GeoEye To Miss Sales Target, Considers Selling Aerial Unit

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PARIS — Earth imagery products and services provider GeoEye on Nov. 1 said it will not make its previously announced revenue target for 2011, mainly because its biggest customer, the U.S. government, is slowing its contract award process in the face of budget pressures.

GeoEye also said an unnamed European customer that had been expected to make a large order has decided to scrap the idea, at least for now, and that the company’s international business this year in general is not performing as well as hoped.

Further complicating GeoEye’s 2011 picture is the performance of its M.J. Harden aerial imagery unit, which depends in large part on contracts from state and local governments whose budget picture is in some cases even worse than that of the U.S. government.

Dulles, Va.-based GeoEye said it is reviewing the costs associated with the M.J. Harden operation and may ultimately decide to sell it.

In a conference call with investors, GeoEye officials said they expected their gross profit margin to remain around 50 percent. But revenue will be about 5 percent lower than the company had forecast in August, totaling between $348 million and $355 million in 2011. It is expected to grow by 5 percent from there in 2012, GeoEye Chief Financial Officer Joseph F. Greeves said during the call.

Led by the U.S. National Geospatial-Intelligence Agency (NGA), the U.S. government accounts for about two-thirds of GeoEye’s total revenue.

GeoEye Chief Executive Matthew O’Connell said U.S. government revenue came up short in the three months ending Sept. 30 for several reasons. First, the delay in the adoption of a fiscal-year 2011 budget caused NGA and other government customers to delay production orders to GeoEye.

It takes several weeks for these orders to be filled and the revenue booked. O’Connell said the production orders have arrived, but many came too late to add to third-quarter revenue, a phenomenon that will cut full-year 2011 revenue as well. GeoEye’s newly purchased Analytics division is suffering from the same problem, he said.

“The delay was a surprise,” O’Connell said. “We underestimated the degree to which the [U.S. government budget debate and enactment delays] would delay the granting of new contract awards.” He nonetheless said GeoEye investors should view this as a temporary slowdown, not something that suggests zero growth in the coming months.

GeoEye’s primary source of revenue is a 10-year agreement with NGA called EnhancedView. The biggest slice of that contract, which is formally a one-year deal with nine annual extensions, is called a Service Level Agreement and is valued at up to $2.8 billion.

GeoEye must meet certain performance metrics each month or NGA has the right to withhold part of the expected monthly payment. The company missed several of these metrics this summer, meaning NGA withheld about $750,000 in payments.

O’Connell said the company in early October renegotiated its EnhancedView performance metrics with NGA, and as a result met the criteria for the month of October and expects to continue to do so from here on out.

“There was a bit of a misunderstanding as to the timing with which we would meet all the new metrics” in EnhancedView, a contract that began in August 2010, O’Connell said. “We’ll be improving our ground structure over the next year.”

O’Connell said M.J. Harden is a regional player in an aerial imagery market that has consolidated in the past couple of years. While it is not a major portion of the company’s revenue picture, he said it is “a slight drag” on the overall company’s financial performance.

“We are looking at reducing costs, and after we do that we’ll take a look and see if it continues to make sense to be a player in that field,” O’Connell said.

For the nine months ending Sept. 30, GeoEye reported revenue of $259.6 million, up 4.8 percent over the same period last year. Domestic revenue, which accounts for 76.7 percent of the total, was up 8 percent from a year ago, while international revenue, at $60.5 million, was down 4.6 percent.

Geoeye operates two satellites in orbit and has a third under construction as part of the EnhancedView program. This third satellite, GeoEye-2, is being partly funded by NGA and is scheduled for launch in late 2013.

 

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