Earnings Call Transcript - ATEX Q2 2020

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Anterix Second Quarter Update Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Natasha Vecchiarelli. Ma'am, the floor is yours.

Natasha Vecchiarelli, Host

Good afternoon, everyone, and thank you for joining us. With me today are Brian McAuley, our Chairman; Morgan O'Brien, our CEO; Rob Schwartz, President and COO; and Tim Gray, our CFO. Before we begin, I'd like to highlight that during our call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's 8-K, which can be found on our Investor Relations page. Please also note that we may make reference to forward-looking statements. And our actual results could differ materially from those implied. Information regarding the risk factors that could cause such differences can be found in our public filings, including our most recently filed Form 10-Q for the quarter ended September 30, 2019. With that, I'd like to turn the call over to Morgan O'Brien.

Morgan O'Brien, CEO

Thank you, Natasha. Thank you, everybody, for joining us this afternoon. It's been five years since Anterix proposed to the FCC a modification of the rules at 900 megahertz to permit the operation of a 6 megahertz broadband segment in the band. While no decision is final until the vote of five FCC commissioners and the publication of the final order, we at Anterix are encouraged by recent signs that a positive outcome may be near. For example, on October 9, the wireless bureau of the FCC issued a decision granting a request by Anterix that the licensing freeze be lifted to permit incumbents to file applications to relocate out of the proposed broadband segment. This does not prejudge a rulemaking, of course, but to us, it suggests that the staff is actively considering a broadband allocation as proposed. In addition, the record in the proceeding reflects a number of recent meetings with the bureau staff on issues that we interpret as underlying a favorable decision on the merits of creating a broadband segment and focus on the details of how that process might work. As reflected in a series of ex-parte filings made by Anterix, there have been discussions with the FCC on a wide range of technical and operational issues around repurposing the band. Our experience suggests to us that the staff is getting ready to make final recommendations in the proceeding to the commissioners. And we're optimistic that the outcome will be consistent with the broadband allocation as we have sought. As we continue the regulatory process, Anterix has been active on a number of other fronts. Of these, the most important are the steps necessary to be ready immediately upon a final order to clear spectrum and make it available for broadband use. After the recent capital raise, Anterix prioritized the hiring of staff for the retuning process. Over the last few months, we built the team we anticipate meeting for the first phase of retuning and enhanced staff with a combined 250 years of retuning experience is now on the job implementing our plans. Also, we're pleased that EWA, our partner in filing the original petition, recently announced an agreement with Anterix to play an integral role in the retuning process. As our investors know, there are approximately 400 incumbent licensees who will need to be retuned or otherwise relocated to clear the 6 megahertz broadband segment that's proposed. A large number of these incumbents are members of EWA and have long-established relationships with the staff at the EWA for frequency coordination. So it makes sense that EWA plays an introductory role in that retuning process, to lay out the FCC decision when it's published and to minimize disruption to operations and to facilitate the retuning. Many incumbents are likely to prefer a simple retune of channels from one part of 900 megahertz to another, something which their existing equipment can accommodate easily. Others may use the opportunity to see if another band spectrum might make more sense, or they may choose to request from Anterix an offer to purchase their license. We believe EWA is the perfect neutral arbiter to make these discussions productive and to speed up the process overall. Many other actions are underway to reduce the size of the retuning task and to give Anterix a stronger spectrum position. Recently, three spectrum transactions have been contracted. The proposed rules require all 20 MTA licenses to be included in any application for broadband. So we've prioritized acquiring MTA agreements. Of only 11 MTA licenses that are not already in our name, we either have signed agreements or are in active discussions with seven. Our experience so far, although these are still early days, would suggest that the process of enhancing our spectrum position will fall pretty much in line with earlier expectations. In a variety of other ways, the team at Anterix is continuing to prepare for a future as a provider of broadband spectrum for private enterprise users. Our thinking has not varied from putting emphasis on the electric utility industry. As we have laid out in a lot of detail in the records of this proceeding and to our investors, the pace of grid modernization and the challenges entailed seem to create a compelling opportunity for wide-scale adoption of LTE broadband technology. And while we may not provide the only way of meeting the challenges, we think our spectrum at 900 megahertz provides the best and most economical way of doing so. It's worth noting, however, that utilities are not alone in appreciating the value of wireless broadband. We're starting to see other potential users of the spectrum showing interest in the prospect that 900 megahertz broadband spectrum will become available for private system use. I'd like to conclude my comments by saying that we recognize that this long process, the regulatory scrutiny, and record-building is taxing on the patience of investors. We're lucky to have investors who understand just how much is involved in being successful in this kind of undertaking. There is a definite upside in the passage of time, however, and we're seeing that every day as more and more attention is being paid to the opportunities for private broadband. While LTE was definitely a nice back when we filed the petition, there have been literally billions of devices deployed around the world since. While the advantages of LTE for latency, security, and throughput were being discussed by enterprises back then, the passage of time has brought much greater understanding of its value. Being at Anterix throughout this process has given us a chance to appreciate the complexity of decision-making at large private enterprises and their need to proceed with caution. Now, however, we can feel every day the momentum that is building for bringing this amazing new technology into use the critical infrastructure on which modern life is built. We're understandably anxious to see the regulatory process run its course and put our spectrum to use. I'll now turn it over to Rob.

Rob Schwartz, President and COO

Thank you, Morgan, and good afternoon, everyone. I would summarize the theme for the first half of Anterix's fiscal year as momentum. You just heard from Morgan about the progress with the FCC and our belief that we are nearing a significant milestone. In addition, I want to emphasize three other key areas where Anterix is gaining momentum. First, we are actively collaborating with a large group of potential customers to meet the rising commercial demand for private LTE solutions. Second, we are building on our industry-wide initiatives, seeing greater support and involvement across the sector. Third, we are enhancing our operational organization to prepare for a broadband future. Let’s begin with our customer progress. Overall, there is a growing recognition and movement toward private broadband networks to meet the critical communication needs of various infrastructure industries. We are noticing increased interest from electric utilities and other industrial sectors. There is a heightened awareness of the value that private LTE networks can offer, especially given the limited options that leverage the advantages of 900 megahertz low-band spectrum. This spectrum is becoming a preferred choice for its cost-effective solutions aligned with existing LTE band standards. Due to this rising market demand and the diligent efforts of our expanding team, we are seeing our pipeline strengthen in anticipation of the FCC order. Utilities are refining their business cases for enhanced telecom capabilities and recognizing their need for spectrum, as demonstrated by the RFIs and RFPs for modernized networks. Although many customer relationships are governed by non-disclosure agreements, a positive indicator of our progress can be seen in public filings for 900 megahertz broadband experimental licenses at the FCC, which entities are using for testing and pilot programs. So far, there have been five broadband licenses granted that utilize our 900 megahertz spectrum, including recent approvals for Exelon and UPS. Amaron was the first to file for an experimental license and recently completed its initial broadband pilot of 900 megahertz private LTE, successfully demonstrating 14 different use cases. This initiative positions Amaron as a leader in advocating for the urgent need for 900 megahertz private LTE with both the FCC and within the industry. Southern Company, a trailblazer in private LTE deployment for utilities, has also filed for an experimental license to use Anterix's 900 megahertz spectrum to address their expanding needs. Their trial aims to test the capacity and latency for various applications supporting electric and gas utility operations while ensuring no interference with adjacent systems. We’ve also advanced into Phase 2 of our collaboration with the Department of Energy's National Renewable Energy Lab, which involves an FCC experimental license. NREL is evaluating the performance of private LTE broadband networks in communication-intensive controlled settings such as Advanced Distribution Management Systems. This program includes an Industry Advisory Board consisting of seven leading utilities across 19 states and aims to expand the private LTE network to integrate a full range of utility grid automation devices along with an ADMS control system. Exelon, through Delmarva, has indicated in its recently granted experimental license that it plans to deploy a private LTE network to support various operations related to electric distribution and gas system sensors, substation backhaul, monitoring, AMI, and customer-owned distributed energy inverters. The range of applications includes distribution automation, SCADA, remote engineering access, Wi-Fi, telephony, and workforce mobility solutions. UPS has also publicly expressed in its 900 megahertz FCC experimental license filing its plans to provide internet connectivity to multiple client devices, smartphones, tablets, and edge routers that will interface with wired connections to computers and other network devices. They plan to migrate this to UPS's internal data network for further testing in production applications, and they aim to utilize 900 megahertz alongside CBRS infrastructure. We continue to prioritize our federal and state initiatives as part of our overarching program to encourage utility regulators to understand and support our efforts. At the federal level, we are educating key agencies on how our solutions facilitate grid modernization and the need for private communications networks, engaging with organizations like NIST, the Department of Energy, and the Federal Energy Regulatory Commission. At the state level, we are also actively informing regulators about the opportunities and advantages of private LTE for electric consumers, having participated in recent NARUC meetings to present on these crucial topics. We view these industry-wide initiatives as essential to uniting the sector toward the adoption and funding of private broadband networks. A key example of our work is the founding of the Utility Broadband Alliance, which has grown into a strong member-driven organization that fosters collaboration between utilities and vendors to streamline private LTE deployment. Last month, the first member summit was held, attended by around 150 participants, including utility executives and industry technology leaders, alongside representatives from the Department of Energy, NIST, and major telecom companies. During the summit, I spoke on a panel discussing various spectrum options, including 900 megahertz and CBRS, which received a positive response given the recent progress with CBRS. We regard CBRS as a complementary addition to our low-band offering, where low-band provides valuable wide coverage suitable for expansive utility service areas, while CBRS can enhance capacity for campus or venue-related needs. Anterix is actively involved in the CBRS Alliance, collaborating with industry participants to create solutions for critical infrastructure, including conducting dual-band trials. Tami Barron, the CEO of Southern Linc, aptly stated during the summit that grid modernization and communication networks go hand in hand; one cannot progress without the other. Private wireless broadband is crucial for providing the security and resilience our networks require. There has been significant engagement and enthusiasm throughout the event, reinforcing that the industry demands private broadband now to address urgent needs. Additionally, we are focusing on initiatives to assist utilities in California in mitigating future wildfire risks by deploying private broadband networks to enhance control and situational awareness. In a recent NPR feature, Caroline Winn, CEO of San Diego Gas and Electric, emphasized the necessity for high-speed, intelligent devices to manage the future grid effectively, leading SDG&E to install its dedicated private LTE communications network. They have developed technology to de-power downed electric lines before they can start fires, and for the successful large-scale implementation of this technology, a low-latency communication network is essential. The efficiency and wide-area coverage of the 900 megahertz spectrum make it ideal for sensor deployment in regions with high wildfire risks. Recent assessments of outage costs highlight the significant financial impact of power shutdowns, noting that a 48-hour public safety power shutdown at PG&E can result in $2.5 billion in losses. While the investment in spectrum and building a private LTE system may appear daunting, the cost of inaction is shown to be far greater as we continue to develop the organization in preparation for broadband operations. Given this collective momentum, I believe we are well-positioned for continued strong progress in the second half of our fiscal year. Now, I will hand it over to Tim.

Tim Gray, CFO

Thanks, Rob. Good afternoon, everyone. We're more than halfway through our current fiscal year. And as Morgan and Rob discussed, we're pleased with all that we've accomplished. As you know, the second quarter of our fiscal year was highlighted by the equity raise we completed in July, to provide us with the funding needed to move forward on our business plans. As we advance our retuning efforts for the 900 megahertz spectrum block, we're accelerating our market clearing activities and prioritizing those markets where we believe we have near-term customer opportunities, thereby shortening the time to revenue post an FCC report and order. Although our second quarter retuning spend was minimal, we expect to ramp up in the current quarter and accelerate as we move forward with the process. I've been asked several times about our plan for accounting for retuning as we move forward, so I wanted to address it. Any acquisitions of this spectrum will continue to be capitalized to our intangible asset until the report and order is final. Retuning costs will be expensed in the general and administrative operating expense line item of our income statement. Post the report and order, retuning costs will be capitalized as an intangible asset. Our balance sheet continues to be strong. As of September 30, 2019, the Company had $157.5 million in available cash and is debt-free. The increase in cash in the prior quarter was driven by the $94 million in net proceeds raised in July. Our spend for the quarter was approximately $6 million and was within our expectations before restructuring and spectrum-related acquisitions. This spend did include $200,000 in retuning related items and $500,000 in restructuring related payments. Looking at our results for the second fiscal quarter ended September 30, 2019, the Company reported a net loss of $7.7 million or negative $0.46 per share, versus a net loss of $11.8 million or negative $0.81 per share for the same quarter in the previous year. Last year, the second quarter included $4.1 million for restructuring related charges due to the realignment of our business. Adjusted EBITDA for the second quarter was negative $6.2 million, compared with negative $7.6 million for the same period in the prior year. The improved performance in fiscal 2020 resulted from lower restructuring related charges offset partially by lower revenue resulting from the transfer of our Team Connect businesses. Anticipating a decision by the FCC shortly, we're going to be ramping up expenses in retuning, continuing to build our commercial team and enhancing our operational readiness. These expense increases will be within our previously mentioned spend parameters and will be necessary to drive our longer-term objectives. That concludes our prepared remarks. I'll now turn it back over to the operator for questions.

Operator, Operator

Thank you, ladies and gentlemen, the floor is now open for questions. Your first question is coming from Mike Crawford. Your line is live.

Mike Crawford, Analyst

Thanks, Mike Crawford from B. Riley FBR. Given that your pipeline is seasoning as you get deeper into discussions of business cases with potential 900 megahertz licensees, have you found any reason to change your expectation for what the revenue model might look like for Anterix with the spectrum leases you anticipate entering into?

Rob Schwartz, President and COO

Thanks, Mike. This is Rob Schwartz. No, I don't see any changes per se. I mean, clearly what we're seeing, and we talked about seasoning, you know, we have a really great level of interest from all kinds of parties in the predominance, which are investor-owned utilities. And the level of demand in conversations has been great. The specific conversations around how they want to engage to be able to contract for the spectrum. As we've talked about in the past, you know, our core offering is long-term spectrum leases. There absolutely are folks who would, as you've seen on the record, rather own the spectrum if they could, but clearly our core model is focused on how we can achieve the same kind of long-term revenue that we talked about it back to Investor Day.

Mike Crawford, Analyst

Okay, thanks, Rob. And then also pursuant to your request, the SEC did grant a listing of the freeze to enable querying of incumbents. So, can you quantify how many parties you might already be working with to do that voluntarily?

Morgan O'Brien, CEO

Mike, this is Morgan. There were certainly enough reasons to make it worthwhile to engage. We were very pleased that the bureau took the positive step of advising against using the waiver approach because it was too complicated. They decided to simply allow these activities. It was definitely worthwhile, and now we have many of the key players ready to start this retuning, and they are actively communicating with others.

Mike Crawford, Analyst

Okay, thank you, Morgan. And then would you expect that the report would come just via circulation or in an official FCC meeting agenda and meeting?

Morgan O'Brien, CEO

Mike, I think it's always a question of what the chairman has going in the course of a particular period of time. He may want to bundle a number of spectrum-related issues and do it all in a meeting, that's pretty common, or may just take the position that hey, something's ready and it's ready to go. There's an urgency; we've certainly tried to communicate that, let's put it out. So I think every time in the past, we've tried to predict. We haven't been very good about predicting which it is. And I think it's, we'll just have to wait and see. But to emphasize the point I was trying to make earlier, it certainly feels like we're approaching while we've been seeking for so long.

Mike Crawford, Analyst

Okay, thank you. And then the final question is, are we less likely now to see any kind of MOU with someone before a final report and order so that we would look for that first before we would see any potential lease or agreement?

Rob Schwartz, President and COO

Yes, Mike, it's Rob. So I think clearly, you know, as we've talked about, these are parallel efforts, right. So we've got the FCC process, as we talked about being, and we think close to the end zone. At the same time, we were also moving forward with a number of customers. Clearly there are those customers who are going to wait to see a report and order before they transact for spectrum. But we're still optimistic that both are moving in parallel.

Operator, Operator

Your next question is coming from George Sutton. Your line is live.

George Sutton, Analyst

Thank you. Nice to see the continued progress. So Rob, you talked a little bit about PG&E and I just want to use the hypothetical example. If they had your broadband in place and were sort of fully functional, how might they be operating differently today? Just to give us a perspective of some of the use-case examples that would take place.

Rob Schwartz, President and COO

Sure. I'll use your hypothetical scenario rather than focusing on a specific company, but the functionality of a broadband van network, particularly a low-band broadband network like our 900 megahertz, could significantly support a utility, especially in California, as it works to address wildfires. There are essentially two aspects to consider. First, there’s the current situation, which is not sufficient, where the detection of events is concerned. Much of the discussion around technology and surveillance revolves around identifying fires as quickly as possible to extinguish them. This involves using heat sensors, cameras, and various sensing methods from satellites to helicopters. With a more extensive network and a higher number of sensors deployed where they are needed—especially in high fire risk zones—response times could improve. More critically, the technology developed by San Diego Gas and Electric in their wildfire mitigation plan, which I mentioned earlier, emphasizes preventing fires before they begin. If this technology can be used on utility poles to deactivate a power line before it falls, it could help prevent fires. If implemented widely, this would enhance the capacity to stop fires from igniting in the first place. Additionally, we have discussed the Public Safety Power Shutoffs that are currently happening. These occurrences often stem from the lack of physical control over extensive areas, which necessitates sending trucks out to turn off and restore power. A more effective command and control, achievable through a communications network, would also improve these operations. These are three significant areas where I believe there is considerable potential to improve fire prevention. While perfection in such a challenging environment is unrealistic, any reduction in fire incidents would be highly beneficial.

George Sutton, Analyst

Just keeping on the Southern California theme, just today there was an application narrative statement from Southern California Edison. Could you just give us a sense of what that document means?

Rob Schwartz, President and COO

I'm not certain of the document you're referring to today, George. Maybe you can give me a little more detail?

George Sutton, Analyst

It's a complicated one, which is why I ask. They want to convert to a non-common carrier SMR and add emissions and they want to also add an area of mobile operations?

Rob Schwartz, President and COO

Yes. Well, we'll have to look at all. But we'll take a look at it and get back to you, George, and give you a perspective.

Morgan O'Brien, CEO

George, you mentioned in your prepared comments that there are other potential uses of the spectrum. We've seen on the record some things related to oil and gas companies and chemical operators. Can you just give us a sense of what you're referring to in terms of the other potential users? Without going into specific discussions that we're having in the category of water and gas, you did see EPS exploration issues like that, perhaps something along the lines of railroads. I mean, those are the kind of critical infrastructure players that are newly aware, I would say, of what's coming down the road. As I said, the positive of the negative amount of time it's taken for this thing to work through the FCC is that there has been an awakening as to what broadband does. A point I want to make and really stress is the latency because I think a lot of people hear the expression latency. And they're really not sure, I know you are. But a lot of them are not sure what it means. It just means the ability of a technology to carry around trip messages in milliseconds. And that's what's brand new to these folks, not just the ability to transmit a lot of data, but to deal with that kind of latency.

Rob Schwartz, President and COO

And, George, to add on to that, I mentioned CBRS, with the considerable amount of recognition it's getting as it's progressing to the FCC and the industry support that's occurring, as more and more industries are becoming aware of it and the LTE technology that's utilizing, but it's really like a campus solution. If people look at it and say, 'Wow, this is really interesting, but I need wider area of coverage. A lot of the industries that Morgan mentioned, as you start looking for what other bands are able to do, it's a natural complement to say, 'Well 900 is a potential solution for that.' So it's been a good path for us to also get other folks aware and interested in what we're doing.

Morgan O'Brien, CEO

But I don't want to buy this kind of answer. I don't want to suggest that we don't still have a firm conviction that the electric utility industry particularly, as it's deployed nationally, there's just all sorts of economies of scale and other reasons why that industry ought to be really riveted on this opportunity. We've certainly done everything we could to divert their attention. I mean, we haven't engineered any of these crises that they have. We just see a technology and a spectrum position that can really address these needs that are so obvious in places like California.

Rob Schwartz, President and COO

Great. I'd like to make a special prediction. When we speak next quarter on an earnings call, we'll be talking about business models and potential deals. We won't be talking about FCC processes. Thanks, guys.

Morgan O'Brien, CEO

Well, let's just say that we're tireless in trying to make that prediction come true.

Operator, Operator

There are no further questions from the lines at this time.

Morgan O'Brien, CEO

All right, thank you so much. We're with George and hoping to have plenty of opportunity in the future to talk about good news and thank you so much until next time.

Operator, Operator

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