Erased Money
Realigned 2000 financials grim for Covad
By Karen Brown
from the June 4, 2001 issue of Broadband Week
Covad Communications Inc.'s long-delayed fourth quarter 2000 earnings didn't age well.
The embattled competitive DSL carrier, which delayed reporting the earnings while it changed its financial reporting methods, acknowledged additional reductions contributing to a whopping $907 million net loss for the quarter.
To make matters worse, the financial statements include a "going concern" opinion from its auditors, which questions whether the company can continue operating.
For the quarter, revenue totaled $55.2 million, while operational losses excluding one-time charges were $259.7 million. Covad also realigned figures from the first three quarters of 2000, cutting revenue by an additional $52.8 million as a result.
In April, Covad briefly dropped from the Nasdaq exchange after officials there questioned the company's reporting practices. In a conference call to announce the delayed earnings, Covad CEO Chuck McGinn acknowledged there are still concerns.
"We are working diligently to address Nasdaq's concerns," he said. "We believe our business is fundamentally sound and hope to convince Nasdaq that we have taken and are continuing to take the necessary steps to ensure future compliance with its listing requirements."
While 2000 was grim, McGinn also was quick to say that the company had made significant improvements in 2001. "We are extremely pleased with our progress in transforming our business from the maximum growth of 2000 to the quickest path to profitability strategy we are now on," he said. "As you will recall, we announced a number of major cost reduction programs in December of last year. The effects of these changes are already having an impact on our Q1 performance."
Exact numbers won't be available until the first quarter results are announced in several weeks, but McGinn said the company's costs "are coming down significantly while revenues and lines continue to grow."
At present, 26 of Covad's 53 regions are in the black, with plans to bring 17 regions to positive cash flow by the end of the year. By the end of 2001 70 percent of the operating regions should reach stable operating level.
"As a result of these operational improvements and our cost-cutting measures, our 5-year business plan shows we have sufficient cash to last into Q2 of 2002 rather than Q1, as previously reported," McGinn said.
Covad may also benefit from an influx of funding from SBC Communications Inc., with whom it forged a marketing agreement late last year to sell DSL service outside of the RBOC's territory. Although the agreement includes a $600 million guarantee in resale value over the life of the six-year contract, company officials would not release what revenue the agreement has generated thus far.
Despite the auditors' warning, McGinn said the company has a strategy to gain the additional funding--with scenarios ranging from $400 and $700 million--to reach profitability.
"While it is too early to tell which scenario represents reality, or whether we will have to build additional scenarios which will require more cap, we believe we can raise this cash in a timely manner," McGinn said. "We are already exploring several sources to raise this additional capital."
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