Q3 2024 Dycom Industries Inc Earnings Call
Yeah.
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[noise] until the Dotcom Industries, Inc. Third quarter fiscal 2024 results conference call.
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I would now like to hand, the conference over to your Speaker today, Mr. Steven Nielsen President and Chief Executive Officer. Please go ahead Sir.
You operator, good morning, everyone. Thank you for attending this conference call to review, our third quarter fiscal 'twenty 'twenty four results.
Going to slide two during this call we will be referring to a slide presentation, which can be found on our website's Investor Center main page.
Slides will be identified by number throughout our presentation.
Today, we have on the call drew that Ferrari, our Chief Financial Officer, and Ryan Urness, Our General Counsel now I will turn the call over to Ryan or des.
Thank you Steve.
All forward looking statements made during this conference call are provided pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements include all comments, reflecting our expectations assumptions or beliefs about future events.
These forward looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from current projections.
Including those risks discussed in the company's filings with the U S Securities and Exchange Commission.
Forward looking statements are made only as of the original broadcast date of this conference call.
We assume no obligation to update any forward looking statements Steve.
Steve Thanks, right now moving to slide four and a review of our third quarter results.
As we review our results. Please note that our comments today and in the accompanying slides, we reference certain non-GAAP measures.
We refer you to the quarterly report section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.
In addition to the impacts of a change order and the closeout of several projects increased contract revenues by $26 $5 million during this quarter.
After the impacts of certain other costs all of these items contributed $23 6 million to both gross margin and adjusted EBITDA.
As a result reported gross margin was increased by one 6% and reported adjusted EBITDA was increased by one 8%.
Both as a percentage of contract revenues on an after tax basis. These items contributed approximately $17 5 million to reported net income or <unk> 59 per common share diluted now for the quarter.
Revenue increased year over year to 1.1, $3 6 billion, an increase of 9% organic revenue grew four 6% as we deployed gigabit wireline networks wireless wireline converged networks and wireless networks. This quarter reflected an increase in demand from four of our top five.
<unk>.
Gross margin was 22% of revenue increased 358 basis points compared to the third quarter of fiscal 2023.
General and administrative expenses were seven 7% of revenue.
All of these factors produced adjusted EBITDA of $166 8 million or 14, 7% of revenue and earnings per share of $2.82 compared to $1 80 in the year ago quarter.
Liquidity was ample at $464 1 million and.
And finally during the quarter, we completed the acquisition of Bacon cable construction.
Now going to slide five.
Today major industry participants are constructing or upgrading significant wireline networks across broad sections of the country.
These wireline networks are generally designed to provision gigabit network speeds to individual consumers and businesses either directly or wirelessly using <unk> technologies.
Industry participants have stated their belief that a single high capacity fiber network and most cost effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment.
This view is increasing the appetite for fiber deployments and we believe that the industry's effort to deploy high capacity fiber networks continues to meaningfully broaden the set of opportunities for our industry.
Increasing access to high capacity telecommunications continues to be crucial to society, especially for rural America. The infrastructure investment and jobs Act includes over $40 billion for the construction of rural Communications networks and Unserved.
And under served areas across the country.
The bead program.
This represents an unprecedented level of support and meaningfully increases the rural market that we expect will ultimately be addressed.
States are progressing through their requirements to submit their bead initial proposals by the December 27 deadline.
As of last week, 55, or 56 states and territories have commenced the planning process with two having completed seven of eight steps required before commencing spending and 19 completing five of eight once all eight steps are completed a state can request, 20% or more of its allocated funding.
In addition, substantially all states have commenced programs that will provide funding for telecommunications networks, even prior to the initiation of funding under the infrastructure Act.
We are providing program management planning engineering and design aerial underground and wireless construction and fulfillment services for gigabit deployments. These.
These services are being provided across the country and numerous geographic areas to multiple customers.
These deployments include networks, consisting entirely of wired network elements and converged wireless wireline multi use networks.
<unk> network deployment opportunities are increasing in rural America, as new industry participants respond to emerging societal initiatives.
We continue to provide integrated planning engineering and design procurement and construction and maintenance services to several industry participants.
Macroeconomic conditions, including those impacting the cost of capital may influence the execution of some industry plants. In addition, the market for labor remains tight in many regions around the country.
Automotive and equipment supply chain remain challenged particularly for the large truck chassis is required for specialty equipment.
Prices for capital equipment continue to increase.
It remains to be seen how long these conditions may persist.
We expect demand may fluctuate less amongst customers as increases in the cost of capital slow.
For several customers the pace of deployments is increasing into next year, including for those customers, whose capital expenditure or more heavily weighted towards the first half of calendar year 2023.
For these customers. We are pleased that some activity may already be increasing.
We are encouraged by recent longer term industry financings. These financings have expanded the pool of capital available to fund future industry growth.
Within this context, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers.
Moving to slide six.
During the quarter revenue increased 9% our top five customers combined produced 54, 4% of revenue decreasing eight 8% organically demand increase from four of our top five customers all other customers increased 29, 8% organically.
Alumina was our largest customer at 16, 5% of revenue or $187 6 million.
<unk> grew organically 47, 1% excluding operations sold a bright speed from the year ago period.
This was our seventh consecutive quarter of organic growth with low rent.
AT&T was our second largest customer at 12, 8% of total revenue or $145 1 million.
Revenue from Comcast was 111 2 million or nine 8% of revenue comp.
Comcast was to icon third largest customer and grew organically two 2%.
Verizon was our fourth largest customer at $104 8 million or nine 2% of revenue Horizon grew 10, 3% organically.
And finally, a customer who has requested their name not be disclosed was our fifth largest customer at $69 8 million or six 1% of revenue.
This customer grew 94, 9% organically.
This is the 19th consecutive quarter, where all of our other customers in aggregate excluding the top five customers have grown organically. It is the first quarter and 20 years, where our top five customers that represented less than 55% of total revenue an encouraging sign of increasing customer breadth.
An opportunity.
Of note fiber construction revenue from electric utilities was $98 9 million in the quarter.
We have expanded our geographic reach and expanded our program management and network planning services in fact over the last several years. We believe we have meaningfully increased the long term value of our maintenance and operations business, a trend, which we believe will parallel our deployment of gigabit wireline direct and wireless.
Wireline converged networks as these 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 third quarter was $6 613 billion versus $6 to $7 billion at the end of the July 2023 quarter, an increase of $406 million.
Of this backlog approximately 383 1 billion is expected to be completed in the next 12 months.
Backlog activity during the third quarter reflects solid performance as we booked new work and renewed existing work, we continue to anticipate substantial future opportunities across a broad array of our customers.
During the quarter, we received from AT&T construction and maintenance agreements in Wisconsin, Kentucky, Tennessee, Alabama, North Carolina, South Carolina, and Georgia from Frontier of fiber construction agreement for Ohio for charter construction agreements in California, Ohio, and New York.
Various rural fiber construction agreements in Arizona, Illinois, Kansas, Arkansas, Tennessee, South Carolina, and Georgia, and various utility line locating agreements in Tennessee, South Carolina and Georgia.
Count was 15401.
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 were 113 6 billion and organic revenue increased four 6% revenue.
Revenue from our recently acquired business was $45 2 million in the current period.
Adjusted EBITDA was $166 8 million or 14, 7% of contract revenues compared to $114 6 million or 11% of contract revenues in Q3 dollars 23.
The impacts of the change order and the closeout of several projects increased contract revenues by $26 5 million in Q3 24.
After the impacts of certain other costs. These items contributed $23 6 million to both gross margin and adjusted EBITDA.
As a result reported gross margin was increased by one 6% and reported adjusted EBITDA was increased by one 8% both as a percentage of contract revenues.
On an after tax basis. These items contributed approximately $17 5 million to reported net income or <unk> 59 per share.
Compared to Q3, 'twenty three gross margins increased 358 basis points, resulting from the 160 basis point impact of the change order and the closeout of several projects and from improved operating performance.
G&A expense was seven 7% of revenue compared to seven 6% in Q3 23.
Net income was $2 82 per share compared to $1 80 per share in Q3 last year.
The increase in earnings reflects higher adjusted EBITDA and higher gains on asset sales, partially offset by higher depreciation and amortization stock based compensation interest expense and taxes.
Going to slide nine our financial position and balance sheet remains strong. We ended Q3 with $500 million of senior notes $319 4 million of term loan and $154 million of revolver borrowings.
Cash and equivalents were $15 7 million and liquidity was ample at $464 1 million.
Our capital allocation prioritizing organic growth, followed by M&A and opportunistic share repurchases within the context of our historical range of net leverage.
Going to slide 10.
Cash flows used in operating activities were $37 3 million in Q3 to support organic growth.
The combined Dsos of accounts receivable and net contract assets were 121 days, an increase of 10 days sequentially cap.
Capital expenditures were $57 million net of disposal proceeds and gross Capex was $67 2 million.
During Q3, we acquired <unk> cable construction for $122 9 million net of cash and debt amounts.
Going to slide 11, each year, our January quarterly results are impacted by seasonality, including inclement weather fewer available work days due to the holidays reduced daylight work hours as well as the restart of calendar payroll taxes. These and other factors may have a pronounced impact on our <unk>.
Results for the January quarter.
As we look ahead to the fourth quarter ending January 27, 2024, we expect organic revenues to be in line with Q4 of last year. In addition, we expect approximately $50 million of contract revenues from our recently acquired business.
We also expect non-GAAP adjusted EBITDA percentage of contract revenues to increase 75 to 125 basis points compared to Q4 'twenty three.
Additionally, we expect $6 8 million of total amortization expense $15 1 million of net interest expense of 26% effective income tax rate and $29 7 million diluted shares now I will turn the call back to Steve. Thanks.
Thanks drew moving to slide 12, this quarter, we experienced solid activity and capitalized on our significant strengths.
First and foremost we maintained significant customer presence throughout our markets. We are encouraged by the breadth in our business.
Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities telephone companies are deploying fiber to the home to enable gigabit high speed connections rural electric utilities are doing the same.
Dramatically increased speeds for consumers are being provisioned and consumer data usage is growing particularly upstream.
Wireless construction activity in support of newly available spectrum bands continues this year.
Federal and state support for rural deployments of communications networks is dramatically increasing in scale and duration.
Cable up Raiders are increasing fiber deployments of rural America capacity expansion projects are underway.
Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long term value of our maintenance and operations business.
As our nation and industry navigate economic uncertainty, we remain encouraged that a substantial number of our customers are committed to multiyear capital spending initiatives. We are confident in our strategies the prospects for our company the capabilities of our dedicated employees and the experience of our management team.
Now operator, we will open the call for questions.
Yes.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced kiln withdraw. Your question. Please press star one again please.
Please standby, we compile the Q&A roster.
Okay.
And our first question will come from.
Adam Palmer from Thompson Davis Your line is open.
Hey, good morning, Stephen Ju, great quarter.
Thanks, Adam Good morning, Steve.
Steve did I hear you say at a high level it feels like the.
But concerns around cost of capital are easing.
Yes, I think what I would say Adam is.
If we roll it back a year ago I don't think people anticipated the signature as significant an increase in interest rates I think that's basically baked into people's outlooks today, and because they have a clearer view and less uncertainty about where that is and perhaps.
It may be in the future hopefully lower.
Things just feel better.
Okay and then.
Is big in cable performing better than expectations $50 million of revenue in a winter quarter seems significant I wonder if you.
Acquire that while they also had a program ramping up.
Yeah, well look we were pleased with their performance in the October quarter. They came in a little bit better than what we expected when we when we talked in August.
The momentum in the business continues.
I think the one thing to keep in mind as their service territory is primarily southeast somewhat less seasonal.
Totally.
Immune to seasonal opex, but certainly probably a little bit less than if.
If they werent, Minnesota.
Okay, and you are probably going to punt on this but for modeling purposes, I'm curious where the.
Change order closeout revenue had an impact by customer.
Good good prediction, Adam we're not going to break it down by customer, but I think what we would say is that we've been working through.
Closing out a large customer program that's been a challenge in that.
As we close it out we think we're going to hopefully we're going to perform better and hopefully we're going to see less volatility.
Great Congrats again.
Thank you.
Thank you.
And our next question will come from Brent Thielman from D. A Davidson your line is open.
Hey, Thanks, good morning, great quarter as well.
Hey.
Gross margin fell off a few hundred basis points change order inflow this quarter.
We're having a little difficulty hearing you if you could speak up a little bit.
Okay.
At that.
Much better.
Okay.
Yes, Brent go ahead.
Thank you and it looks like Brian is actually disconnected. So we will move onto our next question.
One moment please.
And our next question will come from Frank Louthan from Raymond James Your line is open.
Great. Thank you a couple of quick questions. What are you seeing from pre orders and so forth and the bead programs.
Any color there anyone feeling confident about that and then.
I'm not sure. If you will go into this detail, but Luna and Ed said, they intend to sort of flatline their fiber overbuild at the current rate. If you will that's obviously ramped as the year has gone on and what would you consider to be sort of a normalized level of business for them. If they if they were keeping it relatively flat with this year with this past quarter be a good.
Good.
Good.
Baseline for that.
Yes, Frank with respect to be we're having lots of conversations with customers about the demand for resources that be will create I think it's a little premature to get into details.
Only a couple of states have kind of navigated their way all the way through the initial process.
But it's certainly a topic for conversation I think the other thing that I would add more broadly about government funding as we continue to see more.
Federal and state dollars committed to the space.
Sure you are following this enhanced.
Cam program, where where it looks like the FCC is going to feed.
Fairly substantial amount of capital something like 17 $18 billion into at least what we've seen is something like six or 7000 additional homes.
So so I think there's lots of opportunity.
The federal and state side, not only would be but but more broadly and then I guess, what I would say with lumina and we're not going to go into detail at any particular customer, but but based on what they've said publicly and our activity levels. We feel good about next year.
There'll be plenty to keep us busy.
On current plant.
Fair enough alright, thanks, Steve.
Thank you.
And our next question will come from Alex Waters from Bank of America. Your line is open.
Hey, good morning, Steve and Gerry. Thank you guys for taking the questions maybe just the first one.
$26 5 million of the kind of onetime revenue bump any.
Puts and takes you can.
<unk> and whether that.
If a customer could you give us a little bit more color. There and then maybe just looking into 2024 I think frontier noted.
Capex spend kind of one half weighted.
Should we expect that as well from some of the other customer conversations you've been having.
Yes, Alex with respect to the change order.
Not going to provide any detail by customer other than.
We're pleased that we're working through closing out projects.
Projects on a large.
<unk> program.
And I guess, what I would focus on is if you exclude the effect of that activity.
We're still at call it 12, 9% EBITDA margins.
A place where we haven't been in a long time and we feel good about that trend continuing as we close that program out and as I said earlier hoped the results get better and less volatile.
Yes.
I think when we get into the timing of capex by quarter or by year. I think every customer is a little bit different they have different seasonality in their business.
Where we work for them seasonally can be a little bit different and I'm not sure I would extend one customer's comments to more broadly for the entire industry.
We see plenty of things to do next year.
All right. Thanks.
Yeah.
Thank you.
And our next question will come from Alex <unk> from B Riley Securities. Your line is open.
Thanks, very nice quarter, Steve a couple of quick questions. Thanks al.
A lot of equipment vendors have seen.
And anticipate a notable decline in demand for fiber and conduit products.
Some of it's obviously likely due to channel inventory corrections are you seeing any kind of softness out there that kind of reconciles with what the equipment vendors you are saying and if not sort of.
Your take on that.
Alex It's a hard one we certainly pay attention to what goes out on that space.
I think your suspicion that it's largely channel related makes sense.
One of the interesting and notable numbers for this quarter is if you exclude a couple of customers who were more front half loaded this year and you pull them out of this quarter and the year ago quarter, everybody else was up 30% organically.
And that everybody else is.
<unk> 900 $950 million of revenue.
So I think we're seeing a pretty broad level of activity.
Clearly the pandemic changed order patterns for equipment and I guess the good news for US is we don't import labor. So we don't have to figure out what what stuck in the logistics supply chain like they do.
And then on a kind of apples to apples basis.
Parable basis sort of excluding maybe a large program that.
May have been completed now.
How do you think about profit margins today, obviously your guidance is there.
Very strong in the upcoming quarter as it relates to profit margins year over year.
Is that sustainable and can we grow from that level.
Well I think Alex another interesting number is if you look at our trailing four quarters EBITDA. It's at 11, 9% we have talked for a number of years about getting back to what we had said as a long term average we're through it and I think as we've said before we're not aspiring.
To be average so so we're going to keep working on improving margins. There is always things that we can do better there as always.
New opportunities and I think that again, if you look at the demand backdrop.
Maybe take up maybe take a longer view, it's interesting that.
As a public company, sometimes we get lots of and we ourselves think about the business a little bit short term.
But if you take a longer view and go back 10 years ago to the four quarters ended October of 2013, the company had less than $1 $8 billion of revenue and right at $200 million EBITDA and for this most recent four quarters.
Over $4 1 billion of revenue and almost $500 million of EBITDA and the EBITDA grew faster than the revenue, which would tell you that margins can grow over time, while we take debate take a longer view.
Thank you very much.
Thank you.
Thank you.
And our next question will come from Eric <unk> from Wells Fargo. Your line is open.
Hi, Thanks, good morning, everyone.
Steve you touched a little bit on this in the transcript.
Talk about this you had two of your large telco customers that had pulled forward capex in early calendar 2023, and you mentioned you saw some telcos that we're starting to see some signs of them ramping maybe you could talk about the timing of that you kind of see the.
Q3 numbers is effectively the bottom you see activity levels picking up.
Into next year is it still a little bit tough too tough.
Tough to predict with those with those two customers that we've talked about the last couple of quarters.
Yes, I won't speak specifically to those two customers, but I would tell you that we see indicators of growth into next year already in the business that we're only halfway through the quarter. While we're seeing projects that are getting released.
That have in service States next year.
So I think we feel I think we feel good about that and.
And again I think in an environment, where people may not like exactly the absolute level of work.
Cost of capital is but they have a pretty good idea of what it is and what it's going to be and some hope that it may.
The decline over the next 12 months I think they are feeling good about plans for next year.
Okay I appreciate.
Right at that and also wanted to touch on I know you don't typically speak about specific customers, but you.
You had a big increase in revenue from charter I assume the majority of that was from the big cable acquisition, but maybe you could talk about opportunities with that customer above and beyond acquired revenues in terms of if they have a large art off program that they're building out in rural America over the next couple of years and they seem to be ramping up capex is that.
Customer that we.
You have future growth opportunity with above and beyond the <unk> transaction.
On an adjusted basis, Eric So excluding the acquired revenues the growth with.
With charter was just over 97% so we're certainly <unk>.
Executing well.
Both the legacy business and the acquired business, we're working hard to meet their expectations and they have some big plants.
Okay. Good to hear thanks, Steve.
Okay.
Thank you.
And as a reminder to ask a question. Please press star one one.
And our next question will come from Avi Churro slowly from UBS. Your line is open.
Thank you good morning, guys on for Steve Fisher.
So you said that as the cost of capital and stops increasing so much that you're expecting.
Capex plans are going to fluctuate.
Can you remind us is that something that you're hearing from customers themselves or just based on your experience.
Well I think it's primarily based on our experience, but I think when people set budgets.
Like they did last year and then.
For whatever reason rates.
Increased more than may be some expected or certainly.
Was at the higher range of expectations of that makes a tougher year I think in those in that climate Avi.
If you have.
Better weather and you get a little bit ahead of budget, you probably have to work yourself back to the budget line just because.
Costs are a little bit higher on the capital side I think in the <unk>.
Current environment I think people have a good handle on how to budget.
I think they are expecting less volatility around cost of capital and so I think there's more confidence.
As they move into next year.
They execute their plants now theres no guarantees.
But I think when we highlighted this issue last year I think we.
More or less has had a view that was bought out by how the year played out and we're feeling good about that.
That we have now.
Got it okay I appreciate that.
And then in terms of.
What are you seeing in the supply chain and Labor force So continued to call out.
Eliminated equipment availability is that actually had been a constraint on growth there.
A generalized statement, how should we think about that and I guess also on your.
Has the ability to ramp up later then.
Yes, I think it's a generalized risk we have we have been we are.
Done a good job of managing through that risk. So I wouldn't say that we've been constrained that may not be true for everybody in our industry.
And right now as of the end of October we have a little over $100 million worth of equipment on order and we'll be pleased when when it comes in and we continue to place new orders.
So that we can support the growth in the business that we see.
Got it appreciate it thanks.
Thank you.
One moment please.
And our next question will come from Alan <unk> from Sylvan Lake asset management. Your line is open.
Hi, Thank you can you give us a sense of where capex will be in the next for the rest of the year and into next year gross and net.
Yes, Alan on a gross basis it was a little over $60 million in the quarter now we had a good quarter for proceeds or was it less than we expected on a net basis.
It's a little bit hard for us to forecast based on timing, we have a lot on order, but I would say Alan it's probably somewhat less than what our original expectation was for the year that because we don't need it but but we're taking it in as quickly as we can get it.
And where do you think gross capex could be for the next year in terms of growth and how much being that might you might need to upgrade some of their capex.
Yes, I don't see anything beyond what our historical relationships with them.
If we can grow faster, we will buy more.
Can you talk about thank you can you talk about.
You seem very confident about the government programs I guess that are coming in finally after.
The normal bureaucratic delays.
With lending, giving you a lot of confidence in terms of.
The outlook going forward.
Asides the customers, obviously getting used to the cost of capital and just sort of adjusting.
I mean, Alan I think what I'd start with is we have the impacts of earlier vintage federal programs that are impacting the business today.
Such as art off.
ARPA and cares Act, we have state broadband.
Funds that are separate and apart from federal dollars that are in the business and so we continue to see we see bead in other programs as a continuation of an increasing trend.
Not necessarily as a new trend in and of themselves. I mean, this is a big movement. There is lots of capital being deployed.
Sometimes we will work for customers, where a single project will have a state funding source and a federal art off source and in fact, one of our customers.
Just related on a recent earnings call.
<unk> beyond what they had originally identified for eligible passing.
For this customer was about $1 1 million for art off they had found 300000 adjacent passing that were enabled by.
The <unk> program. So I don't know if you call that federal state private capital. It just is up into the right for rural broadband.
Okay.
Are you able to tell how much of your current revenues or incremental revenues are related to some of these programs where does it come through just general Msas and other work so it's hard to tell.
It's a mix Adam or excuse me Alan it's a mix.
Some we can see some of the customers won't tell us and we will just see it flow through the actual.
MSA that we have with that customer.
Okay. Thank you.
Thank you.
I am showing no further questions from the phone lines I would now like to turn the conference back over to Steven Nielsen for any closing remarks.
Well, we thank everybody for your time and attendance as holiday week and wish you all and your families a happy Thanksgiving and we'll talk to you with the NDA.
End of February.
Thank you.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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