High-investment costs hand Covad loss

Covad Communications today posted a second-quarter loss and forecast further losses for the immediate future, based on the investment required to expand its voice-over-IP business and two high-profile deployments—AOL’s high-speed Internet access service and EarthLink’s line-powered voice access trial.

Covad added about 7000 broadband lines in the quarter to reach 554,400 overall and grew its VoIP business by 28% to 870 business customers and 29,900 stations.

The company also took a revenue hit, however, when an upgrade to its VoIP softswitch was problematic and led to customer credits, which impacted second-quarter revenues.

“These were temporary service issues, and we issued credits,” said Covad President and CEO Charlie Hoffman. “We regret the transitional difficulties associated with the upgrade.”

The company reported a net loss of $16.4 million, or $0.06 loss per share, for the second quarter of 2005, compared to a net income of $34.4 million, or $0.11 per share, for the first quarter of 2005 and a net loss of $7.4 million, or $0.03 loss per share, in the second quarter of 2004. Loss from operations was $25.6 million, largely reflected investments in the sales, marketing and implementation of Covad’s VoIP offering.

“Results for the second quarter were within guidance—it’s what we need to do to keep our customers a step ahead and to grow profitably,” he said. There are 270 more business customers with 500 sites and 5000 stations in the sales pipeline that are not reflected in the second-quarter results, Hoffman added.

Revenue for the second quarter of 2005 of $109.7 million, up from the $107.7 million reported for the first quarter of 2005 and up from $107.3 million reported in the second quarter of 2004. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the second quarter of 2005 was a loss of $8.0 million compared to a loss of $7.4 million in the first quarter of 2005 and a profit of $12.5 million in the second quarter of 2004.

The AOL high-speed Internet access service, which is aimed at non-AOL customers and dial-up AOL customers, is proving more costly than expected, Covad officials admitted, and that is having an impact on Covad’s third-quarter forecasts. The company is projected an EBITDA loss of $13 million to $12 million on revenues of $111 million to $116 million, and an net loss of $19 million to $16 million.

In addition, Hoffman admitted, the VoIP market is taking off a little slower than expected, although he believes Covad is growing faster than the overall VoIP industry and grabbing market share.