Dycom Industries Inc (DY) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dycom Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Nielsen. Please go ahead.

Thank you, Greg. Good morning, everyone. I'd like to thank you for attending this conference call to review our second quarter fiscal 2018 results.

Before we begin, going to Slide 3. During this call, we will be referring to a slide presentation, which can be found on our website's Investor Relations main page. Relevant slides will be identified by number throughout our presentation. Today, we have on the call, Drew DeFerrari, our Chief Financial Officer; and Rick Vilsoet, our General Counsel.

Now I will turn the call over to Rick Vilsoet.

Thank you, Steve. Except for historical information, the statements made by company management during this call may be forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, including those related to the company's outlook, are based on management's current expectations, estimates and projections and involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Those risks and uncertainties are more fully described in the company's annual report on Form 10-K for the year ended July 29, 2017, and other periodic filings with the Securities and Exchange Commission. The company assumes no obligation to update forward-looking statements. Steve?

Thanks, Rick. Now moving to Slide 4 and a review of our second quarter results. As you review our results, please note that we have presented in our release and comments certain revenue amounts excluding revenues from storm restoration services during the quarter and from a business acquired during the third quarter of fiscal 2017, adjusted EBITDA, adjusted net income and adjusted diluted earnings per share, all of which are non-GAAP financial measures. See Slides 13 through 21 for a reconciliation of our non-GAAP measures to GAAP measures.

Revenue was $655.1 million, a decrease of 6.6%. Organic revenue, excluding $19.6 million of storm restoration services in the quarter, declined 10.6%. This quarter reflected an increase in demand from 2 key customers as we deployed 1 gigabit wireline networks, wireless/wireline converged networks and grew core market share. Offset by the expected moderation from a large customer, revenue declined from certain other customers.

Gross margins were 17.48% of revenue, reflecting difficult winter weather conditions and costs associated with the initiation of large customer programs. General and administrative expenses were 9.21%. All of these factors produced adjusted EBITDA of $59.6 million or 9.1% of revenue and adjusted diluted earnings per share of $0.12 compared to $0.82 in the year-ago quarter. Operating cash flow was strong, totaling $103.7 million in the quarter. Liquidity was ample as cash and availability under our credit facility was $485.4 million at the end of the quarter.

Going to Slide 5. Today, a number of major industry participants are deploying significant wireline networks across broad sections of the country. These networks are generally designed to provision bandwidth enabling 1 gigabit speeds to individual consumers. In addition, emerging wireless technologies are, in and of themselves, driving significant wireline deployments. A complementary wireline investment cycle is underway to facilitate what is expected to be a decades-long deployment of fully converged wireless/wireline networks. The industry effort required to deploy these converged networks has and will meaningfully broaden our set of opportunities. Total industry opportunities in aggregate are robust.

We are providing program management planning, engineering and design, aerial and underground construction and fulfillment services for 1 gigabit deployments. These services are being provided across the country in dozens of metropolitan areas to a number of customers. In addition, we have secured a number of converged wireless/wireline multiuse network deployments across the country. Planning, engineering and limited construction have begun. Engineering and construction activity is expected to increase and accelerate throughout 2018.

Customers are continuing to reveal with specificity new multiyear initiatives that are being planned and managed on a market-by-market basis. Our ability to provide integrated planning, engineering and design, procurement and construction and maintenance services is of particular value to several industry participants. As with prior initiations of large-scale network deployments, we expect some normal timing volatility and customer spending modulations as network deployment strategies evolve and tactical considerations, primarily permitting, impact timing. We remain confident that our competitively unparalleled scale and market share as well as our financial strength position us well to deliver valuable services to our customers and robust returns for our shareholders.

Now moving to Slide 6. We experienced the effects of a strong overall industry environment during the quarter but saw a continued moderation from a large customer as expected. Revenue declined from certain other customers as well as impacts from difficult winter weather conditions. Organic revenue, excluding storm restoration services, declined 10.6%. Our top 5 customers combined produced 76.5% of revenue, declining 8.5% organically, while all other customers decreased 16.6% organically.

AT&T was our largest customer at 22.4% of total revenue or $146.6 million. Revenue from Comcast was $139.4 million or 21.3% of revenue and grew organically 9%. Revenue from CenturyLink was $100.9 million or 15.4% of revenue. CenturyLink was our third-largest customer. Verizon was Dycom's fourth-largest customer for the quarter at 13.5% of revenue or $88.2 million. Verizon grew 40.7% organically. And finally, revenue from Charter was $26 million or 4% of revenue. Charter was our fifth-largest customer.

We are pleased that we have continued to gain profitable market share, extend our geographic reach and expand our program management network planning services. In fact, over the last several years, we have meaningfully increased the long-term value of our maintenance business, a trend which we believe will parallel our deployment of 1 gigabit and wireless/wireline converged networks as those deployments dramatically increase the amount of outside plant network that must be extended and maintained.

Going to Slide 7. Backlog at the end of the second quarter was $5.847 billion versus $6.198 billion at the end of the first quarter of 2018, a decrease of approximately $351 million. Of this backlog, approximately $3.047 billion is expected to be completed in the next 12 months. We are pleased with our next 12 months backlog as it clearly signals meaningful organic growth for fiscal 2019, the 12-month period ending January 2019. Both backlog calculations reflect solid performance as we booked new work and renewed existing work. We continue to anticipate substantial future opportunities across a broad array of our customers.

For Charter, we extended fulfillment services agreements in Wisconsin, Michigan, Ohio and New York. With Comcast, we renewed construction and maintenance service agreements in Massachusetts and Connecticut and fulfillment services agreements in New Jersey and Pennsylvania. With CenturyLink, we renewed construction and maintenance service agreements in South Dakota, Nebraska, Minnesota and Wisconsin. From various customers, we extended locating services agreements in California and New Jersey. And finally, we secured rural and municipal broadband projects in South Dakota, Minnesota and South Carolina. Headcount was flat during the quarter at 14,368.

Now I will turn the call over to Drew for his financial review and outlook.

Thanks, Steve, and good morning, everyone. Going to Slide 8. Contract revenues for Q2 '18 were $655.1 million and organic revenue declined 10.6% from moderation by a large customer and declines from certain other customers, partially offset by solid growth from 2 top 5 customers. Storm restoration services contributed $19.6 million of revenue and the business acquired in the April 2017 quarter contributed $8.4 million of revenue.

Adjusted EBITDA was $59.6 million in Q2 '18, which was in fact 9.1% of revenue. Gross margins were at 17.48%, which was over 150 basis points below our expectations for the quarter. The last month of the quarter was marked by widespread adverse weather, which reduced the number of available work days and negatively impacted productivity and margins. Margins were also impacted by costs incurred in conjunction with the initiation of large customer programs.

G&A expense increased 92 basis points to 9.2% of revenue in Q2 '18. The year-over-year G&A variance mostly resulted from the impact of labor costs, which are supporting our expanding scale to address growth initiatives. Additionally, there was higher share-based compensation related to the vesting schedule of awards in the current period. Our non-GAAP adjusted diluted EPS in Q2 '18 was $0.12 per share. For purposes of calculating non-GAAP EPS, there are 3 items to highlight, which are provided in the reconciliation of non-GAAP measures in the slide presentation and press release.

First, we have excluded income tax benefits of approximately $32.2 million related to the impacts of tax reform which became effective during the quarter, primarily from the change in valuation of our net deferred income tax liabilities. Secondly, we have excluded income tax benefits of approximately $6.9 million for the settlement of share-based awards, which is now required to be reflected in the income statement. And third, we have excluded the noncash amortization of our convertible notes. Additionally on the notes, we have excluded approximately 435,000 shares from the weighted share count as we have a bond hedge in place.

Now going forward to Slide 9. Our balance sheet and financial profile continue to reflect the strength of our business. We ended the quarter with $358.1 million of term loans outstanding and no revolver borrowings on our senior credit facility. Our liquidity is robust at $485.4 million at the end of the quarter, consisting of availability from our credit facility and cash on hand.

Operating cash flows were strong at $103.7 million during Q2 '18. The combined DSOs of accounts receivable and costs in excess of billings were 95 days for Q2 '18, reflecting normal seasonal increases and timing of collections. Capital expenditures were $28.8 million during Q2 '18, net of disposal proceeds, and gross CapEx was $31.8 million. For fiscal 2019, we anticipate capital expenditures, net of disposal proceeds, to range from $190 million to $200 million. In summary, we are well positioned with a strong balance sheet and ample liquidity.

Going to our outlook on Slides 10 and 11. As we look ahead to fiscal 2019, we continue to see a broad set of customer opportunities, which are expected to drive meaningful growth. This guidance reflects the anticipated timing of activity on large customer programs and the related impacts on margins as well as consideration of near-term weather conditions.

For the full year, we currently expect revenues which range from $3.3 billion to $3.5 billion. We expect accelerating fiber deployments for emerging wireless technologies, increasing wireless services and solid demand from several large customers reflecting 1 gigabit deployments and fiber-deep cable capacity projects. Non-GAAP adjusted diluted EPS is expected to range from $5.22 to $6.14 per share based on estimated diluted shares of approximately 31.9 million. Adjusted EBITDA margin is expected to range from 13.6% to 14.1% of revenue.

As for seasonality and the trend compared to the same quarter last year, revenue is expected to decline in the April quarter and then increase in the July, October and January quarters. Additionally, revenue and margins for fiscal 2019 are expected to be impacted by seasonal adverse weather, which is more likely to occur during the winter season, including the fiscal quarters ending in April and January.

Our expectations reflected in the annual guidance include depreciation, which is expected to range from $160 million to $164 million and amortization expected at $22 million. Share-based compensation included in G&A expense is estimated to range from $26 million to $27 million. Adjusted interest expense is expected to range from $22 million to $23 million, excluding $19.1 million of interest for the noncash amortization of the debt discount on our notes. Other income net is expected to range from $6 million to $8 million. The forecasted effective tax rate is expected to range from 27% to 27.5%, which reflects the changes from recent tax reform but is before the tax effects of the settlement of share-based awards.

Now going to Slide 11. For the April 2018 quarter, which is Q1 of fiscal 2019, we currently expect total revenue to range from $720 million to $750 million, which reflects accelerating fiber deployments for emerging wireless technologies, wireless services that begin to ramp and solid demand from several large customers. Non-GAAP adjusted diluted EPS is to range from $0.63 to $0.78 per share based on estimated diluted shares of approximately 31.8 million and non-GAAP adjusted EBITDA percent to range from 10.7% to 11.1%.

The margin outlook for Q1 '19 reflects the anticipated timing of activity on large customer programs and the related impacts on margins as well as consideration of near-term weather conditions. Other expectations included in the Q1 '19 outlook include depreciation, which is expected to range from $37.9 million to $38.7 million, and amortization is expected at $5.5 million.

Share-based compensation included in G&A is estimated at approximately $5.3 million. Adjusted interest expense is expected at $5.4 million, excluding $4.7 million of interest on the noncash amortization of the debt discount on our notes. Other income net is expected to range from $4.1 million to $4.7 million. The effective tax rate is expected to range from 27% to 27.5% before the tax effects of the settlement of share-based awards.

Now I will turn the call back to Steve.

Thanks, Drew. Going to Slide 12. Within a growing economy, we experienced the effects of a strong industry environment and capitalized on our significant strengths.

First and foremost, we maintained strong customer relationships throughout our markets. We continued to win and extend contracts at attractive pricing. Secondly, the strength of those relationships and the extensive market presence they have created has allowed us to be at the forefront of evolving industry opportunities. The end market drivers of these opportunities remain firm and are strengthening.

Fiber deployments in contemplation of emerging wireless technologies have begun in many regions of the country. A significant number of new project initiations will continue to occur in the near term. Wireless construction activity in support of expanded coverage and capacity is poised to accelerate through the deployment of enhanced macro cells and new small cells.

Telephone companies are deploying fiber-to-the-home to enable video offerings at 1 gigabit high-speed connections. This activity is expected to reaccelerate in the near term. Cable operators are deploying fiber to small and medium businesses and enterprises. These deployments are often in anticipation of the customer sales process as confidence in the number of existing customers continues to increase. Fiber-deep deployments to expand capacity as well as newbuild opportunities and overall capital expenditures are increasing. Dramatically increased speeds to consumers are being provisioned.

Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance business. In addition, we are increasingly providing integrated planning, engineering and design, procurement and construction and maintenance services, creating more visibility around future revenue streams. Within this context, we believe we are uniquely positioned, managed and capitalized to meaningfully experience an improving industry environment to the benefit of our shareholders.

While we are disappointed with current revenue and margin softness, we see that softness abating in the near term and remain encouraged that our major customers possess significant financial strength and are committed to multiyear capital spending initiatives. These initiatives are increasing in number across multiple customers. And improved regulatory environment is increasingly supportive of these initiatives. We remain confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team as we grow our business and capitalization.

Now Greg, we will open the call for questions.

(Operator Instructions) Your first question comes from the line of Matt Duncan from Stephens Inc.

So Steve, first question on your backlog, total backlog taking a step down here. I know the timing of larger, longer-term contracts is lumpy. And frankly, I'm not that worried that it declined, but I know some people are going to be. So can you maybe talk about your perspective on the tick-down in total backlog? And do you generally expect that number to grow here over the next few years or in the near term, anyway, given what you're hearing from your customers and some of the things you've talked about this morning?

So Matt, I think, as you know, backlog is somewhat of a lumpy process, particularly when you recognize that 75%, 80% of our revenue is under master service agreements and other long-term contracts. And so as you recall, there's periods of time where you're burning that down and then you book new long-term agreements and it jumps up. So we don't attribute any significance to a slight quarterly trend. If you had asked us 2 years ago, would we be just short of $6 billion in backlog this quarter, I think we'd have been pretty pleased.

But do you expect it to grow from here generally over time? I'm not asking about next quarter, but just generally over time, given the plans of your customers?

We expect the scale of the company to continue to grow. We've got organic growth in this year's guidance. We see drivers into '19 and '20, maybe even '21, and so no reason to expect that it wouldn't.

Okay, that's very helpful. And then another thing that I know I get asked about a lot is just rising labor cost and how you guys protect yourselves against that in thinking about your gross margin profile going forward. Remind us how you guys handle labor cost in your contracts, what the impact is when labor costs do start to rise. And what level of gross margin are you anticipating embedded within your guidance for this year?

So I think what's important to keep in mind is that the management team here has been through periods of time where we had unemployment rates at this low a level before. We're a large employer; probably in wireline, the largest employer in the country. And so that gives us lots of embedded capacity. We do have escalators in our contracts, in some instances, that each year we get an adjustment based on some sort of index. And we also protect ourselves against rising labor costs because we're more protected today than we were a year ago, right? So there's always opportunities to improve the business. But we feel good about our ability to manage through this. It's nothing new to anybody who's been in the business.

Sure. And then just the embedded gross margin within the guide, Drew, maybe you could give us that?

Matt, I don't think -- we've given you kind of EBITDA and we've given you EPS. I think you can work your way through it with the other items. We're not going to go into kind of disaggregating any more than we have in the slides.

Your next question comes from the line of Alex Rygiel from B. Riley FBR.

A couple of quick questions, Steve. How many 5G customers do you have today? And can you talk a little bit about the 5G CapEx time line and how you see that developing over the next sort of 5 to 8 years and how the different tasks that you could be providing to your customers could change between now and year 5 or 8?

So 5G is a broad concept, right? So the way we think about 5G, there's an element to the 5G technology which requires pretty massive fiber densification. And so we have a number of customers that are either doing it on their own behalf or on the behalf of a wireless carrier that is extending fiber to increase the density of a network and increase small cell capacity. So I think that's step one. And I think all wireline customers that we have over time will be supporting the effort, depending on the footprint and the wireless carrier that's deploying 5G.

I think the second element of 5G, of course, is deploying it across the actual small cell antennas that are attached to that fiber. And once again, we're doing that for a number of customers today. We think that, that small cell deployment in support of densification, both for 4G LTE and 5G, will continue to increase. And then finally, there will be deployments. There are beginning to be deployments of the 5G technical protocol across the macro cell network, even at lower frequency spectrum bands. And that requires antenna work, lines and antenna work, which we think -- and new radios that we think will be involved in that, too. So I think we address the entirety of the spectrum of opportunity.

And can you comment on the competitive environment? Are you seeing an increased level of competition in any subsector of the businesses that you're operating in?

I think right now, there's a lot of work to get done. People are gearing up. And I think people's minds are focused now on getting the work done that they have. And so I think there's plenty to go around. No, in particular, area where we're seeing more competition than another.

Your next question comes from the line of Tahira Afzal from KeyBanc Capital Markets.

Steve, first question is I know you've seen a lot of growth and lumpiness in backlog is the norm in this business. As you see yourselves exiting this year on an annualized basis, are you still in a position where you can see backlog growth and the book-to-bills in the 1.3, 1.5 zone? Because it seems pretty back-end loaded in terms of your revenue burn. I'm just wondering how should we be thinking about growth at the back end of the year.

Well, I think, Tahira, as we talked about with Matt, remember we have master service agreements that are roughly, just by themselves, about 2/3 of the revenue in any given quarter. And as we go through renewal cycles, you see 3 years, 5 years or sometimes longer worth of backlog comes in. And so for us, I know it's a good indicator for The Street to watch. As we renew those contracts, I mean, it will get larger as the scope of the enterprise gets larger. But it's going to be a function of when those relationships get renewed, extended or entered into. There's no lack of opportunity to create more revenue capacity in the business right now.

Got it. Okay, Steve. And I guess as a second follow-up, we saw one of your core customers, for example, announce a pretty large M&A bid. Sometimes investors, as you know, get skittish around M&A and what that means for near-term CapEx spending. Any thoughts or updates there? Are you getting enough reassurance from your core customers that M&A is not really going to push out any work and it's urgent enough?

So I think in that specific situation that you just referenced, Tahira, we looked at what they said in their prepared remarks on the call and said that nothing in the bid changed their 2018 capital expenditure guidance for their cable business. So I don't see it. They live in a competitive world. They have opportunities to deploy capital. And they just said that those weren't going to change in that particular situation.

Your next question comes from the line of Chad Dillard from Deutsche Bank.

So judging from the April quarter guide, it seems like labor cost absorption will probably be with us for another quarter. Is there any way to quantify that figure? And also how should we think about the cost absorption rolling off as fiscal 2019 progresses? And lastly, maybe you can kind of break out how much of the margin pressure was due to cost absorption versus inclement weather during this past quarter?

Yes, Chad, this is Drew. Just as far as the weather one, what I talked about in the remarks is it was over -- about 150 basis points relative to what we expected for the quarter. So you can work from there. And then as far as the outlook goes, we do see some pressure in Q1 as you can tell from the guidance. And then on an annual basis, that improves -- an improvement.

Yes. And we've given annual guidance, Chad. For years, we would give the second quarter out and investors and sell-side folks didn't like it. So now you're asking for it? So look, I think directionally, you've got it right. I mean, it gets better throughout the year. Obviously, we exit the year with a better margin profile than we entered the year, given the way that the quarters are coming together.

Got you. And how much visibility do you have into your largest customer? Of course, I mean, revenues were down a little bit again this quarter. I was just trying to get a sense for how you should see the cadence of spending snap back and your confidence level there.

I mean, we know on the major programs that we're engaged with, with that customer what they'd like to get done this year, what they're expecting us to get done. And so I think we have pretty good visibility. It's in the backlog.

Your next question comes from the line of Adam Thalhimer from Thompson, Davis.

Steve, can you give a little more color on the wireless -- the increase in wireless opportunities you talked about?

Sure. So we're involved in a number of states with -- primarily with 2 large carriers. We're involved in the FirstNet program for AT&T. We see that ramping up. As you may have seen, AT&T took their CapEx guidance up for calendar '18 pretty materially. In part, that was driven by FirstNet and the reimbursements that they expect to receive this year from FirstNet. So I think we see a real opportunity there. I think in both wireless and then with another large customer, we were encouraged that even though we had a slow winter quarter that wireless grew sequentially from Q1 to Q2. That's usually a good sign going into the spring. As well as with another large customer that had the same pattern that grew about 10% sequentially. So we see opportunity there.

Okay. And then a lot of the people in your industry have kind of characterized the 3-year outlook. And you touched on this a little bit and said '19 is better than '18, '20 is better than '19. I mean, do you have that kind of visibility for the next 3 years?

Well, I think the way we think about it, Adam, is that these are large programs. Technology rollouts take, in some cases, literally decades. I mean, we're working on one large fiber-to-the-home program now in our 14th year. And so I think we see real strong opportunity across a whole number of businesses. And I think '18 is going to be, as indicated, a good year. And I think that will continue.

And then just lastly I wanted to try on CenturyLink, it was the first year-over-year decline in revenue in some time. Just curious, any color you can provide there?

Yes, they're obviously going through the integration with Level 3. And I think if you looked at their public comments last week, they indicated that they recognize and are reacting to the importance of driving fiber deeper into their network. And we believe that over time, that will be good for the business.

Your next question comes from the line Bobby Burleson from Canaccord.

Yes, well, I guess a lot of good questions have been asked. I guess I wanted to understand a little bit better what the drivers are of gross margin this year. I know you're not giving specific gross margin guidance, but if there are any particular mix issues, large projects that are kind of coming to an end, where maybe the margins are better at the tail end, anything besides kind of just seasonality, kind of winter patterns that you guys alluded to.

Sure. So Bobby, I guess, first thing is we don't have any major programs coming to an end. I mean, generally they're going to accelerate through the year. I mean, that's how organic growth is kind of, call it, 10% in the year, right? So I think we see that. I think it's -- particularly when you have a large number of projects under one big program that are starting up all over the country, you've got to spend to build your infrastructure around warehousing and office and yard space and the ability to handle that growth. And we are putting that in place, have put a good portion of it in place, more to go. And as that revenue comes through, the revenue will certainly grow faster than that -- than the support costs will as we go through the balance of the calendar year, for this (multiple speakers).

Great. And then are there any particular -- is there a particular quarter we should be thinking about, where those just kind of front-end costs might be a little bit more compressed into 1 quarter? Or is it kind of a linear ramp throughout the year?

No, I think you'll see -- as Drew's comments indicated, I mean, you're going to see pretty substantial revenue growth to get to our full year guidance in the second, third and fourth quarters. And I think at that point, we'll be in a position where we're absorbing those costs based on that increased run rate.

Okay, great. And then just looking at the major areas, like some of the 5G spending that's happening this year, maybe FirstNet, if we had to look at different buckets of growth, can you kind of rank where you think the growth is strongest and maybe where there's the most potential for variability versus your expectations?

Yes, I think we have pretty good visibility across all of the programs. If you think about fiber-to-the-home there with AT&T, there's a commitment in '19. They've indicated that based on tax reform that they're going to spend incremental dollars there. So there's clearly a plan there. There's clearly a plan across FirstNet. Clearly, with Verizon's stated public goal to deploy fixed broadband, which is reliant on deep fiber deployments to 25 million or 30 million homes and perhaps more over the next 3 to 4 years, as well as the cable capacity projects we're involved with to expand network capacity, I think all of those are strong. I think our traditional -- what I'll call traditional wireless services on micro sites, much smaller business for us but has some real growth opportunities. And I think it can be a several hundred million-dollar business as we go forward. So that would imply, off of a smaller base, a higher growth rate than wireline. But I think there's plenty of wireline opportunity, too.

Great. I mean, in the past, there's been times when folks are concerned about new technology maybe impacting the amount of fiber spend and -- in a negative sense. Any update on kind of your perspective there in terms of fixed antenna or other types of solutions that people have been concerned about slowing the need for the deployment of fiber?

So I think I've been answering that question for about 25 years, Bobby. And the company's growing 5% to 6% organically for a generation. So I think the way I think about new technology is The Street always sees them as substitutes. And in fact, they're generally complements. And so when you have multiple networks serving a geographic area perhaps using different technologies, maybe in some ideal or conceptual sense, if you'd had 1 technology that 3 people deploy -- or that 2 people deployed, there might have been more work. But if you have 3 or 4 people that are deploying complementary technologies that solve certain problems for consumers in different ways, I think it makes for a more robust environment. And I think that's the environment that we're in today. I could foresee markets where we're participating in fiber-to-the-home, fiber-deep and fixed broadband all in the same geography.

Your next question comes from the line of Noelle Dilts from Stifel.

So it's -- looking at your EBITDA margin guidance for fiscal '19, 13.6% to 14.1%, for a long time now you've been talking about mid-teens EBITDA margins. Are you still thinking sort of there's opportunity to get into that 15-ish percent range? And then when you think about the drivers of getting there, is it really all about utilization and efficiency? Or does pricing come in to some extent? If you could give us some thoughts there, that would be great.

Sure. So Noelle, we've had a somewhat disappointing couple of quarters. And so we're going to be prudent as we think ahead about margins going forward. But we think mid-teens EBITDA, that there's plenty of opportunity to support that outlook. We've got to make it happen. And it's really an execution gain and an efficiency gain. And we would expect that pricing will reflect as we enter into new projects, the costs that we need in order to get to mid-teens or we'll let somebody else do the work. So I think we're comfortable that as long as we do our jobs, as we get growth started again, that we'll get leverage on our costs and that margins will be able to expand.

That's helpful. And then Windstream, I understand it's a smaller customer. Revenue is obviously down a lot there year-over-year, so not unexpected. Could you just give us some thoughts there on how to think about the trajectory of revenues moving forward?

I think they're a great customer and we do lots of things for them across a broad part of the country. And sometimes the spending moves around here and there sometimes from a quarter or a year. But I think you have to look at the collection of customers and see that there's robust opportunities for growth. And that doesn't mean they're all going to grow, but we've had years where we've been surprised.

Okay. And then the last question, I mean, I think at this point, investors feel pretty comfortable with the outlook here for a lot of the major telco customers. I still get a lot of questions on where kind of the cable industry stands in terms of the response with fiber-deep. Any thoughts there on kind of the sustainability of the spend out of the cable customers and if you see that increasing meaningfully as we go into '19 and '20?

Yes. I think if you look to the public comments of both the cable TV equipment suppliers as well as, for example, Cox, who's private, I mean, they talk about a 10-year spending plan to push fiber-deep into their networks. There is a new technical standard that people expect to settle in 2019 called DOCSIS duplex. That creates pretty robust upstream and downstream capabilities. It can be deployed in a number of ways, but I think it's most likely to be deployed by pushing fiber-deep. So I think we're very early in -- across that industry in pushing fiber-deep.

Your next question comes from the line of Jennifer Fritzsche from Wells Fargo.

Steve, if I may, you touched on tax reform and your customer is benefiting from it. Yet I think backlog being flat, I struggle with knowing if they are using that as a sense of urgency in terms of spending because some would argue that's kind of a hall pass to aggressively spend. And if I may also, and I'm sorry if this was asked, but FirstNet, you mentioned that. Is that technically in the backlog? Because we've gotten some mixed messages from towers if FirstNet is actually in the numbers. Excuse the background noise.

Sure. So with respect to tax reform, Jennifer, remember, with our master contracts, as they increase spending and some have attributed that increased spending to increased cash flow associated from tax reform, the backlog, the way we calculate it on the master contracts is looking backwards. That's the most reliable way for us over a long period of time to calculate it. But we see growth going forwards. And I would tell you that there have been adjustments in plans that had been talked about publicly and others that we've seen that -- for which the change has been attributed, at least in part, to tax reform. So I think tax reform is a real impact on some of the customer spending plans.

I think with respect to FirstNet, remember in our turf agreements that the FirstNet activities, so the antenna and radio work, lines and antenna work, it flows through those existing agreements. We have a pretty detailed understanding of what we're expected to accomplish this year. There are milestones, as I understand it, in FirstNet that AT&T has referred to about reimbursements. And I'm highly confident that they will get the work done in the way that they receive those contributions from FirstNet. So yes, it's in our outlook and in the backlog. To the extent that you're looking for where FirstNet is, it's there.

Next, we'll go back to the line of Noelle Dilts from Stifel.

Just kind of along the lines of tax reform, I was just thinking about your cash flow, Dycom's cash flow. How are you thinking about maybe incremental cash flow associated with the tax reform, deploying that cash, any changes in priority? And as we think about M&A, you mentioned opportunities on the wireless side. Would you be looking to augment your capabilities there through acquisition?

So clearly, tax reform is going to increase our operating cash flow. So it's a nice thing to have, but I think we think about capital allocation kind of in a consistent framework. And given the growth that we have, we're always going to prioritize organic growth, the CapEx investments and working capital to support our customers. And then we will look at share repurchases versus M&A based on kind of relative valuation of those 2 types of assets. So I think it's a good thing. We have kind of always purchased our equipment directly rather than through leasing companies. And so the benefit of expensing comes through to us on purchases directly. So I think we appreciate the benefits of tax reform. But we're going to evaluate that incremental cash flow consistent with our prior capital allocation framework.

And at this time, there are no further questions.

All right. And Drew, just to wind up?

Sure. So to round out the remainder on the top 10 customers: Windstream was #6 at 3.5%; Frontier was #7 at 1.6%; OFS Fitel was #8 at 1.4%; customer #9 was at 1.4%; and Dominion Energy was #10 at 1.2%. And then the split on telco and cable: telco was at 65.2%; cable was 25.9%; facility locating was 6.1%; and electrical and other was 2.8%.

Okay. Well, we thank everybody for your time and attendance. Our next quarter will be reported the week preceding Memorial Day. And we'll let you go. We know you're busy this morning. Thank you.

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