RealTime IT News

After Tough Year Covad Says It's Making Progress

It's been a tough year for data competitive local exchange carrier (DLEC) Covad Communications, but Chairman Chuck McMinn tried to paint an optimistic picture Wednesday as the company released operating statistics for second quarter 2001, which ended June 30.

"We are taking measures to reduce the costs associated with our business, which includes disconnecting subscribers from financially distressed Internet service providers," McMinn said. "We are making very good progress in cleaning up our distressed line issues, which shows up in the lower net line growth for the second quarter that we predicted. The demand for broadband is still strong and we continue to install many new lines."

Indeed, the Santa Clara, Calif.-based company reported 333,000 lines in service on its network, a four percent increase over the lines reported on March 31. The company had 274,000 lines in service at the end of calendar 2000. The company also noted that 51 percent of its total lines are business lines and 49 percent are consumer lines.

Wednesday's figures don't include lines deployed on the BlueStar Network, a subsidiary of the company that focused on digital subscriber line (DSL) services and which was caug ht in Covad's own Safety Net program in June, when the company decided to shut it down to rein in spiraling operational costs.

"Our lower net increase in lines also reflects the elimination of lines in BlueStar central offices where we no longer offer service," McMinn said. "These lines will be disconnected or migrated to other service providers in the coming months."

Covad acquired BlueStar Communications in late 2000.

But Covad's problems extend far beyond the failure of BlueStar. The company was nearly delisted by the Nasdaq earlier in the year when it was late in filing its year-end and fourth quarter 2000 reports with the Securities and Exchange Commission. Those reports were finally filed in May, and reflected a $1.44 billion loss for the year.

Much of that loss was related to distressed ISPs that failed to pay for lines they had purchased. By January of this year, four of those ISPs had filed for Chapter 11 protection, and Covad said it was not recognizing revenue on 92,000 of its lines, about 33 percent of its total at the time.

That in turn lead to the creation of the Covad Safety Net program, which allowed the company to transfer DSL subscribers from "distressed" ISPs to healthy ones, including Covad's direct channel, Covad.net. That program has not gone over well among ISPs, many of which have been leery of the company since it decided to get into the customer acquisition game itself late last year. The Safety Net program is seen as a betrayal of trust by ISPs who signed on with Covad, which until then acted only as a wholesale DSL provider for ISPs, a middleman of sorts between the ISP and the incumbent local exchange carriers (ILECs).

By signing on with Covad, ISPs were reassured, they would aggregate their DSL orders with other ISPs to drive down the base price for a high-speed line. Since the wholesaler wasn't grabbing customers of its own, many ISPs signed up with Covad.

But Covad maintains that it still sees healthy relationships with resellers as a high priority. The company said Wednesday that its direct channel only represents about two percent of its total lines. The remaining 98 percent are provided through resellers. However, the percentage of lines served through the direct channel has decreased somewhat as a result of the exclusion of lines sold through BlueStar.

Also, the company said that as of the second quarter, 14 percent of its total lines are served through resellers for which Covad recognizes revenue when it is paid, a two percent reduction from the previous quarter. That group includes Covad lines sold by BlueStar, whose subscribers have been given the option to switch to the direct service, Covad.net.

"Our focus is on growing a strong, healthy business and focusing on our strongest channel partners," McMinn said. "A healthy reseller channel is very important to us as it continues to deliver the majority of our sales. We will continue our efforts to control costs and increase our subscriber base to maintain our position as the leading national DSL provider."