GeoEye Bullish on Growth Prospects, Mum on Takeover Rumor

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PARIS — Earth observation imagery and services provider GeoEye on Aug. 2 reiterated its forecast of a double-digit revenue increase for 2011 despite slower-than-expected business from the U.S. government caused by a protracted budget debate and by the company’s still-evolving adoption of new government-imposed performance metrics.

In a conference call with investors, Dulles, Va.-based GeoEye refused to comment on a Wall Street rumor that the company has hired an investment bank to prepare for possible takeover bids by one or more suitors. The rumors caused a 17 percent jump in GeoEye stock July 26.

GeoEye operates two Earth observation satellites and has a third under construction and scheduled for launch in early 2013. Once in service, the spacecraft, called GeoEye-2, will trigger increased contract payments from the U.S. National Geospatial-Intelligence Agency (NGA), which purchases imagery and related services on behalf of the U.S. government and is responsible for well over half of GeoEye’s business.

Under a 10-year deal with NGA that began in September, GeoEye is guaranteed up to $3.8 billion in revenue from NGA. NGA is also paying up to $337 million for the cost of the GeoEye-2 satellite, which GeoEye officials say will cost between $800 million and $850 million including launch and insurance.

The contract, called EnhancedView, has slightly different performance requirements than the less valuable multiyear deal it replaces, which was called NextView.

If GeoEye misses any of these performance metrics, the current $12.5 million monthly payment from NGA — this figure will increase once GeoEye-2 is operational — can be reduced by up to 10 percent. This money is not definitively lost to GeoEye, but can be recaptured later in the contract’s life.

In a conference call with investors, GeoEye Chief Financial Officer Joseph Greeves said NGA withheld $875,000 in payments for the three months ending June 30 because the company fell short of one or more performance requirements. A similar hold-back occurred earlier this year.

GeoEye Chief Executive Matthew O’Connell said during the call that GeoEye is still getting used to working under EnhancedView terms and conditions, and that the company expects to recoup the revenue in short order.

The NGA’s 10-year commitment — specifically, a one-year contract with nine annual renewals — gives GeoEye confidence about its future business despite the recent delays in adopting an annual U.S. government budget. O’Connell said the company has seen nothing in the recent discussion about government cutbacks that would cast doubt on the EnhancedView contract’s value.

GeoEye’s contract backlog at June 30 stood at nearly $3.5 billion; NGA accounted for 79 percent of that. This figure does not include NGA’s contribution to the cost of GeoEye-2 and additional ground infrastructure to support U.S. government operations.

O’Connell said GeoEye-2 construction at Lockheed Martin Space Systems of Sunnyvale, Calif., continues on schedule and within budget. At up to $850 million, the satellite will be among the costliest commercial spacecraft ever launched.

Greeves said GeoEye plans to approach insurance underwriters starting this fall to prepare for what he said would be a maximum amount of coverage of the satellite’s launch given the current favorable prices in the space-insurance market.

The company has an in-orbit insurance policy for its GeoEye-1 satellite totaling $255.8 million, and a $9 million policy on its Ikonos satellite, which after 11 years in orbit is well past its scheduled retirement date.

While O’Connell said the budget debate appears not to have affected the 10-year NGA agreement, it has depressed revenue from GeoEye Analytics, a new division from the former Spadac Inc., which GeoEye purchased in December 2010 for $44.3 million in cash and stock.

GeoEye officials had hoped the Analytics business would generate $35 million in revenue in 2011. But a slowdown in contract awards from the U.S. government in late 2010 and early 2011 as Congress deadlocked concerning spending bills forced the company to lower that estimate to around $31 million, Greeves said.

The same phenomenon dampened GeoEye’s overall revenue growth for the first six months of 2011 to $173.8 million, a 7.7 percent increase from 2010, when GeoEye did not have the Analytics business.

O’Connell said recent NGA contract preparations and new work for commercial customers including Scanex of Russia, Google and geographic-information systems specialist Esri of Redlands, Calif., augur well for revenue prospects in the second half of 2011. GeoEye expects full-year 2011 revenue to be around $370 million, which would be a 12 percent increase from 2010. EBITDA, or earnings before interest, taxes, depreciation and amortization, is expected to be around 50 percent of revenue.

“It’s a great sector to be in and it just keeps growing,” O’Connell said.