For DigitalGlobe, Government Business Steady But Commercial Disappoints

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PARIS — Satellite geospatial imagery and services provider DigitalGlobe on Oct. 29 said it is revamping its commercial strategy in the face of disappointing sales and would focus on profitability and share repurchases to bolster its sagging stock price.

The company said that while its business with the U.S. and other government defense and intelligence agencies was doing well, its investments in specific commercial vertical markets had not paid off and would be scaled back.

DigitalGlobe CEO Jeffrey Tarr
DigitalGlobe CEO Jeffrey Tarr

In a conference call with investors, DigitalGlobe Chief Executive Jeffrey R. Tarr and Chief Financial Officer Gary W. Ferrara said one example of future cost cuts will be the replacement of the company’s WorldView-1 and WorldView-2 satellites.

Ferrara said successors to these satellites would be ordered in 2017 or 2018, for an in-service date four years after the contract is signed.

Tarr declined to specify whether the company would opt for a one-for-one replacement or a constellation-type orbital architecture, but said the new spacecraft would be designed with input from DigitalGlobe’s core customer, the U.S. National Geospatial-Intelligence Agency (NGA).

The U.S. government accounts for 85 percent of the use of WorldView-1, and about 50 percent of WorldView-2 capacity.

In an announcement that likely will not be cheered by prospective DigitalGlobe satellite builders, Ferrara said the replacement of the two satellites combined would cost no more than $600 million including launch, insurance and ground infrastructure. WorldView-1 and WorldView-2 cost a combined $900 million, he said. WorldView-3, the company’s newest, highest-resolution satellite, cost $600 million.

As presented in the conference call and in the company’s financial results, Westminster, Colorado-based DigitalGlobe is a tale of two very different enterprises.

Its defense and intelligence customer set, led by the NGA but including other governments, is doing well. Tarr said the NGA’s new commercial strategy is no threat to DigitalGlobe’s core EnhancedView contract, a 10-year, annual-renewal business that remains DigitalGlobe’s core business and runs to August 2020.

NGA recently committed to a sixth year of the EnhancedView Service-Level Agreement (SLA), and Tarr said the agency’s new openness to work with small-satellite providers will be an add-on and will not erode DigitalGlobe’s contract.

“NGA has made it very clear they have no intention to reopen the SLA,” Tarr said. “They have made it clear that funding for smallsat imagery would be incremental. Smallsats are adjacent to what we do, not a substitute for it.”

Because NGA has priority access to WorldView-3’s 30-centimeter-resolution imagery, DigitalGlobe’s 10 Direct-Access Program (DAP) nations have been unable to get as much 30-centimeter imagery as they want, Tarr said. The company has taken out of storage and is refurbishing its WorldView-4 satellite, the former GeoEye-2, for a late-2016 launch.

NGA has no special claim on WorldView-4 capacity, meaning DAP customers will be able to use it to expand their access to 30-centimeter imager.

It is on the commercial side of the business that DigitalGlobe has been unable to find the growth it expected when it made multiple investments in specialized products for specific markets.

Tarr said the problem is not that the company is losing competitions to other providers – DigitalGlobe wins more than 70 percent of the competitions it enters against both satellite- and aerial-imagery companies, he said – but that the markets have not developed.

Compounding the problem is the strengthened U.S. dollar, difficulties among DigitalGlobe’s Russian customers, the drop in crude-oil prices and the fact that DigitalGlobe has decided not to offer reduced-price 30-centimeter imagery to Google Maps and other mass-market location-based services.

Under the NGA contract, the placement into service of WorldView-3 resulted in an automatic increase in payments to DigitalGlobe. There are no further increases planned.

Ferrara said the company expected “flattish” revenue for the foreseeable future, and it specifically reduced its forecast for 2015 revenue, which is now expected to increase by 6 percent over 2014, to about $693 million, he said. In July the company had forecast 2015 revenue of $733 million.