Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Anterix Investor Update Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Natasha Vecchiarelli, Director of Investor Relations and Corporate Communications. Ma'am, the floor is yours.

Thank you. Good morning, everyone, and welcome to our investor call. Joining me today are Morgan O'Brien, our Executive Chairman; Rob Schwartz, our President and CEO; Ryan Gerbrandt, our COO; and Tim Gray, our CFO. Before I turn the call over to Rob, I'll remind you that any statements we make during this call that are not based on historical facts constitute forward-looking statements, and our actual results could differ materially from those implied. A discussion of the factors that may affect our future results is contained in our SEC filings, which are available on the Investor Relations page of our website. And as always, a replay and transcript of this call will also be made available on our website. Following our prepared remarks, we'll open the call to take questions. With that, I'll turn it over to Anterix' President and CEO, Rob Schwartz.

Thanks, Natasha. Good morning, everyone, and thanks for joining this call in short notice, especially after our quarterly investor call just last week. Today represents another big day for Anterix and our shareholders. As you may have seen this morning, we disclosed the signing of a $50 million license purchase agreement with Sempra Energy's San Diego Gas & Electric. Under this agreement, Anterix has agreed to clear incumbents from the 900 megahertz broadband allocation in the SDG&E service territory, secure broadband licenses from the FCC and assign those broadband licenses to SDG&E. The agreement will support SDG&E's deployment of a private LTE network for its California service territory in San Diego County, Imperial County and portions of Orange County, serving approximately 3.6 million people. For those of you not familiar with San Diego Gas & Electric, founded in the 1800s, they serve the eighth largest city in the country and are well-known as a technology innovator, and their leadership has a stellar reputation across the industry. This broadband agreement is Anterix' second, following the recently announced Ameren agreement and is now -- and now further demonstrates the growing demand for low-band private LTE networks by utilities to solve mission-critical use cases, and importantly, we believe the beginning of the collective movement towards a nationwide 900 megahertz private LTE ecosystem. While we remain under NDA with SDG&E, and therefore, cannot speak on their behalf regarding their private LTE plans. Recently, Omar Zevallos, a manager of network technologies at SDG&E, was publicly quoted as saying the following, "A key driver for our private LTE system is to provide wireless communications to enable our falling conductor protection system. This system relies on low latency communications to detect the power line that has failed and deenergize it before it comes in contact with the ground. Private LTE meets our technical and operational requirements to serve this critical system." We at Anterix recognize the tremendous benefits of this falling conductor technology and are thrilled as part of the agreement between Anterix and SDG&E to be collaborating on an accelerated involving this life-saving technology. Anterix intends to help other utilities in California and throughout the western states that have experienced increasingly intense wildfire seasons, incorporate the numerous benefits of LTE's advanced technology into their networks. We also see an opportunity to apply this technology to address a range of possible disaster scenarios well beyond the West Coast. And before turning the floor over to Tim to discuss the financial aspects, I want to emphasize several unique components of this agreement. And please note that we've also provided a fact sheet with the key agreement details that's available on our Investor Relations page for website. So first, the initial $20 million of proceeds from this purchase agreement will be paid next week, and the remaining $30 million is scheduled to be paid through 2023 as the spectrum is cleared and delivered by county. Second, upon completion of the assignment of the broadband licenses to SDG&E, Anterix will have addressed one of the most complicated of the markets contained -- containing FCC-deemed complex systems. We are finding in this case that utilities with complex systems are seeing the same benefits to broadband as utilities throughout the country. Accordingly, these complex system utilities should be considered as part of our 900 megahertz addressable market. As this transaction shows, there are creative, collaborative and accretive approaches to transacting with these entities that have significant 900 megahertz spectrum positions in their markets and are leaders within the utility community. Third, this is our first agreement with utility that has previously purchased CBRS spectrum at auction. This demonstrates that the 3.5 gigahertz mid-band CBRS spectrum is complementary, as we said, to our foundational low-band 900 megahertz spectrum with 900 megahertz supporting cost-effective, wide area coverage and CBRS providing additional spot capacity. Fourth, the sequence of this transaction signifies an experimental license application of the FCC is not always a precondition to consummating the spectrum transaction. And lastly, a very important part of this transaction to me is that Anterix and SDG&E are agreeing to collaborate on a range of efforts designed to drive adoption of 900 megahertz private LTE across the utility sector. This will include support of a technology accelerator with focus on grid modernization, innovation and wildfire mitigation as well as participation in an industry-wide network of 900 megahertz private LTE networks, that will create the benefit of nationwide scale and scope. At Anterix, we are energized about the second agreement, and the developing trend line it represents for the industry movement towards 900 megahertz private LTE. And we're proud to have achieved our target of 2 customers for this fiscal year with almost $100 million of total contracted proceeds. And while our sales funnel continues to develop, given how close we are to fiscal year-end, we think it's more likely than not that we won't see another transaction this fiscal year. But with our current strong pipeline, we are targeting in our upcoming fiscal year the signing of additional 2 to 3 customer agreements in fiscal year 2020. And while it's difficult to be precise on the timing, based on our pipeline and the momentum it's building, we see future transaction opportunities, each ranging from tens of millions to hundreds of millions of dollars. And with that, I'll turn it over to Tim.

Thanks, Rob, and good morning, everyone. We have 2 contracts now in place, both of which are providing upfront proceeds. I want to point out some important outcomes from these transactions. First, this transaction further highlights our ability to convert our spectrum asset into near-term cash flow. Our balance sheet continues to strengthen as a result with approximately $108 million in cash as of December 31, 2020, and an additional $98 million of contracted proceeds from these initial 2 contracts, of which $40 million is expected to be paid in 2021. Second, with the prepaid lease structure and other upfront payments becoming more prevalent in our pipeline discussions, a positive impact on our cash flow is expected to continue. We are in the process of reviewing our business model because of this positive potential change. I want to be clear that we see upfront payments to be beneficial to both Anterix and our shareholders as reflected in the 2 value-accretive deals we have made so far. And as announced on our call last week, we intend to discuss possible updates to our business model at a virtual Investor Day, which we are planning for in early Q1 of our upcoming fiscal year, which starts April 1, 2021. Third, because of the trend in upfront payments, we remain confident that our business, as currently forecasted, is fully funded by our current cash on hand and these announced transactions. With the growing possibility of building our cash balance sooner than initially expected, we are proactively reviewing our strategic alternatives to maximizing shareholder value, including whether to return value to shareholders in the form of share buybacks or taking some other appropriate actions. Moving on to the accounting for the SDG&E purchase agreement. We expect to recognize a gain by county in the 6 megahertz of broadband spectrum has been fully delivered to SDG&E in each of the 3 counties in the agreement. The amount of the gain will be the $50 million price less our basis in the spectrum and our spectrum clearing costs. With payments expected to be made by SDG&E prior to full delivery of the 6 megahertz of broadband spectrum, any payments received in advance will go on our balance sheet as a contingent liability. Finally, on the spectrum clearing front, our overall clearing cost to date continue to run in line with those of our total clearing cost estimates of $130 million to $160 million, which would include returning, acquisitions and FCC anti-windfall payments. We anticipate that most of this spending will take place over the next 4 years. We have spent roughly $11 million year-to-date through our third fiscal quarter and have another $3 million committed on spectrum clearing contracts that have not yet closed. With 2 customer contracts announced and the positive momentum in our pipeline, we would expect a significant acceleration in our clearing spend as we move into fiscal 2022. Also, keep in mind that these early clearing efforts for both Ameren and SDG&E will ultimately benefit counties beyond their footprint. We look forward to sharing more on both spectrum clearing and our forward financial guidance for fiscal year '22 at our virtual Investor Day. I want to conclude by echoing Rob. This is an exciting day for Anterix and our shareholders, and I am very happy with the outcome of both of our announced deals and the continued strengthening of our balance sheet. That concludes our prepared remarks. I will now turn it back over to the operator for questions.

[Operator Instructions] Your first question is coming from Walter Piecyk.

The valuation on this thing, $2.31 or $2.34, whatever it is per megahertz pop, obviously, is substantially higher than the first transaction. Can you kind of walk us through how that dialogue occurred with the utility company in this case? And how you would expect those types of conversations to occur in the future?

Absolutely. The interesting thing about the conversation with utilities, and we, as wireless and industry folks, know a lot about all of the historical transactions; FCC auctions, private market transactions for spectrum. A good part of our initial conversations with utilities is focused on educating them about spectrum and the value of spectrum because they don't have that history, they don't have that understanding. And so the good news is that the historical watermarks, and we always talk about the bookends of the 600 megahertz auction and the AWS-3 auction has been kind of the 2 ends, and obviously, now with a very fruitful C-band auction for the FCC. We really see those as being that marks the range of fair market value. And I think you'll see this transaction again comes in pretty much in the midpoint of that fair market value. And so there's obviously negotiations and lengthy negotiations as the sales cycles are long here. But because we have such good support from comparables of FCC auctions and other transactions that's usually what we're relying on for the conversations. Often, the utilities are relying on third parties to help them understand valuation and then use all kinds of folks that we've seen supporting auctions previously. And so there's expertise out there that usually bring in. But the net effect, as you're asking, Walt, the value you're seeing here is really representative of the very significant value of the San Diego market in prior auctions. And so if you look at what we closed on Ameren, their pricing versus this pricing, it really represents the kind of the midpoint roughly between those 2 bookends previously. And we think we'll continue to see things in that fair market value range.

Got it. And then my second question, Rob, I think you had mentioned something about as part of this transaction, I forget the term you used, but it sounded like a license transfer, meaning that it sounded like this particular utility company was going to take ownership. And I thought with Ameren, it was just like kind of a renewable lease over and over. So is there a structural difference between this deal and the Ameren deal?

Yes. Good question, Walt. There absolutely is. This is a licensed purchase agreement. So we are -- at the end of this transaction, they will be the licensee, San Diego Gas & Electric will be the licensee. As we've talked about before, with complex systems, and we've disclosed the list of those in our FCC summary of the FCC report in order. For the handful of those, we see that we'll have to take more creative approaches to how we transact because realize, in those cases, it's usually that the party is a significant licensee in the 900 megahertz band. So really, we're helping them continue to be a 900 megahertz licensee. And so this transaction is a purchase, is representative of the way we'll approach some of the complex system transactions. But generally, for our business, for the remaining markets where there aren't complex systems, we see the long-term leasing as being a primary business model.

And just a last question on that, which is from both the purchasers from the utility company's standpoint as well as yours, are there different considerations in terms of the taxability of that? Or how -- and in the case of the utility, how they're able to factor that into their rates, whether it's a purchase or a lease or a long-term lease?

Yes. So maybe I'll address the first part and maybe Tim can talk about the taxability. But the important part for utilities, as you know, is to get the cost of their investment into the rate base portion of the rate case. And what that means is that they're able to get their regulated rate of return on that investment. And so with Ameren, we talked about their desire to prepay that lease, and that was a way that they were more comfortable being able to get into that rate base as this spectrum purchase agreement, it has the same clarity SDG&E that they can get it in their rate base. And so we'll continue to be creative on structures to support the state-by-state needs and realize that, that is a -- is interpretation of a rule that's different state by state. And so each time we go into a new market there's going to be different issues that we're going to try and solve with them. Tim, do you want to talk about the tax aspect?

Yes. So with the significant NOLs that we have built up, neither of these 2 transactions with Ameren or SDG&E with a significant upfront payments are going to cause us to become a federal taxpayer. However, if prepaid continues to be the preferred path forward, that could change and we could eat through our NOLs, and we'll talk more in detail about that when we get to our virtual Investor Day.

But Tim, this is a sale as opposed to a lease, so within a sale you have to use NOLs as opposed to a lease? Like if you just developed a bunch of leases, couldn't you drop that into MLP, and then avoid taxes that way?

Well, with -- the issue becomes especially around Ameren and the prepaid that you've got there that, that from a GAAP perspective and a tax accounting perspective there's difference, and you have to recognize the tax revenue much faster. So you could eat into the NOLs from that perspective. So we continue to look at that and work on that and talk to some outside experts about the best way to handle that going forward. But that's how we're looking at it right now.

Walt, I want to add, too, just regardless -- irregardless of the form of the transaction, what's really important in this SDG&E transaction, I think I said it in my comments, is that we have their commitment, and we will be collaborating together on driving the industry forward in a collective fashion. So even though it's a purchase agreement, they're committed through those -- through that part of the agreement to really help us drive through this technology accelerator through the collaboration on an industry-wide network and the work they're going to help us within California driving forward on both on the clearing. And so there's a lot of areas where they will continue to be part of this network of networks and that's really important.

Your next question is coming from Simon Flannery.

Morgan Stanley. On the county clearing, could you just help us think about, is this likely to be 1 every 6 months? Is this likely to be all kind of a bullet in 2023? How does that work? And then the -- presumably, is it -- are there different prices for the various counties? So are we going to see different recognitions over that time? And then just -- if you could just follow-up on reviewing the business model. I understand this is -- you're not going to be getting this month these annual payments going forward. Is that what you're referring to? Or is this about using the cash in terms of investing in other things? What's the kind of the thoughts there behind that comment?

Sure. Why don't I take the first question, Tim, maybe you want to follow-up on the second. So on the counties, as I mentioned, right, there are 3 counties that they're covering San Diego, Imperial and Orange County -- part of Orange County. We will be delivering them in that sequence. And while we haven't kind of put out the specifics about it, you should assume that it's fairly front-end loaded. Obviously, we get the $20 million upfront and the $30 million as it's spread through 2023. I think we'll see a good portion of that earlier on as we do clear and deliver. But the specifics, obviously, are based on our ability to clear and the timing of when that happens, which is work that's ahead of us.

And how are the -- is the pops fairly evenly distributed or...

Well, if you look at historical auction prices by those counties, clearly, the majority of the value is in San Diego County. So if you just base it on a comparable basis, which you can -- it's fair to assume that's how we're basing our prices. You'll see that a lot of the value is specifically in San Diego.

Simon, so on the business model question that you were asking, so there's a couple of different things we are looking at. One is, if we get -- prepaid becomes the preponderance of the deals that we're dealing with. What does that mean from both a revenue perspective when you look at GAAP as well as what does that mean from a buildup of cash and what we would do with that cash, and also looking at -- as I was talking about earlier on Walt's question, what that would mean from a tax perspective. And so we want to be able to walk through as we finish reviewing that with investors what the potential is -- impacts to our business from those couple of points.

And what is your current NOL balance?

Tim, are you still there?

Yes, I am. I don't have it on top of my head. I'll look it up, Simon, but it's over -- it's well over $100 million.

Your next question is coming from Phil Cusick.

Phil Cusick from JPMorgan. I wonder, first, if you can explain -- just remind us some of the history of San Diego and why that's a complex system? And then maybe you can get into the cost to clear that you expect, including acquiring licenses from the FCC and windfall payments?

So I'll talk about the first one. So complex systems, as you know, Phil, and we have explained well -- it was explained well in the reported order, but also in our summary memo about the reporting order, our systems where there's at least 25 sites in a kind of a connected operating system. And so San Diego Gas' parent, Sempra, also San Diego Gas and Electric has the parent company of Sempra. Sempra also owns San Diego Gas, and they have a complex system within their ownership. And so that's the complexity of -- in those situations, there's not a mandatory retuning element. Instead, it's voluntary. And so we need to reach agreement with those parties directly. And in essence, they have a blocking position unless we reach an agreement. And so really what this importantly shows is that the compelling need for the spectrum. It really overrides any of the challenges that we see of them being a complex system. And so that -- those systems will need to get retuned to continue to operate either into the other parts of the 900 megahertz band that they're remaining for narrowband or into other bands as well, which are available.

So forgive me if I should know this, but how much spectrum did San Diego Power have? And how much are you giving to them? I think Walt did the same math I did at $2.30 pop. Is that the right number? Are you going to be handing them 6 megahertz or is it a smaller number?

No, they are not surrendering their spectrum. Their system is going to be retuned, and it'll be retuned into...

No, I know, but are you handing them a full 6 megahertz? Or do they have spectrum already?