Dycom expects CAF-II project construction opportunities to rise in Q2 2016

Now that the largest telcos like AT&T (NYSE: T) and Frontier have accepted funds from the second phase of the FCC's Connect America Fund (CAF-II), Dycom said it is poised to win a number of construction services contracts once projects get underway in 2016.

In August, 10 U.S. service providers announced they would accept $1.5 billion in support as part of the nearly $9 billion total allotment over six years for rural broadband deployment from the CAF-II program. When combined with providers' own investments, the CAF-II program will eventually bring broadband to almost 7.3 million rural customers in 45 states nationwide and one U.S. territory in the next few years.

Speaking to investors during its first-quarter 2016 earnings call, Steven Nielsen, president and CEO of Dycom, said that its service provider customers are putting their blueprints together in order to proceed with their CAF-II builds.

"New projects resulting from the Connect America Fund II are in planning and engineering with construction launching shortly," Nielsen said during the first-quarter earnings call, according to a Seeking Alpha transcript. "These projects are deploying fiber deeper into rural networks and more are expected as new multi-year opportunities emerge through the balance of this calendar year. And customers are consolidating supply change, creating opportunities for market share growth."

However compelling the CAF-II opportunity potentially may be for Dycom, Nielsen emphasized that he does not expect it to make a large contribution to its revenue guidance in the near-term.

"There was essentially no backlog for CAF-II, and at the end of October as we talked about in our comments we think there will be things developing before the end of the calendar year. We expect construction to start in the April quarter," Nielsen said. "Beyond that, we are not relying on a substantial contribution from CAF II to hit our guidance because we're still working through customer discussions, and until those are settled we really haven't included it."

Overall, Dycom reported that it saw double digit growth in all five of its top service provider customers with wireline services growth offsetting what it said was an expected year-over-year decline in wireless.

AT&T remained its largest customer with 19.1 percent, or $126 million of revenue. During the quarter, revenue from AT&T grew 15.4 percent organically year-over-year. It renewed a contract with AT&T for construction and maintenance agreements in North Carolina, South Carolina, Georgia and Florida.

Following AT&T were CenturyLink (NYSE: CTL) and Verizon (NYSE: VZ) where revenues grew 16.5 percent and 71.2 percent to $103 million and $64.1 million, respectively. At Verizon, Dycom renewed engineering services agreements for Massachusetts, Rhode Island, New York, New Jersey, Maryland and Virginia.

In addition to upcoming CAF-II deployments, Dycom is seeing an uptick in cable operators deploying fiber to businesses. Revenues from Comcast (NASDAQ: CMCSA) grew organically to $79.3 million, for example.

"The cable industry is very focused on deploying fiber to small and medium businesses and they have been for a long period of time," Nielsen said. I mean it's been great growth engine for those folks and we continue to see urgency around that deployment. So I think that's a clear opportunity for us going forward."

From an overall contract perspective, total revenues were $659.3 million, up year-over-year from $510 million.

Dycom said that contract revenues for the quarter grew 21.9 percent on an organic basis after excluding revenues from acquired businesses that were not owned for the entire period in both the current and prior year quarter.

For more:
- see the earnings release
- and the earnings transcript (reg req.)

Related articles:
Dycom could benefit from AT&T, CenturyLink, Frontier's upcoming CAF-II broadband builds
AT&T, CenturyLink's 1-Gig fiber deployment boosts Dycom's Q4 revenue to $579M

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