Tuesday, August 30, 2005

Verizon hurting Dycom

As I wrote yesterday, DY lowered numbers for next quarter due to expected lower volumes from VZ FTTH build. DY actually missed numbers on the EPS line also for last quarter, without the $3M accounting gain from some insurance cost amortizations which helped EPS by 4 cents I believe. Its always nice to have some "cookie-jar" accouting to play with during weak quarters.

DY suffers from being at the wrong place-literally. There is nothing wrong/slowing with VZ plans, its not slowing spending. But being a 28% customer VZ has consequences for DY. When VZ shifts its build plans from one state/municipality to another it might not always be beneficial for DY. DY gained earlier in the rollout as VZ started its FTTH build out in areas where DY was the contractor, also DY benefitted earlier in the rollout since it basically does more of the fiber-laying part of the build and does not really have much work when it comes to doing network engineering (splicing fiber, etc.). So as the buildout evolves and moves into other states and also into higher-level work, DY suffers. On the other hand, BLS is actually accelerating its buildouts with DY which help offset some of the losses from VZ.

As I indicated earlier, gross margins are declining because volume of work from VZ declined very quickly and with lower revenues the overhead absorption hurts gross margins. Do not expect margins to tick up anytime soon. Pricing seems like it was not the culprit this time.

It's never a positive sign when backlog declines sequentially and its especially bad when revenues declined also. Backlog declined from $1.137B from $1.236B from Q3, with $551M to be completed in next 12 months.

DY commented that telcos remain commited to driving fiber deeper into their plants. Which is overall positive for telco food chain, just not as good for DY anymore.

Monday, August 29, 2005

Dycom lowers numbers again- Verizon not spending?

DY reported results for fourth quarter inline with negative pre-announcement on revenues and one penny ahead on EPS. However, DY lowered guidance for 1st quarter dramatically. Company expects revenue for the first quarter of fiscal 2006 to range from $225 million to $245 million and diluted earnings per share to range from $0.17 to $0.23. Street estimates were at $266 million/$0.36. I talked about how DY can't get its act together and seems like they have been more aggressive in estimating project rollouts. MTZ on the other hand believes it can deliver its numbers. I still think MTZ is a better way to play the telco spending on new projects like Verizon's Fios. MTZ has outperformed the DY since I spoke about this on August 18th. Looking forward to some reasonable explanation from DY on why company keeps lowering number. I do not believe Verizon is moving capex out but it will be very interesting to listen to the call. DY conference call is tommorrow morning (August 30th).

Monday, August 22, 2005

Optical gear market returning- a welcome sign for some

Om Malik has a post on his site about Dell' Oro report that says that Q2'05 saw sequential growth of global optical revenues up 10%. I do not doubt findings of Dell' Oro given that all the high-speed internet subscriber growth will lead to capacity adds down the network. Given where this market fell from, its of little suprise that any good news is welcomed. Remember the $7B acquistion of Cerent by CSCO, anyone? Om also mentions my Why Ciena Can't get it right post from June 2005. I still think CIEN has a tough time ahead of it; but this quarter will be ok given all the DSL adds and somewhat better optical market driven by Metro Ethernet- yes. Plus read my original post to understand how "cookie jar accounting" will help CIEN to post better gross margins. Just for all you stock buffs out there, CIEN has declined 13% still I posted my original post on June 2nd and Nasdaq is up about 1.7%, now that 15% relative outperformance will make anyone happy and that's only in 2.5 months- annualize that !

Friday, August 19, 2005

$4 Billion joke

Head of IPTV for SBC believes "$4 billion is very little money" and if he "bets wrong, it's not much money for us to burn". I do not own any SBC shares but this sure do not seem like "in the best interest of shareholders"-the tag line managements use to circumvent any question they do not want to answer. Given that all telcos have seen accelerating local line losses (the bread and butter for them) I would not want someone just "burning" $4 billion.

On the other hand, SBC also announced yesterday that it will be using SFA and MOT set-top boxes for IPTV. That's just great! whatever happend to opening up the GA monopoly that exists on the cable side? I thought the entire point of going IP was to give choices to consumers. I guess they are more worried about burning money than giving choices. I agree that there are not many companies that can efficiently scale production for large subscriber base of SBC in the begining. But it would be a welcome sign to see SBC opening up the network to these smaller companies later in the evolution of IPTV rollout- if it ever happens since we all know its just a $4 billon joke!

I wouldn't mind having $4b under management, if any one has some to burn. Probably give you a better return then some heat from burning it.

Thursday, August 18, 2005

Dycom can not get its act together

Why would any rational investor want to own DY? In this fairly robust environment for capital spending by telco, the company has lowered guidance last three quarters . VZ which accounts for 1/3 of DY revs has nothing but raised capex in recent times. DY announced that it expects revenues at low end of its previous guidance and EPS below the guidance. So not only does DY have any idea when VZ (or other revenues) are coming in they also do not really know what margins they can earn. Not a great situation. DY clearly has visibility issue and it has been hiring a lot of contractors to get work done, some of these new hires are not trained-hands which leads to lower yields hence lower margin.

I do not believe there is any thing to worry about from VZ and its capex spending plans the issue remains with DY. I am not too worried about MTZ (a competitor of DY) and believe MTZ might present a better opportunity given that its margins have more upside where as DY margins are headed lower. DY also counts BLS and CMCSA as major customers so do not expect this company to just disappear but near term issues could put a lid on upside for the stock.

If you are knowledgeable on why DY has such hard time please feel free to email me or post your comments.

Wednesday, August 17, 2005

Why 3% dividend yield is tough for Cisco

There has been a lot of talk recently, particularly by Larry Kudlow on CNBC on why Cisco should pay a dividend to move the stock higher. Larry even believes the stock can "double" if CSCO paid a 3% dividend yield. Here is why I think 3% dividend yield is a tough act for CSCO.

3% dividend yield would mean $3.967B (assuming 6.612B shares outstanding and $18 share price). CSCO can't afford to pay out $4b in cash every year (and grow the dividend).

Why you might ask? Because they have to continually buy back shares to issue to employees. Looking at some numbers it becomes clear how much CSCO uses its cash to buy shares for employees benefit.

All numbers are as of Year ending July 30,2005

CSCO generated $7.56B in cash from operating activities and then spent $692M for cap ex and spent another $911M for acquisitions. Leading to FCF of $5.96B (equates to FCF yield of 5.11%- not bad if you are a value investor) which would be plenty to pay a $3.9B dividend a year. But then CSCO management had to buy $10.23B of stock last year - 18% of which they had to pay out to employees.

How do we know that this stock was for employees? Because CSCO shares outstanding only declined by 445 million during the year. That would mean Cisco's avg price on buy-back was $23- the stock has been well below that price through out the yr (july 2004-july2005). Also CSCO mgmt stated that they purchased total of 540 m shares throughout the year in their conf calls as detailed below:

Q1 bought back 156m shares ($3b @19.24)
Q2 bought back 140m shares ($2.7b @ 19.30)
Q3 bought back 114m shares ($2b @17.91),
Q4:bought back 130m shares ($2.5b @19.14)

While Cisco's balance sheet has $16B in cash today, it had $19.3B last year, a decrease of $2.652b in one year, which is exactly how much shareholder equity declined by over the year. With continued dilution from options and shareholder purchases for employees it becomes tough for CSCO to take that cash and send it to shareholders in a form of a dividend. Yes, the share repurchases help stock holders indirectly but it also helps employees directly and more lucratively. As option expensing comes into fore front expect CSCO to issue more shares instead of options which means they would have to buy even more shares for employees then they do currently.

We have to wait for the 10K to see where the employee options are priced and what amount of these options are in the money vs. waiting to be vested- a key factor for CSCO purchases for employees. Also with stock being "dead" for so long, retention has become an issue and its impacting morale- that's why I think CSCO could start increasing compensation this year after such a long time. Bottomline: CSCO is in a tough middle ground where its not really a growth company any more and it isn't a value stock either.