Dycom Industries : Q3 2023 Transcript

Dycom Industries, Inc. (NYSE: DY) Q3 2023 Results Conference Call November 22, 2022 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.

Alan Mitrani, Managing Partner, Sylvan Lake Asset Management LLC

Alex Rygiel, Analyst, B Riley Securities, Inc.

Avi Jaroslawicz, Analyst, UBS Securities LLC

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

Eric Luebchow, Analyst, Wells Fargo Securities, LLC

Noelle Dilts, Analyst, Stifel, Nicolaus & Company, Inc.

Sean Eastman, Analyst, KeyBanc Capital Markets, Inc.

MANAGEMENT DISCUSSION SECTION

Operator

Good day, and thank you for standing by. Welcome to the Dycom Industries, Inc. Third Quarter 2023 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Mr. Steven 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 third quarter fiscal 2023 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. These 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 4, 2022 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 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.

Now for the quarter. Revenue was $1.042 billion, an organic increase of 22.1%. 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 18.4% of revenue and increased 103 bps compared to Q3 2022. Improved operating performance of 123 bps in Q3 was partially offset by 20 bps of higher fuel costs.

General and administrative expenses were 7.6% of revenue. And all of these factors produced Adjusted EBITDA of $114.6 million, or 11.0% of revenue, and earnings per share of $1.80, compared to $0.94 in the year ago quarter. Liquidity was ample at $444.3 million improving sequentially.

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 in 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 are commencing 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.

Looking ahead, these factors will increase the likelihood that demand could fluctuate amongst customers. These fluctuations may result in a wider range of potential outcomes moving into next year. Within this context, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers.

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Moving to slide 6. During the quarter organic revenue increased 22.1%. Our top 5 customers combined produced 66.5% of revenue, increasing 27.4% organically. Demand increased from 4 of our top 5 customers. All other customers increased 13.3% organically.

AT&T was our largest customer at 24.8% of total revenue, or $258.2 million. AT&T grew 29.4% organically. This was our seventh consecutive quarter of organic growth with AT&T. Lumen was our second largest customer at 13.7% of revenue, or $142.9 million. Lumen grew organically 64.5%, excluding from both periods operations sold to Brightspeed. This was our third consecutive quarter of organic growth with Lumen. Revenue from Comcast was $108.8 million, or 10.4% of revenue. Comcast was Dycom's third largest customer. Verizon was our fourth largest customer at $94.9 million, or 9.1% of revenue. Verizon grew 1.7% organically. And finally, revenue from Frontier was $88.9 million, or 8.5% of revenue. Frontier grew 115.4% organically.

This is the second consecutive quarter where our top five customers grew organically in excess of 25% and the fifteenth consecutive quarter where all of our other customers in aggregate, excluding the top five customers, have grown organically. Of note, fiber construction revenue from electric utilities was $82.4 million in the quarter and increased organically 53.6%, 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 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 $6.116 billion vs. $6.028 billion at the end of the July 2022 quarter, an increase of $88 million. Of this backlog, approximately $3.276 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 Lumen, construction and maintenance agreements in Washington, Oregon, Nevada, Utah, Wyoming, Colorado, South Dakota, Nebraska, Minnesota, Iowa and Florida. For AT&T, a utility line locating agreement in Florida. From Charter, construction and maintenance agreements in Texas, Michigan, Ohio, New York and Florida. For Windstream, a construction agreement in Georgia. And various rural fiber construction agreements in Oregon, Wisconsin and Missouri. Headcount was 15,167.

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 22.1%. Adjusted EBITDA was $114.6 million, or 11.0% of revenue, compared to $83.1 million, or 9.7% of revenue. This reflects an improvement of 126 bps compared to Q3 2022. Gross margin was 18.4% of revenue and increased 103 bps. Improved operating performance of 123 bps of gross margin was partially offset by 20 bps of higher fuel costs. G&A expense of 7.6% decreased from 7.8% of revenue in Q3 2022 from improved operating leverage at the higher level of revenue and tight management of costs.

Net income was $1.80 per share compared to $0.94 per share in Q3 last year. The results for Q3 2023 included tax benefits of $3.2 million, or $0.11 per share compared to tax benefits of $3.0 million, or $0.10 per share in Q3 2022 for the vesting and exercise of share-based awards and credits related to tax filings for prior years. The increase in earnings reflects higher Adjusted EBITDA, lower depreciation and amortization, and higher gains on asset sales, partially offset by higher stock-based compensation and interest expense.

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Going to slide 9. Our financial position and balance sheet remains strong. We ended Q3 with $500.0 million of Senior Notes, $336.875 million of Term Loan, and no revolver borrowings. Cash and equivalents were $65.3 million and liquidity was ample at $444.3 million. 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. Cash flow used for operating activities was $4.5 million in Q3 to fund the sequential growth in operations. Capital expenditures were $49.2 million, net of disposal proceeds, and gross CapEx was $54.8 million. The automotive and equipment supply chains remain challenged, and we now expect fiscal 2023 full year capital expenditures, net of disposals, to range from $165 million to $175 million. This is a decrease compared to the low end of $180 million from our outlook previously provided.

The combined DSO's of Accounts Receivable and net Contract Assets was 112 days, an increase of 5 days sequentially as we grew with several large customers during the quarter.

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 quarter ending January 28, 2023, we expect contract revenues to increase mid- to high- single digit as a percentage of contract revenues as compared to the quarter ended January 29, 2022. And we expect Non-GAAP Adjusted EBITDA percentage of contract revenues to increase modestly compared to Q4 of last year. We also expect $11.8 million of net interest expense reflecting higher market interest rates, a 27.0% effective income tax rate, and 30.1 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. Increasingly, rural electric utilities are doing the same. 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 increasing this year.

Federal and state support for rural deployments of communications networks is dramatically increasing in scale and duration.

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.

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 increased economic uncertainty, we remain encouraged that a growing 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.

Now operator we will open the call for questions.

QUESTION AND ANSWER SECTION

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Sean Eastman with KeyBanc. Your line is open. Please go ahead.

Sean Eastman

Analyst, KeyBanc Capital Markets, Inc.

Good morning, guys. Thanks for taking my questions.

Steven E. Nielsen

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

Hey, Sean.

Sean Eastman

Analyst, KeyBanc Capital Markets, Inc.

So I just wanted to start on the revenue guidance for the fourth quarter. I think last quarter, you guys had highlighted normal seasonal moderation going into the fourth quarter. Obviously, now the third quarter revenue came in higher, and it seems like a bit of a more pronounced seasonal moderation into 4Q. So was there some pull forward there?

Maybe just what's happening under the hood?

And what should we take away from this step down from the low 20% growth to sort of the mid- to high-single-digit growth in the guidance for the fourth quarter as we think about the growth prospects into next year?

Steven E. Nielsen

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

Yes. So Sean -- and I think we commented on this on the last call that when you have a really strong year and we've had a really strong first 3 quarters, it's not unusual for the fourth quarter to be somewhat weaker. With respect to growth rate, and we talked about this last time, we have a quarter that's disproportionately impacted by weather, by holidays, by daylight hours. And so I think that, that is certainly a factor.

I think the other thing that we highlighted in the comments and the slide is as we're looking ahead, we're taking a prudent view towards the kind of the macroeconomic effects of an increased cost of capital. And that's just something at this point. We're not giving guidance for next year, but we're just thinking about kind of what the consequences of that are on the overall economy.

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