AT&T, CenturyLink's FTTH expansions create ongoing revenue funnel for Dycom, says Wells Fargo

As AT&T (NYSE: T) and CenturyLink (NYSE: CTL) move forward with their ambitious 1 Gbps FTTH service plans, Dycom should gain revenue benefits, says Wells Fargo.

Wells Fargo said in a research note that Dycom currently has contracts in a number of the key states where AT&T and CenturyLink plan to expand their FTTH footprints.

"Core fiber spending from DY's 2 largest customers – AT&T and CTL – is showing no signs of slowing down," said Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note. "AT&T has committed to expand GigaPower to 14MM locations by July 2019, which is an additional 13MM locations from its current footprint."

The two service providers have put together sizeable expansion efforts to bring FTTH services to more consumer and business customers.

AT&T said in an FCC filing that it would build 1 Gbps service to an additional 11.7 million customer locations over the next four years. This build out plan is one of the provisions it promised the FCC it would meet in getting approval for its DirecTV acquisition.

More recently, AT&T said that it plans to build out its 1 Gbps service to parts of 38 additional metro areas.

For AT&T, its fiber roll out to homes and businesses is part of a broader way to serve various functions. During a recent investor conference, John Donovan, senior EVP of AT&T's technology and operations, said these fiber rollouts could be used to provide business services and backhaul for a macro tower or one of its small cell deployments.

These roll outs bode well for Dycom, which currently has existing contracts with AT&T in 10 of 20 recently announced expansion states.

Meanwhile, CenturyLink planned to extend its GPON 1 Gbps service to 500,000 businesses and 700,000 homes by the end of 2015, two initiatives that company executives have said should continue in 2016 and beyond.

"CTL has passed over 780K households and 490K businesses with its gigabit service, and we expect that number to ramp in 2016 given its relatively low penetration of gigabit broadband," Fritzsche said.

Evidence of how much these two providers influence Dycom's revenue mix was seen in its first-quarter 2016 results.

Having renewed contracts for construction and maintenance agreements in North Carolina, South Carolina, Georgia and Florida, AT&T made up 19.1 percent, or $126 million of Dycom's revenue. No less compelling was CenturyLink, where revenues grew 16.5 percent to $103 million.

The two service providers will likely outline progress and potential future plans during their upcoming fourth-quarter earnings calls.

AT&T and CenturyLink aren't the only telcos that are going to seek out assistance to expand FTTH service. Another notable provider worth watching is Windstream. Following a 1 Gbps FTTH service trial in its Lexington, Ky. market in December, Windstream has committed to bringing its own 1 Gbps FTTH service to five markets this year.

While the telco industry's installation developments are going to be important, Wells Fargo says Dycom could also benefit from cable's fiber expansions.

There are two initiatives that cable will need assistance with network builds: bringing fiber to more businesses and its DOCSIS 3.1-based 1 Gbps and complementary FTTH roll outs.

Cable operators such as Comcast and Cox continue to announce a number of new markets for business services and residential 1 Gbps services.

On the business services front, Comcast has been increasingly aggressive, rolling out fiber to a number of new cities, including most recently Huntsville, Ala.

Earlier, Comcast made similar expansions into Minnesota's Twin City area to extend services to 700 additional business customers as well as Meyers Business Park in Chico, Calif., the East Bay region of California, Denver and New London County, Conn.

Comcast also recently trialed a DOCSIS 3.1-capable modem with a customer in Philadelphia and has been rolling out FTTH-based 2 Gbps services in various markets.

The cable MSO said that it plans to have its entire broadband footprint enabled with DOCSIS 3.1 technology by 2018.

"Our checks have shown an increasing urgency by cable operators in deploying fiber to small-and-medium businesses and around network capacity," Fritzsche  said. In October, Comcast (M. Ryvicker) raised its cable capex guidance to 15.0% of revenue, and the CFO has recently mentioned that 2016 capex should be "in that neighborhood," Fritzsche said. "Comcast has recently started slowly rolling out its DOCSIS 3.1 (Data Over Cable Service Interface Specification) gigabit service, which we believe would require further capacity upgrades as the service is deployed more widely."

Another cable MSO that could provide Dycom with more construction contracts is Cox Communications, which has also made a number of its own 1 Gbps announcements. The service provider recently announced plans to bring its 1 Gbps Gigablast service to Oklahoma City and Tulsa and parts of Providence, R.I.

Ultimately, Cox plans to offer residential gigabit speeds in all of its markets by the end of next year. The cable MSO has launched its Gigablast service in parts of Phoenix, Ariz., Orange County, Calif., Las Vegas and Omaha.

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