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ATEX - Anterix


Saluki
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I haven't seen anyone post about this, so I'll start things off. This popped up on my radar screen when I saw that Michael Price had a pretty big position in it (Owl Creek is also a +10% owner), and I wondered why two value shops would be interested in a telecom company.

 

Well...it's founders are the two guys who started Nextel.  They were telecom lawyers during the time when you could only have 2 cell carriers in each market.  Two for NYC and two for Demopolis Alabama.  The first one was for the incumbent local exchange carrier (ILEC) and the other was for an independent.  So in NYC, for instance, NYNEX (the ILEC) had one cell phone carrier and the  random competitor (many of whom joined forces and became Cellular One) had the other. Then there was an obscure FCC ruling dealing with Car Service (stone age UBER) radio frequencies in the ~800mhz band.  People would call the car service company and the dispatcher would call the driver via walkie talkie in the car. Someone figured out a way to let the drivers talk to each other (for free) without going through the dispatcher. The cell companies sued to prevent it, but the FCC said it was okay as long as they had a walkie talkie.  Enter FleetCall (later NexTell) which allowed a third provider in every major market in the US (with the distinctive phone with walkie talkie that contractors love). They gobbled up these crappy frequencies, which were dirt cheap from car service companies and made billions. 

 

Now...onto Anterix! For 5 years, PvD Wireless (now Anterix) has been lobbying the FCC to allocate certain frequencies for use in private LTE Networks. These are great for things like Utilities, Railroads, Ports, Police Fire EMS etc.  because they are not connected to the internet so they are very difficult to cyberattack. 

 

Based on the spectrum that they acquired it's about a $0.50 dollar.  The FCC priced the spectrum by using comps from the even crappier 600mhz range and based on that, it's trading at about half what it should be.  What makes it interesting is that after about 5 years of lobbying by Anterix, the Utilities and the equipment makers, the FCC approved the creation of these private LTE networks in May 2020.  The price spiked on the news and is trading at pre-approval levels again. 

 

This spectrum is great for utilities because it's crappy for other uses.  The higher MhZ spectrum is great for handling lots of users and data, but you need many more towers placed closer together. This frequency 900mhz isn't good for that (but good enough for 3g and 4g) but the advantage that it has is that the towers can be further apart.  This makes it ideal for use cases like Utilities where your wires can span hundreds of miles with very few people living there but you still need Internet of Things like connectivity to know when you have a downed power line. 

 

These guys have $100mm in cash and no debt and their business will be asset light:  licensing out their spectrum.  The Utilities will pay for the install and the equipment makers will design and build the equipment. It hasn't started making money yet, but when it does, it should produce recurring revenue for years, like a SaaS provider. 

 

I have a small position in ATEX.  I expect to add to it if they are able to sign contracts and start the fly wheel going.

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Here are a few places to start if you want to understand what the deal with Private LTE networks is and why this part of the spectrum is being chosen for this purpose. 

 

Steel City Capital's recent investor letter where Anterix valuation is discussed (normally, I wouldn't post this without permission, but it's been posted on Insider Monkey and Yahoo Finance already)

 

https://www.insidermonkey.com/blog/steel-city-capitals-q2-2020-investor-letter-867384/

 

Anterix Pitch Deck

https://mk0anterixwxj0vfcdrd.kinstacdn.com/wp-content/uploads/2020/07/Anterix_IR_Presentation_1Q_June-20201.pdf

 

Qualcomm Short video about Private LTE

 

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It seems that private LTE networks are also implemented in the CBRS band (shared or unlicensed spectrum at 3.5 GHz) and unlicensed 5 GHz band. Licensed band has obvious advantages over these frequencies for reliability and range. I get that mission critical applications like utilities need dedicated band for their applications; but many others (ex: warehouses and factories) do not and can use cheaper alternatives or even cellular 5G which touts IoT as one of the key use cases. So I have a hard time understanding the market opportunity for Anterix's spectrum. Even if I buy the company's 2024 forecast of $125M revenue with 80% EBITDA margin, this still trades for 8 times 2024 EBITDA today. Not super cheap and only makes sense if the market opportunity and growth in EBITDA post 2024 is high given the risks (I know the company says $30B is the market size, but I cannot find any independent confirmation of this). It could be much smaller if many of the vertical market segments choose cheaper alternatives.

 

The company presentation compares the implied value of their spectrum to the recent cleared prices for 600MHz incentive auction for cellular use. This is a bit misleading because the cellular spectrum is more valuable given the wide potential usage (like 100m subs nationwide) for it as opposed to niche applications for Anterix's spectrum.

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I'm still digging on this one and I don't want to defend it too hard so that I don't talk myself into buying a lot more before it's proven that they can get utilities to sign up for their private LTE plans.  But I do always appreciate hearing the negatives so it makes me challenge my assumptions.

 

I think the $100mm in (125mm at 80% marging) is interesting because it's not like GM where you get $X by selling Y cars, and the next year you have to sell another Y amount of cars to make another $X.  If they have $100mm coming in, that should come in year after year like a bond payment and it goes up from there. 

 

I think an interesting variable is the way utilities set their rates. When the telecom baby Bells were deregulated they went from a Cost+ method of rates set by the regulators to a "cap" method where they would get a certain amount to operate the network and if they could operate below that cost, they would keep the rest as profit (like an HMO).  Every utility that I know of is still operated under the Cost+ method (I haven't looked very hard, so I could be wrong on this). So there is an incentive for them to implement this besides reliability of their network, they get paid more.  And since Utilities will buy the equipment and own it, instead of Anterix buying it and leasing it, it works out good for both of them.  Anterix is not a capital intensive business and the utilities get the cost+ rate adjustments.  For some reason state public utilities commissions (PUCs) like CapEx increases but don't like OpEx increases when setting rates. 

 

Also, they just got FCC approval a couple of months ago but I think it's a good bet they can get the utilities to sign up since the utilities were lobbying the FCC along with Anterix and equipment providers to make this happen. 

 

I think the 5G thing and the unlicensed spectrum is not a big concern.  I saw a test by a reporter (WSJ?) recently where she had 12 devices going on at the same time to test the 5G speed vs home internet.  It IS definitely faster but she tested the devices from a van parked next to the 5G tower because the speed slows down as you get further away and it doesn't work inside her bldg b/c the signal won't go through the concrete and steel.  So lots of towers close together is a great use case for servicing urban hipsters walking around NYC on their iphones, but if you want as few towers as possible and to place them as far apart as possible, this is the horse you want to ride. 

 

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I'm still digging on this one and I don't want to defend it too hard so that I don't talk myself into buying a lot more before it's proven that they can get utilities to sign up for their private LTE plans.  But I do always appreciate hearing the negatives so it makes me challenge my assumptions.

 

I think the $100mm in (125mm at 80% marging) is interesting because it's not like GM where you get $X by selling Y cars, and the next year you have to sell another Y amount of cars to make another $X.  If they have $100mm coming in, that should come in year after year like a bond payment and it goes up from there. 

 

I think an interesting variable is the way utilities set their rates. When the telecom baby Bells were deregulated they went from a Cost+ method of rates set by the regulators to a "cap" method where they would get a certain amount to operate the network and if they could operate below that cost, they would keep the rest as profit (like an HMO).  Every utility that I know of is still operated under the Cost+ method (I haven't looked very hard, so I could be wrong on this). So there is an incentive for them to implement this besides reliability of their network, they get paid more.  And since Utilities will buy the equipment and own it, instead of Anterix buying it and leasing it, it works out good for both of them.  Anterix is not a capital intensive business and the utilities get the cost+ rate adjustments.  For some reason state public utilities commissions (PUCs) like CapEx increases but don't like OpEx increases when setting rates. 

 

Also, they just got FCC approval a couple of months ago but I think it's a good bet they can get the utilities to sign up since the utilities were lobbying the FCC along with Anterix and equipment providers to make this happen. 

 

I think the 5G thing and the unlicensed spectrum is not a big concern.  I saw a test by a reporter (WSJ?) recently where she had 12 devices going on at the same time to test the 5G speed vs home internet.  It IS definitely faster but she tested the devices from a van parked next to the 5G tower because the speed slows down as you get further away and it doesn't work inside her bldg b/c the signal won't go through the concrete and steel.  So lots of towers close together is a great use case for servicing urban hipsters walking around NYC on their iphones, but if you want as few towers as possible and to place them as far apart as possible, this is the horse you want to ride.

 

Thanks Saluki. Anterix is interesting to me, so that is why I am looking at the negatives (per Charlie's advice: "always invert"). I agree that utilities have an incentive to jack up their capex as they did with "green" energy mandates, but the rate increases still need to be approved by the state PUC.

 

On 5G however you are looking at the wrong end of the spectrum. 5G operates in multiple bands with different use cases:

 

(1) mm wave (24-28 GHz), which is used to provide fixed broadband home internet and this is a bust as you correctly identified. This busted business case has to do with RF propagation issues, which require tons of micro cells connected to a fiber backbone to pull this off. Huge capex for Verizon with no return. So my guess is that they will eventually abandon it as they did with FiOS.

 

(2) sub 6 GHz mid-band (aka "Goldilocks band"), most likely in the C-band which is being repurposed by the FCC for cellular use. This is where vast majority of mobile 5G use cases operate. Rest of the world already completed spectrum auctions in this band and services are up and running in many countries (ex. S Korea and China). US is behind the world in this band.

 

(3) low band 5G (600Mhz/700MHz). This is where many of the lower bandwidth IoT applications will operate in the future. The advantage of low band is that it has good range.

 

Many of the vertical segments (other than mission critical applications) Anterix may be going after can be supported with (1) CBRS/5GHz private LTE, (2) Wifi, or (3) low-band/mid-band with a hybrid of public/private 5G.

 

So the question I have is how big is the utility private LTE opportunity.

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Found this dated analysis from late 2015 on VIC under PDV Wireless for additional background:

https://www.valueinvestorsclub.com/idea/PDVWIRELESS_INC/2535340493

 

This is interesting. The company was saying in 2015 they would generate $200M in revenue and $100M in EBITDA from their narrowband PTT service in 5 years (2020). It is fair say that didn't work out (given the cash burn today). This makes me think that we should take their 2024 projection with a grain of salt.

 

There is still optionality in the company; but it seems to me that buying stock today is similar to a later stage VC investment. It seems Cerberus exited the investment after 2015 (perhaps sold it to Owl Creek?). 

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I think some 4G also uses sub 1GHZ range. Those lower frequency have  more penetration in buildings (especially concrete) and less line of sight issues than the higher frequency.

 

That’s was one issue when I had T-Mobile back then. They had generally good coverage outside but when at work inside a concrete building, the signal was very weak. I had no problem with ATT because ATT also had data on lower frequency bands with better building penetration.

 

I wonder how large the market is for utility IOT. I don’t think it’s going to be $30B annually. First it is s large number and the regulators would need to approve this case by case and second there are alternative  solutions out there.

 

It’s an interesting company and I out this on my watch list.

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Intruiging idea for sure. Unfortunately I have no clue how to assess the value of their spectrum vs competing solutions. It's all quite technical with a lot of moving parts. There must be a nice edge for people who know this type of stuff in and out.

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  • 3 weeks later...

Earnings call transcript, for those interested.

 

https://www.fool.com/earnings/call-transcripts/2020/09/17/anterix-inc-atex-q1-2021-earnings-call-transcript/

 

Letter of intent with Ameren and hopefully a signed contract soon.  In talks with other utilities, but nothing signed yet.  Some utilities want to prepay specturm leases to treat them as capex, ATEX will record those revenues in accordance with GAAP throughout the full term of the lease as it is earned. Some government funds may be available for utilities to modernize/strengthen their grids.

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  • 2 weeks later...

Well, part of me thinks it's dropped because I bought it.  The trading gods do this to me to gut-check me every time I buy something new.  I'm thinking of selling my trade signals to short sellers so that I can capitalize on this phenomenon. 

 

It seems to have been falling steadily, not one giant drop so I don't think there is any news to incorporate.  The CEO, OBrien (one of the 2 co-founders of NexTel) stepped down shortly after he shepherded it through to get FCC approval and announced that the president would be the new CEO. OBrien is still Executive chairman of the BOD, which is good, but he sold 3/4 of his stock (about $5 million) after he stepped down.  I haven't sold any shares and only bought a tiny amount more.  If they can sign up a few utilities I think it will confirm my thesis and I'll add more.  If they can't, I'll sell.  But I don't feel comfortable adding a big slug even at a lower price because the position size I have is what I'm comfortable with for something that shows promise but is unproven yet. 

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  • 1 month later...

Down 16% today. I read the earnings call transcript (https://mk0anterixwxj0vfcdrd.kinstacdn.com/wp-content/uploads/2020/11/CORRECTED-TRANSCRIPT_-Anterix-Inc.ATEX-US-Q2-2021-Earnings-Call-17-November-2020-4_45-PM-ET.pdf). Some highlights below:

 

- Continues to await delayed execution of first contract with Ameren (primary reason for sell-off), but still confident. Expects to report 2-3 contracts before 3/31/21. Estimates 40 customers in the pipeline (~75% of its spectrum value).

- Currently in the process of "pilots" with utility companies (essentially trials). Most pilots fall in the 3-9 month range depending on complexity, so a lengthy timeline until contract execution/deployment.

- Rather than just pursuing individual customers, sees an opportunity for collective spectrum demand via a network effect (cites Navigant concept paper: https://guidehouse.com/-/media/www/site/downloads/energy/2019/utility-c-suite-take-note-briefing-paper.pdf) given shared economic benefits and risk mitigation impact. If this occurs, potential domino effect with signing new customers. Interesting, but makes me wonder if they're thinking too far ahead...

- Notes Congress embracing some form of infrastructure stimulus funding as a catalyst. When pushed on this in Q&A given divided government, thinks bipartisan support is likely

- Sees CBRS as complementary (not competitive) to 900 megahertz via a "layer cake" - utilities putting on multiple bands of spectrum but starting with the foundational low band

- Cash-rich balance sheet and debt-free, so ability to weather delays in deployment

- Still confident in $125-150mm 2024 revenue goal

 

Call did not seem as negative as I expected...market seems to be really pricing in a lot of pessimism (especially given that ATEX is already down meaningfully in recent months). However, still visionary at this stage with other risks (e.g., regulatory, difficulty of collective demand), so inclined to continue watching from the sidelines. I wish I understood spectrum better to gauge long-term competitive advantage here.

 

Anyone else have thoughts?

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Well, at the end of the day, you have an almost $500M market cap company with no revenues. It’s doesn’t take a whole lot doof conjecture to see why investors are skeptical. IOT is a tough business model and ramping revenue tends to be difficult and probably even harder with regulated utilities being the main customer.

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One thing I am confused on is this quote from Michael @ Steel City Capital.

 

"At today’s $580 million market cap, ATEX’s spectrum – which is backed up by a viable business model and growing

customer interest – garners a valuation of $0.30/MHz-Pop, well below the $0.70-$1.00/MHz-Pop fair market value

of other low band spectrum assets."

 

EV for the company is set around $400Mil. Does that mean market is not pricing this correctly or the above valuation is not accurate?

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One thing I am confused on is this quote from Michael @ Steel City Capital.

 

"At today’s $580 million market cap, ATEX’s spectrum – which is backed up by a viable business model and growing

customer interest – garners a valuation of $0.30/MHz-Pop, well below the $0.70-$1.00/MHz-Pop fair market value

of other low band spectrum assets."

 

EV for the company is set around $400Mil. Does that mean market is not pricing this correctly or the above valuation is not accurate?

 

I think that valuation is misleading. Comparing Anterix's spectrum to that of other low-band spectrum (often used for cell service) isn't a fair comparison as the cell service is a better usage (and more profitable) than what Anterix's spectrum is used for. The FCC dictates what spectrum can be used for. It's analogous to real estate (you can build an apartment building on this land, but can't on some other land). 

 

I've owned Anterix for four years. I bought it because the valuation was even cheaper and Anterix was in the midst of applying to change what it could use the spectrum for. I haven't kept up on all the details, but I'm disappointed it hasn't done more.

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  • 3 weeks later...

The price jumped 50% yesterday.  :o This contract is good news as it is proof of concept, but that is a big move for such a small contract.  It's 30 years and the payments are on the front end, but if you recognize the revenue as you earn it, the big price move is kind of optimistic.  I may add on the dips.  Ameren has been negotiating this deal for a while so maybe others will join the party when they see it working in the field and not just as a concept.

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  • 5 months later...

Ericsson, Motorola and Nokia are all working on Private LTE equipment in this spectrum. 

 

https://www.fiercewireless.com/private-wireless/ericsson-anterix-collaborate-900-mhz

 

It was down about 30% after I recommended it (I have the worst timing in the universe) and then came back, I'm up 24% on this currently.  I still own a small position and I think the outages in Texas, the hacking of the Northeast pipeline from across the globe, and concerns about global warming/network reliability are all tailwinds in the longterm for ATEX.  It's still only a small position for me because after I buy something I usually understand it better.  

 

At the price they acquired the spectrum, It still looks like they could shut the doors, resell the spectrum and still make some money (or let's say it's hard to lose money).  But I thought their monopoly on the spectrum might be a license to print money, even with tight-fisted utilities.  However, I recently realized that although there are lots of utilities across the US, in each region, there is only utility (or maybe a 2-3).  So although you have a monopoly on one side of the transaction, in each region where you are trying to sell the licenses you have a regional monopsony or oligopoly.  That's not ideal for collecting monopoly rents. I'd add more at lower prices, but I'm still just holding my current position for now. 

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