Good afternoon, everybody, thanks for joining for our second to last session of the day. Everybody else we've spoken to today has told us about their plans for building fiber networks, or almost everybody. Our next speaker is actually the one building those fiber networks. I'm delighted to introduce Steve Nielsen, President and CEO of Dycom. Steve, thanks so much for being with us.
Jonathan, great to be here. Just to remind everybody, during our conversation, we may make some forward-looking statements which are subject to risks and uncertainties that we've outlined in our SEC filings, which we recommend for everybody reading.
Awesome. Steve, you're a repeat guest at our conference last year. We discussed the outlook for fiber deployment. At this event last year, there was, you know, palpable excitement. Everybody's plans were for an acceleration. Things didn't quite materialize the way the industry expected. I won't say they didn't materialize the way you expected, you know, fiber deployments came in lower than expected for 2022, you know, lower than expected for 2023. You're at the center of the action. You know, let's start with 2022. We sort of went in thinking we were gonna do $8 million-$9 million, at least that was our estimate at New Street Research, came in $2 million below that. What changed during the course of the year from your perspective?
Yeah. I think, Jonathan, it's important to keep in mind, we grew our revenue, little north of 20% organically. Kind of hard to say it was a disappointment against expectations when we grew $680 million in change year-over-year, which in the services business is, that's a lot of man-hours, that's a lot of folks working really hard.
Yeah.
Look, I think there's been a, you know, ample public commentary from a number of the carriers as they've adjusted kind of what their near term expectations are. I think what we took away from those conversations is everybody's incredibly committed to fiber deployments. Even some of the notes I've seen from your discussions earlier today, you know, are just really stunning. I mean, to think that you had somebody earlier this morning who, you know, is on their way to doing 1 million homes in 2023 versus essentially, you know, none in 2022, just tells you how much commitment there is to the theme. I think the other thing that we've seen, and, you know, not a surprise, these are big, complicated civil construction programs. I mean, I always, you know.
You know, everybody thinks about when you're an engineering and construction company from an investor perspective, they think bridges and power plants and high rise buildings. These projects are big, and they're complicated. I think it's not a surprise that sometimes they don't go exactly the way you'd want, particularly initially. I think the industry has a good history of evaluating when they need to make adjustments, and they do. I mean, it's just one of those things that it's when you're building 40-year or 50-year assets, there can always be some adjustments, particularly early on, but they get made and the projects get built.
Yeah. Yeah. I think, look, I mean, that's entirely valid, right? A lot of the guys building this fiber are relatively new to this business. You know, it's easy before you started building fiber to sketch out a plan and say you're gonna get to X million per year or X hundred thousand per year and accelerate every year, but the reality of it is different. I think, you know, the biggest drawdown in expectations was AT&T has already built $15 million of these, and, you know, ought to know the process. It looks like their build actually slows from 2023 to from 2022 to 2023.
It's, yeah, just, you know, wondering how much of that is bringing in the pace of the build to adjust for a higher cost environment versus constraints in the, in the labor pool, the ability to get resources out of guys like you just to sort of go at the pace that they had initially hoped, you know, versus other things.
Yeah. Look, I won't talk specifically about AT&T, but I will say, look, we work for big customers that generally have lots of product lines, big capital budgets, and sometimes there are adjustments from year to year on what they're placing at the center of their priorities. Look, AT&T has been a wonderful customer and has built lots of fiber. They know how to do it, and they have long-term plans for what they're doing. Whether that moderates at some point and then picks up again, remains to be seen. I think more of the adjustment, at least in my mind, kind of coming into 2023, is more just from the folks that are getting programs off the ground.
I often tell our investors that it, to use an analogy, it takes, you know, it's harder to predict when you're gonna get from the taxiway to 10,000 ft in the air. Then to go from 10,000 ft- 20,000 ft, I think that just comes with the nature of these programs. Again, we've been at this for a long time. I'm always encouraged. I looked at the notes from an earlier presentation from one of our customers that we've worked for on fiber now for almost 20 years. They sketched out, you know, another several years that they have, you know, pretty significant plans to deploy.
I just think we're encouraged and not overly focused on, you know, an individual customer or two that's moving around from year to year. Even in customers that can moderate, if the cost per home goes up, capital can go up. You know, we have another customer that's gonna do a few, you know, less homes this year, but spend $2 million-$250 million more on the program. Again, that's encouraging.
Yeah. Yeah, I've got to be sort of very careful in these comments to distinguish about impacts to carrier businesses versus impacts to your businesses, to your business. As you mentioned, carriers might have disappointed on the magnitude of the build in 2022, but you grew 20%. A slower build because it costs more doesn't necessarily negative impact your business at all. These, you know, the aggregate trend for Dycom is obviously very compelling. I should also say, Steve, at this conference last year, I said, you know, we're totaling up everybody's expectations, and they're saying they're gonna do $8 million-$9 million. Can the industry, is there enough capacity in the industry to do $8 million-$9 million in 2022? You were skeptical.
I think your comment back then was, "Look, the industry will get there, but maybe not in 2022." Maybe that was prophetic, actually.
Well, look, again, these are big, complicated programs. We work for very sophisticated customers. They figure these things out. Sometimes it may take a little bit longer. Again, they're building 40-year assets that I think they look to the value of what they're building. Again, just looking at the, you know, kind of the commentary from some of the folks you've talked to today, I would say, you know, I left today more encouraged about this year than perhaps I would have before I listened to him. I thought, you know, we're in a strong industry environment. There's no guarantees we've got to execute. It's a good time in the business.
I guess the big question that everybody's wrestling with, is the endpoint still the same? You know, are we getting to the same endpoint at a slightly slower pace? What are your thoughts on that?
Yeah. So again, our experience with this fiber to the home really goes back about 20 years. One of our large customers, I think everybody's familiar with the Fios program, I always recall that when that program started out, that customer passed about 33 million homes. They had targeted about 18 to build initially. They subsequently divested some passings as they sharpened their geographic focus. Today, I think they outlined plans to exceed the 18 million homes, but to do it in a third less footprint. I, you know, I've always been of the view, and we've talked about this publicly, that I think private capital, if I had to put a range on it, will have ultimately build fiber to the home to 70%-80% of passings in America.
We've got a long way to go to get there. We are encouraged with the amount of state and federal support because I think that closes the gap on a good portion of what remains.
Yeah. The, you know, I think that's an excellent point, which is sort of public market-focused people we can often lose sight of. That these are 40 to 50-year assets. You've got to think about the return profile over a long period of time. You know, hiccups in supply chain and access to labor in a given year doesn't really have an impact on what the endpoint is.
Yeah. I think the endpoint is driven by consumer preference, what people, what consumers and businesses will do with the network. A theme that I know you're talking about, you know, the convergence across multiple use cases across a single platform where fiber just does that better than anything else. When you think about the opportunity to serve both wireless and wireline infrastructure in a converged way, I just think there are lots of reasons that you get there.
Look, I think for the most part, not everywhere in rural America, but for the most part, I'm optimistic that between the existing federal funding, the BEAD funding coming out, and the state funding, that we're gonna make a big dent in rural America to where there's really no differentiation in terms of network capability and quality. That's a big thing for the country. I think that's a big deal.
We think it's a big deal as well, and we've been very focused on it, over the course of this event. What I'd love to get your perspective on is the capacity to go out and sort of do the build, the BEAD builds in addition to everything else that's going on at the moment. It looks like the BEAD unserved, underserved markets are gonna come out at about $14 million, and the regulators are gonna want those built at, you know, somewhere between four and six years. If we think of that being another 2.5+ million homes that have to get built a year, does your industry have the capacity to add that 2.5 to the builds that are already going on?
The way I think about capacity for any industry, not just ours, is that there's certainly a level with which our industry can create more capacity. Hard to put a number on it. Is it 5%? I don't know. There's a number where in investing the industry-generated cash back into the business, you can grow. As we're approaching $4 billion in revenue, we certainly have a greater capacity to grow than when we were at $2 billion. I think that's true of the industry.
When the industry, when the end markets require more than that, as long as you can attract capital, and by capital, I mean not just money, but people and assets and management and all that goes into creating the ability to get more work done, over time, I think the industry can do it. Can it do it as quickly initially as everybody would like? Sometimes that's a challenge. Sometimes it's a challenge not just because of the labor, but just the ecosystem. When you talk about rural America, make ready on poles, if you're gonna use aerial cable, it's a big deal. I mean, I know there's a number of things going on in the industry right now to sort through that.
I do think that over time, things get built and, you know, we have a unique perspective on it, Jonathan. I started here, almost 30 years ago, and we've doubled the company every six years since. There's always a way to create capacity as long as the economics are right, the returns are right, and there's enough focus on growing the business in a smart way.
Got it. That, that makes a lot of sense. With growth coming in a little bit slower than expected in 2022, did the industry end up with, your industry end up with excess capacity?
I right now, we continue to be able to use capacity to serve customers.
Yeah.
I wouldn't say that the industry as a whole has got excess capacity. Could there be some small rural build someplace where somebody slowed down, in that local market, there's capacity? That's true all the time. I mean, even last year, as you're growing capacity, you could always find a market someplace where there's a small pocket of supply. I think right now we're all trying to work to grow capacity, us, our customers, and certainly the rest of our industry, for sure.
Right. Yep. We heard from the, you know, one of the panels really early in the day, this is more of a global comment than a US-specific comment, but the deployment costs are up 10%-20% as a function of higher labor and higher input costs. Is that consistent with what you're seeing in the US?
Yeah. I mean, we generally don't comment on kind of trends in pricing for obvious reasons. What I, what I would say is, look, fuel last year cost more. Unskilled and semi-skilled labor, so the people that we need to attract to grow the capacity that everybody would like to see, the low end of the market certainly has been recut. I mean, you cannot hire folks into training at the same prices for labor that you could get them before the pandemic. And you also have situations where, you know, I'm full of analogies, but the analogy I would use is sometimes, you know, it costs more to get a boat on plane than to keep it on plane.
Certainly there are times where whether it's permitting or locating or, you know, getting adequate inventory to keep a build on pace, where there's more cost up front. Then as the build settles in, I don't think those costs go away, but they don't tend to go up as much, once the assets, people, and the project are in place and you have some trajectory in the business.
Yeah. That makes sense. What's been interesting over the course of today is the reasons that each carrier has given for slowing down have been slightly different from carrier to carrier. One of the themes we've heard from a couple, though, is they can go plenty fast on homes passed, thanks to you guys. Having a hard time scaling up install resources at the same pace, though. How are those sort of two functions or those two markets different?
It really depends on the customer. There are varying levels of requirements to use represented labor, which can be a little bit stickier to grow capacity than, say, traditionally in other parts of the industry. Again, you know, we've seen this before. There's nothing like having the great problem of getting good penetration rates so that you're stressed your fulfillment capacity. Again, I think that they can grow it, particularly if you're in a part of the industry that has been declining over time in terms of just kind of the amount of work you've been doing, gonna take you a little bit of time to grow that fulfillment capacity. Again, it will get done.
As long as the value is in the connection, there'll be a way to get the connection done over time.
Last year, certainly at the beginning of last year, the industry was still struggling with supply chain constraints. Have those more or less gone away at this point?
Yeah, what I would say is, we talked about that really starting in the spring of 2021 through the summer of last year, that there was no doubt that fiber optic cable and equipment was a challenge. I mean, the related equipment, the cabinets, the splitter, you know, there were challenges there. I think the manufacturers did a great job, which goes back to you can grow capacity. I mean, if somebody had said, you know, three years ago, "Could the industry produce this much fiber optic cable this quickly?" I think there would have been questions, they did it. There are still some spot shortages here and there.
You know, things like vaults where you for underground construction, where you place terminals, you know, you can have spot shortages of those here or there around the country. I think in our business where we see more concern still is around the automotive supply chain. getting specialty equipment is still a long lead time item. You know, what we're getting today, we ordered many, many months ago. We're working actively with our suppliers for them to grow capacity, but it still tends to be a little bit of a golden screw problem, where you've got everything you need except, you know, the hydraulic pump. Until that comes in, you really can't ship the equipment. It's better. We're ordering with, you know, much farther ahead than we did in the past, but it's still a challenge.
Got it. The other thing you mentioned a minute ago, Steve, was the just challenges around the permitting process. That's been a huge bottleneck for the industry as well. Is that, is that also, is the, have the sort of state and local authorities worked through that bottleneck at this point?
I think that's always an ongoing situation. Depending on the region of the country, you can have states which have lots of municipalities. I'm originally from Massachusetts. There are 351 municipalities. So as your build moves around, there are going to be permitting issues as you get into new jurisdictions. You know, it's hard work. We've gotta make sure we're performing as well as humanly possible so we don't create issues as part of the construction process. But permitting is really an issue most may be a little bit of surprise just based on the amount of traffic disruption a municipality is willing to contemplate.
You know, when we have lots of folks in a, in a neighborhood, you know, there are crews that drivers have to navigate around and so that's a big concern. You know, safeguarding the infrastructure, making sure we have locates and all the things that we need to do to, you know, to do a good job in the field.
One of the really interesting perspectives we had this morning was that ability to keep costs under control and hit deployment targets hinged in large part on scale and really as a function of, you know, the relationships they have with companies like Dycom. The and their, you know, the length of the contracts that they would, that they might have with you. It, you, does that sort of scale advantage in dealing with the Dycoms of the world make sense? You seeing more of your customers try to extend the length of contracts to get certainty around deployment resources?
Yeah, I think the issue, Jonathan, the way we see it is, you know, we work in a business where we've had decades long relationships. There's certain geographies where we've had a service relationship with a client for 60, 70 years. As these new programs come in, you have the benefit of that visibility into those programs coming in so that we can commit, so that we can grow capacity. This year, despite the kind of the logistical challenges of getting new equipment, we'll spend $220 million-$230 million on new equipment. You know, yeah, you know, to a carrier that's spending billions, it's not a big number, but to a service provider, that's a lot of physical assets.
We're always encouraged in doing that based on the relationships that not only we have just because, you know, we've been, we're been helpful over the last couple years, but really thinking about it over 20, 30, 40 years, that we're able to do that.
Yeah, that's a really good point. The, you know, the longer term contracts you get from them, the more confidence it gives you to invest and grow.
Us and everybody else. I mean, you know, it's an industry where in order to grow at the rate the clients want, we're all gonna have to spend some money.
Yeah. Apologies if this is an ignorant question. I don't know your business as well as I know the carriers. When your costs go up, because we're in the environment at the moment that we are, is there flexibility in the contracts that you have with the carriers to accommodate that?
Well, typically, you know, we're entering into an agreement, could be two years, could be a three-year term. You know, generally, if there's any adjustments, it's as a result of changes in industry issues, not specific to us. Depending on the nature of the relationship, I mean, you know, we'll make adjustments at the end of the term as we enter into an extension. It's not a spot market. Clients, you know, hire us to provide certainty. There are occasions when it just, you know, the market changes so quickly and for everybody, that there can be a path to some adjustments.
Got it. Sort of going back to BEAD and the 2.5 million additional locations a year, that could come on over the course of the next sort of six years or so, is that gonna be another driver of inflation and deployment costs?
You know, it's a different market to work in rural America. I don't know if I would call it inflation and deployment costs, but the one thing you know for certain on these large fiber builds that we're doing today in rural America, that if you show up at a county to deploy a couple thousand miles of fiber throughout that county, and the county only has 7,000 people, you're gonna be bringing the labor with you. Now, we train local, we hire local. But at the kind of scale of deployment, we're training people at centralized training centers and then moving them around from project to project. So it will have its own challenges to create that labor force that will move around.
As an example, Jonathan, we've been working now with electrical cooperatives for about seven or eight years. We would just kind of blessed to start with a couple of pioneers in that space. Last year, we did over $300 million of revenue for that kind of customer vertical in rural America that didn't exist eight years ago. You know, you have the ability to create capacity. You gotta be thoughtful about it, particularly around your ability to train and have people travel to where the work is.
Yeah.
Just based on, you know, I can assure you in the middle of Nebraska, you know, there's not gonna be a lot of folks in that county that you can hire to build fiber. You're gonna have to bring them with you.
The other customer vertical where there's just a ton of activity going on at the moment is cable. All of the cable operators are going through, sort of a two-step upgrade process. Is the cable industry and the fiber guys sort of competing for the same set of resources?
Certainly around rural fiber is fiber, right? To the extent that you have edge apps and RDOF and other things, that's certainly competitive. When it comes to more technical upgrades around bandwidth expansion, typically a different labor pool. Again, one that given the magnitude of the growth that's required, something that we believe, you know, will require training, and bringing new labor into the industry.
Steve, is there a way to get from the 2.5 million additional homes that we think will come from BEAD to sort of what portion of that goes to Dycom?
Well, I think from a wireline construction perspective, I think we're generally acknowledged to be larger than anybody else. That doesn't, you know, we've gotta earn the business every day.
Yeah
to service business, so you're only as good as whatever happened yesterday. You know, I think we have a good footprint. We work throughout the lower 48. Don't do any work in Alaska. I don't expect a lot of BEAD money in Hawaii, maybe some.
Right.
I think we're positioned well. That goes to, you know, depends on who the recipients are. You know, we have lots of rural America for both cable and phone companies where we have master service agreements, where we have infrastructure in place, and the ability to expand capacity.
Got it. Last question is, do you know, assuming you get a fair share of that opportunity, sort of whatever that fair share is, do you think it's reflected in expectations for Dycom at the moment?
You know, in a services business, right, with a little bit of volatility 'cause we do have a, you know, our industry is concentrated, right? The top five, six, seven participants are gonna be where the bulk of the CapEx is spent. I think people factor it in. I think people are paying attention to it, whether it's actually come into valuations. I guess we'll see. You know, my job is just to make more next year than this year and keep customers happy and able to grow, and the Street will figure out what it's worth. That's the way it works.
Steve, thanks so much for joining us this afternoon. We really appreciate it. Your insight...
All right.
is valuable.
Thank you for inviting. It's great conference. Lots of great information for us, too. We were avid listeners.
Great. Thanks for being here.
All right. Very good. Thank you.