Thank you for joining us for the Dycom Industries Second Quarter 2021 Results Conference Call. All participants are in a listen-only mode at this time. After the presentation, we will have a question-and-answer session. I will now turn the call over to Mr. Steven Nielsen, President and Chief Executive Officer. Please proceed.

Thank you, operator. Good morning, everyone. I would like to thank you for attending this conference call to review our second-quarter fiscal 2021 results. Going to Slide 2. During this call, we will be referring to a slide presentation, which can be found on our website’s Investor Center main page. Relevant slides will be identified by number throughout our presentation. Today, we have on the call Drew DeFerrari, our Chief Financial Officer and Ryan Urness, our General Counsel. Now, I will turn the call over to Ryan Urness.

Thank you, Steve. The statements made during this call may be forward-looking in nature and are provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. Forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections, including those risks described in our Annual Report on Form 10-K filed March 2, 2020 and our other filings with the U.S. Securities and Exchange Commission. We assume no obligation to update any forward-looking statements. Steve?

Thanks, Ryan. Now, moving to Slide 4 and a review of our second-quarter results. As we review our results, please note that in our comments today and in the accompanying slides, we referenced certain non-GAAP measures. We refer you to the quarterly report section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures. To begin, I want to express my sincere hope that everyone listening to this call as well as their families are healthy and safe. We are living in truly unprecedented times for our country. I could not be prouder of our employees as they continue to serve our customers with real fortitude in difficult times. They have my thanks. Now, for the quarter, revenue was $823.9 million, a decrease of 6.8% as we deployed 1 gigabit wireline networks, wireless wireline converged networks and wireless networks this quarter reflected an increase in demand from two of our top five customers. Gross margins were 20.1% of revenue, reflecting strong overall performance offset in part by the continued impacts of the complexity of a large customer program. Of note, gross margins last exceeded 20% in the October quarter of calendar 2017. General and administrative expenses were 8.2%. And all of these factors produced adjusted EBITDA of $102.7 million or 12.5% of revenue and adjusted diluted earnings per share of $1.18 compared to $0.86 in the year ago quarter. Please note that adjusted diluted earnings per share in the year ago quarter excludes $0.23 resulting from the net effect of a contract modification for services performed in prior periods. Liquidity was strong as cash and availability under our credit facility was $474 million. This amount represents our highest level of liquidity in the last 10 quarters. Finally, we made significant progress in reducing net leverage as notional net debt declined $94 million during the quarter to $668.9 million, a reduction of over $350 million in just the last three quarters. Given our progress in reducing debt, our Board of Directors has authorized an 18-month $100 million share repurchase program. Now, going to Slide 5, today, major industry participants are constructing or upgrading significant wireline networks across broad sections of the country. These wireline networks are generally designed to provision 1-gigabit network speeds to individual consumers and businesses either directly or wirelessly using 5G technologies. Several industry participants have recently stated their belief that one high-capacity fiber network can most cost-effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment. We expect this view will increase the appetite for fiber deployments and believe that the industry effort to deploy high-capacity fiber networks continues to meaningfully broaden our set of opportunities as we look forward to calendar 2021. Access to high-capacity telecommunications has become increasingly crucial to society in the time of the COVID-19 pandemic, especially in rural America. Recently proposed federal legislation and the FCC Rural Digital Opportunities Fund auction scheduled for this fall reflect a view of some that the needs of work from home, telemedicine, distance learning, and other newly essential applications require dramatically increased rural network investment. We are providing program management planning, engineering and design, aerial underground and wireless construction and fulfillment services for 1-gigabit deployments. These services are being provided across the country in dozens of metropolitan areas that several customers, including customers with recently stated aspirations to initiate broad fiber deployments as well as customers who appear to be contemplating the resumption of broad deployments. These deployments include networks consisting entirely of wired network elements as well as converged wireless wireline multi-use networks. Potential fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal incentives. Our ability to provide integrated planning, engineering and design, procurement and construction, and maintenance services is of particular value to several industry participants. Near-term macroeconomic effects and uncertainty may influence some customer plans, particularly those whose capital expenditures have been weighted towards the first half of the calendar year. Customers continue to be focused on the possible macroeconomic effects of the pandemic on their business, with particular focus on small and medium business dislocations and overall consumer confidence and creditworthiness. We see some uncertainty in the overall municipal environment as authorities continue to manage the general effects of the pandemic on permitting and inspection processes, increasing levels of overall activity as states and municipalities reopen, and the impacts of business limitations due to COVID-19 flare-ups. Overall, we remain confident that our scale and our financial strength position us well to deliver valuable service to our customers. Moving to Slide 6, despite the effects of the COVID-19 pandemic on the overall economy, we performed well. During the quarter, we experienced increased demand from two of our top five customers. Organic revenue decreased 6.8%. Our top five customers combined produced 76.6% of revenue, decreasing 9.2% organically, while all other customers increased 2% organically. Verizon was our largest customer at 19.8% of total revenue or $163 million. Revenue from CenturyLink was $158.4 million or 19.2% of revenue. CenturyLink was Dycom’s second-largest customer and grew 14.2% organically. AT&T was our third-largest customer at 16.3% of revenue or $134.6 million. Comcast was our fourth-largest customer at $131.4 million or 15.9% of revenue. And finally, revenue from Windstream was $43.4 million or 5.3% of revenue. Windstream was our fifth-largest customer and grew 25.2% organically. Of note, this is the sixth consecutive quarter, where all of our other customers in aggregate, excluding the top five customers have grown organically. We have continued to extend our geographic reach and expand our program management network planning services. In fact, over the last several years, we have meaningfully increased the long-term value of our maintenance and operations business, a trend which we believe will parallel our deployment of 1-gigabit wireline direct and wireless wireline converged networks as those deployments dramatically increase the amount of outside plant network that must be extended and maintained. Now going to Slide 7, backlog at the end of the second quarter was $6.441 billion versus $6.442 billion at the end of the April 2020 quarter, essentially in line. Of this backlog, approximately $2.455 billion is expected to be completed in the next 12 months. Backlog activity during the second quarter reflects solid performance as we booked new work and renewed existing work. We continue to anticipate substantial future opportunities across a broad array of our customers. For AT&T, we were awarded a wireless construction services agreement covering Texas, Louisiana, Kentucky, Tennessee, North Carolina, South Carolina, Alabama, Georgia and Florida and a construction and maintenance services agreement in Mississippi; from Charter, construction and maintenance services agreements in California, Missouri and Alabama; for Comcast, fulfillment services agreements in Washington, Michigan, Illinois, Pennsylvania and New Jersey; and from Verizon, an engineering and construction services agreement in New York and Pennsylvania. Headcount decreased during the quarter to 14,054. 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 were $823.9 million, reflecting stable demand despite a challenging economic backdrop. Organic revenue declined 6.8% and we had solid growth from two of our top five customers. Adjusted EBITDA was $102.7 million or 12.5% of revenue, reflecting a solid operating performance that resulted in a 223 basis point improvement. Gross margins were at 20.1% in Q2 and were 200 basis points better than the high-end of our expectations due to several factors. First, we had broad-based improvement across the services performed for several of our top customers offset in part by the continued impacts of the complexity of a large customer program. Next, our operating leverage continued to improve as a result of the headcount reductions we initiated at the onset of the pandemic. And lastly, there were fewer than expected disruptions to our business from COVID-19 during the quarter. G&A expense increased 81 basis points, reflecting higher performance-based compensation, offset in part by lower payroll and other costs as headcount declined compared to Q2 ‘20. Our non-GAAP adjusted income per share in Q2 was $1.18 per share. Now, going to Slide 9, our balance sheet and financial position remain solid. Since Q3 of last year, we have reduced notional net debt by $357 million. Included in this decline was a $94 million reduction in Q2 from solid free cash flow and from purchasing $234.7 million principal amount of convertible senior notes at a discount for $224.4 million. We ended the quarter with $22.5 million of cash and equivalents, $200 million of revolver borrowings, $433.1 million of term loans and $58.3 million principal amount of convertible senior notes outstanding. As of Q2, our liquidity was strong at $474 million. Cash flows from operations were robust at $82.3 million bringing our year-to-date operating cash flow to $167.5 million. The combined DSOs of accounts receivable and net contract assets was at 126 days in Q2, which was sequentially in line with 125 days in Q1, but still elevated for the impacts of a large customer program. We expect to continue to make progress on invoicing and collections to improve this metric. Capital expenditures were $2.5 million during Q2 net of disposal proceeds and gross CapEx was $6 million. For the full year fiscal 2021, we expect CapEx net of disposals to remain in line with our prior outlook of $60 million to $70 million. In summary, we continue to maintain a strong balance sheet and strong liquidity. Going to Slide 10, the company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. Based on current conditions, the company anticipates contract revenues and margins to range from inline to modestly lower on a sequential basis for Q3 2021 as compared to Q2 2021. The company believes the impact of the COVID-19 pandemic on its operating results, cash flows and financial condition is uncertain, unpredictable and may be outside of its control. Now, I will turn the call back to Steve.

Thanks Drew. Moving to Slide 11, within a challenged economy, we experienced solid end-market activity and capitalized on our significant strengths. First and foremost, we maintained strong customer presence throughout our markets. Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities. Fiber deployments enabling new wireless technologies are underway in many regions of the country. Telephone companies are deploying fiber-to-the-home to enable 1-gigabit high-speed connections. Cable operators should point fiber to small and medium businesses and enterprises. A portion of these deployments is in anticipation of the customer sales process. Fiber deep deployments to expand capacity as well as new build opportunities are underway. Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing particularly upstream. Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business. In addition, we are increasingly providing integrated planning, engineering and design, procurement and construction and maintenance services for wired and converged wireless wireline networks. As our nation and industry continued to contend with the COVID-19 pandemic, we remain encouraged that our major customers are committed to multiyear capital spending initiatives. We are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees, and the experience of our management team as we navigate challenging times. Now, operator, we will open the call for questions.

Thank you. Our first question comes from Adam Thalhimer with Thompson Davis. Your line is open.

Hey, good morning, guys. Great quarter.

Good morning, Adam.

Hey, Steve. The biggest question I am getting this morning is with COVID and work-from-home, why isn’t there just a little bit more revenue lift near term?

Yes, I think Adam what we saw in the quarter was there are some of the customers that spent heavily in the front half of the year and they are prudently managing their budgets. We are encouraged really looking at what we see going into next year. We have talked about really two sets of customers or subsets of customers, those that are contemplating or aspiring to broad fiber deployments and others that are contemplating the resumption of broad programs. So, we just think that it’s – it reflects the overall environment that the economy is in at the moment.

Okay. So, maybe you can just elaborate on the ‘21 because you are hinting at revenue growth coming back in ‘21?

Yes. I mean, we are not providing guidance for ‘21, but I think we are if you look at the public commentary across earnings calls and conferences, I think folks are focused on the fact that high-speed connections are important to the economy probably never more important and customers are reflecting that. I mean, we have record broadband adds in the cable industry. AT&T said that they moved 750,000 subscribers to 1-gig connections during the quarter. So clearly, those kinds of developments as well as a growing consensus that one fiber supporting many use cases and enabling multiple revenue streams is the way people are thinking about the business. And I think that just means more investment in fiber going forward.

Okay. And then just lastly, great to see gross margins back to 20%, what’s your thoughts on the sustainability of that?

Well, as we have talked about it before, we have had and mentioned in the comments, we have had the effect of this large complex customer program. And I think if we – as we have said before, if you pull that out, we have been in line with long-term historical averages, I would say this quarter we were probably a little bit better. And so I think we are encouraged around margin performance.

Good. I will turn it over. Thanks, Steve.

Thank you. And we have another question from Brent Thielman with D.A. Davidson. Your line is open.

Hey, thanks. Good morning. Great quarter as well.

Hey, good morning Brent.

Hey, Steve. Maybe following on Adam’s question and then 1 month into this quarter, have you seen the business performing consistent to that flat to modestly down revenue outlook. I know, typically you tend to see some sequential growth into the October quarter, but maybe the outlook is more just concerns that more markets are going to shut down?

Well, look, we are taking a reasonably cautious approach based on the fact that you can have flare-ups in the COVID and that can cause impacts near-term in the economy. I think it also goes back to what we said in our comments. And earlier we have a couple of customers that had strong first halves, which implies a little bit slower in the second half. I think we are encouraged that when you look at coming out of the second half of this year into next year that we have people talking about large programs who currently don’t have them underway. So, I think we are encouraged despite kind of the near-term moderation.

Okay. And then notwithstanding some of the customer slowdowns here this quarter, I mean, the bookings are pretty strong. I appreciate the award detail. I am just wondering if there is any color around anything particularly notable in those wins or do you feel like the booking strength this quarter was fairly broad-based across your customer group?

Yes, I think it was a solid quarter on the backlog. I think we are working on some other opportunities in this quarter and going into the final quarter of the year. In fact, Brent, we got notification of award this morning on a contract that will be call it 150 new employees over the next 3 months and about $5 million of CapEx. So I think we are encouraged that customers are open for business and there are good opportunities for us to grow backlog.

Okay, great to see that the cash flow coming in as well. The DSOs, I guess still below where you ended last year, do you still think those can come down as we work through the rest of the fiscal year?

Sure. So, if you look at the business excluding the large program, those DSOs were in line with last quarter and historically. So we have really seen no change in customer payment behavior. And in that other large customer program, they were stable quarter to quarter. And so I think it’s just kind of finance 101, when you stop consuming working capital, you are going to get better EBITDA to free cash flow conversion and then as we normalize that large customer program, more cash becomes available.

Okay. Great, guys. Thank you. Best of luck.

Thanks.

Thank you. Our next question comes from Sean Eastman with KeyBanc Capital. Your line is open.

Hi, gentlemen. Nice work this quarter. I just wanted to start on the DSOs as well, I am just curious as you work through the challenge customer program from an invoicing perspective, should we expect sort of a levy breaking dynamic as you guys figured that out and as those receivables come in or will it still just be a slow trickle? And I am just kind of curious around that dynamic as we work through that invoicing process?

Sure. So, Sean, so first off, right, you got to keep them from growing, which we are able to do the last couple of quarters. So that’s one. As we have talked about this program, some of the processes have evolved that have created some of the challenges, I would say those systems have evolved for everybody based on what I understand. And so I think this is something that the whole industry is working on making better. And I think as time goes by that we will see that improve and normalize and also as we see the mix of work shift. So, systems are getting better. It’s a big program. It’s highly complex, but we are working through it and we get money in on the program every day, just not enough.

Got it, okay. And then going back to Adam’s question on just the sustainability of the margins, clearly, came in way better than what you guys were guiding to on the last quarter’s call, right. I just wondered if maybe you could give us a little more color on the bridge to where you set expectations to where they came in. I mean, I guess the things I am thinking about is as fuel and incremental savings? Was there a big benefit from lower traffic on the roads? Was there maybe less revenue contribution from that challenge customer program? Any color on that bridge would be helpful as we think about what you guys can do from a margin perspective next year?

Sure. Sean, this is Drew. So for the quarter, there are really three primary factors driving the better performance. The first was the cost reductions that we made in April carry through in the quarter. Secondly, there was less of an impact of COVID than expected in the quarter, less disruption. And then lastly, we did somewhat better than expected with some select customers. As far as your question about fuel, the fuel had already come down by the end of last quarter. So, there really wasn’t much of an incremental benefit this quarter from that, so…

Okay, great. So basically, nothing is short-term that’s going to come back in, in a more normalized operating environment is what I am getting at, just any high-level thoughts from that perspective?

Yes, Sean, this is Steve. So I don’t think we saw any. I mean, we went through our normal process of going through our insurance accruals and all those things that were nothing particularly abnormal in the quarter for those types of factors. We did as we talked about on the last call, we did take some headcount out. We have a number of efficiency initiatives underway, which in some sense were accelerated by the COVID, but we were encouraged that we were able to hold those savings through the quarter and we don’t expect to give them back as time goes on. So yes, we hope to be better and hold on to it.

Okay, that’s excellent. I will just sneak one more in, guys. You mentioned the rural broadband opportunity in the presentation. Any perspective you can provide on how big that could be for DY? How well DY is positioned there, maybe relative to the CAF program for some perspective would be helpful?

Sure. So, Sean, there is really two pieces that we talked about in the comments. So, the first one is the Rural Digital Opportunities Fund, which is a fund administered by the FCC. There is an actual auction that will commence at the end of October to allocate those proceeds across the country. I think we are encouraged there, it’s about $20 billion over 8 years, the first phase is $16 billion and there will be private capital that I believe will come into that program in addition to the FCC money. And so I think we see lots of interest from a number of industry participants in that program. In fact, about a month ago, Charter actually publicly announced that they would participate in the auction and aggressively look to expand their footprint into rural areas that are adjacent to their current service territories. Comcast made similar comments although they are not going to participate in the auction. So, when you have large customers, large industry participants that are focused on rural and accessing that money, we think that’s a good thing. I think then there is while nothing is passed and who knows what ultimately gets into further legislation either with respect to infrastructure or to offset the pandemic, but there was a bill that passed the House a couple of months ago that literally had $80 billion in the legislation for rural broadband. And so I think it goes back to what we have talked about on the last call that clearly the pandemic has highlighted how essential connectivity is in residential in rural America. And I think also it will also become increasingly important as at least at the moment, there is this migration or somewhat of an out-migration from the cities to rural America as people have figured out how to do their job from just about anywhere. So, I think we are encouraged by both. With respect to the original stimulus in 2009 that we have participated in, we have talked about it on the last call that was ultimately somewhere around $6.5 billion or $6.7 billion, of which we did just less than $600 million under that particular program. So, I think this is a good opportunity. We – in fact, under the CARES Act, there was a small and not well utilized portion of the money that states have available to build out fiber networks or subsidized fiber networks and we actually just started a number of projects in one southern state funded with CARES Act money. So, we see good opportunities in rural.

Super helpful. Thanks so much for the time.

Thank you. Our next question comes from Eric Luebchow with Wells Fargo. Your line is open.

Great. Thanks for taking the question. Steve, could you maybe talk about the performance of the wireless business, what type of activity you are seeing and what percentage of revenue it is now and whether that’s coming more on kind of macro tower or small cell deployments? And then if there are any additional opportunities now that Sprint and T-Mobile mergers closed and T-Mobile has made some comments about really ramping CapEx over the next 5 years. So that’s a customer that could be a good growth opportunity for you?

Sure, sure. Why don’t I go to Drew and Drew will give us kind of the industry splits and then we will talk about wireless.

Yes. So, for the customer split, telco was at 70.8%, cable was at 19.8%, facility locating was at 7.2% and then electrical and other was at 2.2%.

And so, specifically with respect to wireless, Eric, so we were down sequentially slightly and we were down year-over-year about 6%. And I think what that reflected is our primary customer made real good progress on FirstNet, but I think it also reflects at least a moderation as customers think about the news CBRS spectrum, which apparently the auction closed yesterday, and the upcoming C-band auction. And I think as that spectrum becomes available that’s always been good for the wireless business. And I think from a macro tower perspective, more spectrum bands equals more opportunity for us to grow. So, I think we are pretty encouraged based on what we expect to come out of the auctions. With respect to the T-Mobile, I think we talked about this on the last call we do some work for T-Mobile. We are not a substantial participant there. But I do think the creation of a very robust competitor to the other carriers, the other top carriers has always meant in the past that there were opportunities to work for those core customers that we have as they respond competitively. So, I think we are encouraged there. And then I think on small cell, again, industry numbers that I have seen show somewhere around 200,000 small cells in the country growing to 1 million over, 5, 7, 10 years, whatever number, period of time. There is lots of opportunity there around small cell. And as we have talked about that before, that plays especially well to our ability to do the fiber backhaul and front-haul, which is really the key element of small cell deployments. So, I think we have both, the wireless opportunity in terms of radios and antennas and structures as well as the backhaul and front-haul.

Great. That’s very helpful. And just one follow-up, I was curious on the cable space, what you are seeing there, it was nice to see some sequential improvements from Comcast and obviously it seems like their residential broadband businesses are doing really well even with some uncertainty on SMBs. So I am wondering, with DOCSIS 4.0 specs coming out earlier this year, when do you think we can see kind of another ramp in commercial deployments as they move toward that new standard? Thanks.

So, we were also encouraged, Eric that we had sequential growth out of Comcast and I will tell you that there were opportunities across the cable industry as they split nodes to add capacity. But I will also say that they were particularly cognizant of how important they are residential America for connectivity. And so they were careful around things like the AP exam schedule and year-end with high schools. So, I think as we look ahead, I think they continue to push more fiber deeper into the network. And I think we are encouraged that that’s a growing opportunity for us through the back half of the year and into next year.

Thank you. We have a question from Noelle Dilts with Stifel. Your line is open.

Thanks. And again congrats on a good quarter. So, I recognize there has been a lot of questions on margin, but just to understand the dynamics in terms of your guidance, if we are looking at EBITDA margins sort of potentially flat to down next quarter, could you walk me through some of the dynamics you are thinking about from a margin perspective? I guess my key question is that you have been making a lot of progress kind of moving from the more challenged Phase 1 of the large complex customer program into Phase 2, which seems to be more profitable. I guess I would think that some of that would continue into the back half and maybe offset some of the pressure from potentially one of the large customers being more front half loaded. So, is there anything else we should really think about just in looking at that sequential margin trends?

I think, Noelle, it just reflects our view as to total revenue. So once again, we had couple customers, not all customers that spend heavily in the first half of the year and they are managing their budgets well. And so that creates a little bit of negative operating leverage. As they adjust, I think, but we also have opportunities as we get into the fourth quarter and can start working on next year’s budget that I think there are opportunities as we go through the balance of the year for that to reverse. I think we are going to take a prudent position around the impacts of the virus on customer spending and also on our ability to get the work done. And there are other reasons to do that, for example and as I mentioned earlier on the call, we are going to be starting a fairly sizable contract that’s new with a fair amount of hiring and that it’s not a big deal across the company, but those are the kinds of things that we will have benefits going forward, but take a little bit of cost in this quarter.

Okay. And then while it seems clear that, that coming out of the coronavirus crisis, you are seeing broadband deployments accelerate overall. But I guess one sub-segment of the market that came up a few times in channel checks, where folks were a little bit worried about the outlook was more on fiber to small to medium businesses. I know in the call, you mentioned continued confidence there. Is there any concern that you might see small to medium businesses kind of defer decisions on maybe upgrading their connections, just curious how you are thinking about that?

Yes. I think what we said in our comments Noelle is that something that those kind of dislocations or potential dislocations to small and medium business is something customers are paying attention to and we are also – and so I think that’s just another reason to have a prudent view on the back half of this year. That being said, we are encouraged by the activity around the residential line, right. So, it’s always kind of a demand moves around. And right now, it’s more residential than on SMB. But then again, as the economy comes out and we get a vaccine, I think that might be a potential area where growth resumes.

Okay. Thank you. Appreciate it.

Thank you. Our next question comes from Alex Rygiel with B. Riley. Your line is open.

Thank you. Good morning, Steve.

Hey, Alex.

Understanding the rural broadband market opportunity, but could there be a gap in funding between sort of your activity levels of today or last quarter versus when some of these new programs start, what kind of downside pressure can we see from that, if any?

Well, Alex, if we look at what I will call non-traditional rural work, it was about 3% in the quarter and it was growing last quarter sequentially, but not – it wasn’t a huge ramp up. And I think we see that steady. And we see the new funding sources being additive to that base level of activity because even now in rural America with private capital, there is a fair amount of work that’s going on right now. And in fact as we mentioned earlier, some of it’s picking up with some of the earlier funds available under the CARES Act. So I am not – I am not concerned that what we have currently underway slows. I think what the new funding to the extent it becomes available will only accelerate the trends that we are already seeing.

And your kind of official guidance continues to be a little limited this year understanding COVID issues and whatnot. But your commentary is fairly upbeat about prospects for 2021. At what point, do you think you might be more extensive in your guidance as we get closer to that 2021 opportunity?

Yes, I think Alex, this as we said on the last call, we have mixed approaches from our customers to how they are guiding and to the extent that they are still mixed, we don’t want to get ahead of them. I think as they go through their fourth-quarter calls or third-quarter calls and into fourth-quarter calls and become clear about what they expect next year as well as we see the outcome of the CBRS auction, we see the outcome of a number of other potential stimulus bills or infrastructure bills. I think as they get more comfortable, we will become more forthcoming.

And one last question, last conference call, there was some conversation around short cycle work, how did that play out in the quarter and what’s your outlook in the current quarter?

Yes. So I think in the short cycle business, what I would tell you is it was steady in the quarter. So I don’t think we had a tremendous change in our expectations from where it was in May. With the virus spiking in July and August, early August, I think there were some impacts limited to the business, but I think we saw some, but that’s all baked into our outlook for the third quarter.

Thank you.

Thank you. We have a question from Jon Lopez with Vertical Group. Your line is open.

Hey, good morning. Thanks so much.

Good morning, Jon.

How are you?

Just fine.

Good, good. I got two and a half questions. The first one, I guess I find myself still like a little confused by backlog. So, maybe I could just ask it this way, if we look at the greater than 12 month number, it’s still down sort of high single-digits. Is this because the customers are seeing these network stresses and all of the various things that we have been discussing, but just haven’t yet put in place plans to deal with that or just how do we filter the sort of disparity if you will between those two things?

So Jon, about 70% of revenue in every quarter, and I think also this quarter is typically under master service agreements. And the way the backlog under master service agreement gets valued is as we look backward for 12 months we take the monthly run-rate and we multiply that times the number of months remaining. And so it is sensitive to the renewal cycles or it’s sensitive to new awards. And so from our perspective to try to draw any conclusions – or any precise conclusions around customer demand in the near-term or for any given quarter based on the backlog that’s calculated that way has not been particularly effective in the past. I mean, for example, we are going to book a reasonable amount of backlog on the contract we just got this morning, right. And if it had been booked 3 weeks ago, it would be included in this number. So, it’s just not the way we think about backlog.

Got it. Okay, so that argument is sort of its timing related like this stuff is starting to come?

Yes. As we renew a contract, so remember, we have had areas that we have served for decades, contracts come to an end, we renew them in the period before they are renewed. There is no next 12 months backlog in the day we do renew them, there is 12 months of backlog.

Right. I got it.

It’s a calculation that’s subject to timing.

Got it, okay. But my second question, I realized there is a lot of different factors that go into this, but I was just going to ask the question this way. If we look at Verizon’s CapEx for the first half of the calendar year, it’s up quite a bit. If we look at your revenue of Verizon, it’s down quite a bit. Can you just parse apart some of the dynamics at work there and at what point would you expect some improvement with that customer?

So Jon, similar conversation to backlog, so keep in mind all of our customers, not any one in specific recognize CapEx on a cash basis and they have equipment that they purchased through the CapEx line that goes in and out of inventory. And so on a short-term basis, it’s pretty difficult to correlate their spending directly to our revenue line, right. They are big companies, we don’t work for them in all facets. Now, what I would tell you is there are times where what they spend in one half of a budget year compared to the full budget year will impact the intensity with which they work in the second half of the year as they reassess the priorities as they look ahead to the next year. But on any given year, our revenue with that particular customer has grown pretty dramatically over the last 3 years, but the CapEx has been essentially flat over the same period of time, which would tell you of the difficulties in using it as a tight statistical measure.

Got it. Really helpful. My last one just coming back to the gross margin topic, I guess I want to ask it this way, we are already in the low – I guess very low 20s. If we look back historically that number has gotten up a couple of hundred basis points from here a couple of times? I guess the question is, the current level does not yet incorporate the improvements from that large customer contract, like all else equal, doesn’t that kind of argue that historical, a couple of hundred basis point lift from here is reasonable?

I think what we have always said is that over the last couple of years, if you control for that large customer program, we have been in the middle of our historical range around margins. I think this quarter, we were a little better and we are going to work hard to continue the trend, obviously, no guarantees, but we are encouraged.

Got it. Really helpful. Thanks for all the thoughts.

Thank you. Our next question comes from Alan Mitrani with Sylvan Lake Asset Management. Your line is open.

Thanks, guys. Just before we go ahead, do you mind giving us the list of the top 10 customers and their percentages?

So, Alan, they are on the – on Slide 6 in the…

Okay.

In the presentation material, they are outlined there.

Fair enough. I will look at that. And then, as it relates to gross margin, just following from that last question, do you think all these issues that you have referenced regarding your large customer, Verizon, who has been challenging will be finished by this calendar year, by this fiscal year?

So Alan, we don’t in total, but as we talked about in February and then again in May and we are still broadly comfortable with that, we see substantial progress by the end of this fiscal year. There maybe one or two projects that extend beyond for some period of time, but we are actually encouraged that for that – particularly for one that’s extended, extending it’s a better mix of work. And so I think there is, at a high level, not a lot of change from when we spoke in May.

Okay. And then just to run down the P&L, it seems like the – even though the revenues have come in from year-over-year, the SG&A has not so much, it came out a bit ex stock comp, it’s slightly flattish or holding it flat, do you think that these cost cuts that you put in some of the headcount taken out, will show up in SG&A? How – like where was it in the quarter, was it towards the middle of the quarter, beginning of the quarter, how should we think about that going forward on a run-rate basis?

So Alan, the cost that we took out in April stayed out in the business, but we had better performance and a number of our incentive plans are formula-driven and so they – the bonus expense reflected that increase in performance in the business. But when we look at G&A and strip out stock comp and that incentive compensation we made real progress quarter to quarter.

Okay. And then your PP&E has been dropping significantly, call it since a year ago or year and change ago, it was 430 – now it’s down to 315. And I guess your other income went up as well. Do you – are you – I mean even though you just got some new business, are you getting rid of assets selling some out, because you think you have enough you are working them harder or what’s – can you just walk us through how that works relative to what the book of business could be in the next year?

Well, Alan, we have always had a pretty routine replacement cycle and that typically took advantage of the fact that we sell our used assets at a nice percentage of what we pay for them given the uncertainty and where our leverage levels were at the beginning of the year or say 12 months ago, we worked aggressively to make sure that we were managing our CapEx appropriately. And we have been able to do that without any increase in maintenance expense from last quarter to this quarter. I think now that leverage is approaching target kind of in that two area, we will continue to look to grow organically. And as we talked about earlier, we are going to spend some money this quarter on a new startup and we will also look to our basic capital allocation framework that says we are going to fund growth in CapEx and then we are going to evaluate share repurchases versus deploying the capital through M&A. And that was something that we were not aggressively looking at when we were at a leverage level that needed to come down. But now that we are approaching target, we have more capital allocation opportunities and we also have more opportunities to revisit CapEx.

Great. Thank you.

Thank you. We have a follow-up from Adam Thalhimer with Thompson Davis. Your line is open.

Thanks. Steve, I wanted to ask on the buyback, it seems significant to me from the standpoint – I mean, we keep all of us are asking about sustainability and margins and when does the revenue turn positive, but I don’t know, I kind of read the buyback announcement is that you feel confident in both?

Well, look, we – let’s face it, there hadn’t been a lot of fun around here for a while. We had leverage that was at levels that was above target. We have done – the organization this isn’t me or Drew or Tim, the organization has done a great job over three quarters of taking leverage down $357 million and that allows us to contemplate actions that will create value for shareholders that when the leverage was up, we were more constrained in what we could do. And I think that’s what the buyback shows. And as we talked about earlier, our EBITDA is up if our DSOs stay stable and we are working hard to get them to improve, our free cash flow conversion goes up then we generate cash. We are at a lower level on the revolver today. I think we are at $45 million less on the revolver today than we were at the end of last quarter. So yes, we have some things we can do with the cash as it comes in.

Okay. And then a couple of times in the Q&A session and particularly in one of your answers to Noelle’s question, you are referencing a large startup or large program in the back. I am not sure I don’t know what that is?

Well, besides the fact that we said that we just got notified of it today and it’s about 150 employee startup this quarter, with a core customer and there will be about $5 million of CapEx and that’s a good use of cash flow that we have generated over the last three quarters.

Okay. And lastly, Drew, can you just – what’s the interest expense we should be putting in the model for the next few quarters?

Yes. First of all, Adam, there is clearly lower rates out there right now, which is helpful. I think if you look at where the revolver ended up and there is a scheduled pay down on the term loan as well. If we can continue to generate cash flow and take down the revolver, I think you can just do the math from there.

Okay. Appreciate it.

I mean, there is really not much, there is really not much left on the convertible notes. We completed that or those are down to $58 million or thereabout after the buyback in the quarter, last quarter.

Okay, thanks. Appreciate it.

Thank you. And there are no other questions in the queue. I would like to turn the call back to Steven Nielsen for any closing remarks.

Well, we thank everybody for joining the call and we look forward to speaking to you again in November. Have a good day. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect everyone. Have a great day.