Dycom Industries Inc (DY) 2005 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Dycom earnings conference call.

[Operator Instructions].

I would now like to turn the conference over to your host, Steven Nielsen, President and CEO. Please go ahead.

Thank you Linda. Good morning everyone. I would like to thank you for attending our second quarter fiscal 2005 Dycom earnings conference call. With me we have in attendance Richard Dunn, our Chief Financial 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 companies or management's intentions hopes, beliefs, expectations, or predictions of the future are forward-looking statements. It is important to note that the companies 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 companies SEC filings, including but not limited to the companies report on Form 10-K for the year ended July 31,2004, and the companies quarterly report on Form 10-Q for the quarter ended October 30, 2004.

Additionally during this the call there would be references to certain non-GAAP financial information. This information has been reconciled to GAAP in the companies press release of yesterday that has been posted on the company's website. Steve?

Thanks Mike. Yesterday we issued a press release announcing our second quarter 2005 earnings. Included in last year's earnings was a non-recurring gain of a 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 of 2004 will exclude this gain. The 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 29, 2005, total contract revenues were 224.5 million versus a 196.4 million, an increase of 14%.

Net income was 7.4 million versus 9.6 million, a decrease of 23%. While fully diluted earnings per share was $0.15 versus $0.20, a decrease of 25%. Backlog at the end of the second quarter was 1.442 billion versus 1.376 billion at the end of the first quarter of 2005. The sequential increase of 66 million. Of this backlog, approximately 851.1 million is expected to be completed in the next 12 months. Our second quarter results while at the lower end of our expectations and in some respect disappointing, continued to demonstrate the fundamental health of our business.

Gross margin declined from the year ago quarter by 404 basis points. However, this negative impact was in part offset by a decline in G&A of a 118 basis points. The decline in gross margin was the result of several factors; increase over time training and recruiting expenses generated by our ramp up for FTTP related locating engineering and construction activity; expenses associated with the ramp down of several cable TV upgrade projects; several large projects whose management required relatively higher local cost of sales overhead versus traditional corporate G&A expenses.

Liquidity increased significantly during the quarter. Net cash and short-term investments increased 35 million to over 62 million, despite capital expenditures to support our growth totaling 19.5 million net of disposal. Day sale outstanding declined appreciably to 68.6 days, down 6.1 days from the first quarter, after adjusting for working capital acquired in the RJE transaction. During the quarter, we continue to experience the effects of a growing overall economy, major telephone company expenditures, which grew substantially year-over-year, and growth from some video providers.

Most significantly we performed work for a bit for Verizon's Fiber to the Premise varied plan initiative in the states of Massachusetts, New York, Pennsylvania, Maryland, Virginia, California and Florida. Revenue from Verizon was 55.6 million during the quarter, up from 2.7 million in the year ago quarter. At over 24% of revenue, Verizon is now our largest customer. Additionally during the quarter we negotiated updated pricing for Verizon's 2005 plan, necessitated by the need to attract resources adequate to complete this year's program.

Organic revenue from BellSouth increased over 32% compared to the year ago quarter, and BellSouth was our second largest customer. Revenue from Comcast was 25.3 million. Comcast was Dycom's third largest customer for the quarter at 11.3% of revenue, down from 19.4% in the previous quarter. Year-over-year revenue as expected was down for Comcast, while revenue for both Charter and DIRECTV increased.

Employee head count decreased during the quarter by 480 to 7982 at the end of the quarter, reflecting normal seasonal patterns. During the quarter, we continued to book new work for BellSouth, multi-year extensions to our Rome, Savannah and Atlanta Georgia contracts as well as our Birmingham Alabama contract; Verizon, FTTP work in the Portland Oregon area, as well as work in New Hampshire, for Cox business projects in Southern California and for Charter, project in Texas and New Mexico. Dycom demonstrated our continued stability and our ability to profitability respond to emerging growth opportunities.

First and foremost we maintain solid customer relationships throughout our markets. 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. We remain encouraged by a growing and accelerating commitment by 3R box to deploy fiber deeper into their networks. We see these commitments as evidence that a sustained cycle of dramatic increases in growth capital expenditures is commencing.

In fact, it is increasingly evident that we're seeing the real beginning of the (indiscernible) toll rewiring of the nation's telecommunications infrastructure, in order to dramatically expand the provisioning of bandwidth and the delivery of new service offerings. And finally, we've maintained our superior relative financial strength. As the economy continues to expand and our industry begins to see an upsurge in growth, we believe Dycom's fundamental strength will allow us to remain one of the best-positioned firms in our industry able to exploit profitable growth opportunities where others may be constrained.

Having been prudently managed during our industry downturn, we look forward to the prospect of a potentially significant growth. After weighing all the factors we have discussed today, we have updated our forecast as follows. For the third quarter of fiscal 2005, we anticipate earnings per share of $0.23 to $0.28 on revenues of 235 million to 250 million. This outlook anticipates continued solid growth in the US economy, normal seasonal weather, Sarbanes-Oxley 404 implementation expenses of approximately $0.02 per share, declining spending by Comcast as it completes its AT&T broadband upgrade, and a prudent assessment of increasing revenues and margins from our Verizon fiber to the premise opportunity.

Looking beyond the third quarter, we anticipate earnings of $0.35 to $0.45 per share on revenues of 275 to 295 million for the fourth quarter of fiscal 2005. Our expectation for the fourth quarter is based upon the continued impact of those factors cited above. At this point I will turn the call over to Dick Dunn, our CFO. Dick?

Thanks Steve. Before I begin, let me point out that during the second quarter of the prior fiscal year we recorded an after tax gain on the sales of certain long-term receivables of 6.8 million or $0.14 per share fully diluted. Unless otherwise noted, my discussion will eliminate the impact of this gain. A reconciliation of these amounts to our GAAP net income including the gain has been provided at the table via yesterday's press release, which is available on our website. Contract revenues for the current quarter were 224.5 million, up 14.3% from last year's Q2 of a 196.4 million. Organic revenues for the quarter were down 3.1%.

Contract revenues for the 6-month period ended January 29, increased 24.3% to 487.7 million, versus fiscal year 2004 revenue of 392.4 million. Organic revenue activities for the 6-month period was up1.5%. For the quarter, the top 5 customers accounted for 64.3% of contract revenues versus 66.8% for the prior year's second quarter. For the 6 months ended January 29, sales to the top 5 customers as a percent of the total was 63.6%, versus 68.2% for the prior year.

The top 5 customers and their respective percentages for Q2 of fiscal year '05 and 2004 are as follows. For fiscal year '05, for Horizon 24.7%, BellSouth 16.7%, Comcast 11.3%, Sprint 7.4% and Quest 4.2%. And for Q2 of fiscal year '04, Comcast at 29.5%, BellSouth 13.2%, Sprint 11.0%, Adelphia 7.2%, and Quest 5.9%. Net income for the second quarter was 7.4 million versus 9.6 million in fiscal year '04. Net income for the 6 months ended January 29 was 23.0 million versus last year's 23.6 million. Fully diluted earnings for the quarter were $0.15 per share versus $0.20 per share in the prior year's second quarter. Fully diluted EPS for the 6 months -- for the 6 months period ended January 29 was $0.47 per share versus last year's $0.48 per share.

Operating margin for the second quarter decreased 296 basis points coming in at 4.82% versus last year at 7.78%. This decrease was due to a 404 basis point increase in cost to earn (ph) revenues, a 10 basis point increase in depreciation and amortization, offset by a 118 basis point decrease in general and administrative costs. Operating margin for the 6 month period decreased 213 basis points, coming in at 7.40% versus last year's 9.53%. This decrease was due to a 408 basis point increase in cost to earn revenues, partially offset by 170 basis point decrease in general and administrative costs, and a 25 basis point decrease in depreciation and amortization.

The effective tax rates for the quarter and 6 month period were 39.5% for both, and 38.2% and 39.4% respectively for the prior year's period. Net interest income for the quarter and 6 months period was a 192,000 and a 146,000 respectively, versus net interest expense for the prior year's quarter of 284,000 and net interest income for the prior year 6 month period of $34,000. This change was primarily due to increased cash and investment balances. For the quarter, our cash flow from operating activities was 51.8 million. The primary components of this cash flow were net income of 7.3 million, depreciation and amortization of 12.8 million, and reduction to working capital and other assets of approximately 32.7 million.

Investing activities consisted of capital expenditures of 20.9 million, partially offset by proceeds from the sales of assets of 1.5 million, resulting in a net use of $18.7 million. Financing activities for the quarter generated $1.3 million. The components of this amount were proceeds from the exercise of employee stock options of 2.4 million, partially offset by a principal payments on notes payable of 1.1 million. Cash and short-term investments at the end of the quarter were 71.2 million, up 33.7 million from the prior quarter.

During the quarter receivables dropped from a 158.6 million to a 115.6 million, resulting in a DSO of 46.9 days versus 54.8 at the end of the first quarter, a decrease of 7.9 days. Net unbilled revenue balances dropped in the quarter from 63.8 million to 53.7 million, resulting in a DSO of 21.8 days, essentially unchanged from Q1's figure of 22.1 days. On a cumulative basis, the combined DSO for our trade receivables and unbilled revenues decreased from 76.9 days to 68.6 days, a decrease of 8.3 days.

At January 29, ARPU for our self-insured casualty programs decreased to 48.3 million from 48.8 million at October 25. During the current quarter, revenue from multi-year master service agreements represented 55.4% of contract revenues, versus 47.1% for Q2 of the prior year. Revenue from long-term contract and multi-year master service agreements represented 87.9% of contract revenues, versus 87.7% for Q2 of the prior fiscal year. Steve?

Now Linda, we will open the call for questions.

Thank you.

[Operator Instructions].

Our first question will come from the line of Gina Gordon (ph) from Merrill Lynch. Please go ahead.

Good morning.

Good morning.

Good morning Gina.

Hi. The guidance going forward implies that margins in the second half of the year, while they will be recovering, will be down year-over-year. Is this all really related just to the ramp up costs for Verizon?

I think it's related to the ramp up and the fact that the magnitude of the program that the guide implies is very substantial. And so we're going to have some expenses to grow the business.

Okay and how much training was -- has been -- costs of the training has been incurred year-to-date? How much more is expected in Q3?

We don't break out the isolated impact of training expenses Gina, and we don't do that because it really has 2 impacts. One it's a part of growing the work force and two, the issue is not only the direct training expenses but their impact on productivity, which is harder to quantify. And because we have been in this business and we have been through growth cycles before, we know that over a 6 month to 9 month period that those expenses will regress back to a normal level. But to sit there and say that it was X basis points or Y amount of dollars as an isolated impact, I do not think that is important to understand because it is hard to isolate out the impact on productivity.

Is it fair to assume that the third quarter will be the last quarter that the training expenses will be incurred?

We're buying (ph) ramping revenues, so there is always an element of training expense. We think those expenses will be offset as we get into the best part of the construction season in the fourth and first quarters of next year.

Where do think margins can go? In the past, you talked about how 24 to 24.5% margins are achievable. Is that still a realistic goal?

We feel comfortable with the level of pricing that we have been able to secure for 2005 work. That is a reasonable expectation.

Okay. My last question, how much of an impact is whether?

You know my sense was that while it was pretty wet on the west coast and there were some impact in California, the rest of the country experienced what I would call normal seasonal weather. It does not help when you get a snowstorm and your doing underground construction, as folks in the mid-Atlantic and Northeast probably understand today. Our sense was that it was not significantly different from what we expected.

Okay. Thank you, I'll get back in the queue.

Our next question will come from the line of Alex Rygiel from Friedman Billings. Please go ahead.

Thank You. Good morning gentlemen. Steve very early in your opening comments, you suggested or stated that in some respects the quarter was disappointing. Could you expand upon what was disappointing in your mind?

I think the expenses that we saw as we ramped down some of the Comcast work were a little more than we expected. We had a sequential decline in revenue from Comcast that was expected, but when you drop from 50 some million to 25, 26 million, there were some costs associated with that that I wish we had done a better job of anticipating. The offset to that is, the amount of capital spending that we did and the organic growth that we can't with BellSouth was encouraging.

With regards to Verizon, you mentioned you negotiated pricing with Verizon. Did this lead to any business that had been in your backlog to be pulled out of backlog?

The backlog, other than using the same methodology to calculate it, was consistent with the same list of projects. As we also mentioned, we were able to secure some additional work in Oregon.

I believe you mentioned in the last conference call that your backlog as it relates to Verizon was through 2005 and therefore, you were including November and December of '04 and 12 months of '05. How are you calculating Verizon in terms of backlog today?

We're calculating it the same way so that as of the end of the January quarter, there were 11 months of expected backlog from Verizon. Nothing that extended past that.

Can you provide an update on SBC and BellSouth for their fiber to the node initiative. Have you been communicating with the companies at all? Have they been communicating with you? Have they let any project work out?

With BellSouth, our best information at this point, and certainly the level of activity that we are experiencing and the number of crews that had to add during the quarter and that we're continuing add is indicative that their capital spending plans are up. They are up both for the type of work you expect to see to support fiber to the node, but they are also up just to support regional economic growth. There were essentially no market share gains year-over-year, so when you see this same set of contract to produce over 30% revenue growth, that is a pretty significant ramp of in BellSouth activities.

Secondly, with regard to SBC, the pace of activity that they are generating through their normal channel for securing outside plant services has increased. We have seen that impact in those limited areas where we participate in that market. We have also seen some expense-- expected or have had some discussions about some expansion in their central office work that will also support fiber to the node. I think interestingly, a couple of weeks ago, Sprint also indicated that while they are not committing to a wholesale fiber to the node build out, but they're also working at a trial project, somewhere in the country to commence shortly. It seems like all of the fiber to the node activity is picking up.

On the last conference call you referenced 2 customers, MCI and Adelphia. MCI as it related to fiber reinforcement project in Arizona. Can you give us an update on that, and as it relates to the potential applications of MCI being acquired by another entity, and with regards to Adelphia, you mentioned that projects are in the bid phase. Can you give us an update on that?

Yes, with regards to MCI, the project is moving right along. There have been some incremental additions to the scope of work. There will be other projects that will be bidding from MCI for this fiber reinforcement during this quarter. Without getting in the middle of who should be the right owner of the MCI assets, I think it's safe to say that the integration of MCI's networks with whoever winds up as the owner, will require them to also spend some additional CapEx. I know that Verizon in their acquisition announcement was very clear that they had anticipated a couple billion dollars of capital spending on the MCI infrastructure.

I think that we would both participate in that effort through outside plant and also through the transmission equipment and installation business that we do with MCI in a limited way, although that was a much larger business several years ago. With respect to an Adelphia, there were some projects that they proceeded with and we've picked up what we considered to be our fair share. I think that has played out as expected. Of course, at this point in time, it appears that the auction process may take somewhat longer, at least than what we expected, so we do not expect to see a significant burst of activity in the near term.

One last question. With regards to the re-negotiated pricing with Verizon, is that for all of your markets or is that only new incremental markets? When does the pricing going to effect?

No that was effective for all of the markets nationally. It was effective with new projects that commenced after January 1 -- new work orders.

Thank you.

We have the question now from the line of Paul Russell (ph) from PR Capital. Please go ahead.

Good morning. A little bit different take here as I am a hedge fund manager. My concern is with the stock. Your issue is down 30% since November plus you're going to take another 8 to 10% haircut here, it looks like on the opening. What precludes you from implementing a buyback or paying a dividend to at least give some confidence to the street that you think this currency is undervalued here?

There is nothing that precludes us from a share repurchase or dividend. Our board is always looking at both of those instruments as appropriate. I think Paul, from our perspective, as we look forward to the business that we see going out and the organic growth that we anticipate for both of third and fourth quarters and hopefully in to our next fiscal year, we're going to have adequate uses of the capital internally that will generate returns that will eventually be reflected in the share price.

Very good, thank you.

[Operator Instructions].

Our next question comes Alan Mitrani from Copper Beech Capital. Please go ahead.

Thank you. Can you give us the rest of the top-10 customer list-maybe DIRECTV, Charter, Adelphia, Alltel -- some of the others?

Dick will give us the top 10 for the quarter.

Dropping below Quest we had DIRECTV at 8.2 million, Charter at 7.9, Alltel at 5.4,Texas Utilities at 3.2, and Adelphia at 2.7.

I'm sorry, 2.7?

2.7 Alan.

Did you do any additional work for Bright House this quarter?

I think there were number 11 Alan, but a normal run rate for us with them, about 1.7 million.

On the Verizon pricing increase, what percentage increase did you get year-over-year?

Alan, we're not going to get into the substance of the negotiations with Verizon, other than to say that we felt that it was set at a level that would allow us to earn acceptable margins and attract the necessary resources to get a very substantial program built.

Also, on Sprint sequentially went down about $5 million, 20-some, 25 odd percent. It seems a little more than seasonality given some of the business to picked up last year. Was there a slowdown from Sprint spending given their merger?

Yes. Well I do not know if it was given their merger Alan. I think that they have indicated in their communications with the street that they see lower local telephone spending, at least in the near term. That may be in fact, be in part coupled with the growth initiatives that they have also disclosed at they're analyzing. There were no changes in market share. It was just a somewhat slower quarter based on what they wanted to get done.

In response to Gina's question, you have talked about margins going up. A similar thing happened last time we came around with a big company transition. You talked about 24 to 24.5% gross margins. Did you say calendar '05 for that?

No, I believe-- and I do not exactly recall what Gina's exact question was, but in terms of the margin expectation, when we get to a steady, solid business that is in expansion phase, which we see, if not by the fourth quarter, by the first quarter of fiscal '06, there is nothing about this business that would imply that it has a lower margin embedded in it than anything else and we have done. The focus from our perspective internally was managing the downturn in Comcast during the quarter, when we had a 25 million plus sequential declined more than the expenses associated with the ramp up, particularly with Verizon particularly after the adjustment to pricing that we received in January.

Is using a fiscal number somewhere around 115 million or so for Comcast, is that good, dropping from 51 the first 25 and leveling out to 17 to 20 a quarter?

We have said before that we would look at 15 to 20 million as a run rate Alan. Based on what we see, that still seems reasonable.

Also just quickly, CapEx-- this is the biggest CapEx quarter I think I've seen in years for you. On an annual basis calendar wise, you are up about 140% on top of 100% increase last year on a calendar basis. You talked about 35 to 40 million, I believe in fiscal CapEx. Can you give us your sense as to what you see CapEx for this year and maybe next year?

We had talked about 35 million to 40 million net of disposals. That implies that, as we rotate to more underground construction that will be surplusing some of the aerial construction equipment that we use primarily for Comcast. I think at this point Alan, based on what we're seeing for growth out of BellSouth and Verizon, that there may be a slight upward bias to the fiscal year number in terms of what we expect to spend for CapEx. We never felt bad about any CapEx that we ever had to make to support growth with BellSouth, and we feel comfortable that the same will be true with Verizon.

I will get back in queue. Thanks.

Our next question comes from the line of Mark Degenhart from Oppenheimer Capital. Please go ahead.

Good morning. I wondered if you could talk about your top 3 customers and give us a sense of trends with regard to how much work of this nature there doing internally, versus outsourcing to larger companies like yours, versus to sending to mom-and- pop? Could you give us a sense of the mix of that for each of the 3?

We will do our best. There are no published numbers on any of the information you requested, but we will do what we can. With respect to Verizon primarily on the fiber to the premise program that we're performing for them, what was historically in the old Bell Atlantic prior to the GTE merger, they predominantly outsourced all of the underground construction, a portion of the engineering, and a minor amount of aerial construction.

That is generally done to larger firms such as ourselves or some regional private firms. In what historically was GTE, where there are more flexible internal work rules, they tend outsource a substantial portion not only of all the other activities that were listed, but also aerial fiber placement and splicing of the cable.

In that area, they tend to use both large firms, and what I would call mid-size regional firms. They do not use traditional mom- and-pop companies. With respect to Bell South, they do not perform for the most part any underground construction or placement of polls or the placement of aerial cable, and they have outsourced that historically to not only ourselves, one other public peer, and a series of private regional firms.

In terms of aerial construction, they do not do any of that with outside sources because of their union agreement. With respect to Comcast, for upgrade construction, they do very little if any of that internally. In terms of new build, plan extensions, and other capital activities, they also do a very little of that with their own work force. Does that answer your question, Mark?

Could you just add SBC into the equation?

Yes, SBC once again because they have different work rules from the acquired entities, the historic Southwest Bell used contractors for all activities. Essentially all of the underground and a portion of the aerial and splicing. In California, they do all of the underground historically with outside vendors, and less with outside vendors with aerial construction, but they can. And in Ameritech, it is similar to the historical California Pacbell arrangement. So, that portion of what they have to spend that is underground, historically has always been done by outside vendors.

And with that portion, what is your sense of mix between larger versus mom-and-pop?

I think there are several things that are going on that have encouraged generally the use of larger vendors, because the programs are significantly larger than they have been in the past. Given some of the industry difficulties over the last 3 or 4 years, where there has been both capacity and private firms that have exited the business, I think they are using larger vendors. I think the general exception to that rule would be that SBC has generally used a channel that relied more on small mom-and- pops.

They've been very comfortable with that; it works for them in their view. We will see as their needs increase significantly if that changes.

Last question. To what extent do mergers in the industry-- to what extent have those mergers had any impact on your forward guidance?

In terms of any of the long- distance and RBOC mergers, and our view is that those events will have no impact on their growth initiatives with regards to broadband or video. Because I just do not think that anybody who is participating there from Verizon or SBC is capital constrained to execute on their '05 or '06 plans. So for us, it does not seem to be an issue in our view.

Thank you.

We have a question now from the line of Mark Bishop from Boston & Company. Please go ahead.

A couple of things. First, just to clarify, you said you get normal margins by the first quarter, first fiscal quarter of '06.

I think we can expect-and when we say normal margins Mark, what we're talking about is given the level of the activity in the ramp up, we think that those kinds of margins are attainable. We would like to do better. And historically in the right environments we have done better.

What do you consider to be a range of normal margins?

It depends on where we are in expansion cycle. Normal margins historically have been anywhere from 24 to 25% on the gross margin line. We have added locating business, which has somewhat less gross margins because it is not near as capital intensive. On the other hand, we feel comfortable that given the magnitude of the RBOC programs, that we will be able to see margins as we did in prior expansion cycles like in the '90s.

Your G&A is kind of flattish year-over-year. Is there any reason why as revenue grows or ramps up in the next couple of years, how much higher does General and Admin have to go up to support that?

You have to grow your G&A to make sure you maintain tight control over the business. I think, the bigger issue, at least in the near term is going to be the 404 implementation costs that we're going to have that are going to impact G&A for the next couple of quarters. We think we have factored that in. Once that process is over, and it becomes part of the regular framework, we would hope that we would grow by G&A sufficiently to keep tight control of the business. But that it would not grow as quickly as revenue. You should be able to get some G&A leverage in this business.

All right. So if revenue were to grow 30%, after you get rid of the 404 stuff, if revenue grew 30%, does G&A have to grow more than a couple million dollars?

Are you talking on a quarter basis?

Yes.

That is reasonable, but we would try to do it less. When we pull more revenue through our existing business units, we're not going to add any essential subsidiary corporate costs. We're going to add some additional safety people and other things that we need to do to make sure that it is kept tightly under control. But I would hope-- if you look Mark, at our fiscal '04 versus fiscal '03, we grew the business over 250 million in revenue and G&A went up 5 million on an annual basis.

Okay that is great. And then the other thing is on depreciation and amortization, as you ramp the revenue I guess you have to spend a little bit more money. I was wondering if that has already happened or if there is a good slug of more D&A growth that is coming from your recent planned expenditures to support the revenue ramp?

Certainly we're going to spend some more money to do it because we generally depreciate assets over a 16 month period. There is some lag from when you buy to when they show up in the full quarter. It is not going to grow as dramatically as the CapEx is. In fact, we also have assets that we acquired in 2000 that will be rolling off over the next couple quarters also.

Okay. That's great. Thanks very much.

We have a question now from the line of David Lieberman from South Point Capital. Please go ahead.

Good morning. I was wondering, which quarter do you expect Verizon revenue to sort of reached a peak?

That is a function of the number of homes passed that they decide as the corporate goal. As I understand their public statements on that, they would like to continue to grow the number of homes passed each week throughout the year. We certainly will have a seasonal impact due to the fact that-- underground construction activities in certain parts of the country have to be reduced or stopped during the winter. Based on what Verizon has indicated in the last couple of months, I think they would like to have that number accelerate throughout the year.

Would you characterize that Q4 work you did for Verizon as a 1 million households workload, or was that more of a 2 million household workload?

As best we can tell, that number will have to expand, the amount of work that we completed during that quarter will have to expand significantly in order for them to hit their current expectation for homes passed for '05.

Okay. What percent of your backlog is Verizon?

We have generally David, not commented on specific customers in the backlog because there are of varying maturities of the contract. There has been some Wall Street estimates that would look at numbers that are reasonably close to what we would expect. We cannot get into comparing 11 months of backlog with Verizon versus 50 months on a new BellSouth contract.

Understood, and was the Verizon work won through a bid process?

Well, we originally went through a RFP process in the fall of 2003 that culminated in a contract in 2004. That contract had a provision for revisiting pricing to reflect market conditions. That is what we did in the November/December period.

Okay, so there's no there was not inside the contract and therefore some work had to be re-bid or re-put out there?

Well, I mean there was a process by which we jointly established what the fair market price was. But it was within the confines of that agreement.

Okay, great. The last question, the sequential guidance. About 10 million to 20 million in growth, is that just a seasonal move, or what is the expectation there? Is it Verizon growing?

You have more workdays in April. So you certainly have some seasonal impact. Generally our customers like to get out of the gate on the telephone side of the business early in the year to address their capital spending plans. We continue based on what we see as a run rate with Comcast. We will see that continuing to decline, offset by an expansion in the revenue earned hopefully with Verizon.

Okay. Thank you very much.

You have a follow- up question from the line of Gina Gordon from Merrill Lynch. Please go ahead.

How much did RJE Telecom contribute to the quarter?

Once we own them Gina, we have not generally broken out by individual subsidiary what they have contributed. I think we can safely say, and I think Dick commented that organic growth was down about 3% year-over-year. So when you back out the impact of RJE along with the partial periods of UtiliQuest and First South, we are year over year about flat, if that helps you.

Okay. Thanks a lot.

We have a follow- up question from the Alan Mitrani from Copper Beech Capital. Please go ahead.

Thank you, I missed it earlier. What was your backlog from Verizon for this coming year?

Alan, we have not commented publicly, as we've said before about that portion. But suffice it to say, since overall backlog was up slightly, although we had some significant new bookings with BellSouth, the fact that we are only using Verizon through December 31, 2005, and the overall backlog did not come in, but the number of months in the calculation went down, one can assume that it held steady.

Last time this happened when Comcast ramped up from 40 million to 55 million level call it a couple of years ago, your margins bottomed at 18.8% -- your gross margins and then jumped a couple hundred basis point as you got the project going. You had a lot of wire centers open. It seems like your guidance anticipates the same thing, margins bottoming here at 19% with a couple basis point expansion now that Verizon is up into the 50s and hopefully 60s or more and Comcast is taken down. Do we need to wait a quarter or 2 more, or is it similar to a couple of years ago in your mind?

I think the only issue that is somewhat different is when we came out of the recession in to the Comcast field Alan, the rest of the business had contracted so that all of the upside of Comcast came through. In this particular case, what we had to manage in this quarter and will have to manage year-over-year for a little bit is that, we have rotation where Comcast rotation is coming down while Verizon and BellSouth and the other phone companies are going up. We did not have any customers a couple of years ago that were actually still declining in '03.

In your mind that is better here or worse?

It just means that we have got to get to the steady state run rate with Comcast. On a year-over-year basis, we will have to work through that. It just means that the growth that you are seeing on the telephone side is not as apparent as it was a couple years ago with Comcast.

On DIRECTV, can you give us our sense - there is a battle between satellite and cable now for subs. Are using DIRECTV expand their sub base aggressively are you getting more business from them? Can you just give us a sense what you are seeing from the satellite -- ?

Well, we have limited involvement with them. It has been a good business for us. You can look at the subscriber ads in the fourth calendar quarter that have been disclosed publicly, and they still seem to be adding customers.

Can you talk about-- I realize uses of cash have almost always gone to acquisitions and CapEx and only rarely do you buy back stock. It seems like your stock is trading, if you believe the outlook, at about 6 times EBITDA, the lowest multiple in the construction group. Can you give us a sense as to what your cash needs may be in the future? Do need to make more acquisitions to get exposure to SBC or other vendors?

Well, as always we're going to be opportunistic about acquisitions. We do not have to do anything. We have a good nationwide footprint and feel like we can be responsive to our customers if the right acquisition comes along. We certainly have the cash and the balance sheet to accomplish a good acquisition. From that perspective, I do not think that where our share price is, is going to influence our long-term strategic view of when acquisitions make sense and when they don't.

We do see organic growth off of the base business for the out quarters and into next fiscal year, that will require us to spend capital dollars. While I think that we are very pleased with the DSOs below 70 days, which we have not seen in almost 8 years in our mix of business and mix of receivables, I do not want a quarter were sequentially we have declining revenue, and so we were able to bring our working capital back in this cash, to necessarily be confused with opportunities where we're going to have the ability to grow the business, but we will also use working capital as we do it.

And lastly, normally you accrue for bonuses in the fourth quarter. Given your expectations - your reduced expectations, it looks like you may only grown earnings fiscal year-over-year less than 10%. Would that result in large bonuses in the fourth quarter?

We are missing-- what you're missing is we accrue for bonuses throughout the fiscal year. To the extent that results are less supportive of wherever the accrual is, it is adjusted on a quarterly basis. It is not like we wait until the end and then take it all through one way or another in the quarter. I would not necessarily think that you would see any G&A adjustments driven one way or the other in the fourth quarter for the whole year. Does that answer your question Alan?

Yes, it does. Thank you.

We have a follow-up question from Alex Rygiel from Friedman Billings. Please go ahead.

Few questions. First, Steve as it relates to Comcast you mentioned in your commentary that you expect it to be down in the fiscal third quarter. Do expect it to be down sequentially in the fiscal third quarter?

Yes, absolutely. If we are implying a run rate of 15 to 20 million, and we did almost 26 in the January quarter, it is going to be down.

Fair enough. And then secondly, your stock is trading around 22 today. It has not been at this level since August of 2003, which was way before Verizon's fiber to the premise initiative was even announced and the RFP was put out there. Can you comment on what you think this market is missing as it relates to your business today?

Far be it for me to try to figure out what the market is missing or seeing or overemphasizing. The way we look at it, we have got a great business here that while we have had to manage through a transition, we have a good outlook, a substantial piece of the largest program that our industry has ever seen. We have margins that while lower than we would like to see, have every opportunity to expand. When we make money, we through off cash.

From my perspective, since we get to look at it from a long- term view and not where it is trading at the moment, this is a better time to manage this company than we have seen in a 5, 6, 7 years. From that perspective, we will let the market figure out how to appropriately discount the future to today. From our perspective, particularly on a relative basis to our peers, we feel pretty good about where we sit right now in the industry.

Thank you.

You have a follow up question from the line of David Lieberman from South Point Capital. Please go ahead.

Just on the Comcast work, did they give you that stability (ph), that kind of revenue that can come from them, or is that just your best guess?

They are a big company and have lots of operations around the country. This is that the locating business we do with them, some of the recurring maintenance and planned extension business, based on what we are seeing from them on a local basis everyday that is how we have developed the estimate.

Got you. What - this may be granular, but how much, what percent could locating be of ongoing revenue stream from Comcast?

Probably a couple -- 3 million a quarter. I think I have that number, 2 to 3 million a quarter.

Got you. Out of the 17 to 20?

15 to 20.

15 to 20 sorry. On the big project you won from Verizon, was that based on the full rollout for 5 years, your market share staying the same with them?

In terms of backlog or forecast or --?

In terms of ongoing work.

They have a 5-year - they've articulated a 5-year view to the program. The term of the underlying contracts have been 5 years. But our view as to backlog has been limited to this calendar year just to be prudent because it does not do anybody any good to look at the out years of a project where they basically are overbuilding their existing infrastructure with a new network, until we get more comfortable as they go through their annual budget cycle.

Understood. The heart of my question would be, it looks like you had a very substantial share of their work this year. Is that the kind of market share we can hope for if the Verizon's project continues going forward?

Well, with regard to market share, you know obviously if the project does not go forward, market share will be zero along with everybody else's. But we are very comfortable that as long as we do our jobs everyday -- this is an execution business, but if we do our jobs everyday that we will be able to sustain a you know fair portion of the work that they have to get done and it will be substantial.

And the last question do they bid -- have they continuously just put out more work as the year goes on?

The issue with a program this large is that there is a substantial portion of work for engineering and permitting that has to be done before we see the construction activities, and so those are activities that they have to ramp up both through the use of outside vendors and their own people. And they are hard at it everyday, but it's a large task all over the country. And the permitting is to some degree -- relies upon their relationships with a lot of different municipal and county governments. And it sometimes takes a bit of time to build up a pipeline.

Okay is it possible just because of -- it sounds like we got updated pricing. Did that make us maybe more -- less competitive on any new work that was coming out from Verizon?

We feel comfortable that the level of unit activity was not impacted one way or another by the pricing.

Okay. Thank you very much.

Linda, we will take one more question if there is one.

Al right. Then our last question will come again from the line of Alan Mitrani from Copper Beech Capital. Please go ahead.

Hi, obviously sometimes I feel like I am the only guy on the call, but I know this time I am not. Do you view '05 it maybe a stupid question, but do you view '05 as a transition year on your way out of fiscal '06 and '07, or do you feel that, looking at your competitors, that maybe some of them are better positioned to win work from you and you're just going to grow with the market?

Well, I think we have got a pretty substantial market share of '05. I think the market itself is going to continue to grow. And then overtime, we have been able to strike the right balance between market share and margin. And I mean we will continue to do that going forward.

But I don't perceive that there are any dynamics in the marketplace that are impacting negatively our competitive position. If anything, if you look at our ability to generate operating cash flow, the balance sheet and the amount of available credit facility -- we have more liquidity for growth than anybody else does.

Are you finding that, that matters?

I think on the margin it does matter. I think these programs are large. I don't think that customers necessarily look at somebody's income statement before they put them on a bid list. But you know there are fundamental issues when you see significant growth, you have to have the availability of capital to fund both the working capital and the equipment purchases, and cost of capital ultimately matters. It may not matter one day, but it certainly matters over a period of time.

And last question if I can. It looks like given your good working capital management, it looks like free cash flow will be greater than net income for this year. Am I wrong to think that?

It depends Alan, if the offset to the Comcast receivables' coming in is offset by the working capital billed that the higher revenue guidance implies.

And you have not gotten paid on this year a Sierra Touch America settlement yet?

No actually we have received that cash.

You have received that cash. How much was that?

I don't know that we ever publicly disclosed the number Alan, but it was about 6.5 million. Dick?

That's correct.

And did that come in this quarter or was that last quarter?

That came in this quarter.

Thank you very much.

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

Well, Linda I thank -- want to thank everybody for their participation on the call. And we will talk to again at the end of May with our April results. Thank you.

And ladies and gentlemen that does conclude our conference for today. We thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.