Earnings Call Transcript - ATEX Q3 2022

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Anterix Third Quarter Investor Update Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Tim Gray. Sir, the floor is yours.

Tim Gray, CFO

Good afternoon, everyone and welcome to the Anterix third quarter fiscal year 2022 investor call. I'm Tim Gray, Anterix's 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. Additionally, 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's President and CEO, Rob Schwartz.

Rob Schwartz, CEO

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 non-stop 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 and 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 what 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 three 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 three 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, along 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 its 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 continue 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, and as such, this should be viewed as a fundamental attributor of value for Anterix shareholders. In the eight years since we filed with the SEC, as a result of our efforts, the narrative around private broadband for utilities has changed dramatically. We are witnessing an expanding list of critical use cases that are fueling market demand for private networks, and we are having deeper engagements across these organizations with growing involvement from the C-suites. We are 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's 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. We 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.

Tim Gray, CFO

Thanks, Rob. Let me start with the significant announcement for which we are very proud. For the first time in Anterix's 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 two-year repurchase program. I'm pleased to share that during our fiscal third quarter, we invested $12 million in share repurchases associated with this program, representing one quarter 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 three initial contracts, which total approximately $129 million. On to cash spend. As we've 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 non-monetary 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 grants of broadband county licenses by the FCC. The gain or loss considerations include the cost of the narrowband license, clearing costs, and anti-windfall payments. Based on the anti-windfall payment set by the FCC in the May 2020 report, we are using the 2017 600 megahertz auction prices as our accounting basis for 900 megahertz broadband licenses. We expect that for all of our narrowband to broadband license exchanges, there 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. 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-Qs 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 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, Operator

Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Simon Flannery. Your line is live.

Simon Flannery, Analyst

Great. Thank you very much for the commentary. Tim, I wanted to ask about the guidance. Rob mentioned the $200 million for this year upfront. Are you removing that from your formal guidance at this point?

Rob Schwartz, CEO

Yeah. Hi, Simon. It's Rob. How are you? Can you hear me okay? Okay. Good. So look on the guidance, we're confident that might they conclude after March 31, yes that's a possibility. I've got to say, we're directly seeing the continued progress and while there may be uncertainty on the precise timing, I believe there is certainty on the outcome. So we're really confident that we're going to close these deals and bring them the proceeds to Anterix. Ryan, you want to add any color to that?

Ryan Gerbrandt, COO

Yeah. I'd be happy to, Rob. Thank you. And as you said, definitely we're actively working on a variety of deals here still before the end of the quarter, Simon, all hands on deck in there. As we've talked about before, kind of the complexity and how we engage with we deal, as our teams are facing across early a variety of the different touchpoints of these organizations. In fact, just to share some color, I'm 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 you said at the same time, we've seen already what can happen, 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. Overall, Rob referenced kind of what we've seen in the building of the Phase III pipeline, which has increased to be more than $400 million of potential contracted proceeds in this phase alone. Just to refresh on what that phase is—the closing phase. It's where we've got a relatively 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 is certainly still work that we have to be pushing on to be able to close.

Simon Flannery, Analyst

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

Tim Gray, CFO

Yeah. 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 see value here at the stock price for us to…

Simon Flannery, Analyst

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

Tim Gray, CFO

We're using a combination of discretionary and automatic methods to make purchases in the marketplace. We plan to remain active and will provide updates on this at the end of each quarter.

Simon Flannery, Analyst

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, etc.?

Chris Guttman-McCabe, Chief Regulatory and Communications Officer

Sure, Simon, and great to talk to you. We have 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 to both the middle mile and the other sections of 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.

Simon Flannery, Analyst

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

Chris Guttman-McCabe, Chief Regulatory and Communications Officer

I think we can only make educated guesses at this point, but I expect that we will start to see funds distributed in early fall, possibly late summer. The programs are aiming for transformational opportunities, and I believe our business goals align well with the direction that the administration and relevant agencies are pursuing.

Simon Flannery, Analyst

Great. Thanks for the color.

Chris Guttman-McCabe, Chief Regulatory and Communications Officer

Certainly.

Operator, Operator

Your next question is coming from Phil Cusick. Your line is live.

Unidentified Participant, Analyst

Hi. 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?

Tim Gray, CFO

Yeah. 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 County. 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 a 150 per quarter for the next four to six quarters.

Unidentified Participant, Analyst

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

Tim Gray, CFO

We updated our guidance during the Investor Day in June. Initially, it was based on 20-year lease payment streams. However, with the introduction of our prepaid model, we revised our guidance to focus on cash proceeds and free cash flow. We're now looking at the $1.8 billion that we anticipate signing by our fiscal year 2024, rather than the previous $125 million to $150 million. Rob, do you want to add anything?

Rob Schwartz, CEO

No, Tim. I think you covered it well. Thank you.

Unidentified Participant, Analyst

That's helpful. Thank you.

Rob Schwartz, CEO

Yes.

Operator, Operator

Your next question is coming from Walter Piecyk. Your line is live.

Walter Piecyk, Analyst

Thank you. Rob, you've invested in developing a services business, and there has been an ecosystem that has emerged. Considering the $400 million potential in Phase III, do you expect 2022 to be the year when you begin to see significant service business linked to those contracts? Additionally, with your current customers, has there been any progress towards developing a services business alongside your spectrum contracts?

Rob Schwartz, CEO

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 two ways. First, it's really about continuing to position us and our company as the trusted advisor to these utilities as we're working day-to-day and the pipeline customers that you mentioned in that $400 million of that Phase III. We are 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. For us, the catalyst of the investment first is 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 and also that are really innovators like the ones in our cybersecurity collective that's making the compelling elements of broadband that much more valuable. Utilities aren't buying technologies; they are 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. This is really where 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 is going to be, but we are absolutely looking at ways in which we can continue to monetize beyond spectrum. Today, we're working with utilities closely helping advise them, and through that process, we are 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.

Walter Piecyk, Analyst

As we move into 2022 and possibly 2023, there is a certain amount of investment needed to support the sales process, particularly in terms of free services that can help close sales. However, there may come a time when we have to think about reducing investment in that area if it does not lead to increased revenue.

Rob Schwartz, CEO

I think we're very satisfied with the investment to date. I think Tim described us as having 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; the reason 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 are a great channel into utilities, and all these big companies are joining our ecosystem to have great access to this very valuable customer base. 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 in a very prudent way. With that, we really believe we can bootstrap our way into being accretive in building that business opportunity.

Walter Piecyk, Analyst

Okay. And then, in terms of the three 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, 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 I meaning like what new discussions have you had with utility companies that have entered Phase I in terms of pipeline, expressed in dollars or number of utilities have you won?

Rob Schwartz, CEO

Yeah. So maybe I'll start there, and 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 I for us of being $400 million – Phase III 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. For us, it's not about – 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 III to close as well. Ryan, anything you want to add?

Ryan Gerbrandt, COO

Yeah. I think your question is really focused, Walt, on kind of the 10 that Rob talked about. What we're seeing there is certainly kind of new entrants to the conversation and so through a lot of this is a result of some of the other kind of market tailwinds as we call about it, and we talked about it. It's expanding the reach in the conversation that we're seeing in PLT. The ecosystem certainly draws in new participants and for those existing relationships. Think about the ecosystem from the perspective of every one of those companies; it's literally now a new marketing channel driving the conversation and trying to push awareness into their portfolio of customers around the potential role of PLT. We're also seeing kind of the increases of the voice that organizations like UBBA, 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 refine 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.

Walter Piecyk, Analyst

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 I either in terms of number of utilities or dollar potential?

Ryan Gerbrandt, COO

Yeah. That's the 10 utilities. We are up to 60 in the pipeline.

Walter Piecyk, Analyst

Got it. Okay. Sorry. I clearly missed that. I appreciate that.

Ryan Gerbrandt, COO

No problem.

Operator, Operator

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

Unidentified Participant, Analyst

Hi. This is Adam on for George. Thanks for taking my questions. Rob, we know the other week that Texas state was out with an announcement discussing the completion of their new facility in the beginning of testing, about 100 use cases of 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.

Rob Schwartz, CEO

Sure. Thanks, Adam. I think, I'll pass 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 is a vibrant ecosystem there that those licenses and the efforts there recommend but—you want to add to that, Ryan?

Ryan Gerbrandt, COO

Yeah, happy to. No, there is a lot of exciting things going on out there, Adam. The one recently I think that triggered perhaps the announcement. One thing what happened is kind of a general macro point to kind of the advancement of what's being largely described as EMI or smart metering Phase II 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 the meter. But they are continuing to attract interest in terms of sponsorships in members into the program; we do anticipate there will 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. Now coming back to our goal for CEDAR kind of why we wanted to get involved in the first place is to 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.

Unidentified Participant, Analyst

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

Rob Schwartz, CEO

I can respond to that, Adam. As mentioned in our prepared remarks, we are actually experiencing growth in all three phases. While we are seeing an increase in the funnel with the additional ten at the top, we are also witnessing steady growth as we progress through Phase II. Today, we noted the $400 million in Phase III. Everything is developing as we expected, with customers moving through the process, and we look forward to continuing this trend. We're also starting to notice some indicators suggesting acceleration as the year goes on.

Unidentified Participant, Analyst

Great. Thanks.

Operator, Operator

We have no further questions coming from the lines at this time.

Rob Schwartz, CEO

Thank you, Catherine. So just in summary, as you all heard, we strongly believe that Anterix is 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. Thanks everybody for joining us today.

Operator, Operator

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.