DigitalGlobe Revenue up Despite Steep Drop in Russian Business

by

PARIS — Geospatial imagery and services provider DigitalGlobe on July 31 said business from Russia, one of its biggest emerging-market customers, had collapsed because of the Ukrainian crisis but will be more than matched by growth in India, the Middle East, oil and gas companies and nongovernmental organizations.

In a conference call with investors, DigitalGlobe officials said they were uncertain whether the 83 percent drop in Russian revenue in the three months ending June 30 — to $1 million from $5.8 million a year ago — was a direct consequence of Western sanctions on Russia.

DigitalGlobe Chief Executive Jeffrey R. Tarr said the company has not turned away “any specific customer because of sanctions.” The downturn in the Russian economy could have played a role, he said, as could the very public use of DigitalGlobe imagery, by the U.S. government and the NATO alliance, showing Russian troop locations and, more recently, purporting to prove that missile strikes in Ukraine came from batteries located in Russian territory.

“We don’t know what business isn’t coming to us because of sanctions,” Tarr said. “It’s well understood we are supporting NATO and others, bringing visibility to what’s going on, and that could be having an impact.”

Russia generated $23 million in revenue for Longmont, Colorado-based DigitalGlobe in 2013.

Russia was about the only negative aspect to DigitalGlobe’s financial performance in the three months ending June 30. Total revenue was up 5 percent, to $157.8 million, from a year ago and up slightly from the first three months of 2014.

Business with the U.S. government, which generates about 60 percent of DigitalGlobe’s total revenue, was up 15 percent compared with a year ago, to $95.5 million.

The launch of DigitalGlobe’s WorldView-3 satellite, scheduled for mid-August, will be followed by an increase starting Sept. 1 in U.S. National Geospatial-Intelligence Agency (NGA) contract payments under the NGA’s 10-year EnhancedView Service Level Agreement with the company. The increase of $50 million per year will assure DigitalGlobe of $300 million in annual NGA revenue under the contract.

The company said NGA on July 23 confirmed that it will exercise its option for another year of EnhancedView service, starting Sept. 1. The 10-year contract, valued at $2.8 billion, is structured as a series of one-year renewals.

Tarr conceded that a struggle over the U.S. government budget for the fiscal year starting Oct. 1 could well mean the budget is not enacted on schedule, but he said the company’s value to U.S. authorities is high enough to protect the contract from the turbulence.

“We supply 90 percent of the foundational imagery for the U.S. government,” Tarr said.

The U.S. Commerce Department’s decision to permit DigitalGlobe to sell sharper imagery to non-U.S. government customers than what had been authorized previously, which took effect in June, means the company is selling images with a ground sampling distance of 40 centimeters collected by its GeoEye-1 satellite.

Once it takes final effect sometime next year, and pending any amendments to the approval, the relaxed image-precision restrictions will permit DigitalGlobe to sell commercially the 31-centimeter imagery produced by the WorldView-3 satellite.

DigitalGlobe said earlier this year that once the image-resolution restrictions were relaxed, it would assess the global commercial market for indications of new demand. The company’s biggest competitor, Airbus Defence and Space of Europe, has satellites in orbit that, with resampling, can provide images with 50-centimeter resolution.

Airbus officials have said the U.S. government’s decision is a worry for them as France, which is Europe’s leader in optical Earth imaging, has no program to produce 30- or 40-centimeter commercial imagery anytime soon. For the moment, then, DigitalGlobe is alone among satellite operators in the highest-resolution end of the market.

Tarr said DigitalGlobe has concluded that pent-up demand for sharper images will overwhelm the capacity of WorldView-3 given that satellite’s imagery-supply obligations to the NGA.

As a result, he said, DigitalGlobe will advance, by about a year, the launch of the GeoEye-2 satellite, now called WorldView-4, to the second half of 2016.

DigitalGlobe Chief Financial Officer Yancey L. Spruill said during the conference call that the company would incur capital charges of $120 million in 2015 and 2016 to finish paying the WorldView-4 launch services provider, purchase launch insurance and adapt the company’s ground segment to prepare for the new satellite.

Tarr said this money would have been spent anyway, just a year later. WorldView-4 will be placed into storage late this year after undergoing modifications ordered by DigitalGlobe following its January 2013 purchase of its principal U.S. rival, GeoEye. Shortening by one year the storage time of WorldView-4 will result in savings that DigitalGlobe did not disclose.

Tarr said one customer has signed a letter of intent to secure guaranteed imagery from WorldView-4. Once that deal is finalized into a binding commitment, it will result in that customer’s increasing annual payments to DigitalGlobe by $15 million, he said.

Tarr said this is only one example of the market’s willingness to pay more for 30-centimeter imagery than it has been paying for 50-centimeter imagery.

WorldView-4 is not part of DigitalGlobe’s obligations to the U.S. government under the EnhancedView contract, meaning the company can offer the satellite’s full capacity to commercial customers and include guaranteed-access provisions in contracts.

DigitalGlobe has 10 so-called Direct Access Partners, which have rights to the company’s imagery in specific territories and have their own ground stations to task the satellites when they are within range.

Tarr said DigitalGlobe tracks its performance in contract bids when the company is directly competing with Airbus and other satellite competitors, and with aerial imagery providers, and that DigitalGlobe wins more than 75 percent of these contracts.

Nongovernmental organizations, many performing humanitarian work, have become a significant source of revenue for DigitalGlobe, Tarr said.

Tarr said examples of these customers include the Nature Conservancy, which uses satellite imagery and crowdsourcing to track the proliferation of invasive weeds in Hawaii; World Resources International’s surveillance of agricultural production and fires in Indonesia; and the World Bank’s program assessing food security and agriculture, notably in Syria.