Dycom Industries Inc (DY) 2004 Q2 法說會逐字稿

Welcome to the Dycom earnings call. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Steven Nielsen. Please go ahead, sir.

Good morning, everyone. I would like to thank you for attending our second-quarter fiscal 2004 Dycom 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.

Statements made in the course of this conference call that state the Company's or management intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note 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, and the Company's quarterly report on Form 10-Q for the quarter ended October 25, 2003. Additionally, during this call, there will be references to certain non-GAAP financial information. This information has been reconciled to GAAP in the Company's press release yesterday which has been posted on the Company's web site.

Yesterday, we issued a press release announcing our second-quarter 2004 earnings. Included in those earnings was a nonrecurring gain of $11.4 million before taxes related to the sale of a long-term accounts receivable. To ensure meaningful comparisons, all references I will now make to the second quarter will exclude this gain. A reconciliation of our earnings with and without this gain is attached to yesterday's press release that has been posted to our website.

For the quarter ended January 24, 2004. Total contract revenues were 196.4 million versus 137.2 million in the year ago period, an increase of 43 percent. Net income was 9.6 million versus a loss of 1.1 million and fully diluted earnings per share was 20 cents versus a loss of 2 cents. Backlog at the end of the second quarter was $1.174 billion versus 900.4 million at the end of the first quarter of 2004, a sequential increase of 274 million. Of this backlog, approximately 545 million is expected to be completed in the next 12 months. These estimates include approximately 254 million of total backlog and 118 million of twelve months' backlog derived from our recently completed acquisitions of FirstSouth and UtiliQuest. They include no backlog from our announced participation in Verizon's fiber-to-the premises buried plant installations.

Our second-quarter results continue to demonstrate the fundamental health of our business. Growths remain strong. Internal growth for the quarter was 25.8 percent and 24.8 percent for the first six months of fiscal 2004. In addition, our forecasted third-quarter revenue indicates continued year-over-year organic growth. Gross margin increased by 418 basis points from the year ago quarter while G&A decreased 312 basis points and depreciation and amortization decreased 202 basis points. Both the G&A and depreciation and amortization percentages continued to be favorably impacted as relatively fixed costs were leveraged by increased quarterly revenue. Overall, improved results were driven by tight cost controls; solid field productivity despite difficult weather in January; good safety performance in active claims management; and expected performance from a newly acquired operations of FirstSouth and UtiliQuest.

Liquidity remained ample with over $20 million in net cash despite acquisition cash expenditures of 175 million during the quarter. Capital expenditures to support our growth totaled 4 million net of disposals. Excluding balances and revenues from companies acquired during the quarter, days sales outstanding was 73 days, a sequential decrease of two days on the first quarter. Cash flow from operations totaled 60.8 million, including a nonrecurring gain related to the sale of a long-term accounts receivable. Excluding this gain and the taxes associated with it, operating cash flow was 32.4 million in the quarter, a sequential improvement of 11.2 million from the first quarter.

During the quarter, we continued to experience the effects of a growing overall economy, major telephone company expenditures, which grew substantially year-over-year and continued robust spending by several cable customers. Revenue from Comcast was 59.2 million, Comcast was Dycom's largest customer for the quarter, at 30.1 percent of revenue, down from 34.8 percent in the previous quarter. Additionally, revenue from Adelphia and Charter increased year-over-year and sequentially. Revenue from our major telephone-company customers Sprint, BellSouth, Alltel and Qwest, all increased significantly compared to the year ago quarter. Employee headcount increased to 7,590 at the end of the second quarter from 5,470 in the previous quarter, reflecting normal seasonal patterns offset by the addition of the employees of FirstSouth and UtiliQuest. Perhaps most significantly, Verizon recently notified us that Verizon intends to enter into a contract with Dycom, whereby we will perform a portion of Verizon's fiber-to-the premises buried plant installations.

During the quarter, we continued to book new work. For Comcast, we received system upgrade contracts for Montgomery County, Pennsylvania, the Pittsburgh tri-state area, Grass Valley California, South Chicago, Sacramento, California, San Mateo, California and a new build betterment contract for the southern half of metropolitan Denver. For Time Warner, an electronics betterment project in Memphis; for Charter, a new build betterment contract for Jackson, Tennessee, for James, Cable upgrades in Georgia, Florida, Texas, Louisiana and Oklahoma, and for Insight, an installation contract in Louisville, Kentucky. In addition, we extended several locating contracts including those for Atlanta Gas Light, BellSouth and Comcast in Atlanta. And with Puget Sound Energy in the Seattle area. Finally in Florida, we were awarded a three-year master contract for underground power installations for Sumpter Electric Cooperative. As Dycom grew this quarter, we demonstrated our continued stability and ability to profitably respond to growth opportunities, both organically and through acquisition. 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 recent acquisitions. Secondly, the strength of those relationships and the value we can generate for our customers has allowed us to be at the forefront of rapidly evolving industry opportunities. Finally, while growing, we have maintained tight margin discipline, solid cash flows and our superior financial strength. As economic conditions continue to improve, Dycom's fundamental strength 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 allowed us to generate industry-leading organic growth, while simultaneously pursuing significant and strategic acquisitions. Over the last several quarters, we have repeatedly stated that our belief, that as profitable growth opportunities return to our industry, we will be one of the first and the best-positioned firms in our industry to take advantage of them. We believe 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 third quarter of fiscal 2004, we anticipate earnings per share of 18 to 24 cents on revenues of 185 to 200 million. This outlook anticipates continued growth in the U.S. economy and easing of February's difficult weather, continued spending by Comcast on its acquired systems, expected performance for FirstSouth and UtiliQuest acquisitions, and only modest incremental revenues from our new Verizon opportunity.

Looking beyond the third quarter, we anticipate earnings of 24 to 30 cents per share on revenues of 205 to 225 million for the fourth quarter of fiscal 2004. Please note that Dycom utilizes a 52/53 week fiscal year, which ends on the last Saturday in July, as a result, the fourth quarter of fiscal 2004 will contain 14 weeks. Our expectation for the fourth quarter is based upon the continued impact of those factors cited for the third quarter, with the exception that we do expect revenues from Verizon to increase throughout the fourth quarter to meaningful levels. Although a precise expectation of this impact is difficult to determine at this early stage of the project. At this point, I will turn the call over to Dick Dunn, our CFO.

During the current quarter, we recorded an after-tax gain on the sale of certain long-term receivables of 6.8 million or 14 cents per share, fully diluted. Unless otherwise noted in my discussion, we will eliminate the impact of this gain. A reconciliation of these amounts to our GAAP net income including the gain has been provided in the table to yesterday's press release, which is available on our website.

Turning to the income statements, contract revenues for the current quarter were 196.4 million, up 43.1 percent from last year's Q2 of 137.2 million. Revenues for the quarter on a same-store basis were up 25.9 percent. Total revenues for the six-month period ended January 24 increased 32.7 percent to 392.4 million versus fiscal year 2003 revenue of 295.6 million. Organic revenue activity for the six-month period was up 24.8 percent.

For the quarter, the top five customers accounted for 67.4 percent of total revenue versus 63.4 percent for the prior year's second quarter. For the six months ended January 24, sales to the top five customers as a percent of the total were 68.5 percent versus 58.3 percent for the prior year. The top five customers and their respective percentages for Q2 of fiscal year 2004 and 2003 are as follows -- for the current year Q2, Comcast, 30.1 percent; BellSouth, 13.2 percent; Sprint, 11.0 percent; Adelphia, 7.2 percent; and Qwest, 5.9 percent. And for the Q2 of fiscal year 2003, Comcast, 30.6 percent; BellSouth, 11.6 percent; DirecTV, 9.5 percent; Sprint, 6.1 percent; and Qwest, 5.6 percent.

Net income for the second quarter was 9.6 million versus a $1.1 million loss from fiscal year 2003. Net income for the six months ended January 24 increased 20.6 million to 23.6 million versus last year's 3.0 million. Fully diluted results for the quarter were 20 cents per share versus a loss of 2 cents per share in the prior year's second quarter. EPS for the six-month period ended January 24 increased to 48 cents per share versus last year's 6 cents per share. Operating margins for the second quarter increased 932 basis points coming in at 7.78 percent versus last year's negative 1.54 percent. This increase was due to a 418 basis point decrease in cost of the earned revenues, a 312 basis point decrease in general and administrative costs and a 202 basis point decrease in depreciation and amortization. Operating margin for the six-month period increased 828 basis points, coming in at 9.53 percent versus last year's 1.25 percent. This decrease was due to a 345 basis point decrease in cost of earned revenues, a 281 basis point decrease in general and administrative costs and a 202 basis point decrease in depreciation and amortization. The effective tax rate for the quarter and six-month periods were 38.2 percent and 39.4 percent, respectively, versus 1.2 percent and 50.2 percent, respectively, for the prior year's period. The prior year's period effective rates were impacted by the prior year's loss in the second quarter, which resulted in non-meaningful rates.

Net interest expense for the quarter was 284,000, and net interest income for the six-month period was 34,000 versus net interest income of 370,000 and 645,000, respectively, for the prior year. This decrease was primarily the result of the use of cash on hand and increased borrowings in connection with the two acquisitions closed during the quarter. Interest income is generated through investments in high-quality municipal and corporate instruments.

For the quarter, our cash flow from operating activities, including the sale of long-term receivables, was 60.8 million. The primary components of this cash flow were net income of 16.4 million, depreciation and amortization of 11 million and reduction to working capital and other assets of approximately 33.4 million.

Investing activities, consisting of acquisition expenditures net of cash acquired, of 175.1 million, capital expenditures of 5.1 million partially offset by proceeds from the sale of assets of 1.1 million, resulted in net investing activities of 179.1 million. Financing activities for the quarter generated 86.8 million. The components of this amount were borrowings under our revolving credit agreement of 85 million and proceeds from the exercise of employee stock options of 1.8 million.

Cash and cash equivalents at the end of the quarter were 118.3 million, down 31.5 million from the prior quarter. During the quarter, receivables, net of acquired receivables, dropped from 124.8 million to 110.1 million, resulting in a DSO of 55.7 days versus 57.9 at the end of the first quarter, a decrease of 2.2 days. Net unbilled revenue balances, excluding acquired balances, dropped in the quarter from 36.6 million to 33.4 million, resulting in a DSO of 16.9 days, essentially unchanged from Q1's figure of 17.0 days. On a cumulative basis, the combined DSO for our trade receivables and unbilled revenues, again, excluding acquired balances, decreased from 74.9 days to 72.6 days, a decrease of 2.3 days.

At January 24, our accrual for self-insured casualty program increased to 28.8 million from 24.9 million at October 25. Of the 28.8 million, 18.6 million represents incurred, but not reported claims, an increase of 3.1 million from the first quarter. Steve.

Now John will open the call for questions.

(OPERATOR INSTRUCTIONS). Steven Fox, Merrill Lynch.

Can you talk a little bit about the gross margins at 23 percent? I think you have been targeting like 24 to 25 percent? Is that still a realistic assumption over the next few quarters, given the mix? And then I have a follow-up.

Yes, Steve, I think the 23 percent was right in line with what we expected given the seasonal weather impacts and the holiday impacts in the second quarter. I think we don't see anything here. In fact, if you look back historically, 23 percent in the second quarter is a pretty solid number.

From the standpoint of Verizon, I am sure you're limited on what you can say. But can you talk about how many of the contractors are involved, or what type of split you have? And generally give some color on the ramp? Are you going to be fully ramped with this project in two quarters? How else can you describe it?

What we are permitted to say, Steve, is that Verizon's publicly disclosed that in 2004 they want to deploy in nine states; they have not disclosed those nine states. But we are awarded and are in final documentation on the project in a substantial number of those states. We feel like in order to hit the objectives that Verizon has for 2004, that we will need to be very fully deployed by midsummer at the latest.

Toby Sommer, SunTrust Robinson-Humphrey.

A question regarding what you think is driving the competitive force with Verizon and fiber-to-the home? Is it strictly in the cable, or do you think the wireless and the opportunity to maintain your home phone number and shift it the wireless is sort of another nail that is helping to drive this sort of shift for them?

As I have understood it, they are looking at fiber-to-the home as an opportunity to increase their revenues. At the same time, passive fiber networks will have significantly lower operating and maintenance costs going forward. So I think they see it as an opportunity to increase the topline and expand margin by reducing the cost of operating the network. Clearly, there may be some ability to bundle the data offering and the voice offering enabled by the fiber with wireless. And certainly, given Verizon Wireless is leading market position, that may be attractive to them also. But I think -- pretty simple, they want to grow revenue and be able to reduce their future costs to maintain the network.

Two quick follow-ups, if I could. If you could refresh my memory, I don't think there's any sort of incremental CAPEX. But with this kind of work, are there any different things involved that you currently don't have? I was wondering if you could comment about where you see your long-term revenue mix? Are you comfortable where it is now, or could you see it shifting a little bit over time?

I think on an incremental CAPEX basis, certainly we have -- this is business we understand and do every day. So we have assets in hand to do it. It's a growth opportunity, so we may have to spend some CAPEX to support it; that will be a good thing, because it will reinforce our future growth. And your second question?

It was regarding your revenue mix and sort of longer-term, where your goal was and what your vision was for the company?

Dick has the revenue mix for the quarter here. Why don't you go ahead and share?

For this quarter, we were in telecom with 34.7; cable TV was 46.3 (ph); utility locating was 15.2; and other and electrical was 3.8.

We have set up the business for long time here to primarily focus on the cable and telephone industries. And it's been in the action and reaction between the two industries that we have seen growth opportunities. We think this is just -- with the Verizon opportunity -- this is just another example of why that strategy has been sound in the past and will be going forward. So we may see a shift from some of our cable business as the upgrades with Comcast are winding down. But that is going to be picked up on the telephone side of the business, hopefully plus some. We are comfortable with our revenue mix.

Alan Mitrani, Copper Beech Capital.

Did I hear you correctly, as related to Verizon, it is not in your backlog right now?

Yes. We had not signed the contract, Alan. And our policy is that we don't put contracts in backlog until they're finally documented. And that would be in this quarter, which is our third quarter. It will be reflected in our third-quarter backlog.

Is there a reason why the contract was not signed yet? Are certain reasons still up for grabs? Or is it just dotting the i's and crossing the t's? Can you just give us a little more color on that?

We are in the documentation phase. And because it is a substantial project, there was obviously a need to communicate to our people. I think it's also fair to say, because we have had some folks call us, that some of the other competitors have been notified that they -- if they wanted to participate, they needed to talk with us. And so given that there was some chatter in the industry about it, we felt like and Verizon concurred, that it was prudent to put out an announcement.

To understand, my understanding of when you were running through your revenue guidance and your estimated earnings guidance for the next two quarters, you did include some contribution from Verizon and sort of a meaningful one in your mind for the fiscal fourth quarter?

Primarily for the fourth quarter. If we can earn some revenue in this quarter, we are going to hit it as quickly as we can. But it is in the start-up phase.

With that said, you raised guidance a bit for fiscal third quarter. The fiscal fourth quarter seemed -- I know you have not put estimates out there before; but relative for what some people were looking for in terms of earnings contributions or others seemed a little light. Are there certain start-up costs in that fourth quarter that would result in a lower margin initially, but then ramping up? Or are the acquired assets that you bought this past quarter coming in less than expected? Can you give us some insight in terms of that, or is it just you being conservative?

We are always going to be prudent with the guidance, particularly when we are starting a contract that is potentially this large. We are happy with the acquisitions; they are producing according to the plan. So I think it's for us to make sure that we execute on the guidance we provide and hopefully, do better. Right now, this is our best estimate, given the -- particularly the newness of the Verizon opportunity.

Were there any one time costs or deal-related costs in the quarter, or anything that was just related to closing the books on the other two businesses and having owned them for about a month or two?

Certainly, there is travel expenses and integration expenses; G&A was probably higher. We did have those types of expenses, but we just took those through ordinary expense. We didn't have any charges.

Also, the tax rate this quarter, in my estimation came in at about 38 percent. I know you guys have been doing a lot to try to lower your tax rate from previous years. Most people, and I myself, have been using about 40 percent. Can you give us some guidance on the tax rate going forward? Was there something special this quarter ,and should we use a lower rate going forward?

Nothing particularly special. One thing is as our income goes up, our permanent unfavorable schedule Ms (ph) kind of get diluted down as a percent. So we were at about 38 percent, 38.5, or thereabouts.

That's a lot of tax talk for a guy who's not a CPA. So here is my quick question -- what kind of estimate should I be using for the next 12 months or for fiscal '05 or something like that?

In the 39 percent range.

In the 39 percent range?

Yes.

Alex Rygiel, Friedman, Billings, Ramsey & Co.

Congratulations on the Verizon work.

Thanks.

You used the word meaningful and large several times. Can you compare those terms and define those terms relative to Comcast, which I suspect is a meaningful and large customer of (ph) yours right now?

The agreement -- and I think this is known in the marketplace -- that Verizon was anticipating entering into was a five-year contract. And so by definition, it's going to be significant. And clearly, with their stated goals of passing 1 million homes and presuming success there, or doubling that, we certainly have pretty significant growth opportunities based on what they have disclosed publicly. We love all our customers. I don't know if I would want to compare it on a relative basis to Comcast. We continue to have good business with Comcast, and value them as a customer. Clearly, it's a nice opportunity for us to participate in -- in really the initial deployment of what could be a pretty revolutionary network technology for the largest RBOC in the country.

How many subsidiaries do you anticipate working with Verizon on this FTTP opportunity right now?

Oh, probably five, six, seven.

Can you comment on how your recent acquisitions helped you be successful in getting this business?

The acquisitions really were entered into separately from any discussions we had from the opportunity. Clearly, particularly, in UtiliQuest's case, they had a significant piece of business with Verizon across the country, and also were located in serving some other utilities in markets that Verizon is the local phone company. And so clearly, there will be some impact on the locating business based on not only the buried construction but also the aerial construction, to the extent that requires grounding systems and other deployments that require locating services.

What I look at this entire opportunity, is this all new business, or is there some cannibalization going on? Or are you taking some market share from maybe some of your smaller competitors that could have had relationships with Verizon?

It's all new business, Alex. This is really -- it is an overlay project, so it's replacing existing facilities. And so I don't see it as -- I see it as all incremental. Over time, as the network is fully deployed, there may be less local maintenance opportunities for some of the smaller contractors. But right now, it's all incremental.

You went through a number of new job awards during the quarter. Can you throw out, was half of that from new opportunities and half from market share gains, or 75/25? How much is new opportunity versus market share gains?

Some were clearly market share gains. We mentioned the extension, so those were not. I think we have been relatively successful in adding mileage, particularly with Comcast, as they continued their upgrade process. I would not say that was a market share gain. That was just mileage that was unassigned and available for folks who could get it done. And so we are proud of the job the subsidiaries have done so that we were interested with more to do.

One last question, you have obviously worked with Verizon in the past. Is there anything different about this contract or the language with this contract versus other traditional MSA work for Verizon or other RBOCs?

I do not think we are in a position to get into the specifics of the contract language, other than to say we are very comfortable signing it. It's not anything that would give us pause based on long experience of working with telephone companies.

(OPERATOR INSTRUCTIONS). Chris LaCroix (ph), John Levin & Co.

Just a question, is it your understanding that Verizon is going to be focused more on the buried plant installations or the above ground installations in the startup of their build?

I think they publicly disclosed that they are serious about working on both. Historically, Verizon has done the majority of their aerial construction with their own employees. And I think they are very capable of jumping on that. And we are going to be very active on the buried construction side.

Follow-up from Alan Mitrani.

Can you give us some little more detail on some customers? I saw Charter's CAPEX in the quarter really jumped in the fourth quarter, in their calendar fourth quarter; and they are indicating they need to spend a lot of the loose (ph) basic subs. I saw they did not make your top five. Can you give us what Charter was in the quarter, as well as DirecTV?

They were number six. And basically, Alan, they were 3.5 percent which is a little more than a year ago, although our revenue is up 43 percent. So I guess you could figure out how much they increased in the quarter.

It keeps going up, it seems. And you expect them to continue to go up this coming year?

They are spending lots of time on the new build and betterment side of their business. And we see opportunities there. Also, they are doing some things on the installation side, so they seem to be proactive in bettering the way they operate the business.

If you could round out with DirecTV and Alltel, if you don't mind.

We will go to seven, I guess, for DirecTV, at 2.99 percent.

And Alltel?

Number eight, 2.5.

DirecTV was down from 9.4 percent last year.

That's because you guys are (ph) losing (ph) some (ph) contracts, right?

Right. But that's all organic to offset.

I understand. I have a couple questions on this Verizon deal, but I want to focus on Comcast a bit. The weather I guess in the calendar fourth quarter was pretty good; January looked bad. Your revenues were not down nearly as much, I guess, sequentially from Comcast, about 14, 13 percent relative to what Comcast's CAPEX was essentially, 18 percent. Can you give us the sense as to what you think Comcast -- how much it is going to be down for calendar '04 versus calendar '03, given their rhetoric that the upgrade cycle is mostly done, and they are just trying to finish up a bunch of cities?

I think there are a couple of things. We have not provided guidance out past the fourth quarter. So we are not going to comment on the calendar year other than to say that Comcast continues to indicate that they are going to be substantially complete by midyear. I think the other thing is that we are on the locating side of the business, and with some of these new build betterment contracts, there is a recurring piece of that business that may not be as sensitive to their overall CAPEX number. So that is part of the impact that you see in the second quarter.

Just on Verizon again, if other contracts -- I am trying to reconcile a little bit -- I am hearing obviously the job is going to be pretty good, and if I run through one million homes -- and I realize you're not necessarily -- they are not necessarily going to hit one million homes, and I have to assume a certain percentage -- but if Verizon ramps the way you expect them and hopefully the way they expect it or they have said, your fourth-quarter numbers in the second half of '04 numbers should be substantially higher than what you are saying unless the rest of your business is really going to come down. I am trying to reconcile with what I know about how big this contract is or my assumptions are versus your conservatism. Can you just help me out there?

It is going to be a large project. What we want to make sure that we understand exactly what the magnitude of the project is. It's been a very detailed process and some of the numbers have changed over time. And we just want to make sure when we commit, that we understand. It also included some engineering phases as part of the tasks; and those may be self-performed by Verizon. We are happy to do them if they want us to. But they may choose them to do them themselves. It's not a major portion of the revenue opportunity, but it is some volatility coming up with an estimate. It's a large project.

Alan Mitrani; Can I assume that if other contracts -- or contractors -- have to come to you then this contract is a little bigger than your guidance potentially?

No, our guidance is our best expectation given what we know today. And as that changes, we will update you.

Do you expect Verizon to make your top five next fiscal year?

Clearly.

And then, lastly, you had talked about the acquired properties that you bought to be -- have higher margins, probably, over time than your existing business, as you integrate it and as you start going through their markets. It sounds like your answer to Steve's question at the beginning was initially you've just got it, as you work through it, we could see a couple of quarters where the margins are much higher as we get to seasonally stronger quarters. Is that the way it's likely going to play out as you integrate them and you start bidding and put the Dycom model into it?

I think there are a couple of things. Both were large businesses, particularly UtiliQuest. I think that EBITDA margin expectation that we said was that we would be at the average or higher. And we don't see any indication that that's not going to be the case. We are enthusiastic about what these acquisitions provide to us, in terms of both growth and margin expansion. It may only be the bottom of the second inning, but so far, we have not had any strikeouts.

Dick, I missed what percentage Qwest was in the quarter; was it 5.9?

Yes, that's it.

Follow-up from Toby Summer.

I was curious what you think the other RBOCs -- particularly BellSouth, has historically been a good customer -- what their plans are for fiber-to-the home and if you see that spreading among the other RBOCs, or if you think some of them may take a wait and see attitude and see how the first leg of Verizon's project goes?

In BellSouth's case, they have the largest installed base of fiber-to-the curb, I believe, of any of the major carriers in the country. I think they are still working through some regulatory issues as to whether fiber-to-the curb is the regulatory equivalent of fiber-to-the premise. But I think once they resolve those issues, BellSouth has always been at the forefront of deploying new network technologies. And we don't see any reason to expect that they are going to fall very far behind on this one, once they get comfortable with the regulatory environment, so that they can earn a return on their investments.

Would you put Qwest and Alltel in the same category?

Qwest has not indicated that they are going to participate at this point with any fiber-to-the premise. And Alltel is generally in a little more rural environment. So I don't think that they have any plans at this point. Certainly, we do some business for SBC. And they also are a participant, along with Verizon and BellSouth, in the technology portion of the fiber-to-the premise procurement process. So they certainly have shown interest, if not for overlay, certainly for greenfield environments.

Follow-up from Alex Rygiel.

What percent of your revenues from Comcast are what you would classify as reoccurring?

The locate (ph) business -- this new build betterment work -- some of the minor construction activities, it could be 10 to $15 million a quarter. And hopefully, we are trying to grow that business, as we talked about previously.

And could you generally speak about the directions of your gross margins over the next 12 to 24 months, taking into consideration the Verizon FTTP work?

I think, Alex, it is interesting. We're probably about in the same position we were a year ago with a significant amount of work coming from an existing customer, but with a new opportunity. And we are not going to speculate other than what our general trendline has been with gross margins, that it's going to be any stronger than that until we get farther into the project. Our first focus is creating value for the customer and getting the project going. And we are confident that if we do that that we will earn satisfactory returns for the shareholders.

Given that you mentioned you feel comfortable that you have been awarded a number of the nine states that they are looking to be active in, are the remaining states still available opportunities for you? Or have they been pulled off the table?

All I can say is that of the nine states, we will be participating in a substantial number. And that is for Verizon to comment as to what their plans are for the balance, not for us.

Rick Grubbs, Kaufman Bros.

My question just concerns I guess -- what you can talk about regarding the structure of the contract with Verizon. I hate to beat that too much. But I am just interested in the comment you made about Dycom being I guess in the driver's seat in a sense of --?

I don't remember saying that.

I think it was back to -- I guess what I am looking for is other vendors perhaps, and getting some direction from you guys on maybe coordinating this effort. Is that the way I heard that, or did I misunderstand?

No, what we said is we felt like we needed to make an announcement, because as part of the award process, some of the potential participants had been notified they were not going to directly participate and if they would like to continue, to contact us. And we've have received several calls.

That would be sort of, they would operate in that fashion, subcontractor?

At this point, if we choose to go that way, that would be the relationship.

Follow-up, Alan Mitrani.

Depreciation and amortization, about 11 million this quarter. Can you give us your sense as to what D&A is going to be on an annual basis? I realize you acquired properties and also, there may have been some purchase accounting adjustments or something; can you just help us out there? What percentage of revenue or what dollar amount should we look at?

I think we see that run rate continuing through the remainder of the year.

The run rate of about 11 million a quarter?

Yes. And there is some intangibles amortization that is new to the income statement, as well as the result of the acquisitions.

Also, CAPEX continues to be pretty low, about 19 million last year; maybe 25 million for the calendar year, roughly. Can you give us a sense of what calendar '04 is going to look like on a CAPEX basis -- gross CAPEX?

I think it's probably 20 to 25 million, with an upward bias as we get busier, which is a good thing.

Lastly, you guys paid off, it seems, almost 25 or 30 percent of the deal costs with only two months of having this deal done. What is your outlook as it relates to the use of cash, given interest rates really being at historic lows? Are you done making deals for the next six to 12 months? Are you going to pay down the debt quickly? Or can you talk about uses of cash?

Certainly, we are going to have some working capital needs as we ramp up on the fiber-to-the premise project; so we certainly have that. We've talked a little bit about our CAPEX needs. As always, we are going to be looking for strategic opportunities, when we see the right target and the right set of customers.

Do you expect DSOs, once you have integrated acquisitions, do you expect the consolidated DSOs to come down as you shift towards the Telco customers, which can help support some of that increase of working capital needs?

The acquired companies both had lower DSOs than our average. So as we get full-quarter results, we will certainly have some DSO impact there. We certainly -- it's hard to speculate on the exact DSO profile for the new opportunity because we have not done any billing yet. We would expect generally that that would be in line or a little better.

Lastly, I have not heard you speak of James Cable in years. Can you tell us -- were they a meaningful customer in the quarter? What percentage of revenues, and how big can this contract be over time?

It's a significant 5 to $10 million contract. It's a customer that we have done work for on and off. They are primarily a rural cable provider in the Southeast and Southwest. And as the larger MSOs continue to work through their upgrades, there are other opportunities with some of the rural providers.

In response to your answer to someone else's question regarding the other RBOCs' fiber-to-the premise or fiber-to-the home initiatives, obviously, BellSouth and SBC has been a little slow dragging their feet; Verizon is taking the lead. It seems like SBC will likely be next. Can you talk to us about the opportunities in terms of, if you are working for Verizon and you are doing all this work, could you possibly still bid on other fiber-to-the premise opportunities? Does this preclude you from looking at the other RBOCs, and what is your outlook there?

Our focus is going to be to start the job and do a good job for Verizon and build our value there. To the extent that there are other opportunities, as long as we're doing what we need to for Verizon and they are comfortable, then we will leverage that. But our focus right now, unlike Wall Street, which is always thinking two moves ahead is, we need to do a good job with what we have got in hand. This has been a long process. We've spent a lot of work on it. We have had a good working relationship with the customer, and we want to take that right out of the RFP process and put it into the field and start getting some conduit in the ground.

Was my understanding of this Verizon contract -- obviously this is not just a one-year contract; this is a multiyear contract you're going to sign, right?

The expectation is for a five-year agreement, which is similar to what I understand they have issued to other equipment suppliers.

If that's the case, the amount goes up in the subsequent years as they get further along? It just does not start at peak and stays with a peak; it starts low and moves up? Is that a good understanding of it?

As I understand what has been publicly disclosed by Verizon and the equipment vendors is that there is a bias that successful deployment will generate an increase in the out years.

Thank you, great. Congratulations on the contract.

Follow-up, Alex Rygiel.

Are you working with SBC in any markets right now? Are you working with SBC in Wisconsin, where they are trialing a fiber-to-the premise network?

We are not working in Wisconsin that I am aware of. We do some construction work for them in kind of the Missouri/Kansas area. We do locates for them in Texas, and one or two other locations, as needed. We certainly understand who the customer is and how to speak with them. They have historically used smaller vendors, not unlike what historically Verizon has done.

John Frank (ph), Miller Asset Management.

If you could just share some of the drivers that led to Verizon's decision? Is it really to go with you guys? Is it their relationship with you, your experience with the technology, your geographic footprint relative to the nine states, just any type of color, please?

I really think that is a question for Verizon to answer. What we presented to them and what we thought was important was that we have lots of experience in large deployments, arising both from the telephone and the cable industries. So the magnitude of the opportunity was something that we have been through before and we have got some good experience. We have a large geographic footprint. I think we are in 44 or 45 states, had a presence in each one of the markets that they identified initially. So we had pretty good experience, almost -- even on a county by county basis as to what the conditions would be. Generally, we just did our best to present our ability to help them be a success, because at the end of the day, for us to be successful, our customers need to be.

Mr. Nielsen, there are no further questions in queue.

Thanks, John. We appreciate everybody's time and attention today. We look forward to speaking with you on our next conference call. Thank you.

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