AT&T's (NYSE: T) ongoing FTTH build, which will also be used for other purposes, will continue to be a large major contributor to Dycom's future growth debunking investor concerns that the telco is going to slow down network investments.
Although some investors have expressed concern that AT&T and cable operators will slow down their respective fiber network deployments.
To date, AT&T has passed 1.6 million homes in 20 markets with plans to bring service to 56 markets.
On top of the initial rollout, AT&T will build out to an additional 12.5 million locations as part of its agreement with FCC to get its DirecTV deal approved.
Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note, said that since AT&T's fiber build will enable it to address multiple uses, including businesses services and supporting wireless services, the investment won't slow down in the near-term.
"We believe AT&T's fiber investment cycle will extend well beyond its FCC commitment to connect 12.5MM additional locations by 2019," Fritzsche said. "Recent T management commentary would support this thought. The fiber build-out will enable AT&T to not only offer much higher-speed broadband but also to advance the development of its wireless networks toward a 5G ecosystem."
AT&T has signaled that it plans to leverage and extend its FTTH network to serve various functions, including delivering business services and using it for backhauling DAS and small cell wireless traffic.
AT&T CFO John Stephens told investors during the recent Deutsche Bank 2016 Media, Internet & Telecom Conference that when it brings fiber to a neighborhood it will look at other opportunities to use the fiber.
"When we build these things, we look at it on a holistic basis," Stephens said. "Yes, on the front end it may take a little more investment, but when you think about the efficiency that you can get multiple uses out of the fiber backbone or these connecting points it's really much more efficient and provides more value."
AT&T remains Dycom's largest customer, making up 22.4 percent of its second quarter revenue, growing 29 percent year-over-year. Wells Fargo says that "AT&T should continue to be a major contributor to DY's future growth."
But AT&T is only one telco that could feed into Dycom's growth engine.
Fellow telco Verizon (NYSE: VZ) just announced plans to build out FiOS in Boston, one of the cities initially left out of the service provider's initial plans.
Under a $300 million, six-year investment plan with the city, Verizon will start replacing copper with fiber in Dorchester, West Roxbury and the Dudley Square neighborhood. Later deployments will take place Hyde Park, Mattapan, and other areas of Roxbury and Jamaica Plain.
While Verizon did not reveal who its construction partners are for the project, Dycom is going to likely be a part of it.
Dycom reported in its second quarter 2016 earnings that revenues from Verizon rose nearly 12 percent to $66.3 million. The company said that its second quarter's revenue with Verizon was the highest it's seen since the fourth quarter of 2005 when the telco was just getting started with its FiOS roll out.
Besides AT&T and Verizon, Dycom will also benefit from cable operators that are deploying, or are in the process of deploying, DOCSIS 3.1 to deliver 1 Gbps to residential and business customers.
One provider worth watching on this front is Comcast (NASDAQ: CMCSA), which recently began a DOCSIS 3.1 trial in Atlanta. After Comcast completes the advanced trial, the cable MSO said it plans to roll out the gigabit service at additional price points in other markets to gage consumer interest in gigabit speeds.
As cable operators like Comcast, Cox and Suddenlink roll out service to more homes they will have to extend fiber deeper into their networks to support the 1 Gbps services over their existing hybrid fiber coax (HFC) plant.
"We have also heard investor concern that new technologies, such as DOCSIS 3.1 (Data Over Cable Service Interface Specification), will enable cable companies to slow down spending on network infrastructure investments," Fritzsche said. "Therefore they will not need DY in a major way to push fiber. However, our checks with industry contacts suggest that cable needs to continue spending on its plant to push fiber deeper."
Fritzsche cited information from an analyst day event held by cable manufacturer Arris. According to Arris, cable operators are moving their fiber nodes deeper into the network, meaning that instead of serving 500 homes they might serve 50. What this means is that cable operators will have to conduct a number of construction projects to install these new nodes deeper in their networks.
Comcast and Time Warner Cable (NYSE: TWC), which currently make up a combined 18 percent of Dycom's revenues, will likely be the biggest drivers of growth.
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