Weathering the storm

Feb 26, 2001 12:00 PM, Chris Sewell

It would be an understatement to say that Covad Communications' past year has been troubling.

Since March 2000 the company has slashed its work force by 800 employees, announced 260 central office closings and had the bottom drop out of its stock, losing as much as 98% of its value from its 52-week high of $66.67 to a year low of $1.25.

In addition, Covad has identified and dropped troubled ISPs for failing to make payments, restated revenues, postponed its year-end earnings call for revenue reassessment and had the Nasdaq temporarily suspend its stock trading.

At a glance, Covad's condition appears critical, and the question of the DSL provider's demise is not a matter of if, but when. But despite financial hardships—and analysts' uncertainties—Covad remains sanguine about its ability to turn profits and relive past glories.

“We established a new set of priorities in response to a new set of financial priorities in the marketplace,” said Covad chairman Charles McMinn. “Before, the priority was maximum growth, and when the markets decided they were interested in profitability we revamped the business plan to focus on that.”

But investment analysts are skeptical that a revamped business model is enough to restore Covad's viability. Analysts said the company's history of over-promising and under-delivering may have shaken investors' confidence once too often.

“There's very little institutional interest in the stock right now—if any,” said Rachael Rennert, an analyst at Gerard Klauer Mattison & Co. “When you're constantly relaying bad news to the investment community, that doesn't bode well for your stock price.”

Other analysts say that even if Covad is able to move its refocused business model forward, competing with RBOCs such as SBC Communications, Verizon and Qwest Communications in the DSL market is a daunting task because Covad relies on these companies for its service. But McMinn said that with its expansive network, Covad is in a good position to compete with the larger companies that can only provide in-region service and have a much narrower focus.

“They don't have a national network, and a large number of potential ISPs want to deal with a single [provider] and a single set of services nationwide,” McMinn said. “The ILECs are exclusively focused on the consumer, whereas we have a suite of services that's in the small business space and in the consumer space.”

It was Covad's move from the small and medium-sized business segment to the consumer space that some analysts speculated might have contributed to the company's current problems.

When Covad was well-funded, and as Wall Street demanded more lines and aggressive network growth, analysts said the company turned to the residential segment, leveraging a mass-marketing approach to gain many customers quickly. Its problems began when the company could not keep up with its own sales efforts.

McMinn also said Covad's network expansion was perhaps too ambitious.

“We accomplished far more than I thought we could because of the favorable funding environment. Then, after we had built that network but before we had loaded it, the funding dried up,” McMinn said. “2001 is all about loading the network to scale, proving the economics of the network by signing up subscribers and proving that we can make money and are on a path to profitability.”