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Coverage Initiation: DigitalGlobe (DGI)
DigitalGlobe (DGI), a provider of commercial high-resolution earth imagery products and information services, recently made its debut in The Value Line Investment Survey. The company was founded in 1993 as WorldView Imaging, and went public in 2009. After some initial enthusiasm for its role in digital satellite imaging, including supporting Google’s (GOOG) Google Earth product, its shares traveled higher. Those gains, however, were erased between 2011 and early 2012. Despite the price drop, the promise of the company’s technology has not been diminished.
For anyone even remotely interested in science fiction, DigitalGlobe could easily fill the role as the antagonist company with the ability to watch your every movement. Its first imaging satellite was launched in 2001, with subsequent launches in 2007 and 2009. A fourth satellite is planned for 2014. These form the basis of its imaging services.
Launching satellites is an expensive and risky process, however, in which mistakes can result in material losses. When things go well, though, these satellites provide the basis of long-term revenue streams, with obsolescence, often many years away, being the biggest risk. Of course fixing a broken asset that is located in Earth’s orbit would have its own complexities, but that is less of an ongoing issue, though always a possible one. The company maintains insurance on all of its satellites, in case problems arise. Note, too, that regulation of the industry is a material factor in its business since launching objects into space is not a run of the mill event.
Another issue to consider is that DigitalGlobe does not currently have a comprehensive back up system in place to maintain its operations should its main facility in Colorado be compromised. Although it maintains facilities around the world, and regularly backs up its image library (which accounts for over half of the company’s sales), none of the other sites would be capable of replacing the work performed at its main location. Indeed, much of the benefit that is derived from the images the company takes are from the processing that is done to them.
DigitalGlobe has two main customer groups, commercial and government. Commercial customers accounted for 23% of 2011 revenues, while governments, primarily The United States government, represented the remainder. It generated about 38% of revenues through direct sales, with the rest coming from its reseller and partner network. A material portion of its revenues are recurring, which helps provide some clarity into future earnings potential.
That said, some of its contracts with the U.S. government are subject to annual review and, thus, potential discontinuation. The heavy reliance on government work represents a material risk, as any cuts in government spending could materially effect DigitalGlobe’s top and bottom lines. That said, the imaging that the company provides is cutting edge and useful for more advanced applications—from “spying” on foreign governments to remotely, and safely, monitoring a natural disaster. This is likely to provide a modicum of protection from budget cutting efforts.
The company’s services include the ability to order from images in its extensive image library or place orders to task its satellites to take images of a specific area of interest. Satellite imagery is provided at three processing levels: basic imagery, the least amount of processing; standard imagery, with radiometric and geometric correction; and orthorectified imagery, with radiometric, geometric, and topographic correction. It isn’t necessary to fully understand what all of those terms mean, just that the company can do some pretty fancy, high-tech, and desirable things with the pictures it takes.
DigitalGlobe is also in the process of acquiring GeoEye (GEOY), one of its main competitors, with DigitalGlobe remaining the surviving and controlling entity. The prospective deal is expected to be completed in late 2012 or early 2013. It will result in the company having five satellites in orbit, with two on order for future delivery. Over the long-term, management expects to maintain three satellites. The combined entity is also expected to have a more varied customer mix, reducing the dependence that DigitalGlobe currently has on the U.S. government to some degree.
Subscribers interested in owning a piece of a leading supplier of high-tech imaging should consult the most recent quarterly reports for both DigitalGlobe and GeoEye. Moreover, the interim update, outlining the merger agreement, was written the day the deal was announced—so it is also a must-read. Although it is hard to predict when such breaking news will necessitate an update between regular quarterly reviews, it is important that subscribers keep an eye out for these research updates as they can provide material insight into Value Line’s opinions of late breaking events.
This small-cap company isn’t one that risk averse investors should have on their radar screens, but more aggressive types with an eye on the high-tech space would do well to keep DigitalGlobe on their watch list.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.