AT&T and Verizon’s aggressive fiber expansion plans to support an array of business, consumer and future 5G wireless deployments will continue to be a key opportunity for telecom construction companies Dycom and MasTec (MTZ), which count these companies as their largest customers.
AT&T, CenturyLink, Verizon and Comcast collectively account for 77% of Dycom's telecom revenue and 71% of its total revenue.
In its fourth-quarter earnings call, Dycom reported that AT&T made up 21% of its revenues. Verizon, meanwhile, is Dycom’s fourth largest customer with 10% of its revenues in the period. Interestingly, Dycom saw strong organic growth with CenturyLink at 52.8% and Comcast at 44.9%.
Likewise, MasTec is seeing similar trends. José Mas, CEO of MasTec, said during the company’s second-quarter earnings call that new fiber expansion projects are setting it up to ramp up future wireline revenues.
“Wireline revenue for the quarter was up 26% year-over-year and we continue to see strong demand in everything from electric distribution to fiber rollout and expansion,” Mas said during the earnings call, according to a Seeking Alpha transcript. “We continue to see strong nationwide fiber deployment projects from both, telephone companies and cable TV companies, and I'm confident this will provide us with significant opportunities for years to come.”
“From a contractor perspective, DY followed by MTZ stand to benefit significantly from ramp in fiber spending, given that the spending leaders, AT&T and Verizon, are key customers,” said Deutsche Bank in a research note. “DY has shown steady share gains in each of these customers.”
AT&T, Verizon sharpen fiber focus
What makes AT&T and Verizon attractive revenue targets for Dycom and other large construction companies are the projects they have launched. Verizon signed two key fiber supply deals: it will spend $1 billion with Corning to buy 1.5 million miles of fiber over three years, and it has a $300 million deal with Prysmian to buy 1 million miles of fiber over 3 years.
Under the terms of an agreement with the FCC to acquire DirecTV, AT&T committed to connect 12.5 million homes with 1 Gbps-capable FTTH network services by 2019. The service provider has connected over 5.5 million homes with hopes to connect a total of 7 million by the end of this year. Interestingly, AT&T said it might reach close to 14 million by 2019.
Deutsche Bank said that the service provider’s focus to spend capital to expand their fiber networks will bring initial benefits to Dycom.
“Although balance sheets largely limit large scale capex growth by telecom/cable companies, we expect the mix to shift increasingly towards fiber (wireline) from 40% of spend over the last few years and towards 60% of spend through 2019 before returning towards 40% in the 2020+ timeframe,” Deutsche Bank said. “In our view, this mix is more beneficial to DY than MTZ over the near term, given that 80% of DY revenues come from wireline vs 12% for MTZ.”
Google Fiber pullback factor
One of the key concerns for Dycom and other network construction companies was Google Fiber’s pullback from its aggressive FTTH builds.
The service provider has been through a challenging time over the past year. Besides seeing two leaders step down, it delayed various rollouts in key markets as it realigned its strategy.
According to a report in the Kansas City Star, the Kansas Corporation Commission confirmed that Google missed deadlines to bring service throughout four Kansas cities: Mission Hills, Westwood, Westwood Hills and Kansas City. Earlier, concerns about Google Fiber’s momentum emerged as reports surfaced about Google Fiber potentially delaying rollouts in cities like San Jose, California, and Portland, Oregon, after the company acquired Webpass.
Deutsche Bank said that the fallout from Google Fiber’s spending pause was already taken into consideration by Dycom.
“Prior to Google’s pullback, telecoms/cable companies were more likely to preemptively deploy fiber in their market to head off a potential threat from Google. Our checks suggest that this behavior has ceased and there has been a pullback in the pace of investment,” Deutsche Bank said. “That said, much of these lower growth expectations are already factored into shares.”