Covad report from Kaufman Feb 2005
They were very optimistic about the year and covad
Its easy to see why they were so disapointed with the Q3 cc last week..
Feb 2005
The real takeaway, however, is that our model, which yields our $5
price target, has
left plenty of wiggle room and should this VoIP business develop as
guided there
could be significant upside to our current projections. We have also
not modeled for
any contribution from Line Powered Voice or Voice Optimized Access
as the timing,
pricing, demand and opportunity for these new products is uncertain
at this point in
time. Nevertheless, both represent potential upside to our estimates.
We have revised our estimates to reflect the quarter's performance,
management guidance and adjusted projections for the VoIP business.
4Q04 RESULTS: THE TRANSITION IS UNDERWAY
• Covad reported a solid 4Q04 highlighted with evidence that the
company's business model transition is making progress. We believe
the quarter's results support our thesis of a company in transition,
and
continue to look toward execution of its evolving strategy as the
central
catalyst for the stock.
• 4Q04 was the second full quarter of VoIP results and is on track to
deliver projected growth. Excluding a one time offset, VoIP
contributed
$2.5 million to revenue, in line with our estimate, driven by
stronger-than-expected customer additions and offset by a
lower-than-projected ARPU per customer. A strong pipeline and an
aggressive
sales effort should result in accelerating traction for the business
line
throughout the year.
• The quarter's financial results were in line with expectations and
demonstrate management's ability to run the business through this
transitionary period. Revenue out-performance was driven in part by
higher-than-expected broadband subscription billings, supporting our
thesis
of a stabilization of the broadband access business. While results
on both the
EBITDA and EPS lines were down sequentially, this trend was expected
due to
increased spending related to the rollout of the VoIP platform.
• Balance sheet remains solid. COVD ended the quarter with $153
million in
cash and $125 million debt. Cash burn was lower than projected. We
continue to estimate accelerated cash burn for the next several
quarters as the
company rolls out its VoIP service nationwide. However, we project a
return
to EBITDA positive in mid-2005 and FCF positive in 2006. In our
view, the
company has sufficient cash to operate its business and fund its
transition to
becoming an integrated voice and data provider through the next
couple of
years.
• We have revised our estimates to reflect the quarter's performance,
management guidance and adjusted projections for the VoIP business.
While
our 2005 estimate revisions appear significant, we note that they
reflect
greater traction for the VoIP services than previously modeled.
• We reiterate our BUY rating and $5 price target. We continue to
expect
the company's exposure to competitive pressures and regulatory
uncertainty
to wane, and suggest that the recent pullback in the stock is a
buying
opportunity. Our price target of $5 is based on a 10-year DCF.
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Please see the end of this document for important disclosures
Kaufman Bros. 1
4Q04 Variance Table
Y/Y
(in millions) 4Q04 4Q03 Change KBRO Est. Difference
Total Revenues 107,707 105,039 2.5% 105,843 1,864
Gross Profit 38,516 28,720 34.1% 38,103 413
Gross Margin 35.8% 27.3% 842 b.p. 36.0% -24 b.p.
Total EBITDA (5,022) (9,245) (45.7%) (4,234) (788)
EBITDA Margin -4.7% -8.8% 414 b.p. -4.0% -66 b.p.
EPS excl. extra. Items ($0.10) ($0.08) ($0.02) ($0.09) ($0.01)
Basic Shares Outstanding 260,584 227,758 260,581
Actual 4Q04
Source: Company reports and Kaufman Bros. estimates
2004 Variance Table
Y/Y
(in millions) 2004 2003 Change KBRO Est. Difference
Total Revenues 429,197 388,851 10.4% 427,333 1,864
Gross Profit 163,025 100,729 61.8% 162,612 413
Gross Margin 38.0% 25.9% 1208 b.p. 38.1% -7 b.p.
Total EBITDA 14,719 (39,451) (137.3%) 15,507 (788)
EBITDA Margin 3.4% -10.1% 1357 b.p. 3.6% -20 b.p.
EPS excl. extra. Items ($0.26) ($0.47) $0.21 ($0.25) ($0.01)
Basic Shares Outstanding 249,126 224,950 249,125
Actual 2004
Sources: Company reports and Kaufman Bros. estimates.
COVD reported a solid 4Q04 highlighted with evidence that the
company's
business model transition is making progress. Excluding a one time
offset,
VoIP revenues were in line with our estimates. Most notably, the
addition of 194
VoIP customers was significantly stronger than our projection. The
company
continues to report a strong pipeline of VoIP customers with 223 new
customers
that should begin contributing to revenues in 1H05. As expected, the
distribution
mix continues to shift with direct distribution accounting for 29%
of revenues, up
from 27% in 4Q03. Management continues to guide that the rollout of
new products
and solutions, including wireless last mile access technologies and
UNE-P
replacement voice services, are on track for 2005 deployments and
are already in
market trials. The completion of its network expansion, the pending
introduction of
these new services and the continued deployment of the VoIP solution
offer Covad a
platform for growth. We believe the quarter's results support our
thesis of a
company in transition and continue to look toward execution of its
evolving strategy
as the central catalyst for the stock.
4Q04 was the second full quarter of VoIP results and is on track to
deliver
projected growth. Although the VoIP business contributed slightly
lower-than-expected revenues of $2.3 million vs. our $2.5 million
estimate, we note
that revenues were impacted by a one time issue that resulted in a
$200,000 offset to
revenues. Excluding that one time offset, VoIP contributed $2.5
million to revenue,
in line with our estimate, driven by stronger-than-expected customer
additions and
offset by a lower-than-projected ARPU per customer. The company
added 194 new
customers in the quarter, bringing the total stations to 20,400 from
17,900 at the end
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Please see the end of this document for important disclosures
Kaufman Bros. 2
of 3Q04. While customer additions were ahead of our projections, we
note that in
the early stages of growth estimating accurate counts is tricky.
This customer
addition count is slightly misleading as 78 of these "new" customers
were the result
of a change in accounting for customers. Nevertheless, the 116
actual customer
additions was double our estimate.
The company now has customers in 29 states and is offering the
service throughout
its entire footprint. Covad has indicated that it currently has 223
contracted
customers in the pipeline but with a 45 day deployment period those
customers
have not yet begun generating revenue. Additionally, the sales cycle
time is 60 days,
down from 90 days reported at the end of 3Q04. Although the ramp up
of this
business line would continue to be gradual over the next couple of
quarters, as
deployments do not occur overnight, we do expect accelerating growth
and revenue
contribution through 2005.
The quarter's financial results were in line with expectations and
demonstrate management's ability to run the business through this
transitionary period. Total revenue of $107.7 million beat our
estimate of $105.8
million. This out-performance was driven in part by higher-than-
expected broadband
subscription billings of $88.5 million compared to our estimate of
$87.0 million. This
core revenue line item appears to have stabilized and has begun to
deliver modest
growth supporting our thesis of a stabilization of the broadband
access business.
Despite the revenue out-performance, the EBITDA loss of $5.0 million
was greater
than estimated, due to in part to continued selling and marketing
costs associated
with the ongoing VoIP deployment. Adjusted EPS of $(0.10) just
missed our $(0.09)
estimate as a result of these same costs. While results on both the
EBITDA and EPS
lines were down sequentially, this trend was expected. Management
had guided that
the quarter's results would be impacted by increased spending
related to the rollout
of the VoIP platform nationwide. This cost impact is expected to
keep Covad in the
red for the next couple of quarters with EBITDA returning to
positive territory in
mid- to late-2005.
COVD ended the quarter with $153 million in cash and $125 million
debt.
Cash burn was lower than projected. While cash burn was guided to
accelerate
from the prior quarter's $6.5 million burn rate, as the company
rolled out its VoIP
solution, we overestimated the spend. The company burnt $12.3
million in cash in
4Q04 compared to the $22 million that we had projected. This burn
rate was in line
with guidance. While it is unclear what exactly drove this slower
cash burn, the
company did manage to continue the deployment of its VoIP service
while
controlling costs/investments. We continue to estimate cash burn in
the $20
million-$25 million rate for the next several quarters as the
Company rolls out its
VoIP service nationwide. However, we project a return to EBITDA
positive in
mid-2005 and FCF positive in 2006. In our view, the company has
sufficient cash to
operate its business and fund its transition to becoming an
integrated voice and data
provider through the next couple of years.
We do note that based on our projection the company's cash balance
should
fall below the $100 million threshold in 3Q05. Management has said
that it does
not want to drop below this threshold and the company may be seeking
additional
source of cash later this year. We do not, however, expect the
company to return to
the capital markets in the near term. The company's stake in Acca
Networks, a
Japanese ISP which had previously been written off is a source of
found money for
the company. That company underwent an IPO on the Japanese market
last night
and priced at the equivalent of about $4,300 per share which, based
on Covad's 10%
stake in the company, should be worth about $50 million. Should the
company need
to raise funds, we would expect them to monetize this asset |
