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April 23, 2002 04:18 PM ET by Jerry Borrell [INSIDE COVAD] - Interview mit CEO Charles Hoffman Charles Hoffman grew up in St. Louis, Mo., attended the U.S. Coast Guard Academy, and enlisted in the U.S. Air Force, where, for four years, he was a Russian linguist in Fairbanks, Alaska. He left the Air Force in 1971 and then earned his bachelor`s degree and MBA from the University of Missouri–St. Louis. His first job was with IBM (IBM), where he spent six years selling mainframe computers. In 1980, Hoffman joined Southwestern Bell, which was then part of AT&T (T). During his 16 years in various positions at Southwestern Bell and its parent company, SBC Communications (SBC), he helped build SBC`s cellular operations in the St. Louis, Boston, and Washington, D.C./Baltimore regions and eventually established its wireless operations throughout Mexico. In 1996, Hoffman joined Sprint PCS (PCS) and ran its northeastern operations for two years. In 1998, he became CEO of Rogers Wireless Communications, a Canadian company that is listed on the New York Stock Exchange. Hoffman is currently the president and CEO of Covad Communications. Upside: Why did you decide to leave Rogers to come to California and run Covad? Hoffman: There were a lot of reasons. One is that I had made some money [at Rogers] and I could afford a risk. I was intrigued by DSL, and broadband in general was on the cusp of dramatic growth, with only 9 percent or 10 percent penetration, so there was a long way to go. Everybody wanted it. You perceived that this was your chance to resurrect the company? Yes. I wanted to make another hit, but I was ready to leave Canada, particularly after Sept. 11. It`s almost like the guys who are still up there are [trying to] escape the problem. I just felt like Canada`s too easy. It`s a great place to live, with nice people, but it was time to come home. The other thing was that I really needed something new. Doing the same thing for four years was kind of unusual for me. The interview process [at Covad] was seven months long. I interviewed with every senior person and every board member here, and I did it just on weekends because I didn`t want to take time from my job to do it, so it was a long process. I had ups and downs. I really got interested when I saw they were getting ready to do a proactive move to address our issues and what it costs to build out a nationwide network. Thank God we did that. Describe Covad before you got here. The company was doing great, hitting its numbers. [Problems arose] in the fourth quarter of 2000 when 19 ISPs failed in the same quarter. Nineteen of our biggest customers all stopped paying, and [their] customers—the end users—were left in the lurch. That led to all kinds of problems. There wasn`t a lot of attention paid to the infrastructure [at Covad], as in; Do we have proper clients to serve revenue assurance? Do the bills we send the customers match what we think they owe us? There were a lot of basic business problems, just because it was a startup and it grew fast. Covad was a company of 5,000 people. The stock price had gone up to $65. Covad Communications Covad is a national broadband service provider of DSL Internet and network access to small- and medium-sized businesses and home users. It also offers IP and dial-up services through ISPs, telecommunications carriers, enterprises, affinity groups, PC OEMs, and ASPs. Founded: 1996 URL: covad.com Number of employees: 1,500 Exchange/symbol: Naddaq/COVD Shares outstanding: 178.99 million Market capitalization: $314.5 miliion As of 3/12/02 When you joined, it had a market cap of some several billion dollars? No, at the time I joined, the stock was down to 85 cents. I knew what I was getting into. That was one thing: The board really made sure I [was aware of] every problem. They didn`t want surprises. They didn`t want to go through all of this [interviewing] and have me spend a month and say, "I`m out of here." I really liked their strategy, and I really liked the company and the people. I started on June 25 [2001], and that`s the day we closed a subsidiary. We filed for bankruptcy in mid-August, but it was pre-negotiated with the bondholders. It didn`t affect our customers. It certainly wasn`t my strategy, but I knew of it before I joined. And what distinguishes a prepackaged bankruptcy? [In our case,] it was pre-negotiated with the bondholders, who took 19 cents on the dollar and 15 percent of the equity. It was a good deal for them, because they had lost confidence that they would get anything. Our competitors, like NorthPoint Communications and Rhythms NetConnections, had failed or were about to fail. How much did Covad owe its bondholders? At one point, we were $4 billion in debt. The trick was to keep the business going. The bankruptcy was associated with our name, so every time you saw our name, the B word was in front of it, even though it was pre-negotiated and just affected bondholders. We had issues with American Express, which dropped all of our corporate cards [on the day of our bankruptcy], so we are not going back to them. Throughout this period, the trick was to keep our partners confident that we were going to survive. We still needed AT&T, SBC, and all of our partners to keep giving us business throughout that period, but, at the same time, we had to cut expenses big-time once we paid off the bondholders. You had to pay them in cash? Yes, we had the cash to do it. We had to pay them about $283 million, but the end result was great: no debt on our balance sheet for a nationwide network. We had to keep the end users intact, we had to keep the partners that sell for us intact, and [we had to] cut expenses so that the cash would last longer. We were cutting expenses like mad without affecting quality, but then we [needed] more money. We had to raise funds so that we could get the cash flow positive. How did you raise money? It wasn`t easy. I spent a lot of time telling the story, telling [people] what was going to happen. We could`ve gotten venture capital money, but, rather than do that, we monetized a contract we had with SBC. I`ve seen that reported different ways. Some people think it was a loan by SBC, and some say that it was a settlement as part of litigation that you won against them for unfair competitive practices. What`s the real story? It`s all of the above. It started when we won an antitrust suit against SBC. You have other suits remaining? One with Verizon (Communications) (VZ) that goes to trial this November. What was the basis of that litigation? In the early days of this business, we had to rely on the phone companies to provide us their loops and space in their central offices [COs]. That`s part of the [Telecommunications Act of 1996]. That means the central premise is collocation and the last-mile delivery? Right. Their copper allows us to do this. The classic story was right here in Menlo Park, Calif., where SBC kept saying, "We have no room for your collocation." We were in arbitration, and the lawyers on both sides agreed to have an onsite visit at the central office because Pacific Bell was saying there was no room. But when they got there, it was a bowling alley. The whole floor was empty. That was embarrassing for SBC? Very. The lawyers came in the next day to settle the lawsuit, which resulted in a $600 million take-or-pay contract for services in that amount over a period of six years. It was heavily weighted toward the back end, unfortunately, but SBC started using us to provide DSL to their end users as the underlying service for SBC. Also, they`re in 13 states. Outside of those 13 states, they use us. They were going pretty slowly, so during this fundraising process, we went down to see them and said, "Well, guys, you`re not taking very well, so you`re going to have to pay us." That`s right off their bottom line. That`s embarrassing. We said, "With your run rate, you`re never going to catch up." And they didn`t have much interest, until we said, "What if we structure this as a prepayment?" In other words, we`d get our money up front, as opposed to over time. They showed a lot of interest in that, and that`s the way it worked out. There`s a $50 million involvement with no interest for the first two years and $75 million that`s a prepayment for services. Was that much-needed cash for you at the time? Yes. That was in December. What did it feel like negotiating with your former employers? It was interesting, because I knew them all. I knew the [M&A] guy, the general counsel, the number two guy there, and the CFO I was with while in Mexico. Did that help or hinder the process? I don`t think it mattered, because they had to convince their board and the chairman of SBC that this was a good business deal, so I don`t think that the personal [relationships] really mattered other than getting the first appointment and getting them to listen to us. Everybody associated with Covad in those days was the enemy. We`re partners now, not the enemy. Some people might have expected the phone companies to see you as a natural partner. Right. They may talk of us as competitors, but we`re nationwide, and none of them are. To any one of them in their territory, we`re not that big of a competitor. Also, because we`re mostly a wholesaler, we`re selling through the AT&T brand, so SBC doesn`t even necessarily know we`re the underlying service provider when they lose business to AT&T. Do you also compete with the cable-modem companies? Just in the consumer segment. We really divide the company into two focuses: One is direct and one is wholesale. Resale is still about 90 percent of the business. That`s how we grew up, and that was our emphasis up until four or five months ago. Covad.net, which is our own ISP, is our fifth-largest customer and is growing really fast. Wasn`t NorthPoint primarily consumer? Yes, that was one thing that made us different. Business is our sweet spot. They were less price-sensitive. They couldn`t function as a company without broadband. Business is a much better target. We`ve really been innovators in that [sector] with new services. Whereas Excite@H... and NorthPoint were delivering to consumers. Because cable only goes to homes; it doesn`t go to businesses. Describe the company as it is today. We`re in 1,700-plus COs. We have about 1,500 people. The main locations are Santa Clara, Calif.; Denver, Colo.; Manassas, Va.; and Media, Pa. We have people everywhere, but those are the big ones. We have two network-operating centers—one here in Santa Clara and one in Manassas—that we call control centers. Denver is really our operations center. Most of the customer-facing people are in Denver. The Covad.net ISP is located in Media, and that [came from our] acquisition a couple of years ago [of a company] called LaserLink.net, which grew into our own ISP. How are your customers by region? How are they dispersed? We`re in 50 regions of the country and the 50 largest metropolitan areas. There`s a direct correlation between how we`re doing in that market and how long we`ve been in that market. The top markets are the ones you would expect: New York City, Chicago, San Francisco, and Washington, D.C. They tend to be the largest cities, but there is a correlation between how long we`ve been [in a city] and the size of the city. When I talk about our worst market, it`s our newest market, so it`s no surprise. The customer base is scattered throughout the country by region, depending on how long we`ve been in that particular region. Are you principally divided by region of the country or by state? We`re organized along customer segments. In wholesale, the customers are AT&T, EarthLink, MegaPath, Speakeasy, and SBC. EarthLink is our largest customer by far, Speakeasy is second, and MegaPath is third. AT&T is about fourth and Covad.net is fifth. Where is your cash—in the bank or assets? We ended the year with $290 million in the bank, and we`re burning about $20 million a month. It`s coming down. As you look back on this, would you do a prepackaged approach to Chapter 11 bankruptcy protection again? It was scary. We had to get the majority of the bondholders to agree, and there were hundreds. Before we announced it, we had persuaded more than 50 percent to agree, but the formal voting process didn`t happen until a month before the December coming-out date. Throughout that period, we walked a tightrope. Some of us were pushing for positive PR, while the rest of us were saying, "Well, we don`t want to be too positive." We didn`t want the bondholders to think, "Hey, boy, maybe if I just hang in there, I`ll get more than 19 cents for these bonds." So, last year, we quietly tried to keep things going, and, in fact, we ended up doubling our revenue in a bankrupt year with a pretty poor economy. When did the Nasdaq delisting occur? In July, and the Chapter 11 was filed in August. Your OEM customers, also potential competitors, are saying, "These guys are delisting; they`re going to file for bankruptcy." [And we`re saying,] "But hang in there with us." The other factor is that there was no competition. We can deal with the ILECs [incumbent local-exchange carriers]—AT&T and [companies] like that. Without us, there`s no price competition, there`s no innovation, and there`s no focus on small businesses. We [offer] a lot, so customers really wanted us to survive. Cable has its own set of issues, and no one really felt all that comfortable with Excite@H... during this period of time. Who`s acquired them? WorldCom (WCOM) bought the assets of Rhythms NetConnections. AT&T had the biggest piece of Excite@H..., so they got it, but they sold their broadband business [to Comcast], which is desperately trying to convert itself into a big, nationwide ISP via cable. Is that going to happen, on the cable side? When I was in Canada, I was very involved in a cable company. There`s a problem with the technology: It works great until all of your neighbors get it, too, and then your service really deteriorates. Plus, cable companies are used to being a monopoly. They`re not really good at customer service. Maybe [Comcast] can pull it off. It doesn`t affect us that much, because we`re not very consumer- oriented. Funding is our big concern right now. Our focus is really our small-business customer. Today, Covad is traded over the counter? In the pink sheets; we`re still part of Nasdaq. You can still go on Nasdaq and look us up. The problem is, if one of my friends calls his broker and says, "I want to buy Covad," the broker will do his best to talk him out of it, because he doesn`t know anything about it, and he says, "They were delisted; they just got out of bankruptcy. Are you crazy?" Analysts still follow you? They`ve started to again. We didn`t have any analysts following us once we were delisted last year. Your coverage dropped? Yes. Kaufman Bros. was the first to come out with an $8 target price and a buy recommendation. Today, [our stock] was at $2.03. So it`s a great buy, and the volume was 3 million shares an hour ago. In a day? Every day, there are 2 [million] to 3 million shares trading hands, even though it`s over the counter. When does the first market maker show up? Others are talking to us about picking up coverage. We need to get relisted on Nasdaq before institutional buyers can come in. To do that, you have to meet five or six criteria, like a minimum number of assets and public shares. We can meet them all, with one exception: There has to be a $5 average stock price for over 90 days. What is the feedback from institutional buyers? The trick for all of these guys now is the buying opportunity. They know once we`re at $5, they will have missed the opportunity. So how bold are they? The trouble is, the whole telecom sector has been decimated. So there are a lot of skeptical people out there. Since we got the funding from SBC, we can say with confidence that we`re fully funded to keep the cash flow positive, but since we haven`t announced any results yet, there`s still a lot of, "Let`s see if they can do well now." The only issue now is getting the stock relisted? Right, whether or not the stock price goes from $2 to $5, based just on fourth-quarter 2001. I have my doubts, but then first-quarter 2002 will follow, so we`ll just go with that. We`re fully funded. Everybody is in a good spot. We did a big option grab in November at something like 56 cents, so all of the employees are thrilled that [the stock] is at $2. Jerry Borrell is editor in chief of UPSIDE magazine. |
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| aus der Diskussion: | Covad - Himmel oder Hölle |
| Autor (Datum des Eintrages): | Bannerman (25.04.02 15:25:38) |
| Beitrag: | 69 von 149 (ID:6250330) |
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