Covad Clawing Its Way Out Of Bankruptcy

Reduced monthly operating costs and increased customer acquisition helped
Covad Communications weather the third quarter of 2001 and just might get
them out of Chapter 11 bankruptcy trouble.

Covad, one of the two largest independent national digital subscriber line
(DSL) providers in the U.S. (with Rhythms NetConnections), announced Friday
it had reduced its monthly capital expenditures to under $25 million while
still managing to garner 13,000 new customers for a total of 346,000.

That figure is a paltry number compared to Verizon Communications, which
announced this week it had topped the one million customer mark, but is a
good sign nevertheless that people still have enough faith in the data
competitive local exchange carrier (DLEC) to sign up as a customer.

Charles Hoffman, Covad president and chief executive officer, said the
combination of reduced expenditures and increased subscribers is a good
indicator of his company’s progress, and promised even better numbers for
the fourth quarter.

“We are pleased with the progress we have made to lower our capital needs
through continued growth in subscribers, ongoing cost reduction measures
and anticipated savings from operational initiatives,” Hoffman said. “Our
line count has increased in a difficult economic environment, which
demonstrates that demand for broadband is still solid. I am especially
pleased that in these tough times we have improved our major operating
metrics including installation intervals, mean time to repair and network
availability.”

Covad officials attribute their moderate fiscal success to finally
completing their divestiture of BlueStar, a subsidiary it bought last year,
shutting down DSL access multiplexers (DSLAMs) at underserved central
offices (COs) and other operational improvements (which include job cuts
and cutting deals with carriers for line sharing contracts).

It’s a ray of light for a company that’s had little to cheer about. But
gradual improvements to its expenditures and the $460 million it still has
in the bank, coupled with the expected boom of new DSL customers in the
coming years, are what officials are pinning their hopes.

Despite indications that consumers have been wary of DSL to date, a report
released by Jupiter Media Metrix this week reports that 40 percent of
American households will have a broadband connection by 2006.

Covad released information Friday on its subscriber demographics, which
gives a good indication why the company has been able to weather the
Chapter 11 filing and has a shot of getting out of its predicament.

The DLEC, which originally based its business model on the sign up of
Internet service provider (ISP) customers who would then resell Covad’s
offering, report that roughly 52 percent of its customers are actually
business-class customers. Business-grade services are the ones DSL
providers like to offer, since the profit margin is much more acceptable
than residential service.

Residential service has been the kiss of death for ISPs and DLECs
nationwide, who have been unable to keep their costs low enough to compete
with the telephone companies who own the network. Companies like Verizon,
SBC Communications and Qwest Communications were able to keep costs low
because they could rely on the diversification of its revenue streams and
operate at a loss until the competition went away.

And that’s exactly what happened, with DLECs like NorthPoint Communications
going bust, while Covad and Rhythms filed for Chapter 11 protection.

Earlier this year, Covad drew the ire of the ISP community for its Safety
Net program, which allows customers to sign up directly to Covad for DSL
service. Many providers considered it a betrayal of its wholesale
neutrality, with ISPs planning boycotts of the Covad name.

Covad officials set up the program to save some of the DSL customers that
were going to be lost as a result of ISPs who were not able to pay their
DSL bill to the DLEC and were going to go out of business.

Despite that policy, Covad reports only four percent of its total lines are
the result of direct acquisition through the Safety Net program.

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