Dycom Industries : Q4 2022 Transcript

Dycom Industries, Inc. (NYSE: DY) Q4 2022 Results Conference Call March 02, 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 Security, 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.

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

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

Sean Eastman, Analyst, KeyBanc Capital Markets, Inc.

Steven Fisher, Analyst, UBS Securities LLC

MANAGEMENT DISCUSSION SECTION

Operator

Good day, and thank you for standing by. Welcome to the Dycom Industries' Fourth Quarter 2022 Results Conference Call. Please be advised that today's conference may be 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, sir.

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 fourth 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 Security, 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 U.S. 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 fourth 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 report section of our website for a reconciliation of these Non-GAAP measures to the 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.

Now for the quarter, revenue was $761.5 million, an organic increase of 10.1%. As we deploy gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from 2 of our top 5 customers.

Gross margins were 13.77% of revenue, reflecting the continued impacts of the complexity of a large customer program, revenue declines year-over-year with other large customers, fuel costs and the heightened effects of COVID during the second half of the quarter.

General and administrative expenses were 8.4% of revenue. And all of these factors produced Adjusted EBITDA of $43.3 million or 5.7% of revenue and Adjusted Earnings per Share of $0.02 compared to a loss per share of $0.07 in the year ago quarter. Included in Adjusted Earnings per Share are incremental tax benefits of $0.13.

Liquidity was solid at $351.5 million, and operating cash flow was robust at $145.5 million, reflecting a sequential DSO decline of 5 days. During the quarter, we repurchased 600,000 shares for $56.1 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 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, an increasing number of states are commencing initiatives 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 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 initiatives. We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants.

Macroeconomic effects and supply constraints may influence the near-term execution of some customer plans. Broad increases in demand for fiber optic cable and related equipment may cause delivery volatility in the short to intermediate

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term. In addition, the market for labor remains tight in many regions around the country. It remains to be seen how long this condition persists.

Furthermore, the automotive and equipment supply chain remains challenged, particularly for the large truck chassis required for specialty equipment. Prices for capital equipment are increasing. As we contend with these factors, 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, organic revenue increased 10.1%. Our top 5 customers combined produced 66.6% of revenue, increasing 5.4% organically. Demand increased from 2 of our top 5 customers. All other customers increased 20.8% organically.

AT&T was our largest customer at 26.6% of total revenue or $202.6 million. AT&T grew 73.6% organically. This was our fourth consecutive quarter of organic growth with AT&T. Revenue from Comcast was $100 million or 13.1% of revenue. Comcast was Dycom's second largest customer. Lumen was our third largest customer at 11.7% of revenue or $88.8 million. Verizon was our fourth largest customer at $76.9 million or 10.1% of revenue. And finally, revenue from Frontier was $38.6 million or 5.1% of revenue, Frontier grew 97.2% organically.

This is the first quarter since October 2019, where our top 5 customers have grown organically and the 12th consecutive quarter where all of our other customers in aggregate, excluding the top 5 customers, have grown organically. Of note, fiber construction revenues from electric utilities was $57.4 million in the quarter and increased organically 37.2% 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 fourth quarter was $5.822 billion versus $5.896 billion at the end of the October 2021 quarter, essentially flat. Of this backlog, approximately $3.072 billion is expected to be completed in the next 12 months. Backlog activity during the fourth 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 California, Nevada, Texas, Missouri, Wisconsin, Indiana and Ohio. For Lumen, construction and maintenance agreements for Washington, Oregon, California, Arizona and Arkansas. From Comcast, an engineering agreement for Michigan, Pennsylvania, Massachusetts, Delaware, Maryland and Georgia. For Ziply Fiber, a fiber construction agreement in Washington, Oregon and Idaho. And various utility line locating agreements in California and Virginia.

Headcount increased during the quarter to 15,024.

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 $761.5 million and organic revenue increased 10.1% for the quarter. Q4 of the prior year included an additional week of operations due to the 52/53 week fiscal year and $5.7 million of revenue from storm restoration services compared to none in Q4 of this year.

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Adjusted EBITDA in Q4 was $43.3 million or 5.7% of revenue compared to $45.7 million or 6.1% of revenue in Q4 of last year. Gross margin was 13.8% of revenue for Q4 '22, and declined approximately 50 basis points compared to the Non-GAAP Adjusted Gross Margin in Q4 '21. COVID-related absences increased significantly in the quarter and peaked at a level approximately 2.3x higher than in Q4 of last year. The rapid increase in higher overall level compared to the prior year impacted productivity during the second half of the quarter. In the month of February, COVID cases for the company have declined back down to historically low levels. Gross margins in the quarter were also impacted by adverse winter weather conditions.

G&A expense of 8.4% improved approximately 10 basis points compared to Q4 '21 from improved operating leverage at the higher level of revenue in the quarter.

Non-GAAP Adjusted Net Income was $0.02 per share compared to a Non-GAAP Adjusted Net Loss of $0.07 per share in the year ago period. Q4 '22 included approximately $4.2 million, or $0.13 per share, of incremental tax benefits, including credits related to filings for prior periods. The total variance in net income reflects the after-tax decline in Adjusted EBITDA as well as benefits from lower depreciation, amortization, stock-based compensation and income taxes, offset by higher interest expense and lower gains on asset sales.

Now going to Slide 9. Our financial position and balance sheet remains strong. We ended the quarter with $500 million of senior notes, $350 million of term loan and no revolver borrowings.

Cash and equivalents were $310.8 million and liquidity was solid at $351.5 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. Operating cash flows were robust at $145.5 million in the quarter, bringing year-to-date operating cash flows to $308.7 million. Capital expenditures were $43.4 million, net of disposal proceeds and gross CapEx was

$43.6 million. Looking ahead to fiscal 2023, we expect net CapEx to range from $180 million to $190 million.

During Q4, we repurchased 600,000 shares of our common stock at an average price of $93.55 per share for

$56.1 million. Our Board of Directors has approved a new $150 million authorization for share repurchases through August 2023. This authorization replaces the remaining amount from our prior authorization.

The combined DSOs of accounts receivable and net contract assets were at 108 days, an improvement of 5 days sequentially from Q3 '22 as we made substantial progress on a large customer program.

Now going to Slide 11. As we look ahead to the quarter ending April 30, 2022, the company expects contract revenues to increase mid-to-high single digits as a percentage of contract revenues compared to Q1 of last year. And we expect Non- GAAP Adjusted EBITDA percentage of contract revenues to increase modestly as compared to Q1 of last year. We expect a Non-GAAP Effective Income Tax Rate of approximately 27% and diluted shares of 30.2 million.

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.

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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 expected to increase 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.

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, 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

(Operator Instructions) Our first question comes from Alex Rygiel with B. Riley.

Alex Rygiel

Analyst, B. Riley Securities, Inc.

Thank you. Good morning, Steve and very nice quarter.

Steven E. Nielsen

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

Hey. Good morning, Alex.

Alex Rygiel

Analyst, B. Riley Securities, Inc.

Steve, when we look at backlog, total backlog is down 15% year-over-year,12-month backlog is up 10% year-over-year. Your commentary appears to be very bullish. Many leading indicators out there suggest a bullish environment for telco spending on fiber in 2022. Can you help us to reconcile sort of backlog versus fairly bullish commentary?

Steven E. Nielsen

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

Sure, Alex. So as you know, about 90% of our business is under long-term contracts and master service agreements. And when we come up with the total backlog estimate for those, we look back for a trailing 12-month period, multiply that run rate times the number of months remaining. And so it's sensitive to duration. It's also sensitive to just kind of being a

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