Dycom (DY) is under pressure today (-17%) after reporting strong Q3 (Apr) earnings but providing weak Q4 (Jul) guidance. 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.
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.
Turning to the Q3 (Apr) results, non-GAAP EPS came in at $1.30, much better than prior guidance of $1.11-1.24. Revenue rose 18.3% year/year to $786.3 mln, also well above prior guidance of $715-745 mln. The problem is the guidance for Q4 (Jul) was well below market expectations. DY sees non-GAAP EPS of $1.35-1.50 and revenue of $780-800 mln.
On the call, explained the guidance saying that it experienced a stronger than expected start to the calendar year and its outperformance in Q3 (Apr) may have pulled revenue forward from Q4 (Jul). Also, two of its top five customers are in the M&A process, which is impacting guidance as well as these customers deal with that. Dycom also expects some normal timing uncertainty and customer spending modulations. Based on these observations, Dycom says its near term expectations have been tempered.
In sum, the stock is under heavy pressure today as the JulQ guidance is spooking some investors. However, it seems more related to timing issues and not to overall demand. 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. A lower regulatory environment with the new administration should help as well.