Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Hi, thanks for joining us. My name is Phil Cusick. I follow the comm services and equipment as well as media here at JPMorgan. I want to welcome Tim Gray, CFO of Anterix. Thanks for coming.

Thank you. I appreciate being here, and it's wonderful to be doing this face-to-face again after a couple of years.

Okay. I want to remind people that you can put in questions on the -- over the system and anybody in the room, I'd be happy to take questions as well. Just raise your hand, I'd be happy to call on you. Just -- it's been a while since you came public and you've got 3 utility deals done now. Just give us a little overview of the last year and the deals that have come through and the ones that are sort of taking a little bit longer.

Sure, Phil. Thanks. So in the last year, we announced a deal with Evergy for $30 million, a utility in the Midwest, mostly in Kansas. But the best part of the story for me is the progression that we've had in the pipeline. I wish I could tell you there were more deals that closed and I think that's what people want to hear. But it is what it is and with the -- but we have significant progression in our pipeline through at least the Phase 2 and Phase 3 parts of the pipeline where we're closer and closer to getting these customers over the finish line. And I think one of the things that -- there are a couple of things that are happening that have added more time than I would have thought probably 2 years ago when we went through this process. First and foremost is now we're starting to deal with bigger and bigger utilities. The first 3 contracts we did are relatively modest sized utilities with Amarin, Evergy and SDG&E. But now we're talking to significantly larger utilities that cover a lot more territory, with a lot more operating companies. So what that does is it adds to the process of having to sell not only the parent company, but across multiple operating companies because those operating companies are the ones that are going to go and do the regulatory process. You've got to work through the process with them as well. So that's one big piece of it. And the second piece is what our customers are asking us to do and help them really look at the holistic process of building out these wireless networks. So that includes not only leasing spectrum, which we're -- we're the ones doing, but it's also looking at things like the regulatory process where we've got teams now in the utility helping to write regulatory filings so that they can move on to the next stage of the PUC process and get their entire network, not only the lease done for our spectrum and get that entire network approved. And another case where we're helping a utility build out their business case, not for the spectrum part of it, but for the overall network field that they've got to do. So it's us doing these extra things that have added a little bit to the process where if you -- actually 2 years ago, we've been very capable and solely focused on doing the lease. But we're doing this actually just to get these sales done. And we're seeing progress. We're seeing things move forward. It's hard because with NDAs and things like that with these customers, you can't be out talking about specific customers and milestones on a day-by-day basis. And I know that's hard in the public markets. And -- but we're showing progress, and I feel confident about where we are in the direction that we're going in.

So you bought back, I think it was $3 million worth of stock in the second quarter. Walk me through your flexibility of doing that. Do you set that up at the beginning of the quarter or sort of runs? Do you -- are you in there day-to-day like I want this price, not that price? How do you do that?

Yes, so there's 2 different methodologies you can use. One is to be doing open windows being in the market, setting pricing, prices you want to buy at and things like that. And then second is setting up a program like a 10b5-1 where kind of you setup the parameters at the beginning of that for whatever length you set it up for and then it runs on its own. We've used both where we're in, in an open window buying at prices that we want to buy at and 10b5-1s to kind of buy on autopilot. And so we continue to look at the market, a variety of factors as to how much we're going to buy. That includes things like cash on hand, what kind of cash receipts we're projecting to have in the near term as well as the stock price. And that's a very important consideration as well that we'll look at.

Is it fair to say that if there were problems in your path, and so Phase 1 or 2 and 3 that you probably wouldn't have been buying stock over the last quarter?

Yes. I mean, look, at the end of the day, part of the reason why we set this program when we did and the fact that we have been active is because we continue to have confidence in the business plan. And we continue to have confidence in the progression of the pipeline and see cash coming in from contracts, not only that have we've already contracted, but contracts that we expect to have in the near-term future. Again, and we talked before about the prepaid nature of the deals that we're going to have, where we expect most of them to deliver the proceeds of the contracts within the first several years of the deal, which is going to provide us with the opportunity to return capital to our shareholders, which is a significant priority we laid out last year and was the driver of the $50 million share buyback program that we put in place. And I would hope as we add additional contracts, receive additional cash proceeds, we increase the amount of dollars we're setting aside to buy shares. But if I lack confidence in our plan, we definitely wouldn't be in the marketplace buying back shares, but because we have that confidence we are.

Okay. I think there were 3, what we call, letters of understanding you announced?

Letters of Intent, LOI.

Letters of intent. I knew the acronym, I couldn't remember, that you announced last week. If I'm a customer, do I care about signing an LOI or is this more you asking them to do it to sort of show progress?

So let me talk a little bit about letters of intent. So we've done 3 deals to-date, Amarin, Evergy and SDG&E, only one of those had a letter of intent. So not everybody is going to do a letter of intent, don't need to go through that process to get to contract with us. I would say we discuss letters of intent and sometimes that's something that the utility wants to do or doesn't want to do is really kind of way they want to run their process. What it does for the utility is it really starts for their deal team that starts the internal process of moving things forward because there's a lot of mechanisms in the vast decision-making machine that's got to take place in those companies. That they want to put on the board that they've got this letter of intent and you're going to start to see activity here, meetings, discussions of business cases, all of that type of stuff that's got to take place to get from A to Z to get a contract done. So that's very important. What it does on our side is it says, okay, we think we're going to set aside this spectrum for this potential customer as well as starting to kick off that retuning of clearing process that we're doing to that area because we would consider them to be a relatively near-term customer as we work through that process.

Did those 3 signed letters of intent on their own volition or were you asking them to do that?

No, they did that on their own volition.

Okay. And are there other companies that are in a similar position, but have not signed letters of intent?

Correct, yes, we have customers that are kind of in our final phase of working through that, have not sent letters of intent.

Okay. Okay. Not to be blunt, but what's the sort of hurdles that you need to get over or they need to get over to move from that letter of intent to actually signing a contract?

Yes. So it's an internal process that they've got to go through. One, they -- of course they have to come to a deal with us about what they want to do. But there are layers of decision-making that has to take place across these companies, whether that's going through executive committees, going to a CEO, those types of things that have to take place that maybe your parent company, but also then they've got to shift and go through the operating companies. Because as I mentioned earlier, the operating companies are really where the regulatory process takes place. Those are the entities that are going and doing the filings with the PUC, doing the testifying all of those things that have to happen. So you have to get the presidents and the leadership of the operating companies to understand and to buy off on the arrangement that those are going to take place. So there's kind of that double selling process that you have to go through. And of course, as you get to bigger entities that have a lot more operating entities, yes, more states and more PUCs, you've got to work across all of those pieces. So a company with one -- with the parent company and then several operating companies because they cover a lot of states. That's the sales process you've got to go through to get this across the finish line. It's something that we've -- our machine works its way through and does all of this. But you run into issues like the executive committee meets once a quarter. And they don't do ad hoc decision making. And so you've got to get on that agenda and you've got to work through that process. So once you get that, you go to the next curve. So that's part of the decision-making that takes place. And of course, they're all different entities. But we continue to see the progress and it moving forward, talking to more folks about contract terms and things like that, working through spectrum delivery, pricing and then just having to work our way through the different entities and really that final set of decision-making that's got to take place to get these things done.

You mentioned earlier that you're helping one of the utility put together their business case. Can you help us with what are the big pieces with that business case that you're helping them sort of lay out?

Yes, so when you think about these networks that are getting built, the spectrum piece, usually, depending on a variety of factors, is somewhere to 15% to 30% of the overall spend of their wireless network. So it's that other 70% to 85% that is inclusive of really building a broadband network from scratch, cell site, core, backhaul and probably 50 other things that go into that when you're thinking about the cost of deploying capital dollars. And so it's working on the math, working on different vendor conversations that we are helping to support who's going to come in and do the hardware? Is it going to be Ericsson, is it going to be Nokia and talking to them with the utility so that they can help make their decisions and work through all of that and looking at what the different options are. But that's being asked to do it. And I look at that like it's a sales support activity that we ought to be doing to get these leases done.

It sounds like a little consulting sales support going on inside the company. Are they paying for you this upfront or this is all sort of part of the, let's get it done?

This is all part of let's get it done. So this kind of goes into how we look at the potential for services moving forward.

Right.

And last week we put out a press release kind of coinciding with the UTC, Utility Telecom Council, and then this week's DistribuTECH conferences, which are very important for utilities around the platform that provides an ecosystem for utilities, which hopefully will provide some recurring revenue for us in the long-term. But right now it's about developing scale so that when utilities come to want to build out these networks, work at 900 megahertz, they know that there are going to be things like core that are going to be available for them, so we're working with AWS-3. There's going to be cybersecurity enhancements that are available for them and variety of vendors that we're working with that are part of that as well. And then even working on multiband devices where the 900 megahertz of CBRS because as you remember, there were quite a few utilities that bought spectrum at CBRS or the CBRS auction. And so we've been asked to help support and drive dual band devices so that they can use both of them, and they're available and there's an ecosystem and these things are built and available at scale. So it's really utilities helping to drive this process. And so on the leadership board of, kind of the platform that we're talking about are multiple C-suite level executives at utilities, including several of whom are from companies that we haven't contracted with. So -- and again, this is all focused on 900. So you can draw your own conclusions about what that means for those companies that haven't contracted with us yet, but they are driving what they want to see so that when they build out these networks. These things are readily available for them to move forward with.

You mentioned core on AWS. So I think of that as, I think, of a 5G software-defined core. Can you build a 4G core on AWS?

Yes, you can and so they're very volatile. So let me talk about one of the ways this came up. So Amarin and Evergy are 2 utilities that are side-by-side with some overlapping territories. And so naturally the customers started to have the conversations with us after they had signed with us on the spectrum is, why do we both need a core? And so we've been working through what those different options are and working with AWS-3 about how they can help. And they're very excited to be a part of the platform that we've been rolling out and even at present, some of these utility conferences to be able to talk to utilities about what they can offer.

And so do you imagine Anterix sort of owning that core and then sort of leasing that around or is that just, somebody can drop it on AWS and sort of tie into it somehow?

Yes. And so how that business plan is going to work at the end of the day is still being worked out in influx. But I would imagine that most of the work we're going to do around a lot of these platform things are going to be done through vendors. Third-parties that are going to do the work, we may be an integrator. We may be providing the consulting services of how they put things together. And we'll see how that flushes out over time. But we're not going to have armies of people to maintain these things. It's going to be maintained by AWS or by vendors who are doing X, Y, and Z. But I mean, in this platform are world-class companies. They include Nokia, Ericsson, Motorola and then you go down into specific high-class cybersecurity companies that are involved as well. So it's across the economy of people who want to be involved and it includes over 80-plus companies.

Okay. We have talked in the past about other things you had to do with the cash flow you have coming in. Is there anything in that sort of set of opportunities that could be a real place to put capital?

Yes, no, our intent is not to set things up with a lot of capital. Our intent is spend a relatively low amount of money to get these things setup and use vendors and third-parties to really help drive it without us having to do that. Because, remember, the highest intent that we have is to return much money to shareholders as we can. But we'll continue to look at these opportunities that are going to be accretive. We want to make sure that they are or we're not going to go forward with them. So that's how we're looking at, that's how we're looking at building out the business model for these things. So I don't intend to spend a lot of money upfront to drive these things, and we'll see how the business cases develop over time.

Okay. Let's switch gears and talk about where the initial customer signed are, Amarin and the it 2?

Yes.

How far have they gotten down the path?

All Amarin, Evergy and SDG&E, are all in the phases of actually putting together their networks, working with equipment vendors that are getting stuff set up. We have actually started to deliver broadband spectrum to Amarin. And I believe we're on the verge of -- we've gotten as public that we've gotten broadband license for Imperial County, where there are 3 counties for San Diego Gas & Electric. So we're doing the work necessary that we have to do to deliver the broadband spectrum and they are in different stages of getting network setup and starting to run devices.

Okay. And as we've been talking about this for a few years, 5G has gone from sort of out there high in the sky with the expensive gear to getting to the point where I don't think it's a whole lot more expensive than 4G. Are your customers starting to look at why would I deploy a 4G network rather than 5G?

Well, I mean, I think they're all interested in what the evolution is going to be from where they would be if it went from LTE to 5G over time. And all of them, I think, as a part of this process, see the path of what they would have to do. But again, the core set of a foundation with spectrum has to be built out for their service territory, whether -- no matter what technology they're going to use because without having that low-band spectrum, it's really hard for them to move forward. So I think the conversations we're having are all centered around LTE right now. But 5G is out there and we talk about the path forward to 5G with the customers that ask about it, but we haven't seen that deal really in this.

Okay. Are there other bands that people are tying into these networks? I mean, CBRS is something that some of your potential and real customers bought and some didn't. How tied in is that? And are there other bands that people are looking at using as well?

Yes. So just coming back to CBRS for a second. So I think 11 utilities bought spectrum, including -- about CBRS spectrum, including San Diego Gas & Electric. And so they're looking at deploying both as a part of their network build-out, especially CBRS where they need much higher capacity. Amarin also has potentially looked at whether or not they would want to use CBRS, but unlicensed CBRS channels where they might need capacity. And so we'll see how that plays out over time. That's really been one of the key focus areas, particularly around the entities that bought that CBRS and being able to potentially deploy both because you know that CBRS is not necessarily the best for wide area networks. We also have an arrangement with Federated that's public that we've talked about, where we're, in essence, reseller for each other for different spectrum opportunities. So we're working very closely with Federated on places where we can help deploy CBRS for entities that may want that as well as a part of the 900 deployment. So we're doing that. But other bands of spectrum, really no. I mean, all of our conversations have really been focused on 900. We haven't, from a competitive standpoint, other than the fact that everybody these days is talking about private networks. A few years ago, that was kind of a head scratcher for a lot of folks. That's just really become a thing. So I think you're seeing people out there talking about it. And we'll see besides the carriers what other bands of spectrum come to play here, if at all.

Okay. Where are you in the process of rolling out more of the spectrum in that 900 band?

Sure. So we continue to move the retuning process along kind of as we had planned. The cost estimate that we put out when we got the report in order of $130 million to $160 million, we're still -- we still expect to stay within that range and work our way through that. We have taken the amount of counties where we are greater than 90% of ownership from roughly 40% at the time of their report in order to almost 2/3 now, which -- and that's a significant milestone because of 90% triggers the mandatory retuning process. We can get across that. So we continue to make significant efforts across the entire United States. We're also delivering spectrum per the contract parameters of the deals that we have gotten done. And so there are challenges in markets where there's a lot of incumbents, and we knew that there would be, those are not surprises, i.e., Southern California, but it's just more things to work through because there are more incumbents. So, it's more cumbersome, that figure now, where to put people within the band or if we can find places to put them outside the band. But we -- but the challenges were expected, we're able to work our way through. And I think the process is working kind of on the timeline and on the budget we have laid out.

Early in your process of, before you became public, we talked about some people would actually want to be transitioned to different parts of the band. Some people would just say, you know what, give me the cash and go away. What have you seen in that mix?

Yes, so early on it has been -- it was mostly we were buying channels at 900. What we have now seen as we move through those, we're getting to the point where we're doing more of straights returning, which includes markets where we can do easy retuning from 1 place to 900 within the broadband allocation to outside the broadband allocation. But there are some markets that have a lot more incumbents where we even bought 800 megahertz and moved people into 800 megahertz to their systems. And we provide -- we help provide equipment that we already have for them to be able to do that. So that -- the mix is becoming more like we thought it was even though it was heavier on the buying side at the beginning, but part of that was a little bit of a low-hanging fruit to work our way through. But right now in Southern California, which was a heavy incumbent area, it's mostly straight retuning.

So give us an example of what's going on in Southern California. What are the challenges that you're seeing?

Just a lot of incumbents.

So like who?

So, the -- L.A. Metro Transit Authority. So remember, because of the way this works, you don't just have to clear the channel specifically within a county, but they have a 70-mile radius. So we have to clear L.A. County to clear the 3 counties for San Diego Gas & Electric. So L.A. MTA is a very big incumbent, it's the Metro Transit Authority. And so they run very heavily on their system for radio communications. And so figuring out a plan to get them moved without disruption to service takes time, project planning, is more costly than others would be. They also have a pretty significant number of channels. So you got to find places outside the broadband allocation to put them that makes sense. So that's a bigger type of deal with the public entity who doesn't -- you can't afford to have disruption of service; that you've got to solve for.

I just thought of the movie Speed where they're driving around the bus and then all of a sudden they don't have service. Okay. And is that what you're looking at with thousands of buses and public utility trucks and things like that?

Yes. I mean, that's the type of thing that they've got to work. So you're always doing where there were bigger systems. It just required more project planning and how they're going to do it. The team has done this before at 800 megahertz and worked their way through all of that with a lot more public safety entities, which luckily we don't have as many here without disruption. But when you get to bigger systems, particularly public entities like that, they cannot afford to have disruptions. So you've got to figure out a way to get things changed over in the middle of the night and all of that kind of stuff on a plan, work with the entity, figure out how to help pay for whatever needs to be paid for to do all of that, provide channels for them to do that. Part of the process and early on that we have to go through is really looking channel-by-channel as to where we can move them that makes sense and trying to find the right channels to be able to do that outside of the broadband allocation.

Okay. Even as you've sort of been later getting deals done, you've stuck with your guidance of 2024. I think its $1.8 billion of deals to be done. What gives you confidence that it's going to be that sort of step change in pace of deal size?

Yes. So I think a couple of things. One is we talked about on our call last week that we now have in our Phases 2 and 3, we have over $1.8 billion of what we see as contracted value. So having them move kind of out of that initial Phase 1 exploratory stage and to having real discussions with us for more than that value is one we think is very important. 2 is we're starting to see bigger deals than anything we've done so far. I mean the biggest one we had was $50 million with San Diego Gas & Electric. Now we're starting to see much larger deals in terms of aggregate dollars. And these are these larger entities that I talked about with more states, more operating companies, all of that. So that is where I see significant progression as well on moving those larger deals through the pipeline. So the pipeline progression that we see, and I know, again, this is hard because it's -- a lot of its not public. It's under NDAs, all of those types of things, is all positive and all moving in the right direction. And I think the other key thing to note is we haven't anybody fall out of the pipeline. We have anybody say, no. It's just they move at a pace, they move that through our pipeline. Again, as I said earlier, I'd love to have more contracts announced at this point time, but we are where we are. But we see the potential to get to that target that we've laid out there and a path forward to be able to get there through more deals and especially some significantly larger ones.

Is there a trigger for them, something that they want to hit a particular timeline for it?

It depends on the utility.

Okay.

It depends on the utility.

Sort of overarching federal dollars that has to be allocated based on network modernization and things like that?

No, there's not. And so since you mentioned federal dollars when we talked about, so there's buckets of money in the new infrastructure bill for things like rural broadband that they potentially could -- or good modernization that they potentially could take advantage of. And so several utilities that are looking at those opportunities where they could use federal dollars to help on their build-outs. Not sure how that's going to play out or who's going to apply for what bucket of dollars, but the funds are out there for them to be able to do that in some cases, depending on the utility and what they want to do. So there's that -- those dollars that are -- but there's no set time that this has to be done by this point in time. This is just how we see the progression of things moving forward that the 2024 timeline is still our target. Could things flip by a quarter or 2, sure, but as we've seen before, but that's the target we're shooting for, and we still have confidence based on the progression we're seeing through the pipeline.

Okay. We hope there is a microphone.

I'm sure each state is different, but can you talk a little bit about what the likely objections you would face from PUCs would be and what your high-level rebuttals are to each of those?

Yes, I think it's less about a spectrum lease per se and more about the overall spend of a project, which in some entities cases could be pretty significant for what they've got to build out depending on the service territory, the number of cell sites, all of those types of things, which just will lead to questions because some of this is new. And that's more, I think, the questions than anything else. Why are you building a broadband network? What do you need to do? Why is this happening? If you remember, the vast majority of utilities in United States have had communication systems, a vast array of them for a long, long period of time. It's just most of them are on old outdated technologies. And so now with the changes in power distribution or power generation, they need to have more things like more sensors and things like that that come into play to be able to measure all of this activity and also help modernize the grid. So that's part of it. That's why we are very active in being involved with the state regulatory or community and doing as much outreach and teaching to them as to what they would see and expect from these types of rate cases and business cases and things that they'll see coming forward and get over those initial kind of what is this set of questions?

If I could just ask one follow-up question. Has your level of confidence in the ability to succeed in that changed in light of the shifting macro environment where money may not be as easy? There's oil prices and gas prices and energy price inflation that's passing through and many of these investor owned utilities may not be able to get that increase in rate base or at least the capital allocated to do some of these projects?

It's a good question. And first I'm going to caveat my answer by saying I'm not a state PUC expert. So -- but again, the utilities are intended to spend capital, and that's part of the process that they go through. And I'm sure that they'll get extra questions as they move through whatever they're putting forward from a rate case perspective because of the pressures that they are facing from the inflationary environment as well as the consumers at the end of the day. So I'm sure there'll be some extra questions from PUCs about everything that gets put forward in rate cases from that perspective. And quite honestly, I don't -- we haven't seen that play out from that perspective. So we'll have to see how that moves forward.

We talked about PUCs as customers, and we talked about other potential customers over time. Anything changing there in sort of the other customer landscape?

Yes, I would say, first and foremost, our pipeline and our focus is in the investor and utility space, I mean, that's where the vast majority of the time of our team is spent. Are there other verticals where we have spent some time and we have talked to entities? Absolutely the answer is yes. Those have not moved forward to this point where it's enough for us to talk about on a material basis, but there's different opportunities in small pockets of the country that we continue to reach out to. But again, the vast focus of everything we're doing is in the IOU space.

Okay. I'll take the last question from the iPad because I think it's a good one. Since the share price is the same as when you got the report in order from the SEC and you've since signed 3 customers. The market is not rewarding your achievement. So have you and the board considered evaluating strict alternatives to improve shareholder value?

See, that's a great question, Phil.

It was well written I thought -- maybe just…

Yes, well, I'm going to -- I'll say I'm not going to go into what we've talked about with the Board around strategic alternatives or anything like that. But look, I mean, we continue to have confidence in the direction that we're going in, the pipeline that we're going in and we continue to share all of that with our Board as to how we see this playing out from that perspective. I hope to see the share price as we start to announce deals reflect what we think the value is as we move forward. But again, we're open with our Board about all the different ways we can move this forward.

Okay. I think that's good. Thanks very much.

Thanks Phil, I really appreciate it.

Thanks, guys.