Dycom Industries, Inc. (DY) Earnings Call Transcript & Summary

Good morning, everyone. I'm Eric Luebchow, Senior Analyst at Wells Fargo, covering telecom services and communications infrastructure. Really pleased this morning to be joined by Steven Nielsen, the CEO of Dycom. Steve, thanks for joining us.

And Eric, good to be here.

Appreciate it. Steve, I know you had a couple of safe harbor statements that you wanted to read before we got started.

So I just want to remind everybody who's participating that during the course of this discussion with Eric, we may make forward-looking statements. Those statements are subject to risks and uncertainties, which are outlined in our SEC filings, which we recommend for everybody's review. So with that, Eric, happy to be here and happy to get started.

Great. Thanks, Steve. So just to start, I wanted to touch on -- upon demand. So you put up greater than 20% organic revenue growth in the past quarter. You guided to a strong July quarter as well. It seems like this current cycle is more broad-based across different customers than maybe some we've seen in the past. So maybe you could help frame the demand environment that you see today and perhaps compare it to some of the previous cycles that you've been through.

Sure. So Eric, one of the ways that we help investors think about the math of the U.S., which is our focus. And broadband is to think about the math is, say, roughly 140 million living units. Of course, some of those are Downtown, New York and L.A. and other places that we're not as involved. But if you look at the plans broadly of folks deploying private capital, the wireline telephone and cable company wireless carriers. But if you look at private capital, I think people think and I know you're, in print, to think there's somewhere like another 50 million or 60 million homes that eventually will be connected to a high-capacity fiber network if you're a home company and some more high-capacity network using [ NOXs ] or some other technology for the cable operators. And so that's a huge ramp of demand, you've got good research on that. Customers have been very explicit in their plans. And then you have the rest of the math. So let's say, another 30 million or 40 million homes, with some percentage of those probably are so rural that a non-wire approach will be the best, but probably 20 million or 30 million of those homes will be wired. And will be wired with the help of government capital that could come from the FCC's [indiscernible] program, some state broadband initiatives that are funded by their budgets as well as the Infrastructure and Jobs Act -- our Infrastructure Investment and Jobs Act. So there's lots of place. And in essence, what that does, Eric, is it really expands the math and because of the cost of serving those 20 million or 30 million rural homes is probably at least triple, maybe more than it is of the incremental 50 million or 60 million homes in urban suburban America, it more than doubled the opportunity because, obviously, if you have 20 million to 30 million times 3, that's more than 60 million and $1,000 home pass. So certainly lots of opportunity out there. And the biggest math that of course we're speaking that we've ever addressed.

Sure. And you would agree that some of the past cycles, you've seen it's typically being 1 or 2 customers that really have been driving a lot of the activity that seems to be broad-based, not just across some of the large carriers, but also rural utilities and a handful of smaller customers as well. Is this kind of the broadest base demand environment you've seen in your career?

Well, demand was very broad in the mid- to- late 1990s when all the cable operators moved to an HFC approach where they could deliver broadband internet access. I would say what we're seeing on the telephone side is completely analogous to what the cable operators did out of a 10-year build-out of their -- 10- to 15-year build-out of their capability. So there's absolutely an alignment around the strategic importance of high-capacity connectivity but you probably have to go back 20-plus years to see a similar phenomenon in the industry.

Sure. Sure. So according to our research, not your numbers, ours, we expect that somewhere between 9 million to 10 million new premises will be passed with fiber this year in 2022 -- calendar '22. And that's a pretty meaningful step-up from about 5 million last year. So -- and it looks like there's the potential for future years to be even bigger than that. So one of the questions we always get is whether the industry has enough labor resources to meet the coming wave of demand? And maybe anything that you think can be done to address some of the labor shortages you've heard about in the industry recently.

Yes. Well, a couple of thoughts, Eric. So one, we grew organically about $150 million last quarter year-over-year. We're forecasting similar levels of percentage growth in this quarter. So clearly, if you annualize that, you're creating about $600 million or $700 million of incremental capacity just from our business. So I think we can grow, I think that others in the industry can grow. And then second -- and we've been through these cycles before. Supply is elastic. If the economics get better on a relative basis compared to what other -- to what folks can do for other adjacent industries, we can attract and create and train talent. And it's not an overnight thing, but if it's -- you work at it every week and every month, and you grow capacity, and we've been through these level of growth cycles before. If you went back at our fiscal '15, '16 and '17, I think combined, we grew roughly $1 billion of revenue over that 36-month period. So certainly, there have been times where this has been possible in the past.

Sure. Sure. And specifically to Dycom, I think you've added around 800 employees to your headcount over the past 4 quarters. And according to my numbers, it's the highest it's been since your Q4 2020. And it appears to us the revenue outlook is even bigger today. So maybe you can talk about in your business, you need to add significantly more headcount? And are you finding it challenging to find qualified applicants in the current market?

Well, certainly, it's a tight labor market. Of course, in our business, I think if you talk to our operating people securing the right labor and deploying them in a productive way is always a challenge. No matter where we are in the overall labor market. So certainly, there are some challenges there, but it's an experienced team. There are no guarantees, but we think we'll work our way through it. We always focus, Eric, on -- it depends on the type of work, how much we self perform. So we have businesses like our locating business, it's technical. And for the most part, we perform that work entirely with our own workforce. In other parts of the business, particularly, civil construction, there are opportunities to attract subcontractors and help them grow their business. And so we really have a confirmed approach, which is grow in-house capacity and at the same time, be a good partner with our subcontractors and help them grow their businesses so that together, we can create more capacity. It's a pretty stunning number to be able to grow the business annualized at $700 million in the year. And I'm pleased with the hard work that everybody has put in, in the field to make that happen.

Sure. Fair. So you made a comment on your last earnings call, Steve, that industry participants increasingly understand industry-wide cost pressures. So maybe you could help us unpack that statement. Does that mean do you think we're starting to see market pricing, not just with yourselves but across other participants in the market more broadly reflect the current economic realities of the highest inflation we've seen in 40 years.

Yes. Clearly, there was a period of recognition in the industry that took a little bit of time where everybody saw their fuel costs are up. The cost of capital equipment is up. We've talked about labor, particularly new hire in some skilled labor. I mean you're competing with the broad number of industries there. So you have to be where the market is. And so I think that, that recognition has become industry wide, and different folks deal with a different way. But for us, what's always been crucial is in an environment where there's lots of demand and costs are increasing to make sure that we commit our capacity, one, where we'll be able to deliver. So if we can deliver, we'd rather not sign up. And then, second, to make sure that where we do decide to deliver that we've done a good job of matching our capacity and capabilities with that particular customer needs because when we meet their needs well, that's always helpful not only for them but for us.

In terms of -- I think you said new hires and semi-skilled labor were perhaps where you've seen the biggest cost increases. Has employee retention been an issue as well? Or is there so much opportunity you think in the current industry that you're seeing employees generally very busy and pleased with their current line of work?

We're in an industry where there's always some turnover. So that's something that's always a part of the business, no matter what the level of overall unemployment is. We have to be a good employer. We have to understand that people's economics have changed. That's why we had increasing costs because we have adjusted wages where that makes sense. Doesn't mean that we're perfect at it, but I think we've done a good job of, again, being able to build capacity.

Yes, yes. And so just sticking on the whole inflationary discussion. Maybe you could talk a little bit about how you're managing your business in this new environment in terms of pricing new contracts. You've talked about this a little in the past about maybe shortening duration on certain new contracts and renewals or maybe adding some type of cost escalator into the contracts. Can you maybe update us on how that's going?

Yes, Eric, what I would say is, again, as this industry-wide understanding as emerged of the cost pressures, I think we're having very productive discussions around the right length of duration for a contract. And so as we've talked about earlier, we're happy to go longer duration contracts if we get some inflation protection. There's a number of different mechanics as that can be done or if the customer is not particularly comfortable with that, we're actually happy with shorter duration because, again, there's a lot of uncertainty that I have managed through inflation before, that helps everybody how old I am. But I have seen this before. And again, it's just a question of being careful. One way that we analogize this for investors is to say in this type of demand and cost environment, we need to send our matters to the play, thinking slugging percentage is not batting average. There's a lot of pitches we can hit. We want to make sure that we're able to impact for the better of our customers by hitting doubles, triples and home runs and not a bunch of group singles where we're just getting by. And I think if we take that approach, and we do a good job of matching our capabilities to customers' needs, then with -- that's a good environment to create value for everyone.

Sure. And given the tightness that you talked about in the labor market and some of the cost pressures industry-wide, do you think that evolve -- just thinking at all from some of your large customers and how they either in-source or outsource construction activities? Or is that still to be determined?

I think there's a general trend. This is predominantly an outsourced industry. Every once in a while, somebody tries an experiment the other way. But I mean if you think about the uncertainties around costs, taking them inside somebody's business doesn't change the economics, they may change the recognition, but it doesn't change the economics. And there's plenty of work to go around for everybody.

Sure. Sure. So I wanted to shift to the cable companies. I think there's been some debate in the industry around how do they respond to a lot of the increase in fiber deployments that we're starting to see and it seems like, as you've talked about before, accelerating these mid- and high split upgrades and a path to DOCSIS 4.0 in the coming years. So maybe based on what you see in your business, how do you see the cable plant evolving as more high-capacity fibers overbuilt the next 10, 12 years?

Well, Eric, as we said on the earnings call, you never want to bet against the cable operators. They've had dominant flow share around small and medium enterprise and residential broadband customers now. Probably you have the math somewhere, but I'm thinking it goes back for at least a decade. And so they are -- they know how to compete. They know how to gain share. And for them, where their networks are today, they feel comfortable that increasing the capacity through a number of predominantly technical activities is what's best for them to be both capital efficient as well as competitive. So I just think we'll have to see how it plays out, but they are an industry that has known how to compete for a long time.

Sure. I know in some of the cable industries like in Europe, outside of the U.S., we've seen a lot of them shift to fiber-to-the-home. I mean do you think that's something that we'll see more out well into the future and probably not in the next few years, but looking out another decade plus that many of them will have networks that more -- are more similar to fiber-to-the-home networks than the current HFC plant?

Well, they certainly, Eric, have the opportunity to deploy fiber deeper and deeper into their networks, and they can do that almost on a one way or one serving area at a time. So they have some flexibility around how they do that. And I think they've often talked about, for example, if you look at 2 subdivisions, larger subdivisions, they may take fiber there initially, also large multiple dwelling unit complexes. They may take fiber in there. And certainly in the rural, where they don't have a plant, they seem to be opting for fiber solutions. So I think they have kind of an all of the above approach depending on the context of the decision.

Sure. Sure. So I wanted to flip to some of the subsidy funding that's out there today. We've talked a lot for a while now about some of the state-level funding initiatives that are already underway. We now have more clarity on the $40-plus billion infrastructure bill. And then if you add private capital on top of that $40 billion of federal support, it's really kind of an unprecedented amount targeted primarily at fiber broadband. So maybe you can talk about how you think this increases your addressable market longer term? And then any sense on timing on when we might start to see construction activity related to the $40 billion infrastructure bill?

So we're clearly encouraged that there's not only the FCC, our workflow digital opportunities fund the state level program. So I think we added up -- come to somewhere like $12 billion or $13 billion already. And then, of course, the base funding of, call it, $40 billion out of the Infrastructure Act that does have a requirement for matching capital at least at the 25% level. And I think interesting development coming out of the notice of funding opportunity that came out about a month ago -- a little over a month ago where, one, as you referenced, they made it pretty clear that all things being equal, they'd like to see more fiber deployments rather than unlicensed spectrum or satellite. So that was the clarity there, I think, was hopeful and I think addressed some perceived criticisms that perhaps prior programs may have suffered. And then, the other thing was, I believe that there is some sense that a number of maybe some of the people that spoke at the conference yesterday, that they have an active appetite to participate with this funding so that they can expand into more rural areas that perhaps on their own capital, they would not have been so interested in. And so as we have lots of master service agreements across rural America, where activity levels have not been all that significant for quite a while. And so the fact that we could have an opportunity for customers that we have those agreements with pickup additional funding, I think that would be a healthy thing for our business.

Sure. And some of the activity you're seeing from the rural electric utilities, as it have been tied, do you think any of these state-level initiatives? Because it seems like they've been very active in your footprint for the last few years?

Yes. So if you look at it, our last quarter, it was just under $70 million worth of revenue that was up 47% year-over-year organically. It was actually up. The organic growth rate was up a little bit from the January quarter. So that was very encouraging. I think the good news there is, Eric, that for the most part, that money is being -- or those customers who have support of their own capital traditional funding sources, whether that be debt or grants as well as a number of them having received [ ARDA ] funds. So actually, I think we're still early with the ability of -- of that particular group of potential customers accessing more federal funds. And these are round numbers that I heard from a pretty good industry source and said there's something like 800 electrical cooperatives in the country and maybe today 200 to 300 are addressing some sort of broadband initiative. So I would say we have more funding available, probably more folks will get in the game.

Interesting. I wanted to touch on just the broader supply chain because it's a question that we've been asking companies for the last year. Maybe specifically with -- in your business, I know the fiber supply chain was maybe a little bit stretched last year. I know AT&T had to take down some of their passing guidance for the year. It seems like things have more or less normalized and maybe the lead times are slightly longer, but with enough advanced notice, work can generally get done. Have you noticed any changes in the last handful of months on your own supply chain or your customer supply chain in terms of any project delays, anything that is worth noting?

I think the larger customers have worked with allocations from the manufacturers, I think, realized last year that they need to get ahead of it and that they need to carry more inventory and probably a quarter earlier in the cycle, but earlier than they would have in the past. That doesn't mean there aren't [indiscernible] here and there. But I do think that they've got a handle on it. If you're a smaller customer, you didn't have allocation. You're going to see some delays in when that fiber and other types of equipment come available. I think that our own supply chain, it's similar. We're ordering earlier. We're keeping more idle equipment and inventory so that when a pocket of demand kicks in, that we can jump on that quickly, whereas in the past, we might have just bought some new equipment. I wouldn't say that the supply chain is back to normal. It seems like one component can get back to normal for a piece of capital equipment and then some other components, somewhat surprisingly, can develop some hiccups. But I think everybody is applying more inventory, more capital to solve the problem. And so we're getting by.

Sure. Sure. That makes sense. So I wanted to flip to a conversation that's been topical in the carrier space. So fixed wireless, it's been debate a lot this year. They've gained some traction in the last couple of quarters of AT&T -- or sorry, at T-Mobile and Verizon in terms of subscriber growth. So I guess what's your opinion on this new wave of fixed wireless predominantly using mid-band spectrum, how -- what impact that has on the broadband market in the near term and perhaps slightly longer term? And is there any opportunity for you to do any work related to fix wireless?

Yes. So fixed wireless or wireless in general has always been perceived as a potential substitute for a wired connection. And that goes back to the very first deployments of wireless networks in the late '80s, early '90s. And I think as any, every cycle has matured, Eric, they've always turned out to be far more of a complement than they are a substitute. So for example, I read some research, I'm not sure whether it's yours or somebody else's where some of the fixed growth -- or fixed wireless growth may be in backup second connections for small and medium enterprise businesses, periodic need and a cost-effective way to do that. And I think that probably makes plenty of sense. But I don't see it impacting today the wired plans that our customers have. And of course, to the extent that it is successful, [indiscernible] cost for wireless capacity, and that's good for that business. So I see wireless and wireline have always been feared to be substitute -- or wireless has always feared to have been a substitute for wire, and it's never quite really worked out that way.

Sure. My perspective was always that it would have a bigger addressable market in rural America where there's not as many high-speed options available. But with some of the new initiatives underway that are going to bring more fiber to rural America, I just wonder if that's going to have an impact on the longer-term viability of fixed wireless, but I guess we'll have to see.

Yes. well, I think that's right, Eric. But remember, given the [ topography ] of rural America sometimes, I mean if you have to have a cell site or a pocket of 6 homes, it's 10 miles from the next one. It isn't all but we'll have to get wire to that particular radio-antenna combination. So we'll just have to see how it plays out. But it was interesting where the notice of funding opportunity came out, particularly around unlicensed spectrum and satellite that they did not see those as areas where the government wanted folks to invest.

Yes. That was interesting. So sticking on the topic of wireless, I think your last quarter, your wireless business was annualized around $200 million of revenue. It's been north of $300 million in some periods in the past, maybe you could talk about your pipeline related to C-band deployments at AT&T and Verizon, kind of where you see that business going in the next handful of quarters and into the future as a lot more mid-band spectrum is deployed?

Yes. So we said in the last quarter, it was down organically around 4%. So -- and that was the lowest rate of decline in several quarters. And we've said that we think we see the back half of the year picking up and that we think next year is a strong year. One of the details of C-band is depending on the geography that a service provider where they bought A Block versus B&C Block and can determine when that spectrum clears, and when our activity picks up until it's [indiscernible] tight a geography analysis, but clearly, by next year, we think things will be quite busy.

Yes. And you've historically done most of your work for AT&T, but is there emerging opportunities with some of the other carriers? Obviously, I know Verizon is a large customer of yours or T-Mobile or Dish or are there opportunities outside of AT&T?

Yes, there certainly are. We've always done some work for Verizon primarily in the Southeast, and we work for others here and there. But our primary focus in that business is AT&T.

Sure. So I wanted to ask about EBITDA margins. I'm sure you haven't answered this question at all recently. So -- your long-term average is around 11%, and we've seen some peaks before where it kind of goes into the mid-teens back 5 or 6 years ago. Maybe you could talk about some of the moving pieces to get back at 11%. And then is there an opportunity, you think, at some point to go above the long-term average, given that the supply-demand dynamics the industry seem to be pretty favorable for your business today. If you could kind of talk through that, that would be helpful.

Yes. So as you said, kind of long-term average for EBITDA has been the middle average. We have done better at times. And we've typically done better when we've seen broadly distributed growth. So one of the interesting things about last quarter was we had growth of, call it, 21% or thereabouts organically. And about 2/3 of the business was from our top 5 customers and 1/3 was everybody else. The last time, which was over 5 years ago that we were at a similar rate of organic growth that was, excuse me, was 3/4 of the revenue 5 years ago, and was in top 5 in 1 quarter. So we've already got a broader book of business today than we did the last time we had this sort of organic growth. And we clearly said that we like to -- we'd like to be better than average. But to be mindful of fact that we have a cost environment, we're working through those cost impacts and making sure that we get good operating leverage. This is something that you have to show up every day and work harder. And we're confident we can get there, but there are no guarantees, particularly in the current cost environment.

And then obviously, one of the costs that probably everyone here can identify with our fuel cost. I think it costs me $100 to fill up my car in Chicago last week. That was a first for me. So just wondering, is there any way you can manage some of the fuel cost inflation from speaking recently? I mean, is that something that you're starting to put in contract? Or is there a way to kind of pass it through to customers? Or how are you kind of managing that impact specifically those -- that's really spiked this year, continue to remain very elevated.

So it does, and it was about 58 basis point headwind in the April quarter. We've been through spikes in fuel before, and we need to reflect the current cost of providing the services to our customers, okay and I think they knew that we do and anything that we redo, but we also want to be careful, fuel escalators also can become de-escalators. And in my experience, Eric, about the time I'm able to negotiate an escalator, the price of fuel has headed the other way. And so we're more focused on operational improvements around fuel, so eliminating idle time, more efficient routing, all things that we should be doing and have been doing anyway. It just means they're on a relative basis, they're more important now and it's $5, $6 a gallon than when it was $3, but now it is important to be fuel efficient.

Of course. Of course. And then a couple more for you, Steve, before we wrap up. So we saw Lumen, one of your top customers kind of return to growth in the quarter. And just wondering what the opportunity looks like with them. Obviously, they have -- the Lumen footprint where they talked about 12 million connected homes at some point in time. And then you also have the Apollo's spinoff, Brightspeed that's already building some network in North Carolina. And so maybe are you seeing bigger opportunities emerge with both of those customers that you think should pick up here in the coming quarters?

Yes. I think we're -- we've had a long relationship with Lumen. We've known the folks that are involved with Brightspeed for a long time, where they had worked elsewhere. Pleased that we're able to help them do an initial trial project in North Carolina. So we're really encouraged with the outlook for both of those customers. And when you see a customer who is going to do about 1 million homes passed this year, but would like to exit at a kind of a 1.5 million run rate. I think that's encouraging for us because of the length and the strength of the relationship, again, so we're going to have to work hard. This is a business you earned 1 day at a time, but very encouraging to see their comments.

Yes. Yes, I agree. And then we've talked about for a number of years now, the large customer program and its impact on your numbers. So maybe you could -- I think you've said that it's not -- obviously, it's not having as material of an impact now and it should mostly be -- it should be fairly immaterial by the end of the year, but maybe you could still kind of talk us through any impacts you're seeing from that customer program? Anything you can quantify around the impact to your business today?

Yes. What we said on the call last month, Eric, was that there was less of an effect in April quarter than there was in the January quarter. We expected that to decline again in July and October and essentially be pretty de minimus by the fourth quarter. We've had lots of good operating cash flow from that program. So I think from a cash perspective, there's always a little bit more to go, but we had very strong cash flows and so we're working hard to close out the program and move those resources that we've developed, managing that program to lots of other good growth opportunities where they could help us be a better business for other customers.

Yes. And one last one for me, Steve, before we wrap. So just in terms of capital allocation, you do have a share buyback program in place. You also have a lot of organic growth opportunities ahead of you in a slightly tight supply chain. So maybe you can talk about how you're thinking about managing the balance sheet based on the cash flow outlook, the leverage outlook and kind of balancing organic investment versus share buybacks versus potential M&A?

Sure. So organic growth is the highest use of cash. You never want to go back and say to a customer, you can address an opportunity since you bought back shares or you bought on the business at the wrong time. And so I think right now, we're very focused on supporting our organic growth when you have sequential organic revenue growth of $100 million a quarter, that's going to consume some working capital. We're spending some CapEx to support that growth. And that's going to be our primary focus and then we'll look at share repurchases and M&A opportunistically. We've had a long history reducing shares outstanding. That creates equity leverage. And that's a good thing when you're able to grow the business and when the right opportunity comes along, we've done lots of M&A. But right now, if you annualize our organic growth, it's creating a pretty significant competitor to ourselves inside our own business every quarter. So lots of growth opportunities internally.

Okay. Well, that's great, Steve. I appreciate the time today. Obviously, hopefully, we can do this in person soon. And thanks for joining us.

All right. Very good. Thanks for your time, Eric.

Take care.