Dycom Industries, Inc. (DY) Q4 2017 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 will turn the conference now over to your host, Mr. Steven Nielsen. Please go ahead, sir.

Thank you, John. Good morning, everyone. I'd like to thank you for attending this conference call to review our fourth quarter fiscal 2017 results. Before we begin the call, our thoughts and prayers are with our fellow Americans suffering from the winds and floods of Hurricane Harvey. Please reflect on heroic work done as neighbors are helping neighbors not because they have to, but because the crises like this always brings out the very best in our nation. Going to Slide 3, during the call, we will be referring to a slide presentation, which can be found on our website's Investor Relations main page. Relevant slides will be identified by numbers throughout our presentation. 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 maybe 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 related to the 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 in 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 30, 2016 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 fourth 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 2016 and third quarter of fiscal 2017; adjusted EBITDA, adjusted general and administrative expenses, adjusted net income, and adjusted diluted earnings per share, all of which are non-GAAP financial measures. See Slides 13 through 19 for a reconciliation of non-GAAP measures to GAAP measures. Additionally, see Slide 14 for a calculation of non-GAAP organic revenue for the fourth quarter of fiscal 2016 that has been adjusted to exclude the impact of the incremental 14th week and the quarters acquired revenues. Revenue was $780.2 million, an increase of 6.5% after adjusting for last year's additional week. Organic revenue grew 4.6%. This quarter reflected an increase in demand from two key customers as we deployed 1-gigabit wireline networks and grew core market share, offset by a near term moderation by a large customer. Gross margins were 22.21% of revenue, reflecting solid operating performance. Adjusted general and administrative expenses improved year-over-year, decreasing 16 basis points. All of these factors produced adjusted EBITDA of $118 million or 15.1% of revenue, and adjusted diluted earnings per share of $1.47, compared to $1.64 in the year-ago quarter. Operating cash flow improved significantly, totaling $149.9 million in the quarter. Liquidity was strong as cash and availability under our credit facility was $439.9 million at the end of the quarter, as all outstanding draws on the revolving portion of our credit facility were repaid during the quarter. Going to Slide 5; today a number of major industry participants are deploying significant wireline networks across broad sections of the country. These networks are generally designed to provision bandwidth enabling 1-gigabit speeds to individual consumers. In addition, emerging wireless technologies are now beginning to drive significant incremental wireline deployments. It is clear that a complimentary wireline investment cycle will be required to facilitate what is expected to be a decades-long deployment of fully converged wireless wireline networks. Notably, one industry participant has begun to invest in the wireline infrastructure required to enable fully converged wireless wireline networks. The industry effort required to deploy these converged networks has and will meaningfully broaden our set of opportunities. Total industry opportunities in aggregate were already without precedent in our experience prior to this development. We're providing program management, planning, engineering, and design aerial and underground construction and fulfilment services for 1-gigabit deployments. These services are being provided across the country in dozens of metropolitan areas to a number of customers. In addition, we have secured a number of converged wireline wireless multi-use network deployments across the country. Planning, engineering and limited construction have begun. Engineering and construction activity is expected to increase throughout the balance of calendar 2017 and accelerate into calendar 2018. Customers are continuing to reveal with more specificity new multi-year initiatives that are being planned and managed on a market-by-market basis. Our ability to provide integrated planning, engineering and design, procurement and construction of maintenance services is of particular value to those industries participants with projects outside of their traditional geographic service territories. As with prior initiations of large scale network deployments, particularly those occurring during periods of customer M&A activity, we expect some normal timing uncertainty and customers spending modulations as network deployment strategies evolve. We remain confident that our competitively unparalleled scale and market share, as well as our financial strength, position us well to deliver valuable service to our customers and robust returns for our shareholders. Now moving to Slide 6; we experienced the effects of a strong overall industry environment during the quarter and saw some moderation over the summer after a strong start to the calendar year. Organic revenue grew 4.6%, our top five customers combined produced 75.7% of revenue increasing 7.4% organically, while all other customers decreased 3.5% organically. Off note, this quarter marks our our 11th consecutive quarter of organic growth. AT&T was our largest customer at 21% of total revenue or $163.5 million, a near-term decline in wireline services was offset in part by growth in wireless services. Revenue from CenturyLink was $157 million or 20.1% of revenue. CenturyLink was our second largest customer and grew organically 52.8%. Revenue from Comcast was $153.1 million or 19.6% of revenue and grew organically 44.9%. Comcast was our third largest customer. Verizon was Dycom’s fourth largest customer for the quarter at 10% of revenue, or $78.3 million. And finally, revenue from Windstream was $38.8 million, or 5% of revenue. Windstream was our fifth largest customer. We are pleased that we have continued to gain profitable market share, extend our geographic reach, and expand our program management and network planning services. In fact, over the last several years we have meaningfully increased the long-term value of our maintenance business, a trend which we believe will parallel our deployment of 1-gigabit and wireless-wireline converged-networks as those deployments dramatically increase the amount of outside plant network that must be maintained. Going to Slide 7; backlog at the end of the fourth quarter was $6.016 billion versus $5.47 billion at the end of the third quarter of 2017; an increase of approximately $546 million. Of this backlog, approximately $2.794 billion is expected to be completed in the next 12 months. We're are particularly pleased with the increase in our next 12 months backlog as it clearly foreshadows resumed growth during calendar 2018. Both backlog calculations reflect strong performance as we booked new work and renewed existing work. Of particular note, during the quarter backlog -- during the quarter, backlog associated with wireless services grew significantly. We continue to anticipate substantial future opportunities across a broad array of our customers. For Comcast, we renewed construction and maintenance services agreements in Washington, Oregon and California, New Mexico and Colorado and secured a construction services agreement in Alabama. From AT&T, we received wireless construction services agreement for Texas, Kentucky, Mississippi, Alabama, Georgia and Florida and construction services agreements in California and Tennessee. With Charter, we renewed construction and maintenance service agreements in Texas, Illinois, Tennessee, Alabama and North Carolina. From Frontier we secured a construction and maintenance services agreements in California and finally we secured rural and municipal broadband projects in North Dakota, Minnesota and Virginia. Headcount increased during the quarter to 14,227. Now I'll 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 Q4 '17 were $780.2 million and organic revenue grew 4.6% reflecting strong growth by two key customers offset by near-term moderation by another large customer. Acquired businesses contributed $19.3 million of revenue in the current period. Adjusted EBITDA was solid at $118 million in Q4 '17. As a percentage of revenue, adjusted EBITDA was in line with our expectations and was at 15.1% of revenue. As expected, our mix of work during Q4 '17 included a greater portion of jobs where we provide materials for the customer and that mix impacted the gross margin, which decreased 101 basis points year-over-year. G&A expense improved 16 basis points to 7.6% of revenue in Q4 '17 compared to adjusted G&A expense in Q4 '16. Non-GAAP adjusted diluted EPS in the 13 weeks of Q4 '17 was $1.47 per share compared to $1.64 in the 14 weeks ended Q4 '16. Now moving to Slide 9, our balance sheet and financial profile continue to reflect the strength of our business. We ended the quarter with $367.7 million of term loans outstanding and no revolver borrowings on our senior credit facility. Our liquidity is robust at $439.9 million at the end of the quarter, consisting of availability from our credit facility and cash on hand. Operating cash flows were strong at $149.9 million during Q4 '17. The combined DSOs of accounts receivable and cost in excess of billings were 87 days for Q4 '17, which represents a three-day sequential decline from last quarter reflecting solid cash collections and billings during the quarter. Capital expenditures were $60.1 million during Q4 '17 net of disposal proceeds and gross CapEx was $66 million. As we look ahead to fiscal year 2018, capital expenditures, net of disposals are expected to range from $175 million to $185 million with the majority of the spend in the back half of the fiscal year. In summary, we're well positioned with a strong balance sheet and ample liquidity. Going to our outlook on Slides 10 and 11, as we look ahead to the next two quarters, our expectations has been tempered to reflect the trend in customer spending. we experienced in Q4 '17. As reflected in our next 12-month backlog, we do continue to see a broad set of customer opportunities. For Q1 '18, we currently expect revenues which range from $715 million to $745 million reflecting near term moderation by a large customer offset in part by solid demand from other customers. We expect continued 1 gigabit deployments, fiber deep cable capacity projects and initial phases of fiber deployments for newly emerging wireless technologies. This outlook includes approximately $5 million of revenue from the business acquired in Q3 '17. Gross margin percent is expected to decrease compared to Q1 '17 reflecting pressure from the near-term revenue decline and the impact of costs associated with the initiation of customer programs. G&A expense as a percent of revenue is expected to increase compared to Q1 '17 from higher share-based compensation related to the vesting schedule rewards and the impact on operating leverage at the lower expected level of revenue in Q1 '18. Share-based compensation included in G&A expense is estimated at $7.4 million in Q1 '18 compared to $5.7 million in Q1 '17. Depreciation and amortization is expected to range from $42 million to $42.8 million and includes amortization of $6.3 million. Higher depreciation results from fleet expansion that increases our capacity and from the normal replacement cycle of fleet assets. Adjusted interest expense is expected at approximately $5.1 million, excluding $4.5 million of interest in Q1 '18 for the non-cash amortization of the net discount on our notes. Other income net is expected to range from $3.1 million to $3.7 million. These factors are expected to generate an adjusted EBITDA margin percent, which decreases from Q1 '17 results and non-GAAP earnings ranging from $0.81 to $0.96 per diluted share. We expect approximately 31.9 million diluted shares during Q1 '18. Now going to Slide 11; for Q2 '18 our outlook reflects an expectation of revenue decline of low-to-mid single digits compared to Q2 '17 revenues. This outlook includes revenue of approximately $5 million in Q2 '18 from the business acquired during the third quarter of 2017. We expect a continuation in Q2 '18 of the drivers evident in Q1 '18. We expect gross margins to be in line with the Q2 '17 margin, reflecting expected mix of work activity and the near-term margin impacts as we initiate customer programs. G&A expense as a percent of revenue is expected to increase year-over-year. Non-cash stock-based compensation included in G&A expense is estimated at approximately $6.2 million. We also expect depreciation and amortization to range from $41.8 million to $42.6 million. Adjusted interest expense of approximately $5.2 million excluding $4.6 million of interest in Q2 '18 for the non-cash amortization of the net discount on our notes and other income net to range from $0.4 to $1.0 million. This Outlook is expected to generate an adjusted EBITDA margin percent which decreases modestly from the Q2 '17 result. We expect approximately 32.1 million diluted shares during Q2 '18. On a final note, the effective tax rate and the outlook provided for both quarters is expected to be approximately 38%. With the adoption of new accounting pronouncements in fiscal '18, we will begin to recognize the tax effects related to the settlement of share-based awards as a component of income tax expense rather than a component of shareholder's equity. We expect the application of this new accounting pronouncement will cause greater variations in our effective tax rate in future periods for GAAP reporting purposes and we will highlight meaningful variances when they occur. Now I will turn the call back to Steve.

Thanks Drew. Moving to Slide 12, within the growing economy, we experienced the effects of a strong industry environment and capitalized on our significant strengths. First and foremost, we maintained strong customer relationships throughout our markets. We continue to win and extend contracts at attractive pricing. Secondly, the strength of those relationships and the extensive market presence we have created, has allowed us to be at the forefront of evolving industry opportunities. The end market drivers of these opportunities remain firm in our strengthening. Telephone companies are deploying fiber at the home to enable video offerings in 1 gigabit high-speed connections, cable operations deploying fiber to small and medium businesses and enterprises. These deployments are often in anticipation of the customer sales processes, confidence in the number of existing customers continue to increase. Fiber deployments will expand capacity as well as new build opportunities in overall capital expenditures are increasing. Dramatically increased speeds to consumers are being provisioned. Fiber deployments in contemplation of emerging wireless technologies have begun in many regions of the country, more are expected. Customer who are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance business. In addition, we are increasingly providing integrated planning, engineering and design, procurement and construction and maintenance services creating more visibility around future revenue streams. Within this context, we believe we are uniquely positioned to manage and capitalize the meaningfully experienced and improving industry environment to the benefit of our shareholders. While we are disappointed with some near-term revenue softness, we remain encouraged that our major customers possess significant financial strength and are committed to multiyear capital spending initiatives. These initiatives are increasing in number across a number of customers and improved regulatory environment is supportive of these initiatives. We remain confident in our strategies and prospects for our company, the capabilities of our dedicated employees and the experience of our management team as we grow our business and capitalization. Now John, we'll open the call for questions.

[Operator instructions] And first we'll go to the line of Tahira Afzal with KeyBanc Capital Markets. Please go ahead.

Hey Steve. So, I guess first question for me is I know you had two large customers who gave you some pretty considerable awards this quarter and you had one then modulated. Is there any overlap or are they three different customers?

Oh Tahira, I am not sure, I fully understand the question right. We talked on the revenue side that there was moderation with one large customer. We did receive orders, large backlog orders from that customer as well as others.

Got it. Okay. So that's just what I wanted to find out whether one of those key customers was starting to still pick up on the award side. So that answers my first question Steve. I guess the second question for me as you look out to some of the timing elements that we have between the converged networks, obviously the first quarter caught you by surprise. As you look out to the third and fourth quarter, how comfortable are you in terms of how the recovery happens in terms of an inflection. Should we have confidence that the third quarter could be a revenue inflection point for you or should we be assuming that in the near term still and in the medium term there might be some nuances?

Yeah so with respect to the first quarter, I think this was in Drew's comments that it was really not around the ramp up on the converged networks. I think that's preceded pretty much as we expected. It was really a little more softness from the customer that we had that softness within the -- in the fourth quarter and we have pretty good idea what next calendar looks like and we see that customer resuming growth next year. I think with any large programs, there is always some uncertainty around permitting, final design and the normal things it takes to settle in. I think as we get into next calendar year, the customer has aggressive timelines. We know what the milestones are and we will have substantial pickup in activity to meet the customer's expectations.

Got it. Thank you very much, Steve.

Our next question is from Matt Duncan with Stephens. Please go ahead.

Hey. Good morning, guys.

Hey Matt.

So, Steve, on the awards that you guys talked about and the nice, really nice backlog growth that you saw this quarter, I notice there wasn't a mention of Verizon and I'm assuming that One Fiber is going to ramp pretty rapidly next year. Are you starting to see those guys award contracts as we're moving through time here?

So Matt. I think what we can say about Verizon One Fiber is Verizon has acknowledged that we're participating in the program publicly. Beyond that, we're bound by a nondisclosure agreement as to the specifics of our involvement although were we to receive awards from any customer whether we're under an NDA or not, they are reflected in our backlog and our outlook.

Sure. All right. And then on AT&T it's obviously the large customer we're talking about that's slower here in the short-term. Their number of passings was up in their June quarter versus their March quarter and they're talking about passing the same number of homes in the back half of the year as the first half of the year. So, should we look at the slower spend level there with you guys right now as areas outside of AT&T fiber being slower or is the construction work that they're doing in the homes that they're passing may be in geographies where you guys don't have the contract?

So, we work for them in a number of geographies around the country. We have some that we're more over-indexed to. I think the thing that you always have to be careful with on these large programs and this is a general comment, not just directed to one customer, is when they count homes passed in terms of completion when they're available for service, when they're marketed for service, there is a whole bunch of different ways that you can mention the numbers. And from a construction perspective right, we're early in that process and so sometimes it's a little hard from the outside to gain directional sense of what I would tell you is on the construction site and the areas that we're involved it's slower now than it was, but we're pretty confident it's going to pick up significantly for them to hit their objectives as they go forward in '18 and '19.

Okay. So then to tie a bow around this Steve as I look at the 12-month backlog number, your guide for the next two quarters, your commentary about what you're expecting from T doesn’t sound like you got much 1 fiber stuff in backlog yet and that should be coming. So, going back to what Tahira was talking about, is it safe for us to assume that there's almost got to be a pretty substantial inflection point in your April quarter for that 12-month backlog number and total backlog number doing what they've been doing to make a lot of sense. Is that the way you see things shaping?

Well let’s parse that out just in pieces. So, we believe that in next calendar year, the growth will resume. So that's number one. The timing of exactly how it plays out for a year, we believe that the year will be up. We're not providing guidance but that's given the opportunities that we see that what we have in backlog. Once again, we're limited in what we can say about customers for who we have NDAs, but I would not presume that the lack of disclosure says that we're not very actively involved with customers.

Understood. All right. Thank you, Steve. Appreciate it.

Next, we'll go to Alex Rygiel with FBR and Company. Please go ahead.

Thanks. Good morning, Steve.

Good morning, Alex.

Steve, coming back to 12-month backlog, it sounded like you had a lot of confidence and that it moved nicely, sequentially and year-over-year. Is your 12-month backlog with your top five customers also up as strong sequentially and year-over-year?

Yeah, we had strong awards across all the major customers.

And you don't called out wireless backlog as being particularly strong. Can you quantify your wireless backlog at the end of the quarter, 12 month in total and can you quantify wireless revenue in the quarter?

Well, we provided revenue before as we said in the past, we're not going to start disaggregating backlog, but wireless revenue was up slightly year-over-year and then you adjust for the extra week last year. So, it was up. Our largest customer there was up organically, offset some of the moderation on the wireline side and there will be as we disclosed in the customers, we've solidified our position in the number of states for work going into calendar '18 for a three-year time period. So, we feel better about the wireless business today than we ever have and this is business that as the run rates we'll see next year, we'll be very substantial and if you think about it five years ago, we basically didn't have a business there.

Is your wireless backlog at an all-time high?

Yes.

Thank you.

Next question is from Adam Thalhimer with Thompson and Davis. Please go ahead.

Hey good morning, guys.

Good morning.

Hey, when I look at your guidance for Q2 versus Q1, your guidance is about half of the normal seasonal decline in revenue and I am just curious where the strength is coming from perhaps.

We have a very large program that’s beginning and we're blessed in the areas that we're active to be those parts of the country that are less weather affected then probably the average book of business for the company.

And is that revenue in backlog right now.

Yes.

Okay. And then what will be your early thoughts on FirstNet with AT&T?

We think we have established with the new contract framework a pretty good position to grow our business for a number of reasons including FirstNet as states opt in.

And then lastly, I am just curious on CenturyLink that was another customer where we were concerned about a pause in the back half of the year but it wasn't really mentioned in terms of your guidance. Is that…

Well they are always going to modulate around the trend they had and the primary one is the one that we talked about. There's others that go both directions, but the primary driver is a large customer, not CenturyLink.

Got it. Okay. Thank you.

And next, we'll go to Bill Newby with DA Davidson. Please go ahead.

Good morning, guys. Thanks for taking my questions.

Good morning.

I just wanted to talk about the mix shift as you guys kind of move forward here in 5G starts to ramp up a little bit more and it definitely sound like you're -- the mix is going to shift more towards wireless? Is there anything we should be aware of there in terms of the operating mechanics? Are the margins pretty similar? Has anything changed as you guys start to see that change in mix?

So, I think there is going to be growth in wireless, but I think we're going to see substantial opportunities in growth on the wireline. So, I am not so sure that the mix is going to shift as much as your question might imply. We manage all the businesses to get similar returns on capital and we don't see anything particular about the wireless business that makes that any different from anything else that we do.

Okay. That's fair. And then I guess in terms of capital allocation, is it -- does it start to look more and more attractive now as you see this -- the growth that you guys think is common to share buybacks start to look really attractive at this point?

Well I think what we've always said Bill is we're going to support our growth. We had great operating cash flow not only in the quarter, fourth quarter, but for the full year that generated free cash flow. So, we have good cash flows in the business. We're going to always support organic growth first right that always makes the most sense as the highest returns and then we'll look at share repurchases and M&A based on opportunities.

Okay. Thanks. I'll hop back in queue.

And we'll go to Jennifer Fritzsche with Wells Fargo. Please go ahead.

Thanks Steve. Thanks for taking the question. I wanted to focus on CenturyLink because the growth there was way ahead of my expectations, especially given that involved in a large fiber deal with fiber deal with Level3? Has your sense based on the leadership changed there or leadership seen in place that consumer will continue to be a large part in Dycom's role in the combined and that they will continue at the current pace? Thanks.

Yeah Jennifer, I don't know that we have a view. The business that we have there is primarily consumer. We do a little bit of work on the more enterprise side. But I think they have a big footprint in 24 or 25 states whatever it is and we really don't have any information as to kind of any changes in direction. As you can tell they were busy in the quarter.

And Steve, if I may, is most of their work in maintenance or is it a combination of maintenance and new build?

It's always a combination of maintenance or what I would call some programs and routine CapEx right. So, there was some Connect America Fund work. There is always projects that enhance capacity and extend service to new customers. And so, I think it was just the mix.

Great. Thank you.

Our next question is from Noelle Dilts with Stifel. Please go ahead.

Thanks. Good morning.

Good morning.

I just wanted to focus first a little bit on some of the drag that you're seeing on gross margin. So, you've talked about obviously some fee leverage as your large customer moderates, but you've also talked about some headwinds associated with investing in the fee initiation of customer program. So, cost associated with that. It looks like that continues into the second quarter, although your comments are suggesting that maybe those programs are starting to ramp as we get into the second quarter, but maybe you can just give us some thoughts on one, just how much of a drag this has been and how to think about that as we move into calendar '18 and these programs start to really ramp up?

Sure. With respect to calendar '18 Noelle, we don't see anything about this book of business that's any different than the business that we've had over the last several years and we think that as we get busier and as we regain operating leverage in the business that the margins will respond appropriately. There's always from quarter-to-quarter there can be mix shifts, some customers we provide a larger percentage of our revenue with them as the provision of the materials that we actually install and so there's always going to be a little bit of mix here and there, but we don't see the revenue next year as having any potentially different margins than what we have experienced over the last several years in the business.

Okay. And then just a couple of housekeeping questions around the top 10 customers and then also the breakdown of business going into your -- sorry the underground facility locating and the utility business?

Sure Noelle, this is Drew. Charter Communications was number six at 3.9% of revenue. Unnamed customer number seven was at 2.1% of revenue. Crown Castle was number eight at 1.3%. Frontier Communications was number nine at 1.2% and Level3 was number 10 at 1.1%. And then for the split, Telco was 66.7%, cable was 24.5%, facility locating was 6.1% and electrical and another was the balance at 2.7%.

Okay. And then just one more question, just to make sure, we're understanding this correctly, it sounds like this work that you picked up in wireless and United, AT&T in your sides. So, it sounds like that is not necessarily work associated with FirstNet, so there is some additional opportunity there, any comments there?

Well, I think we haven’t said Noelle, we have a broad number of services we provide under those agreements, which could and probably will incorporate FirstNet. We have some view, but I think that will evolve as more states opt in.

Okay. Thanks. That's helpful.

The next question is from [Jeff] with FMA Advisory. Please go ahead.

Yeah. Good morning, Steve. Last quarter you had mentioned some lower visibility with a large customer of which we mention as T. Are the Q4 numbers outside of and below what your expectations were because you had discussed the impact of perhaps the merger or acquisition the telephone was making that there was low visibility and then it was common in the business that you have some low visibility for a while. I was just wondering if these Q4 numbers were at the lower end of what your internal expectations were or on the money or anywhere near?

Well, if we take the company as a whole right, we were at the low end of the $25 million range or $30 million range that we had provided. We had some customers that were growing. Some that were moderating and I don't think that we calibrated it back finally rather than to say we got inside the range of the lower end. And so, I guess to the extent we had thought we would be at the midpoint, than it was a little bit slower.

Thank you.

[Operator instructions] And we do have a follow-up from Jennifer Fritzsche. Please go ahead.

I am sorry. Thank you for taking the question. I just wanted to explore the 12-month backlog. I know it's more of a or it's not financed. But Steve, if I look back to prior fiscal years and what was in the 12-month backlog at a certain period, it seems like you exceeded it quite a bit. I am not saying that, that is a trend, but can you just talk about how do you define the 12 month versus the total backlog? How do you parse that out?

Sure. So, we have a schedule of contracts by customer for which we either establish a run rate by looking on a trailing 12-month period and forecasting that ahead for both the next 12 months and then through the contract term. And then for those contracts that are project-based or where we have visibility and milestones from the customer that actually includes our estimates of what revenue will need to be provided to the customer to meet those customers. So, it's a detailed contract-by-contract basis now. We have contracts that are renewing right. So, there are always contracts that are renewing during the period where they're in the current run rate of the business, but they may not be in the 12-month backlog until we get them renewed. And so that's why historically 12-month backlog as a percentage of whatever the eventual next 12 months revenue are at a point in time is always lower because we're always booking new work. We're also renewing contracts through that 12-month period.

Got it. Okay. Thank you. Thanks a lot.

We do have a follow-up from Alex Rygiel. Please go ahead.

Steve, could you remind us or Drew, could you remind us about the seasonality within your operating cash flow, particularly over the next six months and how you see that playing out?

Yeah, so our January quarter because it's seasonally slower just because of the number of holidays, the reduced daylight working hours and the weather is always very strong from both a operating cash flow and a free cash flow basis. As Drew highlighted in our comments, given that we have couple of quarter period where things are going to be slower, we're going to moderate our CapEx deployment in the first half of this fiscal year and so that will generate additional free cash flow also.

Thank you.

And Mr. Nielsen, there are no further questions in queue.

Okay. Well we appreciate everybody's attendance on the call and just to be clear, our next earnings call will be on Tuesday morning before Thanksgiving in November. There will be a press release that's issued one week before the call providing the call-in details and consider the call scheduled when that first release comes out. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.