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.

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