DigitalGlobe's (DGI) CEO Jeff Tarr on Q1 2016 Results - Earnings Call Transcript

| About: DigitalGlobe, Inc. (DGI)

DigitalGlobe, Inc. (NYSE:DGI)

Q1 2016 Results Earnings Conference Call

April 27, 2016 05:00 PM ET

Executives

Patrick Elliott - Director of Finance and IR

Jeff Tarr - President and CEO

Gary Ferrera - CFO

Analysts

Denny Galindo - Morgan Stanley

Peter Appert - Piper Jaffray

Jason Gursky - Citigroup

Howard Rubel - Jefferies

Josephine Millward - Benchmark Company

Jim McIlree - Chardan Capital

Chris Quilty - Raymond James

Mark Strouse - JPMorgan

Operator

Good afternoon. Welcome to the DigitalGlobe First Quarter 2016 Earnings Conference Call. All participants are in a listen-only mode until the question-and-answer session begins, following the presentation. [Operator Instructions]

Today’s call is being recorded and 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 on the Investor Relations section of the Company’s website, at www.digitalglobe.com.

I will now turn the call over to Patrick Elliott, Director of Finance and Investor Relations for DigitalGlobe.

Patrick Elliott

Thank you, Sonia. Good afternoon and thanks for joining our call today. With me are Jeff Tarr, President and Chief Executive Officer; Gary Ferrera, Chief Financial Officer; and Fred Graffam, Senior Vice President of Investor Relations.

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current expectations and assumptions of future events and are subject to risks and uncertainties that could cause our actual results, performance to differ materially from those indicated by such forward-looking statements.

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.

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 revise or update any forward-looking statement except as required by law. 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 supplemental materials on the investor relation section of our website at www.digitalglobe.com that will be referenced on today’s call. During the question and answer session, please limit your questions to one question plus a follow-up, and then please reenter the queue if you have additional questions.

With that I’ll turn the call over to Jeff.

Jeff Tarr

Good afternoon and thank you for joining today’s call. I’ll begin by sharing a few thoughts on our first quarter financial performance. I’ll then provide a brief update on our progress executing our five-point strategy for shareowner value creation. Finally, I’ll turn the call over to Gary to discuss our financial results and outlook which remains in line with the view we shared on our Q4 call.

Starting with our financial performance, overall, first quarter financial results benefited from continued strength in our DAP [ph] business, and our focus on operational excellence. Total revenue was up 3.5% and our previously implemented operating efficiencies and revenue mix increased our adjusted EBITDA margin 1,120 basis points to 54.4%. We are pleased with these results and remain confident in the guidance we provided last quarter. We also recognize that we are still early in the year and have much work to do.

Importantly, we’ve made good progress on our five-point strategy for shareowner value creation. These five points include one, we will manage our industry leading imagery business, with an orientation towards improvements and efficiency to drive strong free cash flow and returns; two, we will make disciplined investments on our multisource platform initiative for growth; three, we will leverage our analytics services business to further integrate our imagery platform and tools into our customers’ workflows, driving increased productivity and value; four, we will significantly reduce our capital intensity over time and ensure that we sustain a commanding technological lead over both current and aspiring competitors; and, five, we will continue to return capital to shareowners.

Now, let me spend a few minutes on the progress we’ve made within each of these five components of our strategy. The first, imagery leadership, focuses on extending our industry lead while delivering margin expansion, strong free cash flow and returns. As reflected by the total growth and margin expansion delivered in the quarter, we’ve made good progress. Let me focus today’s comments on each of the three customer categories served by our imagery business beginning with the U.S. government, followed by international defense and intelligence, and finally, commercial.

Starting first with the U.S. government, our business has never been stronger. We continue to execute flawlessly against our customers’ exacting service level requirements and are as confident as ever in the long-term potential of this important customer relationship. Importantly, we continue to leverage our multi-billion dollar investment in space assets and ground infrastructure to deliver unrivalled resolution, accuracy, image quality, capacity and revisit in a fashion that is deeply embedded in the work flows of hundreds of thousands of end users across the U.S. government.

Our international defense and intelligence business has also never been stronger. WorldView-3 and our new constellation DAPs are speeding timelines and giving our customers access to more capacity and capability where and when they need it. During the quarter, we grew our direct access business by 35%. The global security environment stretched our capacity in multiple regions and some customers spent beyond their contractual minimums. While we expect difficult comparisons later in the year, we remain confident in the long-term potential of this customer group as reflected by our progress building our pipeline for WorldView-4 and executing early contracts and LOIs.

In the quarter, we announced the conversion of an LOI with an existing DAP to a firm contract, positioning that customer for growth in 2017 and extending the relationship by four years. And today, we issued a press release announcing a letter of intent with what we expect to become the 11th nation in our DAP program. Our recent progress expanding our DAP revenue base highlights the value of our investments in WorldView-4 and our cDAF program.

Our commercial imagery business rather performed in line with our expectations for the quarter with revenue approximately flat compared to last year. We believe the steps we are taking will eventually put our commercial business back on a growth trajectory, but for now we remain cautious in our near-term outlook due to continued macroeconomic headwinds including emerging market volatility, currencies and oil and gas commodity prices. The second component of our strategy, platform leadership, is building the world’s leading multisource geospatial analytics platform to enable a wide array of customers, developers and partners to unlock the power of our content and drive long-term growth.

In the quarter, we announced several new customers. Facebook announced that they are using our platform to map population densities. PSMA announced that they are using our platform to map and analyze 15 million structures across the continent of Australia. Spaceknow announced that they are using our platform to create a manufacturing index which went live on Bloomberg terminals in the quarter, tracking activity across 6,000 industrial facilities in China. And we expanded the trial with the U.S. government. We also launched a self-service version of Maps API with Mapbox which enables developers to integrate DigitalGlobe content into their websites and applications with a single line of code.

Taken together our commercial platforms including our Geospatial Big Data platform, Spatial on Demand and Maps API now support an ecosystem, consisting of hundreds of developers and applications, dozens of data sources and tens of thousands of end users. We’re seeing strong sequential growth in this emerging business albeit from a small base. Though not a material contributor to growth this year, with continued progress, we expect this to become a more meaningful driver of growth over the long term.

The third component of our strategy, services leadership, is focused on our efforts to more deeply embed our imagery and platforms in our customers’ workflow, using professional services combined with proprietary analytic software and IP. During the quarter, our services team supported the implementation of our Geospatial Big Data platform with the government customer and sold our human geography product to an international defense and intelligence customer. Our services team remains focused on serving not only our U.S. government customers but increasingly engaging with strategic accounts wherever professional services are required to help customers get full value from our imagery and platform offerings.

The fourth component of our strategy is focused on reducing our capital intensity over time while extending our industry lead. As previously stated, we’ll begin investment to replace the combined capacity of WorldView-1 and WorldView-2 in either 2017 or 2018, depending on capacity utilization, the projected used lives of our in-orbit satellites at that time, and the need for the U.S. government. We’re also making good progress n partnership with KACST and TAQNIA Space to enhance our constellation in a highly capital efficient manner with the fleet of small satellites intended to ensure we sustain our leadership, not only in resolution, accuracy and overall image quality but also revisit. While we question the value of standalone small sat constellations, we believe that by integrating small sat imagery into our constellation, we’ll be able to efficiently unlock the potential of this technology and create new applications that leverage the full breadth of our capabilities.

This brings me to the fifth and final component of our strategy, returning capital to shareowners. By executing the first four components of our strategy, we are generating excess cash flow that we’re returning to shareowners. In the quarter, we repurchased an additional $61 million of stock. Since initiating the program in July of 2014, we’ve repurchased $281 million in stock and have reduced our share count by approximately 16%.

Overall, I’m pleased with our early progress executing our five-point strategy for shareowner value creation. We also recognize that we are early in the year and have more challenging comparisons ahead. Our core imagery business with our U.S. government and international defense and intelligence customers has never been stronger. Our emerging platform business is unlocking new use cases with customers and developers. We’re positioned to extend our lead and drive down capital intensity with a launch of WorldView-4, our future architecture and our partnership with KACST and TAQNIA Space, and we’re returning capital to shareowners.

Let me now turn the call over to Gary to discuss our results and guidance in detail.

Gary Ferrera

Thanks, Jeff and welcome everyone. During the first quarter, we reported 3.5% revenue growth to $175.4 million, while delivering adjusted EBITDA growth of 30.5% to $95.4 million. The increase in revenue was primarily due to continued outperformance in our high incremental margin direct access program, while our restructuring initiatives implemented last year drove additional margin expansion and improved profitability.

While we are pleased with these results, our guidance for the year remains unchanged, as we expect that some of the increase in DAP revenues during the quarter is due to revenue potentially being pulled forward from the second quarter. U.S. government revenue in the quarter was $110.3 million, down 3.9% year-over-year. This decline was expected as we have realized the deferred revenue earn out on prior Global-EGD awards in Q1 of 2015. This decline was partially offset by an increase in our U.S.G. analytics business which is up approximately 10%.

Diversified commercial revenue was $65.1 million in the quarter, up 19.2% year-over-year. DAP revenue was $33.2 million, up 35% over the prior year. We saw high usage across most of our customers due to the current geopolitical environment. Even with this first quarter outperformance, we believe DAP revenue will be in line with our original expectations for the full year as we anticipates that the majority of these customers will limit their total spend to within their annual budgets. As Jeff previously mentioned, we’re adding our 11th to the DAP program. This customer will purchase access minutes, primarily WorldView-4 through a multi-year agreement. This will bring the total value of commitment from customers on WorldView-3 and WorldView-4 since the third quarter of 2015 to $355 million with 65% of net revenue under firm contract. We believe on our full year basis, these commitments will generate an increase in contracted revenue of approximately $43 million. We’ll partially recognize this incremental revenue in the second quarter of 2017, ramping to a full run rate during the second half. Other diversified commercial revenue was $31.9 million, up $1.9 million or 6% year-over-year, driven by strength in our civil government and non-DAP international D&I verticals.

Our adjusted EBITDA was $95.4 million for the quarter, an increase of 30.5% over Q1 2015. The strong growth resulted in a significant increase in margin to 54.4% versus 43.2% in the prior year. While we’re pleased with this result, there are many factors which allowed us to achieve this margin, for example, the overperformance in our high incremental margin DAP business, not all of which can be expected to repeat in the future. Additionally, the timing of certain hiring, other investments and costs related to the launch of WorldView-4 will impact remainder of 2016. Our cost of revenue decreased by 18.1% year-over-year. This was result of various procurement savings across the business combined with our reengineering and restructuring efforts. SG&A expenses were down $8.3 million or 14.6%. This decline was also driven by our reengineering and restructuring efforts, which resulted in lower headcount and lower consulting and professional service fees.

In total for the quarter, operating expenses decline by $15.4 million year-over-year or 16%. Net interest expense was $5.1 million, reflecting capitalization of $11.2 million. Total interest expense for the quarter inclusive of capitalized interest was $16.4 million. Cash interest in the quarter was $22.5 million due to the semiannual payment of interest on our bond. We continue expect that cash interest pay will be approximately $58 million for the year. CapEx excluding capitalized interest was $22 million in the quarter and we continue expect approximately $125 million of CapEx for the year.

For the quarter, we made net investments in cDAFs totaling $4 million that were accounted for as deferred contract costs. By making these investments in advanced of the launch, we will accelerate the realization of revenue on WorldView-4. As we noted on our last call, these investment could approximately $20 million in 2016 net of customer reimbursement.

Free cash flow for the quarter was $17.8 million, down $7.8 million year-over-year due to the timing of milestone payment on WorldView-4. During the quarter, we repurchased 4.1 million shares at an average share price of $14.80 for a total of $60.9 million. Shares outstanding at the end of Q1 were 63.5 million. As of the end of the quarter, we have $55 million remaining on our authorization.

Our full year guidance remains unchanged. We continue to expect revenue to be in the range of $670 million to $700 million and we continue to expect adjusted EBITDA to be in the range of $330 million to $355 million. While we do not provide quarterly guidance, we note as we did on the last call that we will face tough comps in Q2 and Q4 versus last year, due to the material prior year outperformance in our DAP business, which we do not anticipate repeating. As we mentioned earlier, we saw over performance in DAP business during the recent quarter and some of that may have been pulled forward from future quarters.

We remain focused on and committed to driving ongoing efficiency in the business while making disciplined investments to drive long-term revenue and EBITDA growth, margin expansion, free cash flow and ultimately improve return.

With that I’ll now turn the call back to Jeff.

Jeff Tarr

Thanks, Gary. We are off to a good start with Q1 and at the same time, we recognize we are still early in the year with three quarters to go. We remain confident in our original guidance despite tougher comparisons ahead. We also continued to make disciplined investments to deliver revenue growth beyond this year, including the launch WorldView-4; the deployment of constellation DAPs and development of our Geospatial Big Data platform. We are also taking important steps to reduce our capital intensity and extend our industry lead. Operator, will you please now open the call for questions?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Denny Galindo from Morgan Stanley. Your line is now open.

Denny Galindo

I wanted to delve into the new DAP contract. It looks like from your press release that adds around $5 million a year, so little bit lower than average. Is this kind of a minimum amount and how much will we expect kind of the revenue from this new customer to fluctuate around that $5 million a year?

Jeff Tarr

Let me just lead into say what we’ve communicated is what we expect at this time. We always strive to grow our accounts but you can never count on that. And with regard to the pace of revenue recognition, on that Gary, what can you share?

Gary Ferrera

I think for a second, I would like to reiterate what Jeff said. I mean all these contracts are different sizes. They all do things differently; they all have different numbers of minutes that they use. So, I wouldn’t read too much into the future of contracts based on this. And then there is some recognition of different parts of the spread over different periods of times. So, it’s not as simple as taking a number and dividing it by the number of years of contract. And I wouldn’t want to give much more detail in there.

Denny Galindo

And then, moving on to the upcoming enhanced RFP, do you have any idea of when more information might be forthcoming? It sounds like you kind of mentioned that you’ll start building either next year, the following year. Does that depend at all on the new contracts? And then maybe talk about kind of upcoming dates to look forward to?

Jeff Tarr

Well, you’ve never heard a reference to an RFP from us. So, I’m not sure where that’s coming from, Denny, but what I can tell you is we’re always talking to the U.S. government regarding their short and long-term needs, no change there.

Operator

Thank you. And our next question comes from Peter Appert from Piper Jaffray. Your line is now open.

Peter Appert

So, the margin performance is really impressive, so congratulations on that. I’m wondering, Gary, is it possible to give us any insight in terms of how much of that margin upside is a function of DAP flow through as opposed to maybe a permanent benefit from some of the structural changes that you’ve made? And I’m asking this in the context of understanding why maybe you’re not a little bit more optimistic in terms of the potential for full year margin and EBITDA upside?

Gary Ferrera

We’ve put a lot of effort into controlling costs and being as efficient as possible. But as you mentioned, the DAP incremental margin,. which I tried to get across in my remarks, is very high. So, the flow through on that could be a 100 -- almost the 100% when it’s incremental like that. And then obviously, the rest has been us going through the whole business, every piece of it. I don’t think you’re going to necessarily see the same exact margin that it goes go forward but we’re completely focused on generating efficiencies across the business. And we’ll continue to do that.

Peter Appert

Okay. That was very diplomatic. The DAP business, we’ve had bunch of -- several quarters here recently where the numbers have been quite robust and the world’s not getting any saner and/or safer. So, I’m not sure why you would think necessarily the DAP numbers would trade down. Customers pulled forward some spending but when some of these numbers we’ve seen in recent quarters imply that the overall sustainable level of spending by some of these customers is perhaps at a higher level than you’ve seen in the past?

Jeff Tarr

Well, Peter, you’re right. The DAP business is strong. And the world is not getting safer. There are some other factors which impact the timing of revenue and growth. For example, as we indicated, customers spent heavily in the first quarter above the contractual minimums. And looking forward, we have to assume that their budgets will be constrained and that essentially the spending will revert back to the contracted level for the year. So, that’s the key assumption that is in our forecast. Secondly, you’ll recall we were especially capacity constrained in the second and fourth quarters of the last year, really stretching our ability and the headroom for growth in those two particular quarters.

Operator

Thank you. And our next question comes from Jason Gursky from Citigroup. Your line is now open.

Jason Gursky

Jeff, just a high level question for you. As you step back and think about the constellation where we’re going to be here in ‘17, ‘18, ‘19, what percent of the capacity is sold at this point and how much in dollar terms do you have left grow out themselves? If you could just wave your magic wand, get it all sold, what’s that get us to?

Jeff Tarr

Well, what makes that question one that is not possible to answer is because demand is not uniform across the globe. So, while, for example, today, we may be stretching capacity in certain parts of the world and certain times of year, there’re are other parts of the world and times of the year where we have capacity; the price also varies considerably across the globe. What I can tell you is we’re seeing robust demand within our DAP business. We still have active opportunities in our pipeline. And so essentially, we’re not done and we think there’s more opportunity ahead.

Jason Gursky

Maybe ask a different way. What your addressable markets look like at that -- at this point and how much have you penetrated that addressable market?

Jeff Tarr

Again, when you’re tapping into a market opportunity that’s not been -- that’s been capacity constrained in certain parts of the world, it’s very difficult to forecast what that might look like once more capacity is laid available. Right now, we’re seeing head room for growth and we’ll continue to drive that as best as we can.

Operator

Thank you. And our next question comes from Howard Rubel from Jefferies. Your line is now open.

Howard Rubel

Could you talk a little bit about commercial markets, Jeff? I mean, you indicated they came in where you expected but there’s always mix or this customer dialogue. And then related to that you’ve made some changes to your sales approach. Could you elaborate on them and whether in fact you’re either seeing some sort of improved customer engagement?

Jeff Tarr

So, here is what I can tell you that Q1 was a better quarter for commercial than we’ve seen in recent quarters. However, one quarter is not a year make. We’re confident that we’re eventually going to return that part of our business to growth. But as we look at in the near-term, we’re still seeing macroeconomic headwinds, volatility in emerging markets, oil and gas commodity prices are still tough, impacting some of our customers and currencies still are weaker than they have been in prior years. So, those are all the factors. I’d also add and this leads into your second question, our platform is still in its early days. So, while we believe that will eventually be a driver of growth, it’s still small. In terms of what we’ve done with our business, we have our sales for commercial imagery are sitting alongside our product team for commercial imagery, under one leader who is driving performance, really focused on execution. And then we have our commercial platform business which is operating more at Silicon Valley web speed as you would expect for an early stage enterprise, and that also is driving early results. So, one quarter in effectively to this new structure, what we’re seeing is encouraging.

Howard Rubel

And then just as a follow-up, I continue to hear very good things about the capability of WorldView-3 and outside of NGA, are you able to make -- are there any indications that you’re able to translate that into improved analytics, in the U.S. of business either in terms of some potential task orders or other opportunities that typically show up in the ops budget that commanders have opportunities to exercise desecration.

Jeff Tarr

Well, certainly the higher resolution imagery is reviling information about what’s going on, on the ground, that’s a value to customers. When you ask about analytics, it’s important to point out that we have two strong drivers of our competitive advantage when it comes to analytics, one is the fact that we have 15 years of history. We’ve been monitoring the earth for a longer period of time, at high revolution than anyone else and what we’re finding is customers are coming in. And one of the first things they do is run analytics over a long period of time to test their algorithms. The second differentiator is the one you point out, which is the 30-centimeter imagery which reviles details on the surface of the earth that no one else has. Higher resolution means more information , more information means better analytics. So, yes, we see both as unlocking of potential future opportunity.

Operator

Thank you. And our next question comes from Josephine Millward from Benchmark Company. Your line is now open.

Josephine Millward

Thank you for taking my questions. Good afternoon, Jeff. Do you think that NGA will want access to WorldView-4, are you having those discussions? And if so, how would that impact your ability to sell WorldView-4 capacity to DAP customers?

Jeff Tarr

As I said, we’re always talking to the U.S. government about their short and long-term needs. If our largest customer decided that they have a need for WorldView-4 and a willingness to pay, we’re going to do everything we can to accommodate them, provided it does undermine other commitments to other customers. And I don’t think they’d expect anything different either.

Josephine Millward

That’s helpful, thank you. Can you also give us an update on your LBS renewal? I think on the last call, you said, you’ve renewed two out of three of your largest LBS.

Jeff Tarr

Yes. I also pointed out that of our largest LBS customers, a third was in the mix of a multi-year agreement that will come up for renewal, and one of the other large ones we’ve talked about at length. So, at this point, what I’d say is, LBS is a relatively small part of our business, both in terms of revenue at around 5%; it’s relatively small number of customers; it’s performing consistent with our expectations. And as we pointed out last quarter, we largely derisk the year and feel that we’ve got a good understanding of the balance of the year.

Operator

Thank you. And our next question comes from Jim McIlree from Chardan Capital. Your line is now open.

Jim McIlree

You talked a little bit about the timing differences and operating expenses, I was wondering if you could quantify that a little bit. And then also on that issue, are the declines in the consulting and professional fees in both cost of revenue in SG&A, are those permanent or are those likely to increase as we access through the year and/or as WorldView-4 becomes more close along. [Ph]

Jeff Tarr

Yes, Jim. So, basically, the situation we’re in is, we had a great quarter, expenses were down quite a bit, we’re working at it. However, as you would expect, we’re not going to able to hold that level for the full year and it comes to those points that you just made. I mean, we’ve got WorldView-4 that’s going to be launching; we’ve got other stuff that’s going with D&I customers et cetera. So, we do expect that never to increase. I don’t expect it to increase dramatically. But, as I said, we’ll just continue to watch everything and make sure we’re as efficient as possible. I can’t give you any specifics to when, consulting and contracting and things like that will come into play in the future quarters.

Jim McIlree

Okay. And can you just validate that WorldView-4 remains on schedule, any changes there?

Jeff Tarr

WorldView-4 remains on schedule.

Operator

Thank you. And our next question comes from Chris Quilty from Raymond James. Your line is now open.

Chris Quilty

I had a spin on Howard’s question about WorldView-3, which is -- I mean just holistically, are you continuing to see good customer uptake on the satellite where you thought or want to benefit in terms of new contracts and are you continuing to see a price lift relative to the legacy fleet?

Jeff Tarr

Well, we always want more, and we are striving to deliver it. On the last part of your question, pricing, we are also commanding a premium price for that satellite. And that’s encouraging as well. In terms of where we would like to be, I’d say we have done -- we made good progress on the taxes [ph] side of things, so monetizing with our international defense and intelligence customers for example. Where things have gone more slowly than we had originally expected was on the archive. And the reason for that is the way our customers are using that satellite has slowed the pace of building all additional scan of the earth at 30 centimeters. Eventually, we will get there and eventually we believe we’ll unlock that value too.

Chris Quilty

So, when you have that complete archive built, are there customers basically waiting in the wings for when the product is ready, I have a contract?

Jeff Tarr

Waiting in the wings would be a stronger term than I would use. Let’s just say that at this point we are focused on building out the archive as quickly as we can without -- we are still delivering on our commitment to international defense and U.S. government customers. And over time, especially when we add WorldView-4 to the mix, we should accelerate that and then we will see what we can deliver on that front revenue wise. Also from the analytics perspective, as we build history at 30 centimeters and scale at 30 centimeters on our archive, we believe that will unlock opportunities too.

Operator

Thank you. [Operator Instructions] and our next question comes from Mark Strouse from JPMorgan. Your line is now open.

Mark Strouse

So, just wanted to dig in a little bit more on the other diversified commercial line. The quarter-over-quarter bps from Q4 to Q1 is a bit better than what it’s been over the past couple of years. And just wondering -- just wanted to get your thoughts on that. Is that really just a bit of an easier comp from Q4 of last year or is potentially some demand pulled in from Q2 there? Just really trying to get a sense of the seasonality throughout the year for that one?

Jeff Tarr

I think that on seasonality front last year, we saw less seasonality in our business than we have seen in prior years. I’ll let Gary has anything to add to that, if he may jump in. I would say that in terms of commercial overall, as I said, we had a better quarter than we’ve had in recent quarters. However you measure it. But it’s still just one quarter. And one quarter is not a trend to make. So we still have more work to do, we’re still seeing a challenging macroeconomic environment in that part of our business and our platform still early days. But certainly Q1 was better than we see in recent quarters.

Gary Ferrera

And part of the -- part of other diversified commercial, remember is -- also has international defense intelligence in it. The folks -- what we put in the Q et cetera was that we saw growth in civil government and other diversified -- within other diversified commercial, also the international defense and intelligence at non-DAP business.

Mark Strouse

Got it, okay. Thanks. And then specifically on one of the macro issues that you mentioned in with oil and gas customers. Obviously oil is still significantly below where it was couple of years ago, but we have had the recent uptick over last several weeks. Can you just talk about how those conversations are going with your customers? I mean is this really a customer saying hang tight, we get over $50 oil, we might be have some budget free up or is it kind of a come back next year, kind of conversation?

Jeff Tarr

Well, there is two components to our oil and gas business, one is the subscription part of our business and that performed well last year, we’re more cautious going into this year, just because we are entering another year of the depressed commodity price. And then there is the project side of it. And we haven’t seen the same activity in project business that we saw perhaps two years ago and three years ago. So, we remain cautious on oil and gas. And there is really not much more to say on that.

Operator

Thank you. And we have a follow-up question from Chris Quilty from Raymond James. Your line is now open.

Chris Quilty

Just one follow-up on the DAP business. Can you remind me what you think the potential pipeline is for new DAP customers? You’ve obviously added one, but how much capacity or how many additional DAP customers do you think you can support with your existing and oncoming capacity?

Jeff Tarr

First of all, we’ve said in the past that we think that there’s approximately 15 customers out there who we think could potentially become DAP accounts. Time to keep in mind, these are very long sales cycles; they’re measured in multiple years, three or more. In terms of your question as to how many we could actually serve, it depends on the distribution of those DAP customers. So, we talk frequently about the Middle East and Asia Pacific and being capacity constrained there. You can conclude from there that there are other parts of the world that right now we have more capacity and as the DAP customer emerges our ability to serve them will be greater. So, we’ll see how it plays out, but right now we’re very pleased that we’re able to sign a letter of intent with an 11th and we’re working others.

Operator

Thank you. And that does conclude our question-and-answer session. I would now like to turn the call back over to Jeff Tarr for any further remarks.

Jeff Tarr

Thanks everyone for your time today. Looking forward, we’re going to seek to continue to build on our early progress executing our five-point strategy for shareowner value creation. We’ll continue to manage our imagery business for free cash flow and returns. We’ll continue to make disciplined investments in our platform for growth. We’ll continue to leverage our analytics services to embed our imagery and platforms in our customers’ workflows. We’ll continue to drive down our capital intensity while extending our industry lead and we’ll continue to fulfill our promise to return capital to shareowners. Taken together, we believe these strategies will create long-term value for share owners and we look forward to updating you on our progress. Thank you.

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.

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