Covad Communications announced Thursday inking a five-year wholesale agreement with America Online to give the No. 1 ISP a way to bolster its broadband presence.
AOL also plans to own a stake in Covad, which issued warrants to the ISP to buy 3.5 million shares representing 1.5 percent of common stock.
Although the wholesale agreement does not require AOL to buy a minimum amount of DSL lines, it does add “credibility” to the Covad name, said Charles E. Hoffman, president and CEO, in an interview Thursday.
“I think the warrants show they believe in Covad so I think that is important for our credibility with everyone in the marketplace,” he said.
AOL was not immediately available for comment late Thursday.
It is difficult to tell how much revenue the wholesale agreement could generate. Covad does not break out the revenue generated through each wholesale partner.
But Kaufman Bros. analysts said Thursday in morning notes the deal was significant for both companies.
“We believe that this agreement, along with the recent Sprint agreement, are evidence that Covad remains one of the few viable broadband wholesale service providers with a nationwide network that large ISPs, Tier 1 carriers and RBOCs can tap into,” they said.
The analysts said they anticipate orders being provisioned in the fourth quarter with a greater volume of orders early next year. They expect AOL to tap Covad’s DSL footprint to market service to about half of its 31 million dial-up customers in cities where the ISP does not have cable properties.
AOL Time Warner recently reached a three-year non-exclusive agreement with AT&T Broadband and Comcast that will allow AOL to offer high-speed Internet service over AT&T Comcast cable systems passing approximately 10 million homes.
Ultimately it will be up to AOL to acquire the broadband customers, although Covad will provide input regarding what works, Hoffman said. AOL is not Covad’s only huge wholesale customer. The company has partnerships with AT&T Corp., SBC Communications Inc. and Sprint Corp., Hoffman said.
While the AOL contract is “only the beginning,” Hoffman added, “It should really help solidify our future.”
That future first brightened up last December when Covad emerged from bankruptcy court, eliminating $1.4 billion in bondholder debt in exchange for $270 million in cash and a 15 percent equity stake in the company.
Covad posted a second-quarter net loss last month of $40.8 million, or 19 cents per share, off revenue of $97.7 million. The Santa Clara, Calif.-based company ended the quarter with $245.8 million of cash and investment balances.
Shares of Covad were trading at $1.20 Friday on the OTC Bulletin Board.
