Steven E. Nielsen - Chairman, Chief Executive Officer, President and Chairman of Executive Committee Richard B. Vilsoet - Vice President, General Counsel and Corporate Secretary H. Andrew DeFerrari - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Treasurer.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division Alexander J. Rygiel - FBR Capital Markets & Co., Research Division Saagar Parikh - KeyBanc Capital Markets Inc., Research Division Adam R. Thalhimer - BB&T Capital Markets, Research Division Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division Alan Mitrani.

Ladies and gentlemen, thank you for standing by, and welcome to the Dycom Results Call. [Operator Instructions] I'd now like to turn the conference over to our host, President and CEO, Mr. Steven Nielsen. Please go ahead, sir..

Thank you, Lola. Good morning, everyone. I'd like to thank you for attending this conference call to review our first quarter fiscal 2014 results. During the call, we will be referring to a slide presentation, which can be found on our website, www.dycomind.com, under the heading Events.

Relevant slides will be identified by number throughout our presentation. Going to Slide 2. Today, we have on the call, Tim Estes, our Chief Operating Officer; Drew DeFerrari, our Chief Financial Officer; and Rick Vilsoet, our General Counsel. Now I will turn the call over to Rick Vilsoet..

Thank you, Steve. Referring to Slide 3. Except for historical information, the statements made by company management during this call may be forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements, including those related to the company's outlook, are based on management's current expectations, estimates and projections and involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Those risks and uncertainties are more fully described in the company's annual report on Form 10-K for the year ended July 27, 2013, and other periodic filings with the Securities and Exchange Commission. The company assumes no obligation to update forward-looking statements.

Steve?.

Thanks, Rick. Now moving to Slide 4 and a review of our first quarter results.

As you review these results, please note that we have presented in our release and comments revenue amounts that exclude certain revenues, including those from acquired subsidiaries, G&A expenses which exclude acquisition costs, adjusted EBITDA and adjusted earnings per share, all of which are non-GAAP financial measures.

See Slides 14 through 17 for a reconciliation of the non-GAAP measures to the GAAP measures in the slide presentation provided for this call. For clarity and to ensure comparability between periods, our comments will now address our non-GAAP results. Revenues for the quarter increased year-over-year to $512.7 million, an increase of 58.6%.

After excluding revenues from acquired subsidiaries of $157.1 million from the current quarter, revenue grew 10% organically. Gross margins, as expected, were down slightly year-over-year, but reflecting stable operating trends.

Despite integration costs of approximately $1.5 million, adjusted general and administrative expenses declined 30 basis points as a percentage of revenue year-over-year, reflecting continued good cost discipline. All of these factors produced adjusted EBITDA of $63.2 million for the first quarter, or 12.3% of revenue.

Net income of $0.54 per share for the first quarter increased from last year's earnings per share of $0.36 despite acquisition integration expenses. Amortization expense increased approximately $3.6 million, and liquidity was solid, with cash and availability under our current credit facility totaling $156.7 million.

Overall, volumes during the quarter were solid from telephone companies as a whole, with some companies growing meaningfully, while all carefully managed routine capital and maintenance expenditures and spending by cable customers increased strongly year-over-year. Going to Slide 5.

During the quarter, we experienced the effects of an industry environment which continues to improve. AT&T was our largest customer at 17.5% of total revenue or $89.7 million. AT&T grew 88.5% organically year-over-year. Revenue from CenturyLink was $79.3 million or 15.5% of revenue. CenturyLink was our second largest customer and grew organically 3.2%.

Revenue from Comcast was $54 million or 10.5% of revenue. Comcast was our third largest customer and grew organically 5.9%. Verizon was Dycom's fourth largest customer for the quarter at 8.4% of revenue or $43.2 million. Revenue from Time Warner Cable, a returning member to our top 5 customer list, was $27.2 million or 5.3% of revenue.

Time Warner Cable was our fifth largest customer and grew organically 21.8%. Altogether, our revenue grew 10%. After excluding revenues from acquired subsidiaries in the current quarter, this represents our 11th consecutive quarter of organic growth.

Our top 5 customers combined produced 57.2% of revenue, growing 25.8% organically, while all other customers decreased 9.4%. Of note, organic revenue, excluding projects funded in part by the American Recovery and Reinvestment Act of 2009, grew 15.8%. Now moving to Slide 6.

Backlog at the end of the first quarter was $1.996 billion versus $2.197 billion at the end of the fourth quarter, a decrease of approximately $201 million. Of this backlog, approximately $1.116 billion is expected to be completed in the next 12 months.

Both backlog calculations reflect solid performance as we continue to book new work, renew existing work and look forward to substantial future opportunities. For CenturyLink, we renewed a 3-year construction and maintenance services agreement for Ohio. With AT&T, we secured a new engineering services agreement in California.

For Charter, we renewed construction and maintenance services agreements in Texas, Missouri, Illinois, Tennessee, Alabama, Vermont, New Hampshire, Connecticut, Massachusetts. From Washington Gas, we received a 5-year extension to our underground facility locate services agreement.

And finally, we secured rural broadband projects in a number of states, including Nebraska, Missouri, Arkansas and Kentucky. Headcount increased during the quarter to 11,107. Now I will turn the call over to Drew for his financial review and outlook..

mid-single-digit total revenue growth, which includes low- to mid-single-digit organic revenue growth, as a result of services to wireless carriers, which remain robust; cable construction, which strengthens; and continued wireline improvements by a key customer.

Gross margins, which expand year-over-year as a result of legacy performance, which remains solid, and contributions of acquired companies. G&A, which reflects increased scale and includes noncash compensation of approximately $3.2 million.

EBITDA margin percentage that expands year-over-year from margin improvement and greater operating efficiencies accompanying revenue growth.

Other factors influencing results include depreciation and amortization, which declines to $22.3 million to $22.8 million; interest expense, which declines to $6.7 million; and other income from asset sales of approximately $3 million per seasonal asset sales. Now I will turn the call back to Steve..

Thanks, Drew. Moving to Slide 13. Within an improving economy, we experienced the effects of a solid industry environment and capitalized on our significant strengths. First and foremost, we maintained solid customer relationships throughout our markets. We continue to win projects and extend contracts at attractive pricing.

Secondly, the strength of those relationships and the extensive market presence they have created has allowed us to be at the forefront of evolving industry opportunities. The end market drivers of these opportunities remain firm and are strengthening.

Wireless carriers are upgrading to 4G technologies, creating meaningful growth opportunities in the near to intermediate term, as well as planning to increase macro cell density. Telephone companies are deploying fiber-to-the-home and fiber-to-the-node technologies to enable video offerings.

These deployments are accelerating and impacting our business. Some of those telephone companies deploying fiber-to-the-node are expanding fiber-to-the-home trials and contemplating larger deployments. Cable operators are continuing to deploy fiber to small and medium businesses and with increasing urgency.

Some are doing so in anticipation of the customer sales process. In one instance, a cable operator has indicated that it is exploring combining some fiber-to-the-home deployments with its fiber-to-the-business initiatives. Industry participants continue to aggressively extend fiber networks for wireless backhaul services.

These services are now planned for small cells, as well as macro cells. Dramatically increasing wireless data traffic may prompt further wireline deployments. As we look out over the intermediate term, we are increasingly encouraged that these current end market drivers are but harbingers of an emerging industry-wide consensus.

The network bandwidth, both wireline and wireless, needs to increase dramatically in response to consumer demand and competitive realities. We are encouraged that we have already seen some limited impacts of this emerging consensus on our business.

Previous periods in which industry consensus has changed sharply such as dial-up to broadband, broadband to fiber deep or fiber to the home and cellular voice to wireless data have been accompanied by significant growth opportunities for us.

We are hopeful that this potentially looming transition may be as or more rewarding than previous industry consensus transitions given our scale, market position and capital structure.

Among service providers of our size or larger, we believe we are uniquely positioned, managed and capitalized to meaningfully experience an improving industry environment to the benefit of our shareholders.

We remain encouraged that our major customers possess significant financial strength and remain committed to multiyear capital spending initiatives, which, in some cases, are meaningfully accelerating.

We remain confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team who have grown our business in capitalization many times before.

1 year after the announcement of our Quanta transaction, we want to thank all of our employees for the hard work they have provided as we have come together as one company. We look forward to the future as a bigger, but more importantly, better company. Now we will open the call for questions..

[Operator Instructions] First, we'll go to the line of Simon Leopold with Raymond James..

Steve, I just wanted to get a couple of housekeeping items out of the way because somebody's got to do it.

So first, if we could get the segment breakdown between telco, cable and if you can give us the utility lines locating and electric and other disclosure, as well as the costumer 6 through 10 disclosure? And I've got a couple of longer-term trending questions..

Sure. Go ahead, Drew..

Great, Simon. I'll handle the first part of that. So telco was at 65.1%, cable, 22.7%. The underground facility locating customers at 7.1% and the -- all others at 5.1%.

And then for the -- to round out the top 10, Windstream is at #6 at 5% of revenue; Charter is at #7 at 4.5% of revenue; customer #8 is at 2% of revenue, and this is for a customer who's requested that we not identify them by name; customer #9 is Ericsson at 2% of revenue; and customer #10 is Frontier at 1.5% of revenue..

Great. And then in terms of kind of the trending questions, 2 topics that have come up recently. One is regarding the spending behavior of what are typically classified as Tier 2 and 3 telcos, basically the folks who are typically smaller than CenturyLink, AT&T and Verizon. Some vendors have talked about some weakness there, a lack of a budget flush.

If you could talk about the trends you're seeing from this group, that's the first one.

And then the second question I wanted to see if you could delve into is maybe a little bit more color on the opportunities you see from small cells since there are likely to be many more small cells deployed in the next coming quarters, how you would quantify your opportunity, both in terms of dollars, as well as timing..

Sure. So Simon, with respect to the Tier 2 and 3 customers, to the extent that some of those customers were recipients of stimulus dollars, which -- where that program is concluding, certainly, they're somewhat softer. I would not -- beyond that, I would not characterize their spending as any different than what we've seen. So no shift in strategy.

Clearly, there are some rural providers who are exploring fiber to the home. And there are some stimulus recipients for whom there may be follow-on opportunities. I think more broadly at a higher level, I think the industry is all trying to digest kind of what the Connect America Fund looks like from 2014 through 2018.

And I think we're generally encouraged by the announcements over the summer that some of our customers were pretty significant recipients of funding there. With respect to small cell, Simon, I think it's really early.

I think the dynamic around small cells is going to be very similar as fiber to the cell, in that we'll have a number of different industry participants, whether they be cable, could be CLECs, could be the carriers themselves, just a number of different participants in that market.

I think it's clearly part of everybody's 4G strategy to improve coverage and capacity. And so while it's early, I think we're encouraged, as we've said in our comments, that the growth in wireless could be driving future wireline investments..

And next, we'll go to the line of Alex Rygiel with FBR..

First, a couple of questions. Your first quarter organic growth was 10%. Second quarter guidance is mid- to high-single digits. Third quarter guidance is low- to mid-single digits.

Can you give us a little bit more color on why the declining trends in organic growth?.

Well, I think there's a couple of things in the second quarter. One, we continue to have some of the stimulus that is sunset in the second quarter. So that's coming out of the business. I think it's also been a back half of the year where a number of customers have spent strongly.

And we're seeing kind of traditional behavior where they're somewhat budget constrained in November and December, but telling us to be ready to resume that spending strongly in -- after the first of the year. With the holidays and the weather, that's always kind of a difficult thing to time, but I think it is encouraging for calendar year '14.

And then with respect to the April quarter, it's really just the fact that we're lapping the acquisition of the Quanta entities that will be included in both periods. And as we talked about at the time of acquisition, that was a business that was going to grow somewhat slower. I mean, it's actually performed better than we expected.

We're very pleased with the performance, but it's just going to be something that when the base of business jumps up from the legacy Dycom to include legacy plus Quanta, we want to make sure that we have an appropriately tempered view of what the growth rate on that bigger number is going to be..

Helpful.

And could you quantify revenue from wireless in the quarter?.

Yes, Drew, go ahead..

Sure, Alex. It was at about -- just under $53.8 million..

And how does that compare to the year-ago period?.

Up dramatically..

And lastly, customer #8.

Are they new to the top 10 list? And directionally, is that a customer that can climb the list over the next couple of quarters?.

Well, they are new to the list because, obviously, we have not disclosed them before. And Alex, I think, at this point, they requested that we not identify them by name and so we're just not going to have any comments about their potential or other attributes..

And next, we'll go to the line of Saagar Parikh with KeyBanc..

Just a quick question on your gross margin guidance. Looking at the second quarter guide, you have been trending downwards year-over-year. But then looking at the third quarter guide, you have been trending up year-over-year.

Can you just provide us some additional color on what's happening with the mix shift there, if it's the integration of the Quanta assets, and what you see going forward?.

As you probably recall, as well as anybody else who lives in the Northeast in the year-ago period with Hurricane Sandy, we had substantial storm restoration revenues. And in fact, that may be a clue why the consensus might have been a little bit miscalculated for the second quarter.

And so clearly, when we do storm business, it's high risk, but we performed well. And so we're not anticipating any storm business and so there's some slight pressure on gross margin from that.

In looking forward into the April quarter, based on a more traditional spending pattern where we see acceleration in the business in March and April, which has always been the traditional pattern prior to the last recession, we're seeing the signs now that a more traditional pattern will emerge for that transition from the second quarter to the third quarter..

Okay.

And then just to make sure I have it correct, Hurricane Sandy worked last -- into the fiscal second quarter last year was around $17 million?.

That is correct..

[Operator Instructions] And next, we'll go to the line of Adam Thalhimer with BB&T Capital Markets..

Steve, I think you hinted around this during the commentary.

But in terms of the 1 gigabit to the home projects, are you seeing any revenue from a project like that currently?.

We had mentioned in our comments that we've seen a slight impact to the business.

And I think, Adam, if we go back to our last call at the end of August, we thought that there was a -- a kind of a shift under -- the industry was at least thinking about going to much more high-speed connections, and then lo and behold, had a number of customers talk about it, either at investor conferences as late as last week or on their earnings calls.

And so I think it's not an irreversible trend. But clearly, right now, people are trying to get their minds around how do we deliver dramatically higher speeds to both businesses and residential customers..

How do you think that plays out throughout calendar '14 in terms of your plans being implemented?.

Here's how -- it's in the windshield, right, so we're talking about what potential is. But I think a good analogy may be kind of the way 4G has impacted the wireless industry. So clearly, when Verizon made the decision to go to 4G somewhat earlier than the rest of the industry, it took some time for a consensus around 4G to form.

But as it formed, what it did was cause a number of customers to have similar spending plans at the same time. And so that industry has undergone some pretty substantial growth and will continue in '14. I think the potential is there on the wireline side.

That as we see this consensus emerge, and it is a successful strategy, both in terms of generating consumer demand or business demand and a differentiator competitively, that, that same dynamic that has been so evident in wireless may also assert itself in wireline..

Okay. And then quick question on AT&T. They've said consistently that their 4G coverage rollout will be done by the middle of next year, they've also said coverage isn't capacity.

How do you think about those comments from AT&T about the coverage being done by the middle of next year?.

Well, I mean, we have no reason to believe other than what they've indicated. But I think that the second part of your comment is what we look to, is that we're clearly seeing projects to add capacity to existing networks. We're also seeing what they call densification, which is new site builds.

And new site builds has a general rule, some variation possible. But as a general rule, involve more labor services and more construction activity than 4G deployments. So while the absolute number of sites may go down, that they're touching -- the sites are touching, they're going to spend more money on.

It's -- I understand that there's been some comments in the industry about next year on CapEx, and obviously, our customers are formulating their plans. But we don't see anything in the industry that would say that next year is not a good year with our customers..

Okay, great. And last question from me. I mean, you kind of brought up the competitive landscape in your industry.

I mean, what does that look like now? Who are your larger competitors? And then where has -- or will scale benefit you if this bigger wireline 1 gigabit to the home rollout moves forward?.

Yes, I think there's not been a substantial change in the competitive landscape. We have a couple of public companies that are in and out of the space. We have some larger private E&C companies and then a whole host of regional private players. So nothing particularly new there.

I mean, clearly, when -- and we've seen this in the wireless industry, too, when customers have big plans and when a consensus changes, there's an urgency to the deployment, which we think plays to the ability that we have to manage large projects, the financial capability and just the fact that we've been through it before with other customers..

Next, we'll go to the line of Noelle Dilts with Stifel..

I have just a couple of housekeeping questions first.

First, on the Quanta integration, were there any charges in the quarter associated with continuing to integrate that operation?.

Yes, we had said, Noelle, that in the quarter, there was about $1.5 million of integration expense. There will be some slight tail into our second quarter, but we expect to be done, more or less, by the end of the calendar year..

Okay, great.

And then the $17.4 million of storm revenue last year in the second quarter, was that all -- do you kind of look at that all on your legacy business or did some of that fall into Quanta as well?.

There was a very slight amount in the Quanta businesses. That was all legacy, so it's all impacting the organic growth forecast..

Okay. So looking again out to the second quarter, you're looking at your share base going up a bit due to vesting of employee equity awards. You have the share repurchase out there.

Could you just talk about how you're thinking about that at this point and how that ranks in terms of your priorities throughout capital allocation?.

Yes, I mean, I think, Noelle, there's really been no change there. I mean, we continue to look at potential acquisition opportunities. We look at the demands on capital for organic growth opportunities and then we look at where the stock is trading.

And based on our assessment of each one of those factors, we'll make a decision as to whether to deploy capital or not. We -- I think we've done enough of it that we have a pretty good idea of what makes sense for long-term shareholders and we'll continue to do that..

Okay. And last question. I think this has kind of been alluded to a bit in the questions, but obviously there's a lot of talk in the industry about the opportunity associated with the Sprint wireless upgrade.

Can you just talk about your thoughts on that opportunity, maybe the timing, how you think you're positioned?.

Sure. So there's been lots of commentary. I don't want to get ahead of speaking for our customer other than I think they've indicated that they would like to go to some degree, maybe to a large degree, to procuring the services directly from labor suppliers rather than going through the OEMs, or all of -- or some portion of the OEMs.

We have good relationships regionally around the country with Sprint and so we continue to have communication with them as they go through that process. So it's really a rotation and a direct selling opportunity..

And next, we'll go to the line of Alan Mitrani with Sylvan Lake Asset Management..

You spent a lot -- I think it was $30.3 million, you said, in gross CapEx in the first quarter, Drew. Can you just update us again on what you're looking for in the year? And then it was more than I was looking for in the quarter. Just remind us maybe, if there is a linearity, what the linearity of the CapEx will be this year..

Well, I mean, we're still comfortable at $70 million to $75 million of net CapEx. I mean, clearly, there is some bonus depreciation that we wanted to make sure that we took advantage of in the current calendar year. And we had some growth in the quarter that was a little more than we expected.

And when we grow, there will be some CapEx associated with that..

Okay, great. And what about the DSOs? No one has talked about it. I didn't hear much mention of it. I calculated about 90 days, which, to me, is your highest day I've ever seen Dycom DSO.

Can you talk about what you can do to bring that down, why they're so high? Was there any impact from the government shutdown this quarter as it relates to payments from some of your customers?.

Well, there were clearly some contracts where interactions between customers and the government were impacted -- was impacted by the period of the shutdown. I think we also had a period of time that customers were very busy and they were concentrated on getting the work done.

And historically, in the second quarter, they concentrate on paying the bills. And so we foresee substantial free cash flow as that working capital build reverses in the quarter. But we don't see anything in the balances that's of concern..

Okay, that's helpful. Because, I mean, you're so far above what your normal DSOs would be.

Is there any -- can you talk about what the barriers might be over the next couple of quarters or what -- or other barriers in terms of getting those down to what might be what's considered normal Dycom or normal Dycom plus Quanta's higher level?.

Well, I think that's in part it, right? So we have a business in Quanta that we said from the beginning was far more seasonal. And what that means is that there's going to be working capital in that business as they try to complete projects before bad weather.

And so I think, to the extent that we've evaluated kind of what their seasonal patterns are, we're not surprised that they had a working capital build. And so I think we've just got to reset our expectation somewhat overall.

Just because it's a little different business doesn't mean it's not a good business, doesn't mean the money will come in this quarter just like it did last year. But it just changes the pattern of the DSO quarter-to-quarter..

That's fair.

And then did you buy any stock back this quarter?.

We did not..

Right. I figured, given the way the cash flows came in. So this is about a year now ever since you did the deal that you haven't bought them, but now you're facing a couple of quarters where you might be able to generate a few bucks a share in free cash and your stock has declined about 15% from its highest year.

Can you talk about your propensity besides paying off the seasonal line that you have about buying in stock and remind us how much is left?.

I mean, there's $40 million of authorization available that's fully unrestricted by any covenants in the high-yield notes. I mean, we can spend the authorization if we're given the opportunity at a right value.

We're also going to make sure that we -- that we're appropriately -- that we have the appropriate balance sheet given the potential magnitude of future opportunities. It's just both M&A and organic. It's an art, not a science..

Great. One last question on wireless.

What were wireless revenues last quarter?.

$50 million, just over $50 million even..

And no one else is in queue with a question, Mr. Nielsen..

Well, we appreciate everybody's time and attention on this call, and look forward to speaking with you at the end of February. Thank you..

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and using AT&T Executive TeleConference. You may now disconnect..