Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. Delighted to have Tim Gray join us from Anterix. Welcome, Tim. Thanks for making the trip.

Thanks, Simon. We're really happy to be here in this year's conference so well attended. We're very excited. Thank you.

Great. Before we get started, for important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

So perhaps you could just start, Tim, with just the elevator pitch on Anterix for those who are less familiar with the company?

Sure, Simon. So thank you. We own a 900-megahertz block of spectrum that we are using to lease out to investor-owned utilities for the most part, serving critical infrastructure but really going after investor-owned utilities. They've got significant change going on in the industry where because of climate change, grid modernization, they need to make significant change across their entire infrastructure. And part of that is with the enablement of private broadband networks, which we enable with our block of 900 megahertz spectrum.

And you got that spectrum approved by the FCC, what was it like 3 years ago at this point?

It was just about 3 years ago, in May of 2020 they enabled the 6 megahertz of broadband allocation that we have been busy clearing and providing 4 leases so far to customers.

Great. And you touched on the utility interest in it. But give us a little bit of color of what people are using or plan you think are going to be the key use cases. Why do this versus some other wireless solution?

Yes. So for utilities, command and control of their networks. And that's not just telecommunications network. That's all of their infrastructure is extremely important. And so, as they go through this transformational change that I talked about, they need to be able to have connectivity. And you've seen generation of power now is completely different than it used to be 10, 20 years ago where you just had one coal plant or a natural gas plant and send power outwards. Now everybody is generating power, whether it's on your solar roof, wind farms, things like that. So there's a ton of data that now is being used and needs to be measured and has to flow across these networks. And their older systems don't have the capabilities to do that. So they're looking for new solutions. And one of the key components for them is having a private network, not something that's connected to the public internet, but a private network where they can control it, they can control the cybersecurity, they can control where sites are built across their network and really drive those sets of solutions that are very specific to them, whether that's fire mitigation, whether that's data management, whether in some cases it's just OpEx reduction by taking tons of old systems and shutting them down and enabling the power broadband. So that's just a kind of skimming along the surface of what some of the uses are that we're seeing.

Great. And isn't there an aspect here that the carrier networks might not cover transmission lines and so forth? So in many cases, they need to architect their own solution?

Yes, they're able to tailor their coverage for exactly what they need. They're able to put those cell sites where there's no people, where those transmission lines are, where the carriers are not necessarily going to have those cell sites. They're able to do things like harden and add extra power generation to cell sites so that when there's an event, those sites will stay up or when they go down, they'll be able to drive what sites come back up faster because for the carriers, they're going to put it up -- put a site up back where people are versus going out to the middle of nowhere where substation is, that's important that the utility has connectivity, but they can't get that cell site up when the carrier is running that process.

You've spent a lot of time educating the utilities on what you can use the spectrum for and how to integrate it into a network. Can you talk a little bit about those outreach efforts about the pilots that people are doing and what your kind of signed customers are, where their deployment stands?

Yes. So, so far, we've got 4 agreements with utilities. All 4 are currently have networks up and running with 900-megahertz spectrum. So we've been able to enable broadband licenses in each of those areas, including San Diego County, which we just got approved here very recently. So -- and seeing those up and running, that's further proof points to other utilities that they're able to make these networks happen and make network deployments happen on a timely basis, so they can get a prudent use of something that they're capitalizing through their rate base up and running as quickly as possible. And so just for example, as we've talked about, and this is San Diego Gas & Electric is very -- fire mitigation is very important to them. So that's what they're doing to set up for as a first priority use case for them and driving that really. Excel, who we signed most recently, an $80 million deal for a utility that's across 10 states, they're really interested in data management. And that's very important to them with all the things I've talked about changing across their network. So that's been the core for them. So what we're seeing is almost utility by utility, there's a difference in what their use cases are and what's important to them. And that's great. So we could sit down with a catalog in front of the next utility and talk about the multitude of use cases that are available for them to use. We've also enabled what's called the Anterix Active Ecosystem. And through that program, which now has over 100 vendors involved, which goes all the way from the big infrastructure delivery guys like Nokia and Ericsson, all the way down to much smaller players. So we're able to point to utilities when they talk about specific use cases around look at this group of vendors that can provide this. They've already done some work at 900. They put time and effort into the capabilities to be able to deliver you something sooner rather than later, so you can put it into your network right away as soon as you have your network deployed. And so with those capabilities there, these networks can happen faster and faster.

Great. And do you want to talk about UBA?

Sure. So several years ago, we helped create what's called the Utility Broadband Alliance or UBA for short, which now has spun off into its own organization that's run and managed by utility members. And so their specific remit is to talk about private wireless networks and what can be done with broadband solutions. So they've got -- they just had a big show recently in the fall that was -- had very significant attendance really run by utility members. It took place in San Diego. I believe the next one is going to be run in Minneapolis by the Excel folks. And so it's great to see kind of utilities managing this and really running the process of how we get to private wireless networks. And they're the ones sharing with each other information on how to build use cases -- excuse me, how to build business cases, what kind of use cases are there that we can use. And so that, we think, is very important that, that's a stand-alone individualized organization run by utilities.

Great. And can you update us on your pilot programs? How many of those you have? And how should we think about a pilot, how long does it last? And what's the decision process after that?

Yes. We've seen more than 10 pilot programs run across a variety of different utilities. And I would say the length of them varies a lot by utility-to-utility as to what they want to do and what their use cases are and how they want to work through those different solutions. And I would say those pilots or tests, often case there's something that utilities need to do as a part of their process when they're running through new technologies. It's not specific to a private wireless network. It's any new technology that they're putting into their networks. So they've got a testing process that they have to go through. And some, it's more rigorous than it is for others. Some don't have to go through that because they've seen other utilities do that. So we've seen success across the board, across a variety of different use cases. And several of those from Amarin on have led to contracts to date or with customers that are much further along our process.

Great. So maybe we'll pivot from that level of interest into the pipeline overall. So you have, what is it, 60 utilities in the pipeline? Can you just -- is it $3 billion of potential value just based on that?

Yes, there's over 60 utilities within the pipeline with over -- what we see is over $3 billion in potential contracted value. It's important to note that we've not seen anybody drop out of the process. Sometimes there's fits and starts where someone may run into another issue that's got to slow down their process a little bit, but no one's really dropped out of the pipeline, which we see as a really positive sign about where we're going with each of these utilities. And so, that is a positive process that we've been going through. We've got in our phases of 1 of 2 of our pipeline, we put them into 3 phases. There's over $1.7 billion of folks that have gone from past the initiation phase of discussions with us and to further parts of the overall kind of contracting process. And so that's been important. So just this last couple of weeks ago in our last earnings call, we introduced something else that -- to talk about our customers and the process that they go through called demonstrated intent. And that was really to look at a scorecard across a variety of things that the utilities do to go from A to Z in the contracting process and really grade those, rank them, look at how far along they've gotten in the process. In previous calls that we've had investors and discussions with you, we've talked about where we are with Letters of Intent or LOIs, experimental licenses. And those are great as one-offs. They don't necessarily mean as one-offs, a significant amount of customer intent. But when you aggregate a lot of the activities that the utilities go through in part of the process, they've done 10 or 12 things, including sometimes public comments. They've done RFPs where they're specifically talking about sole-sourcing 900. Those are things that we wait and look at and score and wanted to say to investors and as we look at it ourselves I mean, on an internal basis, that these are important ways that they're showing an intent. And they've scored high enough. We say they've got a significant amount of demonstrated intent to move forward with a private wireless network, particularly at 900 megahertz. So that's what we wanted to talk about and put out there. We'll be consistent in how we talk about that going forward in the future, where we...

Update that every quarter?

Yes. We'll talk about the headline numbers. So we've got 15 companies with over $800 million in that demonstrated intent category as of our last earnings call. We'll talk about where those headline numbers are each quarter as well as what anecdotally has caused those numbers to change.

Great. And if I look at that demonstrated pipeline, it's a large number, it's bigger than your market cap right now. I mean what is the -- do you think all of those ultimately will sign with you? And is this all going to happen? I know you don't want to give time lines, but in -- this is an area where there's a clear process towards the final contract or is it little bit earlier than that?

Yes. I mean I don't want to guarantee that everybody is going to sign or something is going to happen that makes somebody go in a different direction because I can't guarantee...

Do the companies know they've been put in this as well?

I don't think so. Not necessarily. But when we look at it and see what across a variety of things that are public, that are private with us happening, that they're moving forward. And we look at that as a very positive sign. Could something happen where somebody drops out over time? Sure, it could, but we haven't seen that to date. So we feel very good about demonstrated intent as a signal that they're going to move forward to finalizing the contract process.

Great. You talked about your contracts. I think the market has been frustrated that you've had one deal in the last 15 months or something like that. So I think you talked on the last earnings call that it's been frustrating to you as well that this stuff has taken longer. So just to unpack that a little bit and just talk about what has caused the delays in terms of getting -- not getting more contracts signed by I guess, FY '24, you wanted to have a much bigger number?

Right. No, I agree. And we have been frustrated as well. And it's hard as we look at the process, when we look at our key learnings from the deals that we've done for us to pinpoint exact timing. And so we want to be very forthright about where we were with that on the last earnings call, and that's why we came out with kind of our discussion around demonstrated intent and backing away from specific dollar amounts at specific time lines. And so I think when you look at it, I think the amount of process that has to take place within a utility to move from, again, A to Z to get that contract done has been significantly more than I think we had anticipated working through that. And so much of that, the vast majority of it is really out of our control. There are things we can do to move forward a capital approval meeting within a utility that's got a date set 3 months from now kind of is what it is. And so we don't control that. There's not much we can do to move that as it exists. So what have we done to kind of try to move the ball forward where we can? Recently, with our customers, we've developed what we call our playbook. And that's really a set of chapters around different challenges that we've seen utilities face when we've been working through the contracting process with them from the contracts we've gotten to date as well as things that are currently in our pipeline. Things like, how do you look at a business case? What are the challenges other utilities face when they work through their business case? And it's a chapter we can hand off whether they want to use it. It's totally up to them, but they can see experiences that other utilities have had things like the regulatory process, things like use cases are also in there. So that those challenges we have already anticipated, and we can move the ball forward because they've got this information. Does it move things faster? At the end of the day, I don't know, but at least we're trying to address those where we take questions that they're going to have off the table as early and as quickly as possible.

Great. I'm sure they appreciate that. And in terms of the size of the contracts, the lumpiness, it's -- you've had lots of different size, lots of different formats. I think if you say 15x 800, it's what, a $60 million average, something like that. But how should we think about what that is everything going to be in that range? Or might we get a $150 million or $200 million contract coming out of that?

Yes, that's a good question. So we've talked before about the median size of the deals in the pipeline being around $60 million. That hasn't changed, that we still see is the same. So you will see a continued variety of different sized deals. And really, you have to look at the investor on utility space where there are much -- they're very large utilities that cover some very large urban areas where spectrum value is significantly higher than for other smaller utilities that are more rural. A couple of the deals we've done to date cover some more rural territory. So those deals have been a little bit on the smaller side than some of the bigger ones that we see forthcoming. But yes, I would say, in the future, you will see significantly larger deals in the hundreds of millions of dollars. You'll also continue to see deals that may be on the very small side. And it really just depends on, again, how you look at the value of spectrum for a specific utility in their territory.

Great. And you may reference the spectrum there. I think the deals you've done so far, you don't always break out exactly the spectrum value. But generally, it sounds like you've been pretty happy with your ability to monetize that, and we've seen in C-band or whatever spectrum value is generally up and to the right?

Yes, exactly. I mean we talked several years ago that we wanted our goalpost to be the 600-megahertz auction in the AWS-3 auction. So far, all the contracts we've done to date have gone right through those goalposts and we've been very pleased with that. And again, in conversations, you see where when we look at it, that spectrum values have continued to go up, whether that's in auctions, private transactions, what you just saw take place with some 600 megahertz spectrum between Colombia Capital and T-Mobile sold for significantly higher than what was paid at auction. So all of those go into the mix when we're having conversations with potential customers about how we see the value of spectrum moving forward. And again, it's a finite asset. And so people are willing to pay premiums for it when you look at it and you look at auctions. And so, that all goes into our calculus.

Let's assume you're successful at converting most of your pipeline. You're still going to have a lot of spectrum that is unused. Presumably, there will be spectrum covering, I don't know, 1/3 of the country or 1/4 of the country or something. So what are the plans for any spectrum that isn't taken up by investor-owned utility?

Well, I think one of the things that we're doing is not only looking at investor-owned utilities across the broad scale of the pipeline, but also some other opportunities as well, whether that's gas, whether that's utilities that don't fall into that IOU category. Those are some specific clear-cut cases where we've got discussions that are currently taking place. Whether those lead to contracts at the end of the day, I don't know, but we're actively talking to folks outside of very specific IOUs. And so we would continue to do that for pockets of spectrum that would go unused for whatever reason because the IOU hasn't signed or because there's not an IOU in a specific territory. We'll continue to look to ways to monetize that spectrum as we work through the process. But I think if we convert the vast majority of our pipeline and the way we see it, there's only a small sliver of spectrum that's kind of left over, I think, less than 20% from our perspective. But that would mean we'd have to monetize a huge amount of what we've got in our pipeline, which we still feel very good about over time. It's just the time line that it takes to get there.

It's a good problem to have.

Yes, exactly.

Yes. Private networks is a pretty popular buzzword at Mobile World Congress and even here this week. I know DISH talks a lot about it, Amazon has talked about it. So just talk about the competitive environment either from other companies that are applying a standup private with their own spectrum or from the telcos that are going to try to stand-alone 5G and network slicing and so forth?

Yes, you're right. Everybody is talking about private networks. I mean you see the quotes that just are expanding from, not only from the carriers and others who are involved here, but also from enterprise that want them. And so that has been ever expanding. And so we're excited about that because we think that's a good thing as we move forward from our perspective. If you look at Anterix to date, we probably have from a square mile perspective, the largest amount of private networks that have been sold across the United States at this point in time. And so we think we're a leader in the private network space, and we'll continue to be and continue to do so. And we've done a lot of work to get into the utility space where we can enable those and drive them to completion. But look, everybody is talking about it. So -- and we always knew that once we got a little bit of success, there would be others who would want to come and play here, particularly in the utility space because of the value that's there. What does that mean at the end of the day, from our perspective? I don't know. But we've done a lot of work to date to get embedded within the utility space to be a trusted partner. And that, we think, is very important when you're having these conversations. We've done the work around how to capitalize the lease, which the utilities that we've done leases with so far have been able to do through their regulatory process. That is very important. So someone coming in with a different setup and an OpEx structure is not necessarily as favorable to what they want to do and how they're set up and want to run their financials. So it's things like that, that we've been very nimble in satisfying our customers that we think are very important and will continue to make us a leader in the private network space. But you never know with the power and the heft that some of the larger providers here, how they're going to think through things and how creative they could be at the end of the day. But we think with the work that we've done to date, we're a little bit ahead.

Okay. And as you said, people haven't really dropped out of your pipeline...

Right, exactly.

[ Going somewhere else ]. So -- and Carrier's, DISH, all of these guys, they are the going to continue to talk about private networks. But they've all said the same thing. They've taken a little bit longer than they thought, which, thank you for going somewhere else.

Exactly. Yes. So and the carrier is DISH, all of these guys, they're going to continue to talk about private networks. But they've all said the same thing. They're taking a little bit longer than they thought, which I think you've heard us say too. But we think we've got a little bit of a head start, particularly in utilities with all the work we've done to date.

And I think some of the utilities bought CBRS spectrum, and there is scope for higher band spectrum for maybe indoor type environment. So what are you seeing in terms of companies integrating your spectrum with some other spectrum?

Well, I think it's important -- just as one example, with San Diego Gas & Electric, who bought CBRS and then bought some spectrum from us, they really are looking at kind of a dual purpose with both bands and being part of their network. And so they're looked at as a leader there. I think 10 other utilities bought CBRS during that. And so they're having active conversations with folks like us or with San Diego about how you're doing that and what are you doing and what are the use cases that you're thinking through. And some are also looking at unlicensed as a part of a way to enhance capacity at certain places where they're going to need to be able to do that, whether that's at a certain substation or that's at a campus environment. But those are things that they're definitely looking at and definitely thinking through. And we're happy to help support that process with things like helping to drive chipsets that have both sets of spectrum on it for CBRS and for 900 megahertz. And so that's all in development now, really driven by us through the Active Ecosystem that we've got and some of the partners that we've been able to develop over time, which are all things that are meeting the needs that they've got, the utilities have.

Great. So you alluded a little bit to the capitalization of the lease. So just talk about the structures you've signed, some of it involves selling the spectrum and then how the next few deal should look?

Yes. I mean -- so we've done 3 leases to date that are either 20 or 30 years in length. And so our original business model, if you went back and looked at it was we had the expectation we get paid over time with escalating payments and all that. And as you know, really driven by the customer from the capitalization process, it moved to how do we prepay for the lease so that we can drive -- so that we can capitalize these leases in our regulatory process. And so we've had -- what we've modeled is that the vast majority of the leases that we have going forward will have some sort of -- we have prepayment terms where they're paying over the first 3 to 5 years of the lease. And that's kind of an average model and the way we look at it. I mean, Evergy paid the whole amount of their lease within 30 days of us closing the deal. So I think that may have been more of an aberration, but you're going to see different flavors of that with how they want to look at it as they work through that process to begin. This is all customer-driven. This is not driven by Anterix. This is us being nimble to their needs and what they're trying to do so that we can help them out and get to lease completion faster. And so we're happy to do that. The math has worked out for us on 2: 20-year leases and a 30-year lease. They've all got extra periods built onto the end of them for additional 10-year terms. So there's additional benefit that we'll see on those leases once the first terms run out.

You bring up an interesting question. If we were sitting here 10 years from now, what would Anterix look like? Would it be this sort of Shell company that had this huge cash flow stream coming on renewal? I mean, how does -- how do you envisage it looking like, you'd be very active and then you will have received the cash and then you kind of go dormant and then open things up again? Is that the right way to think about it or...?

It wouldn't necessarily be a bad problem to have to have leased out all the spectrum and have received all that cash. So I'm looking forward to dealing with that challenge. But I think that does raise questions about where can we develop some potential revenue streams over time to be more recurring? And those are things that we continue to look at, and we've talked about our platform that we've developed and are continuing to look at different opportunities there, whether it's helping to support a cloud core, whether it's helping utilities get towers and those types of things. Those are all things that are potential opportunities for us over time. Although today, I must say and remind people that our main focus is on getting these leases done, but I want that to be the challenge that we have where we're looking for those recurring revenue streams because we've leased out so much spectrum, and we just sat back and collected a bunch of checks.

And what happens in year 20 on these leases? Is there a specific pricing or an arbitration mechanism? How does that all get determined? Presumably, they've built out a network on the spectrum and they'll have an incentive to keep it, but where does the negotiating power lie?

Well, so there are specific terms that we've got built into the deals that we've done around what those next terms are going to look like, how they're going to be priced out and things like that. So there's a very specific process built into each of the contracts. It's slightly different but -- so there's protection for both us and the customer at the end of the day, but we see getting current value at the time from our perspective as to what that would look like in 20 years.

So that would account if there was inflation or whatever, that would account for that?

Yes, absolutely.

And does that start like a year out or 2 years out? What's the -- when do you start having that evaluation process both year 18 or 19, if you remember?

It will happen in the years leading up to it.

Right.

There's not a specific time line per se per contract, but there's -- in a couple of years leading up to it, there'll be a set of discussions around that next renewal.

Yes, because you've got such an unusual GAAP accounting versus your cash accounting.

Yes.

And maybe just talk about that, you've got no debt. You've got a nice cash balance. You've got a buyback program. You've got cash coming in. How do you, as the CFO, balance all of that and take advantage of the stock price and yet remain prudent from your capital management?

Yes. So just so people know, so we ended the last quarter with $57 million in cash over the next 13 months, we've got $85 million coming into us from contracts that we've currently signed. So from a funding perspective, again, we still feel we're fully funded and feel very good about where we are. We do want to maintain a minimum amount of cash on the balance sheet, knowing that we don't have debt and we want to stay in that position for now and continue to use our buyback program. And so just be prudent about where we are with our cash position, keep a year plus of cash on the balance sheet with where we are right now. We can also lever up and down the clearing process so we can manage our cash balance. But we've used about half of our allocation that we were given by the Board for the buyback program to date. We'll continue to be active and move that forward. But I feel very good about the strong financial position that we're in.

And just remind us on -- you talked about the clearing program, but what is the SG&A, the OpEx and then the clearing cost and how does that evolve over the next couple of years?

Yes. So this year, we'll spend this fiscal year which ends on 3/31, we'll spend about $40 million on the OpEx side. I would anticipate that growing somewhat over the next couple of years until you get to a peak once we've done a significant amount of penetration of customers where it's like a bell curve and starts to drop off. From a clearing perspective, we had anticipated a couple of years ago when the SEC ruled that we spend $130 million to $160 million in clearing costs. We have spent roughly half of those dollars. We've cleared more than half of the United States to date. And that process has gone kind of as planned, exactly like we thought it was going to go. And so very happy to be on budget with that with where we are right now. And so next year, I would anticipate this year about $30 million, next year about $30 million as well. And then once you get past our, say, fiscal '24 -- excuse me, '25, '26, the clearing spend drops off very significantly. There'll be some tail with kind of the stragglers that we've still got to get, but we'll have the vast majority of the country cleared, I think by the end of our fiscal '26.

And I think clearing had been one of the things that was delaying the cash because some of your cash payments were tied to clearing.

Right.

So to the extent that you now for future deals, perhaps the spectrum will be more likely to have been cleared already, and you can maybe collect the cash quicker. Is that right?

Yes. It's somewhat dependent on that, and it's also been dependent on how the utilities want to build out their networks and the pace that they want to go so they can put the spectrum to use immediately. So those have been the 2 biggest drivers. But yes, we feel good about where we are in clearing.

Great. Tim, thank you so much.

Thanks, Simon. Appreciate it.

Appreciate you coming.

Thanks for the time.