Dycom Industries, Inc. (DY) Earnings Call Transcript

Well, thanks, everyone, for being here bright and early, and welcome to D.A. Davidson's 21st (sic) [ 25th ] Annual Diversified Industrials & Services Conference. Appreciate you guys all kicking off the day here with Dycom, and welcome, everyone, on the webcast as well. I'm Kurt Yinger. I cover building products and infrastructure services here at D.A. Davidson. I'm joined by Dan Peyovich, the CEO of Dycom. Dan...

Good morning.

Thanks so much for being here.

Thanks for having me, Kurt.

Maybe just to start for investors who aren't as familiar with Dycom and what you do. Can you just talk a little bit about the company, provide a quick overview?

Yes. If I could just briefly start with -- I might make forward-looking statements today, so everybody could just please reference the safe harbor statement on our website. That would be appreciated. And jumping in, if you think about Dycom today, the best way to think about us is really end-to-end solutions to solve the growing data needs, right? Data consumption has grown for the last three decades. For a long, long time, Dycom provided all of the fiber, all of the HFC infrastructure around the country to connect people, to connect homes, to connect businesses, and we've extended that recently to get inside the data centers. So whether it's data being computed, data being stored, data being processed and then now the entirety of the transmission from that data center out ultimately to the end user, that's where Dycom comes into play. So end-to-end solutions, Kurt, and we're pretty excited about the opportunity set and the demand drivers.

Okay. Maybe big picture, you've been in the CEO seat for almost 2 years. You've done a great job kind of expanding the platform into building systems, improve the overall financial profile, some of those growth opportunities. Can you just talk a bit about kind of the strategy since you've come in and how that positions Dycom going forward?

The strategy is centered around growth. There is a ton of opportunity in infrastructure needs for the reasons I talked about, right? There's many that say that we will create more data in the next three years than has been created today from the dawn of time. So all of that is going to need infrastructure. And what we've really done is, over time, all of the work we've been doing on the telecommunications side has got closer and closer and closer to the data center. We started spending a lot more time with the hyperscalers, making sure that we could get the fiber ultimately to their data centers, the work that we call inside the fence. And as those relationships started to grow, we saw a continued need. And again, it's all centered around the skilled workforce, all centered around the skilled workforce. We have about 21,000 employees nationwide today. We saw a growing need to also be able to lean into the data center itself. So we're right outside the 4 walls, bringing fiber to the meeting room, conversation said, maybe we just take that next step, go to the other side of the wall. Pick up electrical, which was the first move we made in our building systems segment, expanded the breadth of the business, added National Technology Integrators recently. So now we're doing all of the structured cabling inside those facilities. And we have a very nice chart that shows this end-to-end step, right, that we can move through and have these conversations. Cross-sell opportunities. We're having tons of conversations across platforms, even though they come through different contracting ultimately. What everybody is looking for is who's going to meet this need, right? Who's going to make sure that they have certainty of execution that they have certainty of delivery and the kind of growth that's happening out there today. And everybody certainly sees the headline, you see headlines around electricians, you see headlines around data center spend. And you see on the telecommunications side, a lot of headlines, making sure that our customers, the carriers are going to have enough fiber to meet the needs in the coming years. So all of that is coming together. And Dycom's entire platform is we want to be an excellent partner. We want to lean into our customers and make sure that we can deliver success with them. So the conversations, Kurt, that we're having today with all of our customers, they are 3 years out there, 4 years out there or 5 years out to make sure that we're setting up our workforce, and I'm sure we'll talk more about our workforce today.

Yes.

We're setting up our workforce to be able to meet that demand and meet that growth.

Got it. Okay. And more recently, you guys reported strong Q2 results, really strong backlog growth kind of continuing there. But maybe a little bit of dislocation related to the outlook. I mean, what are you hearing from customers? I mean, is there any fundamental change in kind of their messaging to you, their outlooks, anything like that, that you could kind of communicate to the investment community?

There were some things that we talked about related to the second half of the year that didn't resonate with the investment community. But I would bring it back to, you talked about the backlog. If you look at the entire year and you look at the revenue for our fiscal 2027, we're looking at 10% to 12% organic growth, which is all coming through the telecommunications business. Dycom has never been a quarterly business, it's never been a quarterly business. The way that the projects come through, whether you're on our communications sector or segment, you've got tens of thousands of work orders that are stacking at any given point in time. Those projects, those big build programs from the different customers, they move around all the time. They ebb, they flow. You might have permit challenges at one point in time. You might have a huge influx of needs and passings that you're trying to push through. So they're always moving. And so you do get some irregularities between the quarters that has nothing to do with the overall demand. What investors should really be thinking about is that 10% to 12% organic growth. That is a huge number coming off of a $5.4 billion communications year last year. And that's really a much better indicator of where this is going as we talk further into the demand drivers. And then again, as you look at the entirety of the business, part of the reason that we're diversifying, look at the consolidated results, right? We got very strong margins coming out of the building systems segment, fantastic growth there as well to meet the needs that we talked about before in the data center space. And if you bring all that together, it was a great quarter for Dycom from an overall margin perspective, great quarter for Dycom from a backlog. We're 1.4x book-to-bill in the year. And again, I think that's another really good indicator of what the future looks like and what that demand is.

Yes. Okay. And I mean it's a good segue. The communication business has these kind of three large fiber deployment opportunity sets. You got fiber-to-the-home, long-haul and middle mile infrastructure. A lot of that's data centers and BEAD. I mean, where are we in terms of the phasing of those opportunities? Maybe what you've already experienced and time line thinking about when some of those might hit?

Yes. And I'm happy to talk about them in detail, but what you'll hear us start to talk about going forward is we have service and maintenance, which everybody -- we really highlighted how large a part of our business that was, think about a year ago. So that's about half of Dycom's revenue. So rough numbers on communications is around $3 billion, plus or minus. That has growth that really comes more with the overall footprint as we expand, but it's a completely different growth curve than the program work. So if you think about that, I talked about being kind of the bottom of the iceberg continuing over time, right? That's a highly recurrent nature to it, a lot of infrastructure to maintain. And then you have the other half, which is program work collectively, which is the demand drivers that you talked about. If you think about that program work, you see a huge amount of growth coming through there. Our fiber-to-the-home in the first half of the year grew 60% year-over-year, right? That's a very big number. If you look at the actual number of passings that increased year-over-year, industry reports have put it more like 10%, maybe 12%, maybe 15%. So a huge opportunity for Dycom to lean further into that. But we look at it across all of those growth drivers, all of those demand drivers. So service and maintenance and then you have program work. What we see for a very long trajectory today is that program work providing a lot of growth opportunity for Dycom. Today, fiber-to-the-home, obviously, you heard the 60% plus, 60%. A lot of growth opportunity in that. We still have several years of significant growth opportunity. And then at some point, you will see is some taper that's starting to happen. But on the other side, you have the long-haul and middle mile work, right? That is -- we talked about hundreds of millions of dollars of work that we put in place over the last couple of years. We talked about over $1 billion of -- and when I talk about pure backlog, I want to make sure we're not confusing it with anything else. This is literally just fiber connecting data centers nationwide. That's the only thing that's in that over $1 billion. And that's after we're already burning. So you can see that starting to ramp up. Over a year ago, we talked about $20 billion of addressable market over the next 5 years. So that's going to really start to feather in nicely. And then you throw BEAD on top of that, taking a long time to get to where we are, but we are starting to see those green shoots of things getting through financing -- or excuse me, funding, getting through permitting. And so we're going to see that start to move as well. What that means is when you get to calendar 2028, you're going to have fiber-to-the-home going completely hot and heavy like it is today. You're going to have these other demand drivers really coming on strong. What Dycom is doing today is making sure that we're investing. We are leaning into our customers very deeply. You actually see that in our backlog to make sure that we can build the workforce ahead of that need because you're going to have this huge balloon of all this activity starting in 2028 that the industry has got to get ready for. And what we believe is there's going to be too much industry-wide. And ultimately, that's going to push a lot of these builds out for a much longer time horizon. So again, you can see evidence of that in our customers, the partnerships that they have with Corning for fiber, making sure that they have the fiber that they're going to need for these big builds. You can imagine they're doing the same thing with the services folks like Dycom to make sure that we have the labor force.

And you just talked about making those investments ahead of time. I mean how do you think about that in the context of margins, right? We get into 2028, the latter part of this decade. Do you start to leverage those much more meaningfully in the context of margins? Or do you have to continue to invest? Like is there a cycle element in there?

Yes. So we had significant investments, specifically on the communications side this quarter for the reasons I just talked about. I would say that's a big part of it. The other part is there's times we're investing in our customers. We have customers that call us up and say, "We want you to go as fast as you can through these different markets in fiber-to-the-home, right? We want you to go as fast as you can on this long-haul work." And we're going to rise to that challenge and go do everything we can to meet that need. That's the kind of partner that we want to be for our customers. It's not as efficient upfront. But everything we're doing is with a long-term lens, right? The more that we can do that, the more that we can really lean into the customers and deliver success for them, the better we know it's going to be in the longer term. So you have those kind of investments coming through. And we talked about where the margin profile in the communications business is for this year, which is kind of that plus or minus 13% range. And I'll remind folks last year, 13.3% adjusted EBITDA for really what ended up being the communications business. That's a really good range for us. That's a great return on our people. It's a great return on what we do. We feel really good with how that compares if you look across the landscape. And it's really important that management as we do continue to grow, absolutely, there's opportunities for operating leverage as we grow, you can bring some of these efficiencies up as we grow. But we really want people to center around that plus or minus 13%, again, very strong return because we need to make sure that we can reinvest for the long term when we need to. And then at other times, sure, it will drop through to the bottom line. And then if I can just quickly touch on margins for the building systems segment. Really, really, really proud of the team and the integration that's happened there. A lot of people working really, really hard, very quickly growing business. We want to make sure we brought them in right. We're able to really lever them up into all of that. And so you've seen the margins kind of go up and up. And then now what we're saying is over the longer term, we believe that, that high teens to low 20s adjusted EBITDA for that segment of the business, which, again, accretive for the overall position for Dycom goes to our diversification strategy. That's a good range to be looking forward.

Okay. Yes. And I mean that's still very healthy relative to a lot of the peer set, too, in terms of the margin profile of that business.

Yes. And again, we're looking on the returns, right? What are the returns on our people, what are the returns on our investment? And how does that come through the business? And again, we think that's a great profile for us to continue to lean into as we continue to grow.

Okay. And on a lot of discussion around bottlenecks kind of across the construction space. Is there -- is that 2028, is there a specific point in time where it's either labor or equipment that you think can get particularly tight? And I mean, what are you doing today to make sure you're positioned to address that?

Sure. It would surprise nobody on the building systems segment that electricians are in short, they are absolutely a bottleneck there. You have power and you have electricians, and that is keeping the flow of the data center builds. It's definitely going fast and faster than it was, but it is keeping that flow restrained. And that's not going to go anywhere anytime soon, right? There are limitations on how quickly you can grow that labor force. But we've obviously shown that we can grow and grow well even in spite of that. And I think you heard that from a lot of our peers as well. On the communications side, today, labor is not a constraining factor for us. Really, the constraint today on the communications side comes down to permitting. We think that's going to continue overall. And Dycom, what we're leaning into is making sure that our labor force continues not to be what hinders our customers from meeting their program. That's why we're having these longer-term conversations. That's why most of my time is looking in that 3- to 5-year range today, right? It's not looking in the 1- to 2-year range to make sure that we are set up well to be able to deliver on that. Now that said, we do think that industry-wide, yes, as you start to get to 2028, you are going to have labor constraints. You do -- again, you see the customers talking about making sure that they have fiber secured. What that would say that there could be fiber shortages for people that haven't done that. And then from an equipment perspective, we do feel good about the landscape today being able to meet that need.

Okay. And when we think kind of big picture around some of those constraints, and maybe this goes back to fiber-to-the-home growing 60% this year like, how do you prioritize those opportunities? What are some of the different factors you're looking at in selecting which of these you want to pursue, which offer the best returns?

Sure. First, just to say, don't expect fiber-to-the-home to always be growing 60% year-over-year, right? That's not how it works. That goes back to the quarterly conversation that we had. But continued strong growth for fiber-to-the-home for several years in front of us. And that's been fantastic work. We've got a great footprint that overlays our service and maintenance. And let me just talk a little bit about service and maintenance and how it sets us up for these other programs. When we're across 50 states, we're not in every community in every ZIP code, but we're in a whole lot of them. We know how to build there. We know the municipalities. We know the difference in traffic control requirements. We have relationships in those markets. We know how to hire in those markets. So when things like fiber-to-the-home come, when things like long-haul, middle mile come, even when opportunities like BEAD come, we have this knowledge, years of experience on how we can leverage into those, years of experience on what those cost dynamics should look like that we can make sure we price in for success for us and for success for our customers. And so that's really how we're leaning into it. And then we're thinking about the portfolio approach. So fiber-to-the-home has been great work. We're going to continue to lean into that because we have such a great footprint, a lot of great relationships there and a ton of growth. But we're also going to be balancing that with long-haul and middle mile. We are investing in that space. There's a huge amount of training. There's a big difference between fiber-to-the-home training and long-haul middle mile training. And because there hasn't been a lot of the long-haul middle mile work actually put in place to date, even though we've been doing it for 2 years, and we've learned a lot of those lessons. But remember, for the entire industry, there was three decades of quiet, right? There were 3 decades of quiet in doing the long-haul work. And now it's different technology. How you handle these fiber bundles that are extremely large, 864 fiber counts, 1,728 fiber count is completely different than how you are doing something in the community feeding homes or housing development. How you're splicing that and what the testing requirements are, the industry has never seen that kind of rigor. So you're talking about a vast difference. So we're leaning into that. We're training into that today. We've been working on that work today, and we think that really positions us incredibly well to meet the customers' needs because as everybody knows, there is a lot of fiber that needs to get connected around the country. I think that $20 billion is just going to be the starting point, and we see that being a very long arc curve.

Okay. And that sort of ties into maybe the discussion around complexity. And whether it's maybe some of the more rural areas of fiber-to-the-home, the less easy passings or the long haul and middle mile. I mean, how does that differ from maybe the work you've been doing for the last decade? How does that ultimately impact sort of the competitor set when you're going to bid these jobs or looking at those opportunities?

Sure. Complexity has gone up just in general, if you think about the skilled workforce. When I started in the skilled workforce, many decades ago, many decades ago, very different. Today, all of our folks are using technology, right? They're using technology in everything they do. The pace of deployment, and it just doesn't matter what industry you're in, the pace of deployment is way faster today, probably twice as fast today as it was a few decades ago. All of those things come together to add complexity. Then you throw -- let's take fiber-to-the-home. In fiber-to-the-home, you have our customers, the carriers, making commitments on how many passings that they're going to do in a given year. They have build programs that they're trying to hit for internal metrics. That means that you cannot fail, right? You have to meet those commitments. And that's a different -- that's just a different arena with a huge, huge ramp into the project and then a huge expectation that happens month after month after month. Where we've really excelled again is leaning into that training upfront, leaning into using Dycom as a whole, bringing in services like program management to really partner with our customers to make sure that across their portfolio that we're delivering success month after month after month, and we're planning well ahead. But I think that complexity, what we saw was created a lot of challenges in the industry. I think there were a lot of people that really struggled with that opportunity, and it was a differentiator for Dycom. It sets us up really well for the work that's coming. BEAD is going to have a lot of pressure behind it when it comes out. Again, you're going to have time-based pressure, cost-based pressure. You're also going to have a very, very busy industry on top of that. But the one really to look at is this long haul and middle mile. The complexity, if you look at fiber-to-the-home, which incredibly complex, but if you are going to miss a few passings in one neighborhood, you might be able to pick them up somewhere else. On fiber-to-the-home, it's a straight shot, right? And if you miss 200 feet, it's not connected. If you miss 200 feet, you cannot test it. If you splice poorly and you're back digging up splices, you could be delayed for a very long time. All of those things come together to mean that you really have to know and really be able to plan out what that looks like. And then your workforce, you're talking at least 6 months of training. If you're going to take somebody from fiber-to-the-home to bring them over to long-haul middle mile, 6 months of training to get them ready for the difference in that environment. Simple things like traffic control, right? People don't think a lot about traffic control. We drive past it every day. The difference of traffic control requirements, if you're in one municipality or another and in a lot of cases, it could be just across one bridge, you go from one county to the next. The difference in how you price that, think about that, how it interrupts your flow of work, your speed of work can be completely night and day. I mean it can be 2, 3, 4x, 5x the cost to do it in one municipality compared to the other. And if you haven't spent time in those municipalities and you don't have those relationships, I think that's going to be a really big challenge for folks. And again, I think that's where Dycom is just incredibly well positioned to continue to lean into complexity. Kurt, one of my favorite things, complexity favors Dycom.

Okay. I like that. It's got a good ring. And maybe tying it back to kind of fundamentals, like when I think of complexity, I think better pricing, better economics? Like is that what you see in practice? And maybe how does that 50% maintenance and service blend together with maybe some of the opportunity on the program side?