Dycom Industries Inc (DY) 2003 Q2 法說會逐字稿

Welcome to the Dycom conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, press zero and then star. This conference is being recorded. I will turn the conference over to our host, Mr. Steven Nielsen. Please go ahead.

Thank you. Good morning, everyone. I would like to thank you for attending out Second Quarter Fiscal 2003 Dycom conference call. With me we have attendance Rich Dunn, our CFO. Now I will turn the call over to Dick Dunn.

Thanks. Statements made during this conference call that state the company's or managements’ 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 are 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 ended July 27, 2002, and the company's quarterly report on form 10-Q for the quarter ended October 26, 2002. Copies may be obtained by contacting the company or are available on SEC website. Steve?

Thanks Dick. Yesterday we released our press release announcing our second quarter Fiscal 2003 results along with our current outlook for the third and fourth quarters. For quarter ended January 25, 2003, total contract revenues were $137.2m versus $138.3m in the year-ago period, a decrease of 1%. Net loss for the quarter was $1.1m, versus net income of $5m in the year-ago period. Fully diluted earnings per share was a loss of 2 cents, versus income of 12 cents in the year-ago period.

Backlog at end of the second quarter fiscal 2003 was $789.3m, versus $673.8m at the end of the first quarter, sequential increase of $115.5m. Of this backlog, approximately $452.7m is expected to be completed in the next 12 months.

As discussed on our February 13th call, second quarter results were impacted by several factors. First, a pronounced slowing of activity beginning in latter part of December, 2002 through the middle of January, 2003. Specifically field operations were hampered by difficult weather conditions, which reduced number of available work days and productivity, combined with year-end holidays, which fell in middle of two consecutive work weeks, these conditions impacted vacation expense and productivity, more than had originally been expected. Activity began to return to expected levels by end of the quarter with one cable operator in particular initiating several new projects. Gross margin was impacted by all factors, along with start-up expenses associated with these new projects. All of these issues increased cost, reduced revenue and resulted in reduced earnings per share.

Additionally, we continued to be impacted by the significant challenges facing our industry. Spending by telephone companies continued at subdued levels and while we anticipate a normal seasonal uptick in demand, increases may be less robust than in previous years. Budgets for cable operators, with the exception of Comcast, appear to continue to be restrained and reflect in part difficult capital markets and general economic uncertainty. Activity by Adelphia remains at low levels although we are encouraged by recent senior management additions.

Yet despite this negative environment, we were encouraged by increases in backlog, which reflected new awards and contract extensions. Backlog to be completed in the next 12 months increased by over $106m, the first time it has increased in three quarters. While we continue to maintain a disciplined approach to new business, only booking new work so long as it meets margin targets, we had a very active quarter.

For Comcast, we received contracts for system upgrade work in the following metropolitan areas - Boston, Pittsburgh, Atlanta, Chicago, Dallas, Denver, Seattle and the San Francisco Bay area. For Cablevision, upgrade projects in Patterson, New Jersey and Madismore (ph), Pennsylvania, and for Patriot Communications, an upgrade in Northern New Jersey.

For telephone companies, we receive two-year extension from ALLTEL for our master contract in north Georgia, as well as a new three-year master contract with Qwest for all of out state Colorado.

In our utility locating business we received three-year master contract extensions from Qwest for Washington and Oregon. Finally, we were able to retain our work with Direct TV for metropolitan Chicago, at terms which were mutually satisfactory. This resulted in an approximate increase in backlog of $44m.

We continue to support these contracts with our robust balance sheet and solid cash flow. Cash increased by $20m sequentially in the quarter to $131m, with over $20m of cash flow from operations. We continue to manage our near-term challenges through several initiatives designed to offset pressures on operating margins.

First, we have maintained a reduced level of capital expenditures. Net of proceeds from disposals, capital expenditures were less than $10,000 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, with the exception of new contract starts, we will continue significant reductions in general and administrative expenses to better align our administrative cost with near-term anticipated activity. In fact, during the third quarter, we will complete elimination of three reporting units in our continuously evaluating additional consolidations as necessary. While we sincerely regret the adjustments to our employee headcount 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.

Although disappointed with our poor performance, we did demonstrate continued stability. First and foremost, we maintain strong customer relationships throughout our markets, in particular growth with Comcast was encouraging. Net cash remained ample and we maintain strong working capital position. While our pricing environment remains tight, we remain focused 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 that believe Dycom’s superior financial health will increasingly allow us to differentiate ourselves from our competitors in the eyes of our customers, employees and suppliers. Our financial strength is key to our belief when growth opportunities return to the industry, we will be the first and the best position to take profitable advantage of them.

After weighing all of the factors we have discussed today, we have updated our forecast as follows. For the third quarter of fiscal 2003 we anticipate earnings per share of 2 to 6 cents on revenue of $120-135m. This outlook anticipates a continued slow economy in the U.S, but no dramatic slowing due to international events, poor weather in February, which improves through the balance of the quarter, continued increase spending by Comcast on its newly acquired systems, a soft seasonal pick-up in demand from telephone customers, 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 third quarter we anticipate earnings per share of 13-18 cents on revenues of $135-150m for our fourth quarter of Fiscal 2003. This expectation is based upon the continued impact of those factors cited for the third quarter along with normal seasonal weather patterns and reflects our view for the first time in two years, industry development support a two quarter outlook. It is important to note, that during both quarters we expect day sales outstanding to increase, as revenue from cable operators represents a larger portion of our overall business.

In addition, recent developments continue to indicate that substantial competitive capacity may be less able to respond to increased future customer demand due to capital constraints. The trend may accelerate as even larger, more competitors have recently experienced difficulties. Finally, yesterday our Board of Directors authorized repurchase of up to $25m of common stock, over the next 18 months.

At this point, I will turn over to Dick Dunn, our CFO.

Thanks Steve. Before I begin my review, let me remind everyone that the results of a year-ago, six-month period, ended January 26th, include a first-quarter after-tax impairment charge to goodwill of $86.9m. This goodwill impairment is cumulative effect of adopting accounting standard FAS 142. For purposes of my discussion of the prior year’s financial results, I will eliminate this charge. Results including impact of SFAS 142 adoption are included in yesterday's press release and will be posted to our web site. With that in mind, I will begin my overview of the quarterly financial performance.

Contract revenues for current quarter were $137.2m, down 0.8% from last year’s Q2 of $138.3m. Revenues for the quarter on same-store basis were down 21.5%. Total revenues for the six month quarter ending January 25th, declined 3.4% to $295.6m, versus Fiscal 2002 revenue of $306.1m. Organic revenue activity for the six-month period was down 24.7%.

For the quarter, the top five customers accounted for 63.5% of total revenues, versus 60% for the prior year’s second quarter. For the six months ended January 25, sales to top five customers as a percent of the total were 58.3%, identical to fiscal year 2002 percents. The top five customers and their respective percentages for Q2 of fiscal 2003 and 2002 are as follows - Fiscal 2003, Q2 top customers were Comcast at 30.6%, Bell South at 11.6%, Direct TV at 9.5%, Sprint at 6.1%, and Qwest 5.7%. For Q2 of FY 2002, the top five customers were Comcast at 19.1%, and this includes the revenue from the former AT&T Broadband, Bell South at 16.9%, Adelphia at 13.2%, Direct TV at 6.1% and Qwest at 4.7%.

Net loss for the second quarter was $1.1m versus $5m income in FY 2002, representing decrease of 122%. Net income for the six months ended January 25th, decreased 76.9% to $3m versus last year's $13m. Fully diluted results for the quarter, were a loss of 2 cents per share, 117% decrease in last year's 12 cent per share results. EPS for the six months ending January 25th, decreased 80% to 6 cents per share versus last year's 30 cents per share.

Operating margins for second quarter declined 705 basis points, coming in at a negative 1.54% versus last year's income of 5.51%. This decease was due to a 401 basis point increase to cost of earned revenues, 168 basis point increase in G&A cost and 136 basis point increase in depreciation and amortization. Operating margins for the six month period declined 531 basis points, coming in at 1.25%, versus last year's 6.56%. This decrease was due to a 206 basis point increase in cost of earned revenues, 184 basis point increase in G&A cost, and 141 basis point increase in depreciation and amortization.

The effective tax rates for the quarter and six month periods were a benefit of 1.2% and provision of [50.2%] respectively, versus provisions of 42.7% and 42.0% respectively for the prior year’s period. The impact of a negative pre-tax number, combined with certain relatively fixed permanent Schedule [M] items, generated non-meaningful effective tax rate for the current quarter.

Net interest income for the quarter and six months was $370,000 and [$645,000] respectively, versus $679,000 and $1.6m for the prior year. This decrease was primarily a result of declining short-term interest rates and reduced cash balances as a consequence of the repayment of the debt acquired in the Arguss acquisition. The interest income is generated through investments in high-quality municipal and corporate instruments.

For the quarter, our cash flow from operating activities was $20.1m, the primary components of this cash flow were depreciation and amortization of $10.5m, reductions of working capital of approximately $10.7m, partially offset by a loss of $1.1m. Investing activities consisted of capital expenditures of $1.5m, offset by proceeds from sale of assets of $1.5m, resulting in net investing activities of zero. Net financing activities were less than $5,000. Cash and cash equivalents at the end of the quarter were $131.4m, up $20.1m from the prior quarter.

During the quarter, net current receivables dropped from $105.1m to $99.9m resulting in a DSO of 66.3 days, versus 60.4 days at end of the first quarter, and increase of 5.9 days. Net unbilled revenue balances dropped in the quarter from $32.1m to $22.9m, resulting in DSO of 15.2 days, a reduction of 3.3 days from a Q1 figure of 18.5 days. On cumulative basis, the combined DSO for our current trade receivable and unbilled revenues increased from 78.9 days to 81.5 days, an increase of 2.6 days.

At January 25th, our accrual for our self-insured casualty program increased from $21.6m, from $20.0m at October 26th. Of the $21.6m, $12.1m represents incurred, but not reported claims, an increase of $1.1m from the first quarter. Steve?

Thanks. Now, we will open the call for questions.

Ladies and gentlemen, if you wish to ask a question, press 1 on your touchtone phone. You will hear a tone indicating that you have been places in the queue. You may remove yourself from queue by pressing the pound key. If you are using speakerphone, pick up the handset before pressing the number.

Our first question comes from Steven Fox of Merrill Lynch.

This is Celeste Laurenzano (ph) for Steven Fox. Couple of questions. Can you talk about some of the puts and takes you need to manage in order to see gross margins rise a few hundred basis points over the next couple of quarters?

And then can you quantify the impact of both the weather and the start-up expenses for the new cable projects had on gross margins in the January quarter? And what kind of impact from both items do you expect for the April quarter? Thank you.

The key items to manage on the gross margin are always field productivity of our people, which is interrelated to the second question on the weather impacts on current quarter. I think that what we need to do is manage our gross margin back to levels that we have seen before when we have had robust cable activity, which we are seeing pick-up there. I think it is a mix change and I think it is also a productivity impact.

In terms of quantifying the weather impact, what we had going on in the second quarter was some severe weather in January. The issue for us with weather is when it occurs at the end of a quarter, for the period -- for that particular quarter there is no way to recover from that poor weather. So, during that particular quarterly period. So, I think that was the key factor. Gross margins came down in that particular month probably 500 or 600 basis points from December. Our business mix didn't change, our pricing didn't change, our inherent ability to manage the productivity of our people didn't change. We just had a lousy period. So, we will see that unwinding, obviously last week was not a very productive time from Washington, D.C. up through the Northeast. But everyday the days get longer and we would expect with any kind of cooperation for March and April, we will be able to do as we projected.

Thank you.

Thank you. Our next question comes from Mark Hughes from SunTrust. Please go ahead.

Thank you. In looking at the fourth quarter guidance of $135-150m, it’s relatively flat, up slightly from what you described as weather-impacted January quarter. And if you look at that relative to the backlog, your 12-month backlog of $450m, it seems like the revenue number is assuming you are not going to add much more to the backlog, and you are going to see it drop-off somewhere in the business when you would have normally expected more of a seasonal pick-up. Any thoughts about what softness you would see between this January quarter and what you are expecting for July?

I think what we are seeing is a mix shift. Now, in the January quarter, we had a little over $13m in Direct TV business. We are forecasting somewhere kind of in the $4-4.5m range for the fourth quarter. So if you had a $9m variance there, the good news is that that’s $9m of revenue and $9m of cost or maybe a little more. So, that goes away from the business.

The other issue of course, is that we are not forecasting at this point, and it is very unclear given recent regulatory rulings from the FCC, exactly what our telephone company customers plan to do with their CAPEX for 2003. So, we're taking a conservative view with that piece of the business, with those two factors offset by increased growth primarily on the Comcast projects.

Right. How about non-Comcast cable business? Can you characterize the magnitude of the decline there?

We didn't split it out. If you do the arithmetic, you will note that both Adelphia is at best flat and that Charter may be more subdued as they work through of their capitalization issues. The other factor that you could see from Dick's recitation of the top five customers, is that we are not anticipating much in the way of any business at all from Touch America in that particular quarter, which would be down from the first quarter this year and down from this second quarter.

Right. Maybe ask again, the backlog doesn't seem like you are expecting to add much to backlog during the year, is that just taking more conservative posture, or is this normally where you expect to be with backlog?

We have booked backlog for our initial estimates of value of all projects we listed for Comcast. We booked the value of the new contract with Qwest for out state Colorado, which is a significant piece of business and also the extensions on our existing work with both Qwest and ALLTEL. I would say it was an active quarter in terms of particularly with Comcast as they gear up. Also, we were able to book about $44m of backlog with Direct TV. There were pockets of strength, there were other pockets given the overall uncertainty in the economy right now where we didn't see significant activity.

Finally, I am not sure whether you directly addressed the negative impact of the start-up in all those new markets. How much is that dampening earnings in the near-term?

It had a more pronounced impact in January and has diminished in February. By April, it should not be a significant factor.

Great. Thank you.

Our next question comes from Toby Sommer from SunTrust. Please go ahead.

Good morning. I was wondering if you could give us a breakdown, geographic breakdown, of your revenue, just to get a sense for what future weather impacts may be? Thanks.

I am going to give you a qualitative breakdown. We manage the business through our subsidiaries, some of whom have primarily Northeast, East Coast focus and others of which work across the country. We don't have a regional revenue breakdown we can give you. I think what we can say, we have projects ongoing in Washington, D.C. and in New Jersey and in Pennsylvania and Connecticut and Massachusetts have all had significant weather impacts. I would be guessing to give you percentage. But, it is a significant piece of those businesses and then, in January, and somewhat in February, we did have impacts to our business in the Southeast, primarily in North Carolina, Tennessee and Kentucky.

Thanks.

Thank you. Our next question comes from Scott Kirk (ph) from Cuttin (ph) Capital.

Hi, most of my questions have been answered. But, if you could give more clarity, Steve or Dick, on the strength that you see in terms of visibility improving enough for you to give guidance for two quarters for the first time. Is that attributable to Comcast spends or if not, are there some other areas outside of Direct TV, that you see improvement?

And if you could quantify the DSO on the cable side of the business, where that should stabilize? That would be helpful. Thank you.

We see the strength of the Comcast business. Obviously the business that we started with Qwest and the two contract extensions we received were significant for us. I think we talked about in the last quarter, once again we will preface our comments by saying that barring no significant changes from the telephone companies based on the SEC decision last week, we seem to see a bottoming process. We may not see any robust pick-up off the bottom. But, our folks and everything we know from customers seem to indicate that we did not need to anticipate a lot of volatility from the third to the fourth quarter.

So, if you think about it, we resolved at least in the near-term, the number of projects with Comcast and their staffing levels and what they expect us to get done for the next six months. We resolved a third of the Direct TV business. Then, we initiated several new contracts for which we have a pretty strong idea of what the backlog was that was pending when we assumed them. So, from that perspective, I think that is what gave us strength in terms of the two quarter outlook. The Comcast work when it impacts that many markets, actually involves about 8 or 9 business units. We haven't had a tailwind to 8 or 9 business units in this industry in over two years.

In terms of DSO, historically, the cable operators have been very efficient in their use of accounts payable. We have always talked about DSO of 90-95 days on that piece of the business. No change expected obviously in our telephone business at this point. It has historically been in 60-65 day range. So it’s a really a mix shift.

If you could clarify that Steve, have you given guidance on how much of the business you except will be coming from cable side by year-end? Should we see DSO get to 70 or should it continue to go up from where it is?

You’re talking about accounts receivable DSO. I was talking about accounts receivable and work in process DSO. Okay.

I am referring specifically to accounts receivable DSO.

The mix of the business for current quarter, Dick was --

We hedged about 42% in telephone and about 46% in cable.

I think you could see a shift of 10-15 points between that mix from telephone to cable. So, I mean you can do a weighted average on DSO. It is going to move, not going to 100 based on what we know right now.

Thank you.

Thank you. Our next question comes from Ramkrishna Kasargod with Morgan Keegan. Please go ahead.

Steve, couple of questions, if you will bear with me. The first one is when you look at the third quarter, I know you never gave guidance before, but the third quarter is going to come in below the second quarter as it stands to date. Can you give us some thoughts on that? You have a backlog going up, but third quarter -- I know you discussed issues earlier on. Can you go over it again?

There’s a $9m reduction in our expected work for Direct TV, based on retaining a portion but not all of that work at acceptable margins. We are taking a conservative approach to the impact of the weather in February. In the start-up phase of all these projects, when you start up this many projects all over the country, there is an initial period where material and permitting and design delays have to get themselves worked out. We feel comfortable because Comcast is very good at this, but they’ll get them worked out. It is just a question of that shake-down period. We want to make sure we didn't get ahead of ourselves on that revenue estimate. I think the other impact Ramkrishna, is our third quarter historically has been the strongest with our master contract business with the R-Box. They generally had a bias once budgets were set, to get it spent. We are seeing seasonal uptick with them, but not as robust as what it would have been in prior years, at least in February. We wanted to make sure that is reflected in the forecast.

Secondly, this is more for Dick. Dick, can you give a breakdown of three business segments? When you look at telecom, how much is cable and how much is pure telecom as percent of revenue?

For the pieces for the quarter, telecom was about 42.2%. Cable was about 46.1%. Locating utility was 8.5% and electrical 3.2%.

Okay. Then, when you look at on a going forward basis, is there any guidance for tax rate or for the second half as you make money, what should we --

The rates this quarter were not meaningful. We would anticipate getting back to rates we were at prior to that, and we’re hoping to get down from that a bit as the projects we are working on comes to fruition, probably in fourth quarter.

Steve, one of your competitors is doing some kind of a management buyout at potentially below book value. Do you have thoughts on what that means for your sector overall?

I think that the facts and circumstances in that case, Ramkrishna, are unique to that situation. I don't think you can imply anything from management's offer there. They actually, as I understand, own a majority or close to a majority of the common stock to begin with. I think that is probably one for the lawyers to settle, not have any impacts on the rest of the business.

Thanks a lot.

Thank you. Our next question comes from Alexander Rygiel from Friedman, Billings, Ramsey. Please go ahead.

Steve, couple of questions. First, you have obviously seen quite a few opportunities with Comcast so far. Can you help us to understand what your hit rate has been on the markets that you bid on?

Well, it has been a combination of a bid process along with a normal cable TV process where if we are in the market place, the customer will strike what they think is a fair pricing line and offer the work at those numbers to us. We have the ability to work through different views on different pricings. I think for the most part, we have been very satisfied that we have won the work we anticipated and that so long as we continue to perform for Comcast, because this is one day at a time business, we will maintain that business and hopefully see other opportunities as they become available.

With regards to the [Adersill] markets that you have actually received new awards for, can you talk about when those projects have started or will be starting? As well, can you talk about whether or not the entire geographic market has been let out at this time or only a portion of that work?

For the most part, they have taken an approach where they’ve let the bulk of the geographic area. There is not a lot left. Comcast has a lot left to decide over. They are aggressive schedule and they are going to, in my opinion, do all they have to, to hit it. The issue is going to be as the design and permitting and walk-out of the systems is completed, the actual scope of that work may change in one way or another. So, I think that is pretty well -- I think they have got a plan for most of the geography. Exactly what that work consists of is still evolving somewhat.

I know you can't answer this question for them, necessarily, but with regards to the markets they have let out and you are recognizing in backlog, what percentage of the markets do you think that equates to when you look at the whole AT&T Broadband rebuild opportunity long-term? Have they let all of the projects out for the entire AT&T Broadband rebuild?

I wouldn't say that have let all of them out, but they have a plan as to how they will do that. I think they've got a pretty good plan. As I said, the issues they are working through and that will come to conclusion probably in the next couple of months is exactly what the work content is. Of course, that is always subject to adjustment because the work content is impacted by what you find in the field, how much cable passes signal and how much doesn't. How much has to be replaced and what local permitting issues create in terms of new design needs and those kind of things.

So, I think the mileage out there and geography is out there. The content is what is missing. I think we have fared in line with the share of the work that we have always historically performed for both AT&T and Comcast.

One follow-up question. With regards to these markets that you have gotten business from with Comcast, today do you feel comfortable that gross margin can approach the 25-26% level now that you know what the pricing structure looks like?

I think we are comfortable with that, Alexander. If you look at fourth quarter guidance, we feel the business is going to be busy. When you look at those numbers, that is the kind of gross margin you have got to be at to hit EPS guidance.

Thank you.

Our next question comes from Joe Gladeu (ph) with Chapman (ph) Company.

Most of the question have been answered. I did have a question about headcount. Where did it end the quarter? I guess you talked about possibly shutting a few other areas. Where do you think it could get to in the third quarter?

We look at -- from the headcount at end of the quarter was 5,200, approximately. 5,211 to be exact, Joe. And I think the bigger impact is not on the G&A, but in the reduction of the technicians on the Direct TV business teat we did not retain. I would expect it to be down 500 or 600 employees based on the work that we currently have contracted.

Thank you.

Our next question comes from Barry Posterneck (ph) with Conseco (ph) Capital. Please go ahead.

Good morning. With regard to Comcast, when you mention that Comcast work is offered at a certain price, is there some sort of national agreement or contract which dictates pricing on Comcast business?

The markets have done the pricing market-by-market. Clearly there are specific issues to each market in terms of either work rules or the conditions. I mean, it is obviously more expensive to do work in the San Francisco Bay area than it would be in Nashville, for example. It has worked out a market at a time.

Worked up by the corporate office rather than regional Comcast?

They work it two ways. Corporate is responsible for the efficiency of the budgeting process. They can't let somebody price work that is not budgeted. The local folks are given reasonable latitude to make sure they have appropriate pricing that is good for them, but also allows the contractor to make a fair return for the effort they are looking for.

Okay. Roughly how much of your work is outsourced on the cable side versus handled internally?

For upgrade work, with a few minor exceptions, they outsource the entirety of that. Okay. There will be little upgrade work done in-house by any of the major cable operators.

Okay. And given the ramp in the business with Comcast, would it be fair to assume that excluding the increase from Direct TV to the backlog, the sequential increase was primarily due to Comcast?

Primary due to Comcast, although the Colorado project for Qwest was a good contributor as well as other extensions we talked about on existing business.

And just given that Comcast was about 30% customer in the quarter and that seems to be like that will continue to grow, could you see them becoming a 50% customer at some point by the end of the year or something of that magnitude?

That might be a bit aggressive. Although, they are a good customer and a fair customer. If they grew to 50% that wouldn't necessarily be a bad thing.

Okay. Thank you.

Our next question comes from Alan McPlanny (ph) with Copper Beech (ph) Capital. Please go ahead.

Can you talk about your buyback? When are you free to buy back stock?

Basic windows that we operate in, Alan, is two days after an earnings release. I guess that would be Thursday. Then, we cut the window off two weeks before the end of the quarter.

Okay. Last time you had a buyback it was a similar size and you only bought back about 82,000 shares about $14.60 according to the last Q. Seems like you issued 6 million shares plus or minus given the options for the Arguss acquisition at $15-16 with the stock likely to open at $10, how aggressive will you be on buyback?

We will evaluate buyback as we always have, what it does to where we see EPS so we know how accretive it is, what return that implies on the repurchase sales, and what we think we can do with that money inside the business.

Is there a reason to keep so much cash on balance sheet? Are you going after market share now that competitors are having difficult time? Where can you take the business if you keep the cash over the next 12 to 18 months?

We have anecdotal evidence that comes in everyday that we are receiving incremental opportunities based on the strength of the balance sheet that the customer receives. That is important to us. We also see that there is growth opportunity with Comcast. We also know that will require working capital because that is the way the business operates and always has.

Most competitors, or at least your public ones that we can look at, and the ones that had public debt don't seem to be in a position to put up working capital. Are you seeing customers, not just Comcast, differentiate between competitors and give you more business based on your balance sheet and where you are?

It is difficult to get them to identify a single factor that drives the buy decision. If you had a tie, you would be more comfortable with our balance sheet than many of the others out there from our competitors.

Okay. As it relates to the Adelphia receivable, I assume you did not sell it this quarter?

Yeah, in other long-term assets.

In hearing the CommScope call the other week, the coaxial cable company, when asked about their Adelphia receivable, their comments were that they have been offered decent numbers, 50, 60 cents and those type of numbers on the dollar for theirs. Their answer was they said they were going to hold it out, they do better getting – that in general they think they can get 100 cents on the dollar if they hold it. Do you have the same attitude?

We have it on the balance sheet where we think it is appropriately valued for all the information we have. We do receive some comfort from the mechanics liens and the fact the data is down at the subsidiary level and not at the holding company level. Because of that seniority in capital structure that we think we will have a good chance at recovering where it is on the balance sheet and hopefully better we are encouraged by the management additions at Adelphia and we would not be prone particularly given our balance sheet, to sell anything at a discount. Just to bring some cash in the door.

Okay. Also, when do you think your peak quarters are expected to be from Comcast? Is there any indication that they are spending or planning to spend any slower than they expected or deferring projects necessary general in the term of the pace on them to conserve cash and show better cash flow initially?

They have an announcement coming out, I think tomorrow or Thursday, they would be the best one to answer those questions. Specifically, all I can say is that Comcast has always been extremely good at identifying what it needs to increase system cash flow. They have always been willing to spend capital dollars in order to do that. I have not seen anything in their behavior on this upgrade that would indicate they have taken a different approach.

Okay. If I could spend a second on cash flow, even though revenues seems to be a bit disappointing over the next quarter or so, the cash flow has been pretty strong. Do you expect to be able to generate on a calendar basis, it seems you did a buck plus after-tax in free cash flow, is there any reason to think your cash flow, because you didn’t give margin guidance, should weaken over the next couple of quarters?

No, the only issue, and we talked about it on our one caveat on the DSOs, is that as cable business grows as percentage of overall business, that DSOs will creep up, not because the credit quality is changing, it is probably improving given Comcast position, they just have a different approach than our telephone company customers.

As it relates to cash flow, working capital will likely be usage of cash, but CAPEX this past year on calendar basis was $12+m, not netting out what you sell, the year before, about $17m, are you looking between $10-15m?

Yeah, with the exception that there are opportunities in our business and to the extent we have a opportunity and we can take advantage of it because of the balance sheet and the cash we have, it will be a good thing if CAPEX is able to increase.

Okay. I will make the pitch as I have done before. With over a 10% free cash flow yield, and $2.70 on the balance sheet, I would be hard pressed to find a better company to invest in, at least from a risk reward perspective, that your own, in terms of your cash. You should be more aggressive on buyback than you have.

We appreciate your opinion.

If you have a question, press 1 at this time. We have a follow-up question from the line of Ramkrishna Kasargod. Please go ahead.

Steve, the question I have for you is number one, Dick talked about a 21% rate of decline in internal business. What has been the trend at Arguss? Can you talk about that? Has their trend been about the same as yours?

Yeah, that business has performed remarkably similar to Dycom. The think the biggest issue year over year is reduction in Adelphia, which was both an old icon impact and old Arguss impact. If you remember in our third quarter of last year, we had about $30m, Dick, I believe in Adelphia revenue? In the current quarter, we had Adelphia revenue of $4 or $5m. We will check, but not a significant number. So, I think that is the biggest impact.

If I could ask one more question. Now that you talk about lowering CAPEX to practically zero in the second quarter, where are you with respect to capacity utilization, how will you define it? Finally what is the leverage? You are talking about fourth quarter more or less starting to get normalized? Do you have visibility on the fiscal '04 outlook, as you see it today?

To answer the first question on utilization, what we look at is in-house listing of idol assets available for reassignment. With the pick-up in the Comcast work, we have seen more reassignments between divisions and also this work we picked up primarily with Qwest in Colorado. So, we are seeing -- we still have idol assets out there. But, we certainly have been able to shift those assets around. That is the idol trucks and equipment is how we measure utilization because if we don't need the craft labor to operate them, we obviously have to let those folks go. Your second question, again, Ramkrishna?

Second question was your fourth quarter seems to be getting more normalized, do you have visibility for fiscal '04 based on what the telecom's might do?

I think we have enough clarity that we gave guidance for two quarters, which we went through a full planning exercise with every one of our business units to do that. I think the overhang on providing guidance for '04 is really the pace with which the Comcast work gets completed, as well as what the results on our teleco customers are of the latest FCC decision, is it litigated? Is it litigated quickly, which probably is a contradiction in terms. But, it is possible. So, what clarity on teleco CAPEX is there..

Thanks.

Follow-up from line of Toby Sommer. Please go ahead.

Do you have a number of route miles associated with your new Comcast wins?

I think Comcast has disclosed that there is 60,000-65,000 miles, I think is the number I heard on their last call. It's not for us to say exactly how many miles we have got, other than to say that we did put a value to the work that we received based on preliminary estimates, which are still being finalized. I think we got a share of that business, as long as we perform that is in line with historical averages.

Could you refresh my memory what the historical averages are for the cost per route mile in sort of metro market versus the suburban markets?

That is a function of the design process, that really is a question for Comcast. We don't determine the work content of a mile. We have to get it done on time so they give us more. So, that's more appropriately a question for Comcast.

Okay. Lastly, I wanted to see if we could break out your top 10 customers or if you could go beyond the top five list explicitly with what they did in the quarter?

Well, we mentioned Adelphia at 5.5m, Charter at 4.5, Mediacom at about 3. And ALLTEL at about 2.9.

Thank you.

We have no further questions. Please continue.

Thank you very much. Thanks everyone for attending the conference call. We appreciate your time and we will speak with you on our next call after the third quarter. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.