Dycom Industries, Inc.

Q1 2022 Earnings Conference Call

5/25/2021

spk02: Good day and thank you for standing by. Welcome to the DICOM Industries Inc. Q1 2022 results conference call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Steve Nielsen, President and Chief Executive Officer, please go ahead.
spk08: Thank you, operator. Good morning, everyone. I'd like to thank you for attending this conference call to review our first quarter fiscal 2022 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. Relevant slides will be identified by number throughout our presentation. Today we have on the call Drew DeFerrari, our Chief Financial Officer, and Ryan Ernest, our General Counsel. Now I will turn the call over to Ryan Ernest.
spk04: Thank you, Steve. The statements made during this call may be forward-looking in nature and are provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all comments reflecting our expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods. Forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections, including those risks described in our annual report on Form 10-K, filed March 5, 2021, and our other filings with the U.S. Securities and Exchange Commission. We assume no obligation to update any forward-looking statements. Steve? Thanks, Ryan.
spk08: Now moving to slide four and a review of our first quarter results. As we review our results, please note that in 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. To begin, I want to express my sincere thanks to our employees who have served our customers with real fortitude in difficult times over the last 15 months. Now for the quarter. Revenue was $727.5 million, a decrease of 10.7%. Organic revenue, excluding $3.9 million of storm restoration services in the quarter, declined 11.1%. As we deployed one gigabit wireline networks, wireless wireline converged networks, and wireless networks, this quarter reflected an increase in demand from two of our top five customers. Gross margins were 14.8% of revenue, reflecting the continued impacts of the complexity of a large customer program, revenue declines year over year with other large customers, and the effects of winter weather in the first half of the quarter. General and administrative expenses were 9.2%, and all of these factors produced adjusted EBITDA 44.1 million, or 6.1% of revenue, and adjusted loss per share of 4 cents compared to earnings per share of 36 cents in the year-ago quarter. Liquidity was strong at 477.4 million, and operating cash flow was 41.5 million. Finally, during the quarter, we issued $500 million in 4.5% senior notes, due in April 2029 and resized and extended our credit facility through April of 2026. These two transactions leave the company solidly financed as we look forward to better performance. 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 one gigabit network speeds to individual consumers and businesses, either directly or wirelessly using 5G technologies. Industry participants have stated their belief that a single high-capacity fiber network can 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 effort to deploy high-capacity fiber networks continues to meaningfully broaden our set of opportunities. Increasing access to high-capacity telecommunications continues to be crucial to society, especially in rural America. The wide and active participation in the completed FCC RDOF auction augurs well for dramatically increased rural network investment supported by private capital that in the case of at least some of the participants is expected to be significantly more than the FCC subsidy. We are providing program management, planning, engineering, and design, aerial and underground, and wireless construction and fulfillment services for one gigabit deployments. These services are being provided across the country in numerous geographic areas to multiple customers, including customers who have initiated broad fiber deployments as well as customers who have resumed broad deployments. These deployments include networks consisting entirely of wired network elements as well as converged wireless wireline multi-use networks. Fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal incentives. We continue to provide integrated planning, engineering and design, procurement and construction, and maintenance services to several industry participants. Macroeconomic effects and potential supply constraints may influence the near-term execution of some customer plans. Broad increases in demand for fiber optic cable and related equipment may impact delivery lead times in the short to intermediate term. In addition, the market for labor is tightening in some regions of the country, particularly for unskilled, semiskilled new hires. It remains to be seen how geographically broad these conditions will be and how long they will persist. Despite these factors, 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, organic revenue decreased 11.1%. Our top five customers combined produced 68.2% of revenue, decreasing 23% organically. Demand increased for two of our top five customers. All other customers increased 31.9% organically. AT&T was our largest customer at 21.4% of total revenue, or $155.6 million. AT&T grew 0.9% organically. This was our first quarterly organic growth with AT&T since our July of 2019 quarter. Revenue from Comcast was $131.1 million or 18% of revenue. Comcast was DICOM's second largest customer and grew organically 10.7%. Verizon was our third largest customer at 12.6% of revenue or $91.5 million. Lumen was our fourth largest customer at $85.8 million or 11.8% of revenue. And finally, revenue from Windstream was $32.1 million or 4.4% of revenue Windstream was our fifth largest customer. This is the ninth consecutive quarter where all of our other customers in aggregate, excluding the top five customers, have grown organically. In fact, the 31.9% organic growth rate with these customers is the highest growth rate in at least nine years. Of note, fiber construction revenue from electric utilities was $47 million in the quarter, or 6.5% of total revenue. This activity increased organically 92.1% year over year. We have extended our geographic reach and expanded our program management network planning services. In fact, over the last several years, we have meaningfully increased the long-term value of our maintenance and operations business, a trend which we believe will parallel our deployment of one gigabit wireline direct and wireless wireline converged networks as those deployments dramatically increase the amount of outside plant network that must be extended and maintained. Despite this overall industry trend, we were recently notified by a customer representing less than 5% of our revenue that it had decided to insource a portion of the construction and maintenance services that are currently provided for them by us as well as a number of other suppliers. They expect to implement this decision during the fourth calendar quarter of 2021. After this initiative is fully implemented, we expect to continue working for this customer in several markets under new contracts and perform other work on an ongoing basis, although it currently appears at lower levels of activity. Now going to slide seven. Backlog at the end of the first quarter was $6.528 billion versus $6.81 billion at the end of the January 2021 quarter, decreasing approximately $282 million. Of this backlog, approximately $2.746 billion is expected to be completed in the next 12 months. Backlog activity during the first 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. From Varus Electric Utilities, fiber construction agreements in Arizona, Oklahoma, Missouri, Mississippi, Indiana, Kentucky, Tennessee, Georgia, and North Carolina. For Ziply Fiber, construction and maintenance agreements in Washington, Oregon, and Idaho. For Charter, a fulfillment agreement covering Washington, Nevada, Montana, Wisconsin, Massachusetts, Connecticut, New York, North Carolina, South Carolina, Alabama, and Georgia. From Frontier, a locating services agreement in California. and for Consolidated Communications, a construction services agreement in New Hampshire. Headcount increased during the quarter to 14,331. Now I will turn the call over to Drew for his financial review and outlook.
spk09: Thanks, Steve, and good morning, everyone. Going to slide eight. Contract revenues for Q1 were $727.5 million, and organic revenue declined 11.1%. Adjusted EBITDA was $44.1 million, or 6.1% of revenue. Gross margins were 14.8% in Q1 and decreased 169 basis points from Q1-21. This decrease resulted from the impact of a large customer program as well as margin pressure from revenue declines for other large customers compared to Q1-21. Margins were also impacted by the adverse winter weather conditions experienced in many regions of the country during the first half of the quarter. G&A expense increased 112 basis points, reflecting higher stock-based compensation and administrative and other costs. Non-GAAP adjusted net loss was $0.04 per share in Q1-22, compared to net income of $0.36 per share in Q1-21. The variance resulted from the after-tax decline in adjusted EBITDA offset by lower depreciation, lower interest expense, and higher gains on asset sales. Now going to slide nine. Our financial position remains strong. Over the past four quarters, we have reduced notional net debt by 185.2 million. During Q1, we issued 500 million of 4.5% senior unsecured eight-year notes due April 2029. We repaid $105 million of revolver borrowings and $71.9 million of term loan borrowings, and we resized and extended our senior credit facility through April 2026. Cash and equivalents were $330.6 million at the end of Q1. $58.3 million is expected to be used to repay our convertible notes due September 2021. We ended the quarter with $500 million of senior unsecured notes, $350 million of term loan, no revolver borrowings, and $58.3 million principal amount of convertible notes. Our capital allocation prioritizes organic growth followed by opportunistic share repurchases and M&A within the context of our historical range of net leverage. As of Q1, our liquidity was strong at $477.4 million, and we continued to maintain a strong balance sheet. Going to slide 10, operating cash flows have remained strong and totaled $41.5 million in the quarter. The combined DSOs of accounts receivable and net contract assets were at 128 days, an improvement of eight days sequentially from Q4-21. Capital expenditures were $28.6 million during Q1 net of disposal proceeds, and gross CapEx was $31.6 million. Capital expenditures net of disposals for fiscal 2022 are expected to range from $105 to $125 million, a reduction of $40 million when the midpoint is compared to the midpoint of the prior outlook. This deferral reflects short- to medium-term manufacturer supply constraints. Going to slide 11. For Q2 2022, the company expects contract revenues to range from inline to modestly lower as compared to Q2 2021 and expects non-GAAP adjusted EBITDA as a percentage of contract revenues to decrease compared to Q2 2021. We expect year-over-year gross margin pressure of approximately 200 basis points from the impact of a large customer program and from revenue declines for other large customers that are expected to have lower spending in the first half of this calendar year. We expect approximately $8.7 million of non-GAAP adjusted interest expense for the components listed, as well as $0.7 million for the amortization of the debt discount on convertible notes for total interest expense of approximately $9.4 million during Q2. We expect a non-GAAP effective income tax rate of approximately 27% and diluted shares of 31.3 million. Now I will turn the call back to Steve. Thanks, Drew.
spk08: Moving to slide 12. Within a recovering economy, we experience solid activity and capitalize on our significant strengths. First and foremost, we maintain significant customer presence throughout our markets. We are encouraged with the emerging 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 one gigabit high-speed connections. Increasingly, rural electric utilities are doing the same. Cable operators are deploying fiber to small and medium businesses and enterprises. A portion of these deployments are in anticipation of the customer sales process. Deployments to expand capacity as well as new build opportunities are underway. Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing, particularly upstream. Fiber deployments enabling new wireless technologies are underway in many regions of the country. 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 recover from the COVID-19 pandemic, We remain encouraged that a growing number of our customers are committed to multi-year 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.
spk02: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sean Eastman from KeyBank Capital Markets. Your line is now open.
spk00: Good morning, Steve and Drew. Thanks for taking my questions. I just wanted to start on the comments on supply chain constraints and how that could potentially have a near-term impact on customer deployment kind of phasing. I'm just curious, is that something you're seeing happening slow-down activity today or something you're trying to get out in front of, you know, since it's a big topic these days? And, you know, what exactly in the supply chain do we need to be monitoring, Steve?
spk08: So, Sean, I think it is a big topic. I think the way we see it in the business so far is that the trajectory of growth as customers kick off new programs is probably could be a little bit faster if the inputs were a little more available. That's not unusual. We saw that 10 years ago. We've seen that at other times in the business. And so I just think in some ways it's a little counterintuitive. It obviously would be better were all the inputs freely available, but it's also indicative of how much upturn in demand that we can see in the industry.
spk00: Okay, thanks. In terms of the margin guidance for the second quarter, 200 basis points year-over-year, lower year-over-year gross margins, how much of that is from the challenge customer program? It would just be helpful to get some more color on why that challenge program is still having such a pronounced impact from a year-over-year perspective and If you could give us some indication of how that drag looks into the third quarter, fourth quarter, you know, even directionally, it would be really helpful, Steve.
spk09: Go ahead, Drew. Sure. Thanks, Sean. So, yeah, as we talked about in the comments, we anticipate year-over-year impacts of about 200 basis points. There were several things that we talked about in the large customer program, and we've also had a few customers that appear to be spending less in the first half of the year, and so there's some absorption around that component as well.
spk08: I think, Sean, with respect to the large customer program, look, it's a smaller part of the business. There's lots of closeout activity that's associated with completing markets. There are costs associated with that, and we've just got to chop through them. And every day that goes by, we're chopping through more, and we're on a path to make this a much smaller effect on the business, but we've got to get through it.
spk00: So I guess just to follow up on that, I mean, how much of the 200 basis points is the challenge customer program versus absorption on their remaining balance of customers?
spk08: It's a significant factor, Sean, but it's not the only factor. I mean, the other thing that was clear in the revenue that we had and the comments that we heard from Lumen is that they got off to a slower start to the year. They expect that to continue, but when you have year-over-year revenue declines on the order that we have there – and we're still serving the same geography, there can be some absorption issues. On the other hand, we have other customers that are picking up quite nicely, and so it's just a balance of taking a prudent view of what that does to margin in total.
spk00: Okay, thanks, guys. I'll turn it over.
spk02: Thank you. Our next question comes from the line of Eric Lubchow from Wells Fargo. Your line is now open.
spk01: Great. Thanks. Thanks for taking the question. Steve, you mentioned that the labor market was starting to tighten in some markets as well. So are there any notable changes to point out in terms of, you know, wage inflation or building any of that into your near-term guide that we should be aware of?
spk08: Yeah, Sean, what we've – excuse me, Eric. What we've seen is in our core workforce – We're monitoring the situation, but we don't see big changes in labor costs. It's been more as we look to hire unskilled and semi-skilled people in the marketplace and probably those that are most affected by some of the government policies that are out there. It's not everywhere, so it's regional. So that's why we highlighted it. It's not something that's a tremendous impact on the business at the moment, but it's something that we're paying careful attention to.
spk01: Okay, great. That's helpful. And you're still down about 900 total employees in terms of headcount versus, you know, pre-pandemic. Are a lot of those kind of administrative cuts that you've made that, you know, employees that aren't revenue producing that you don't need to bring back, or, you know, should we expect that to continue to ramp as, you know, the next wave of demand hits this year?
spk08: Well, we certainly made some adjustments on the G&A side as growth picks up in the business looking ahead, but There will be some increase there, but we're not back to where we were, that's for sure. And then as we see growth opportunities across a number of customers for fiber construction, it's going to be a mix of what we do ourselves versus what we subcontract. The net of that, we'll probably see some employee growth, but not as we've seen in the past. It doesn't have to grow as rapidly as the top line.
spk01: Okay, great. Thanks, Steve.
spk02: Thank you. Our next question comes from the line of Brent Spielman from D.A. Davidson. Your line is now open.
spk11: Great. Thanks. Good morning. Steve, could you remind us the timing of the large customer program and sort of phasing associated with that when you sort of expect this to see more of a transition in that program?
spk08: Well, I mean, we're actively closing out a number of markets, as we've talked about. As a portion of the original expectation, there's not a whole lot left, but there's still lots of activity that has to occur to close out the projects, to get the final documentation done, and to work through all the invoicing. So it's just a cost that we have to bear to get through the program this year. Okay.
spk11: And then, you know, Steve, I was trying to reconcile some of the, you know, the near-term challenges, supply constraints, labor constraints, you know, things of that nature relative to what looked like a, you know, nice bump up in the next 12-month backlog versus your total backlog this quarter. I mean, any thoughts relative to that?
spk08: Well, I think as always, you know, we were encouraged, if you look at our other than top five customers, they grew organically, you know, almost 32%. We have a combination of Frontier and Ziply that a year and a half ago were the same entity that would have been a top-five customer. And so I think it's just a question of working through some of the challenges while we're doing that within the context where lots of customers are kicking off large fiber programs, and the largest of which, of course, is AT&T. And I think we're – be hard to be anything other than encouraged, given their commentary as late as yesterday of how they're reprioritizing CapEx and focused on spending money on wireless and fiber. So it's just something we have to work through.
spk11: Okay. Maybe just lastly, the fiber construction revenue from utilities continues to be a small but really fast-growing component of the revenue for you. And you also highlighted quite a few new awards this quarter from those types of customers. Maybe just, Steve, your thoughts on what you're seeing there, and can this be a much more impactful kind of segment to the company in the near future?
spk08: Sure. So we certainly were encouraged with the award activity, both its breadth and then the rate of growth that we saw in the work for those customers. Yeah, I think what's interesting, Brett, is that the RDOF process has not finalized. So we're seeing customers that are making decisions that these programs are strategic enough for them to begin on their own capital, confident, of course, that their RDOF applications actually do get through the final approval process. But I think that tells you how important it is and what an opportunity it is for those customers types of entities, and so we're pleased with the exposure that we have to that customer set of the industry. I mean, it's almost as if, if you think about it, we've created a brand new top five customer in the last 12 to 18 months.
spk11: Right. Okay. Thank you.
spk02: Thank you. Our next question comes from the line of Adam Thalheimer from Thompson Davis. Your line is now open.
spk10: Hey, good morning, guys. Hey, Steve, the AT&T revenue came in above what we were looking for. Are you starting to see the benefit of that fiber build? And speaking of phasing, how do you expect that to kind of phase in over the course of the, well, really, I guess the next two years?
spk08: So, Adam, we were encouraged that we returned back to organic growth with AT&T. You know, wireless business overall was down about 35%, and for the most part that was AT&T. And we offset that almost entirely with the increase on the fiber program, and it's just getting started. So I think we're encouraged with AT&T. We think it continues to ramp. They're always in a program that size. It's distributed across a number of geographic locations for us. I think it will continue to ramp through the balance of the year. We were encouraged last week and then again yesterday when AT&T reiterated their objective to approximately double the number of homes passed over the next through the end of 2025. And then in some comments they made yesterday, they talked about potentially extending it 10 million homes beyond that. So it's a big program. We're serving them in a number of geographies, and we're growing pretty rapidly.
spk10: The Charter Fulfillment Awards, are those related to RDOF?
spk08: No, that's just part of the core business that we've had with Charter for, you know, literally decades at this point. Okay.
spk10: And then lastly, can you help us understand the customer who is insourcing? I mean, they're talking about hiring 1,000 people and buying a bunch of equipment. And I'm just curious how they're going to do that, given the challenges that you've addressed for your business.
spk08: Well, their business is theirs to run. We had discussions with them. As we said in our comments, we're going to enter into some new agreements that covers work for Next year and beyond, we expect activity levels will be somewhat lower, but they continue to remain a good customer, and as they move forward, we'll support them in that decision and see how it plays out.
spk10: All right, I'll turn it over, but I just wanted to say, in terms of that large customer program, it's not like you're the only one in the industry seeing that, and I do think the customer is being somewhat unfair. Thanks for the time.
spk02: Thank you. Our next question comes from the line of Alex Regal from . Your line is now open.
spk06: Thanks. Good morning, Steve. First question, you know, your organic growth was a negative 11%. Backlog growth was somewhat limited. I suspect those two data points are not really telling us the story of what you see and feel on the ground today. Can you help us to better understand that?
spk08: Sure, Alex. I mean, if you just think about the organic growth calculation for this quarter, and then, you know, Drew's guidance implied for the next quarter, we actually see the organic growth improving. But it was really in the current quarter, it was really focused on two clients, one who started the year slow and the other one who clearly has pivoted spending away from a large program, and it's much more focused in the second half of the year or this half of the year to get ready in the second half of the year to deploy C-band. I think the C-band auction certainly had an impact on the way the two largest participants have planned about their network, but I think we're encouraged. We've already received small initial allocations of CBAN work to perform for both AT&T and Verizon. So it's just one of these pivot periods in their plans.
spk06: That's helpful. And then what does your net capex revision suggest about sort of near to intermediate term revenue outlook and new project awards?
spk08: So what it really reflects is that we have lots of orders out. We've had continuing discussions with all of our suppliers from pickup trucks to directional drills to bucket trucks, and this microchip issue is a problem on deliveries. And so what we'll do, we got ahead of it a little bit with orders last fall and winter. And so what we'll take, the equipment that we do get in, and we'll dedicate that to growth opportunities, and then we'll extend the lives of the rest. And when the supply becomes available at the end of the year, then we'll take receipt of it then. Thank you.
spk02: Thank you. Our next question comes from the line of Noel Diltz from Stiefel. Your line is now open. Pardon me, Noel. Your line is now open. Can you hear me?
spk03: Hello?
spk08: Yeah, go ahead, Noel. You're fine now. You were breaking up before.
spk03: Oh, okay. Great. So, yeah, I just was hoping to touch on the labor tightness issue a little bit more. You know, I've always kind of thought of your business as, you know, your suppliers of labor. So, you know, in my view, we've talked about this before, you know, in scarcity situations over the kind of medium to long term that tends to fit you. It sounds like this could be a little bit more of a headwind in the near term. So how should we be thinking about that balance?
spk09: Yeah, Noel, and just regarding when there is scarcity of labor, we think there are times that that's helpful. And then just Steve, if you want to touch on that.
spk08: Yeah, so look, Noel, I think what we've seen, and there's lots of speculation about the impact of enhanced benefits, which are set to expire in September, so I don't want to overread, but I don't also want to underplay that on the unskilled and semi-skilled side of the business, for us to get new employees through the door, in certain parts of the country, not everywhere, we're having to pay more money. Now, you can see the growth rate that we had with a number of customers, and obviously we have the ability to put more field forces in the field, or we couldn't have grown 32% of our business 32% organically year over year. So there's an ability to do it. I think what it does say is that we're going to be careful where we commit our resources, make sure that we've got returns right, and that's what you always do in a period of time where the industry looks ahead to more demand than what they currently have, you know, than what resources are currently available. We've been through this before. It doesn't mean that it won't be an issue, but it is something that we have managed through before.
spk03: Okay. And then, you know, just for the supply constraints, you know, it's a word that may several times impact you. Right.
spk08: Noel, you're breaking up. We may want to operate and go to the next person in queue. And, Noel, if you can get a little better reception, we'll come back to you. Operator?
spk02: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from the line of Alan Mitrani from Sylvan Lake Asset Management. Your line is now open.
spk05: Hi. Hi. Can you speak to the SG&A expense? It was higher than I was looking for and the highest you've had, even though your revenues were the lowest you've had in a while. Is there something specific in there, or is this just inflation, giving salary increases, and what your guidance would be going out? Thanks.
spk08: Drew, go ahead. I mean, Alan, there was some increase in stock comp that obviously we call out. There were some administrative and some other expenses that ran through the quarter. I don't think we don't really have anything to add. We understand it was a little bit above trend, but we think it's manageable.
spk05: I mean, it's manageable if your revenues start going up. I mean, that's really what needs to happen, obviously. So in looking at it and going through it, I look forward to that thing. Can we fast forward a year where maybe things are a little better? Your comparisons get a little better with Verizon. Some of this stuff is all in the rearview mirror in terms of the in-between time between when all these guys start spending and maybe an infrastructure bill might be passed. What does the industry look like a year out from now? You said there's not enough capacity to handle things, but the way it works with you guys is your top five customers really represent the bulk of the business. I realize... collectively they're not growing, but there's a couple reasons for that in between. But underneath the hood, things look a little better. You've got to parse the data. But I just want to understand where you see the next couple years going, so once we get through this.
spk08: Well, clearly, if we start with AT&T, Alan, they could not have been any more clear about what their plans around the strategic deployment of fiber in their consumer network and in other parts of their network. And we think that Obviously, this year, essentially a restart of the program. They expect it to grow next year, and they expect it to continue at least through 2025, although some comments yesterday that as long as the program is performing well, that it continues. I think the year ahead or two years ahead, Alan, what's interesting is All of the ILEC phone companies, for the most part, have fiber-to-the-home programs that are at least maintaining, if not growing, right? So clearly lots of growth with AT&T. Frontier has been very clear that they look at the deployment of fiber as strategic. Smaller companies like Ziply, we actually, as we mentioned in our comments, we've started with consolidated communications. which is a smaller customer, but an interesting one in that they've been very clear that they expect to build out over the next five years about 70% of their footprint or about 1.6 million homes of fiber to the home. So I just think there's a clarity around the business strategies around network, particularly on the phone company side, that has never been clearer. both on the wireline side, so fiber, but also on the wireless side with respect to C-band. There were comments yesterday at a conference where there's an appetite for one of our large customers to really deploy a wireless broadband product throughout the country, including rural America. And I think on the cable side of the business, I think they've also been very clear that that they have very healthy broadband businesses that they're willing to invest in, particularly to grow upstream capacity to maintain their competitive advantage over fiber. So I think the themes are all there. We've got to work through this large customer program. We've got some absorption issues in a slow first half or top five customer, but we haven't been at 68% of revenue for, the top five or 32% for everybody else in a very long time, and we think that's a good sign for the future.
spk05: Thank you for that insight. I appreciate it. Drew, can you give us maybe just a follow-up on the Verizon? What was, since we're going to see it in the queue most likely anyway, can you give us what the 8% of total AR is for Verizon? I know it had been going down as you worked through this in terms of where they stand. It would have been $390 million. last quarter on the receivables and contract assets. Do you have that number for this quarter?
spk08: Alan, when we publish the queue tomorrow, we'll have all of that detail. I would say that the balance tied up in this large customer program is down about 25% year over year. We're making progress. We understand everybody, including us, would like it to be faster, but it is moving in the right direction.
spk05: Great. Thank you.
spk02: Thank you. Our next question comes from the line. Noelle Diltz from Stiefel. Your line is now open.
spk08: Hi. Noelle, it's a little bit better. We'll do our best. Go ahead. Noelle, we'll just have to follow up with you. At least on our end, we're getting every other word. Okay. Thanks.
spk02: Thank you. Our next question comes from the line of John Lopez from Vertical Group. Your line is now open.
spk07: Hey, thanks very much. I'm sorry, I wonder if we could come back to the Verizon situation real quick, and maybe if you could help me this way. At this point, if we look relative to sort of the interim peak, your revenue with that customer is down like over 50%. I guess the thing I'm still wrestling with is what is the baseline, if we can call it that, with this customer relative to the unfavorable contract stuff that sounds like you're kind of in the late stages of working through here. So, sorry, can you maybe tease those things apart? Like how much left... before we get to a run rate with that customer? Or is kind of the whole 13%, you know, deemed stuff that you need to work out?
spk08: Well, John, there's really three elements. So there's a portion of the work that we're working through that's been challenging. There's another portion of the work, which is around their small cell deployment and network extensions, that as they work through their C-band priorities is slow this year. And that was the portion of the program that last year was more supportive because there was more work there. And then there's the BAU portion. The challenge portion is not all of the work, but it's a significant part of the work, but it's coming down sequentially as we work through the year. And the cost associated with it, to a degree, are operating costs, but they're really – more focused around the closeout costs. And it's just something that we've got to work through.
spk07: Okay. Okay, that helps. My second question, again, just conceptually around, not this customer so much, but sort of the surrounding elements. So I guess my understanding was the idea here was you work out this revenue and then there's enough revenue other project revenue, other customer-related revenue that would be significantly more margin-friendly that you can replace this with over some not-in-terminal amount of time. Is that still the right concept here, or have factors, either labor, CapEx, otherwise perhaps constrained the ability to replace this revenue in maybe the same way that you had previously intended?
spk08: Yeah, so, John, it's not an input. It's not a labor or material constraint. As the customers made clear in a number of presentations, with the advent of C-band and the focus on deploying that spectrum, the portion of the bill that was going to do more network extensions to more small cells is at a level that is lower than I think what everybody expected a year ago. On the same hand, AT&T is at a level that nobody dreamed of a year ago, and so, as always, it's a mix in the business of making adjustments as customers adapt their plans to changing priorities.
spk07: No, I get that 100%, Steve, but just follow up on that last statement. So is the increase in the second bucket sort of unforecast, unforeseen in your view? Is that larger than the decrease in the first bucket, unforecast, unforeseen?
spk08: Okay, John, I maybe didn't keep track of first bucket and second bucket. What I would say is that the portion of the work that's in support of extending the network this year is currently slower than I think everybody expected a year ago, and I think in part that's because of the result of the C-band results.
spk07: Sure, no, but if you think two, three years out, if bucket two was network extension, bucket one was small cell related, I guess my question is, as you think out of year two, three, is the increased appetite for that second cohort larger than the drop in the first cohort?
spk08: John, again, I've got to make sure I'm clear on your term. So network extensions and small cells, are one driver to the program, right? Because you're deploying fiber off of the core to pick up new endpoints. Look, C-band requires a coverage layer. It will require a capacity layer. And I think as they figure that out, there'll be opportunities around doing that. This just is not the year that it turned out to have been as busy as I think people expected a year ago. And that's not just us. That's everybody.
spk07: No, I got you. Okay, sorry. Just one last clarification on the CapEx stuff. Is your view that that is a limiter industry-wide, or would there be some reason that you're unable to procure some of those items, whereas, say, peers and or customers may be in a more advantageous place with those?
spk08: So with respect to the cable and the equipment, that's a factor of what the customers are doing. There's a portion of the business... in rural where we might supply some material, but that's not the real driver. The driver is the uptick in demand that everybody has to deal with. On the automotive side, we enjoy as good or as a relationship with all the suppliers as anybody else, and we don't think we're getting things any slower. In fact, I think we're probably blessed that we had a pool of assets that we had on order from last fall. that puts us in as good a position as we can be given the supply constraints.
spk07: Okay, I got you. Thanks for all the thoughts. I appreciate it.
spk02: Thank you. Our next question comes from the line of Alan Mitrani from Sylvan Lake Asset Management. Your line is now open.
spk05: I wanted to follow up on the backlog issue. Did you already pull out all whatever expectations of backlog for that customer that's insourcing the maintenance? Yes.
spk08: There's no need to adjust the backlog, Alan, because we have contracts through the end of the period, and we expect to enter into new contracts that cover next year and beyond. So there's no adjustment required.
spk05: Okay. And then what's your expectation for backlog growth going forward? I mean, normally, the way I'd look at your business, obviously revenues are going to trail the backlog growth. When do you expect to start seeing some of these contracts grow?
spk08: how did you talk about five or do you expect them just to come through regular maintenance contracts and what you have in terms of what they for example increase in eighteen to your others that will just be in your global uh... geographic uh... geographic position well certainly alan there's a portion of this was through the master agreement so for example that the the uh... projects that we've received around c-band i mean they're just blowing through the the standard term agreement that we have and so that you know they'll reflect in backlog as the run rates increase. With respect to the fiber, again, we had a pretty strong quarter last quarter. As an example, with AT&T, we announced a number of states where we extended our master agreements and included the scope of work to cover the fiber deployment, and so that's subject to estimate revisions as we go through that three-year period, but it's essentially reflected in the backlog now. There may be some opportunities to grow geographically, and when those are booked, then we'll add to backlog. I think the other thing, Alan, and again, we've had this discussion about backlog before, it is not highly correlated to our growth rates in the near to intermediate term, and there are certain elements in the industry that are going to be a little bit different than the traditional top five customers. So, for example, in all this rural work we're doing, They typically issue work in phases. We put the phase, when we receive it in backlog, we complete it, they give us another one. But there's not a contractual commitment to do that. We could book a big number if we wanted to torture the way we think about the definition. But, I mean, we've got north of a billion dollars in the pipeline just on the rural stuff that's not reflected in backlog. It may never be reflected in backlog as it just comes through the business.
spk05: That's helpful. Thank you. And then lastly, on the weather, you mentioned that February, obviously we all know weather was bad this quarter. Can you just detail a little better maybe how that played out in the quarter or how much you think that impacted you?
spk08: I mean, Alan, February was as bad a February as we've had in a long time. I mean, it was a big impact through the middle of the country.
spk05: Okay. Thank you.
spk02: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Steve Nielsen for closing remarks.
spk08: We thank everybody for your time and attention. And before I go, I just want to express my thanks to Tim Estes. Tim is retiring effective today as our COO after 27 years of service. He's not been visible on all these calls, but he's been visible on growing the company from what it was when he came at $150 million in revenue to $3 billion today plus, and we wish him well in his retirement. And then Drew has one more housekeeping item to get out.
spk09: Yeah, just to close out the call, I'd break out the customer split. Telco was at 64.9%, cable was at 23%, facility locating was at 8.9%, and electrical and other was at 3.2%. Steve, go ahead.
spk08: Thanks, Drew, and thanks, everybody, for your time and attention. We'll speak again on our next quarter's call at the end of August. Thank you.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
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Q1DY 2022

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