Dycom’s Outlook Looks Much Better Than Appearances

Implications: 1.      Dycom is very reluctant to point the finger at one particular customer.   2.      Especially one such as AT&T, which is likely to be its bread and butter for the next several years. 3.      The expectation of CommScope is another indication that AT&T’s CAPEX for U-verse will probably substantially increase this year, a lot of it coming in the second half.  

Analysis:  Most of the contracts that Dycom has with AT&T are kind of in a temporary limbo state.  In contrast to Verizon, AT&T has not been pre-prepping its sites.  In other words, engineers draw up the plans, send out the construction crews – and then sometimes they unknowingly run into obstacles such as hydrants, power sources, etc.  So, the main reason that Dycom is feeling the pinch, that will last perhaps through all of February, is centered around the need for AT&T to send out advance teams to do the necessary preparation work including drilling, etc. to make sure that there will not be delays once the construction people get started.  

Undoubtedly, there have been slowdowns as well at Verizon and at the MSOs because of unanticipated weather conditions – including snow in the southeast and flooding in California.   In addition, there has been a holdup in certain areas by the postponement of housing developments.  It was certainly expected that Verizon was going to slow down on FiOS deployment immensely over the last quarter in order to concentrate on customer turn-ups.   

While there might have still have been somewhat of a slowdown at AT&T even if the   RBOC had done the proper preparation work, Dycom would not be experiencing the hit to the same degree.  Activity is anticipated to come back very strong as early as March and a supplier such as CommScope could see as high as 40 percent growth on the AT&T U-verse account in 2008 over 2007.  And while the overall video networking strategy is likely to substantially shift at the carrier to FTTC and FTTH, leading to delays beyond the node, it will not affect the big planning of the fiber backbone network.  

As spring arrives, Verizon will again shift its attention to equipment deployment again – to the benefit of Dycom.  

All in all, the overall slowdown for Dycom was not principally caused by factors such as the weakness in the economy, but rather mainly in AT&T getting its act together.  And barring a major recession, the RBOC has to catch up on building its infrastructure.   Also, the statement in the source article that Dycom’s “decline was the product of a noticeable softening in the intensity with which a broad range of customers executed near term spending plans” is clearly intentionally ambiguous given the company’s high level of concentration of buyers – and really is a means to protect AT&T.