Dycom (DY) is trading down today after lowering guidance this morning for Q4 (Jan) although it has rebounded off its lows. In case you're not familiar, Dycom is a provider of contracting services to various utilities, including telecom/cable providers and electric and gas utilities primarily in North America. It provides program management, engineering, construction, maintenance, and installation services.
Dycom supplies telecom providers with a broad range of contracting services, from program management, engineering, construction, maintenance, and installation to underground facility locating. Engineering services include the design of aerial, underground, and buried fiber optic, copper, and coaxial cable systems that extend from the telephone company central office to the consumer's home or business. Dycom also obtains rights of way and permits.
Construction, maintenance, and installation services include the placement and splicing of fiber, copper, and coaxial cables. In addition, DY digs trenches in which to place these cables; it also installs poles, anchors, conduits, manholes, cabinets etc. It provides these services for both telco and cable operators.
Dycom also provides tower construction, lines and antenna installation, and foundation and equipment pad construction for wireless carriers, as well as equipment installation and material fabrication and site testing services. For cable TV operators, the company installs and maintains customer premise equipment such as set top boxes and modems. It also performs construction and maintenance services for electric and gas utilities.
The company is intensely focused on services to telecom as it represents close to 95% of revenue. This includes everything from central office engineering and installation through outside-plant copper and fiber cabling through limited installations for businesses of structured cabling. On the cable side of the business, Dycom does everything from the cable head-end through the fiber and coaxial cabling right through the set-top box and cable modem installation in home. Dycom also has exposure to the wireless business, which includes everything from lines and antenna through small cell and test and turn-up.
In terms of what has been driving its business, telcos/cable operators are racing to put in higher bandwidth networks to enable video offerings as services like Netflix become more popular. Dycom says it's really the expansion of bandwidth to 1GB that's driving the growth. Also, fiber is the foundation of telecom networks and, on a comparative basis across the globe, the US is very underpenetrated relative to a number of other nations. Dycom sees a lot of runway ahead in terms of growth.
Turning to the guidance, Dycom now expects Q4 (Jan) non-GAAP EPS of $0.09-0.12, down sharply from prior guidance of $0.24-0.36. Revenue is now expected at approximately $655 mln, below the mid-point of prior guidance of $645-675 mln. Looking ahead a bit, the guidance for Q1 (Apr) is also pretty weak: non-GAAP EPS of $0.63-0.78 and revenue of $720-750 mln. Adjusted EBITDA margin for AprQ is expected in the 10.7-11.1% range.
The company is citing widespread adverse weather, which reduced the number of available workdays and negatively impacted productivity and margins during JanQ. Margins were also impacted by costs incurred in conjunction with the initiation of large customer programs. Full JanQ results will be reported on February 28 before the open.
In sum, the stock is trading lower today but not by that much considering how much the guidance was cut. That tells us that investors are understanding in terms of the weather issues Dycom faced in JanQ. Despite the near term weakness, if you look at Dycom from a broader perspective, the build out to 1GB sounds like it still has a lot of runway ahead of it. Also, Dycom is benefitting from not only a higher spend per home but also more of that spending is being outsourced to companies like Dycom. It's sort of a double benefit. And finally, fiber penetration in the US trails a number of other nations. Dycom sees a lot of runway ahead in terms of growth.