Spectrum Loses 233,000 Broadband Subs, Bets on $2B Overhaul

Spectrum shed 233,000 broadband subscribers on a pro forma basis in Q3, and CEO Chris Winfrey's answer is a $2 billion cost-cutting exercise wrapped in what he calls a "fundamental redesign" of the company.

The combined Charter-Cox operation now counts 34.31 million broadband customers — 32.28 million residential and 2.02 million business. A year ago the equivalent loss was 171,000, so the trend is not cooperating. Total pro forma revenues fell 1.5% to $16.50 billion, with Internet revenues sliding to $7.09 billion from $7.36 billion.

"We recognize that we have not generated the customer growth and performance we expect," Winfrey said on Friday's Q3 earnings call, adding that Spectrum is being redesigned "at every level." Investors showed their appreciation by marking the stock down $3.35, or 2.66%, to $122.51. Charter shares are down 41% year-to-date. Redesigns, it turns out, take a while to sell.

What does the new operating model actually involve?

Winfrey announced "a new path forward for Charter to address a more competitive and complex market." The specifics so far: a reworked value proposition, a fresh go-to-market strategy that leads with broadband, and more attention to churn, customer service and existing bundles.

That's roughly it for detail. Winfrey promised more soon and pledged that Spectrum "will grow our Internet sales rate." He declined to say when. "We're not providing any guidance or outlook for exactly when we return to growth," he said. "But I want to be very clear: That's the objective; that's the determination of success." A target without a date. Bold.

The architect is Nick Jeffery, the former Vodafone UK and Frontier Communications executive who joined as COO on September 1. Last month he introduced a flatter operating structure in service of what he's branded "The Great Cable Comeback." Winfrey called Jeffery a "change agent" forcing Charter to rethink how it competes. The industry will recognize the playbook: Comcast is mid-restructuring of its own, complete with layoffs.

How much money is on the table?

Beyond the $1 billion in transaction synergies already expected from the Charter-Cox combination, Winfrey is targeting an incremental $2 billion in annualized run-rate operating expense savings over the next 18 months. Much of it comes from killing projects that don't contribute to broadband growth.

Nobody knows yet how many layoffs the flatter structure will produce. Winfrey did say the savings are not aimed at front-line service and sales staff — presumably those people are expected to sell the comeback.

Why the Cox footprint matters

Part of the path forward runs through the Cox markets, which add roughly 11 million passings and 5 million customers. "The lower starting penetration [in the Cox markets] is a big opportunity," Winfrey said — cable optimism in its purest form: fewer customers means more to win.

Early numbers from the Cox footprint, where Charter's pricing and packaging launched September 16, point in both directions:

• 68,000 mobile lines added in legacy Cox markets, more than double the 32,000 gain a year earlier
• 77,000 broadband subs lost, worse than the 62,000 lost a year ago but better than the 103,000 lost in the prior quarter
• 39,000 video subs lost, improved from a 51,000 loss a year ago

What else moved in Q3?

The pro forma company added 508,000 mobile lines (489,000 residential, 19,000 business), bringing the total to 13.45 million. Video losses narrowed to 77,000 from 121,000 a year ago, leaving 13.8 million video customers. Network expansion continued at a steadier clip: 390,000 new passings in the quarter, for a total of 70.7 million.

Mobile, in short, is doing the work broadband used to do. Whether Jeffery's flatter structure can reverse the broadband arithmetic is the question the next 18 months of savings and the undated growth pledge will have to answer.