DSL providers counting pennies

DSL providers Covad Communications and Rhythms NetConnections both tightened their belts this week to conserve cash as their share prices hovered in the $1-$3 range. This morning, Rhythms announced it was deferring payment of the $5.1 million quarterly dividend on its 6.7% Series F convertible preferred stock payable on December 3. Yesterday, Covad announced a round of job cuts.

Although Rhythms said it has enough cash to pay the dividend, the company’s debt indentures prohibit it from paying cash dividends on its Series F stock so long as the indentures remain outstanding. Additionally, the recent decline in the price of Rhythms’ common stock means it would have to sell approximately 4 million common shares to pay the $5.1 million dividend, and according to the company such action would be “inappropriate.”

Meanwhile, Covad announced Monday that it is laying off 13% of its workforce, or about 400 employees, and cutting operating costs to save 20% to 30% in 2001. Among the cost reductions, Covad is halting the construction of its planned Alpharetta, Ga., call center and plans to close it in the next 60 days. Other savings will come from office consolidation and the reduction of business and marketing expenses, central office build-out expenditures, and equipment.

In addition, Covad is “holding” the expansion of its nationwide DSL network to “just over 2000 central offices,” and plans to rely “almost exclusively” on its rollout of line sharing for customer orders received after the first of the new year. Self-installation DSL options should reduce truck rolls, further cutting costs, Covad said in a press release.

“Although we feel these ‘belt tightening’ measures are prudent, given the current market climate, the potentially positive impact on cash flow may be mitigated by lower revenues due to delinquent ISPs and reduced provisioning capabilities resulting from a smaller workforce,” said Goldman Sachs analyst Matthew Janiga in a report.

But a Covad spokeswoman said most of Covad’s line installers are contract employees and thus not affected by the cuts, and that with line sharing Covad would need less and less installers. “These [job] cuts are really more around the opportunity to save money in the Atlanta area,” she said.

Covad expects to record a one-time, undisclosed charge in its fourth quarter to cover severance fees and discontinued operations. The company plans to release formal financial guidance on December 12.

Rhythms also announced today that it had received an additional $50 million in vendor lease financing, and that with its cash and equivalents on hand its operational needs are funded through the end of 2001. As of September 30, Rhythms had cash, investments and restricted cash in the amount of $748 million.