Dycom could benefit from AT&T, CenturyLink, Frontier's upcoming CAF-II broadband builds

With five of its largest service provider customers, including AT&T and CenturyLink, having accepted a total of $1.5 billion in phase two of the FCC's Connect America Fund (CAF-II), network construction company Dycom could gain another revenue boost as projects go into action over the next year.

Five of Dycom's customers -- AT&T (NYSE: T), CenturyLink (NYSE: CTL), Verizon (NYSE: VZ), Windstream and Frontier -- took $1.44 billion in total CAF-II funding. Verizon's acceptance of $48.6 million in CAF-II funding will be transferred to Frontier upon closing its $10.5 billion wireline deal early next year.

The major impact of the CAF-II program could come from AT&T and CenturyLink -- two key customers that accepted $427.7 and $505.7 million, respectively -- in annual support to build out 10/1 Mbps-capable broadband in rural areas.

A key element of these awards is the sheer market reach.

By accepting the $427.7 million in CAF-II funds, AT&T will extend its broadband coverage in 18 of the 21 states in its operating territory via a mix of wireline and wireless facilities. Likewise, CenturyLink will have funds to conduct projects that would enable it to deliver broadband services to about 1.2 million rural households and businesses in 33 states over the next six years.

Jennifer Fritzsche, senior analyst for Wells Fargo, said in a research note that a large portion of the grants will be in locations where Dycom already serves and that its recent acquisitions of TelCom Construction and an affiliate will enable it to address a broader footprint where the CAF-II projects will take place.

"We estimate that $676MM of the $1.5B in accepted grants will be in states where DY has a current construction agreement in place with an existing customer," Fritzsche said. "Furthermore, DY recently announced 2 acquisitions it stated would expand its footprint among the CAF 2 recipients, making the potential opportunity even larger."

While not willing to call out specific customers, Steven Nielsen, president and CEO of Dycom, said during its fourth quarter fiscal year 2015 call that "two of the three acquisitions have broad exposure to one of the CAF recipients through a part of the country."

No less important will be Windstream and Frontier. Windstream has accepted $175 million in CAF-II funds to extend broadband services to nearly 400,000 rural households across 17 states, while Frontier will be able to reach 650,000 rural locations that it could not economically reach before.

Leveraging a mix of ADSL2+ and VDSL2 and other emerging technologies, Frontier has also committed to deliver broadband to an additional 750,000 households at speeds of 25/3 Mbps by the end of 2020, including the areas it will in California, Florida and Texas from the pending Verizon acquisition.

Of course, there are a number of questions about how big of an impact the program will have and how much of the total spend will be outsourced to Dycom and other construction companies?

Fritzsche said despite these issues, "We believe DY, which is 5x larger than its next biggest competitor, has the scale and expertise to capture a sizable piece of the outsourced capex."

It's likely that the real impact of the CAF-II program won't begin until the first half 2016 and accelerate into 2017 when service providers have to meet the FCC's requirement to cover 40 percent of their eligible footprints with broadband service.

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