Anterix Inc. ($ATEX)

Good afternoon, everyone. My name is Sebastiano Petti, and I cover the telecom, cable and satellite space at JPMorgan. I want to introduce Chris Guttman-McCabe, Chief Regulatory and Communications Officer of Anterix. Chris, thanks for joining us.

Thank you. Did I do it -- here we go. Thank you, Sebastiano. How are you? Good afternoon.

Yes. Thanks again for joining us. And so Anterix is at a unique intersection of spectrum policy, utility, modernization and critical infrastructure. There's a lot going on, tapping on each of those fronts. So as you think about the next 12 to 18 months, what are management's top priorities, whether that's advancing customer utility customer deployments, working through regulatory milestones or something else in because where do you see the biggest sources of potential upside or risk to the business from here?

Yes. Thank you. So first of all, thank you for having us. We're excited to be here. When you look around the hotel and you see the unbelievable amount of capital that is being deployed and to be deployed, it's really a testament to your position and the company's position in the marketplace. So we're -- again, we're excited to be here. For those that don't know, Anterix is -- we're a wireless technology company. As Sebastiano said, we really sit at the intersection of telecommunications, technology, the grid modernization of the grid. As we jump around and we pop into some of the talks like this, I think it's really fair to say Anterix is at the intersection of a lot of what is being discussed here, whether it's modernization of the grid, whether it's the integration of AI into all of the sectors of our economy, whether it's data centers and/or load growth and it's directed device. Part of what we do at Anterix is we enable the communications connectivity for the critical infrastructure sector that is really going to enable all of that dilution. And so as we look forward and we look out to the next 6 months, I would say we have 3 areas of focus. One is continuing to execute, continuing to drive spectrum contracts. That's paramount. We have a 10 megahertz spectrum asset that we're working to monetize on behalf of our shareholders, 5 megahertz by 5 megahertz. So that's number one. Number two is beginning to investigate other opportunities and product opportunities. So we have a new Chief Product Officer. And we're looking to introduce annual recurring revenue, really improve our top line revenue and do it in a way that takes advantage of the position that we have with our current customer base and our future customer base. And then, I would say, simultaneously to investigate other uses and users of our spectrum. Today, we announced the grant from the FCC of an experimental license to utilize our spectrum, our 900 megahertz spectrum with Link Global to investigate direct-to-device satellite connectivity. So we're excited about that. And we are going to full steam ahead on all -- really all 3 of those priorities.

Great. And definitely I want to come back to the Link announcement and continue to elaborate on some of the other items that you noted. So starting with the 5x5 report in order from the FCC. So it largely mirrored your original petition. Are there any conditions, whether it be build-out requirements or time line obligations embedded in the order that investors should be aware of or that could constrain your flexibility?

No. There's really -- it was a very magical report and order, if I may use those terms. It was it aligned with really exactly how we had petitioned the FCC. So we're very excited about how it came out. In fact, one of the more creative elements in the report and order was the movement of our band spectrum to what's called flexible use, which actually opens up the opportunity for satellite-directed device. So that, to me, was one of those nuggets that you find embedded in a government report in this case, an FCC report and order that really opens the door to a lot of flexibility. So super excited about that. As far as build out as far as the rules, they are exactly as we petition the FCC. And we think we have a lot of flexibility, a lot of optionality, and as to how to move forward and monetize the spectrum.

I want to come back to the optionality as well. But thinking about one of the things that we get questions on from the investment community is just the implied asset valuation. And so the expansion from 4 megahertz to 10 increases your monetizable spectrum per county by, call it, 67%. Elena referenced an implied asset valuation range of $2.5 billion to $7 billion at 10 megahertz. Can you walk us through the key assumptions underlying that range and where you believe your actual pricing is likely to fall?

Yes. And I'm going to make a plug for your recent report because a lot of it is contained right in that report in terms of how to get to an applied valuation. So fantastic job to you and the team.

Thank you.

So when Elena, our CFO, talked about that range of valuation, 2.5 to 7, when we look at pricing, our spectrum assets we have an opportunity in front of a potential customer. We kind of look at the 2 -- some people call them goalposts. I think it's the 2 edges of the fairway since we just had the PGA Championship day. And one is the 600 megahertz auction pricing and the other one is the AWS 3 auction pricing. So if you take that 600 megahertz auction pricing and you apply it to 10 megahertz, and to our remaining spectrum that we have yet to monetize, that's where you get to $2.5 billion. If you take the upside, the AWS 3, the higher pricing, a little bit more competition in that auction and you apply that, that's where you get to $7 billion. But if you look at some of the other transactions, the private market transactions that we've seen, particularly for low-band spectrum, and there was a Columbia Capital to T-Mobile. There was a Comcast to T-Mobile. Those are up in the $3 per megahertz pop. And so they provide an upside that is even beyond the $2.5 billion to $7 billion. So that's sort of how we look at it. We get to determine our price -- and we tend to have our price fall between those 2 card rails. And we go down that fairway and somewhere between that what would be $2.5 billion to $7 billion. But that price -- and it's turned out to be about $1.70 a megahertz pop. If you look at our 11 contracts so far, that's 5 to 6x what we're currently trading at, right? We're trading at with a little bit over $1 billion market cap, we're trading at about $0.33 a megahertz pump right now. So there's a lot of upside. There's a lot of headroom. We do have -- we have 11 customers. We're building these networks across 18 states. But we think there's a lot of opportunity to continue to move that number up and also to continue to monetize our asset.

Great. And from a clearing cost perspective, you've indicated you're still within the original, I think, 3 x 3 guidance issued roughly 7 years ago. As you move to 5 x 5, can you help us understand the marginal clearing cost profile. You mentioned having already blended in some of the incremental 22 over the past year. But how should we think about the remaining investment required from here?

Yes. I want to focus for a moment on a portion of your question, which is I do think one of our company's superpowers is the ability to really clear spectrum and bring it to market and ultimately have a cost basis that is just fantastic. And the teams that execute both on the analysis and also on the actual clearing itself happened to flow up through me, the corp dev team and the spectrum teams. And so I feel quite blessed. They picked a number. They did their analysis and identified a number almost 7 years ago. And with years of clearing, they were still on target to hit that number. As you said, Sebastiano, we began, as we got closer to a report and order, we began to clear for 5 x 5, not just -- at the moment, we have about 90% of the counties in the country cleared for 3 x 3. When you move to 5 x 5, we're probably closer to 40% or cleared for 5 x 5. What we have determined is that any time we speak publicly, like this. We're speaking to our analysts. We're speaking to our investors, but we're also speaking both to our potential customers and our potential incumbents -- and so we've made a determination, we're not going to talk in detail about clearing costs or margin on our spectrum because we think it just it creates an environment that might be more difficult for us than it needs to be. So where we zero in is we have an incredibly valuable asset. It just grew by 2/3. We have an incredible opportunity to drive value to our shareholders. There is significant margin in the 3 x 3, and there is significant margin in the 5 x 5. Some areas will be more difficult to clear than others. But we are very, very comfortable and optimistic that we're going to clear it in a way that drives a really healthy margin and absolute value for our shareholders.

Got it. So you touched on the Link Global experimental license that was approved by the FCC today to explore the use of satellite D2D in Anterix license, 900 megahertz broadband spectrum. Can you help us maybe understand the architecture that is being tested and helping us link connecting directly to devices operating on your 900. I mean what would be maybe a -- what would a commercial arrangement look like if the experiment succeeded?

Yes. Let me -- do you mind if I go back to just give a sense of what we're testing. So as we look at opportunities in the enterprise space for directed device, right, there's a lot of talk about the consumer space for directed device. But as an entity that is focused on providing connectivity to the enterprise space, what we are investigating is the direct connection from a low earth orbit satellite in this case, Link Global, because we happen to our spectrum in their -- or their satellites have our spectrum in their receivers. So we're testing the direct connectivity from the satellite to a range of devices. And the reason we say a range of devices is we want to see, to get to your ultimate question, what would a product look like across the enterprise community. So we're testing a land mobile radio device. We're testing a smartphone. We're testing a tough book. We're testing a bunch of different edge devices and routers, sort of high-end routers so that any type of enterprise entity paying attention, watching and looking at what we're going to report, we'll be able to say, "Oh, that's our type of connectivity, and that's what we do." And we're doing it across about a half dozen different for the same reason. And then when you say sort of what the product could look like, that's where that word, you're going to maybe hear me say even one more time, but optionality comes into play. Could we ultimately have an integrated product with Link? Certainly. Could it be a Link product? It could. Could it be an Anterix product? Might it be with another satellite provider? It might. Link is a great partner, and we are excited to move forward with them. It doesn't foreclose other opportunities. But when we look at it, we could see a satellite product that is primary connectivity in areas where our 900 megahertz hasn't been built out, and sort of a resilient redundant play almost like a satellite overlay in areas where it has been built out, where you would want to make sure and the utilities are a great example for this. They love the belt and suspenders approach. So if they have terrestrial connectivity. And if something were to happen, you have satellite backup, that's sort of an element of what we're testing.

Okay. And maybe help us think about what is the potential time line for this experimental phase? And I guess maybe what are some of the milestones that need to be achieved before becoming more a commercial launch or maybe a joint go-to-market effort?

Yes. So -- and this is traditional and an experimental license request. We asked for a year, we were granted a year. We will begin testing soon. Link has those devices that I referenced. And we will have -- both companies will have presence in the locations where we begin to test. And so we'll work through that in the next couple of months. I don't think it's going to be a year. I think we're talking in the next few months and maybe even a couple of months. And then obviously, we will have commercial discussions with Link about what it will look like. There's a moment, and it's happening very soon, where we take this regulatory approach, and we hand it over actually to our product team. So Ross Spero was brought on as our Chief Product Officer about 4 months ago. So it will be Ross's task to the extent that we move forward, it will be his task to really turn it into product that is beneficial to our shareholders and our customers.

And so you mentioned that you -- this agreement with Link doesn't necessarily foreclose you from other ties or speaking to others. Have you had conversations with others in terms of -- in dialogue with other satellite or LEO operators?

How about if I say, clearly, there is a lot of activity in the directed device space. And there are other providers out there. Our focus in the near term is on the great relationship with Link and on ensuring that this -- we move forward and we really prove out this proof of concept. The next step for any of these bands of spectrum that haven't originally been designated for supplemental coverage from space is to go back to the FCC. So for us, what we're doing is we're gathering a wealth of information with Link to be able to go back to the FCC and make the case for this band to be designated for satellite use. As for the others, it's a very identifiable group. I happen to run corporate development as well. So we listen to all sorts of inbound discussions about use of our spectrum. And -- is that fuzzy enough?

No, that's perfect. And as you think about D2D, I mean, in your traditional business with utilities and IOUs, -- do you think of them as a threat longer term, though?

I think that the future for D2D is a little bit unknown I think you and I probably 6 months ago, wouldn't have anticipated a future where these low earth orbit satellite companies were trying to secure spectrum right? I think that's a new reality. I know at Anterix, we were waiting for the outcome of the report and order to begin the process of investigating this satellite connectivity. And I look at it like the outcome could definitely be a product that is of value to our customer base. And the outcome could be that a satellite company wants access to our spectrum, the remaining spectrum in its entirety or some blend of both. And that's why when we say optionality, there it is the third time, when we say optionality, we truly mean it. Like we are open to investigating any path that drives value to our shareholders, including continuing down the path where we are, right? We have pristine balance sheet. We have no debt. We have more than sufficient cash, both in the bank collected and to be collected. So we don't have any pressure to act in a way that isn't sensible. And so I think we all look at this investigation as something that's very compelling, and we're excited to see where it goes.

Okay. And then I want to talk about the deal momentum at Anterix. So I think you've described the recent pace as a deal a week. Can you help us understand what has structurally changed in the sales cycle that is driving this acceleration? Is it the 555 approval, the closure of the accelerator program, proof points from existing deployment or some combination of all of the above?

I think it's probably the last. I think it's a little bit of all of the above. So with 11 customers, right? It certainly will be easier for the twelfth to make a decision. It was easier for the eleventh than it was the tenth. Each one is an additional proof point, whether it be just the type of utility that is contracting, the geography that they're contracting to or the use cases that have justified building a private network. But I think sort of all of the above, we certainly don't have to convince any utility of the value of private connectivity any more. And certainly, they are experiencing a new reality. I mean it's front and center throughout the conference, right? It is data centers. It's load growth. It's distributed energy. There are a whole bunch of companies here that will help guarantee power and connectivity, fiber, tower. And so the reality that the utilities are facing is really calling for absolutely for private secure broadband networks.

And I think you noted that the next 10 customers will come faster than the first 10. I guess what gives you that conviction? And are there specific friction points that you -- that have been eliminated that were bottlenecks for the first cohort?

Our goal is absolutely to pick up the pace of contracts. We think that, that will help unlock the value of our asset and ultimately, our stock price. We were aware of 2 friction points that awareness was brought to us by what we call our utility strategic advisory board. So we have 11 CIO level executives. Obviously, some of them are customers, and they help ensure that we are helping them to drive to an ROI to value. One of the things they brought up was access to towers. And so we worked with Crown Castle, and we launched a product called Tower X, that product, we sit in the middle between Crown Castle and our customer base, and we had scale in both directions. So Crown Castle has access to 11 customers across states. And those customers, some of them are deploying only in a county, even if they're a big utility. Some of them just serve a very large county, -- and so we have negotiated a master lease agreement on their behalf with the tower company, Crown Castle in this case. And then we did a very similar thing with subscriber identification module, SIMs. And we worked with a very large SIM provider to procure and ultimately to manage those SIMs and to help provide an environment for roaming and a progression from public network to private network. So those are 2 that are -- were sticking points, ultimately after a utility contracted -- and so any time we find something like that, we put resources to solving the problem and sometimes like these 2, it results in us actually bringing a product to market.

Great. And so A lot of focus, I guess, maybe some of the focus has waned to some extent. But obviously, there was a lot of focus with grain management after their announcement by T-Mobile spectrum and then utilize it to go after the utility community. But recently, they've updated their filing to focus on direct to device. But help us dig beyond green, -- are there other competitive threats that are on the horizon, whether it be CBRS where we could see increases to power private 5G or other maybe low-band spectrum holders that could create friction in your utility pipeline or maybe slow down some of the decision making?

Yes. Let me just take an element of grain issue because I think it goes all the way back to our first question that we talked about. I'm generally a glass full person, right? So as I look at grain and potentially coming to market to compete with us and/or going to satellite. One of the more compelling elements of that investigation is He, they felt comfortable spending $3.6 billion to buy an asset that they would drive a P/E return for just because they were securing low-band spectrum. And to me, that confirms our thesis, right, that low-band spectrum has an inherent value and an unbelievably inherent scarcity that I think makes our asset really valuable. And so whether or not we see David Grain in the utility space or he goes direct to satellite or he holds the asset and waits for it to appreciate as spectrum assets always do, I think that's going to be interesting to watch. When I think of competitors, we have worked diligently to be more than just a spectrum company. We've created, I think we have about 155 companies that build products for our spectrum and services. We've gone out of our way to work with the standards bodies continuously to drive chipsets, to drive modules -- at the recent distribute Tech event, we had about 4 dozen different use cases in our booth. So we had our partners in-stationed in our booth showing what they're doing with the spectrum from a technology development perspective. So there -- utility can always choose a different communications capability. but I don't think it matches what we're offering, right? You could do network slicing, you're still beholding to the carriers' deployment plans to their evolution plans. You're still getting a portion of their spectrum and it doesn't provide the same 5 reliability. And then you also don't get to capitalize it and put it into your rate base. So I think we just look at there are other opportunities for utilities to connect their devices. I just don't think they're comparative to what we're offering.

Okay. And back to where we started for a moment, but just thinking about valuation, even with shares having rerated over the last several months, at the -- at today's share price, you touched on earlier, the implied valuation is just of $0.33 is a steep discount versus your -- the blended average of your announced transactions to date. I guess what do you believe is causing this persistent discount? And what do you see as maybe near-term catalyst to close the gap?

So I think the catalysts that are currently helping to close the gap, right? Because I think we've seen more than a doubling in the share price in the last or so. I do think it's the movement to 5 megahertz by 5. The investigation of satellite and directed device, the closing of 4 contracts the hard work that was done to reduce our burn rate. And so I think all of those both enhance investors view of our spectrum asset and our investment thesis. So I think we need to continue to get the message out that from just a pure spectrum perspective, we're trading at a fraction of any comparable analysis, right? You could pick the lowest comparable, and we're still 1/3 of that, right? You pick a more reasonable and we're fifth or seventh or an eighth. So I think continuing to show up and really get that message out. And then really work to drive some additional top line revenue such that we look more interesting on a Bloomberg terminal type of -- so that when you take a look, you see top line revenue and you see recurring revenue. So there is an absolute focus in the company on that as well. I think those 2 will help really to unlock that disparity. But we're not being viewed for better or for worse as a spectrum asset. I think we're being viewed as an operating company. And our business, there's a lumpiness to our closing of contracts and bringing in revenue. So we're working on trying to smooth that out, accelerate contracts, get more top line recurring revenue, but at the same time, to really message around the underlying asset provides such significant downside protection just even at the amount that it's valued at now. And I think some of the new product solutions should probably help with the top line dynamic there.

So Scott described the strategic review as passively active with continued inbound interest. Given the 5 x 5 approval and the expanded asset value range of $2.5 billion to $7 billion we talked about, has the profile of potential acquirers or partners changed at all? And I guess, are you seeing any interest from infrastructure funds, towers, companies or strategic acquirer, strategic acquirers outside the traditional telecom universe?

It's a tough one to answer. What I'll say is I think we all at Anterix love Scott's passively active, right, because it makes sense. As a public company, you have to listen to anything that comes in. You can dismiss certain things if it doesn't make sense. But at I believe we are more appealing to a range of entities, whether it be funds or strategic partners or spectrum companies. And then whether that changes the ultimate outcome, that's going to be up to those entities and our Board. But I think passively active still makes sense as a way to describe it. But obviously, we're at a better share price than we were when we began that process. So could a premium on that be more compelling? It could. We'll see. We'll be on the lookout there. Yes.

So your customer base today is primarily investor-owned electric utilities. But on the April call, I believe you referenced water and waste wastewater systems, transportation and logistics and industrial IoT as potential verticals. How should we think about that -- about the optionality of value embedded in some of these nonutility verticals that just kind of listed off that have not necessarily been contracted? I guess is there a framework for when these become more material contributors to the business?

So what 5 x 5 really gives us is the ability potentially for a customer to serve multiple entities within its footprint, right? I think just that additional capacity opens up that I think satellite direct-to-device connectivity potentially opens up a range of others in the enterprise sector. Imagine if you could wake up tomorrow and you have a satellite connectivity to the entire remaining country that we haven't yet monetized. I think that opens up some opportunities. And then I really do believe we're going to see more broader enterprise sector interest now that we're at 5 x 5. It's just more easily understood by folks in the connectivity community. It's a more traditional 3GPP sort of designation. We are perfectly set at 3 x 3. We have standardized LTE and for 5G, but we also already have 5 x 5 standardized for 5G in our band.

Okay. And then just touching on the deal pipeline, again, just with the Accelerator program, you've indicated that the program window is now closed to new entrants, but that active deals showing good faith will be honored. How many deals remain active within that framework? And what is the range of contract sizes you're seeing?

So one of the things that's new about Accelerator is we've begun to put companies on notice that were part of it, that it's time to finalize those agreements and that, that price won't remain out there permanently. I think we've been asked multiple times by the investor community, was that program come to an end? So we've begun to notify participants that the window is closing on that particular price. And as we think and as we look forward, what we did there, and I think this is incumbent on the leadership of a public company, we investigated different paths to try to move contracts more quickly. And so we were looking at sort of price elasticity right is there. And what we found is, for some of them, it was important, not all, but for some companies, it was. And those companies that remain there is a range of deal sizes all the way up to 9 figures, right? And we've talked about that. That's nothing new. But collectively, it aggregates up to the full complement, the full $250 million. So there are a range of entities in the program still. But that window is not open permanently.

Got it. And I guess real quick last I think there's 2 operating company IOU, a fairly large one that is still in active negotiations. Is that correct?

Yes.

And so without naming the counterparty, can you characterize where those discussions stand today and the remaining milestones?

Robust discussions still and continues to move forward, I sort of stay tuned, I guess, is how I would characterize.

Great. Well, I guess that's a great place to end it. Chris, thank you again for your time today, and thanks, everybody.

Yes. Thank you. Appreciate it. Thank you.