Anterix Inc. (ATEX) Earnings Call Transcript & Summary

Thanks for joining us. Welcome to the 51st Annual TMC Conference from JPMorgan. My name is Phil Cusick. I follow communications and media space here. I am happy to welcome Rob Schwartz, CEO of Anterix. Rob, thanks for joining us.

Thank you, Phil. Great to be here.

If anyone on the line has a question, in fact, there is a question on the line already, and you're welcome to put it into the system, and I'll ask that. But first, Rob, starting at a high level, can you provide investors with an overview of your asset base and a quick history of the company, and how this evolved since the FCC process?

Happy to do so. So Anterix founded by the founders of Nextel to really focus on providing a very important service that really no one knew about until -- including ourselves, until we discovered it through our process. We set out almost 10 years ago with an idea of identifying an underutilized band of spectrum that we acquired from Sprint and utilizing that spectrum to provide a very unique service, which is helping the utilities of our nation. Electric utilities, as everyone knows, are spread throughout the country with very specific requirements, but historically had been relying on what I think it was legacy communications. As we -- as Anterix focused on bringing modernized communications, broadband communications, private networks to be able to enable these utilities to support what we now know as really mission-critical requirements as the grid -- electric grid that we all rely on every day is becoming more susceptible to risks of changing weather situations, decarbonization requirements to connect up energy storage, solar, wind, other factors, also for cybersecure requirements. So really to sum it up, Anterix is focused on providing broadband resilient communications from our nation's electric utilities and well beyond into other critical infrastructure. It all started from a regulatory founding of us getting our broadband licenses now just about 3 years ago after a landmark ruling from the FCC, and we've been on a pretty solid tariff from our standpoint since then now with utilities licensing our spectrum in 14 states throughout the nation.

Okay. So talk to me about the pace of customer contracts that have been coming in over the last few years.

So we started right out of the blocks after our FCC ruling with an industry leader, thought leader, utility named Amarin, and we're uniquely a confluence of the telecom industry. People understand spectrum and we own this nationwide spectrum asset on our balance sheet, and that's kind of one side of it. The other side of it is the utility space. I started to explain kind of the demand characteristics of this evolving utility landscape. As we've presented the understanding of the power of modernizing communications to support all of these requirements of the utility industry over the past three years, we've signed on Amarin in Illinois, Missouri, Evergy, their neighboring utility in Missouri and beyond. We've got San Diego Gas & Electric. We've signed on Xcel Energy. And then most recently, Lower Colorado River Authority just last month. It's a new kind of customer for us. They're actually -- unlike the other utilities, they're a public utility set up by the state of Texas to both be the shepherd of the Colorado River through there. So they generate hydro power through their facilities on that river, but also provide water management. They also manage park systems. They're also providing all kinds of other value-added services to that community, bringing electricity. But on a wholesale basis, they're selling to municipals and co-ops throughout Austin way out into Western Texas as well. So we're seeing -- as we evolve the kinds of customers through this -- since we first got our licenses now going back 3 years ago, we're seeing really expansion of the use cases of these networks. No difference in the phones we're carrying in our pockets that we got at one point to make phone calls and send text messages. And now we've got this diversity of applications from hailing taxis to watching videos and doing other things. Utilities are the same way. Utilities have always used private networks. This is not a new idea for them. Their legacy networks that are being replaced here can be 20, 30, even 40 years old. But now they're modernizing them to do all the things that we have the capabilities in LTE, but taking LTE as the global technology in a private way to do the customized things that they want to do and a growing list of valuable use cases.

So we've always talked about investor-owned utilities as the primary customer. Why is Lower Colorado River, LCRA, why is that a different type of customer? Why would it be a different customer than just sort of a regular utility?

Sure. So the other utilities we talked about are classified as investor-owned utilities. These are public companies. You can buy stock and they put out debt, as you know. This is a Texas-started entity, part of a different sector, public utilities. They have much broader needs, very different needs. They generate power and they transmit power, but they don't distribute it. They don't sell to the end users like you and I. And so they're instead selling that wholesale power to other distribution companies, typically municipals and cooperatives in their broad region. But they're also adding all these other use cases that I was referring to. I mean, for example, they're the stewards of the Colorado River. They have to deal with flood management. And so they have historically had sensors along that Colorado River that used to cost them, I think, $8,000 to $10,000 a piece, and they didn't have a lot of them because of the cost. Now as they adopt the standard technology of LTE, sensors are cheap. You can get sensors for hundreds of dollars instead, and the ability to deploy a lot more of those centers and be much more situationally aware of just that 1 use case of flood monitoring is very valuable. It's priceless and then it can prevent lives lost in floods with having early warning systems. But that's just one of the many use cases we're seeing. Other interesting use cases, I mean take San Diego Gas & Electric, one of our other early customers. Their primary use case when they first deployed was wildfire mitigation. They're looking at how they can not just detect fires, which is what most systems are doing before, but how they can prevent them. And so by deploying a system where they can monitor when a line breaks, whether it's a storm or a tree falling on that line, they measured, it takes about 1.4 seconds for that broken line to hit the ground. If they can turn off the power on that segment before it hits the ground and prevent a wildfire from starting, that's a priceless application. As you know, there are other utilities in California that the utility has gone bankrupt as a result of that. So these all add up to being very valuable use cases and really go into the rationalization for the significant expense of deploying these private networks. And so the more use cases that they're rationalizing, the more value bringing in LCRA as an additional user of these kind of networks. We look at it as a nationwide network of networks, just keeps expanding the value and the demonstration of value use cases that utilities are generating from private 900 megahertz LTE networks.

Okay. So help me understand the primary use for the customers you've signed on. I mean we originally talked about that sort of active network, intelligent network where you can turn off the power before the line hits the ground, but it seems like this is a much wider, more widely used product.

Yes. I mean you really have to just think about it as fundamentally sensors, right? So in a world where electric utilities used to be barely aware of what happened from -- when the power is generated in 1 place and brought all the way down to the end user, the customer, you or I, a tree fell on a line, they wouldn't have any awareness of where that happened. They'd roll a truck around the neighborhood to look for where that occurred. Now think about the modernized network where you're deploying low-cost sensors throughout that network. And that could be in their -- in the generation capabilities. It could be in substations. It could be along transmission lines or in generation lines. All of these assets, transformers, all the way out to the meters on the side of your house, need greater situational awareness for a lot of reasons. One is just fundamental capabilities. Having come from the wireless world, when we built a wireless network, you know this well, we could see everything, right? We had a network operations center that any element in our network went down, we'd be aware of it because we were a communications network. If you're an electric network, they had no awareness. They were running power down the line, and there was no communications on a lot of that. And so the ability to have a much greater awareness increase the resiliency, which is really the important thing when you're measuring the capabilities of electric network. It means, should there be a problem? Because there always will be. Things will happen. How fast can you bounce back and be aware of that problem to be able to fix that problem and bring the power back? And power is the life blood of our economy driving important things, but it's also -- it's saving lives. There's power in hospitals. There's power to people in their homes using it for home health care. And so the ability to keep resilience high, especially in an environment where we're having increasing storms, increasing weather incidences, increasing cyber events that are happening, and so being aware of all the things that are possibly happening at network can be able to respond appropriately, both in a manual way, but more importantly, in an automated way. The more of these sensors you have, you have the ability to respond to it. The example that wildfire mitigation is 1 of many of saying, "I see something occur in an automated basis. What kind of response do I want my network to have to keep that network up and running as much as possible?"

And there's federal money to harden the utility grid, right? So how does that impact you? And how much of the customers you've signed up? Are they maybe taking advantage of that?

Yes. Absolutely, we see it as a considerable tailwind for the energy industry overall, but even specifically for the deployment of private LTE. We've had several folks who have applied for, several who have gotten encouraged in this process of the IIJA funding and the BIL funding, the billions and billions of dollars that now we're flowing through for multiple beneficial needs, whether it's for better -- subsidizing the deployment of these networks, whether it's building some of the application layers on top of it, bringing broadband to rural areas. There's all kinds of use cases at the end of the day are trickling through to drive overall what we call grid modernization, right? The deployment of broadband networks is not a stand-alone project for utility. It's part of a supportive investment to modernize these networks, to really manage what's a rapidly changing both production side and demand side of electric power, right? We used to have just large generation stations transmitting power down the line. Now we have distributed energy throughout regions, both the renewable energies of solar and wind and battery storage, all the way down to residential locations. And you need to have a level of awareness. As you have all these new sources of energy being generated, you have to be aware of where they're being generated, and the old one-way network now becomes a 2-way network. And that requires a level of intelligence. Communications is a critical piece of that.

And so let's be more specific. What kind of money is going to these utilities you're signing up for you? And what's the level of support they're getting from the federal government?

The applications so far have not gone public. So I can't talk about the specific numbers of the ones we've seen. And the first stages of government response to the initial concept papers was encourage or discourage. And we've had several that have gotten encouragements to move forward into a full application process. So that's kind of where they are from a stage standpoint. So it's doing exactly what it's intended to be. It's stimulating -- it's stimulus money to help drive it. On the specific numbers, I think we'll probably see soon enough.

Okay. Help me think about the spectrum clearing process. There's 10 megahertz and you have 6 and somebody else has some. And maybe use LCRA as an example of what that sort of clearing process happens, and they're contributing some of their own spectrum as well. So what happens there? And what's the time line for it?

Sure. So yes, as the FCC ruling was made, it basically says that the 6 megahertz of spectrum at 900 megahertz, our unique low band spectrum, which has -- it's kind of the beachfront property with the best physics of kind of across the band, in order for us to turn our narrowband channels into broadband, we have to do what's called retuning, which is there's incumbents within the band that are using it for narrowband uses, and we have to move them outside of that 6 megahertz. There's another 4 megahertz designated to be the place where we can move those incumbents. We find sometimes we go to these incumbents and they no longer use it, because typically, it was being used for 2-way radio systems and narrowband communications. As we know, narrowband is becoming less and less utilized as people are converting on to whether it's commercial networks or other broadband ways. So we go through the process and we have what I consider one of our core competencies. We have the same folks who did a lot of this work for us when we were at Nextel, and this was the fundamental premise that allowed us to take then underutilized spectrum and turn it into a more useful spectrum. We need to negotiate with each of those incumbents. In this case, there's hundreds of them. We've actually gone through just about half of the licensees in the nation already and worked agreements to move them out of the band. And we continue to do so. It's a bit of a success-based process, where -- so you talked about LCRA, for example, right, in that area of Texas. We've been in -- because we had a good idea that these were coming, we've done a lot of the work already, and we have some remaining retuning to do of these incumbents. And so we'll continue to go out strike arrangements with those existing incumbents, which, as you mentioned, LCRA is one of the largest themselves. So obviously, it's in their interest to retune their systems to free up space. And we'll be delivering the spectrum over the next couple of years to allow them to be able to utilize broadband. Typically, the payment terms, we're signing usually long-term leases or, in their case, a sale. We're doing that in which they're paying upfront as we deliver the spectrum. So that's why we see the -- even for the long-term leases that we're typically signing, we're seeing that payment over the first several years of a long-term lease.

Okay. So they're contributing some of the spectrum to the retuning process. What's the net amount of spectrum you're going to end up with in that area in particular?

So for LCRA, they're -- as part of the agreement, they're contributing spectrum with significant value for us that counts in the channels that we deliver to the FCC in order to get the broadband license back. And what we get is a 6 megahertz broadband license throughout their service territory. So that's what we've contracted with them, is to deliver 6 megahertz of broadband, which is what the FCC has designated throughout their service territory.

Got it. Got it. You mentioned the payment terms here. So when we first started talking about this idea a few years ago, it was going to be 20-year leases, and then let's see what happens on the other side. Increasingly, these are happening as sales. How should we think about the process of utilities in going from A to B?

So it's interesting as we went into utilities and we're talking about this long-term leasing and really copying the dynamics of long-term tower leases, saying we were going to offer a 20-year lease with renewals. And typically, we're offering a 20-year lease with 2 10-year renewals as kind of our standard terms. The utilities asked if they could prepay us and for a couple of reasons. One is it's kind of the way they think about it operationally, and their cost of capital is pretty low, as you know, as probably 1 of the best credits next to the government for now, depending on how things go. But the prepayment aspect also was important for them because they capitalize their investments when they make them. And that's part of the business model of electric utilities, investor-owned electric utilities. They put their capital investments into a rate case. They get it approved by their state regulators. And as a result, they get a fixed rate of return on that investment. So for them, it's important to have their capital investments in this rate case approval process. And for that, they get the returns. And so prepaying us made it easier for them to be able to capitalize those investments. As a result, when you talk about the $240 million, roughly $1 million of contracted proceeds we've signed so far in these 5 deals, we still have another $150 million to be collected as we deliver the spectrum for those contracts. We're going to see about $100 million of that this year. And so from a cash flow standpoint, it's got great fundamentals for us as we see the proceeds upfront for the long-term usage of that spectrum. In LCRA, because you asked about kind of the sale aspect, there's a small number of utilities that are what are called complex systems as designated by the FCC. Those are the few that actually had very large existing systems narrowband in the 900 megahertz system. They have a unique position that they are not required to move out of that band, unlike the other incumbents. They have to voluntarily do so. So LCRA is a great example that when we first filed our petition to the FCC almost a decade ago, they were opposed to the idea of broadband. And like others, they said, I don't know if we need broadband. Now they've come around fully and saying, "Actually, we really do need broadband. And obviously, we've contracted to move forward." And it's important because this is what we're seeing nationwide. The idea that the requirements to be able to support this modernized grid requires a modernized communication system. And so all the narrowband legacy systems that are disparate throughout utilities. And some of these utilities working would have 10, 15, 20 different existing networks today, wireless networks that will converge onto a single private LTE network that's considerably more secure, a lot more reliable and resilient for their requirements.

Okay. The initial pace of contracting was expected to be a lot faster than it has been. What do you think has changed that pace?

Yes, absolutely. I would say we went into it with a level of optimism. And as we've learned a lot through the work with utilities, we've learned about what it takes for a utility to get through their own decision-making process. It's a complicated process. I mean these are large, flat organizations, often multistate jurisdictions. And so they're regulated state by state in different ways. And so making a decision across all of these operating companies is often challenging process that honestly, we're helping them learn how to do. The other -- the great thing about that, though, as we progress and we're seeing the influence of utilities and other utilities is the most powerful communication tool we have. And we signed on Xcel communications, and they're out talking publicly in Utility Broadband Alliance forums, which is the leading industry association that we're proud to have launched and now is standing on its own 2 feet as a nonprofit led by utilities and had hundreds of attendees in the last session. The ability to have utilities driving utilities to understand the collective value of them working together, that's going to have a big influence on this pacing for us. It doesn't shorten the sales cycle, meaning the cycle in which they have to make decisions like any large organization, that's conservative in nature because they need to be, right? They need to make sure that the power system runs. They're not taking technology risk. They're not taking the kind of risk that an ordinary commercial organization would because the power has to run. And so for them, as they're seeing their peers move forward, that's having a really big influence on the level of interest. We measure it. We talk about our pipeline of utilities with over 60 utilities that are working with us through the process. We've talked in our last quarterly call about the way in which we measure internally, we've now turned into an external metric as this demonstrated intent.

Scorecard.

Yes, exactly. And it's an important thing for us internally, and now we've started to share it externally because we measure these utilities. These are conservative potential customers that normally don't talk publicly about things unless they really have a serious intent. And so when we -- when a utility files for an experimental license or if they're getting on a podium in a public event and talking about their intention to do this or even there's some that aren't yet customers that have filed their public PUC statement saying, "We intend to deploy a private LTE network to cover our service territory." So they don't get ahead of themselves. It means that they're in a process that they intend to get to the conclusion. And that's why I like to say it's not a question of if they're going to do it, it's just a question of when they're going to do it. And so for us, we -- it's hard to be patient. As we -- as a public company, we talk about that we wish we had more control and awareness of exactly when they happen. What we're confident is in the scale of what's happening here. The movement that's occurring within the utility industry, the sharing of information and the necessity of modernizing these communications is clear to us, and that's going to result in what we see as a large funnel. We talked about the demonstrated intent. The last thing we talked about was $800 million roughly of contracts in this top level of measurement. Roughly 15 to 20 variables that we measure are positively measured on a utility, and that puts them in this category. I mentioned a few of them. Some of them are public, some are private aspects of what we learned through our conversations. But they're demonstrating intent that they want to put in a private LTE broadband system and move forward with us.

One thing we've heard is that many of them are happy to wait and see how Amarin and the others do. Where are you in that process of getting the early ones up and running?

Yes. We're very involved in seeing them succeed. The great news is we have a very broad base of partners that interests are aligned with ours of doing so. We have this Anterix Active Ecosystem program now with over 100 companies, leading vendors that are out demonstrating -- out developing capabilities, requirements, and that's everything from leading engineering firms that are providing the consulting and advising on helping them design and deploy these networks. It's leading vendors that are infrastructure vendors that are selling them equipment to deploy these networks. For us, it's important they have a lot of choice. And so -- but through that, we're seeing great progress. Amarin, Evergy are well under the way, as is SDG&E, on deploying their networks, and we expect to see that. These are complicated networks. You've seen it. These are cellular networks. It's no different than what we saw with the carriers, but it's the same people that are helping them that have done this before. So this is not rocket science. It's a very complicated process that we've seen cellular networks deployed around the globe. Now they're adapting it for their own requirements.