All right. Good morning, everyone. Thanks for joining us at the Wells Fargo TMT Summit. Eric Luebchow, a senior analyst covering telecommunications, and pleased this morning to be joined by Dycom CEO, Steve Nielsen. Thanks for joining us.
Well, thanks, Eric, and before we get started, I just want to remind everyone that in the course of my conversation with Eric, we may make some forward-looking statements, which are subject to risks and uncertainties, which we more fully outline in our SEC filings, which we recommend for everybody's review. So with that out of the way, good to be here. Good to see you.
All right. Thank you. So Steve, you just reported earnings last week, but maybe before we get into a lot of the detail we could talk big picture. So over the last 10 years, Dycom has more than doubled its business as measured by revenue and adjusted EBITDA. So maybe, but maybe you could frame the opportunity set, you know, over the next 10 years that you see for Dycom compared to the opportunity set that you might have seen a decade ago.
Sure. So, and I think that's a good way to think about it, Eric. And we talked about on the call that if you took the four quarters ending October of 2013 compared to the four quarters ending October of 2023, we grew from just under $1.8 billion to just over $4.1 billion on revenue. EBITDA from $200 million to just under $500 million. And I think a key point, and we also repurchased $622 million of our shares. So if you look at where our net debt position is today, we did an acquisition last quarter. But essentially, for the most part, we are able to more than double the business, even higher rate of increase on EBITDA, and essentially do it with internally generated cash.
And so the exciting part, I think, about where the company is today is, okay, that's the rearview mirror. Nobody pays for the past. But if you look at the opportunity set that we have today, the breadth of our customer and market exposure, and you compare that today at $4 billion+, I think we have a better opportunity set today than we did when we were at $2 billion or less, and it's proportionate. In other words, it's bigger now, even though the company is twice as large.
Yeah.
And so if you think about that, how do we come to that number? Right? So we clearly have a very broad trend in the country to deploy Fiber to the home in urban and suburban America. We think that there's lots of activity, either by the incumbents or by others. You look at what the cable companies are doing to upgrade the capability of their network so that they can offer multi-gig symmetric services. And then you think about what's really the big change in our marketplace. Those are all great. I mean, that would fund a lot of growth just by itself.
But then you look at, as a result of the pandemic, the societal interest in extending high-capacity communications networks to the 20 million-25 million homes in rural America that previously just were not very important. And so you look at the money that was initially appropriated in 2020 in the CARES Act and then ARPA in 2021, RDOF in 2021, now BEAD, and then there's north of $20 billion that has been appropriated by individual states, that is not contingent upon any federal funding. And so there's just lots of activity out there or opportunity out there. So that I would say, since the pandemic, awful thing to go through for the country, but for us, it's really doubled our total addressable market from where it was before the pandemic.
You touched on this a little bit, just the breadth of demand today versus previous cycles. I mean, your top five customers are last quarter, about 55% of your revenues. If we rewind 5 or 10 years ago, that number was closer to 80%. So maybe is that supporting your view of the next 10 years, that it's not really-- this build will not be driven by one or two large customers? It's a much broader base of demand you see in the industry than perhaps in, in previous cycles.
Yeah, I think we're in a position, and clearly there are no guarantees, but I think the big customers get bigger. But because of this rural environment where there was no spending, essentially, that was ongoing above kind of basic levels of maintenance, that all of that spending typically goes to smaller providers. So one of the market segments that we talk about, or customer groups that we talk about, is in providing fiber to the home construction services to rural electric cooperatives. And that's there are about 900 of those cooperatives in the country. About 300, from what I've seen, have some active fiber programs. And 10 years ago, that we probably, if we did $10 million a year with those types of organizations, that would have been a lot.
This last quarter, we did just under $100 million in the quarter. And so clearly that's a collection of smaller customers that in aggregate were, you know, call it 8% of the business, that 10 years ago didn't exist.
Yeah. And just touching on a couple of your top telco customers, I mean, the business has continued to grow this past quarter, despite the fact two of your larger telco customers that had pulled forward CapEx earlier in the calendar year had slowed since then. You touched on this in your earnings call. Volatility in the cost of capital surely had some impact. But as you look at, you know, some of these larger customers that have had more volatile spending patterns this year, are you starting to see some activity levels normalize, you know, what do you think for the top telco customers?
Yeah, this year was a little anomalous in that for last winter, we didn't have much of a winter. It was pretty warm, and there wasn't a lot of snow across the country.
In Chicago.
Yeah. Yes, you ought to know. Chicago, you ought to know. And so, you know, some folks got a little bit ahead of where they expected to be, and so they made adjustments through the balance of the year. I think sometimes, for people that maybe don't have a more strategic view of our industry, they look at that and over-interpret those kind of adjustments as to some lack of commitment as to the importance of those programs. I think next year you will see the reemergence of how important those programs are. T he industry will make adjustments, and there will be more opportunity.
Yep. So we touched on rural broadband. Obviously, that's a pretty big topic that should drive growth into the future. Maybe you could talk about some of the work that you're doing today. I know a lot of people focus on the BEAD program, but there's a lot of other sources of money that are out there, the CARES Act, ARPA, RDOF, Enhanced A-CAM, which is a newer one that you brought to our attention. Maybe you could talk about where you're seeing the demand today in more rural America. Is it coming more from the large incumbent operators or, you know, some of these smaller customers, like you mentioned, the rural electric co-ops, that have scaled to almost $100 million a quarter business?
Yeah. I think all of the customers are evaluating where they fit against the various programs. Different programs have different requirements. I think the larger incumbents are focused primarily on BEAD at this point. That's the biggest near-term opportunity. State initial applications are due a couple of days after Christmas, and at that point, the allocation process will go forward. And I think we're encouraged with the amount of interest and activity that we see. But again, there are state programs, and one of our large customers just received a $several hundred million award in California to build some middle-mile fiber. There's just an abundance of funding sources that's available to the industry that just hasn't been there before.
Yep. Obviously, BEAD is a large opportunity, over $40 billion of government money. Once we start to hear about award activity, you know, in early calendar 2024 throughout the year, how quickly do you think it will take to kind of scale up construction activity related to that program? Is that more of a calendar year 2025 event, or will it partially depend on who actually wins, you know, the funding?
Yeah, I think that's a good point, Eric. I really do think there's one industry analyst who's looked at the 12 or 13 million homes covered by BEAD and done some analysis that 4.5 million of those are inside the footprint of existing incumbent telcos. To the extent that they are successful at the state level at securing funding, I think it goes quicker. They already have central offices, they have transport fiber serving those central offices. They have pole attachment agreements with the other utilities. They have existing conduit. T here's just a lot of reasons why that potentially could go quicker.
I think from what they've said and others, if you think fourth quarter of 2024 going into calendar 2025, I think that's a good way to think about it. Again, that doesn't mean that we're all sitting around waiting for that to happen because there's plenty going on between now and then.
Yeah. Yeah. Understood. So you talked about in your earnings call, a large change order from a large customer program. You booked some incremental revenue in the quarter. So maybe you could talk about have you largely closed out the contracts tied to that customer program and, you know, should there be any, you know, margin impacts going forward as you, you know, reallocate resources from some of those projects, maybe into other projects that you have in your pipeline?
Yeah, I think we haven't said, you know, exactly where we are in that program for closing out, but what we have said, Eric, is that to the extent that we have, you know, significant adjustments coming out of that program, we'll call it out. I mean, we'd love to have printed 14.7% EBITDA, and but we didn't see that closeout activity extending into a year from now, and so that's why we closed it out. I think even without that program, we were pleased with the adjusted EBITDA that we were able to produce, not only in the quarter, but on a trailing four-quarter basis.
I think in general, when you work through a large program such as that and you're coming out the other side, it may have been difficult at times, but I think it leaves you a better company. We've created additional capabilities around program management. We've had some, you know, opportunities to grow the capabilities of our management through difficulties. And we look forward to applying lessons learned and resources becoming available to all the growth opportunities that we see in the business.
Yep, understood. So I wanted to touch on one of the some of your supply chain vendors. We've, you know, heard from the Nokias, the Ericssons, the Cornings, the CommScopes of the world. They've called out some recent weakness in the North American telecom segment. It seems to us like a lot of this is just related to simple, you know, inventory digestion. You know, lead times that blew out significantly during the pandemic have started to normalize back down to much more normal levels. Anything else that you think we should read into some of these, you know, equipment vendors and them calling out weakness in this segment?
Certainly in 2020, 2021, and 2022, the strategic importance of these fiber programs was first and foremost in the minds of our customers, and they made sure, given the, you know, extended global supply chains, to make sure that they had enough fiber and related equipment to meet the needs of their programs. And I think because of all of the logistics challenges that we're all well aware of, that there was some inventory build that they're working their way out of. You know, luckily, we're in a labor services business. We don't inventory hours, man-hours, and so we haven't seen the kind of impact that they did.
But I think they got there, where they are today, because of how important customers believe it is to hit the objectives that they've set, despite what the logistical issues had been in the past.
Yep. And what about your own supply chain within your business, not your customers' businesses, in terms of equipment, labor, permitting? It seems like you've probably been through the worst of it during the pandemic, and things are starting to get a little bit easier, but maybe you could talk about bottlenecks that you still see in the business as you guys try to get work orders completed.
Well, it's still a 4% unemployment world, and so that means securing new labor, you have to work at it. We're constantly trying to refine the way that we recruit and onboard new employees, the level of training that we provide so that we can create new capacity. So I would say it's a little better than it was. Kind of peak discomfort was probably summer of 2022. I think that we're not the only industry that saw it. In terms of the capital assets or the trucks and specialty equipment that we need, again, it hasn't been a constraint because we have a large fleet. We were able to extend some useful lives. We ordered our equipment much earlier than we used to.
We've had pretty good relationships with all the big OEMs, based on the longevity of our relationships. So I think we're getting what we need. We'd surely like it to come a little quicker, and we're glad that the auto industry issues seem to have resolved themselves, 'cause that was not gonna be helpful if they continued much longer.
Yeah. Yeah. No, absolutely. So recently, you, you closed on an acquisition last quarter, Bigham Cable, and it had been some time since you had done an acquisition. So maybe you could talk about that, what made that operator particularly attractive? It seemed to outperform expectations the past quarter that you just reported. And then a bigger picture question, I mean, do you see more consolidation opportunities within your footprint to scoop up some of the smaller operators, extend your share in certain regions or with certain customers?
Yeah, we've always had an opportunistic approach to M&A, although in my time here, I think we've closed on 50 individual companies. Sometimes we acquired them 2 or 3 or 6 at a time, but basically, if you add it all up, it's somewhere around 50 different business units, and so it's always been part of our strategy. But I would tell you that when interest rates were low, cost of capital was low for everybody and not differentiating, that we just didn't see the same level of opportunities that we're seeing today with what I would say is a more normalized cost of capital. And so I think that's created opportunities for M&A in a couple ways.
1, we're seeing private equity, from my perspective, I'm sure they'd have a different view, be more disciplined in the marketplace because they now have, you know, much higher costs of capital than where they were. And then I think if you're a smaller private company that was relying on regional bank financing for your growth, it's gotten harder. And so in this particular case, as we've said on calls, it's a third-generation family business, that is the, you know, those types of transactions are what has made Dycom what it is today.
And so we've known the folks for a long time, and when they were available and we thought we could be helpful in helping them accelerate their growth rates, we thought it was a good deal to do for both of us.
I mean, you have such a broad geographic footprint already. Are there any geographic regions in the country where you would like to gain additional scale, or do you feel like you have the resources to service most work orders? I think you work in every state except Alaska, if I'm correct.
Yeah. No, look, we can – the important thing is whether you do a big acquisition or a small acquisition, if you have the right mindset, you learn something about how to operate successfully that you didn't know before. And so we always have looked at acquisitions, not only for just geographic footprint, right? We can open offices, we can buy equipment, but really to gain local customer relationships where we may already be there, but there may be a reason why they're doing... The target company is doing a little better than we are.
Mm-hmm.
It's always an opportunity to learn when we do an acquisition.
Yep, makes sense.... Another topic I wanted to hit on was the insourcing versus outsourcing of labor, something that we will ask you about pretty regularly. So wondering if your perspective today versus, you know, maybe a few years ago, if things have changed, a tighter labor market, higher absolute cost of capital today, has that changed at all your customers' desire to outsource labor to a contractor such as yourself, versus insource labor in parts of their footprint?
I think generally, the approach is stable with a couple of caveats, which is, as these programs have become so large and resources have been constrained at times, there have been some customers who've done a little bit of the work themselves. But not in any way to change kind of the way we think about our future growth. And over time, I think those are always opportunities for customers to learn the value of what we do. So nothing really significant in the big scheme of things.
Sure. Another industry development over the last year has been in the fiber securitization market. We've seen, you know, several large residential fiber operators issue ABS debt, and, you know, you pointed this out on your calls. This is something we've seen with other digital infrastructure asset classes. We saw it with towers many years ago. We've seen it with data centers in more recent history. So maybe you could talk about what your view is of this as a source of financing going forward for the industry and, you know, how helpful it could be for their access to capital.
Yeah. We talked about this on our August call, and I think there are interesting precedent transactions in other parts of the TMT ecosystem. So if you think back 15 years ago, it's hard to believe this, 15, 17 years ago, the tower industry was primarily funded through high yield. And as that industry matured and as financing sources became more comfortable with the durability of their cash flows, they were able to then begin accessing asset-backed securitizations to fund tower growth. And I think what the industry saw when that happened is more transactions occur, greater growth rates accelerated.
and what I would say is that anytime a growth industry can transition at least a portion of its funding needs to an investment grade source, that that means that that growth in that industry becomes more durable. And so I think when we look back on calendar 2023, 5-10 years from now, and you're trying to think about what's really important that happened, I think one of the things on that list will be a broader use of asset-backed securities to fund the growth of fiber.
Yeah. Yeah, it certainly seemed to work out well for tower industry and also the data center industry. It's become a real material source of financing. So to switch to another one of your customer segments, cable, maybe we could just touch on the activity levels you see there. Obviously, two very large operators, but you do work for smaller cable operators as well. And really touch on kind of two areas that they're growing. So, a lot of them are still working towards DOCSIS 4.0, and you've talked about how there's some technical capabilities you can provision as they add more upstream capacity. But we're also seeing a big push towards adding new footprint, whether that's geographic edge outs, whether that's rural rural builds, like Charter's doing with RDOF.
Maybe you could kind of frame the cable opportunity as you see it today, and what you look for in the future.
I think all of the cable industry is intensely focused on how you grow subscribers and how you expand footprint to support that effort. Some, such as Charter, have accessed government programs, as has Comcast, to a degree, and others are just doing with their own capital because they see good returns. So I think the whole industry will continue to what they call edge out, which is to create new subscriber growth opportunities adjacent to where they already have infrastructure. And then in addition, as we talked about earlier, they're working through how to enable their networks to provision multi-gigabit symmetric speeds.
They have a very interesting path to upgrading the electronic equipment that attaches to their fiber and coaxial cable so that they can do that. That's something that we're actively participating in and looking forward to as a nice growth opportunity.
As you look longer term with cable, do you think as bandwidth demands continue to scale, I mean, is the fiber deep strategy of pushing a fiber node closer to the end user? I mean, do these almost approximate like fiber to the home networks eventually, much further down the road, once you keep pushing fiber in closer and closer to where it, it almost becomes, it's effectively equivalent to a, a direct fiber to the home type of network?
I think irrespective of what industry you're talking about, if you bet against the further deployment of fiber over the last 30 years, you are on the wrong side of history.
Yeah.
I think that goes back to, you know, the first part of our discussion, where we said, you know, we've been able to grow the revenue of the business 2.25 times over the last 10 years, EBITDA 2.5 times. And the way we've always thought about that strategically is, as long as traffic is growing on networks 25%-30% on a compound basis per year, as long as we're migrating applications in our lives to the network, that kind of big picture or strategic support for what we do is there, then something always seems to come along.
Right.
If we were here in 2019, we probably were, probably in Vegas, and we had said: "You know, there, there's going to be this pandemic thing, and as a result of the pandemic, the government's going to commit north of $100 billion of capital to deploying, you know, deploying high capacity networks in rural America," nobody would have believed it, but yet here we are.
Yeah, that's true. Very difficult, very sometimes difficult to predict the future, but bandwidth demand scaling seems to be one of the surer bets that's out there. So another industry, you know, development in the last couple of years has been the evolution of fixed wireless. It's been the primary share taker if you look at, you know, broadband growth in the last couple of years. I mean, do you think it's had any impact at all on fiber overbuilders? 'Cause fixed wireless has been perhaps a little more successful than even we expected a few years ago. Or, you know, conversely, do you also see it as an opportunity to connect, you know, some of the harder-to-reach rural locations where, you know, perhaps fiber will be very difficult to build?
Well, certainly in the second part of your question, there's probably always been a role for wireless in very rural areas where just the cost to connect is very costly if you just do it by fiber.
Mm-hmm.
And that can either be traditional terrestrial, wireless, or satellite. So that's always been there. I guess the way I think about wireless is we have one customer who has both a very large fixed wireless business that's been growing quite nicely, and they also have a seven- or eight- or nine-state service territory where they're the incumbent telco, and they continue to deploy lots of fiber in that incumbent footprint. And so I suspect that, at least for them, it makes sense to continue to deploy fiber, even though they have a great fixed wireless product that's had a lot of traction.
Yeah. Yeah, I mean, even, and even T-Mobile, who has, you know, been a big proponent of fixed wireless, is actively evaluating potential fiber JVs. So it seems like it's, you know, it seems like something that's an opportunity for all the telcos. So, I guess if you look at the competitive environment for Dycom today, between public and private ENC firms, there's one large public firm that you compete with. Are there more opportunities to improve market share, whether it's just organically? I would imagine the current macro conditions, higher cost of capital, you know, is still a very tight labor environment, make it, you know, more difficult for some of the smaller private companies to operate.
I mean, do you have any sense for, you know, market share gains that you've been able to make the last few years?
Well, certainly, as customers have gotten larger and as they expand into new territories, they like to take relationships that they have with them. Now, there's no guarantees. We've got to perform every day. We've got to make sure we're providing good service. But that, that's another, maybe not fully appreciated element to this rural push, is not only do you have to deploy all this network, but you have to connect homes to this network.
Mm-hmm.
And you have to maintain those connections. And so there's this, you know, call it 20 or 30 million homes of rural America, where there's been very little maintenance and upgrade activity because there's been no investment there. As we see fiber investment, we think there will be follow-along maintenance opportunities. You put more plant in the ground or in the air, and you have to, you actually have to maintain it, and you also have to connect customers to the network, which is also another opportunity.
Then, if you think about even in urban and suburban America, as you have more and more geography that's subject to two competitors, that means there's twice as much plant that's in the ground that has to be maintained for, you know, that ordinary part of our business, which is really our core strength, which is, you know, keeping the bandwidth working.
Yeah. Does that maintenance opportunity change at all as they upgrade, you know, traditional DSL or copper networks to fiber? Because I know fiber usually has lower maintenance capital requirements over time, but just the sheer magnitude of networking they're adding still provides opportunity.
I think particularly in rural America, as they, as they create more subscribers, inevitably they'll spend more money to maintain that service because they will have more people accessing the service.
Yep.
We've already seen, even in the electrical co-op world, maintenance opportunities come behind fiber builds that we did four or five years ago.
Yep. So I wanted to touch on your EBITDA margin performance. It's been, you know, improving very nicely. Even if we take out the change order that you called out this past quarter, you were at nearly 13%. And this is despite the fact that, as we talked about earlier, two of your larger customers are down year-over-year. So maybe you could talk through some of the moving parts about how to, you know, drive even further margin improvements from here. I imagine the diversification of demand you're seeing today is certainly supportive of profitability versus some of the other prior cycles. But anything else that... Any other opportunities you see to improve?
Well, clearly, when we get broadly distributed growth opportunities, that's always helpful, right? Because you're getting operating leverage across a broader number of operations. And if you think about this last quarter, if we control for, you know, a couple of customers that were a little bit front-end loaded, everybody else grew north of 30% organically, and that was over $950 million of revenue. So we clearly have had good growth opportunities across a number of customers. We're always working hard to improve our operations, even in a good quarter, that tells you half the business was worse than average and half was better, so there's always something to work on.
We do think that as the opportunities get larger, that the benefits of scale become more evident to clients.
Mm-hmm.
That doesn't mean we're gonna do everything. We don't want to do everything. We only want to do those things that we can do demonstrably better than anybody else, but we work really hard at improving our operations every day.
Yeah. Yeah, understood. And you've continued to expand your labor force as well, I think even despite a couple customers that, you know, have slowed a bit year-over-year. I mean, maybe you could talk about the hiring environment today. It seems like it's a little bit easier than it was, like you mentioned, in the summer of 2022, but it's still very competitive. You know, what are you seeing in terms of adding new resources, whether it's your direct employees, subcontractors? Are you starting to see it ease a bit in terms of the difficulty?
It's a little better than it was. We'll see how it is next spring as things perhaps normalize. I think the other thing, and I think the street often focuses on the craft labor, the skilled folks that we need and the people that we need to bring in and train, and those people are extremely important to the success of the business. Without them, I wouldn't be here. But I think where scale can matter and where there can be differentiation is really in the program management, the project management, the ability to interact with customer systems at scale, that other folks that don't have the specialization that we do and don't have the scale may not make the same investments that we do.
We spend a lot of time to try to make it easy for us to interact with our customer systems, in ways that is difficult for somebody of lesser scale, to replicate. We're working hard on that every day also.
And, we just have another minute or two left, but, one area of your business that, wasn't really touched upon in, on the earnings call was your wireless business. We just had Verizon on the stage, so I felt it would be appropriate to ask. You know, we've heard from the tower companies that we cover this year, about activity levels, slowing pretty substantially versus last year in wireless, but yet there are still, you know, a pretty material amount of mid-band spectrum assets that have yet to be deployed. M aybe you could talk a little bit about the wireless business performance, and the outlook from here. I know it's not, you know, the primary driver of your business, but it, you know, is still a strategic business for you.
Yeah, it was a little bit less than 4%, call it 3.5% of revenue last quarter. So certainly down year-over-year, in line with, I think others in the industry. I guess what I would say is, in every, you know, next G, so 4G versus 3G and 5G versus 4G, the technology gets better. I think all of the carriers have said they've been pleased around some new antenna and radio technology that's allowed them to get the mid-band spectrum up and covered. We think that just elongates kind of the number of years it will take for them to get new equipment on all the towers that are out there, but we still see that as an opportunity to grow our business.
You know, we do a good job there, and we'd like to do more of it.
All right. Well, I think we're just about out of time. So, Steve, I appreciate your time today, and thank you for joining us.
All right. Good to see you, everybody. Thank you.
Take care.