Conference Call Highlights

GeoEye-1 Ready to Go, SLA Being Negotiated

The following are the highlights from GeoEye’s analyst conference call:

• Update on GeoEye-1 Calibration Issues: The satellite is working well and they are delighted by the imagery. On October 8th they released the first GeoEye-1 image of the Kutztown University in Pennsylvania.

In answer to the obvious question why Kutztown, the CEO stated that it really was GeoEye’s first image, and that they literally opened the camera door and that’s what they saw. Since then, they have released other equally stunning images, which are posted on GeoEye’s website.

GeoEye-1

Management stated later in the call that the calibration and checkout have taken somewhat longer than expected.

They further stated that they knew that a 45 day checkout period was aggressive, but now a little more than two months since launch, they are seeing the kind of success that they wanted to attain sooner.

Management stated that the hardware is performing flawlessly, but they have had several software issues almost exclusively related to the attitude control system that have been the major reason why checkout has taken longer than expected.

These internal issues were not readily discoverable in testing on the ground.

Further, management says that they have worked their way through each of these issues and they won’t have any impact on future GeoEye-1 operations or life expectancy.

Finally, GeoEye said that they are confident that they will be able to work through any remaining issues and start full commercial operations in December.

My Take: I knew something wasn’t quite right and that the calibration and checkout were taking much longer than expected.

Add this to the long list of delays that have plagued GeoEye-1’s launch from the start.

The good news is that GeoEye has been working hard on these issues, and better for us and them, none of them are irreparable to the point of rendering GeoEye-1 non-operational.

GeoEye is targeting delivery of their imagery in December, which is about 1 month later than I had projected, but should still lead to significant revenue and profit increases for the last month of 2008, and then explode in 2009.

This is all part of the risk of owning a stock like this. We are dealing with very sensitive pieces of equipment that are fragile and are going to be held to a very high and exacting standard. Any malfunction, slip-up, or nuance that throws that off will destroy our investment thesis.

• NGA Service Level Agreement (SLA): The CEO stated that as they said in their last call, they didn’t expect to solve the NGA order issues and obtain a service level agreement until after the launch of GeoEye-1 at the earliest, and checkout at the latest.

He further clarified that they are in the final stages of negotiating the SLA.

This agreement should even out the peaks and valleys of the NGA’s image ordering process so that GeoEye can get a predictable revenue stream and the government can get a predictable supply of imagery.

The CEO then stated that they where pleased to see what the Director of the NGA, Vice Admiral Robert Murrett said about GeoEye at a round-table in Washington.

He said: “the point that people need to not lose sight off is what a huge chunk of our mission capabilities is comprised by the commercial remote sensing industry, and how we have them programmed and embedded in our architecture in ways that are irreversible for many, many years of the future.”

My Take: This is good news for us going forward as it will essentially lock in the NGA for longer term orders with GeoEye and in turn smooth out their revenue fluctuations, and allow them to better plan their next satellite build out and launch with the steady stream of revenue and supposedly cash flow, that this deal will generate.

• On the postponement/cancellation of the BASIC program: The CEO commented that the Broad Area Space-Based Imagery Collection (BASIC) program has been put on hold by congress until some additional studies are done early next year.

He stated that no one knows what those studies will conclude.

The BASIC program would have directly competed with GeoEye in that the U.S. government would have launched 2 of their own satellites by 2012 to provide commercial-type imagery to the U.S. government.

The CEO further went on to say that GeoEye was proud to support the U.S. government’s collection system and that they believe they can satisfy even more of the government’s imagery and mapping requirements.

My Take: The CEO went on to say that if the government did decide to go ahead with the BASIC program, which you can  read all about here, GeoEye would be a full supporter of the program.

It sounded like a little cover-your-butt speak, in that it seems that GeoEye is trying to stay on the government’s good side so as not to elicit the potential for the go-ahead of the BASIC program, and remain their good graces.

A smart move by all accounts I’m sure.

Like I wrote about before, this delay or possible deletion of the program, is good news for GeoEye, and might eventually lead to the abandonment of the BASIC program.

My guess is that part of the “studies” that the government will be doing in the next year or so to determine whether they want to proceed with the program, will depend partially, if not fully, on how well GeoEye and their only U.S. competitor DigitalGlobe (NYSE: DGI) can service the NGA’s imagery needs.

I’m sure the government will keep a close eye on how fast they receive promised imagery, if they had to wait longer than what is determined reasonable, and if GeoEye is putting other clients, namely Google (NASDAQ: GOOG), ahead of the government.

I don’t think that will happen since GeoEye knows where their bread is buttered, but we shall see.

• Deal with Google: The CEO reiterated that GeoEye-1’s imagery will be exclusive to Google for use on Google Earth and Google Maps.

He further stated that they are “delighted by the partnership”, and that in addition to Google paying for their GeoEye-1 inventory, GeoEye actually in turn paid Google to help them develop a program for searching imagery archives.

They are marketing that new search capability to several of their international clients, who are interested in it because it’s terrific way for them to search both GeoEye’s archives and their own.

My Take: One appealing aspect to this deal is that, although there won’t be material revenue from these deals in the overall financial picture, there will be a steady source of recurring revenue and a natural tendency for a higher profile which can lead to more deals with other companies.

The Google partnership already lead to the first request for GeoEye to supply imagery to other providers and acted as a bridge that introduced the possibilities of GeoEye’s imagery to a more diverse market.

• GeoEye’s recently announced deal with Telespazio: The CEO stated that with regards to GeoEye’s commercial regional affiliates, they’ve mentioned before that they plan to transition commercial affiliates away from buying minutes of direct access to the satellite, to buying square kilometers of imagery.

That plan achieved a major success last month with the execution of a multi-million dollar, multi-year agreement with Telespazio for the European and North African region.

Telespazio, a Finmeccanica/Thales company, will produce, market and sell Earth imagery and related products and services from GeoEye’s newest high-resolution satellite, GeoEye-1, to customers in Europe and North Africa.

Telespazio’s GeoEye-1 exclusive imagery sales rights begin as soon as GeoEye-1 becomes operational.

Beginning in 2009, Telespazio will also have access to the IKONOS satellite and collect, produce, market and sell Earth imagery and related products to customers in Europe and North Africa.

You can read more about this agreement here.

The CEO further commented that they were excited about Telespazio’s ability to provide value-added services from throughout Europe and that Telespazio has committed to a guaranteed annual minimum payment for the satellite imagery inventory that GeoEye-1 will provide.

Finally, the CEO stated that revenue from this deal should start to be realized during the first half of 2009 and will be one more element that makes GeoEye’s revenue more predictable over the long-term.

My Take: As we can see, GeoEye-1 has already begun to reap some powerful rewards for GeoEye. This will only continue as more and more providers, foreign governments, and other contractors look to GeoEye to supply them with the highest resolution commercial imagery available today.

• Status of GeoEye-2: The CEO updated the status of GeoEye’s next generation satellite that has already been commissioned, and that ITT (NYSE: ITT) has received the glass for the primary mirror, has assembled the mirror and has ordered parts for the assembling of the camera electronics.

These are long lead-time items.

The next step, is for GeoEye to choose a vendor to build the satellite itself.

The CEO stated that this could happen at the end of this year or early next year, and that from that point it will take about three years until launch, which puts launch in the 2012 time-frame.

As for how much money they will need, management stated that as of right now, they don’t need financing for the new satellite in the short-term, and that they can pay for the development of the satellite via their free cash flow.

Over the next six months they will continue to monitor the demand from government, international, and commercial customers, and determine how they will proceed with the expenses for this satellite as time goes on.

My Take: This is good news to hear. It looks like we will have a runway of about 4-6 months or so whereby GeoEye will not need to leverage more debt, dilute shareholders, or have to tap into the equity markets in this current environment.

What happens beyond then will all be determined by the revenue ramp that GeoEye-1 provides, and how much of that cash flow GeoEye is able to drop to plow back into the construction of their new satellite.

• Earnings/Tax Restatements: Concerning the various earnings and revenue restatements that GeoEye has had lately, the CEO commented that the restatements didn’t have a big economic impact on the company, although they regret that they happened at all.

He also stated: “I guess the simplest explanation as to why they occurred is that we grew too fast for our financial system.”

Further, he stated that they have hired a new controller in Jeanine Montgomery, and they have a new auditor in KPMG and a new tax adviser.

Finally he stated that they are still uncovering some small issues that need to be cleaned up and they will continue to beef up their system so that they don’t have anymore discrepancies, even minor ones.

My Take: GeoEye has delayed their 10-Q filing by about 5 days to give them some more time to work on these issues and make sure their numbers are right.

Like management stated in the call, there is nothing in these restatements or delays that will affect GeoEye’s balance sheet, financials, or other metrics of substance, but it is worth noting that hopefully GeoEye has gotten their internal controls in order and we’ve seen the last of these issues.

• On GeoEye’s production business: CEO Matt O’Connell said that they were going to expand their production staff in their Thornton office significantly to keep up with the demand in their airport mapping database business. They are also going to increase their office space in St. Louis by 50%.

In both expansions, the CEO noted, the cost is far outweighed by increases in GeoEye’s production capacity, which is a good source of revenue and also a great competitive factor, since no other satellite imagery operator does the value-added production on the level that GeoEye does.

• Satellite imagery demand from developing countries: Management stated that they continue to see strong demand in developing countries for their satellite imagery, and that Russia seems to be catching China as the developing nation with the fastest growing demand, but that they are both exciting markets.

So whats’ the bottom line?…

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