Covad Communications Group Reports Fourth Quarter 2007 Results

Covad Communications Group, Inc. (AMEX: DVW), a leading national provider of integrated voice and data communications, today announced its fourth quarter of 2007 financial results, including $121.6 million in net revenues, $10.6 million in A-EBITDA and a net loss of $11.9 million, or a $0.04 loss per share. "The fourth quarter capped a year in which we improved A-EBITDA and cash flow, added value over our broadband pipes, expanded our distribution portfolio, and improved our strategic position,” said Charles Hoffman, Covad president and chief executive officer. "During the quarter we also signed a definitive agreement to be acquired by Platinum Equity for $1.02 per share. We are currently pursuing stockholder and regulatory approvals, and are confident that the acquisition will be completed sometime in the second quarter of 2008, as originally announced.” Summary of Financial Results Net revenues for the fourth quarter of 2007 totaled $121.6 million, a decrease of $0.3 million from the $121.9 million reported for the third quarter of 2007, and an increase of $2.1 million from the $119.5 million reported for the fourth quarter of 2006. Direct subscribers for the fourth quarter of 2007 contributed $45.7 million of net revenues, or 37.6 percent, as compared to $45.3 million, or 37.2 percent, for the third quarter of 2007, and $42.3 million, or 35.4 percent, for the fourth quarter of 2006. Wholesale subscribers for the fourth quarter of 2007 contributed $75.9 million of net revenues, or 62.4 percent, as compared to $76.6 million, or 62.8 percent, for the third quarter of 2007, and $77.1 million, or 64.6 percent, for the fourth quarter of 2006. Subscription revenue from Growth products for the fourth quarter of 2007 totaled $58.4 million, an increase of $1.6 million, or 2.8 percent, from the third quarter of 2007, and an increase of $10.9 million, or 22.9 percent from the fourth quarter of 2006. Covad’s growth products are T-1, business ADSL, Line-Powered Voice Access ("LPVA”), Voice over Internet Protocol ("VoIP”) and wireless. The increase from the third quarter of 2007 was attributable to increases in broadband subscription revenue from T-1, business ADSL and LPVA of $1.4 million, and VoIP subscription revenue of $0.2 million. The increase from the fourth quarter of 2006 was attributable to increases in broadband subscription revenue from T-1, business ADSL and LPVA of $8.1 million, VoIP subscription revenue of $2.4 million and wireless subscription revenue of $0.4 million. Subscription revenue from Growth products for the fourth quarter of 2007 contributed 52.6 percent of total subscription revenues, an increase of 1.6 percent from the third quarter of 2007 and an increase of 9.3 percent from the fourth quarter of 2006. Refer to the Selected Financial Data below, including Note 3, for additional information, including a summary of subscription revenue from Growth and Legacy products and a reconciliation of subscription revenue to the most directly comparable GAAP measure. Subscription revenue from Legacy products for the fourth quarter of 2007 totaled $52.7 million, a decrease of $1.8 million, or 3.3 percent, from the third quarter of 2007, and a decrease of $9.5 million, or 15.3 percent from the fourth quarter of 2006. Covad’s legacy products, primarily sold through wholesale channels, are consumer ADSL, business SDSL, frame relay and high-capacity transport circuits. The decreases from the third quarter of 2007 and fourth quarter of 2006 were primarily attributable to decreases in broadband subscription revenue from consumer ADSL and business SDSL and frame relay products. Subscription revenue from Legacy products for the fourth quarter of 2007 contributed 47.4 percent of total subscription revenues, a decrease of 1.6 percent from the third quarter of 2007 and a decrease of 9.3 percent from the fourth quarter of 2006. Refer to the Selected Financial Data below, including Note 3, for additional information, including a summary of subscription revenue from Growth and Legacy products and a reconciliation of subscription revenue to the most directly comparable GAAP measure. Revenue from business subscribers for the fourth quarter of 2007 contributed $97.9 million of net revenues, a 1.0 percent increase from the third quarter of 2007 and a 4.4 percent increase from the fourth quarter of 2006. Revenue from business subscribers comprised 80.5 percent of net revenues, up from 79.5 percent in the third quarter of 2007 and 78.6 percent in the fourth quarter of 2006. Revenue from consumer subscribers for the fourth quarter of 2007 contributed $23.7 million of net revenues, down from $24.9 million in the third of 2007 and $25.6 million in the fourth quarter of 2006. Revenue from consumer subscribers for the fourth quarter of 2007 comprised 19.5 percent of net revenues, down from 20.5 percent in the third quarter of 2007 and 21.4 percent in the fourth quarter of 2006. Adjusted earnings before interest, taxes, depreciation and amortization ("A-EBITDA”) for the fourth quarter of 2007 totaled $10.6 million, up $0.3 million from the A-EBITDA reported for the third quarter of 2007, and up $3.9 million from the A-EBITDA reported for the fourth quarter of 2006. A-EBITDA in the fourth quarter of 2007 includes $2.1 million of expenses related to our pending merger agreement with Platinum, partially offset by lower operating expenses as a result of cost containment initiatives. 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 loss for the fourth quarter of 2007 totaled $11.9 million, or $0.04 loss per share, compared to the $4.9 million net loss, or $0.02 loss per share, reported for the third quarter of 2007 and the $8.4 million net loss, or $0.03 loss per share, reported for the fourth quarter of 2006. As stated above, fourth quarter of 2007 includes expenses related to our pending merger. In addition, included in net loss and A-EBITDA above for the fourth quarter of 2007 is a $7.3 million charge from an arbitration award case with one of our former wholesale customers. The Company has filed a motion to vacate this arbitration award and it is waiting for the court’s decision. Cash, cash equivalents and short-term investments, and restricted cash and cash equivalents at the end of the fourth quarter of 2007 totaled $71.6 million, an increase of $7.4 million when compared to the balance of $64.2 million at the end of the third quarter of 2007. This increase in cash, cash equivalents and short-term investments, and restricted cash and cash equivalents for the fourth quarter of 2007 was primarily as a result of an improvement in our cash generated from our operating activities and the cost containment initiatives stated above. "The fourth quarter results were the successful outcome of our strategy to significantly improve our A-EBITDA and cash performance,” said Justin Spencer, Covad’s chief financial officer. "Combined with our operational and network expertise, these results provide a platform for us to improve A-EBITDA and cash flow in 2008.” Due to the pending acquisition of Covad by Platinum, which is expected to close in the second quarter, Covad will not provide financial guidance for 2008. Conference Call Information Covad will conduct a conference call to discuss these financial results on February 13, 2008 at 5:00 p.m. Eastern Time (ET)/ 2:00 p.m. Pacific Time (PT). The conference call will be Webcast over the Internet. To listen to the call, visit the Event Calendar section on the Covad web site at http://www.covad.com/about_investors.html. Investors and press may also listen by telephone to the call by dialing (800) 218-9073. 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 on Wednesday, February 20, 2008 by dialing (800) 405-2236 and reference pass code 11107430. A companion presentation providing graphical details of this press release is also available on the same investor section of the Covad Website. About Covad Covad is a leading nationwide provider of integrated voice and data communications. The company offers DSL, Voice Over IP, T1, Web hosting, managed security, IP and dial-up, broadband wireless, and bundled voice and data services directly through Covad's network and through Internet Service Providers, value-added resellers, telecommunications carriers and affinity groups to small and medium-sized businesses and home users. Covad broadband services are currently available across the nation in 44 states and 235 Metropolitan Statistical Areas (MSAs) and can be purchased by more than 57 million homes and businesses, which represent over 50 percent of all US homes and businesses. Corporate headquarters is located at 110 Rio Robles San Jose, CA 95134. Telephone: 1-888-GO-COVAD. Web Site: www.covad.com. About the Transaction In connection with the proposed merger, Covad has filed a proxy statement with the Securities and Exchange Commission. Investors and security holders are advised to read the proxy statement because it contains important information. Investors and security holders may obtain a free copy of the proxy statement and other documents filed by Covad at the Securities and Exchange Commission’s Web site at http://www.sec.gov. The proxy statement and such other documents may also be obtained free of charge from Covad by directing such requests to Covad Communications Group Inc., 110 Rio Robles, San Jose, CA Attention: Investor Relations; Telephone: 408-434-2130. Covad and its directors, executive officers and other members of its management and employees may be deemed to be participants in the solicitation of proxies from its shareholders in connection with the proposed merger. Information concerning the interests of these individuals in the solicitation is set forth in Covad’s proxy statements and Annual Reports on Form 10-K, previously filed with the Securities and Exchange Commission. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: The foregoing contains "forward-looking statements" which are based on management's current information and beliefs as well as on a number of assumptions concerning future events. Examples of forward-looking statements include the company’s expected revenue and revenue growth, net loss, A-EBITDA, expected savings from our cost-reduction efforts, continuing optimization of our business, increased sales of our growth products, our ability to close the transaction with Platinum Equity in the second quarter 2008, and our ability to more efficiently operate our business and build a platform for sustainable success. 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 and upgrade our existing network and 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 Dec 31,2007 Sep 30,2007 Dec 31,2006   Cash, cash equivalents, and short-term investments $ 65,956 $ 55,648 $ 62,072 Restricted cash and cash equivalents 5,667 8,534 19,578 Accounts receivable, net 30,186 35,625 31,151 All other current assets   7,807     9,657     11,148 Total current assets 109,616 109,464 123,949 Property and equipment, net 71,353 72,300 87,586 Collocation fees and other intangible assets, net 14,499 16,604 22,768 Goodwill 50,002 50,002 50,002 Deferred costs of service activation 23,580 25,920 24,268 Deferred debt issuance costs, net 2,209 2,623 3,823 All other long-term assets 1,470 1,765 912 Total assets $ 272,729   $ 278,678   $ 313,308   Total current liabilities $ 97,594 $ 89,839 $ 101,670 Long-term debt 172,461 172,461 167,240 Other long-term liabilities 38,944 42,687 42,044 Total stockholders' equity (deficit)   (36,270 )   (26,309 )   2,354 Total liabilities and stockholders' equity (deficit) $ 272,729   $ 278,678   $ 313,308 COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands, except per share amounts)             Condensed Consolidated Statements of Operations Data Three Months Ended Twelve Months Ended Dec 31,2007 Sep 30,2007 Dec 31,2006 Dec 31,2007 Dec 31,2006   Revenues, net $ 121,594 $ 121,878 $ 119,456 $ 484,207 $ 474,304   Operating expenses: Cost of sales (exclusive of depreciation and amortization) 84,795 86,950 84,325 346,876 328,474 Benefit from federal excise tax adjustment - - - - (19,455 ) Selling, general and administrative 26,581 25,064 29,267 111,434 127,380 Depreciation and amortization of property and equipment 10,042 10,137 9,938 41,985 34,876 Amortization of collocation fees and other intangible assets 2,268 2,322 2,411 9,284 9,949 Provision for post-employment benefits 229 66 137 1,652 1,597 Provision for arbitration award   7,338     -     -     7,338     -   Total operating expenses   131,253     124,539     126,078     518,569     482,821     Loss from operations (9,659 ) (2,661 ) (6,622 ) (34,362 ) (8,517 )   Other expense, net   (2,285 )   (2,243 )   (1,820 )   (8,605 )   (5,432 ) Net loss $ (11,944 ) $ (4,904 ) $ (8,442 ) $ (42,967 ) $ (13,949 )   Loss per common share: Basic $ (0.04 ) $ (0.02 ) $ (0.03 ) $ (0.14 ) $ (0.05 ) Diluted $ (0.04 ) $ (0.02 ) $ (0.03 ) $ (0.14 ) $ (0.05 )   Weighted-average number of common shares outstanding Basic   298,044     298,013     295,683     297,489     290,262   Diluted   298,044     298,013     295,683     297,489     290,262     Gross Margin (Note 1) $ 36,799 $ 34,928 $ 35,131 $ 137,331 $ 145,830 % 30.3 % 28.7 % 29.4 % 28.4 % 30.7 %     A-EBITDA Calculation (Note 2) Three Months Ended Twelve Months Ended Dec 31,2007 Sep 30,2007 Dec 31,2006 Dec 31,2007 Dec 31,2006   Net loss $ (11,944 ) $ (4,904 ) $ (8,442 ) $ (42,967 ) $ (13,949 ) Plus: Other expense, net 2,285 2,243 1,820 8,605 5,432 Depreciation and amortization of property and equipment 10,042 10,137 9,938 41,985 34,876 Amortization of collocation fees and other intangible assets 2,268 2,322 2,411 9,284 9,949 Provision for arbitration award 7,338 - - 7,338 - Employee stock-based compensation   570     519     958     2,181     3,244   A-EBITDA $ 10,559   $ 10,317   $ 6,685   $ 26,426   $ 39,552   COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL DATA (unaudited) (in thousands)               Consolidated Revenue Data Three Months Ended Twelve Months Ended (Note 3 through 7) Dec 31,2007 Sep 30,2007 Dec 31,2006 Dec 31,2007 Dec 31,2006   Broadband subscription revenue $ 92,265 $ 92,916 $ 93,100 $ 370,887 $ 373,658 VoIP subscription revenue 10,873 10,615 8,483 40,304 27,752 Wireless subscription revenue 3,763 3,679 3,377 14,497 10,872 High-capacity circuit subscription revenue 4,221 4,131 4,724 17,300 18,574 Total subscription revenue 111,122 111,341 109,684 $ 442,988 $ 430,856 Other revenue, net   10,472   10,537   9,772   41,219   43,448 Revenues, net $ 121,594 $ 121,878 $ 119,456 $ 484,207 $ 474,304   Subscription revenue from Legacy products Broadband - Consumer ADSL $ 15,809 $ 16,456 $ 20,028 $ 68,580 $ 88,089 Broadband - Business SDSL & Frame Relay 32,666 33,938 37,407 137,909 154,872 High-capacity circuits   4,221   4,131   4,724   17,300   18,574 Total subscription revenue from Legacy products   52,696   54,525   62,159   223,789   261,535 Subscription revenue from Growth products Broadband - T1, Business ADSL, LPVA 43,790 42,522 35,665 164,398 130,697 VoIP 10,873 10,615 8,483 40,304 27,752 Wireless   3,763   3,679   3,377   14,497   10,872 Total subscription revenue from Growth products   58,426   56,816   47,525   219,199   169,321 Total subscription revenue 111,122 111,341 109,684 442,988 430,856 Other revenue, net   10,472   10,537   9,772   41,219   43,448 Revenue, net $ 121,594 $ 121,878 $ 119,456 $ 484,207 $ 474,304     Direct subscription revenue $ 44,026 $ 43,736 $ 41,460 $ 172,434 $ 155,528 Wholesale subscription revenue   67,096   67,605   68,224   270,554   275,328 Total subscription revenue $ 111,122 $ 111,341 $ 109,684 $ 442,988 $ 430,856 COVAD COMMUNICATIONS GROUP, INC. SELECTED FINANCIAL AND OPERATING DATA (unaudited)           Key Operating Data As of Dec 31,2007 Sep 30,2007 Dec 31,2006 End of Period Lines (EOP) Company Business 226,604 230,182 236,956 Consumer   260,647   274,898   282,059 Total Company 487,251 505,080 519,015   Wholesale Business 163,261 166,078 171,647 Consumer   253,183   266,671   271,311 Total Wholesale 416,444 432,749 442,958   Direct Business 63,343 64,104 65,309 Consumer   7,464   8,227   10,748 Total Direct 70,807 72,331 76,057   Direct VoIP Customers 2,315 2,340 1,623 Stations 56,005 56,966 49,987 Sites 4,024 4,035 2,805   Direct Wireless Subscribers 3,540 3,582 3,493     Average Revenue per User (ARPU) Three Months Ended Dec 31,2007 Sep 30,2007 Dec 31,2006 Company Business $ 107 $ 105 $ 101 Consumer $ 24 $ 24 $ 24 Total Company $ 62 $ 61 $ 59   Wholesale Business $ 90 $ 88 $ 84 Consumer $ 24 $ 24 $ 24 Total Wholesale $ 49 $ 48 $ 47   Direct Business $ 151 $ 150 $ 147 Consumer $ 30 $ 30 $ 35 Total Direct $ 138 $ 135 $ 130   Direct VoIP Customers $ 1,635 $ 1,665 $ 1,814 Stations $ 64 $ 62 $ 58 Sites $ 924 $ 926 $ 1,039 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, (iv) employee stock-based compensation expense, and (v) provision for arbitration award is a useful measure because it provides additional information about the company's ability to meet future capital expenditure and working capital requirements and fund continued growth. Management excludes employee stock-based compensation expense from this measure to enhance the comparability of operating results without giving effect to these non-cash charges which are in part a function of matters over which management has no control. Management also excluded a $7.338 million provision for an arbitration award from A-EBITDA because it believes the specific dispute from which this arbitration arose is not reflective of its ongoing business activities and that investors will benefit from an understanding of the performance of the Company's business without giving effect to this unusual event. Management uses A-EBITDA to evaluate the performance of its business segments and as a factor in its employee bonus program. A-EBITDA 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. Management reconciles A-EBITDA to net income or loss because it believes that net income or loss is the closest measure determined under accounting principles generally accepted in the United States that approximates A-EBITDA.   3. Broadband, VoIP, Wireless and High-Capacity subscription revenues are defined as billings for recurring services provided during the period. These subscription revenues exclude charges for Federal Universal Service Fund ("FUSF") assessments, dial-up services and other adjustments. In addition, these subscription revenues include bills issued to customers that are classified as financially distressed and whose revenue is only recognized if cash is received (refer to Note 4 below for a more detailed discussion on accounting for financially distressed partners). Management believes that Broadband, VoIP, Wireless and High-Capacity subscription revenues are useful measures for investors as they represent key indicators of the growth of the company's core business.   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.