Covad Revises Business Plan

Plagued by non-paying ISP customers and a downturn in the market, Covad Communications Co. (www.covad.com) today revealed strategic changes that will hopefully give the company long-term staying power. Covad said it plans to strengthen its distribution channels, relying more on sales of DSL lines by financially sound ISP partners and its own internal sales organizations. The company is also plans to halt its network growth at 2,000 central offices and concentrate on adding more customers to its existing network.

“Our industry has faced difficulty recently,” Chuck McMinn, Covad’s chairman, said during a press conference this morning. “By making these changes, we’ve adjusted course as a result of market conditions to get to profitability.”

The most important move Covad is making is the refocusing of its ISP sales channel. The company was forced to restate its third quarter earnings last month because 14 of its ISP partners were not making timely payments for the DSL lines Covad installed on their behalf. Four of those partners – Flashcom Communications, Zyan Communications, Relay Point and FastPoint – have filed for bankruptcy protection. Those four ISPs account for more than half of the 65,000 lines that are being served by Covad’s financially troubled ISP partners.

“It’s disappointing to have such a large amount of our ISP customer base deteriorate so rapidly,” says McMinn, noting that overall, about 26 percent of Covad’s total installed lines are from troubled ISPs, and another 32 percent of lines are from potentially weak ISPs. These potentially weak ISPs are currently up-to-date on payments to Covad, but are shakier financial ground than company’s tier one ISP partners.

Covad announced yesterday its SafetyNet program, which is focused on transitioning DSL end users from troubled ISPs to other, stronger ISP partners, or Covad’s own retail ISP service. Covad also plans to focus more of its new line growth among its “Gold Tier” ISP partners, which include AT&T Corp., EarthLink, UUNET and XO Communications. During the third quarter 2000, Covad reports that less than 50 percent of its lines were coming from these Gold Tier partners.

McMinn said that he also expects to derive more new lines from two of the company’s internal divisions, Covad Integrated Services and Covad Business Solutions.

Covad revised its financial and operational expectations for 2001, as a result of these changes. The company expects to have 440,000 to 460,000 lines installed by the end of next year vs. previous analyst expectations of 600,000. Expected revenue will be $380 million to $390 million, with EBITDA losses decreasing up to $100 million for total EBITDA losses of $450 million to $470 million.

McMinn said that capital expenses will also be reduced by $100 million to approximately $250 million. The monthly cash burn rate will also decline, from $75 million expected in the fourth quarter 2000 to $60 million by the end of 2001. With that decline, McMinn believes the company will be fully funded into 2002.

The company also announced Frank Marshall as its interim CEO. Marshall, a Covad board member since 1997, who most recently served as vice president and general manager of Cisco Systems Core Business Unit, responsible for Cisco’s high-end 7000 series routers.

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