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DSL: Too Much, Too Fast?

As U.S. incumbent, data and competitive local exchange carriers (ILEC, DLEC and CLEC) scramble for market dominance in the high-stakes world of high-speed Internet access, some are neglecting to collect money from the customers that pay their bills.

Covad Communications Group is a perfect example.

Monday, the DLEC announced its intentions to serve 200,000 DSL customers by the end of the third quarter, exceeding Wall Street analyst projections by 30 percent.

Robert Knowling, Jr., Covad chairman, president and chief executive officer, was quick to point out his company's successful business plan.

"The numbers demonstrate that we have successfully managed our business in light of recent announcements and events, including the addition of a direct sales channel through our acquisition of BlueStar Communications and the Verizon Communications work stoppage," Knowling said. "Given the current level of our day-to-day orders and installations, I'm very bullish about the future of our business and the DSL industry in general. We are more than ready and very well-equipped to meet the demand for broadband."

But underlying the obvious success of the company's rollout is the uncollected revenues from Internet service providers who are using Covad's DSL lines.

In a report issued Friday by ideaadvisor.com, Covad has between $8-10 million in uncollected revenues from ISPs, prompting a hold recommendation for investors.

Todd Truitt, ideaadvisor.com senior telecommunications equity analyst, said Covad has booked $58 million in DSL sales last quarter, but only collected on $32 million of that amount. Because local and regional ISPs can't pay for the services they've booked, it's hurting the company that's providing the lines. It's a trend, he said, that's affected all DLECs, not just Covad.

"If these ISPs can't raise money to continue operating, then obviously there is no money to pay the DLECs," Truitt said. "We have the opinion that the current condition of the capital markets will continue to hurt stocks with capital intense business models, on more than one level. Not only does (the DLEC) have to worry about raising money itself to continue operating, but it has to worry about its customers having the capital to pay it for its services as well.

"The bottom line," Truitt added, "is that if the capital markets dry up much more, we could see this whole sector unravel."

Covad officials dismiss Truitt's claims as overblown, saying it's a very small number of local ISPs that are behind in any payments.

Nick Kormeluk, Covad's senior vice president of investor relations, said the DSL market has always been out of favor with the market because the industry is still in its infancy.

"There are a handful of ISPs that we're watching, but we don't believe there's an excess of problems collecting revenues," Kormeluk said. "It's all part of the business. If we thought we were having increased problems, we wouldn't have raised the amount of lines we're putting out in the third quarter."

Truitt maintains the increased line projections, as well as Covad's expected announcement of more funding, are a short-term solution to the industry's long-term concerns.