GeoEye: Expect Lackluster Earnings, but Good Things Around the Corner

Now that things have settled down for GeoEye (NASDAQ: GEOY) we have one more earnings release to get through before the company can start realizing the full potential of their GeoEye-1 satellite launch.

When GeoEye announces its 3rd quarter 2008 earnings on Tuesday morning, I won’t so much be focused on this earnings announcement, but more so on a status update on GeoEye-1 and when GeoEye expects to begin delivering usable and approved imagery to the National Geospatial-Intelligence Agency (NGA) and its other customers.

In this post I’ll go over the important aspects that we need to be aware of before GeoEye announces earnings and then break them down into the following parameters:

• What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
• What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
• What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
• What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
• What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
• Bottom Line: What it all means, and what you should do.

New to the GeoEye story?

GeoEye provides space-based, and aerial imagery and geospatial information through high-resolution and low-resolution imagery, imagery-derived products, and image processing services to customers worldwide.

This capability benefits a broad array of industries including national defense and intelligence, online mapping, state and local governments, environmental monitoring and land use management, oil and gas, utilities, disaster management, insurance and others.

Want more?

• Read my initial buy recommendation here.
• or listen to my EXCLUSIVE interview with GeoEye’s management team here.

Q3 Earnings Most Likely Won’t Be Great

Focus will be on outlook

It was quite an eventful quarter for GeoEye with the successful launch of GeoEye-1 as well as the U.S. government pulling out of a potentially competing venture to launch their own commercial grade satellites into space in 3-4 years.

Let’s take a look at the quarter that was, and what I expect in the next 3 months.

What Went Right In the Quarter

GeoEye-1 Successfully Launches, Government Drops BASIC Program

There was a lot of good stuff in the quarter as far as GeoEye was concerned. Let’s get right to it.

• GeoEye-1 Launch, Initial Check-Out Successful: On September 6th, 2008, GeoEye-1 was successfully launched from Vandenberg Air Force Base in California, and achieved a successful orbit, and initial check out.

Since that time, GeoEye has released the first image ever taken by GeoEye-1, and updated the status of the satellite saying that so far, everything is working well, and they are going through the full calibration and check-out process, which could take anywhere from 45-90 days from launch.

GeoEye-1's first image ever taken of Kutztown University in Pennsylvania

We are now in the 60-70 day mark, so the imagery should be fully certified and GeoEye should update us on this conference call as to the status of their ongoing calibration, and imagery delivery schedule.

• Exclusive Deal With Google: GeoEye also announced this quarter an exclusive deal with Google (NASDAQ: GOOG) whereby Google, via Google Earth and Maps, will be using GeoEye-1’s imagery on an exclusive basis, meaning that GeoEye will not be selling this particular satellite’s imagery to any other company.

GeoEye will however continue to sell imagery from its IKONOS satellite to other search and mapping providers such as Yahoo (NASDAQ: YHOO) and other online portals for their online imagery needs.

• U.S Government Cancels BASIC Program: The U.S government canceled what could have been a potentially detrimental and competitive program called the Broad Area Space-Based Imagery Collection satellite system, or BASIC, which would have launched two commercial grade satellites similar to the ones already in use by GeoEye and their only U.S. based rival DigitalGlobe (NYSE: DGI).

It looks like GeoEye was a beneficiary of the current economic downturn in a move that was widely viewed as controversial and was perceived to have directly violated previous presidential directives.

The bottom line is that the measure was struck down, and we can all breath a sigh of relief that the U.S. government won’t be launching their own commercial satellites to compete with GeoEye.

You can read all about the BASIC program and its implications for GeoEye here.

What Went Wrong in the Quarter

Another lackluster quarterly earnings performance

There wasn’t much that went “wrong” in the quarter, other than the actual quarterly revenue and earnings performance that GeoEye announced the last time around.

As I explained then, because of the continued launch delays of GeoEye-1, GeoEye’s revenues were going to fall short, and in turn their profitability, as their customers, and specifically their largest customer the NGA, shifted their satellite imagery purchases to DigitalGlobe because at that time they had the better satellite with the highest resolution.

Now that GeoEye-1 has been launched and is close to being ready to deliver full-fledged imagery, that balance has shifted back to GeoEye, and in turn, we should see a big boost in GeoEye’s revenue and earnings starting with the 4th quarter of 2008 and extending into all of 2009, which should be a banner year for the company.

What I want to see

Robust Outlook

The most obvious and important thing that I want to see and hear out of GeoEye this quarter, is a robust outlook (even though the company does not provide financial guidance) at least in terms of order flow, and imagery generation capabilities from GeoEye-1.

Anything else would be gravy, but I want to make sure that we are close to getting this bird delivering imagery to GeoEye’s customers ASAP.

What We Need To See

Continued Execution, Calm Words

No surprises.

Just status quo in terms of GeoEye-1 status, meaning everything looks good and is on track, and continued execution of their business model via new deals with vendors, resellers, and other governments around the world for the imagery that GeoEye will be delivering very shortly.

What We’ll Probably See

All’s Well

We’ll probably hear just that.

Some new deals, poor quarterly earnings as a result of the above-mentioned satellite revenue and order shortfall, and then a reaffirmation that GeoEye-1 is looking good and perhaps even a status update on the exact dates that imagery will start to be delivered and when we can expect measurable revenue from GeoEye-1 in this quarter.

Bottom Line

If you haven’t already, get in

It does not really matter what GeoEye’s earnings look like this quarter, and what happened in the past three months in terms of revenue generation, and profits.

That’s not why we are here.

We are invested in GeoEye for the future, and that future is actually the present.

GeoEye-1 is the most advanced commercial imagery satellite in operation today. When GeoEye begins delivering the certified imagery to their customers, GeoEye’s revenues and profits will soar, and year over year comparisons will look juicy indeed.

The time to play that is now, not later.

Wall Street will be listening in on the call, and also watching intently as this thesis plays out over the course of the next several months to a year.

Regardless of the gyrations in the market, I fully advocate you buy shares of GeoEye at any time the stock shows weakness as a result of outside factors.

As of right now, there has been no change in the investment thesis, and in fact that investment thesis has continued to favor us in a risk/reward scenario in that one of the largest hurdles, that of a successful launch and check-out of GeoEye-1, is now almost complete.

The fear and panic should be mostly removed from this stock, and now we can just settle in, and enjoy the fruits of my diligence and research as it plays out beautifully in the form of a much higher stock price over the course of the next 6-12 months.

GeoEye remains my #1 pick.

New to the GeoEye story?

• Read my initial buy recommendation here.
• or listen to my EXCLUSIVE interview with GeoEye’s management team here.