Charter warns of possible broadband sub loss in Q4

Charter Communications shares fell nearly 9% Tuesday after CFO Jessica Fischer warned that the operator might lose net broadband subscribers in the fourth quarter of 2023, even as the company is bullish about its longer-term prospects as an ISP.

Speaking today at the UBS Global Technology, Media and Telecom Conference, Fischer noted that Charter saw some carry-over churn in the third quarter from the combination of its temporary carriage dispute with Disney and the impact of rate changes that occurred inside the quarter.

"November has been similarly soft, so I can certainly see that it's likely that we could end up with negative Internet net adds inside of Q4," Fischer said.

She stressed that these are "short-term challenges for Charter" and added that the long-term opportunity for the overall broadband market "has not changed."

Decline unexpected

Charter is getting some broadband subscriber growth from its ongoing rural buildouts. But the US cable industry at large has struggled to grow broadband subscribers in the face of slow housing move activity and increasing competition from fiber and fixed wireless access (FWA) providers.

Analysts have not been expecting a possible decline in broadband subs at Charter in Q4. Indeed, KeyBanc Capital Markets has projected Charter to add 56,000 broadband subs in Q4, a bit below consensus expectations of +66,000.

Related:Charter plots big multi-gig network, wireless upgrades

"We see this as negative, though the stock reaction being down ~8% seems overdone," KeyBanc analysts explained in a research note issued today after Fischer's talk.

Fischer said Charter is "positioned really well to be able to grow [broadband] in the long term," in part because of its investment in rural buildouts and the coming upgrade of its hybrid fiber/coax (HFC) network.

She said Charter remains on pace to build 300,000 new rural passings with fiber in 2023. Charter's build pace in Q4 would put the company on a path to build about 400,000 new locations in 2024, she said.

Step by step

Charter is also making some progress on a multi-step upgrade of its HFC network that will be completed in the coming years and carry an expected network-side cost of $100 per home passed.

Fischer said Charter has initiated upgrades in Charter's "step one" markets that cover about 15% of its footprint, with an expectation that this segment of the upgrade will be completed inside of 2024. That step will involve a spectrum expansion to 1.2GHz and a "high-split" upstream upgrade that together will enable Charter to offer multi-gigabit speeds downstream and up to 1 Gbit/ in the upstream.

Related:Charter's more aggressive rural expansion might push out HFC upgrades

The step two upgrade, covering 50% of Charter's HFC footprint, will also move capacity up to 1.2GHz paired with a distributed access architecture (DAA) and the use of a virtual cable modem termination system – enabling speeds of about 5 Gbit/s down and 1 Gbit/s up. Step three – set to start in late 2024 and cover the remaining 33% of Charter's HFC footprint – will involve a full DOCSIS 4.0 upgrade (with DAA and a vCMTS) and a move to 1.8GHz, putting Charter on a path to deliver downstream speeds up to 10 Gbit/s.

Fischer reiterated that the initiation of step two market upgrades will be delayed slightly as Charter looks to manage capital that is also flowing to an expansion of its rural buildout initiatives. The delay, expected to run just a "handful of months," could push the completion date of Charter's HFC upgrade project to around mid-2026.

Turning to mobile, Fischer also addressed concerns as some customers start to roll off a Spectrum One promotion that provided a free line of service for a year.

Charter appears to be keeping mobile churn in check and converting many of those promotional customers to paid lines. According to Fischer, Q4 mobile churn is mirroring the churn seen in Q3 2023. Charter added 594,000 mobile lines in Q3, extending its total to 7.22 million.

QAM's demise far out on the horizon

Regarding video, Charter is bullish about Xumo, its national streaming joint venture with Comcast.

Charter is now deploying the Xumo "Stream Box" to all new video customers, offering a platform that integrates Charter's pay-TV service with a wide range of third-party streaming apps and a unified, voice-capable search capability.

Charter is not proactively swapping IP-based Xumo boxes for hybrid QAM/IP Worldboxes or older QAM-only digital set-tops already deployed in the field. The company will shrink its QAM network footprint over time as more Xumo devices get attached to the network, but the completion of a migration away from that legacy architecture is not going to happen anytime soon at Charter.

"QAM video is going to be with us for a long time," Fischer said.

The end of QAM might come sooner for other operators. Cable One, an operator that's been indifferent to video losses for years amid its "broadband-first" posture, recently acknowledged that the operator has entered the "final stages of decline in our video product."