GeoEye, Inc. (NASDAQ: GEOY), a provider of space-based and aerial imagery and geospatial information, hit us with some good news, and a whole host of bad news today.

With GeoEye’s only U.S. competitor DigitalGlobe (NYSE: DGI) going public later this week, lots of attention is being bestowed upon both companies as a true apples-to-apples comparison can now be made as it relates to their satellite fleets, valuations and prospects going forward.

The problem?

As those that follow me on Twitter know, today GeoEye hosted its fiscal 1st quarter earnings conference call, and there was a little nugget of information about halfway into the call that caught Wall Street and me by unexpected surprise: The company’s newest satellite, GeoEye-1 is experiencing some technical problems that GeoEye is currently evaluating and determining how it will affect the company’s prospects going forward.

As you can see by the stock price, investors sure didn’t wait around for a nice and tidy explanation, and now with more focus on this sector as a result of Jim Cramer highlighting DigitalGlobe on Mad Money, as well as increased attention by various news outlets, now is certainly not the time for GeoEye to be experiencing some technical difficulties.

What follows is a summary of GeoEye’s earnings announcement and conference call, and what you need to know if you own, or are thinking of owning the stock.

New to the GeoEye story?

GeoEye provides space-based, and aerial imagery and geospatial information through high-resolution and low-resolution imagery, imagery-derived products, and image processing services to customers worldwide.

This capability benefits a broad array of industries including national defense and intelligence, online mapping, state and local governments, environmental monitoring and land use management, oil and gas, utilities, disaster management, insurance and others.

GeoEye operates in what in essence is a duopoly with only one other U.S. competitor, DigitalGlobe (NYSE: DGI), and just recently launched and certified their latest satellite, GeoEye-1, which is the most accurate and detailed commercial imagery satellite available today.

Want more?

• Read: my breakdown of GeoEye’s last quarterly conference call and earnings update.
• OR: read my latest buy recommendation for GeoEye.
• OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.

–> Get updates and real-time stock trades you WON’T find on PeakStocks.com by following me on Twitter.

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Sales, Earnings Beat Expectations
• Other Business Highlights: GeoEye-1 Satellite Experiencing Problems
• Conference Call Highlights: Management Discusses GeoEye-1 Issues
• Bottom Line: GeoEye Presents Much More Risk Now

Hit Me With Some Numbers

Sales up nicely, even without full benefit of NGA contract

Here are some of GeoEye’s earnings highlights (growth from previous year’s Q1/analyst’s estimates where applicable):

• Q1/2009 sales of $45.2 million (up 25.9%, from $35.9 million in the prior year/vs. $41.9 million projected by analysts)
• Q1/2009 operating income of $1.7 million (down 69.8%, from $5.6 million in the prior year)
• Q1/2009 net loss of (-$1.7) million, or (-$0.09) per diluted share (down from (-$.82) million, or (-$.05) per diluted share in prior year/vs. (-$.25) per share projected by analysts)
• Q1/2009 Gross margin of 45.1% (down from 47.9% from prior year, but up from 43.5% in Q2/2008, down from 49.9% in Q3/2008, and down from 46.7% in Q4/08)
• Q1/2009 Operating margin of 3.8% (down from 15.7% from prior year, 15.4% in Q2/2008,  23.1% in Q3/2008, and 9.0% from Q4/09)
• Q1/2009 Net margin of -3.8% (down from -2.3% from prior year, 7.0% in Q2/2008, and 16.8% in Q3/2008, up from -8.9% in Q4/09)

My Take: The numbers came in much higher than expected and should continue this trajectory well into the future, provided there are no major problems with GeoEye-1 (see more below).

The increase in revenue was primarily attributed to the GeoEye-1 satellite beginning commercial operations in February 2009 resulting in increased imagery orders from the National Geospatial-Intelligence Agency (NGA) for their Service Level Agreement (SLA) that they have in place with GeoEye.

The reduction in the operating and net margins is mostly as a result of increased depreciation and amortization expenses associated with the costs of GeoEye-1 that are now being deferred and expensed over the life of the satellite, which will be for about 9 years.

What is important about these figures, and more so with the bottom line net profit and EPS numbers, is that as a result of these deferred expenses and amortization costs, GeoEye’s earnings will look artificially low in the next few years and over the life of the satellite so anyone valuing the company based purely on just EPS valuation has to be careful.

For a proper valuation of GeoEye, you need to use the EV/EBITDA figure instead as it excludes these values, which are added back on the cash flow line for operating and free cash flow measurements.

In the end, those are the only metrics that matter, and although GeoEye has a history of high capital expenditures, and will most likely continue to have them for the foreseeable future, especially as GeoEye looks to build GeoEye-2 for launch in 2012, the cash flow figures should show a marked improvement and ramp up quickly as revenue starts dropping directly to the bottom line, and cash flow margins should be higher than net margins going forward.

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