Q2 2021 Dycom Industries Inc Earnings Call
[music].
Ask a question during this session you'll need to press star one on your telephone.
If you will part any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today, Mr., Stephen Nielsen President and Chief Executive Officer. Please go ahead Sir.
[music]. Thank you operator.
Good morning, everyone I'd like to thank you for attending this conference call to review, our second quarter fiscal 2021 result.
Go into slide two during this call we will be referring to a slide presentation, which can be found on our web sites Investor Center main page.
Slide you'll be identified by number throughout our presentation.
Today, we have on the call screwed up Rory our Chief Financial Officer, IRI Internet or general counsel.
Now I will turn the call over to light or no.
Thank you Steve the statements made during this call maybe forward looking in nature and our provided pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements include all comments, reflecting our expectations assumptions or beliefs about future events or performance, but 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 projection.
Including those risks described in our annual report on form 10-K filed March 2nd 2020.
There are other filings with the U.S. Securities and Exchange Commission, we assume no obligation to update any forward looking statements Steve.
Thanks Ryan.
Moving to slide four and a review of our second quarter results.
As we review our results. Please note that our comments today and then 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 their corresponding GAAP measures.
To begin I want to express my sincere hope that everyone listening to this call as well as their families are healthy and say.
We are living and truly unprecedented time for our country.
Could not be prouder of our employees as they continue to serve our customers with real fortitude in difficult times, they have like things.
Now for the quarter.
Revenue was 823.9 million a decrease of 6.8%.
As we deployed one gigabit wireline networks wireless wireline converged networks in wireless networks. This quarter reflected an increase in demand from two of our top five customers.
Gross margins were 20.1% of revenue, reflecting strong overall performance offset in part so they continue to impact so the complexity of a large customer program.
No gross margins last exceeded 20% in the October quarter of calendar 2017.
General and administrative expenses were 8.2%.
At all of these factors produced adjusted EBITDA of $102.7 million or 12.5% of revenue.
And adjusted diluted earnings per share of $1.18 compared to 86 cents a year ago corridor.
Please noted that adjusted diluted earnings per share in a year ago quarter excludes 23 cents, resulting from the net effect of a contract modification port services performed in prior periods.
Liquidity was strong as caf and availability under our credit facility was 474 million.
This amount represents our highest level of liquidity in the last 10 quarters.
Finally, we made significant progress in reducing net leverage as notional, but that declined $94 million during the quarter. The 668.9 million a reduction of over 350 million and just the last three quarters.
Given our progress in reducing debt our board of directors says authorized an 18 month 100 million dollar share repurchase program.
Now going disliked by 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 one gigabit network speeds, the individual consumers and businesses either directly or wireless sleep using fiveg technologies.
Several industry participants have recently stated their belief that one high capacity fiber network and most cost effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment.
We expect this view will increase the appetite for fiber deployment and believe that the industry effort to deploy high capacity fiber networks continues to meaningfully broaden or set of opportunities as we look forward to calendar 2021.
Access to high capacity telecommunications has become increasingly crucial to society and the time of the Kobin 19th pandemic, especially in Rural America.
Recently proposed federal legislation and the FCC Rural digital opportunities fund auction scheduled for this fall reflect the view of sub that the need to work from home telemedicine distance learning at other newly a central applications require dramatically increased rural that work investment.
We are providing program management planning engineering and design aerial underground at wireless construction that fulfillment services for one gigabit deployments.
These services are being provided across the country and dozens of metropolitan areas to several customers, including customers with recently stated aspirations to initiate broad fiber deployment as well as customers who appear to be contemplating the resumption of brought deployments.
These deployments include networks, consisting entirely of wired network elements as well as converged wireless wireline multi use networks.
Potential fiber network deployment opportunities are increasing in rural America, new industry participants respond to emerging societal incentives.
Our ability to provide integrated planning engineering and design procurement and construction and maintenance services as a particular valued as several industry participants.
Near term macroeconomic effects and uncertainty may influence some customer plans, particularly those whose capital expenditures have been weighted toward the first half of the calendar year.
Customers continued to be focused on the possible macroeconomic effects of the pandemic on their business with particular focus on small and medium business dislocations and overall consumer confidence and credit worthiness.
We see some uncertainty in the overall municipal environment as authorities continue to manage the general effects of the pandemic on permitting and inspection processes, increasing levels of overall activity as states and municipalities reopened and the impacts of business limitations due to cope with 19 flare ups.
Overall, we remain confident that our scale in our financial strength position us well to deliver valuable service to our customers.
Moving to slide six.
Despite the effects of the cobot 19 pandemic on the overall economy, we performed well during the quarter, we experienced increased demand from two of our top five customers organic revenue decreased 6.8% our top five customers combined produced 76.6% of revenue decreasing nine point.
2% organically, while all other customers increased 2% organically.
Right. It was our largest customer at 19.8% of total revenues were 163 million.
Revenue from Centurylink was 158.4 million or 19.2% of revenue.
Three Lake was die come second largest customer and grew 14.2% organically.
Hey, TNT was our third largest customer at 16.3% of revenue were 134.6 million.
Comcast was our fourth largest customer to 131.4 million or 15.9% of revenue.
And finally revenue from Windstream was 43.4 million or 5.3% of revenue.
Windstream was our fifth largest customer and grew 25.2% organically.
Of though this is the sixth consecutive quarter, where all of our other customers in aggregate, excluding the top five customers have grown organically.
We have continued to extend our geographic reach and expand our program management network planning services in fact over the last several years, we have meaningfully increased the long term value of our maintenance and operations business.
Trend, which we believe will parallel our deployment of one 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 seven.
Backlog at the end of the second quarter was 6.441 billion versus 6.442 billion.
At the end of the April 2020 quarter essentially in line.
This backlog approximately 2.455 billion is expected to be completed in the next 12 months.
Backlog activity during the second 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.
Great TNT, we were awarded a wireless construction services agreement, covering Texas, Louisiana, Kentucky, Tennessee, North Carolina, South Carolina, Alabama, Georgia and Florida.
And a construction and maintenance services agreement in Mississippi.
Time charter construction that maintenance services agreements in California, Missouri and Alabama.
For Comcast fulfillment services agreements in Washington, Michigan, Illinois, Pennsylvania, and New Jersey.
From Verizon in engineering, and construction services agreement in New York in Pennsylvania.
Headcount decreased during the quarter to 14054.
Now I will turn the call over to drew for his financial review and outlook.
Thanks, Steve and good morning, everyone going to slide eight contract revenues for Q2 were 823.9 million, reflecting stable demand despite a challenging economic backdrop.
Ganic revenue declined 6.8% and we had solid growth from two of our top five customers.
Adjusted EBITDA was 102.7 million or 12.5% of revenue, reflecting a solid operating performance that resulted in a 223 basis point improvement.
Good morning.
Gross margins were at 20.1% in Q2 and were 200 basis points better than the high end of our expectations due to several factors.
First we had broad based improvement across the services performed for several of our top customers offset in part by the continued impacts of the complexity of large customer program.
Next our operating leverage continued to improve as a result of the head count reductions we initiated at the onset of the pandemic.
Lastly, there were fewer than expected disruptions on our business from cobot 19 during the quarter.
DNA expense increased 81 basis points, reflecting higher performance based compensation offset in part by lower payroll and other costs as head count declined compared to Q2 20.
Our non-GAAP adjusted income per share in Q2 was $1.18 per share.
Now going to slide nine.
Our balance sheet and financial position remained solid.
Since Q3 of last year, we have reduced notional net debt by 357 million.
Included in this decline was a 94 million dollar reduction Q2 from solid free cash flow and from purchasing 234.7 million principal amount of convertible senior notes at a discount for 224.4 million.
We ended the quarter with 22.5 million of cash and equivalents 200 million of revolver borrowings 433.1 million of term loans and 58.3 million principal amount of convertible senior notes outstanding.
As of Q2 or liquidity was strong at 474 million.
Cash flows from operations were robust at 82.3 million, bringing our year to date operating cash flow to $167.5 million.
The combined Dsos of accounts receivable and net contract assets was at 126 days in Q2, which was sequentially in line with 125 days in Q1, but still elevated for the impacts of a large customer program.
We expect to continue to make progress on invoicing and collections to improve this metric.
Capital expenditures were $2.5 million during Q2 net of disposal proceeds and gross Capex was 6 million.
For the full year fiscal 2021, we expect Capex net of disposals to remain in line with our prior outlook of $60 million to $70 million.
In summary, we continue to maintain a strong balance sheet and strong liquidity.
Going to slide 10.
The company continues to closely monitor the impact of the Cobot 19 pandemic on all aspects of our business.
Based on current conditions, the company anticipates contract revenues and margins to range from in line to modestly lower on a sequential basis for Q3 2021 as compared to Q2 2021.
The company believes the impact of the Cobot 19 pandemic on its operating results cash flows and financial condition is uncertain unpredictable and maybe outside of its control now I will turn the call back to Steve. Thanks Drew moving to slide 11 within a challenge the economy, we experienced solid end market activity and.
Capitalized on our significant strengths.
First and foremost we maintain strong customer presence throughout our markets. Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities.
Fiber deployments, enabling new wireless technologies are underway in many regions of the country telephone companies are deploying fiber to the home to enable one gigabit high speed connections cable operators are deploying fiber to small and medium businesses and enterprises a portion of the these deployments are in anticipation of the customer sales process.
Yes.
Fiber deep deployments to expand capacity as well as new build opportunities are underway.
Dramatically increase speeds to consumers are being provision to consumer data usage is growing particularly upstream.
Customers are consolidating supply change, creating opportunities for market share growth and increasing long term value of our maintenance and operations business.
In addition, we are increasingly providing integrated planning engineering and design procurement and construction and maintenance services for wired and converge wireless wireline networks.
As our nation and industry continue to contend with the Cobot 19 pandemic. We remain encouraged that our major customers are committed to multiyear capital spending initiatives. We're confident in our strategies the prospects for company the capabilities of our dedicated employees in the experience of our management team as we navigate.
Lunging times.
Now operator, we will open the call for questions.
Thank you as a reminder to ask a question you'll need to press star one on your Touchstone telephone begin to ask a question press star one.
And our first question comes from Adam Tolman, Hi, Mark.
Thompson Davis your line is open.
Hey, good morning, guys great quarter.
Good morning, Adam Hey, Steve the biggest question on getting this morning is which coded and work from home why isn't there just a little bit more revenue lift near term.
Yeah, I think at and what we saw in the quarter was there there are some of the customers that that spend heavily in the front half of the year and their their prudently managing their budgets were encourage really looking at what we see going into next year, we talked about really to two sets of customers or subsets of cost.
Summers.
Those that are contemplating or aspiring to.
Broad fiber deployments and others that are are contemplating resumption abroad program. So we.
We just think that it's.
It reflects the overall environment that the economies and at the moment.
Okay. So maybe you can just elaborate then on the 21 could you are hitting at revenue growth coming back and 21.
Yes, I mean, we're not providing guidance.
For 21, but I think we are if you look at the public commentary across earnings calls.
In conferences I think folks are focused on the fact that high speed connections are important.
To the economy, probably never more important and customers, reflecting that I mean, we had record broadband adds in the cable industry.
TNT said that they move 750000 subscribers to one gig connections during the quarter.
So clearly.
That those kind of bit developments as well as.
Growing consensus that one fiber supporting many use cases and enabling multiple revenue streams.
It is is the way people are thinking about the business and I think that just means more investment in fiber going forward.
Okay, and then just lastly, great to see gross margins.
Back to 20%, what's your thoughts on sustainability of that.
Well as we've talked about a before we've had and mentioned in the comments we've had the effect of this large complex customer program.
And I think if we as we've said before you pull that out.
We've been in line with long term historical averages I would say this quarter, we were probably a little bit better.
So I think we're we're encouraged around margin performance.
Okay, I will turn it over thanks, Dave.
Thank you and we have another quick question from Brent.
With D.A. Davidson your line is open.
Hey, Thanks, good morning, great quarter as well.
Good morning, Brent.
Hey, Steve maybe just following on Adam's question, then and then one month into this quarter have you seen the business performing consistent to that flat to modestly down revenue outlook I know typically tend to see some sequential growth into the October quarter, but maybe the outlook is more just concerns that more markets are going to shutdown.
Well look we're taking a reasonably cautious approach based on the the fact that you can that flare ups in the co bid and that can cause impacts near term and the economy I think it also goes back to what.
What we said in our comments and earlier with a couple of customers that had strong first halves.
Which implies a little bit slower in the in the second half I think we're encouraged.
But when you look at.
Coming out of the second half of this year into next year that we have people talking about large programs.
Who are currently don't have them under way. So I think we're we're.
We are encouraged.
Despite kind of the near term moderation.
Okay.
And then not withstanding some of the customer slowdowns here this quarter bookings are pretty strong.
Appreciate the award detail I'm, just wondering if there's any color around.
Anything, particularly notable in those wins or do you feel like the booking strength. This quarter was fairly broad based across your customer group.
Yes, I think it was a solid quarter on on the backlog I think we're working on some other opportunities.
In this quarter and going into the into the final quarter of the year. In fact front. We got notification of award. This morning on a contract that will be call. It 150, new employees over the next three months in about 5 million a capex. So.
I think we're encouraged that the.
Customers are open for business and and there are a good opportunities for us to to grow backlog.
Okay.
Great great to see the the cash flow coming in as well.
The Dsos I guess still.
Below where you ended last year do you still think dose can come down as we work through the rest of the this fiscal year.
Sure. So if you look at the business ex the large program. The those dsos were in line with with the last quarter and historically, so we're really seeing no change and customer payment behavior.
And then the.
And that other large customer program, they were stable quarter to quarter and so.
I think is just kind of finance what a one when you stop consuming working capital you're going to get better EBITDA free cash flow conversion.
Then as we normalize that large customer program.
More cash becomes available.
Okay, Great guys. Thank you good best of luck.
Thanks.
Thank you. Our next question comes from Sean Eastman with Keybanc capital. Your line is open.
Hi, gentlemen, nice work this quarter.
I just wanted to start on on the Dsos as well Im just curious as you work through the challenge customer program.
From a invoicing perspective should we expect sort of a levy breaking dynamic as you guys figure that out.
As.
Those receivables come in or.
Well, it's still just a slow trickle and just kind of curious around that dynamic as you work through.
That invoicing process.
Sure. So Sean so first off right you've got to keep them from growing which we were able to do the last couple of quarters. So that's that you had one.
As we've talked about this program some of the processes have evolved that has created.
Some of the challenges I would say those systems of evolve for everybody based on what.
I understand and so I think this is something that the whole industry is working on making better.
And I think is as time goes by that we'll we'll see that improve and normalize and also as we see the mix of work shift so systems are getting better. It's a big program, it's highly complex, but we're working through it and.
We get money and on the program everyday just not enough.
Got it Okay, and then going back to Adam's question on just the sustainability of the margins clearly.
Came in way better than what you guys were.
Turning to.
On the last quarter's call right I, just wondered if maybe you could give us a little more color on the bridge to where you set expectations to where they came in I mean, I guess the things.
Thinking about is.
This fuel and incremental savings was there a big benefit from lower traffic on the roads was there may be less revenue contribution from that challenge customer program any color on that bridge would be helpful. As we think about.
Yeah, what you guys can do from a margin perspective next year.
Sure. John This is drew just so for the quarter. There really three primary factors that that I had mentioned previously driving the better performance. The first was the cost reductions that we made in April carry through in the quarter.
Secondly, there was I would say there was less of an impact of covre than expected.
In the quarter less disruption.
And then lastly, we did somewhat better than expected would with some select customers.
As far as your question about fuel.
Well that already come down by the end of last quarter. So they're really we haven't much of an incremental benefit this quarter.
From that so.
Okay, great so basically.
Nothing sort of onetime me that's cost that's going to come back in.
In a more normalized operating environment.
What I'm getting at.
Yes, just any high level thoughts from that perspective.
Yes, Sean this Steve So I don't think we saw I mean, we went through our normal process of going through our insurance accruals and all those things are were nothing particularly abnormal.
In the quarter for those type of factors.
We did as we talked about on the last call. We did take some head count out we have a number of efficiency initiatives underway, which in some sense were accelerated by the co bid, but we were.
Encouraged that we were able to hold those savings through the quarter.
And we don't expect to give them back.
As time goes on so yes, we hope that we hope to be better.
And hold onto it.
Okay. That's excellent I'll just sneak one more in guys.
Mentioned the rural.
Broadband opportunity in the presentation any perspective, you can provide on how big that could be for for de why how well do wise position there.
Maybe relative to the Caf program.
For some perspective would be helpful.
Sure. So Sean is really really two pieces that we talked about in the comment. So the first one is the rural digital opportunities fund, which is a fund.
Administered by the FCC there is an actual auction.
We will commence at the end of October to allocate those proceeds across the country.
We are encouraged there it's about $20 billion over over eight years. The first phase is 16 billion. There there will be private capital that I believe will come into that program. In addition to the FCC money.
And so I think we see lots of interest.
From a number of industry participants in that program in fact about a month ago charter actually publicly announced that they would participate.
In the auction.
And aggressively.
Look to expand the their footprint into rural areas that are adjacent to their current service territories. Comcast made similar comments, although they're not going to participate in the auction. So what you have large customers large industry participants that are focused on rural and accessing that money we think.
That's a we think thats a good thing.
I think than theirs.
While nothing's passed and who knows what ultimately gets into further legislation either with respect to infrastructure or to offset the pandemic, but there was a bill that pass to have.
A couple three months ago that literally had $80 billion in the legislation.
For rural broadband and so I think it goes back to what we've talked about on the last call that clearly the pandemic has highlighted how essential cut activity is in residential and rural America.
And I think also.
It will.
Also become increasingly important as at least at the moment. There is this migration or somewhat of a out migration from the cities.
To Rural America as people have figured out how to do their job from just about anywhere so.
I think we're encouraged by both.
With respect to the original stimulus in 2009 that we participated in we've talked about it on the last call that was ultimately somewhere around six and a half or $6.7 billion.
Which we did just less than 600 million.
Under that.
Under that particular program so.
I think this is a good opportunity we in fact.
Under the cares Act there was a small about well utilize portion of the money that states had available to build up fiber networks are subsidized fiber network. We actually just started a number of projects and one southern state.
Ended with cares act money so.
So we see good opportunities are rural.
Super helpful. Thanks, So much of the time.
Thank you. Our next question comes from Eric.
With Wells Fargo. Your line is open.
Great. Thanks for taking the question.
Steve could you maybe talk about the performance of the wireless business what type of activity, you're seeing and what percentage of revenue. It is now in.
Whether thats coming more on kind of macro tower or small cell deployments and then if there any additional opportunities now that sprint and T. Mobile mergers closed in T. Mobile has made some comments about really ramping capex over the next five years, if thats a customer that could be a good growth opportunity for you.
Sure sure when I go to drew Andrew will give us kind of the industry splits and then we will talk about wireless yet so great for the customer split telco was at 70.8% cable was at 19.8%.
Facility locating was at 7.2%.
And then electrical and other was at 2.2%.
And so.
Specifically with respect to wireless Eric so.
We were we were down sequentially slightly and we were down year over year about 6% and I think with that reflected is our primary customer made real good progress on on Firstnet.
But I think it also reflects at least a moderation as as customers think about the news she vrs spectrum, which apparently the auction closed yesterday.
And the upcoming C band auction and I think.
As that spectrum becomes available that's always been good for the wireless business and I think from a macro tower perspective.
More spectrum bands equals more opportunity for us to grow so I think we're pretty encouraged.
Based on the based on what we expect to come out of the auctions.
With respect to T mobile I think we've talked about this in the last call. We do some work for T. Mobile, we're not a substantial participant there, but I do think the creation of a very robust competitor.
To the other carriers the other top carriers has always meant in the past that there were opportunities to work for those core customers that we have as they respond competitively. So I think we're encouraged there and then I think on small cell.
Again.
Industry numbers that I've seen show somewhere around 200000 small cells in the country growing 2 million over.
Five 710 years, whatever number period of time is lots of opportunity there around small cells and as we've talked about that before that plays, especially well to our ability to do the fiber backhaul and fronthaul, which is really the key element of small cell deployments. So I think we have both wire.
Plus opportunity in terms of radios and antennas and structures.
As well as the backhaul in front haul.
Great very helpful.
And just one follow up I was curious on on the cable space, what you're seeing there. It was nice to see some sequential improvements from Comcast and obviously it seems like the residential broadband businesses are doing really well even with some uncertainty on SMB. So I'm wondering with DOCSIS Board I know specs.
I mean out earlier this year when do you think you can see kind of another ramp in commercial deployments.
Move toward that no new standard thanks.
So so we were also encouraged Derek do we had sequential growth out of Comcast I will tell you that that there were opportunities across the cable industry as they split nodes to add capacity, but I'll also say that they were particularly cognizant of how important they are residential America for connectivity and so they were careful around.
Things like the APQE exams schedule and.
Year end with with high schools. So so I think as as we look ahead I think they continue to.
To push more fiber deeper into the network and I think we're encouraged that thats are growing opportunity for us through the back half of the year and into next year.
Okay. Thanks.
Thank you we have a question from Noelle Dilts with Stifel. Your line is open.
Thanks, and again congrats on a quarter.
So I recognize it's been a lot of questions on March but.
Just to understand the dynamics in terms of your guidance. If we are looking at EBITDA margins sort of.
Seems like flat to down next quarter could you walk me through some of that dynamics, you're thinking about from a margin perspective I guess my question is that you've been making a lot of progress kind of moving from the more challenged phase one of the large complex customer program into phase, two which seems to be more profitable.
I guess I would think that some of that would continue into the back half in maybe offset some of the pressure from on potentially.
One of the large customers being more or one or two large customers being more front half loaded. So is there anything else. We should really think about just in looking at that sequential margin trends.
I think well it just reflects our view as to total revenue. So once again, we had a couple of customers not all customers that that.
Spend heavily in the first half of the year, they're managing their budget budgets, well and so that creates a little bit a negative operating leverage as they adjust I think but we also have opportunities as we get in the fourth quarter income start working on next year's.
Budget that I think there are opportunities as we go through the balance of the of the year for that to reverse.
I think we're we're going to take a prudent position.
Owned.
The impacts of the of the virus on customer spending and also what our ability to get the worked on.
And there are other reasons to do that for example, it as I mentioned earlier on the call we're going to be starting a fairly sizable contract that's new with a fair amount of hiring of that it's not a big deal across the company, but those are the kinds of things.
That will have benefits going forward, but take a little bit of cost in this quarter.
Okay.
And then well it seems clear that that.
Coming out of the current events crisis years, you're seeing broadened deployments accelerate overall.
I guess one.
Sub segment of the market that came up a few times and channel checks, where folks were a little bit worried about the outlook was.
More on fiber to small to medium businesses I know in the call you mentioned continued confidence there.
Is there any concern that you might see yes want to begin business has kind of deferred decisions on on.
Maybe upgrading their connection just curious how you're thinking about that.
Yes, I think what we said our comments Noel is that something because the those kind of dislocations are potential dislocations to small and medium businesses something customers are paying attention to and we are also.
And Joe I think Thats just another reason that have a prudent view on the back half of this year.
That being said.
We were encouraged by the activity around the residential lying right. So it's always kind of the.
Demand moves around.
And right now it's more residential that on SMB, but then again as the economy come down and we get a vaccine.
I think that may be a potential area, where where growth resumed.
Okay. Thank you appreciate it.
Thank you. Our next question comes from Alex Regal with B. Riley Your line is open.
[music].
Thank you good morning, Steve.
Hey, Alex.
Understanding the rural broadband market opportunity, but could there be a gap funding between sort of your activity levels of today are up last quarter.
Versus when some of these new program started what kind of downside pressure could we see from that if any.
Well, Alex if we look at what I'll call Nontraditional Rural work it was about 3% in the quarter and it was growing last quarter sequentially, but not not not.
It wasn't a huge ramp up and I think we see that steady.
And we see the new funding sources being additive to that base level of activity because even now in rural America with private capital.
There's a there's a fair amount of work that's going on right now, adding impact as we mentioned earlier some of its picking up.
With some of the earlier.
Tons available under the cares Act so.
I'm not I'm not concerned that what we have currently underway slows I think what the new funding to the extent it becomes available will only.
Accelerate the trends that we're already seeing.
And your kind of official guidance continues to be a little limited this year I understand it kind of in issues and whatnot, but.
Your commentary is fairly upbeat about prospects for 2021 at what point do you think you might be more extensive in your guidance.
As we get close to that 2021 opportunity.
Yes, I think Alex this as we said on the last call we have mixed.
Approaches remark customers to how they're guiding and to the extent that they're still mixed we don't want to get ahead of that I think as they go through their fourth quarter calls or third quarter calls in into fourth quarter calls and become clear about what they expect next year as well as we see the outcome of the CBRN.
This auction, we see the outcome.
A number of other.
Potential stimulus bill.
For infrastructure Bill.
I think as they get more comfortable will become.
More forthcoming.
And one last question last conference call. There was some conversation around sort of short cycle work.
How did that play out in the quarter and what's your outlook to the in the current quarter.
Yes, so I think in the short cycle business, what I would tell you is it was steady in the quarter. So I don't think we had a tremendous change in our expectations from where it was in may.
With with the virus spiking in July and August early August I think there were some impacts limited to the business, but I think we saw some.
But but that's all baked into.
Our outlook for the third quarter.
Thank you.
Thank you we have a question from John Lopez with vertical from your line is open.
Hey, good morning, Thanks, so much.
Good morning, John how are you.
The spine good.
Hi, guys I get that should have questions. The first one I guess I find myself still like a little confused by backlog.
Maybe I could just ask it this way if we look at the greater than 12 months number it's still down sort of high single digits.
Is this because the customers are seeing these networks stresses and.
All the various things that we've been discussing but just haven't yet put in place plans to deal with that or just how do we filter that sort of disparity if you will between those two thanks.
So John about 70% of revenue in every quarter and I think also this quarter is typically under master service agreements and the way the backlog under Master service agreement gets valued is we look backwards for 12 months, we take the monthly run rate and we multiply that times the number of months remaining right and show.
It is sensitive to the renewal cycles or insensitive to to New awards.
And so.
From our perspective to try to draw.
Any conclusion or any precise conclusions around customer demand in the near term or for any given quarter based on the backlog that's calculated that way.
Has not been.
Particularly effective.
In the past made for example, we're going to book a reasonable amount of backlog on a contract. We just got this morning.
And if it had been booked three weeks ago. It would be included in this number. So it's just not the way we think about backlog.
Gotcha, Okay says that argument is sort of its timing related like this stuff is starting to come.
Yeah, you know as we renew a contract. So remember if we have we've had areas that we've served for decades contracts come to an end, we renew them in the period before they are renewed.
There's no next 12 months backlog in the day, we do renew them. There is 12 months of backlog right I got you, it's a calculation that subject to timing.
Got you, Okay, but my second question I realize there's a lot of different factors that go into this but I just ask the question this way.
If we look at Verizon Capex for the first half of the calendar year, it's up quite a bit.
And we look at your revenue to rise in its down quite a bit.
Can you just parse apart some of the dynamics at work there and at what point would you expect some improvement.
With that customer.
So John in similar conversation to backlog. So so keep in mind all of our customers not any one specific.
Recognized capex on a cash basis.
And they have equipment that they purchase through the Capex line that goes in and out of inventory and so on a short term basis, it's pretty difficult to correlate.
They are spending directly.
Due to our revenue wide right, they're big companies, we don't work for them at all facets now what I would tell you is there are times, where what they spend and one half of a budget year.
Compared to the full budget year will impact the the intensity with which they work in the second half of the year as a.
Reassessed the priorities as they looked ahead to the next year, but on any given year.
Our variety or our revenue with that particular customers grown pretty dramatically over the last three years, but the capex has been essentially flat over the same period of time.
Which would tell you have the of the difficulties and using it as a tight statistical measure.
Got you really helpful. My last one just coming back to the gross margin topic, I guess I want to ask it this way.
Well you're already in the low like is very low twentys.
If we look back historically that numbers gotten up a couple hundred basis points from here a couple of times I guess the question is the current the current level does not yet incorporate the improvements from that large customer contract like all else equal.
Doesn't that kinda argue that that historical couple hundred basis point lift from here is reasonable.
I think what we've always said is that over the last couple of years. If you. If you control for that large customer program we have.
Ben in the middle of our historical range around margins I think this quarter, we were a little better and we're going to work hard to kit continue the trend obviously no guarantees, but we're encouraged.
Got you really helpful. Thanks for all the thoughts.
Thank you.
If you would like to ask a question press. The Star then one key on your Touchtone telephone.
Our next question comes from Alan Mitrani with.
Even like asset management your line is open.
Thanks, guys just before we go ahead do you mind, giving us the rest of the top 10 customers and their percentages.
So Alan there on the on slide six in the children in the presentation material outlined there.
Fair enough I look at that.
And then as it relates to gross margin just following last question do you think all these issues that you reference regarding your large customer Verizon has been challenging.
We will be finished by this calendar year, but at this fiscal year.
So so Alan we don't in total, but as we talked about in February and then again in May and we're still probably comfortable with that we see substantial progress by the end of this fiscal year, there may be one or two projects that extend beyond for some period of time, but we're actually encouraged that for that.
Particularly for one that's extended extending its a better mix at work.
And so.
So I think there at a high level not a lot of change from when we spoken by.
Okay, and then just to run down the PNM it seems like the.
Even though the revenues just come in from your year over year. The SGN age has not so much you came down a bit ex stock comp.
Slightly flattish you're holding it flat.
Do you think.
Do you think that these cost cuts that you put in some of the head count taken out.
We will show up in SJ, how much like where was it in the quarter was it towards the middle of the quarter beginning in the quarter, how should we think about that.
Going forward on a run rate basis.
So as Joel on the cost that we took out in April stayed out in the business.
But we had better performance in a number of our incentive plans, our formula driven and so they the bonus expense reflected that increase.
In performance in the business, but when we when we look at DNA and strip out stock comp and that incentive compensation, we made real progress quarter to quarter.
Okay.
And then your your pp any has been dropping significantly.
Call it since a year ago, a year change goes for 30 now it's down to 315 I guess your other income went up as well do you guys. I mean, even though you've just got new business are you getting rid of assets tell is selling some out because you think you have enough you're working them harder or whats can you just walk us through how that works relative to what the book of business could be in the next year.
Well, Alan we've always had a pretty.
Routine replacement cycle.
And that typically took advantage of the fact that we sell our used assets at a nice percentage of what we pay for that given the uncertainty and where our leverage levels were at the beginning of the year or say 12 months ago.
We worked aggressively.
To make sure that we were.
Managing our capex appropriately.
And and and we've been able to do that without any.
Incretion maintenance expense from last quarter to this quarter.
I think now that leverage.
Is approaching target kind of in that two area.
We'll continue to look to grow organically and as we talked about earlier, we are going to spend some money this quarter on a new startup.
And we'll also look to our basic capital allocation framework that says we're going to fund growth in Capex.
And then we're going to evaluate share repurchases versus deploying the capital.
Through M&A and.
That was something that we were not aggressively looking at when when we were.
At a leverage level that needed to come down, but now that we're approaching target.
We have more capital allocation opportunities and we also have more opportunities to to revisit capex.
Great. Thank you.
Thank you we have a follow up from Adam Thalhimer Thompson Davis Your line is open.
Thanks, Steve I wanted ask on the buyback.
Seems significant 10 knee from the standpoint, when we keep all of us you're asking about sustainability margins and when does the revenue turn positive.
I don't know kind of read the back the buyback announcement as.
That you feel confident.
[laughter].
Well look weve, let's face it hasn't been a lot of phone around here for a while we had leverage that was at levels that was above target. We've done the organization. This isn't.
Me or grew or Tim the organization has done a great job over three quarters of taking leverage down $357 million and that allows us to contemplate.
Actions that will create value for shareholders that when the leverage was up we were more constrained in what we could do.
And I think thats, what the bare buyback shows and as we've talked about earlier.
Our EBITDA is up if our dsos.
Stay stable and we're working hard to get them do improve our free cash flow conversion goes up and we generate cash.
We're at a lower level on the revolver today I think we're at 45 million less on the revolver today than we work the under last quarter.
So yes, we have some things we can do with the cash as it comes in.
Okay, and then a couple of times in the QNX session and particularly when you and one of your answers to Noel's question.
Yes, you're referencing a large startup or large program in the back I'm not sure I know what that is.
Well besides the fact that we said that we just got notified of it today and it's about 150 employee started up this quarter.
With the core customer there will be about 5 million to Capex and that's a good use of the cash flow that we've generated over the last three quarters.
Okay, and lastly, drew can you just whats the interest expense, we should be plug into the model for the next few quarters.
Yes first of all Adam there's there's clearly a lower rates out there right now which is helpful.
I think if you look at where the where the revolver ended up and there's a scheduled pay down on the term loan as well.
If we can continue to generate cash flow and take down the revolver.
Thank you can just do the math from there.
Okay, and they're really not much theres really not much left on the convertible notes. We completed that are those are down to 58 million.
Are there about after the after the buyback in the quarter last quarter.
Okay. Thanks appreciate it.
Thank you and there are no other questions in queue I'd like to turn the call back to Steve Nelson for any closing remarks.
Well, we thank everybody for joining the call and we look forward to speaking to you again in November.
Good day, thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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