2007 Annual Report
Dear
Fellow Shareholders:
As fiscal 2008 begins, Dycom is well positioned for continued and profitable growth amid industry developments we have long foreseen and eagerly anticipated.
Ten years ago, we acquired Communications Construction Group (“CCG”), our first significant foray into construction and engineering services for cable television multiple system operators. CCG strategically complemented our core construction and engineering services for telephone companies and meaningfully extended our geographic reach. Since CCG’s acquisition, our organic growth strategies and many of the acquisitions which eventually followed CCG, have all been firmly grounded upon one simple model of our industry’s dynamics:
- Telephone and cable companies will converge in their product offerings and compete with one another.
- Each will offer video, voice, and data services to residential consumers over wired networks possessing dramatically improved capabilities.
- Improved capabilities will be initiated by telephone and cable companies to create significant relative competitive advantages.
- These initiatives will enable new consumer applications which create meaningful value.
- Consumers will demand ever increasing amounts of network bandwidth and reliability as they adopt these ever evolving and valued applications.
- Demand for network bandwidth and reliability has continually and inevitably exhausted network capacity, driving increased telephone and cable company capital expenditures to provision ever growing amounts of bandwidth and network functionality.
Over the last ten years, these industry dynamics have created enormous demands for our services, demands which continue today. Customers are expending vast amounts of capital to enhance the capabilities, capacity and reliability of their networks.
The converged, wired world of our model is becoming more visible daily. Cable companies are dramatically expanding their businesses, adding voice communications to complement their video and data offerings. Telephone companies are beginning to expand their businesses, adding video services to complement their voice and data offerings. Both cable and telephone companies are deploying new technologies to residential consumers which can dramatically increase network bandwidth and functionality to levels reserved until just recently for very large commercial customers. As competition increases between telephone and cable companies, Dycom’s ability to engineer, construct, maintain, and install networks and the devices attached to those networks, becomes more valuable every day, both to our customers and our shareholders.
Our growing value to customers and their demands for our services became increasingly evident last fiscal year. Revenue from continuing operations grew 14.4 percent to $1.138 billion in fiscal 2007 from $995 million in the prior year. Additionally, organic “same store” year over year growth improved throughout the year, finishing at 15% for our fiscal fourth quarter. This is significant. Organic growth has generally been a very good indicator of overall demand for our services, especially as our size has increased. Accordingly, it is not surprising that we experienced broad demand across our customer base as organic growth improved. Steady and increasing volumes from telephone companies, increased construction, upgrade, and technical spending from a number of cable companies, and strong in home customer premise equipment installation demand, also from cable companies, were all evident last year. We complemented these demand drivers with a targeted approach to profitably growing our market share with several customers where we believed we were best positioned to provide good service to the customer and good returns for our shareholders.
However, growing demand, no matter how well anticipated, is insufficient of itself to drive financial performance. Improving gross margins, tightly controlled overhead expenses, and the strong operating cash flows required to soundly fund growth, are all necessary to convert improved opportunities into real financial value. In all of these areas, fiscal 2007 was a success. Gross margin, which measures overall operating efficiency, increased to 19.6% from 18.5% in fiscal 2006, an increase of 1.1%. This improvement was accompanied by solid overhead expense controls, with general and administrative expenses constant at 7.9% of revenues in fiscal 2007. Operating cash flow improved to $108 million, amply funding $62 million of net capital expenditures to support our growth as well as the pay down of $40 million of debt which was incurred in connection with an acquisition. As a result of these financial successes, we exited fiscal 2007 with robust liquidity of over $200 million, a growing net cash position after excluding our senior subordinated notes, and the financial strength and flexibility to address new opportunities as they arise.
These financial results and resources reflect the strong efforts of our subsidiary management teams last year. Their knowledge of local market conditions and opportunities, the acumen to price to the value of their services, and demonstrated capability to earn repeat business from customers were crucial to last year’s success. For decades, many of our subsidiaries
have earned reputations for high quality, productivity, and strong customer service one completed project at a time. Adding to our roster of strong subsidiaries, we were pleased to acquire two new companies during the year, Cable Express and Cavo Communications.
Both of these businesses specialize in providing in home services to cable companies throughout the country, a field within our industry where we maintain a leading position and which we expect to continue to grow.
In reflecting on fiscal 2007 and looking ahead to fiscal 2008, we are convinced that our vision of our industry’s future is sound. We perceive opportunities for growth across a broad array of our customers and are confident in our ability to execute against those opportunities in ways that create value for customers and financial returns for shareholders. While mindful of macroeconomic events and their potential impacts, we remain certain that we are participating in an industry supported by strong competitive and technological drivers and are working for customers who possess the financial wherewithal to execute their plans.
Finally, we thank directors Tony Werner, who left our board in February, and Joseph Schell, who chose not to stand for reelection, for their guidance and wisdom. They are and will be missed and we wish them the best in their future endeavors. To the more than 10,000 employees of Dycom, we salute your hard work and diligence, and to our shareholders, you have our thanks for your continued support.
Sincerely,
Steven Nielsen,
President and Chief Executive Officer
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