Yesterday, Remote sensing imaging satellite owner/operator DigitalGlobe reported a negative surprise when it's 2013Q4 revenues missed guidance, and the market immediately hammered the stock, which gapped down and lost over 25% on the day.
Why the violence? The Denver Post identified some of the reasons here:
http://www.denverpost.com/business/ci_25232023/digitalglobe-acquires-spatial-energy
DigitalGlobe's business outlook remains solid-good, but not great. And the stock was priced for great. So the miss caused a reset.
Let's review the important elements of DGI's business:
- The US Government, led by the National Geospatial Intelligence Agency (NGA), accounting for over 58% of DGI's 2013 revenues. With the merger with GEOY, DGI became a near-monopoly supplier of commercial imagery to NGA, used for mapping, visualization and broad area search. We know that the federal budget has been in a mess for a few years, but now it seems that the waters have calmed. Alas! New clouds are forming on the horizon. SecDef Chuck Hegel wants to take the Army down to WWII levels. Does anyone think that the rest of the military would go unscathed? Has Hegel ordered contingency planning for a further reduction in NGA's budgets? Could the NGA meet their mission with 10% less money? These are all good questions, and living inside the beltway as I do, I get the sense that such grim speculations are making the rounds. It is hard to imagine a case where NGA had a budget haircut and DigitalGlobe got nary a trim.
- The foreign groundstation business Direct Access Program (DAP) is healthy, and will get a bump with the launch of the powerful WorldView-3 later this year. All's good there.
- It's the commercial business that's most vexing. If you take out the US government and the DAP, then what I would call the true commercial revenues accounted for only 25% of total in 2013, or $153 million. Meanwhile the balance sheet says that over $3 billion of space assets with an average design life of 7 years have been deployed. Seems incongruous.
Acquisition of Spatial Energy
DigitalGlobe announced the acquisition of their reseller Spatial Energy, a strategically-wise forward integration play. Although some of the revenues will fall out in eliminations, the acquisition should be accretive. Spatial Energy takes DGI solidly into the lucrative Oil & Gas vertical, and I applaud the transaction. However, it is hard to identify other highly-synergistic targets with some heft for the company to pursue. So growing the commercial business non-organically will lead to a broadening of business focus, a dicier strategic proposition.
Smallsats, Skybox Imaging, Planet Labs
And because everyone asks, let's discuss Skybox Imaging and Planet Labs, the pair of Silicon Valley VC-funded imaging smallsat plays, who between them have absorbed about $150 million of investment.
The smallsat revolution is real. Cubesat componentization is the magic, with real and rapid advances in satellite system components such as imaging focal plane arrays, solar collectors, inertial systems, antenna performance, power supplies, and on-board memory and processing. The result is that while DGI's on-orbit cost of a bird is notionally $500million per, a 3U cubesat of the highest quality can be assembled for under $1million.
Yes, yes, the image quality is inferior, NIIRS ratings etc., etc., I concede all that. But if you launch a whole flock of these birds as Planet Labs has, you get new and different capabilities than you get from a huge telescope-in-space that NGA demands. Applications like monitoring and tracking are enabled by frequent revisit times. New clients with new money. And you can bet that smallsat's capabilities will only increase with time. In a few years, the smallsat players will start nipping away at the edges of DGI's revenue pie, so it is a real concern.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.