Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Great. Good afternoon, everybody. It's my great pleasure to welcome Rob Schwartz, the CEO of Anterix. Welcome to TMT, Rob.

Thank you for having me. It's great to be here in person finally.

Great. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Rob, maybe we'll just take it back for people who aren't as familiar with the Anterix story. Just talk a little bit about the spectrum assets you have and the monetization path that you're pursuing with the investor-owned utilities?

Sure. Happy to, Simon. So, for those who are less familiar, Anterix founded by the founders of Nextel, really with a similar principle of taking an underutilized and undervalued asset of spectrum. We own nationwide spectrum in the 900 megahertz band. It's the -- what we call the beachfront property of spectrum. It has all the right characteristics and physics to be the best economics for deploying for wide area coverage. We acquired that spectrum. We went through an FCC process ended a little over a year ago to enable us to use that spectrum for broadband, which was a big win for us and really a big win for our ability to provide that spectrum to -- for private enterprise use. We really -- we filed with the FCC over 8 years ago and talked about the use of spectrum for private enterprise. At the time, it was kind of an unknown. People looked at us like we were a little cross-side at the time. And now obviously and those who came back from Mobile World Congress, it's really become a common theme of growth in the wireless world. And so to fast forward, during this time frame, since then, we've really been focused primarily on the bull's eye as I talk about of the enterprise space, which is the utility opportunity. Electric utilities in the U.S. have very strong and compelling needs to build and operate private networks for numerous use cases I'm sure we'll get into. And so we -- since our ruling, we've signed on our initial 3 investor-owned utilities, we talked about in our last quarter's discussion a few weeks back about having over 60 utilities in our pipeline, which is over $3 billion of potential for contracted proceeds and we're making consistent progress of moving those customers forward. So, we're excited about taking really what I think is a different approach, which is a very vertical focus on not just about speculating in spectrum, but really driving towards monetizing that spectrum with valuable customers for valuable solutions.

So, you mentioned the 3 deals we've done so far. Give us an indication of what those companies are going to be doing with the spectrum and why they chose to go with you rather than say, go with a Verizon or some other public telco?

Sure. Absolutely. A lot of the folks listening are probably primarily TMT investors. And so without knowledge, you got to really understand the utility customer base, both the economic model, public utilities are regulated, regulated monopolies and what drives their real return for investors is investing regulated capital, which they get a fixed rate of return. And that's an important part of the model because for us, we're helping utilities continue to build private networks. Really, our proposal of building private LTE and 5G networks is about modernizing the communications they have. Utilities have been using private networks for decades, a lot of legacy networks, a lot of one-off technologies. The specifics of the 3 utilities, the first we signed was Ameren. Ameren is the investor utility in Illinois, Southern Illinois and Missouri. They are primarily focused on in their grid modernization is really connecting up sensors throughout their networks for command and control and resiliency of their networks. There's something called a recloser, which is the device that really just opens and closes the circuit. If you have a challenge, if a tree falls on a limb and you want to turn off a segment, you open your recloser and it stops the power from flowing. And as they're deploying thousands of those throughout their network, those are in places often where there isn't communications. You asked about the sort of the comparative aspect. So, part of it is coverage, being able to build your network, where you want it. And that's a difference between private and public networks because a lot of these transmission lines and substations are built in places intentionally where there aren't people, which means there usually isn't cellular coverage. The other aspect that's really a big differentiator is the level of control they have, right? Every utility I've talked to just about tells us some sort of worst story about an incident that's happened. Going back to Hurricane Sandy, the freezes in Texas, the wildfires in California and the responsiveness of the carriage of their specific needs hasn't always been what they've needed, right? So, the challenge of having systems restored where they need it often not in a densely populated area, they're not often the first ones to have that response. And so a big part of the rationale of the why they're doing and just stability have that level, command and control and the economics, as I talked about. So, Ameren is really focused on modernizing their grid. The second customer, San Diego Gas & Electric, not far from here, is primarily focused on a really valuable use case, which is wildfire mitigation, right? As everyone knows, there's been increasing issues with wildfires, not just in California, throughout the country now and weather instances overall. And the solution set that they have and really they're pioneering. We announced recently a partnership with Schweitzer Engineering, the same kind of solution, it's called a falling line -- falling conductor program. And it really sets that the idea of when a tree falls on a line and unfortunately, that's what really has caused a lot of the wildfires of a line breaking, hitting the ground and a live power line sparks some sort of dry vegetation. Unfortunately, as you know, as we're sitting here in San Francisco, it bankrupted a utility in this area. In the forensics, they've really shown that, that was the cause. What this technology does in the roughly 1.4 seconds that it takes for -- when a line breaks and falls the distance to the ground, with low-latency LTE into 5G, you're able to sense the current doesn't flow through the line anymore. You have a sensor on both sides of that line. And it depowers that segment of the line before it hits the ground. It's a simple idea. That level of command and control, we've had on wireless networks for practically decades, but utilities don't have that level of visibility today. They don't have that level of control. And that's really a very valuable use case. What's the prevention of one wildfire worth to utility, in essence, it's priceless. If you look at the history of the PG&E for example, they're also important and this is a key element of private LTE and private 5G is that it's a Swiss army knife of solutions. It's not a single use case. It's just like the phone in your pocket where you were first making phone calls and text and now you're hailing taxi cabs and ordering food and watching videos, those are applications that run on a network. So, the other applications that SDG&E has one of the important ones is connecting distributed energy and specifically battery storage for them. So, normalizing energy consumption in the peaks of the day and to be able to offload that the usage of both the generation to charge those batteries off-peak and use those batteries during peak times. But that intermittent source of power. It's the same thing with solar and wind, they have in their networks, having that level of command and control and be able to have the visibility to create that kind of 2-way communication, modernizing communications for them, is an essential element to supporting that modernized utility grid. The third customer, Evergy, happens to border Ameren in their territory, really, I would say, blocking and tackling and modernizing their grid. They really went forward with a number of use cases. They had a long list of things they needed to do to modernize there and that was everything from their automatic meter reading systems, right, bringing them up to it. And a lot of that was operating on -- as an operating expense on cellular networks from a backhaul standpoint and they're migrating that onto LTE 5G network and all the way out to being able to communicate eventually with fleets of vehicles and trucks, replacing old 2-way radio systems that were relatively archaic and we've heard stories from utilities that are buying parts on eBay to be able to maintain these networks because I mean, utilities when they start into a system, they fully depreciate them over the life. And that's the beauty of these agreements that we're signing with these utilities is that the leases we've signed are 20 and 30 years. And so these are not short-term partnerships they established. We are able to really become a partner for a long duration. And we think the spectrum, while it's the key part of our economics today, we also see this value of connecting these networks together and create incremental value from that as well.

But even though the leases are long term, you've been able to negotiate upfront payments or towards the earlier part of the lease?

Very important point. Thank you, Simon. As we've approached the capitalization of these leases for utilities and again, capitalizing is a key part of the economics for utilities, we've gone towards a prepayment model. And so of the 3 that we signed, we've really received most of that capital already and we'll receive the rest over the next couple of years. So, while we're amortizing the revenues over the life of those contracts, from an accounting standpoint, from a cash flow standpoint, it's a great place to be.

I guess another thing that's very relevant in the current geopolitical is the networks are air gapped the cyber angle. Do you see that playing more into your conversations?

It's a critical piece. We always talk about which is the most important of the use cases at any given moment. Obviously, when wildfires are breaking out in Colorado, not that long ago, that became a very important element. But with what's going on in the Ukraine, I was just talking to utility early this morning about the heightened sensitivity. They're daily talking to the FBI, the DOE about real threat risks. And so there need to be -- continued to be -- escalate the level of cybersecurity. The #1 element of that, if you read some of the federal government reports, is separating those networks from the public Internet. And so that's another rationale of why you need to have a private network, because if you're on a carrier network, you're on a common network or worse than unlicensed network, the ability for nefarious players to get access, tunnel in through areas is a significant risk and so private is a key part of it. But the other thing that's important, we established something called the Anterix Active Ecosystem Program, really just a fancy name for our sandbox in which we're inviting vendors in to help us drive solutions for these utilities. We now have over 70 companies that are focused on developing for this specifically 900 megahertz solutions for utilities. Within that, we have a subset of cybersecurity companies, our Cybersecurity Collective, we call it. Interestingly, Mandiant is one of those that was bought this morning by Google and they're one of the 6 companies that are as a beginning, starting on driving bespoke security systems for utilities using private LTE. And so again, you asked about kind of the differentiation from a carrier solution. And while carrier solutions are great for enterprise and the carriers run strong businesses, utilities have some specific needs. So, the ability to customize that security level of applications within your network for your own requirements, that's the advantage of having your own private network.

And the 3 companies you signed with, I think, in many cases, they're leaders in the investor-owned utility. So presumably, those are some pretty important use cases to kind of set up a template or role model, both in terms of the contract and also the -- are they your best salespeople?

It's a critical point. Having sold into different verticals over my whole career, the unique aspect of utilities is that they're really in this together. The commonality of sharing of information of -- and we actually launched something called the Utility Broadband Alliance or UBBA for short, which was -- we realized that as we were going around the country and talking to utilities, they were individually trying to solve a lot of the same problems. There wasn't a forum for them to share this information even though they openly share with each other, they don't compete typically. And so we started this Utility Broadband Alliance. There's now dozens of utilities supporting it. And we spun it off last year. It's a stand-alone non-profit run by utilities. But what's important about it is exactly what you were saying, Simon, is that take Ameren, for example, as they got through their initial pilots and as they got into their initial deployments, they go to that forum and they shared their learnings openly. You don't see that in other sectors to have competitors sharing with each other. And so the absolute, the best voice we have of promoting the value of private LTE as utilities directly with each other and that's been a big part of our strategy.

And I guess another proof point in terms of tangible interest as well as your backlog is the pilots, so perhaps update us on where you stand on --?

Yes, absolutely. So, pilots are kind of a commonplace for utilities. They like to be able to -- they're very conservative in their approach to changing their infrastructure because they have a lot of responsibility, right? Unlike companies that can test technologies, the resiliency of the network is everything. And so piloting is very common. I've got to say that of our 3 customers, so far, only 2 of 3 did pilot. And so we're hoping that as the commonality of learning occurs, there's going to be less need for that to happen. But we've got over a dozen different experimental licenses that have been granted by the FCC for various pilots at all levels. And some of those are specific to utilities, some have been done by the Department of Energy's National Renewable Energy Lab to demonstrate the effectiveness of private LTE to operate all the complexity of renewable energy distribution throughout our service territory. We've got an experiment going down in Texas with a whole consortia of entities as well that are doing some really creative things. So, we're really excited about all of those. But at the end of the day, we're really creating around this ecosystem, the Anterix Active Ecosystem Program along with those pilots, some of which are also being done by vendors. We see as a really collegial open architecture to invite in all of the various players to solve these big problems. At the end of the day, our solution is really the conduit to allow all these valuable applications to occur. And so we're excited about all the developments happening. I'm sure there's going to be some more announcements around them in the near future.

In terms of new pilots or?

Both new pilots and also new developments within the ecosystem.

So, remind us of your targets for -- you mentioned the $3 billion of backlog, but your ability to monetize that and the time frame?

Yes. So, we talked on our last call a few weeks back about the scope of the pilot, sorry, of the pipeline of our customers. There's over 60 customers today, as I said earlier, representing about $3 billion of potential contracted proceeds. We break that down into a Stage 1, 2 and 3 as you get down the sales funnel, Stage 3 being our closing phase, the final phase. We've talked publicly about there being over $400 million in that final phase, some large opportunities in there as well, which we're very excited about. I also mentioned on that last call, these are very hard to predict from a timing standpoint. We've had that challenge and we've had a lot of conversations publicly about that. We're highly confident about the scale of what's coming down the pike. But predicting exactly when it's going to happen is a really challenging thing to do with these kind of customers. The complexity of decision-making, it's not so much the decision that they want to do it, it's how that decision has to be achieved. And you've got companies in there that have multiple operating companies and utilities for those who don't know, while we'll have a holding company as a public company, often have multiple states. Ameren, as I gave an example, had 2 states within it. So, Illinois and Missouri, there's state regulators that have to approve both of those, any changes that are made in investment capital and putting that money into rate cases. And so -- and you've got Presidents that are in separate companies that have to also be part of it. So, there's a process and we've gotten really better at the process understanding, but it's an education. It takes time. The good news is the investment in time pays off because the term of these contracts is 20, 30 years. And so we're not here talking about churn as an issue relative to our customers. And the good thing also about these leases is that there's renewals at the end of the day, they're fair market value renewals, typically, we're going to see residual value as well.

But over the medium term, you see what -- over half of that $3 billion conversion?

Yes. So, we set out our target by fiscal 2024, which for us is March 31, 2024, of a $1.8 billion scale, where we see the opportunity to close deals somewhere around that range. Precision is not an easy thing from a timing standpoint, but we're confident based on the pipeline we have that that's the scale of the closed deals, as we say contracted proceeds, we expect to see from that. We'll have hundreds of millions of dollars collected most likely on that at that time with the rest coming in over the -- assuming they're all still prepaid, which is our expectation, the majority will be in the several years that follow. So, the advantage of having that capital upfront and we're probably going to go with the question, might as well talk about it, but what we've been doing with the proceeds and our intention with those proceeds. We announced a share buyback program, not that long ago, which we've initiated our first -- we announced last quarter, putting our first money to work buying back shares. I've worked in a lot of fast growth start-up companies even back in the Nextel days, but to go from the time frame of us speculating about having a business just barely over a year ago as we got our FCC ruling to actually now going past getting customers and now actually being in the positive cash flow and using those proceeds for share buyback is kind of unprecedented and we're excited about it. And our intention is to continue to do that as we generate cash and this is high-margin cash. As you can imagine, the cost of servicing a spectrum lease is pretty de minimis from a marginal cost standpoint. And so we see using those proceeds really in tax advantageous ways to return the value to shareholders. Share buybacks is one of those opportunities and we're committed to continue to do so.

And does dividend play a role down the road?

It's possible. It's possible. Again, we're -- we want to be tax efficient what we do. We still have close to $300 million of NOLs. So, we've got some time to figure that out. But for now, we think share buyback is at least near term, a great way for us to return that, especially at today's pricing.

Sure. And I think it expresses confidence in your visibility into...

100%. And we've got a $50 million plan in place. And with the intentions as we see more proceeds, be able to upsize that.

And what about expanding beyond your core businesses? You've talked about that in the past. Where does that stand in terms of going beyond the electric utilities or into other services business?

I think there's always -- there's a couple of ways to look at that. One is at heart, we are spectrum folks, right? As I mentioned, the Nextel model that we built was built on finding underutilized spectrum and creating a valuable business. Anterix is the same way. We're always looking at other spectrum opportunities from an expansion standpoint. We integrated CBRS, the band that has both owned and licensed and unlicensed usage. We're working closely with Federated as a partner in doing so. And that adds some scalable capacity on these networks. Once you're making the fixed cost investment of building out a service territory and the utilities using their balance sheets to build these valuable networks, the ability to add more capacity on that fixed cost is pretty small on a marginal basis, on a relative basis. And CBRS is one way. We're always looking at other opportunities as well. And that enables what you're asking about, Simon, is the ability then to talk about expanding into other verticals, right? For us, we like the critical infrastructure space because of the really high requirements. It's a unique set of needs. We spend a lot of time. Nextel had a big business in that area as well at the time so we understand those kind of customers. We're working with utilities that also want to use their networks to leverage that to create offsetting revenues. Southern Company is one of the first pioneers through their Southern Linc business in building out a private LTE network and their model and their market is actually offering services to other like-minded customers. And so they do have public safety. They have other utilities, water and gas and others using that network. And we've got a lot of utilities asking us about that. We think we can be helpful in monetizing that. I also think that when you piece together this network, we look at each utility separately. But when you start thinking about our 2024 target that I mentioned of $1.8 billion, that's about roughly half of our spectrum value. So, think about half the country when we get to that point of having these private LTE 900 megahertz networks and the network effect of that, we talked about this Network of Networks. That platform, we think, is very valuable and our ability to continue to drive services, right? You think about the data that's going to be generated by the sensors. Typical utility, it's something like 90% of the sensors are going to be deployed over these next 5 years compared to where they are now. So, you think about all the data that's coming off of this, the level of command and control and analytics and AI that you're going to be able to do once you have a broader perspective than just one service territory. Cyber is a big example of that, right? So, if you see an incident happening in one place and start measuring those patterns and some of the companies we're working with are doing those kind of analytics, but the analytics are only good if you have the data. And so when you have this level of sensors. And so we're very excited about how we leverage this platform with our partners. We're not going to go build a walled garden and do this where we did in the old days at Nextel, just the opposite. This is really an open architecture. We're inviting in partners to come in, but we think it's an opportunity for us to create more value in that path as well for our shareholders.

Makes sense. Somebody like a Southern Company has been very sophisticated and proved that they've obviously had a lot of experience in running these networks. But where is the opportunity? Or who will some of these others use as a system integrator because your initial offer is here's the spectrum, good luck. And yes, there's these other models to look at, but it's a as opposed to buying a service from a Verizon or something like that. So, do you need to do some handholding or bring in a Nokia or an Ericsson or Cisco?

And the good thing is when you look at the ecosystem who's there and from an infrastructure vendors, Nokia and Ericsson and Motorola and others are offering those solutions. And then you get into the Black & Veatch and Burns & McDonnell, and other firms that are doing the engineering and design work, we absolutely are -- this is not a carrier model where we drop the spectrum off in the loading dock and they got to figure it out, just the opposite. We actually have a -- we coach them through the process. And I think we've really established a trusted partner relationship with these utilities. We did the Ameren deal now almost a year ago, but we continue to work with them proactively and helping them through -- going through their vendor RFP processes to make the decisions about who's going to provide infrastructure, who's going to provide endpoints, what the right design is, the application layers. And so really, we're learning with them and helping them along the way. And I think we're really putting that knowledge back quickly into establishing ourselves in that trusted advisor position with other utilities. And I do think that's going to put us in the right place to continue to bring other services in. We want to stay vendor agnostic. It's really important for us to be, obviously, spectrum specific. We don't hide our bias there that we have the best mousetrap alternative for them but when they're deciding, it's important, they have the choice and plenty of choice. That's the beauty of private LTE going to 5G is that it's a global ecosystem. It just continues to expand, you're riding the curve. And this is a new idea for utilities. They really used to bet on one-off technologies, things that were developed specifically for their own needs, some of these mesh technologies for meter reading some of the 2-way radio systems. These were really unfortunately dead end technologies that they've been legacy and having to support. But now getting on to the curve of LTE, the future compatibility of that and our being -- playing the role of really creating an evergreen system for them, helping drive applications and creating value out of that as well along the way.

Coming back to the pipeline, I think, if you call -- this is the Phase 3 segment, if we're on the 1 yard line and we're trying to punch it in, who's back on the 20-yard line and the 50-yard line and how is the Phase 2, Phase 1 evolving?

It's interesting. I always use kind of the race horse analogy. I think it was old race horse vending machine thing where you have those mechanical horses and betting on which one is going to come across the line. You see some stop and others take 3 steps forward. And then -- so it's difficult to predict the path and timing. But what's happening is they're all moving forward. And so we talked in last call that each of those 3 phases has expanded since we last had our call. And the momentum that's happening, I'd like to take all the credit for it, but a lot is about the tailwinds, right? You talked about cybersecurity as a big one. The decarbonization commitments of these utilities, every one of them has made a substantial commitment of by a date certain they're going to be carbon neutral. And in order to achieve that, they absolutely have to have a modernized communication system. Whatever it is, they have to figure it out, but you can't get there from here without that. And so that's one of the key things. The other is the federal funding. Everyone's heard about what's happened with the infrastructure bill, whether build back better happens or not, it sounds like there might be some additional money there. And we work closely with some of the utility industry associations, specifically GridWise Alliance that's very influential in Capitol Hill to really put language in this -- in the bill that's been passed to assure that some of this capital can be used for broadband, private broadband networks. And so whether it's to enable wildfire mitigation, as I talked about, enabling rural broadband or just enabling resiliency within the network, cybersecurity resiliency. Those are all use cases that are described within the bill and there's a lot of buckets of money that we think can be just exactly what they call it stimulus funding to stimulate the market. We saw this with Smart Grid over a decade ago, where the advantage of it is it really set a time frame. In order to use that money, you had to get it and deploy it within 5 years. And so we do see that as this -- as the rules clarify and how the allocations and the applications are going to go, that it's going to be a stimulus to help drive even further movement in all 3 of those phases.

How is the competitive set evolved? Ligado has talked a lot about private network. Globalstar has some private networks out there. Even AWS has got this -- 5G in a Box [indiscernible]. So what are you seeing in terms of other solutions that -- they're all identifying utilities as a potential target market?

Right. We're flattered that success breeds competition. I mean that's what we always said in the Nextel days. In the early days, people used to say, well, can't a carrier just add push to talk to their service and offer a competitive aspect. We have a significant -- a better mousetrap in our spectrum. We really have, I think, a significant lead time in the relationship building. And by taking a vertical approach versus kind of a horizontal approach across segments, we've built really strong important trusted relationship, not just with the utilities, but with the industry associations, with the regulators at a federal level, at a state level, that's something you can't replicate quickly. And so adding utilities to a list of your target segments, it makes sense, but we're offering a heck of a lot more than spectrum now. When you talk to utilities that are working with us, they're coming to us clearly for spectrum, but we're providing a much more comprehensive solution now that we have this ecosystem of companies that are helping turn it into a solution and not just spectrum. So, the non-carriers in the list that you have mentioned, Simon, those are all partners for us. I mean, partner opportunities. Absolutely the trend of virtualization of wireless networks that AWS talked about and Cisco talked about recently at what World Congress and others have, that's a phenomenon that's happening naturally within the environment. And that creates an easier system to deploy and operate and we love that and we're working actively with a number of those parties to create that. Now, you're not going to see utilities being the guinea pigs and testing new technology. And so they're going to be probably later in the phase of deploying 5G and some of the virtualized technologies. But we're going to be on the forefront of helping them understand it so that they can use it to be more efficient and simplify the process of adoption and operating these networks.

Well, unfortunately, we're out of time. Just one last one here. On Phase 3, I think the challenge for investors is the lumpiness of the wins here, even though I think a lot of people really see your confidence, see the demand. When somebody goes into Phase 3, how long -- what's the mean time to get them over the line? Is that a 12-month process? Is that 12 to 24? What do you think it is and where it should be?

Let's just say it's a big standard deviation. And again, we don't have 100 deals done, we have 3. And so it's probably not a statistical sample to look at. And we're only a year away from when we have the ability to even produce agreements given that we just got the FCC ruling. So, my view really is that it depends on the individual aspects of the utilities approach. Some of these utilities are doing broad grid modernization plans, of which spectrum is a piece of the LTE network, which is part of the bigger plan. And Ameren was like that. I mean they put a multibillion-dollar plan forward to modernize the grid, of which a line item was their spectrum. And so where others like Evergy, this was just let's get the system done, let's get it approved and that was quicker. So, the complexity sometimes isn't about what we're doing, it's about the scope of the project they're taking on. But from my standpoint, we're seeing a greater and greater understanding and the learning from each other has really been the catalyst to we think -- I wouldn't say it's necessarily shortening the cycle yet, but it's adding a great level of confidence. Importantly, it's adding a greater involvement of the C-suite because the issues that we're talking about now are not technical issues that are happening deep in the bowels of utility, these are major risk items that are being discussed in boardrooms. And so that's why we're getting a much more senior level of support in those decision making.

Well, Rob, thanks so much for giving us the opportunity.

Thank you, Simon.

We really appreciate it. Thank you.