Covad Communications Group Announces Third Quarter and Nine-month Results.

Business/Technology Editors

SANTA CLARA, Calif.--(BUSINESS WIRE)--Nov. 6, 2002

- Gross Margin Increases to 29.2% versus 23.6% in Second Quarter -

- Company Signs New Wholesale Partners during Quarter -

Covad Communications Group, Inc. (OTCBB:COVD) today reported results for the third quarter and nine months ended September 30, 2002. Revenue was in line with guidance at $96.2 million and EBITDA was ahead of guidance at a loss of $14.7 million. Gross margin grew to 29.2 percent from 23.6 percent for the second quarter of 2002. Net loss was $51.7 million or $0.23 per share. Cash and investment balances, including restricted cash, as of September 30, 2002 were $228.7 million, representing a net cash usage of $17.1 million for the quarter. Line count increased to approximately 359,000 during the third quarter.

"We are executing our plan and believe that we turned the corner on line count during the third quarter. We continue to focus on controlling costs, prudent use of cash, and marketing and sales programs that will drive demand for broadband services and increase Covad sales," said Charles Hoffman, Covad president and CEO. "We are strengthening our distribution channels as evidenced by the wholesale agreements signed during the quarter and our direct channel performance continues to be strong. Our new marketing programs are beginning to show results and we believe the awareness created by our campaigns will have a lasting impact on our business and will continue to generate greater recognition of the benefits of broadband services in the marketplace."

Highlights

-- Covad's direct channel continued to grow. The number of direct lines grew quarter over quarter by 18 percent and now represents approximately nine percent of total lines in service and over 14 percent of total company revenues.

-- Covad continued the extension of its network, expanding coverage in the current 94 Metropolitan Statistical Areas (MSAs) served, and ending the third quarter with approximately 1750 central offices in service.

-- Covad redesigned its Alliance Program, which now has over 700 affiliates selling Covad DSL services across the country.

Wholesale partnerships:

- America Online penned a five-year agreement providing it with the ability to purchase wholesale DSL consumer services throughout Covad's nationwide network. Covad anticipates it will begin to receive orders in the fourth quarter of 2002.

- Sprint signed an agreement to distribute Covad's DSL access services in selected markets to Sprint's business customers. Sprint began placing orders in August of 2002.

- Expanded relationship with EarthLink to include additional consumer services that Covad expects EarthLink will begin offering late in the fourth quarter of 2002.

Launched the "Popularizing Broadband" campaign focused on programs, promotions and advertising to promote Covad services and educate consumers about the benefits of broadband access:

- Launched the "Power to the People" TV campaign in San Francisco and Washington DC to increase consumer awareness of Covad's direct broadband Internet access services.

- Commenced direct small business marketing in select markets with print and radio campaigns, which are expected to continue into the holiday season.

- Launched introductory rates for our TeleSurfer services that are competitive with dial-up rates.

Hoffman continued, "During the fourth quarter, we will continue building brand recognition in the marketplace, while also focusing on gross margin improvement and churn management. The marketing campaign for our direct business will target small business customers who tend to generate the best margins. We are working extensively with our wholesale partners to develop programs that will generate line growth and reduce churn. In both distribution channels, we are showing modest improvement in churn, which continues to be a major focus for us."

Operating Statistics

-- Average revenue per unit (ARPU) remained solid at approximately $61.

-- The quarter-end aggregate unrestricted and restricted cash, cash equivalents and short-term investments balances of $228.7 million reflected capital expenditures of approximately $5.1 million and lower than expected net cash usage of $17.1 million.

-- Line count reached approximately 359,000 as of September 30, 2002.

-- Churn during the quarter was approximately four percent.

-- Business subscribers represented 49 percent of line count and the consumer service represented 51 percent, a slight shift from an even mix last quarter.

-- Approximately nine percent of Covad's total lines are served through resellers for whom Covad recognizes revenue only when it is paid, down from approximately 11 percent at the end of the second quarter of 2002.

Third Quarter Financial Results

Revenue for the quarter ended September 30, 2002 was $96.2 million, an improvement of over 13 percent when compared to $84.8 million for the third quarter ended September 30, 2001, and down slightly from $97.7 million for the quarter ended June 30, 2002. The company's wholesale channel contributed $82.3 million or 85.6 percent of revenue while the direct channel contributed $13.9 million or 14.4 percent of revenue during the quarter ended September 30, 2002.

Network and product costs were $68.1 million for the third quarter of 2002, a 34.1 percent decrease from $103.3 million for the third quarter of 2001, and an 8.8 percent decrease from $74.7 million for the second quarter of 2002. For the third quarter of 2002, gross margin was 29.2 percent, an increase from negative 21.8 percent from the third quarter one year ago and an increase from 23.6 percent for the quarter ended June 30, 2002.

Sales, marketing, general and administrative expenses were $42.6 million for the third quarter of 2002, compared to $46.6 million for the third quarter of 2001 and $35.4 million for the second quarter of 2002. The increase from the second to the third quarter is largely attributable to the company's launch of its "Popularizing Broadband" campaign.

EBITDA for the quarter ended September 30, 2002, was a loss of $14.7 million, compared to a loss of $70.2 million for the quarter ended September 30, 2001 and a loss of $7.3 million for the quarter ended June 30, 2002. The increase in EBITDA loss from the second to the third quarter also reflects the increase in marketing expenses in the third quarter as well an increase in non-cash litigation-related expenses, offset by the improvement in network and product costs described above. Operating loss for the third quarter of 2002 was $51.9 million, compared to $108.1 million in the third quarter of 2001 and $39.5 million in the second quarter of 2002.

Covad's net loss for the third quarter of 2002 was $51.7 million or $0.23 per share, compared to a net loss of $139.7 million or $0.79 per share for the third quarter of 2001, and a net loss of $40.8 million or $0.19 per share for the second quarter ended June 30, 2002. The net loss for the three months ended September 30, 2002 includes charges that should have been recorded in prior periods. These charges consist of additional depreciation expense of $9.6 million related to changes in Covad's network configuration, which necessitated a reduction in the remaining estimated useful lives of certain assets, and a charge to network and product costs of $1.2 million related to the capitalization of certain network and product costs that should have been expensed.

Mark Richman, Covad's chief financial officer, stated, "During the quarter, we devoted resources to our marketing programs as reflected by the increase in sales, marketing, general and administrative expenses for the quarter. We anticipate our marketing investments will generate continued line count growth in the fourth quarter, with revenue improvements to begin in the first quarter 2003. We continue to maintain a cost discipline that allows us to focus resources on funding growth."

Year-to-date Financial Results

Revenue for the nine months ended September 30, 2002 was $295.6 million, up from $243.1 million for the nine months ended September 30, 2001. The company's wholesale channel contributed $254.3 million or 86.0 percent of revenue while the direct channel contributed $41.4 million or 14.0 percent of revenue during the first nine months of 2002.

Network and product costs were $231.6 million for the nine months ended September 30, 2002, down from $359.9 million for the comparable period in 2001. Sales, marketing, general and administrative costs were $116.6 million, down from $168.7 million for the same period in 2001.

EBITDA loss was $43.9 million for the nine months ended September 30, 2002, compared to a loss of $311.5 million in the same period in 2001. EBITDA loss for the nine months ended September 30, 2002, includes a $9.0 million non-cash recovery for litigation expenses, while the EBITDA loss for the comparable period in 2001 included $25.5 million of expenses related to restructuring, asset impairment and litigation. Covad's net loss for the nine months ended September 30, 2002 was $149.3 million or $0.68 per share, compared to the net loss of $513.7 million or $2.94 per share for the nine months ended September 30, 2001.

Business Outlook

Covad currently expects revenue for the fourth quarter to be in a range of $92 million to $95 million with continued subscriber growth. The results for the first nine months of 2002 include revenues from certain cash basis customers for services provided and payments made in prior periods that are not anticipated during the fourth quarter of 2002. For the fourth quarter of 2002, the company expects EBITDA loss to be in a range of $25 million to $30 million and cash usage to be approximately $30 million, including capital expenditures. Based on the results for the first nine months of 2002, the anticipated results for the fourth quarter and the related timing of subscriber growth, Covad expects to reach EBITDA positive in the second half of 2003 and cash flow positive, including cash for capital expenditures, in mid 2004. The change of approximately six months is largely related to slower than anticipated subscriber growth. Despite the change in guidance, Covad continues to believe that it has a fully funded business plan.

Conference Call Information

Covad will conduct a conference call to discuss these financial results on Wednesday, November 6, 2002 at 5:00 p.m. Eastern Standard Time (EST)/2:00 p.m. Pacific Standard Time (PST). The conference call will be webcast over the Internet. To listen to the call visit the Covad website at www.covad.com/companyinfo. Investors and press may also listen by telephone to the call by dialing 703-871-3085 and are advised to call in ten minutes prior to the start time. The conference call telephone replay will be available until 9:00 p.m. PST on Friday, November 8, 2002, by dialing 888-266-2081 or 703-925-2533, passcode 6294387. The webcast will be available until Friday, November 22, 2002.

Definition of Terms

EBITDA: defined as loss from operations excluding expenses for depreciation and amortization of property and equipment and amortization of intangible assets and may be defined differently by other companies. EBITDA should not be considered a substitute for other results reported in accordance with generally accepted accounting principles, such as net loss, loss from operations or net cash used in operating activities.

Gross margin: defined as revenues less network and product costs.

Net cash usage: defined as the net change in cash and cash equivalents, short-term investments and restricted cash and investments.

About Covad Communications

Covad is a leading national broadband service provider of high-speed Internet and network access utilizing Digital Subscriber Line (DSL) technology. It offers DSL, T1, managed security, IP and dial-up services directly through Covad and through Internet Service Providers, value-added resellers, telecommunications carriers and affinity groups to small and medium-sized businesses and home users. Covad services are currently available across the United States in 94 of the top Metropolitan Statistical Areas (MSAs). Covad's network currently includes approximately 1,750 operational central offices that pass more than 40 million homes and business and reaches approximately 40 to 45 percent of all US homes and businesses. Covad's corporate headquarters is located at 3420 Central Expressway, Santa Clara, CA 95051. Telephone: 1-888-GO-COVAD. Web Site: www.covad.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:

The statements contained in this press release that are not historical facts are "forward-looking statements," including statements concerning Covad's anticipated sales, revenue, operating expenses, profitability, sufficiency of capital resources, losses and growth, reductions in churn and the statements made by the president and CEO and the CFO and the assumptions underlying such statements. Actual events or results may differ materially as a result of risks facing Covad or actual results differing from the assumptions underlying such statements. Such risks and assumptions include, but are not limited to, Covad's ability to continue as a going concern, to continue to service and support its customers, to successfully market its services to current and new customers, to manage the consolidation of sales to a fewer number of wholesale customers, to successfully migrate end users, Covad's ability to generate customer demand, to achieve acceptable pricing, to respond to competition, to develop and maintain strategic relationships, to manage growth, to receive timely payment from customers, to access regions and negotiate suitable interconnection agreements, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, as well as regulatory, legislative, and judicial developments and the absence of an adverse result in litigation against Covad. Covad disclaims any obligation to update any forward-looking statement contained in this press release. All forward-looking statements are expressly qualified in their entirety by the "Risk Factors" and other cautionary statements included in Covad's SEC Annual Report on Form 10-K for the year ended December 31, 2001 and its Report on Form 10-Q for the period ended September 30, 2002.

                   COVAD COMMUNICATIONS GROUP, INC.
                         Financial Highlights
             (Dollars in thousands, except per share data)
                              (Unaudited)


                       Three Months Ended        Nine Months Ended
                         September 30,             September 30,
                      2002         2001         2002         2001
                   ------------ ------------ ------------ ------------
Revenues, net        $  96,206    $  84,784    $ 295,605    $ 243,128

Operating expenses:
Network and
 product costs          68,112      103,290      231,576      359,896
Sales, marketing,
 general and
 administrative         42,607       46,601      116,636      168,696
Provision for bad
 debts (bad debt
 recoveries), net       (1,731)       3,572          312          523
Depreciation and
 amortization of
 property and
 equipment              33,498       36,092       92,882      103,796
Amortization of
 collocation fees        3,700        1,763       10,990        9,333
Provision for
 restructuring
 expenses                    -         (130)           -       17,617
Provision for
 long-lived asset
 impairment                  -         (241)           -        1,989
Litigation-related
 expenses                1,884        1,907       (9,029)       5,907
                   ------------ ------------ ------------ ------------
Total operating
 expenses              148,070      192,854      443,367      667,757
                   ------------ ------------ ------------ ------------
Loss from
 operations            (51,864)    (108,070)    (147,762)    (424,629)

Other income (expense):
Realized gain
 (loss) on short-term
  investments                -           75          (17)       5,912
Other than
 temporary losses
 on short-term
 investments                 -            -            -       (1,311)
Provision for
 impairment of
 investment in
 unconsolidated
 affiliates                  -       (9,467)           -       (9,467)
Equity in losses
 of unconsolidated
 affiliates               (101)      (5,011)        (704)     (11,626)
Gain (loss) on
 disposal of
 investments in
 unconsolidated
 affiliates                  -            -         (636)         178
Interest income
 (expense), net            184      (13,282)         (53)     (69,301)
Reorganization
 expenses, net               -       (3,896)           -       (3,896)
Miscellaneous
 income (expense), net      74          (98)        (167)         394
                   ------------ ------------ ------------ ------------
Other income
 (expense), net            157      (31,679)      (1,577)     (89,117)
                   ------------ ------------ ------------ ------------
Net loss             $ (51,707)   $(139,749)   $(149,339)   $(513,746)
                   ============ ============ ============ ============


Basic and diluted
 net loss per
 share               $   (0.23)   $   (0.79)   $   (0.68)   $   (2.94)
                   ============ ============ ============ ============

Weighted average number of
 common shares used in
 computing
   basic and
    diluted net
    loss per share 220,432,609  176,829,127  218,901,267  174,507,085
                   ============ ============ ============ ============

EBITDA (A)           $ (14,666)   $ (70,215)   $ (43,890)   $(311,500)
Gross Margin (B)     $  28,094    $ (18,506)   $  64,029    $(116,768)
Gross Margin %            29.2%      (21.8%)        21.7%      (48.0%)

(A) EBITDA is defined as loss from operations excluding expenses for
    depreciation and amortization of property and equipment and
    amortization of intangible assets and may be defined differently
    by other companies.

(B) Gross margin is defined as revenues less
    network and product costs.




                                           As of           As of
                                       September 30,   December 31,
                                           2002           2001
                                      --------------- --------------
Selected Balance Sheet Data:
Cash, cash equivalents and
 short-term investments                    $ 228,207      $ 283,863
Restricted cash and investments                  500          9,203
Other current assets                          55,321         46,032
Property and equipment, net                  119,654        215,804
Other long-term assets                        99,129        120,266
                                      --------------- --------------
Total assets                                 502,811        675,168

Current liabilities                          128,506        136,442
Long-term debt                                50,000         50,000
Collateralized customer deposit               70,080         75,000
Deferred gain on deconsolidation
 of subsidiary                                55,200         55,200
Unearned revenues                             79,185         98,697
Total stockholders' equity                   119,840        259,829
                                      --------------- --------------
Total liabilities and
 stockholders' equity                        502,811        675,168