Covad Remains Optimistic Despite Customer Woes

Shares of the nation’s number two DSL provider lost half of their value after Covad Communications Group Inc. reported problems with collecting revenue from certain troubled customers.

But despite growing pains in revenue collections, the competitive local exchange
carrier remains optimistic about its future.

In early Wednesday trading, the stock fell 50 percent to about $4.

Late Tuesday, the digital subscriber line provider released its third quarter
results, reporting a 49 percent increase in subscriber lines to
205,000, a net gain of 67,000 new customers. Despite the encouraging
numbers, they incurred a net loss for the quarter of $189.9 million, a
$58.4 million increase over the second quarter.

Robert Knowling, Covad chairman, president and chief
executive officer, acknowledged the difficulties adding his company isn’t
panicking as the result of several Internet service provider’s inability to
pay their bills.

“We continue to take the prudent, long-term approach to managing our
business and our fundamentals have never been stronger, supporting our
abilities to deliver broadband access,” Knowling said. “Covad has had to
manage issues of slow payment by small ISPs before. We have a mechanism in
place where, when we determine an account is non-collectible, we can
roll-over the individual accounts to another ISP or potentially to our
BlueStar network.”

Covad has three levels of partners when it comes to DSL resellers. Gold
level partners are made up of large providers like AT&T Corp. , EarthLink Inc. ,
and UUNet, which order a lot
of DSL lines at one time. But it’s the silver and bronze partners that are
causing problems for Covad’s accounts receivable department.

Martha Sessums, Covad vice president of corporate communications, said the
CLEC has had its tiered partner program in place for almost a year to help
ISPs meet order commitments.

“We have three levels of partnerships for the ISPs to take advantage of,”
Sessums said. “If they can’t make their commitments, we have a reseller
program in place made up of people who can help make up the difference
between the number of lines ISPs say they can sell and the actual number of
lines they do sell.

“The whole industry is getting more diligent when it comes to collecting
revenues from their customers,” Sessums continued. “We’re going to do
everything in our power to make sure ISPs honor their commitments, and for
the ISPs who can’t, we will make arrangements on a case-by-case basis.”

Covad’s third quarter results led Goldman, Sachs and Co. to revise its revenue
projections for the fourth quarter, from $91 million to $84 million. Its
report to investors also saw repercussions to Covad’s revenue losses.

“We believe the ramifications of these collection difficulties will be
twofold; one, near-term margins and revenues will suffer and two, increased
difficulty in raising capital may force Covad to cap its network build,
thereby lowering long-term growth potential.”

Knowling points to Covad’s other third quarter accomplishments, which he
says will keep Covad in business and on the road to profitability.

“We just completed a convertible debt offering, giving us $500 million to
run our business,” Knowling said. “The demand for broadband is huge and
our bookings are very strong. Our delivery and installation systems are
growing in efficiency, as evidenced by our continued installation success
and our Operations Support System back office system continues to give use
the ability to scale our business faster than any other company in

the
category.”

Covad has been busy looking at unconventional measures to increase
revenues, even to making deals with the devil, as it were. CLECs in
general have maintained an uneasy relationship with incumbent local
exchange carriers like SBC
Communications Inc.
and Qwest Communications since
line-sharing regulations were passed.

Covad, the second largest DSL provider in the nation, signed a couple of
deals with number one DSL provider SBC. The first, a six-year, $600
million reselling agreement, gives Covad much-need hard currency and SBC a
chance to extend its footprint outside its territory. The second was
Covad’s 13-state line-sharing price agreement with SBC at a reduced price
of $5.75 monthly.

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