Anterix Inc. (ATEX) Earnings Call Transcript & Summary

My name is Jerome Darling, and I follow the cable and telecommunications space here at JPMorgan. I want to introduce Tim Gray, CFO of Anterix. Tim?

Thanks, Jerome. I really appreciate you and the JPM team having us today, and great to be here and talk.

Great. Thanks for joining us.

I guess starting off at a high level, could you provide an overview of the Anterix asset base, the solutions you provide and the customers that you're trying to solve issues for?

Sure. We really see our mission to be the utility industry's partner, empowering enhanced visibility, control and security for the modern grid. And we do that with our unique 900-megahertz position. It's nationwide, and it really satisfies helping utilities with their need to monitor and control more and more devices. And wireless broadband network is the most effective and cost -- really cost-effective method to be able to do that. We're now seeing the connectivity of devices, millions and millions of devices being a problem that utilities now have to solve for and these private wireless broadband networks are the way to do that.

Got it. Okay. And Anterix specifically targets investor-owned utility companies. What's unique about that group of potential customers?

There are a couple of things. So for us, it's really the capitalization process that they go through where they want to capitalize the lease, build out these networks for command and control and security purposes so that Anterix isn't outlaying any capital from that perspective. And because they capitalize the leases, they also want to prepay for those leases. So we get the cash flow in early for a 20- or 30-year lease. We'll see the cash flow come in within the first 3 to 5 years of the transaction. So that has enabled us to do things like our $250 million buyback program. And there's also a unique need that these IOUs have with the changing -- what's changing in the utility industry and the massive need for grid modernization where you have things like distribution, transmission issues that didn't exist long ago -- that long ago where you had a coal plant or a gas plant that was putting out electricity in one direction. And then you've got electricity moving in many, many different directions, whether that's from wind farms that have now been developed or solar panels on roofs, where the utility has to measure power going in multiple different directions. And the amount of devices that are going on these networks to be able to do that is just growing and growing and growing. And a broadband network really beats the old legacy systems that they have to be able to do that work.

Okay. That makes sense. And then I guess, how should investors think about the total market opportunity in front of the company in terms of number of customers and potentially contract value?

Sure. So right now, we have over 60 IOUs within our pipeline. It's not a huge universe that we're going after. But that group also represents 90% of the value that we see nationwide from a perspective of over -- well in excess of $3.5 billion. And so for us now, it's continuing to monetize that portfolio in addition to the 6 contracts we've gotten done to date worth over $270 million.

Okay. And then, I guess, could you just touch on kind of the evolution of the company since it's received its FCC ruling by -- in 2020. What has that done for the company? And where do you see the future going forward?

Yes. So it's hard to believe, but it's only been 4 years that we've had a product to sell. And so our broadband spectrum position enables us to do the things that we're out there doing for these utilities and putting us in a position to monetize that asset. So we've gone through a process of clearing our spectrum to move incumbents out of the way. So that takes -- levels the playing field for us so that we can offer that broadband spectrum and put it out there for folks. And then go forward with these long-term leases that we've put in place across multiple different utilities, we've also done 2 sale transactions, but it's really also enabled us to build the pipeline. And we've also done some other things. We've put in place the Utilities Broadband Alliance, which we built out and started and now it's on its own as a dues-paying organization split off from Anterix. We've also got what we call the Anterix Active Ecosystem that we've put in place with over 100 different vendors for utilities, whether that's the large infrastructure providers or it's small device makers. And so those are all putting -- all those entities are putting time, effort and money behind 900 megahertz. We've also developed an advisory board that we call the USAB. And this is with senior technology and information systems, folks directly from utilities that are talking about use cases and working together across the industry to be able to do that. Because at the end of the day for us in building this marketplace, our best sales force is not our own internal people. It's the utilities themselves because they all share information. They all talk to each other with these regulated monopolies. So when someone is at a forum like this, that's got a network, they've leased spectrum from us. They're building and putting up their sites. They're talking about their use cases and it's got a room full of their brethren. It's really helpful that the utilities hear from each other versus sometimes hearing from us.

Right. That makes sense. And obviously, there's a clear focus on utilities. Are there any other groups that Anterix could potentially provide solutions for?

Yes. We see the core value being in the investor-owned utilities, but one of the deals that we did recently was with the Lower Colorado River Authority, which is a quasi-governmental utility agency in the state of Texas, but they also provide water services where they monitor the Lower Colorado River in Texas. And there's a whole separate set of use cases that don't necessarily go through the IOUs from a water perspective, and we're starting to see more appetite from that avenue. Also, from gas. There are a lot of pipeline monitoring and things like that from a use case perspective that we're starting to see as well. And so we've got some interest in the pipeline from that. And so on the oil and gas side. So there are opportunities that we see just outside of just directly the IOUs.

Okay. That makes sense. Then I guess, tackling some recent news in February, Anterix, along with other industry participants, filed a petition with the FCC for an expanded 5x5 [ pair ] within the 900-megahertz band. If this is approved, what does it mean for Anterix? And how does that kind of change the path of the company going forward?

Yes. So it's really about what the customers and the utilities themselves want. And that's why we had multiple people go on this filing in addition to Anterix and that included multiple utilities because they see the future of -- the use cases are just going to continue to grow. The data usage is going to continue to explode as it has on every device that everybody uses every day. There's just going to be more and more information needed to monitor flowing through these networks. You're going to have things like smart meters, where utility is not just pinging your meter once a month or once a week to find out your usage so they can do your bill. They're going to be monitoring your electric usage during the afternoon on a super-hot day so they can power up or down certain equipment in your house like your hot water heater. And those things are going to be super important and continue to move forward as we go over time. Today, we feel like the current 3x3, we have is plenty of capacity for the current needs of the customer set that we've got. But everyone sees that this -- the data usage is just going to continue to grow over time. And since the FCC asked this question in the report and order that they put together in 2020 about when would be the right time to consider this question, we felt like this was the right time to start that process and move it forward. We feel like this is a bipartisan issue. It's not one or the other. People are behind what we're trying to do. That's why we've had so many positive comments both in the initial filing and in the comments that just came through. So we'll continue to push the process forward. As we always know with the FCC, and we learned back in the original process that we did. You can't really predict the timing. But we see this as much more momentum than the early 3x3 process did. And hopefully, we'll get completed faster to be able to provide even more spectrum to those customers.

Okay. Let's talk about deal pacing. Over the last 2 years, Anterix has done an average of 2 deals a year for about $45 million a piece. You've given guidance and said that the average deal size in the pipeline is about $60 million. Could you speak to what causes the elongated sales cycle and makes the prediction in terms of timing of these deals very difficult?

Yes. If it was just a lease transaction, it would be super easy. But what the utility is going through is they're doing a business case and going through a process of improving a complete wireless build-out or wireless network build-out. So a lease of spectrum may be a very small sliver of that total overall cost when you look at that pie, you can have, for example, for this conversation, a $1 billion project, of which a spectrum lease maybe, for discussion purposes, $50 million. But it's that $1 billion project that they're pushing through their own internal processes. And this is new and novel to have one wireless broadband network within a utility. So there's a lot of work that has to be done across a majority of different levels. You've got different operating companies. You've got a holding company. You've got C-suite folks that all have to be able to work through this. And they have their own process when they go through very large capital projects that involve so many different perspectives, including regulatory, where they need to get people to sign off on it, and that just takes time. And we can do the best that we can do to help that process along. But we have very little, almost no control over the process at all. But we'll do the things that I've talked about, like try to make it easier. Things like working on use cases, working on things like the Anterix Active Ecosystem, setting up our spectrum, so it goes through -- so it has gone through the 3GPP process where it's going to be enabled for 5G from a 3x3 perspective as we move forward at 900 megahertz. All of those things take questions off the table. But at the end of the day, when you've got $1 billion or whatever it is a very, very large project, it's going to take a lot of time. And so pinpointing when exactly that utility is going to sign a lease with us as they move through getting that whole project approved has proved to be difficult. And so that's why we haven't -- we've moved away from trying to predict when things are exactly going to happen.

Okay. Let's talk about some deals that you guys have actually signed to date, starting with the Tampa Electric Company. Last -- late last year, you guys signed a 20-year lease for roughly $35 million. I think it was $34.5 million. What else can you share with us in terms of this deal, perhaps valuation, service coverage area? Any other details you can share there?

Yes. So it's for approximately 3 counties in Central Florida for the service territory that Tampa Electric covers, again, a $34.5 million deal. We feel like, as with the other deals that we've done, we've gotten fair market value for those 3 counties for spectrum value. Spectrum value as we see. We've talked about being between the goalpost of 600 megahertz and the AWS-3 auction. But of course, things have changed. There have been more transactions below 1 gigahertz that have taken place in the last several years that have more than doubled or paid double the price of 600 megahertz. And so we're taking all those considerations into how we see fair market value, and we're continuing to see that go up, and we're reflecting that in our pricing. We've received roughly $7 million from Tampa Electric of the $34.5 million. The remainder will receive over the next couple of years. Again, where I talk about how we've got a long lease, but we're getting all those proceeds in over the first couple of years. We'll recognize revenue over a 20-year period. So there's a little bit of a gap between GAAP accounting and the cash flow. But all good for Anterix and a good transaction to really get into the state of Florida, where there are multiple other entities that we're engaged with as well.

Right. Okay. And how does the Tempa Electric deal compare to your largest deal for $80 million with Xcel Energy. Is there anything that differentiated you would call out there?

Well, I mean the deal with Xcel, it's 100-plus counties, very different geography, very different geographic spectrum value. But again, we feel like for Xcel, we got spectrum value -- the fair market value for that spectrum. And so all good from that perspective as we look at it. But of course, having the big deal, having these larger utilities, Xcel is really a thought leader. And we've had a lot of success with having Xcel people speak at forums like I talked about earlier about all the different opportunities that they're doing with their network and the initial successes that they're starting to see as well.

Okay. And then are there any other larger deals in the pipeline perhaps, maybe 6-figure deals, investors are typically very interested in you guys pulling one of those through?

As are we. But yes, we do have multiple 6-figure deals that we are working in the pipeline. Again, because they're big, that means that the wireless network project is also a really big number, and that takes a lot of time to work its way through their internal systems and processes. But we feel like there's good opportunity even in the very, very large utilities. And the hope and the expectation is in the near term, we'll start to see some announcements around those. But we're also going to see -- continue to see some on the medium size and the smaller end, the utilities all come in different shapes and sizes and have different spectrum values for the territories that they cover. But from a large deal perspective, we do know that we will see larger deals than what we did with Xcel at $80 million.

Got it. Okay. And let's talk a little bit about the Demonstrated Intent scorecard. So in late 2022, you guys moved away from issuing formal guidance. Could you kind of talk about the thought process behind going to the scorecard, why it was needed and how you guys use a scorecard internally?

Right. So from our customer perspective, when we're talking about how we're doing from a pipeline perspective, it's hard to really give a lot of detail because we're under NDA with so many -- with all of these customers. So we can't say X utility has gone to this part of the process and is exactly here. So what we wanted to talk about was a way to assess intent that these customers have to move forward with us at 900 megahertz. And so we took a variety of factors that we've learned from the customers that we've signed and some that are still in the pipeline about how they're showing that they're moving forward and they'll eventually get there. It's more a question of when, not if, as they move to these processes. And once they cross a certain threshold of these scores, we've got 20 factors that we look at that we give a weighting to and things that may be public, things that may be private from just going on between us, but let me give you a couple of examples, whether someone puts out an RFP for spectrum to build out a network. Well, that's a sign that they're doing something. But these things in and of itself, just even like that, don't necessarily mean that they're totally committed to moving forward. It's an aggregation of multiple things. It's joining a Board. It's talking at a forum. It's beginning pricing negotiation with us and trading paper from a contract perspective. All of those things are boxes that we tick off and we score. And once they reach a certain threshold, we're going to talk about them in our Demonstrated Intent. We've got 18 utilities in there right now with a value of over $1.1 billion. And just let me add that this is something that our internal team and our Board take very seriously. We just had an audit committee meeting yesterday. We were talking with our auditors who we've asked to make sure that we're doing the right thing here because this is a new thing that we've put out in the last year. Are we doing scores the right way? Are we providing the right documentation? All of those types of things to make sure we get it 100% accurate when we're out there talking about it with investors. It's a lot of good feedback from the teams yesterday. But we take a lot of care and make sure that the sales folks are continuing to move these things along because it's just part of getting there. Are they going to -- is every utility going to check off all 20 boxes at the end of the day? No, all of these deals are different and they go about a different path that kind of meanders one way or another, but they -- we've had 6 get there at the end. And a lot of these factors were what we were able to score and say, okay, now we knew they were going to get there, and they would sign a contract with us. So it's been effective, I think, both internally and I hope, externally for folks like yourselves on the analyst side and as well as investors to see the progress that we're making and overcome the difficulty of being able to talk without a lot of detail about utility by utility.