All right. Good morning, everybody. My name is Brian Brophy. Thank you all for coming. Very pleased to have Dycom Industries here for our next session. From Dycom, we have Steve Nielsen, CEO. Steve, welcome.
Cool. Good morning, Brian. Good to see you.
Yeah, good to see you, too.
All right, just before we get started, Brian, I just want to remind everybody that in the course of this conversation, we may make some forward-looking statements which are subject to risk and uncertainties that we outline more fully in our SEC filings, which we always recommend for everyone's review.
Appreciate it. All right, we'll kick it off. For those less familiar with Dycom, can you give us an overview of what you do, why investors should be interested in this story?
So we are a leading provider of engineering, construction, and maintenance services to wireline, cable, and telephone companies and wireless carriers. We work in every state in the U.S., so we're domestically based. And we built the company around the theme that as traffic on communications networks has grown at a 25% or 30% annual rate over a generation, that over time, that has created demands on our customers to upgrade their technology to facilitate that kind of growth. It's also as we've all taken advantage of the capabilities of the network to change the way we live and migrate analog paper processes onto the Internet, that the reliability of the network has never been more important to us as consumers.
That's created opportunities around ongoing maintenance and operations of the technology that periodically we upgrade and install.
That's great. You talked about your communications, telecom focus. Obviously, this is a little bit different than some of your specialty E&C peers, which have more end-market diversity. Why this singular focus, and why telecom and not other end markets?
So about 20 years ago, if you had looked at our top five or six customers, they would have been probably something like 15 or 20 individual companies. And so we've been in an industry on cable, telephone, and wireless, where there has been a level of concentration and consolidation over the last 20, 25 years. And so we looked at that and said, there's two responses to that kind of risk. First response is diversify away from it, get into adjacencies. I actually grew up in a family T&D business, so I've done that. Been there, done that. Or you could embrace the concentration and try to create scale.
The tip in my mind was, as our customers were getting larger and where the returns to scale would become more valuable to them, which it has over that period of time, to diversify, in essence, is to tell the customers, "You're getting bigger, but we want less exposure to that opportunity." Now, concentration always brings a risk, right? And from our view, we were willing to take that risk so long as we could earn good returns on invested capital, good returns on equity, and basically have EBITDA margins that we thought were greater than those that would be associated with a more diversified strategy. And I think if you look at our numbers, that's what we've been able to do.
So no, no guarantees, but we think that singular focus, given the magnitude of the opportunities that we're seeing, that the fruits of that strategy are evident in the business today and will probably be more evident if we look ahead.
Absolutely. Yeah, I wanna talk about some of those opportunities. Obviously, the big one being fiber has been a key growth driver for you guys over the past few years. Big picture, why is this such an important area of investment for your customers, and what have the drivers been there?
It's really interesting. If you think about the pandemic as a huge shift in the economy, and in the way we all live, one of the byproducts of that was a significant increase in the demand for high-capacity residential networks. Whereas before the pandemic, there was a mix of views about how long the copper network could be extended and improved to compete with cable. Given the step function change in residential expectations, all of the phone companies all have aligned now around deploying fiber as a way to meet the demands that copper could no longer satisfy. That's number 1, just what they had wasn't gonna work.
Number two, there's been an increasing understanding that even if you're not an incumbent, that there are opportunities for private capital to get involved and build out new networks, again, because of the increased importance to consumers of that high-capacity connection and the fact that these folks can make some money at it, right? So there's been increased investment in the space.
and then the third thing that I would say is that, as a whole, the country concluded that the 15% or 20% of America that is rural deserve to have the prospect of equivalent capabilities around the network, because when they had to go to school remote or they had to do telemedicine, or they had to do just about anything that everybody had to do in the rest of the country, that they deserve that capability. And so there's been a phenomenal amount of money committed to rural broadband, again, because of the pandemic. So we just think that there were trends that we talked about in the business for the last 20 years. The pandemic was an accelerant of those trends.
It didn't create any, but it certainly accelerated those that were already in place.
Yeah, that, that makes a lot of sense. From a fiber standpoint, where are we at from a penetration point of view? How much runway is there? How much coverage do you ultimately expect in the U.S.?
Yeah, this is a view that evolves, and not everybody, you know, there are different sets of numbers out there. But at a high level, we use something like 140 million homes passed in the country, probably a little bit higher, goes up every year as there's new housing brought on board. And we think that 75% or 80% of that footprint gets built by—ultimately gets built by investor private companies. You know, the big wireline telco companies or overbuilders that are deploying similar fiber technology. You know, lots of reasons why we think that's true. That's been our view for over 10 years. I think the first time we stated that in a slide, there were about 25 million homes passed, and today there's somewhere between 65 and 70.
So that was eight years ago, so I think we've got, we've established that there is a trend. And if you look around the world, I was just reading some research about TELUS and BCE in Canada, and they're targeting 80%. So I think that's where those companies ultimately, or a combination of those companies and others with private capital, build out. That leaves, call it, 25 to 30 million, that's rural. If we look at a number of programs that have been enacted during the as a result of the pandemic, the CARES Act, ARPA, RDOF, that actually was underway before the pandemic, but was 2020 and 2021, as well as now the BEAD program, which is part of the IIJA.
If you look at the sum total of those programs as well as state funds, those together are in excess of $100 billion of capital. And so, again, if you think about the consequence of the pandemic, really, if you look at the opportunity for us in those rural passings, that without the subsidy, they would probably be built, but very slowly. Now, will be built over the next, call it, five to seven years. And so as a result of the pandemic, the total addressable market has probably doubled.
Yeah, that's great. And digging in that a little bit deeper, you talked about passings, but how should we be thinking about multiple passings per household?
So we think that in urban and suburban America, there is an economic case for a good duopoly between a wireline provider who is not cable and cable. And cable's undergoing a number of technical upgrades to their network, to new DOCSIS protocols, of which we're participating in. And by doing that, they will create capability that will be competitive with fiber. So we think there's a duopoly there. Now, every once in a while, there may be an overbuilder that, you know, is a third provider someplace. That's probably not sustainable, but I think there's plenty of room for at least two.
Yeah. Yeah, that makes sense. You alluded to this a little bit, but had a handful of questions on BEAD funding. I think this is gonna be a really important topic for you, especially into 2025. For those less familiar, you kind of alluded to it, but what is it, and what is the magnitude of this program relative to ones we've seen in the past?
Yeah, so BEAD stands for Broadband Equity Access Deployment. And the purpose of the program, and it was passed in November of 2021, was to identify through a detailed mapping exercise those homes that were unserved, essentially had, I believe, less than three megabits of connectivity, which really doesn't work in today's world. And then those that were underserved, so had 25 megs or thereabout, and it redefined those as underserved. And so the latest count is, I think, 6 or 7 million unserved, another 2 or 3 million underserved. And so that's the target of the program. So call it round numbers, 10 to 12 million of that 20 to 25 that we talked about in total.
And what's good about the BEAD program is it learned some of the lessons from the 2009 broadband stimulus that was part of the American Recovery and Reinvestment Act. And in that program, they issued the money from the Commerce Department and the U- and the Department of Agriculture, and they tried to manage those programs at a federal level. This program is so large that they actually have allocated $40 billion or so dollars to individual states based on their share of the unserved and underserved homes. And so the money goes to the states. The states, in turn, grant it to what are known as subgrantees. And that's how the program's gonna be managed.
So it's really to get to the hardest places in America that have not been addressed by any program up to this point.
... Yep, I appreciate you walking us through that. So how should we think about timing from BEAD? When do you expect it to start impacting results? Are you seeing anything in the backlog today as it relates to BEAD-funded programs?
So because of the structure of the program, where the money goes to the states, and the states then allocate it to the actual builders and operators of the network, the Commerce Department, through one of its agencies, has set up a framework of rules that the states had to address in their applications for the money. Louisiana has gotten through the entirety of that process. There's another eight states that have, or seven states that have recently been approved, and we expect them to accelerate that approval through the fall. I think we're encouraged, may be a kind of a different perspective than perhaps Wall Street has.
You know, for us, given the magnitude of the program, if they approve eight or 10 states a quarter, and so the program builds on itself over the next, you know, three or four quarters, that really creates good opportunity for us to see how individual states are dealing with the opportunity, see who the subgrantees are on a more stage basis, and also develop the capacity to meet what is clearly gonna be the largest build-out of rural broadband infrastructure in the country's history. By way of comparison, the 2009 program I referenced was $6.5 billion. The first eight states that have been approved for BEAD have more money in total than the entire program had 15 years ago.
Yeah. Yeah.
It's a big program.
Yeah, that is, part of the reason why I think investors are excited. So can you talk about how Dycom is positioned to capture this opportunity, and how your existing MSA agreements play a part in that?
Yeah. So we have the broadest geographic coverage of any provider in the country and the largest scale. We think that's important because we're gonna have to develop, as an industry, lots of capacity. You know, doesn't mean we have anything in backlog for BEAD, because we nor anyone else does. But I think it does position us well to get our fair share, and we'll work hard to compete for that. You know, it is such a large program that there's gonna be plenty to go around.
Yeah. Yeah, makes sense. And then, are you hearing from your customers this is expected to be incremental to their pre-existing plans? Is that the right way to think about it?
Yeah. So too early to tell, so we'll have to see. But because, remember, the program is to address unserved areas, which by definition are gonna be pretty remote, I think generally it will be incremental to programs, because the programs that are proceeding in the urban and suburban footprint of the country are all to create competitive advantage to get to that opportunity that we've talked about earlier. And so I...
You know, I don't know that on the margin there might be a little bit of shifting going on, but, you know, it would be hard for me to believe that in a state with a large metropolitan area, that if a carrier served both BEAD-eligible areas and that large metropolitan area, that they would slow down in the metropolitan area, where there are 50 homes to the mile, to go spend money where there's five to eight homes to the mile, even if it's subsidized. So I think they'll do both.
Yeah.
But again, we'll have to see. I mean, one of the things that is helpful is about 80% of our revenue does come from multiyear master service agreements, so we cover broad areas of rural America through those existing agreements. And to the extent that the incumbents, who are our customers on those agreements, are successful in their BEAD applications, I think that creates, you know, natural opportunities for us to increase our revenue density in a part of the country where there hasn't been a lot of investment for probably a couple decades.
Yep, that, that makes a lot of sense. And then, how should we be thinking about margins on BEAD-funded programs? Are they gonna be any different? How should we think about DSOs as well?
Yeah. The way we think... And the two are related. So the way we think about margins is, it's really a function of how much the particular contracting arrangement requires in terms of investment and capital. Those projects that require more capital have better margins, and those that require less capital have lower margins. But we're solving not to margin, we're solving to return on what we invest. And given that framework, we're happy to work in rural America, we're happy to work in downtown Boston, as long as we get the prices to reflect the cost of providing the service and the margins to reflect the amount of capital we have to commit. We're pretty agnostic as to where the work is.
Yep, that makes sense. How do you feel about the industry's ability to meet this demand from BEAD and some other drivers we're seeing from fiber? What does that potentially mean for pricing and margins?
Yeah, Look, it's gonna be a big lift. I think everybody is aware of that. I think it so long as the returns are reasonable, not exorbitant, but we get good, reasonable returns, I think the industry and ourselves are able to grow to meet the demand. So if you look over calendar 2022 and 2023, we were able to grow our business in wireline, essentially wireline, by right at $1 billion of organic growth, which is as large, maybe larger than most of our competitors.
And so I think with the right opportunity and the ability to make sure that there's a good match where we commit our resources to grow, with where we can do the best job for the customer, that over the life of the program, that we and the industry as a whole will be able to step up. We had the same questions when the company was much smaller in 2009. This is the biggest program ever at $6.5 billion, and at the end of the day, we were able to grow through that opportunity as well as the industry. And I think that we'll be able to do that again.
Yep. Yeah, makes sense. Really helpful color on BEAD. Appreciate you entertaining all my questions there. Wanted to pivot to data centers, obviously a hot topic in the ENC space. How important of a market is this for Dycom today, and what opportunities do you see on a go forward?
So in the near term, Brian, there are certainly opportunities that as data centers have to be relocated from those geographies where they have historically been centered, into areas where perhaps have more access to power and/or cheaper power, that there will certainly need to be some backbones that are extended to provide the connectivity. That, that's a good opportunity. It's not a huge opportunity, anywhere near the magnitude of this fiber deployment or these technical upgrades to the cable network. So it's something we're paying attention to. Tends to be more project work. We like MSA work.
In the kind of down the road, who knows, speculation, if all of these applications that develop that are based on the capacity of these data centers to crunch data and create information that people can act on, you know, it could very well be that in some day that the long distance network, which was built out 25 to 30 years ago, if that needs an upgrade because of the amount of raw connectivity that needs to increase for a raw capacity of the internet, then that certainly could be a good opportunity for us.
Yeah. Yeah, that makes sense. Wanted to pivot again, touch on some of the JV partnerships we've been hearing about. Obviously, a lot of JVs have been announced with financial partner, really providing a lot of the CapEx needs for some of these fiber deployments. Can you talk about what you're seeing here? How important of a driver is this, and what do you think it means about the overall broader market?
Yeah, so to begin with, they are financial partners, but T-Mobile most recently got involved, and I don't think of them as a financial partner. They actually are gonna market and own the customer relationship in that-
Sure
... particular JV. So I've been doing this a while, and what this reminds me of, and I think the import of what's going on is, 30 years ago, the cable industry knew that they had a great opportunity to upgrade analog cable networks to digital. That meant they had to change out all the set-top box infrastructure or add it. That meant they had to deploy lots of fiber and upgrade the carrying capacity of their coax network in order to offer first-generation broadband service. And that ultimately cost, I think I've seen numbers like $85 billion or $90 billion to do that, of private capital. When that became clear to that industry, not a surprise, private equity got involved. Blackstone, Providence Equity got involved.
Microsoft injected money into both TCI, which was the largest cable operator at the time, now part of Comcast. Microsoft took a position in Comcast, at one point bought 10% of Comcast. And there was lots of JVs, Insight Cable, InterMedia Cable . There was just Paul Allen got involved with Vulcan Ventures, which was the precursor, did the roll-up that was the precursor of today's Charter. And so that's exactly what I think is happening now. There is this huge opportunity in urban and suburban America to create good returns. Subsidized, there are good returns available in rural America, and the industry is looking at and saying, "We got all this money to spend.
What's the best way for us to accelerate our ability to address that opportunity and create that financial capacity through what I'll call more unconventional structures? Unconventional now, but totally exactly what happened from what I recall thirty years ago.
Yeah. Yeah, that's interesting. We talked a lot about fiber. Wanted to talk about cable. What are you seeing from your cable customers? Where are they investing, and how are they thinking about these investments to compete successfully?
You know, all of the cable companies are actively addressing what they call edge-out opportunities or rural build opportunities. Charter is, you know, the largest recipient of RDOF dollars from the FCC. So they have aggressive programs to build out right now in rural America. We're hopeful that they'll participate broadly in the BEAD program. I think they've indicated that as long as the terms that the states offer are conducive to private investment, they'd like to participate in a meaningful way. So edge-outs, rural builds, and then in their existing franchise footprints. Coax is a very robust infrastructure. It's not copper cable.
And so by going through upgrades to electronic equipment like nodes and amplifiers, they're able to extend the bandwidth that's available on that network, so that they can effectively address the competition from fiber. And, you know, that's work that we also do. So, so great opportunities, you know, really across the board.
Yeah, that's great. Wanted to touch a little bit on the outlook. Obviously, the outlook this quarter calls for a nice inflection in organic growth. Can you talk about what you're seeing there? What's driving this reacceleration? What are you hearing from customers?
Yeah, last year, we had an interesting year insofar as we had a couple of key customers that were front-end loaded, so they had strong kind of first thirds to first halves of the year, probably more first thirds. And so as we lap that, right, just naturally, the growth in the overall industry and the fact that those two customers grew sequentially from the January quarter to the April quarter just makes it easier on the comps. So we feel good about the inflection point based on the math.
And then I just think in general, as the customers are increasingly acting on themes, that gives us confidence in kind of the intermediate to long-term view of the vision that we had in 2016 that said that fiber would be deployed to, I think, somewhere between 100 and 110 million homes, when we were at 25, and not everybody believed, and now we're at 65 or 70, and we think there's more to go.
Yep. And then on margins, obviously, you saw some nice improvement in the last quarter. Current quarter, you're talking about more margin expansion. Can you talk about what's driving that? How much opportunity is left there?
So we always think about the biggest driver to margin is operating leverage, and in order for that to be at its best, you want broadly distributed organic growth. So, and we've had periods of time when this happened, just sometimes it works out that way. If you have a couple of key customers that are very aggressively growing, you know, up 50% or 100% in a year, but the rest of the book of the business is not as healthy and it is flat to declining, that's not a good mix for good operating leverage. If you look at last year and you took these two key customers out, everybody else grew at 24.8%, and so that helps with operating leverage. So there's always operating leverage, and then, of course, we can always do better.
We are not perfect by any stretch, and so we're always working on improving productivity, getting better administratively, streamlining the business, so that we can generate good returns because, again, for us, it's all about returns. You know, the growth will come if we do a good job for customers. The returns will come as we do a good job for customers, that we do a good job of matching capabilities with opportunity, and that's really where the opportunity to improve develops.
Yep, makes sense. Got a couple of minutes left here. Wanted to ask on capital allocation, can you talk about your priorities there? You have pretty low leverage. You've bought back about $60 million of stock the past two quarters.
$993 million, actually-
Excuse me
... since we started, but-
Oh, yeah.
But who, who's counting?
Right. No, that's impressive. How, how are you thinking about deploying cash going forward?
So the first thing we always wanna make sure that we do is that we have enough operating cash flow dedicated to the growth of the business for our customers. So organic growth is just a, you know, absolute prerequisite before we think about anything else. So long as, and at the leverage we're at, we're confident that we can meet the opportunities that are presented by our customers. They count on us. We need to make sure they can rely on us to allocate capital well to their benefit. If we look at capital beyond that, we always think about M& A versus share repurchase. We have done three, you know, one good-sized deal, two smaller deals over the last nine months.
So we're always looking for the right opportunity to extend our customer relationships in new geographies. We work everywhere, but we have good competitors, and sometimes the best thing to do is to do some acquisitions. No matter how small a business is that we've acquired, there's always something to learn, and you have to be open to those opportunities to bring in new talent and new ideas. And then we look carefully at share repurchases, and the way we think about that is we really look at those as an opportunity to allocate capital to reduce claims on the future. And if we think the future's gonna be better, we'd like for shareholders that wanna stay with us to own more of the future than they do today.
For those who are happy to take cash for their shares and redeploy it other places, we thank them for being around as long as they have, but we're happy to take out those shares. You know, so it's been an extended period of time. It's not kind of every once in a while, but we have taken out almost $1 billion worth of stock over the life of the program. Average price, $35 and change. So it's worked out pretty well.
Yep, and the shares are obviously quite a bit higher than that. Gonna wrap it up there, out of time. Appreciate it, everybody.
All right. Thank you.