Delinquent ISPs Cause Covad 3Q Pain

Analysts speculate weather Covad can survive its 3Q results after collections issues convolute its performance. Is it time for the second largest DSL provider in the US to go shopping for a buyer?

by ISP-Planet Staff [October 18, 2000]

Despite growing pains in revenue collections made public in Covad Communication, Inc.'s third quarter report, its chief remains optimistic about the future.

Tuesday, the digital subscriber line provider released its 3Q results reporting a 49 percent increase in subscriber lines to 205,000 and a net gain of 67,000 new customers.

Even with the strong subscriber growth, Covad incurred a net loss for the quarter of $189.9 million, a $58.4 million increase in losses reported in the second quarter.

The troubles
Robert Knowling, Covad chief executive officer, acknowledged its troublesome 3Q report with startlingly candid comments about several key ISP partners that defaulted on 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," Knowling added."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 different partnership plans for DSL resellers. Gold level partners are comprised of top tier providers like AT&T Corp., EarthLink Inc., and UUNet, which order large block of DSL lines at one time.

Silver and bronze level partners are the resellers that are causing problems for Covad's accounts receivable department. Martha Sessums, Covad vice president of corporate communications, said it has a program in place to help ISPs meet the financial demands of paying for their DSL orders.

"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 added. "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, down $7 million from $91 million, to $84 million.

Revenue shortfalls
The investment firm noted that despite Covad's strong growth in DSL subscribers it still reported revenues 8 percent short of analysts estimates. This shortfall represents $11 million in revenues that were billed for but could not be booked due to dubious financial situations among nine of Covad's ISP partners.

In a statement, GS analysts said "we believe the ramifications of these collection difficulties will be twofold. First, near-term margins and revenues will suffer. Second increased difficulty in raising capital may force Covad to cap its network build, thereby lowering long-term growth potential."

Covad's Knowling pointed out that its long-term financial future is not as bleak as analysts report.

"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 recently secured a six-year $600 million reselling deal with SBC Communications, Inc., which gives Covad access to much-needed cash. But news of its 3Q earnings sent Covad's stock tumbling down $4-27/32 or 58 percent at $3-3/4 by Tuesday's market close.

That puts Covad atop a list of NASDAQ leading losers in percentage terms. Covad's price has fallen 94 percent since its record closing high at $66-1/4 in March.

SBC is no shrinking violet when it comes to growth by acquisition. The former "Baby Bell" has sucked up more telecom firms than Dracula has drawn blood from the necks of unsuspecting prey.

As a result of Covad's doubtful collection procedures, the firm may be ripe for SBC to extend its DSL footprint outside its traditional service area by taking a larger ownership stake in Covad.

—End