Covad Communications Group Announces Second Quarter 2004 Results; Reaches Cash-Flow Positive, Revenue Increases 16%, VoIP Services Network Ready in 56 Cities.SAN JOSE San Jose, city, United StatesSan Jose (sănəzā`, săn hōzā`), city (1990 pop. 782,248), seat of Santa Clara co., W central Calif.; founded 1777, inc. 1850. , Calif. -- Covad Communications Group, Inc. (OTCBB OTCBB See OTC Bulletin Board (OTCBB). :COVD COVD College of Optometrists in Vision Development COVD Covad Communications Group (stock symbol) ), a leading national provider of integrated voice and data communications data communications, application of telecommunications technology to the problem of transmitting data, especially to, from, or between computers. In popular usage, it is said that data communications make it possible for one computer to "talk" with another. , today reported revenue for the second quarter of 2004 of $107.3 million, a 16 percent increase over the $92.4 million reported in the second quarter of 2003, and a decrease of $1.2 million from the first quarter of 2004. The company reported net loss for the second quarter of 2004 of $7.4 million, or $0.03 per share, as compared to a net loss of $27.3 million, or $0.12 per share in the second quarter of 2003, and a net loss of $13.5 million, or $0.06 per share for the first quarter of 2004. Loss from operations for the second quarter of 2004 was $6.7 million, compared to $26.2 million in the second quarter of 2003 and $12.9 million for the first quarter of 2004. Cash, cash equivalent and short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. investment balances, including restricted cash and investments, increased by $2.7 million to $172.3 million in the second quarter of 2004 compared to $169.6 million in the first quarter of 2004. Second quarter cash flow included approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $10.4 million of capital expenditures. "We are pleased to achieve cash-flow positive this quarter as it demonstrates our disciplined approach to grow the company profitably," said Charles Charles, archduke of Austria Charles, 1771–1847, archduke of Austria; brother of Holy Roman Emperor Francis II. Despite his epilepsy, he was the ablest Austrian commander in the French Revolutionary and Napoleonic wars; however, he was handicapped by Hoffman, president and chief executive officer of Covad. "Critical to our continued growth is our ability to leverage our nationwide facilities-based broadband broadband Term describing the radiation from a source that produces a broad, continuous spectrum of frequencies (contrasted with a laser, which produces a single frequency or very narrow range of frequencies). network. We are incorporating our Voice-over-Internet Protocol (VoIP) services into our network and have now launched in 56 cities. "We plan to aggressively roll-out Voice over IP to 100 markets nationwide by the end of the year," Hoffman added. "This will give Covad the opportunity to strategically grow its revenue." Earnings before interest, taxes, depreciation and amortization Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP metric that can be used to evaluate a company's profitability.
See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). measure and other information. The company's wholesale subscribers contributed $78.5 million of revenue, or 73 percent, while direct subscribers contributed $28.8 million of revenue, or 27 percent. On June June: see month. 30, 2004, Covad had approximately 440,800 wholesale and 73,600 direct lines in service, as compared to 394,900 wholesale and 58,600 direct lines in service reported in the second quarter of 2003 and 444,600 wholesale and 71,200 direct lines in service on March 31, 2004. For the second quarter of 2004, broadband and VoIP subscription billings Billings, city (1990 pop. 81,151), seat of Yellowstone co., S Mont., on the Yellowstone River, in a valley surrounded by seven mountain ranges; inc. as a city 1885. increased 15 percent to $87.5 million from $76.1 million reported in the second quarter of 2003, and decreased slightly from $89.6 million reported in the first quarter of 2004. Management uses broadband and VoIP subscription billings to evaluate the performance of its business and believes broadband subscription billings are a useful measure for investors as they represent a key indicator Indicator Anything used to predict future financial or economic trends. Notes: In the context of technical analysis, an indicator is a mathematical calculation based on a securities price and/or volume. The result is used to predict future prices. of the performance of the company's core business. Refer to the Selected Financial Data, including Note 3, for additional information, including a reconciliation of this non-GAAP financial performance measure to the GAAP measure. For the second quarter of 2004, gross margin was $44.6 million or 42 percent of revenue, as compared to 26 percent of revenue in the year-ago quarter, and 37 percent of revenue for the first quarter of 2004. Sales, marketing, general and administrative (SG&A) expenses were $31.9 million for the second quarter of 2004, as compared to $31.6 million in the year-ago quarter and $33.3 million for the first quarter of 2004. Mark Richman Richman is a surname and may refer to:
Operating Statistics --Digital subscriber lines The line from the customer site to the local telephone company. See subscriber network. increased 13 percent year-over-year, from 453,500 in the second quarter of 2003 to 514,400 in the second quarter of 2004, and decreased by 1,400 from the first quarter of 2004. Line count continues to be impacted by pricing pressures in the consumer broadband market. --At the end of the second quarter, Covad had approximately 292,200 consumer and 222,200 business lines in service, representing approximately 56 percent and 44 percent of total lines respectively. --Weighted Average Revenue per User (ARPU (Average Revenue Per User) A calculation often used to determine the overall value of an application. It is also used to rate particular customers, especially in the wireless space, by comparing someone's account to the overall average. ) was approximately $57 during the second quarter of 2004, a decrease from $58 in the first quarter of 2004. The decrease in ARPU is due to the pricing pressures in the consumer broadband market. --Net customer disconnections, or churn churn: see butter. , averaged approximately 3.6 percent in the second quarter of 2004, a decrease from 4.1 percent in the first quarter of 2004. Much of the churn decrease is due to the lower number of consumer installs over the past two quarters. Business Outlook Covad currently expects revenue for the third quarter of 2004 to be in the range of $104-108 million with flat subscriber line count growth. Broadband and VoIP subscription billings for the third quarter of 2004 are expected to be in the range of $86.5-90.5 million. With the aggressive nation-wide nation-wide adj → diffuso/a in tutto il paese adv → in tutto il paese rollout of VoIP services primarily requiring investments in sales and marketing activities, for the third quarter of 2004, Covad expects its net loss to be in the range of $21-25 million, and generate an EBITDA loss in the range of $2-5 million. Net change in cash, cash equivalents and short-term investments, including restricted cash and investments, in the third quarter of 2004 is expected to be in the range of negative $10-15 million. Recent Business Highlights --Completed the close of the acquisition of GoBeam, Inc., a privately owned provider of Voice over Internet Protocol See Internet and TCP/IP. (networking) Internet Protocol - (IP) The network layer for the TCP/IP protocol suite widely used on Ethernet networks, defined in STD 5, RFC 791. IP is a connectionless, best-effort packet switching protocol. (VoIP) solutions to small- and medium-sized Me´di`um-sized` a. 1. Having a medium size; as, a medium-sized man s>. Adj. 1. medium-sized - intermediate in size medium-size, moderate-size, moderate-sized businesses. --Covad is partnering with Netopia Netopia is a company, headquartered in Emeryville, California, that produces a variety of broadband products including modems, routers, gateways, and Wi-Fi devices. The company also produces the NBBS (Netopia Broadband Server Software), as well as the Timbuktu remote administration , Inc., a market leader in broadband equipment and software, to provide a turn-key See turnkey system. (jargon, application) turn-key - A term which describes a complete system (hardware and software) which can be used for a specific application without requiring further programming or software installation. , all-in-one (1) A combination computer printer, scanner, copy machine and fax machine. Some all-in-ones exclude the fax capability or make it an option. (2) A desktop computer that houses every component except the keyboard and mouse inside the same case as the monitor. wireless fidelity See Wi-Fi. (Wi-Fi (WIreless-FIdelity) A logo from the Wi-Fi Alliance that certifies network devices comply with the IEEE 802.11 wireless Ethernet standards. In the early 2000s, Wi-Fi/802.11 became widely used (initially 802.11b, then 802. ) and DSL DSL in full Digital Subscriber Line Broadband digital communications connection that operates over standard copper telephone wires. It requires a DSL modem, which splits transmissions into two frequency bands: the lower frequencies for voice (ordinary network solution that enables customers to access Covad broadband wirelessly from nearly any location within a home or small business. --Entered into a one-year adj. 1. completing its life cycle within a year. Adj. 1. one-year - completing its life cycle within a year; "a border of annual flowering plants" annual phytology, botany - the branch of biology that studies plants agreement that will enable MetTel, an integrated communications provider, to bundle To sell hardware and software as a combined product or to combine several software packages for sale as a single unit. Contrast with unbundle. See bundled software and bundling. Covad's Digital Subscriber Line See DSL. (communications, protocol) Digital Subscriber Line - (DSL, or Digital Subscriber Loop, xDSL - see below) A family of digital telecommunications protocols designed to allow high speed data communication over the existing copper telephone lines between end-users and (DSL) broadband services See broadband and broadband service provider. with its local and long distance service packages. MetTel currently serves customers in 11 states and plans to expand its coverage area to 30 states by the end of the first quarter 2005. --Announced that Speakeasy Speakeasy - Simple array-oriented language with numerical integration and differentiation, graphical output, aimed at statistical analysis. ["Speakeasy", S. Cohen, SIGPLAN Notices 9(4), (Apr 1974)]. ["Speakeasy-3 Reference Manual", S. Cohen et al. 1976]. will be its first broadband partner to offer Covad's new dedicated-loop asymmetric digital subscriber line (communications, protocol) Asymmetric Digital Subscriber Line - (ADSL, or Asymmetric Digital Subscriber Loop) A form of Digital Subscriber Line in which the bandwidth available for downstream connection is significantly larger then for upstream. (ADSL See DSL. ADSL - Asymmetric Digital Subscriber Line ) services to consumers and very small businesses on a nationwide basis. --Announced a strategic relationship with WilTel Communications WilTel Communications (formerly known as Williams Communications, which was formerly part of The Williams Companies, Inc) is a telco and Tier 2 Internet Service Provider with its own MPLS-enabled OC-192 optical wave division multiplexing backbone network. to provide its enterprise customers with more broadband access See broadband and wireless broadband. choices in the country's top Metropolitan Statistical Areas (MSAs). --Announced that it is supporting the launch of the new EarthLink EarthLink (NASDAQ: ELNK), is an Internet service provider headquartered in Atlanta, Georgia, USA. Business EarthLink provides a variety of Internet connection types, including dial-up, DSL, satellite, and cable. High Speed 3.0 service, which is up to 70 times faster than a standard dial-up Refers to using the regular "dial-up" telephone network to send data from a computer to a remote network or to a remote device. The computer's digital data are converted to analog signals in the same frequency range as human voice by a modem. connection based on the average speed between a 28.8k and 56k. Conference Call Information Covad will conduct a conference call to discuss these financial results on Tuesday Tuesday: see week. , July July: see month. 27, 2004 at 5:00 p.m. Eastern Time (ET)/ 2:00 p.m. Pacific Time (PT). The conference call will be webcast over the Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the . To listen to the call, visit the Event Calendar section on the Covad web site at www.covad.com/companyinfo/investorrelations. Investors and press may also listen by telephone to the call by dialing (617) 801-9712, pass code 30389302 and are advised to call in 5 minutes prior to the start time. The conference call will be recorded and available for replay listening until 11:59 p.m. EST P.M. also p.m. or p.m. abbr. post meridiem Usage Note: By definition, 12 a.m. on August 3, 2004 by dialing (617) 801-6888, pass code 59600200. The Webcast will be available through our Website until July 26, 2005. About Covad Covad is a leading nationwide provider of integrated voice and data communications. The company offers DSL, voice over IP, T1, Web hosting Making a Web site available on the Internet. Many ISPs host a few personal Web pages for an individual at no additional cost above the monthly service fee, but the address is subordinate to the ISP; for example, www.friendlyisp.com/pat_smith. , managed security, IP and dial-up, and bundled bun·dle n. 1. A group of objects held together, as by tying or wrapping. 2. Something wrapped or tied up for carrying; a package. 3. Biology A cluster or strand of closely bound muscle or nerve fibers. voice and data services directly through its network and through Internet Service Providers Internet service provider (ISP) Company that provides Internet connections and services to individuals and organizations. For a monthly fee, ISPs provide computer users with a connection to their site (see data transmission), as well as a log-in name and password. , value-added resellers A value-added reseller (VAR) is a company that adds some feature(s) to an existing product(s), then resells it (usually to end-users) as an integrated product or complete "turn-key" solution. , telecommunications Communicating information, including data, text, pictures, voice and video over long distance. See communications. carriers, and affinity groups A special interest group. This is a marketing term for a group of people with similar interests. to small and medium-sized businesses and home users. Covad broadband services are currently available across the nation in 44 states and 235 Metropolitan Statistical Areas (MSAs) and can be purchased by more than 57 million homes and businesses, which represent over 50 percent of all United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. homes and businesses. Its corporate headquarters are located at 110 Rio See RapidIO and MP3. Robles Robles is a common surname in the Spanish language meaning oaks, and may refer to:
Safe Harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. Statement under the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995: The foregoing contains "forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. " regarding expected financial and operating results, as well as other matters, which are based on management's current information and beliefs as well as on a number of assumptions concerning future events made by management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside Covad's control that could cause actual results to differ materially from such statements. These risk factors include the impact of increasing competition, pricing pressures, consolidation in the telecommunications industry, and uncertainty in telecommunications regulations and changes in technologies, among other risks. For a more detailed description of the risk factors that could cause such a difference, please see Covad's 10-K, 10-K/A, 10-Q, 8-K and other filings with the Securities and Exchange Commission. Covad disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results of Covad.
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA
(in thousands)
Selected Balance Sheet Data As of As of
Jun 30, Mar 31,
2004 2004
--------- ---------
Cash, cash equivalents, and short term investments $169,392 $166,647
Restricted cash and investments 2,942 2,942
Accounts receivable, net 29,956 31,418
All other current assets 15,240 15,917
Property, equipment, collocation fees, and other
intangible assets, net 166,610 130,253
Deferred costs of service activation 30,406 30,969
Deferred debt issuance costs 4,673 4,836
All other long-term assets 6,232 6,835
--------- ---------
Total assets $425,451 $389,817
========= =========
Total current liabilities $114,943 $115,897
Long-term debt 125,000 125,000
Collateralized customer deposit 48,476 50,426
Deferred gain from deconsolidation of subsidiary 53,963 53,963
Unearned revenues 53,305 54,633
Other long-term liabilities 2,397 0
Total stockholders' equity (deficit) 27,367 (10,102)
--------- ---------
Total liabilities and stockholders' equity
(deficit) $425,451 $389,817
========= =========
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
Consolidated Condensed Statements of Operations Data
Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2004 2004 2003 2004 2003
--------- --------- --------- --------- ---------
Revenues, net $107,326 $108,477 $ 92,445 $215,803 $183,305
Operating expenses:
Cost of sales
(exclusive of
depreciation and
amortization) 62,748 68,294 68,632 131,042 137,509
Sales, marketing,
general and
administrative 31,878 33,302 31,627 65,180 68,720
Depreciation and
amortization of
property and
equipment 14,162 14,495 13,752 28,657 28,345
Amortization of
collocation fees
and other
intangible assets 5,042 4,751 4,024 9,793 8,020
Provision for
restructuring
expenses 223 547 604 770 1,235
--------- --------- --------- --------- ---------
114,053 121,389 118,639 235,442 243,829
--------- --------- --------- --------- ---------
Loss from operations (6,727) (12,912) (26,194) (19,639) (60,524)
Other income
(expense), net (679) (619) (1,093) (1,298) (1,485)
--------- --------- --------- --------- ---------
Net loss $ (7,406) $(13,531) $(27,287) $(20,937) $(62,009)
========= ========= ========= ========= =========
Basic and diluted
net loss per share$ (0.03) $ (0.06) $ (0.12) $ (0.09) $ (0.28)
========= ========= ========= ========= =========
Weighted average
number of common
shares used in
computing basic and
diluted net loss
per share 242,359 233,257 223,724 237,593 223,585
========= ========= ========= ========= =========
Gross Margin (Note 1)$ 44,578 $ 40,183 $ 23,813 $ 84,761 $ 45,796
% of revenue 41.5% 37.0% 25.8% 39.3% 25.0%
EBITDA Calculation
(Note 2) Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2004 2004 2003 2004 2003
--------- --------- --------- --------- ---------
Net Loss $ (7,406) $(13,531) $(27,287) $(20,937) $(62,009)
Plus:Other (income)
expense, net 679 619 1,093 1,298 1,485
Depreciation
and
amortization
of property
and equipment 14,162 14,495 13,752 28,657 28,345
Amortization of
collocation
fees and other
intangible
assets 5,042 4,751 4,024 9,793 8,020
--------- --------- --------- --------- ---------
EBITDA (Note 2) $ 12,477 $ 6,334 $ (8,418) $ 18,811 $(24,159)
========= ========= ========= ========= =========
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA
(in thousands, except key operating data)
Consolidated Revenue Data
Three Months Ended Six Months Ended
--------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2004 2004 2003 2004 2003
--------- --------- -------- --------- ---------
Broadband
subscription
billings (Note 3) $ 87,032 $ 89,599 $76,101 $176,631 $147,049
VoIP subscription
billings (Note 3) 501 - - 501 -
High-capacity circuit
billings 5,792 5,252 5,036 11,044 10,833
Dial-up billings 1,130 1,058 1,528 2,188 3,261
--------- --------- -------- --------- ---------
Total Billings, net $ 94,455 $ 95,909 $82,665 $190,364 $161,143
Financially
distressed partners
(Note 4) (146) (240) 88 (386) (153)
Customer rebates and
incentives not
subject to deferral
(Note 5) (302) (422) (4,755) (724) (8,022)
Other revenues, net
(Note 6) 13,319 13,230 14,447 26,549 30,337
--------- --------- -------- --------- ---------
Revenues, net $107,326 $108,477 $92,445 $215,803 $183,305
========= ========= ======== ========= =========
Consolidated Network & Product Costs Data
Three Months Ended Six Months Ended
--------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2004 2004 2003 2004 2003
--------- --------- -------- --------- ---------
Direct Cost of Total
Billings, net (Note
8) $ 15,967 $ 17,676 $17,072 $ 33,643 $ 34,404
Other Network and
Product Costs (Note
9) 46,781 50,618 51,560 97,399 103,105
--------- --------- -------- --------- ---------
Cost of Sales
(exclusive of
depreciation and
amortization) $ 62,748 $ 68,294 $68,632 $131,042 $137,509
========= ========= ======== ========= =========
Key Operating Data As of
-----------------------------
Jun 30, Mar 31, Jun 30,
2004 2004 2003
--------- --------- ---------
End of Period Lines (EOP)
Company
Business 222,178 221,361 189,379
Consumer 292,167 294,421 264,080
--------- --------- ---------
Total Company 514,345 515,782 453,459
Wholesale
Business 165,009 163,869 148,466
Consumer 275,785 280,703 246,389
--------- --------- ---------
Total Wholesale 440,794 444,572 394,855
Direct
Business 57,169 57,492 40,913
Consumer 16,382 13,718 17,691
--------- --------- ---------
Total Direct 73,551 71,210 58,604
VoIP
Customers 311
Stations 15,833
Average Revenue per User (ARPU)
Company
Business $ 93 $ 96 $ 90
Consumer $ 29 $ 30 $ 35
--------- --------- ---------
Total Company $ 57 $ 58 $ 59
Wholesale
Business $ 76 $ 77 $ 79
Consumer $ 28 $ 29 $ 34
--------- --------- ---------
Total Wholesale $ 46 $ 47 $ 51
Direct
Business $ 140 $ 147 $ 134
Consumer $ 46 $ 51 $ 48
--------- --------- ---------
Total Direct $ 122 $ 128 $ 106
VoIP
Customers $ 2,059
Stations $ 42
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA
(in thousands)
Three Months Ending September 30, 2004 - Business Outlook
---------------------------------------------------------
EBITDA Calculation (Note 2) Three Months Ending
Sep 30, 2004
-----------------------
Projected Range of
Results
-----------------------
Net Loss $(25,000) to $(21,000)
Plus: Other (income) expense, net 500 to 500
Depreciation and amortization of
property and equipment 15,000 to 14,000
Amortization of collocation fees and
other intangible assets 4,500 to 4,500
--------- ---------
EBITDA (Note 2) $ (5,000) to $ (2,000)
========= =========
Consolidated Revenue Data Three Months Ending
Sep 30, 2004
-----------------------
Projected Range of
Results
-----------------------
Broadband subscription billings (Note 3) $ 85,000 to $ 88,000
VoIP subscription billings (Note 3) 1,500 to 2,500
High-capacity circuit billings 4,500 to 5,500
Dial-up billings 500 to 800
--------- ---------
Total Billings, net $ 91,500 to $ 96,800
Financially distressed partners (Note 4): (100) to (500)
Customer rebates and incentives not subject to
deferral (Note 5) (500) to (1,500)
Other revenues, net (Note 6) 13,100 to 13,200
--------- ---------
Revenues, net $104,000 to $108,000
========= =========
Notes to Unaudited Selected Financial Data
1. Gross margin is calculated by subtracting cost of sales (exclusive
of depreciation and amortization) from revenues, net.
2. Management believes that Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), defined as net loss
prior to (i) depreciation and amortization of property and
equipment, (ii) amortization of intangible assets and (iii) other
income (expense), net, is a useful measure because it provides
additional information about the company's ability to meet future
capital expenditures and working capital requirements and fund
continued growth. Management also uses EBITDA to evaluate the
performance of its business segments and as a factor in its
employee bonus program. EBITDA may be defined differently by other
companies and should not be used as an alternative to our
operating and other financial information as determined under
accounting principles generally accepted in the United States.
EBITDA is not a prescribed term under accounting principles
generally accepted in the United States, does not directly
correlate to cash provided by or used in operating activities and
should not be considered in isolation, nor as an alternative to
more meaningful measures of performance determined in accordance
with accounting principles generally accepted in the United
States. EBITDA generally excludes the effect of capital costs.
3. Broadband and VoIP subscription billings is defined as customer
bills issued within the period for services provided during such
period. Broadband and VoIP subscription billings exclude charges
for Federal Universal Service Fund ("FUSF") assessments, dial-up
services, and high- capacity circuits. Broadband subscription
billings include bills issued to customers that are classified as
financially distressed and whose revenue is only recognized if
cash is received (refer to Note 4 below for a more detailed
discussion on accounting for financially distressed partners).
Management believes broadband subscription billings is a useful
measure for investors as it represents a key indicator of the
growth of the company's core business. Management uses broadband
subscription billings to evaluate the performance of its business
segments.
4. When the company determines that (i) the collectibility of a bill
issued to a customer is not reasonably assured or (ii) its ability
to retain some or all of the payments received from a customer
that has filed for bankruptcy protection is not reasonably
assured, the customer is classified as "financially distressed"
for revenue recognition purposes. A bill issued to a financially
distressed customer is recognized as revenue when services are
rendered and cash for those services is received, assuming all
other criteria for revenue recognition have been met, and only
after the collection of all previous outstanding accounts
receivable balances. Consequently, significant timing differences
may occur from the time a bill is issued, the time the services
are provided and the time that cash is received and revenue is
recognized.
5. Customer rebates and incentives not subject to deferral consist of
amounts paid or accrued under marketing, promotion and rebate
incentive programs with certain customers. Rebates and incentives
paid or accrued under these programs are not accompanied by any
up-front charges billed to customers. Therefore, these charges are
accounted for as reductions of revenue as incurred.
6. Other revenues consist primarily of revenue recognized from
amortization of prior period SAB 101 deferrals (refer to Note 7
below for a discussion of SAB 101) and FUSF billed to our
customers and other revenues not subject to SAB 101 deferral
because they do not relate to an on-going customer relationship or
performance of future services.
7. In accordance with SAB 101, the company recognizes up-front fees
associated with service activation, net of any amounts
concurrently paid or accrued under certain marketing, promotion
and rebate incentive programs, over the expected term of the
customer relationship, which is presently estimated to be 24
months, using the straight-line method. The company also treats
the incremental direct costs of service activation (which consist
principally of customer premises equipment, service activation
fees paid to other telecommunications companies and sales
commissions) as deferred charges in amounts that are no greater
than the up-front fees that are deferred, and such deferred
incremental direct costs are amortized to expense using the
straight-line method over 24 months.
8. Direct costs of total billings, net consists of monthly charges we
receive from telecommunications carriers to support the delivery
of broadband services to our customers. Direct costs of total
billings, net includes the on-going costs associated with
high-capacity circuits provisioned for our wholesalers and the
costs associated with local loops provisioned for our broadband
and dial-up end-users.
9. Other network and product costs consist of all other costs,
excluding depreciation and amortization, associated with
operating, maintaining and monitoring our networks and delivering
service to our customers.
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