Covad Communications Group Reports Fourth Quarter 2006 Results

Covad Communications Group, Inc. (AMEX:DVW): Fourth Quarter Financial and Business Highlights Net revenues of $119.5 million 48.4 percent increase in subscription revenue from Growth products from the fourth quarter of 2005 A-EBITDA of $6.7 million, which includes $2.0 million of LPVA build-out costs Net loss of $8.4 million ($0.03 per share) Cash, cash equivalents and short-term investments, and restricted cash and cash equivalents decreased by $0.9 million. Excluding the cash outlay of $4.4 million related to the LPVA build-out expenditures and $1.2 million related to the acquisition of DataFlo assets, cash, cash equivalents and short-term investments, and restricted cash and cash equivalents increased by $4.7 million Completed build-out of the nation’s largest next-generation network, covering 758 central offices and 14 million households. Enhanced distribution capability through strategic partnerships with United Online, TalkSwitch, and Telarus Expanded fixed broadband wireless footprint to Chicago with acquisition of DataFlo assets Covad Communications Group, Inc. (AMEX:DVW), a leading national provider of integrated voice and data communications, today announced its fourth quarter of 2006 financial results, including $119.5 million in net revenues, $6.7 million in A-EBITDA and a net loss of $8.4 million, or $0.03 loss per share. Charles Hoffman, Covad president and chief executive officer, said: "In 2006, Covad achieved its goals of becoming cash flow, excluding LPVA expenditures, and A-EBITDA positive while accelerating our transition from being a provider of wholesale broadband services to becoming a direct provider of high-growth, high-margin offerings like Voice over IP, line-powered voice, and business-class wireline and wireless broadband. We also continued to invest in our future growth through the completion of the nation’s largest next-generation network.” Summary of Financial Results Net revenues for the fourth quarter of 2006 totaled $119.5 million, an increase of $0.9 million from the $118.6 million reported for the third quarter of 2006, and an increase of $5.8 million, or 5.1 percent, from the $113.7 million reported for the fourth quarter of 2005. Direct subscribers for the fourth quarter of 2006 contributed $42.4 million of net revenues, or 35.5 percent, as compared to $40.3 million, or 34.0 percent, for the third quarter of 2006, and $33.6 million, or 29.6 percent, for the fourth quarter of 2005. Wholesale subscribers for the fourth quarter of 2006 contributed $77.1 million of net revenues, or 64.5 percent, as compared to $78.3 million, or 66.0 percent, for the third quarter of 2006, and $80.1 million, or 70.4 percent, for the fourth quarter of 2005. Subscription revenue from Growth products for the fourth quarter of 2006 totaled $47.5 million, an increase of $3.5 million, or 8.0 percent, from the third quarter of 2006, and an increase of $15.5 million, or 48.4 percent from the fourth quarter of 2005. Covad’s growth products are T-1, business ADSL, Line-Powered Voice Access ("LPVA”), Voice over Internet Protocol ("VoIP”) and wireless. The increase from the third quarter of 2006 was attributable to increases in broadband subscription revenue from T-1, business ADSL and LPVA of $1.8 million, VoIP subscription revenue of $1.5 million and Wireless subscription revenue of $0.2 million. The increase from the fourth quarter of 2005 was attributable to increases in broadband subscription revenue from T-1, business ADSL and LPVA of $8.4 million, VoIP subscription revenue of $3.7 million and wireless subscription revenue of $3.4 million. Subscription revenue from Growth products for the fourth quarter of 2006 contributed 43.3 percent of total subscription revenues, an increase of 2.6 percent from the third quarter of 2006 and an increase of 12.1 percent from the fourth quarter of 2005. Refer to the Selected Financial Data below, including Note 3, for additional information, including a summary of subscription revenue from Growth and Legacy products and a reconciliation of subscription revenue to the most directly comparable GAAP measure. Subscription revenue from Legacy products for the fourth quarter of 2006 totaled $62.2 million, a decrease of $2.0 million, or 3.1 percent, from the third quarter of 2006, and a decrease of $8.3 million, or 11.8 percent from the fourth quarter of 2005. Covad’s legacy products, primarily sold through wholesale channels, are consumer ADSL, business SDSL, frame relay and high-capacity transport circuits. The decreases from the third quarter of 2006 and fourth quarter of 2005 were primarily attributable to decreases in broadband subscription revenue from consumer ADSL and business SDSL and frame relay products. Subscription revenue from Legacy products for the fourth quarter of 2006 contributed 56.7 percent of total subscription revenues, a decrease of 2.6 percent from the third quarter of 2006 and a decrease of 12.1 percent from the fourth quarter of 2005. Refer to the Selected Financial Data below, including Note 3, for additional information, including a summary of subscription revenue from Growth and Legacy products and a reconciliation of subscription revenue to the most directly comparable GAAP measure. Revenue from business subscribers for the fourth quarter of 2006 contributed $93.9 million of net revenues, a 1.7 percent increase from the third quarter of 2006 and a 13.4 percent increase from the fourth quarter of 2005. Revenue from business subscribers comprised 78.6 percent of net revenues, up from 77.8 percent in the third quarter of 2006 and 72.8 percent in the fourth quarter of 2005. Revenue from consumer subscribers for the fourth quarter of 2006 contributed $25.6 million of net revenues compared to $26.3 million in the third quarter of 2006 and $30.9 million in the fourth quarter of 2005. Revenue from consumer subscribers for the fourth quarter of 2006 comprised 21.4 percent of net revenues, down from 22.2 percent in the third quarter of 2006 and 27.2 percent in the fourth quarter of 2005. Adjusted earnings before interest, taxes, depreciation and amortization ("A-EBITDA”) for the fourth quarter of 2006 totaled $6.7 million, an improvement of $2.2 million from the $4.5 million A-EBITDA reported for the third quarter of 2006, and an improvement of $10.1 million from the $3.4 million A-EBITDA loss reported for the fourth quarter of 2005. A-EBITDA in the fourth quarter of 2006 includes the benefit of a transaction-based tax adjustment of approximately $2.3 million which was offset by costs of approximately $2.0 million related to the build-out of LPVA service and $0.3 million related to facility expenses. The third quarter of 2006 includes costs of approximately $1.6 million related to the build-out of LPVA service. Included in A-EBITDA for the fourth quarter of 2005 is a reduction in network costs of approximately $4.2 million, primarily as a result of a billing settlement reached with Verizon Communications, Inc. This benefit was partially offset by an increase in employee compensation and other operating expenses of approximately $2.5 million, primarily as a result of reductions in workforce during the fourth quarter of 2005. Excluding these items, A-EBITDA for the fourth and third quarter of 2006, and fourth quarter 2005 would have been $6.7 million, $6.1 million and an A-EBITDA loss of $5.1 million, respectively. Refer to the Selected Financial Data below, including Note 2, for additional information, including a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure. Net loss for the fourth quarter of 2006 totaled $8.4 million, or $0.03 loss per share, an improvement of $0.3 million from the $8.7 million net loss, or $0.03 loss per share, reported for the third quarter of 2006 and an improvement of $9.5 million from the $17.9 million net loss, or $0.07 loss per share, reported for the fourth quarter of 2005. As stated above, fourth quarter of 2006 results include the benefit of a transaction-based tax adjustment of approximately $2.3 million which was offset by costs of approximately $2.0 million related to the build-out of LPVA service and $0.3 million related to facility expenses. Third quarter of 2006 includes costs of approximately $1.6 million related to the LPVA build-out. Included in net loss for the fourth quarter of 2005 is a reduction in network costs of approximately $4.2 million, primarily as a result of a billing settlement reached with Verizon Communications, Inc. This benefit was partially offset by an increase in employee compensation and other operating expenses of approximately $2.5 million, primarily as a result of reductions in workforce during the fourth quarter of 2005. Excluding these items, net loss for fourth and third quarter of 2006, and fourth quarter of 2005 would have been $8.4 million, $7.1 million and $19.6 million, respectively. Cash, cash equivalents and short-term investments, and restricted cash and cash equivalents at the end of the fourth quarter of 2006 totaled $81.7 million, a decrease of $0.9 million when compared to the balance of $82.6 million at the end of the third quarter of 2006. Excluding the cash outlay of $4.4 million related to the LPVA build-out expenditures, which is being funded with the proceeds from the strategic agreement with EarthLink, and $1.2 million related to the acquisition of DataFlo assets, cash, cash equivalents and short-term investments, and restricted cash and cash equivalents improved by $4.7 million for the fourth quarter of 2006. "As Covad enters 2007 we are in a strong position to capitalize upon the investments made over the last several quarters and our continual improvements in operational efficiency,” said Christopher Dunn, Covad’s chief financial officer. "Our growth products are building momentum and will allow us to enhance our offerings to customers while generating additional revenue and continue to improve the bottom line. This operating leverage in our business gives Covad an opportunity to deliver value to our customers as well as our shareholders.” Business Outlook Due to the strong business foundation built in 2006 and stability in the key components of its cost structure, the company will no longer provide a business outlook on a quarterly basis but will instead provide full year guidance for 2007. In addition, due to the completion of the LPVA project in the fourth quarter of 2006, the Company will no longer separate LPVA expenditures. Covad expects to update this full year guidance on a quarterly basis. For the fiscal year 2007, Covad expects: Net revenues in the range of $490 - $525 million A-EBITDA in the range of $30 - $50 million Net loss in the range of $15 - $39.5 million Covad also expects to increase its cash position in 2007. Conference Call Information Covad will conduct a conference call to discuss these financial results on Tuesday, February 13, 2006 at 5:00 p.m. Eastern Time (ET)/ 2:00 p.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/about_investors.shtml. Investors and press may also listen by telephone to the call by dialing (800) 240-2134. Participants are advised to call in 10 minutes prior to the start time. The conference call will be recorded and available for replay listening until 11:59 p.m. EST on February 20, 2007 by dialing (800) 405-2236 and reference pass code 11083115. A companion presentation providing graphical details of this press release is also available on the same investor section of the Covad Website. About Covad Covad is a leading nationwide provider of integrated voice and data communications. The company offers DSL, Voice Over IP, T1, Web hosting, managed security, IP and dial-up, broadband wireless, 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 company’s expected revenue, net loss, A-EBITDA, increases in its cash position, enhancements in its offerings to its customers and improvements to the bottom line. 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 our ability to rapidly expand and deploy new services and improve and upgrade our existing network and services, the impact of increasing competition, pricing pressures, consolidation in the telecommunications industry, 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, 10-Q, 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. COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands)   Condensed Consolidated Balance Sheet Data As of As of As of Dec 31, 2006 Sep 30, 2006 Dec 31, 2005   Cash, cash equivalents, and short-term investments $ 62,072  $ 57,956  $ 96,501  Restricted cash and cash equivalents 19,578  24,674  5,503  Accounts receivable, net 31,151  35,075  28,074  All other current assets   11,148    9,978    10,971  Total current assets 123,949  127,683  141,049  Property and equipment, net 87,586  87,628  71,663  Collocation fees and other intangible assets, net 22,768  23,903  20,715  Goodwill 50,002  50,002  36,626  Deferred costs of service activation 24,268  25,304  25,456  Deferred debt issuance costs, net 3,823  4,292  3,223  All other long-term assets   912    1,753    1,849  Total assets $ 313,308  $ 320,565  $ 300,581    Total current liabilities $ 101,670  $ 99,226  $ 133,217  Long-term debt 167,240  167,240  125,000  Collateralized and other long-term customer deposits -  2,441  16,912  Unearned revenues 39,506  41,308  43,758  Other long-term liabilities 2,538  1,926  1,863  Total stockholders' equity (deficit)   2,354    8,424    (20,169) Total liabilities and stockholders' equity (deficit) $ 313,308  $ 320,565  $ 300,581  COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except per share amounts)   Condensed Consolidated Statements of Operations Data Three Months Ended Twelve Months Ended Dec 31,2006 Sep 30,2006 Dec 31,2005 Dec 31,2006 Dec 31,2005   Revenues, net $ 119,456  $ 118,562  $ 113,651  $ 474,304  $ 443,179    Operating expenses: Cost of sales (exclusive of depreciation and amortization) 84,325  83,410  77,653  328,474  311,139  Benefit from transaction tax adjustment -  -  -  (19,455) -  Selling, general and administrative 29,267  31,259  35,744  127,380  159,123  Depreciation and amortization of property and equipment 9,938  8,210  11,079  34,876  49,813  Amortization of collocation fees and other intangible assets 2,411  2,502  3,349  9,949  17,428  Provision for restructuring and post-employment benefits 137  186  3,640  1,597  3,640  Total operating expenses 126,078  125,567  131,465  482,821  541,143    Loss from operations (6,622) (7,005) (17,814) (8,517) (97,964)   Other income (expense) Gain on deconsolidation of subsidiary -  -  -  -  53,963  Gain on sale of equity securities -  -  -  -  28,844  Other (1,820) (1,695) (74) (5,432) (565) Other income (expense), net (1,820) (1,695) (74) (5,432) 82,242  Net loss $ (8,442) $ (8,700) $ (17,888) $ (13,949) $ (15,722)   Loss per common share: Basic $ (0.03) $ (0.03) $ (0.07) $ (0.05) $ (0.06) Diluted $ (0.03) $ (0.03) $ (0.07) $ (0.05) $ (0.06)   Weighted-average number of common shares outstanding Basic 295,683  295,604  266,601  290,262  265,240  Diluted 295,683  295,604  266,601  290,262  265,240    Gross Margin (Note 1) $ 35,131  $ 35,152  $ 35,998  $ 145,830  $ 132,040  % of revenue 29.4% 29.6% 31.7% 30.7% 29.8%     A-EBITDA Calculation (Note 2) Three Months Ended Twelve Months Ended Dec 31,2006 Sep 30,2006 Dec 31,2005 Dec 31,2006 Dec 31,2005   Net loss $ (8,442) $ (8,700) $ (17,888) $ (13,949) $ (15,722) Plus: Other income (expense), net 1,820  1,695  74  5,432  (82,242) Depreciation and amortization of property and equipment 9,938  8,210  11,079  34,876  49,813  Amortization of collocation fees and other intangible assets 2,411  2,502  3,349  9,949  17,428  Employee stock-based compensation 958  785  -  3,244  -  A-EBITDA $ 6,685  $ 4,492  $ (3,386) $ 39,552  $ (30,723) COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands)     Consolidated Revenue Data Three Months Ended Twelve Months Ended (Note 3 through 7) Dec 31,2006 Sep 30,2006 Dec 31,2005 Dec 31,2006 Dec 31,2005   Broadband subscription revenue $ 93,100  $ 93,245  $ 93,537  $ 373,658  366,174  VoIP subscription revenue 8,483  6,951  4,735  27,752  13,681  Wireless subscription revenue 3,377  3,175  -  10,872  -  High-capacity circuit subscription revenue 4,724  4,778  4,203  18,574  17,209            Total subscription revenue 109,684  108,149  102,475  $ 430,856  $ 397,064  Other revenue, net 9,772  10,413  11,176  43,448  46,115  Revenues, net $ 119,456  $ 118,562  $ 113,651  $ 474,304  $ 443,179    Subscription revenue from Legacy products Broadband - Consumer ADSL $ 20,028  $ 21,148  $ 25,258  $ 88,089  $ 99,136  Broadband - Business SDSL & Frame Relay 37,407  38,255  40,991  $ 154,872  169,769  High-capacity circuits 4,724  4,778  4,203  $ 18,574  17,209  Total subscription revenue from Legacy products 62,159  64,181  70,452  261,535  286,114  Subscription revenue from Growth products Broadband - T1, Business ADSL, LPVA 35,665  33,842  27,288  130,697  97,269  VoIP 8,483  6,951  4,735  27,752  13,681  Wireless 3,377  3,175  -  10,872  -  Total subscription revenue from Growth products 47,525  43,968  32,023  169,321  110,950  Total subscription revenue 109,684  108,149  102,475  430,856  397,064  Other revenue, net 9,772  10,413  11,176  43,448  46,115  Revenue, net $ 119,456  $ 118,562  $ 113,651  $ 474,304  $ 443,179      Direct subscription revenue $ 41,460  $ 39,618  $33,026  $ 155,527  $ 126,143  Wholesale subscription revenue 68,224  68,531  69,449  275,329  270,921  Total subscription revenue $ 109,684  $ 108,149  $ 102,475  $ 430,856  $ 397,064    COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited)   Key Operating Data As of Dec 31, 2006 Sep 30, 2006 Dec 31, 2005 End of Period Lines (EOP) Company Business 236,956  239,337  232,347  Consumer 282,059  292,311  334,828  Total Company 519,015  531,648  567,175  Wholesale Business 171,647  174,416  171,000  Consumer 271,311  280,637  317,080  Total Wholesale 442,958  455,053  488,080  Direct Business 65,309  64,921  61,347  Consumer 10,748  11,674  17,748  Total Direct 76,057  76,595  79,095  Direct VoIP Customers 1,623  1,481  1,147  Sites 2,805  2,492  1,649  Direct Wireless Customers 3,464  3,129  n/a  Average Revenue per User (ARPU) Company Business $101  $100  $98  Consumer $24  $24  $25  Total Company $59  $58  $54  Wholesale Business $84  $83  $82  Consumer $24  $24  $24  Total Wholesale $47  $46  $44  Direct Business $147  $146  $145  Consumer $35  $35  $34  Total Direct $130  $128  $119  Direct VoIP Customers $1,814  $1,656  $1,681  Sites $1,039  $960  $998    COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands)   Business Outlook     A-EBITDA Calculation (Note 2) Full Year-2007 Projected Range of Results   Total Revenue, net $ 490.0  $ 525.0    Net loss $ (39.5) $ (15.0) Plus: Other income (expense), net 10.0  8.0  Depreciation and amortization of property and equipment 46.0  44.0  Amortization of collocation fees and other intangible assets 10.0  10.0  Employee stock-based compensation   3.5    3.0  A-EBITDA (Note 2) $ 30.0  $ 50.0  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 Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("A-EBITDA”), defined as net loss excluding (i) depreciation and amortization of property and equipment, (ii) amortization of intangible assets, (iii) other income (expense), net, and (iv) employee stock-based compensation expense, 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 excludes employee stock-based compensation expense from this measure to make the results comparable to prior years when employee stock-based compensation expense was not included in the statement of operations. Management also uses this measure to evaluate the performance of its business segments and as a factor in its employee bonus program. A-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. A-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. A-EBITDA generally excludes the effect of capital costs. Management reconciles A-EBITDA to net income or loss because it believes that net income or loss is the closest measure determined under accounting principles generally accepted in the United States that approximates A-EBITDA. 3. Broadband, VoIP, Wireless and High-Capacity subscription revenues are defined as billings for recurring services provided during the period. These subscription revenues exclude charges for Federal Universal Service Fund ("FUSF”) assessments, dial-up services and other adjustments. In addition, these subscription revenues include 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 that Broadband, VoIP, Wireless and High-Capacity subscription revenues are useful measures for investors as they represent key indicators of the growth of the company’s core business. Management uses these subscription revenue measures 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), 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 to 48 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.