Dycom Industries, Inc. (DY) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Dycom Results Conference Call. For the conference, all the participant lines are in a listen-only mode. There will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded. I'll turn the conference now over to your host, Mr. Steven Nielsen. Please go ahead.

Thank you, John. Good morning, everyone. I'd like to thank you for attending this conference call to review our Second Quarter Fiscal 2016 Results. During the call, we will be referring to a slide presentation, which can be found on our website, www.dycomind.com under the heading events. Relevant slides will be identified by number throughout our presentation. Going to slide 3, today we have on the call Tim Estes, our Chief Operating Officer; Drew DeFerrari, our Chief Financial Officer; and Rick Vilsoet, our General Counsel. Now, I will turn the call over to Rick Vilsoet.

Thank you, Steve. Except for historical information, the statements made by company management during this call may be forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, including those relating to company's outlook, are based on management's current expectations, estimates and projections, and involve known and unknown risks and uncertainties which may cause the company's actual results and future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in the company's Annual Report on Form 10-K for the year ended July 25, 2015, and other periodic filings with the Securities and Exchange Commission. The company assumes no obligation to update forward-looking statements. Steve?

Thanks, Rick. Now moving to slide 4, and a review of our second quarter results. As you review our results, please note that we've presented in our release and comments certain revenue amounts excluding revenues from businesses acquired during the fourth quarter of fiscal 2015, and the first quarter of fiscal 2016. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share all of which are non-GAAP financial measures. See slides 13 through 18 for reconciliation of non-GAAP measures to GAAP measures. Revenue increased significantly year-over-year to $559.5 million, an increase of 26.8%. This quarter was impacted by a broad increase in demand from several key customers as we deployed 1-gigabit wireline networks and grew core market share. These factors offset a reduction in services for wireless carriers. Gross margins were inline as a percentage of revenue, reflecting changes in work type mix, cost to expand operations for several large programs and more pronounced seasonality due to acquisitions made during calendar 2015 offset by fuel savings. General and administrative expenses improved year-over-year decreasing 108 basis points. All of these factors produced adjusted EBITDA of $66.4 million or 11.9% of revenue and adjusted diluted earnings per share of $0.54 compared to $0.27 in the year ago quarter. Cash and availability under our credit facility totaled $309.3 million. While we experienced slight margin pressures during the quarter our second quarter adjusted earnings per share represented the best second quarter and the fifth best quarter in our history. Our $2.1 billion in backlog growth year-over-year and over $1 billion in growth sequentially amply demonstrates that our customers continue to convert aggressive plans for the future into specific initiatives. The decision by our Board of Directors to increase our share buyback authorization from $50 million to $100 million reflects the magnitude of business growth opportunities we have received. Going to slide 5, today a major number of industry participants are deploying significant wireline networks across broad sections of the country. These newly deployed networks are generally designed to provision bandwidth enabling 1-gigabit speeds to individual consumers. One industry participant has articulated plans to deploy speeds of 10 gigabits while others are preparing to do so. These industry developments have produced opportunities across a broad array of our existing customers which in aggregate are without precedent to the industry in our experience. Currently we are providing program management, engineering & design, aerial & underground construction in fulfilment services for 1-gigabit deployments. These services are being provided across the country and dozens of metropolitan areas to a number of customers. Revenues and opportunities driven by this new industry standard accelerated during the second quarter fiscal 2016. Customers are continuing to reveal with more specificity multi-air initiatives that are being implemented and managed and then market by market bases. As we now clearly understand the activity levels required for 2016 & beyond it is clear that calendar 2015 was the foundational year for a massive investment cycle for wireline networks which will be more meaningful that the one that occurred for us in the 1990s. We remain confident that our competitively un-parallel scale and market share as well financial strength position us well to deliver valuable service to our customers and robust returns for our shareholders. Now moving to slide 6. During the quarter we experienced the effects of strong overall industry environment, organic revenue grew 19.4%, our top five customers combined to produce 68.9% of revenue increasing 42.5% organically while all other customers decreased 11.9% organically. Of note five of our top six customers grew organically for the fourth consecutive quarter. AT&T was our largest customer, 22.4% of total revenue or $125.3 million. AT&T grew 28.6% organically year-over-year. Growth in wireline services more than offset an expected year-over-year decline in wireless. Revenue from CenturyLink was $83.4 million or 14.9% of revenue, CenturyLink was our second largest customer. Revenue from Comcast was $75.3 million or 13.5% of revenue, Comcast was our third largest customer and grew organically 29.8%. The rise in Dycom's fourth largest customer for the quarter at 11.9% of revenue or $66.3 million, Verizon grew organically 137.9%. Of note this quarter's revenue was the largest with Verizon since the fourth quarter of 2005. And finally, revenue from a customer who has requested that we not disclose her identity was $32.5 million or 6.3% revenue, it was our fifth largest customer. We are particularly pleased that we have continued to gain share and expand our geographic reach, in fact over the past five quarters the increase to long term value of our maintenance business a trend which we expect parallel our deployment of 1-gigabit networks. Going to slide 7, backlog at the end of the second quarter was $5.056 billion versus $3.967 billion at the end of the first quarter of 2016, an increase of approximately $1.09 billion. Of this backlog, approximately $1.999 billion is expected to be completed in the next 12 months. Both backlog calculations reflect outstanding performance as we continue to book new work and renew existing work. We continue to anticipate substantial future opportunities across a broad array of our customers. For AT&T we secured construction services agreements in Kentucky, Tennessee, North Carolina, South Carolina, Georgia and Florida. From Comcast we have received construction services and construction and maintenance services agreements in Illinois, Maryland, Virginia, Tennessee & Georgia. With Windstream, we secure construction and maintenance services agreements in New York, Iowa, Pennsylvania, Ohio, Missouri, Kentucky, Oklahoma, Mississippi, Tennessee, South Carolina, Georgia and Florida. For Time Warner Cable we have renewed installation service agreements for Wisconsin, New York, Ohio, New Jersey and North Carolina. And finally, we extended our underground facilities locating agreement with Southern Cal Edison. Headcounts usually declined during the quarter to 11,980. Now I will turn the call over to Drew for his financial review and outlook.

Thanks Steve and good morning, everyone. Going to slide 8, contract revenues for Q2 of 2016 were $559.5 million and organic growth was at 19.4%, reflecting solid growth from several of our top customers. Acquired businesses contributed $32.9 million of revenue in the current period. Adjusted EBITDA increased to 11.9% of revenue or $66.4 million compared to 10.8% or $47.6 million in the year ago period. Gross margins were inline year-over-year and were pressured by certain near term factors. Those factors impacted year-over-year comparisons and pressured our actual results as compared to the expectations we provided in November. First, for the year-over-year impact we experienced variations in work type mix, costs incurred to expand operations for several large customer programs and pronounced seasonality from recent acquisitions. Offsetting these impacts was a $1.6 million from lower fuel prices. Second, for the comparisons to our November expectations, actual gross margins came in lower than expectations by approximately 100 basis points. This pressured to our expectations resulted from productivity initiatives and certain operations we are growing to address significant customer demand and more pronounced seasonal impact from the businesses we acquired during calendar 2015. For the outlook that we are providing today for Q3 and Q4 of 2016 we consider the productivity impacts of these near term factors. We believe the impacts will dissipate in the later parts of Q3 2016. Now for G&A. G&A as a percent of revenue decreased 108 basis points year-over-year from improved operating leverage as the company efficiently increased in scale. Non-GAAP adjusted EPS of $0.54 compared to EPS of $0.27 in Q4 '15 & Q2 '15. Our non-GAAP adjusted EPS of Q2 '16 excludes the impact of non-cash amortization of the debt discount of our senior convertible notes. Now moving to slide 9, our balance sheet and financial profile continued to reflect the strength of our business. Our liquidity is over $309 million consisting of availability under credit facility and cash on hand. We have no significant debt maturities over the next several years. Our senior credit facility matures in fiscal year 2020. At the end of the quarter we have $150 million outstanding on the term loan and $103.3 million drawn on the revolver. Next, our 0.75% coupon convertible notes in the aggregate principle amount of $485 million has a maturity date in fiscal year 2020 too. Operating cash flows were $75.4 million during the quarter which increased during Q2 2015 primarily from greater earnings from current year period. Net working capital changes also contributed to operating cash flow while still providing the ongoing investment necessary to support the growth that we are experiencing with our top ten customers. DSO's for accounts receivables and unbilled costs in excess of billings net were at 99 days which increased from the 96 days last year. This change included an increase of approximately one week for net unbilled completed work performed. For certain customers with dramatically increased volumes of activity we experience some customer administrative processing delays due to volume and one case the implementation of new procedures. As these customer programs mature these efficiencies of this processes should improve. For billed accounts receivables our DSO's improved three days year-over-year resulting from the collection of age balances from certain world customers but offset incurred by a slight increase and standard retainage balances necessary on certain large ongoing contracts. Capital expenditures made to facilitate our growth and maintain our fleet represent key investments for us. CapEx net of disposals was $48.7 million during Q2 and gross CapEx was at $50.1 million. With the December 2015 extension of tax regulations would provide for bonus depreciation on CapEx we are able to generate significant cash tax savings during fiscal 2016 related to the capital expenditures. Reflected on the balance sheet of the end of Q2 we now have an income tax receivable of approximately $29.3 million which will benefit our 2016 operating cash flows as the amount is applied towards taxable income. Over the past twelve months we have increased our investment in CapEx up to $147.1 million. Not only has this reported an annual organic revenue increase of over $355 million but the investments in our fleet of assets will also contribute to our achievement of higher operating levels responsive to our backlog that now exceeds $5 billion. Based on our outlook and the rewards we are raising our expectations for CapEx net at disposals for the full year 2016 up to $175 million. In summary, we continue to maintain a strong balance sheet which has enabled us to effectively invest in organic growth opportunities that provide for solid returns and increase long term valuation. Now going to our outlook on slide 10. For Q3 of 2016 our outlook contemplates normal winter weather patterns and we currently anticipate revenues which range from $585 million to $605 million. We expect a broad range of demand by several large customers, robust 1-gigabit deployments, CAF II underway, Core market share growth and cable capacity projects expanding. This outlook includes an expectation of approximately $20 million revenue from recently acquired businesses. For Q3 of 2016 gross margin percent is expected to be in line with Q3 2015. This reflects a solid mix of customer growth opportunities with margins impacted by cost to expand operations for several large customers and an expectation for normal winter weather and related impacts on productivity. Total G&A cost as a percent of revenue are expected to decline from Q3 2015 from continued operating leverage on our increased scale. Total G&A is expected to include $4 million of share based compensation compare to $3.2 million in the year ago period. Depreciation and Amortization is expected to range from $31.6 million to $32.3 million. Adjusted interest expense of approximately $3.7 million will include the 0.75% cash coupon on our convertible notes. Interest on our senior credit agreements, amortization of debt issuance cost and other interest. Adjusted interest expense excludes $4.2 million of interest expense for non-cash amortization of the debt discount. Other income from asset sales is expected to range from $2.8 million to $3.2 million, our effective tax rate is expected to be approximately 38.2% during Q3 2016. These factors are expected to generate an adjusted EBITDA margin percent which is inline or slightly better than the Q3 2015 result, and non-GAAP earnings which are currently expected to range from $0.70 to $0.78 per diluted share. This range of non-GAAP earnings per share excludes the non-cash amortization of the debt senior convertible notes. We expect approximately 33.5 million diluted shares during Q3 2016 with shares gradually increasing in subsequent quarters. Now going to slide 11, as a result of our 52, 53 week calendar please note that Dycom's Q4 of fiscal 2016 will include 14 weeks of operations compared to 13 weeks during Q4 of fiscal 2015. Looking ahead to Q4 of fiscal 2016 we currently expect total revenue growth in the mid to high 20s as a percentage of revenue compared to Q4 2015. This growth includes the increase for the additional week of operations in Q4 2016 as the result of our 53 week fiscal calendar. We expect the broad range of demand by several large customers, robust 1-gigabit deployments, CAF II underway, core market share growth and cable capacity projects expanding. This outlook includes and expectation of approximately $40 million in revenue from recently acquired businesses. We expect margins to increase over the Q4 2015 results. G&A is expected to decline as a percent of revenue year-over-year from improvement in operating leverage. Non-cash, stock based compensation is expected to be approximately 4.3 million and the adjusted EBITDA margin percent is currently expected to increase from Q4 2015. Other factors influencing results include depreciation and amortization which is expected to range from $34.2 million to $35 million. Adjusted interest expense is expected to be approximately $3.9 million excluding $4.6 million of interest expense for the non-cash amortization of the debt discount and other income from asset sales is expected to range from $1.1 million to $1.6 million. Now I will turn the call back to Steve.

Thanks Drew. Moving to slide 12. Within a growing economy we are experiencing the effects of a robust industry environment and capitalized on our significant strengths. First and foremost, we maintain a strong customer relationship throughout our markets, we continue to win and extend contracts at attractive pricing. Secondly, the strength of those relationships and extensive market presence they have created has allowed us to be at the forefront of evolving industry opportunities. The end market drivers of these opportunities remain firm and are strengthening. Telephone companies are deploying fiber to the home and fiber to the node technologies to enable video offerings and 1-gigabit high speed connections. These deployments are accelerating and impacting our business. Some of those telephone companies previously deploying fiber to denote architectures had definitively transitioned fiber to the home deployments while others are beginning to provision video over their fiber to the node architectures. Cable operators are continuing to deploy fiber to small and medium businesses and with an increasing urgency some are doing so in anticipation of the customer sales process. Overall, cable capital expenditures new build opportunities and capacity expansion are increasing. Dramatically increased speeds to the consumers are being provisioned. New projects resulting from the Connect America Fund 2 are in planning and engineering with construction launching shortly. Each project are deploying fiber deeper into rural networks and more are expected as new multi-year opportunities emerge through the balance of this calendar year. Additionally, for one recipient we have received assignments to perform fixed wireless deployments. Customers are consolidating supply change creating opportunities for market share growth and increasing the long term value of our maintenance business. Within this context we believe we are uniquely positioned, managed and capitalized in meaningfully experience in improving industry environment to the benefit of our shareholders. We remain encouraged that our major customers possess significant financial strength and are committed to multi-year capital spending initiatives. These initiatives are meaningfully accelerating and expanding in scope across a number of customers. We remain confident our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our Management Team as we grow our business in capitalization. Now John, we will open the call for questions.

[Operator Instructions] And first from the line of Alex Rygiel with FBR. Please go ahead

Thank you, good morning Steve, tremendous quarter, congratulations.

Thanks, Alex.

Steve, you talked a little bit about backlog, backlog grew quite a bit sequentially. Amazing number. Can you talk a little bit about your success with CAF II so far? How much of that has a backlog now and is there more to come?

Yes, there is a modest amount of CAF II in backlog. There's wireless in the backlog, there's some wireline projects with a number of customers but we expect more this quarter, this third quarter.

And secondly, your margins were a bit compressed in the quarter, obviously you called out a number of items that created that. Clearly, mobilizing into some new contracts was somewhat of a negative effect. Can you talk about what a typical timeline looks like to reach normalized margins when you are deploying into these contracts?

Yes, I think as we talked about in Drew's comments we see that dissipating by the end of the third quarter and so typically there can be a couple of three month impact sometimes maybe less or sometimes maybe more depending on the geography. In this particular quarter we have mobilized in part into some small contracts in the upper or in the north east where we have more weather effects. So depends on where you are also.

And lastly, Drew had mentioned that you're expecting cable opportunities to expand. Some like to think that that somewhat contradicts the key the message coming out of cable operators with regards to the ease of their deployment of docs 3.12, can you talk about how you benefit from the expansion of that?

Sure, I am not going to hit that directly other than to say that they are certainly initiatives to expand cable capacity. One of our customer's talks about that on their conference earnings call and in addition, there is a large equipment supplier to the cable industry that has lots of expertise around the technology and I just point you to their comments on their most recent earnings call where they talked about access 3.1 and its relationship to pushing fiber deeper and increasing capacity.

Very helpful, thank you. Congratulations.

Our next question is from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.

Hi Steve, and congrats on the phenomenal backlog.

Thanks, Tahira.

Steve, first question is, from your clients as well that this is going to be pretty long cycle. You have a lot of experience in this industry. If you were to lookout can you guess when you would hit peak revenues?

So Tahira, we have to think about that in a couple of ways. If we look back to the Verizon Fios initiative, that started in 2004 and we are still working at it today and happy to have the business, so these are big networks. This is a big country and it takes a while to get through these contracts and as with respect to peak, I think about the way, I think about the history of the company as our customers have deployed more networks that have increased the amount of installed plan which meant there is maintenance opportunities, there has been market share opportunities and I think as I highlighted in my comments this quarter which was a winner quarter was the largest quarter we have had with Verizon in 10 years so, who's to say what peak is when you have that dynamic.

Fair enough, Steve. And I guess second question, let's say if I was to look at your implied fiscal fourth quarter revenue growth and I take out that extra quarter week, I am looking at sort of maybe at best low teen revenue growth. That's exceptionally strong. Is that something you can maintain as you see based on the backlog profile and would you have to add for the investments a year down the road if you saw the same sort of growth going forward?

So I think you math is in line with ours Tahira so I think that's right I hope to do better. We still got some time, but that's where we see it. I think when you think about the organic growth in the trailing period the fourth quarter last year we grew at 18%. To have an 18% organic growth and comp it in the low teens. I think there's lots of folks that would love to have that performance in their outlook. So I think it signifies good performance there are still programs that are out there, there are still things that are coming on board so, yes we will hope to do that. Realizing that if you look at it, if you look at our water lowering fourth quarter to the second quarter, yes we had almost $450 million of organic growth which is a pretty good size for a company to be building once a year so that's our objective.

And that's the issue. Your growth even in the low teens is enviable in this environment. I guess what I am asking is to sustain that, let's say demand is strong for many years, are you going to have to make some incremental investments like the ones you have made in fiscal second and will be making in third quarter every now and then, maybe every once a year.

If you are speaking with respect to CapEx, there is certainly a maintenance CapEx level this year we think is $75 million to $80 million. We have got a $100 million additional for growth. We are getting high returns on investor capital. We are getting high returns on equity and we are happy to spend the money if we can have those kind of return levels so we don't see that as a problem. We see that as a good sign.

Last question and then I will hop back in the queue. I guess would you say that implied 9% operating margins in your guidance of this year, would you say those are peak or can you expand on those?

So the industry is in a cycle where we need to grow capacity and we got to have good returns because we are spending lots of money. Everybody in the industry is spending lots of money to grow capacity right now and we think if that continues we will get smarted as we go, we will take some cost out. We will get better at running business, we always have initiative to take cost out and so we talked about mid-teens EBITDA for a long period of time and we think we can get there.

All right. Thank you and congrats again.

Thank you.

And we move on to you John Rogers for D.A. Davidson. Please go ahead

Hi, good morning, couple of things. First of all, Steve just back on the backlog. This point is supposed to be your long term backlog relative to revenue. It's highest I have seen in a long time and could you just talk about that a little bit more. How secure are these contracts? What sort of visibility, is there a change in the business when these larger customers want to lock you up for a longer period? How should we think about the security and visibility that backlog provides for you?

So I think we have had lots of success in our core master services agreement business so we have had some renewals and expansion, both typically come in at three years, sometimes longer, the work with Verizon is longer and so clearly I think as your question highlights there has been an extension in the visibility we have because these core businesses are under contract for a longer period of time. I think with respect to some newer opportunities clearly customers realize that there are substantial commitments that are being made by us and everybody else to grow capacity and typically they reflect that in the terms of the agreements so that we can have some certainty around making the investment. So I don't think that's unusual for this environment given all that has to get done.

Okay. And then, just back to the gross margin for a second. It looks like based on Drew's comments about a 100 basis points variance there, it's $15 million quarter that you are investing. Can you give us a little bit more specificity, is it training, is it less efficient crews starting up or is it more difficult sites or conditions that could persist?

John, it's not more difficult conditions, these are just the costs that are associated with hiring the supervisors and the safety people and field staff people to administer the processes that you have to have in place before the work shows up. You can't just show up the same day as the people to administer the business. And clearly, when you are just picking off a program there is going to be some warning curve even for the folks in the field in new geographics. So there is nothing unusual here. It's just the way the business works.

Okay, and last if I could, Drew, what did you say I missed your comment on tax rate you are expecting and then is you wouldn't mind running to the customers.

Sure John, the tax rate is about 38.2% which is the year-to-date rate so far as well. And then from a customer and a split perspective, Windstream was number six at 5.5% revenue, Time Warner Cable was number seven at 4.2% of revenue, Charter Communications was number 8 at 2.1% of revenue, Crown Capsule was number nine at 1.4% and Questar Gas was number ten at 0.8% of revenue. Telco was at 64.5%, Cable was at 25.5%, facility locating was at 6% and the electrical and all other was at 4%.

Great. Thank you.

Thank you.

Our next question from Adam Thalhimer from BB&T Markets. Please go ahead.

Good morning guys.

Good morning, Adam.

Steve, I wanted to start off with some of the disclosures you made around the current awards like for AT&T some of the states overlap. Last quarter you had North Carolina, South Carolina, Georgia, Florida for three years and we have the same state showing up here for four years. So I am curious on that and then on the Comcast, there's construction services contracts and also construction and maintenance services contracts so it's kind of a new dynamic there in terms of the contract description.

I think Adam, just to address both points here we have some of these new network deployments that we are calling construction services so where the primary focus of the contract is really deployment of new technology and then we have our existing or new, in some instances, constructions or maintenance agreements which are traditional master surface agreements which can deploy new technology but are more focused around extensions. The small and medium businesses, routine maintenance. Deployment and sub-divisions, the average businesses usual work that we have and so in some instances customer may cover them both with one agreement and in others may have two separate agreements.

Okay, very helpful. And then, you also talked about in here that this is kind of change in language and customers are revealing more specificity multi-year initiatives. Just wondering if you can expand on that.

Yes, these programs are now underway in such scale that customers are now starting to talk about the three year operating plans as to where exactly houses are going to passed with new network. And in any one of these initiatives, you go through the overall goal of objective setting by the customer and then they have to go through a pretty detailed process but this tells everybody where that money is going to be spent and we're well down that road to understanding where it's going to be spent.

If I go back to wanting to hear his questions, did I give you more visibility on kind of one year, two year, three year organic growth potential?

I think it does Adam, as is always right. This is a dynamic business so there's always going to be new opportunities and perhaps every once in a while disappointment but clearly, given the size of the company that have $5 billion in backlog and $2 billion that we have visibility due for the next twelve months is a pretty good place to be and also remind you the way we value our master contracts is we look to trailing revenue to determine the monthly value and so as we are growing organically you could make an argument that that twelve month backlog is probably even higher than our method would calculate.

Okay, great thank you.

Our next question is from Christian Schwab from Craig Hallum Capital Group. Please go ahead.

Good morning guys, just need a little bit more help on this work mix. Can you give a little bit more specifics on what exactly happened in the quarter that modestly crossed margins?

So last year Christian we had talked on this call for second quarter 2015 that we had good results although these are better but we had good results a year ago based on the facts that we had an increase mix of which is less impacted by seasonality. We have a little bit lower portion of the businesses here that was aerial in technical services. And so the mix interacting with the seasonality just put a little bit of pressure year-over-year on margin.

Okay, great. That's great. And then I'm trying to understand why the acquired business maybe more seasonal than the rest of the business?

I think you're calling us from Minnesota Christian, aren't you?

Yes.

There is more seasonality in the upper Midwest which is where the largest of those acquisitions occurred. And so just more seasonal effect, we try to get it right, we wish we'd done better but there was a little more impact than we expected.

Excellent. And then, I'm trying to - I don't know if I completely understood the comments earlier. I'm trying to figure out what's going on at Verizon for such wonderful revenue.

Starting a year ago, Christian, we disclosed on that call that we had secured a new agreement with Verizon to substantially expand our footprint. There was a staging effect where in each quarter we've added some new territory. We added a substantial amount of territory in this quarter, actually just at the end of the first quarter. There is a little bit more to go in this third quarter, and even into the fourth quarter and then that will be online. I would just say generally that also the activity in the existing full credit has been fairly [ph].

Excellent. I don't have any other questions. Thanks guys.

Thank you.

And next we'll go to Noelle Dilts with Stifel. Please go ahead.

Hi, thanks for taking my questions. So just - not steering off course [ph] but coming back to the margin impact, you talked about mix, investments and operations and seasonality. Can you just give us a sense of the relative impact there of those factors on the margin in the quarter?

I think the majority of - let's call it approximately 100 basis points was around the cost and the expanding operations on the seasonal factors and just keep in mind on the sequential basis while fuel was down a little bit, it wasn't significant. So there wasn't much of a tailwind from fuel on a sequential basis.

Okay. And then I just want to go to the long term mid-teens EBITDA margin goal that you've expressed in the past. I mean how are you thinking about that right now given that you are facing - looking at the tremendous growth opportunity and the potential need to continue to invest in operations. I mean is that something you still think is attainable in the cycle? Could you just give us some update about there.

Yes, we do. I think if you look at kind of what I call recon during the third and fourth quarter, we're making progress when you look at it on the year. We feel that we'll have momentum going into the next fiscal year, no guarantees but this is a good environment where we're investing a lot and when we invest a lot to grow capacity, generally margins go up to reflect at effort.

And then on just the CAF II project, could you talk a little bit about the - essentially the profitability profile of those jobs and given that their project opportunities could they actually be a little bit more profitable than some of the work you're doing [ph]?

So generally these projects are going to be in areas of the country that are fairly rural, in some ways very analogous to the work that we did under the stimulus program in our fiscal kind of 2010, 2011, 2012. And we have lots of experience in rural, we have businesses that have worked in rural America for decades. And - it's going to be appropriate to the level of effort and what it cost to secure the resources but there is not one way or another that would say that it was more difficult to earn good returns on that type of project.

Great, thank you.

Next question is from Jennifer Fritzsche with Wells Fargo. Please go ahead.

Great, thanks. Three, if I may. First on headcount, I was surprised to see it decline sequentially and if you put color on that. Secondly, I think you said you've been working on some wireless local projects for our CAF provider, I realized you can't say the name but that's interesting to me because can you talk about how you participate there? And then third, the bigger question, I think Drew mentioned cable, a 25% of your revenue. Bigger picture longer term Steve, can you see that getting to about 30-year revenue?

So we'll try to knock them off one at a time. So with respect to CenturyLink we had a really busy calendar 2015 with CenturyLink and it's not unusual, everyone sort of allowed for customer to pause in kind of the pace of activity. They have lots of CAF work that they are looking at doing. We have good opportunities with them, and so I'm not over reading anything into that development. And then with respect to the fixed wireless and CAF, it has clearly been one CAF recipient that's identified publicly that they will perform that work. With fixed wireless we're pleased to be participating with them on that. Clearly, none of the other recipients will do that, they don't have any spectrum, nor any wireless infrastructure. So it's really an opportunity for everybody that's limited to that one particular recipient. And then with respect to cables, Jennifer, we're growing as you can see and the numbers we've disclosed were growing nicely, particularly to the Comcast. We're growing nicely with a number of other customers and so whether it grows as a percent as a whole company, I guess it's kind of a rough plated growth question and I don't want to imply that the other parts of the business wouldn't grow as fast or faster than cable, nor would I say that cable's going to slowdown. So I think it's possible that it gets bigger as a percentage but I think everything is growing right now. In fact, even if you look at our overall business, we're actually feeling a little better about wireless, we think in the third quarter we'll probably lap the year ago quarter in revenue for the first time in about five or six quarters. So we've even got some other areas that are coming back.

Got it. And just if I may, one more. Verizon announced the application this week, I know that is enclosed from next year but to me it shows like their willingness to need fiber outside their nine state footprints from here [ph]. Is there a work opportunity that you could do or do you see that as just a non-event for you or something that could lead to some additional revenue down the line?

We've worked for XL for a number of years building metro networks. So we certainly have the relationships both with XL and with Verizon and I think it's encouraging that Verizon's committing capital because I'm sure they're going to want to grow that footprint. And as I read in their announcement, it's certainly going to be part of their identification effort. The quality of wireless networks is increasingly a function of how much wider they have access to and where. And I think that's what it reflects.

Thank you.

[Operator Instructions] And we'll go to Allen Nitrani, Silen Lake Asset Management [ph]. Please go ahead.

Hi, thank you. Steve, can you tell us how big was your wireless revenue base this quarter?

I think it was 6%.

6% of revenue, it's okay. I appreciate it. And you talked about maintenance, earlier on in your conversation you said about how increasing portion of your business is maintenance and you would go after some of these long-term programs, which - especially the one new programs which have a maintenance tail. Can you expand on that a little more?

Yes, I think I would reframe it just a little differently Allen. I mean that the core maintenance activities that our customers perform generally through master service agreements is what we're really good at. I mean that's what got us through the recession, once the price, maybe three times, if you go back far enough. And that's what we're always focused on and so even in the newest one-gigabit deployment, as you put more network out there, there are going to be maintenance opportunities and so we think that those grow hand-in-hand, not sequentially. We also - even for those who are not deploying new technology, they are always trying to streamline their procurement practices until the extent that we can help them do that. We can grow some share there if you think about this Verizon contract that we've talked about, and we expanded the footprint and they have infrastructure there that will have to be maintained, essentially forever. So that's just good for the business.

Okay, great. And under employee income, maybe I missed it, but you said it was seasonality to go down, yet it was to back close going up. I'm assuming you're expecting a meaningful increase in employees over the next couple of quarters to be able to trail, to be able to deal with all this work?

There is always a mix Allen depending upon where the work opportunities are, how much will be subcontracted for that particular opportunity versus done in-house. We also generally do not hire more people in the winter because there is less to get done, just because of the seasonality of the calendar. So I wouldn't over read all that much into the headcount one way or another in any individual quarter.

Okay. And then on the acquisition, I guess it's always very hard to plan where the revenues are going to fall especially if the company's headquarter is in Minnesota. But when you bought TelCom, you said you paid about $49 million, the revenue you sought was $80 million. It looks like it did $55 million already and your guidance seems to imply it's going to go up as well. You're not missing your forecasted revenues on this business are you, it's just a question of where it falls and the margin impact?

Yes, it's really the contours of the seasonality and the business which you can do a lot of work but until you own it and you go through it, and you see the dynamics and the business, it was a little more challenging to forecast than we expect it. But as we said, that was a small piece of the overall issue.

Okay. And then finally, I saw you doubled your buyback, you didn't buyback any stock this past quarter given the pace of CapEx and where the sales came in. Can you talk about given the stocks gone from 90 to 50 or 56 whatever it is here, your willingness to buy, especially given that you have no maturities in your debt and for years now. Can you talk about that? And it seems like every - it seems like it's pretty accretive to buy back stock at these levels?

So we certainly are happy to buy the stock back when we think that earns you return for the shareholders. We bought a lot of stock back in the last five or six quarters. We're balancing that appetite with what we need to do to make sure that we support our organic growth because that's always the highest return on capital. And then we look at where our shares are versus acquisition opportunities. I think the good news is, as Drew outlined on his comments on the balance sheet, we've got the strength to probably do more than one of those things. So we'll see it and take advantage of it when it makes sense.

Thank you.

And we have a follow-up from Noelle Dilts. Please go ahead.

Actually, Allen just asked my question about cash parity, so thank you.

All right. Operator, do we have one more question?

We do. Follow-up from Adam Thalhimer. Please go ahead.

Thanks. The project startup cost is going to continue in Q3, what's the actual gross margin impact? I mean you talked about 100 basis points in Q2 but you have a basis point number for Q3?

Yes, I think we look at it as carrying through Adam from the second quarter to the third quarter. Clearly going through an exercise like we've had where we had to tamper our expectations, we're trying not to have to do that again. And hopefully, we'll do better but that's where we see it right now.

So a 100 basis points in Q2, 100 basis points in Q3, and then probably some taken for Q4…

We have it up in Q4.

So your startup cost in Q4 is less?

Well, there is less and there is other strength in the businesses once we started up in Q2 and Q3 is producing revenue in Q4.

Okay. And the other one was - your all other customers you had, you just won back deposit organic with them in Q1 and then your negative in Q2, I'm just - is there like a pause ahead of CAF II or what happened there?

CAF II is really not going to be other than one particular customer, two customers is going to be portion of the top five. I don't - I wouldn't read too much into it if there was about $9 million of headwind year-over-year on stimulus projects that we're finishing up. So that was a portion of it too.

Okay. Thank you.

And any closing comments?

All right. Well, we thank everybody for your time and attention on the call. We look forward to speaking to you next in May. Thank you.