Covad revamps business plan

(Telephony) Covad Communications, one of a bevy of digital subscriber line (DSL) providers in financial trouble, announced that it will take a fourth-quarter restructuring charge of up to $20 million to cover the recent 13% reduction in its workforce and said its fourth quarter earnings and revenues will be below previous expectations. The company also made moves to reduce its cash burn rate and thereby extend its funded life.

Covad estimates fourth quarter sales will be in the range of $60 million to $65 million and earnings before interest, taxes, depreciation and amortization (EBITDA) to fall in the negative $180 million to $190 million range. Previous projections had Covad ringing up $85 million in sales and losing between $140 million and $150 million.

Covad initiated a program called Safety Net under which it will give customers of financially troubled Internet service providers (ISPs) partners an opportunity to switch to a financially sound ISP or to Covad’s own ISP, Covad.net. Covad has just begun transitioning 2,000 of the approximate 65,000 lines being served by its 14 delinquent ISP resellers.

For 2001, Covad is modifying its business plan to reduce the company’s capital expenses and cash outflow and target higher margin business accounts. The company will cap its network build at just over 2,000 central offices and restrict residential orders to higher-margin line shared installations. Covad expects to spend $200 million less cash in 2001 as a result, extending its funded life to the fourth quarter of 2001. It hope to decreased its monthly cash burn rate from about $75 million in the fourth quarter to less than $60 million by the end of 2001.

For 2001, Covad expects revenue of about $385 million, down from the $550 million previously forecast. The cost-cutting measures are expected to reduce the company’s estimated EBITDA loss for 2001 by $100 million, to about $460 million. As of November 30, Covad had $900 million in cash on hand.

“We still see a high level of risk in [Covad’s] business plan, given that the company is only funded for approximately 12 months and that we suspect it will take several quarters for [Covad] to transition away from the delinquent ISPs to more stable, well-funded partners.,” said Credit Suisse First Boston Analyst Mark Kastan, in a report. “A private investment from a strategic source is unlikely, and even if [Covad] were to receive such an investment, it would be highly dilutive to existing shareholders.”

Meanwhile, NorthPoint Communications confirmed this week that it is filing a lawsuit against Verizon Communications seeking $1 billion in damages or injunctive relief from the termination of the two companies’ merger agreement. Verizon pulled out of a merger of the firms’ DSL businesses after NorthPoint experienced lowered earnings due to delinquent ISP customers.

The suit, filed in California Superior Court in San Francisco, alleges that Verizon’s backing out of the merger was “without legal or factual basis under the binding merger agreement” and that Verizon’s basis for the move was “a pretext” and in fact an attempt to “increase its near-term stock price.”

“We intend to pursue this matter completely to ensure that Verizon either closes the deal with NorthPoint or that NorthPoint received or that NorthPoint receives the full compensation and benefits to which it is entitled under law and the merger agreement,” said a statement by Liz Fetter, NorthPoint president and CEO.

NorthPoint, which is in need of financing to sustain operations, had been scheduled to receive $800 million from Verizon in exchange for a 55% stake in the company. Verizon has said that it would retain its previous $150 million investment in NorthPoint convertible preferred stock, but would not pay the $100 million break-up fee or $200 million in interim financing scheduled for January 2001.