Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Hi. My name is Phil Cusick. I follow the comm services and infrastructure space here at JPMorgan. Thanks for joining us. I want to welcome Rob Schwartz, CEO of Anterix. Rob, thanks for joining us.

Thanks for having us, Phil.

Great. I want to highlight that if anybody wants to ask a question, you can hit the Ask a Question button in the system, and I'll see that pop up. I can ask it for you. And otherwise, I'll go through mine.

Rob, it's been just over a year since the FCC adopted your 900 megahertz report and order. How has the company and business case evolved since then? And is this where you thought you'd be a year in?

Sure. And thanks, again, Phil and JPMorgan, for having us. We're excited to be able to give you an update today. It's kind of an important timing for us. We're just 3 weeks ahead of our Investor Day on June 16, so I'm excited to give you some previews on a couple of key elements. As far as how we're doing as a business, I couldn't be any more excited kind of where we are from a positioning standpoint. As you mentioned, we received our FCC report and order middle of last year. It was actually a monumental event this week as the application window opens at the FCC. We'll be applying for our first broadband licenses for our initial customer. As you know, since the FCC report and order, the rule-making, we've announced 2 customers in December. We announced Ameren with a $48 million long-term lease transaction. And then in February, we announced San Diego Gas & Electric for our second customer, also about a $50 million deal. So combined, we've got $100 million. It means -- it's important to us because that's actually kind of the basis originally when we purchased this nationwide spectrum that we hold from Sprint, that we've been seasoning through this FCC process going through the development. And for us, what we really -- we've started telling the story actually going back 2 years ago to our first Investor Day. And now we've gone through the storytelling and now really to the execution, the commercialization of empowering this transformative broadband spectrum to enable utilities to build private LTE networks and other critical infrastructure as private LTE has become a more defined term within the industrial category to solve so many critical use cases. So we're excited about that progress, equally excited about the amount of interest we're seeing across this sector and others. We've talked a lot about our pipeline, the prospective customers we have that are in development, what's really happened over this time period. And while we'd like to take the credit of all the work that we're doing, it's also a lot of now the industry driving this collectively. And that's what's important about this utility sector, is they are collective. They work together. They have national associations where they openly share information with each other. And so as we get industry leaders driving towards private LTE, the Amerens, the San Diego Gas & Electrics, Southern Company who's ahead of the curve already in their deployment of a private LTE system, the benefits and the use cases are becoming very crystal clear to a lot of utilities. And we're seeing an expansion in the number of utilities in our pipeline, but equally importantly, the seasoning of those customers in our pipeline as the interest continues to develop.

So just to follow up a little bit, what has gone better in the last year than you expected? And what's been a little slower or worse?

Yes. I think -- so in the battery category, clearly, the -- what's happened now with the escalation and focus of the federal government in, as I like to say, above-the-fold stories about how important it is to modernize our critical infrastructure and a modernized grid requires modernized communications. And so we saw actions last year, last December by the Congress and the administration and putting forward funding towards improving our grid. We're obviously seeing the big stimulus bill that's being discussed now, of which there's tens of billions if not over [ $100 billion ] of potential capital being discussed to improve our grid. What's happening on the negative side is obviously all these incidents that are occurring. We've obviously had the Colombia pipeline incident where we clearly saw the need to have a secure and private control of our key national assets, pipelines, electric grids, things that our economy is just so reliant upon that we took for granted. But the communications layer that's foundational in understanding how these systems run, the ability to have a command and control of the systems to be able to respond to situations that happened, the unfortunate incident -- weather incident in Texas, that again showed the resiliency of the electric grid is not as good as it should be. And a key part of that, as we've shown, is the communications layer. So the ability to be situationally aware of exactly what's happening in that grid, having come from the wireless business in the early days of Nextel -- I'm sure a lot of investors are aware Anterix was founded by the founders of Nextel. Wireless networks, you're aware of every element at any given time. You have a network operation center. You know where the handsets are, the endpoints, the elements throughout that network. The communication systems that are driving our grid today have a really strong need to be modernized. And the awareness of that now is really what's happening because of all these unfortunate incidents.

Okay. For those who aren't as familiar with Anterix, just give us the 1- or 2-minute follow-up on there. You're founded by the founders of Nextel. Help us quickly with what Anterix is and what the target customer base looks sure.

Sure, sure. So yes, we're founded by the founders of Nextel. At our core, we have -- we purchased from Sprint a nationwide 900 megahertz spectrum asset, and the key thing about that is that we spent over 5 years at the FCC driving a rule-making to allow us to use that spectrum for broadband. And the importance of that is that we want to use it to empower the transformative power of this broadband to build private LTE networks for critical infrastructure. And at the bull's eye of that is really the electric utility industry because that's where we see the strongest need, a lot of the reasons we just talked about, the calamities that are happening. But it's driven by use cases that the implementation of LTE to drive things like San Diego -- I mentioned one of our customers. A falling line conductor use case, which is when a power line is broken, whether it's because a tree falls on a line or there's another incident because of wind or otherwise, the ability to monitor when that line is broken and more importantly, to de-power that line in the roughly 1.4 seconds it takes to hit the ground, and so that technology exists. San Diego Gas & Electric has it deployed already in their initial pilot, and they now intend to deploy it throughout their service territory. Obviously, the ability to use that technology through other wildfire regions, but for other issues that are happening. And so for us, what started off -- and again, we talked about it 2 years ago at Investor Day, and we now have one coming up in 3 weeks. The mission -- really, the meaningful aspect of our mission of being able to increase the security and resiliency of our nation's electric grid, the lifeblood of our economy is really the key focus of what we're doing, doing so with these private networks. The business model is long-term leasing of our spectrum to utilities. And so Ameren, as an example, signed a lease for 30 years to utilize our spectrum. San Diego Gas & Electric is one of the few that we consider to be complex systems, complex systems as defined by the FCC, really the utilities that already had a significant amount of 900 megahertz spectrum. So with those customers, we have other opportunities. And with San Diego, we actually did a sale transaction, exceptionally from a business model but accretive for our shareholders, really being able to drive accretive fair market value transactions to monetize the spectrum that's on our balance sheet today. We own a nationwide spectrum throughout the U.S., Alaska, Hawaii and Puerto Rico and turning that spectrum into cash flow for our shareholders and being able to leverage this nationwide network of networks. And it's an important element of it. As we do these individual transactions, what we see is a network of these utility networks and the scale and scope benefits that they receive, and we've already started to show that. In fact, we just announced last week our Anterix Active Ecosystem Program. That's a program where we have 37 different vendors within the ecosystem, and these are partners from Cisco and Ericsson and Nokia, GE, among many others. And so what's clear now for our customers, this isn't about spectrum. It's not about LTE. It's not even about these vendor solutions. It's about the use cases that this ecosystem has come together to solve for all these critical reasons, for utilities and other critical infrastructure.

Okay. So what's unique about the 900 megahertz band? And why do these utilities need you instead of working with someone else?

It's a great question. So the band, as you know, is broken up between low band, mid-band and high band. The laws of physics of low band support it in such a way that it carries the furthest, which translates into a cost efficiency of deploying networks. And so that cost benefit of being able to put up a cell site and cover the maximum area translates into capital efficiency and operating cost efficiency. The other key piece about what we offer is allowing utilities to do this privately. A private network has significant advantages. The key one is control, meaning they build it how they need it, where they need it with the level of cybersecurity that they want at any given time. They can have the prioritization of their specific applications. Like a wildfire application, for example, should be a much higher priority than reading your meter and mine on a monthly basis to send us our bills. And so they can prioritize their own traffic, not have to be subjected to being on someone else's network which is built and operated the way that particular carrier needs. And so for us, the offering that we have of private LTE with low band is pretty unique. There really isn't an alternative of a nationwide low-band spectrum availability today because of the -- most of the spectrum, as you know, has been sold and auctioned in the past. Only because of the way that we were able to put the spectrum together to bring it to market for this purpose is there an opportunity for utilities and other critical infrastructure to be part of a nationwide network of networks that provides that kind of scope and scale. One last piece is that our spectrum at 900 megahertz is part of the LTE standard, the 3GPP standard. So as you'll see from that list of vendors involved in our ecosystem, GE was the first device that actually got the FCC certification with their global chipset for LTE because it already has 900 megahertz in it. So devices are available. There are thousands of devices that operate on 900 megahertz already because it's a band that's used throughout the world by cellular carriers.

Okay. You mentioned a couple of times the infrastructure bills that are making their way through Washington. Can you give us any insight on what might be sort of differences between the Biden and latest Republican bill that would really impact you?

Yes. So the great commonality, I think, from a bipartisan standpoint is investment in infrastructure and the definition of sort of real infrastructure, especially with these incidents that occurred. The electric grid is a key piece of it. So I can't really give you the -- opining on what the eventual law will look like. But at the same time, we're seeing strong bipartisan support for significant capital to be focused on the strengthening and resilience and security to our electric grid. And so I think if and when anything gets done, which I'm confident it will, we believe it will have a strong component. The other thing is that the industry is coming together -- there's a group called GridWise Alliance, one of the key industry associations, has put forward their $50 billion proposal to say, "Here's the way we think it can benefit the industry." And within that is the industry's view that it should be that communication is a key piece, both wired and wireless, private wired and private wireless as an important part of that security and resilience element. So it's the industry support, and we believe now, unfortunately, because of these incidents that have occurred, there's even a greater focus. I mean unfortunately, a week can't go by where there hasn't been some sort of idea of another incident of why we need to be investing more in -- specifically our electric utility infrastructure.

Okay. And why can't AT&T or Verizon or T-Mobile do this for utilities? And if they can, are they trying to?

Yes. So having been at a former carrier, they all have great business models. They have very strong, resilient, robust networks nationwide. What they can't do with the existing network is really be able to peel off the spectrum. They could. It's not cost-efficient for them the way they operate their networks. These utilities historically -- this isn't a new idea of operating private networks. Utilities have, for decades, run their 2-way radio systems, their LMR networks. They've run SCADA systems, AMI systems or automated meter reading systems. And so owning and operating private networks has been a critical piece of utilities' ability to control the communication. So when Hurricane Sandy came through our region in New Jersey, the time it took for utilities to get restored in the places they needed it, their telecommunications was longer than they ever said they want it to happen again. So executives of those utilities have said, "We definitely will continue to operate our own communications because we can't be reliant upon a third party." The other aspect is prioritization, right? As you know, a lot of the developments through FirstNet, we've learned a lot about what prioritization means of applications. Utilities, when they need it the most is when crises are happening, and they don't want to be competing with my kids watching YouTube or online gaming as an application layer when their critical lives are on the line, as lines are down where they need to restore power to people who need it most.

So are telcos trying to compete with this business -- for this business?

I think any enterprise business is a focus of the major telcos. And so no different than our Nextel past, it's about what we do and what we do well and what we're only focused on. And that's enabling these private communications networks to empower this transformative value of private broadband. And so we don't see a directly competitive offering from the carriers today. I never underestimate the ability of carriers to make competitive moves, but at this point, I think we've got a great robust business in enterprise. And I think that we're complementary really to a lot of the business models of the carriers.

Okay, okay. That makes sense. You mentioned the 2 deals you've signed already. But give us an update on the current pipeline and how that shifted since the Ameren and San Diego deals were announced.

Absolutely. And I think as we talked about when we announced those deals, the more recent being San Diego, both of those utilities are key thought leaders for the industry, their CEOs, their executives and again, uniquely in this sector. That means they're out and about talking about how -- the innovative uses and what they're doing. And so we are seeing the ripple as the CIOs get together and they talk about what they're -- how they're using private LTE. As industry associations like Edison Electric Institute and other interviews are going on during this COVID time when people are talking a lot about it being used, we're seeing really a growing number of utilities that are hearing about it not from us but from other utilities, from some of these -- and coming to us. And remember, these are complex sales. These are very large organizations. And we're down in the depths of the telecom engineering groups, and we're all after the C-suite where now there's strategic issues being solved of cybersecurity and resiliency. And so our ability now to have more robust conversations with these utilities, seeing greater awareness across those complex organizations and what that's causing is a maturity of those conversations, right? So we talk about our funnel through our 3 key stages from sort of top to bottom. We're seeing a seasoning of those customers occurring as we -- we're seeing more momentum from other utilities. We're also seeing more utilities coming in the surface. I mean we have the vast majority of our spectrum value -- of the nationwide footprint of our spectrum in our pipeline today. So it's not that we have to go find new prospects, bring new customers in. This is a process. It's a process of educating the utilities across the organization, from the C-suite, the regulators, down to the engineering team and helping them develop the use cases to justify the expenditure on building a private LTE network. It's not a cheap endeavor, but the value equation we've seen as we've gone through these cost-benefit analysis, the total cost of ownership versus the benefit that they're driving is substantial. Ameren, as an example, really justified the deployment of their network almost completely on the existing networks that they have migrating on to this single robust network. So they operate almost 20 different wireless networks today within their infrastructure, narrowband, some unlicensed, some narrowband licensed, but the ability to bring those together and consolidate the operating costs, consolidate the capital investment. And then, importantly, that's the beginning. As you know, from our use of LTE and going into 5G, it's the E, it's the evolution where the value is because it's about new use cases within that existing pipeline. This is not a closed network that -- like the old 2-way radio systems. You put them up 30 years ago, they're still doing the same thing today. LTE is the opposite. You put it up -- you've got your LTE phone. Suddenly, you realize you can be ordering food and trading and balancing your budget and ordering taxi cabs. There's always new application layers that will continue to be rolled out. That's why we're so excited about this new Anterix Active Ecosystem Program because we now have a growing ecosystem of world-class vendors that are driving solutions, not just hardware or technical aspects but the solution set that's going to continue to add value to this network. And so I gave the example of GE's product that got the first Anterix active certification. They're now sending that device out to utilities nationwide, talking about that they're Anterix active-ready to put that device on to private LTE networks. And so we now have the tentacles of all of these great industry leaders talking about Anterix and the value of private LTE.

Is it fair to say that your pipeline has grown since you've quantified it for us a few months ago?

It is fair, Phil, to say that. And I'm going to hold off on giving you the specifics because I'm going to leave that for Ryan Gerbrandt to talk about it in 3 weeks at our Investor Day. But absolutely, the momentum we're seeing -- I sort of said the momentum has turned into a movement. What we launched with -- the Utility Broadband Alliance, we started this group. It's now standing on its own. It's led by utilities, for the benefit of utilities. We're seeing more members joining regularly. That's part of that movement. What we launched now with this Anterix Active Ecosystem is picking up where that leaves off, about driving the vendors and the economic solutions to help solve these valuable use cases. And so we're seeing -- and now what's happening at the federal and state level from a stimulus standpoint, from an awareness of the necessity of communications to -- as the grid gets modernized, it's going to require this modernized communications, we're really seeing really a stronger level of support, not just from utilities importantly, from the regulatory environment as well, which, as you know, the investor-owned utilities put rate cases forward to their state regulators. And it's the approval of those rate cases that allows a lot of these key capital expenditures to move forward.

Okay. I was just thinking of a really old song where somebody becomes [ a monument ]. So at the same time, you're having discussions with different utilities for a long time. Are there any that have fallen out of the pipeline? And why might that have happened?

Yes. I got to be honest, I'm not aware of any that had fallen out of the pipeline. It's always -- like any big customers that have such complex decisions, this is not obviously the only thing on the table for these utilities. And it's worth noting that the LTE decision is part of a much broader package typically, right? This is a grid modernization decision of utility, upgrading their infrastructure. And that includes putting out new reclosers and upgrading lines and varying cables and having the situational awareness of all those new assets by putting out the sensors and controllers. And they got to run as utilities. What does grid modernization mean? I know I throw that out there. It's about the ability to put -- we're reading about that now. It's becoming, again, above-the-fold headlines, about the need for renewable energy sources, right, what they call distributed energy, having solar everything from residential rooftop solar to large industrial-grade, wind, battery storage, EV charging. All those are new assets within the network of a utility. And they have to be readily aware of how much energy is being generated there, how much is being consumed in those areas. And the ability to have a 2-way network to be able to control that requires a very robust, resilient, low-latency communication system like LTE. And so that's really a critical piece of as these networks need to -- as the electric grid networks need to change, they need to have a communication system that can support these vast changes that are really falling within this modernization of the electric grid.

Okay. You've talked about a couple of, let's call it, double-digit millions over time deals that you've signed. You have guidance in a few years of $125 million to $150 million per year of revenue. How many deals do you need to sign to get there? And are those customers like that toward the front of your pipeline?

Yes. So quick answer is yes. There are customers like that toward the front of our pipeline, but I want to expand on that a bit. And this is really the purpose of our Investor Day. Is -- as we've learned more and honestly, as we've seen improvement in our model, one of the key things -- when we talked about that idea of what we call our annual recurring revenue at fiscal year-end 2024, to get to those targets, a couple of years ago, we thought conceptually, because that was before we really had our first customers, that we'd be having all long-term revenues associated with our long-term leases. And what we're seeing is the majority of our pipeline desiring to prepay for these leases. And so we saw that happen with Ameren. We saw the upfront payment with SDG&E. And that has a pretty positive impact on our near-term cash flow. And so it puts us in a different position, focusing more on when we're seeing the cash flow versus recurring revenue. Because, obviously, if we collect like an Ameren, most of that, in the first few years, same thing in San Diego, yes, we'll, obviously -- for GAAP purposes, we'll be reporting revenue over the 30 years of the Ameren lease term. But at the same time, what we think is a better measurement is how much of that contracted proceeds we're going to be seeing over the next several years. And that's the kind of update we want to talk about when we get back together. So we're still confident that we're going to see -- that revenue target was about 50% of our spectrum monetized by fiscal year-end 2024. We're still absolutely confident that we're on that track based on what we're seeing in the pipeline. Obviously, it depends on a lot of continued movement. But based on the movement -- momentum we're seeing, we're online with being able to continue to hit that target.

So let's sort of jump around and follow up on that comment. If you were to have triple-digit upfront payment deal signed, what are the best uses of capital?

Yes. So it's a great question. That's something we're looking into pretty actively. But for us, it's about tax-efficient ways of returning that value to shareholders in whatever form we do. And so the things we've talked about in the past, we have the opportunity to buy back stock. We have the opportunity to do special dividends. And so we're going through that analysis, but we definitely see the opportunity to be able to use that good problem to have as we accumulate cash on our balance sheet to be able to return it in tax-efficient ways toward shareholder value.

Okay. Now you've also talked about buying more spectrum. Does that make sense? And are there bands that seem like they would benefit from you being sort of a spectrum holding company for utilities?

Yes. Well, look, we're obviously very interested in continuing to enable utilities and other critical infrastructure to be able to build, own and operate private LTE networks. One of the things we've done actively is work with the CBRS band, right, the 3.5 band. San Diego Gas & Electric was a winner of the auctions there, and so we're using that in conjunction. They're really strong complements. I always compare it to the way you use WiFi in your home or office, and then you go outside and you're using the cellular network. CBRS has the same kind of characteristics from our perspective that it's good for campuses, it's good for end buildings and factories. When you want wide area coverage for an entire service territory, you need the complementary capabilities of low band or 900 megahertz. And so that's one particular band that we see as additive, and we're working actively with a lot of the ecosystem players within CBRS. As you know, there's over 10 utilities that actually bought spectrum in that auction, which was a pretty important benchmark for us to see utilities' willingness to pay for spectrum. And obviously, there's the unlicensed portion of that bandwidth, there's plenty of it, especially in more remote rural areas that we think will still be available as a complement to 900 elsewhere. So beyond that, Phil, we're not retail buyers of spectrum historically, right? You know our roots of Nextel and the way we worked into establishing this nationwide band. You won't see us being the high bidder in major auctions most likely. At the same time, we are always looking at spectrum opportunities, ways to cost efficiently bring spectrum value to market but the way we like to do it, which is typically not in a retail fashion.

That makes sense. Okay. You mentioned other types of customers as well as investor-owned utilities. What does that conversation look like? And are you able to sell or lease the same spectrum to more than one type of customer in a given territory?

Yes. So our existing leases that we've done, the one with Ameren and obviously, the sale to SDG&E, those are exclusive use of the 6 megahertz of spectrum that we have, the broadband 900 megahertz spectrum, once we can get those licensed from the FCC. However, as you can imagine -- and Southern Company, I always like to describe them as the crystal ball. Southern Company built their network in their region, and based on that, they are offering services to third parties. They offer some, I believe, to even some public safety, some municipal utilities. We think the ability to -- as this fabric of the 900 megahertz network of networks gets woven together, there are a lot of other parties that would likely be either users on those existing systems, maybe overlaying additional spectrum bands on it or other creative ways. Because if we think about we just had this pipeline incident, that pipeline runs straight through some of the major IOU utility territories north to south and so the ability to be able to, of those utilities, work with that linear path of a pipeline and be able to offer services in some way in conjunction to offset their capital costs, to create new revenue opportunities. And so we do see as this model evolves and we're actively being asked by utilities to help them think through how do they either commercialize it, how do they add additional users or how do they share it with other elements. So I think when you think about the eventual nationwide network of networks, absolutely, there's going to be users outside of electric utilities. The railroads criss-cross through that gas utilities. The line between all of these infrastructures, because you have regional utilities that are building generation -- solar and wind generation way outside of their service territories. And then they struggle with, "Well, how am I going to get the connectivity that I need there?" And so there's a natural ability. And we watch this. I think you and I both are old enough, having gone through the early cellular days, right, when these were all small regional cellular companies that got stitched together into a nationwide fabric. First, it was under the Cellular One umbrella. Then it became under some of the national brands that we know about today, including Nextel as the first nationwide provider. So I think as we see more and more of this build out -- commitment and build-out, especially because the sector works so closely together, I think we'll see the ability for other tangential critical infrastructure sectors to take advantage of that and become either customers or partners on those systems.

Okay. As you look at clearing spectrum, you've talked about $130 million to $160 million in clearing costs. Anything changing for the positive or negative within that range?

No, I think we're pretty solidly on course there. As I said, we're excited to be filing our first applications for broadband license this week because of the clearing that we've gotten accomplished in the Ameren service territory, and those will be going in before the end of the week. And so we're on track. It's the -- I think I've always talked about that internally as our manufacturing process, right? We -- our raw material is our narrowband spectrum. The output of our factory is this broadband spectrum, and all the steps in between is what we've done for years. We have the team that did most of this retuning for us in the Nextel days, and they're doing the blocking and tackling of going to each individual spectrum holder, working with the retuning of their licenses so that they don't have any kind of challenges with their operations, and it's going well and on budget today.

Okay. What's your tax situation? Are you -- if you were to receive a lot of money, are you at risk of being a taxpayer? Or is spectrum a REIT-able asset? How do you think about that?

Yes. So Tim Gray, our CFO is going to go into that in a lot more detail in our event in a few weeks. But generally, we're not a taxpayer today. We have a few hundred million dollars of NOLs on our balance sheet that's going to take us through the beginning period of cash generation. We are looking at all kinds of alternatives on how we can be as tax efficient as possible if we're in a great situation to be able to generate the substantial cash flow we see potentially happening as we begin to penetrate these larger and larger customers. So yes, there's absolutely discussions going out about the REIT-ability of spectrum. We're not the first ones to try and skin that cat. And we think with the progress that's been made in the marketplace of other assets going into REITs, there's a good likelihood if that's a path we choose to go down.

Okay, okay. This has been great. Anything else you can sort of preview for us on your June 16 event?

I'm just -- if I can put my shameless plug-in that everyone should tune in on June 16. We're going to continue to discuss what we see as the improvement of our model. Because, for us, the trends that are happening with the prepayment of -- and the impact that has on cash flow for us and what's happening with the excitement within the industry and the industry collective movement turning into a much stronger momentum for us and then, lastly, what's happening on the federal and state side, we'll give a lot more color about what we're seeing and what we think -- the impact we think that will have. So a lot of good elements for us, strong tailwinds. I almost feel guilty, as we're hopefully exiting the worst part of COVID, having had such a good year as a company, but we're really raring to go and get back into our offices and go back out and start visiting customers even more and be able to drive the business forward.

That sounds great. Thanks very much, Rob.

Thank you, Phil. Good talking to you.

Thanks, everybody.