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Executives

David Banks - Vice President of Investor Relations

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

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

Analysts

Jonathan Raviv

Andrea James - Dougherty & Company LLC, Research Division

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

Mark W. Strouse - JP Morgan Chase & Co, Research Division

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

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

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

DigitalGlobe (DGI) Q2 2012 Earnings Call July 31, 2012 5:00 PM ET

Operator

Good afternoon. Welcome to the DigitalGlobe Second Quarter 2012 Earnings Conference Call. [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 David Banks, Investor Relations for DigitalGlobe.

David Banks

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

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Any forward-looking statements are based upon our historical performance and our current plans, estimates and expectations. We may make forward-looking statements about, among other matters, revenue and revenue growth, adjusted EBITDA and adjusted EBITDA margin, earnings per share, cash flow, sales pipelines and strategic initiatives. Inclusion of this forward-looking information should not be regarded as representation by us that we will achieve future plans, estimates or expectations. Such forward-looking statements are subject to various risks and uncertainties and assumptions. A number of important factors could cause our actual results or performance to differ materially from those indicated by such forward-looking statements. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which a statement is made or to reflect occurrence of unanticipated events. Please refer to our earnings release, which can be found on our website at www.digitalglobe.com, for a discussion of these risk factors. You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed during this call and for a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional, meaningful comparisons between current results and prior reported results and as a basis for planning and forecasting for future periods. For your convenience, we have posted slides on the Investor Relations section of our website at www.digitalglobe.com to give you an overview of the information we will cover today. [Operator Instructions]

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

Jeffrey R. Tarr

Thanks, David. Good afternoon, and thanks to everyone for joining us this afternoon. We had a strong second quarter, exceeding expectations. We grew revenue at a double-digit rate for the third straight quarter. We delivered significant EBITDA margin expansion, improvement in free cash flow and EPS growth, demonstrating the operating leverage in our business. And subsequent to quarter close, we announced our business combination with GeoEye.

Taken together, these developments mark a significant step forward in the transformation of DigitalGlobe into a high growth, recurring revenue, geospatial information business that delivers compelling value to customers and solid returns to shareowners.

On today's call, I'll first run through our financial highlights. I'll then discuss a couple of important strategic points about our combination with GeoEye and how it advances our long-term strategy. I'll then turn the call over to Yancey to provide more detail on our results and the financial aspects of our combination. Following Yancey, I'll make some closing comments, and we'll open the call up to your questions.

First, for the financial highlights. Second quarter revenue was a record $101.8 million, up 23% year-over-year with double-digit growth in both our Defense & Intelligence and Commercial segments. Our EBITDA margin in the quarter was 47.1%, up 720 basis points compared with a year ago. We generated positive free cash flow at approximately $4 million, up from negative cash flow of $17 million in Q2 of last year. And earnings per share was $0.21 compared with a net loss of $0.02 per share last year.

Our much improved EBITDA margin, free cash flow and EPS were all achieved despite incurring $2 million in expenses related to our combination with GeoEye.

In addition to our strong top and bottom line growth in the quarter, I'm pleased to report our 12-month backlog was up 32%, positioning us well for continued strong growth in future quarters.

Across the board, our performance has exceeded expectations and positions us well for both the balance of 2012 and 2013. I'll now turn to more detailed results by segment and customer category.

Our Defense & Intelligence segment grew 27% to $81.4 million, with 12-month backlog up 26% compared to prior year. Within the segment, our U.S. government business was strong, up 34% in total, driven by a step-up in revenue from the Service Level Agreement and by a strong contribution from our value-added services business, which generated more than $9 million in the quarter.

The only disappointment in an otherwise stellar quarter was a $208,000 hold back. This was triggered when we missed one metric by 0.4%. We've taken remedial action and are back on track to again exceed the metric going forward.

During the quarter, we received verbal and then written confirmation of the exercise of option year 3 of our EnhancedView contract. This marks the 10th straight year of our partnership with the National Geospatial-Intelligence Agency. This fact, combined with the important role of commercial imagery, placed in the defense and security of our nation gives us continued confidence in the future of this important customer relationship.

International Defense & Intelligence revenue was up 6%. And as anticipated, our fifth DAP customer contributed a full quarter of revenue.

Let me now turn to our Commercial segment. We grew our Commercial segment 10% in the quarter compared with last year. We also grew 12 months Commercial backlog by 84% compared to prior year, demonstrating both year-over-year growth and our progress in transitioning from what was once a lumpy business to a more predictable recurring revenue stream.

Revenue from international civil governments grew 67% in the quarter. We had a variety of wins, including one with the provincial government in China where we're providing information for local infrastructure and land management.

We've also won business in India, in conjunction with the transportation project; in Indonesia, for agricultural planning; in Mexico, for monitoring hydroelectric facilities; in Peru, for environmental studies; in Thailand, for natural resource management; and finally in Russia with the Russian Forestry Commission (sic) [Federal Forestry Agency] , also for local resource management.

Within our Location Based Services or LBS customer category, we had our first full quarter of revenue from Apple. And shortly after quarter's close, we renewed another major LBS account and signed a multimillion dollar multiyear deal with Esri. We now count among our customers: Apple, Google, Microsoft, Baidu, Tencent, Yandex, NAVTEQ, Esri and others. During the quarter, we also renewed Garmin and signed AutoNavi, a large international GPS navigation provider.

Revenue for the quarter was down $4 million in this category, driven by one account that has not yet renewed, due to challenges unique to its own business.

We also grew other verticals, which were up collectively by 52%. We generated new business in a variety of industries, including multiple contracts for airport mapping project, both in the U.S. and overseas, and both project-based and recurring work for oil and gas and mining customers. We also added Genscape to our growing list of strategic partners in the information industry. After quarter close, we also expanded and extended our relationship with the Enough Project and Satellite Sentinel, to which we're monitoring violence in Sudan and South Sudan in the interest of saving civilian lives and eventually, aiding in the prosecution of war crimes.

Taken together, we feel very good about our revenue growth across a broad range of customers and believe this, combined with our strong backlog, positions us well for the balance of the year in 2013.

Let me turn to our business combination with GeoEye, which we believe offers great promise for our shareowners, the U.S. government and other customers and team members of both companies.

When I joined DigitalGlobe 16 months ago, I told shareowners that I believe we have the potential to become a high growth, recurring revenue geospatial information business. We subsequently laid out a vision to become the leading source of information about our changing planet. Since then, we've accelerated our growth, expanded our margins and shifted our revenue mix to a more predictable recurring revenue model. Our business combination with GeoEye will propel us another giant step forward towards our aspiration. It will diversify our revenue mix, reduce our asset intensity and broaden our capabilities in production and analysis.

From a scale perspective, we will have a 2012 pro forma revenue base of $610 million, from which we will grow into 2013 and beyond. It's important to note that this is a growing revenue base. The $610 million in 2012 revenue assumes only that DigitalGlobe SLA continues. Of course, if funding is not restored to the GeoEye EnhancedView contract, we'll have additional capacity to sell to other customers.

Turning to synergy. We expect to generate more than $1.5 billion in savings on a net present value basis as a combined company. A majority of these savings will come from a more efficient capital footprint as we evolve towards a constellation of 3 next-generation satellites. The benefits of the combinations to our customers are numerous. By optimizing orbits of our combined constellations and coordinating collection planning, we will speed timelines. By providing integrated access to our extensive imagery archive, we will create new efficiencies for customers. And by combining GeoEye's advanced production and analytics with our larger constellation and imagery archive, we will bring new solutions to mission-critical challenges faced by both our government and Commercial customers.

And further, for our largest customer, the U.S. government, we believe this combination provides a compelling solution in a budget-constraint environment, while giving shareowners a more stable and predictable revenue stream.

There are, of course, many other customer benefits. Overall, this combination is about growth, innovation and building an even better company for the future. While it's only been a week since we announced our agreement with GeoEye, planning for the combination and work on the regulatory approval process are both well underway, and we are on track to complete the transaction in the last quarter of 2012 or the first quarter of 2013.

I'll reserve some closing comments, but now I'd like to turn the call over to Yancey for a closer look at our financial performance and our combination with GeoEye, and update you on our improved guidance.

Yancey L. Spruill

Thanks, Jeff. Before providing you with detail on the quarter, I'd like to take a few minutes to discuss our planned business combination with GeoEye and the nature of the synergies we anticipate.

First, the combined company will have a pro forma 2012 revenue footprint of approximately $610 million. This is based on the midpoints of both companies combined guidance levels for 2012 but reflects only DigitalGlobe's EnhancedView Service Level Agreement funding. This is a base of revenue from which we expect to grow in 2013.

Second, related to the expected synergies of more than $1.5 billion, we expect less than 1/3 of that total will be related to operating expenses. We expected to take approximately 6 quarters from closing to achieve those operating efficiencies. The estimated total nonrecurring cost to achieve those efficiencies may impact margins in any quarter during this period, depending upon the pace of spending to achieve them. As a result, we expect to achieve the run rate of operating expense reduction by the second half of 2014 with recurring EBITDA margins then exceeding 50%.

Most of the operating expense savings relate to technology infrastructure items, such as duplicative ground stations, communications and data services and software and related hardware systems. We will provide more details as we approach the close and we refine our models as the work on planning for the combination progresses.

We use a 10% discount rate over a 10-year planning horizon to calculate our basis for the NPV synergy calculations. The balance of the savings will come from capital spending reductions. This has important ramifications for free cash flow. Assuming we close the transaction at the end of 2012, there will be 2 key trigger events over the first 6 quarters of the combination that will result in significant ramp downs in capital spending.

In Q2 2013, we expect the spending for GeoEye-2 will be complete. And by Q2 2014, we expect the spending for WorldView-3 to be complete. After which, we expect a dramatic reduction in capital spending for 2 to 3 years before we begin spending on a new replacement satellite for our constellation.

When coupled with revenue growth and the full run rate benefit of the operating efficiencies arriving also in the second half of 2014, this capital spending trough will springboard us into the period where robust free cash flow generation is a core attribute of our business over the long term.

Finally, during this period of EBITDA growth and reduced capital spending, we expect to substantially delever our balance sheet by the end of 2016 or early 2017 timeframe. We will evaluate the best uses of that incremental cash to be prioritized by investing in return enhancing growth or managing the capital base of the business.

Now let me turn to our financial performance in the second quarter.

Q2 D&I revenue was $64.5 million, up 34% year-over-year. These results reflect an increase of $10.9 million from the Service Level Agreement, reflecting the benefit of our capacity investments to deliver more imagery to NGA in the current period. The growth in Q2 was also enhanced by $5.5 million in year-over-year growth from value-added services.

International D&I was $16.9 million in Q2, up 6% with DAP revenue of $13.5 million in the quarter. Commercial revenue was $20.4 million in the quarter, up 10% year-over-year. Growth was driven by International Civil Government customers and from customers and other verticals. This growth was offset by a challenging comparison in LBS as a result of a large customer that did not renew in the second half of last year. Nonetheless, outlook across the universe of our Commercial customer base is robust.

Our forward 12-month revenue backlog increased 32% year-over-year to $355.3 million, reflecting strong momentum across our business and giving us confidence in our outlook. Now on to operating profitability.

We generated $47.9 million in EBITDA in the quarter, resulting in an EBITDA margin of 47.1%, up 720 basis points compared to Q2 of last year. Cost of revenue was $20 million in the quarter or 20% of revenue and up 30% compared with Q2 2011. This detracted from EBITDA margins by 450 basis points. The increase in expenses was expected and is principally related to the addition of our 4 remote ground terminals or RGTs in Q3 of last year that had a year-over-year impact.

We have added the final 3 RGTs in the last few weeks. These will add expense to the current run rate in Q3 and Q4 in-line with or ahead of revenue growth in those quarters. These expenses are part of the baseline, and we expect to see operating leverage on the COGS expense line as we generate future revenue growth.

SG&A expense was $33.5 million in the quarter or 33% of revenue, down 810 basis points compared with the year ago period. This decline in SG&A contributed 70 basis points to EBITDA margin expansion in the quarter and included $2 million of expenses related to the combination with GeoEye.

Stock compensation expense, which is included in both COGS and SG&A, was $2.2 million in the quarter. Interest expense was $2.6 million in the quarter, down from $5.7 million in the year ago period. This reflects the lower total interest cost due to our debt refinancing in Q4 2011 and the increasing amount of interest we are now capitalizing as we continue to add to the assets under construction for EnhancedView. We capitalized approximately 68% of interest in Q2 and expect that percentage to continue to rise as we increase our EnhancedView-related investments.

Tax expense in the quarter was $7.2 million and our effective tax rate was 42.9%, in line with our expected tax rate for the rest of the year. In the quarter, we reported net income of $9.6 million or $0.21 per share compared with a loss of $900,000 or negative $0.02 per share last year. Our diluted share count in the quarter was $46.2 million.

Now our free cash flow and our capital spending. Free cash flow, defined as operating cash flow less investing cash flow, is $3.9 million in Q2, a $20 million increase over the negative free cash flow in the year earlier period. CapEx in the quarter was approximately $38 million, excluding capitalized interest of roughly $6 million. We ended the quarter with $212.4 million in cash, an increase of roughly $14 million since the end of 2011. Our business is healthy, and our balance sheet is strong. Now our outlook for the balance of 2012.

Our outlook is improving. We now expect revenue growth of approximately 16% for the year. This upward revision from approximately 14% growth principally reflects our strong second quarter with a robust second half forecast consistent with our prior outlook. We expect our normal sequential revenue progression this year with the second half stronger than the first half and Q4 as the strongest quarter for the year. Q4 is strongest due to seasonal buying patterns across many of our customers around the globe. Additionally, this year, like 2011, we expect to step up revenue related to our SLA in Q4. This is a result of adding the final compliment of remote ground terminals earlier this third quarter, which increases the imagery capacity made available to NGA under the SLA.

We expect to deliver an EBITDA margin of approximately 46% for the year. We expect that operating leverage will be driven by revenue growth that is somewhat offset by nonrecurring expenses related to the pending combination with GeoEye, which may impact full year margins with approximately 300 basis points. Those expenses include advisory fees in connection with the transaction, as well as cost associated with the regulatory and shareholder approval processes and the planning for the combination prior to close.

We expect a GAAP tax rate of approximately 43% for the year. We expect our free cash flow to be positive for the full year with a potential for neutral to positive free cash flow in the last 2 quarters of the year. Finally, our CapEx outlook is unchanged at approximately $200 million for the year, excluding capitalized interest.

Now I will turn it back to Jeff.

Jeffrey R. Tarr

Thanks, Yancey. The accomplishments of our teams since our last quarterly call are remarkable. We delivered strong financial results, demonstrated the strength of our relationship with our largest customer and announced the transformative combination with GeoEye. These achievements are a direct result of the efforts of our more than 700 team members and our dedication to our customers and shareowners.

Soon after I joined the company, we developed a statement of values, which have guided the efforts of our team through this time. These values are central to our culture of leadership, have steered us through the choppy waters of this last 12 months and positioned us for an even brighter future.

I've never shared these values broadly with shareowners, but I'd like to close by sharing them today. We are relentlessly committed to our customers and our purpose. Our values guide us as we help our customers save lives, resources and time. We act with integrity always. We treat people with respect in all dealings. We put mission and team before self. We inspire curiosity and harness innovation. Our results matter. It's our expectation that in just a matter of months, we will join together both the GeoEye and DigitalGlobe teams. I'm confident that, together, we will create an even stronger company.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jason Gursky, Citi.

Jonathan Raviv

It's actually Jon Raviv in for Jason this afternoon. I was just curious if we could talk a little bit about how your ability to sell some empty capacity and what the kind of demand is out there, and if it's the kind of thing that you could still fill in empty capacity if the GeoEye actually is not fulfilled?

Jeffrey R. Tarr

Super, thanks for your question, Jon. We are -- today, we sell all of our capacity out depending on the region and time of year. So there's certain regions of the world and certain times of year in those regions where we're capacity-constrained. And so -- and that happens to be the highest value capacity that we have. So to the -- as the GeoEye constellation comes together with our constellation, that will create additional revenue opportunity.

Operator

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

Andrea James - Dougherty & Company LLC, Research Division

Basically, it's been a week now. Can you share any preliminary feedback that you might have heard from regulators or Congress regarding the consolidation with GeoEye?

Jeffrey R. Tarr

Sure. Thanks for your question. First of all, Andrea, overall, we would not have announced the combination if we didn't believe that we could get it done and get it done in a timely fashion. At the time we didn't see any regulatory hurdles we couldn't overcome, and we still see that as the case. We don't see any regulatory hurdles that we can't overcome. And obviously, we are in close contact with our customer, both within the appropriate regulatory branches of government and also Congress.

Andrea James - Dougherty & Company LLC, Research Division

Awesome. And then just specifically on the quarter, it looked like your value-added products and services had a really nice ramp over Q1, and I was just wondering should we consider that sustainable? And also could you just give us some insight into kind of what the difference was between Q1 and Q2 on the value add?

Jeffrey R. Tarr

Sure. I'll start, and then Yancey will talk to the difference. But I think it will be too soon, Andrea, to consider this a trend. We had a good quarter. What we do in the value-added services realm is a great value to our customer but again, too soon to call it a trend.

Yancey L. Spruill

And if you look at our value-added services business historically, it has had a mix of subscription, which are more regular routine business and then some lumpy business, and so that, this quarter is consistent with that in terms of quarter-to-quarter variability. We are seeing and hopeful that Q1 does represent a trough, but it's unclear whether the Q2 level is something that we're not prepared yet to say is a run rate. But we're obviously encouraged by our relationship with NGA and our Q2 results.

Operator

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

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

Jeff, the -- could you talk a little bit more about the backlog and, I mean, really kind of put it in the 3 buckets, maybe subscription versus project, new customers and maybe a duration?

Jeffrey R. Tarr

We don't break out the backlog in a more granular fashion than I provided in the script. It is a 12-month backlog. So it does reflect revenues that we would expect to deliver an earn out over the coming 12 months. It's driven by 2 things. It's driven by both real growth, new customers' growth within existing customers. And it's also driven by a shift in mix from onetime revenue to recurring revenue. And that shift, we're now at about 85% recurring revenue, which is a really good place to be and give us a good deal of visibility into the coming 4 quarters.

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

Just a follow-up, if I may. I mean, part of this should help you then plan a little bit in terms of how you should think about the rest of your expense base. I mean, it looks like it was -- I mean, granted, I think, a year ago, you had some nonrecurring items. So if we really look at the run rate of expenses, while they're up a little bit, we should sort of look at it as being a little bit more tightly controlled. And then just sort of as a follow-up, I mean, it's hard to have like a lot after everything you've done in the last week. I mean, there's a little bit of let down here. So I apologize for that in terms of what I mean.

Jeffrey R. Tarr

No, it's a good question, and let me just say, then I'll hand it over to the Yancey to give a little bit more depth. But clearly, the recurring revenue model is, and especially one with the kind of operating leverage we have is it does give us the opportunity to have good visibility and, therefore, manage our expense line. Now obviously, we have some onetime nonrecurring expenses associated with the GeoEye combination. Yancey, why don't you give a little more depth?

Yancey L. Spruill

Yes, with respect to GeoEye, we said $2 million in Q2. So we've essentially had a 200 basis point impact on our margins, which we did see dramatic expansion in EBITDA margin and leverage in the business offset somewhat a couple hundred basis points by the GeoEye combination. That will be a trend we'll see in the second half, which we outlined. We expected to impact full year margins by about 300 basis points. But having said that, I think we telegraphed a couple things early last year that we were going to add to COGS expense base to ramp up the ground terminals to support the EnhancedView contract. That is now behind us. Those 7 ground terminals are up and running. The expense base will be normalized then as we get into Q4. And so we'll now see a leverage on our COGS line, which we haven't seen for a number of quarters. Because that infrastructure is now in place, we're operating at a significant level of NGA until the next step-up in the out-years. On the SG&A line, you've seen relatively consistent lower growth in that line item than we had in previous periods. We do have -- have invested strategically to grow the business, and I think that's working and reflected in the revenue results. And obviously, we are focusing our efforts on the combination at this point and delivering on our other commitments to customers.

Operator

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

Mark W. Strouse - JP Morgan Chase & Co, Research Division

It's Mark on for Paul. Jeff, just want to ask you about the mood in Washington. Just there's some of the people that have been calling for the draconian cuts to this program, are they now satisfied, I guess, will be an appropriate word with GeoEye's SLA going to 0, or do you think there's still kind of a thirst for more? Or is the debate now -- this is the worst case, and there could possibly be some additions to GeoEye, or is it kind of there could be further downside here?

Jeffrey R. Tarr

Look, we -- this is the 10th year of DigitalGlobe's history with the NGA or the DigitalGlobe SLA has continued. It has been honored. It's been fully funded throughout the history of our engagement with NGA. We feel very good about the future of the program. We believe a lot of thought has gone into both the government's critical need for Commercial imagery and the determination of what is an appropriate level of spend in this environment. So we feel very good about the outlook and our contract with our largest customer.

Mark W. Strouse - JP Morgan Chase & Co, Research Division

Okay, good. And then, Yancey, just one quick one. Just want to confirm, the 46% EBITDA margin that does conclude the potential 300 point impact from GeoEye. So in other words, that number could be 49% if weren't for those costs?

Yancey L. Spruill

Yes, on an operating basis for the revenue producing operations, yes.

Operator

[Operator Instructions] Your next question comes from the line of Ronald Epstein, Bank of America.

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

It's Elizabeth in for Ron. A couple of questions. One is, your 16% year-over-year revenue guidance, I just was hoping you could reconcile that against the fact that year-to-date, you've had 18% year-over-year growth in your revenues. So are you expecting a slowdown in the second half and so where that come from?

Yancey L. Spruill

We are not expecting a slowdown in the second half. I just will remind everyone that implicit in 2011 was a very strong Q4. We expect growth across the board year-over-year in each quarter and for the second half of the year. But I just want to remind everyone that we did have a really strong Q4 last year.

Jeffrey R. Tarr

And our outlook for the second half is as strong as it was coming into this call.

Yancey L. Spruill

Correct. And just to clarify, in the script, we -- our second half outlook is unchanged from our May call.

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

Okay. And then just one other question. What's the max cash consideration for the GeoEye acquisition?

Yancey L. Spruill

So the consideration in the GeoEye transaction is a fixed exchange ratio for all shareholders, and there's a fixed cash element subject to all shareholders having an election. However, we will put in approximately $100 million of cash. And to the extent that -- which in aggregate equals 410 per total GeoEye shares in cash. And so to the extent that we are not fully subscribed in cash, shareholders who prefer all stock will be cut back in a pro rata fashion. To the extent we have an equal amount of cash requested, then all people who've requested stock will get their requested stocks. So -- but it is a fixed amount of cash, approximately $100 million to all GeoEye common shareholders.

Operator

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

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

Jeff, you had talked about $1 billion revenue target in 5 years when you first joined, which I believe implies an organic growth rate of 10% to 15% a year. Can you give us an update on that in light of the combination with GeoEye? And talk about how you see, what you see as the key drivers in the coming years outside of the U.S. Government.

Jeffrey R. Tarr

Super, thanks for that question. And yes, we still have the aspiration, the aspiration that we established when I first joined the company of becoming a $1 billion revenue recurring, revenue information business within approximately 5 years. We've always felt that approximately half that growth would come from acquisition and approximately half through organic growth. Obviously, the GeoEye combination is a big step forward on the acquired growth required to get to our aspiration. And we've been tracking, we've accelerated our organic growth over the last 4 to 5 quarters to a point that we are well within the zone of what's required to get to that aspiration. In terms of drivers, we always look outside in. We start with our customers. We look at their needs and then that guides us as we think about how to get there. Governments, still represent a very substantial opportunity for us, both U.S. Government and international governments are big drivers. And bringing together the capabilities that we'll bring together with GeoEye, the combination of the advanced analytics and production with a larger constellation, I think, represents a significant opportunity to continue to fuel growth across a wide range of government needs, both domestically and internationally. The second largest category is Location Based Services. We still see significant opportunity there. We do business with a large number of them, but the appetite for geospatial services and for more and more imagery seems to be very robust. And then finally, we have other verticals, which to date, collectively are small, approximately 5% of our total revenue, a little bit more. But there are many opportunities within those verticals, and I believe once we have the scale of a combined company with the broader range of capabilities, we'll be better positioned to meet the very unique needs of those particular verticals and drive growth there. So I feel very good about the future, very good about our aspiration and from where we sit today, it seems eminently achievable.

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

Very helpful. On the U.S. government value-added services, previously, you have talked about that category being down this year. In light of what we saw in Q2, do you think it's going to be flat to up for the year? Do you have -- I mean, how good is your visibility on government value-added services?

Jeffrey R. Tarr

Visibility, as we said we're not going to call this quarter a trend. So we haven't propagated that growth from value-added services into an improved outlook for value-added services in the back half. But the need is certainly there. So it comes down to a question of funding.

Yancey L. Spruill

The only thing I would add is there is lumpiness in that, and the government has been holding money back, given the certainty. We obviously had a good quarter in Q2 relative to a recent experience. But we'll have to see how the second half plays out. And just to emphasize, the relationship and what we're doing with NGA, we feel good about -- there's more appetite. It's a question of budget, and obviously, with some of the certainty, we're cautious with respect for the outlook in that line item.

Operator

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

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

First, just a quick question for Yancey. Can you give us the breakdown of the Commercial business, U.S. versus international? And if you have to look for that, I guess, a question for Jeff. When you -- on Location Based Services, you ran through a pretty good logo list, earlier in the call, of current partners. When you talk about that being a growth area, are you primarily focusing on adding new LBS partners, or would the bigger opportunity be simply selling them more imagery to your existing customers?

Jeffrey R. Tarr

It's actually, it's both. So we've almost, every quarter, it seems, signed another account. So after this quarter close, we announced Esri, which is a large account in the LBS space, not reflective at all in the second quarter results. But there's also opportunity within Location Based Services. There are -- I can't -- in general, they don't buy all that we have to offer. They're each making different choices about refresh rates and what parts of the world they want to focus on. And as they grow their businesses, that represents opportunity. So I see both. There's new players entering, there's new players buying and there's existing players buying more.

Yancey L. Spruill

Chris, in terms of domestic and international and Commercials, $8.6 million in Q2, domestic; and $11.8 million, international.

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

Got you. And a theoretical question here for you. In a post-merger environment, should the NGA not extend an EnhancedView contract for GeoEye? And do you have basically an untapped resource in the GeoEye-1 satellite? How long would it generally take for you to negotiate and implement contracts with international customers who, I think, are probably in need of that capacity, given in fact that both companies already have established relationships? Is it something that you could do in a matter of months or the more normal 6- to 9-month process?

Jeffrey R. Tarr

Our average sales cycle is about 6 months, DAP excluded. Our DAP business is a multiyear sales cycle. So I would -- obviously, we're not going to begin selling that capacity until such time as the transaction is closed. So I think it would be safe to assume it would take 6 months for that to begin to be reflected in the P&L.

Operator

Your next question is a follow-up question from the line of Andrea James, Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

Jeff, one of the first things you do when you came on board is you listed the cap on the DAP program. And you saw this nice media bump. And I was wondering if you could talk about how did that program would operate as a combined company. Yes, I'm just curious how you think about that.

Jeffrey R. Tarr

Well, first, let me say that there are a number of active procurements in the world right now that we're involved with. So we still see opportunity to acquire more DAP customers. And GeoEye also has a similar business that is of similar scale. So I would see that to be, combined, a larger opportunity. Plus, as we've said, by operating a combined constellation, we can operate the combined constellation more efficiently. This is one where one plus one on the satellite front actually equals more than 2 because of that efficiency in collection planning and tasking.

Andrea James - Dougherty & Company LLC, Research Division

Great. And then the small hold back that you had. Did that have anything to do with the change in the metrics that you announced last quarter that led to the faster rev rec on EnhancedView?

Jeffrey R. Tarr

No, not at all. It was a onetime incident related to a system upgrade. As a result, we missed a metric by literally a hair. And we've taken appropriate action. We're well above the threshold this month as we had been prior to this month, and we don't anticipate a repeat.

Operator

Your final question comes from the line from Jason Gursky, Citi.

Jonathan Raviv

It's Jon again. Just 2 quick ones. First of all, just on the quarter and what led you -- you had good sales and you increased your sales guidance. I was wondering what specifically was the source of that strength. Was it Commercial performing a little bit better than you thought, or was it really the value add piece? And then second, I know, Yancey addressed what your free cash flow plans would be over the long term, I was just wondering now what the GeoEye deal pick moving to the pipeline, so to speak, over the next 6 months, can we expect -- are you guys still in the market for other M&A opportunities, or are we taking a break for maybe 3 or 4 quarters here?

Yancey L. Spruill

So first of all, the growth was very broad-based across both D&I and Commercial, domestic and international, to the extent that there was a surprise in the quarter, which there obviously was. We came in a very strong quarter. The strength in value add certainly wasn't expected. Turning to your second question, we have an aspiration to grow DigitalGlobe into a $1 billion revenue business. That's an important milestone for us. And while the GeoEye combination is a big step forward, it's not the end of that journey. It's actually, in many respects, the beginning of that journey. We currently, of course, are very focused on implementation of this combination. And that's our focus, and we're going to do a great job of it. Once the combination is complete, we would expect that we would be an even better acquirer than we are today.

Operator

There are no further questions at this time.

Jeffrey R. Tarr

Super. Well, thank you very much for joining the call today. We appreciate the time with all of you and look forward to speaking with many of you over the coming days, weeks and months. Thanks very much. Bye now.

Operator

This concludes today's conference call. You may now disconnect.

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