Anterix Inc. (ATEX) Earnings Call Transcript & Summary

So thanks for joining us. My name is Phil Cusick. I cover the comms services and infrastructure space here at JPMorgan. This is our last presentation of the day, but I think a really exciting one to finish up with. I want to introduce Morgan O'Brien, the CEO of Anterix; and Rob Schwartz, President and COO of Anterix. Gentlemen, thanks for joining us.

Thank you, Phil. Happy to be here.

Thanks, Phil.

To start, you are the lead item on the FCC's open meeting yesterday, congratulations. Can you tell us what this means for your business and the impact these rules have on the 900 megahertz band?

Sure. Let me give you a little tiny bit of history on this item and on Anterix. Literally, 30 years ago, Nextel began to accumulate frequencies of 900 megahertz to use in the iDEN network. And through the decades, that spectrum was accumulated and as a result, Sprint had roughly 52% of all the licensed spectrum at 900 megahertz. So out of 10 megahertz in that very valuable below 1 gigahertz band, Sprint had accumulated 52%. We created Anterix, bought that spectrum, and 5.5 years ago started at the FCC a proceeding saying this spectrum and the rest of the spectrum in the band, is not being sufficiently utilized. It should be repurposed so that most of the spectrum, 60% of the spectrum becomes available for broadband, and in particular, LTE and even more particularly for critical infrastructure such as the utility industry. And we've worked that process at the FCC. A lot of your audience understands what that spectrum repurposing process can be like. And yesterday, it doesn't always end this way, folks, but yesterday, we ended up with a unanimous decision of the FCC under the leadership of Chairman Pai, pretty much setting up exactly the environment that we look for. So now there is a new essentially virgin broadband spectrum below 1 gigahertz that can be available for LTE deployments. Very important asset for the public, very important opportunities to potential users, all waiting for this FCC outcome. For users to preferably lease that spectrum, long-term leases from us and to develop, build and then operate on their own, LTE private system. So lots and lots of reasons why private is preferable to a public. We can talk about that.

I mean not only does it -- is it rare for that to happen, but I think it might be the second time and you had both of them. Morgan?

There's been more, but maybe if you were ranking them on difficulty and likelihood of success, maybe I'd be up there. But yes, Nextel had some similarities to that. Some people in your audience, if they're old enough, remember that. But it's a formula, which strikes me as so much -- so sensible, which is you take a good team of people, you acquire spectrum, which because of rules that are all the rules here that were revised yesterday have been in place without any change since the middle 1980s. Just think about how technology is changing. And we sought to adapt those rules in a way that would protect incumbents that give the FCC an opportunity, which they're always looking for to introduce new innovative technologies. So it's for whatever reason, it's something that I love doing. There are many easier ways of operating in this business, but this is my chosen occupation. And of course, as of yesterday, the whole team at Anterix, which is small, it's like only 60 of us, but we just couldn't be more happy.

That's great. Rob, do you want to talk about some of the changes in the NPRM, from the NPRM to the Report and Order. What do these mean for Anterix? And how should we think about pace going forward?

Sure. Sure. Look, I think the silver lining of a long process, right, and as Morgan mentioned, this was a long process, is that there was plenty of time for both the market to respond to exactly what it was the needs were. And during this time, we've seen tremendous growth of demand for what's become now known as private LTE. When we first filed our petition, we talked about the idea of using this spectrum for private networks, broadband networks for utilities and other critical infrastructure industries and private enterprise. Now what you've seen is the market has spoken, and that's been very important. And really, to your question, Phil, it shaped the dynamic of what went from the first petition the NPRM and now the Report and Order. While we haven't seen the final Report and Order yet, we did see the draft that was circulated last week. And what we clearly saw there is that it has a very fair balance process, one that protects large systems that will make sure that they're going to be well taken care of if they move forward, but at the same time, has a very clear path on how we can move forward to bring broadband to utility, critical infrastructure and other enterprises. So the key things, I guess, that I think of in the rulemaking, we're going to go into great detail. In fact, next week, we plan to publish a letter of our own, explaining our interpretation of it and really trying to give the market a better understanding of this is complex stuff. As Morgan mentioned, he's been doing it for decades. We've been doing it for a long time, but the interpretation of it from our view, it gives us a clear path on how we can execute and bring broadband to the customers. So main thing is in there, is a way for us to both voluntarily work with the incumbents but get to what we believe is a fair mandatory retuning process when necessary once we get enough volume, and that really gives us the tools to be able to use the spectrum we have, work with the incumbents as we've done in the past with a lot of our experience at Nextel and otherwise, in moving the incumbents in the broadband section out of that area, so that they can continue to operate without any real changes to the way their systems operate, but be able to deliver a clear and broadband spectrum to the prospective customers.

Morgan, anything you wish was in the order that wasn't included?

It would be churlish for me to ask for more. It's what it needs to be. And as Rob said it, it balances the interest of incumbents. Keep in mind, our primary target for Anterix' business case by the utilities and the principal incumbents that need to be protected are very same utilities. So working cooperatively is something that's deeply embedded in our business case. And now it's enshrined in the rules with very important exception that there is a mandatory provision, which we were very anxious to see, a mandatory provision, which when all else fails, there is -- the FCC does have a mandatory provision to just avoid sort of frivolous holdouts. But other than that, I have to be honest and say, when you start something like this, you imagine, in order to keep yourself going because there are a lot of twists and turns, you imagine what Report and Order that comes out, as came out yesterday, will look like, what position the commission will take? How they will shape a public interest outcome that is consistent with what we see. And it's pretty, pretty awesome. It's an excellent outcome.

That's great. Rob, you made an announcement this morning on a frequency change with Evergy. Is that the sort of typical frequency exchange of moving the incumbent out of the broadband market?

Yes. It's a great question, Phil. That's the -- one of a series of transactions we've done already with incumbents. As one of the, again, silver linings of an extended process has been that we haven't waited for the rules to get going. And so we've been retuning. We've talked about other folks like PSE&G and some other large utilities that we've already worked with in moving them simply out of the broadband allocation, allowing them to continue to exactly what they do with their systems in what now is the narrowband allocation within the band. So the Evergy announcement was just that. And what it did was it move them from -- as they're deploying some modifications in the new Motorola P25 system, you two-way radio system. It's going to allow them to use the frequencies as they have done historically, and we'll continue to do outside of the broadband allocation but it's freed up that broadband allocation in their service territory. And so we've done that, as I mentioned, with a number of utilities. We've done it with other systems. We continue to disclose those as they occur. But that's -- I always talk about that is being the input of the raw material to our ability to deliver the manufacturer good, the final good of being cleared spectrum. And so we continue to see more and more of these transactions in the pipeline, and we'll keep announcing. So that is -- so you know, one of the nuances for those who are following closely, Evergy is what's called a complex system. There happen to be 11 systems that are complex systems around the country. And as Morgan mentioned, just about every one of those is at utility. It's our ability to work with the incumbent to have them agree to move out of that space is very often in their interest. The target customer we have happens to be the incumbents. It's very different than when we did this in the past in the next 12 days when we step to move public safety out of the way, they had no benefit by moving. It was just a mandate that they had to move. And so that was much more challenging and there were many more. Here, it's a much smaller universe, and they have a lot more to gain by doing so. And the Evergy release is just a good example of that.

Phil, can I jump in and give you one clarifying point? I don't want to get into the weeds. I don't think this is the right, get into the weeds opportunity, but retuning, rebanding the process by which incumbents move from where they are to open up the space for broadband, isn't really moving. It's a much less complicated process. It's actually changing one set of frequencies on which a system operates to another set of frequencies for which their current radio system is easily adapting. It's an over-the-air programming concept. So in most cases, at 900 megahertz, what made to Anterix this opportunity so compelling is the ease of rebanding. It isn't simple particularly when you get into complicated systems, but it isn't moving. It involves reprogramming radios. And the benefits are enormous and it allows frequencies that have been used at workman-like, use of spectrum narrowband gets opened up for broadband, which has just so many benefits.

And to your point, I don't want to get into the weeds on that particular deal, but I think -- I think it may be a good example of a couple of things that could happen. One is it sounds like they were in the process of rebuilding the system anyway. So it should have been a relatively simple rebanding process, if not, almost 0 effort.

Well, if there's ever a time to reband, and we make this point, it's when you're going to a new system because it's just literally what frequencies you tell the manufacturer to load up at your particular base station. So yes, it's the perfect time. As I say, it's not without complexity, but it is nowhere near as complex as the expression moving systems would seem to imply. It's pretty straightforward. And it's something that the team we put in place are like the best there are. These are all alums from the Nextel rebanding days, which literally Nextel spent decades rebanding.

Okay. And then the second piece, and again, last question on this one, but was -- as I think about the cost of your rebanding plan, the $90 million to $120 million of cash that you needed and a lot of which you already raised, should we think of something like this as something where economics change hands? Or is this a sort of handshake and move-on deal?

It can be any of those, but let me just make a quick -- give you a quick preview of how we're going to present this next week. There's really 3 legs to the stool. One is the rebanding. So for example, somebody like Evergy, we work with them and they move from one set of frequencies to another. But there's also spectrum acquisition in which as we approach somebody who needs to be rebanded, they say, I've been thinking about just going to an over-the-top cellular application. Would this be the opportunity for us to do that? And we say, absolutely. It's completely within the contemplation of the commission's rules that we can make any kind of a deal in the marketplace that's acceptable to you, Mr. Incumbent, and we go on from there. And then the new, interesting, and we're going to need to really peel back the layers of it, process of these rules is the so-called windfall payments. And that's the third leg of the stool. But when you step back and look at the 3 of them, they're all interrelate by accounting and all fall into what used to be thought of as just the retuning process. So again, I don't want to jump too much into the weeds, but when we talk about retuning, it is very much a one incumbent at a time discussion as we find out what it is that they're looking for. Believe it or not, sometimes we find out they did not know they had the license because the licenses kind of lost in some earlier version. These are not communications businesses who have these frequencies for the most part. These are businesses that use spectrum for purposes of just running their business.

And may have been consolidated again and again over the last 35 years.

As we know, the over-the-top applications running in cellular networks have pretty much foreclosed the traditional two-way radio markets. And that is one of the things we demonstrated in early days of the tariffs when we tried to see if there was still something kind of left in that part of the market.

Well, let me follow up because it's the second time you brought that up. So you come to an incumbent and he says, I've been thinking about going to cellular anyway. Is there instead a conversation of, well, listen, you could do that by yourself. But let me show you what you could do with us instead. So how does that conversation go?

My conversation goes, let's start talking about the difference between private and public. And as you get to the larger incumbents, this is why the utilities are so important. There's a great advantage to them of having a private system in which they determine the coverage trends. They determine who gets access when. They determine what happens when there's too much demand. I may have to turn off my -- I may have to turn off for a second and close my door, unfortunately.

Morgan has motorcycles going by his house or something.

A leaf blower.

Right. Rob, do you want to follow up there?

Yes. Look, I think that -- a couple of things. I think the opportunity, and just to kind of to broaden a bit, right? So most incumbents are utilities, and if you think about that we're going in -- we're not going in with a retuning conversation to those folks. We're going with a strategic discussion about the landscape of their communications. As Morgan was saying, the value of what a private network does for them and what private LTE does for them. The Ameren example, where we went in and they probably stated, they had 19 different wireless communication systems within their footprint. As they did their forensics. They didn't know that. And by the way, they're up to 22 because they keep discovering more as they kind of -- these are individual systems that have single purposes. It's no different than the way we used to communicate. A cell phone was just for making phone calls. And we had data communications for doing other things. Now it's a pipe that we keep adding applications to do various things. When they start realizing the value, and that's really what we're pitching. The retuning is a piece of it if they're the incumbent, but that's not the lead, right? So in the case of a lot of these incumbents, the interest is how do I create the value of a private network that's way more resilient, way more cybersecure and is under my control and its capital that I deploy not relying on ongoing operating expense at a carrier's whim. And so that's sort of -- that's more of a value proposition to the customer if they're both a potential user and also an incumbent.

Okay. Morgan, anything to follow up there?

Yes, I want to make sure that we make one important point. And believe me, it's hard to wean yourself off of thinking of mobile spectrum and mobility. The ability to use the spectrum with devices that are intended to be used in mobility. This opportunity is more fixed than that. What we envision being supported on this super valuable spectrum, for the most part are fixed devices, fixed wireless devices, sensors. And so it's a significant difference from what you would think of, which is not to say that mobility won't -- as LTE becomes more and more refined, mobility will also be one of the functionalities of the network. But the primary interest that we're seeing from customers is sensors, the sensors that are embedded at all the various points of vulnerability in the web -- I mean in the electric grid and also the distributed generation, the wind and solar, which is increasingly taking over the architecture of the grid. What makes this broadband spectrum so important is that it permits inexpensive, tens of thousands of -- hundreds of thousands of sensors to be deployed throughout a grid, a wide-flung grid, electric grid and have all that data collected and give situational awareness to the company. They've never been able to do that because they don't have the latency --they don't have the latency capability of LTE. The systems are too narrow and therefore, too slow. So it's -- you have to think differently about this spectrum. So I like to do, like a compare and contrast to Nextel. Nextel accumulated the spectrum and raised the capital on built its own network so we could provide mobility on a sort of a by-the-drink usage case for millions of customers. Here, we're -- we've assembled the spectrum. We've got the rules in place, and now we can lease the spectrum to users who, in turn, raise the capital, build the network, provide the services privately.

Okay. So from a practical standpoint and timing perspective, what happens now?

I think Rob should answer that question because he's got his hand on all the appropriate levers.

Again, the beauty of having the time that we've had so far, while the Report and Order is going on, is that we did a lot to really build the demand side of the equation and work with utilities. You saw, not just all the comments on the records. There have been 6 experimental licenses granted that really cover 11 different utilities and also UPS to show the uses outside of the utility space. From that and the work that's going on, what we did with the Department of Energy's lab, NREL, what's happened with the Utility Broadband Alliance, right, the alliance that we put together, but now is run by the utilities themselves, that is cascading into an industry-owned. And that's really important for us, an industry-led movement that -- getting to the value of what private LTE can do for them. And it's different for different utilities. It's very interesting to watch. There's a committee at this Utility Broadband Alliance or UBA, as we call it, that's driving the use cases and a list of all the potential use cases. And some are coming at it from Ameren's case of, I have 11,000, what are called reclosers, devices that will open and close the circuits. If a tree falls on a line, you have to go to shut up the power to that line. Historically, those were manual things. You roll a truck, you had to open and close it. Now you can do that remotely. Why is that important now to them? Especially now in this time of crisis with COVID, they said they had 35% of their workforce out still in the field because they have to do manual work on these kind of things. And obviously, the value when Morgan talks about the thousands and even millions of sensors that are being deployed, it's to have this level of command and control remotely, not putting people in harm's way, not having to do these manual things and having the ability to do it instantly. And so there's a long list of valuable use cases that they're coming together with and pushing forward. So we're seeing the opportunity from the dozens of customers that potential that Morgan talked about. We announced our Ameren letter of intent, which was really the first customer that we wanted to put on the board and be able to talk about. You've seen comments from other interested parties publicly, like Southern and NYPA, New York Power Authority, several of the utilities in California. There's a good strong list, and we've got a great team now. We've been building and commercially preparing for this day, literally launching our commercial business beyond just -- we used to call our sales effort business development. As of today, its sales. We are out working to convert all of those interests into customers, and we see a great strong pipeline.

That's great. With the FCC having approved this, what's the largest outstanding hurdle to execute the plan today?

My answer to that, Phil, is that it's now -- what to me is the favorite part of a process like this, now it's up to us. We have the rules. We have the capital. We have the team assembled, and now we have to just execute properly, and we have to retune the incumbents, to take the process through what the FCC has in place. Have I gone?

Rob, are you still with me?

I'm still here.

I can see you, Morgan.

Can you hear me? Okay. Now I lost my train of thought because I thought my system went down. Rob will pick it up.

What we need to do to get to the -- what the big issues now and retuning, yes, so I think to me, it's execution, right? And that's -- we've been here before. Morgan gave the Nextel analogy. Now it's a much smaller set of customers that are high-value customers that we're focused on. These are long-term leases. Each one is highly valuable from tens of millions of dollars to hundreds of millions of dollars, depending on the scale of the opportunity, the revenue potential of each of them. And the unique thing about this sector that we've been, really, is that they work together. So it's not like a typical market where you're trying to sell to competitors and they're fighting against each other. There's a domino effect. We absolutely see it. That when you get leaders to step up and start doing things, there are a lot of people who learn from that and want to do the same. And so they have so many forms where that information is shared. Just the word that I keep mentioning, Ameren has done and what Southern Company has done in putting a private LTE system, they've shared those plans completely. What they did right, what they did wrong with the entire industry, and the industry is learning together moving forward. So our job is to keep fostering that demand by really fanning that fire and being able to help them solve it.

Let me mention a point that sometimes the investors who concentrate on the telecom sector are not as familiar with the way the utilities work. But what makes a business case for utilities is that they make large capital investments. They go to their state regulators and they get permission to put that investment in the rate base and to earn a rate of return on it. And in the past, these large capital investments were centralized power-generating facilities, for example. Now that is no longer viable as a business model for these guys because of trying to -- carbon reduction. So when we propose to a utility, particularly to a major investor-owned utility, which have roughly 80% of the meters, that when we propose to them, their opportunity is to put both the payment on the leases and the infrastructure investment into the rate base and earn a guaranteed rate of return on it. That's what makes our business plan coincide very nicely with their business plan, all in the public interest of getting a more resilient, secure grid.

You mentioned the letter with Ameren. Why was that -- I think you said that, that's the first one you wanted to put up. What made that one special? And walk us through the steps that they've taken to vet you as a partner in the 900 spectrum.

Sure. And so why is Ameren first? Because they're a leader in the market. They're known. They're CEO, Warner Baxter is an innovator. They're in Illinois and Missouri. And they took an early lead in trying to understand the value of LTE. They had -- everyone comes at this each utility from a different place. They had some aging systems that needed to be replaced. And then as they were reviewing what the right replacement was for those individual application systems, they said, "Well, why aren't we doing this broader?" They spend a lot of time sharing information with Southern Company who has already deployed a private LTE network and learning from them. They put up a pilot initially, right? They put up a pilot where they tested 14 different use cases. Nokia was the lead vendor in doing so. We are actively involved in helping them build that out and test that and really learning about the value of LTE. LTE is just a pipe to them. It's a way of them getting the last mile connected to all these different pieces of infrastructure, as Morgan said, mostly fixed wireless infrastructure that traditionally, in the old networks that in these one-way communication networks, they couldn't see or talk to. We come from the telecom world like you do, where we're used to be able to see every element of our network, right? You sit in and knock, one particular device goes bad, you can see it remotely. The electric networks don't have that traditionally, so they want to get that ability. So they're going to put sensors throughout their network and have that level of visibility and control has been a key part. And Ameren, through their 2-state effort, both Illinois and Missouri, has been driving that forward considerably. There is also a state mandate that Ameren is having to deal with in Missouri where they're actually being required to put a level of control in connectivity. And because of the state regulators, the state PUC wants them to be able to have a level of reliability and that can't be done without the level of robust communications. And this is communications in places a lot of times that you can't get to unless you build your own network. We talked about the value of private but you put transmission lines often in places where there aren't people. You put substations in places where there aren't people. That means there's likely no carrier coverage in those places. So the ability to build your network where you want it and how you want it, is a big part of that as well. That prove it for Ameren.

Okay. I think Morgan, you mentioned more than 2 dozen companies in discussions right now. What does that pipeline look at, like is it all investor owned utilities? Or is there some sort of wider view there as well?

Yes, it's wider. It includes -- I mean publicly, it involves -- it includes UPS, which, of course, is not a utility at all. UPS has a trial going and others that we can't identify publicly, but it's predominantly utilities. And our focus is predominantly utilities and initially, it's predominantly the IOUs because the IOUs do have this access to large amounts of capital. They have the motivation to make capital investments to improve grid performance. And in a world in which solar and wind are taking more and more of a role, it's a challenge for utilities to find ways to rationalize their function, and this fits perfectly. So that's where our attention is focused. But I get asked sometimes, well, if the refineries, if all of them came to you and said, well, but we want Houston. Would they be out of luck as they're not a utility? And we say, heck, no. We're -- our shareholders want to deploy our spectrum. We have a nationwide spectrum position. We've held it for 5.5 years, looking for this opportunity. So we're definitely open for business. And one point I think, I should make because I think it's interesting, is when I first met Chairman Pai before he was the Chairman, he's just a Commissioner. He said, oh, I know you because I know Nextel. And he said, another thing about Nextel is it's just -- so I tell people it's so important to see when an entrepreneur gets access to risk capital, comes to the FCC and works productively, it just works out great. So naturally, I thought to myself, well then when he became chairman, I thought, well, this is perfect because we have somebody who looks at this whole process of risk capital and applying it through the rulemaking process. He has done it favorably. And so we're certainly glad that he did. This is a very satisfying outcome of a process that should work and it does work. We've had to make -- if you look at -- there's 250 filings on the record of this proceeding. A goodly number of which were ours. But if you work through the process, the torturous process that the FCC goes through to come to a decision, and they come to a good decision, it feels great. It feels great. We're completely open for business. We have a lot of confidence in LTE. We think the way LTE works for private LTE for business, for enterprise is a very compelling proposition, and we're all out for that. That's who we are. We're enterprise, private wireless.

That's great. And we're running out of time anyway, but anything you want to leave us with. I think that was a great way to wrap it up.

Maybe Rob has concluding remarks since I grab so much time there. Rob?

No, I think Morgan really summarized it well. We're obviously very satisfied with the outcome that it puts a perfect foundation in place for us to be able to move forward on the commercial efforts that we've been developing for years now. We're seeing the right level of strong interest and ownership by the utility industry specifically in their desire and need. You can see it all the comments made on the record. You can see it from the commercial efforts going on. And equally important, the vendor ecosystem that needs to be out there. This spectrum is a standardized 3GPP, LTE band, so equipment is out there. We've got great support from folks like Ericsson and Nokia and Motorola and Cisco and Sierra Wireless and others you'll see on the record. And so the complementary nature of this scarce asset of low-band spectrum to all of the other rising industry ties around private LTE on CBRS, we see as very strong, right? If you want to put a strong system in your plan, CBRS is great. But if you want to do a wide area, private LTE network, you need low band to make it cost efficient, and this spectrum is just the perfect band to be able to do that. We're excited to drive the utility industry forward and the adjacent sectors to be able to bring this to fruition.

Well, this is great. Congratulations again, and thanks for joining us. And to everybody online, thank you for joining us. This is the end of the conference. And if you have any questions, please e-mail me, and I'll be happy to pass things along. Have a great day. Have a great weekend, and stay safe out there. Thanks, guys.

Thanks, Phil.