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

Great. Well, hi, everybody. Thanks very much for joining us today. I'm Joe Osha from Guggenheim Securities. We are joined by Dan Peyovich, who is the CEO of Dycom. Thanks very much for hosting. We appreciate it.

Thanks for having.

Yes. We're going to talk through a number of aspects of the business today. This is one-way thing only. So we're not taking questions. Although if any of you do have issues, you want me to address, you can e-mail me. Most of you know my e-mail, we'll try and get to them. But anyway, thanks for joining us.

Let's start off at a high level here, right? And I call this the why-now question. You just had a heck of a Q1, right, $12 billion in backlog. Is this just a cyclical upturn or is something more significant happening here? Is this the beginning of something secular?

We've talked a lot about the different demand drivers, Joe. And again, thanks for the conversation today. Talked a lot about the different demand drivers and really where they're coming through the cycle. And I think one of the things we've really tried to impress on folks is there is a lot of room left to run. Even if you look at fiber to the home which has been out there for a while, a lot of room left to run and we can get in more specifics about that later. So if you look at that, almost total $12 billion of backlog for the quarter, that really just represents a lot of these demand drivers coming in now on top of each other and Dycom's positioned to do that. Remember, Dycom is really about the skilled workforce. We've got over 20,000 men and women around the country today. What our customers need on either segment of the business or really anything we're offering is they need that skilled workforce to deliver on their very ambitious build programs. So no, we think that this has a ton of same power. These build cycles go well into the next decade. And we think that Dycom is incredibly well positioned to deliver that for them.

If you -- we're going to talk about fiber to the home in a little bit, but you've talked a lot about this long haul and middle mile opportunity is being something significant. Can you talk a little bit about that starting with the size of the opportunity and how you see that growing.

With size to just over a year ago now at $20 billion over the next 5 years, that number has grown considerably. The number of incoming calls that we get about these long-haul networks is only growing, growing by the day, growing by the way, growing by the month. And that really comes back to the need, right? What is happening out there is you have aged networks that are just not at the capacity. They're not at the right routes, going to the right data centers, making the right connections of what's needed, not just today but in the future build plans. That $20 billion that we did a year ago really was almost entirely lines on paper. That was no knowns, right? We could see coming through various customers. That number continues to grow. You see a lot more press releases from our customers. You see more press releases from the hyperscalers and others that the demand really is significant. I think the part that we're trying to communicate is it's still extremely early in that. We've been out there in the field for over a year. We're doing a lot of that work across customers, across builds, but it's still really in its infancy in the overall build cycle. So think about that ramping up next year and then significantly as you get to calendar 2028.

You spoke a little bit about higher fiber counts being one driver. Can you talk a little bit about the numbers there? And what's added [indiscernible].

Absolutely. Absolutely. And I think, again, that it's a really interesting point because it's not just about fiber count, it's about the routes as well. But 864 has become more of a norm today. So almost a tenfold increase over what was there previously. 1728, also quite common, so 2x of that. And I mentioned on our call last quarter that we're hearing some of our customers talking about the hyperscalers want to get something out to 7,500 or 10,000 counter. I think what's really important, again, is it's not just about the accounts, what we're talking about is redundancy, route redundancy. Sometimes that's in another conduit in the same ditch. Sometimes it's in a completely different ditch on the other side of the road. And sometimes it's a completely different route. All of that is coming together. So that $20 billion has grown considerably. This is a very, very active space that we're excited about. And I think that there's not a lot of folks that have proven like Dycom has that we have the ability, we have the workforce to go deliver and execute on these ambitious [indiscernible] builds.

Okay. And that -- it's interesting because people are very, very focused on the FTTH side, right, which we're going to talk to in a little bit. Help us understand when we think about that $20 billion or obviously larger than $20 billion. Now how much of that lies in the future, almost all of it or...?

Yes, the vast -- vast majority. I just think, again, we have meaningful contributions to our revenue today. We have meaningful backlog as part of that $11.9 billion. But for the work to come on generally when you're hearing about the complexity of these programs takes about a year to really get them going. And then once you start, you got to really get it to ramp to get at whatever that peak delivery rate is. So you just have to really add time into all these things. But they are progressing, right? They are moving through the ecosystem. And again, Dycom, we really feel like we're winning our fair share. We still see some activity from some of our competitors, it's a little bit concerning about how they're pricing this or maybe haven't done the work before, that's going to play through the ecosystem over time. And I think that creates additional upside if you think about where Dycom is in the future.

And let's detour a little bit because you do bring up this issue of irrational behavior. How do you think that's going to play out over the course of the next couple of years? And in particular, you talk about it in the long haul and middle trial?

Yes. And we saw this in fiber to the home. It's -- I think people look at the work that we do and they underestimate the level of complexity. They underestimate the skill set on how you need to train people to go deliver it and they underestimate the difference in building in one location is compared to another location. And how I mean this [indiscernible] might be different, how the actual geology might be different, all of the parts and pieces that come together to price the work properly. Dycom is in all 50 states. We're working not in every ZIP code, but virtually all around the country. So we know the dynamics of a given market. We know the dynamics of how to build in different places, and we know what that cost and what it takes. I think when you see a lot of folks coming in, we saw them fiber to the home. They buy off more than they could chew. They take work at rates that just really can't be achieved. And coming through that, that was an opportunity for Dycom to continue to get additional markets with our customers because we proved that we could deliver time and time again. There's always things that we want to improve on. We want to constantly raise the bar, but we really feel like we are raising the bar across the industry. It's still so early in the long-haul middle mile that you have a lot of people filling a backlog with that work today, and we would call it low calorie backlog, right? We don't see with the rates that they're putting out there that they're going to be able to make money or complete the work. And just like it was on fiber to the home, a lot of that becomes another market opportunity for us in the future. And we would believe that that's probably what's going to play out here. Now it is important to point out, Joe, that we are winning our fair share. And for us, when you look at our backlog, that is quality backlog, right? We want to -- we don't need practice as we say, right? We want to make sure that everything that we're doing and we're putting into backlog. We're delivering the field, and you see that in the margin growth we've shown over the last year and over the last couple of years that with we're getting appropriate margins and good returns for our shareholders.

So you'd say you're sort of winning you're holding on to share right now, -ish. And then you have the potential to perhaps take share of some of just less rational behavior takes now.

I think that what needs to happen in the ecosystem is we need to see who can actually deliver on the work over time and who can't. What Dycom has already proven because we're really first doing this in large part, we believe we're first doing this in large part in the long haul that is. We've proven that we can do it. We have customers calling us -- customers calling us and asking us to help where they brought other competitors in. So all of that is a positive and just goes again to where we really want to differentiate is in how we partner with our customers, having that long-term view. And yes, we think that we are absolutely winning good quality work there today with more opportunity in the future.

Okay. All right. That's helpful. Let's talk a bit about BEAD that's been much discussed, but I think it would be helpful for our audience if you talked about the magnitude of that opportunity. And I think more importantly, how you see that layering into your revenue over the course of next couple of years.

Absolutely. I said at the end of last quarter that we thought we'd see some revenue contribution this quarter. but really to think about it, every should think about is upside for this year. It is taking longer. It's a little bit stickier getting through the cycle, getting the [indiscernible] approvals, getting through their permitting for things really to come out. And so we have said for a long time, think about calendar 2027 really starts to take shape. Because that right now is the finite program to be delivered over 4 years. We think that the addressable market for Dycom, so this is -- excludes any materials. This is purely what Dycom can address is about $17 billion, very big number to do in 4 years. So if you think about '27, you think about '28, you're talking about multibillion spend years, is that growth cycle. As we sit here today, I think it's probably going to be more than $17 billion. And I think it's probably going to be longer than 4 years just in kind of the noise that we're hearing in terms of the ecosystem. And though we were hoping that we'd see a lot more shape to how it's going to come through Q2, it's probably going to be the back half of this year before we really see a better idea of how that's going to shape out through the years.

And can you help us understand how that $17 billion manifest in terms of your opportunity?

I think the most important thing for people to think about it, if you think about our backlog is we have a strategy about how we want to fill that and how we would diversify that backlog. And what I would tell you that we're not going to do is we're not going to say numbers that we want to get on how much BEAD work and then we're going to go into any price to do that. If we see a flurry of people coming into the BEAD work at very low pricing, then we're going to find opportunities where we can get a good return on our people or [indiscernible] capital. So we're thinking about that blend overall. But we do believe, and we talked about $500 million of verbal awards, I think more than a quarter ago, probably a couple of quarters ago. That has only grown. So we do believe we'll play a very big part in BEAD, but we are going to make sure that we're always prioritizing and getting good quality work.

So you are comfortable saying that, that 500 verbal that you've talked about has grown since you've discussed it?

It has. It has. And the only reason that some of those haven't contracted in earnest, is not because we're -- in many cases, we're already kind of preplanning to do the work, but it just has to get through these final approvals and then get to our customers' own systems before they can come into and be a true backlog for us.

And is it your sense that it's probably going to be the latter half of the calendar year before you're going to be able to give investors [indiscernible].

Yes. I mean because we're 3 weeks away from our quarter end here, I mean you really think that in large part, you're going to see that start to kind of take shape in the back end of the year.

Okay. So let's talk about the big elephant in the room, which is Starlink. And I think there are a lot of angles here, but let's start with fiber to the home. We've seen some estimates out there for potential Starlink subscribers that are big. How do you see in the markets and stipulating that some of those numbers are outside the U.S., which are less relevant to you. How do you see potential StarLink subscriptions impacting your FTTH business. We'll talk about other computing space and still separately [indiscernible], we'll start there.

It's important to start on really what is it that Dycom does for our customers. So at the end of the day, we're here because for the last 30 years and the first [indiscernible] going forward, the world consumes more data every day. The world consumes more data every year. And that data consumption, that data growth requires more infrastructure. It requires more compute, requires more to transmit that data. And that's really where Dycom comes in, right? We bring our large-scale workforce to really meet that need and either enhance, build or grow those networks so that, that data can be delivered. So from that perspective, everything that SpaceX is talking about everything Starlink is talking about. Remember, even if it's up in space, the whole premise is it needs to come down. It needs to come down to earth. And here on earth, we have the requisite skill for us to make sure that, that can get connected in whatever capacity that is. So I think that's really the first starting point that I believe is really important because I think there's as much upside to talk about is there is some of the concepts of how the impacts could be. Specific to fiber-to-the-home, I would just stick to the known knowns this really got tested and need to beat is the most ripe opportunity for SpaceX or for Starlink, excuse me.

It's an economic [indiscernible].

Yes, because it's much harder -- these are much more difficult places, much lower density and in that scenario, which again is as open of a landscape as you could have. Starlink took 25% or what I should say is Elio took 25%. Yes, actually, its 23%. So that's kind of the best-case scenario. So do we see that now when you move to metropolitan area as being a big impact, we don't believe that, that's going to be the case. The second part is these fiber-to-the-home build programs are very [indiscernible]. They've got a lot of momentum behind them. And so at 10-plus million passings a year that are completed on I think you have to think about the time lines and how those time lines will be. What the fiber to the home build showed everybody is really it's about speed. We can get there first. The first fiber connection was the one that got the best penetration. So I think speed is a big component there. I think you can see that play out with our customers as well. But the second is that what you saw from a consumer perspective is they did prefer fiber. They had that preference. We're the highest capacity, the lowest latency. And in that scenario, fiber is really unmatched.

Okay. But let's return to that other point you made about space-based computing. If that happens, right, generating terrestrial demand. Let's build that out a bit. Let's imagine that we do have data centers and space. How is that going to manifest terrestrially for your company?

Absolutely. And like many, I grew up in the Star Wars generation. So this as exciting, right? It's exciting to talk about, but remember, we're not competing anything in space to keep it in space. It's got to come back on Earth. Probably the most important point to make today, and this goes on whether it's our Building Systems segment and what we're doing inside the data centers or what we're doing on the communications side, the conversations on the ground. The conversations we're having with our customers every day are unchanged. In fact, today, they're only [indiscernible] than they were 6 months ago. So there is a ton of demand that continues to be there. So we're not seeing any concerns or anything that gives us concern there. The second part is that anything that gets computed in the space. What we know today is that enough data centers can't get built here to rest really to meet the needs. We -- even with our business today, we are turning away work because the demand is so strong. So anything that augments that, I mean the demand is there, the demand is incredible. The data centers in the space, that data still got a good factor, and it's still got to get transmitted wherever it's ultimately going to go. And again, that's where Dycom comes in. And that's what we love about our portfolio, right? We have both parts of it. And we're not so heavily invested on the data center side that we're betting on all these with these could be, right? Remember, our strategy really is to be down that fairway. So we feel really good about the markets we're in. We feel really good about the opportunity set and the ability to both things can live and work together. And over time, that's only a good thing because, again, that means more data is getting computed and more data needs to get transmitted.

That -- so that kind of brings us to this data center question. You've talked about long-haul and middle mile a little bit. How how more directly adjacent to the data center opportunity, do you see your business benefiting? What does that look like?

Yes. So first, the Power Solutions business is performing exceptionally well. You see considerable growth. We raised that number up 35%.

I'll actually said -- we said Power Solutions as [indiscernible] if you don't mind.

You must understand the communication.

[indiscernible] and we'll get to -- yes.

I was going more towards inside but outside the 4 walls exactly right. So as the data center space continues to take shape, as you're looking at markets that continue to grow or new markets, right, that become significant growth markets for data center. Remember, all has to be connected. Also it has to get back to those long-haul networks. And you hear the hyperscalers very bulk about this or a lot of our customers on the telco side, talking about it, that there's just huge demand and appetite for all of that to happen. The more that comes there, the more opportunity it creates. And that's why that $20 billion is a much stronger number. The other thing is that the work that we're doing now connected with the Building Systems side, that inside defense opportunity on the fiber side, continues to grow for Dycom. So not only are we continuing to win more work, but the opportunity for us to use that and really cross-sell both parts of the business only grows as well.

And then I think let's shift over to Power Solutions. How much of that business would you say is data center geared versus other opportunity?

Yes. So they continue to be 90-plus percent in the data center space. And in the DMB market, and again, I think this is important because there is a lot of noise out there, and there's a lot of very complex issues that we're paying attention to. But what we're seeing on the ground every day is the demand is absolutely insatiable. And that's with the kind of growth that I just talked about earlier, 35% growth on an already very large workforce and a very large business. Even there, we still have to turn away opportunities. So we're highly confident in that particular market continue to grow in the market at large continued to growth. Where we're going to be strategic as in how we play through that to make sure that where we're going and what we're doing is in the places where we do have a lot of confidence that those data centers are going to continue to be built.

And does that mean as we think about inorganic growth adding to your portfolio from a regional standpoint or kind of a skill set standpoint or both? So you said you intend to continue to grow in organic.

Absolutely. And I do want to be clear about that. We are continuing to look at acquisition opportunities. You saw that with Power Solutions. You saw us widen the aperture further with NTI. Very excited to welcome them to the Dycom family now. But moving to structured cabling, adding that into the electrical, that's a great combination, right? We're looking for those kind of synergies, but the aperture does get a wider for us. Ultimately, diversification for Dycom is a positive, right? Further customer diversification, further market diversification, all of those are positive, but we are going to be very disciplined about how we think about it. What I would tell you is we have a very strong M&A group here. Very proud of what they've been able to do, integrating power solutions very quickly. Being able to do NTI in addition to that, I would tell you we still have capacity today. You can see we still have financial capacity today. So we are active in the space. And there's -- this stuff doesn't happen by the day or by the quarter, you really want to find the right opportunities with the right teams. And I've talked about before what really those core components are that we're looking for in a business. But when and where we find that, we're confident that we have the ability to do more acquisitions in that space.

Without asking you to tip your hand too much when you talk about opening the aperture, what does that mean? Is it further afield in terms of different businesses or just saying, "Hey, we want the same skill sets in West Texas that we have in DMV", or what does that look like?

Yes. I mean, obviously, I'll let the electrical work, and it doesn't purely have to be data center-centric. I think Power Solutions is pretty unique in being so data center-centric. So businesses that aren't as data center-centric that are on the electrical side, obviously, that makes sense. Continuing now with MTI in the business, the structured cabling because they're doing in multiple markets. You can look at opportunities to grow that. But there are other building systems that are in and related to it. And Joe, as I mentioned before, this is a space that I spent 2 decades of my life and so I know incredibly well and inside and out. And what I can tell you is that there's a lot of opportunity there that can really make sense for the Dycom portfolio over time.

Okay. That makes sense. When that sort of begs the question on capital allocation, how do you think about how you put your company's money to work, especially because your cash flow is so well, right? You're able to delever pretty quickly. So I guess it's a 2-part question on capital allocation broadly? And then how should investors think about kind of the high and low end of your leverage levels as you seek to tap to the business.