Like one of its satellites racing overhead for some amazing and spectacular shots of the Earth, GeoEye (NASDAQ: GEOY) is getting ready to ramp up its own news stream with a flurry of activity over the next 10 days or so.

Not only is the company going to announce its 2nd quarter 2008 earnings on Wednesday morning, but more importantly, on August 22nd, GeoEye will be launching the most advanced commercial imaging satellite currently available.

The launch of GeoEye-1, which took four years in the making, represents a seminal moment for the PeakStocks.com portfolio recommendation.

The company will either push through to new heights, literally, or fail miserably if the launch proves unsuccessful for any reason whatsoever.

In this post I’ll go over the important aspects that we need to be aware of before GeoEye announces earnings and before the launch of GeoEye-1 and then break them down into the following parameters:

• What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
• What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
• What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
• What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
• What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
• Bottom Line: What it all means, and what you should do.

It’s Make or Break Time for GeoEye

Next 10 Days Will Dictate the Fate of the Company

GeoEye is a provider of space-based and aerial imagery and geospatial information.

GeoEye’s imagery information products enable customers to map, measure, and monitor the earth for intelligence gathering, precision mapping, construction planning, and environmental monitoring applications, among others.

New to the GeoEye story?

• Read my initial buy recommendation here.
• or listen to my EXCLUSIVE interview with GeoEye’s management team here.

Click here to read my complete GeoEye research report

I can tell you right now that Wall Street is not going to be too interested in GeoEye’s Q2 earnings release, but are going to be carefully listening on the call for updates on the status of their launch, and if they expect any additional delays.

Remember that the launch of GeoEye-1 was delayed several times this year, and was initially expected to launch in early 2008, and has now been scheduled for its August 22nd time slot.

Because of these continued delays, through no fault of GeoEye’s, the amount of revenue and GeoEye’s ability to service their customers with the highest possible resolution imagery allowed by the U.S. government, was severely hampered, and with it, GeoEye’s stock price.

So, with that being said, GeoEye’s Q2 earnings release most likely won’t be very surprising either on the upside or downside because of the delays with servicing contracts related to GeoEye-1, as well as the current backlog that is associated with the wait-and-see approach by GeoEye’s customers that aren’t going to commit to long term contracts before they know they are going to be getting that imagery from the best available commercial satellite on the planet.

What Went Right In the Quarter

Continued Image Utilization, Launch Status Execution

There were several positive developments in the quarter as far as GeoEye was concerned, with continued execution within the company, as well as forward progress and positive developments concerning the launch of GeoEye-1.

One of those developments was a confirmation that GeoEye’s imagery is now being used by Google (NASDAQ: GOOG) on Google Earth and Maps, Yahoo (NASDAQ: YHOO) and other online portals for their online imagery needs.

In addition, GeoEye’s imagery was also being used in other applications such as those of navigational GPS providers, as well as video game manufacturers that are using GeoEye’s imagery, both current and future, in their applications.

Here’s a screenshot of one of GeoEye’s images found on Google Maps:

Notice the little copyright at the bottom of the image with DigitalGlobe (NYSE: DGI), GeoEye’s only US competitor, and GeoEye.

On the same token, once GeoEye launches their next generation satellite, GeoEye-1, it will be the highest resolution satellite available today, and thus will garner a larger market share in the competitive online marketplace.

Another positive development for GeoEye occurred on June 4th, when GeoEye announced new awards totaling $22 million to supply geospatial products and related services to the National Geospatial-Intelligence Agency (NGA), GeoEye’s largest customer that accounts for about 50% of GeoEye’s sales.

These products and services include a significant amount of value-added, imagery-based geospatial-intelligence products including the company’s airport mapping product line.

I contacted management and they confirmed that this imagery will be delivered most likely within the next 12 months, so while this won’t vastly improve GeoEye’s finances in the upcoming quarter, it will add incremental revenue that will allow GeoEye to really execute their business strategy towards revenue diversification.

This order from the NGA is in addition to the previously reported backlog that NGA has instituted in anticipation of the launch of GeoEye’s next generation satellite, GeoEye-1.

Also in the quarter, GeoEye began the design, parts acquisition and construction of their next generation satellite, GeoEye-2.

Since these things take 4 years or so to build, test, develop and launch, GeoEye is already looking ahead to when they will need to replace their IKONOS and GeoEye-1 satellite with yet another high resolution next-generation satellite.

In this quarter GeoEye secured the cameras and mirror assemblies that will be used in GeoEye-2, and began work on integrating them.

This is a long process, and securing these types of in-demand parts early in the design schedule is critical for GeoEye.

Finally, and most importantly for us, GeoEye continued to progress towards a smooth launch of GeoEye-1, with their latest update confirming that GeoEye-1 has arrived safe and sound at Vandenberg Air Force Base, California, from where it was manufactured in Gilbert, Arizona.

Remember that GeoEye-1 will be launched from a Delta II rocket, which has a success rate of over 98%, out of 137 launches overall.

What Went Wrong in the Quarter

Miscommunication With Wall Street, Possible Government Contract Losses

Although nothing huge went wrong for GeoEye in the quarter, there were some potential problems on the horizon that we need to be aware of going forward.

First off I’ll touch on the fact that GeoEye missed, what was at the time, the only (there are now 3) analyst’s earnings estimates available on the company last quarter, and the stock was severely punished.

Even though there were very reasonable explanations as to why this occurred, the fact remained that management’s inability to effectively communicate with with Wall Street before and after earnings to explain what was going on regarding the delayed launch of GeoEye-1 adversely affecting revenues and profits, hampered investor’s ability to understand what was going on, and dumping of the shares ensued.

GeoEye has pledged to do a better job of this, and I talked at length with GeoEye’s management team about their communication strategy going forward in my exclusive interview with them.

You can listen to the interview in its entirety here.

The second bit of potential bad news came from a recent government pronouncement that the U.S. government might be launching their own satellite fleet in the future, which would curtail their spending in support of companies like GeoEye and its rival DigitalGlobe.

There has been nothing firmly decided yet, and the report was rather nebulous with dates for the government to start building its own commercial satellites starting in 2014, but this is nonetheless something to worry about.

I talked to GeoEye’s management about this in my exclusive interview with them, and they said that again, nothing has been determined, and they might not know anything until the current U.S. elections have been completed and new budgets are drawn up.

For the time being, things are status quo, with companies like GeoEye and DigitalGlobe putting their weight into the discussion to make sure that they are being properly supported by the NGA and the U.S. government, especially in light of the fact that the NGA helps to pay 50% of the cost of building and launching a satellite.

Also, under these mandates as reported, for now anyway, the government will step up their efforts to buy more imagery from these two companies to the tune of $1 billion under their current agreement.

The Pentagon’s plan to both buy commercial satellite imagery and operate similar satellites of its own is an attempt to balance two competing goals.

National space policy requires the Pentagon to buy as much commercial imagery as possible to help companies like GeoEye withstand competition from subsidized foreign satellite companies.

But, at the same time the Pentagon does not want to give these companies so much business that they tailor their services to government needs and ignore the private sector they need to make them self-supporting.

The Pentagon satellites will also be a back-up capability in case future commercial satellites malfunction.

I don’t think that GeoEye is relying on the government to the detriment of their commercial business, especially in light of their recent purchase of aerial imagery company MJ Harden, and their expansion into other commercial fields such as online portals, and other applications that take GeoEye away from purely governmental business.

However, these are things we need to watch out for, and get more clarity on as time moves forward.

What I want to see

Decent Quarterly Results, Obvious Successful Launch

Most likely, GeoEye’s Q2 results won’t be anything spectacular as a result of the delays in launching GeoEye-1 and the deferred revenue associated with that delay.

So, as long as GeoEye reports a quarter that is in-line with last quarter, that’s about all I want to see this time around.

I also want to get some color on the conference call about GeoEye’s business prospects, any updates on the U.S. government’s spending/contracts, and of course an update on the launch of GeoEye-1.

To be honest, almost nothing else matters on this call, aside from absolutely devastating news, except the status of the launch of GeoEye-1.

Any further delay and the stock will take a big hit.

What We Need To See

Continued Execution, Calm Words

What we need to have happen on the conference call and associated press release, assuming GeoEye finally puts one out, is calming words to the ears of Wall Street.

GeoEye basically needs to explain themselves much better than they have in the past, whether that’s in their earnings press release, their analyst conference call, or preferably, both.

Like I said, I don’t expect GeoEye’s earnings to be anything special, but that’s not what we’ll be listening for.

The devil will be in the details, and we’ll be scanning the press release, and listening to management’s words carefully to make sure all is on track with that all-important August 22nd launch.

What We’ll Probably See

Continued Execution, Explanation

I expect GeoEye’s management team to deliver on their promises of better communication with Wall Street and the few analysts that cover their stock, as well as give a nice reassuring report on GeoEye-1 and the launch status.

Anything else on the plus side, including better than expected earnings and revenue, will be a bonus.

Bottom Line

GeoEye Still Best-In-Breed

There are only two companies that operate in this space: GeoEye and DigitalGlobe.

Out of those two, GeoEye is the superior company both in terms of future business prospects and diversity, the GeoEye-1 launch notwithstanding, as well as current execution, and management.

Owning shares of GeoEye into the launch is somewhat risky, even with the stellar track record of the Delta II rocket and all associated companies involved with the launch.
The problem is, owning shares afterwards would most likely significantly reduce some of your potential share price appreciation since most of the risk would be taken out of the stock, and more buyers would jump in with the knowledge that the spigot is now turned on with GeoEye’s business model, and higher revenue and profits are right around the corner.

My talks with management, as well as my thorough research on this company lead me to believe that everything that is within GeoEye’s power to do, has and will be done, to not only ensure a more successful relationship with Wall Street, but also see to continued execution of new commercial contracts to expand GeoEye’s business, and the successful launch of GeoEye-1.

For those that are more risk averse but still want to own a piece of such a dynamic and undervalued company, you can simply wait until after earnings are released and GeoEye-1 successfully launches, or purchase a small position now at these levels and see what happens.

If you are more of a risk taker, then purchasing shares at these levels still represents a good bargain, even though the stock has appreciated from where I initially recommended it.

GeoEye is still a STRONG BUY either going into, or coming out of their next earnings release, and/or the launch of GeoEye-1.

Short of an absolute disaster, we’ll look back on the share price of GeoEye at today’s prices as an absolute bargain.

I recommend you get in now.

Oh, and if you are interested in learning more about the launch, and tracking the launch, of GeoEye-1, GeoEye has provided a web page dedicated to constant updates and real-time streaming video of the launch.

You can visit that here:

http://launch.geoeye.com

New to the GeoEye story?

Click here to read my complete GeoEye research report

• Read my initial buy recommendation here.
• or listen to my EXCLUSIVE interview with GeoEye’s management team here.

*Variables You Should Know About GeoEye, Inc. (NASDAQ: GEOY)
Current Recommendation:	STRONG BUY
The Company:	GeoEye, Inc. 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. Its imagery information products enable customers to map, measure, and monitor the earth for intelligence gathering, precision mapping, construction planning, and environmental monitoring applications, among others.
Why Buy Now:	Valuation at Historically Low Levels #1 Player in US Duopoly Diversified and Consistent Revenue Streams/Joint Ventures, etc. Established Large Player/Customer Base Experienced and Deep Management Team Scalable Margins/Cash Flow Downside Protection In Recessionary Climate Several Upcoming Positive Catalysts Should Bring Attention to the Sector and Company Largely Underfollowed Stock Well Capitalized for the Next 12 Months or More
Market Cap:	$423.00
Revenue (TTM):	$181.37
Cash/Debt:	$212/ $247
Current Price:	$24.00
Risk Rating (?):	8 (High)
Position Size (?):	1/2 (5-5-08), 1/4 (6-12-08)
Buy Around Price (?):	$22.00 (5-5-08), $16.50 (6-12-08)

*As of 8-8-08. Except share price, all values in millions.