Dycom Industries Inc (DY) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dycom fiscal year 2004 first-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Steve Nielsen, President and CEO.

Good morning, everyone. I'd like to thank you for attending our first-quarter fiscal 2004 earnings conference call. With me we have in attendance Richard Dunn, our Chief Financial Officer, Tim Estes, our Chief Operating Officer, and Mike Miller, our General Counsel.

Now, I will turn the call over to Mike Miller. Mike?

Thanks, Steve. Statements made in the course of this conference call that state 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 ended July 26, 2003. Copies of these filings may be obtained by contacting the Company, or are available on the SEC's Web site. Steve?

Yesterday, after the market closed, we should our first-quarter 2004 earnings release. Previously, on November 6, we announced entering into an agreement to purchase substantially all of the assets of First South Utility Construction, a provider of outside (indiscernible) construction and engineering services to telecommunications providers throughout the United States.

Furthermore, on November 17th, we announced the execution of a definitive merger agreement with UtiliQuest Holdings, whereby UtiliQuest will become a wholly-owned subsidiary of Dycom. UtiliQuest provides underground utility-locating services throughout the United States.

Both acquisitions are subject to customary closing conditions and are currently expected to close before the end of the first week of December.

Given the substantial amount of information to be reviewed today, I will now outline the structure of this call. First, I will recap the earnings release and provide backlog information. Second, I will comment on our first quarter and review recent industry developments, along with our contract awards and extensions during the quarter. Third, I will provide some general information concerning our agreements to acquire First South and UtiliQuest. More details will be provided shortly after the closing of these pending acquisitions. Then finally, prior to Dick's detailed review of the financials, I will outline our outlook for the second quarter.

Now, for our results. For the quarter ending October 25, 2003, total contract revenues were $196 million versus 158.5 million in the year ago period, an increase of over 23 percent. Net income was 13.9 million for the October quarter versus 4.1 million in the year ago quarter, an increase of 239 percent, while fully diluted earnings per share was 29 cents versus 9 cents, an increase of 222 percent.

Backlog at the end of the first quarter of fiscal 2004 was 900.4 million, versus 890.9 million at the end of the fourth quarter of 2003, a sequential increase of 9.5 million. Of this backlog, approximately 417 million is expected to be completed in the next 12 months. These estimates of total backlog and 12-month backlog do not include any amount with respect to our pending acquisitions of First South and UtiliQuest.

Our first-quarter results continue to demonstrate solid organic growth, significant margin expansion and a noteworthy increase in operating cash flow. Revenue increased sequentially by $13 million from the prior quarter and by over 37 million from the year-ago quarter. This represents an organic growth rate of 23.7 percent.

In addition, our forecasted second-quarter revenue indicates continued year-over-year organic growth. Gross margin increased by 81 basis points sequentially from the fourth quarter to 24.98 percent while sequentially, both G&A and depreciation and amortization decreased slightly. Both the G&A and depreciation and amortization percentages continued to be favorably impacted as relatively fixed costs were leveraged by increased quarterly revenue.

Pretax margin expanded by over 100 basis points from last quarter. Liquidity remained ample with over $149 million in net cash. Cash increased by 19.9 million during the quarter despite 2.4 million of capital expenditures net of disposals, which were required to support our growth.

Days of Sales Outstanding was 75 days, a sequential decrease of two days during the quarter. Cash flow from operations totaled 21.2 million and working capital increased sequentially from the prior quarter.

During the quarter, we welcomed the effects of a growing overall economy, major telephone company expenditures, which grew year-over-year and sequentially for the first time in over two years, and robust spending by several cable customers. Revenue from Comcast was 68.2 million. Comcast was Dycom's largest customer for the quarter at 34.8 percent of revenue, down from 38.1 percent in the previous quarter.

Additionally, revenue from Charter and the Patriot Communications both increased sequentially. Revenue from our major telephone company customers, Sprint, BellSouth, Qwest and ALLTEL, increased both sequentially from the fourth quarter and year-over-year. Employee headcount increased to 5,470 at the end of the first quarter from 5,259 in the previous quarter.

Perhaps most interestingly, a major incumbent local exchange carrier last week announced the winners of its RFP for the telecommunications equipment required for a technology known as Fiber-to-the-Premises, or FTTP, and outlined its five-year deployment plans. Furthermore, a senior industry executive was recently quoted as saying "World-class networks are essentially the critical infrastructure that provides the product differentiation that we offer in the marketplace." This view evidences the central importance of our services to our customers and signals a possible upturn in telephone company capital expenditures and fiber deployments in calendar 2004 and beyond.

During the quarter, we continued to book new work. For Comcast, we received system upgrade contracts for Salt Lake City, Upton, Michigan and Santa Cruz, California. For Adelphia, upgrade projects for Morrow, Ohio and Frederick, Maryland. In addition, we secured several master contracts for telephone companies, including extensions with BellSouth for Chattanooga and Knoxville, Tennessee (indiscernible) Citizen Communications for Tennessee, West Virginia and Pennsylvania. Finally, we were awarded two new contracts from ALLTEL for Lexington and East Kentucky and two new central office turf (ph) contracts for SBC Communications in Kansas City and Oklahoma City.

Now, for a general review of our pending acquisition of First South. First South Utility Construction is headquartered in Greensboro, North Carolina and provides its services throughout the eastern United States. The acquisition of substantially all of the assets will enhance our scale, increase both our customer diversification and penetration, yield obvious synergies and present margin-expansion opportunities. Due to its geographic location, it fits naturally within our current Southeast operations and expands our already-leading capabilities in that crucial regional market. It increases our exposure to telephone company expenditures and an upturn in the general economy.

Given its overlap with our current subsidiary operations, First South will be completely folded into two existing Dycom subsidiaries. Integration planning is well-advanced and we anticipate the elimination of significant amounts of duplicative overhead and the generation of meaningful cost synergies.

Upon completion of the integration, we expect cash flow margins which equal or exceed current Dycom cash flow margins. We anticipate that the acquisition will be accretive no later than our April quarter.

First South's acquisition presents significant strategic benefits and has been well-received by our joint customers and employees.

Next, I will review our pending acquisition of UtiliQuest. UtiliQuest is headquartered in Atlanta, Georgia and provides underground utility-locating services throughout the country. It is generally viewed as the largest locating firm in the United States. It's acquisition will enhance our scale, provide significant product line and customer diversification, expand our geographic footprint, yield clear and quantifiable synergies and present margin-expansion opportunities.

UtiliQuest currently employs over 1900. It, in conjunction with our existing locating operations, will possess unparalleled scale, capability and resources to serve our customers. It dramatically increases our exposure to routine and recurring maintenance expenditures by our customers and will position Dycom to broadly benefit from an upturn in general economic activity. It has a strong geographic presence in the mid-Atlantic, Southeast, Texas, Colorado and California.

Given its operational overlap with one of our locating operations, UtiliQuest will be combined administratively within an existing Dycom subsidiary. Integration planning is ongoing and we again anticipate the elimination of significant amounts of duplicative overhead and meaningful cost synergies. Upon completion of the integration, we expect cash flow margins which equal or exceed current Dycom cash flow margins, although those margins will be seasonally stronger from April through October each year. We anticipate that the acquisition will be accretive no later than our April quarter.

The UtiliQuest acquisition strategically positions Dycom to uniquely benefit from a general economic upturn, any increase in overall (indiscernible) activity, including any activity arising from Fiber-to-the-Premises initiatives, and dramatically increases the proportion of Dycom's revenue driven by routine and recurring expenditures by our customers. It has been well-received by our joint customers and employees.

As Dycom grew this quarter, we demonstrated our continued stability and unparalleled ability to profitably respond, both organically and through acquisition, to growth opportunities. First and foremost, we maintained strong customer relationships throughout our markets. This view has been clearly demonstrated in multiple discussions with our customers arising from our two announced acquisitions. Net cash remained ample and grew over $19 million in the quarter and our already-strong working capital position strengthened.

As economic conditions improve, Dycom's superior financial health has allowed us to differentiate ourselves from our competitors in the eyes of our customers, employees and suppliers. Dycom's financial strength and strong customer relationships have been key to our ability to demonstrate marked organic growth and pursue significant strategic acquisitions simultaneously.

Over the last several quarters, we have repeatedly stated our belief that as profitable growth opportunities return to our industry, we will be one of the first of the best-positioned firms in our industry to take advantage of them. We believe that this advantage, relative to other industry participants, continues to become 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 2004, we anticipate earnings per share of 13 cents to 17 cents on revenues of 140 to $155 million. This outlook anticipates a growing economy in the U.S., normal but not especially difficult seasonal weather, continued spending by Comcast on its acquired systems and firming seasonal demand from our telephone customers. This outlook does not include any revenues or earnings from our pending acquisitions of First South and UtiliQuest. We will update our outlook upon the closing of these acquisitions.

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

Contract revenues for the current quarter were 196 million, up 23.7 percent from last year's Q1 of 158.5 million. For the quarter, sales from our top five customers accounted for 69.7 percent of total revenues, versus 56 percent for the prior year's first quarter. The top five customers for the two periods are as follows -- for Q1 of fiscal year 2004, top customers were Comcast at 34.8 percent; Sprint at 13.7 percent; BellSouth, 10.9 percent; Qwest, 5.6 percent; and Adelphia, 4.7 percent.

For Q1 of fiscal year 2003, the top five customers are as follows -- Comcast at 22.4 percent; BellSouth, 12.6 percent; DirecTV, 8.2 percent; Fiora (ph) Touch America, 6.5 percent; and Charter Communications, 6.3 percent.

Net income for the first quarter was 13.9 million versus 4.1 million in fiscal '03, representing an increase of 238.5 percent.

Fully diluted earnings for the quarter were 29 cents per share, a 222 percent increase from last year's 9 cents per share results.

Operating margins for the quarter increased 763 basis points, coming in at 11.29 percent versus last year's 3.66 percent. This increase was due to a 296 basis point decrease in cost of earned revenues, a 260 basis point decrease in general and administrative expenses, and a 207 basis point decrease in depreciation and amortization.

The effective tax rate for the quarter was 40.2 percent versus 42.5 percent for the prior year's period.

Net interest income for the quarter was approximately 318,000 versus 275,000 for the comparable prior year period. This interest income is generated through investments in high-quality municipal and corporate instruments. Other income for the quarter, consisting, primarily of gains associated with disposition of fixed assets was 800,000 versus 1.1 million for the comparable quarter in our fiscal 2003 year.

Operating activities for the quarter resulted in positive cash flow of 21.2 million. The primary components of this amount were net income of 13.9 million and depreciation and amortization of 9.3 million, partially offset by increases in working capital of approximately $2 million.

Investing and financing activities for the quarter resulted in the use of $1.2 million. The primary components of this amount were capital expenditures of 3.8 million, partially offset by proceeds from the sale of fixed assets of 1.4 million and 1.2 million of proceeds associated with the exercise of employee stock options.

Cash and cash equivalents at the end of the quarter were 149.8 million, up 19.9 million from the prior quarter.

During the quarter, current net receivables increased 2.8 million to 124.8 million, resulting in a DSO of 57.9 days. This figure represents a decrease of 2.8 days from the last quarter's DSO of 60.7 days. Net unbilled revenue balances increased in the quarter from 34.1 million to 36.6 million, resulting in a DSO of 17 days, unchanged from last quarter.

On a cumulative basis, the combined for our trade receivables and net unbilled revenues decreased from 77.7 days 74.9 days, a decrease of 2.8 days. Net intangible assets were essentially unchanged at 107.3 million. Finally, at October 25th, the accrual for our self-injured casualty program decreased $500,000 to 24.9 million from the prior quarter's balance of $25.4 million. Steve?

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

Thank you. (OPERATOR INSTRUCTIONS). Steven Fox with Merrill Lynch. Please go ahead.

One quick question -- can you just clarify your 12-month backlog? Did you say it was 417 or 470?

It was 417, Steve.

Could you provide a little bit more detail on the acquisitions, at least maybe the in terms of trailing look at sales and EBITDA levels, or something along those lines?

I think, Steve, because we haven't close them, we're going to be careful, but in the case of First South, we expect revenues of -- in the mid '40s.

With regards to UtiliQuest, I think there's public information out on their Web site that would indicate revenues in excess of 125 to 130 million. We would expect those revenues and some more.

You are expected to be as profitable as -- (Multiple Speakers)?

As our current cash flow margins, that's the plan.

The last question, just on the Comcast business, how much business do you expect to see decline, say, over the next couple of quarters, as some of the upgrade work is done? How much is that risk?

I don't know that it is a risk, Steve. What we're managing is Comcast as dated publicly, and we've said it all along that by the middle of next calendar year, they will be substantially complete with their targeted AT&T upgrade. There will be some other upgrades that are ongoing, just given the nature of their system. So, we've got a pretty good handle on what backlog does over the next couple of quarters.

We also are having discussions with them and with others about ongoing maintenance and capital upgrade or capital opportunities. You know, those are, at this point, still not determined, given that everybody is still focusing on meeting the schedule for the middle of next year.

Mark Hughes with SunTrust.

Thank you very much. With respect to Fiber-to-the-Premises, any activity in terms of signing up contractors as of yet? Does it look like that will be sort of in conjunction with the equipment manufacturers, or are the carriers going to do that contracting separately?

Mark, what we know is publicly available. The Verizon made an award last week of their equipment RFP and had indicated that they were in the process of having a discussion about construction services to get that placed. Beyond that, we can't comment.

When would you normally start to get more details or see this activity pick up?

When Verizon shows them with everybody.

Okay. How did the UtiliQuest do during the downturn in '01 and '02? Can you give us a sense of what their peak might have been, how much volatility they saw?

They've actually grown throughout that period, Mark. The locating business is much more generally correlated with the overall economy rather than CapEx specifically, and so to their business, like our own -- if you look at our locating business over that time period, it has actually had some modest but steady growth.

Then in terms of valuation on the acquisitions, you know, anything you can you can say in terms of multiple, and then to what sort of earnings you applied that to? Was it trailing? Was it forward, what did you pay? What was your methodology?

I think, Mark, historically -- and we are glad to hear from you again -- historically, you know that we have paid anywhere from four times cash flow to six times. I think both of these deals -- after we get them integrated into our structure -- will fall squarely in that range.

It's good that you've got a deal. Thank you.

Alan Mitrani (ph) with Copper Beech Capital.

Thank you. Could I just get a little more customer information? Can you tell us what DirecTV was in the quarter as a percent of revenues?

I show 3.19 percent, Allan.

Okay, and as well, Charter Communications -- you talked about getting some contracts; you are seeing some increases there but it didn't see them show up on your customer list as a top five. Can you just give us -- (Multiple Speakers)?

Yes. It's 2.94 percent, which was up sequentially. Again, that's the second quarter in a row that it was up.

Also, I was a bit surprised that Adelphia actually went down on a dollar basis, given the CapEx that they are spending, but you talked about seeing ramp ups there. Can you just give us some more detail?

Yes. I think -- at least in the areas that we're seeing some growth with Adelphia -- they are still getting the (indiscernible) infrastructure in place and some of the basic building blocks. I think that equipment is expensive and it has to be spent first before we can get to the upgrades, and so with the recent awards that we had seen with Adelphia, we actually think that once they get that (indiscernible) infrastructure in place that they will be pushing to up the pace of upgrade spending.

So actually the call it roughly 10 million run-rate that we've seen the last couple of quarters that you've done with Adelphia is really pretty understated and it's going to get a lot better over the next 12 --(multiple speakers)?

My sense is that activity is picking up. They are getting pushing to get projects at run-rates going into next year. The only caveat there, Allan, is we do do a substantial amount of work for Adelphia in northern New England, and so our ability to ramp up through the winter may be impacted by weather.

Also, you talked about Alltel that you want some MSA work there. What percentage of business was Alltel this quarter?

A little over 4 percent.

A little over 4 percent, okay. Can you give us a size as to how big that contract to be when it's finally up and running or how much of it contributed this quarter, the ones in Lexington -- (Multiple Speakers)?

Again, they are up and running and we are in the process the gearing those up fully for the first of the year. We could expect 8 to 10 million out of those contracts.

Is that annually, or is that --?

That's annually and that's incremental.

Also, since you brought up the Verizon RFP in general, or I guess in response to a question from Mark, do you have any sense of timing as to when they may award the contracts? I realize the equipment vendors have gotten theirs. Do you think they want to tie this all up before year-end?

We have no view on their timing.

Let me ask you a different theoretical question and I'll get back in queue. Based on what Bobby O. (ph) was saying at some recent conferences the other day, we were talking about a million homes. By my math, it equates to -- if they want to do that next year -- somewhere close to a few hundred million, $300 million in revenues from a construction piece. Is that in the ball park?

Yes. There are so many variables to go into making that analysis and you know, we're just not going to speculate. (multiple speakers) --

Right, but you haven't factored that into any of your estimates, right? (Multiple Speakers) -- expectations.

We have not factored anything other than what we know about today.

Alex Rygiel with Friedman Billings Ramsey.

Very nice quarter, gentlemen. I have a couple of quick questions. Steve, you mentioned several times that, with regards to your to acquisitions, current cash flow margins are equal to or slightly better than Dycom's current cash flow margins. Could you define what current means?

Current quarter, Alex. As always -- you know, we have been doing acquisitions for a long time. We want them to be accretive to our margins.

So current cash flow is defined as the current quarter.

The current quarter.

Great, thank you. Just generally speaking with regards to Fiber-to-the-Premises, are you seeing any other bells discuss taking fiber all the way to the home as aggressively as Verizon is at the time?

I have not seen anything publicly. I think we have historically done a lot of work for BellSouth and greenfield deployments, what they call fiber-to-the-curb, which is essentially the same deployment. They are continuing to do that in the new subdivision work that we do. We have also deployed, at times, a fair amount of fiber to the curb for Sprint and some of their growing markets. So I think those all continue. Beyond that, I have not seen any public comment.

With regards to your Charter revenues in the quarter, was that primarily driven from market-share gains or increased spending in existing markets by Charter?

I think it was both. We have picked up some additional work in the Southeast that we did not have six months ago. Then we are also continuing to spend in kind of their traditional Midwest markets, where we have served them for a long time.

Do you suggest that with regards to your two acquisitions that there's going to be a fair amount of office consolidation? At what point in time in the future will you update us on whether or not you'll be taking any type of charge for that?

We have no plans to take a charge at this point, Alex, as we have not taken charges on prior acquisitions. We are fair value of the assets and liabilities through the purchase accounting. You know, while there will be some modest severance costs, they are anticipated in our outlook.

One last question -- do you have any further plans to make acquisitions over the next 6 to 12 months?

Our view, Alex, is that we're going to be opportunistic. We feel good about -- (technical difficulty) -- general economy is and if the economy begins sustained growth, this is probably a good time to be looking at acquisitions if you have a high likelihood that you're forward multiples three and five years out are lower than what you pay.

Michael Jurinski (ph) with Vinneck (ph) Asset Management.

Great quarter! I've got two questions here. The first one, on the tax rate, I believe you had previously been guiding towards about 42 percent. I just wanted to find out what went into the lower tax rate and what I should be looking at, going forward.

We indicated last year that we had done some restructuring, which would help our tax rate. Generally speaking, I think that at these income levels, that's probably a pretty good rate -- this quarter's rate, going forward.

Okay, so I should model that, going forward?

I think the other thing is at this income level, we have some schedule-in book tax differences that the more money you make, they are a smaller percentage of your pretax income.

The other one is, can you give a little bit more color on the business outlook you have, going forward, in terms of the opportunities that are there? I look at your backlog is up sequentially; you've come off of two real strong quarters now, and then now your forecast here seems to be indicating much greater seasonal drop-off than I would normally expect. I look at a normal drop-off for you seems to be about 10 to 15 percent from first quarter into second quarter. Does this look like you are in a normal environment anymore, or what's going on?

Well, no, I think what it indicates is we have growth with our telephone company customers; we're going to be cautious about how that extends into 2004 just because we are generally conservative. If you pull out our Touch America revenue from the year-ago period, the rest of our telephone business was up about 14, 15 percent, and that's a good growth rate that truly hasn't been seen in a while. We want to be careful that we don't get ahead of ourselves going into 2004.

We do have the Comcast business where we still have good business there but we know by mid '04 that they would like to be substantially complete. Usually what Comcast says they're going to do, they will do. So, we are just factoring those into our outlook. I think when we did take another look at it and updated our view from 90 days ago that our current outlook for this quarter was better than our outlook was 90 days ago, which is a nice trendline once you get into something we haven't had happen for a while.

Okay, so from just a perspective of what it feels like out there from a business standpoint, it's not feeling that it is any worse than normal?

No, I don't think so. My general sense is that we're seeing more opportunities and more growth and we are actually -- and this is a good thing in our business -- there are certain projects that customers are pushing to get spent in this budget year, and we're seeing a little bit of tightness in the labor supply. While most people might think that's a bad thing, from our perspective that's a good thing because it promotes discipline in the marketplace.

You had mentioned the headcount increases last quarter. Are you still adding bodies?

Right now, we're trying to add them so we can meet our customers' needs.

Great, thank you very much. Great quarter!

Matthew Berg (ph) with Laether (ph) Management.

Good morning, gentlemen. Just a follow-on to that last question -- within the environment that you're describing, do you think we're going to see a ramp-up in CapEx for fiscal '04 budgets?

You know, I think, as always, it's difficult to forecast the interaction of an upturn in the economy with the capital budgets of our customers. Just as kind of coming into a recession, our customers' budgets lagged kind of the downturn; they generally have lagged an upturn. I mean, if the economy shows two, three, four quarters of 4, 5, 6 percent growth rate, that's clearly going to drive access lines, clearly going to drive new housing, and every other economic cycle has tended to firm and increase CapEx.

Okay.

But may be a lag; that's also historical.

That, in combination with the Verizon Fiber-to-the-Premises and then BellSouth and SBC -- I mean, this seems like this is a very strong environment for your business. Any color on that?

Well, I think it's certainly a better environment to come to work in every day than it has since the first calendar quarter of '01. You know, we clearly like to see sustained momentum, both in the general economy and with our customers' businesses. I mean, we do well when our customers do well, and to the extent their businesses pick up, I think they will be happy to spend money to support growth. That's been difficult for them over the last couple of years.

Okay. As someone a little bit new to this story, it seems like you've generated a significant amount of cash this quarter and you have a lot of cash on your balance sheet. How are you going to use that cash? Do you have a share buyback program -- (multiple speakers)?

If you look back, we've announced two cash acquisitions that are not closed, that are pending, but we expect them to close before the end of next week. That will utilize substantially all of our cash balance. We have a $200 million credit facility and we would probably utilize that, you know, so we don't draw down all the cash. But right now is not a bad time to be borrowing. I mean, when you have a better outlook and you have low borrowing costs is the time to reinvest in your business.

Absolutely, absolutely. Well, congratulations on the quarter and thanks for your answers.

Steve Curran (ph) with Lowe's (ph) Corporation.

Do you have any sense of if Verizon passes one million homes in '04, how much of that work they're planning on doing internally versus outsourcing?

I have not seen them comment on that, so we don't have any view on that right now.

Okay. I know Steve asked this question again. You said 417 was the next twelve month backlog?

Yes.

Okay, and that compares to last quarter of -- if I'm calculating right -- 446?

I think it was 446 or 444, something like that.

I think that the way our backlog is calculated is pretty conservative. For our master contracts, we look back twelve months, take our average monthly revenue and then forecast for the balance. So, to the extent that you are in an up-cycle, you may underestimate your backlog because you're looking at trailing numbers for the estimate. To the same extent, when you off strong numbers, it may overestimate the backlog. It's the consistent practice of the Company to do it this way, and so that does cause some variability around the number, quarter-to-quarter.

Then just for modeling purposes, if you're paying mostly cash for these acquisitions, what were you earning approximately on the cash sitting on the balance sheet?

We would almost be embarrassed to answer! Dick, what is the number?

It's in the neighborhood of 1 percent.

One percent tax -- (multiple speakers).

So, if you are earning one, then you are going to -- (Multiple Speakers).

(indiscernible) is more like 80, 90 basis points.

A follow-up question from the line of Alan Mitrani (ph) with Copper Beech Capital.

I missed the answer to the CapEx. What's your budget for this coming fiscal year?

It's about 22 million on CapEx.

That's gross, right?

No, that's net of disposals.

That's net of disposals, okay. Do you have sense as to a gross number, maybe 5 million -- (multiple speakers)?

Maybe 3, 4 million more.

CapEx has been relatively low with regards to depreciation. Maybe you can explain -- I saw depreciation jump this quarter a few hundred thousand, even though CapEx really hasn't picked up. Was there something behind that, Dick?

Yes, there was a little unusual -- historically, we've used a method -- the half-year convention method for depreciation, although the last two years, we've moved to a straight line. What happens when you dispose of assets in the early part of the year, you end up with a half year's worth of depreciation, and so it kind of doubles up in the first quarter.

So you think we can go back to a run-rate a sort of 8.9 million roughly, something like that nature?

Yes.

Okay, so this is sort of more of a one-time anomaly, right?

Yes, it should be.

Also, were there any -- I know there (indiscernible). Were there any one-time charges within the SG&A, either for bonuses accruals for this past year, or for deal costs expensed into the numbers?

The deal costs, Allan, are always part of the purchase accounting to the extent that that's the way we account for them, so we have had travel expenses and those kinds of issues, but nothing material.

The bonuses are calculated on a formula that levers off a pretax margin, and so -- I mean, it's not a one-time charge; that's the way we've always done it.

That was in this quarter?

It's in every quarter.

Okay, so (inaudible). Also, how many shares are outstanding as of now?

Are you talking basic or are you using treasury share -- (Multiple Speakers)?

If you can give us the basic number first and then talk about options?

(inaudible).

Mike (sic), we have our annual shareholder meeting in about an hour and 20 minutes, so I guess we should know, but it's a hair under 48 million.

In terms of options, just another maybe half a million?

Well, in terms of those that are in the money, yes -- (multiple speakers) -- treasury share of that that's about half a million of dilution.

That's very interesting. Just to follow-up with Alex's question, I want to understand, when you are saying -- one, I just want to make sure I heard you right; in terms of -- you were giving us trailing 12 months, roughly 12 months revenues for First South and UtiliQuest?

Yes, that's a historical -- (multiple speakers).

Okay, so maybe roughly 175 combined on a trailing basis?

That's correct.

Okay, so one times revenues. It seems like with the -- when you talked about cash flow margins, you're talking about EBITDA margins?

Yes.

Did I understand the last couple of quarters, you're running in 15, 16 percent type of levels? Those are the margins you're talking about to these companies?

What we said what that they would be there or better. Better is what the plan is.

Do you still have the Adelphia receivable on your books?

Yes, it's down there in the other long-term assets.

Okay, so nothing has changed. Any progress with that? It seems like they are making -- you know, now, it's probably in the next nine months or so that they are going to be out of bankruptcy.

We are generally encouraged that the market for unsecured claims, which we consider to be inferior to the (indiscernible) claims that we have, have traded up significantly, so that is encouraging.

Lastly, when I run through -- if you are going to pay about 170 million in cash out-of-pocket for these deals, correct (sic)?

That's what we've announced.

And with 150 on your books and it looks like you're going into obviously seasonally slower quarters, cash flow should be good. It seems like, within a few months, you will have still no debt on your books. Am I right in thinking that you could pay this off relatively quickly?

I don't know that we could pay it entirely off but we can certainly whittle it down substantially.

Can you remind me of what the original amount of the receivable was on Adelphia, and what the carrying value is right now?

The original amount was approximately $40 million and it's 21.4 or there abouts.

21.4.

21.4 you're carrying it on your books, okay. What do you pay right now on your line?

Of course, we haven't borrowed under it, but a good pricing would be LIBOR plus 1.5.

LIBOR plus 1.5 basis points.

Plus, we'd offset -- you know, we're paying commitment fees so we'd (inaudible) 50 basis points currently, which would go away if we borrow.

So basically, you're still borrowing at maybe 3 percent or less?

In that neighborhood.

Well, incrementally -- because we have cash, you have to also offset -- you know, if we keep cash, what we'd earn on it. We can borrow pretty cheaply.

If I just step back for a second other than talking about details and just looking at the big picture, in reading your annual report, the Chairman's Letter, and in just hearing the kind of contracts and market share you're taking, it seems to me that we are walking into a period that we haven't seen in years, where cable looks like they still need to upgrade and spend money on voice-over-IP and telco is looking at fiber, which could be many, many years of work. How do you see yourselves playing in the upgrade cycle? I mean, is it walk -- you go after the Verizon contract soon or sit back and look for the BellSouth and others? I mean, do you see much competition for getting these, given the working capital needs and the experience you need to get this business?

Allan, in this business, you've always got to be paranoid and you're only as good as whatever service you provide the customer today. (LAUGHTER). We're never going to say that we're not concerned about the competitive environment. We think that we husbanded our strength through the recession and have positioned the Company to do as well if not better than other folks in the up-cycle. But that's only as good as our ability to execute it. All of the management who is on the phone right now, listening to this call knows that because I hear it everyday!

Lastly, for the Alltel (indiscernible), you talked about 8 to 10 million incremental revenues on a run-rate basis for the MSA work. (indiscernible) Citizen Communications in Tennessee and West Virginia on this -- how much of those (indiscernible) MSA work?

I think it's in the neighborhood of 5 to 7 million a year.

Five to 7 million a year? That's (indiscernible) the incremental to what you're running now?

Those were extensions. (multiple speakers) -- we have that work currently.

Lastly, if I'm right on this Comcast work, were some of those are new jobs (sic). Maybe do you -- it looks like share gains from other competitors?

You know, I don't know that we took work from anybody but we were asked to help out to make sure that they met the schedules that they had committed to, and we were happy to do that.

Okay. Do you have any sense of when you're going to hear about maintenance work or others from Comcast?

I think that's an evolving process, Allen. I mean, I don't expect that there will be a singular approach, but I know what their long-range plan is and I also know that they generally get where they want to go.

Well, great. It looks like you've got a lot of good things ahead of you. I appreciate it. Thanks a lot for the update. You expect to have a conference call when you close these deals -- (multiple speakers)?

Absolutely. When we own the businesses, we will provide more granular detail.

Lastly, is that the reason why you didn't give us two quarters out guidance? You want to close the deals and talk a little more about things?

I think that would be a pretty good approximation of what we were thinking.

We have a question now from the line of Angelo Metioli (ph) with Esland (ph).

On these two pending acquisitions of First South and UtiliQuest, could you tell me what your estimated goodwill will be from those purchases?

Yes, I think we -- we haven't closed and so we are a little reticent to provide that kind of detail but I think we can say safely that it's in the neighborhood of 140 million.

That's all I had. Thank you.

A follow-up question from the line of Alex Rygiel with Friedman Billings Ramsey.

A quick question for Dick -- backlog at the end of this quarter was about 900 million in total, about 417 million to be worked off over the next twelve months. Can you give me the same corresponding figures for the end of the fiscal first quarter of '03?

We can give you the total, Alex, because I've got a schedule in front of me. It was 673.8 million. What it was in the twelve-month period, we are checking. Yes, next twelve months (indiscernible) 673.8 million.

Doing the quick math, that looks like it's up about 30-plus percent?

That would be my quick math also.

Mark Hughes with SunTrust.

In terms of subcontractor use, are you using more subcontractors, or are you hiring folks internally?

I think we're doing both right now, Mark. You know, as we indicated, we had demand for additional crews and we are both hiring employees and adding subcontractors.

How about the -- (technical difficulty) -- work that that ILEC would normally do themselves? Is that something they outsource, or would they even have the capacity to do that kind of incremental work?

I think, Mark, that any one of the ILECs could do anything they want to do to accomplish the work. They all have different work practices. Sometimes, even within an ILEC from region to region around the country, they will do some things in-house and outsource others and the mix changes. So, we would think, generally, if construction activity picks up, that each one of the ILECs makes use of contractors. So, I think there will be certainly a general benefit that we could speculate upon. Anything more specific would be case-by-case.

Do you think they will be hesitant (indiscernible) to make permanent hires and more likely outsource? Do you think that will be the --?

If we get a chance to voice our opinion, we would certainly say the same thing.

I'm sure you will pass that along.

(LAUGHTER). We will use you as a reference, Mark!

A follow-up question from the line of Alan Mitrani (ph) with Copper Beech Capital.

Last year, you had one of your worst quarters in a long time, the equivalent of a the fiscal -- I guess -- second quarter for '03. The weather hurt you and it seemed like there wasn't much business. A year makes a lot of difference, but November -- I'm hearing from a lot of construction companies and other companies that deal with outside plants -- obviously, and I'm sitting here in New York. Weather is pretty good in November. Can you give us a sense of how the quarter is going so far, or how November compares with your expectations versus last year?

I think, generally, it's been, as I said in my comments, it's been normal, seasonal weather. You know, the issue in our business, as we talked about last year, is the weather between the holidays. You have, you know, significant weather and you have, you know, mid-week Christmas and New Years, it can make for a short quarter -- like about a week shorter than normal. That's what we will just have to pay attention to.

Also, BellSouth is up I guess every quarter over the last four. Looking at their CapEx budget, it looks like they spent almost 5 percent more sequentially and it looks like they're going to spend 10 to 15 percent more. A lot of the RBOCs look that way in the fourth quarter. Is this just like, as you said earlier, maybe just economic activity coming back a little, or are you seeing a lot of project work coming out that had been on hold for some of the RBOCs for a long time?

Well, I think, generally, as they start feeling better about the economy, they start to spend some money. To the extent that there is perhaps not access line growth in total but access line growth in certain geographic areas, that they will spend money to maintain good customer service.

I mean, none of our ILEC or RBOC customers is ever going to let a capital budget get between them and providing good service, so you know, area by area, spending can be up.

Then lastly, regarding First South and UtiliQuest, can you give us some of the big customer exposures of the companies? I mean, which -- you talked about MSA work for them and sort of recurring business. Which of the RBOCs or which of the utilities are they most -- (multiple speakers)?

(Multiple Speakers) -- (indiscernible) is a leading provider to BellSouth. They also perform work for Centurytel (ph) and some of the rural Southeast telephone providers.

UtiliQuest, you know, not surprisingly -- folks like Qwest, BellSouth, Verizon, XL Energy, some of the other electric utilities that they serve in conjunction with their multiple locates (ph) for communications companies.

Okay. Two other quick questions -- I appreciate the time you are spending. Your guidance for this coming quarter -- I know maybe one (indiscernible) regarding weather. What does it assume for weather? (multiple speakers)?

(Multiple Speakers) -- normal winter weather, but not the kind of weather we had last year, which -- you know, was outside the norm in our experience.

Then I guess not the kind of weather we are having so far in November, either!

You said that Allan; we didn't!

Lastly, the next question regards -- are there any new customers that you got from these deals? I mean, customers that you haven't had experience with in working with and maybe you can sell them more services or maintenance services or expose them to more of the Dycom family?

Well, I think, historically, we've had work for Centurytel but not near the opportunity that First South has. I think, generally in our locating business -- and I think this would also be true at UtiliQuest -- that that business tends to work for more gas and electric utilities -- any utility that has buried facilities. So to the extent that that piece of our business grows, you also see an increase in recurring revenue but you also see a broader customer base.

Okay. I'll ask (indiscernible) come up with a new question. From a maintenance perspective, when you get MSA work or some more maintenance work with cable companies or others, can you give us a sense of what the margin differential is between that work from a gross margin perspective versus some of the, you know, more time-intensive upgrade work?

I think that we will always shoot to have consistent margins across those businesses and we've been able to on the telephone side. In the cable industry, that's any evolving model, and we will manage as much margin out of it as we can and remain competitive.

Great, thank you.

Mr. Nielsen, we have no further questions at this time. Please continue.

Well, thanks, everyone, for your time and attention and we will speak to you after our next quarter towards the end of February. 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.