from yhaoo board
Sorry for the formatting, but this is the best I could do. Very
good article. I apologize if this is a repeat post. I love the
comment at the end saying that CH wants Covad to be its own company,
but covad's assests make a possible buy-out a good safety net for
investors in case financials start going really poorly
( DJ ) 02/17 07:30AM =DJ TALES OF THE TAPE: Covad Strikes Deal For
Growth
(This article was originally published Thursday)
NEW YORK (Dow Jones)--Covad Communications Group Inc. (DVW), a
technology
bubble high-flyer that faded into an afterthought, may now have
reason to turn
some investors' heads again.
The San Jose-based provider of digital subscriber line, or DSL,
service
recently expanded its relationship with Earthlink Inc. (ELNK) to
provide
consumers with a package of telephone and high-speed Internet
services. The
deal further blurs Covad's roles as a customer, partner and
competitor to the
Baby Bells. But it may be a necessary move, as the deal's structure
could
potentially allow Covad to upgrade its unique national broadband
network while
increasing its long-term profitability.
"They still need to prove themselves, but they're certainly doing
all the
right things," said Greg Mesniaeff, an analyst with Needham & Co.
Late Wednesday, the company posted a narrower fourth-quarter loss
and growth
in revenue from increased broadband connections and Internet phone
customers.
Pricing in the DSL business, however, continues to be tight as the
Baby
Bells aggressively cut their offers. As a result, Covad is focusing
more on
its Internet telephony business, the so-called voice-over Internet
protocol,
or VoIP, service. Having made strides in directly selling the
service to its
small-business customers, the company is looking to expand to the
larger
consumer market through resellers.
"Broadband alone would be tough to continue to grow," said Covad
Chief
Executive Charlie Hoffman in an interview with Dow Jones
Newswires. "VoIP
really is our growth engine."
In what Covad hopes is a model for future deals, Earthlink has
agreed to
spend $6 million to upgrade the network infrastructure in the trial
markets
that it will operate. The capital expenditure is considered
prepayment for
future services, and can be redeemed from Covad based on performance
metrics
such as customer growth.
"They have their skin in the game," Hoffman said. "They wanna make
sure they
can grow this business since they have a stake in it."
The agreement allows Covad, without spending its own cash, to
upgrade its
network to allow for a faster Internet connection - an important
defensive
step since all of the Baby Bells are busily doing the same thing. In
addition,
the company will also be able to expand its higher margin voice-and-
Internet
business. The service will retail for between $50 and $70 a month,
with
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roughly $25 to $30 going to Covad.
The service, unveiled last week, is available to 2 million homes
throughout
San Francisco, San Jose, Dallas and Seattle. Earthlink Chief
Executive Garry
Betty said during the company's last quarterly conference call that
he wants
to expand his reach to 20 million homes by the end of the year.
"If Earthlink turns their marketing machine on this, I think they'll
have a
success," said Enda Flynn, a consultant with BusinessEdge Solutions
Inc.
While the business isn't expected to be a major contributor to
revenue this
year, it couldn't hurt its stock performance. Covad shares hover
around the
$1, compared with its peak of roughly $7 set September 2003
following its
emergence out of bankruptcy protection in late 2001. Its price
around midday
Thursday of $1.28 a share sits 9% below its 52-week high of $1.40,
set in
July.
Complicated Relationships
Covad, which offers a rival DSL connection to the Baby Bells, once
again
butts heads with the industry as a competing source for voice
service. While
the phone companies have been more than willing to partner up with
the likes
of Earthlink or Time Warner Inc.'s (TWX) AOL to sell DSL service,
they've been
less helpful with Internet phone service. Companies such as AOL have
been left
to run their own services, while Covad actually offers an Internet
phone line
powered by its network. The company added that the satellite-
television
companies, long a partner of the Bells, are interested in Covad's
technology.
At the same time, Covad also serves the phone companies by
connecting their
customers in regions they don't serve through line-sharing
agreements. Indeed,
AT&T Inc. (T) Chairman and Chief Executive Ed Whitacre told Dow Jones
Newswiresthat he doesn't consider Covad a threat since it shares in
the
revenue generated from the Internet traffic that runs through its
facilities.
AT&T owns a small stake in Covad, but neither company will comment
on the size
of the holding.
"Theoretically, it may ruffle some feathers with the (regional phone
companies), but practically, I don't view it that way," Needham's
Mesniaeff
said. The analyst doesn't have any conflicts of interest to report.
Covad stands as the only company with a nationwide broadband
network. It
survived the technology crash even as rival start-ups Rhythms
NetConnections
and NorthPoint Communications were acquired and eventually shut down.
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"Covad has managed through the turmoil of the DSL market,"
BusinessEdge's
Flynn said. "They've positioned themselves well for what VoIP can
bring to the
market."
The company's position also makes the company attractive to Bells
such as
AT&T and Verizon Communications Inc. (VZ), both of which have
aspirations to
provide nationwide service. So while Hoffman said he prefers an
independent
Covad, the company's assets do provide a safety net for investors in
case its
growth prospects fade.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020;
roger.cheng@...
(END) Dow Jones Newswires
02-17-06 0730ET
The following story was published on Thomson ONE: |
