Covad Communications Group Announces Third Quarter 2004 Results; Company Reports 10,500 New Broadband Customers; VoIP Service Now Available in 57 Markets

Business Wire, Oct 20, 2004

SAN JOSE, Calif. -- Covad Communications Group, Inc. (OTCBB:COVD), a leading national provider of integrated voice and data communications, today reported revenue for the third quarter of 2004 of $105.7 million, a five percent increase over the $100.5 million reported in the third quarter of 2003, and a decrease of $1.6 million from the second quarter of 2004.

The company reported net loss for the third quarter of 2004 of $13.8 million, or $0.05 per share, as compared to a net loss of $33.4 million, or $0.15 per share in the third quarter of 2003, and a net loss of $7.4 million, or $0.03 per share for the second quarter of 2004. Loss from operations for the third quarter of 2004 was $15.3 million, compared to $32.2 million in the third quarter of 2003 and $6.7 million for the second quarter of 2004.

Cash, cash equivalent and short-term investment balances, including restricted cash and investments, decreased by $6.6 million to $165.8 million in the third quarter of 2004 compared to a balance of $172.3 million at the end of the second quarter of 2004. Third quarter cash was favorably impacted by the recovery of a pre-bankruptcy claim and a legal settlement which resulted in $3.2 million of payments to the company.

During the third quarter, line count from stand-alone broadband services increased by 10,500 lines ending the third quarter with approximately 524,900 lines in service. This is compared to a net decrease in lines of approximately 1,000 lines in the second quarter of 2004.

Covad ended the third quarter with 373 business customers that have chosen the company's leading small business Covad VoIP solution, a 20 percent increase over the 311 customers at the end of the second quarter 2004. End user VoIP stations increased to 17,900 contributing $2.2 million in revenue in the third quarter, our first full quarter of reporting VoIP-related sales activity.

During the third quarter 2004, Covad expanded the availability of Covad VoIP service to 46 markets with 11 more added in October bringing total markets served to 57. By the end of the year, the company plans to complete the launch of Covad VoIP in all major metropolitan areas served by the company's national footprint. The growth in Covad VoIP services during the third quarter 2004 was captured in the existing three markets served at the time of the GoBeam acquisition at the end of the second quarter. As Covad expands its VoIP markets, the company expects to continue driving Covad VoIP revenue growth.

"The third quarter was significant for Covad as we experienced positive momentum with a return to positive broadband line count growth as well as significant growth from Covad VoIP services. As we develop new markets, our aggressive nationwide rollout of Covad VoIP should continue to drive revenue growth," said Charles Hoffman, president and chief executive officer of Covad. "We will continue to fuel sales for Covad VoIP services through our new VoIP advertising campaign launched in September. We have also expanded our national reseller base by adding 84 new Covad VoIP channel partners in the third quarter.

"We also continue to improve our business to take advantage of the demand for the next generation of high-speed access," Hoffman added. "We recently completed our network expansion initiative which grew our nationwide footprint by 11 percent and have built a national, direct sales force to focus on the $32 billion dollar small and medium business telecommunications market."

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2004 was a profit of $4.1 million as compared to a loss of $14.3 million in the third quarter of 2003 and a profit of $12.5 million in the second quarter of 2004. This reduction in EBITDA primarily resulted from increased expenses related to sales and marketing to launch nationwide Covad VoIP service. 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.

The company's wholesale subscribers contributed $75.3 million of revenue, or 71 percent, while direct subscribers contributed $30.4 million of revenue, or 29 percent. On September 30, 2004, Covad had approximately 448,700 wholesale and 76,200 direct lines in service, as compared to 419,700 wholesale and 71,200 direct lines in service reported at the end of the third quarter of 2003 and 440,800 wholesale and 73,600 direct lines in service on June 30, 2004.

For the third quarter of 2004, broadband and VoIP subscription billings increased eight percent to $88.8 million from $82.4 million reported in the third quarter of 2003, and up from the $87.5 million reported in the second quarter of 2004. Management uses broadband and VoIP subscription billings to evaluate the performance of its business and believes these billings 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.