In its regularly scheduled quarterly call with financial analysts, DigitalGlobe reported strong earnings despite the expenses incurred in the merger with GeoEye. Jeffrey Tarr, president and CEO, said that the merger will create the potential for a "high growth, recurring revenue geospatial information business."
Takeaways
There are two important takeaways from that short quote. Tarr and CFO Yancey Spruill repeatedly used the words "recurring revenue" with analysts during the conference call. This is significant because DigitalGlobe wants to reduce stockholder fear that the business will continue to rely solely on government contracts, which are unpredictable. In fact, some amount of time was dedicated to reviewing the commercial sector lines of business in oil and gas, location services (the contract with Apple, for example, plus those with Garmin and the GPS firm, AutoNavi), as well as other international business in China, India and Russia. The bottom line is that DigitalGlobe wants to give stockholders "a consistent and predictable revenue stream" according to Tarr. While the company will still depend on its government benefactors for a good portion of its revenue, DigitalGlobe is sending a clear signal that the National Geospatial-Intelligence Agency’s EnhancedView contract “gravy train” cannot provide the revenue security that a public company must demonstrate to stockholders. That is, “forward looking statements” would forever carry the caveat that government budget cuts could result in certain risks if the company did not seek continued business expansion in commercial markets.
The other significant takeaway is the use of the phrase "geospatial information business." DigitalGlobe needs to position itself as not just a “provider of commercial high-resolution earth imagery products and services,” as it currently does in its “About DigitalGlobe” statement, but as a company developing a portfolio of information products. The company will be well-served by continuing to use that language for a few reasons:
- Satellite imagery is valuable and essential to certain customers but so are LiDAR, full motion video and other image products. These other platforms are finding new markets and the software to process them is getting better. While the business use cases are still slim, new applications are continually developing. If DigitalGlobe wants to eventually play in the broader image information product market, why limit itself to “large birds” that cost lots of money to design, launch and maintain?
- Unmanned aerial systems (UAS) and the possibility of small satellites will be game changers for the mapping and geospatial information market. DigitalGlobe may be planning to acquire companies that have platforms for the future. Why should the company limit itself to a singular platform for data acquisition? The company appears to be starting now to position itself beyond the need for heavy launch vehicles and the expense of maintaining a constellation that solely relies on high orbit satellites.
- The commercial marketplace, while nascent, will be the largest area of growth going forward. It’s inevitable.
The GeoEye Acquisition
According to the company, it will take six quarters from the time the merger closes for DigitalGlobe to absorb the full extent of efficiencies that will be realized from the acquisition of GeoEye. Any savings from the merger will be based on the ability to reduce duplicative services such as those related to ground stations to collect imagery, image production and a host of expenses related to personnel and overhead. The anticipated eventual savings will be about $1.4 billion. The transaction to merge the companies is expected to be completed by the end of 2012 or early 2013.
Outlook
DigitalGlobe believes the outlook is improving and it has raised the earnings estimate for the year from 14% to 16% revenue growth due to the strong results that the company realized in the current quarter and the expectations that the fourth quarter, usually its strongest, will once again deliver those results. DigitalGlobe painted a very rosy picture for analysts. But it’s the execution over the next 18 months that will determine if it will be successful at merging the two companies and balancing the image production cycle that incorporates GeoEye’s constellation.