Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Dycom Industries, Inc. (NYSE: DY)

NOTE TO EDITORS: The Following is an Investment Opinion Issued by Spruce Point Capital Management

Questions the Sustainability of Dycom’s Recent Financial Performance Given Various Factors, Including Telecom Industry Consolidation Among Key Clients Affecting 14% of Dycom’s Revenues

Believes That Heightened Scrutiny of Dycom’s Dealings With Frontier Communications, a Company the FTC Said Lied to Customers, Is Warranted Given Familial Relationships Among Executives and a State Regulator Alleging Apparent Fraudulent Activities by Both Companies

Identifies Areas of Concern With Dycom’s Financial Reporting, Including Elevated Days Sales Outstanding, Delayed Disclosures of Key Credit Exposures, Newly Disclosed but Unquantified Pre-paid Customer Discounts, Revisions to Reported Revenue From Net Contract Assets, and Recent Misforecasting of Capital Expenditures

Expresses Concerns About Dycom’s Recent Chief Accounting Officers and a Recent Board Appointee Given Their Previous Financial and Accounting Leadership Roles at Companies That Experienced Internal Control Issues and Financial Restatement

Believes That DY’s Share Price Trades at an Irrational Premium to Peers Despite Having a Weaker and Riskier Business and Sees 35% – 55% Potential Long-Term Downside Risk

Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled, “Too Close A Connection”, that outlines why we believe and estimate that shares of Dycom Industries, Inc. (NYSE: DY) ("DY" or the "Company") face up to 35% – 55% potential long-term downside risk, or $78.50 – $113.50 per share. Download and view the report and its Full Legal Disclaimer by visiting www.SprucePointCap.com for additional information and exclusive updates.

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Spruce Point Report Overview

Dycom Industries, Inc., based in Palm Beach Gardens, FL, is a contractor primarily servicing the telecommunications industry throughout the United States. As of the twelve months ended October 26, 2024, the Company reported approximately $4,570 million and $554 million of revenues and Adjusted EBITDA, respectively. Approximately 90% of the Company’s revenues are from the telecommunications industry with customers such as AT&T, Lumen Technologies, Comcast, Charter Communications, Verizon, and Frontier Communications. Approximately 78% of contract revenues are multi-year master service agreements (“MSAs”).

The concerns we outline in our report include:

• Dycom’s clients are under pressure and consolidating with aggressive cost saving goals.
  • Dycom has benefited from fiber deployments among customers but appears to have weak positioning from wireless services. We estimate wireless revenues declined from ~$300 million in 2020 to ~$185 million in 2024. Fixed wireless access networks (FWA) are growing rapidly and are cheaper to deploy than fiber since no cables or trench digging is required and it may use existing towers or poles. In August 2024, Dycom expanded with the acquisition of Black & Veach’s wireless infrastructure construction services business for $150 million in cash. The acquisition brings modest revenue until FY 2026. Based on the $250-$275 million revenue range and $1 billion estimated backlog, the business looks incredibly cheap at 0.55x revenues and 0.15x backlog which leads us to question the quality of the deal especially in light of an industry source referencing “past due invoices” from contractors. The accounting allocation shows no acquired property and equipment and management referenced “site acquisition for next year’s construction program” which has us concerned the deal may require significant capital spending and be cash flow negative.
  • Given a recent wave of M&A consolidation among fiber customers such as Bell Canada acquiring Ziply Fiber, Uniti Group merging with Windstream, and Verizon acquiring Frontier Communications, we estimate that approximately ~14% of Dycom’s revenue will be in the hands of acquiring companies. As a result, we believe Dycom’s bargaining power with customers could be vastly diminished. Of noted concern, each of these transactions highlight large cost saving synergies which could come at the expense of contractors and suppliers.
  • A significant percentage of Dycom’s revenues and a majority of its backlog is under MSAs which do not contractually commit customers to procure specific volumes of service. Furthermore, these contracts can be cancelled by customers with little or no advance notice and for any or no reason.

• Investors should closely scrutinize Dycom’s dealings with Frontier Communications.
  • Frontier has been one of Dycom’s fastest growing customers totaling $1 billion of revenue since 2020. Dycom’s long-time CEO & Chairman is Steve Nielsen who is the brother of Mark Nielsen, a named executive at Frontier. Despite Dycom’s related party forms explicitly referencing that siblings are “Related Persons,” Dycom claims no related party dealings. While it may have valid reasons for not disclosing any related party transactions, we still believe heightened investor attention and scrutiny of the relationship is warranted.
  • Frontier is a company of questionable integrity and was recently fined $8.5 million by the FTC for lying and ripping off customers.¹ Furthermore, Dycom and Frontier worked together in Connecticut where the utilities regulator blasted them by saying, “Not only are Frontier and its contractors knowingly and willfully violating the law, the contractors appear to be fraudulently concealing the violations in some instances by using fake conduit.”²
  • We find evidence that Dycom delayed disclosure of its material credit exposure to Frontier. From this, we see that Frontier’s accounts receivable and net contract assets to its LTM revenues has averaged ~40% which is elevated to some peers. This begs the question if Dycom extended Frontier favorable terms or prematurely booked revenue? Steve Nielsen resigned from Dycom in June 2024 and retired from the Board in November 2024.

• We believe Dycom’s financial reporting exhibits many hallmarks of increased financial stress.
  • For starters, its Days Sales Outstanding (“DSO”) has risen sharply from ~108 days in 2022 through early 2023 to the 120 days range recently. When asked for an explanation, we believe the former CEO provided little comfort that Dycom had a handle on the situation. Furthermore, we observe that Dycom stopped providing written explanations of DSO changes in its 10-K or 10-Qs in late 2022. Coincident with a rise in the DSO, Dycom reduced its allowance for bad debts which runs counter to a lengthening in collection period. Heightening our concerns about revenue quality, we find a revenue reporting misstatement in net contract assets which is a component of DSO.
  • Starting in 2019, Dycom’s proxy statement disclosed payments to customers to obtain and/or modify contracts through operating cash flow. In 2023, it made a change to reference “pre-paid discounts” but does not quantify the amounts. Prepaid expenses are often recorded on the balance sheet and expensed over time. Dycom has reported some contract awards and extensions up to four years. As a result, this is a potential lever being used by management to embellish operating cash flow.

• Dycom’s margins may be difficult to expand and may be enhanced by aggressive tactics.
  • We believe Dycom’s EBITDA margins, which have expanded from the low 9% to mid 12% range since 2020 are not likely to be sustainable and may have benefited from various actions that may be difficult to continue. As further evidence of our concern, management has walked back talk about its long-term EBITDA margin, once claiming 11% was the bogey, but now declining to be specific.
  • In addition to the elevated DSO, we also find evidence to suggest other areas where DY may be embellishing margins, including: 1) Maintenance capex deferrals, 2) Cutting corners in safety expense (e.g. in Connecticut), 3) Delayed recognition of insurance expenses totaling $47 million, 4) Pre-paid discounts as noted above, and 5) Slowing organic headcount growth to approximately zero in the last 12 months to leverage existing employees.

• There are reasons to be concerned with Dycom’s Chief Accounting Officer and a recent Board appointment.
  • Our concerns about aggressive accounting and questionable financial reporting tactics are exacerbated by a careful review of Dycom’s past and current Chief Accounting Officers. First, Sharon Villaverde joined Dycom in 2019 from Natus Medical Inc. (Nasdaq: BABY changed to NTUS). She was Corporate Controller from June 2013 - 2017 and was appointed interim CFO through 2018. She resigned from Dycom in March 2024. Natus Medical was targeted both by a long and short activist. The long activist criticized the company’s poor operational execution and governance among other things. The short activist alleged improper accounting related to inventory and reserves while comparing Natus to a fraud that occurred at Logitech Int’l. From 2015 - 2019 Natus Medical reported a broad range of errors and a material weakness of internal controls.
  • Sharon Villaverde was succeeded by Heather M. Floyd. Ms. Floyd previously held executive financial roles at KLX Inc. (Nasdaq: KLXI) where she was Vice President, Finance, Corporate Controller & Principal Accounting Officer from December 2014 to September 2020. Ms. Floyd has two conflicting biographies related to her educational degrees. During her tenure at KLX, the company had financial restatement issues tied to revenues and reported a material weakness of internal controls.
  • Lastly, on March 29, 2022, Dycom appointed Ms. Carmen Sabater to the Board and she serves on the Finance and Compensation committees. Her biography notes that she was the Controller of MasTec Inc. (NYSE: MTZ) from 1994 - 2000 and CFO through January 2002. Ms. Sabater’s tenure at MasTec coincided with a troubling financial restatement and formal SEC investigation. Ultimately, the SEC did not bring an enforcement action.

• We believe Dycom’s shares trade at an undeserved premium to peers.
  • Dycom’s story is followed by a roster of lower-tier brokers whom we believe have failed to conduct a rigorous forensic analysis that challenges the glowing Company narrative. The consensus price target of $220 per share implies 26% upside and promoters have a unanimous “Buy” recommendation.
  • We believe Dycom currently trades at an unwarranted premium multiple to other construction and contracting servicing peers on the belief its above average margins and sales growth are sustainable. However, we believe the market fails to consider that Dycom is an inferior company with outsized concentrations to challenged customers that are going through consolidation, MSA contracts that are easily cancellable, and high capex needs. For example, Dycom’s 5% capex margin is more than 2x peers.
  • Dycom currently trades at 1.1x and 31x 2025E EV/sales and P/E which is a rich premium to peers offering a more diversified and lower risk business. Valuing shares at discount to peers to reflect our documented concerns suggests 35%–55% long-term potential downside risk to Dycom’s share price ($78.50 – $113.50 per share). We expect DY’s share price to underperform its industry peers and the broader equity market.

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Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.

As disclosed, Spruce Point and/or its clients have a short position in Dycom Industries, Inc. (NYSE: DY) and owns derivative securities that stand to net benefit if its share price falls. Following publication of the report, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial opinion. For additional important information, please review the “Full Legal Disclaimer” contained in the report.

About Spruce Point

Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.

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