DigitalGlobe's (DGI) CEO Jeffrey Tarr on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: DigitalGlobe, Inc. (DGI)

DigitalGlobe (NYSE:DGI)

Q2 2014 Earnings Call

July 31, 2014 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

Andrea James - Dougherty & Company LLC, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Howard A. Rubel - Jefferies LLC, Research Division

Jonathan Raviv

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

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

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

Operator

Good afternoon. Welcome to the DigitalGlobe's Second Quarter 2014 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 the 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, operator. Good afternoon, everyone, and thanks for joining our call today. With me 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 our 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. [Operator Instructions]

With that, I'll turn the call over to Jeff.

Jeffrey R. Tarr

Thanks, David. Good afternoon, and thank you, all, for joining us for today's discussion of Q2 results and 2 important announcements intended to extend our industry lead and create shareowner value.

First, the quarter. We achieved several important milestones in recent weeks. We readied WorldView-3 for our August launch. We received notification from NGA of the exercise of year 5 of the EnhancedView service level agreement, including the $50 million step-up. And we received approval from the Department of Commerce to sell our best imagery, creating new commercial growth opportunities.

Financial results in the quarter were in line with our expectations, and consequently, we are reaffirming guidance. We grew revenue 5% to $158 million, driven by continued growth of our U.S. Government and Direct Access businesses. We expanded adjusted EBITDA margin by 1,000 basis points to 40.5%, resulting from our success in realizing $115 million of annualized operating expense synergy. We generated $9 million of free cash flow in the quarter, approximately 6% of revenue, and we're on track to put our investment in WorldView-3 and GeoEye -- and the GeoEye integration behind us by Q4.

Our U.S. Government and Direct Access businesses, which collectively represent 80% of our revenue, both performed well in the quarter. These businesses are strongly recurring, exhibiting good growth, are deeply embedded in our customers' workflows and critical to their missions of keeping their nations safe.

Looking forward to the balance of the year, aside from the recognition of $9 million of deferred value-added services revenue in Q3 of last year, we believe both U.S. Government and DAP are well-positioned for continued growth in the second half and into next year.

Our commercial revenue, excluding Direct Access, was down in the quarter, due primarily to ongoing challenges in Russia, as well as a couple of large deliveries in Q2 of last year that did not repeat this year. These discrete issues, which we highlighted in last quarter's earnings call, impacted year-over-year results in the quarter by $11 million.

Offsetting the ongoing challenges in Russia are several positive developments and trends that should return our commercial business to at least modest growth by the fourth quarter. Specifically, we've signed a new 7-figure LBS customer, and we closed on a number of deals with civil governments, oil and gas customers and NGOs.

Our price-competitive, lower-resolution offerings targeted at the low end of the market have gained traction and contributed to returning our transactional business to healthy growth, albeit on a small base. At the high end of the market, we're now selling 41-centimeter imagery from our current constellation and expect that offering, as well as several other new products, begin to contribute to commercial growth in the second half.

We're also encouraged by early results in oil and gas, which is performing at the high end of expectations. To support new products and new geographies, we've hired additional salespeople in Africa, the Middle East, Eastern Europe and the Silicon Valley, with expertise in our key verticals. These new additions are making good progress, adding to our pipeline of new opportunities.

At our Geospatial Big Data, crowdsourcing and insight offerings are winning new customers across multiple industry vertical. All of these successes are encouraging, but I don't want to understate the challenges in Russia. This region of the world contributed significantly to our growth in recent years and represented $23 million of commercial revenue in 2013.

In Q2, Russia was down 80%, from $6 million to approximately $1 million, and will likely continue to hold back growth in commercial until the first quarter of next year when we fully lap the anniversary of events in Ukraine.

Now let me turn to 2 important actions highlighted in today's 2 press releases intended to generate profitable growth and improve shareowner returns. First, a decision to launch GeoEye-2, now renamed WorldView-4, about a year earlier than previously anticipated; and second, the commencement of a significant share repurchase program.

I'll take a few minutes to walk through each, starting first with WorldView-4. Last month, the Department of Commerce made a landmark decision to allow us to sell our highest-quality imagery. Following next month's launch of WorldView-3, we'll image at 30 centimeters of resolution and begin to commercialize that offering 6 months later. While not the only aspect of quality that matters to customers, with this resolution, we'll be able to see objects on the surface of the earth with 5x the detail of our nearest competitor and 10x the detail of new entrants. This will enable us to solve a wider array of customer problems than ever before.

Early customer response suggests strong demand for 31-centimeter imagery, and we no longer believe that WorldView-3 alone will be sufficient to realize our full potential. For this reason, we have decided that rather than store WorldView-4 on the ground, we will place it on orbit where it can generate revenue.

Importantly, capacity on WorldView-4 will be unencumbered by commitments to the U.S. Government. This will allow us to offer customers guaranteed access to highly accurate imagery with 30 centimeters of resolution. This will be a truly unique offering of great value to international defense and other commercial customers, who demand the highest quality casting and monitoring capabilities available to keep their nations safe and make high-impact business decisions.

As evidence of that demand, we've signed our first WorldView-3 DAP agreement with an existing customer that will begin in the second half of 2015, and once at full run rate, will represent about a 25% annualized increase over its expected 2014 revenue.

We also entered into a Letter of Intent with another large existing DAP customer that represents a $15 million annual uplift in revenue for assured access to WorldView-4. It's worth noting that we've secured this commitment for WorldView-4 fully 2 years ahead of launch, and we already have a robust pipeline of other opportunities.

A mid-2016 launch will require CapEx spending of approximately $120 million for ground infrastructure, launch and insurance, spread about equally across 2015 and '16. This is capital that would've been spent beginning in 2016 or '17. So essentially, we aren't increasing our investment in the constellation, but are simply accelerating an investment that was always in our plan by about a year.

Even with this investment, we continue to expect to generate meaningful free cash flow beginning in Q4 of this year. And for that reason, we have determined it's appropriate to initiate what we expect to be a meaningful share repurchase program over time. Our initial authorization is for $75 million. This reflects our confidence in our future and our commitment to balancing investments in organic and acquired growth, with a direct return of capital in a fashion intended to create shareowner value over time.

Taken together with the imminent launch of WorldView-3, resolution restriction relief and the accelerated launch of WorldView-4, we are extending our lead and positioning our business for sustained profitable growth and shareowner value-creation.

Before I turn the call over to Yancey to cover our financial results and guidance, let me take this opportunity once again to thank him for his service to the company over the last 10 years. This will be the last DigitalGlobe earnings call Yancey will be a part of. We wish him the very best going forward. In terms of a successor, we're making good progress in the search. We have a strong slate of candidates and are well into the process. We'll update you when we have definitive news.

Now to you, Yancey.

Yancey L. Spruill

Thanks, Jeff. Our second quarter results were in line with our expectations and keep us on pace to deliver against our full year projections.

Revenue for the quarter was $157.8 million, up 5% year-over-year, and up slightly from Q1 levels. U.S. Government revenue in the quarter was $95.5 million, up 15% year-over-year. Included in that revenue is $56.8 million from our EnhancedView service level agreement, or SLA, which is flat compared with Q2 2013. We expect SLA revenue to increase when we begin delivering higher volumes of imagery, which we anticipate will be in mid-Q4 when WorldView-3 becomes operational.

As a reminder, the cash flow from the SLA steps up by $50 million annually to a $300 million annualized level beginning on September 1.

U.S. Government value-added services was the primary driver of revenue growth in the quarter at $32.3 million, up 66%. Growth was driven by Global-EGD, our analytics business, and an increasingly diverse set of value-added services across multiple U.S. Government agencies and contractors. As we noted previously, Q3 value-added services revenue year-over-year comparables will be affected by a $9 million onetime catch-up revenue in Q3 2013. Also, as noted previously, in this last Global-EGD contract year, we've been amortizing roughly $7 million per quarter in revenue, which ends on August 31. Q4 will be the first full quarter without this quarterly amortization.

Diversified Commercial revenue was $62.3 million in the quarter, down 8%. Direct Access revenue was again strong at $30.6 million, up 7% compared with Q2 2013. We continue to expect our DAP business to generate about $26 million per quarter.

We delivered $31.7 million of other Diversified Commercial revenue, down 19%, in line with our expectations. The decline was driven by 2 revenue deliveries in Q2 2013 that we discussed previously, totaling about $6 million, which did not repeat this year and which affected revenue in both location-based services and other industry verticals. Additionally, Russia was weaker than previously expected, as we have continued to feel the impact of geopolitical unrest in that market.

Our next 12-month revenue backlog increased 7% to $517 million, with growth driven by the Q4 step-up in the SLA. We generated $63.9 million of adjusted EBITDA in the quarter, a margin of 40.5%, up 1,000 basis points year-over-year. This continues to reflect the operating leverage in our business, as we realize the benefit from synergies and revenue growth.

Margins were down slightly in the quarter from Q1 levels due to investments to drive growth. Through the end of Q2, we have achieved $115 million in annualized expense savings from the integration, continuing progress towards our annual synergy target of $120 million. We realized approximately $28 million of benefit from expense synergies in Q2 and expect to realize the full $120 million run rate in Q4 of this year.

Depreciation and amortization was $57.6 million in the quarter, down slightly year-over-year. Depreciation should stay at this level through the third quarter and will increase by approximately $10 million in Q4, reflecting 0.5 quarter of incremental depreciation once WorldView-3 becomes operational.

We again had no net interest expense in the quarter, reflecting capitalization of nearly all of the $13 million in quarterly interest on our debt. We expect similar levels of interest expense in Q3, and then expect it to increase to approximately $9 million in Q4, reflecting the impact of WorldView-3 reaching full operational capability in November and WorldView-4 going into storage early in Q4.

We generated a $4.3 million tax benefit in Q2, principally driven by a favorable IRS audit ruling. Net income available to common shareholders was $3.9 million, with $0.05 of fully diluted EPS. Integration-related spending totaled $21.1 million, of which $5.6 million were expensed and $15.5 million were capitalized. Year-to-date, we have expensed $10.5 million and capitalized $25.5 million related to completing the integration.

Free cash flow in the quarter was $9 million, principally driven, as expected, by the reversal of working capital items from the first quarter. CapEx in Q2 was $53 million.

Our outlook for 2014 remains unchanged. We expect revenue in the range of $630 million to $660 million. We expect Q3 revenue to be roughly in line with Q2 levels, and we expect to see the typical seasonality pattern where Q4 is our highest quarter for revenue for this year. We're maintaining our 2014 outlook for adjusted EBITDA margin at approximately 43%, with Q3 margins in line with Q2 and Q4 at 50%, as we benefit from a full quarter of the completion of the integration and seasonally strong revenue, including the SLA step-up in the second half of the quarter.

We continue to expect to achieve free cash flow as a percentage of revenue or free cash flow margin for the year of approximately 5% and of at least 20% in Q4. We expect our CapEx for the year to be approximately $170 million, with the vast majority to be spent by the end of the third quarter when we complete and launch WorldView-3, complete and place WorldView-4 into storage and ramp down the spending on integration.

Finally, I'd like to say it's been a great pleasure to serve as DigitalGlobe's CFO these last 10 years. I'd like to thank Jeff and the leadership team for their friendship and our board and investors for their long-standing support. And last, but not least, I'd like to acknowledge the members of the DigitalGlobe team, who have such incredible passion for this business. It has been inspiring to work with you.

With that, for the final time, I would now turn the call back to Jeff.

Jeffrey R. Tarr

Thank you, Yancey. To recap, we are reaffirming our full year guidance. New products, new sales resources, new marketing efforts and new capacity with new capabilities should contribute to putting our commercial business back on a growth trajectory.

I want to thank all our team members for their efforts across a wide range of initiatives, including building 2 satellites, integrating a large transformative acquisition and achieving resolution restriction relief, among others. I especially want to call out our DigitalGlobe team members and many partners for their efforts readying what will be the world's most capable commercially available imaging satellite. Once on orbit, we'll not only allow our customers to see the earth with greater clarity than ever before, but we'll also allow them to see through smoke, peer beneath the ocean's surface and determine the mineral and moisture content of the Earth below. No other commercial satellite operator will come close to offering the unique capabilities of this satellite, let alone our constellation overall. These capabilities, along with our other satellites, expansive ImageLibrary, customer relationships, automated production systems, Geospatial Big Data and analytics position us to maintain our technological lead and continue to win versus competitors, both existing and new, for years to come.

With that, operator, let's please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Andrea James of Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

I guess the first question, do you -- are you going to change the size of your steady-state constellation to 4 satellites instead of 3 now?

Jeffrey R. Tarr

Today, we are simply accelerating the launch of WorldView-4, and that's based on what we're seeing of demand in the marketplace for 30-centimeter imagery. In terms of what happens beyond that, we continue to monitor the useful life of our satellites, customer demand for capacity, capacity replacement costs, and it's based on all of that, that we'll make a decision about replenishment of our constellation beyond the launch of WorldView-4. For now, it's simply an accelerated launch, and that's what we're -- we believe that, that is an easy decision to support with the revenue that we secured. In fact, it's more than supported by the one LOI that we have already signed 2 years early.

Andrea James - Dougherty & Company LLC, Research Division

It kind of ties into my next question, because I guess it was my -- yes, my understanding you had a threshold of, I guess, how much EBITDA you'd like to generate off of the WorldView-4, without the U.S. Government being an anchored tenant. So you think the pipeline is strong enough to really support that threshold.

Jeffrey R. Tarr

Well, the threshold associated with accelerating that capital investment by approximately 12 months is really very modest. And that $15 million LOI alone more than supports that acceleration.

Andrea James - Dougherty & Company LLC, Research Division

Okay. And then just to kind of switch over to competition. It's my understanding that your nearest competitor just doesn't face the same profitability pressures you do, just given that they're buffered by a much larger enterprise. So can you expand more on how you're gaining traction and market share with, I guess, the 50-centimeter to 70-centimeter offerings?

Jeffrey R. Tarr

Well, first, let me say that we track our competitive win rates when we're in head-to-head situations with competitors, both the European competitor that you referred to, as well as Aerial [ph] and other competitors. And we win more than 75% of the time. And we win because of our resolution -- our superior resolution, our superior accuracy, the spectral diversity of our offering, which has -- which is beyond the visible, which allows us to solve a wider set of customer problems and the extent to which we're embedded in customer workflows. So that's how we're winning. We are winning with WorldView-3 and WorldView-4. We expect to extend our lead and continue to win going forward.

Andrea James - Dougherty & Company LLC, Research Division

Just one more from me. Is the Russia weakness tied to the sanction specifically? Or is it the combination of that and the fact that maybe the Russian government is a bit more externally focused than they have been?

Jeffrey R. Tarr

Well, we haven't had to turn away a specific customer because of sanctions. But what I would say is we don't know what business isn't coming to us because of sanctions. There also -- the economy is not what it was. And I think it's well understood that we are playing a role supporting NATO and others, bringing visibility to what's going on, and that could be having an impact as well. Net-net, Russia is down. It's down significantly, and we've contemplated that in our guidance.

Operator

Our next question comes from Peter Appert of Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So first, just, Yancey, thanks for all your help over the years, and congratulations on your next exciting adventure. Second, if I got this right, I think you said $11 million in commercial revenue related to Russia and these 2 things that didn't recur. So that would imply, if I'm doing this arithmetic right, maybe sort of underlying growth around 10% for the residual commercial business. So can you give us any color on sort of what you're seeing in the different components of the commercial business?

Jeffrey R. Tarr

Sure. I would say your math is directionally correct, Peter. So if you strip away those Russia and the 2 onetime data deliveries that didn't repeat, the growth is -- underlying growth is strong. If we look specifically as to where the growth is coming from in that part of our business, we are seeing growth in a number of emerging markets. So India has been quite strong. Middle -- we have some Middle Eastern markets that have been quite strong. So what we saw in Q4, at least in some parts of the world is now showing signs of recovery. So that is encouraging. Oil and gas has been quite strong and is exceeding our expectations. And we've also -- we entered a new vertical last year in a deliberate way, NGOs. And what we're finding is that there are quite a number of large well-funded NGOs, whose businesses -- or endeavors, rather, I should say, their humanitarian missions were able to contribute, too, in a significant fashion. So those are some of the things we're seeing, and we're also encouraged by what we will see once we get WorldView-3 on orbit and are able to commercialize that -- the new capacity and the new capability.

Peter P. Appert - Piper Jaffray Companies, Research Division

How about the LBS channel, specifically, in those recent quarters?

Jeffrey R. Tarr

Yes. Specifically, so if you take the 2 one-timers, one of them was in LBS. And actually, that one -- we do expect that one customer to come back starting in Q3. It was a customer that shifted some -- more of their spending disproportionately to Aerial, and we're seeing some of that spending come back to us. We've also signed a new LBS customer. So -- and are having a number of really productive conversations with several LBS players about some innovative opportunities. So net-net, we feel very good about LBS. The other one-timer was a customer that we've talked about the last several quarters in other verticals that shifted from onetime data delivery that really only occurred over about an 18-month period to being a distributor. And we're getting growth on that distribution relationship, but still quite small.

Peter P. Appert - Piper Jaffray Companies, Research Division

Do you have any additional color you can offer in terms of indications of level of demand for commercial imagery at the 30-centimeter level?

Jeffrey R. Tarr

The best indications that I can share today are the Letter of Intent that we signed with the DAP customer that had a significant uptick in price associated with it; and our first WorldView-3 DAP agreement, also, with an uptick in price associated with it. So we're seeing uptick in demand and the willingness to pay premium prices. We've also had some good conversations with a number of LBS customers, and we still feel very good about being able to displace an increasingly large portion of their Aerial spend over time with our 30-centimeter imagery. So those are the best indications I can share today.

Peter P. Appert - Piper Jaffray Companies, Research Division

And last thing. In terms of the accelerated launch of WorldView-4, are there any margin implications we should be thinking about?

Jeffrey R. Tarr

Not really. I mean, there's the capital investment that we talked about, which will impact free cash flow margins, but not EBITDA margin. And then when it's on orbit, we'll have a very compelling offering that should be able to command premium prices in the market. So by the -- towards the tail end of 2016 and into 2017, we would -- we believe that this will be accretive to our EBITDA margins at that time.

Operator

Our next question comes from Howard Rubel of Jefferies.

Howard A. Rubel - Jefferies LLC, Research Division

First, a comment, I noticed on the slides you have Vandenberg with the IKONOS imagery. Is that just to tease us of what you can do as opposed to not really show what's possible with 30 imagery, Jeff?

Jeffrey R. Tarr

That -- it wasn't intentionally intended to tease you. The fact is IKONOS has superior resolution to just about anything else on the market today. So even with IKONOS resolution, we're the market leader. When we have WorldView-3 imagery to share, it's going to look very different from what you've seen from others.

Howard A. Rubel - Jefferies LLC, Research Division

Just 2 questions. One is, are you going to add any sensors or improve any other capability on WorldView-4?

Jeffrey R. Tarr

No. WorldView-4 -- we've been making some changes to WorldView-4 that will be completely wrapped up when WorldView-4 goes into storage towards the end of this year, and that's the extent of what we plan to do with it.

Howard A. Rubel - Jefferies LLC, Research Division

And then one of...

Jeffrey R. Tarr

And by the way, Howard, even without doing anything to it, again, like IKONOS, but even beyond IKONOS, it will have comparable resolution to WorldView-3 and will be an extraordinary satellite that will really extend our lead.

Howard A. Rubel - Jefferies LLC, Research Division

I appreciate that. And then, finally, if you were to sort of split and talk a little bit about the commercial business, I mean, oil and gas has clearly been the biggest leader and then maybe Location Based Services second. Have you been able to -- I mean, it sounds like you're making a little bit of traction in some of the other markets through either added sales force or other initiatives. Could you talk for a moment, first, about split; and then, second, what kind of traction you're getting with Big Data applications?

Jeffrey R. Tarr

Thanks. So in terms of the split, and I'm not sure I fully understand the question, so I'll take a shot at it. And if I get to clarify, I just -- if I have to clarify, let me know what I haven't answered. But in terms of split of revenue, as we said, about 60% of our revenue is U.S. Government; 20%, DAP; 8%, civil government; about 6%, LBS; and about 6%, industry verticals. The other metric that we've shared in the past is that our oil and gas business that we acquired was to be between $1 million and $3 million per quarter this first year, and we're performing at the high end of that range. So that -- I mean, I think that gives you a sense of split. The NGO business is also growing nicely...

Howard A. Rubel - Jefferies LLC, Research Division

I mean, I think that's part of it. I was just -- and I get that. I mean, just to stay with that is the challenges and sort of expanding -- obviously, beyond just LBS, but some of the other industry verticals and finding them to also help the commercial. That was the breadth of the question.

Jeffrey R. Tarr

Oil and gas is getting a lot of traction, some early, early traction in mining. We are encouraged by what we see the opportunities in ag. And so -- and the NGO business, as I said, was going quite well. You also asked about what we're seeing with our new Geospatial Big Data offerings, and we signed a number of new customers. We've been building out our Geospatial Big Data platform. We've been inviting a number of beta customers to come in and run various algorithms on our data. We're doing some really interesting demographic work in Africa. We're doing some insurance work in several parts of the world. We've been doing a bunch with NGOs. We're doing a project right now with the Nature Conservancy in Hawaii using crowdsourcing and some other capabilities to help monitor invasive weeds, doing the work with World Resources International with regard to the fires in Indonesia and agriculture. We're doing work with the World Bank to look at agriculture in Syria and understand various food security issues. And we're doing a number of very interesting defense and security-related projects in Africa, which are using a very wide range of capability.

Operator

Our next question comes from Jason Gursky of Citi.

Jonathan Raviv

It's actually Jon Raviv on for Jason. And congrats, Yancey, on your next steps. A question about the repurchase. I was wondering if you could take us through the strategy that the board went through and the thought process to instituting that, what your expected cadences of making those repurchases, what the goal is, whether we could expect more, and whether it reflects any de-scoping of your M&A hopes starting maybe fourth quarter in 2015 and forward?

Jeffrey R. Tarr

So I'll answer the last question first and say no, it does not represent a de-scoping of our M&A hopes and expectations. We've taken a portfolio approach to our use of capital. We see our company moving into a new phase of free cash flow generation beginning in the fourth quarter. Some very significant capital investment projects are being put behind us. And our goal is to maximize shareowner value. And our intent is to do that, or at least when it comes to that free cash flow and putting that to work and taking a portfolio approach in balancing organic investments, for example, our investment in the early launch of WorldView-4, with acquisitions such as our recent acquisition of Spatial Energy and repurchases which we're announcing today. So we -- and we think this initial share repurchase is sized at a level that allows us to pursue all 3, and we intend to do that.

Jonathan Raviv

Great, appreciate that. And then a quick follow-up, talking about free cash flow margin. You stuck to your estimates for this year. Care to sort of talk about what you expect next year? I believe at the Analyst Day you gave us some number to think about next year. Obviously, that changes. And then with that in mind, any change or update to what you think the long-term opportunity can be? I know EBITDA margin long term is about 50%. Any update there?

Jeffrey R. Tarr

No updates, and this would not be the time to give 2015 guidance.

Operator

Our next question comes from Jim McIlree of Chardan Capital.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

Given the situation in Russia and your lowered expectations there, is it likely that you're going to come in at the low end of guidance for 2014 for revenue?

Jeffrey R. Tarr

No, we aren't saying that at all. We are saying that the range of possible outcomes in Russia is contemplated in our guidance.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

So if that's the case, then it must have been contemplated for a number of quarters, is that correct?

Jeffrey R. Tarr

Well, Russia is not completely new. It wasn't a -- I completely understood the nature of the issue when we gave our guidance for the year. But I would say at this point in the year, with the guidance that we've given, it contemplates the full range of possible outcomes for Russia.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

And so what would be the offsets? What would be the ups? What would be the things that potentially would be better than expected or growing at significantly higher rates to offset the Russian weakness?

Jeffrey R. Tarr

Well, I think what you see performing very well, DAP is performing very well. You also see our commercial business when you strip away Russia in the 2 one-timers in the second quarter. You see growth rates there. We've seen -- behind that, we're seeing recovery in India. We are seeing recovery in the Middle East. While we haven't seen it in the first half, we're encouraged by what we see, at least, in some parts of South America. And our oil and gas business is performing at the high end of our expectations. So I don't want to get ahead of the fact Russia is a large factor, $23 million last year, down 80% in the first half. But we do have some positive things happening that are helping to offset that for sure.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

Okay. And Yancey, good luck with everything.

Yancey L. Spruill

Thanks, Jim.

Operator

Our next question comes from Chris Quilty of Raymond James.

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

Wanted to follow up on the decision to launch WorldView-4 early. If I look at any of your prior satellite launches, you've had the U.S. Government as an anchor customer and effectively, they bought half of their shutter time prelaunch. And it sounds like, right now, you've only got a commitment for $15 million. I don't know how to translate that into percentage or shutter time. But it seems like a much lower contribution than you've gone forward in the past. So a, is that correct; and b, do you have some kind of a pipeline of likely customers who you think will step in, and are they mostly DAP? Or are there some LBS customers in there?

Jeffrey R. Tarr

So first of all, let me say indications are the demand for 30-centimeter imagery, we expect to exceed our available capacity for 30-centimeter on WorldView-3, and that's for commercial customers. And when I say that, I'm also including DAP. We have a robust pipeline with our DAP customers. Those are customers and probably the only customers that plan out their needs in our industry 2 to 3 years early. So for other commercial customers, it's really premature to have in-depth conversations about WorldView-4. But -- so it is mostly DAP. I'd also say that today, we have a satellite that's built, it's paid for, it's on the ground and all we're talking about doing is accelerating the launch by approximately 12 months. So on that kind of -- if you look at the economics of doing this, we're pulling forward along some CapEx that's in the plan by about 12 months. The revenue required to ensure that this is a decision that is accretive to return on invested capital is really quite modest and is already covered by what we've secured.

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

Got you. And then a clarification. You said you had a DAP customer that was up 25% with their contract. Was that simply to add on WorldView-3? Or was that inclusive of them now getting access to the library and the higher-resolution images? And can you break out how much of the uplift is related to one versus the other?

Jeffrey R. Tarr

I can't break out because it's not possible to break out how much of the uplift comes from the fact that WorldView-3 is 30-centimeter versus the fact that it's just additional available capacity in what's been a constrained region. This particular customer is one that wasn't a WorldView-2 or WorldView-3 DAP customer, and it's added both to the mix. And so now, it's essentially buying access to the entirety of our constellation to meet their security needs.

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

Got you. So it's not fair to assume the other non-DAP customers are going to go up 25% when they add WorldView-3?

Jeffrey R. Tarr

No, I don't think you can generalize. Each of our 10 DAP customers is different. What they have in common is they all have critical security needs that we are uniquely positioned to meet. But the mix of needs with regard to resolution and which assets they're buying capacity on and where are their price today versus tomorrow really varies customer-by-customer.

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

Okay. And if it's $120 million to put WorldView-4 on orbit, that's $50 million less than your spending on WorldView-3. So either you're getting a real good deal on an Atlas V or you're moving to a different rocket? Is that a fair assumption?

Yancey L. Spruill

That's just the remaining spend on the -- to get the satellite up. It's not the total spend and it does include a portfolio of the rocket, some launch insurance and some changes we need to make on the ground. So that's not apples-to-apples, as you laid it out.

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

And so wait, the $120 million is what's left just for WorldView-4?

Yancey L. Spruill

Right. So it's remaining payments for the rocket, part of it has been paid, but that's remaining at insurance when we launch it and the changes we need to make to handle the data on the ground.

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

Okay, I'm right. You're right on that. I got the 2 mixed up. And final question, where does the NGO fall from a segment reporting basis?

Jeffrey R. Tarr

In other verticals.

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

Under Diversified Commercial, got you. And actually, one other question, if I can. It looks like you had your first other predictive analytics contract here with a civil government agency. But are you seeing any uptick from pure commercial customers?

Jeffrey R. Tarr

Absolutely, especially with NGOs. It's a natural movement to NGOs, some with oil and gas. So we are starting to take that analytics business and getting traction outside of the U.S. Government.

Operator

[Operator Instructions] Our next question comes from Josephine Millward of The Benchmark Company.

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

Can you give us an update on when you might be receiving a follow-on for the Global-EGD program? And do you think your current run rate is sustainable for the coming year? Since you backhauled there, it's down to $34 million.

Jeffrey R. Tarr

So with Global-EGD, we are -- we've been selected as the sole-source provider. And as we look at value-added in total, we're having a broader set of discussions with regard to a broader set of value-added offerings than any time before in our history. Now that's counterbalanced by the fact that the appetite exceeds the budget for value-added in general, as has been the case in recent years. So right now, we feel good about our value-added business going into next year. We don't think it will be contribute to growth in the same way that it did this past year. As we look at U.S. Government, we think, obviously, the growth will be overwhelmingly driven by the uptick in the SLA. But value-added, we feel good about that from where we sit.

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

Great. Following up on the NGA's SLA. So with the exercise of business option year [ph], does that mean that you no longer have any government budget risk in '15?

Jeffrey R. Tarr

We are funded. It's been signed off on to go into next year. So we feel very good about it, as we have felt about the last 15 years of this relationship.

Operator

Our next question comes from Jason Gursky of Citi.

Jonathan Raviv

It's Jon, again, I appreciate the follow-up. Just on, Jeff, on WorldView-4. When can we expect that to start generating sales as it relates to 2017, given the launch window? And then, also, does your discussions and those decisions would indicate that WorldView-3 is already filled up, and that customers are having to go to WorldView-4? Or is there's still some capacity that's still on WorldView-3?

Jeffrey R. Tarr

So you should expect it to start to generate revenue towards the tail end of 2016, based on current -- expected launch timing and the window we've been able to secure. With regard to WorldView-3, I think the way you should look at this is we see robust demand materializing. What WorldView-4 will enable us to offer that we can't offer on WorldView-3 is a satellite that's unencumbered by priority commitment to watch the U.S. Government. So that has a very special value proposition, and it's a somewhat different value proposition than WorldView-3, which has short-wave infrared, has a [indiscernible] atmospheric sensor, but also will have the priority commitment to the U.S. Government.

Jonathan Raviv

So is it fair to think that the first customer of WorldView-4 is going to WorldView-4 and not WorldView-3 for that very reason?

Jeffrey R. Tarr

Well, we have customers on WorldView-3 as well. This is a customer that has also made -- has made a commitment to WorldView-4. And so that's -- they aren't mutually exclusive.

Operator

Our next question is a follow-up from Josephine Millward of Benchmark.

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

I just wanted to follow up the exercise of your fifth option year [ph]. Does that mean you no longer have any civil government budget risk? And how does NGA hedge that risk since Congress hasn't finalized the '15 budget and there's potential for another CR?

Jeffrey R. Tarr

Well, it's -- the risk is negligible. I mean, you can never say the risk is 0 with the U.S. Government, but the risk is negligible, and we feel that we're on solid ground with the $300 million SLA that begins with this upcoming fiscal year.

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

And if there's a CR? Do you feel comfortable with this step-up?

Jeffrey R. Tarr

Again, we feel that we are covered. We have no indication whatsoever to doubt that, and we'll leave it to our customer to figure out the funding -- various funding questions that they face. But Josephine, the thing to keep in mind here is that we are -- we supply 90% of the foundational imagery for the U.S. Government. And that was publicly disclosed at GEOINT's by a very senior government official. That is mission-critical to what's going on in the world today. And it's -- and the customers renewed, so that's what we're going by.

Operator

Our next question comes from Howard Rubel of Jefferies.

Howard A. Rubel - Jefferies LLC, Research Division

Jeff, I wanted to talk about the strategic transaction that Google engaged in to purchase Skybox. How do you sort of look at this particular competitor? I mean, there's a number of ways in which you could say glass is half-full, i.e., somebody looks at imagery in a very strategic way, another way is you now have a big gorilla in the room.

Jeffrey R. Tarr

The way we look at it is that Google is an important and strategic customer. We are talking to Google almost everyday. Skybox has a very different type of satellite than our constellation. And so we have every reason to believe that our customers sees us as complementary, as opposed to one being an alternative for the other. And I'd add also on top of it, we're seeing new opportunities with a number of LBS players. Now whether those were triggered by Google's decision -- acquisition decision or not, I can't tell you, but I can tell you that we're seeing LBS as a very healthy vertical for us.

Operator

Thank you. And at this time, I'm not showing any further questions. So I'd like to turn the call back to management for closing comments.

Jeffrey R. Tarr

Well, first of all, I want to thank all of you, as always, for your questions. Greatly appreciate that. This is really a very exciting time for our company. We're in the midst of launching a satellite and extending our industry lead. We're really looking forward to being back together next time. And when we are together, we expect to be able to show you some images and insight from WorldView-3 that really demonstrates that technological lead, and maybe we'll even see some of you at the launch. Thanks a lot.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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