K hit the nail on its head
> Rating: HOLD Price Target: $1.50 Market Cap: $226.4MM
> • We are lowering our rating to HOLD from BUY to reflect increased
> concerns related to slower-than-expected traction in the
> VoIP business segment. We have lowered our price target to $1.50 from
> $3 based on a 10 year DCF analysis. This revision
> reflects an increased risk profile and revisions to our model.
> • The bottom line is that we need to see execution before we can
> regain our confidence. We continue to believe that VoIP offers
> a meaningful long-term opportunity. Nonetheless, in the absence of
> results and traction we cannot continue to give the
> company credit as the timing of execution has grown more uncertain.
> This uncertainty, together with continued losses and cash
> burn, has given us reason for concern and as such, we are stepping to
> the sideline.
> • We do believe that the company is making the right strategic
> investments for the future of the business. However, the impact is
> extending the transitionary period we had described when we launched
> coverage of the company in December 2004. It is clear
> that Covad continues to leverage its one-of-a-kind national network
> to drive its growth. Nonetheless, it is unclear when the
> revenue growth from these opportunities will kick in and offset the
> related costs. As such, Covad's risk profile, in our view, has
> increased.
> • As for quarterly results, Covad reported a mixed 3Q05, highlighted
> by stronger-than-expected line additions,
> lower-than-expected VoIP revenues and customers, and a narrower-than-
> estimated EBITDA loss. Revenue of $112.1 million
> missed our $114.0 million estimate. The EBITDA loss of $11.9 million,
> however, was narrower than the $14 million loss we had
> projected and the $12 million-$15 million loss range that management
> had guided. EPS of $(0.11) beat our $(0.12) estimate.
> • Cash burn continues and the company has returned to a net debt
> balance. Our projections suggest that the company should
> continue to burn cash through 2006 and as such, may indeed need to
> raise additional cash next year. We note that the cash burn
> is largely being driven by strategic initiatives as the company
> continues to invest in various opportunities. While these
> investments are, in our view, prudent, the company continues to burn
> through its cash and remains unprofitable as a result.
> • We have revised our estimates to reflect the quarter's results,
> guidance, the elimination of an AOL launch from our model, and
> slowed expectations from the VoIP business. We now estimate 2005
> revenue, EBITDA and EPS of $444 million, $(37.3) million
> and $(0.40) from our prior $451 million, $(40.5) million and $(0.43)
> estimates, respectively. We now estimate 2006 revenue,
> EBITDA and EPS of $482 million, $(579,000) and $(0.24) from our prior
> $545 million, $(3.8) million and $(0.30) estimates,
> respectively. |
