ISP Customer Woes Weigh on Covad

The meltdown among digital subscriber line providers continued last week when one of the largest-Covad Communications Inc.-said it would take a $50 million to $100 million charge to earnings to cover restructuring charges.

The company previously had been expected to take a $20 million charge.

Covad had been under fire recently after NASDAQ officials asked for additional information regarding its revenue recording methods. Exchange officials halted trading in the stock on Feb. 16 while they waited for that data.

The stock resumed trading at midday on Feb. 20 and continued to sink, losing $1 per share to end at $1.72 each. Covad shares rebounded slightly on Feb. 20, closing at $1.81, but still a far cry from the 52-week high of $66.25.

In a statement, Covad said the new accounting standards would lower its 2000 revenue by $52 million and increase its cash-flow losses for the period by $17 million.

Covad said customer credits for the year were expected to be about $15 million and marketing expenses were estimated at $38 million, but stressed that these predictions could change.

"The company emphasizes that these are the areas under review and the amounts are not necessarily indicative of the impact to the company's financial statements," Covad said in a prepared statement.

Covad also tallied about $120 million in goodwill and other assets related to its purchase of BlueStar Communications last year. The company said it was "currently evaluating whether any portion of goodwill or tangible assets are impaired," which could result in additional charges.

Covad's report served as yet another example of how the fortunes of the once high-flying DSL companies have reversed in a relatively short period of time. But while other DSL companies can trace their problems to service-quality issues and delays in rolling out service, Covad's troubles stem from Internet-service provider customers that can no longer pay their bills.

That was evident in the company's third-quarter financial statement, which showed a $433.5 million loss on revenue of $156 million in the first nine months of 2000-more that twice the $195 million loss in all of 1999.

Covad has made some radical changes in the past few months. CEO Robert Knowling resigned in November. His replacement, interim CEO Frank Marshall, embarked on a plan to divest the least profitable operations and take other steps to shed about $200 million in costs per year.

In December, the company said it would lay off about 800 of its 3,100 employees.

Banc of America Securities Corp. analyst Doug Shapiro said he was surprised by the magnitude of the additional fourth-quarter charges, but did not believe this was the beginning of the end for Covad.

"I think it's too early to say that this is the final nail in the coffin," Shapiro said. "They have been going through a process over the past several months of trying to clean up customer accounts. What is being reflected is that cleanup is going to be a lot more difficult and a lot more costly than they thought."