from K Dec 16 (y board)
Merchants Exchange Building, San Francisco, CA
Company Note December 16, 2005
Covad Communications Group, Inc. (DVW/AMEX) HOLD
Communications Services & Technology
Stock Data
Price $0.73
Price Target $1.50
52-Week Range $2.39 - $0.71
YTD S&P Return 4.87%
YTD Stock Return (65.58%)
Float (MM) 261.8
Avg. Daily Volume 775,998
Dividend Yield 0.00%
Shares Outstanding 266.6MM
Balance Sheet Date 09/30/2005
Enterprise Value $203.6
Market Cap $194.6MM
Net Debt $9.0MM
2004A 2005E 2006E
Revenue (MM) $429A $444 $482
EV/Revenue 0.5x 0.5x 0.4x
EBITDA (MM) $14.7A ($37.3) ($0.6)
EV/EBITDA 13.9x -5.5x -339.3x
EPS
Mar ($0.06)A ($0.10)A —
Jun ($0.03)A ($0.10)A —
Sep ($0.07)A ($0.11)A —
Dec ($0.10)A ($0.10) —
FY ($0.26)A ($0.40) ($0.24)
FY P/E — — —
CY P/E — — —
Q1 Q2 Q3
0
1
2
3
2005
1 Year Price History for DVW
Created by BlueMatrix
Covad Communications provides broadband
access and related communications services to
businesses and consumers. Covad's services
include a range of high-speed, high-capacity
Internet access and related services using DSL,
T-1, virtual private network and firewall
technologies. Covad's network covers 96 of the
top 100 metropolitan statistical areas and more
than 45% of the homes and business in the
United States.
Ari M. Moses, CFA
212.292.8152
amoses@...
TAKEAWAYS FROM MANAGEMENT MEETINGS
• This week we spent some time with Covad's new CFO,
Chris Dunn as well as
the management of the customer operations group.
Although we remain
cautious on our outlook for the company in the absence
of evidence of
execution, we thought it worthwhile to highlight some
encouraging
takeaways from these meetings.
• The new CFO articulated a balanced approach to
getting the company back
on track. In order of priority he laid out three
objectives: 1) address capital
requirements; 2) manage costs and spending; and 3)
execute on growth
initiatives. While this list may seem obvious we are
encouraged by this
straightforward approach that did not discount the
operating issues or solely
focus on opportunity.
• The company has begun to deploy a new VoIP solution
(PBXi) which should
allow the company to expand its addressable market.
According to
management, this product is gaining traction quickly
and although it was just
deployed in the past few weeks, sales have reportedly
been robust, indicative
of pent up demand.
• VoIP business has been challenged by growing pains,
but the company has
worked past the issues. These issues apparently had
come to a head over the
summer months but have since been addressed and sales
have reportedly
picked up in 4Q05.
• The EarthLink opportunity appears to remain on track
as evidenced by
comments from both Earthlink and Covad management.
Despite the
acquisition of New Edge Networks by EarthLink,
announced earlier this week,
EarthLink remains committed to the deployment of
line-powered voice and its
relationship with Covad, consistent with our read of
this strategic
relationship.
• The bottom line: These data points are certainly
encouraging but in the
absence of actual results they do not change our wait
and see approach to this
investment. Nonetheless, we continue to view the
company's market position
and network assets as unique and suggest that as the
transition progresses and
initiatives translate to financial results, the
company may offer an attractive
means of participating in the evolving communications
marketplace.
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Kaufman Bros. 1
Please see page 6 of this document for important
disclosures.
This week we spent some time with Covad's new CFO,
Chris Dunn, as well as the
management of the customer operations group. Although
we remain cautious on our
outlook for the company in the absence of evidence of
execution we thought it
worthwhile to highlight some takeaways from these
meetings.
The new CFO is well aware of the challenges the
company is facing and articulated a
balanced approach to getting the company back on
track. In order of priority he laid
out three objectives: 1) address capital requirements;
2) manage costs and spending;
and 3) execute on growth initiatives. While this list
may seem obvious we are
encouraged by this straightforward approach that did
not discount the operating
issues or solely focus on opportunity. Without
addressing capital and spending,
growth and opportunity would be unsustainable. We will
be monitoring these
objectives and view progress through 2006 as key to
long term success.
The company began its rollout of VoIP with a product
designed to replace a
customer's PBX (named vPBX). The company has now begun
to deploy a solution
named PBXi which integrates to an existing phone
system. As such, the company's
addressable market should expand significantly. The
company has suggested that the
vPBX solution, which is effectively a "rip and
replace" strategy, addresses the needs
of 15% of the market place whereas PBXi allows it to
address the other 85% of the
market by allowing customers to enjoy the benefits of
the service without having to
wait until they are ready to replace existing
infrastructure (and then convert to vPBX
when they are ready).
Although this new PBXi service has just recently been
deployed, demand for this
service has reportedly been strong with December sales
of PBXi outpacing vPBX
sales. Our cautious rating is partially predicated on
the lack of traction in the VoIP
business. While this data point does not change our
perspective, we note that this
new solution should contribute to acceleration in
customer deployments. We
continue to look to the next couple of quarters for
evidence that the VoIP business is
gaining traction and beginning to contribute to
overall growth.
VoIP business has been challenged by growing pains,
but the company has worked
past the issues. As the company has worked to gain
traction in its VoIP business it
has been impeded by technical obstacles, the
operational challenge of the transition
from a data to a voice and data provider and the
necessity for customer education.
These issues apparently had come to a head over the
summer months but have since
been addressed allowing the company to get back on
track and work past its "first
mover disadvantage". It has reportedly been several
months since the last notable
"issue". While these issues had impacted the sales
effort, the company apparently did
not lose any customers as a result, a testament to
product stickiness and customer
service.
The EarthLink opportunity appears to remain on track
as evidenced by comments
from both Earthlink and Covad management. Despite the
acquisition of New Edge
Networks by EarthLink announced earlier this week,
which at first glance put the
relationship with Covad into question, Covad's
management has indicated that
EarthLink remains committed to the deployment of
line-powered voice and
continues to monitor its current trial and explore the
next steps. We note that New
Edge Networks is a customer of Covad and the overlap
between its network and
Covad's is only 11%. As such, we view this acquisition
as a sign of EarthLink's
commitment to its communications service strategy
which should, in our opinion,
drive an expanding relationship with Covad.
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Kaufman Bros. 2
Please see page 6 of this document for important
disclosures.
The bottom line: We continue to view Covad with a
"show me the money" approach
as timing of execution remains uncertain. These data
points are certainly
encouraging but in the absence of actual results they
do not change our approach to
this investment. Nonetheless, we continue to view the
company's market position
and network assets as unique and suggest that as the
transition progresses and
initiatives translate to financial results, the
company may offer an attractive means of
participating in the evolving communications
marketplace.
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Kaufman Bros. 3
Please see page 6 of this document for important
disclosures.
Other public companies featured in this report
EarthLink, Inc. (ELNK $8.97 Under Review)
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Kaufman Bros. 4
Please see page 6 of this document for important
disclosures.
Rating and Price Target History
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
0
2
4
6
8
2003 2004 2005
02/21/03
B:$3
08/04/03
B:$5
08/18/03
B:$8
09/18/03
B:$7
10/23/03
B:$6
01/06/04
H:$4
03/29/04
B:$4
03/30/04
H:$4
03/31/04
B:$4
05/18/04
H:$2
08/17/04
UR:$2
09/01/04
UR:NA
12/02/04
B:$5
07/28/05
B:$3
10/31/05
H:$1.5
Rating and Price Target History for: Covad
Communications Group, Inc. (DVW) as of 12-15-2005
Created by BlueMatrix
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
Kaufman Bros. 5
Guide to Kaufman Bros. Ratings - Distribution and
Definitions*
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B]
HOLD [H]
SELL [S]
57
49
7
50.44
43.36
6.19
3
2
0
5.26
4.08
0.00
BUY: We believe the stock will outperform its peer
group over the next 12 months due to superior
fundamentals and/or positive catalysts.
HOLD: We believe the stock will perform in line with
its peer group over the next 12 months due to full
valuation and/or lack of catalysts.
SELL: We believe the stock will underperform its peer
group over the next 12 months due to
overvaluation, deteriorating fundamentals, and/or
negative near-term catalysts.
* Excludes stocks with ratings under review.
Analyst Certification
I, Ari M. Moses, CFA, hereby certify that the views
expressed in this research report accurately reflect
my
personal views about any and all of the subject
securities or issuers referred to in this document.
Furthermore, no part of my compensation was, is or
will be, directly or indirectly, related to the
specific
recommendation or views expressed in this report.
Research Disclosures
Kaufman Bros., L.P. managed or co-managed a public
offering of Covad Communications Group, Inc. in
the past 12 months, received compensation for
investment banking services from Covad Communications
Group, Inc. in the past 12 months, or expects to
receive or intends to seek compensation for investment
banking services from Covad Communications Group, Inc.
in the next three months.
Kaufman Bros., L.P. makes a market in ELNK.
Disclaimers
This report is for informative purposes only. Under no
circumstances is it to be construed as an offer to
sell or a solicitation to buy any security. The
information contained herein has been obtained from
sources
believed to be reliable, but its accuracy and
completeness, and that of the opinions based thereon,
are not
guaranteed. Kaufman Bros., L.P., its affiliates and
subsidiaries, and/or its officers and employees may
from
time to time acquire, hold, or sell a position in the
securities mentioned herein. Kaufman Bros., L.P. may
also perform investment banking or other services for,
or solicit investment banking or other business
from, any company mentioned in this report.
The analyst(s) responsible for preparing this report
may receive compensation based upon various factors
including the firm's overall profitability, a portion
of which is derived from investment banking revenues.
© 2005 KAUFMAN BROS., L.P. All rights reserved.
Reproduction without permission is prohibited.
Additional information available upon request.
KAUFMAN BROS. EQUITY RESEARCH KBRO KAUFMAN BROS., L.P.
800 Third Avenue, 25th Floor, New York, NY, 10022 Tel:
212.292.8100 Fax: 212.292.8103 KBRO Trading Desk:
1.800.437.5276
www.kbro.com
Kaufman Bros. 6
Kaufman Bros. Research Ari M. Moses, CFA
Covad Communications Group, Inc. Communications
Services & Technology
Statement of Operations amoses@...
($ in 000s) 2003 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05
3Q05 4Q05E 2005E 2006E
Total Revenue 388,851 108,477 107,326 105,687 107,707
429,197 107,718 109,741 112,069 114,607 444,135
481,868
Cost of Goods Sold 288,122 68,294 62,748 65,939 69,191
266,172 72,749 76,240 84,497 84,692 318,178 327,176
Gross Profit 100,729 40,183 44,578 39,748 38,516
163,025 34,969 33,501 27,572 29,916 125,958 154,693
Research & Development - - - - - - - - - - - -
SG&A 140,081 33,302 31,878 35,488 43,538 144,206
42,374 41,492 39,513 39,835 163,214 155,272
Provision for bad debts 99 - - - - - - - - - - -
EBITDA (adjusted) (39,451) 6,881 12,700 160 (5,022)
14,719 (7,405) (7,991) (11,941) (9,919) (37,256) (579)
Amortization of Collocation Fees 17,325 4,751 5,042
5,328 5,464 20,585 5,364 4,717 3,998 3,500 17,579
14,000
Depreciation & Amortization 56,559 14,495 14,162
14,078 14,090 56,825 13,785 12,909 12,040 11,565
50,299 46,737
Restructuring costs and other charges 1,235 547 223
145 494 1,409 - - - - - -
Total Operating Expenses 503,421 121,389 114,053
120,978 132,777 489,197 134,272 135,358 140,048
139,592 549,270 543,185
Operating Income (EBIT) (114,570) (12,912) (6,727)
(15,291) (25,070) (60,000) (26,554) (25,617) (27,979)
(24,984) (105,134) (61,316)
Adjusted Operating Income (EBIT) (96,010) (7,614)
(1,462) (9,818) (19,112) (38,006) (21,190) (20,900)
(23,981) (21,484) (87,555) (47,316)
Interest Income 2,105 351 484 1,044 331 2,210 922
1,081 1,064 943 4,010 2,208
Interest expense (5,526) (1,141) (1,224) (1,281)
(1,281) (4,927) (1,203) (1,203) (1,203) (1,203)
(4,812) (4,812)
Other income (expense), net 5,689 171 61 1,724 - 1,956
- (85) 136 136 186 -
Pretax Income (112,302) (13,531) (7,406) (13,804)
(26,020) (60,761) (26,835) (25,824) (27,982) (25,109)
(105,750) (63,920)
Taxes (tax benefit) - - - - - - - - - - - -
Effective Tax Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0%
Net income (loss) before minority interest (112,302)
(13,531) (7,406) (13,804) (26,020) (60,761) (26,835)
(25,824) (27,982) (25,109) (105,750) (63,920)
Gain on deconsolidation of subsidiary - - - - - -
53,963 - - - 53,963 -
Gain on sale of investments in equity securities - - -
- - - 7,246 9,421 12,177 - 28,844 -
Net Income to Common (112,302) (13,531) (7,406)
(13,804) (26,020) (60,761) (73,552) (16,403) (15,805)
(25,109) (130,869) (63,920)
Adjustment for extraordinary items 6,715 - - (4,100) -
(4,100) (61,209) (9,421) (12,177) - (82,807) -
Net Income to Common (excl. extraordinary) (105,587)
(13,531) (7,406) (17,904) (26,020) (64,861) (26,835)
(25,824) (27,982) (25,109) (105,750) (63,920)
EPS (Excl. Extraodinary) ($0.47) ($0.06) ($0.03)
($0.07) ($0.10) ($0.26) ($0.10) ($0.10) ($0.11)
($0.10) ($0.40) ($0.24)
Weighted Ave. Shares O/S 224,950 233,257 242,359
260,304 260,584 249,126 263,690 263,918 263,918
263,918 263,861 263,918
Y/y Growth Rates
Total Revenue 1% 19% 16% 5% 3% 10% -1% 2% 6% 6% 3% 8%
Gross Profit 18% 84% 88% 50% 34% 62% -13% -25% -31%
-22% -23% 23%
EBITDA (adjusted) NM NM NM NM NM NM NM NM NM NM NM NM
Total Operating Expenses -11% -3% -4% -3% -2% -3% 11%
19% 16% 5% 12% -1%
Operating Income (EBIT) NM NM NM NM NM NM NM NM NM NM
NM NM
Adjusted Operating Income (EBIT) NM NM NM NM NM NM NM
NM NM NM NM NM
Net Income to Common NM NM NM NM NM NM NM NM NM NM NM
NM
Net Income to Common (excl. extraordinary) NM NM NM NM
NM NM NM NM NM NM NM NM
EPS (Excl. Extraodinary) NM NM NM NM NM NM NM NM NM NM
NM NM
Margin Analysis
Gross Margin 26% 37% 42% 38% 36% 38% 32% 31% 25% 26%
28% 32%
EBITDA Margin -10% 6% 12% 0% -5% 3% -7% -7% -11% -9%
-8% 0%
Operating Margin -29% -12% -6% -14% -23% -14% -25%
-23% -25% -22% -24% -13%
Adjusted Operating Margin -25% -7% -1% -9% -18% -9%
-20% -19% -21% -19% -20% -10%
Net Margin -27% -12% -7% -17% -24% -15% -25% -24% -25%
-22% -24% -13%
Source: Company reports and Kaufman Bros., L.P.
estimates
Kaufman Bros. Research Ari M. Moses, CFA
Covad Communications Group, Inc. Communications
Services & Technology
Metrics & Revenue Drivers amoses@...
($ in 000s) 2003 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05
3Q05 4Q05E 2005E 2006E
Broadband
Business DSL Lines 213,396 221,361 222,178 222,431
225,204 225,204 227,158 229,747 230,985 232,985
232,985 256,485
Consumer DSL Lines 303,609 294,421 292,167 302,464
308,036 308,036 320,256 324,652 347,437 356,937
356,937 394,937
Total Lines 517,005 515,782 514,345 524,895 533,240
533,240 547,414 554,399 578,422 589,922 589,922
651,422
DSL ARPU 57 $58 $57 $56 $56 57 $54 $55 $54 $54 54 52
Broadband subscriptions Billing 316,015 89,319 87,032
86,514 88,533 351,398 89,087 90,736 92,814 94,556
367,193 384,441
% of Total Billings 92% 93% 92% 92% 93% 93% 93% 93%
92% 92% 92% 88%
VoIP
VoIP Customers 311 373 567 567 690 870 1,035 1,235
1,235 3,235
VoIP ARPU (Customer) $2,059 $2,191 $1,934 2,061 $1,763
$1,698 $1,578 $1,293 1,583 1,295
VoIP subscriptions Billing 501 2,241 2,298 5,040 2,431
2,738 3,777 4,403 13,349 34,732
% of Total Billings 1% 2% 2% 1% 3% 3% 4% 4% 3% 8%
Other
High Capacity Circuits Billing 21,402 5,532 5,792
4,637 4,078 20,039 4,193 4,511 4,302 4,302 17,308
17,308
Dial-up Billings 5,879 1,058 1,130 739 56 2,983 - - -
- - -
Financially Distressed Partners 57 (240) (146) (47)
(179) (612) (126) 120 (70) - (76) -
Customer rebates and Incentives not subject to
deferral (14,160) (422) (302) (643) (55) (1,422) (48)
(268) (101) - (417) -
Other revenues, net 59,658 13,230 13,319 12,246 12,976
51,771 12,181 11,904 11,347 11,347 46,779 45,388
Y/y Growth Rates
Broadband
Business DSL Lines 19% 20% 17% 8% 6% 6% 3% 3% 4% 3% 3%
10%
Consumer DSL Lines 50% 27% 11% 6% 1% 1% 9% 11% 15% 16%
16% 11%
Total Lines 36% 24% 13% 7% 3% 3% 6% 8% 10% 11% 11% 10%
DSL ARPU -4% 0% -2% -2% -2% -1% -7% -2% -4% -4% -5%
-3%
Broadband subscriptions Billing 19% 26% 14% 5% 2% 11%
0% 4% 7% 7% 4% 5%
VoIP
VoIP Customers NM NM NM NM NM NM NM 180% 177% 118%
118% 162%
VoIP ARPU (Customer) NM NM NM NM NM NM NM -18% -28%
-33% -23% -18%
VoIP subscriptions Billing NM NM NM NM NM NM NM 447%
69% 92% 165% 160%
Other
High Capacity Circuits Billing -22% -5% 15% -8% -27%
-6% -24% -22% -7% 5% -14% 0%
Dial-up Billings -45% -39% -26% -46% -95% -49% NM NM
NM NM NM NM
Financially Distressed Partners -99% NM NM NM NM NM NM
NM NM NM NM NM
Customer rebates and Incentives not subject to
deferral NM NM NM NM NM NM NM NM NM NM NM NM
Other revenues, net -20% -17% -8% -22% -5% -13% -8%
-11% -7% -13% -10% -3%
Source: Company reports and Kaufman Bros., L.P.
estimates
--- spacejunkie2001us <spacejunkie01@...>
wrote:
> spec, at the top of the adobe doc should be a
> 'select' tab. Click on
> that and then you should be able to highlight what
> you want to copy
> and then right click to copy it.
>
>
>
>
> --- In covadcommunications@yahoogroups.com, Spec_59
> <spec_59@y...>
> wrote:
> >
> > Sorry to be ignorant, but how do you cut and paste
> > adobe format research?
> >
> > --- mooseknucklelover <marcweiner@y...> wrote:
> >
> > > can you cut and paste the note?? TIA for the
> info.
> > > Spec!
> > >
> > > --- In covadcommunications@yahoogroups.com,
> Spec_59
> > > <spec_59@y...>
> > > wrote:
> > > >
> > > > No mention of NW. Management noted strong VOIP
> for
> > > the
> > > > new PBXi replacement. Line powered voice with
> > > > Earthlink on track.
> > > >
> > > > --- mark7182002 <leber817@a...> wrote:
> > > >
> > > > > Anyone know what's in it....someone likes us
> > > this
> > > > > morning....maybe we
> > > > > get NW deal closed this week.
> > > > > |
