Covad Says More Customers Aren't Paying

Covad (COVD) says its total number of deadbeat customers has increased by five to 19 Internet service providers, adding more pressure to the financially troubled digital subscriber line wholesaler.

Covad disclosed the 40% increase in nonpaying customers Monday. The Santa Clara, Calif.-based company had already warned last month that nonpaying customers would cause it to fall 30% below Wall Street's sales growth expectations. At the time the company said it would take a $20 million restructuring charge.

By cutting $100 million from its expansion and equipment buying budget, Covad had hoped it could hunker down and survive as its customers attempted to regain their footing. The spending cuts, however, punished suppliers such as Efficient Networks (EFNT), which warned last week that slackening demand for network access equipment would cause it to miss its sales and profit targets for the its second quarter, which ended in December. Digital subscriber line, or DSL, uses conventional copper phone wire to provide speedy Net access.

While Covad says it exceeded line growth expectations for the fourth quarter, the spike in unpaid lines may have erased any gains. The company sequentially increased its total lines by 70,000, or 34%, to 274,000 in the fourth quarter, but it's not being paid for 92,000, or a third, of those lines, because ISPs are teetering on failure. Previously, the company said that it would possibly have trouble collecting monthly fees from 23% of its lines.

Now, following Chapter 11 bankruptcy filings by DSL retail businesses Flashcom, Zyan, Relay Point and FastPoint, Covad is scrambling to move customers to other ISPs to recover the monthly subscriber revenue.

Covad's shares finished regular trading up 12 cents, or 8%, at $1.62. The shares remained mostly unchanged in after-hours trading.

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