RealTime IT News

Covad CEO Embraces New Mindset

Six months ago, Charles Hoffman left the relatively safe world of wireless telecommunications and descended into chaos.

He left Rogers Wireless Communications, Inc., Canada's largest wireless provider, for an industry that was in the middle of a catastrophic downward spiral. You've got to wonder what kind of glutton for punishment would want to leave a relatively cushy job as president, chief executive office and director of a wireless telephone giant to take over the reins of a company only days away from getting delisted on Nasdaq.

But that's exactly what Hoffman did, taking the reins of Covad Communications from interim chief executive officer Frank Marshall June 5, who was filling in for Robert Knowling.

Knowling, Covad's chairman, president and chief executive officer, resigned from the data competitive local exchange carrier (DLEC) a week after announcing net losses of nearly $190 million in conjunction with $12 million in revenues.

While Knowling was instrumental in putting together and deploying the largest and most popular independent DSL provider in the nation, he made the mistake of signing on some questionable partners that hastened Covad's downfall.

Covad, while in the middle of a rapid nationwide deployment of DSL access multiplexers (DSLAMs) in central offices two years ago, needed customers to help pay for the equipment and further deployment. As a DSL wholesaler, Covad attracted the attention of many Internet service providers (ISPs) around the U.S., who felt they didn't have to worry the DLEC would steal its customer base down the road, as many believed the local telephone companies were doing.

Many of those ISPs, caught in the hype of the broadband frenzy of the time, signed up to contract term agreements they had no hope of achieving. Most of those ISPs later went bankrupt and reneged on payments Covad expected to receive.

The bankruptcies forced Covad to institute its Safety Net program, a service that won the gratitude of consumers who didn't have to worry about losing their DSL from their bankrupt ISP, but earned the scorn of ISP owners who thought it was only a matter of time before Covad went after their customers, too.

Coupled with the burst of the dot com bubble and an expensive overseas venture, Covad's stock value and cash reserves quickly dwindled until it was but a fraction of its former glory.

Enter Hoffman, who quickly assessed the situation as untenable and moved for a pre-emptive Chapter 11 bankruptcy. Creditors and bondholders were decidedly not happy with the deal he cut for them, a contract renegotiation that wiped out Covad's $1.4 billion debt and gave creditors 19 cents back on the dollar of their investment, $283 million cash and 33 million shares.

The creditors were clearly not happy, but most clearly remembered the mess created by NorthPoint earlier in the year. NorthPoint creditors shut down their network after only getting $135 million back for its investment. Only one creditor, Vernon Computer Leasing, Inc., refused to sign off on the deal in the end

Mark Kersey, a broadband industry analyst with ARS, Inc., said the forthright manner in which Hoffman handled the bankruptcy situation is probably what helped save Covad.

"The mere fact they were honest with their investors and their bondholders and filed a pre-negotiated bankruptcy proceeding was definitely a step in the right direction," Kersey said. "In stark contrast, you have a company like NorthPoint, who essentially shut down their network overnight."

Hoffman also led Covad managers on a cost-cutting campaign, starting with the divestiture of BlueStar, its business DSL provider arm. Unsuccessful service areas were taken offline and jobs were cut, resulting in savings of $25 million in monthly capital expenditures.

A deal with SBC Communications overcame Covad's last hurdle, putting $135 million in it coffers.

Charles Hoffman, Covad chief executive officer, said it's important for Covad to maintain fiscal responsibility going forward, so you won't see a repeat of the situation that got many DSL providers in trouble in the first place a too-rapid nationwide buildup.

"We're going to continue to keep our costs low," he said. "We're going to stick with the 50 regions around the country that we're in right now. Our customers haven't really asked us to expand. I think it's more important that we rebuild our customer base and take advantage of the network that we've already built."

Instead, Hoffman said, because of Covad's unique position as the only DSL provider in the nation, they've made deals with several large businesses, "so I think you'll be seeing announcements from us very soon."

He reiterated his belief that Covad will reach cash-flow positive revenues sometime in 2003.

How successful will Covad be a year from now? That's uncertain, but Kersey believes the Covad board has put together a good team and has a good shot.

"I think any company that has a good management team and deals with their financial issues in a responsible manner, is going to be successful," Kersey said. "When you come right down to it, there are an awful lot of ISPs and smaller companies that still depend upon Covad for their DSL."

Kersey speculates that the new deals Hoffman is keeping under wraps involve other local telephone companies around the country, like BellSouth and Verizon Communications, with terms similar to SBC.

"Face it, they are the only true DSL wholesale provider in the nation," Kersey said. "Sure, you have New Edge Networks, but they avoid the major cities, so it's safe to say that Covad is the only provider that counts."