Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. So it's my great pleasure to welcome Anterix and Tim Gray, Chief Financial Officer. Welcome, Tim.

Thank you.

Thanks for being here.

Appreciate it.

Please note that all important disclosures, including personal holding disclosures and the Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

If I had $1 every time I've heard Spectrum at this conference, it's been a recurring theme. And hopefully, we're at a stage here for the company where things are about to get pretty interesting. So perhaps if you -- particularly for those people who aren't as familiar with the story, if you just kick it off with -- tell us the Anterix story, where you'd come from and where we are today.

Sure. And as Rob Schwartz, our COO, said on our last earnings call that we did recently, we're at a stage where we like to think we're at the end of the beginning, and we're on the verge of moving on to the next phase of our business. We're the largest holder of 900 megahertz in the United States. And we've been going through an FCC process to get that 900 megahertz readjusted, so that it can be used for broadband because under today's rules, it cannot. And so we think we're on the cusp of an FCC decision very soon, where they'll put out a Report and Order, which will give us the ability to offer broadband services to critical infrastructure, that's our target market, a 3 x 3 or 6-megahertz of broadband, so they could take a whole use -- set of use cases forward.

Great. And we've seen a lot of action on spectrum at the FCC, as we were just talking about it, the C-band Report and Order was voted on last week. Do you think that was kind of a log jam item and now the way is clear from what you're hearing from DC?

Yes. And I think that's true. We saw -- there becomes some political involvement in the whole C-band issue, which kind of moved things in a very different direction from where I think the FCC and the industry was headed. And so a lot of the Wireless Bureau, a lot of the folks at the FCC, had to chase down some new issues and come up with a new plan. They've got that behind them now, and I think that they are ready to tackle some other issues, including our proceeding in relatively short order.

Great. Chairman Pai certainly mentioned 900 in comments about spectrum more broadly over the last year or 2.

Yes. And then even specifically within the last couple of months, all of the FCC commissioners were asked specifically about our proceeding in some congressional testimony and all gave pretty, very positive answers to that about moving this forward in the short-term because they know there's a need for under 1-gig spectrum to be put out there so it can be used for broadband because there, really, today, is not a whole lot of available under 1-gig spectrum that can be used for this kind of purposes.

Great. So I guess we're coming up on the March agenda next Tuesday, perhaps. I mean how are you thinking about being on a regular agenda versus a circulation item?

I think -- and we talked a little bit earlier today that we're happy with it coming out either way. We just want it to come out and be done and get voted on by the Commission, so we can go on with the commercial plan that we've got, and we'll talk a little bit more about here shortly. Whether it's an open meeting, and we see that agenda early next week or that goes through the whole circulation process, we believe either one of those should be relatively soon. And for us, it's more a matter of getting it done and pushed through. So whatever mechanism they want to use to get it done soon will be the mechanism that we'll be the happiest with.

Great. I mean as we've seen with C-band, there's a lot of twists and turns. And to some extent, the devil's in the details. So when we see the final Report and Order, what are the things that you're focused on, the things that you're really hoping to get resolved?

Well, I think there's a couple of things. What -- some specifics on that are what are the triggers for mandatory retuning to move people out of the band and how has the FCC written that will be one of the key things that we'll be looking at. I think another key item for us will be how is the FCC going to deal with markets where we need additional channels that are currently sitting on the shelf at the FCC to get the aggregate 240 that you need to have a full 3 x 3 broadband allocation. And how they're going to deal with that and whether there's any sort of payment involved and what that would entail, how they've calculated that it will be another key thing we'll be looking at. One other item I'll mention are any time lines they've put around when to apply for broadband licensing and what that means from a construction of systems around that spectrum and putting it to use time frame. So those are kind of 3 or 4 of the key items we'll be looking at. Of course, we'll have a team going through. We believe it's probably a pretty long document with a lot of technical rules and all of that good stuff that will need some in-depth analysis. But based on our discussions and where we are, we think it's in a good place to move forward, and we'll be happy with the result once that's done.

Great. So we had repacking and the broadcast incentive auction. You've talked a lot about retuning. Give us retuning 101. What exactly does that entail and -- I think you've prefunded a lot of the expense as well. How long will it take?

Sure. So retuning we look at as kind of an umbrella that covers a couple of different things. One is actually retuning current incumbents who are currently located in what the broadband allocation is going to be and moving their equipment from one set of frequencies to another set of frequencies outside where the broadband allocation is going to go.

And give us some -- what kind of users are those today?

Sure. There's a wide variety of users in 900 megahertz. The biggest set outside of Anterix are a lot of utilities for their internal communication needs, whether that's voice or whether they're using that for some sort of narrowband IoT purposes. And then you've got a lot of SMR operators that still exist throughout the country. And then it's a lot of businesses that have internal use, radios and trucks and things like that. And so it's a wide variety and vary by size of incumbent and different business sizes. So we've got to go in and work with them. And we have a plan that will come to each incumbent with around here's the frequencies you're on, here's the frequencies we can move you to, here's the plan, here's the time frame, here are some vendors that can help do that process for you, and here's how much we'll pay to make sure that you kind of end up with comparable facilities, which I think is the FCC term. And you're basically communicating just like you were before, except on a different frequency. And that's the actual retuning, which is moving the frequencies. There's also a part of the process that we will acquire. There will be people who would rather sell the licenses than actually go through a retuning process. And so that's part of what we'll see as well. We've had a lot of activity that started to ramp in the last 4 to 6 months where most of that activity has been on the acquisition side where we've come across people that we've talked to who would rather sell than go through a retuning process. So we've picked up some chunks of spectrum around the country. We've really focused our retuning efforts on where we think we have near-term customer opportunities because it's important for us to clear that spectrum, make it available to have a 3 x 3 as soon as possible, so that we can start to get -- once we sign some contracts, start to get revenue in as quickly as possible because some of that revenue may be contingent upon being able to deliver the broadband slivers of spectrum. So we'll be moving rapidly in those areas where we feel like we've got good opportunities.

And how long do you think the whole process will take?

We think -- we talked about this roughly a year ago. And of course, once we see the final Report and Order, we may have to adjust our thinking, and we'll go through that process and analysis, as I stated. But roughly, it's about a 3-year period and a range of about $90 million to $120 million. We did go through a capital raise last summer. And really, the basis for that was to fund this retuning process. We've already gotten a little bit of a head start. I think the Report and Order will help to accelerate that process moving forward. And one of the other key things about it is we can control it. If we decide we want to throttle back for whatever set of reasons, we can make it last longer than 3 years. If we want to go faster, we can go faster. But we think, on average, it's going to be about 3 years to get it all done.

And what about the holdout issue? I mean maybe -- is that what you referred to when you say the mandatory retuning?

Yes, yes. So -- and the holdout issue is really people who are incumbents who have frequencies within the -- where the current view of the broadband allocation is going to be according to the FCC Notice of Proposed Rulemaking. And that's somebody who doesn't want to move unless they have to and doesn't want to go through the process. Because for some people to move a fleet of vehicles, it's painful and it just takes time and effort. So we want to make sure that there is some sort of mandatory backstop within the Report and Order. I think there'll probably be one. We're not exactly sure what that trigger is going to be. But some way in there to make sure that we're able to get people to move out of the way into the back, into the -- what's going to be the narrowband section, so that we can provide that 3 x 3 to the customers that we're looking to sign up.

But there will be a carve-out for some of the complex systems?

Yes, yes. So in the NPRM, and we'll see where this ends up in the final Report and Order, the FCC came up with this concept of what they call users with complex systems. And that's over, according to the NPRM, 65 sites. There's been some comments since that came out from some of the incumbents asking for some different definitions of what complex systems is, whether that's 45 or 25 sites. We'll see where the FCC ends up, but that's to basically say that they don't have to move and would not be subject to mandatory retuning. So basically, we'd have to come to some sort of commercial arrangement with them to make sure that they could move out. And that would be our intent no matter what size that complex system definition is because most of the entities debt that would fall into a complex system are the targets we're going right after, which are utilities. I think that's the vast majority, with 1 or 2 exceptions on that. And so those are the people we'll be talking -- we're either already talking to or we'll be talking to about commercial opportunities.

Great. So assuming we'd get through all of that, we can -- and then you go to monetize the spectrum. And I guess, unlike some other spectrum investments, you're not looking to sell the spectrum. You're not looking to operate the spectrum. You're looking to lease it out. So talk us through why follow that model versus, again, selling it to a Verizon or somebody like that?

Well, I think if you look at the history of the management team, they're operators and have really come upon what we think is a real interesting target market that we can help with our spectrum. And these are customers, i.e., critical infrastructure, particularly the investor-owned utility community, that are not nationalized. They are -- they cover certain geographies around the country. And they have a specific set of broadband use cases that they're looking to fulfill. And for us, there's a couple of reasons why this lease concept works out really well, particularly for this set of customers. One is these investor-owned utilities are incented to spend capital. And they're incented to spend that capital, so then they can put it into the rate base and have the rate payers pay for that and they get it, in essence, a guaranteed rate of return going forward. And so part of that is, they would build out networks, they would have control, they're going to build out those cell sites and all the equipment that goes into that. And then we would provide spectrum to be able to do that. And that really becomes a very interesting long-term business model as their leasing spectrum providing a recurring set of cash flows that we've monetized and start to build high-margin EBITDA over a long period of time based off of 20-year leases is what we're talking about. Because this community, particularly the utilities, they want to have long term -- the long-term vision set, where they're not looking at 2 or 3-year leases, where they've got to then renegotiate or do something different because when they put this infrastructure in the ground, they want it to be there for a long time. These are companies that put infrastructure in the ground for 50 and 100 years. So that's their intent, is these long-term leases. So it's a great kind of, what I call, a sweet spot for us. And we're excited about the opportunity and ready to get the Report and Order behind us so we can start to sign up some of these customers and show that there is a real path to monetizing the spectrum going forward.

And why are they so focused on private networks? You hear the big 4 talking a lot about chasing the enterprise and the business opportunity. You've got the FirstNet network out there that can give you quality of service and so forth and broader extension. So what are the kind of the drivers of that and the use cases that it seems like it's becoming more urgent?

Yes. And I think one of the biggest issues that I hear is, one is, a lot of these companies really want command and control of all of their network, not just their communications, but all of the grid that they support. And this is a piece of that. And as a part of that, with them having that command and control, they've also got -- they're not connected to the public Internet through one of the carriers. So they've got some extra security that can be built in because they have that private network, and that is growing bigger and bigger and bigger as a concept. And we're starting to see that not only in the utility space around security, it's also in a lot of private enterprise as well, where they're starting to say, I'd rather be kind of off on my own and not have to be on someone else's network. But -- and one of the other keys, particularly in the utility space, is when something happens. You've had a hurricane or a tornado or something come through, they want to make sure that their traffic is prioritized. On their own network, there's nobody else to get prioritized against -- versus being on a carrier network or someone else's where, when something happens, you get the busy signals and all the kind of stuff where the network goes down, then you're worried about one of the carriers deciding what cell sites are going to be prioritized and all that kind of stuff. You're making those decisions. And you can also make the decisions about how to harden what sites. And so you've really made the decisions about what that network is going to look like.

And there's been some interesting use cases about fall detection and things like that on the electric utility poles, right?

Yes, yes. There's a utility out in California that's got some proprietary technology called falling line conductors, and that really help send signals back to a station with incredibly fast speed because of a little latency of broadband, where they can make a decision because there's no signal coming through on that wire to turn that wire off. In theory, and this sounds totally amazing to me, before that wires -- they're snapped or some wind, tree whatever, and it could be turned off before it hits the ground, which, as we all know, particularly in this state, has been a significant issue with fires. And so that's -- I know, in California, there's a lot of initiatives going on around that. And hopefully, that's a place where we can move forward with some customers.

And these are LTE networks, some of who -- where does 5G fit into their plans?

Yes. So we see 5G as kind of the next evolution. You're looking at 4G LTE. Technology across this industry changes fast, changes rapidly. And we know that in working through with standards boards and things like that, there's a path forward for even small swaths of spectrum to be a part of what the 5G answers are going to be in the future. And so there's -- we feel like there's a path forward, of which 900 megahertz is a part of.

Okay. So we get the Report and Order. You've talked about, what is it, 6 to 11 deals over the next several years. So what does your pipeline look like today? And what should our expectation be for announcements with -- of the initial deals?

Yes. So when we talked, I think, last year, we had an Investor Day, and we talked about our 2024 revenue target of having recurring revenue ending that year of $125 million to $150 million. It would be made up of 6 to 11 of the top IOUs. And so we've got a pipeline that's very strong. We continue to move people through that pipeline and add some additional folks to it. You could see some strength in the fact that there continue to be growth in experimental licenses, so that different utilities and enterprise can test different use cases on our spectrum. Just this -- in the past couple of weeks, and this is public now, New York Power Authority, NYPA, which does energy transmission across most New York state, signed up for an experimental license so they can test a variety of use cases. And they're not even an IOU. They're owned by the State of New York. So there's -- we're starting to see not only from the IOU community, but other utilities, other what we call critical infrastructure are seeing the need for broadband and thinking about private networks. And so when they think about under 1-gig spectrum, they come and have the conversations with us. So because we continue to see growth in experimental licenses, we feel like the opportunity is only growing. There's been testing going on that's moving from Phase 1 to Phase 2 at the National Renewable Energy Lab that has a committee of, I think, it's 9 to 10 utilities that are part of the group that are helping design the use cases and the tests, particularly around renewable energy sources and use cases. And so we see that as another sign that there's real opportunity here from our pipeline, and then we're going to start to see some opportunities sooner rather than later. We had talked about one of our goals was to have, by the end of our fiscal year, which actually ends at the end of March, having a customer signed. We're still working really hard to meet that goal. And we think we've got an opportunity to do that. We'd like to see the FCC act, so that kind of helps grease the skids a little bit and makes it a bit more reality. But...

Sorry. That was the Wireless Bureau.

Yes, yes, exactly. They're working. So -- but yes. So there's real opportunity in the pipeline.

Okay. And -- so we get that press release. You've got, I don't know, a letter of intent or something like that. What's the path to actually booking that revenue and getting that revenue with the retuning? And maybe we need to go through a PUC process? I don't know how that might play out.

Yes. And again, the interesting thing is, all these contracts are going to be different. I don't think you'll see any kind of one normalized template that all of them sign up to. I think -- but most of the contracts would be, of course, dependent on us getting spectrum cleared. And spectrum clearing means that we got it clear, so they can have broadband. And that may be part of a process where, first, because we've cleared a certain portion of it, we're able to deliver a 1.4 x 1.4, so they can start to do some of the uses in a broadband format. And then over time, we'll clear more spectrum so we can deliver a 3 x 3. And so that may take the form of a lower payment for the lease, while they have a 1.4 x 1.4, and that grows to something bigger over time as they -- as we deliver that 3 x 3. So that's why the retuning process is so incredibly important. And we're really focused on is what we think are our near-term customer opportunities, so that once we sign them up, we're in a good place on clearing the spectrum so we can get to revenue recognition faster. And that will be our goal. But they'll all be dependent. And you may see some of it be dependent on how that organization wants to build out its own network. So they may not want spectrum for their whole area right away. They may only want it for a small portion of their geography. And so we'll work with them on that, too. And so revenue recognition may move with that as well. So there's a wide variety of factors that go into when we're going to recognize revenue from when we get a contract up, but the first and foremost factor is really us getting things cleared. And yes, the PUC process will be a part of it. What we have learned, though, is each state and each utility with their states are all very different in how they work through the PUC process. Some happens before they do something, some happens after they do something. Some of our contracts may not even be contingent on PUC approval, so they can put it in the rate base. So there'll be -- again, I think that's going to be a wide variety of ways that those things get done at the end of the day. So we may sign a contract that doesn't require PUC approval, but then the next one, it may. So...

But there may already be funds designated for grid modernization or something like that?

Absolutely. And I mean that's right. And that's the other thing we're seeing is that the spectrum piece of some of these cases that they're taking to their PUCs is such a tiny portion of a mammoth grid modernization spend. And so we would expect them to get the approval of that piece of it. We've been very active in working through with state PUCs and educating them on private networks, what the power of broadband is and what it can deliver. So that when these cases come to the state PUCS, it's not the first time they're hearing about it, and they understand it and can move forward to approval.

So we're all familiar with tens of billions of dollars of spectrum value for C-band or for international auctions, whatever it might be. But that must be an interesting conversation with the utilities. So help us understand how do you get to that kind of per megahertz pop and have that discussion. Because I would assume that it's -- when you don't live in that spectrum world, it's a little bit of wait. What's...

Yes. And of course, the other thing you'd throw into that mix is a lot of the utilities that do have spectrum today, a lot of them got it for free. In fact, the vast majority of them got it for free from the FCC 30-plus years ago. So when you start having the -- you're going to charge us for spectrum conversation. For some of them, you really have to start at the beginning and talk about spectrum, spectrum values, how they get derived, a history of auctions, why one market goes for a different price than another market and how important population centers are. And all of that goes into the kind of education process. But we also have experts that will be part of that conversation with us that are outside folks that come in and do some of that teaching as well and give their views on why your service teradata should look and be priced like this. And when we put different factors than what we look at from a pricing standpoint. We look at this -- a lot of the most comparable recent set of transactions, whether that's the 600 auction, any private transactions that have taken place that may cover that geography, and then whatever else may be going on that we can think about as you look at long-term value, and those are all pieces of the internal work that we do to go into the conversations that we have with the customer.

And I guess, one of the challenges for the investors is how much of that are we going to see, so we can populate the model and extrapolate and all that. Have you come to any decisions on KPIs and disclosure and so forth?

I would say that's something we're working through, Simon. And there's a couple of things that go into that. One is each one of these contracts is going to be a little bit different. So there's not one set of -- or one answer for the -- every contract that we're going to do, and that's going to vary. I think the second piece is, we've also got to work through the part that giving out too much information while we're still actively trying to get additional customers going through negotiations and things like that may not be in the best interest of the company in the long term. So we've got to manage that as well. So we're being very thoughtful about how we want to think about disclosure and what we give people like yourselves and the rest of the investor community, so that they can update their models moving forward. And I wish I had a better answer than that, but that's kind of where we are right now.

Okay, good. So you mentioned the experimental licenses again. Is that a way of thinking about your funnel? Is that the right way of hearing people who are taking this seriously enough that this is a kind of a baby step towards signing up with you?

I think that's right. A lot of these companies really want to touch and feel something before they move forward. You can't touch and feel spectrum, but they want to know that it works. And the set of use cases that we want to use that it works for those use cases. So it's an important step for many of these companies to do, and that testing process is very important. But we also feel like some of the testing that NREL is doing, hopefully, will enable some other potential customers not to have to do their own testing because they've seen it in the lab or wherever through NREL. And so we'll see whether everybody has to have an experimental license and do their own testing. Hopefully not, but for a lot of them, it's a very important step forward.

And what about your -- on the device side, the manufacturers and the equipment vendors, what sort of support are you seeing there for the ecosystem?

Yes. So we are actively working with vendors, the Qualcomms of the world, just to make sure that as chip sets move forward, 900 megahertz is an important part of that. With 900 megahertz being used for broadband in different parts of the world, we feel like we've got a head start there. But it's -- we're getting in there and working with everybody just to make sure that there are going to be devices. And so we had some good news that came out within the last month or so when Motorola put out a press release about a new product that they've got that's going to be specifically designated to be used on 900 megahertz in a broadband capacity for LTE. So...

Handset or...

Yes, yes. And so that's a big step forward. And we think that others will be following soon and talking about that. So we felt really good about that.

And what about CBRS? Is that something that can be used in conjunction with the 900?

Yes. We feel like 900 is compatible with lots of different swaths of spectrum and the spectrum aggregation, you see that going on. But CBRS is a perfect complement because you can take that and add capacity where you need it. You don't need CBRS or you don't really want to use CBRS to build out a big wide area network, and that's what you want to have under 1 gig spectrum for. But to have CBRS where, in a certain population area or a place where you're going to have a lot more -- need for a lot more capacity, it can be a bolt-on where you can use. And we've had, from an experimental license standpoint, some of the testing that's been done, there's been additional work with CBRS on top of 900 that's really helped. People see that future. So we're looking at opportunities to see where should we be involved with CBRS or how do we want to actively work with that community to make sure that it's available for our customer set when they need additional capacity moving forward.

So beyond the electric industry, you talk critical infrastructure. I think railroads is an important market here as well water. Can you just talk about how that might play in?

Well, yes, I mean, we talk about critical infrastructure, that encompasses more than just the investor-owned utilities. The investor utilities are the big guys, and that's where a lot of the value is in those geographies. But we're looking at multiple different opportunities. The railroads are important for one specific reason is. One is, they have 6 channels of nationwide licenses, 3 of which are in what's going to be the broadband allocation. So it's been important for us to work with their association and the FCC to come up with a deal to move their channels in the broadband allocation out. And so we're working through that as a part of the Report and Order. And we think that will be, hopefully, a big accomplishment as a part of what the Report and Order says. Could there be a long-term customer opportunity on the railroad side? I believe so. But in the short term, it's been really focused on getting that deal done. So they're moved out of what the broadband allocation is going to be at a national level because they're the only one with -- really, that has those kind of national licenses.

Great. Well, unfortunately, we're out of time. That's a great overview, Tim, and best of luck.

All right. Thank you, Simon. I appreciate your time, and thanks for everybody for being here.