DigitalGlobe Projects 10% Growth Amid Contract Uncertainty

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DUBAI, United Arab Emirates — Geospatial imagery and services provider DigitalGlobe on Feb. 29 said it still expects its revenue to grow by 10 percent in 2012 despite persistent rumors that its biggest customer, the U.S. government, is planning a substantial cut in spending.

The company said it has received no indications from its main revenue source, the U.S. National Geospatial-Intelligence Agency (NGA), that a cut to DigitalGlobe’s key EnhancedView contract is imminent.

In a conference call with investors, DigitalGlobe Chief Executive Jeffrey T. Tarr repeatedly refused to speculate on how the company would react if its 10-year, $3.55 billion EnhancedView deal with NGA were slashed.

“We have not been notified of any cut to our portion of the EnhancedView program, and we are not engaged in a negotiation of any cut,” Tarr said. “We are running this business for the long term. We don’t want to discuss negotiation strategies on the basis of a hypothetical cut.”

Longmont, Colo.-based DigitalGlobe and its direct U.S. competitor, GeoEye of Herndon, Va., about evenly split the $7.3 billion EnhancedView award, which took effect in mid-2010 and is foreseen to continue for 10 years through one-year renewals.

Tarr said DigitalGlobe had no idea what NGA is planning. He speculated that any cuts might be directed at only one of the two competitors, in which case DigitalGlobe might emerge relatively unscathed.

U.S. government and industry officials have said EnhancedView’s budget was cut by $50 million for the year ending in September, with no indication of whether the reduction would be applied equally to DigitalGlobe and GeoEye.

Noting that his company has more satellite capacity in orbit to serve EnhancedView than does GeoEye, Tarr said: “Today we deliver to the NGA more imagery than the advertised capacity of our competitor’s entire constellation.”

The Defense Department’s 2013 budget, government and industry officials said, would cut much more deeply. A study of the value of commercial imagery to the U.S. government is currently being carried out by the U.S. director of national intelligence and the undersecretary of defense for intelligence.

The study is scheduled to be completed in mid-April, after which, Tarr said, NGA could decide on whether and how EnhancedView should be cut.

The EnhancedView contract is divided into two sections. The biggest piece is called a Service-Level Agreement (SLA), under which DigitalGlobe and GeoEye receive monthly payments from NGA if they meet performance milestones set out in the EnhancedView contract.

These milestones include, in addition to imagery deliveries, undertaking substantial investments. Both companies are building new satellites, and DigitalGlobe is investing in at least seven new remote ground stations to improve its image-delivery time. Once the investments are made and validated by NGA, the monthly payments increase.

In 2011, DigitalGlobe was booking revenue of $12.5 million per month under the EnhancedView SLA until midyear, when its investment in remote ground infrastructure was rewarded with an increase, to $14.1 million per month.

Further increases will follow further investment. Three more ground stations will be operational by September, and the company’s WorldView-3 satellite is scheduled for launch in mid-2014.

The second piece of the DigitalGlobe EnhancedView contract is called value-added services and is valued at up to $750 million over 10 years.

Tarr declined to speculate whether NGA might target the value-added-services element for most of the budget cuts. He said any decision by NGA to cut deeply into EnhancedView would mean reopening just about every detail of the agreement.

Ultimately, he said, reduced NGA demand could mean DigitalGlobe would have more capacity available for sale to other customers in high-demand regions of the world. But it could take a year or more to develop these customers.

Tarr expressed frustration that DigitalGlobe’s performance in 2011 has been overshadowed by possible budget cuts that may or may not upend the company’s future business prospects.

For the year ending Dec. 31, DigitalGlobe reported revenue of $339.5 million, up 5.3 percent over 2010 on the strength of new contracts with commercial and government entities in China and Russia. Backlog at Dec. 31 stood at $307 million, up 19 percent from a year ago.