GeoEye: 10 Thoughts on What's Going On

Jan.29.09 | About: GeoEye, Inc. (GEOY)

As a GeoEye (NASDAQ: GEOY) shareholder and investor, I am disappointed but not surprised by the delay of GeoEye-1’s latest imagery and certification via the National Geospatial-Intelligence Agency (NGA).

One thing is certain, if these images aren’t approved, and approved soon, this year’s investment thesis for shares of GeoEye goes down the toilet in a hurry.

Here are 10 thoughts on GeoEye as of right now.

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GeoEye LogoGeoEye 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.

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10 Thoughts On GeoEye

1) How far away are we from NGA certification?

It seems that lately, ever single press release issued by GeoEye contains the following line: “The satellite is currently in its final stages of check-out and calibration.”

That was actually quoted from a recent press release concerning a wonderful new poster being offered by GeoEye of the presidential inauguration taken from space, for only $29.99!

Woohoo!

How bout some updates on the “final stages of check-out…”?

This is probably the 10th press release that has had that line or a similar line stating that something is imminent…for the last 3 months.

So the real question becomes: how far away are we REALLY, from NGA certification? Are we talking weeks, or months?

If it’s the latter, GeoEye had better issue an honest and forthright press release ASAP.

2) Why has the imagery certification taken this long?

That’s the million dollar question.

It seems that GeoEye did not foresee the problems with the software inside the satellite not being congruent with what they and the NGA are looking for in terms of results and imagery.

As we speak, a high priced programmer is rewriting the code from scratch for the satellite for this imagery or particular set of instructions or processes that makes them germane to the NGA.

Obviously GeoEye-1 has been taking beautiful images for months now, as evidenced by the widespread treatment and press coverage that GeoEye received as a result of their presidential snapshots, but the question remains, why is the imagery certification taking this long?

Shouldn’t GeoEye put out some type of press release that is less cryptic than what they have already issued?

3) What impact has this had on GeoEye’s business?

It’s probably not a good impact that’s for sure.

We’ll find out soon enough as GeoEye will be releasing Q4/2008 and full year 2008 earnings sometime in the next few weeks.

I would not expect the whole of 2008 or the 4th quarter to be pretty at all, but we did see vast improvements in margins in Q3/2008, so I at least look for that to continue but on a lower revenue base.

Not getting the intended revenue stream from GeoEye-1 that we have all been counting on from no later than January of this year, is going to seriously affect GeoEye’s revenues, margins, and our investment thesis.

I would look for a major impact to GeoEye’s top and bottom line for the first quarter of 2009 as well even if the imagery was approved tomorrow.

4) What about those deals that GeoEye announced recently with resale partners?

In October, GeoEye announced a deal with Italy’s Telespazio appointing the company as GeoEye’s Commercial Regional Affiliate for the region of Europe and North Africa.

Then in January, GeoEye announced a similar deal with the Centre for Remote Imaging, Sensing and Processing (CRISP) at the National University of Singapore to deliver imagery in the Southeast Asian region.

This was an extension of a previous relationship that GeoEye had in place with CRISP to resell IKONOS imagery.

So do these deals mean that GeoEye thinks it’s a matter of if not when the NGA certifies GeoEye-1’s imagery?

It’s tough to say because in their announcements, GeoEye made no mention of contingencies, and if the deals were predicated on whether or not GeoEye-1 was fully operational and the imagery certified by the NGA.

The deals definitely make sense for both GeoEye and their partners, and make the certification of that imagery look favorable, but again, make no mention of what happens if the imagery is not certified by the NGA.

5) So what happens if GeoEye-1’s imagery is NOT certified by the NGA?

Well, it’s my guess that we’re already seeing what happens if the imagery is not certified, as obviously, the imagery has not yet been certified, and as a result, GeoEye has not been able to sell any imagery to anyone, or at least hasn’t announced that they have.

What remains to be seen, and what I hope to get more clarity on, is whether or not GeoEye can sell imagery to other partners such as Telespazio and Google (NASDAQ: GOOG) even if the imagery has not been certified yet or ever, by the NGA.

If the imagery is not certified, you can rest assured that GeoEye would do whatever was in their power to make sure it eventually was certified, and failing that, squeeze every last bit of revenue that they possibly could from GeoEye-1 with the imagery that it was producing, sans approval from the NGA.

6) What’s the realistic time frame for certification now?

I honestly don’t know, and to be honest, neither does GeoEye’s management.

If the certification were imminent, you can bet your last stock option that GeoEye’s management would have put out some press releases that were a lot less cryptic in their intent and meaning.

We’re now 1 month into the new year, and almost 3 months or so behind schedule when GeoEye first launched GeoEye-1 and they boldly proclaimed that the satellite would be operational and have approved imagery most likely within 45-60 days, which we’ve blown by and then some.

On the last conference call, management admitted that their timetable may have been overly optimistic.

No kidding.

My guess is that we’re going to be bumping up against the end of Q1/2009 if not later before the imagery is certified.

I hope I am wrong.

7) So what are GeoEye’s partners doing?

What they can do, which is to say, nothing.

Current agreements are in place to utilize GeoEye’s other two satellites that are still in orbit and operational: IKONOS and Orbview-2.

IKONOS is still providing reliable and usable imagery, and OrbView-2 while an older generation satellite, is still filling its niche when it comes to the fishing industry and charting water temperature patterns, and other data related to helping fisherman yield the best catches when they are out at sea.

Even GeoEye-1 is providing imagery, as evidenced by the presidential inauguration images that were passed around to various media outlets and created a buzz around GeoEye’s technology.

So while the NGA hasn’t signed off on GeoEye-1’s imagery yet, GeoEye is still using the satellite to collect various images.

I don’t yet know if any of GeoEye’s service partners and resellers are able, or have been granted access to, GeoEye-1’s imagery, but we’ll find out soon enough on GeoEye’s conference call that is coming up in a few weeks.

(8) Has management been incompetent, or is this just bad luck?

Probably a little of both.

I’m sure they didn’t foresee the potential problems that they have been running into on such a large scale, but they should have dealt with it much better than they have, and had contingencies in place for such occurrences.

Don’t get me wrong, I’m sure that GeoEye’s management team has been doing the most they possibly can to assuage concerns, and get things approved as quickly as possible, but that being said, it’s also clear that they have been lacking in their track record of communication with Wall Street and the general public, and while attempts were made to clean that up recently, it seems that GeoEye has fallen back into those same habits and patterns of non-communication.

I already mentioned the cryptic one-liners that GeoEye often inserts at the end of their press releases stating that the imagery approval is forthcoming or some other nonsense, but they have been issuing the same message for months now, so I guess to them soon means not really that soon at all.

Either GeoEye will get the approval that they need from the NGA shortly before their next conference call, or else they better take a nice long time to explain on that call what’s going on, why things are being delayed this much, and what we can expect as shareholders going forward over the next few months in regards to this whole process.

GeoEye’s very credibility depends on this.

They are at a critical juncture now, and management needs to step up to the plate and make sure they communicate with shareholders and Wall Street.

I’m not asking them to hold our hands and pander to investors, but rather inform us, enlighten us and explain to us what the heck is going on, in detail.

9) Can we trust anything that GeoEye says from here on out?

At this point, it’s a mixed bag.

A few weeks ago I was touting the fact that insiders at GeoEye were buying the stock in fairly consequential amounts, but it also turns out, so to were some insiders selling in those same consequential amounts.

For instance COO William (Bill) Schuster sold 6,000 shares of GeoEye stock at around $28 per share on 9-9-08.

A few weeks later a director, William W Sprague sold 5,000 shares at around $23.56 on 9-25-08.

Recently, board member James A Abrahamson sold 6,000 shares at around $17.70 per share on 12-5-08.

And finally, Henry Dubois, the recently resigned CFO who no longer works for the company in an active role, sold 3,000 shares (he still holds about 14,000) on 12-19-08 for about $14.90 each, almost the lowest price the stock touched last year.

Now there has been some recent insider buying as well by the CEO, and 2 other board members for a total purchase of about 14,000 shares, so the sales are offset a bit by the insider buying, and to be fair, there have not been any insider sales, aside from those of the CFO Henry Dubois, for almost 2 months.

So the old adage “actions speak louder than words” might have some credence here, but net-net, I feel that the buying and selling aren’t anything out of the ordinary, and don’t particularly dissuade me from owning the stock, and give me a slightly better feeling when thinking about additional purchases in the stock since the CEO and 2 other board members have been purchasing shares lately on the open market.

As I stated before, buying stock is a bullish sign provided the buys are skewed within a certain range.

GeoEye’s recent buying activity is borderline bullish, but does speak to a certain confidence that management has in GeoEye-1 getting its imagery approved.

I’ll put it another way.

People sell stock for a bunch of different reasons.

The fact that there is some fairly significant insider buying lately signals that there is some faith and confidence being shared by those on the inside that something positive is going to be happening within the company sometime relatively soon.

I would rather see insiders buying than selling any day of the week.

10) So what should we do now?

Everything remains for now, on track with my original investment thesis, albeit slightly to moderately delayed.

Again, GeoEye carries a higher risk/reward premium from other stocks, but I believe we are getting shares now at a significant discount to their true value, and once again, GeoEye remains my number one pick right now barring any unforeseen events or a change in the investing thesis.

I didn’t plan on the long delays both in the launch and calibration and check-out of GeoEye-1, but now that we are here, we need to look past all of that and ask ourselves what’s the most realistic scenario for GeoEye as a company, and what odds and risks we are willing to take in owning those scenarios.

At this time, I feel that the approval of the NGA imagery will be delayed, and perhaps significantly so, but I feel that it is forthcoming, now we’re stuck on trying to pin down exactly when.

At the same time, it will be incumbent upon management to relay what is happening in an acceptable and understandable manner to Wall Street and all of us as shareholders, which I expect them to do either before, or on their next conference call as the delay will be something on everyone’s mind and be the most important question being asked of management on that conference call.

In the mean time, while shares have held steady, we just have to hang tight, and keep our eyes and ears peeled for the latest information.