Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Good morning, and welcome to day 3 of Morgan Stanley's 2021 TMT Conference. Glad you can join us today. I'm Simon Flannery. I cover telecom services and communications infrastructure. And from Anterix, we're delighted to welcome Rob Schwartz, the CEO; and Tim Gray, the CFO. Welcome, gentlemen.

Thanks, Simon. Great to be here.

Yes. Thanks for joining us. So before we get started, please note, for important disclosures, see Morgan Stanley's research disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So it's been a busy few months for Anterix and for kind of spectrum opportunities broadly with the C-band auction setting new records. So Rob, I wonder if you could just start -- for those who are less familiar with the Anterix story, talk a little bit about the genesis of the company and the objectives of the company. And then we'll get into some of the recent activity.

Absolutely. And again, thanks, Simon, for having us here this morning. So Anterix was founded by the founders of Nextel really with the idea of taking what was an underutilized specific band of spectrum, the 900 megahertz band, that we acquired from Sprint going back a number of years ago. And the thing is, as you referenced, that we really have shown our achievements over this past year. It's really been a breakout year for us, in which we've -- we went to the FCC to seek a report and order to allow us to use this spectrum for broadband usage. And we received that last May, finalized in October as it went on the federal register. We then talked about and have now executed on delivering that spectrum to enable private LTE utilization. Focused -- I would say the bull's eye is on the utility segment. And we've announced a couple of very important transactions over the past few months with a couple of key utilities, and we've also demonstrated the value of that spectrum. As you said, there have been a lot of recent things between the C-band spectrum auction, other spectrum transactions. But what we've shown is the value of this band, and really the value for private LTE utilization by industry is supported by these kind of fair market values that we've seen in these past 2 transactions. So with all of those things combined, it's been a great year for us, a breakout year over the past several months to be able to demonstrate our business model as we come to market.

That's great. And perhaps for people who are less familiar with some of the opportunities here, talk about what you see for private LTE networks and why this is the right solution for your customers as opposed to, say, doing an AT&T-FirstNet type solution.

Sure. So what Anterix owns on our balance sheet, we have a nationwide spectrum footprint, 900 megahertz. 900 megahertz is what we like to call the beachfront property of spectrum. Anything under 1 gigahertz is what's typically defined as low band, and low band is what allows you to have cost-effective coverage deployment. Just about every carrier around the globe started with low band. So when you're covering rural areas, you're covering areas with less population. And with our target customer, where we're going towards utilities, utilities cover state-wide and multi-state territories often in places where there aren't even people, where transmission lines go, where substations are built. The cost-effective aspect of low band is an important part of the model. So what's emerged is this private LTE use case, which is really industrial users who want to build their own private networks. And there's been more discussion about it as the CBRS auction has occurred over the past year. And that's a mid-band spectrum that's, I would say, more WiFi-like, kind of super WiFi that allows you to cover campuses and buildings, and it's great for that. But just like you use WiFi in your enterprise or in your home, when you roam outside, you use cellular because of the broad area of coverage of that low band and the kind of capacity. That's the model that we're working with, so complementary, very much so, to that CBRS band and WiFi. We're seeing a growing demand from industry. And we're focused primarily on utilities because utilities have a unique desire to run their own private communications. They've done so for decades, whether it's LMR, 2-way radio systems, SCADA systems, their automatic metering systems, AMI systems. One of our most recent customer opportunities we've talked about, our partner is Ameren. Ameren, we've been working with for a while. And I bring them up because in their use case, they really have leveraged 900 megahertz spectrum to cover very wide areas. They're in Missouri and Illinois, and they use that low-band spectrum to solve many use cases. And as Ameren said publicly, they intend to actually migrate 20 legacy systems onto a single private LTE system. So with -- the value of going to a standardized technology in LTE, LTE is the technology of the phones that are in all of our pockets and what every global carrier uses now. You get to benefit from the economies of scale of global development, carrier research and development. And so the cost-effectiveness for them, rather than using what often were legacy one-off technologies to solve single-use cases, now those are consolidating onto an LTE standard network. And private LTE, because of the standardization, has become cost-effective and much easier to deploy than it was decades ago.

Great. And I think one of the questions that we get quite a lot is: How do the PUCs play into all of this? And how does the process of getting -- compensation getting included in the rate base? So it sounds like every state is a little bit different, but any color around that process would be great.

Yes, sure. So with utilities as our target, the majority of the country is covered by investor-owned utilities, public companies that operate electric utilities. And those utilities are regulated state by state by those PUCs, the public service commissions, that approve their expenditures. And the model that electric utilities have is when they invest capital and it gets approved in a rate case, they then get a fixed rate of return on that investment based on the approval of those rate cases. So the capitalization of their costs is a pretty critical part of their business model. So it's another reason why they often are building their own communications networks rather than relying on commercial carriers. But it's not just the financial aspect. It's also the operational control. There's a long history of utilities in times of crisis that have had to use their own systems because, as we know when -- whether it's Hurricane Sandy or September 11 or wildfires in California, in these peak times of usage of networks, there has been a history of utilities not being prioritized as users, and that's caused challenges. And so every utility, just about as we visit them and talk to them and said, "No, no, we need to operate our own very resilient, reliable and cybersecure communication network for our own usage so that we can build it where we want it, how we want it and make sure it's available when we need it."

Great. And then just following up on the use cases. I think you mentioned in the San Diego Gas & Electric case, they're looking at falling conductors. Maybe you can just expand on the opportunities there.

Yes. So I've made a quick reference -- in the past couple of months, December and into this year, we've signed 2 landmark agreements, our first 2 big broadband customer agreements: first, with Ameren, a $48 million transaction for a 30-year prepaid lease. And the duration of that's really important for us to show and demonstrate utilities, when they put infrastructure in place, they have very, very long use case. They look at their total cost of ownership over that kind of period of time. And so we're excited about having a partnership in place for that duration. And Ameren, as an example -- I'll talk about San Diego in a minute, but Ameren is focused on a number of things. They have a grid modernization plan, which is something we're seeing happening with utilities across the country. Unfortunately, we're seeing all these kind of incidents that are happening throughout the nation, whether they're weather-related or manmade issues, but with the continued changing of the climate conditions combined with the changing of the demand side on utilities, right? So what we call grid modernization is really the integration of all the new distributed energy or renewable energy sources. So if you're putting consumer solar and industrial wind capabilities and battery storage and EV charging, that changes what was a traditional one-way network, where you had a big generation plant and that was distributed out to users like you and me, Simon, instead to, say, now there's generation happening throughout that network and you need a 2-way communication system in order to support that kind of intermittent sources of power, right? Solar only works when the sun is shining. Wind only works when the wind is blowing. And you have to be able to real time know what's being generated and what's being used, and the communications requirements of that are substantial and a substantial enhancement of where they are. So for Ameren's case, there's a lot of command and control aspects of what they want to do as they modernize their grid. One of the things they're also doing is increasing the reliability of that network by putting in what are called IntelliRupters, which are really reclosers. If the power goes out in your neighborhood because there's some -- a truck runs into a pole and the wires go out, they can reroute power from other directions. But that's typically historically a manual process. A truck rolls, they crank open a recloser on one side, crank down a recloser on the other. The automation capability is there to be able to have that automated, not even -- and even take the human element out of it, happening -- so it happens in milliseconds. But in order to do so, you need to have a very resilient, reliable and low-latency communications system that can control that. So that's one of the use cases that Ameren is doing. To transition, to your question, to San Diego Gas & Electric, which we're very excited about. They've talked a lot about the primary use case for their system. I say primary because they also have over a dozen different use cases for the -- for private LTE. The beauty of LTE, no different than the phone in your pocket, where you keep adding applications and capabilities, right? We were first used to make phone calls and texts. But now we're handling taxis and ordering food and balancing our budgets and doing -- having video chats on our phone. It's the same thing with these LTE networks. They're being rationalized on current use cases, but it's the future of what they can do that's really exciting for the utilities. In San Diego's case, the primary use case for them is wildfire mitigation. They have a technology that they've developed over really the past decade called falling line conductor. And what that says is that -- imagine what happened, unfortunately, in the PG&E territory. The line breaks. Whether it's because of a fault to the system or a tree falls in that line, they estimate it takes about 1.4 seconds for that line to fall and hit the ground. So you have milliseconds of decision time. But what they've done is they put sensors on poles around that wire. And if they sense that the current is no longer flowing through that, you can depower that line and literally prevent the power from being on that line before it hits the ground and in essence, try and prevent wildfires from doing so. And so you can imagine the value creation, right? We are talking about the cost/benefit of these networks. The prevention of one wildfire can justify the cost of an entire network, but the benefits are considerably greater than just that particular use case. So SDG&E is leading the charge on the deployment of that particular technology, as they've talked a lot about publicly. And we see the opportunity of that not just throughout the State of California, getting into the rest of the wildfire risk region, but the same technology also applies to areas where there's tornadoes or hurricanes or even just foliage. And one of the biggest challenges for electric lines is trees that grow over line and can potentially break it. So we see the application of that particular use case throughout the nation, but one of many use cases. We're seeing the implementation of management of distributed energy sources, renewable energy sources and all kinds of other ways which LTE can be leveraged, including mobile workforce, mobility, like we're seeing with LTE as it's making the transition from being a consumer service like the FirstNet transition to being mission-critical push-to-talk communications. We're seeing the same transition happening within utilities as they have fleets of vehicles that are out in harm's way, literally, as they're going to restore service so that our electricity can continue to work. The ability to bring all of that onto a single reliable and cybersecure private LTE system is considerable.

Great. Great overview. And it sounds like there's a lot of momentum building here. Tim, if we could turn to you. Perhaps help us understand the financial model, and I know you're going to have an Analyst Day in a couple of months here. But I think there was initially a concept of monthly or annual lease payments. And you mentioned the prepaid lease, Rob, just a minute ago here. But help us understand how you take your spectrum holdings and monetize them through this process and over the coming years.

Sure. So Simon, as we've talked, our base business model is built on long-term leases. The Ameren transaction is a 30-year lease for roughly $48 million. And according to GAAP, that's going to get -- that's a straight line from a revenue perspective over that 30-year term. However, San Diego is different. It's a sale transaction. And so we anticipate recognizing a capital gain on that, and that will flow through our gain below the line when we deliver the spectrum. The basis for that gain will be derived from taking the basis we have in the spectrum, which is relatively close to [ previous performance in that territory ], but then adding in the cost related to actually clearing the spectrum in that territory. And our estimates on that, we haven't put out publicly because we're still in the process of clearing that territory. [ We believe that, that can continue ] in the next few years, yes. But we anticipate the vast majority of our transactions being these long-term leases, where we're recognizing revenue over the length of the term. So let me make a couple of points. We can't be anything but pleased with the transactions that we've done so far for a couple of reasons that I want to reiterate on. I think there was some doubt over time going into us -- [ doubt coming from ] customers about our ability to deliver from a market value perspective, and with these transactions, we have. We had talked about, even going back to the Investor Day that we did a few years ago, we saw fair market value for spectrum in between 600 [Technical Difficulty]. And both of these transactions come kind of right in between the middle of those 2 goalposts. So we could initially anticipate getting that kind of fair market value moving forward for the transactions that we could continue to do. As far as upfront payments or prepaid leases go, we're receiving cash significantly faster for a 20-year sort of term. And it's a trade-off we'll make on -- these upfront payments are going to fund the upcoming acceleration of our clearing costs as we sign customers and ensure that we don't need to come back to the markets for funding. So -- and I look forward to discussing the potential impacts of these prepaids as it relates to our [ financials ] , balance sheet and income statement impacts in our upcoming Investor Day that we'll have in Q1 of our upcoming fiscal year. Hopefully, we'll be announcing that date very soon. And then I'll just reiterate, finally on that, that the prepaid trend is super positive.

Okay. Great. You talked about the clearing and the retuning, and I think it's a little bit of a new concept for some folks. And you've got things like complex systems that were a bit big feature of the report and order. So perhaps just take us through how we get comfortable that you're going to be able to clear on time, on budget to kind of satisfy the contracts you have already and that you will have in the future.

Sure. So let me step back and talk a little bit about the basics of what the clearing process is. The process involves falling, so retuning incumbents out of the broadband allocation, so taking their equipment and setting up frequencies that are outside of where the FCC is setup [ upfront ]. There'll be a number of acquisitions that we'll do of channels within the broadband allocation as well as a part of the process [ particularly ]. And finally, what we put in that bucket are what's called, according to FCC, anti-windfall payments, which are payments to the FCC where their spectrum is necessary to achieve the number of channels required to achieve broadband license. So far, we haven't had any roadblocks in any of the process that we've had. We've made significant progress. We feel good about being able to deliver on time for both the Ameren and San Diego territories because we've been doing this process in advance of signing customers. And so we focused on near-term customer opportunities, of which we thought Ameren and San Diego would be there. So we've done several transactions in their territories. And we've also picked up additional channels [ during the retuning ] process or acquisitions across the country where the price has been right or we feel like we've got other customer [ opportunities ]. The pricing that we've been paying for the transactions is well within what we thought we'd be spending. We talked about our overall guidance a year ago, where we came out with $130 million to $160 million. We spent something like roughly $50 million between actual spend and commitments to date and still believe that our overall spend guidance to complete the vast majority of the process is still valid. Now that we've got 2 signed customers, we expect a significant [ increase ] in that spending. And I'll talk more specifically about the near-term guidance that [Technical Difficulty]. But when I talk about [Technical Difficulty], I'm expecting -- in the last year. I'm expecting a very significant [ increase], probably more than double on the spend side from that perspective as we move forward. And again, we firmly believe that we're on track to deliver the cleared spectrum for both Ameren and San Diego Gas & Electric for our contract deliverables.

Rob, maybe we can talk about the pipeline here. And the markets are unforgiving. It's, "What have you done for us lately?" So great to see the 2 deals. What's next? You did guide to a couple more deals in the coming fiscal year. But talk a little bit about what you see in the pipeline and the momentum. You've got a number of pilot programs going on. And presumably, these recent deals have helped demonstrate for others in the utility industry the use cases and maybe give them the confidence to investigate more deeply.

Yes. I think that's spot on, Simon. It's really -- it's demonstrated not just how to transact, which is important. Utilities uniquely, as an industry, they work collectively. And so they talk to each other, they support each other. And so as -- they see the demonstration of that model. But it also sets the benchmark of valuation, which is important, too. We spend a lot of our initial time with some of these customers really just educating them about spectrum, about spectrum values. What we do for a living is new to them. They're not used to paying for spectrum. So getting through that learning curve is very valuable. And so when you just take the implied value of those 2 transactions and you think about the value of our nationwide spectrum, it really implies that we have a multibillion-dollar asset potential on our balance sheet as we go through that monetization. And that kind of gets into the -- what's the market opportunity for us. Today, we have a very robust pipeline. We've talked about over 40 utilities within our pipeline that continue to mature. And absolutely, these first couple of transactions are catalysts to both existing utilities that are in that but also inbound calls we're getting from other parties that are saying, "Well, we're really interested in this. We want to understand more. How do we do what they want to do -- what's being done by these other utilities?" And that happens in different ways. So Ameren, as an example, went through a -- as you've talked about, an experimental license process, where the FCC granted experimental license. We now have over 10 of those that have been granted. We've got a few more in the pipeline, and that's a relatively easy way for a utility to do an initial deployment and be able to kick the tires. Utilities like to do that. At least a lot of utilities like to be able to literally hang things on poles, understand how they work. And it's not about private LTE. It's about integrating them into their existing network capabilities, so replacing an existing commercial service or another line with private LTE to test how that works. And those pilots have all gone great. As we know -- there's no question whether LTE works as a technology. There's billions of users on it. Our band, the 900 megahertz band is band 8 globally, and there's millions of subscribers on carriers in Europe and in Asia that use that particular band. And so there's thousands of devices available on that band as well. And so it's well battle tested, but it's really about the integration of it into their networks. So we see that as one point of entry. Another is we've got a lot of different collective programs going on. One is with the National Renewable Energy Lab, where we have over 7 different utilities that are involved in what is really a continued effort. First phase is completed. There's another one going on now to really look at the integration of renewable energy resources into private LTE and being able to do all the right level of controls and data analysis of that. And so that's another way that a number of utilities have gotten involved. We have other utilities like SDG&E that are going straight to contract, right? So SDG&E didn't have an experimental license. A lot of them are learning from other utilities, right? So they go out and visit Southern Company and Ameren and see these deployments or participating in NREL or are confident that private LTE works because they can go see LTE demonstrated in laboratories or field tests of Nokia or Ericsson or Motorola or other global vendors that provide LTE services. So there's a lot of different points of entry. But for us, we're seeing what we used to talk about as momentum, importantly, now growing into what we see as an industry movement. And that's what we like to see because there's a collective value in what's happening here, where individual utilities are building their, what I call, islands of coverage in their particular areas. They're big utilities. These are small wireless footprints relative to carriers. But as they start to create the economies of scale collectively and whether that's in design, R&D, planning and even some of the integrated services, right, the cyber capabilities that work across -- the cloud computing capabilities, we're working with a number of the cloud vendors in enhancing the services of reducing the friction to deploy, enhancing the capabilities. There's a lot of scale capabilities that as these utilities are working together, it's this network effect, right? So the more of them that move forward, the more value that's created between them. And utilities have a long history of what they call mutual aid, right? If a storm goes through one particular utility's territory, the other utilities roll their trucks and go in and help them. So they're used to working together. So this isn't a new idea. It's just a new instantiation of that idea as we get into private LTE and broadband communications.

Great. And I think you've said before that in some cases, you may get 1 or 2 states within a larger utility so that even within the existing utility, there might be the ability to expand that initial deal to other subsidiaries. Is that something you see?

Absolutely. Ameren, as an example, in Illinois and Missouri, those were 2 different agreements that we have been to sign simultaneously. But there's also going to be utilities that have multiple states that could be a sequencing of events that will announce operating company by operating company. You asked earlier about the PUCs. They have to get state-by-state regulatory approval, and those won't always come at the same time. And so -- and some states have higher priorities because of immediate use cases, whether it's wildfires or grid mod or otherwise, within a bigger operating company. So you will see those individual states sometimes be sequenced. But as an overall trend, we're seeing -- and SDG&E is a good example, right? They're part of a larger holding company under Sempra, which holds other utilities as well. And so we see the opportunity for that to continue to expand as well and also continue to expand throughout California. Another important trend that's happening with CBRS, as we've talked about, it's the first time that we saw utility step forward and actually buy spectrum in that auction, where there was a dozen different utilities that put real money to work there; over, I think, $175 million that they spent just on the CBRS band. And so our view is that, that is a highly complementary band, as we talked about earlier. And so it's really an early indication also about the commitment to private LTE of utilities.

Sure. Great. Now we've talked a lot about LTE, but 5G is a big theme at this conference. How does 5G play into the utility plans? And how does Anterix stand?

Yes. So the 900 megahertz band is part of the 3GPP standard and will evolve into 5G as well. And so initially, the FCC has granted 6 megahertz of spectrum, which there are efforts within 3GPP to have that defined and evolve into a 5G standard. Eventually, we think there's an opportunity to -- whether it's through spectrum consolidation in other bands, in conjunction with CBRS or other bands, we think there's opportunity for -- we used to call that in the carrier days a rich man's problem, right? If you've used up all your capacity, it means you're fully getting the value of that particular spectrum and you can justify either purchasing or acquiring other spectrum as well. So we see that 900 megahertz will be part of the 5G standard as it evolves. Today, the 4G LTE, what Southern Company has deployed solves all of the current use cases and requirements. Utilities are not known to be bleeding-edge technology users. And so as that becomes the standard, I'm certain that, that will evolve to their needs as well.

Great. Well, we're coming up on time here, but you sort of hinted at this. Your business model, the first 2 deals anyway at least, involve significant upfront payments. And that's going to give you, rather than having cash flow over a long period of time, potentially, if you get a dozen more of this, in a surplus cash position. So how are you thinking about the options for that a couple of years down the road, if that's indeed where we get to?

Yes. I love that the question is quickly inverted from -- Simon, from how are we going to fund our business model to what are we going to do with our excess cash. It's obviously a good problem to have. The positive trend for us, and Tim talked about it, of getting prepaid, as in -- we would make that trade all day long. Do you want to wait 30 years for the payments? We're -- when we have these discussions with utilities, it's typically talking about, at their discount rates, which obviously are very low cost of capital, how do we create an NPV payment upfront. As we start to face these issues -- and with Ameren and SDG&E, both, it's sort of through 2023 that we're going to be paid that money. SDG&E, we have $20 million already paid. The rest comes through as we deliver the spectrum. Ameren, we expect to see about half of that coming in this year and the rest also through 2023. So it's not an immediate problem for us to have. And we expect to really communicate at our Investor Day a little more about our options, right? Obviously, we have all of the capabilities of doing things from buying back stock, dividends, other accretive investments for our business. Today, we're focused on really just continuing to close customers and continuing to create that value for shareholders.

Great. Well, gentlemen, thanks so much for your time today. Really enjoyed getting the update on the progress you've made. Thank you.

Thank you, Simon. Appreciate it.

Thank you.