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GeoEye, Inc. (NASDAQ:GEOY)

Q3 2008 Earnings Call Transcript

November 11, 2008, 11:00 am ET

Executives

William Warren – SVP, General Counsel, Corporate Secretary

Matt O’Connell – President and CEO

Bill Schuster – COO

Henry Dubois – EVP and CFO

Analysts

Paul Coster – JP Morgan

Jeff Evanson – Dougherty & Company

James McIlree – Collins Stewart

Simon Solacha [ph] – Harbor Side Capital [ph]

Operator

Good day ladies and gentlemen. Welcome to the GeoEye Inc.’s Third Quarter 2008 Investor Call. At this time, all lines are in a listen-only mode. After the prepared remarks, we will announce the opportunity to receive questions. (Operator instructions) As a reminder, today’s call is being recorded.

Now at this time, I would like to turn the conference over to Mr. William Warren, GeoEye’s Senior Vice President and General Counsel. Please go ahead sir.

William Warren

Good morning. This is William Warren. Thank you for joining us today, as we discuss GeoEye’s third quarter 2008 results. Joining me today are Mr. Matt O’Connell, Chief Executive Officer, President and Director; Mr. Henry Dubois, Executive Vice President and Chief Financial Officer; and Mr. William Schuster, Chief Operating Officer. After our remarks, we will entertain questions. This call is being recorded.

Before we begin the business portion of this morning’s call, we would like to inform you that we expect to be making forward-looking statements during today’s call. Statements including words such as believe, anticipate or expect and statements in the future tense are forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on management’s current views and assumptions regarding future events and operating performance.

A number of factors could cause our actual future results to differ materially from our current expectations. Examples of these factors include, but are not limited to, conditions in the remote sensing industry, levels of government spending, competitive pricing pressures, level of new commercial imagery orders, production rates for advanced image processing, startup costs or overruns on new contracts and technology or product development risks and uncertainties.

Listeners are encouraged to read the risk factors in our Form 10-K on file with the Securities and Exchange Commission for a discussion of various factors which could cause our actual performance to differ from our forward-looking statements. We assume no obligation to publicly update or revise our forward-looking statements.

At this time, I would like to turn the call over to company’s Chief Executive Officer, Matt O’Connell.

Matt O’Connell

Thanks Bill. I want to thank you all for taking part in our call. I know that today is a holiday for many people. We have a lot of veterans here at GeoEye and we salute all veterans’ for their service to the nation.

Following our prepared remarks we will take your questions. The main purpose of the call is to report our financial results for the third quarter 2008. Give you an update on our progress checking out our new satellite GeoEye–1 and on negotiating a Service Level Agreement with the National Geospatial-Intelligence Agency or NGA and then talk about the longer term view for our company.

I will mention some highlights of our last quarter, then our Chief Operating Officer Bill Schuster will provide an update on satellite operations. Our Chief Financial Officer Henry Dubois will give you the details of our financial results and then I’ll back to give you some information about way ahead for us.

Now to GeoEye-1 obviously launching GeoEye-1 was the highlight of last quarter. The satellites working well and we are delighted by the imagery. On October 8th we released our first GeoEye-1 image an absolutely beautiful image of the Kutztown University in Pennsylvania.

In answer to the obvious question like Kutztown it really was our first image, we open the camera door and that’s what we saw. Since then, we released other equally stunning images, we posted some GeoEye-1 images on our website, so you can check them out what we’re doing this call. Bill Schuster will brief you on the status to checkout in just a moment.

Now on the financial front and we will tell you that our operating results for the third quarter were about the same as the results for our first and second quarters 2008, but that’s a 33% decline in revenue from third quarter last year. Revenues for the third quarter were 35.9 million.

As we said in our call last quarter, we didn’t expect to solve the NGA order issues and obtain a service level agreement until after launch of earliest and checkout at the latest. As we disclosed in August, we needed to restate our financial for prior periods. The restatements didn’t have a big economic impact on the company, although we do regret that we have to do them and we will go into more detail on the statements. I guess the simplest explanation as to why they occurred is that we grow too fast for our financial system.

But we have hired a new controller Jeanine Montgomery, we have a new auditor KPMG had a new tax adviser. We are still on covering some small issues that need to be cleaned up and we will continue to beep up of our system, so that we don’t have anymore discrepancy, even minor ones.

Now on the service level agreement with NGA, I said during our last call that we expected to sign a service level agreement with NGA after launch and before we complete checkout. We are in the final stages negotiating SLA. This agreement should even out the peaks and valleys of NGA’s image ordering process, so that we get a predictable revenue stream and the government gets a predictable supply of imagery.

We’re pleased to see what the Director of NGA Vice Admiral Robert Murrett said about us at the immediate roundtable in Washington. He said “the point that people need to not lose sight off is what a huge chunk of our mission capabilities is comprised by the commercial remote sensing industry, and how we have programmed for embedded in our architecture in ways that are irreversible of many, many years of the future.”

We are grateful for NGA’s continued support and we are very proud to be a mission partner. So, we had a terrific new satellite, that will be checked out soon and we have strong support from top of NGA.

We are also enthusiastic about our production business. We’ve recently committed to expand of our cost side production area in our Thornton office significantly to keep up with the demand airport mapping database business that we’ve talked about in the past and as you we have world-class center for innovation in value-added production in St. Louis. We recently committed to increased our space their by 50%.

In both expansions, the cost is far out rated by increased in our production capacity. That production capacity is a good source of revenue; it’s also a great competitive factor, since no other imagery satellite operator does value-added production on the level we do.

Now I want to update you on the international business. As you know, we have two types of regional affiliate’s government, and commercial regional affiliates. The each received imagery in different ways. The government on regional affiliates get direct access to GeoEye-1 as they do with IKONOS.

We’ve executed GeoEye-1 ground station connects with three of them, and still complete their installations by Europe. We expect to sign a port one soon and it fit in early 2009. Regarding our commercial regional affiliates, we’ve mentioned before that we plan to transition commercial affiliates away from buying minutes of direct access to the satellite they’re buying square kilometers of imagery. That plan achieved a major success last month with the execution of a multi-million dollar multi-year agreement with Telespazio for the European and North African region.

Telespazio is Rome-based company, owned by two European industrial giants Den Mechanica in TELES. Telespazio is a world leader in satellite service with years of experience in producing and selling in these products. We’ve got together in Europe last week and we are excited about their ability to provided value-added services from their offices throughout the Europe.

They had committed to a guaranteed annual minimum payment for inventory. While we can out details revenues from then start front flow into our financials, during the first half of the next year and it will be one more element that makes our revenue more predictable over the long-term.

We continue to see strong demand in the developing countries, slightly Russia seems to be fasting China as the developing nation with fasters growing demand, but they are opposed exciting markets. As our commercial sales in the US I am sure many of you’ve saw impress about the Google logo on our rocket, GeoEye-1 is exclusive to Google we want to GeoEye-1 inventory to any other online matching sites.

Soon we will start providing GeoEye-1 satellite inventory to Google Earth and Google Maps. We are delighted by the partnership, in addition Google planning our GeoEye-1 inventory we actually turnaround in paid Google to help us develop a great of searching imagery archives.

That tool got an ovation at a recent industry contrast. We are marketing that new search capability to several of our international clients. They are interested in it because it’s terrific way for them to search both our archives and their own. One appealing aspect to this deal is that, although there won’t be material in the overall financial picture, there will be a steady source of recurring revenue.

The Google partnership is already laid to the first request for us to the supply imagery to some others than Google. Google granted by recently asking, if we could supply some imagery to someone there, we forward the request to our regional affiliate there. It’s a small order, but it’s systematic of the marketing power that the Google relationship brings us.

Now some of you have read or remember us talking about government imagery intelligence program called BASIC, it stands for Broad Area Space-Based Imagery Collection. Congress is put the program on hold until some additional studies are done early next year. No one knows that those studies will conclude. We are proud to support the US government’s collection system and we believe we can satisfy even more of the government’s imagery and mapping requirements.

We have proven that we are very cost effective solution of our government to meet their important area collection requirements, but I want to emphasize that we’re formation partner with NGA at US government on imaging and if they find it necessary for national security reasons to go ahead with BASIC, we will of course support the effort, try to be a big part of it.

Now to our next satellite GeoEye-2, a year ago we announced that we signed the contract with ITT to begin work on new satellite called GeoEye-2. ITT has received the glass from IKONOS for the primary mirror, as assembled mirror and its ordered part from the assembling for the camera electronics. These are long lead-time items.

The next step, sort of pick a vendor to build the satellite itself. That could happen at the end of this year or early next year, from that point it will take about three year’s until launch, which puts launch in the 2012 timeframe. We don’t need financing for the new satellite in the short-term. We can pay for the development of the satellite at our free cash flow. That’s good because great racing money in this market is certainly challenging say at least.

Over the next six month we’ll continued to monitor the demand from our government, international, and commercial customers, I’ll keep you posted on our plans to GeoEye-2. As the investor relation we’ve been working very hard to communicate with our investors and Henry and I spend a lot of time in phone with many views and with analyst, since the last call.

We want to the Deutsche Bank leverage finance conference in Phoenix, we made two trips to visited investors in New York and Boston, in late October, we visited investors in San Francisco in Los Angeles and we are going to continue to improve our communications with our investors.

Now I’ll turn the call over to our COO, Bill Schuster. So, he can report on the status of GeoEye-1.

Bill Schuster

Thank you, Matt. First I want to give you an update on the GeoEye-1. Calibration and checkout have taken somewhat longer than we expected. We knew that are 45 day checkout period was aggressive, but now a little more than two months since launch, we are seeing the kind of success that we wanted to attain sooner.

The hardware is performing flawlessly, that’s important because hardware problems would not be easy to remedy. However, we have had several software issues almost exclusively related to the OrbView-2 control system that have been the major reason why checkout has taken longer than expect it. These internal issues that we were not readily discoverable in testing on the ground.

We successfully worked our way through each of these and they don’t have any impact on future GeoEye-1 operations or life expectancy. We are confident that will work through any remaining issues and start full commercial operations in December. We will be providing imagery to NGA for the formal review in a few weeks. It has been long roads since the initial NextView contract was awarded to us on September 30th, 2004, but we launched within four years of contract of board and with no cost overruns. At completion the cost to bring the entire GeoEye-1 program into service should be a little under the budget of 502 million. That includes all cost to build launch in commission GeoEye-1.

We’ve proven that we are very cost effective solution for our government to meet their important mapping machine requirements. Our customers are thrilled with the imagery they have seen so far. Now despite our excitement about GeoEye-1, we shouldn’t forget IKONOS from all the operational data we believe the satellite can achieve a greater than 10 year life span. This means it will likely continue to operate through 2010, if not longer although obviously there is no guarantee with the satellite at this age.

Now, I’ll turn the call over to our CFO, Henry Dubois, who can report our third quarter financial results and other important matters.

Henry Dubois

Thank you, Bill. I’d like to go through the information contain in the earnings press release we put out last night to our formal 10-Q we will file and extension giving us five more days to file the 10-Q. We expect to file our Form 10-Q within five-day extension period, so if we have more time provided information to our new auditors into prepare our financials.

As you know, we filed financial restatements for the years 2005 to 2007 and the first quarter of 2008 in early September. These restatements related to the one, the tax treatment of the cost-share payments from NGA for the development, construction, and commissioning of GeoEye-1; two, the change of ownership study regarding the use of net operating losses as governed by the Internal Revenue Code Section 382; and three, correction for an over-accrual of the cost of imagery purchased from third parties in 2007.

We have incurred $29.6 million of US tax related interest and penalties in the third quarter of this year as we expected. Of these charges 25.5 million were taken prior to 2008 and 4.1 million was charged in the first six months of this year. This resulted in $25.5 million tax benefit for the nine months ended September 30th, 2008 related to the cost-share payments.

We are working to strengthen our financial disclosure controls and procedures as we move into the GeoEye-1 area. As Matt mentioned in the third quarter, we changed our tax advisors to big four accounting firm and hired a new of the Vice President accounting and Corporate Controller, Jeanine Montgomery. In addition, we appoint KPMG as our new audit firm.

Now on to our third quarter operating results. Throughout our financials our revenues and income from operations, as well as, net income declined from prior periods. This result have primarily from NGA delaying its orders until GeoEye-1, becomes operational. As we’ve said before we believe the NGA ordering issue will be resolved very soon when we execute the Service Level Agreement. This SLA should be effective once we placed GeoEye-1 in operation.

Our revenues for the third quarter of 2008 were $35.9 million as compared to 53.8 million for the third quarter of 2007. In the third quarter 2008, NGA revenue declined by 18.1 million from the third quarter 2007, which represents the revenue drop. Our income from operations in the third quarter of 2008 was 8.3 million compared to 25.8 million of income from ongoing operations in 2007, which excluding the gain of 36.1 million on the impairment of our OrbView-3 satellite, which we recognize in a third quarter of 2007.

Income before taxes was $6 million for the three months ended September 30th, 2008 as compared to 22 million of adjusted income before taxes for the three months ended September 30, 2007, after excluding the of $36.1 million gain referred to previously and an additional $3 million of gain on insurance proceeds as a result of the impairment of the OrbView-3 satellite.

Our net income for the three-month period ended September 30th, 2008 was 32.4 million as compared to 34 million for the corresponding period in 2008. Net income for the three months ending September 30th, 2008 includes 29.6 million of income tax benefit related to the reversal of income tax penalties and interest as expected. This reflects the reversal of the 25.5 million of charges recorded prior to 2008 and 4.1 million recorded in the first six months of 2008. The comparison of net income on a quarter-to-quarter basis is distorted by the occurrence of one-time events in the third quarters of both 2007 and 2008.

These one-time events are, one, the income tax expense related to the cost-share payments that were charged in 2007 and reversed in 2008, and two, the one-time gain in 2007 resulting from the receipt of the insurance settlement proceeds from OrbView-3.

For the nine months ended September 30th, 2008, revenues were 104.6 million as compared to 138.8 million for the nine months ended September 30th, 2007. Again the primary reason for the revenue decrease is a $34.5 million reduction in revenue from NGA. Our 2008 year-to-date, income from operation was 16.5 million compared to income from operations of 62.6 for the corresponding period in 2007.

In addition to the reduced NGA revenue, our income from operations decline, because of the increased cost associated with our preparations for launching commissioning of GeoEye-1. On the year-to-date basis, our net income for 2008 was $30 million, compared to 23.7 for 2007. However, when the one-time events previously discussed are excluded the comparable net income for the nine months period ending September 30, 2008 and 2007 would be 4.5 million and 34.7 million respectively.

For the nine months ending September 30, 2008 the adjustments to be made for comparable net income are the net income tax benefit of 25.5 million related to the cost-share payments that were reversed. The income tax was expense to $14 million related to the cost-share payments that were charged in 2007 and one-time gain of $3 million in 2007 resulting from the insurance settlement proceeds from OrbView-3 at the adjustments of 2007 number.

We have a strong cash position. Our cash and short-term investment balance was $149.9 million at September 30, 2008 as compared to 234.3 million at December 31, 2007. The decrease from the year-end balance reflects payments made to complete our GeoEye-1 program. This balance coupled with the remaining milestone payments from NGA of 11.6 million provides more than sufficient cash to fund the amounts due to complete the GeoEye-1 program.

As of September 30th, 2008, we have expended approximately 471 million, of the $502 million program budget. The 471 million expended to date includes $28 million of amounts incurred but not yet paid to contractors. The remaining $31 million represents final amounts to contractors not yet incurred; interest to be capitalized during the commissioning phase and contingencies.

Now, I’ll turn the call back to Matt.

Matt O’Connell

Thanks, Henry. Thanks, Bill. I want to talk little bit about the way I had. Our industry is come a long way since I joined our processor as it President and CEO in 2001. At that time high-resolution satellite imagery was mostly limited to the intelligence community. Now thanks for work of NGA, the online mapping search engines like Google Earth and Microsoft Worldwide and the hard work of our resellers around the globe. Satellite imagery in the geospatial information really means something in the millions.

People expect to be able to see anywhere around the world with the click of a mouse. Businesses are increasingly using location-based information, including satellite imagery in the geospatial products, when they make decisions like where to locate factories and alternate energy sites. The status of construction projects plans for land development and so on. Millions of consumers now use location-based information in cars, cell phones online, and so on. Not since the follow of 1968, when Harden’s photograph paying, in the dark base.

As the power of imagery had such dramatic impact on our ability to see the planet and to know more about our world and how we live, where we are and where we want to go. This is an incredibly exciting time to be in our industry. Now the GeoEye-1 is operating we can finally take our rise after launch pad and focused on long-term strategy.

We are formalizing our efforts to develop new markets. We recently hired a Chief Technology Officer, Brian O’Toole. Brian as good working background first at GEE in systems integration then working for various location information software companies in DC area and finally, building his own little software company and running it for seven years before selling it to divisional test on.

Brian looking at strategic partnerships and new products in technology especially in the service oriented architecture area that we think is going to play and increasingly important roll in our business for providing information that combines geography and location-based information we’re reassigning some of the business development as strategy people we have to work for Brian; I have adding couple of new heads. We are not spurring on R&D, will spend the little and will spend advisedly on technologies and partnerships that can help grow both our government and commercial businesses. There is a lot of promise in this area.

The CEO of IBM Sam Palmisano, recently gave a speech to suggesting the technology is one area of the American economy that can help provide us spark for economic recovery. He talked about the need to make many parts of American infrastructure more efficient. There is a natural tied between Palmisano’s argument and President Elect Obama’s proposal that we try to stimulate recovery not through further rate cuts, but through direct investment in infrastructure.

We’ve talked to you in the past about the infrastructure work we’re already doing. Moderating oil and gas pipelines, construction projects, airport construction and maintenance sort of thing, we’re going to keep expanding that line of business. As I said we are substantially increasing the size of our production area in the Thornton office to keep up with the demand for our airport database line of business and we are looking ways to use our technology to help make infrastructure more efficient. In fact, we have been engaged in discussions specifically on that subject with one of our international government customers for oil.

As I said before, we are going to continued focus on the business-to-business market. Our long-term goal is not only providing high quality imagery and solutions, but also providing products tools and services that help our customers convert imagery and useful and actionable information, by doing this we create closer ties to our customers and we learn how they use our imagery and products, which helps us make better businesses.

I’ve talked earlier about the growth in our products and solutions business and our plan to expand it. That area is going to be an increasingly important part of our revenue mix and has its great competitive hedge, since we are leader in advance products and services. Competition may pickup in 2010. DigitalGlobe recently reaffirm that they’re going to launch their next satellite in the third quarter 2009. Growing our products and solutions business will help us diversified our revenue makes and also give us a closer tie with customers?

Now we know that some of you have expressed interest in asking questions, we will take those questions now, understanding is always that some of the questions may involve proprietary commercially sensitive information, which may limit our ability to respond. Thanks again for joining in today’s call

Question-and-Answer Session

Operator

Thank you, the question-and-answer session will be conducted electronically. (Operator instructions) We will take our first question from Paul Coster with J.P. Morgan.

Paul Coster – J.P. Morgan

Thank you, good morning. I wonder if, perhaps you can talk a little about ‘09 Matt and Henry, I know the you don’t give expressive guidance, but can you talk about the growth drivers by segment that being NGA, the regional affiliates government, the commercial business and other business?

Matt O’Connell

Sure, Paul. Thanks for the question. Well, let’s start with fact that obviously we have a big new satellite and it’s the best commercially imagery satellite in the world. So, as for the general market we are going to price that higher then we priced IKONOS that’s public in fact I think the prices are published on our website.

So, there is going to be an uplift in prices to people others than NGA. Obviously, the largest growth drives I think is going to be the service level agreement that we expect sign with NGA I am not going to say anything about that right now. Although we do expect to make a press release about that, we do expect to sign that fairly soon as Bill said.

We expect to start commercial operations in the near future it going to be delivering imagery to NGA for checkout, in the next couple of weeks. So, you should an announcement on the SLA and that will help model, Paul as you look forward, because it’s going to be material contract we’re going have to state the payment in to contracts.

On the international side, we don’t disclose the amounts in those contracts, because they are material, and customers are sensitive. They may want their information spread around. However, if you are keeping count, I think what you can drive from what we said is, we have signed up three of the government customers already. We are going to sign up one more in the next 30 days probably and then one in earlier ‘09, that will cover most of our government customers for IKONOS and we have already signed one of the big commercial regions, Europe.

While we don’t give guidance Paul, I think that you will begin to see in pretty early ‘09 as those contracts kick in, since most of them are take-or-pay contracts, you will begin to see revenue running at a rate, which will help you model that may take a quarter or two. So, again we can’t give you guidance, but we do have a healthy number of contracts that are either signed or going to be sign shortly, and those will driver of them. Henry if you want to add that?

Henry Dubois

I think you pretty much cover that.

Paul Coster – J.P. Morgan

On the commercial side, do you think Google will cost materiality threshold in calendar year ‘09?

Matt O’Connell

No, we don’t expect to you, but I guide you reminding me about Google Paul, because I forgot to mention them. Google a great ancillary revenue for us, because don’t require any specific dedication of satellite time we are imaging capacity they just want to copy of everything we take. So, every picture we take we can get ancillary revenue by delivering copy to Google that will kick in pretty shortly. I had the pleasured to visit the Google plus, I got key that launched that effect that I haven’t gone out there and the founders had how come you signed the deal you did come to see us.

So, we went out there and I am must say it is great deal with people who even this economic market, their stock maybe balancing around that they have lot of doubt in big appetite and as it common with many Hi-tech people, the kind of want most faster so they’re terrific partner.

Matt O’Connell

Just the follow on the converse, the comment on the materiality we’d be looking at something exceeding 10% of total revenues before we don’t have to identify it as a standalone customer, standalone revenue line.

Paul Coster – JP Morgan

Okay. Got it. The new regional affiliates, maybe I just want to clarification there. This is not cannibalizing of existing regional affiliates, I thin its some think like 13, may be I got the number wrong, but perhaps you can just clarify that statement.

Matt O’Connell

The regional affiliates in most cases have signed a contract to continue IKONOS and then take increasing amounts of GeoEye-1. Over the long-term Paul there will be a transaction from IKONOS towards GeoEye-1, but as I have said to you in many investors.

Well you generally want to have more and more, that’s not necessarily bad because there are two markets, our two prime markets are the Northwest Pacific and the Middle East and we are over subscribe there, we are really looking forward to having additional capacity to image those parts of the world because we can satisfy our customers currently in those part of world. So, to the extend that people do shift from IKONOS to GeoEye-1, although there maybe a little cannibalization, we actually think it we can use along the IKONOS time to satisfy the unsatisfied demand and in Asia and also in Middle East.

Paul Coster – JP Morgan

Got it, Henry, used about $50 million in cash this quarter, can you just breakout what the use of cash it was?

Henry Dubois

Sure, this quarter as we’ve identified we had a two very significant payments, one was for a insurance. The final payments on the insurance per deal, I want we are made in the August time period, that was probably the neighborhood of about $40 million, when you take both of the total loss only insurance as well as the full coverage insurance that we have, and we are also made the of tax payments at we have been discussing in the past of about another $20, $22 million.

Paul Coster – JP Morgan

Okay and then my last question is, share account, tax rate and CapEx moving, check accounts today, and tax rate in CapEx not the satellite relates to CapEx moving forward. How should we model that?

Matt O’Connell

Well, on the share account, how many shares we have, fully just outstanding and fully diluted basis. I believe we’ve got including warrants, someone they have got about 22 million shares outstanding, the warrants if you need to treat a using treasury method if you want get the proper accounting on a quarter-by-quarter basis.

On CapEx as we move into the kind of maintenance, I shouldn’t say maintenance, but the operational mode of GeoEye-1 you will be focus more on what I always turned on maintenance CapEx, which is not a significant amount on annual basis for additional upgrades on computers software things along that line. I’m sorry what was your third one that you are asking?

Henry Dubois

We just finished that, we have a little CapEx, Paul in St. Louis and Thornton as we expand those production areas, but as I said before I think you are going to see that cost or repaid really profitably because, increasing in the production capacity will help us catch up with demand that we are not currently taking care of fast enough and so that’s not noticeable.

Matt O’Connell

At those announced are in the couple of million dollars effect.

Paul Coster – JP Morgan

Okay and tax rate going forward?

Henry Dubois

I would use a 40% tax rate, I think our affective tax rate through at the end June is around 39.5 and 39.8 now a something mostly here that’s based on current tax environment.

Paul Coster – JP Morgan

Great, thanks very much.

Matt O’Connell

Thank you, Paul.

Operator

We’ll take our next question from Jeff Evanson with Dougherty & Company.

Jeff Evanson – Dougherty & Company

Good morning gentlemen, thanks for taking my questions and congratulations on the solid quarter.

Matt O’Connell

Thank you, Jeff.

Jeff Evanson – Dougherty & Company

Could you, Henry give us a breakdown between imagery and production revenues in the quarter?

Henry Dubois

Sure, and all this will coming out in the 10-Q shortly, but of the 35.9 about, 25 million of that was imagery revenue and about 11 million of that was production and other.

Jeff Evanson – Dougherty & Company

Okay, can you provide a share account in the quarter?

Henry Dubois

The share account in the quarter, I believe will be about 18 million on a basic basis and about 22.2 million on a fully diluted basis.

Jeff Evanson – Dougherty & Company

Can you share any backlog information at this point?

Henry Dubois

There will be coming on the queue and we get that file in next few days.

Jeff Evanson – Dougherty & Company

And then Matt, couple of questions for you. I was wondering if you could talk about how much of yours sales in the quarter, were sale of an image that have been captured and sold once already. In other words how much replication – how many times was image captured and sold more than once, can you give us some sense of that?

Matt O’Connell

Yes, that’s are relatively minor number right now Jeff, as you recall the model that space imaging use was a granted the ownership of the data to the owner of the local regions, as one reason why we are shifting our commercial model overseas, now this, signing the Google Earth started a pick up in that lines, even in this past quarter it was nearly noticeable, which GeoEye-1. I think you can see a much brisker increase in the number of images that we sell more than once, also as I referred earlier to the fact that we have changed commercial model overseas from selling time to selling kilometers.

The resellers of the sell time and let the local guidance on the imagery they capture we can resell that imagery. That was a problem for us in number of respects; we couldn’t derive secondary sales also made to the hard in some incidences to satisfy our US government customers.

So in the all days the sense in the US government that the commercial guidance want as responses has the govern want to going to be had some truth not in the overall sense. When they asked us for something we generally did we right way, but with IKONOS we had to buy imagery back from our regional affiliates. We don’t want to do that, this new model is much more responses to U.S. government, they really like it and it gives us the ability to do those secondary sales so, we going to see a dramatic take-up in that going forward.

Jeff Evanson – Dougherty & Company

Your answer anticipated my next question, which really the assets of it was however you changing these international contracts so, under the clear calamities definition, you will then be ale to resell those images collected under those foreign or those regional affiliate ground stations?

Matt O’Connell

Yes we will, as example is Telespazio, we take a picture for then. They have actually had license to sell and resell that within their market, but we can resell it outside that market and we intend to, that for instance was crucial for that Google deal and to the fact of we consolidated imagery to view us government or in a number of people.

Jeff Evanson – Dougherty & Company

That’s wonder Bill.

Matt O’Connell

That’s fixed.

Jeff Evanson – Dougherty & Company

Then my last question is I would love for you to elaborate little bit more on what your vision is around solutions development, the role of the new CTO and partnerships. You gave as a little bit of color on that, but give us a sense of some ways and what you see that involving over the next 12 to 18 months.

Matt O’Connell

Sure. Let’s look at our vertical shift, defense and intelligence is the biggest, but oil and gas is the second biggest vertical for GeoEye. There is lot of applications in the oil and gas that, we can give more with and were looking at them right now. I can get too much detail because obviously gets proprietary, but I can say for instance monitoring oil bases, we are working on that right now. Working with mining and extraction people, we are working on that right now.

We talk to you before about the oil and gas pipeline monitoring and we’re looking to extend that monitoring from oil and gas pipelines to monitoring high color of wirers and the electrical gear grid. What we like about those is as in many businesses it’s much easier to do a grand extension, if you well product extension and go up and cerate the whole new product. Those were all good things.

Now let’s turn to airports, as I said our business in airports is expanding so much we are littlie going to – I think we are going to triple the production area in Thornton devoted to the airport business. In China we have been approached by the people over there because they would like to have us help them with imaging, areas were they can build new airports, I read I think in the journal this morning China is interested in infrastructure spending as we have upgrade their economy. They talked mostly about airways, but we now from discussions over there, that there interested in airports as well.

I think China is a head of the U.S in terms of using our satellites for planning of infrastructure development. China is using us more than the U.S as we hope that the U.S start to using as more and we’re marketing that, but in the mean time we’re doing a lot work over there, they have so many mouths to feed that they are very conscious. They don’t was to put a road in an area where they have arable land, so we do a lot work with them on urban development, infrastructure planning and infrastructure location. We think that’s all very positive.

Jeff Evanson – Dougherty & Company

That’s great. Thank you and then my lost question is related to I guess the basic situation if you well, if I understand your remarks correctly you see a way for GeoEye-2 work within the basic framework up correct?

Matt O’Connell

I think there are ways we can do it Jeff, I think that it’s important. The headline recently is that the program has been either put on hold or killed. There is a lot of debate right now, there is a new administration coming in. People are looking at whether or not we have money repayable all the different government programs we wanted do. I think with that I will just hold up on further comment again as I said at in the past our clients are intelligent agencies, but don’t really like stuff like this discussed in public and for now since the program is on hold I think at rather just pass if that’s okay.

Jeff Evanson – Dougherty & Company

Great thanks a lot, great job guys.

Matt O’Connell

Thanks Jeff.

Operator

We will take our next question from James McIlree with Collins Stewart.

James McIlree – Collins Stewart

Yes, thank you good morning.

Matt O’Connell

Good morning James.

James McIlree – Collins Stewart

Matt, when you are talking about GeoEye-2 it kind of standard like there was some uncertainty to the construction of that satellite, but then you wanted to off setting, yes may be not. So, are you a little bit more certain now that you going to go forward with that or in misreading it?

Matt O’Connell

Well again, we have free cash flow that Henry can use to maintain the phase of build and we are going to do that say for it roughly to next six months James. We are going to continue to monitor demand and we hope that as people look at the amounts of US government is spending, bailing out Detroit one think and another, we are certainly a cost effective alternative for the US government.

We delivered this last program – although, the investor proceed we’ve relate as we thought we could do it earlier. We still did it in four years and that’s pretty much of record for inventory satellite of this class and we did slightly under budget. The people in the Pentagon, I can you tell you Jim are setting out that looking at that things. Wow this was a fixed cost contract and they came in under budget, when has the Pentagon contract coming under budget.

I don’t think pretty much more than that, but I will say that we think that – actually this new administration might look more favorably on our small growing high-tech company that’s adding jobs and hiring people. That might have in the case under last administration, which was kind of more inclined to so do with people who were the program of record suppliers and sort of big industrial companies. So, we are kind of encouraged about the future. That’s all I should be probably saying.

James McIlree – Collins Stewart

Okay, and just concludes once, one is the gross margins some has better this quarter versus last it revenues were pretty much to same?

Matt O’Connell

Well, there is the revenues were pretty much same totaled, but we did I have some shifting into the inventory side; inventory revenues are do have higher margins then somewhat products and services.

James McIlree – Collins Stewart

Okay, great and when will the capacity additions to the Thornton and St. Louis be completed?

Matt O’Connell

I can do that bill with the six months bill.

James McIlree – Collins Stewart

Yes, probably under six months.

Matt O’Connell

Yes, some under six months and I mean think same viewers might can in little sooner because it smaller and then lets start with the work, and also they have been done in sort of inspection St. Louis is phasing ahead in, what we are going to do is actual bill sort of three years. So, I think we can start working in the wonder one before the other two has finished.

James McIlree – Collins Stewart

Okay, and so we are talking sometime before the end of Q2 before you seems to

Matt O’Connell

Yes, I think it’s going to be ended Q2 but there time you really see that the production pick up.

James McIlree – Collins Stewart

Right and is that the NGA have to left the images before you can make sales to anybody offers it, the first sale of GeoEye-1 of necessarily to NGA or going to be somebody else?

Matt O’Connell

No, each of the customers would have been own qualification, NGA is going to assess the imagery for themselves. So, the answer to your question is we could conceivably sell to someone else before we sell the NGA.

James McIlree – Collins Stewart

Would be bad manners to sell somebody else before NGA?

Matt O’Connell

I don’t think so, I mean the answer is we are going to deliver imagery, the NGA for there evaluation on this vast is they turnaround and expected that meets their quality standards will be selling to them.

Henry Dubois

Yes, NGA did go to pass the capital so, certainly we are focused on NGA but, let’s remember that, they however (inaudible) is latterly sets the standard in terms of acres see around the world, the focus to Google and our interested in seeing staffs, and our staff looks great so, I’m not sure that Google will be as focused on the 59 accuracy and they made as, subscribe we are going to start equipment online. So, technically as Bill said we might sell to somebody else first, we expect from the all the start kind of around same time.

James McIlree – Collins Stewart

Thank you, very much.

Matt O’Connell

Thank you, Jim.

Operator

(Operator instructions). We’ll go next to Simon Solacha [ph] of Harbor Side Capital [ph].

Simon Solacha – Harbor Side Capital

Hi, guys this is John.

Matt O’Connell

Okay.

Simon Solacha – Harbor Side Capital

Most of my question has been answered, I just want to touch for quick on the Google relationships, and you mentioned some kind of contract relationship, now you are buying from thing from them, I didn’t quite understand with that was?

Matt O’Connell

We hired them to help us develop improved search tools, so that people can search our archives and find the image they want. It was a contract, we took Google pro and latterly we presented it at an industry convention of San Diego and got an innovation, because it was so cool.

Simon Solacha – Harbor Side Capital

Okay, great. That’s helpful. Yes, I got all my question and answer.

Matt O’Connell

Great, thanks. Any other questions?

Operator

That appears we have no further questions at this time.

Matt O’Connell

Well thank you all for your support and thanks for calling in and talk you, I guess next quarter. Good bye.

Operator

That does conclude today’s call. We would appreciate your participation. You may disconnect at this time.

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Source: GeoEye, Inc. Q3 2008 Earnings Call Transcript
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