IPO To Aid DigitalGlobe-GeoEye Comparison

The $250 million initial public stock offering (IPO) planned by satellite Earth observation imagery provider DigitalGlobe Inc. will give investors an opportunity to make side-by-side comparisons of the Longmont, Colo.-based company with its principal competitor, GeoEye Inc. of Dulles, Va.

As was made clear in GeoEye's May 9 conference call, investors remain uncertain how to read the buying habits of the U.S. National Geospatial-Intelligence Agency (NGA), which is by far the biggest customer for both GeoEye and DigitalGlobe and likely to remain so for some time.

Investor blogs posted since GeoEye's first-quarter earnings release and conference call, which resulted in a sharp drop in a stock that had been a star performer in 2007, underscore the fact that GeoEye investors cannot determine whether reduced NGA revenues are due to GeoEye-specific problems, or a result of NGA policy changes, as GeoEye officials suggested.

Both companies rely on the U.S. government, mainly NGA, for between 55-60 percent of their revenues, according to filings with the U.S. Securities and Exchange Commission (SEC).

As befits two players in a young industry, DigitalGlobe and GeoEye have yet to stabilize their asset base. The failure of just one satellite in orbit, which can happen at any time, would have a dramatic effect on either company's health because it takes as much as four years to build the kind of high-resolution optical imaging satellites the two companies rely on.

DigitalGlobe announced April 14 that it planned to raise $250 million from an initial public stock offering on the New York Stock Exchange. The IPO is being managed by Morgan Stanley and Lehman Brothers.

In terms of current assets, DigitalGlobe would appear to have an advantage because it has two high-resolution spacecraft, the QuickBird satellite, launched in 2001, and the WorldView-1, launched in 2007. Absent an in-orbit glitch, the two satellites should continue to operate until 2010 and 2018, respectively, according to the IPO registration documents DigitalGlobe sent to the SEC April 14.

A third satellite, WorldView-2, tentatively is scheduled for launch in mid-2009 aboard a Boeing Delta 2 rocket, but as GeoEye recently learned, any slip in the satellite's production schedule could mean the loss of a launch slot and a delay of several months in getting to orbit.

That delay has proved costly for GeoEye, whose Ikonos satellite, launched in 1999, is already two years past its scheduled design life. GeoEye said a late-2007 review of its status concluded that it should continue operating until the end of 2010 at least.

GeoEye is counting on the launch of its GeoEye-1 spacecraft to continue its NGA business under a contract called NextView. DigitalGlobe also has a contract under the NextView program, which is NGA's multi-year agreement to purchase images from both companies.

GeoEye has been struggling to maintain its NextView revenue stream. The NextView deal was signed with GeoEye-1 imagery in mind and a GeoEye-1 launch planned by March 2007. Following a recent rescheduling with Boeing, the satellite now is slated for an Aug. 22 launch aboard a Delta 2 rocket.

But NGA reserves the right to reduce the amount of imagery it purchases in any given period.

Both companies cite the vagaries of NGA demand as a risk factor in their respective businesses.

Another major risk factor that both companies acknowledge in their respective SEC filings is the so far unresolved policy dispute about whether the U.S. government's remote sensing policy places the accent on commercially produced imagery or products derived from U.S. government-owned satellites.

With two high-resolution satellites now in orbit, DigitalGlobe is collecting "four times the amount of square kilometers of high-resolution imagery per day as our closest competitor," the company said in its SEC filing.

The imagery is deposited into DigitalGlobe's ImageLibrary, an elaborate content archive that is the source of a significant share of the company's annual sales revenue.

GeoEye concedes that its competitor has an important new weapon since WorldView-1 entered service in late 2007, and not only because it added a second high-resolution satellite to DigitalGlobe's portfolio.

In addition to the improved frequency of overflight of a given area, the addition of WorldView-1 also gives DigitalGlobe the ability to download data directly to customers, a capacity that QuickBird lacked. GeoEye said once DigitalGlobe has completed the installation of its network of WorldView-1 ground stations, GeoEye's "competitive advantage is no longer as strong."

GeoEye and DigitalGlobe both operate under U.S. government regulations that prohibit distribution of black-and-white imagery sharper than 50 centimeters in ground resolution, and 2 meters for color imagery.

Both companies also are facing increased market challenges from Europe, Israel and India. In Europe especially, the expected consolidation of the Earth observation assets of Astrium under the Astrium Services division will create a single company drawing on the strengths of Spot Image of Toulouse, France, which has a global network of affiliates and partnership deals for optical imagery; and InfoTerra of Germany and Britain, which has begun to commercialize high-resolution radar data.

Despite this, both DigitalGlobe and GeoEye say one of their key strategic goals in the coming years is to increase their presence in Brazil, China, India, Russia and other emerging markets.

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