GeoEye: Back on Track?

There’s been a little nervous rustling going on over at GeoEye (NASDAQ: GEOY) in the last week as the company came clean about its delayed filings, as well as some new deals that expand its imagery reseller program, and announced that it delivered its first GeoEye-1 images to Google (NASDAQ: GOOG) for public consumption.

I recently wrote that GeoEye was due for their 2008 full year earnings and filings, and mused about the possible reasons why they had been delayed.

It looks like those concerns have been cleared up, much to the relief I’m sure, of some shareholders that were sweating the silence.

On top of that, GeoEye then rolled out several announcements this week concerning their imagery reseller program across the globe with various resellers, and ended the week announcing their deal with Google has now come full circle.

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.

GeoEye operates in what in essence is a duopoly with only one other U.S. competitor, DigitalGlobe (NYSE: DGI), and just recently launched and certified their latest satellite, GeoEye-1, which is the most accurate and detailed commercial imagery satellite available today.

Want more?

• Read my latest earnings preview here.
• OR: read my latest buy recommendation here.
• OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.
• OR: Read my latest update on the company’s Q3/2008 earnings release and conference call here.

GeoEye Delays SEC Filings, Earnings Release

Let’s start with the most important news first as far as we are concerned.

On March 18th GeoEye announced that they have filed for an extension with the SEC to delay the filings of their annual 10-k report, as well as their financials because of some accounting irregularities that have been going on for quite some time.

In fact, GeoEye let their CFO go late last year when these issues started to surface.

It looks like they still haven’t gotten a handle on them.

Without going into too much detail that will bore most to tears, GeoEye is basically moving around some of their accounting that upon further review, was causing some of their sales, earnings, and other categories to be incorrectly reported in one way or another.

Here’s a quick rundown of some of the impact this has on 2006 and 2007.

• Earnings from operations (2006): Previously reported: $43.22 million, Revised: $42.03 million
• Net Earnings (2006): Previously reported: $3.72 million, Revised: $1.21 million
• Diluted EPS (2006): Previously reported: $.20, Revised: $.07
• Earnings from operations (2007): Previously reported: $80.31 million, Revised: $79.18 million
• Net Earnings (2007): Previously reported: $30.75 million, Revised: $27.71 million
• Diluted EPS (2007): Previously reported: $1.55, Revised: $1.40

Like I said, the reasons for these revisions are many, but the bottom line for us is that this is all in the past, and doesn’t really affect what’s going on at GeoEye one way or another from here on out.

In addition, the revisions were minor and don’t really deserve much attention.

All that happened was that some categories of income, profit, and expenses were improperly categorized, and needed to be amended properly and therefore, the older financial statements redone to reflect this.

I can only hope that GeoEye finally got a full handle on their financial picture and internal reporting, and that these sorts of delays and restatements won’t be happening anymore.

Finally, because of the extension and delay in filing their annual report, GeoEye’s earnings release and analyst conference call will most likely be held sometime before April 1st, as that is the last day of the extension, and according to GeoEye, they should have everything restated and up-to-date before then.

GeoEye Increases Reach of GeoEye-1 Imagery

Reseller contracts ensure consistent availability of imagery

GeoEye-1

Also this week GeoEye announced that they have signed several imagery reseller deals with partners in China, the Middle East, Turkey and Russia to ensure that their GeoEye-1 imagery will be fully utilized and distributed on GeoEye’s behalf.

These deals also seem to imply that GeoEye’s partners will also resell value added services, such as image manipulation and other special enhancements.

The first deal was an extension of a deal that GeoEye already had in place with Beijing Earth Observation, Inc. (BEO), located in Beijing and owned by Eastdawn Group.

BEO has been GeoEye’s exclusive master reseller in China since April 2007 for its IKONOS high-resolution products and value-added solutions.

BEO and GeoEye have entered in an agreement appointing BEO as the exclusive master reseller in China for GeoEye-1 imagery and value added services.

The second deal was with a company called Space Imaging Middle East, located in Dubai, United Arab Emirates.

Space Imaging Middle East renewed its IKONOS Regional Affiliate Agreement and signed a new agreement to become an authorized reseller of GeoEye-1 imagery and products in Dubai and the Middle East.

Space Imaging Middle East has been GeoEye’s partner and Regional Affiliate for IKONOS imagery collection and distribution since January 2000.

Finally, GeoEye announced a deal with INTA Spaceturk, located in Ankara, Turkey, and a subsidiary of Cukurova Group

INTA signed an agreement on Feb. 27, 2009 to become an authorized reseller of IKONOS and GeoEye-1 imagery and products.

INTA Spaceturk has the exclusive rights to sell IKONOS and GeoEye-1 imagery in Turkey, Georgia and Azerbaijan and has been GeoEye’s partner and regional affiliate since 2001.

Also, in the same press release, GeoEye made a quick note that they have also signed an agreement with seven new non-exclusive resellers in Russia to sell IKONOS and GeoEye-1 imagery in that country.

Bottom line: These are all positive developments and follow along with what GeoEye’s management told us in the past that there were many resellers ready to commit to selling GeoEye-1 imagery after that imagery was fully approved by the NGA.

Now that that domino has fallen, the rest of these deals are taking shape, and GeoEye is beginning to actually produce lots of usable imagery, and make lots of high margin revenue.

Last But Not Least: Google

Exclusive GeoEye-1 partnership begins

Also this week, GeoEye announced that Google (GOOG) has begun to incorporate GeoEye-1 imagery under their exclusive deal announced late last year, for GeoEye-1 imagery to be used in Google Earth, Maps, etc.

Here’s the link where you can see some of the spectacular images already collected.

–> click here

Google Earth image of Mount Fuji.

If you haven’t already looked at Google Earth and these images, they are amazing, and the ability to zoom in and go from location to location is breathtaking.

It will more than likely take years for Google to gather all the imagery that they want, but that’s good news for GeoEye, as it means that they will always have a hungry customer that will want new images for the foreseeable future.

Bottom Line

GeoEye Back on Track?

It’s not that GeoEye wasn’t on track, but management’s persistent silence and potential issues within the company are never a good thing to unsuspecting investors.

The flurry of news that was bestowed upon us this week reflects GeoEye’s acknowledgment that they were behind not only in their SEC and earnings filings, and by extension behind in their responsibility with shareholders, but also that GeoEye wasn’t doing a good enough job communicating what’s going on within the company.

All of these announcements, including the restatement of earnings from past years, assuages many of the fears and doubts that were starting to creep into investor’s minds as to what the heck is going on.

I think we’ll get much more clarity on everything when GeoEye finally does report earnings sometime within the next couple of weeks.

Comments

[Joe Public]

I wouldn't call downward revisions of 13 and 15 cents, respectively, to diluted EPS "minor". That said, I agree that the future is what matters.

2009 Mar 23 11:42 AM

[Maven12]

I wonder about the statement: <s><q>"Like I said, the reasons for these revisions are many, but the bottom line for us is that this is all in the past, and doesn’t really affect what’s going on at GeoEye one way or another from here on out.<s/><q/>

They had to move some capitalized items to expense which reduces capital (but may increase return on equity). The effect on the future is likely to be minor, but <u>could<u/> have an effect in the future, else why adjust them?

2009 Mar 23 12:06 PM

[Chris Fernandez]

Sure, but these are all very minor adjustments.

What matters is how things looked at the end of 2008, and more importantly for us, now that GeoEye-1 is fully operational, and providing usable imagery, what are the numbers looking like as we speak?

Also, today GeoEye announced an expansion of their MJ Harden subsidiary which I feel is good news and compliments their satellite operations well.

Chris

2009 Mar 24 01:45 AM

[LRudy]

How did you come up with April 1 as the new due date. I count 15 days from the original due date of March 16 and come up with March 31. Either way, today is the 31st and not a peep from GeoEye on when they will have the call. As expected they are playing this close mouthed and doing damage to the small amount of credibility they have left.

By the way, any word on a new CFO? That issue is beginning to trouble me.

2009 Mar 31 10:30 AM

[Jim H.]

As someone very familiar with the technology and industry I found both yours and Kramer's analysis faulty. Let me first disclose I am not invested in either company stock.

Kramer said several times in his bit on DG that they are "catching-up" with GeoEye. This isn't the case at all. GeoEye has two high resolution satellites now on orbit (IKONOS & GEOEYE-1) while DG is launching its 3rd this summer (QuickBird, WorldView-1 & WorldView-2).

IKONOS is LONG past its mission and design life. For those non-technical folks it is like a nearly blind three legged dog hoping along while their new satellite (GeoEye-1) is already in trouble. Hardly a place where I would want to put money.

GeoEye doesn't have a reliable satellite provider. IKONOS was built by Lockheed Martin which lost millions before selling out its company Space Imaging to GeoEye along with the crippled asset IKONOS.

GD built the now flawed GeoEye-1. The instrument was built by ITT and the satellite bus (platform) by a company recently acquired by GD named Spectrum-Astro in Arizona.

Rumor in the industry is that GD lost $100 million on the project and given the liability not interested in trying it again (this was their first high resolution imaging satellite). GeoEye's former satellites were built by Orbital Sciences who they sued when they went bankrupt under their previous name of OrbImage.

Now did you think I like DG? It is OK but their soon to be launched satellite is carrying a nearly identical payload (camera) as the GeoEye-1 satellite that has problems. They were reported in Space News (industry publication) as saying it is different and don't expect the same problems.

Guys, the problem with space is the only problems you can fix on orbit are software errors. All the hardware is beyond reach and no matter how minor the problem you cannot tighten a screw, re-clean a part or even replace a minor welding problem once it is launched at some 800 kilometer above the earth.

Look at their HARDWARE SUPPLIERS. Buying something for space from any company that is building that system for the first time is terribly riskier than you can imagine. If I did invest, my money would be on DG (DigitalGlobe) given their solid track record, good business ethics and SUPPLIER who knows satellites better than most anyone - Ball Brothers Aerospace.

2009 May 15 09:42 PM

[Jim H.]

P.S. to previous post -

I say Ball Brothers because they build remote sensing satellites while most companies in the industry can only build weather and communication satellites.

The capability is limited to less than 5 companies most of whom charge over $ 1 billion to build such a system. Since 100% of production and thus revenue relies on the quality of the space asset - investors need to look more carefully at the space assets of the company. Its not like buying the wrong truck in a trucking company or aircraft in the airline industry. Once you spend your money and launch a system you are committed to that solution.

Therefore, GeoEye will be in deep trouble if they cannot find a reliable supplier or get their current "first model" from General Dynamics to work the way it was intended to in the design phase.

2009 May 15 10:10 PM

[Chris Fernandez]

Jim H,

I would like to point out a few errors in your own assessments of GEOY vs. DGI.

First off, if you look closely, you will notice that DGI's satellites that are currently on par with GeoEye are for Black and White imagery only.

Their newest one will make them on par with GEOY in terms of color vs. color resolution, but until that happens, GeoEye has the advantage.

It is true that IKONOS is on its last legs, but until it dies, it provides free revenue, as GeoEye can service all of their customers via GeoEye-1, so anything IKONOS delivers is bonus, and free cash flow.

As for the faulty equipment, it is what it is at this point, and now we have to look at the investment thesis from this point forward.

As I have stated multiple times on my blog, and Twitter feed, GeoEye is looking shaky from a technical perspective, with news to back up the weakness, and I am ready to sell the shares if it breaks below certain key areas.

Risk is one thing, but unwarranted risk is quite another. I plan on protecting my gains in GEOY and letting the satellite malfunction play itself out from the sidelines if it comes to that.

Chris

2009 May 18 07:14 PM

[Jim H.]

With all due respect there are no errors in what I provided you.

Google Earth imagery today is mostly COLOR images from QuickBird (DigitalGlobe's satellite) that is clearly not black and white. That satellite has a resolution of 0.62 meters from an off-axis camera which means it has a higher MTF (more light and better clarity) than GeoEye-1's on-access camera.

DigitalGlobe's second satellite on orbit is WorldView-1. While it is panchromatic (black and white) it was chosen above GeoEye-1 by the U.S. Government to fund first in their NextView program. Why?

Because it has much greater agility (angular velocity) than GeoEye-1. WorldView-1 carries Control Moment Gyros (CMG's) which allow it to image at least 1/3 more area by square kilometers than the much slower GeoEye-1.

The U.S. Government doesn't care so much about color but instead speed and targets imaged. If you look back at the press statements by Bill Schuster (COO of GeoEye) he said they are having problems producing color images on GeoEye-1 so it impacts only their commercial not government contracts.

The U.S. Government will want to capture 100 targets over Iraq and not only say 30-40 by GeoEye-1. The differences in systems that use Control Moment Gyros (CMG) to the older technology of Reaction Wheels is huge and the U.S. Government prefers speed over color.

That means GeoEye can sell its black and white images to the U.S. Government but they collect approximately 1/3 less imaging targets in a single pass thus less revenue than DigitalGlobe for their government contracts on every pass and there are 14 orbits per day at their relative altitudes.

GeoEye is claiming their system is 0.42 meters resolution while the QuickBird is 0.62 meters resolution and WorldView-1 is 0.50 meters resolution. Ask any imagery analyst in the world and they will tell you one cannot distinguish such slight differences in resolution by looking at the image. However, the DigitalGlobe satellites have a higher MTF (due to telescope design and more light to the aperture) thus providing more detail.

DigitalGlobe's new satellite to launch this summer (WorldView-2) will be the clear industry leader by far. It has 8 bands multi-spectral (color) instead of GeoEye's 4 bands. Like WorldView-1 it uses CMG's for agility not like GeoEye-1's old fashioned slow reaction wheels.

Consider that today DigitalGlobe can collect and refresh over 1 million square kilometers per day. After their next system is launched it alone can likely collect more than both the GeoEye current satellites combined. That is just one satellite in their constellation that will soon be 3.

It is also odd that you somehow subtract value from DG because 1 in 3 of their systems is all black and white. GeoEye's only fully functioning satellite they admit is having problems producing color and a replacement satellite is at least 3 years away.

For me its easy. A company with three fully redundant and functioning systems where two are color and two have superior agility and even greater downlink rates etc....compared to GeoEye's one over sold and not working properly GeoEye-1 and the oldest system up there now operating on limited scheduled IKONOS.

Lastly, consider DigitalGlobe has two functioning and one soon to launch systems from the same company that just built the new Hubble Telescope upgrades while GeoEye 's problem new system is the first of its kind ever built by Spectrum Astro (now part of GD) so there is no proven heritage of their system design lasting in space.

My hat is off to GeoEye for their superior investor relations and PR spins. For my money I wouldn't even take a bet they are in business three years from now as the risk is too high. DigitalGlobe also has risks but nothing compared to their much junior performing competitor GeoEye.

2009 May 21 10:47 PM

[Chris Fernandez]

Hey Jim,

Very valid points, but in the grand scheme of things, the government contracts will be the same regardless, and GeoEye and DGI's revenues will virtually match eachother, so in the end, the points are moot as far as the pure numbers go.

Also, you are failing to take into account that satellite launches are very fragile things, and not only is DGI's satellite likely to be pushed back as they always tend to be, but something can go catastrophically wrong with the launch, check out, calibration, and orbit, all real risks right now as the satellite is not a sure thing, as GEOY's already is.

Now as for the dynamics of imagery collection, as well as how much land mass can be scanned, that is true that DGI has superior capabilities, but here again you failed to address GeoEye's imagery processing capabilities which blow DGI out of the water.

They are image agnostic, and are able to parse and format imagery from any vendor/source not just their own, and are expanding this unit by 120 staff members.

Lastly, I addressed the MJ Harden division that also expanded on purchased a new aircraft and camera that you failed to address as well.

Admittedly, this division is a small portion of sales, but if you add up the increased imagery parsing capabilities as well as increased MJ Harden order flow, and you get a nicely diversified business.

I just actually sold my GeoEye position today as a result of uncertainty with the imagery problems with GeoEye-1, as well as falling stock price, and will look to get in at a later time.

Chris

2009 May 22 01:25 AM