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
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, 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,

“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.”

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