DigitalGlobe Warns About Declining U.S. Defense Spending
PARIS — Earth imagery provideron Nov. 2 warned investors that downward pressure on the U.S. government defense and intelligence budgets could reduce the amount of revenue it receives under a keystone 10-year, $3.55 billion contract that took effect in September.
In a conference call with investors, DigitalGlobe Chief Executive Jill D. Smith said the contract with the U.S. National Geospatial-Intelligence Agency (NGA), called EnhancedView, includes “up to” $750 million in value-added services in addition to $2.8 billion to be paid out in annual increments of $250 million for services provided to NGA.
That $2.8 billion is nonrefundable and is not under threat, Smith said, adding that cash from this portion of the contract is already flowing at the anticipated rate. But given the current U.S. government budget climate, Smith said prudence dictates that investors not assume that the entire $750 million will be contracted.
“It is an ‘up to’ award, subject to funding,” Smith said of the $750 million, value-added portion of the EnhancedView contract. “We think it is appropriate to be cautious.”
Smith did not point to any specific warning from NGA or any other agency that suggested a dramatic pullback from what was envisioned under EnhancedView. But indications from U.S. Defense Department and U.S. intelligence agency officials that budgets would be decreasing rather than increasing suggest that optional spending will be a harder sell in the coming years.
Smith said NGA and its U.S. government customers may be forced to do more with a static budget.
Smith and DigitalGlobe Chief Financial Officer Yancey L. Spruill were at pains during the call to explain the Longmont, Colo.-based company’s surprise decision to change its accounting rules in a way that will cause it to recognize less EnhancedView revenue in the next four years, even though the NGA will be sending cash at the agreed-to rate of $250 million per year.
The $2.8 billion Service Level Agreement portion of DigitalGlobe’s EnhancedView contract is for services, not for imagery. Some of these services will be provided only following an extension of the company’s network of regional Earth stations, and following the launch, scheduled for 2014, of the WorldView-3 satellite. These two investments will put DigitalGlobe in a position to provide all the services expected under EnhancedView.
The company has concluded that under Generally Accepted Accounting Principles (GAAP) guidelines, it should defer recognition of part of the EnhancedView monthly revenue — even though the cash is in DigitalGlobe’s accounts — pending the extension to the ground and satellite assets. These funds will instead show up on the company’s books as backlog.
As a result of this accounting change, DigitalGlobe’s revenue for the three months ending Sept. 30 — $80.5 million, up 12 percent from the same period a year ago — was lower than expected as the company did not count $8.3 million in NGA revenue it received.
“The changes in results we are talking about today are related to accounting,” Spruill said. “They are not related at all to our operating performance in the business.” The amount of cash that is withheld from the company’s quarterly revenue line will be $100 million for the first 12 months of the EnhancedView contract, and then fall rapidly as the company’s new ground and satellite assets are brought into service.
In the latter half of the 10-year contract period, the process will reverse itself. DigitalGlobe will declare revenue for a given period in excess of what it receives from NGA during that period, chipping away at the accumulated backlog so that, at the end of the contract, the cash received, and revenue recognized, are in balance.
DigitalGlobe received its full payment under EnhancedView for September, the first full month after it took effect and the last month of the financial reporting period, Spruill said.
EnhancedView replaced NGA’s similar, but smaller, NextView contracting vehicle. For DigitalGlobe, NextView called for the company to provide an unchanging level of capacity on a single satellite. EnhancedView calls for an increasing amount of capacity provided over multiple satellites.
For the first four years of the EnhancedView contract, DigitalGlobe will be guaranteeing NGA the equivalent of 50 percent of the company’s capacity. For the remaining six years, even with the addition of WorldView-3, NGA will be taking 60 percent of DigitalGlobe’s capacity.