DigitalGlobe Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 7.13 | About: DigitalGlobe, Inc. (DGI)

DigitalGlobe (NYSE:DGI)

Q1 2013 Earnings Call

May 07, 2013 5:00 pm ET

Executives

David Banks - Vice President of Investor Relations

Jeffrey R. Tarr - Chief Executive Officer, President and Director

Yancey L. Spruill - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Peter P. Appert - Piper Jaffray Companies, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Andrea James - Dougherty & Company LLC, Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Jonathan Raviv

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Chris Quilty - Raymond James & Associates, Inc., Research Division

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Operator

Good afternoon. Welcome to DigitalGlobe First Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and is also being broadcast live over the Internet at www.digitalglobe.com. In addition, there are supplemental materials that will be referenced on today's call available at the company's website. To access those materials, go to Investor Relations section of the company's website at www.digitalglobe.com.

I will now turn the call over to David Banks, Investor Relations for DigitalGlobe.

David Banks

Thank you, Stephanie. Good afternoon, everyone, and thanks for joining our call today. With me on the call are Jeff Tarr, President and Chief Executive Officer; and Yancey Spruill, Chief Financial Officer.

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Any forward-looking statements are based upon our historical performance and our current plans, estimates and expectations. We may make forward-looking statements about, among other matters, revenue and revenue growth, adjusted EBITDA and adjusted EBITDA margin, earnings per share, cash flow, sales pipelines and strategic initiatives. Inclusion of this forward-looking information should not be regarded as representation by us that we will achieve future plans, estimates or expectations.

Such forward-looking statements are subject to various risks and uncertainties and assumptions. A number of important factors could cause actual results or performance to differ materially from those indicated by such forward-looking statements. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect occurrence of unanticipated events. Please refer to our earnings release, which can be found at our website at www.digitalglobe.com, for a discussion of these risk factors.

You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed during this call and for a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional, meaningful comparisons between current results and prior reported results, and as a basis for planning and forecasting for future periods. For your convenience, we have posted slides on the Investor Relations section of our website at www.digitalglobe.com to give you an overview of the information we will cover today.

During the question and answer session, please limit your questions to one plus a follow-up and then please re-enter the queue if you have other follow-up questions. With that, I'll turn it over to Jeff.

Jeffrey R. Tarr

Thanks, David, and good afternoon, everyone. Before discussing our financial results and updating you on our 4 strategic focus areas, I first like to share a few highlights of our combination with GeoEye, which closed at the end of January. I'm proud of our combined team and what we've accomplished. Importantly, we are ahead of schedule in executing our integration plan. We've already removed $60 million of annualized expense from our P&L, including $35 million of operating expense savings and a $26 million reduction in financing costs. Taken together, with anticipated capital expense savings, we are on track to achieve more than $1.8 billion of synergies on a net present value basis and return to 50% EBITDA margins in the second half of next year.

Strategically, we positioned DigitalGlobe as the worldwide leader in satellite imagery and information. And as a result, we expect to continue to benefit from the rapidly growing market for geospatial services. We've assembled the largest and most capable constellation of high-resolution satellites, the deepest and highest-quality imagery archives and the broadest suite of imagery production and analytic capabilities in the world.

We've diversified our revenue across a broad set of customers and geographies, and no longer derived the majority of our revenue from the EnhancedView contract. We've sustained strong double-digit growth on the stand-alone business, are building a pipeline of opportunities on our recently added assets and are on track to deliver double-digit revenue growth for the full year.

I'd now like to provide a brief overview of our financial results. Our first quarter reflects our progress executing our integration plan. Yancey will provide greater detail, but I'd like to run through a few important highlights. During the quarter, we grew revenue 47% to $127.6 million. This reflects strong organic growth combined with 2 months of revenue from GeoEye, which we closed on January 31.

EBITDA in the first quarter was $35.9 million, excluding about $67 million of combination-related expenses. This drove an EBITDA margin in the quarter, excluding combination-related expenses, of 28.1%. While not fully reflected in this quarter's EBITDA margin, we've now achieved of 35% of our operating expense synergy target and expects to deliver sequential margin improvement beginning in Q2.

During the quarter, we also grew our 12-month backlog 47% to $498 million, reflecting strong growth from both existing and new customers. These results have only been possible because of our team members around the world and their relentless efforts executing against our 4 strategic focus areas. I'd like to quickly discuss our progress on each of these dimensions.

First, on realizing the full potential of our EnhancedView contract with the U.S. government. We continue to meet the exacting requirements of our largest customer, the National Geospatial-Intelligence Agency or NGA. As the nation's primary source of unclassified, shareable, high-resolution satellite imagery, we were pleased to receive a formal written notification that NGA does not anticipate our EnhancedView Service Level Agreement to be impacted by sequestration. During the quarter, we activated the infrastructure we've been developing since 2010, to tie our operations more closely and security with the U.S. government. This is an important milestone, and is allowing us to support additional mission requirements and a broader set of U.S. government users.

In the quarter, we also benefited from our first full quarter of expanded value-added services under our new Global Enhanced GEOINT Delivery contract or Global-EGD. This service allows a growing number of U.S. government users to access our rapidly processed new imagery and our archive. Global-EGD is also enabling our analytics team to more readily access our imagery and combined with new analytics capability, is positioning us to better support our customers with on-site geospatial intelligence and further differentiate our services from those of our competitors.

Turning to our second strategic focus area, we made significant progress generating profitable customer growth beyond the EnhancedView SLA. In the quarter, we generated diversified commercial revenue of $50.1 million, coincidentally up 50% on a stand-alone basis. To bring more visibility to this important source of growth and our progress diversifying our business, we'll report our Diversified Commercial revenue and future filings in conjunction with our segment reporting change, which Yancey will detail.

We remain on track to bring our newest Direct Access customer online later this year. With the addition of GeoEye's Direct Access customers, we've scaled this business to about $100 million annually, servicing customers in 10 countries around the world, in some cases, with multiple ground terminals. Among international civil customers, growth is strongest in emerging markets, where large land masses and economic development are creating significant demand for our unique capabilities.

For example, in Russia, we're delivering a country-based map of 17 million square kilometers, more than 10% of the Earth's land mass. This is a large-scale effort with a focus on forestry mapping. This customer is benefiting from our unique capability to deliver large areas of highly accurate, high-resolution current imagery. In Brazil, we recently signed a deal with a consortium of engineering firms to aid in a construction and implementation of a transit and expressway development program in support of both the 2014 World Cup and the 2016 Olympics.

In Location Based Services, we continue to expand our business through new customers and growth of existing customers fueled, in some cases, by new service offerings. As an example, this quarter, we expanded a multiyear contract with a major customer in order to provide them a new premium service. This new service enables the rapid selection and processing of imagery sales to most closely match to customer specifications for currency, time of year and visual clarity, into a seamless, cloud-free, color-balanced image of unprecedented quality.

We're also making progress with Other Industry Verticals. I'm especially pleased with our recent successes in oil, gas and power. Signing 5 new accounts in the quarter, where our unique capabilities are being applied to exploration and production, environmental management and asset monitoring. We're also successfully leveraging our analytics capabilities originally developed to serve the U.S. government into this and other verticals. One key win in this quarter was a renewed contract with a major East Coast power company that uses our analytic capabilities to predict and stop copper theft.

One other noteworthy event in the quarter was our acquisition of Tomnod, which offers a unique analytics space crowdsourcing solution. This is one example of how we are able to add value to our imagery through bolt-on acquisitions that will help us expand our capabilities and advance us towards our vision of being the indispensable source of information about our changing planet.

Our third and fourth focus areas, operational excellence and culture of leadership, are each best illustrated in the quarter by the progress we've made related to the combination with GeoEye. On March 15, we communicated to each of our team members their role in the combined company. As to be expected, some were told that we would not have work for them, either immediately or after a period of transition. All of these individuals are professionals of enormous talent, who helped build the business we have today, and I'm grateful for their many contributions.

I'm also very proud of our go-forward team that's rallied together around our purpose, vision and values, and the extraordinary opportunity in front of us. Our SAP sales teams are now unified. Our analytics and imagery capabilities are increasingly integrated, and our IT and operations teams have begun consolidating the many systems we use to operate our business.

Among the actions taken was the decision to consolidate our advanced production capabilities in Colorado, and to close a remote facility that was dedicated to this business. I'm grateful that a core group of professionals in that location have agreed to relocate to Colorado, where we'll be better able to integrate our advanced production capability into our core imagery operations, and thereby deliver greater value to our customers and more easily flex capacity and investment to meet changes in demand. This will also enable us to manage the exit of a low margin contract with GE aviation that came to us through GeoEye, while at the same time, achieving our original margin targets.

Taken together, our progress across our 4 strategic focus areas and our strong alignment behind our purpose, vision and values has enabled us to deliver another strong quarter. As usual, I'll reserve some additional comments for closing, but I'd now like to turn the call over to Yancey for a discussion of our financial results and our guidance.

Yancey L. Spruill

Thanks, Jeff. I, too, am pleased with our results for the quarter. Our team is managing the integration well, as evidenced by the run rate of the synergy savings achieved. 2013 is placing us well on our way to delivering on our long-term growth, margin and free cash flow targets.

We have provided many additional details in an earnings release supplement on the Investor Relations section of our website that will help you with your review of Q1. Revenue for the quarter was $127.6 million, up 47% year-over-year and driven by continued strong organic growth in addition to a partial quarter contribution from GeoEye. Of the $40.6 million of year-over-year revenue growth, 58% was driven organically, while $17 million or 42% was driven by acquired revenue from GeoEye. Recall that the GeoEye contribution included results from February and March only, reflecting the closing date of January 31. The results reflect typical first quarter revenue seasonality trends, as the low quarter for the year, especially when considering we only count 2 months of GeoEye revenue in our results.

You will note in our 10-Q filing that we have moved to a single segment for financial reporting. In line with our focus on delivering EnhancedView success and profitable customer growth beyond the U.S. government, we will report our revenue performance in 2 key groupings: the U.S. Government and Diversified Commercial. Included in U.S. Government are the EnhancedView SLA, value-added services and advanced production, analytics and the amortization of revenue from the NextView contract. Included in Diversified Commercial are Direct Access and international governments, Location Based Services and Other Industry Verticals.

U.S. revenue -- U.S. Government revenue in the quarter with $77.5 million, up 44% over Q1 2012. The largest component of our U.S. Government revenue is from our EnhancedView service level agreement, with revenue of $56.8 million in the quarter, up 28%. We delivered $14.3 million in the quarter from value-added services, up 5x compared with 2012. Growth and value-added was driven by progress with our Global-EGD offering, as well as contributions from GeoEye, principally from analytics. We continue to remain cautious given the current budgeted, U.S. government budget environment, as value-added services are variable and driven by demand and available funds. Finally, amortized revenue from the NextView contract was $6.4 million in the quarter.

Diversified Commercial generated revenue of $50.1 million in the quarter, up 50% and represented 39.3% of our total revenue, up 100 basis points compared with the year-ago period, is a clear demonstration of the progress we are making, generating profitable revenue growth beyond the U.S. Government. Diversified Commercial tends to exhibit more seasonality than U.S. Government, and we would expect this mix to be lowest in Q1 ,which has traditionally been a low point for revenue and see the mix increase over the course of 2013.

Direct Access delivered revenue of $18 million in the quarter, up 41%. Revenue from rest of our Diversified Commercial customers was $32.1 million in the quarter, up 57% year-over-year. And driven primarily from International Civil Governments and among industry verticals. Our next 12-month revenue backlog increased 47% to $498 million, reflecting strong momentum across our business and providing us with solid visibility into a large portion of our revenue over the coming year.

Now on to operating profitability. In Q1, we generated $35.9 million of EBITDA, excluding $66.8 million of combination-related expenses, resulting in a margin of 28.1%. We continue to expect margins to improve each quarter throughout 2013 and into the second half of 2014, when we fully realize the expense synergies associated with the combination. Through the end of March, we have achieved milestones representing just over 35% of the expected $100 million in run rate synergy savings, driven principally by labor savings today.

We continue on track with other critical areas of synergies related to the combination, including consolidation of Remote Ground Terminals, satellite operations, production centers, data centers and financial and other reporting systems. Keep in mind that most of those development projects are underway, but will not produce savings until late this year or early into 2014, as we are able to migrate operations on to a single platform.

Depreciation and amortization was $47.3 million in the quarter, up $18.2 million year-over-year. Additions to depreciation are related primarily to the GeoEye combination and other projects that came online in the first quarter, including our enhanced infrastructure, tying our operations more closely to the U.S. government. The incremental depreciation was for roughly 2/3 of the quarter and therefore, will be proportionately higher in Q2 and then normalize in the periods thereafter.

Stock compensation expense, which is included in both COGS and SG&A, was $10.8 million in the quarter. This is higher than it will be in subsequent quarters due to accelerated vesting of the $6.2 million for the parting executives related to the combination.

Net interest expense was $1.4 million in the quarter, this reflects our quarterly cash interest cost of about $13 million. Approximately 89% of interest was capitalized in the quarter, reflecting a significant amount of assets under construction, including both WorldView-3 and GeoEye-2. Once we place GeoEye-2 in storage, it will reduce the amount of assets under construction and therefore, will reduce the amount of interest we capitalize. Future capitalized interest will be based on -- largely upon the growing WorldView-3 asset balance until it is operational in the second half of 2014.

Tax benefit in the quarter was $19 million with an effective tax rate of 23.9%. Effective tax rate in the quarter was affected by a number of nonrecurring items primarily related to the acquisition of GeoEye. These items won't affect the tax rate for the balance of the year. For 2013, we expect an approximate 33% effective tax rate before certain discrete tax items, and we do not expect to pay significant cash taxes in the year.

Net income and EPS were impacted by combination-related expenses, including expenses to close the transaction of $20.8 million in advisory fees and $17.8 million related to the debt refinancing. Restructuring and other integration-related expenses of $28.2 million in the quarter, we also incurred $1.2 million of capitalized restructuring cost in the quarter.

We capitalized a total of $37.8 million related to the combination in the quarter, related primarily to cost associated with the new debt. Our fully diluted share count for the quarter was $64 million, reflecting a partial quarter for the close of the combination. We expect shares to normalize for the balance of the year in line with our end of quarter share comp of approximately $74.0 million.

To summarize, items related to this combination accounted for $0.77 of impact to the quarter's reported loss of $0.96 per share.

Our free cash flow and capital spending. Free cash flow was negative $96.9 million in the quarter, not including a loss on extinguishment of debt. This resulted for the many spending items to close the transaction, as well as the combined operations and includes CapEx, spending of $70.3 million and capitalized interest of $10.9 million in the quarter. We expect free cash flow to be negative in the near term, as we invest to realize synergies in complete GeoEye-2. We expect free cash flow to improve later in the year.

Before updating our outlook for the year, I'd like to update the context I provided last quarter for our 2012 pro forma revenue to serve as the basis for comparing to our 2013 revenue growth. In our supplement, you will find a chart showing full year 2012 pro forma revenue for GeoEye that excludes the legacy EnhancedView SLA and NextView amortized revenue streams. With the 2012 audit complete and making the adjustment for 11 months of 2012 revenue for GeoEye that will align with the 11 months of revenue we will report in 2013, we're adjusting 2012 pro forma revenue for the combined company to $581 million.

Now for our 2013 outlook. We continue to expect revenue in a range of $635 million to $660 million. Though we believe the low end of that range is more likely. This reflects the termination of the contract with GE Aviation within Diversified Commercial, which is contributing to our expectation to be at the lower end of the revenue range. As I mentioned earlier, our Q1 revenue was light this year relative to our historical seasonal contribution, and given the typical 6-month sales cycle on a need to rebuild GeoEye revenue streams, we expect the year-over-year revenue weighting to be higher in the back half of the year and to end 2013 with an even stronger than typical fourth quarter compared to our regular seasonal revenue pattern.

We continue to expect EBITDA margins of approximately 36% for the year, reflecting our commitment to managing the business in line with our outlook for growth and benefiting from synergy realization. Additionally, the contract termination I refer to carried low margins, which though it reduces our revenue outlook this year, it has a positive impact on our margin mix. We continue to expect to spend about $100 million this year related to GeoEye restructuring and integration. While a very small percentage of this was capitalized this quarter, we do expect the amount capitalized to increase as the year progresses, reaching about $30 million of the total $100 million spend in 2013 to combine our 2 companies. We continue to expect $230 million in net capital spending for 2013.

With that, I will now turn the call back to Jeff.

Jeffrey R. Tarr

Thanks, Yancey. As we look ahead to the balance of the year, we are on track to deliver another great year. Our integration is proceeding well, and I'm proud of the results of our talented team members around the world. Our 6 months of detailed planning have enabled a strong start to our integration efforts, and we remain on track to deliver double-digit growth and achieve our targets for both growth and margin. When our integration is complete, approximately 15 months from today, we expect to emerge as a high growth recurring revenue information business that derives half its revenue from diversified commercial sources, delivers EBITDA margins in excess of 50%. It has entered a multiyear period of high conversion of EBITDA to free cash flow, and is well on its way to achieving its vision of being the indispensable source of information about our changing planet.

Operator, I'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Peter Appert with Piper Jaffray

Peter P. Appert - Piper Jaffray Companies, Research Division

So Jeff, I'm trying to make sure I understand why you're anticipating the revenue guidance towards the bottom half of the range, Yancey mentioned specifically the GE contracts. So number one, can you quantify how big that contract was? And then number two, are there any other moving parts that may be causing you to think a little bit more conservatively about the revenues?

Jeffrey R. Tarr

Thanks, Peter. As Yancey mentioned, and as I indicated as well, this contract is the sole reason for the reduction in the revenue guidance range. It explains the entire shift in causing us to view revenue more likely to come in, in the bottom half than the top half. So that should give you a sense of scale of the contract. And as we indicated, it was a low-margin contract, and so we don't expect any impact on our ability to hit our EBITDA target. That's -- our full view of the business is reflected in our guidance. So this is what we see at this point and we feel really good about the balance of the year and our ability to deliver the kind of growth that we anticipated from the revenue base.

Peter P. Appert - Piper Jaffray Companies, Research Division

Then, let's say, a follow-up. In terms of a margin progression for the year, obviously, you've stated clearly expectation of sequential improvement. But it sounded like maybe there'd be a little bit of lumpiness in terms of the revenue progression. So should we assume, therefore, that the margin progression might not be that smooth through the year?

Jeffrey R. Tarr

Yancey, why don't you talk to that? You do have the right idea, Peter, in terms of the top line that we've got strong organic growth that you see in this quarter's results, and we are in the process of rebuilding the revenue on the GeoEye asset base. So that will take a couple of quarters. We're 2 months in and we have about a 6-month average sales cycle in this business. So that's what we're working with. Yancey, can you talk about the margin compression?

Yancey L. Spruill

So as we outlined our guidance a couple of months ago and are reiterating the margins here of 36% x the combination-related expenses, we said that we expected margins to be below the full year 36% target in the first half, and we expected them to be above the 36% target in the second half. That's fairly consistent with what we've seen historically. Obviously, we're very levered to revenue. This year as we have some costs coming out of the system. We will see the benefit of that progress. We're already at a fairly high rate, 2 months into the combination. So the benefit of the synergies during the course of the year, those already realized and those that we'll be ramping in the remaining portion of the year. And then the sequential revenue growth, which we expect this year, although we just -- what we said, is that we expect it to be slightly more back half loaded or more back half loaded because of the dynamics discussed. But the margin progression will be consistent quarter-to-quarter through the year.

Operator

Your next question comes from the line of Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Could you -- if we go through all of this, could you give us a general idea of where you think your cash will end up, Yancey, at the end of the year?

Yancey L. Spruill

Well, what I said was we expect to be free cash flow for the year negative, but a lot of that happened in Q1, obviously, with closing the transaction. And that we would expect, as we complete GeoEye-2 and start to realize revenue growth and the benefit of the synergies and the CapEx starts to ramp down in the second half, that free cash flow will actually moderate. And so we will see a little bit of a dip from Q2. We would expect, from Q1, in the middle of the year, and then we should stabilize. And then as we exit the year, we should growing cash.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

So I mean, somewhere between where you are today and some where north?

Yancey L. Spruill

We should be down somewhat from where we are today and then start to normalize. And then as we exit the year, we should be growing cash.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And then just to touch on restructuring a little bit. It sounds like some of the cost were pulled forward into the first quarter from, maybe, the way you had originally talked about it? And then just related to that, where are you in terms of negotiating your elimination of one launch vehicle from your obligations?

Jeffrey R. Tarr

Let me start on that, and then Yancey can pick it up from there if there's anything to add. With that launch vehicle, as you know, we are rationalizing our satellite constellation. GeoEye-2 is almost complete, we will put it in storage and -- at least that is our plan, our intent and have it as a grounds spare, which derisks the business, allows us to respond to changes and demand and other changes should they occur. So we think that's a terrific asset. Beyond -- like your second question, Howard, on the restructuring charges, Yancey, why don't you take that one?

Yancey L. Spruill

Yes. And just before I answer that, I just want to say the cash spend in the quarter was largely in line with our expectations, so no surprises from our perspective there. In terms of restructuring, I think that's correct. We did, we are ahead on track in terms of the run rate synergies exiting in the quarter. We did accelerate some expense savings, again, largely through labor. So cash expenses is a little bit higher but, obviously, we'll see the tailwind of that -- we're already seeing the tailwind of that, and we'll see it for the balance of the year. As we said a couple of months ago, we expect to spend about $100 million in total cost spending in this calendar year to integrate and combine the companies. $30 million of that is capital. It was expected to be light in the first quarter, that will start to ramp. The balance of $70 million, we said would be evenly paced throughout the year, perhaps a little bit ahead in Q1. But as we mentioned, we're also ahead on the synergies and would expect it to be relatively even or slightly behind the Q1 levels, but not be too spiky throughout the year.

Jeffrey R. Tarr

Howard, when you take all of these together and the fact that we're ahead of pace on the integration of the 2 companies, we feel very good about our ability to complete that 2 expectations within the 6 quarters. And the fact that the rationalization of the constellation is something, which essentially occurs with the strike of a pen, it's simply a decision not to build a constellation to support the 2 companies, but to continue simply to replace the WorldView constellation. That $1.8 billion of synergy is something that we feel great about. I'd also say that the second half of 2014 is something we also feel great about. Because if you look at what happens with cash flow in the second half of 2014, we'll have the restructuring behind us, we'll have the benefit of those cost savings reflected in that 50% EBITDA margin, and we will have completed the construction of both, or essentially completed the construction of both GeoEye-2 and WorldView-3, beginning that period of greatly reduced CapEx. So that is something that we're all looking forward to and we believe is very much on track.

Operator

Your next question comes from the line of Andrea James with Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

So for this first question, I'm just trying to get to a clearer sense on how your end markets are holding up and which you're expanding. Just bear with me, if you take the organic growth, you go from this pro forma 581 in 2012 and I guess, if you go to the bottom end of this year's guidance, you get an incremental $54 million in revenue year-over-year. And if you break that down, I guess, you could say $25 million of that is related to revenue deferral of EnhancedView. And so that leaves about $30 million in real revenue dollars, I guess, or new cash coming in year-over-year that wasn't there last year. And so, I guess, my question is just what revenue buckets are driving that $30 million chunk?

Jeffrey R. Tarr

Well, let me just start and then Yancey might be able to provide a little bit more. But if you look at our business, we've got our U.S. Government business, which is primarily the EnhancedView SLA, but that's about 50% of full year revenue, a little high in the quarter because of the seasonality that Yancey walked through, and that's got growth in it But if you recall, there's a step up in revenue recognition, but there's not -- but it's a modest. There's not a significant step up in the SLA until next year. That leaves the balance of our business about 40%, which is International Governments, about 25%, and then LBS and Other Verticals split that remaining 15%, about 50-50. And those are double-digit growth businesses. We feel very good about the growth we're seeing, both as we look at the backlog and the pipeline.

Yancey L. Spruill

The only thing I would add is the International Civil Govs and the LBS, which are driving growth. Other Industry Verticals have high growth rates, but are relatively small as individual components. But as you look at our backlog growth in the 10-Q, significant percentage of the growth is coming from those areas. And so to do $50 million in Commercial business in the quarter was as big as a commercial business we had when we went public 4 years ago. So I think we are making progress, those smaller numbers are becoming bigger and there's a lot more visibility that those numbers when you think about them coming through the backlog, as opposed to being generated in quarter, more project-like in the past and more recurring today.

Jeffrey R. Tarr

And I should add the one thing to keep in mind also is that, that GE contract does sit inside of Diversified Commercial. So we will have to overcome that. But again, that was a negligible margin contract and so it does not impact our margins, our DCF or expectations for ROIC.

Andrea James - Dougherty & Company LLC, Research Division

And just one more, just sticking to revenue. Does your $14 million in value-added in the quarter include DigitalGlobe analytics? And I guess, if so, should we assume that line growth in Q2 because it would only have 2 months of analytics contribution in Q1?

Yancey L. Spruill

Yes. It does include analytics for 2 months. And so we would have 3 months or full quarter contribution in Q2, which will continue to generate growth for the company.

Operator

Your next question comes from the line of Paul Coster with JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

The growth forecast that you have for the full year, that includes the addition of a new DAP customer in the fourth quarter still does it? And in answering it, can you just sort of give us a sense of how many DAP customers you now have if you also include those kind of being folded in from GeoEye?

Jeffrey R. Tarr

Thanks, Paul. Yes, it does include that new DAP coming online in the fourth quarter. And the way we're looking at -- the best way to count our combined DAP business going forward is by number of countries, because there are our some countries where both GeoEye and DigitalGlobe had a presence, had a contract. Typically, with different agencies, so in one case it might be that we had one with the Defense Department and GeoEye had one with an Intel, for example, so those continue. So rather than counting DAPs, it's easier for us to count how many countries we have a DAP relationship with and that number is 10.

Paul Coster - JP Morgan Chase & Co, Research Division

Got it. And then a bit of a nerdy question here. On the interest expense side, Yancey, can you just talk us through again what's going to happen there once the GeoEye-2 satellite is warehoused? And also, looking even further forward, what happens, again, to interest expense when you get out to the end of '14 and WorldView satellite launches?

Yancey L. Spruill

So in the simplest way to explain how we capitalize interest, you take the accumulated assets under construction, which are largely dominated by GeoEye-2 and WorldView-3, and you divide that by the outstanding debt balance. And that will be the amount that we would capitalize, which is about 90% -- just under 90% in the quarter. That will grow this quarter as we make progress on construction of those assets. And so we'll be very near to capitalizing all of the interest. And then when the assets comes out of the -- when GeoEye-2 goes into storage, we won't depreciate it, but we also won't be under construction. And so that will reduce the amount of assets under construction, approximately in the area of $650 million, $660 million. And then the remaining balance, which will largely be Worldview-3, will then be the amount of percentage that we will offset our capitalized interest. And that will grow, as WorldView-3 becomes complete to the middle of next year. And then when that's launched and in service, we will effectively expense most of our interest in the second half of middle of 2014 until we begin major construction of a satellite, which is many, many years down the road as we, obviously, have a spare satellite on the ground. And we'll not start ramping that spend for several years.

Paul Coster - JP Morgan Chase & Co, Research Division

Can you just give us what the interest expense might be in total this year? And then perhaps, moving forward, run rate post-WorldView?

Yancey L. Spruill

Well, this is pretty significant -- I mentioned 89% this quarter, the amount we capitalize in Q1, that's going to go up in Q2. And then as we bring that asset out of service, which is approximately 55% or so, 60% of the assets under construction, we'll then -- so that will have a step down in capitalized interest to step up in interest expense through the period of middle of next year until we launch WorldView-3.

Paul Coster - JP Morgan Chase & Co, Research Division

You can't give us an interest amounts?.

Yancey L. Spruill

Our total interest is about $52 million on a run rate basis for the debt.

Operator

Your next question comes from the line of Jason Gursky with Citi.

Jonathan Raviv

It's actually Jon Raviv in for Jason. I was wondering if you could talk a little bit more about the assurances you're getting from NGA. You brought that up in the prepared remarks, but I just need a few more details than in terms of -- for this year and also for the go forward?

Jeffrey R. Tarr

Well, the assurance that we have, and if you can call it that, I mean insurance is -- there's no guarantees with the U.S. government but we did receive an official letter from the NGA, which was exactly as I stated in my remarks, that the NGA does not expect any impact to our service level agreement as a result of sequestration. So that's consistent with the expectations that we've shared in the past and that we don't see anything to give us a reason to think otherwise, especially given the critical roles that we play. Looking forward, obviously, this contract is subject to appropriations, but we're now entering, I think, we'll will be entering our 14th or 15th year of the NGA, honoring the full letter and spirit of our agreement with the NGA. Next year, there is a planned step up. That step up delivers a tremendous value to the U.S. taxpayer because essentially, for an incremental $50 million, the U.S. government gets access to about half the capacity on WorldView-3. That is a truly compelling value proposition in the scheme of what overhead -- what overhead or observation resources typically cost. So we feel very good about the future and our recently completed initiative to more deeply integrate with the customer and the rollout of Global-EGD, which allows us to serve end users directly across the U.S. government is really a terrific place to be. We feel very good about the future.

Jonathan Raviv

Okay. And then just a quick follow-up on the other side of the house on commercial. You talked about exiting the GE Aviation due to that being a low margin. Is there something specific to that contract, either it be broken or poorly negotiated that made the low margin or are you seeing some more commercial opportunities that are lower margin and that could imply some negative mix shift over the long run?

Jeffrey R. Tarr

I would say and actually disclosing that contract that we've gone beyond what we typically do and what most companies would do, but given that it fully explains the shift in where we expect to fall in our guidance range, we felt that was appropriate to share. I think it's -- I put in an exclamation point on the fact that because it was a low-margin contract, we don't see it impacting our DCF, our view on ROIC or any of the other metrics that we use to value our business, at least, from where we sit.

Operator

Your next question comes from the line of Josephine Millward with Benchmark Company.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

I wanted to ask you about the GeoEye-2. Would you consider selling this satellite rather than putting it in storage?

Jeffrey R. Tarr

Well, let me just say we'll always consider opportunities that create more value for shareowners. The fact is, as there are base case continues to assume and all the actions that we're taking continue to assume that GeoEye-2 will be a very capable ground spare that we'll put on orbit when we need it, either because demand requires it or as a risk mitigator. If other opportunities emerge that we determine will deliver a superior return to shareowners, then we will obviously pursue those, but there's nothing to share at this point.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

But would that be -- would you require U.S. government approval for that?

Jeffrey R. Tarr

We certainly would.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Okay. Can you tell us more about Tomnod? What is crowdsourcing and how does that enhance your analytics capability? And I'm interested in hearing more about your M&A pipeline as well.

Jeffrey R. Tarr

Yes. I'd love to talk about Tomnod. It's really an incredible capability that we've added. Best way to describe what Tomnod does is to share some of the things Tomnod has done. So for example, during Hurricane Sandy, Tomnod published imagery of the area impacted by Hurricane Sandy. And then invited crowdsourced people from around the world with varying degrees of geospatial expertise, some that are in Tomnod's network and then others from across the Internet, to come in and essentially analyze that imagery, pixel by pixel, looking for road debris, damage, other areas where there were issues, where that information needed to get in the hands of first responders. Then rather than shift -- than delivering to first responders, all of the imagery of the area, because those are very large files and don't lend themselves to being delivered over cellular networks, just delivered those areas of interest. So it's very -- terrific capability was used there. It was used very effectively in Christchurch in Australia. It was -- it's been used to look for lost mountaineers on a mountain in Peru. And it's a small team, but they've created something very powerful. And we believe that this capability can help us help our customers rapidly analyze imagery and get answers to customers when they're needed.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Sounds good. And can you comment on your M&A pipeline as well?

Jeffrey R. Tarr

Yes. Sure. We do have a robust pipeline. We're obviously very focused right now on delivering the promised synergies with the GeoEye combination, but we're not sitting still. And so we have a pipeline, we continue to look at opportunities. And those opportunities are consistent with what we said in the past. If we look at what our customers do before they use our imagery as they're using our imagery and after they use our imagery. And that points us to opportunities where we can make acquisitions, either bolt-on or larger combinations that would allow us to better serve our customers and create value for shareowners. And you can expect more from us, that's part of our vision for getting into that $1 billion of revenue.

Operator

Your next question comes from the line of Chris Quilty with Raymond James.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Just want to start with a clarification of the NGA statement on EnhancedView. I'm assuming that referred specifically to the SLA portion of the contract, not the value-added services, which are IDIQ and have always been subject to their requirements.

Jeffrey R. Tarr

Yes. That's a fair statement, Chris.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Okay. Can you give us a sense of what kind of vibes you're getting from the NGA about their needs for value-added services, either based upon the criteria they use of geographic and global activity or what's available from other government agencies? And how the combination with GeoEye may impact the level of value-added services?

Jeffrey R. Tarr

Well, I think we have to unpack it a bit. You've seen our 12-month backlog, some nice growth. That is primarily tied to Global-EGD. That is a tremendous capability. It's actually built on a legacy of RDOG to EGD and now Global-EGD, which has become increasingly the vehicle by which we deliver processed imagery to end-users across the U.S. government. And that we're seeing -- we feel great about. And while it is never guaranteed because it's U.S. government, we do feel very good about that part of our business. It probably sits somewhere less certain than the SLA, but more certain than other aspects of our U.S. Government business and the second biggest chunk of revenue in our U.S. Government business. If you look at the rest of our U.S. Government business, we've got the analytics, which seems to be performing well, which is performing well. And we've got the advanced production business, which has seen more pressure from budget constraints. And I think you see that in our reported numbers. It's one of the reasons why we're consolidating our St. Louis operations into Colorado. And what we'll ultimately get is -- have all of the capabilities we have in St. Louis, but have an ability to flex up and down given the variability of demand in that part of our business. So we're making the right decisions here to manage the budget environment. We feel we're better positioned than most and -- yet we never take that for granted. We are very focused on every day exceeding the expectations of our customer, so that we can continue to benefit from the great work that's come before.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Got you. On both the launch contract, as well as the GE Aviation, are there any cancellation fees on either of those that we should expect as onetime items?

Jeffrey R. Tarr

I'm going to get into detail on the GE Aviation beyond what I've shared. Anything on the launch contract to talk about, Yancey? I can't think of anything that help Chris here.

Yancey L. Spruill

I don't think it's appropriate to comment on those impacts at this point.

Jeffrey R. Tarr

Yes. But you should know that everything that we see is included in our guidance. We haven't held back in giving our best view of the future.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Okay. And in terms of just forecasting the interest cost and when GeoEye-2 goes into stores, is that a Q2, Q3 event?

Yancey L. Spruill

It will be sometime during the middle of this year on current pace and schedule, then it will go into storage.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Got you. And final question, just regarding GeoEye-1 and where you stand in terms of the utilization of that asset and how quickly you've been able to add new customers?

Jeffrey R. Tarr

So just to give this context, the metrics that we see are comparable to the metrics that we saw before the combination. The GeoEye-1 is adding about 15% to the capacity that we had prior to the combination. So relatively modest step up in capacity. We'll get a little more if and when we raise the altitude of GeoEye-1 but for now, it's about 15%. Capacity in high-demand regions is largely being monetized by what GeoEye called rocks, what we call DAPs. So DAP the go-forward name and other existing contracts that came over with the combination. So we'll certainly get some step up if and when we raise the orbit, and we'll get a very significant step up in the back half of next year when we launch WorldView-3.

Operator

Your next question comes from the line of Jim McIlree with Dominick & Dominick.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

I want to make sure I understand this. To go from the old reporting segments to the new, all I'm doing is taking the international DAP and other, and throwing it into commercial, is that correct?

Yancey L. Spruill

That's correct.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Great. And then Yancey, I know you've talked a little bit about capitalization of the interest on GeoEye-2. When that goes into storage, is that capitalized interest amortized or does that only start amortizing when it goes into service?

Yancey L. Spruill

We will only start amortizing capitalized interest when WorldView-3 goes into service. So we'll continue to capitalize the interest against the assets, and then we will expense it into depreciation when that asset is being depreciated. Again, GeoEye-2 is going to be in inventory effectively, it's not going to be in service, so we'll not be depreciating. So the depreciation will start for the balance the includes capitalized interest once WorldView-3 becomes operational, and that's not expected until the second half of 2014.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

But there's no depreciation or amortization of the interest on GeoEye-2 that goes into service?

Yancey L. Spruill

Correct. Correct.

Operator

Your next question comes from the line of Brian Ruttenbur with CRT Capital.

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

The commercial revenue, just if you could give me what it was in '11 and '12. And is the calculation right that it's going to be about $30 million x the GE this year? I just want to make sure I'm in the right buckets, how the commercial trend is.

Yancey L. Spruill

Well, we're now commercial going forward. We have provided a reconciliation in our deck online and I don't have, just off the top of my head, what commercial was in 2011 and 2012. But again, to bridge from what we used to report as commercial prior to this quarter and this year, and what we're doing now as you add you the DAP and other international D&I and put that, take that out of what it used to be D&I and put it into commercial.

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Okay. So is there a way that you can give me any kind of apples-to-apples comparison to what you're reporting this year versus what it was in '12?

Yancey L. Spruill

So our Commercial Diversified in 2012 was -- would have been pro forma $264 million.

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Okay. And in 2013 it is?

Yancey L. Spruill

We haven't broken that out. Our guidance for this year is $635 million to $660 million total. We expect Diversified Commercial to be shy of 50% for the full year.

Operator

Your last question comes from the line of Andrea James with Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

What are your thoughts on NGA's RSP on GDS? I guess, it seems like you're well positioned to bid on pieces of it. But I'm not sure if it would move the needle for you.

Jeffrey R. Tarr

You're talking about -- this is a competitive bidding process. For those who aren't tracking it, it's a contract that is a value-added services contract, the successor largely to existing value-added work that's being done by us. It's been done by GeoEye and other contractors. And beyond that, it wouldn't be appropriate for me to speculate on the outcome of that process or the competitive dynamic. But rest assured that we have taken our best view of the future, both into our guidance for this year and to the longer-term indicators that we've given about how we see our business progressing.

Andrea James - Dougherty & Company LLC, Research Division

Okay. And is it fair to say the emerging markets, China, Russia and Brazil, and they're growing fairly quickly, it seems like you're adding a lot of new geography. And I'm just curious how that translates to revenue geography covered?

Jeffrey R. Tarr

Well, we've had good growth, very strong organic growth, and then picked up some opportunity through the combination in what we call International Civil Government. And that is large -- that growth is largely being driven by emerging markets. So like the opportunity we described in Russia, starting to see traction in South America as we indicated with that Brazil award, but still early days in South America. But Middle East, all represent opportunities for us. And we're still very bullish on that part of our business.

Andrea James - Dougherty & Company LLC, Research Division

And just one more. You talked a lot about EGD, and I was wondering if you can talk a little bit about taking the technology or developing for the NGA and leveraging that over to the commercial side, and just sort of how that's progressing with host services and stuff like that?

Jeffrey R. Tarr

Absolutely. And that is a great -- and I'm glad you asked the question because it's an opportunity for me to emphasize that when we do make investments like this, we're obviously focused on meeting the requirements of the U.S. government, but we're also looking at how can we apply those investments and grow the whole of our business, which is also in the U.S. government's interest because this a very strategic industry and our nation has made policy decisions about ensuring that we have a robust and healthy growing commercial imagery business. So this is a real win-win, and we're doing some really exciting things as part of that Global-EGD program.

It sounds like there are no more questions. So with that, I just want to thank everyone. I know during this first quarter, when we're bringing the 2 businesses together, it's requiring some extra effort on everyone's part. And I really appreciate the effort that you're making. Fact is, that it is going to get easier to follow, we'll continue to update you on our progress. And as we proceed through the combination, you can expect this to become a much easier story to understand each quarter. So if we all stay focused on the back half of 2014, as where the prize lies for all of us, I think that there are good things to come.

So thank you very much and we look forward to talking to you next quarter.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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