Covad Communications Group Reports Second Quarter 2006 Results; Company Exceeds Adjusted EBITDA and Cash Guidance; Continues to Execute on Growth Opportunities

Business Wire, July 26, 2006

SAN JOSE, Calif. -- Covad Communications Group, Inc. (AMEX:DVW), a leading national provider of integrated voice and data communications, posted best-ever figures for quarterly revenue and surpassed its guidance for Adjusted EBITDA ("A-EBITDA"). For the second quarter of 2006 Covad reported net revenues of $118.5 million, A-EBITDA of $25.6 million and net income of $12.5 million, or $0.04 per share. A-EBITDA and net income for the second quarter of 2006 include a $19.5 million benefit from a one-time tax adjustment.

Charles Hoffman, Covad president and chief executive officer, said: "In the second quarter we grew revenues and effectively managed costs across our business. We continue to successfully focus on providing high-margin, high-value solutions to direct business customers."

"We also made significant strides towards ensuring our future success with several growth opportunities. Our build-out of what will be the nation's largest next-generation network is well underway and will enable us to meet the ongoing telecommunications needs of our customers with unique product offerings such as higher-speed broadband, line-powered voice access and other next-generation communications services. We also solidified our position as an innovative leader in the wireless broadband space. As always, we continued to focus on providing an excellent customer experience, growing our business and improving profitability."

Summary of Financial Results

--Net revenues for the second quarter of 2006 totaled $118.5 million, an increase of 0.6 percent from the $117.8 million reported for the first quarter of 2006, and an increase of 8.0 percent from the $109.7 million reported for the second quarter of 2005. Second quarter of 2006 includes a full quarter of revenues for Covad's wireless business. Net revenues for the first quarter of 2006 include $1.7 million from a software license agreement.

--Broadband and VoIP subscription revenues for the second quarter of 2006 totaled $102.9 million, an increase of 1.9 percent from the $101.0 million reported for the first quarter of 2006, and an increase of 10.1 percent from the $93.5 million reported for the second quarter of 2005. Refer to the Selected Financial Data below, including Note 3, for additional information, including a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure.

--Wholesale subscribers for the second quarter of 2006 contributed $78.9 million of net revenues, or 66.6 percent, as compared to $81.1 million, or 68.9 percent, for the first quarter of 2006, and $78.1 million, or 71.1 percent, for the second quarter of 2005. Direct subscribers for the second quarter of 2006 contributed $39.6 million of net revenues, or 33.4 percent, as compared to $36.7 million, or 31.1 percent, for the first quarter of 2006, and $31.6 million, or 28.9 percent, for the second quarter of 2005.

--Business subscribers for the second quarter of 2006 contributed $90.5 million of net revenues, or 76.4 percent, as compared to $87.5 million, or 74.3 percent, for the first quarter of 2006, and $81.5 million, or 74.3 percent, for the second quarter of 2005. Consumer subscribers for the second quarter of 2006 contributed $28.0 million of net revenues, or 23.6 percent, as compared to $30.3 million, or 25.7 percent, for the first quarter of 2006, and $28.2 million, or 25.7 percent, for the second quarter of 2005.

--Income from operations for the second quarter of 2006 totaled $14.1 million, an improvement of $23.1 million from the $9.0 million loss reported for the first quarter of 2006, and an improvement of $39.7 million from the $25.6 million loss reported for the second quarter of 2005. As stated above, second quarter of 2006 results include a $19.5 million benefit from a one-time tax adjustment.

--Adjusted earnings before interest, taxes, depreciation and amortization, or A-EBITDA, for the second quarter of 2006 totaled $25.6 million, an improvement of $22.8 million from the $2.8 million A-EBITDA reported for the first quarter of 2006, and an improvement of $33.6 million from the $8.0 million EBITDA loss reported for the second quarter of 2005. The second quarter of 2006 includes the benefit of a one-time tax adjustment that contributed approximately $19.5 million to Covad's A-EBITDA. This adjustment stems from a ruling the IRS made in the second quarter of 2006 in which it will stop collecting the federal excise tax for certain classes of telecommunications services. Covad had accrued for this tax from 2000 until early 2004. Covad did not pass this tax onto its customers; consequently it charged the expense to its operations. The ruling enables Covad to release this accrual as the ruling resolved uncertainty around the applicability of the tax to certain telecommunication services. In addition, A-EBITDA for the second quarter of 2006 includes a $2.1 million benefit from an employment related tax adjustment. A-EBITDA for the first quarter of 2006 includes a $1.7 million benefit from a software license agreement. 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.