. Our financial position and balance sheet remains strong. We ended the quarter with $500 million of senior unsecured notes, $350 million of term loan, no revolver borrowings, and $58.3 million principal amount of convertible notes. Cash and equivalents were $261.9 million at the end of Q2. $58.3 million is expected to be used to repay our convertible notes due September 2021. Liquidity was solid at $299.1 million at Q2. Our capital allocation prioritizes organic growth followed by opportunistic share repurchases and M&A within the context of our historical range of net leverage.

Going to slide 10. Operating cash flows were $17.3 million in the quarter. Capital expenditures were $35.5 million during Q2, net of disposal proceeds, and gross CapEx was $36.7 million. During Q2, we repurchased 631,638 shares of our common stock at an average price of $79.16 per share for $50 million. As of the end of Q2, we have a remaining authorization of $100 million for share repurchases through August 2022. The combined DSOs of accounts receivable and net contract assets were at 125 days, an improvement of 3 days sequentially from Q1 2022.

Now going to slide 11. For Q3 2022, the company expects contract revenues in line as compared to Q3 2021 and Non-GAAP Adjusted EBITDA as a percentage of contract revenues to decrease compared to Q3 2021. We expect year-over-year gross margin decline of approximately 125 basis points and G&A increase of approximately 50 basis points. We expect approximately $8.8 million of Non-GAAP Adjusted Interest Expense and $0.3 million for the amortization of the debt discount on convertible notes for total interest expense of approximately $9.1 million during Q3. We expect a Non-GAAP effective income tax rate of approximately 27% and diluted shares of 30.6 million.

Now, I will turn the call back to Steve.

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Steven E. Nielsen

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

Thanks, Drew. Moving to slide 12. Within a recovering economy, we experienced solid activity and capitalized on our significant strengths. First and foremost, we maintained significant customer presence throughout our markets. We are encouraged with the emerging breadth in our business. Our extensive market presence has allowed us to be at the forefront of the evolving industry opportunities.

Telephone companies are deploying fiber-to-the-home to enable 1-gigabithigh-speed connections. Increasingly, rural electric utilities are doing the same. Cable operators are deploying fiber to small and medium businesses and enterprises; a portion of these deployments are in anticipation of the customer sales process. Deployments to expand capacity as well as new build opportunities are underway.

Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing, particularly upstream. Wireless construction activity in support of newly available spectrum bands is beginning and expected to increase next year. 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 continue to contend with the COVID-19 pandemic, we remain encouraged that a growing number of our customers are committed to multi-year capital spending initiatives. We are confident in our strategies and 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.

QUESTION AND ANSWER SECTION

Operator

Thank you [Operator Instructions] And it looks like our first question is going to come from the line of Adam Thalhimer with Thompson Davis. Your line is open. Please go ahead.

Adam Robert Thalhimer

Analyst, Thompson Davis & Co., Inc.

Hey. Good morning, guys.

Steven E. Nielsen

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

Hey, Adam.

Adam Robert Thalhimer

Analyst, Thompson Davis & Co., Inc.

Steve, how much did the large customer program negatively impact margins in Q2 and what's your thought on when that begins to ease?

Steven E. Nielsen

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

Yeah. So if you look at controlling for that program's impact on margins, the EBITDA margin would've been in line as it has been in other periods with the long-term average. And I would say just an additional color that some of the new programs were net-positive to that and some of the customers who seem to be a little bit slower were a little bit of a drag. But the central tendency was around that long-term average controlling for that program.

Adam Robert Thalhimer

Analyst, Thompson Davis & Co., Inc.

And then just on the second part of that. When do you think that that headwind begins to ease? 4

Steven E. Nielsen

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

Well, we continue to work down and close out the project. The balance year-over-year that we're working on closing out is down about 25%. The amount of cash that came in sequentially reduced to in excess of $25 million, so I think we continue to make progress and we hope that that progress will continue, if not accelerate through the balance of the fiscal year.

Adam Robert Thalhimer

Analyst, Thompson Davis & Co., Inc.

Okay. And then the $400 million to $500 million fiber award, can you tell us if that was from an MSO or from a telco customer? And then, kind of how do you think about the revenue or anything?

Steven E. Nielsen

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

So we'll have more to say about it on the next call, but I would say we were encouraged by the breadth of the award geographically.

Adam Robert Thalhimer

Analyst, Thompson Davis & Co., Inc.

Okay. I'll turn it over. Thank you.

Operator

Thank you. And our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is open. Please go ahead.

Brent Thielman

Analyst, D. A. Davidson & Co.

Hey, thanks. Good morning, Steve, Drew.

Steven E. Nielsen

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

Good morning, Brent.

Brent Thielman

Analyst, D. A. Davidson & Co.

Hey, Steve, some of the supply and labor constraints discussed last quarter, and I think you noted again in this call, what impact do you think that's having on the ramp in deployment right now?

Steven E. Nielsen

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

So I think it's as we talked about on the last call, Brent, I mean, clearly we're able to grow the business. So we're encouraged with AT&T growing in excess of 31% total. But probably the more interesting number, Brent, is that on the wireline side of the business it was in excess of 75% year-over-year organically. So we're certainly able to grow the business, grew the business with Frontier, but I would say that there have - that rate of growth might have been even higher absent the constraints.

I think the other thing that was more impactful towards the end of the quarter was clearly the Delta variant has had an impact on the number of people that we've had in quarantine. Unlike the last peak during the winter when we weren't all that busy, we're busier now and so that certainly had some impact on what we were able to deliver and certainly had some impact on cost with respect to overtime.

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