Company Reaches $100 Million in Quarterly Total Subscription
Revenue for First Time; Grows VoIP Stations by 21%
Covad Communications Group, Inc. (AMEX:DVW), a leading national provider of integrated voice and data communications, today reported revenue for the third quarter of 2005 of $112.1 million, an increase of 2 percent from the $109.7 million reported for the second quarter of 2005 and an increase of 6 percent from the $105.7 million reported in the third quarter of 2004.
Covad ended the third quarter of 2005 with approximately 578,400 broadband lines in service, an increase of 24,000 lines from the second quarter of 2005. Covad ended the third quarter of 2005 with 1,035 VoIP business customers using approximately 36,100 stations, representing a 21 percent increase in VoIP station count from June 30, 2005.
Covad reported a net loss of $15.8 million, or $0.06 loss per share, for the third quarter of 2005 as compared to a net loss of $16.4 million, or $0.06 per share, for the second quarter of 2005 and a net loss of $13.8 million, or $0.05 loss per share, in the third quarter of 2004.
Loss from operations for the third quarter of 2005 was $28.0 million compared to $25.6 million for the second quarter of 2005 and $15.3 million in the third quarter of 2004.
Cash, cash equivalents and short-term investment balances, including restricted cash and investments, decreased by $14.9 million to $116.1 million in the third quarter of 2005 compared to a balance of $131.0 million at the end of the second quarter of 2005. Covad's total cash balance as of September 30, 2005 includes proceeds from the sale of the remainder of the Company's ownership in ACCA Networks Co. LTD (ACCA), a Japanese broadband provider, offset by the usage of funds received from Earthlink to support it's Line-Powered Voice Access trial, expenditures to provision new customers from the AOL broadband trial, and a semi-annual interest payment on our convertible debentures.
"The third quarter marks the first time that Covad has generated more than $100 million in total subscription revenue, and is proof of the momentum Covad is building toward our goals of being EBITDA positive by mid-year 2006 and cash-flow positive by year-end 2006," said Charles Hoffman, Covad president and chief executive officer. "We are taking more control of our destiny by increasing Covad VoIP stations by 21 percent in the quarter, selling more margin-rich business services, and through our planned acquisition of wireless broadband provider NextWeb, which will jump start our entry into the wireless broadband market."
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2005 was a loss of $11.9 million as compared to a loss of $8.0 million in the second quarter of 2005 and a profit of $4.1 million in the third quarter of 2004. Refer to the Selected Financial Data, including Note 2, for a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure and other information.
Covad's wholesale subscribers contributed $79.7 million of revenue, or 71 percent, while direct subscribers contributed $32.4 million of revenue, or 29 percent. As of September 30, 2005, broadband lines in service were approximately 498,500 wholesale and 79,900 direct lines, as compared to approximately 472,800 wholesale and 81,600 direct lines as of June 30, 2005, and approximately 448,700 wholesale and 76,200 direct lines reported as of September 30, 2004.
For the third quarter of 2005, broadband and VoIP subscription revenue increased to $96.6 million from the $93.5 million reported in the second quarter of 2005 and the $88.8 million reported in the third quarter of 2004. Management uses broadband and VoIP subscription revenue to evaluate the performance of its business and believes these revenues are a useful measure for investors as they represent a key indicator of the performance of the company's core business. Refer to the Selected Financial Data, including Note 3, for additional information, including a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure.
For the third quarter of 2005, gross margin was $27.6 million, or 25 percent of revenue, as compared to $33.5 million, or 31 percent of revenue, for the second quarter of 2005 and $39.7 million, or 38 percent of revenue, for the third quarter of 2004. The AOL trial, which ended during the quarter, had a positive effect on revenues for the third quarter of 2005, but reduced gross margin by approximately $3.4 million due to the upfront incremental expenditures associated with such volume. Selling, general and administrative expenses were $39.5 million for the third quarter of 2005 as compared to $41.5 million for the second quarter of 2005 and $35.5 million in the third quarter of 2004.
"Our third quarter EBITDA was slightly better than our guidance for the quarter and cash and revenues were well within guidance," said John Trewin, Covad senior vice president and chief financial officer.
Operating Statistics
-- At the end of the third quarter of 2005, Covad had approximately 347,400 consumer and 231,000 business broadband lines in service representing 60 percent and 40 percent of total broadband lines, respectively. Covad had 1,035 VoIP business customers and approximately 36,100 VoIP stations as of September 30, 2005. Business customers contributed $80.9 million, or 72 percent, of total revenue.
-- Weighted Average Revenue per User (ARPU) for broadband lines was $54 per month during the third quarter of 2005, down slightly from $55 per month for the second quarter of 2005. Covad VoIP ARPU per customer (excluding resellers) was $1,578 per month during the third quarter of 2005, down from $1,698 per month for the second quarter of 2005.
-- Net customer disconnections, or churn, for broadband lines averaged approximately 3.3% percent in the third quarter of 2005, slightly up from 3.2 percent for the second quarter of 2005.
Business Outlook
Covad expects total net revenues for the fourth quarter of 2005 to be in the range of $112.0-116.0 million. Total subscription revenue is expected to be in the range of $100.5-104.0 million. Broadband and VoIP subscription revenue is expected to be in the range of $96.5-99.5 million. Covad expects its net loss to be in the range of $23.0-26.0 million, and EBITDA loss in the range of $9.0-11.0 million. Included in our EBITDA guidance is approximately $2.3 million of severance costs. Net change in cash, cash equivalents and short-term investments, including restricted cash and investments, in the fourth quarter of 2005 is expected to be in the range of negative $16.0-20.0 million, which includes the payment of approximately $2.5 million of severance costs and related accrued vacation pay.
The above guidance does not reflect our pending acquisition of NextWeb, which we expect to be consummated later this quarter.
Conference Call Information
Covad will conduct a conference call to discuss these financial results on Wednesday, October 26, 2005 at 8:30 a.m. Eastern Time (ET)/ 5:30 a.m. Pacific Time (PT). The conference call will be webcast over the Internet. To listen to the call, visit the Event Calendar section on the Covad web site at http://www.covad.com/companyinfo/investorrelations. Investors and press may also listen by telephone to the call by dialing (800) 572-9815 and reference pass code 1525649. Participants are advised to call in 5 minutes prior to the start time. The conference call will be recorded and available for replay listening until 11:59 p.m. EST on November 9, 2005 by dialing (800) 642-1687 and reference pass code 1525649. The webcast will be available through our website until October 26, 2006.
About Covad
Covad is a leading nationwide provider of broadband voice and data communications. The company offers DSL, Voice over IP, T1, Web hosting, managed security, IP and dial-up, and bundled voice and data services directly through Covad's network and through Internet Service Providers, value-added resellers, telecommunications carriers and affinity groups to small and medium-sized businesses and home users. Covad broadband services are currently available across the nation in 44 states and 235 Metropolitan Statistical Areas (MSAs) and can be purchased by more than 57 million homes and businesses, which represent over 50 percent of all US homes and businesses. Corporate headquarters is located at 110 Rio Robles San Jose, CA 95134. Telephone: 1-888-GO-COVAD. Web Site: www.covad.com.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
The foregoing contains "forward-looking statements" which are based on management's current information and beliefs as well as on a number of assumptions concerning future events made by management. Examples of forward-looking statements include the anticipated completion of the NextWeb acquisition and the company's expected revenue, Broadband and VoIP subscription revenue, broadband subscriber line growth, net loss, EBITDA loss, change in cash, cash equivalents and short term investments, including restricted cash and investments. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside Covad's control, that could cause actual results to differ materially from such statements. These risk factors include the ability of Covad and NextWeb to satisfy the closing conditions to the NextWeb acquisition, our ability to rapidly expand and deploy new services, the impact of increasing competition, pricing pressures, consolidation in the telecommunications industry, and uncertainty in telecommunications regulations and changes in technologies, among other risks. For a more detailed description of the risk factors that could cause such a difference, please see Covad's 10-K, 8-K and other filings with the Securities and Exchange Commission. Covad disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results of Covad. -0- COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands) Condensed Consolidated Balance Sheet As of As of As of Data Sep 30, Jun 30, Dec 31, 2005 2005 2004 --------- --------- --------- Cash, cash equivalents, and short-term investments $111,898 $123,282 $150,996 Restricted cash and cash equivalents 4,167 7,695 2,533 Short-term investments in equity securities - 14,288 - Accounts receivable, net 32,131 29,401 30,041 All other current assets 14,356 16,012 12,211 Property and equipment, net 72,808 71,494 78,707 Collocation fees and other intangible assets, net 23,638 26,843 34,561 Goodwill 36,626 36,626 36,626 Deferred costs of service activation 27,184 28,198 30,152 Deferred debt issuance costs, net 3,475 3,727 4,231 All other long-term assets 3,902 4,280 5,167 -------- -------- -------- Total assets $330,185 $361,846 $385,225 ======== ======== ======== Total current liabilities $117,735 $116,176 $116,717 Long-term debt 125,000 125,000 125,000 Collateralized and other long-term customer deposits 42,866 44,922 44,444 Deferred gain resulting from deconsolidation of subsidiary - - 53,963 Unearned revenues 46,252 48,032 51,518 Other long-term liabilities 2,078 2,003 2,218 Total stockholders' equity (deficit) (3,746) 25,713 (8,635) -------- -------- -------- Total liabilities and stockholders' equity (deficit) $330,185 $361,846 $385,225 ======== ======== ======== COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except per share amounts) Condensed Three Months Ended Nine Months Ended Consolidated Statements of Operations Data ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Revenues, net $112,069 $109,741 $105,687 $329,528 $321,490 Operating expenses: Cost of sales (exclusive of depreciation and amortization) 84,497 76,240 65,939 233,486 196,981 Selling, general and administrative 39,513 41,492 35,488 123,379 100,668 Depreciation and amortization of property and equipment 12,040 12,909 14,078 38,734 42,735 Amortization of collocation fees and other intangible assets 3,998 4,717 5,328 14,079 15,121 Provision for restructuring expenses - - 145 - 915 -------- -------- -------- -------- -------- Total operating expenses 140,048 135,358 120,978 409,678 356,420 -------- -------- -------- -------- -------- Loss from operations (27,979) (25,617) (15,291) (80,150) (34,930) Other income (expense) Gain on deconsolidation of subsidiary - - - 53,963 - Gain on sale of equity securities 12,177 9,421 - 28,844 - Other (3) (207) 1,487 (491) 189 -------- -------- -------- -------- -------- Other income (expense), net 12,174 9,214 1,487 82,316 189 -------- -------- -------- -------- -------- Net income (loss) $(15,805) $(16,403) $(13,804) $ 2,166 $(34,741) ======== ======== ======== ======== ======== Earnings (loss) per common share: Basic $ (0.06) $ (0.06) $ (0.05) $ 0.01 $ (0.14) ======== ======== ======== ======== ======== Diluted $ (0.06) $ (0.06) $ (0.05) $ 0.01 $ (0.14) ======== ======== ======== ======== ======== Weighted average number of common shares outstanding Basic 266,412 263,918 260,304 264,731 245,219 ======== ======== ======== ======== ======== Diluted 266,412 263,918 260,304 270,342 245,219 ======== ======== ======== ======== ======== Gross Margin (Note 1) $ 27,572 $ 33,501 $ 39,748 96,042 124,509 % of revenue 24.6% 30.5% 37.6% 29.1% 38.7% EBITDA Calculation Three Months Ended Nine Months Ended (Note 2) ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Net income (loss) $(15,805) $(16,403) $(13,804) $ 2,166 $(34,741) Plus:Other (income) expense, net (12,174) (9,214) (1,487) (82,316) (189) Depreciation and amortization of property and equipment 12,040 12,909 14,078 38,734 42,735 Amortization of collocation fees and other intangible assets 3,998 4,717 5,328 14,079 15,121 -------- -------- -------- -------- -------- EBITDA (Note 2) $(11,941) $ (7,991) $ 4,115 $(27,337) $ 22,926 ======== ======== ======== ======== ======== COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except key operating data) Consolidated Revenue Three Months Ended Nine Months Ended Data ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Broadband subscription revenue (Note 3) $92,814 $90,736 $86,514 $272,637 $263,145 VoIP subscription revenue (Note 3) 3,777 2,738 2,241 8,946 2,742 High-capacity circuit subscription revenue 4,302 4,511 4,637 13,006 15,681 Dial-up subscription revenue - - 739 - 2,927 --------- --------- --------- --------- --------- Total subscription revenue $100,893 $97,985 $94,131 $294,589 $284,495 Financially distressed partners (Note 4) (70) 120 (47) (76) (433) Customer rebates and incentives not subject to deferral (Note 5) (101) (268) (643) (417) (1,367) Other revenue, net (Note 6) 11,347 11,904 12,246 35,432 38,795 --------- --------- --------- --------- --------- Revenues, net $112,069 $109,741 $105,687 $329,528 $321,490 ========= ========= ========= ========= ========= Consolidated Cost of Three Months Ended Nine Months Ended Sales Data (exclusive of depreciation and amortization) ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Direct cost of revenue, net (Note 8) $20,956 $20,559 $16,122 $60,670 $49,765 Other network and product costs (Note 9) 63,541 55,681 49,817 172,816 147,216 --------- --------- --------- --------- --------- Cost of sales (exclusive of depreciation and amortization) $84,497 $76,240 $65,939 $233,486 $196,981 ========= ========= ========= ========= ========= Key Operating Data As of ----------------------------- Sep 30, Jun 30, Sep 30, 2005 2005 2004 --------- --------- --------- End of Period Lines (EOP) Company Business 230,985 229,747 222,431 Consumer 347,437 324,652 302,464 --------- --------- --------- Total Company 578,422 554,399 524,895 Wholesale Business 170,214 169,559 165,669 Consumer 328,279 303,239 283,020 --------- --------- --------- Total Wholesale 498,493 472,798 448,689 Direct Business 60,771 60,188 56,762 Consumer 19,158 21,413 19,444 --------- --------- --------- Total Direct 79,929 81,601 76,206 Direct VoIP Customers 1,035 870 373 Stations 36,062 29,922 17,898 Average Revenue per User (ARPU) Company Business $98 $97 $95 Consumer $25 $26 $28 --------- --------- --------- Total Company $54 $55 $56 Wholesale Business $81 $80 $76 Consumer $25 $25 $27 --------- --------- --------- Total Wholesale $44 $45 $45 Direct Business $144 $145 $148 Consumer $33 $32 $39 --------- --------- --------- Total Direct $117 $114 $122 Direct VoIP Customers (excluding resellers) $1,578 $1,698 n/a Stations $37 $35 $44 COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except key operating data) Three Months Ending December 31, 2005 - Business Outlook ---------------------------------------------------------------------- EBITDA Calculation (Note 2) Three Months Ending Dec 31, 2005 --------------------------- Projected Range of Results --------------------------- Net loss $ (26,000) $ (23,000) Plus:Other (income) expense, net 500 500 Depreciation and amortization of property and equipment 11,000 10,500 Amortization of collocation fees and other intangible assets 3,500 3,000 ---------- --------- EBITDA (Note 2) $ (11,000)to $ (9,000) ========== ========= Consolidated Revenue Data Three Months Ending Dec 31, 2005 --------------------------- Projected Range of Results --------------------------- Broadband subscription revenue (Note 3) $ 92,000 $ 94,000 VoIP subscription revenue (Note 3) 4,500 5,500 High-capacity circuit subscription revenue 4,000 4,500 ---------- --------- Total subscription revenue $ 100,500 to $ 104,000 Financially distressed partners (Note 4): - - Customer rebates and incentives not subject to deferral (Note 5) - - Other revenue, net (Note 6) 11,500 to 12,000 ---------- --------- Revenues, net $ 112,000 $ 116,000 ========== ========= Notes to Unaudited Selected Financial Data 1. Gross margin is calculated by subtracting cost of sales (exclusive of depreciation and amortization) from revenues, net. 2. Management believes that Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), defined as net loss prior to (i) depreciation and amortization of property and equipment, (ii) amortization of intangible assets and (iii) other income (expense), net, is a useful measure because it provides additional information about the company's ability to meet future capital expenditures and working capital requirements and fund continued growth. Management also uses EBITDA to evaluate the performance of its business segments and as a factor in its employee bonus program. EBITDA may be defined differently by other companies and should not be used as an alternative to our operating and other financial information as determined under accounting principles generally accepted in the United States. EBITDA is not a prescribed term under accounting principles generally accepted in the United States, does not directly correlate to cash provided by or used in operating activities and should not be considered in isolation, nor as an alternative to more meaningful measures of performance determined in accordance with accounting principles generally accepted in the United States. EBITDA generally excludes the effect of capital costs. 3. Broadband and VoIP subscription revenue is defined as revenue for recurring services provided and earned during such period. Broadband and VoIP subscription revenue excludes charges for Federal Universal Service Fund ("FUSF") assessments, dial-up services, and high-capacity circuits and other adjustments. Broadband and VoIP subscription revenue includes bills issued to customers that are classified as financially distressed and whose revenue is only recognized if cash is received (refer to Note 4 below for a more detailed discussion on accounting for financially distressed partners). Management believes broadband and VoIP subscription revenue is a useful measure for investors as it represents a key indicator of the growth of the company's core business. Management uses broadband and VoIP subscription revenue to evaluate the performance of its business segments. 4. When the company determines that (i) the collectibility of a bill issued to a customer is not reasonably assured or (ii) its ability to retain some or all of the payments received from a customer that has filed for bankruptcy protection is not reasonably assured, the customer is classified as "financially distressed" for revenue recognition purposes. A bill issued to a financially distressed customer is recognized as revenue when services are rendered and cash for those services is received, assuming all other criteria for revenue recognition have been met, and only after the collection of all previous outstanding accounts receivable balances. Consequently, there may be significant timing differences between the time a bill is issued, the time the services are provided and the time that cash is received and revenue is recognized. 5. Customer rebates and incentives not subject to deferral consist of amounts paid or accrued under marketing, promotion and rebate incentive programs with certain customers. Rebates and incentives paid or accrued under these programs are not accompanied by any up-front charges billed to customers. Therefore, these charges are accounted for as reductions of revenue as incurred. 6. Other revenues consist primarily of revenue recognized from amortization of prior period SAB 104 deferrals (refer to Note 7 below for a discussion of SAB 104) and FUSF billed to our customers and other revenues not subject to SAB 104 deferral because they do not relate to an on-going customer relationship or performance of future services. 7. In accordance with SAB 104, the company recognizes up-front fees associated with service activation, net of any amounts concurrently paid or accrued under certain marketing, promotion and rebate incentive programs, over the expected term of the customer relationship, which is presently estimated to be 24 months, using the straight-line method. The company also treats the incremental direct costs of service activation (which consist principally of customer premises equipment, service activation fees paid to other telecommunications companies and sales commissions) as deferred charges in amounts that are no greater than the up-front fees that are deferred, and such deferred incremental direct costs are amortized to expense using the straight-line method over 24 to 48 months. 8. Direct costs of revenue, net consists of monthly charges we receive from telecommunications carriers to support the delivery of broadband and VoIP services to our customers. Direct costs of revenue, net includes the on-going costs associated with high-capacity circuits provisioned for our wholesalers and the costs associated with local loops provisioned for our broadband and dial-up end-users. 9. Other network and product costs consist of all other costs, excluding depreciation and amortization, associated with equipment maintenance, central offices' (COs) cost, installation costs paid to others, the internal installation services group, and federal universal service fund tax.
Covad Communications Group, Inc. (AMEX:DVW), a leading national provider of integrated voice and data communications, today reported revenue for the third quarter of 2005 of $112.1 million, an increase of 2 percent from the $109.7 million reported for the second quarter of 2005 and an increase of 6 percent from the $105.7 million reported in the third quarter of 2004.
Covad ended the third quarter of 2005 with approximately 578,400 broadband lines in service, an increase of 24,000 lines from the second quarter of 2005. Covad ended the third quarter of 2005 with 1,035 VoIP business customers using approximately 36,100 stations, representing a 21 percent increase in VoIP station count from June 30, 2005.
Covad reported a net loss of $15.8 million, or $0.06 loss per share, for the third quarter of 2005 as compared to a net loss of $16.4 million, or $0.06 per share, for the second quarter of 2005 and a net loss of $13.8 million, or $0.05 loss per share, in the third quarter of 2004.
Loss from operations for the third quarter of 2005 was $28.0 million compared to $25.6 million for the second quarter of 2005 and $15.3 million in the third quarter of 2004.
Cash, cash equivalents and short-term investment balances, including restricted cash and investments, decreased by $14.9 million to $116.1 million in the third quarter of 2005 compared to a balance of $131.0 million at the end of the second quarter of 2005. Covad's total cash balance as of September 30, 2005 includes proceeds from the sale of the remainder of the Company's ownership in ACCA Networks Co. LTD (ACCA), a Japanese broadband provider, offset by the usage of funds received from Earthlink to support it's Line-Powered Voice Access trial, expenditures to provision new customers from the AOL broadband trial, and a semi-annual interest payment on our convertible debentures.
"The third quarter marks the first time that Covad has generated more than $100 million in total subscription revenue, and is proof of the momentum Covad is building toward our goals of being EBITDA positive by mid-year 2006 and cash-flow positive by year-end 2006," said Charles Hoffman, Covad president and chief executive officer. "We are taking more control of our destiny by increasing Covad VoIP stations by 21 percent in the quarter, selling more margin-rich business services, and through our planned acquisition of wireless broadband provider NextWeb, which will jump start our entry into the wireless broadband market."
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2005 was a loss of $11.9 million as compared to a loss of $8.0 million in the second quarter of 2005 and a profit of $4.1 million in the third quarter of 2004. Refer to the Selected Financial Data, including Note 2, for a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure and other information.
Covad's wholesale subscribers contributed $79.7 million of revenue, or 71 percent, while direct subscribers contributed $32.4 million of revenue, or 29 percent. As of September 30, 2005, broadband lines in service were approximately 498,500 wholesale and 79,900 direct lines, as compared to approximately 472,800 wholesale and 81,600 direct lines as of June 30, 2005, and approximately 448,700 wholesale and 76,200 direct lines reported as of September 30, 2004.
For the third quarter of 2005, broadband and VoIP subscription revenue increased to $96.6 million from the $93.5 million reported in the second quarter of 2005 and the $88.8 million reported in the third quarter of 2004. Management uses broadband and VoIP subscription revenue to evaluate the performance of its business and believes these revenues are a useful measure for investors as they represent a key indicator of the performance of the company's core business. Refer to the Selected Financial Data, including Note 3, for additional information, including a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure.
For the third quarter of 2005, gross margin was $27.6 million, or 25 percent of revenue, as compared to $33.5 million, or 31 percent of revenue, for the second quarter of 2005 and $39.7 million, or 38 percent of revenue, for the third quarter of 2004. The AOL trial, which ended during the quarter, had a positive effect on revenues for the third quarter of 2005, but reduced gross margin by approximately $3.4 million due to the upfront incremental expenditures associated with such volume. Selling, general and administrative expenses were $39.5 million for the third quarter of 2005 as compared to $41.5 million for the second quarter of 2005 and $35.5 million in the third quarter of 2004.
"Our third quarter EBITDA was slightly better than our guidance for the quarter and cash and revenues were well within guidance," said John Trewin, Covad senior vice president and chief financial officer.
Operating Statistics
-- At the end of the third quarter of 2005, Covad had approximately 347,400 consumer and 231,000 business broadband lines in service representing 60 percent and 40 percent of total broadband lines, respectively. Covad had 1,035 VoIP business customers and approximately 36,100 VoIP stations as of September 30, 2005. Business customers contributed $80.9 million, or 72 percent, of total revenue.
-- Weighted Average Revenue per User (ARPU) for broadband lines was $54 per month during the third quarter of 2005, down slightly from $55 per month for the second quarter of 2005. Covad VoIP ARPU per customer (excluding resellers) was $1,578 per month during the third quarter of 2005, down from $1,698 per month for the second quarter of 2005.
-- Net customer disconnections, or churn, for broadband lines averaged approximately 3.3% percent in the third quarter of 2005, slightly up from 3.2 percent for the second quarter of 2005.
Business Outlook
Covad expects total net revenues for the fourth quarter of 2005 to be in the range of $112.0-116.0 million. Total subscription revenue is expected to be in the range of $100.5-104.0 million. Broadband and VoIP subscription revenue is expected to be in the range of $96.5-99.5 million. Covad expects its net loss to be in the range of $23.0-26.0 million, and EBITDA loss in the range of $9.0-11.0 million. Included in our EBITDA guidance is approximately $2.3 million of severance costs. Net change in cash, cash equivalents and short-term investments, including restricted cash and investments, in the fourth quarter of 2005 is expected to be in the range of negative $16.0-20.0 million, which includes the payment of approximately $2.5 million of severance costs and related accrued vacation pay.
The above guidance does not reflect our pending acquisition of NextWeb, which we expect to be consummated later this quarter.
Conference Call Information
Covad will conduct a conference call to discuss these financial results on Wednesday, October 26, 2005 at 8:30 a.m. Eastern Time (ET)/ 5:30 a.m. Pacific Time (PT). The conference call will be webcast over the Internet. To listen to the call, visit the Event Calendar section on the Covad web site at http://www.covad.com/companyinfo/investorrelations. Investors and press may also listen by telephone to the call by dialing (800) 572-9815 and reference pass code 1525649. Participants are advised to call in 5 minutes prior to the start time. The conference call will be recorded and available for replay listening until 11:59 p.m. EST on November 9, 2005 by dialing (800) 642-1687 and reference pass code 1525649. The webcast will be available through our website until October 26, 2006.
About Covad
Covad is a leading nationwide provider of broadband voice and data communications. The company offers DSL, Voice over IP, T1, Web hosting, managed security, IP and dial-up, and bundled voice and data services directly through Covad's network and through Internet Service Providers, value-added resellers, telecommunications carriers and affinity groups to small and medium-sized businesses and home users. Covad broadband services are currently available across the nation in 44 states and 235 Metropolitan Statistical Areas (MSAs) and can be purchased by more than 57 million homes and businesses, which represent over 50 percent of all US homes and businesses. Corporate headquarters is located at 110 Rio Robles San Jose, CA 95134. Telephone: 1-888-GO-COVAD. Web Site: www.covad.com.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
The foregoing contains "forward-looking statements" which are based on management's current information and beliefs as well as on a number of assumptions concerning future events made by management. Examples of forward-looking statements include the anticipated completion of the NextWeb acquisition and the company's expected revenue, Broadband and VoIP subscription revenue, broadband subscriber line growth, net loss, EBITDA loss, change in cash, cash equivalents and short term investments, including restricted cash and investments. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside Covad's control, that could cause actual results to differ materially from such statements. These risk factors include the ability of Covad and NextWeb to satisfy the closing conditions to the NextWeb acquisition, our ability to rapidly expand and deploy new services, the impact of increasing competition, pricing pressures, consolidation in the telecommunications industry, and uncertainty in telecommunications regulations and changes in technologies, among other risks. For a more detailed description of the risk factors that could cause such a difference, please see Covad's 10-K, 8-K and other filings with the Securities and Exchange Commission. Covad disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results of Covad. -0- COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands) Condensed Consolidated Balance Sheet As of As of As of Data Sep 30, Jun 30, Dec 31, 2005 2005 2004 --------- --------- --------- Cash, cash equivalents, and short-term investments $111,898 $123,282 $150,996 Restricted cash and cash equivalents 4,167 7,695 2,533 Short-term investments in equity securities - 14,288 - Accounts receivable, net 32,131 29,401 30,041 All other current assets 14,356 16,012 12,211 Property and equipment, net 72,808 71,494 78,707 Collocation fees and other intangible assets, net 23,638 26,843 34,561 Goodwill 36,626 36,626 36,626 Deferred costs of service activation 27,184 28,198 30,152 Deferred debt issuance costs, net 3,475 3,727 4,231 All other long-term assets 3,902 4,280 5,167 -------- -------- -------- Total assets $330,185 $361,846 $385,225 ======== ======== ======== Total current liabilities $117,735 $116,176 $116,717 Long-term debt 125,000 125,000 125,000 Collateralized and other long-term customer deposits 42,866 44,922 44,444 Deferred gain resulting from deconsolidation of subsidiary - - 53,963 Unearned revenues 46,252 48,032 51,518 Other long-term liabilities 2,078 2,003 2,218 Total stockholders' equity (deficit) (3,746) 25,713 (8,635) -------- -------- -------- Total liabilities and stockholders' equity (deficit) $330,185 $361,846 $385,225 ======== ======== ======== COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except per share amounts) Condensed Three Months Ended Nine Months Ended Consolidated Statements of Operations Data ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Revenues, net $112,069 $109,741 $105,687 $329,528 $321,490 Operating expenses: Cost of sales (exclusive of depreciation and amortization) 84,497 76,240 65,939 233,486 196,981 Selling, general and administrative 39,513 41,492 35,488 123,379 100,668 Depreciation and amortization of property and equipment 12,040 12,909 14,078 38,734 42,735 Amortization of collocation fees and other intangible assets 3,998 4,717 5,328 14,079 15,121 Provision for restructuring expenses - - 145 - 915 -------- -------- -------- -------- -------- Total operating expenses 140,048 135,358 120,978 409,678 356,420 -------- -------- -------- -------- -------- Loss from operations (27,979) (25,617) (15,291) (80,150) (34,930) Other income (expense) Gain on deconsolidation of subsidiary - - - 53,963 - Gain on sale of equity securities 12,177 9,421 - 28,844 - Other (3) (207) 1,487 (491) 189 -------- -------- -------- -------- -------- Other income (expense), net 12,174 9,214 1,487 82,316 189 -------- -------- -------- -------- -------- Net income (loss) $(15,805) $(16,403) $(13,804) $ 2,166 $(34,741) ======== ======== ======== ======== ======== Earnings (loss) per common share: Basic $ (0.06) $ (0.06) $ (0.05) $ 0.01 $ (0.14) ======== ======== ======== ======== ======== Diluted $ (0.06) $ (0.06) $ (0.05) $ 0.01 $ (0.14) ======== ======== ======== ======== ======== Weighted average number of common shares outstanding Basic 266,412 263,918 260,304 264,731 245,219 ======== ======== ======== ======== ======== Diluted 266,412 263,918 260,304 270,342 245,219 ======== ======== ======== ======== ======== Gross Margin (Note 1) $ 27,572 $ 33,501 $ 39,748 96,042 124,509 % of revenue 24.6% 30.5% 37.6% 29.1% 38.7% EBITDA Calculation Three Months Ended Nine Months Ended (Note 2) ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Net income (loss) $(15,805) $(16,403) $(13,804) $ 2,166 $(34,741) Plus:Other (income) expense, net (12,174) (9,214) (1,487) (82,316) (189) Depreciation and amortization of property and equipment 12,040 12,909 14,078 38,734 42,735 Amortization of collocation fees and other intangible assets 3,998 4,717 5,328 14,079 15,121 -------- -------- -------- -------- -------- EBITDA (Note 2) $(11,941) $ (7,991) $ 4,115 $(27,337) $ 22,926 ======== ======== ======== ======== ======== COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except key operating data) Consolidated Revenue Three Months Ended Nine Months Ended Data ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Broadband subscription revenue (Note 3) $92,814 $90,736 $86,514 $272,637 $263,145 VoIP subscription revenue (Note 3) 3,777 2,738 2,241 8,946 2,742 High-capacity circuit subscription revenue 4,302 4,511 4,637 13,006 15,681 Dial-up subscription revenue - - 739 - 2,927 --------- --------- --------- --------- --------- Total subscription revenue $100,893 $97,985 $94,131 $294,589 $284,495 Financially distressed partners (Note 4) (70) 120 (47) (76) (433) Customer rebates and incentives not subject to deferral (Note 5) (101) (268) (643) (417) (1,367) Other revenue, net (Note 6) 11,347 11,904 12,246 35,432 38,795 --------- --------- --------- --------- --------- Revenues, net $112,069 $109,741 $105,687 $329,528 $321,490 ========= ========= ========= ========= ========= Consolidated Cost of Three Months Ended Nine Months Ended Sales Data (exclusive of depreciation and amortization) ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- --------- --------- --------- Direct cost of revenue, net (Note 8) $20,956 $20,559 $16,122 $60,670 $49,765 Other network and product costs (Note 9) 63,541 55,681 49,817 172,816 147,216 --------- --------- --------- --------- --------- Cost of sales (exclusive of depreciation and amortization) $84,497 $76,240 $65,939 $233,486 $196,981 ========= ========= ========= ========= ========= Key Operating Data As of ----------------------------- Sep 30, Jun 30, Sep 30, 2005 2005 2004 --------- --------- --------- End of Period Lines (EOP) Company Business 230,985 229,747 222,431 Consumer 347,437 324,652 302,464 --------- --------- --------- Total Company 578,422 554,399 524,895 Wholesale Business 170,214 169,559 165,669 Consumer 328,279 303,239 283,020 --------- --------- --------- Total Wholesale 498,493 472,798 448,689 Direct Business 60,771 60,188 56,762 Consumer 19,158 21,413 19,444 --------- --------- --------- Total Direct 79,929 81,601 76,206 Direct VoIP Customers 1,035 870 373 Stations 36,062 29,922 17,898 Average Revenue per User (ARPU) Company Business $98 $97 $95 Consumer $25 $26 $28 --------- --------- --------- Total Company $54 $55 $56 Wholesale Business $81 $80 $76 Consumer $25 $25 $27 --------- --------- --------- Total Wholesale $44 $45 $45 Direct Business $144 $145 $148 Consumer $33 $32 $39 --------- --------- --------- Total Direct $117 $114 $122 Direct VoIP Customers (excluding resellers) $1,578 $1,698 n/a Stations $37 $35 $44 COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except key operating data) Three Months Ending December 31, 2005 - Business Outlook ---------------------------------------------------------------------- EBITDA Calculation (Note 2) Three Months Ending Dec 31, 2005 --------------------------- Projected Range of Results --------------------------- Net loss $ (26,000) $ (23,000) Plus:Other (income) expense, net 500 500 Depreciation and amortization of property and equipment 11,000 10,500 Amortization of collocation fees and other intangible assets 3,500 3,000 ---------- --------- EBITDA (Note 2) $ (11,000)to $ (9,000) ========== ========= Consolidated Revenue Data Three Months Ending Dec 31, 2005 --------------------------- Projected Range of Results --------------------------- Broadband subscription revenue (Note 3) $ 92,000 $ 94,000 VoIP subscription revenue (Note 3) 4,500 5,500 High-capacity circuit subscription revenue 4,000 4,500 ---------- --------- Total subscription revenue $ 100,500 to $ 104,000 Financially distressed partners (Note 4): - - Customer rebates and incentives not subject to deferral (Note 5) - - Other revenue, net (Note 6) 11,500 to 12,000 ---------- --------- Revenues, net $ 112,000 $ 116,000 ========== ========= Notes to Unaudited Selected Financial Data 1. Gross margin is calculated by subtracting cost of sales (exclusive of depreciation and amortization) from revenues, net. 2. Management believes that Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), defined as net loss prior to (i) depreciation and amortization of property and equipment, (ii) amortization of intangible assets and (iii) other income (expense), net, is a useful measure because it provides additional information about the company's ability to meet future capital expenditures and working capital requirements and fund continued growth. Management also uses EBITDA to evaluate the performance of its business segments and as a factor in its employee bonus program. EBITDA may be defined differently by other companies and should not be used as an alternative to our operating and other financial information as determined under accounting principles generally accepted in the United States. EBITDA is not a prescribed term under accounting principles generally accepted in the United States, does not directly correlate to cash provided by or used in operating activities and should not be considered in isolation, nor as an alternative to more meaningful measures of performance determined in accordance with accounting principles generally accepted in the United States. EBITDA generally excludes the effect of capital costs. 3. Broadband and VoIP subscription revenue is defined as revenue for recurring services provided and earned during such period. Broadband and VoIP subscription revenue excludes charges for Federal Universal Service Fund ("FUSF") assessments, dial-up services, and high-capacity circuits and other adjustments. Broadband and VoIP subscription revenue includes bills issued to customers that are classified as financially distressed and whose revenue is only recognized if cash is received (refer to Note 4 below for a more detailed discussion on accounting for financially distressed partners). Management believes broadband and VoIP subscription revenue is a useful measure for investors as it represents a key indicator of the growth of the company's core business. Management uses broadband and VoIP subscription revenue to evaluate the performance of its business segments. 4. When the company determines that (i) the collectibility of a bill issued to a customer is not reasonably assured or (ii) its ability to retain some or all of the payments received from a customer that has filed for bankruptcy protection is not reasonably assured, the customer is classified as "financially distressed" for revenue recognition purposes. A bill issued to a financially distressed customer is recognized as revenue when services are rendered and cash for those services is received, assuming all other criteria for revenue recognition have been met, and only after the collection of all previous outstanding accounts receivable balances. Consequently, there may be significant timing differences between the time a bill is issued, the time the services are provided and the time that cash is received and revenue is recognized. 5. Customer rebates and incentives not subject to deferral consist of amounts paid or accrued under marketing, promotion and rebate incentive programs with certain customers. Rebates and incentives paid or accrued under these programs are not accompanied by any up-front charges billed to customers. Therefore, these charges are accounted for as reductions of revenue as incurred. 6. Other revenues consist primarily of revenue recognized from amortization of prior period SAB 104 deferrals (refer to Note 7 below for a discussion of SAB 104) and FUSF billed to our customers and other revenues not subject to SAB 104 deferral because they do not relate to an on-going customer relationship or performance of future services. 7. In accordance with SAB 104, the company recognizes up-front fees associated with service activation, net of any amounts concurrently paid or accrued under certain marketing, promotion and rebate incentive programs, over the expected term of the customer relationship, which is presently estimated to be 24 months, using the straight-line method. The company also treats the incremental direct costs of service activation (which consist principally of customer premises equipment, service activation fees paid to other telecommunications companies and sales commissions) as deferred charges in amounts that are no greater than the up-front fees that are deferred, and such deferred incremental direct costs are amortized to expense using the straight-line method over 24 to 48 months. 8. Direct costs of revenue, net consists of monthly charges we receive from telecommunications carriers to support the delivery of broadband and VoIP services to our customers. Direct costs of revenue, net includes the on-going costs associated with high-capacity circuits provisioned for our wholesalers and the costs associated with local loops provisioned for our broadband and dial-up end-users. 9. Other network and product costs consist of all other costs, excluding depreciation and amortization, associated with equipment maintenance, central offices' (COs) cost, installation costs paid to others, the internal installation services group, and federal universal service fund tax.
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