My name is Jerome Darling, and I follow the cable and telecommunications space here at J.P. Morgan. 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. You know, 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 MHz 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 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 3-5 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 what's changing in the utility industry, and the massive need for grid modernization, where you have things like, you know, distribution, transmission issues that didn't exist long ago, where you had a coal plant or a gas plant where that was putting out electricity in one direction. And now you've got electricity moving in many, many different directions, whether that's from wind farms that have now been developed or, you know, solar panels on roofs, where you know, the utility has to measure power going in multiple different directions.
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, 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, it's continuing to monetize that portfolio in addition to the 6 contracts we've gotten done to date, worth over $270 million.
Okay. Thank you. 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?
Yeah. So, you know, it's hard to believe, but it's only been four years that we've had a product to sell. 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 you know, that takes... It 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 two sale transactions, but it's really also enabled us to build a pipeline, and we've also done some other things.
We've put in place the Utility 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 all those entities are putting time, effort, and money behind 900 MHz. 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, you know, 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?
Yeah. 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, you know, 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.
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 within the 900 MHz band. If this is approved, what does it mean for Anterix, and how does that kinda change the path of the company going forward?
Yeah, so it, it's really about what the customers and the utilities themselves want, and that's why we had, you know, multiple people go on this filing in addition to Anterix, and that included multiple utilities. Because they see the future of, you know, the use cases are just gonna continue to grow. The data usage is gonna continue to explode as it has on every device that everybody uses every day. There's just gonna be more and more information needed to monitor flowing through these networks. You're gonna have things like smart meters, where, you know, a 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 gonna 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 gonna 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 gonna 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, 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, you know, both in the initial filing and in the comments that just came through. So, we'll, we'll continue to, 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, but we see this as much more momentum than the early, 3x3 process did, and hopefully it will get completed faster to be able to provide, even more spectrum to those customers.
Okay, let's talk about deal pacing. Over the last two years, Anterix has done an average of two deals a year for about $45 million apiece. 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?
Yeah, you know, 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 approving a complete wireless build-out or wireless network build-out. You know, so a lease of spectrum may be a very small sliver of that total overall cost. When you look at that pie, you could have a, for example, for this conversation, a billion-dollar project, of which a spectrum lease may be, for discussion purposes, $50 million. But it's that billion-dollar project that they're pushing through their own internal processes, and this is new and novel to have one wireless broadband network with any utility. So, you know, 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, you know, need to get people to sign off on it, and that just takes time. And, you know, we could 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 it, so it has gone through the 3GPP process, where it's going to be enabled for 5G, you know, from a 3x3 perspective, as we move forward at 900 MHz. All of those things take questions off the table, but at the end of the day, when you've got a $1 billion or whatever it is, very, very large project, it's gonna take a lot of time. So pinpointing when exactly that utility is gonna 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, you know, we've moved away from trying to, you know, predict when things are exactly gonna happen.
Okay. Well, let's talk about some deals that you guys have actually signed to date, starting with the Tampa Electric Company. 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, any other details you can share there?
Yeah. 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 felt like, 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 goalposts of 600 MHz 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 MHz.
And so we're taking all those considerations into how we see fair market value, and we're continuing to see that, you know, 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 we'll receive over the next couple of years. You know, again, you know, where I talk about how, you know, 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, you know, where there are multiple other entities, you know, that we're engaged with as well.
... Right. Okay, and how does the Tampa 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 was 100+ counties, very different geography, very different geographic spectrum value. But again, we feel like for Xcel, we got, you know, spectrum value, or the fair market value for that spectrum. And so all good from that perspective as we look at it. But of course, you know, having the big deal, having these larger utilities, you know, 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 six-figure deals? Investors are typically very interested in you guys pulling one of those through.
As are we. But yes, we do have, we have multiple six-figure deals that we are working in the pipeline. You know, again, because they're big, that means that the wireless, the, 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, but we feel like there's, there's good opportunity even in the very, very large utilities. And, you know, the hope and the expectation is in, you know, the near term, we'll start to, see some announcements around those. But, you know, we're also gonna see, continue to see some on the, the medium size and the smaller end.
You know, 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, you know, 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 the 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 a, you know, 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 MHz. And so we took at 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 through these processes.
So once they cross a certain threshold of these scores, we've got 20 factors that we look at, you know, that we give a weighting to, and things that may be public, things that may be, you know, private from, you know, just going on between us. But let me give a couple of examples. You know, whether someone puts out an RFP for spectrum to build out a network. Well, that's a sign that they're doing something. You know, 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, you know, beginning pricing negotiation with us and trading, you know, 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 gonna 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, you know, this is something that, you know, 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. You know, 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 was a lot of good feedback from the teams yesterday, but, you know, 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 gonna... is every utility gonna check off all 20 boxes at the end of the day? No, all of these deals are different. And then they go about a different path that kind of meanders one way or another.
But they, you know, we've had six get there at the end, and a lot of these factors were what, you know, we were able to score and say, "Okay, now we knew they were gonna get there, and they would sign a contract with us." So it's been effective, I think, both internally and I hope externally for, 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.
Right. Okay, and, and what are you seeing from a competitive perspective? Who are the other players in the spectrum space, and why do customers prefer to work with Anterix versus the field?
Yeah, I mean, I think from our perspective, let me talk about Anterix first. We've built a marketplace, and we've done things like I talked about earlier, whether that's the Anterix Active Ecosystem, the USAB, UBBA, and things like that, to bring people together to talk about the need for these networks, the need for under one gigahertz spectrum, you know, with its lower cost basis, you know, with its propagation and penetration characteristics of being able to lower costs from an operating cost perspective, of having less cell sites and things like that, that are all very important. We also, from our perspective, have the advantage of being able to tailor the spectrum that we offer at the county level.
So we can make sure that the spectrum that we're leasing or, and are selling in the few cases that we've done, ties directly to a utility's service territory... So they're not having to pay for spectrum that they're not using. So that's another thing. Second is, we've been able to work through the process with the utilities, where they're able to capitalize the spectrum cost, which is very, very important to them. And we've, you know, effectively gone through that now in multiple different iterations across the deals that we've gotten put in place. And so, you know, Anterix has done a lot, you know, a lot of the right things to put this market in place and have people moving through, as I just talked about, our Demonstrated Intent Scorecard. But yes, I mean, are there competitors? Absolutely.
You know, there are different pockets of spectrum holders that say 600 MHz, you know, that sometimes won't engage with the utility, but they have different issues, like not being able to tailor spectrum exactly to that utility's service territory. And we've also put ourselves in place where, you know, you're not gonna have the OpEx cost perspective from different, you know, different competitives, where they might get from a carrier, you know, where they're paying by the bit or by the device. That's not something they wanna do. They wanna capitalize those costs, moving forward.
You know, there have been some players, you know, who've stepped in, put their toes in and out of the process, but to date, you know, we've been very effective in building the marketplace, and we feel good about our position.
Got it. And then, I guess, you know, why, why haven't members of the Big Three, AT&T, Verizon, T-Mobile, some of the other carriers that have a lot of spectrum, why haven't they kind of ventured into this space?
We're not saying they can't, and they've got size and heft of their own nationwide networks. But I think it's really what it boils down to is some of the hurdles that have to be overcome from a utility perspective. As I just talked about, it's the capitalization piece. That's one key, for instance, you know, where they know working with us, they can capitalize the spectrum, you know, not necessarily sure how that would work from a carrier perspective. From a utility, it's really important when they think about it, that they're choosing where things like cell sites go, you know, where they've got rural, you know, substations and things like that, where they wanna make a decision about, you know, where to put the site, you know, even when there's no people.
How much they harden that site so that when a hurricane or a tornado happen, that site's either gonna stay up or they can determine how fast it gets back up when, you know, somebody else may prioritize, you know, putting up a population center versus that substation that's so incredibly important to getting power back on for that population center, that a utility can run through. And they've got the security aspect of running their own network, that's also very important to them. So, you know, we'll see, who else comes to play here, but, you know, there are a lot of things from a utility perspective, that we feel like we've got in place, to be the sweet spot for them.
Okay, now let's take a question from the line. "So with all of the CapEx being spent by utilities for increased power, specifically related to AI, why aren't these utilities spending faster on private networks?
That's a good question, and as I talked about, I mean, they move at their own pace. You know, even when you know, they move fast, it's still, you know, relatively... It's slower than a lot of other industries, and we've come to learn that kind of is what it is. But you know, the pace that we're seeing, the intent, the increased intent that we're seeing, we all see positive signs. Yes, we'd like to see things move faster, and we're working to make sure that they can move as fast as possible from our perspective.
Okay. Is there an opportunity for some of these utilities to use federal dollars to subsidize the build-out of their networks? What are you seeing from that perspective?
Yeah. So in a couple of infrastructure bills that were passed over the past few years, we have seen, you know, the availability of some money for, you know, whether it's, you know, from a broadband perspective or other grid modernization enhancements, that multiple utilities that we have worked with have, you know, either applied for funds and are working through that process right now with the federal government, or it's really kind of pushed their thinking and accelerated their thinking about this process and how they wanna move, you know, and work through a business case and all of those things that are gonna be important, that may make federal funding be a part of it.
But yes, there are current options for them to be able to do so, and each utility kind of takes that on a case-by-case basis from within their own perspective. But I think we're gonna see, you know, at least hopefully in the near term, some additional investment coming from the federal government that helps support these build-outs moving forward.
Okay. And how is Anterix thinking about the potential implications of an election year? Could you kind of talk about the different scenarios there? What would benefit you? What would potentially take away?
Sure. I think, you know, there's two ways, there's some impact. On the on the core business, we really don't see any that you know, grid modernization, the enhancements we're talking about, the bills that have already been passed and put in place are all important, all have a lot of bipartisan support. So, you know, and everybody knows that what's happening in the utility industry is gonna need grid modernization enhancement moving forward. So we don't foresee any you know, election year issues or potential changes causing impacts there. From a 5x5 perspective, you know, that process is gonna continue to move through. We feel like we have bipartisan support on that as well.
But, you know, if there's, you know, potential change in administration, there's always a change in focus for a short period of time, while people figure things out in Washington. But again, we expect that process to hopefully continue to move forward positively.
Okay. And then just touching on something you mentioned earlier, spectrum clearing. Could you kind of explain to investors what spectrum clearing is, and why it's required?
Sure. So it's a common process in spectrum rule changes that the FCC puts forth, and so this has happened over time in multiple different bands. In the 3x3 that the FCC approved in 2020, there were incumbents built in within currently using spectrum channels within the 3x3 that was allocated for broadband from the FCC. It's up to Anterix, at Anterix's cost, to move those incumbents out of the way. The FCC built in a mandatory provision that once you got to a certain amount of ownership of the spectrum, you could go to incumbents and move them, you know, kind of, and tell them they have to go.
We haven't had to put that in place yet, because people, you know, spectrum holders and 900 MHz holders know that this is a very common practice, and this happens, and they know they're gonna get, you know, paid for it. They know that if they wanna continue to use their channels, they'll get moved to, you know, spectrum outside of the 3x3, but still that they can use effectively in the same way that they're using it today. We had talked in 2020 about spending roughly $120 million-$150 million to clear those incumbents. We're probably close to 70% of the way through that, both from a spending perspective as well as an incumbent clearing perspective in the number of incumbents that are there.
This is also the type of spend that we can throttle up and throttle down, depending on where we are with customers and what's happening from that perspective. So if things are happening faster, we can spend more quickly. If things are slower, we can slow that clearing down, clearing spending down as well. We anticipate, you know, and I've talked about this in the upcoming fiscal year, spending, you know, roughly $25-$39 for some additional clearing over the next year.
Okay. So we've touched on CapEx. How should investors think about operating expenses? In calendar year 2023, you spent about $40 million. Excluding stock-based compensation, how should we expect that to trend moving forward?
Yeah, I mean, I would expect some slight increases. I expect that cost, as I've talked about many times with investors, from an operating cost perspective, to be like a bell curve, where, you know, as we continue to penetrate more and more, we'll be able to start to bring costs down. You know, we're gonna probably peak in the next year or two in the $45 million-$47 million range. We'll be a little bit less than that this year. And, you know, continue to move the ball forward with what we're trying to do effectively.
Okay. And the company's board recently... Well, not recently, but you approved a $250 million buyback program. This was five times the size of your prior program. Could you talk a little bit more about the thinking there, and why the board decided to approve such a large buyback?
Yeah. So we did that in September of 2023, so just this last year. And effectively, it was a statement of confidence in the pipeline that we have. We see, you know, internally, where we are with customers that are coming, the sizes and the scopes, what potential payment terms could look like, and felt that that was a number that we could effectively meet over a three-year period. And we wanted to put that out there to really emphasize how good we feel about where the pipeline is and how, that, that it is going to... We're gonna see more transactions close during that timeframe with those upfront payments that will enable us to fund that program. We've been active. We've continued to buy shares since that announcement has been made, and we will continue to do so.
Okay. And then, are there any additional opportunities to partner with utilities, you know, potentially as a reseller of some products? Any other revenue-generating opportunities above and beyond the spectrum that Anterix could tackle?
Yeah, there are definitely, and that's something that we're looking very closely at with a small team. We just hired a new VP of Product from Itron, whose you know specific focus is to look at, you know, not only supporting use cases that utilities need to make sure that they can move forward with monetizing our spectrum, but also some additional revenue opportunities in the future, potentially for Anterix. And these are things like, you know, a product that we've put out within the last year called CatalyX, which is really to help support the transition for utilities from narrowband to broadband. It's really a needed product for those that have questions about how they're gonna manage their systems as they go from their old legacy systems to their new broadband systems.
So, you know, there are active RFPs, where companies are actually thinking about this process that we're involved in with this product. We'll continue to put things out that we think are gonna be one, helpful for utilities as they move forward. Two, accretive to our shareholders, and build long-term value for them over time.
Okay. And then lastly, as you think about the future of the company, perhaps over the next 5-10 years, what do you think investors are missing that will eventually show up in the numbers, and cause the stock to potentially go up?
That's a good question. You know, really, at the end of the day, we're in the early innings here. I mean, we've only had a product that we really could sell for four years, and I wanna reemphasize that. It's really been a short amount of time to be able to put that together. We're excited about what we've built, the marketplace that we've put together, the things I've talked about, you know, a couple of different times today around, you know, how we're helping utilities move forward here, whether that's the Active Ecosystem or other things that we've put in place. We're excited, encouraged by the progress that we've seen that we continue to show every day, and I get to see it internally.
In general, the other issue that we're seeing is the importance of these networks on a day in and day out basis just continues to grow. You know, data usage is not slowing down. It is continuing to accelerate and will continue to accelerate for these utilities, and so they're gonna need these communication solutions to really drive home the answers that they need.
Could Anterix make sense as a part of a larger industrial or wireless provider?
Yes, but, you know, we're operators, and we're gonna run this company the best that we can to continue to drive results, to continue to move our pipeline forward, and that's what we do. And that's the history of the folks that are running the organization, and that's what we'll continue to do on a day in and day out basis. And, you know, continue to fire on the number one priority that we have, is to monetize the spectrum asset we've got.
Great. Tim, I think that's a great place to leave it. Thanks for joining us today.
Thanks again, Jerome. I appreciate the time.