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Covad lowers earnings expectations; stock sinks

The provider of high-speed Internet connections details its plan for cutting its losses and revises its financial projections lower, sending its stock downward.

Covad Communications, a provider of high-speed Internet connections, detailed its plan for cutting its losses and revised its financial projections lower Tuesday, sending its stock downward.

Executives said the company will attempt to add more customers to its existing network rather than spending heavily to expand its system nationwide. The changes will result in lower sales and capital expenditures during the fourth quarter and in 2001, the company said.

The revised business plan was necessitated by a change of heart on Wall Street, where investors have battered the grow-at-all-costs strategies of Covad and many competitors.

"We are adjusting our business in response to the changes on Wall Street," said Covad chairman Chuck McMinn. "The early measure of success for many companies was growth--growth in lines for us, but growth in advertising or eyeballs for others. And now the measure is a path to profitability. We took several steps to reach that."

Shares in the company slipped more than 18 percent Tuesday to $2.50. The stock has traded as high as $66.63 and as low as $1.44 in the past year.

Covad now expects fourth-quarter revenue between $60 million and $65 million, down from Wall Street projections of about $75 million for the quarter. Covad also will take a charge of about $20 million related to its recent layoffs.

In 2001, Covad expects annual revenue of between $380 million and $390 million, down substantially from Wall Street's expectations of about $550 million.

Covad will trim its expenses by about $100 million to $250 million, as it has reduced its head count and plans to spend less on network equipment--a separate problem plaguing many Internet gear makers.

Covad expects its losses on earnings before interest, taxes, depreciation and amortization (EBITDA) to come in at $450 million to $470 million, down from projections of $550 million. Executives said Covad will break even on an EBITDA basis by the fourth quarter of 2002, rather than later in 2003.

The company is projecting 440,000 to 460,000 subscribers by the end of 2001, although most analysts expected about 650,000 subscribers. Covad, which ended the third quarter with 205,000 subscribers, is aiming for 270,00 subscribers by the end of December.

In addition to Covad, several other broadband companies and Internet service providers are struggling financially. Investors pounded the stocks of many broadband companies after several announced earnings warnings, layoffs and potential corporate sales.

Although many other broadband providers are quickly running out of cash, Covad has about $900 million in the bank, which the company expects will fund operations through 2001.

"The fundamentals of the business are strong. The number of people we're signing up for service is very exciting," McMinn said. "I think that we'll emerge from this as a stronger company."