Anterix Inc (ATEX) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Anterix Third Quarter Investor Update Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Tim Gray. Sir, the floor is yours.

Good afternoon, everyone, and welcome to the Anterix Third Quarter Fiscal Year 2022 Investor Call. I'm Tim Gray, Anterix' CFO, and I'm doing the introduction for today's call for Natasha Vecchiarelli who is on maternity leave, following the recent birth of a baby girl.

Joining me today are Rob Schwartz, our President and CEO; Ryan Gerbrandt, our COO; and Chris Guttman-McCabe, our Chief Regulatory and Communications Officer.

Before we begin, please note that during today's presentation, we may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. Risk factors that may impact our performance are identified in our most recent SEC filings.

Following our prepared remarks, we will have an operator-led question-and-answer session. In addition, at the conclusion of today's call, a replay and transcript of our discussion will be posted to our Investor Relations website.

With that, I'll turn the call over to Anterix' President and CEO, Rob Schwartz.

Thanks, Tim. Good afternoon, everyone, and thank you for joining our third quarter investor call. With our March 31 fiscal year-end approaching, I want to start by saying that we, as a team, are working nonstop in our effort to close deals towards our $200 million fiscal year-end target and beyond.

From my vantage point, in my direct interactions with the utilities we have in the expanding later stages of our sales process, I believe it's not a matter of if, but rather when, we close these contracts. And while we share in the frustration that the confidentiality required for these deals does not allow us to give specific details regarding the individual utilities, we can provide some color around the combined magnitude of the transactions that we're working through.

As we've discussed, we break our customer pipeline into 3 phases, and we call our third and final phase the closing stage of the process. I'm pleased to share that the number of utilities that have moved into this third phase has increased, with the total potential contracted proceeds now in excess of $400 million, including several larger deals. Additionally, our total pipeline of customers in all 3 phases continues to mature and grow even since our last call, now with more than 60 utilities translating into potential total contract values well in excess of $3 billion. Ryan and I, with our team, are driving these deals to completion, and we remain steadfast in our belief that our continued efforts through fiscal year 2024 will result in approximately $1.8 billion of contracted proceeds with multiple paths to get there.

Our strategy has been to take a unique vertical approach to building the value of our spectrum. We have the right target customer base, utilities with strong and growing needs for modernized private communications with ready access to capital and with top credit ratings. What comes with these powerful attributes, however, is a sector that moves at their own pace cautiously, and yes, sometimes slowly, to make these important multi-decade commitments. We believe the long-term benefit is well worth the wait and can drive significant shareholder value.

As you may have seen in our 10-Q filed earlier today, in our third fiscal quarter, we began to return the value of contracted proceeds to our shareholders through our previously announced share repurchase program. Going forward, with our continued confidence in our near-term transactions and our pipeline, we target returning substantially all of the net proceeds from our future contracts to our shareholders through the expansion of our repurchase program or through other tax-efficient means. The driving motivation of the Anterix team is to directly return this value to shareholders as our net proceeds continues to expand.

While the pace of contract collection will dictate the pace of our potential return of net proceeds, our basic philosophy here is that our gross proceeds, minus clearing costs and operating expenses, including any taxes, will determine the value we intend to return to our shareholders. Based on the scale of the contracts in our pipeline, we anticipate that this can provide a continuing and significant return to our investors. As such, this should be viewed as a fundamental attribute of value for Anterix shareholders.

In the 8 years since we filed at the FCC, as a result of our efforts, the narrative around private broadband for utilities has changed dramatically. And as a result, our interactions with the sector have evolved. We're witnessing an expanding list of critical use cases that's fueling market demand for private networks. We are having deeper engagements across these organizations with growing involvement from the C-suites. We're helping them build compelling cases to justify to their Boards and regulators the substantial value that comes from modernized communications.

Our growing position in this valuable sector is also reflected in the continued development of our industry ecosystem as part of our nationwide platform. As an example, just last week, we released a joint white paper with Schweitzer Engineering Labs, a preeminent technology supplier to the utility sector, documenting the success of their wildfire mitigation solution when deployed using Anterix 900 megahertz spectrum. Their falling conductor solution de-energizes a broken electric line before it hits the ground, reducing the possibility of fire. This proactive approach to disaster mitigation is valuable for the growing regions of the country threatened by wildfires as well as other universal threats like increasing storms and falling branches. This Schweitzer project, enabled by Anterix' broadband, can truly be a game changer for the utility sector throughout the nation.

The Anterix Active Ecosystem Program, like our pipeline, continues to grow. We just recently announced a collaboration with Cisco, and we announced the introduction of additional 900 megahertz products from Sierra Wireless. We also recently launched within our ecosystem a cybersecurity collective with leading innovators, focusing on the critical and growing security needs of the sector. These relationships will enable even more vital functionality and value for the users of our spectrum. In less than a year, the Anterix Active Ecosystem Program has virtually doubled from 37 to 72 companies who are developing solutions, equipment and services that continue to enhance the value of 900 megahertz networks. This rapid growth is a sign of the expanding scale of commercial interest in serving utilities' needs as part of our powerful nationwide Anterix platform.

It's meaningful to me and my team that all of these elements of our efforts are coming together to address an urgent national need to foster and protect our nation's electric grid and support the robust introduction of renewable energy resources to achieve our decarbonization goals.

And with that, I'll turn it over to Tim.

Thanks, Rob. Let me start with a significant announcement for which we are very proud. For the first time in Anterix history, we yielded positive free cash flow from operations. In the third quarter, free cash totaled roughly $27 million and was driven by the receipt of the full $30 million of contracted proceeds from Evergy and a $17 million payment from Ameren. Our business plan continues to be fully funded and debt-free with approximately $128 million in cash on our balance sheet at December 31, 2021.

As you may recall, in September 2021, our Board approved a $50 million 2-year repurchase program. I am pleased to share that during our fiscal third quarter, we invested $12 million in share repurchases associated with this program, representing 1/4 of the total program, further underscoring our ongoing confidence in our ability to generate positive cash flow.

Turning to our fiscal year '24 forecast. Based on our market traction and current pipeline, we maintain our estimate of securing approximately $1.8 billion of contracted proceeds. We also maintain our forecast of receiving initial prepaid cash proceeds of $300 million to $500 million associated with these deals by the end of March 2024, with the remaining over $1 billion of contracted proceeds due from these contracts in fiscal year '25 and beyond. So far, we collected $73 million to date from our 3 initial contracts, which total approximately $129 million.

On to cash spend. As we previously guided, we expect to spend roughly $70 million per year through fiscal year '24, including $40 million of OpEx based on our lean operating cost structure and $30 million in spectrum clearing costs. Through the third quarter of our current fiscal year, we have spent approximately $27 million in OpEx and $15 million in clearing costs, which includes returning costs, spectrum acquisitions and anti-windfall payments, with an additional $10 million in committed funds to clear spectrum.

I would also like to point out that we restated our second quarter 10-Q, which we filed today, for this fiscal year to include a $10 million nonmonetary gain. This gain is related to the exchange of 900 megahertz narrowband licenses for 900 megahertz broadband licenses with the FCC. Using the accounting guidance, ASC 610, we have determined that Anterix should have recognized the difference between the cost of narrowband licenses being returned to the FCC and the accounting basis of broadband licenses being issued. Going forward, we will report this accounting gain or loss upon the grant of broadband county licenses by the FCC. The gain or loss considers the cost of the narrowband license, clearing costs and any anti-windfall payments. Based on the anti-windfall payment obligations set by the FCC in the May 2020 Report and Order, we are using the 2017 600 megahertz auction prices as the accounting basis for 900 megahertz broadband licenses. We do expect that virtually all of our narrowband to broadband license exchanges will be gains for Anterix. Due to the unpredictable nature of the timing of these gains or losses, we will not be providing guidance on them on a quarterly or annual basis.

The $10 million gain in our amended second quarter 10-Q relates to the first 12 900 megahertz broadband licenses we received from the FCC in August that were not marked up at the time and we have, therefore, identified a material weakness in our internal control over financial reporting related solely to this matter. Remediation efforts are well underway and more information can be found in our 10-Q filed today.

I'll conclude by saying that Anterix continues to be well positioned for continued success, allowing us to be in a position to return significant value to shareholders. We proudly achieved our first positive free cash flow quarter, are fully funded with a substantial cash balance, remain debt-free and are poised for a growing balance sheet, stemming from our forecasted contracted proceeds.

Now I will turn it over to the operator for questions.

(Operator Instructions) Your first question is coming from Simon Flannery. .

Great. I wanted to just, Tim, touch on the guidance. I know that Rob mentioned the $200 million for this year upfront. But are you removing that as part of your formal guide at this point?

Okay. Good. So look, on the guidance, we're confident we're going to get these deals done. Might they conclude after 3/31? Yes, that's a possibility. But I've got to say, week over week, we're directly seeing the continued progress. And while there may be uncertainty on the precise timing, I believe there's certainty on the outcome. So we're really confident that we're going to close these deals and bring the proceeds to Anterix.

I don't know, Ryan, do you want to add any color to that?

Yes, I'd be happy, to Rob. Thank you. And as you said, definitely, we're actively working a variety of deals here still before the end of the quarter, Simon, all hands on deck, as we've talked about before, kind of the complexity in how we engage with these deals and as our teams interfacing across really a variety of the different touch points of these organizations. In fact, just to share some color, I was actually out in the field here today with one of these potential customers. And that's been a nice change of pace, to be able to be back out in the field, building some of the relationships that are extremely helpful and necessary as we continue to help them to get to close.

But just as Rob said, I'm also a realist. And while we're feeling confident about where we're at, I feel good that the path we're on can absolutely lead us to the contracted proceeds that gets us to the fiscal year '22 $200 million commitment that you referenced. But as he said, at the same time, we've seen already what can happen over the timing of these deals as we get to the close and can't rule out the alternative that the agreements may push beyond March 31 either.

But overall, we have referenced kind of what we've seen in the building with the Phase 3 pipeline, which has increased to be more than $400 million in potential contracted proceeds in this phase alone. And just to refresh what that phase is, the closing phase, to where we've got relative established alignment with the customer, we have a certain level of commitment and are working towards the final agreements. But as we've seen, there's certainly still work that we have to be pushing on to be able to close.

And to give you a sense of the types of items that our teams are engaged across the different potential customers right now, we're really focusing in with them, again, under the premise that there's an alignment to do PLTE and a general acceptance around the role of our spectrum in 900 megahertz. The work where we really engage with them and where a lot of our strengths shine is the ability to help them with their business plans, their deployment plans, stakeholder engagement, executive positioning and paper of the agreements. All activities that we're helping to guide them through, we'll be able to address any roadblock and stuff as they bring them all up.

Great. That's helpful. And I guess, Tim, just great to see the buyback kicking in. Are you able to share, did you do any buybacks since the quarter end?

Simon, we're not going to report on buybacks kind of intra-quarter. We'll do that when we get to the end of the quarter and put it in there. But as I've said before, we expect to be active throughout the life of the program, and we'll see value here at the stock price for us to...

Do you have a grid in place like automatic? Or is it really discretionary?

We're using a little bit of both, discretionary and an automatic grid, to be able to buy in the marketplace. So again, we expect to continue to be active, and we'll report on that at the end of each quarter.

Great. And I know Chris is on the line. It would be great to just get some updated thoughts on the infrastructure funding and what to expect from the NTIA on this middle mile and how that might help the utilities, et cetera.

Sure, Simon, and great to talk to you. We've had great meetings with the Department of Energy and with NTIA. We're very happy with the language that came out of the infrastructure legislation and the opportunities for utilities both for middle mile and the other sections, the resiliency and grid flexibility sections and wildfire mitigation sections, in the legislation. And in total, it approaches $10 billion in funding that the utilities could go after to support the modernization of the communications component. So we're very excited. Both of the agencies are moving forward with their processes, and both of them have like notice of inquiries out there asking questions. And we're going to be active throughout the process both individually and with several of the trade associations.

So when do you think that money starts to flow? Is it like the broadband stuff in like mid-'23 or something like that?

Yes, Simon, I think we would all sort of be guessing to some extent, but I anticipate that we'll see money begin to flow early fall, maybe late summer -- at least sort of late summer, early fall potentially begin to flow out. I think what the programs are looking for is transformational opportunities. And I think what we are advocating for, and at the core of our business, I think we're perfectly aligned with where the administration and the departments and the agencies want to go.

Your next question is coming from Phil Cusick.

This is Amir for Phil. It looks like this quarter, the Ameren deal added about $200,000 in revenue versus what we thought would be like $500,000 per quarter. Is this more of a timing issue? And what should Ameren be contributing per quarter in revenues going forward?

Yes. Remember, there is a ramp-up to get to full steady state. We were delivering a 1.4 before a 3.3 for a certain amount of counties. So to get to a steady state revenue will be a couple of years before we fully deliver all their spectrum, and then you see a straight line from there. So in the current set of quarters, it will be about [$150 million] per quarter for the next 4 to 6 quarters.

Okay. That's helpful. And I just wanted to make sure, on the previous guidance of $125 million to $150 million in run rate revenues exiting fiscal year 2024, is that guide still in place? Or has that now been kind of replaced by the $200 million?

Yes. So yes, I would say we replaced that guidance at the Investor Day we had in June. That was based on 20-year payment streams of leases over time. And now that we've got the prepaid model, we've really kind of adjusted our guidance and what we've talked about to cash proceeds with a focus on free cash flow. So we're not using that $125 million to $150 million, but you're really looking at maybe $1.8 billion that we expect to sign by our fiscal '24.

Rob, did you want to add something else?

No, Tim, I think you covered it well.

Your next question is coming from Walter Piecyk. .

Rob, you've made some OpEx investments in developing, I think, a services business. There's been an ecosystem that's developed. You've had some announcement there. When you think about the $400 million of potential that's in Phase 3, aside from the spectrum portion of those contracts, do you anticipate 2022 being a year where you're going to start to see some notable service business associated with those contracts? Or conversely, with your existing customers, has there been any movement in that direction in developing a services business on top of what you're doing on the spectrum contracts set?

Thanks, Walt, for the question. I think, look, a couple of things. You mentioned the investment that we're making. I look at really that investment in 2 ways. First, it's really about continuing to position us and our company as the trusted adviser to these utilities. As we're working day to day in the pipeline, customers that you mentioned in that $400 million of that Phase 3, we're helping them think about exactly how to approach this from their first understanding of what is broadband and LTE. Remember, these are sophisticated customers that know electric networks well but really don't know a lot about broadband networks.

And so starting with what we did by launching UBBA, the Utility Broadband Alliance, and bringing them through the knowledge and sharing that goes on there, it's honestly one of our best marketing channels, the idea that we have the industry driving forward, educating each other about the value of broadband. We're investing in those things primarily initially because they really drive demand. And so for us, the catalyst of the investment first of creating the demand side for our customers and helping them go through what's a complicated process from a standing start to having an operational model.

A lot of the things we're doing, like the Anterix Active Ecosystem I talked about now with over 70 companies there and a lot of notable companies, but a lot of companies also that are really innovators like the ones that are cybersecurity collective, that's making the compelling elements of broadband that much more valuable. These utilities aren't buying technologies, they're buying the outcomes that the technologies bring, the application, so stopping wildfires, being able to be more resilient in storms, being able to stop the increasing cybersecurity events. So really we're driving the visibility of those solution sets for utilities. So in the front end, it's easier for them to make the cases to adopt these networks.

Does that drive us further up the value chain? We believe so. I think it's early for us to really predict what the impact of that's going to be, but we are absolutely looking at ways in which we can continue to monetize beyond spectrum. And today, we're working with utilities closely, helping advise them. And through that process, we're getting to understand how they approach it and identify where we think these other opportunities are within the value chain. But I think it's probably a bit early for us to talk about the magnitude of that, but we absolutely are focused on developing those additional opportunities.

So at some point, as 2022 or maybe 2023 progresses and, obviously, there's some level of investment that helps in the sales cycle, right, as a service, this is almost a free service in order to continue to get sales close, but there might be some incremental investment that you were hopeful perhaps historically to generate a services business. At what point is it not too early to consider cutting back on the investment in that area if you're not seeing incremental revenue?

I think we're very satisfied with the investment to date. I think Tim described it as being a lean operating expenses. We've got a small, but very effective, team that's really developing those services today. We really have a model where we're leveraging partnerships, right? The reason why we have over 70 companies is because it's their capabilities that are helping translate into those valuable services. Can we make money from them selling services? We can. We're a great channel into utilities and all of these big companies are joining in our ecosystem to have great access to this very valuable customer base. And so I do think that translates into incremental economic value for us. So it's not that we're not investing, we're doing it, I think, in a very prudent way that we really believe we can bootstrap our way into being accretive in building that business opportunity.

Okay. And then in terms of the 3 phases, I may have missed this in the prepared comments, but can you specify either in terms of number of utility companies or dollar size perhaps? Because I know you gave an aggregate dollar size of, I can't remember, I think it was $3 billion of potential value. How much of that or how much increase, if at all, occurred in Phase 1, meaning like what new discussions have you had with utility companies that have entered Phase 1 in terms of pipeline? Express it as dollars or number of utilities, however you want.

Yes. So maybe I'll start, then I'll let Ryan fill in. But we talked about a couple of things. One is that we gave the scale of the increased Phase 3 for us of being $400 million of our pipeline. We did also talk about the increase of the number of utilities in the overall pipeline to 60 utilities, and that's an increase from where we previously talked about it. The overall scale has gotten bigger. As I mentioned, we're well in excess of that $3 billion now. And so for us, the size is great and we've got the lion's share of the marketplace within that pipeline, now it's about bringing it through the pipeline and seasoning those customers and obviously getting them through Phase 3 to close as well.

Ryan, anything you want to add?

Yes. I think your question is really focused, Walt, on kind of the 10 that Rob talked about. And so I think what we're seeing there is certainly kind of new entrants to the conversation. And so a lot of this is a result of some of the other kind of market tailwinds as we talked about it. It's expanding the reach and the conversation that we're seeing in PLTE. The ecosystem certainly drives the new participants where there's existing relationships. And think about the ecosystem from a perspective of every one of those companies is literally now a new marketing channel, driving the conversation and trying to push awareness into their portfolio of customers around the potential role of PLTE.

We're also seeing kind of the increases of the voice that organizations, like UBBA and EEI and UTC have, who have a much broader perspective in terms of the utility audience. But that's where a lot of the utilities we find go out to get their information and attract learnings around some of the new evolving things that we may just not have touched yet, frankly, through some of the direct sales relationships and the team that we've been able to build.

I think I understand all those points. What I was specifically trying to figure out or understand, if you are available or making it available to us, is specifically how much it did increase in terms of new relationships that kind of entered into what you define as Phase 1 either in terms of number of utilities or dollar potential.

Yes, that's the 10 utilities, Walt, the 10 new utilities last reported.

Okay. Got it. Sorry, I clearly missed that. Appreciate that.

No problem.

(Operator Instructions) Your next question is coming from George Sutton. .

This is Adam on for George. Rob, we noticed the other week that Texas State was out with an announcement discussing the completion of their new facility and the beginning of testing of about 100 use cases in 900 megahertz. I would love to hear if there's any updates around that effort and project and if there are any new partners that you expect to join Texas State in the near term.

Sure. Thanks, Adam. And I think I'll pass it on to Ryan. But just quickly, the Texas State program for us, the CEDAR program, is a great test bed of various communications technologies but also broader -- it's about the use cases for utilities. And there's a vibrant ecosystem there that those licenses and the efforts that represent.

But do you want to add to that, Ryan?

Yes, happy to. No, there's a lot of exciting things going on out there, Adam. The one recently, I think, that triggered perhaps the announcement, one thing that happened, which is kind of a general macro point too, kind of the advancement of what's being largely described as EMI or smart metering Phase 2. And one of the applications that Texas State was able to pull in, leveraging the 900 megahertz, was a use case demonstration of kind of what the advanced next stage can be about really pulling LTE, under the glass it's called, literally being able to embed an LTE chipset underneath the glass of a meter.

But they're continuing to attract interest in terms of sponsorships and members into the program. We do anticipate there'll be continued access to either members through the Anterix Active Ecosystem Program or direct relationships with Texas CEDAR that we're going to continue to see exercises there. Coming back to our goal for CEDAR, kind of why we wanted to get involved in the first place is, see, the university infrastructure, really what Texas is trying to drive is trying to push really the cutting edge of getting out into the advanced applications and use cases, the ones that utilities might not be thinking about today, to be able to really drive innovation and promote the next generation.

Great. And one more for me. Is there any other additional details you could share on the Phase 2 component of the segment? Are you seeing people move faster through that? Or certain types of utilities begin to move with a sense of urgency for some reason?

Yes, I could talk on that one, Adam. Yes, as we said in the prepared remarks, I mean we've been seeing growth actually or development, which it would translate to, in all of the 3 phases. So while we've been seeing kind of the growing of the funnel, as we just mentioned, the additional 10 coming into the top end, we've been seeing equal kind of growth as we move through Phase 2 and, ultimately, as we noted with the $400 million in Phase 3. So we're seeing all the right maturation as we'd hope, as customers start working their way through that process, anticipate continuing to be able to see that and, hopefully, the signs of some of the indicators that we're starting to sense in terms of sources of acceleration as the year continues to progress.

(Operator Instructions) We have no further questions coming from the lines at this time.

Thank you, Katherine. So just in summary, as you all heard, we strongly believe that Anterix has a unique and valuable asset around which we built a unique opportunity. Our laser focus remains on capturing this value. We appreciate your patience as we do so, but we see the tremendous opportunity to return it to our shareholders, and we believe we're on a great path to do so. So thanks, everybody, for joining us today.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.