Covad Communications Group Reports Second Quarter 2006 Results; Company Exceeds Adjusted EBITDA and Cash Guidance; Continues to Execute on Growth Opportunities.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. (AMEX AMEX See: American Stock Exchange :DVW DVW Deutscher Verein für Vermessungswesen eV (German Surveying Association) DVW Dynamic Virtual Worlds ), 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. , posted best-ever figures for quarterly revenue and surpassed its guidance for Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become ("A-EBITDA"). For the second quarter of 2006 Covad reported net revenues of $118.5 million, A-EBITDA of $25.6 million and net income of $12.5 million, or $0.04 per share. A-EBITDA and net income for the second quarter of 2006 include a $19.5 million benefit from a one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. tax adjustment. 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, said: "In the second quarter we grew revenues and effectively managed costs across our business. We continue to successfully focus on providing high-margin, high-value solutions to direct business customers." "We also made significant strides towards ensuring our future success with several growth opportunities. Our build-out Build-out is an urban planner’s estimate of the amount and location of potential development for an area. Build-out is one step of the land use planning process. Evaluation of potential development impacts begins with a build-out analysis. of what will be the nation's largest next-generation network is well underway and will enable us to meet the ongoing telecommunications Communicating information, including data, text, pictures, voice and video over long distance. See communications. needs of our customers with unique product offerings such as higher-speed 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). , line-powered voice access and other next-generation communications services. We also solidified so·lid·i·fy v. so·lid·i·fied, so·lid·i·fy·ing, so·lid·i·fies v.tr. 1. To make solid, compact, or hard. 2. To make strong or united. v.intr. our position as an innovative leader in the wireless broadband High-speed wireless transmission of data. What is "high" speed is always a changing number. Wireless systems are typically slower than land-based, wireline networks. In the past, wireless broadband started at 250 Kbps, whereas land-based broadband was generally considered to start at T1 space. As always, we continued to focus on providing an excellent customer experience, growing our business and improving profitability." Summary of Financial Results --Net revenues for the second quarter of 2006 totaled $118.5 million, an increase of 0.6 percent from the $117.8 million reported for the first quarter of 2006, and an increase of 8.0 percent from the $109.7 million reported for the second quarter of 2005. Second quarter of 2006 includes a full quarter of revenues for Covad's wireless business. Net revenues for the first quarter of 2006 include $1.7 million from a software license agreement. --Broadband and VoIP subscription revenues for the second quarter of 2006 totaled $102.9 million, an increase of 1.9 percent from the $101.0 million reported for the first quarter of 2006, and an increase of 10.1 percent from the $93.5 million reported for the second quarter of 2005. Refer to the Selected Financial Data below, including Note 3, for additional information, including a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). measure. --Wholesale subscribers for the second quarter of 2006 contributed $78.9 million of net revenues, or 66.6 percent, as compared to $81.1 million, or 68.9 percent, for the first quarter of 2006, and $78.1 million, or 71.1 percent, for the second quarter of 2005. Direct subscribers for the second quarter of 2006 contributed $39.6 million of net revenues, or 33.4 percent, as compared to $36.7 million, or 31.1 percent, for the first quarter of 2006, and $31.6 million, or 28.9 percent, for the second quarter of 2005. --Business subscribers for the second quarter of 2006 contributed $90.5 million of net revenues, or 76.4 percent, as compared to $87.5 million, or 74.3 percent, for the first quarter of 2006, and $81.5 million, or 74.3 percent, for the second quarter of 2005. Consumer subscribers for the second quarter of 2006 contributed $28.0 million of net revenues, or 23.6 percent, as compared to $30.3 million, or 25.7 percent, for the first quarter of 2006, and $28.2 million, or 25.7 percent, for the second quarter of 2005. --Income from operations for the second quarter of 2006 totaled $14.1 million, an improvement of $23.1 million from the $9.0 million loss reported for the first quarter of 2006, and an improvement of $39.7 million from the $25.6 million loss reported for the second quarter of 2005. As stated above, second quarter of 2006 results include a $19.5 million benefit from a one-time tax adjustment. --Adjusted 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.
adj. 1. Almost exact or correct: the approximate time of the accident. 2. $19.5 million to Covad's A-EBITDA. This adjustment stems from a ruling the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. made in the second quarter of 2006 in which it will stop collecting the federal excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. for certain classes of telecommunications services In telecommunication, the term telecommunications service has the following meanings: 1. Any service provided by a telecommunication provider. 2. . Covad had accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. for this tax from 2000 until early 2004. Covad did not pass this tax onto its customers; consequently it charged the expense to its operations. The ruling enables Covad to release this accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. as the ruling resolved uncertainty around the applicability of the tax to certain telecommunication telecommunication Communication between parties at a distance from one another. Modern telecommunication systems—capable of transmitting telephone, fax, data, radio, or television signals—can transmit large volumes of information over long distances. services. In addition, A-EBITDA for the second quarter of 2006 includes a $2.1 million benefit from an employment related tax adjustment. A-EBITDA for the first quarter of 2006 includes a $1.7 million benefit from a software license agreement. Refer to the Selected Financial Data below, including Note 2, for additional information, including a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure. --Net income for the second quarter of 2006 totaled $12.5 million, or $0.04 per share, an improvement of $21.8 million from the $9.3 million net loss, or $0.03 loss per share, reported for the first quarter of 2006 and an improvement of $28.9 million from the $16.4 million net loss, or $0.06 loss per share, reported for the second quarter of 2005. As stated above, second quarter of 2006 results include a $19.5 million benefit from a one-time tax adjustment. First quarter of 2006 includes a $1.7 million benefit from a software license agreement. Included in net loss for the second quarter of 2005 is a $9.4 million net gain from the sale of part of Covad's investment 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, 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. Excluding these items, net loss for second quarter of 2006, first quarter of 2006 and second quarter of 2005 would have been $7.0 million, $11.0 million and $25.8 million, respectively. --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, at the end of the second quarter of 2006 totaled $95.3 million, a decrease of $45.0 million when compared to the balance of $140.3 million at the end of the first quarter of 2006. Included in the total net cash usage for the second quarter of 2006 are (i) a $33.6 million payment related to the redemption The liberation of an estate in real property from a mortgage. Redemption is the process by which land that has been mortgaged or pledged is bought back or reclaimed. It is accomplished through a payment of the debt owed or a fulfillment of the other conditions. of Covad's secured collateralized customer deposit with AT&T, (ii) $11.6 million of expenditures related to the build-out of Covad's LPVA LPVA Libertarian Party of Virginia platform, which are being funded with the proceeds from the strategic agreement with 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. , and (iii) a $6.1 million inflow in·flow n. 1. The act or process of flowing in or into: an inflow of water; an inflow of information. 2. from Covad's line of credit. Excluding these transactions, Covad's cash usage for the second quarter of 2006 was $5.9 million. "As we execute To run a program, which causes the computer to carry out its instructions. See executable code, instruction and EXE file. execute - execution our growth and operational strategy we continue to see improving financial results," said Christopher Dunn For the mechanical engineer, see . Christopher Dunn is an American soap opera writer. Guiding Light (GL)
Operating Statistics --Broadband lines in service at the end of the second quarter of 2006 were approximately 548,000, a 1.1 percent decrease from the second quarter of 2005. While total broadband lines in service decreased by 1.6 percent from the first quarter of 2006, business broadband lines in service increased by 3,600, or 1.5 percent, to 238,100. VoIP business customers at the end of the second quarter of 2006 were 1,343, a 1.1 percent increase from the first quarter of 2006 and a 54.4 percent increase from the second quarter of 2005. VoIP stations at the end of the second quarter of 2006 were approximately 44,000, a 2.8 percent increase from the first quarter of 2006 and a 46.9 percent increase from the second quarter of 2005. The customer and stations counts reflect an exit in the second quarter of 2006 from the Wholesale VoIP business where the company transitioned service for 170 Wholesale VoIP customers comprising 3,257 stations. Covad expects direct VoIP business customer growth to continue at previous quarter levels. --Broadband lines in service at the end of the second quarter of 2006 were approximately 469,900, or 85.8 percent, wholesale and 78,100, or 14.2 percent, direct, as compared to approximately 478,400, or 85.9 percent, wholesale and 78,500, or 14.1 percent, direct at the end of the first quarter of 2006, and approximately 472,800, or 85.3 percent, wholesale and 81,600, or 14.7 percent, direct at the end of the second quarter of 2005. --Broadband lines in service at the end of the second quarter of 2006 were approximately 309,900, or 56.6 percent, consumer and 238,100, or 43.4 percent, business, as compared to approximately 322,400, or 57.9 percent, consumer and 234,500, or 42.1 percent, business at the end of the first quarter of 2006, and approximately 324,700, or 58.6 percent, consumer and 229,700, or 41.4 percent, business at the end of the second quarter of 2005. --Weighted average revenue per user, or 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 in service for the second quarter of 2006 was $56 per month, same as the first quarter of 2006, and up from $55 for the second quarter of 2005. VoIP ARPU, excluding resellers, was $1,668 per month for the second quarter of 2006, down from $1,900 for the first quarter of 2006, and down from $1,698 for the second quarter of 2005. --Net customer disconnections, or churn churn: see butter. , for broadband lines averaged approximately 3.0 percent in the second quarter of 2006, up from 2.9 percent for the first quarter of 2006, and down from 3.2 percent for the second quarter of 2005. Business Outlook for Q3-06 and Full-Year 2006: For the third quarter of 2006, Covad expects: --Net revenues in the range of $119.0 - $122.0 million. --A-EBITDA in the range of $5.0 - $8.0 million, excluding LPVA project 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. of approximately $3.5 million --Net loss in the range of $8.8 - $13.0 million. --Net usage of cash, cash equivalents and short-term investments, including restricted cash and investments in the range of $(2.0) - $(5.0), excluding LPVA project cash usage of $(15.0) - $(20.0). For the Full-Year 2006, Covad expects: --Net revenues in the range of $475.0 - $485.0 million as previously stated at the May 30, 2006 Analyst and Investor Day hosted by Covad in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. . --A-EBITDA in the range of $44.0 - $50.0 million, excluding LPVA project operating expenses of approximately $7.0 million. A-EBITDA includes the benefit of the aforementioned a·fore·men·tioned adj. Mentioned previously. n. The one or ones mentioned previously. aforementioned Adjective mentioned before Adj. 1. one-time tax adjustment that contributed approximately $19.5 million to A-EBITDA. --Net loss in the range of $9.5 to 19.5 million Conference Call Information Covad will conduct a conference call to discuss these financial results on Wednesday Wednesday: see week. , July July: see month. 26, 2006 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) 218-0204. Participants are advised to call in 10 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 2, 2006 by dialing (800) 405-2236 and reference pass code 11066574. About Covad Covad is a leading nationwide provider of integrated 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. , broadband wireless See wireless broadband. , 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 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, net loss, A-EBITDA, net usage of cash, cash equivalents and short term investments, including restricted cash and investments, and our ability to meet the telecommunications needs of our customers with high-speed high-speed adj. 1. Operated or designed for operation at high speed: a high-speed food processor. 2. Taking place at high speed: a high-speed chase. 3. broadband, line-powered voice access and other advanced services. 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 and improve our existing services, the impact of increasing competition, pricing pressures, consolidation in the telecommunications industry, 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-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 (unaudited)
(in thousands)
Condensed Consolidated Balance Sheet
Data As of As of As of
Jun 30, Mar 31, Dec 31,
2006 2006 2005
--------- --------- ---------
Cash, cash equivalents, and short-term
investments $ 55,877 $ 84,985 $ 96,501
Restricted cash and cash equivalents 39,428 55,310 5,503
Accounts receivable, net 34,010 29,729 28,074
All other current assets 11,148 12,669 10,971
Property and equipment, net 78,487 70,035 71,663
Collocation fees and other intangible
assets, net 25,353 26,314 20,715
Goodwill 50,020 50,020 36,626
Deferred costs of service activation 24,763 24,534 25,456
Deferred debt issuance costs, net 4,683 4,470 3,223
All other long-term assets 2,254 1,848 1,849
-------- -------- --------
Total assets $326,023 $359,914 $300,581
======== ======== ========
Total current liabilities $ 96,720 $142,367 $133,217
Long-term debt 165,000 166,014 125,000
Collateralized and other long-term
customer deposits 4,464 7,585 16,912
Unearned revenues 41,533 42,074 43,758
Other long-term liabilities 2,117 2,460 1,863
Total stockholders' equity (deficit) 16,189 (586) (20,169)
-------- -------- --------
Total liabilities and stockholders'
equity (deficit) $326,023 $359,914 $300,581
======== ======== ========
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
Condensed
Consolidated
Statements of
Operations Data Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2006 2006 2005 2006 2005
--------- --------- --------- --------- ---------
Revenues, net $118,535 $117,751 $109,741 $236,286 $217,459
Operating expenses:
Cost of sales
(exclusive of
depreciation and
amortization) 80,802 79,937 76,240 160,739 148,989
Benefit from
transaction tax
adjustment (19,455) - - (19,455) -
Selling, general
and administrative 31,889 34,965 41,492 66,854 83,866
Depreciation and
amortization of
property and
equipment 8,080 8,648 12,909 16,728 26,694
Amortization of
collocation fees
and other
intangible assets 2,636 2,400 4,717 5,036 10,081
Provision for
restructuring and
post-employment
benefits 511 763 - 1,274 -
-------- -------- -------- -------- --------
Total operating
expenses 104,463 126,713 135,358 231,176 269,630
-------- -------- -------- -------- --------
Income (loss) from
operations 14,072 (8,962) (25,617) 5,110 (52,171)
Other income
(expense)
Gain on
deconsolidation of
subsidiary - - - - 53,963
Gain on sale of
equity securities - - 9,421 - 16,667
Other (1,599) (318) (207) (1,917) (488)
-------- -------- -------- -------- --------
Other income
(expense), net (1,599) (318) 9,214 (1,917) 70,142
-------- -------- -------- -------- --------
Net income (loss) $ 12,473 $ (9,280) $(16,403) $ 3,193 $ 17,971
======== ======== ======== ======== ========
Earnings (loss) per
common share:
Basic $ 0.04 $ (0.03) $ (0.06) $ 0.01 $ 0.07
======== ======== ======== ======== ========
Diluted $ 0.04 $ (0.03) $ (0.06) $ 0.01 $ 0.07
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding
Basic 292,993 276,488 263,918 284,791 263,852
======== ======== ======== ======== ========
Diluted 339,915 276,488 263,918 290,050 309,260
======== ======== ======== ======== ========
Gross Margin
(Note 1) $ 37,733 $ 37,814 $ 33,501 $ 75,547 $ 68,470
% of revenue 31.8% 32.1% 30.5% 32.0% 31.5%
A-EBITDA Calculation
(Note 2) Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2006 2006 2005 2006 2005
--------- --------- --------- --------- ---------
Net income (loss) $ 12,473 $ (9,280) $(16,403) $ 3,193 $ 17,971
Plus:Other income
(expense), net 1,599 318 (9,214) 1,917 (70,142)
Depreciation
and
amortization
of property
and equipment 8,080 8,648 12,909 16,728 26,694
Amortization of
collocation
fees and other
intangible
assets 2,636 2,400 4,717 5,036 10,081
Employee stock-
based
compensation 837 664 - 1,501 -
-------- -------- -------- -------- --------
A-EBITDA (Note 2) $ 25,625 $ 2,750 $ (7,991) $ 28,375 $(15,396)
======== ======== ======== ======== ========
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,
2006 2006 2005 2006 2005
--------- --------- --------- --------- ---------
Broadband
subscription
revenue (Note 3) $ 96,753 $ 94,880 $ 90,736 $191,633 $179,823
VoIP subscription
revenue (Note 3) 6,194 6,124 2,738 12,318 5,169
High-capacity
circuit
subscription
revenue 4,656 4,416 4,511 9,072 8,704
-------- -------- -------- -------- --------
Total subscription
revenue 107,603 105,420 97,985 $213,023 $193,696
Financially
distressed partners
(Note 4) (50) 72 120 22 (6)
Customer rebates and
incentives not
subject to deferral
(Note 5) (84) (77) (268) (161) (316)
Other revenue, net
(Note 6) 11,066 12,336 11,904 23,402 24,085
-------- -------- -------- -------- --------
Revenues, net $118,535 $117,751 $109,741 $236,286 $217,459
======== ======== ======== ======== ========
Consolidated Cost of
Sales Data
(exclusive of
depreciation and
amortization) Three Months Ended Six Months Ended
----------------------------- -------------------
Jun 30, Mar 31, Jun 30, Jun 30, Jun 30,
2006 2006 2005 2006 2005
--------- --------- --------- --------- ---------
Direct cost of
revenue, net
(Note 8) $ 24,640 $ 23,545 $ 20,559 $ 48,185 $ 39,714
Other network and
product costs
(Note 9) 36,707 56,392 55,681 93,099 109,275
-------- -------- -------- -------- --------
Cost of sales
(exclusive of
depreciation and
amortization) $ 61,347 $ 79,937 $ 76,240 $141,284 $148,989
======== ======== ======== ======== ========
Key Operating Data As of
-----------------------------
Jun 30, Mar 31, Jun 30,
2006 2006 2005
--------- --------- ---------
End of Period Lines
(EOP)
Company
Business 238,130 234,516 229,747
Consumer 309,859 322,434 324,652
-------- -------- --------
Total Company 547,989 556,950 554,399
Wholesale
Business 173,183 171,855 169,559
Consumer 296,741 306,576 303,239
-------- -------- --------
Total Wholesale 469,924 478,431 472,798
Direct
Business 64,947 62,661 60,188
Consumer 13,118 15,858 21,413
-------- -------- --------
Total Direct 78,065 78,519 81,601
Direct VoIP
Customers 1,343 1,328 870
Stations 43,968 42,787 29,922
Average Revenue per
User (ARPU)
Company
Business $ 100 $ 99 $ 97
Consumer $ 24 $ 25 $ 26
-------- -------- --------
Total Company $ 56 $ 56 $ 55
Wholesale
Business $ 83 $ 82 $ 80
Consumer $ 24 $ 24 $ 25
-------- -------- --------
Total Wholesale $ 45 $ 45 $ 45
Direct
Business $ 145 $ 146 $ 145
Consumer $ 34 $ 34 $ 32
-------- -------- --------
Total Direct $ 125 $ 122 $ 114
Direct VoIP
Customers
(excluding
resellers) $ 1,668 $ 1,900 $ 1,698
Stations $ 49 $ 49 $ 35
COVAD COMMUNICATIONS GROUP, INC.
SELECTED FINANCIAL DATA (unaudited)
(in thousands)
Business Outlook
---------------------------
A-EBITDA Calculation
(Note 2)
Q3-2006 Full Year-2006
--------------------- ---------------------
Projected Range of Projected Range of
Results Results
--------------------- ---------------------
Net loss $(13,000) $ (8,800) $(19,500) $ (9,500)
Plus:Other income
(expense), net 2,200 1,900 6,500 5,500
Depreciation and
amortization of
property and
equipment 8,700 8,300 34,000 32,000
Amortization of
collocation fees and
other intangible
assets 2,800 2,300 13,000 12,000
Employee stock-based
compensation 800 800 3,000 3,000
-------- -------- -------- --------
A-EBITDA (Note 2) 1,500 4,500 36,000 43,000
LPVA project operating
expenses 3,500 3,500 7,000 7,000
-------- -------- -------- --------
A-EBITDA (Note 2),
excluding LPVA project
operating expenses $ 5,000 to $ 8,000 $ 44,000 to $ 50,000
======== ======== ======== ========
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 Adjusted Earnings Before Interest, Taxes,
Depreciation and Amortization ("A-EBITDA"), defined as net loss
excluding (i) depreciation and amortization of property and
equipment, (ii) amortization of intangible assets, (iii) other
income (expense), net, and (iv) employee stock-based compensation
expense, 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 this measure to evaluate the
performance of its business segments and as a factor in its
employee bonus program. A-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.
A-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. A-EBITDA generally excludes the effect of capital costs.
3. Broadband and VoIP subscription revenue is defined as billings for
recurring broadband and VoIP services provided during the 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. In
addition, 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), 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 to 48
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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