Saturday, April 04, 2009

Profits at GeoEye in Decaying Orbit?

GeoEye Inc (GEOY-$24.57) said in February that its earth-imaging satellite GeoEye-1 received full operational capability certification from National Geospatial-Intelligence Agency. Launched on September 6, GeoEye-1, currently the most advanced imagery collection satellite that is commercially available, can now begin delivering images to the agency, with the company collecting a monthly revenue stream of $12.5 million. The timing of the certification was welcome news, as two of the three low-Earth orbit imaging satellites owned and operated by GeoEye are running on fumes, having outlived their designed operational lives of seven years, according to the 2008 annual report just filed with the SEC:

The IKONOS satellite was launched in September 1999. A study that was completed in August of 2008 by the IKONOS manufacturer resulted in a revised life expectancy for IKONOS to the 2010+ timeframe. Based on that study, we currently expect to continue commercial operations with IKONOS through that timeframe. However, we can offer no assurance that IKONOS will maintain its prescribed orbit or remain commercially operational..

The OrbView-2 satellite was launched in August 1997. Despite the fact that OrbView-2’s operational life has expired, we currently expect to continue commercial operations with OrbView-2 in 2009. We cannot, cannot guarantee the use of OrbView-2 throughout 2009, or beyond.
The expected operational lives of satellites are affected by a number of factors, including the quality of construction, the supply of fuel, the expected gradual environmental degradation of solar panels, the durability of various satellite components and the orbits in which the satellites are placed.

GeoEye does not presently have plans to construct and launch a replacement satellite for IKONOS or OrbView-2 if either fails prematurely. The company is developing the GeoEye-2 satellite program, but has yet to select a satellite builder. Timeline to launch is at least three to four years from commencement of actual construction.

Financing the construction of GeoEye-2, whose total costs could exceed $500 million, will strain an already levered balance sheet. Long-term debt of $246.7 million is 1.3 times shareholder equity, and comes due in 2012. The times interest earned ratio—an indicator of GeoEye’s ability to meet the interest payments on its debt—0.9 times EBIT at December 31—suggests that unless earnings expand rapidly, GeoEye could find the capital markets less than receptive to their request for additional financing. [Ed. Note. GeoEye’s ability to cover its annual interest payments would be even more suspect, but the company used a legal loophole, known as
“capitalized interest” that permitted the company to defer payment of certain costs involved in the construction of GeoEye-1].

If IKRONOS and OrbView-2 lose satellite imagery capabilities before 2012, sales and profitability could end up in decaying orbits, dooming GeoEye’s plans for its GeoEye-2 satellite.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.


ChrisDFernandez said...

Hey David,

I did a full write up on GeoEye and have been writing about and following the company for about 1 year now.

I can tell you from my analysis, that starting this month and going for years into the future, GeoEye-1 will deliver huge improvements to GeoEye's top and bottom line.

I would love to speak with you about GeoEye to clear any misperceptions up about their ability to repay their debt based on cash flow generating capabilities.

At any rate, here is the link to my latest post:

Chris Fernandez

Eric Jackson said...

Hi David:

The fact that GEOY has older satellites isn't different from DigitalGlobe (their competitor).

I also think your analysis overlooks how much new revenue and EBITDA GeoEye-1 is going to generate. When you look at what GEOY has done in historical op margins (mid 40s), this coming 18 months should be very strong.

This incoming EBITDA will help with debt. Their debt profile is not different from DGI.

Also, their largest customer partially funded GeoEye-1 and probably will do the same with GeoEye-2 (as the govt has decided to get out of this business themselves). Therefore, future revs from this customer are highly likely.