Charter Communications’ dismal Q3 broadband subscriber performance — it missed analysts’ consensus growth estimates by nearly 30% — may seem like the harbinger of bad things to come, but influential analyst Craig Moffett believes that the real culprit in the slowdown may be sluggish household formation.
Charter stock was down as much as 6% ($41.60 each) to $667.07 per share in early trading Friday after it said it added 265,000 broadband customers in Q3, 29% below analyst consensus estimates of 344,000 additions and 31% off its Q3 2019 mark of 351,000 adds.
In a research note Friday, MoffettNathanson principal and senior analyst Moffett wrote that while the quick reaction is that the growth phase has ended for cable’s most important product, he believes it is tied to a slightly more arcane reason — declining new household formation.
In his report, Moffett noted that Comcast “missed” its broadband subscriber growth targets by about 80,000 customers in Q3, adding that would work out to around 250,000 for the full year. Charter’s deceleration, he wrote, is about the same. Considering Comcast passes 60 million homes and Charter passes 54 million, those “misses” work out to about 0.4% of total broadband subscribers for both companies.
At the same time, new household formation, once increasing at about 1% per year prepandemic, actually fell during the past year, the result of a combination of supply chain and labor shortages that have reduced additions to housing stock. According to Moffett, “supply is simply not keeping up with demand.”
Also Read: Punching a Hole in Convergence Apocalypse Theory
Given that new housing formation has accounted for up to one-third of all broadband additions over the past few years, “When new household growth is zero, of course broadband growth will slow,” Moffett wrote.
Add to the mix that broadband penetration is about 85% of the country and the slowdown in subscriber additions looks all the more inevitable.
The good news is that the sluggishness does not seem to be due to increased competition. Analysts have said fiber buildouts by AT&T and T-Mobile and other carriers will still take years to complete, so their effect has been minimal at best. And Charter chairman and CEO Tom Rutledge said on a Friday conference call with analysts to discuss Q3 results that the competitive market is basically the same as it has been for years.
Also Read: Analyst Says Telcos Better Positioned to Chip Away at Cable’s Broadband Lead
“We’re seeing the same effect where there are no wireline competitors as we do with wireline competitors in terms of net adds proportionally to 2019,” Rutledge said on the call. “So we’re seeing the competitive environment doesn’t appear to be significantly different than it has been — it’s always been a competitive environment.”
With competition not yet a factor, that leaves other economic factors like new household formation and consumer mobility as possible reasons for the slowdown. Moffett added that there is precedent — he pointed to 2017, when cable operators anticipated a slowing of broadband growth due to sluggish household formation. When new household formation recovered in 2018, so did broadband subscriber growth.
Also Read: How Slow Will The Broadband Slowdown Be?
This year, because of higher broadband penetration rates, is a little different, but Moffett added the same tenet holds true — as more houses get built, broadband rates will rise.
On the conference call, Charter executives seemed to agree that low customer mobility and sluggish household formation were big factors in the sluggish broadband performance.
“How that unwinds is unclear,” Charter chairman and CEO Tom Rutledge said on the call. “It's a very unusual market situation — sheltered in place, so to speak. All the friction of the market came out, that used to exist — people in transition — and they settled into subscriptions. When the market remobilizes, so to speak, I think there will be continued pressure on growth because of the pull-forward of all of that activity. But I think the fundamental opportunity for growth and long-term growth is the same, and our ability to take share out of the market is still the same.”
Charter is now saying that full-year broadband subscriber growth will look more like 2018 than 2019, the year that many of its peers have used as a target for overall additions. That new benchmark implies that Q4 broadband additions at Charter will be even lower than Q3, or about 251,000, according to Moffett.
Also: How Long Is Comcast’s Broadband Growth Runway, Really?
At the same time, financial metrics have soared as broadband grows and video shrinks. Cash flow margins rose to 40.2% in Q3, an increase of 80 basis points from a year ago. At the same time capital intensity is declining, even as the company continues to edge-out to grow its addressable footprint. In Q3, capital intensity including wireless was 14.2% and 13.8% ex-wireless. Consensus estimates were for capital intensity to be about 15.4%.
“Broadband growth will inevitably slow as full penetration is achieved,” Moffett wrote. “And, yes, fiber expansion will mean more of Cable’s footprint will be overlapped by a competing service. That, too, will dampen broadband growth. But all that has been in everyone’s numbers for a very, very long time. The harder-to-forecast swing factor appears to be the rate of overall market growth, i.e. new household formation. Charter, for their part, seems content to use the opportunity to keep doing what they’re doing, raising margins, lowering capex, producing cash and buying back stock.”
