Top 5 Companies to Watch: DigitalGlobe and GeoEye

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Commercial imaging satellite operators DigitalGlobe and GeoEye were sitting pretty in August 2010, when the U.S. National Geospatial-Intelligence Agency (NGA) awarded both companies contracts worth $7.3 billion combined over 10 years for imagery and related services under a program dubbed EnhancedView.

The contracts called for the companies to procure next-generation satellites and build out their ground infrastructure for better responsiveness and integration into the NGA’s own data storage and distribution architecture. In addition to helping to underwrite those investments, the EnhancedView funding would be used to buy at least $12.5 million worth of data products per month from each company under so-called service-level agreements.

But severe budgetary pressures are causing the U.S. government to rethink its commercial imagery procurement plans. Senior military and intelligence officials began warning in late 2011 that EnhancedView could take a hit in the 2013 budget request then under deliberation.

The first shoe dropped prior to the release of the 2013 request. Congress, sources said, finalized in December an EnhancedView budget for 2012 that will result in the companies losing a combined $50 million, or some 10 percent, of the revenue they were anticipating for the year.

January brought the first firm indication of what is forthcoming in 2013: Pentagon officials, offering a preview of some programmatic and force structure decisions that had been made in light of the budgetary environment and shifting military priorities, listed commercial imagery among several spending accounts singled out for significant reductions.

The size of the proposed reduction is unclear since NGA budgets are classified, but industry officials and observers were not optimistic in the days leading up to the Feb. 13 release of the budget request. According to an analyst note to investors dated Feb. 15, the Defense Department has proposed spending $435 million on EnhancedView next year, compared with a previously planned $735 million. The note, from the investment firm Dougherty & Co. LLC, cautioned that the figures are company estimates.

DigitalGlobe and GeoEye are publicly traded, and the share price of both companies dipped sharply Feb. 15, but had begun to recover before the day was finished. This followed more gradual yet bigger declines that took place from late October through November, as the warnings about what might be in store for 2013 began to reach a wider audience.

A substantial reduction in EnhancedView funding would raise questions about the long-term viability of DigitalGlobe and GeoEye as separate companies — already there has been speculation about a merger.

DigitalGlobe and GeoEye likely will try to offset reduced government funding by winning more commercial business, but that market got more crowded with the successful December launch of the French government-funded Pleiades 1A high-resolution optical imaging satellite. Astrium Geo-Information Services, which has commercial marketing rights to Pleiades data, has made clear its intent to compete head-to-head with the U.S. companies in the international market.

Congress has yet to weigh in on the 2013 budget request, and DigitalGlobe and GeoEye have their champions on Capitol Hill. Lawmakers, who last year protested potential cutbacks to the EnhancedView program, can be expected to raise their voices more loudly in the coming weeks and months.

Meanwhile, the Office of the Director of National Intelligence is undertaking a study of the cost and value of commercial satellite imagery, the results of which are due April 15. The findings likely will have a bearing on how commercial imagery fares in Congress’ budget deliberations.

The revenue impact of any EnhancedView cuts in the 2013 budget would of course not be felt until October. But shares of DigitalGlobe and GeoEye, which are investing nearly $1 billion apiece in new satellites and infrastructure, could be in for a wild ride between now and then as bits and pieces of the EnhancedView budget battle find their way into the public domain.

 

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