Covad Communications Group Announces Second Quarter 2005 Results; VoIP Stations Grew 28%; Broadband Lines Increased to 554,400.SAN JOSE San Jose, city, United States San 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 2005 of $109.7 million, up from the $107.7 million reported for the first quarter of 2005 and up from $107.3 million reported in the second quarter of 2004. Covad ended the second quarter of 2005 with approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 554,400 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). lines in service, an increase of 7,000 lines from the first quarter of 2005. More than one-third of the line growth was from sales of business T1 services. Covad ended the second quarter of 2005 with 870 VoIP business customers using approximately 29,900 stations, representing a 28 percent increase in VoIP station count from March 31, 2005. VoIP stations added in the second quarter of 2005 were more than double the stations added in the first quarter of 2005. While VoIP station growth doubled quarter over quarter in 2005 revenue does not reflect similar growth primarily because of the treatment of installation and equipment charges, which are deferred for revenue recognition purposes when billed. These amounts billed will be recognized as revenue in subsequent quarters. The company reported a net loss of $16.4 million, or $0.06 loss per share, for the second quarter of 2005 as compared to a net income of $34.4 million, or $0.11 per share, for the first quarter of 2005 and a net loss of $7.4 million, or $0.03 loss per share, in the second quarter of 2004. Loss from operations for the second quarter of 2005 was $25.6 million compared to $26.6 million for the first quarter of 2005 and $6.7 million in the second quarter of 2004. The loss from operations in the second quarter of 2005 reflects the company's continued investment in sales, marketing and implementation of Covad's Voice over IP (VoIP) service. Cash, cash equivalents 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, decreased by $4.6 million to $131.0 million in the second quarter of 2005 compared to a balance of $135.6 million at the end of the first quarter of 2005. Covad's total cash balance as of June June: see month. 30, 2005 includes proceeds from the sale of a portion of the Company's ownership in ACCA ACCA Air Conditioning Contractors of America Association, Inc. ACCA Association of Chartered Certified Accountants ACCA American Corporate Counsel Association ACCA Association Communale de Chasse Agréée (France) Networks Co. LTD LTD 1 Laron-type dwarfism 2 Leukotriene D 3 Long-term depression, see there 4. Long-term disability (ACCA), a Japanese Japanese (jăp'ənēz`), language of uncertain origin that is spoken by more than 125 million people, most of whom live in Japan. There are also many speakers of Japanese in the Ryukyu Islands, Korea, Taiwan, parts of the United States, and broadband provider, as well as an 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. Line-Powered Voice Access prepayment Prepayment 1. The payment of a debt obligation prior to its due date. 2. The excess payment over a scheduled debt repayment amount. Notes: 1. Examples include deferred expenses such as rent and early loan repayments. 2. . "Our second quarter results, with continued growth in revenue, adding 7,000 broadband lines and increasing VoIP stations by 28 percent, are a reflection of our commitment to building a long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. profitable business and being a leader in voice and data services. Our direct sales force is proving to be a significant asset as we continue to set the standard for the business-class VoIP market," 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, Covad president and chief executive officer. "The second quarter also indicates a change in the mix of broadband lines with an increase in more profitable, business-class lines being added to our network. Additionally, our new initiatives with both AOL (A division of Time Warner, Inc., New York, NY, www.aol.com) The world's largest online information service with access to the Internet, e-mail, chat rooms and a variety of databases and services. on high-speed Internet See broadband. services and with EarthLink on Line-Powered Voice Access that were announced in the quarter will enable Covad to continue leveraging our nationwide network to innovate in·no·vate v. in·no·vat·ed, in·no·vat·ing, in·no·vates v.tr. To begin or introduce (something new) for or as if for the first time. v.intr. To begin or introduce something new. and collaborate with our partners." 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 $78.1 million of revenue, or 71 percent, while direct subscribers contributed $31.6 million of revenue, or 29 percent. As of June 30, 2005, broadband lines in service were approximately 472,800 wholesale and 81,600 direct lines, as compared to approximately 465,900 wholesale and 81,500 direct lines as of March 31, 2005, and approximately 440,800 wholesale and 73,600 direct lines reported as of June 30, 2004. For the second quarter of 2005, broadband and VoIP subscription revenue increased to $93.5 million from the $91.5 million reported in the first quarter of 2005 and the $87.5 million reported in the second quarter of 2004. Management uses broadband and VoIP subscription revenue to evaluate the performance of its business and believes these revenues 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 most directly comparable GAAP measure. For the second quarter of 2005, gross margin was $33.5 million, or 31 percent of revenue, as compared to $35.0 million, or 32 percent of revenue, for the first quarter of 2005 and $44.6 million, or 42 percent of revenue, for the second quarter of 2004. Selling, general and administrative expenses were $41.5 million for the second quarter of 2005 as compared to $42.4 million for the first quarter of 2005 and $31.9 million in the second quarter of 2004. "Our second quarter results are in line with the guidance we provided and reflect our continued commitment to invest in VoIP as well as opportunities in the broadband area," said John Trewin, Covad senior vice president and chief financial officer. "The year-over-year increase in operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. reflects our conscious decision to invest to become a leader in the VoIP market. Going forward, we will continue to make strategic investments in our business to improve our VoIP, sales, marketing and delivery processes which will result in an improved customer experience and operational efficiencies, such as faster order processing and more automated au·to·mate v. au·to·mat·ed, au·to·mat·ing, au·to·mates v.tr. 1. To convert to automatic operation: automate a factory. 2. billing." Operating Statistics --At the end of the second quarter of 2005, Covad had approximately 324,700 consumer and 229,700 business broadband lines in service representing 59 percent and 41 percent of total broadband lines, respectively. Covad had 870 VoIP business customers and approximately 29,900 VoIP stations as of June 30, 2005. Business customers contributed $81.6 million, or 74 percent, of total revenue. --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. ) for broadband lines was $55 per month during the second quarter of 2005, equivalent to $55 per month for the first quarter of 2005. Covad VoIP ARPU per customer (excluding resellers) was $1,698 per month during the second quarter of 2005, down from $1,763 per month for the first quarter of 2005. --Net customer disconnections, or churn churn: see butter. , for broadband lines averaged approximately 3.2 percent in the second quarter of 2005, slightly up from 3.1 percent for the first quarter of 2005. Business Outlook In the third quarter of 2005, Covad will be focused on equipping e·quip tr.v. e·quipped, e·quip·ping, e·quips 1. a. To supply with necessities such as tools or provisions. b. central offices for the EarthLink line-powered voice trial, continuing network augmentations to support execution of the AOL High Speed offer and other broadband growth, and continuing investment to maintain leadership in the growing VoIP hosted-PBX market. The AOL trial has a positive effect on revenues, but negative impact on EBITDA and cash due to the upfront incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. expenditures to support that volume. There also is some capital expenditure related to the EarthLink trial so some cash received from EarthLink last quarter will be spent in the third quarter. These expenditures are partially offset by the expectation of selling the balance of Covad's shares in ACCA during the third quarter of 2005. As a result, Covad expects total revenue for the third quarter of 2005 to be in the range of $111-116 million. Broadband and VoIP subscription revenue is expected to be in the range of $95-98 million. Covad expects its net loss to be in the range of $16-19 million, and EBITDA loss in the range of $12-15 million. Net change in cash, cash equivalents and short-term investments, including restricted cash and investments, in the third quarter of 2005 is expected to be in the range of negative $14-18 million. Covad also announced today that it has been accepted for listing on the American Stock Exchange American Stock Exchange (AMEX) Stock exchange in the U.S. Originally known as “the Curb,” it began as an outdoor marketplace in New York City c. 1850. It moved indoors to its present location in the Wall Street area in 1921. (Amex) under the symbol "DVW DVW Deutscher Verein für Vermessungswesen eV (German Surveying Association) DVW Dynamic Virtual Worlds " for data, voice and wireless. Covad shares will begin trading on Amex on July July: see month. 28, 2005. Covad was previously traded on the OTCBB. Conference Call Information Covad will conduct a conference call to discuss these financial results on Wednesday Wednesday: see week. , July 27, 2005 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 http://www.covad.com/companyinfo/investorrelations. Investors and press may also listen by telephone to the call by dialing 800-510-0178 and reference pass code 80786596. Participants 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, 2005 by dialing 888-286-8010 and reference pass code 59801621. The webcast will be available through our website until July 26, 2006. About Covad Covad is a leading nationwide provider of broadband voice and data communications. The company offers 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 , 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 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. , 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 Covad's 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 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 and home users. Covad broadband services See broadband and broadband service provider. 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 US homes and businesses. Corporate headquarters is 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. " which are based on management's current information and beliefs as well as on a number of assumptions concerning future events made by management. Examples of forward-looking statements include the company's expected revenue, Broadband and VoIP subscription revenue, broadband subscriber line The line from the customer site to the local telephone company. See subscriber network. growth, net loss, EBITDA loss, change in cash, cash equivalents and short term investments, including restricted cash and investments. 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 our ability to rapidly expand and deploy new services, 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, 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 (unaudited)
(in thousands)
Selected Condensed Balance Sheet Data As of As of As of
Jun 30, Mar 31, Dec 31,
2005 2005 2004
---------- ---------- ----------
Cash, cash equivalents, and short-term
investments $128,444 $133,018 $150,996
Restricted cash and cash equivalents 2,533 2,533 2,533
Short term investments in equity
securities 14,288 27,671 -
Accounts receivable, net 29,401 27,862 30,041
All other current assets 16,012 14,990 12,211
Property and equipment, net 71,494 71,444 78,707
Collocation fees and other intangible
assets, net 26,843 29,452 34,561
Goodwill 36,626 36,626 36,626
Deferred costs of service activation 28,198 29,128 30,152
Deferred debt issuance costs 3,727 3,979 4,231
All other long-term assets 4,280 4,710 5,167
---------- ---------- ----------
Total assets $361,846 $381,413 $385,225
========== ========== ==========
Total current liabilities $116,176 $109,825 $116,717
Long-term debt 125,000 125,000 125,000
Collateralized customer deposit 40,152 42,237 44,444
Deferred gain resulting from
deconsolidation of subsidiary - - 53,963
Unearned revenues 48,032 49,728 51,518
Other long-term liabilities 6,773 2,108 2,218
Total stockholders' equity (deficit) 25,713 52,515 (8,635)
---------- ---------- ----------
Total liabilities and stockholders'
equity (deficit) $361,846 $381,413 $385,225
========== ========== ==========
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA (unaudited)
(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,
2005 2005 2004 2005 2004
--------- --------- --------- --------- ---------
Revenues, net $109,741 $107,718 $107,326 $217,459 $215,803
Operating expenses:
Cost of sales
(exclusive of
depreciation and
amortization) 76,240 72,749 62,748 148,989 131,042
Selling, general
and administrative 41,492 42,374 31,878 83,866 65,180
Depreciation and
amortization of
property and
equipment 12,909 13,785 14,162 26,694 28,657
Amortization of
collocation fees
and other
intangible assets 4,717 5,364 5,042 10,081 9,793
Provision for
restructuring
expenses - - 223 - 770
--------- --------- --------- --------- ---------
Total operating
expenses 135,358 134,272 114,053 269,630 235,442
--------- --------- --------- --------- ---------
Loss from operations (25,617) (26,554) (6,727) (52,171) (19,639)
Other income (expense)
Gain on
deconsolidation of
subsidiary - 53,963 - 53,963 -
Gain on sale of
investments in
equity securities 9,421 7,246 - 16,667 -
Other (207) (281) (679) (488) (1,298)
--------- --------- --------- --------- ---------
Other income
(expense), net 9,214 60,928 (679) 70,142 (1,298)
--------- --------- --------- --------- ---------
Net income (loss) $(16,403) $34,374 $(7,406) $17,971 $(20,937)
========= ========= ========= ========= =========
Earnings (loss) per
common share:
Basic $(0.06) $0.13 $(0.03) $0.07 $(0.09)
========= ========= ========= ========= =========
Diluted $(0.06) $0.11 $(0.03) $0.07 $(0.09)
========= ========= ========= ========= =========
Weighted average
number of common
shares outstanding
Basic 263,918 263,691 242,359 263,852 237,593
========= ========= ========= ========= =========
Diluted 263,918 310,756 242,359 309,260 237,593
========= ========= ========= ========= =========
Gross Margin (Note 1) $33,501 $34,969 $44,578 68,470 84,761
% of revenue 30.5% 32.5% 41.5% 31.5% 39.3%
EBITDA Calculation
(Note 2) Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2005 2005 2004 2005 2004
--------- --------- --------- --------- ---------
Net Income (Loss) $(16,403) $34,374 $(7,406) $17,971 $(20,937)
Plus: Other (income)
expense, net (9,214) (60,928) 679 (70,142) 1,298
Depreciation
and
amortization
of property
and equipment 12,909 13,785 14,162 26,694 28,657
Amortization of
collocation
fees and other
intangible
assets 4,717 5,364 5,042 10,081 9,793
--------- --------- --------- --------- ---------
EBITDA (Note 2) $(7,991) $(7,405) $12,477 $(15,396) $18,811
========= ========= ========= ========= =========
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA (unaudited)
(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,
2005 2005 2004 2005 2004
--------- --------- --------- --------- ---------
Broadband
subscription
revenue (Note 3) $90,736 $89,087 $87,032 $179,823 $176,631
VoIP subscription
revenue (Note 3) 2,738 2,431 501 5,169 501
High-capacity
circuit revenue 4,511 4,193 5,792 8,704 11,044
Dial-up revenue - - 1,130 - 2,188
--------- --------- --------- --------- ---------
Subtotal $97,985 $95,711 $94,455 $193,696 $190,364
Financially
distressed
partners (Note 4) 120 (126) (146) (6) (386)
Customer rebates
and incentives not
subject to
deferral (Note 5) (268) (48) (302) (316) (724)
Other revenue, net
(Note 6) 11,904 12,181 13,319 24,085 26,549
--------- --------- --------- --------- ---------
Revenues, net $109,741 $107,718 $107,326 $217,459 $215,803
========= ========= ========= ========= =========
Consolidated Cost of
Sales (exclusive of
depreciation and
amortization) Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2005 2005 2004 2005 2004
--------- --------- --------- --------- ---------
Direct Cost of
Revenue, net
(Note 8) $20,559 $19,155 $15,967 $39,714 $33,643
Other Network and
Product Costs
(Note 9) 55,681 53,594 46,781 109,275 97,399
--------- --------- --------- --------- ---------
Cost of Sales
(exclusive of
depreciation and
amortization) $76,240 $72,749 $62,748 $148,989 $131,042
========= ========= ========= ========= =========
Key Operating Data As of
-----------------------------
Jun 30, Mar 31, Jun 30,
2005 2005 2004
--------- --------- ---------
End of Period Lines
(EOP)
Company
Business 229,747 227,158 221,766
Consumer 324,652 320,256 292,579
--------- --------- ---------
Total Company 554,399 547,414 514,345
Wholesale
Business 169,559 168,189 165,009
Consumer 303,239 297,765 275,785
--------- --------- ---------
Total
Wholesale 472,798 465,954 440,794
Direct
Business 60,188 58,969 56,757
Consumer 21,413 22,491 16,794
--------- --------- ---------
Total Direct 81,601 81,460 73,551
Direct VoIP
Customers 870 690 311
Stations 29,922 23,420 15,833
Average Revenue per
User (ARPU)
Company
Business $97 $96 $93
Consumer $26 $25 $29
--------- --------- ---------
Total Company $55 $55 $57
Wholesale
Business $80 $78 $76
Consumer $25 $25 $28
--------- --------- ---------
Total
Wholesale $45 $44 $46
Direct
Business $145 $147 $140
Consumer $32 $32 $46
--------- --------- ---------
Total Direct $114 $116 $122
Direct VoIP
Customers
(excluding
resellers) $1,698 $1,763 n/a
Stations $35 $37 $42
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
Three Months Ending September 30, 2005 -
Business Outlook
------------------------------------------------
EBITDA Calculation (Note 2) Three Months Ending
Sep 30, 2005
----------------------
Projected Range of
Results
----------------------
Net Loss $(19,000) to $(16,000)
Plus: Other (income) expense, net (14,000) to (12,000)
Depreciation and amortization of
property and equipment 13,000 to 12,000
Amortization of collocation fees and
other intangible assets 5,000 to 4,000
--------- ---------
EBITDA (Note 2) $(15,000) to $(12,000)
========= =========
Consolidated Revenue Data Three Months Ending
Sep 30, 2005
----------------------
Projected Range of
Results
----------------------
Broadband subscription revenue (Note 3) $91,000 to $93,000
VoIP subscription revenue (Note 3) 4,000 to 5,000
High-capacity circuit revenue 4,000 to 5,000
--------- ---------
Subtotal $99,000 to $103,000
Financially distressed partners (Note 4): - to -
Customer rebates and incentives not subject to
deferral (Note 5) - to -
Other revenue, net (Note 6) 12,000 to 13,000
--------- ---------
Revenues, net $111,000 to $116,000
========= =========
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 revenue is defined as revenue for
recurring services provided and earned during such period.
Broadband and VoIP subscription revenue excludes charges for
Federal Universal Service Fund ("FUSF") assessments, dial-up
services, and high- capacity circuits and other adjustments.
Broadband and VoIP subscription revenue includes 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 and VoIP
subscription revenue is a useful measure for investors as it
represents a key indicator of the growth of the company's core
business. Management uses broadband and VoIP subscription revenue
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, there may be significant timing
differences between 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 104 deferrals (refer to Note 7
below for a discussion of SAB 104) and FUSF billed to our
customers and other revenues not subject to SAB 104 deferral
because they do not relate to an on-going customer relationship or
performance of future services.
7. In accordance with SAB 104, 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 to 48 months.
8. Direct costs of revenue, net consists of monthly charges we
receive from telecommunications carriers to support the delivery
of broadband and VoIP services to our customers. Direct costs of
revenue, 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 equipment
maintenance, central offices' (COs) cost, installation costs paid
to others, the internal installation services group, and federal
universal service fund tax.
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