GeoEye Inc. Q1 2008 Earnings Call Transcript

May. 9.08 | About: GeoEye, Inc. (GEOY)

GeoEye Inc. (NASDAQ:GEOY)

Q1 2008 Earnings Call

May 9, 2008 11:00 am ET

Executives

William Warren - SVP and General Counsel

Matthew O'Connell - President, CEO and Director

Henry Dubois - EVP and CFO

William Schuster - COO

Analysts

Jeff Evanson - Dougherty & Company

Dax Atkinson - Deephaven Capital

Shy Nisman - D.E. Shaw

Jim McIlree - Collins Stewart

Steven Russell - Emerald Advisors

Tom Barton - White Rock Capital

Tim Chatard - Sterling Johnston

Operator

Welcome to GeoEye Inc's first quarter 2008 investor call. At this time, all lines are in a listen only mode. After the prepared remarks we will announce the opportunity to receive questions. (Operator Instructions) As a reminder today's call is being recorded.

At this time, I like to turn the conference over to Mr. William Warren, GeoEye's Senior Vice President and General Counsel. Please go ahead, sir.

William Warren

Good morning. This is William Warren. Thank you for joining us today as we discussed GeoEye's first quarter 2008 results. Joining me today are Mr. Matthew O'Connell, Chief Executive Officer, President, and Director; Mr. Henry Dubois, Executive Vice President and Chief Financial Officer; and Mr. William Schuster, Chief Operating Officer. After our remarks, we will entertain questions. This call is being recorded.

Before we begin the business portion of this morning's call, we would like to inform you that we expect to be making forward-looking statements during today's call. These forward-looking statements involve known and unknown risks and uncertainties and are based on management's current views and assumptions regarding future events and operating performance. The Company's actual future results could differ materially from our current expectations.

Our actual future results will be dependent on conditions in the remote sensing industry, level of new commercial imagery orders, production rates for advanced imaging processing, the level of government spending, competitive pricing pressures, startup costs or overruns on new contracts, and technology and product development risks and uncertainties.

Listeners are encouraged to read the risk factors in our Form 10-K on file with the Securities and Exchange Commission for a discussion of the various factors which could cause our actual performance to differ from our forward-looking statements. We assume no obligation to publicly update or revise our forward-looking statements. At this time, I would like to turn the call over to the Company's Chief Executive Officer, Matt O'Connell.

Matthew O'Connell

Thanks Will. I want to thank you all for taking part in our call. The main purpose of the call is to report our financial results of first quarter of 2008. I'll provide a couple of highlights of our performance, then our Chief Financial Officer, Henry Dubois will give you the details of our financial results. After that, our Chief Operating Officer, Bill Schuster will talk about our operations and the status of our GeoEye-1 Satellite. I'll come back to discuss our strategies for growing the business.

Following our prepared remarks, we'll take your questions. As Henry will tell you our operating results for the first quarter were not as strong as in previous quarters. Our financial results were negatively affected by a couple of one time events and our ongoing analysis of the net operating loss tax issues we described in our last call in March. We're conducting an analysis of the tax issue and while that's going on, we've adopted the most conservative approach with respect to the intervals. The result of all this is that we're reporting breakeven net income for the quarter as Henry will explain in greater detail. Revenues for the first quarter were $34.4 million compared to $36.8 million for the first quarter 2007.

We said during our March call that our results might be affected by the timing of new orders from National Geospatial-Intelligence Agency or NGA. Their orders for the quarter were low and as a result, our revenues were too. Bill will talk more about the issue. I'm glad to report that two days ago we signed the contract, the memo with Boeing Launch Services setting the launch date for GeoEye-1 on Friday, August, 22 2008 from Vandenberg Air Force base in California.

Now I'll turn the call over to our CFO, Henry Dubois, so he can report our first quarter financial result.

Henry Dubois

Thank you Matt. As Matt mentioned, revenue for the first quarter of 2008 were slightly lower than for the first quarter of 2007. We generated $34.4 million of revenue in the first quarter of 2008 versus $36.8 million in 2007 are roughly 7% below last year. The primary reason for this reduction was the NGA order timing issue, we mentioned during our market investor call.

In the first quarter of 2008, we delivered to NGA $6 million of imagery versus $12 million in the first quarter of 2007. This reduction of 6 million was offset by increased revenues of $1.7 million from a full quarter from our aerial operations, production and service delivers of $1.6 million to NGA and imagery purchases of $300,000 from other governmental and commercial customers.

As compared to our fourth quarter 2007 revenue of $44.9 million, our first quarter 2008 revenue decreased by $10.5 million, or 23%. Overall, deliveries to NGA decreased by $13.5 million, of which $8 million related to imagery sales and $5.5 million related to production services.

This decline in NGA deliveries was offset by net increase of $3.3 million of the imagery sales to domestic and international customers. We believe the NGA ordering issue will be resolved over the coming months and should not be an issue once we have GeoEye-1 in operation later this year.

Our operating income in the first quarter of 2008 was $4.6 million, compared to an operating loss of $25 million in 2007. The primary reason for the loss in the first quarter of 2007 was the $36 million write-off attributable to the loss of our OrbView-3 satellite.

In the first quarter of 2008, we lost an arbitration case with Orbital Sciences regarding an on-orbit incentive payment for OrbView-3 up to the period the satellite fees operate. As a result, we recorded a one time $1.2 million cost that's the final OrbView-3 payment to Orbital Sciences.

Net of the effects of the OrbView-3 loss, our operating income in the first quarter of 2008 would have been $5.8 million versus $11 million in the first quarter of 2007. The primary reason for this decline in operating income was due to the lower NGA imagery orders as discussed. A full quarter of operating cost associated with our aerial operations increased imagery purchases to fulfill certain orders for NGA. Some increase cost incurred in preparation for the launch of GeoEye-1 and a cost to equivalent sales associated with our SeaStar program. These are offset in part by the absence of depreciation on all these rates.

On a quarter-over-quarter comparison and excluding a $1.2 million OrbView-3 payment, our operating profit for Q1, 2008 would have been $5.8 million versus $16.4 million in the fourth quarter of 2007. This decrease of $10.6 million is primarily attributable to a $10.5 million decrease in revenue.

Revenue from our products and services segment grew 37% over the first quarter of 2007. Revenue from this segment was $11.1 million for the first quarter of 2008 versus $8.1 million in 2007. As we have discussed the overhead allocation methods used tend to skew these expenses to the products and services sector from the imagery sector since IKONOS is nearly depreciated. The overhead and SG&A expense allocations are based on relative revenue, deployed asset base and direct headcount.

Inclusive of these allocations, the operating income margins for the two sectors will be 10% for product and services in the first quarter and 15% for imagery. As of these allocations, product and services provided a contribution margin of 59% versus imageries contribution margin of 53%. Once we have GeoEye-1 deployed the allocations should smooth to show a more comparable margin, pre-imposed allocations for products and services.

As of march 31 2008, our total backlog is $272 million up from $238 million as of December 31 2007. On a quarter-to-quarter basis our production backlog has increased $16.9 million from $13.6 milling to $30.5 million at the end of the first quarter. Our IKONOS and GeoEye-1 backlog has also increased $17.3 million from $224 million as of December 31 to $241 million at the end of March. Our funded backlog is also up. It is up $34.1 million from $96.2 million at the end of the year to $130.3 million at the end of March.

As we discussed in our 10-K we are undertaking an in-depth review of our net operating loses to determine whether or not we can utilize them in accordance with the internal revenue code Section 382. We have retained KPMG to analyze our shareholder base and its changes to determine whether or not we had a change of control for tax purposes. While this study is underway, we are maintaining our accounts as if we had a change of control, and thus have lost the ability to utilize our net operating losses to offset current pretax income.

Our first quarter net income for 2008 was essentially breakeven compared to a new loss of $30.2 million in the first quarter of 2007, the quarter we lost OrbView-3. The absence of net income in the first quarter of 2008 was due in part to a number of non-routine events specifically the NGA order timing issue, the Section 382 tax issue, and the arbitration loss on the OrbView-3 incentive payment.

As of March 31, 2008, our operations provide approximately 1.7 million of positive cash flow in the first quarter. This amount reflects net cash provided by operations of $8 million offset by net working capital decrease of $6.3 million. We use $25.1 million of cash in the first quarter to fund our capital expenditure requirements for our GeoEye-1 satellite, its related ground system and our GeoEye-2 satellite.

We received $1.2 million of cash from financing based on stock options that were exercised during the quarter. Overall our cash position as of March 31 was $212 million of which $98 million was in our restricted subsidiaries and $114 million was in our unrestricted subsidiaries. The GeoEye-1 program remains fully funded. To-date, we have expended approximately $415 million of $502 million associated with the program, most of which has been capitalized. The $415 million of expenses includes payments of $366 million and accrued but not yet paid amounts to contractors of $49 million.

On a cash basis, there is $136 million remaining to be paid under the GeoEye-1 program, which includes the previously mentioned $49 million of accrued, but not yet paid expenses and $87 million consisting of amounts to our contractors from milestones not yet completed, insurance premiums, interest to be capitalized and remaining unused contingencies. To cover these expenses we have $212 million of cash in our balance sheet and $41 million of remaining NGA milestone payments. Plus, we have $253 million of cash from these sources providing a significant cushion. In addition, we have access to the cash flow generated from our operations.

Regarding GeoEye-2, we have commenced long lead items for this satellite, but have not signed a contract yet for the construction for the construction launch or insurance of the new satellite.

In addition, we are still evaluating our financing options for our GeoEye-2 satellite and we will take appropriate steps to finalize our plans in conjunction with our selection of an integrating contractor for the satellite. For more detail on our financial performance in the first quarter, please see the report on form 10-Q that we flied yesterday with the SE. It's available on our website and the SEC's.

Now, I'm going to turn the call over to our Chief Operating Officer, Bill Schuster.

Bill Schuster

Thanks, Henry. As Matt said earlier, we have a launch date of August 22, 2008. We have completed 20 out of 24 milestones under the next few contracts. The remaining four milestones relate to launch check-out.

Last month, we successfully held the space segment readiness review. While GeoEye-1 was on track for launch earlier this year, we are taking maximum advantage of the extra time that will launch in August [support us].

We are using the extra time for additional exercises, rehearsals, training and other risk reduction measures. I'm happy to report that the ground stations for GeoEye-1 are complete including the new ones in Antarctica and Norway.

It's worth noting that GeoEye-1 has four ground stations not including customer ground stations. This will reduce the time from when an image is taken to when it can be delivered to a customer who relies on us to deliver their products.

We've gotten positive feedback on our operations from our customers. A number of them have commented that the quality of our imagery and products is terrific. Since part of our strategy is to provide the highest quality imagery product, this feedback was very welcome.

Our high-quality standards have led the increased revenue from our valuated products created for NGA our St. Louis facility. In fact, we are expanding the St. Louis facility and hiring people there. We are also expanding our production space in Denver to meet the growing demand. As you've heard, NGA's imagery orders were low in the first quarter. In addition, the winter months are not ideal for imaging over the northern hemisphere where most of the demand is due to snow cover on sun angle.

We previously reported that we have a past quarter from NGA for $60 million to collect imagery from last November through July 1. It is the pace of their purchasing is obviously the issue. We have had numerous meetings with NGA about the issue and we'll continue to work with them on it. We believe that the timing uncertainty related to NGA orders arises in part from the fact that the launch of the next few satellites occurred later than originally planned.

We have applied our IKONOS satellite to meeting NGA's needs, but without the full benefits that our next few program has to offer. The governments need for imagery remain strong, our challenges to align their needs with our collection capability. Once again, we believe the NGA ordering issue will be resolved over the coming months and should not be an issue once we have GeoEye-1 in operation later this year.

As GeoEye-2, I'm happy to report that we have received the primary mirror blank, which is now ready for grinding and polishing. In addition, we have gotten the other long lead parts, so we can now begin working on the secondary and tertiary mirrors and building up the next level of assemblies critical to maintaining our timeline. As Henry reported in the coming months we'll select the prime contractor who will integrate the satellite. That will keep us on track for the timeline meets the demand curve domestically and internationally. Now I'll turn the call back to Matt.

Matthew O'Connell

Thanks Bill. Obviously the financial results for the first quarter aren't as robust as we would like. I want to reassure you that we are working to solve the issues at hand and that we are also working proactively to grow the business. We have a number of initiatives underway, although some of them will take longer than hours to bear fruit. We are very focused on the upcoming launch. Our goal is to get GeoEye-1 on orbit and operating as soon as possible. As we said during our March call, we continue to receive strong interest from our customers and resellers for GeoEye-1 imagery.

Our strategy on distribution continues to be twofold. First, is to reach agreement with our existing regional partners and customers overseas for access to GeoEye-1. And second, to move up the value chain on our offerings to customers. Regarding the first plan of our approach, one strategic customer Mitsubishi Corporation, signed a contract with us on March 28, for its subsidiary Japan Space Imaging to have continued access to our IKONOS satellite now, and to get access to our GeoEye-1 satellite after check up.

It's a multi-year contract that provides for a set level of payments from our customers in exchange for direct downloading from our constellation similar to our IKONOS contracts with our international partners that are currently subscribers. As with any international agreement, giving foreign parties access to U.S. satellite imagery, our contracts require approval from NOAA, our licensing agency. The contract has been submitted for approval, which typically takes up to 60 days.

Another international regional partner signed a contract last week to have us begin modifying their ground station to begin to receive GeoEye-1. Signing these agreements at this stage is very positive. As we've said in the past, we hope to reach memoranda of understanding with leading customers before launch. But, we expect that most of them will wait until actual launch to enter into binding agreements. So, we are glad that we were able to add these two now.

We've also received strong interest in our imagery end products in some new markets particularly the rapidly developing markets in China, Russia, and India. Our sales in China have grown particularly fast. It is one of our fastest growing international markets.

From a strategic standpoint, we have an opportunity to get more insight into market dynamics now, because our competitor DigitalGlobe recently filed their registration statement for an initial public offering. The second leg of our strategy is to continue work on moving up the value chain with our customers. In this regard, we continue to focus on the business-to-business market, not the business consumer market, because we think the B-to-B market offers us more upside value. Our long-term goal is to provide not only high quality imagery and solutions, but also it provides products, tools, and services that help our customers convert that imagery into actionable information.

By doing so, we create a closer tag of the customer and also get a better return on a capital adjusted basis. Since we already have robust value added production capabilities at our facilities in St. Louis, Denver in Kansas City, it's relatively easy for us to increase value added production capacity incrementally to meet rising demand without large capital expenditures. Our engineering development teams in St. Louis and Denver have continued to create innovative products and solutions. And, we recently completed development of the niche software tool that will be released soon.

Demand for our value added imagery products remain strong and confirms the ability of our strategy of focusing on creating products and solutions, in addition to selling imagery. Long-term in the five or ten time frame, there may be more international satellites, although we expect that our satellites will continue to set the standard for image quality, resolution, and accuracy. As we've said before, what we do at pixels will be as important as generating them.

Our airport mapping product line is an example of a growing value added product. We've delivered over a 100 airport mapping data bases since 2002 and we have over a 1000 more back order. Just to give you an idea of the growth potential, there are about 14,000 [page] airports in the world. Another area of commercial growth is our sales to the online industry. This sector continues to show significant interest. The visibility that comes from our relationships with the online portals is also growing and the increased market awareness that this visibility offers us may in fact exceed the revenue value of the deals.

And that concludes our prepared remarks. We know that some of you have expressed interest in taking questions, asking questions and we'll take those questions now understanding that some of the questions may involve proprietary, commercially sensitive information, which may limit our ability to respond.

I'd also like to remind you that our shareholder meeting is at the Sheraton Hotel in western Virginia on June 5th. The proxy statement will give you all the details. Thanks again for joining the call. I'm going to turn this back to the operator now.

Question-and-answer session

Operator

(Operator Instruction)

And we'll go first to Jeff Evanson with Dougherty & Company.

Jeff Evanson - Dougherty & Company

Good morning gentlemen, thanks for taking my questions. Bill, you mentioned the $60 million task order with NGA, and I guess that's where this question I thought of you. Do you expect that that you are fully realize that $60 million given this timing uncertainty or pace of ordering issue?

William Warren

As I think we said that we expect this problem to be seen resolved with the launch GeoEye-1 certainly before the end of the year.

Bill Schuster

I think the simple answer, Jeff. Is yes we will complete that task order. The question is when.

Jeff Evanson - Dougherty & Company

Okay, do you expect this issue to remain at least partially impacting your sales to NGA in Q2 and Q3?

William Warren

I think so yes.

Jeff Evanson - Dougherty & Company

Yeah. Okay. Great and I appreciate that there are these cost allocations that impact the production in other margins? But, I guess what I like is, if you could give me some sense of what's happening with the profitability of those services? If I just look at Q4 and Q1, in other words the sequential change here looks like your operating margins declined from 25% down to 10%, and I know allocations are part of that but give us a sense of, is 10% really the true profitability of production in other or is this 10% number kind of anomaly?

Henry Dubois

Jeff this is Henry. As I was trying to explain, we believe that our product and services do offer some significant upside. The allocations because of the fact that IKONOS is fully depreciated, there is not an asset value against which to carry some of the overheads that get burdened. In addition, we had a number of one time events that we are getting allocated around. When you break those things out on a contribution margin basis, which would be prior to you start doing your allocations, products and services provided about a 59% contribution margin in the first quarter versus about 53% for imagery. So I mean, we believe them to have a very strong and growing capability and as we ramp them up. I would expect that margin to continue in that fashion.

Jeff Evanson - Dougherty & Company

So, Henry for those of us trying to put together GAAP estimates, should we continue to expect this 10% level for the next several quarters?

Henry Dubois

Jeff, as you know we don't provide financial guidance, but I believe that 10% is of the anomaly.

Jeff Evanson - Dougherty & Company

An anomaly to the low side?

Henry Dubois

Yes.

Jeff Evanson - Dougherty & Company

Okay. Thank you. And then Matt, I'm encouraged to hear about your increasing interest from the online portals. Could you just give us a little bit more color on the progress you are making their and did you sign any new customers in the quarter? And, I think you alluded to if I heard you right, there is more of value beyond what we're seeing now, so some color there? And I guess, a follow on to that would be, do you see the level of sales you had in Q1 is the kind of thing that can repeat in the future, looks that was a forward question, but I'll throw it out there or was there one time impact in Q1?

Matthew O'Connell

Jeff, all those are good questions, you're right the last one is forward-looking. But, let me take it sort of from the top. We don't talk about our customers by name, because I think that as tied with those intelligence community as the online people are so competitive right now that, none of them wants us to mention in public who they are. I will say that our new satellite, because it's going to be the best commercial satellite out there and because it has color, has attracted interest from all of the online providers and we're talking to all of them.

As to the growth and revenue, the revenue is growing and is becoming more meaningful overtime. As to the visibility, I mean the marketing visibility of being on some of these large portals is terrific. I think, as the new satellite gets launched the visibility of our supplying top notch imagery of these people will increase the market visibility of our name. And, that is so global that in some ways it out weighs the dollar value of these deals. And I don't mean, to discount the dollar value, but I should put in context. We have a network of international ground stations and we directly download imagery to those guys and that plus the NGA money is fairly large supply of revenue to us. The online stock is growing and it is great incremental money. It's just not as meaningful as the global relationships we have with our current customers. It will be a good add on and it's going to be a great for visibility.

Jeff Evanson - Dougherty & Company

Should we think about those online sales as perpetual license type sales or subscription sales, and was there anything in Q1 that was one time in nature?

Matthew O'Connell

I would not - it's not a perpetual license. It's more like a subscription, and I don't think there was anything one time about the first quarter sales. I think that one of the greatest values in those relationship is they are all very creative people. We are looking at new ways to distribute our not just imagery, but our products and services and all of those folks are very clever and they all want to do that. They would like to partner with us with our various customers, and think of new ways to move information around the world, if you will. I can't go into too much detail about that obviously, because we are thinking that some fairly proprietary things there, but I think if that segment will grow in absolute dollars of the sales, and it will also grow because it gives us entry to new types of business.

Jeff Evanson - Dougherty & Company

And, well great, it's great to see the commercial sales picking up that's wonderful thanks.

Matthew O'Connell

Welcome.

Operator

We will go next Lance Vitanza with [Night Head].

Unidentified Analyst

Hi guys, couple of questions. First on the NGA ordering shortfall, I heard the $6 million of imaging buys versus $12 million last year, but could you repeat the figures that you mentioned earlier regarding the total amount of NGA revenues year-over-year.

Henry Dubois

Well, actually it was $6 million of imagery purchases n the first quarter Lance, which was a $6 million Delta to the $$12 million that they had purchased in the first quarter of last year.

Unidentified Analyst

Yeah. I know, that I got, but then you went on to say something that was a larger number that I believe represented not only imaging, but also other services type revenues from NGA.

Henry Dubois

I'm just looking at my notes here where we talked about was NGA did then purchase about $1.6 million of imagery in the first quarter, our products and services. Are you talking about the comparison to fourth where NGA purchases were down by about $13.5 million, which was 8 million of imagery sales versus $5.5 million to products and services.

Unidentified Analyst

And, for what period was that?

Henry Dubois

That was Q4 to Q1.

Unidentified Analyst

That was Q4.

Henry Dubois

'07 to Q1 '08.

Unidentified Analyst

Okay. Okay, great. Thank you. And then, does that if we just stick with Q1 over Q1 for a second. Does that represent a shift in imaging buys temporary or other otherwise to DigitalGlobe, now that they have their satellite up or--?

Henry Dubois

I think, it relates to the overall order debt issue that we've been explaining that they've given us a very specific set of orders as opposed the larger pool to collect from. That makes it more difficult for us to correct as efficiently as we could possibly do. And, that's about as much as we can say at the moment, don't know what other implications there might be.

Unidentified Analyst

Okay. On the remaining payments under the NextView. The 49 and the 87, I think were the two figures that you mentioned. Do those numbers include the $40 million or so that you still owe on the existing insurance policies?

Henry Dubois

That's part of the 87.

Unidentified Analyst

Great, okay, thanks. And then, I think in the queue I mentioned that you might actually seek additional insurance depending on what market conditions were like?

Henry Dubois

We are starting to look into that right about now.

Unidentified Analyst

Could you help me understand your top process there? I mean, do you feel underinsured now or why would want to go out and seek additional insurance?

Henry Dubois

We perhaps 270,000 million insurance right now, which is a comfortable amount if the price is right we may be willing to look at different risk mitigation not that we are worried about our launch value, but it's always prudent to have as much insurance that's cost effective.

Unidentified Analyst

Okay. And the last question, worst case scenario, you have to make it and I may be getting this wrong. So, interrupt me, but worse case scenario you might have to make a $27 million tax, cash tax payment this year, awaited this year is that right?

Henry Dubois

That is correct.

Unidentified Analyst

What would the timing be under that or is it possible to speculate?

Henry Dubois

We would expect to have to make it by the time we would file our federal tax return, which is in September. We are working diligently on the 382 studies to determine whether or not we did have a change of control for the tax purposes that actually dates back to something in 2004, 2005. We don't have any further details that we can share at the moment. I'm willing to say we're booking this as conservatively as we could.

Unidentified Analyst

Okay, great. Thanks guys.

Operator

And we go next to Dax Atkinson with Deephaven Capital.

Dax Atkinson - Deephaven Capital

Hi thank you for taking my call. A few questions, one OrbView-3 how much did it contribute to your gross margin in the first quarter of 2007?

Henry Dubois

Well OrbView-3's revenue in the first quarter of 2000 revenue was in the neighborhood of about $5 million. On a gross margin basis, we would have had about $4.5 million to $5 million of depreciation on OrbView-3. On an individual basis it was more just helping us just generate additional revenue, it did not have as high margin fees.

Dax Atkinson - Deephaven Capital

Okay, great. And then as the amounts remaining to be paid for the GeoEye-1 expenditures, how much of that specifically will be paid to subs?

Henry Dubois

To the subsidiaries?

Dax Atkinson - Deephaven Capital

No to contractors.

Henry Dubois

Our contractors.

Dax Atkinson - Deephaven Capital

Contracts and the sub-contractors, yeah.

Henry Dubois

Pretty much all of it. I mean, the largest piece of that $87 million is the roughly $40 million of insurance premium, in addition to that would there be payments to both Boeing and some final payments to General Dynamics.

Dax Atkinson - Deephaven Capital

Okay. And how much of contingency is remaining?

Henry Dubois

We still have a pretty good contingency, but we really haven't gotten into the disclosures on that.

Dax Atkinson - Deephaven Capital

Okay. And, your international sales year-over-year in the first quarter how did they change?

Henry Dubois

I believe international sales year-on-year would have been down slightly given the fact that we are in a quarter-to-quarter basis. OrbView-3 was operating in the first quarter of 2007. We were able to shift a fair bit of total revenue from OrbView-3 over to IKONOS. But there were some customers that we didn't have capacity in the regions in which they were.

Dax Atkinson - Deephaven Capital

Okay. So down slightly, but due to OrbView-3 not been in service?

Henry Dubois

Correct. I mean, we had that partially offset by the growth in our China sales.

Dax Atkinson - Deephaven Capital

Okay. And your relationships with international customers, they are good still, how does that look?

Henry Dubois

Yeah that's still good. I mean, they want the satellite up, we want the satellite up, but the fact as I said earlier. We've been telling you guys all along, we didn't think we would be able to sign firm contracts until after launch and now actually we told you we had one sign before this call and we just announced two more on this call. So, we're gratified that these guys are signing up now rather than waiting until launch. I'm not sure, if we will get many more sign before launch, but we are out trying and they're obviously interested in the quality of our imagery, because they think this is going to be the best.

Dax Atkinson - Deephaven Capital

You have three contracts signed with international customer, could you have one?

Henry Dubois

Yeah

Dax Atkinson - Deephaven Capital

Okay. And, how much of the first quarter was impacted by weather? You've mentioned, Bill mentioned, snow pack and angles with sun and clouds. Is there a way to estimate how much of your revenue was kind of impacted by abnormal weather?

William Warren

Dax I don’t have this bill. I don’t have our number at my finger tips right now. In general, there are sets of requirements that kind of come in and out of the deck as a function of the season and so it's not necessarily an unexpected outcome, but I don't, exactly what that was on a dollar basis, I don't have it at my finger tips.

Henry Dubois

Dax, if you want to look at our results on a quarter-by-quarter basis of the last couple of years, you will see that the first quarter is typically our lowest quarter, our fourth quarter is another, I mean, it's the fourth and first with the first being another lower.

Dax Atkinson - Deephaven Capital

Okay but Henry there was an abnormal weather related impacts in the first quarter of '08, relative to other first quarters?

Henry Dubois

No that impact was more or of the order of deck issue

Dax Atkinson - Deephaven Capital

Okay in the order deck from NGA currently is it you indicated that only certain imagery they put in order for only certain imagery versus a poor order. Is that part of the impact were you not able to shoot certain images in Q1, or is it like a certain resolution that they are seeking in that specific order that's impacted timing.

William Warren

No, I think that what they have done is they do a scrub of their entire set of requirements. And, instead of leaving out a huge target set for us to go and as we fly over almost to pick and choose from that what we got was a lot more limiting in terms of saying here was a relatively small set, which doesn't give you the flexibility on the efficiency of the collection.

We have started to see some of those requirements which have been scrubbed out, starting to come back into the deck, but unit we have a robust set of targets out there, it makes it very difficult to shoot in an efficient manner and therefore to get to get the kind of volumes that we believe that they really need and are interested in as well as that we are capable of producing.

Henry Dubois

But to be specific Dax, no it's not a resolution issue?

Dax Atkinson - Deephaven Capital

Okay. Great, thank you.

Operator

Thank you. We'll go next to Shy Nisman with D.E. Shaw.

Shy Nisman - D.E. Shaw

Hey, guys its Shy. Just one quick question, first, you've mentioned you've amended the Boeing launch agreement. Is there the only thing you amended there the date of launch or are there other amendments to that?

William Warren

Yeah. The amendment cover the date of launch and change to couple of dates that go into what happens, like two months before launch, so there are activities that happened that were also changed in relation to that, but that was the only thing.

Shy Nisman - D.E. Shaw

Got you, but the pricing and everything is the same?

William Warren

Correct.

Shy Nisman - D.E. Shaw

And, does that effectively guarantee you, now the August 22 date or there are still kind of externalities that could push you back?

William Warren

It should guarantee that date of things that can move our launch date. For instance there is one launch in front of this us. It's a NASA mission this summer. If that were to be delayed, but stay there on the range, it could push our launch back. Other than that I think the only things that will change it would be accident.

Matthew O'Connell

Yeah Shy just to tell you what Boeing told us, because we asked them the same question and we said look we want to make sure that this amendment gives us what we think we are getting and they said you get August 2. So, they didn't disclose any big contingencies out there.

Shy Nisman - D.E. Shaw

Okay. And then, I guess just looking at DigitalGlobe's S1, they had a pretty nice increase in revenue and profitability after they launch their next few satellites, is that a good proxy to kind of estimate where you guys will be after launch of July 1, do you think that's low or high?

Henry Dubois

Shy this Henry. The S1 is interesting leading and I really would rather not comment on their margins relative to our margins, because that would be a close to getting guidance. Let's just, if I could just leave at that.

Shy Nisman - D.E. Shaw

Okay. And then, I guess just following up on Dax's questions from earlier. I guess, how much of, I guess it sounds like you have the tag that you do to service for the NGA and with your current satellite, you're able to do a certain amount per quarter. Beside amount I guess, increase with the weather and day light hours and stuff like that to improve in summer or is it just the matter of capacity on the satellite or something like that?

William Warren

Well during the summer months the total deck, target deck not just that related to NGA does increase. And so, therefore you get more things and more opportunities to go and collect imagery. Does that answer your question?

Shy Nisman - D.E. Shaw

Yeah.

Henry Dubois

I think, one thing you were asking in effect Shy was, our week capacity constrained and we are not and that's why Bill has been taking to the government, because we have available capacity. We know that they need more imagery or we think they do. So, the short fall has not been related our capacity.

Shy Nisman - D.E. Shaw

Got you. And then, just in your 10-Q, you mentioned that about $13.5 million of your revenue came from the government, which similarly goes down significantly from before but kind of like netting that out, it seems like your non government or non U.S. government revenue has continued to perform well, is that fair?

Matthew O'Connell

That is correct.

Shy Nisman - D.E. Shaw

And are you seeing those trends continue?

Matthew O'Connell

We are continuing to do things to grow our business with the U.S. government as well as outside the U.S. government.

Shy Nisman - D.E. Shaw

Okay. Thank you.

Operator

And we'll go next to Jim McIlree with Collins Stewart.

Jim McIlree - Collins Stewart

Yeah. Thank you. Were there any 10% customers besides NGA during the quarter?

Henry Dubois

I'm sorry, what was your question?

Jim McIlree with Collins Stewart

Were there any customers who accounted for more than 10% of revenues besides the NGA?

Henry Dubois

No.

Jim McIlree with Collins Stewart

Okay. And on the taxes, I think the Q said that there was a $900,000 penalty for outstanding payment. So if I X that out, it look like the tax rate was about 25%. Is that is my math okay and is that kind of what the accrual for taxes is expected to be?

Henry Dubois

For the first quarter that would be, your math is fairly as accurate, that interest and penalty issue really is related to the 382 potential liability, and would have to be paid in the event that we did have a chance to control. Regarding the tax rate that is, what it was for the first quarter.

Jim McIlree with Collins Stewart

Does that say anything about what it is going to be in future quarters or how do you accrue, how are you accruing for taxes for the remaining portion of the year?

Henry Dubois

On a go forward basis, I'd be working at a cash tax pay basis of more in line with the standard of 38% to 40% rate.

Jim McIlree with Collins Stewart

Okay. Great and library sales, was there significant down the dollar amount of library sales during the quarter.

Henry Dubois

We don't break our revenue streams out there way at the moment, so really can't comment on it.

Jim McIlree with Collins Stewart

Okay. You said that you are expanding the St. Louis facility, would that be an association with the images form GeoEye-1 or would that capacity increase also be utilized for the IKONOS satellite.

William Warren

It actually as we have a value added processing capability in St. Louis that uses multiple sensors, not just our own but others as well. The data from other sensors and produced products using all those sensors and that's primarily what that location's up to.

Henry Dubois

So, Jim, that's not driven by GeoEye-1. We see more demand now and we think it will grow in the future for multi sensor products and we're actually kind of a leader in this field. St. Louis has been doing for ever and they're literally regarded worldwide as a leader. So, that expansion is independent of GeoEye-1. Yes it will also include GeoEye-1 imagery when its up, but we think this is an area that just going to keep growing as the world looks for more textured and more layered information products.

Jim McIlree with Collins Stewart

Right, so GeoEye-1 becomes another dataset that they can use to produce whatever product is, they are producing for customers?

William Warren

Yeah.

Jim McIlree with Collins Stewart

Great. I think that's all I have. Thank you.

Operator

And we'll go next to Steven Russell with Emerald Advisors.

Steven Russell - Emerald Advisors

Morning. Thanks for taking the question. Your funded backlog, does that include your remaining milestone payments from NGA as well as the approximately 40 million left on the NextView task order?

Henry Dubois

It does include the milestone payments from the NextView piece as well as part of the $60 million cash part that Bill mentioned as well as other backlog we have from other customers.

Steven Russell - Emerald Advisors

Okay. Thank you.

Operator

And we'll go next to Matt Golub with [Greyfire Capital] Capital.

Good morning. Questioning another question about the NGA order volume. Why would the rate of their orders decrease sequentially, and how would they get, and how would that be resolved with the launch of GeoEye-1?

William Warren

I think that, what I was trying to explain was that last year when we were collecting at a different rate, we had a very robust target deck out there. What NGA has done as a part of our overall requirement scrub is they pulled back that robust deck and started to beat the targets out at a slower rate, which then makes our collection efficiencies go way down. And, as we would complete target, they would send us some more targets. But again, the efficiency, the rate at which we could collect them went way down. I think that they have just about finished this work that they were doing and we are already seeing some signs of increase but we still have a ways to go before we get the robust kind of target that we need to maximize the collection capability, but satellite has and at the same time maximizing our satisfaction of the requirements that we know the government has.

Unidentified Analyst

But that practice has direct impact on how much you charge them correct? In other word did they give you a scrub lift targets than you make less money?

William Warren

Certainly we would, when we are entering into these deals we consider the quantity as part of our, as a quantity by discount.

Unidentified Analyst

Okay. And, so you would envision that the practice of submitting a scrub list of targets will revert back to the old practice overtime?

William Warren

We think that we believe that we will have a more efficient arrangement for both us and the government going forward.

Unidentified Analyst

Okay. Is there -- so there-- I'm just trying to get a sense for the demand for this service from the government, is there -- does the reduced ordering from the government and because the revenue has gone down. Does that reflect lower demand or reevaluation of a temporary lift in their demand or are they sending the orders elsewhere or is it a budget issue?

William Warren

No we believe that the demand remain strong. We believe that this was more of a temporary versus our long-term kind of trend. In fact we would think that it is quite the contrary that they are having a stronger demand going forward and I think that this was a realignment of looking at how it is that they go and get these requirement satisfied.

Unidentified Analyst

Okay. Earlier in the call someone mentioned that maybe several of you that the issue would be resolved once GeoEYE-1 launch, but it doesn't sound, and then I think Matt made the comment later that, it wasn't a resolution issue that's causing below your order flow. So I'm just wondering whether what the launch of GeoEYE-1 has to do with how much the government orders, because there was a -- that your capabilities were certainly enough for them to order a larger quantity a year ago or nine months ago? So, I'm just trying to get a sense of---

William Warren

It's premature to say much about this, but as I was said earlier in answer to your previous question.

Unidentified Analyst

Yes.

William Warren

I believe that we will have a method of going forward that will work better for us, as well as for the government in terms of gaining efficiency of the collection. And I think, that until that all pokes itself out and that will be in connection with GeoEye-1's launch and I think until that works itself out, until we've reached closure on that is going to be difficult for us to speak about.

Unidentified Analyst

Okay, I understand. And a question about the distributor relationship that you have, once the satellite, once GeoEye-1 is launched and the distributor that doesn't have a contract to sell inventory derived from GeoEye-1 wants to purchase. How long would it take them to do that, could they do it immediately or is it a long process with a lead time?

William Warren

Well we have multiple sales relationships as you can imagine.

Unidentified Analyst

Yeah.

William Warren

We have a network of international ground stations. We sometimes call them regional affiliates, we sometimes call the regional distributors.

We also have plane commercial resellers and we have plane distributors. If somebody wants, one of the advantages IKONOS has and one of the advantages GeoEye-1will enjoy, is that we do have this embedded network of ground stations around the world where our clients can get direct downlinks from our satellite. So, the governmental customers especially enjoy the speed and confidentiality of that relationship. We are working right now, as you heard before on the ground station upgrades, which fund really big dollars to get those folks over from IKONOS to GeoEye-1. So, if somebody wanted a new ground station, it takes a while and that's why we are working on it now and in fact we've ordered the long live time parts and one ground station is actively being worked on right now.

The folks who don't, if they don't have a ground station any one or new one, that can take a process that takes a while especially since our incumbent guys have generally indicated that wanted to get GeoEye-1 and we are working on them first, because they are long-term customers with pretty sizeable money. The commercial resellers or distributors who have never had ground station may resell our stuff right now and we will continue to deliver to them to any number of ways. We download things here, we downloaded at customer sites. We will deliver imagery to people who want to use it pretty much any way they want to. So the people who want to commit the capital to have the speed and confidentiality of a direct down link they get that. Other people take it through electronic means, through delivery of CDs. We handle deliveries anyway the customer wants.

Unidentified Analyst

Okay. Thanks very much.

Operator

And we go next to Tom Barton with White Rock Capital.

Tom Barton - White Rock Capital

Yeah. Good morning. Just a couple of comments a little bit different than the one before. I'll give you a pass on this launch date last of April, because I think I understand that situation and that was probably a little bit out of your control. I also understand that NOL situation, I think that the jury is still out on that. So I give you pass on that as well.

But the thing that I won't give you pass on is that I think the management has done an absolutely horrific job in dealing with Wall Street and an absolutely horrific job in letting the value of the stock fall this much. And I'll tell you why, if you look at the market cap today of little over $300 million, and if you take your book value then you add back in your real asset value because you have depreciated so many items down to zero. It's probably trading below book value.

And to have a business that has a kind of lead times that you guys have to put assets up in the year to trade at potentially right now book value or to trade below book value. We've another companies getting ready to file to go public which will be coming at somewhere. It looks to me between 5 and 6 times book value?

I strongly suggest you guys contact an investment banker and figure out how to manage this because you either need to be looking for strategic opportunity going forward or you need to be looking to buy stock back, but to be managing a business with the kind of relationships you have and the kind of technology that you have, trading at book value, it's just beyond me. And, I really hope you guys get this thing fixed, and if you don't get this thing fixed. I think we got be looking to find some new management. And that it's a little bit more associated to the real value of this business. Those are my only comments. Thanks.

Matthew O'Connell

Well, we, I share your opinion quite literally, I mean, I--

Tom Barton - White Rock Capital

You don't, share my pain quite literally. I don't think you and I share it on a one-to-one basis because up that I earn a lot more stock than you do.

Matthew O'Connell

Well maybe so. I left a lot of paper in New York, in Kenya. I get to restart those company. I made a big bet on it and I have most of my network tied up here. Amazon's Jeff Bezos has said in interview recently. He try to take criticism about stock price and about how willing her serves the customers. Now, we are doing a good job on serving the customers. We have a lot of initiatives that should help us grow the business and we've touched on some on today. We have settled a launch date with Boeing that was obviously an issue.

Tom Barton - White Rock Capital

I'm not arguing about the way you are running the company. I think actually given some of the events that had taken place, the fact that you had a satellite go black, the fact that you've got a satellite that’s up in the air, it's got an extended life on it. I think this is all very good. The facts you got bumped in April is not your fault, the fact that you have one of the, that you have the number one advanced satellite in the air in August that is awesome.

But the bottom line is and you I've made calls for the company's before, you do a horrible job with Wall Street, you did a horrible job setting up expectations of what would happen when your satellite launch was delayed. You did horrible job to that and as a result you don't give guidance today at all. Your press releases that come out on a monthly basis are pretty much non-existent and so you come out today with something which quite frankly didn't surprise me at all and the market cut your stock again another 25%.

And ultimately, you know the real value of this company is not reflected on a day in and day out value of your stock, but I'm just telling you that as of three weeks ago I couldn't have made the same call, but call today is you were trading below book value. It is not a matter of just feeling the pain, it's a matter of somebody figuring out how to get that corrected because otherwise some company is going to say look, it's a lot cheaper to go and buy GeoEye at $25 bucks and it is for us to put a new satellite in the air.

And we're going to be stuck with somebody coming in with an offer substantially above we trades today potentially and having to take a really low offer because you guys force it down here. So, again I'm not commenting about the way you’re running the business. But clearly you have totally mishandled Wall Street and you've let the value of the business fall below book, and its inexcusable and that's all I have to say about it.

You don't need to defend how you're operating the business. I understand the issues that you are up against. I think you'll get those adjusted. I think you're numbers personally will be totally be fine. Once the new satellite is up, I can understand why you would have trouble getting business when people thought that you would have this new satellite up in the air, I totally get that. That has nothing to do with the other aspect.

Matthew O'Connell

We will try to do a better job with Wall Street and since you said that sorry I've to say we'll take the next question.

Operator

We'll go next to Tim Chatard with Sterling Johnston.

Tim Chatard - Sterling Johnston

Good morning. Related to the NGA task order for $60 million, I just need to understand a little bit more in the 10-Q language says that task order was to run, I guess from November 1 '07 through the launch of GeoEye-1, it would, which would lead me to believe that that entire $60 million would be funded by the launch. Is that an accurate understanding?

William Warren

At the time of the negotiation the launch was going to be in July and indeed we, accordingly in April with that check out finished in July, I'm sorry. It was going to be imaging in July.

Tim Chatard - Sterling Johnston

Correct.

William Warren

And, so the intent was to have on contract that whole $60 million to be expended in that period to time prior to the launch and check out of GeoEYE-1.

Tim Chatard - Sterling Johnston

But that's no one of a case now. Meaning that $ 60 million is not going to get funded prior to the launch or by July. It sounds like a probably stretches out through the rest of this year. I am just trying to figure out what kind of quarterly revenue we'll have to look for with remaining $40 million.

Henry Dubois

Tim, it's little unclear at the moment whether this contract would end and be fully funded by July or by the end of the check out. With the August launch, there would be some time around October 1, give or take. We're working through that right now and trying to solve the entire order deck issue. It has, I mean, we're just working our way through it. Parts of it have been funded and we're delivering against that. We are trying to resolve the NGA and get it done.

Tim Chatard - Sterling Johnston

Okay it did seems like a languished in a queue, probably it could be updated to be a little more clear about what the current situation is. It seems like it’s a little bit outdated and tough for me to kind of decipher. A question on the backlog, have you talked about how much of that backlog is governmental versus non-governmental or commercial customers?

Henry Dubois

The Majority of that would be governmental. We haven't, we don't, we haven’t broken that out. I mean, we got the pre FOC milestone payments in there plus some of the commitments part of this $60 million that we would be in there, as well as other commercial backlog that we're working. We also have production services backlog out of St. Louis and certain operations in there.

Tim Chatard - Sterling Johnston

Of the revenues this quarter, the imaging revenue, and again the current quarter, have you talked about how much of that is commercial at all?

Henry Dubois

Well we have about $23 million of total imagery revenues, of which about $6 million of that was NGA. So the remaining 17 million would be foreign international governments as well as commercial.

Tim Chatard - Sterling Johnston

Okay. Any thoughts towards breaking out commercial, is a similar category going forward, it--?

Henry Dubois

That’s a, I appreciate the comment, and we're looking at, if we should be adjusting or how we might be adjusting our segmentation as we go forward with GeoEye-1?

Tim Chatard - Sterling Johnston

Just my true sense would be that commercial is something that I try to like to get a handle on the momentum of that business and to extent that you probably add more detail on that would be helpful?

Henry Dubois

We hear you, we'll take that into consideration. I appreciate the thoughts.

Tim Chatard - Sterling Johnston

Thanks.

Operator

And we go to Jim McIlree with Collins Stewart.

Jim McIlree - Collins Stewart

Thanks again. Henry, I'm trying to reconcile a couple of things you said. One, you said that the Q1 margins were an anomaly on the low side, but I didn't really hear anything that would make it be an anomaly. Is the contribution margin going up in future quarters or is that may going down, I am just a little bit--?

Henry Dubois

You may remember, I mean our business is a very much of fixed cost business. So, if you pump through more revenue, you will get a much higher market. I mean, you take a look at our numbers for the fourth quarter versus first quarter, our revenue dropped $10.5 million, our operating income dropped $10.6. I mean, you've got a pretty strong correlation there. In the totality, there was some shifting around going as well, but in general it's very much a margin, it's very much a very heavily fixed cost business.

Jim McIlree - Collins Stewart

Okay, so you weren't saying that SG&A was unusually high this quarter, that you had some mix issues or something like that? It was just more of a volume business.

Henry Dubois

It's a very much a volume business.

Jim McIlree - Collins Stewart

Okay. That's great. Thank you very much.

Operator

And we'll go next Matt Golub with [Greyfire Capital].

Unidentified Analyst

Just a quick follow-up question guys, for Henry. The Q says that $13.5 million was revenue from the government 5.9 of that was imagery, is that I mean the balance.

Henry Dubois

Little bit of production.

Unidentified Analyst

Okay. Great thank you.

Operator

Thank you. And that will conclude our question-and-answer session. I would like to turn the conference back over for any additional or closing remarks.

Henry Dubois

Thank you all for joining and feel free to come to the stock holder's meeting. We look forward to talking to you next quarter.

Operator

Thank you, ladies and gentlemen that will conclude today's conference call.

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