Dycom Industries Inc (DY) 2003 Q1 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the Dycom Industries earnings conference call. At this time all participant lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. If you should require assistance from an Operator during the conference please press zero then star. As a reminder the call is being recorded. I would now like to turn the conference over to president and CEO Mr. Steven Nielsen. Please go ahead, sir.

Thank you, Rita. Good morning, everyone. I'd like to thank you for attending our first quarter fiscal 2003 Dycom earnings conference call. With me we have in attendance Richard Dunn our Chief Financial Officer and Timothy Estes our Chief Operating Officer. Now I will turn the call over to Dick Dunn. Dick?

Thanks, Steven. Statements made in the course of this conference call that states the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings, including but not limited to the company's report on Form 10(k) for the year-ending July 27th, 2002. Copies of these filings may be obtained by contacting the company or the SEC. Steve?

Thanks, Dick. Yesterday we issued a press release announcing our first quarter 2003 results. Please note that for fiscal 2002 we adopted SFAS-142. As a result of our adoption of SFAS-142, we booked a loss of $86.9 million net of tax during the first quarter of fiscal 2002 as a cumulative effect in a change of accounting principal. Consequently in order to assure accurate comparisons all references to prior periods are pro-forma as if we had not recorded the cumulative effect of the change in accounting principal in the year ago period.

For the quarter ended October 26, 2002, total contract revenues were $158.5 million versus $167.8 million in the year ago period, a decrease of 6 percent. Net income was $4.1 million versus 8 million, a decrease of 49 percent while fully diluted earnings per share was 9 cents versus 19 cents, a decrease of 53 percent.

Backlog at the end of the first quarter of 2003 was 673.8 million versus 795.1 million at the end of the fourth quarter of 2002, a sequential decrease of 121 million. Of this backlog approximately 346 million is expected to be completed in the next 12 months. Our first quarter results continued to be impacted by the significant challenges facing our industry. Backlog decreased sequentially from the fourth quarter of fiscal 2002. This decrease was primarily attributable to a continued slow down in telephone company capital expenditures as well as a lull in new project awards from AT&T Broadband (ph) and Comcast prior to the closing of their merger.

Gross margin while stable was unfavorably affected by increased casualty and medical insurance expenses and the settlement of two pieces of outstanding litigation. While general and administrative expenses were impacted by increased professional fees in part driven by previous difficult disclosed customer bankruptcies.

Despite these negative developments we were encouraged that our core business continued to per farm perform well given a tough operating environment. Gross margin remained in excess of 22 percent. Additionally working capital and our current and quick ratios all improved from last quarter.

Liquidity remained ample with over $111 million in net cash and we maintained our industry leading position with a day sale outstanding of 78.8 days.

During the quarter we continued to experience the effects of the slow overall economy, reduced capital expenditures by telephone companies and the lingering impact of Adelphia's withdrawal from the cable construction marketplace. However these factors were increasingly offset by accelerating sales to AT&T Broadband and some indications of a bottoming in capital expenditure declines among some telephony company customers. These developments among others point to mixed industry performance in the near term with firming of potentially improving performance possible in the spring of calendar year 2003.

Sales to AT&T broad band increased sequentially in the quarter by over 44 percent to 24.7 million. AT&T broad band was Dycom's largest customer for the quarter in 15.6 percent of sales. On November 18th subsequent to the end of our quarter Comcast and AT&T broad band closed their merger creating the largest cable Operator in the United States. Comcast has publicly stated that it will aggressively upgrade its newly acquired systems and has budgeted $2 billion for the labor services and material required to do so during calendar 2003 and 2004.

For telephone companies, planned capital expenditures by certain customers accelerated towards the end of the quarter in order to ensure project completion before the end of the calendar year while historically the seasonal pattern is not unusual and was somewhat unexpected given the steady downward revisions in budgets and actual expenditures over the last five or six quarters.

Finally, pricing discussions with a specific top five customers were unfruitful and that relationship will be terminated by the end of January 2003. While generating certain demobilization expenses in the near term, this will likely enhance our financial performance in calendar 2003. On balance, these factors point to continued near term softness, yet with an increasing likelihood of a firming results during calendar 2003.

To manage our near term challenges we have continued several initiatives to offset pressures on operating margins. First we will maintain a reduced level of capital expenditures, net of proceeds from firm disposals, capital expenditures were only $200,000 in the quarter. Our fleet of capital equipment is in good condition and significantly reduced investment will have little or no impact on operational expenses.

Secondly, particularly in our telephone operations, we will continue to sell idle assets, even those assets which retain significant useful lives. And thirdly we will continue significant reductions in general and administrative expenses to better align our administrative costs of near term anticipated activity. In fact, we are proceeding with eliminating three reporting units and are continuously evaluating additional consolidations if necessary.

While we sincerely regret the adjustments to our employee head count that we have made and will continue to make, they are necessary to maintain our substantial strength and better position Dycom for the current environment. While backlog was down sequentially for the fourth quarter, we have maintained a disciplined approach to new business, only booking new work so long as it meets our margin targets.

In our industry during periods of reduced demand it is extremely important to avoid prolonging reduced margins through aggressively booking low margin backlog, particularly in an environment where firming conditions may become more likely.

As Dycom responded to a challenging environment this quarter, we demonstrated our continued stability. First and foremost we maintain strong customer relationships throughout our markets and particular growth with AT&T Broadband was encouraging. Net cash remained ample and we maintained a strong working capital position.

While our pricing environment remains tight, we remain focused STEPHANIE: on time tested cost controls and productivity improvements as we continually evaluate appropriate staffing and capital equipment levels. In these difficult economic times we firmly believe that Dycom's superior financial health will increasingly allow us to differentiate ourselves from our competitors in the eyes of our customers, employees and suppliers. Dycom's financial strength is key to our belief that when growth opportunities return to our industry, we will be the first and the best position to take profitable advantage of them. We believe that this advantage relative to other interested participants becomes more pronounced every day.

After weighing all of the factors we have discussed today we have updated our forecast as follows: For the second quarter of fiscal 2003, we anticipate earnings per share of three to 7 cents. On revenues of 135 to 150 million. This outlook anticipates a continued slow economy in the U.S., normal seasonal weather, increased spending by Comcast on its newly acquired systems, soft seasonal demand from our telephone customers, certain demobilization expenses likely to be incurred in terminating a customer relationship at the end of January 2003, and professional fees driven in part by customer bankruptcies and in part by fees associated with establishing a more tax efficient legal structure.

Looking beyond the second quarter we are not currently in a position to provide specific guidance for the third quarter of fiscal 2003 as macroeconomic conditions capital market volatility and some customer plans remain uncertain in the intermediate term. That being said we have three observations as to what factors will be important to track during the next 12 months. First, for cable operators the pace at which Comcast upgrades its newly acquired systems will be key. Second, for telephone companies it appears that current capital spending run rates will remain lackluster without a significant increase in overall economic growth or regulatory relief. Eventually to the extent that reduced levels of activity are maintained in the near term, we believe that either of these catalysts will ensure a more sustained rebound in the future when necessary expenditures can no longer be delayed.

And finally, recent developments continue to indicate that substantial competitive capacity may be less able to respond to increased future customer demand due to capital constraints. This trend may accelerate as even larger more significant competitors have recently experienced difficulties. At this point I will turn the call over to Dick Dunn, our CFO. Dick.

Thanks, Steve. Before I begin my review, let me remind everyone that the results for the year ago quarter ended October 27th include an after-tax not cash impairment charge to good will of 86.9 million or $2.02 per share. This goodwill impairment's a cumulative effect of adopting SFAS-142 and this requires thereby the first quarter of the prior fiscal year to reflect this charge for purposes of my discussion of the financial results I will eliminate this charge.

Contract revenues for the current quarter were 158.5 million, down 5.6 percent from last year's Q1 of 167.8 million. Revenues for the quarter are on a same store basis were down 27.3 percent. For the quarter sales from our top five customers accounted for 49.8 percent of total revenues versus 53.6 percent for the prior year's first quarter.

And the run down of the top five customers is as follows: for Q1 fiscal 2003 top five customers were AT&T, at 15.6 percent, Bell South at 12.6 percent, Direct TV at 8.3 percent, Comcast, 6.8 percent, and [inaudible] at 6.5 percent. The top five customers for the Q1 of fiscal year 2002 were as follows: Comcast 17.7 percent, Bell South 16.0 percent, Adelphia 8.4 percent, Quest 6.5 percent and Sprint at 5 percent.

Net income for the first quarter was 4.1 million versus 8 million in fiscal year '02 representing a decrease of 48.8 percent. Fully diluted earnings for the quarter were 9 cents per share, a 52.6 percent decrease from last year's 19 cents per share. Operating margins for the quarter decreased 377 basis points coming in at 3.66 percent versus last year's 7.43 percent. This decrease was due to a 38 basis point increase in cost of running revenue, a 195 basis points increase in general and administrative expenses and 144 basis point increase in depreciation and amortization.

Increase for general administrative expenses were in part related to professional fees associated with the maintenance of lanes and the monitoring effects of these proceedings associated with receivables of the major cable customer as well as professional fees associated with the establishment of a more tax efficient legal structure. The effective tax rate for the quarter was 42.5 percent versus 41.6 percent for the prior year's period. Net interest income for the quarter was approximately 275,000 versus 926,000 for the comparable prior year period. This decrease was a result of lower interest rates and invested balances.

Our investment balances were reduced primarily as a consequence of the repayment of debt associated with the Argus acquisition. Additionally we recorded an interest charge of approximately $200,000 as a result of a legal settlement. The interest income is generated through investments in high quality corporate and municipal instruments. Other income for the quarter consisting primarily of gains associated with disposition of fixed assets was 1.1 million versus 347,000 for the comparable quarter in our fiscal 2002 year.

Operating activities for the quarter resulted in negative cash flow of $4.7 million. The primary components of this amount were an increases in working capital of approximately 19.6 million offset by net income of 4.1 million and depreciation and amortization of 10.8 million.

Investing and financing activities for the quarter resulted in the use of $40,000. The primary components of this amount were capital expenditures of 2.1 million, offset by proceeds from the sale of fixed assets of 1.9 million and 200,000 of proceeds associated with the exercise of employee stock options -- and cash and cash equivalents at the end of the quarter were $111.3 million down 4.8 million from the prior quarter. It should be noted we continue to operate essentially debt-free with total notes payable below $100,000.

During the quarter current net receivables increased from $86.4 million to $105.1 million resulting in a DSO of 60.4 days. This figure represents an increase of 3.2 days in the last quarter's DSO 57.2 days. Net unbilled revenue balances decreased in the quarter from 33 million to 32.1 million resulting in the DSO of 18.5 days. This represents a decrease of 1.8 days from the last quarter's DSO's 20.3 days. On a cumulative basis the combined DSO for trade receivable and net unbilled revenue increased from 77.5 days to 78.8 days an increase of 1.3 days.

Net intangible assets were essentially unchanged at 107.6 million. At October 27th our approved self insurance was 20.3 million up from the prior year's quarter balance of 19.3 million. Steve?

Thanks, Dick. Now Rita will open the call for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the one on your touch tone phone. You will hear a tone indicating you have been placed in queue. If you pressed one prior to this announcement, we ask that you please do so again at this time. You may remove yourself from queue at any time by pressing the pound key. Our first question is from the line of Alex Rygiel at Friedman, Billings, Ramsey & Co. Please go ahead.

Thank you very much. Steve, congratulations on a nice quarter. a couple questions. Can you quantify the expense from professional services in the fiscal first quarter as well as quantify the impact on your fiscal second quarter guidance?

Well, the first quarter amounted to about 50 basis points of that of the increase, Alex.

Okay.

Second quarter we're looking at about seven, $800,000 as part of the tax planning project.

Okay. And I understand that your share repurchase authorization is due to expire in the next week or so. Do you have any interest in reauthorizing new share repurchase program?

You know, we're always constantly evaluating our opportunities. The question for us, Alex, is always what we can do with that cash externally either through acquisition or hopefully funding some growth next year. And, you know, we'll look at it and our board supports us in the approach that we take.

You mentioned a couple times firming conditions may become more likely. I suspect some of that firming of conditions is relative to your telecom customers. Can you discuss UNE P rules of pricing and how it's impacted some of your tell come customers in their capex budgets and what your outlook is over the next 12 months with regard to UNE P and how any resolution can impact capex by your telephony customers?

I think there are really two regulatory issues, Alex that are driving primarily our RBOC customers. One is the unbundled network elements you referred to, the other is the classification of their high speed data services as information services rather than telecom, which would pull those out from the traditional regulatory framework and really allow the RBOCs to treat their high speed data services in the same way that cable operators can treat and price cable modems.

I think that the FCC is currently reviewing among the UNE P regulation as part of their triennial review, you know, general sense is that with kind of the changing political fortunes in Washington that there may be a more sympathetic ear to our telecom customers. There is also legislation that was proposed last year regarding the classification of these high speed data investments as information services that probably has a higher likelihood of congressional approval when the new Congress takes over next year.

And one last question. If we were to exclude Direct TV in this most recent quarter, what would your gross margins have looked like?

You know, we have a pro forma that, but we can tell you that the gross margin on the Direct TV business was eight to ten basis points under where the company was as a whole.

The next question is from the line of Steven Fox with Merrill Lynch.

Yes, good morning. a couple questions. First of all, Steve, on the gross margins you looked out over say the four to six quarters, and assume that dropping and adding of customers is part of your normal course of business, what type of gross margin range would we expect from the company if the volumes are, you know, relatively stable?

The ceasing of the Direct TV business and the addition, as we've seen this quarter, of increasing amounts of cable business would tend to drive the gross margin to more normal historical levels which have been any, you know, in the 25 to 26 percent range. And that's certainly our active goal to get it there over that time period.

And is it possible to be more specific about the G&A levels say the next several quarters? I mean, is there a range of dollars, even with some of the projects you're work on that we could expect it to be in, or --

I think in -- there are two factors going on. On the telephone side we're continuing to evaluate the number of the business units to make sure that we are rational in our corporate structure. and that would tend to reduce at least absolute levels of G&A. On the other hand, if we do experience what we see as some potential growth next year, we'll add some nominal G&A, but we should be able to shrink the percentages, get a little bit of leverage out of the growth. With the idle equipment we have and with the less than robust growth that we've been experiencing, it's been hard to have G&A leverage.

Right.

Like we have had in the past.

Ram Kashagab (ph) Morgan Keegan.

Congratulations, Steve. I've got a couple of questions for you. In this first quarter, your revenues came in about where you thought it would be. I know you gave us some reasons for why. Can you go by that once again? Where was the positive surprise in this quarter in terms of revenue?

I think there were two predominant factors, Ram. One was we had an increase sequentially of a little over $7 million from AT&T broad band in the first quarter versus the fourth quarter. Secondly, we saw, not with all telephone company customers, but with several, we saw little more urgency about completing projects by the end of this calendar year which meant activity picked up, really beginning the end of September through October. And then, you know, we also had one large project going on out West that was very active in the quarter.

I need to ask you to look at the second quarter. The ranges that you're giving for the second quarter are very similar to what you gave as a range for the first quarter on your fourth quarter conference call. Where would you expect to see any positive surprises if they were to come?

You know, I think the issue would be the carry through of the telephone company spending in November and December. So that all indications are there they're still interested in spending their budgets which is kind of refreshing after five or six quarters where that was not a real management imperative. And then secondly, really, the ramp up of the AT&T, what was AT&T now is Comcast, Broad band upgrades, really pretty much across America. And as Comcast has done before, they're usually pretty aggressive on closure of a merger to get down to business. So I think that would be the other factor that we would watch. The offsetting factor is just the demobilization expenses and focus issues on this Direct TV contract.

And then the final question I would have for you is when you look at your MSA business, can you give us a quick update on where that stands relative to the company total? And when you look at MSA's, to what level are the Bell companies spending on their commitments relative to the past?

Dick, go ahead with the percentages.

The master percents, Ram, were 44.8 for the quarter versus 40.8 for the prior year. So the master contract percentages for our business have been stable. I would say that the performance is somewhat mixed, and even mixed within an RBOC. Some budgets they have money to spend and they're being allowed to spend it. Others have run a little hotter earlier in the year. And it's slow, but we are seeing more of a fourth calendar quarter seasonal effect to make sure that budgets are spent than we saw last year. Clearly last year nobody was interested in spending budget money, even if they had it.

Next question Chris Gutek, Morgan Stanley.

Thanks, good morning, guys. Steve, you talked about competitive landscape and some of the bigger competitors getting out of the business, I guess Arise (ph), Linknet (ph) and certainly lots of smaller ones would be examples. Could you talk about the process of how this works especially some of the bigger competitors as they're shutting down operations? Are those contracts coming up to bid, how aggressive is the bidding, how many bidders are you seeing and to the extent you guys should have competitive advantage being one of the stronger companies out there, is that actually happening?

Yeah, I think there's really two effects. One is a little more sit subtle. I think generally as some of the larger competitors have had difficulties, our customers are certainly aware of that. And if they aren't, we bring it to their attention. And I think that has made it somewhat easier for us to either extend or negotiate new business, because there's just a backdrop where the financial stability that we bring is highlighted by other competitors' difficulties. I think in terms of the -- of how the capacity gets rationalized in the business, in those areas of the business where bonding is required, as they have difficulties with credit facilities and debtor in possession financing, that has shut out some participants from the surety market.

So they're just not there. And I think furthermore we've seen some signs that at the reduced levels of activity, that even the smallest of our competitors are realizing that they've got the to deal with the lack in revenue, not by cutting prices, but by firming the prices up, which is a little different dynamic than we saw probably six months ago.

And regarding pricing, I know it's difficult actually if not possible to actually quantify. But if you were to try and quantify say for a particular project what the pricing would be -- unit price basis versus a year ago, what level of price decline in the aggregate across your entire business would you say you're experiencing?

You know, maybe two to 3 percent, Chris, and certainly nothing that we are not able to pass down to our subcontractors and the rest of our cost structure. So, you know, the kind of the step change adjustment in pricing was really kind of a first three quarters of 2001. We have not seen significant adjustments subsequently.

Okay. Finally if I could, what exactly are you doing to create more tax -- legal structure, would will be the end impact on the final tax rate?

We're streamlining our structure, establishing a different corporate structure using LLCs versus C-corporates which will allow us to consolidated in many states, Chris, should help us on the apportionment basis. As we ramp into this we expect we'll save something in the neighborhood of 1.5 - 2 percent. It will ramp into that.

The other thing is does for us, Chris, it simplifies the number of tax returns that we're going to be filing since we'll be able to file on a consolidated basis rather than having to generate individual returns at the state level by subsidiary.

The next question Richard Diamond (ph) Enwood (ph) Capital Partners.

Hey, Steve, nice quarter. I just wanted to get your thoughts on a devil I can't, if you could give us some color, and whether you'll forecast for potentially firming conditions and that's where it includes or excludes potential Adelphia?

We had a little over $6 million in the quarter with Adelphia, 6.8 million. So they're still spending money. and post edition, they're paying their bills very promptly. I think the issue for Adelphia which has been rumors in the trade press is that they're just trying to determine what the top of their corporate structure is going to look like going forward. And I think they're somewhat hesitant to accelerate their spending plans until their debtor in possession finance, banks that are financing the company are confident with what the plan is from a management standpoint. They certainly still have the needs. There is work ongoing, but I think if we can resolve the management structure, that they will come back to the marketplace.

So is it fair to say that your conservative forecast only shows minimal Adelphia work in 03, but were Adelphia to come back strongly that Dycom could be a beneficiary?

Yeah, we did not forecast anything over kind of the maintenance levels. And of that 6.8 million, probably a third of that volume is installation and locating services that they've got to do every day. So we really did not forecast a substantial amount of upgrade capital spending by Adelphia. So there are still substantial projects to do in LA, substantial projects in New England and elsewhere. So -- and the need is there. We think the financing will be there as their plans come together.

Thank you very much.

Mark Hughes SunTrust Robinson Humphrey.

Thank you. You described a $2 billion opportunity with AT&T. Kind of given the market position, you've got and -- Argus what they have in their markets, how much do you think you're competitive for?

Let's back up, Mark. Let's be clear that the 2 billion includes the material.

Uh-huh.

Okay. So the old rule of thumb is, you know, 900 million to a billion of labor services.

Uh-huh.

Could be a little more, could be a little bit less, depending on the mix of the work.

Is that annually or over the two years?

That's over the two-year period that they have disclosed publicly.

Right.

You know, we think we're in a good position. We talked about it when we acquired Argus. AT&T Broadband was Argus' historically, their largest customer. We have subsidiaries that are -- that we acquired through Argus located in large new Comcast clusters such as Denver, Seattle, the Bay Area, the metropolitan Boston area. So we think that the Argus transaction well positions us for it. There are no guarantees in this business. We've got to perform every day and keep the customer happy. But if we perform the way Comcast has expected we would, we'll get our fair share.

Care to throw a number at that or a range?

I think historically we've said that with Comcast we did not do a majority of their work, but at times we could see it, and we'll, you know, there are no guarantees and no assurances, but we're going to work hard to perform as well as we have in the past.

Right. So to interpret, maybe you'll have a good opportunity, maybe slightly less than half of that business?

You could draw that conclusion, but I'm not saying that. We're just going to work at one project at a time and do a good job, and in the past they've always rewarded good job with more work.

I understand. Quick question on Telco. You talked about acceleration in the fourth quarter. I think as part of the public relations effort the folks have been a little more conservative in the outlook and Telco's have been more conservative for next year. What do you think the first quarter looks like? Looks like there's a fourth quarter bubble here. Is the strength going to continue into the first quarter? Calendar quarter?

It's unclear to us. Quite honestly we're just happy to have it up sequential quarter with our telephone company customers. Not all of them, but, you know, a significant number of those.

I see. And finally, cash flow in the quarter, I did not get.

Operating cash flow was negative 4.7.

Thank you very much.

Alan Matrani (ph) Copper (ph) Beach (ph) Capital.

I have a couple financial questions, if you can. The tax rate you talked about steps you're taking to lower the tax rate, does that mean let's say for calendar '03 period we could use something more a 41.5 percent tax rate? Does that make more sense on a calendar basis?

Yeah, with a little bit of back-end loading on that.

Okay. That's fine. Also you talked about two legal issues settled this quarter which hurt margins a bit. How much was that on the pretax and after tax basis?

We had pretax about a million and a half dollars in the cost of goods line. and as I mentioned we had about 200 of interest associated with it.

I'm sorry, I didn't understand that. The legal settlement cost you how much? It was a million and a half dollars you said?

Pretax in the cost of goods. And we had also $200,000 interest element recorded on the interest line.

So it cost you a little over 2 cents this quarter relative to that if I do the math, if I just take 1.7 million, give it roughly a 58 percent tax rate divided by 47.8 million shares, 2 cents this quarter you're penalized for issues you don't expect to recur?

We didn't talk about it because we weren't happy with the outcomes. You know, it was issues that came up and we settled both in mediation, but we weren't happy with the outcomes.

Okay. Those are -- then those are issues that you settled and they're done this quarter? Those issues are done. Excellent. Could you talk us through Adelphia, you had roughly 48 million in reserve in business to that you had written it down to about 50 cents on the dollar. Could you give us an update as to where the receivables stand with Adelphia and just walk us through what happens if they don't pay at all? I seem to remember there's some sort of tax benefit you have. Could you walk us through that.

Yeah. We're monitoring the situation closely primarily other we're using Shearman and Sterling to help us in that arena and that was part of the costs associated with professional fees we talked about. There's really not been any significant change in the bankruptcy proceeding itself. It's winding its way through. Information we've received from our outside advisors relative to you're position as a creditor continue to -- we believe our valuation we assigned last quarter is still appropriate. We are leaned as we did suggest we have about $40 million growth and wrote down about $18 million which, while we took a tax provision for it has not yielded any tax cash benefit yet. There won't be a deduction unless some kind of event occurs to realize that loss. You mentioned if it went to zero and we didn't get paid we would get a tax deduction for that loss.

Okay. So to understand this, if you get paid what you think right now, it seems to be you said roughly $22 million after tax plus an $8 million tax provision, correct?

Yeah because we'd get roughly 40 percent benefit on the $18 million we've written off.

So it would give you roughly 63 cents of after tax free cash flow if that happens. And then if you get paid nothing, you get $16 million you said, 8 million for 8 million apiece?

Yeah, we'd get essentially 40 percent of $40 million if we get nothing. So we get about $16 million in tax benefits.

Excellent. Can you expand a little bit more? You talked about the potential for positive, a better Spring once the seasonality kicks in for you and the weather gets better. Can you expand a little bit in terms of what kind of visibility you have on that and what kind of impact AT&T Comcast could be? It seems I hear a lot in the press how they're not upgraded in many cities, Denver San Francisco Boston where there's a lot of satellite competition. Could you expand on your thoughts on that.

I think what we've said in our comments Alan was that Comcast is -- has always been aggressive when they have acquired new systems such as Lend Fast and Jones Intercable to aggressively upgrade the plans to provide additional video services. They are video focused MSO and based on all that we've read, we listened to their last conference call. They're being consistent with what they've done in the past. So that would argue that if they say they're going to do something, they will in fact do it. So that supports, you know, coming out of the winter with at least more opportunity.

You know, we've got to execute, we've got to do a good job for them to pick up that business. Secondly, you know, the insight that we have from our discussions with our telephone company customers indicate that the normal budgetary pattern where they try to spend more money in the first half of the year on our services than they do in the second half is certainly something that they're all expecting and even in this year at depressed capex levels, we saw a similar pattern in the first half of this year.

Okay. and lastly, if that's the case that you get some bit of a seasonal snap back and there is spending from Comcast and Adelphia comes back in a year or year and a half from now if their systems get sold or they realize they have to upgrade more, you talked about gross margins making cuts to try to get them back up to the 25, 26 percent level which would be the highest level in years, I guess, it hit 26 in '99 but those are also volumes were pretty high. Can you talk about the impact of what you need to do to get those margins up? Are there actions that you need to take or is it customer work that needs to come in?

Primarily it's a function of volume and demand by the customer for the services. It's always us finding out how to do things better. I mean, one of the only benefits of going through a cycle like we have right now is that we're, despite our results, we're managing more tightly today, more efficiently, have a greater focus on cost control and productivity than we did when there was all kind of business and the top line was growing so robustly. So our experience going through a cycle ten years ago was that if you manage your way through the bottom correctly, you come out being more effective the other side.

Okay. One last question if I can. This has been an interesting conversation. I was shocked your capex level this quarter to be honest. Do you think you can offset a lot of capex spending with proceeds from excess equipment? It seems like you're going to generate a lot of excess cash flow if that's case. Do you have a guidance for this year calendar year what your capex is going to be?

We talked on the last call we were going to be aggressive and I think we said we were going to dispose of a couple million dollars of equipment in the quarter and I think we did about 1.9 million, Tim.

That's correct.

So we executed according to plan. We generally don't sell substantial amounts of equipment in this quarter just because of the season. It's not the right time to do it. But if we have idle assets, we will unlock the cash when it makes sense. Now, we had said on the last call that, you know, somewhere in the 12 to $15 million annualized range is kind of where we see capex at the moment.

That's not net of proceeds, correct.

That's not net of proceeds. Proceeds would not be probably reproducible at this level for the full year, but we have always had other income every year we've been around.

Our next question is from the line of Matt Template with Quaker Capital.

Hi, a few questions as well. Steve or Dick, can you walk me through a little bit the decline in the backlog which I thought was pretty dramatic? I guess a couple questions, one, how much of that is seasonal and how much of that is Direct TV? And then could you maybe fill in some of the other pieces? Because it did seem fairly significant.

Sure. There are really two primary pieces. One is with the AT&T Comcast merger getting closer to closure. There were lots of discussions and opportunities, but I think prudently there were not a lot of contract awards. So during the quarter we generally reached into backlog for that AT&T revenue. We don't think that will continue because that would not be consistent with our spending plans, but that happened. I think secondly, particularly in one RBOC, we saw slower volume levels and using a conservative approach to forecasting our backlog when we see slower current period run rates, we tend to adjust backlog down, especially when you have contracts that -- you know, where that effect is amplified out for 2005, six and seven. So that was really a function of estimate change rather than anything inherent in a number of contract awards that we received in the quarter.

Was that Bell South or not?

I think that was across the board, but Bell South was certainly one because as our largest RBOC customers they have a big piece of the backlog.

Okay. So the change of -- did Direct TV come out of the backlog last quarter.

We pulled Direct TV out of the backlog last quarter. Obviously what sales we did for Direct TV this quarter came directly out of backlog and were not replaced.

Could you just clarify what you had said about the impact of the gross margin from Direct TV? Was that seven -- you had said seven to eight basis points which really --

Which didn't make sense. Seven to 800 basis points. Seven to 8 percent.

That's what I thought. So it's huge obviously which is why you had the conversations.

That seven to eight on their piece of the business.

Yeah, on their piece of the business, not on the overall.

I understand. But the incremental gross margin on that versus the corporate mix is seven to 800 basis points difference, right?

That is correct.

Okay. Can you quantify at all what the sort of savings you anticipate from the latest round of G&A reductions or is it that material?

You know, I think at this point we built some of those into our forecast, and I don't know that they're significantly material, other than this ongoing rationalization of under performing business units. I mean clearly in those cases if they're under performing they probably have a higher relative contribution to G&A than other folks. So as they come out of the mix, we get more efficient on the G&A line.

Also want to understand the negative cash flow for this quarter was built -- was a fair amount of working capital with the increased revenue. Is it fair to assume you should generate pretty good cash next quarter?

Two things to keep in mind. Our subsidiary bonus plan is paid out in our first quarter. So there was about $4 million of subsidiary bonus that have been sitting in accounts or in accrued liabilities that got paid. So that's kind of a one-time event that we always live with in our first quarter. I think secondly, at least through this part of November we've had pretty good cash collections. So it appears that a good portion of our customers are trying to clean up accounts receivable for the end of the year, which once again has historically been kind of a normal pattern that wasn't necessarily as evident last year.

Okay. and I guess one other question, more philosophical. I guess sort of follows up on Alex's opening questions about the authorization of share buy back. I wouldn't necessarily advocate you chase the stock here at 15 bucks roughly where you're trading right now, but you guys obviously traded quite a bit cheaper during the quarter. For whatever reasons chose not to buy back the stock. I'm assuming you would have been allowed to be in the market at the time. May not be a valid assumption, but assuming it's valid, can you walk me through the thinking a little more?

I guess my only thought is I realize that you have a much better balance sheet than your competitors, you have an ability to get bonding which is obviously a competitive advantage. The flip side is you have a lot of cash and you're taking steps which seem premised more on frankly the lack of growth than the expectation to growth which is sort of one of the reasons you're holding out cash for 03 if I understood you. This is a long preamble. I'm almost done . So the last question would be assuming whatever those sources of growth do come along in '03 and given where Mr. Greenspan currently has debt rates, if you actually needed to borrow a little because it was worth it, why wouldn't you have bought in more of your stock at prices that are cheaper than anybody you could have bought?

I mean, I think what we've always said, Matt and we've had this discussion with lots of folks on the Street, it's counter-intuitive, but our cash balance is indicative in our mind that there is a potential for future growth and that our first choice to finance that, because of the conservative way we run the business which got us to the position we're in where we can experience the growth and take advantage of it, is to fund that out of our cash balances. And while the market is certainly more optimistic about the future in the last six weeks, don't forget where we were trading on September 29th and 30th.

That's precisely my point.

That's a trading call on our own currency versus the uncertainty in the economy.

The only argument I would make, given where your stock is no now it would be moot. Hopefully you won't revisit this issue any time soon.

We're in agreement on that point.

But let's say the stock is at 10, which frankly isn't cheap on an expected P/E for next year, I would just argue that given the incredibly low cost of capital courtesy of the Fed, and given the capital intensive nature of your business, you could make a very rational argument you could have a larger part of your capital structure in debt, given that it's only 20 percent. I would just argue that when your stock is on sale and you believe in your business, and I think you do, if the public is giving it away, you should buy it.

We hear you and we will certainly continue to evaluate that as we do on a regular basis is I guess best we can say right now.

Thank you.

And the next question is from the line of Steven Colbert at JMG Securities.

Yes, good morning. Just to in effect follow-up on that discussion of the cash, given where your cash is right now, can you share with us or add some color to what you're looking at right now in terms of acquisitions and what kind of prices you're seeing out there today relative to maybe six or nine mines ago? And maybe in terms of areas between telecom and the cable side?

I think clearly the private market is more rational than it was six or nine months ago. Multiples have adjusted. We are primarily focusing on the telephone side of the business given that the Argus transaction really brought to us six or seven additional cable units. So it was one transaction, but brought us a significantly increased exposure to cable. So we are seeing opportunities, multiples are getting better in the private business. I think that, you know, the industry has been down long enough. People's expectations are adjusting.

In terms of multiples or example on the EBITDA for example, can you give us some feel in terms of what your parameters are?

Three to four times it's got to be accretive to our shareholders so there's got to be an arbitrage.

Okay. Thank you.

And the next question is from the line of Steven Fox, Merrill Lynch.

Yes, just -- sorry, just one quick follow-up. It looks like Arise (ph) is going to come out of bankruptcy. Does that give you guys a positive or negative for competitive landscape?

You know, from what we've seen, and when we have limited information, Steven, depends on what kind of capital structure the banks leave them with when they come out. If preliminary indications are where it come out, they may be levered enough that they're going to be a very disciplined player, but not so levered that they kind of just say well we need to book whatever revenue we can to service, you know, this large debt load. So if they come out with the right capital structure, they ought to be a better competitor.

Thanks again.

And from the line of Mark Hughes.

My question was answered. Thank you.

Next we have Alex Rygiel Freedman billings.

Thank you. One quick follow-up call. Steve, did you make any money on the revenues booked from Direct TV in this most recent quarter?

We had a slight pretax profit, which is the normal seasonal pattern in the satellite business.

And can you quantify -- I suspect you're going to have a slight loss in the upcoming second quarter as you back away from that business. Could you quantify that?

You know, we're still, we're still working on those numbers. I think the way we look at it is we will have demobilization expenses but we will also offset those with what is normally a pretty strong, you know, holiday season for installations in that business. But it will probably experience a pretax loss net of those two factors for the quarter.

Thank you.

Alan Matrani (ph) Copper Beach Capital.

Just to voice my opinion as it relates to the buy back, I agree with the other caller who called in. I think if the stock comes down that's a great use of your cash. But I was happy to hear that the only thing you wouldn't use the stock -- you wouldn't be buying back the stock if you think you can get more meaningful growth. But I would also encourage you to look at your business on a cash flow basis as opposed to an earnings basis.

But one question outside of the commentary. To understand Direct TV, it sounds like when you gave us guidance on that a few months ago host people most people took it out of the their revenue numbers but it sounds like people did not raise their earnings appropriately for the losses that you likely will have for this business. But once it's gun, the loss is stopped, you can scale back your business do you have any sense, can you give us any sort of guidance what kind of bottom line earnings accretion there could be from getting rid of them?

Yeah, it could be in the mid single digits for pennies.

Okay.

Was that confusing enough?

Nope. It always is, Steve. Don't worry. It's all good. Thanks a lot.

And our last question is from the line of Ram Kashagab, Morgan Keegan.

You talked about getting your gross margin back up to prior levels in the 24, 25 percent range, and you did discuss a need to -- that are not really pleased with having to do the cutbacks at the company. Can you give us an update on where you are on head count and how much more do you have to prune your head count to get to where you want to be?

In the quarter, Ram, as you know, our revenue increased about $10 million sequentially. The head count came down about 100 from a little over 5700 to a little over 5600.

And are you done with that? Or you feel you have to do more head count?

We make those adjustments every minute. I mean, when we have folks in the field that are not productive or for whom there is not ample work available that's part of our business, which is what we said consistently for the last two years. And our folks understand that and just part of business.

Thank you.

And we have no further questions.

Well, we thank everybody for attending the conference call, and we will be speaking with you in the last week of February for the second quarter. Thank you very much.

Ladies and gentlemen, that does conclude your teleconference for today. Thank you for your participation. You may now disconnect.