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Bear of the Day: Dycom Industries (DY)

Zacks

Dycom Industries (DY) is a $2.4 billion provider of specialty engineering & construction (E&C) services to telecom providers and of construction and maintenance services to electric utilities.

On August 30, Dycom reported a small earnings beat in its fourth-quarter fiscal 2017 but the bottom line came in 10.4% lower than the year-ago figure, dragged by weak contract revenues.

Dycom’s fiscal fourth-quarter contract revenues came in at $780.2 million, down 0.8% year over year. The top line also missed the Zacks Consensus Estimate of $799 million, and came at the lower end of the company’s projected range of $780–$810 million.

Extensive deployment of 1-Gigabyte wireline networks by major customers and expanding core market share fueled top-line growth during the quarter. This was somewhat offset by a near term moderation by a major customer, possibly AT&T. Organic revenues grew 4.6% year over year.

For the fiscal year, Dycom reported contract revenues of $3.1 billion, up 14.1% year over year. Acquisitions contributed $19.3 million, supplementing the revenue stream.

Following the report, analysts have slashed earnings estimates for the current fiscal year (ending July 2018) and the next.

The current year's EPS consensus dropped from $5.29 to $4.26, representing 19% negative "growth."

Next year's profit projection likewise fell 20% from $6.71 to $5.35.

The Headwinds for Pure Telecom Contractors

Dycom expects that its gross margins will be pressured in the upcoming quarter due to expected adverse mix of work activity, lower revenues and high costs associated with initiation of customer programs. Costs as a percentage of revenues are also expected to increase year over year, putting pressure on operating margins.

The company’s business remains highly vulnerable to risks associated with the U.S. telecommunications industry. Presently, the space is facing intense pricing competition.

Severe spectrum crunch, coupled with gradual smartphone and tablet adoption, is compelling wireless operators to seek other options for raising revenues.

The telecommunications industry is highly dynamic in nature. It continues to experience rapid technological, structural and competitive changes and may reduce service requirements from Dycom, thereby affecting its financial performance.

With the rise in operating expenses, poor contribution from acquired businesses, and pronounced seasonal fluctuations, analysts believe growth in the upcoming quarters will face multiple headwinds.

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