Leading data CLEC, Covad Communications made three major announcements on Monday, which we believe are positive for DSL CPE provider Efficient Networks, and should signal an upturn in the DSL market. First, the Company announced that it would add 62,000 DSL subscriber lines this quarter to reach an installed base of 200,000 DSL subscribers, which exceeds expectations for third quarter subscriber additions by 30%. With 245,000 total subscribers targeted for year-end, we believe Covad should easily top this number as well. We view this as a positive for Efficient, which counted Covad as a 20% customer in the second quarter. The Company also announced that it has settled its antitrust dispute with SBC communications. As part of the agreement, SBC will make Covad an in-region and out-of-region DSL provider, pay Covad a guaranteed $600 million in resale revenues over a 6-year period, and invest $150 million to acquire a 6% stake in the Company. We also view this as positive news for Efficient. The agreement would give SBC, which was Efficient’s largest customer accounting for 38% of revenues last quarter, an additional partner to help them meet exploding DSL demand, both in and out of region. Covad, meanwhile emerges as a stronger, better-capitalized customer of Efficient’s. Finally, Covad announced plans to sell $500 million in convertible notes. This announcement addresses recent investor concern about the carriers’ (especially the CLECs) ability to obtain financing, and should help alleviate some of these fears. We believe that shares of many of the DSL equipment suppliers, including CPE vendors Efficient and Netopia, have come under pressure recently due to carrier financing concerns and its resulting effect on carrier capital spending, as well as concerns about the overall viability of the CLEC business model. We feel that Covad’s financing, along with NorthPoint’s cash infusion from Verizon and recent private financings of emerging CLECs, Network Telephone, and @Link Communications, provide important examples that funding is still available to carriers and serve as validations of the CLEC business model.
Source:
wrhambrecht.com |
