RealTime IT News

Covad Remains Optimistic Despite Customer Woes

Shares of the nation's number two DSL provider lost half of their value after Covad Communications Group Inc. reported problems with collecting revenue from certain troubled customers.

But despite growing pains in revenue collections, the competitive local exchange carrier remains optimistic about its future.

In early Wednesday trading, the stock fell 50 percent to about $4.

Late Tuesday, the digital subscriber line provider released its third quarter results, reporting a 49 percent increase in subscriber lines to 205,000, a net gain of 67,000 new customers. Despite the encouraging numbers, they incurred a net loss for the quarter of $189.9 million, a $58.4 million increase over the second quarter.

Robert Knowling, Covad chairman, president and chief executive officer, acknowledged the difficulties adding his company isn't panicking as the result of several Internet service provider's inability to pay their bills.

"We continue to take the prudent, long-term approach to managing our business and our fundamentals have never been stronger, supporting our abilities to deliver broadband access," Knowling said. "Covad has had to manage issues of slow payment by small ISPs before. We have a mechanism in place where, when we determine an account is non-collectible, we can roll-over the individual accounts to another ISP or potentially to our BlueStar network."

Covad has three levels of partners when it comes to DSL resellers. Gold level partners are made up of large providers like AT&T Corp. , EarthLink Inc. , and UUNet, which order a lot of DSL lines at one time. But it's the silver and bronze partners that are causing problems for Covad's accounts receivable department.

Martha Sessums, Covad vice president of corporate communications, said the CLEC has had its tiered partner program in place for almost a year to help ISPs meet order commitments.

"We have three levels of partnerships for the ISPs to take advantage of," Sessums said. "If they can't make their commitments, we have a reseller program in place made up of people who can help make up the difference between the number of lines ISPs say they can sell and the actual number of lines they do sell.

"The whole industry is getting more diligent when it comes to collecting revenues from their customers," Sessums continued. "We're going to do everything in our power to make sure ISPs honor their commitments, and for the ISPs who can't, we will make arrangements on a case-by-case basis."

Covad's third quarter results led Goldman, Sachs and Co. to revise its revenue projections for the fourth quarter, from $91 million to $84 million. Its report to investors also saw repercussions to Covad's revenue losses.

"We believe the ramifications of these collection difficulties will be twofold; one, near-term margins and revenues will suffer and two, increased difficulty in raising capital may force Covad to cap its network build, thereby lowering long-term growth potential."

Knowling points to Covad's other third quarter accomplishments, which he says will keep Covad in business and on the road to profitability.

"We just completed a convertible debt offering, giving us $500 million to run our business," Knowling said. "The demand for broadband is huge and our bookings are very strong. Our delivery and installation systems are growing in efficiency, as evidenced by our continued installation success and our Operations Support System back office system continues to give use the ability to scale our business faster than any other company in