Dycom Industries Inc (DY) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Dycom Industries Second Quarter 2021 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Steven Nielsen, President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone. I'd like to thank you for attending this conference call to review our second quarter fiscal 2021 results.

Going to Slide 2. 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 Urness, our General Counsel. Now I will turn the call over to Ryan Urness.

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 2, 2020, 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. Now moving to Slide 4 and a review of our second 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 Reports 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 hope that everyone listening to this call as well as their families are healthy and safe. We are living in truly unprecedented time for our country. I could not be prouder of our employees as they continue to serve our customers with real fortitude in difficult times. They have my thanks.

Now for the quarter. Revenue was $823.9 million, a decrease of 6.8%. As we deployed 1 gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from 2 of our top 5 customers. Gross margins were 20.1% of revenue, reflecting strong overall performance, offset in part by the continued impacts of the complexity of a large customer program. Of note, gross margins last exceeded 20% in the October quarter of calendar 2017.

General and administrative expenses were 8.2%, and all of these factors produced adjusted EBITDA of $102.7 million or 12.5% of revenue and adjusted diluted earnings per share of $1.18 compared to $0.86 in the year ago quarter. Please note that adjusted diluted earnings per share in the year ago quarter excludes $0.23, resulting from the net effect of a contract modification for services performed in prior periods. Liquidity was strong as cash and availability under our credit facility was $474 million. This amount represents our highest level of liquidity in the last 10 quarters.

Finally, we made significant progress in reducing net leverage as notional net debt declined $94 million during the quarter to $668.9 million, a reduction of over $350 million in just the last 3 quarters. Given our progress in reducing debt, our Board of Directors has authorized an 18-month $100 million share repurchase program.

Now going to Slide 5. 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 1 gigabit network speeds to individual consumers and businesses, either directly or wirelessly using 5G technologies. Several industry participants have recently stated their belief that 1 high-capacity fiber network can most cost effectively deliver services to both consumers and businesses, enabling multiple revenue stream from a single investment. We expect this view will increase the appetite for fiber deployments and believe that the industry effort to deploy high-capacity fiber networks continues to meaningfully broaden our set of opportunities as we look forward to calendar 2021.

Access to high-capacity telecommunications has become increasingly crucial to society in the time of the COVID-19 pandemic, especially in rural America. Recently proposed federal legislation and the FCC Rural Digital Opportunities Fund auction scheduled for this fall, reflect the view of some that the needs of work from home, telemedicine, distance learning and other newly essential applications require dramatically increased rural network investment.

We are providing program management planning, engineering and design, aerial, underground and wireless construction and fulfillment services for 1 gigabit deployments. These services are being provided across the country in dozens of metropolitan areas to several customers, including customers with recently stated aspirations to initiate broad fiber deployments as well as customers who appear to be contemplating the resumption of broad deployments. These deployments include networks consisting entirely of wired network elements as well as converged wireless/wireline multiuse networks. Potential fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal incentives. Our ability to provide integrated planning, engineering and design, procurement and construction and maintenance services is of particular value to several industry participants.

Near-term macroeconomic effects and uncertainty may influence some customer plans, particularly those whose capital expenditures have been weighted towards the first half of the calendar year. Customers continue to be focused on the possible macroeconomic effects of the pandemic on their business, with particular focus on small and medium business dislocations and overall consumer confidence and creditworthiness. We see some uncertainty in the overall municipal environment as authorities continue to manage the general effects of the pandemic on permitting and inspection processes, increasing levels of overall activity as states and municipalities reopen and the impacts of business limitations due to COVID-19 flare ups. Overall, we remain confident that our scale and our financial strength position us well to deliver valuable service to our customers.

Moving to Slide 6. Despite the effects of the COVID-19 pandemic on the overall economy, we performed well. During the quarter, we experienced increased demand from 2 of our top 5 customers, organic revenue decreased 6.8%. Our top 5 customers combined produced 76.6% of revenue, decreasing 9.2% organically, while all other customers increased 2% organically. Verizon was our largest customer at 19.8% of total revenue or $163 million. Revenue from CenturyLink was $158.4 million or 19.2% of revenue. CenturyLink was Dycom's second largest customer and grew 14.2% organically. AT&T was our third largest customer at 16.3% of revenue or $134.6 million. Comcast was our fourth largest customer at $131.4 million or 15.9% of revenue. And finally, revenue from Windstream was $43.4 million or 5.3% of revenue. Windstream was our fifth largest customer and grew 25.2% organically.

Of note, this is the sixth consecutive quarter where all of our other customers in aggregate, excluding the top 5 customers, have grown organically. We have continued to extend our geographic reach and expand 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 1 gigabit wireline direct and wireless/wireline converged networks as those deployments dramatically increase the amount of outside planned network that must be extended and maintained.

Now going to Slide 7. Backlog at the end of the second quarter was $6.441 billion versus $6.442 billion at the end of the April 2020 quarter, essentially in line. Of this backlog, approximately $2.455 billion is expected to be completed in the next 12 months. Backlog activity during the second 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.

For AT&T, we were awarded a wireless construction services agreement covering Texas, Louisiana, Kentucky, Tennessee, North Carolina, South Carolina, Alabama, Georgia and Florida, and a construction and maintenance services agreement in Mississippi. From Charter, construction and maintenance services agreements in California, Missouri and Alabama. For Comcast, fulfillment services agreements in Washington, Michigan, Illinois, Pennsylvania and New Jersey. And from Verizon, an engineering and construction services agreement in New York and Pennsylvania. Headcount decreased during the quarter to 14,054.

Now I will turn the call over to Drew for his financial review and outlook.

Thanks, Steve, and good morning, everyone.

Going to Slide 8. Contract revenues for Q2 were $823.9 million, reflecting stable demand despite a challenging economic backdrop. Organic revenue declined 6.8%, and we had solid growth from 2 of our top 5 customers. Adjusted EBITDA was $102.7 million or 12.5% of revenue, reflecting a solid operating performance that resulted in a 223 basis point improvement compared to Q2 '20. Gross margins were at 20.1% in Q2 and were 200 basis points better than the high end of our expectations due to several factors. First, we had broad-based improvement across the services performed for several of our top customers, offset in part by the continued impacts of the complexity of a large customer program.

Next, our operating leverage continued to improve as a result of the headcount reductions we initiated at the onset of the pandemic. And lastly, there were fewer-than-expected disruptions on our business from COVID-19 during the quarter. G&A expense increased 81 basis points, reflecting higher performance-based compensation, offset in part by lower payroll and other costs as headcount declined compared to Q2 '20. Our non-GAAP adjusted income per share in Q2 was $1.18 per share.

Now going to Slide 9. Our balance sheet and financial position remains solid. Since Q3 of last year, we have reduced notional net debt by $357 million. Included in this decline was a $94 million reduction in Q2 from solid free cash flow and from purchasing $234.7 million principal amount of convertible senior notes at a discount for $224.4 million. We ended the quarter with $22.5 million of cash and equivalents, $200 million of revolver borrowings, $433.1 million of term loans and $58.3 million principal amount of convertible senior notes outstanding. As of Q2, our liquidity was strong at $474 million. Cash flows from operations were robust at $82.3 million, bringing our year-to-date operating cash flow to $167.5 million. The combined DSOs of accounts receivable and net contract assets was at 126 days in Q2, which was sequentially in line with 125 days in Q1, but still elevated for the impacts of a large customer program. We expect to continue to make progress on invoicing and collections to improve this metric.

Capital expenditures were $2.5 million during Q2, net of disposal proceeds, and gross CapEx was $6 million. For the full year fiscal 2021, we expect CapEx, net of disposals, to remain in line with our prior outlook of $60 million to $70 million. In summary, we continue to maintain a strong balance sheet and strong liquidity.

Going to Slide 10. The company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. Based on current conditions, the company anticipates contract revenues and margins to range from in line to modestly lower on a sequential basis for Q3 2021 as compared to Q2 2021. The company believes the impact of the COVID-19 pandemic on its operating results, cash flows and financial condition is uncertain, unpredictable and may be outside of its control.

Now I will turn the call back to Steve.

Thanks, Drew. Moving to Slide 11. Within a challenged economy, we experienced solid end market activity and capitalized on our significant strengths. First and foremost, we maintained strong customer presence throughout our markets. Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities. Fiber deployments enabling new wireless technologies are underway in many regions of the country. Telephone companies are deploying fiber-to-the-home to enable 1 gigabit high-speed connections. 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. Fiber-deep 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. Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business.

In addition, we are increasingly providing integrated planning, engineering and design, procurement and construction and maintenance services for wired and converged wireless/wireline networks. As our nation and industry continue to contend with the COVID-19 pandemic, we remain encouraged that our major customers are committed to multiyear 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 as we navigate challenging times.

Now operator, we will open the call for questions.

(Operator Instructions) And our first question comes from Adam Thalhimer with Thompson, Davis.

Great quarter. Steve, the biggest question I'm getting this morning is with COVID and work from home, why didn't there just little bit more revenue lift near term.

Yes. I think, Adam, what we saw in the quarter was there are some of the customers that spent heavily in the front half of the year, and they're prudently managing their budgets. We're encouraged, really looking at what we see going into next year. We talked about really 2 sets of customers or subsets of customers; those that are contemplating or aspiring to broad fiber deployments, and others that are contemplating resumption of broad program. So we just think that it's -- it reflects the overall environment that the economy is in at the moment.

Okay. So maybe you can just elaborate then on the '21? Because you're hinting at revenue growth coming back in '21.

Yes. I mean we're not providing guidance for '21. But I think we are -- if you look at the public commentary across earnings calls and conferences, I think folks are focused on the fact that high-speed connections are important to the economy, probably never more important and customers are reflecting that. I mean we have record broadband adds in the cable industry. AT&T says that they moved 750,000 subscribers to 1 gig connections during the quarter. So clearly, that -- those kind of developments as well as a growing consensus that One Fiber supporting many use cases and enabling multiple revenue streams is the way people are thinking about the business. And I think that just means more investment in fiber going forward.

Okay. And then just lastly, great to see gross margins back to 20%. What's your thoughts on sustainability of that?

Well, as we've talked about it before, we've had -- and mentioned in the comments, we've had the effect of this large complex customer program. And I think if we -- as we've said before, if you pull that out, we've been in line with long-term historical averages. I would say this quarter, we were probably a little bit better. And so I think we're encouraged around margin performance.

And we have another question from Brent Thielman with D.A. Davidson.

Great quarter as well. Steve, maybe following on Adam's question. And then 1 month into this quarter, have you seen the business performing consistent to that flat to modestly down revenue outlook? I know typically, you tend to see some sequential growth into the October quarter, but maybe the outlook is more just concerns that more markets are going to shutdown?

Well, look, we're taking a reasonably cautious approach based on the fact that you can have flare-ups in the COVID, and that can cause impacts near term in the economy. I think it also goes back to what we said in our comments and earlier, we have a couple of customers that had strong first halves, which implies a little bit slower in the second half. I think we're encouraged that when you look at coming out of the second half of this year into next year, that we have people talking about large programs who currently don't have them underway. So I think we're encouraged despite kind of the near-term moderation.

Okay. And then not withstanding some of the customers slowdowns here this quarter, the bookings were pretty strong. I appreciate the award detail. I'm just wondering if there's any color around anything particularly notable in those wins? Or do you feel like the booking strength this quarter was fairly broad-based across your customer group?

Yes. I think it was a solid quarter on backlog. I think we're working on some other opportunities in this quarter and going into the final quarter of the year. In fact, Brent, we got notification of award this morning on a contract that will be, call it, 150 new employees over the next 3 months and about $5 million of CapEx. So I think we're encouraged that customers are open for business, and there are good opportunities for us to grow backlog.

Okay. Great to see the cash flow coming in as well. The DSOs, I guess, still below where you ended last year. Do you still think those can come down as we work through the rest of the fiscal year?

Sure. So if you look at the business ex the large program, those DSOs were in line with last quarter and historically. So we really see no change in customer payment behavior. And in that other large customer program, they were stable quarter-to-quarter. And so I think it's just kind of finance 101, when you stop consuming working capital, you're going to get better EBITDA to free cash flow conversion. And then as we normalize that large customer program, more cash becomes available.

Our next question comes from Sean Eastman with KeyBanc Capital.

Nice work this quarter. I just wanted to start on the DSOs as well. I'm just curious, as you work through the challenged customer program. From an invoicing perspective, should we expect sort of a levee-breaking dynamic as you guys figure that out and as those receivables come in? Or will it still just be a slow trickle? And I'm just kind of curious around that dynamic as you work through that invoicing process.

Sure. So Sean, so first off, right, you've got to keep them from growing, which we're able to do the last couple of quarters. So that's step 1. As we've talked about this program, some of the processes have evolved. That has created some of the challenges. I would say those systems have evolved for everybody based on what I understand. And so I think this is something that the whole industry is working on making better. And I think as time goes by, that we'll see that improve and normalize, and also as we see the mix of work shift. So systems are getting better. It's a big program. It's highly complex, but we're working through it. And we get money in on the program every day, just not enough.

Got it. Okay. And then going back to Adam's question on just the sustainability of the margins. Clearly, came in way better than what you guys were guiding to on the last quarter's call, right? I just wondered if maybe you could give us a little more color on the bridge to where you set expectations to where they came in. I mean, I guess the things I'm thinking about is as fuel and incremental savings. Was there a big benefit from lower traffic on the roads? Was there maybe less revenue contribution from that challenged customer program? Any color on that bridge would be helpful as we think about what you guys can do from a margin perspective next year.

Sure. Sean, this is Drew. So for the quarter, there are really 3 primary factors that I had mentioned previously, driving the better performance. The first was the cost reductions that we made in April carried through in the quarter. Secondly, there was -- I would say there was less of an impact of COVID than expected in the quarter, less disruption. And then lastly, we did somewhat better-than-expected with some select customers.

As far as your question about fuel, the fuel had already come down by the end of last quarter. So there really wasn't much of an incremental benefit this quarter from that. So...

Okay. Great. So basically, nothing sort of one timing that's cost that's going to come back in a more normalized operating environment is what I'm getting at. Just any high-level thoughts from that perspective.

Yes. Sean, this is Steve. So I don't think we saw any -- I mean, we went through our normal process of going through our insurance accruals and all those things. There was nothing particularly abnormal in the quarter for those type of factors. We did -- as we talked about on the last call, we did take some headcount out. We have a number of efficiency initiatives underway, which, in some sense, were accelerated by the COVID, but we were encouraged that we were able to hold those savings through the quarter, and we don't expect to give them back as time goes on. So yes, we hope to be better and hold on to it.

Okay. That's excellent. I'll just sneak one more in, guys. You mentioned the rural broadband opportunity in the presentation. Any perspective you could provide on how big that could be for DY? How well DY is positioned there? Maybe relative to the CAF program for some perspective would be helpful.

Sure. So Sean, there's really 2 pieces that we talked about in the comments. So the first one is the Rural Digital Opportunities Fund, which is a fund administered by the FCC. There is an actual auction that will commence at the end of October to allocate those proceeds across the country. I think we're encouraged there. It's about $20 billion over 8 years. The first phase is $16 billion. And there will be private capital that I believe will come into that program in addition to the FCC money. And so I think we see lots of interest from a number of industry participants in that program. In fact, about a month ago, Charter actually publicly announced that they would participate in the auction and aggressively look to expand their footprint into rural areas that are adjacent to their current service territories. Comcast made similar comments, although they're not going to participate in the auction. So when you have large customers, large industry participants that are focused on rural and accessing that money, we think that's a good thing.

I think then there's -- while nothing's passed, who knows what ultimately gets into further legislation, either with respect to infrastructure or to offset the pandemic, but there was a bill that passed The House a couple of 3 months ago that literally had $80 billion in the legislation for rural broadband. And so I think it goes back to what we talked about on the last call that clearly, the pandemic has highlighted how essential connectivity is in residential and rural America. And I think also, it will also become increasingly important, as at least at the moment, there is this migration or somewhat of an out migration from the cities to rural America, as people have figured out how to do their job from just about anywhere. So I think we're encouraged by both.

With respect to the original stimulus in 2009 that we participated in. We talked about it on the last call. That was ultimately somewhere around $6.5 billion or $6.7 billion of which we did just less than $600 million under that particular program. So I think this is a good opportunity. We -- in fact, under the CARES Act, there was a small and not well utilized portion of the money that states have available to build out fiber networks or subsidized fiber networks. And we actually just started a number of projects in one Southern state, funded with CARES Act money. So we see good opportunities in rural.

Our next question comes from Eric Luebchow with Wells Fargo.

Steve, could you maybe talk about the performance of the wireless business? What type of activity you're seeing and what percentage of revenue it is now? And whether that's coming more on kind of macro tower or small cell deployments? And then if there are any additional opportunities now that Sprint and T-Mobile merger is closed, and T-Mobile has made some comments about really ramping CapEx over the next 5 years, if that's a customer that could be a good growth opportunity for you?

Sure. Eric, why don't I go to Drew and Drew will give us kind of the industry splits, and then we'll talk about wireless.

Yes. So for the customer split, telco was at 70.8%; cable was at 19.8%; facility locating was at 7.2%; and then electrical and other was at 2.2%.

And so specifically, with respect to wireless, Eric. So we were down sequentially, slightly, and we were down year-over-year about 6%. And I think what that reflected is our primary customer made real good progress on FirstNet. But I think it also reflects at least a moderation as customers think about the new CBRS spectrum, which apparently the auction closed yesterday and the upcoming C-band auction. And I think as that spectrum becomes available, that's always been good for the wireless business. And I think from a macro tower perspective, more spectrum bands equals more opportunity for us to grow. So I think we are pretty encouraged based on what we expect to come out of the auctions.

With respect to T-Mobile, I think we've talked about this on the last call, we do some work for T-Mobile. We're not a substantial participant there. But I do think the creation of a very robust competitor to the other carriers, the other top carriers, has always meant in the past that there were opportunities to work for those core customers that we have as they respond competitively. So I think we're encouraged there.

And then I think on small cell. Again, industry numbers that I've seen show somewhere around 200,000 small cells in the country growing to 1 million over 5, 7, 10 years, whatever number, period of time. There's lots of opportunity there around small cell. And as we've talked about that before, that plays especially well to our ability to do the fiber backhaul and front haul, which is really the key element of small cell deployments. So I think we have both a wireless opportunity in terms of radios and antennas and structures as well as the backhaul and front haul.

Great. Very helpful. And just one follow-up. I was curious on the cable space, what you're seeing there. It was nice to see some sequential improvements from Comcast. And obviously, it seems like the residential broadband businesses are doing really well, even with some uncertainty on SMB. So I'm wondering with DOCSIS 4.0 specs coming out earlier this year, when do you think we can see kind of another ramp in commercial deployments as they move toward that new standard?

So we were also encouraged, Eric, that we had sequential growth out of Comcast. And I will tell you that there were opportunities across the cable industry as they split nodes to add capacity. But I'll also say that they were particularly cognizant of how important they are in residential America for connectivity. And so they were careful around things like the AP exam schedule and year-end with high schools. So I think as we look ahead, I think they continue to push more fiber-deeper into the network. And I think we're encouraged that that's a growing opportunity for us through the back half of the year and into next year.

We have a question from Noelle Dilts with Stifel.

And again, congrats on a good quarter. So I recognize there have been a lot of questions on margin. But just to understand the dynamics in terms of your guidance, if we are looking at EBITDA margin sort of potentially flat to down next quarter. Could you walk me through some of the dynamics you're thinking about from a margin perspective? I guess my key question is that you've been making a lot of progress kind of moving from the more challenged phase 1 of the large complex customer program into phase 2, which seems to be more profitable. I guess I would think that some of that would continue into the back half and maybe offset some of the pressure from potentially one of the large customers being more -- 1 or 2 of the large customers being more front-half loaded. So is there anything else we should really think about just in looking at that sequential margin trend?

I think, Noelle, it just reflects our view as to total revenue. So once again, we had a couple of customers, not all customers, that spent heavily in the first half of the year, and they're managing their budgets well. And so that creates a little bit of negative operating leverage as they adjust I think -- but we also have opportunities as we get into the fourth quarter and can start working on next year's budget, but I think there are opportunities as we go through the balance of the year for that to reverse. I think we're going to take a prudent position around the impacts of the virus on customer spending and also on our ability to get the work done. And there are other reasons to do that. For example, as I mentioned earlier in the call, we're going to be starting a fairly sizable contract that's new, with a fair amount of hiring. And it's not a big deal across the company, but those are the kind of things that will have benefits going forward, but take a little bit of cost in this quarter.

Okay. And then while it seems clear that coming out of the coronavirus crisis, you're seeing broadband deployments accelerate overall. But I guess, one subsegment of the market that came up a few times in channel checks where folks were a little bit worried about the outlook was more on fiber to small to medium businesses. I know in the call, you mentioned continued confidence there. Is there any concern that you might see small to medium businesses kind of deferred decisions on maybe upgrading their connections? Just curious how you're thinking about that.

Yes. I think what we said in our comments, Noelle, is that something -- that those kind of dislocations or potential dislocations to small and medium business is something customers are paying attention to, and we are also. And so I think that's just another reason to have a prudent view on the back half of this year. That being said, we're encouraged by the activity around the residential line, right? So it's always kind of the demand moves around. And right now, it's more residential than on SMB. But then again, as the economy comes out and we get a vaccine, I think that may be a potential area where growth resumes.

Our next question comes from Alex Rygiel with B. Riley.

Understanding the rural broadband market opportunity, but could there be a gap between funding, between sort of your activity levels of today or last quarter versus when some of these new programs start? And what kind of downside pressure could we see from that, if any?

Well, Alex, if we look at what I'll call nontraditional rural work, it was about 3% in the quarter, and it was growing last quarter sequentially, but not -- it wasn't a huge ramp up. And I think we see that steady. And we see the new funding sources being additive to that base level of activity because even now in rural America, with private capital, there's a fair amount of work that's going on right now. And in fact, as we've mentioned earlier, some of it's picking up with some of the earlier funds available under the CARES Act. So I'm not concerned that what we have currently underway slows. I think what the new funding to the extent it becomes available, will only accelerate the trends that we're already seeing.

And your kind of official guidance continues to be a little limited this year, understanding COVID issues and whatnot. But your commentary is fairly upbeat about prospects for 2021. At what point do you think you might be more extensive in your guidance as we get closer to that 2021 opportunity?

Yes. I think, Alex, just as we said on the last call, we have mixed approaches from our customers to how they're guiding. And to the extent that they're still mixed, we don't want to get ahead of them. I think as they go through their fourth quarter calls -- or third quarter calls and into fourth quarter calls and become clear about what they expect next year as well as we see the outcome of the CBRS auction, we see the outcome of a number of other potential stimulus bill or infrastructure bill. I think as they get more comfortable, they will become more forthcoming.

And one last question. Last conference call, there was some conversation around short-cycle work. How did that play out in the quarter? And what's your outlook in the current quarter?

Yes. So I think in the short-cycle business, what I would tell you is it was steady in the quarter. So I don't think we had a tremendous change in our expectations from where it was in May. With the virus spiking in July and August -- or early August, I think there were some impacts limited to the business, but I think we saw some. But that's all baked into to our outlook for the third quarter.

We have a question from Jon Lopez with Vertical Group.

I get 2.5 questions. The first one, I guess I find myself still like a little confused by backlog. So maybe I could just ask it this way. If we look at the greater-than-12-month number, it's still down sort of high single digits. Is this because the customers are seeing these network stresses and all of the various things that we've been discussing, but just haven't yet put in place plans to deal with that? Or just how do we filter the sort of disparity, if you will, between those 2 things?

So, Jon, about 70% of revenue in every quarter and I think also this quarter is typically under master service agreements. And the way the backlog under master service agreement gets valued as we look backwards for 12 months, we take the monthly run rate, and we multiply that times the number of months remaining, right? And so it is sensitive to the renewal cycles or it's sensitive to new awards. And so from our perspective to try to draw any conclusion -- or any precise conclusions around customer demand in the near term or for any given quarter, based on the backlog that's calculated that way, has not been particularly effective in the past. I mean, for example, we're going to book a reasonable amount of backlog on a contract we just got this morning, right, And if it had been booked 3 weeks ago, it would be included in this number. So it's just not the way we think about backlog.

Got you. Okay. So that argument is sort of it's timing related, like this stuff is starting to come.

Yes. As we renew a contract. So remember, we have -- we've had areas that we've served for decades. Contracts come to an end. We renew them in the period before they're renewed. There's no next 12 months backlog. On the day we do renew them, there is 12 months of backlog. It's a calculation that's subject to timing.

Got you. Okay. My second question, I realize there's a lot of different factors that go into this, but I'm just going to ask the question this way. If we look at Verizon's CapEx for the first half of the calendar year, it's up quite a bit. If we look at your revenue horizon, it's down quite a bit. Can you just parse apart some of the dynamics at work there? And at what point would you expect some improvement with that costumer?

So, Jon, similar conversation with backlog. So keep in mind, all of our customers, not any 1 in specific, recognize CapEx on a cash basis. And they have equipment that they purchase through the CapEx line that goes in and out of inventory. And so on a short-term basis, it's pretty difficult to correlate their spending directly to our revenue line, right? They're big companies, we don't work for them in all facets. Now what I would tell you is there are times where what they spend in 1/2 of a budget year compared to the full budget year will impact the intensity with which they work in the second half of the year as they reassess the priorities, as they look ahead to the next year. But on any given year, our revenue with that particular customer has grown pretty dramatically over the last 3 years, but the CapEx has been essentially flat over the same period of time, which would tell you of the difficulties in using it as a tight statistical measure.

Got you. Really helpful. My last one, just coming back to the gross margin topic. I guess I want to ask it this way. You're already in the low -- or I guess, very low 20s. If we look back historically, that number has gotten up a couple of hundred basis points from here a couple of times. I guess the question is, the current level does not yet incorporate the improvements from that large customer contract. Like all else equal, doesn't that kind of argue that, that historical-- a couple of hundred basis point lift from here is reasonable?

I think what we've always said is that over the last couple of years, if you control for that large customer program, we have been in the middle of our historical range around margins. I think this quarter, we were a little better. And we're going to work hard to continue the trend. Obviously, no guarantees, but we're encouraged.

(Operator Instructions)

Our next question comes from Alan Mitrani with Sylvan Lake Asset Management.

Just before we go ahead, do you mind giving us the rest of the top 10 customers and their percentages?

So Alan, they are on the -- on Slide 6 in the presentation material, they're outlined there.

Fair enough. I'll look at that. And then as it relates to gross margin, just following from the last question, do you think all these issues that you've referenced regarding your large customer, Verizon, who's been challenging, will be finished by this calendar year -- by this fiscal year?

So Alan, we don't, in total, but as we talked about in February and then again in May, and we're still broadly comfortable with that, we see substantial progress by the end of this fiscal year. There may be 1 or 2 projects that extend beyond for some period of time, but we're actually encouraged that for the -- particularly for one that's extended -- extending, it's a better mix of work. And so I think there's -- at a high level, not a lot of change from when we spoke in May.

Okay. And then just to run down the P&L. It seems like the -- even though the revenues have come in from year-over-year, the SG&A has not so much. It came out a bit. Ex stock comp, it's slightly flattish, you're holding it flat. Do you think that these cost cuts that you put in, some of the headcount taken out will show up in SG&A? How -- like where was it in the quarter? Was it towards the middle of the quarter, beginning of the quarter? How should we think about that going forward on a run rate basis?

So Alan, the cost that we took out in April stayed out in the business. But we had better performance. And a number of our incentive plans are formula driven. And so they -- the bonus expense reflected that increase in performance in the business. But when we look at G&A and strip out stock comp and that incentive compensation, we made real progress quarter-to-quarter.

Okay. And then your PP&E has been dropping significantly, call it, since a year ago -- or a year and change ago, it was $430 million, now it's down to $315 million. And I guess your other income went up as well. Are you -- I mean even though you just got this new business, are you getting rid of assets, selling some out because you think you have enough, you're working them harder? Or what's -- can you just walk us through how that works relative to what the book of business could be in the next year?

Well, Alan, we've always had a pretty routine replacement cycle. And that typically took advantage of the fact that we sell our used assets at a nice percentage of what we pay for them. Given the uncertainty and where our leverage levels were at the beginning of the year or, say, 12 months ago, we worked aggressively to make sure that we were managing our CapEx appropriately. And we've been able to do that without any increase in maintenance expense from last quarter to this quarter. I think now that leverage is approaching target kind of in that 2 area, we'll continue to look to grow organically. And as we talked about earlier, we're going to spend some money this quarter on a new startup. And we'll also look to our basic capital allocation framework that says we're going to fund growth in CapEx, and then we're going to evaluate share repurchases versus deploying the capital through M&A. And that was something that we were not aggressively looking at when we were at a leverage level that needed to come down, but now that we're approaching target, we have more capital allocation opportunities, and we also have more opportunities to revisit CapEx.

We have a followup from Adam Thalhimer with Thompson, Davis.

Steve, I wanted to ask on the buyback, it seems significant to me from the standpoint -- I mean we keep -- all of us are asking about sustainability and margins and when does the revenue turn positive. But I don't know, I kind of read the buyback announcement, is that you feel confident about?

Well, look, we -- let's face it. There hadn't been a lot of fun around here for a while. We had leverage that was at levels that was above target. We've done -- the organization, this isn't me or Drew or Tim. The organization has done a great job over 3 quarters of taking leverage down $357 million. And that allows us to contemplate actions that will create value for shareholders that when the leverage was up, we were more constrained in what we could do. And I think that's what the buyback shows. And as we talked about earlier, our EBITDA is up if our DSOs stay stable, and we're working hard to get them to improve our free cash flow conversion goes up, then we generate cash. We're at a lower level on the revolver today. I think we're at $45 million less on the revolver today than we were at the end of last quarter. So yes, we have some things we can do with the cash as it comes in.

Okay. And then a couple of times in the Q&A session, and particularly, in one of your answers to Noelle's question, you're referencing a large start-up or large program in the back. I'm not sure to know what that is.

Well, beside the fact that we said that we just got notified of it today, and it's about 150 employee start-up this quarter with a core customer, and it'll be about $5 million of CapEx. And that's a good use of the cash flow that we've generated over the last 3 quarters.

Okay. And lastly, Drew, can you just -- what's the interest expense we should be plugging in the model for the next few quarters?

Yes. First of all, Adam, there's clearly lower rates out there right now, which is helpful. I think if you look at where the revolver ended up and there's a scheduled pay down on the term loan as well, if we can continue to generate cash flow and take down the revolver, I think you can just do the math from there. I mean there's really not much left on the convertible notes. We completed that -- or those are down to $58 million or thereabout after the buyback in the quarter -- last quarter.

And there are no other questions in the queue. I'd like to turn the call back to Steve Nielsen for any closing remarks.

Well, we thank everybody for joining the call, and we look forward to speaking to you again in November. Have a good day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.