Can the volatility possibly get worse?

Covad lays off more employees, other DSL providers restate revenue estimates

The financial illness infecting the telecom sector may have been slow to reach companies involved with optical networking, but it has spared no time invading DSL providers and vendors selling to that market. With stock prices that once soared near $100 per share, DSL providers such as Covad Communications are struggling to survive.

Vendors are feeling the pain of DSL's financial downturn. Both Efficient Networks and Turnstone Systems were forced to revise their earnings estimates last week.

Just last month Covad announced plans to lay off 400 workers, but the company is now cutting another 400 workers to help it stay afloat. The 400-person cut will account for 14% of Covad's work force and primarily involves sales and marketing staff.

But with a cut following a cut and a stock price that keeps slipping, the question remains: When will the bleeding stop? "It is not our goal to have more," said a Covad spokeswoman. "But we have to look for a path to profitability by reducing costs. Hopefully this will last, but there is no guarantee that it will."

Despite the gloom that appears to have fallen upon once-gleaming Covad, the spokeswoman denied the company has any interest in selling assets or being acquired by another company.

But the steep decline in Covad's valuation would seem to make it - as well as NorthPoint Communications and Rhythms NetConnections - a prime target for incumbents hungry for more high-speed access customers. And those appetites would be even greater where the incumbents could pick up an out-of-region play for DSL connectivity.

Many maintain that the DSL market is still strong, despite the unfriendly reception from investors. "There are 50 million households in the U.S. with [Internet] access, and that leaves a lot out there as potential new customers," said Greg Langdon, executive vice president of product strategy for Efficient. "When you pull back and look at the market, there are tens of millions of new customers."

Despite this potential, Efficient's revenue estimates for fiscal 2001 were far off original estimates.

"We missed revenue for the quarter by a pretty significant amount," Langdon said. "And missing it by a third isn't great."

Efficient's lower revenue is not a symptom of ailing customers - as is the case with Covad - but of expected sales not falling into the quarter as planned, Langdon said.

And Efficient was not alone. Turnstone's quarter ending Dec. 31, 2000, also had far lower revenues than expected. Although Turnstone representatives were not available for comment, the company offered "continued weakness in its CLEC customer base" as an explanation.

Long-time Wall Street favorite Copper Mountain also was forced to revise estimates last week, as it did not count $8 million worth of equipment shipped to an unnamed customer that couldn't pay.

"The world is rapidly separating into two types of business models - those that make good businesses and those that don't," Langdon said.

One analyst thinks that the DSL market's suffering on Wall Street is exaggerated. "We are still high on DSL because we believe it will continue to thrive," said Claude Romans, director of access networks for RHK. "The wholesale model doesn't seem to be the right model. But DSL will definitely not go away."

The stock price listed for TalkingNets on page 42 of the Dec. 18, 2000, issue was incorrect. TalkingNets is not a public company.

Sycamore Networks' SN 16000 switch was mistakenly listed as the SN 10000 in the chart on page 47 of the Jan. 1 issue.

Telephony regrets the errors.