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DigitalGlobe's IPO Hits Tech Radar

Kevin Kelleher

Investors looking for a viable IPO candidate may be surprised to find that one of them -- DigitalGlobe -- has long been watching them.

Longmont, Colo.-based DigitalGlobe filed this week to go public on the New York Stock Exchange under the ticker DGI. The company's satellites orbit the Earth, snapping high-resolution pictures that are used by governments and companies alike.

And demand for those pictures is rising: despite increasing competition, DigitalGlobe's rising revenue and profit has investors circling the company's name as a potentially hot IPO to watch for down the road.

DigitalGlobe has only two satellites, but it claims it uses the most sophisticated technology and offers the highest resolutions of any commercial market satellites. Together, they can take detailed snapshots of a million square kilometers every day -- an area larger than France and Germany combined.

The company draws its revenue from both government and private vendors, and both sources delivered strong growth last year. Revenue from defense and intelligence customers rose 47% to $103.4 million in 2007, while commercial revenue gained 33% to $48 million.

Its biggest single customer is the Defense Department's National Geospatial-Intelligence Agency (its motto: " Know the Earth ... Show the Way"), which collects satellite imagery and distributes it to other U.S. agencies for primarily national security reasons.

Other U.S. agencies use the images for non-defense purposes, such as disaster response. DigitalGlobe is increasingly reaching out to civil agencies abroad. As the prospectus notes, "International civil agencies represent one of the fastest growing opportunities for us, especially in rapidly growing markets in Asia, Russia, the Middle East and South America."

DigitalGlobe's images are prominently featured in Google Maps and Microsoft's Visual Earth and they're starting to find their way onto mobile navigation devices as well as video games.

But other industries are customers as well: Agricultural firms use satellite images to monitor crops, energy firms for exploration, telecoms and utilities for infrastructure planning and monitoring, and insurance companies for monitoring claims.

The company's commercial revenue as a percentage of total revenue has dropped to 32% from 38% over the past three years, in part because the launch of a new satellite last September and also a restructuring of a contract with the U.S. government that extends to 2014.

It's not clear whether government revenue will continue to grow at 2007's rate, so DigitalGlobe may need to rely on the commercial market for growth.

Operating costs, meanwhile, didn't rise quite as fast. Selling and administrative costs rose 31% to $49 million in 2007, and cost of revenue rose by 34% to $22 million. Depreciation and amortization, primarily for satellites and other equipment, were even larger: $47 million last year, flat with 2006 and equal to nearly a third of total revenue.

As a result, DigitalGlobe's operating margin grew to 22.2% in 2007 from 6.4% in 2006.

While DigitalGlobe is boosting profit in a growing industry, it's also facing a lot of competition, notably from Virginia-based GeoEye and France's Spot Image. GeoEye's stock is down 22% this year, although it's still showing a 44% gain over the past 12 months.

As DigitalGlobe points out in its prospectus, these competitors aren't sitting sill. "GeoEye has announced plans to launch a multi-spectral satellite in the summer of 2008 with a black and white resolution of 41 centimeters. SPOT Image has announced plans to launch two additional high resolution satellites, one in 2010 and the other in 2011."

That's why DigitalGlobe is planning to launch a third satellite next summer. It will offer a higher resolution than its current satellites, and have the capacity to collect as much imagery in a day as both of them combined. In 2010, the first satellite that DigitalGlobe launched -- the QuickBird in 2001 -- is expected to reach the end of its operational life.

New satellites cost money, and that's a key reason why DigitalGlobe is heading for an IPO now. The company is running through cash. It had $23 million on hand at the end of 2007, down from $103 million a year earlier.

But with lead underwriters like Morgan Stanley and Lehman Brothers and an income statement that shows revenue growing and operating profit growing even faster, DigitalGlobe is likely to see a successful launch into the public markets.