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San Jose, Calif. (October 26, 2005) - Covad
Communications Group, Inc. (AMEX: DVW), a leading national provider of integrated voice and data communications, today reported revenue for the third quarter of 2005 of $112.1 million, an increase of 2 percent from the $109.7 million reported for the second quarter of 2005 and an increase of 6 percent from the $105.7 million reported in the third quarter of 2004.
Covad ended the third quarter of 2005 with approximately 578,400 broadband lines in service, an increase of 24,000 lines from the second quarter of 2005. Covad ended the third quarter of 2005 with 1,035 VoIP business customers using approximately 36,100 stations, representing a 21 percent increase in VoIP station count from June 30, 2005.
Covad reported a net loss of $15.8 million, or $0.06 loss per share, for the third quarter of 2005 as compared to a net loss of $16.4 million, or $0.06 per share, for the second quarter of 2005 and a net loss of $13.8 million, or $0.05 loss per share, in the third quarter of 2004.
Loss from operations for the third quarter of 2005 was $28.0 million compared to $25.6 million for the second quarter of 2005 and $15.3 million in the third quarter of 2004.
Cash, cash equivalents and short-term investment balances, including restricted cash and investments, decreased by $14.9 million to $116.1 million in the third quarter of 2005 compared to a balance of $131.0 million at the end of the second quarter of 2005. Covad's total cash balance as of September 30, 2005 includes proceeds from the sale of the remainder of the Company's ownership in ACCA Networks Co. LTD (ACCA), a Japanese broadband provider, offset by the usage of funds received from Earthlink to support it's Line-Powered Voice Access trial, expenditures to provision new customers from the AOL broadband trial, and a semi-annual interest payment on our convertible debentures.
"The third quarter marks the first time that Covad has generated more than $100 million in total subscription revenue, and is proof of the momentum Covad is building toward our goals of being EBITDA positive by mid-year 2006 and cash-flow positive by year-end 2006," said Charles Hoffman, Covad president and chief executive officer. "We are taking more control of our destiny by increasing Covad VoIP stations by 21 percent in the quarter, selling more margin-rich business services, and through our planned acquisition of wireless broadband provider NextWeb, which will jump start our entry into the wireless broadband market."
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2005 was a loss of $11.9 million as compared to a loss of $8.0 million in the second quarter of 2005 and a profit of $4.1 million in the third quarter of 2004. Refer to the Selected Financial Data, including Note 2, for a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure and other information.
Covad's wholesale subscribers contributed $79.7 million of revenue, or 71 percent, while direct subscribers contributed $32.4 million of revenue, or 29 percent. As of September 30, 2005, broadband lines in service were approximately 498,500 wholesale and 79,900 direct lines, as compared to approximately 472,800 wholesale and 81,600 direct lines as of June 30, 2005, and approximately 448,700 wholesale and 76,200 direct lines reported as of September 30, 2004.
For the third quarter of 2005, broadband and VoIP subscription revenue increased to $96.6 million from the $93.5 million reported in the second quarter of 2005 and the $88.8 million reported in the third 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 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 third quarter of 2005, gross margin was $27.6 million, or 25 percent of revenue, as compared to $33.5 million, or 31 percent of revenue, for the second quarter of 2005 and $39.7 million, or 38 percent of revenue, for the third quarter of 2004. The AOL trial, which ended during the quarter, had a positive effect on revenues for the third quarter of 2005, but reduced gross margin by approximately $3.4 million due to the upfront incremental expenditures associated with such volume. Selling, general and administrative expenses were $39.5 million for the third quarter of 2005 as compared to $41.5 million for the second quarter of 2005 and $35.5 million in the third quarter of 2004.
"Our third quarter EBITDA was slightly better than our guidance for the quarter and cash and revenues were well within guidance," said John Trewin, Covad senior vice president and chief financial officer.
Operating Statistics
At the end of the third quarter of 2005, Covad had approximately 347,400 consumer and 231,000 business broadband lines in service representing 60 percent and 40 percent of total broadband lines, respectively. Covad had 1,035 VoIP business customers and approximately 36,100 VoIP stations as of September 30, 2005. Business customers contributed $80.9 million, or 72 percent, of total revenue.
Weighted Average Revenue per User (ARPU) for broadband lines was $54 per month during the third quarter of 2005, down slightly from $55 per month for the second quarter of 2005. Covad VoIP ARPU per customer (excluding resellers) was $1,578 per month during the third quarter of 2005, down from $1,698 per month for the second quarter of 2005.
Net customer disconnections, or churn, for broadband lines averaged approximately 3.3% percent in the third quarter of 2005, slightly up from 3.2 percent for the second quarter of 2005.
Business Outlook
Covad expects total net revenues for the fourth quarter of 2005 to be in the range of $112.0-116.0 million. Total subscription revenue is expected to be in the range of $100.5-104.0 million. Broadband and VoIP subscription revenue is expected to be in the range of $96.5-99.5 million. Covad expects its net loss to be in the range of $23.0-26.0 million, and EBITDA loss in the range of $9.0-11.0 million. Included in our EBITDA guidance is approximately $2.3 million of severance costs. Net change in cash, cash equivalents and short-term investments, including restricted cash and investments, in the fourth quarter of 2005 is expected to be in the range of negative $16.0-20.0 million, which includes the payment of approximately $2.5 million of severance costs and related accrued vacation pay.
The above guidance does not reflect our pending acquisition of NextWeb, which we expect to be consummated later this quarter.