Analysts Issue Warning on Covad

Covad has failed to collect payments for over ten percent of recently installed lines. Analysts blame financially unsound ISPs, and warn that the problem could apread across the whole industry.

by Jim Wagner
of internetnews.com
[August 29, 2000]

As U.S. incumbent, data, and competitive local exchange carriers (ILEC, DLEC, and CLEC) scramble for market dominance in the high-stakes world of high-speed Internet access, some are failing to collect money from customers.

Covad Communications Group is a perfect example.

Monday, the DLEC announced that it intends to serve 200,000 DSL customers by the end of the third quarter, exceeding Wall Street analysts' projections by 30 percent.

Is there really a problem?
Robert Knowling, Jr., Covad (NASDAQ: COVD) chairman, president and chief executive officer, was quick to point out his company's successful business plan.

"The numbers demonstrate that we have successfully managed our business in light of recent announcements and events, including the addition of a direct sales channel through our acquisition of BlueStar Communications," Knowling said. "Given the current level of our day-to-day orders and installations, I'm very bullish about the future of our business and the DSL industry in general. We are more than ready and very well-equipped to meet the demand for broadband."

But uncollected revenues from Internet service providers who are using Covad's DSL lines belie the rosy picture presented by Knowling.

Blame the ISPs?
On Friday, ideaadvisor.com said that it was "reiterating a hold on Covad Communications." Covad has between $8 million and $10 million in uncollected revenues from ISPs, and the uncollected revenues prompted the warning to investors.

Todd Truitt, ideaadvisor.com senior telecommunications equity analyst, said Covad booked $58 million in DSL sales last quarter, but only collected on $32 million of that amount. Local and regional ISPs can't pay for the services they've booked, hurting the company that's providing the lines. It's a trend, he said, that's affected all DLECs, not just Covad.

"If these ISPs can't raise money to continue operating, then obviously there is no money to pay the DLECs," Truitt said. "We have the opinion that the current condition of the capital markets will continue to hurt stocks with capital intense business models, on more than one level. Not only does (the DLEC) have to worry about raising money itself to continue operating, but it has to worry about its customers having the capital to pay it for its services as well.

"The bottom line," Truitt added, "is that if the capital markets dry up much more, we could see this whole sector unravel."

The argument continues
Covad officials dismiss Truitt's claims as overblown, saying that only a very small number of local ISPs that are behind in any payments.

Nick Kormeluk, Covad's senior vice president of investor relations, said the DSL market has always been out of favor with the market because the industry is still in its infancy.

"There are a handful of ISPs that we're watching, but we don't believe there's an excess of problems collecting revenues," Kormeluk said. "It's all part of the business. If we thought we were having increased problems, we wouldn't have raised the amount of lines we're putting out in the third quarter."

However, Truitt maintains the increased line projections, as well as Covad's expected announcement of more funding, are a short-term solution to the industry's long-term concerns.

Subsequent story
SBC, Covad Strike $750 Million Deal
Despite being the second-largest digital subscriber line provider in the nation, Covad Communications Group made a $750 million deal with the devil, giving SBC Communications, Inc. a six percent equity piece of the company.

—End