DigitalGlobe Inc. Stock Falls to Earth As Guidance Disappoints

By Steve

Imagery collected by DigitalGlobe's various satellites, Credit: DigitalGlobe,

DigitalGlobe just reported reasonably strong third-quarter results. But thanks to significantly reduced guidance for the remainder the year, shares of the satellite imagery purveyor crashed to Earth, briefly falling as much as 37% on Friday before settling down around 25%.

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But before we talk about that seemingly ominous road ahead, let's zoom in on what DigitalGlobe accomplished in Q3:

DigitalGlobe results: The raw numbers

Data Source: DigitalGlobe.

What happened with DigitalGlobe this quarter?

  • U.S. government revenue grew 26.4% year over year to $111 million.
  • Diversified commercial revenue fell 6.7% to $62.3 million, primarily because of lower sales to location-based services clients.
  • Recall that last quarter, with regard to selling the company's highest-resolution 30cm imagery to LBS customers, managementconsciously decided "not to undermine ourvalue proposition to customers in other verticals by selling our best imagery at too-low a price to a segment that would make this unique offering freely available on the Web."
  • Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, grew 48.6% to $91.4 million.
  • Adjusted EBITDA margin of 52.7%, up from 39.8% in Q3 of 2014.
  • Cash flow from operations increased 80.6% to $85.6 million.
  • Free cash flow was $51.5 million, swinging fromnegativefree cash flow of $40.4 million in the same year-ago period.
  • The National Geospatial-Intelligence Agency exercised the sixth option year of the EnhancedView SLA and awarded DigitalGlobe its fourth year of the Global-EGD contract.
  • The company repurchased 1,491,098 shares of common stock for $36.7 million, at an average price per share of $24.62.
  • The company authorized a $130 million increase to the existing share-repurchase authorization.

What management had to sayDigitalGlobe CEO Jeffrey Tarr stated:

Looking forwardBut despite its decent performance in Q3, DigitalGlobe reduced its full-year guidance and now expects 2015 revenue of $685 million to $700 million (down from the previous range of $725 million to $750 million) and adjusted EBITDA of $330 million to $345 million (down from $355 million to $375 million previously). For perspective on the former, analysts' consensus estimates predicted 2015 revenue of $728.5 million.

Tarr noted during DigitalGlobe's earnings conference call that the decision to lower guidance came after "considerable analysis and discussion," and that thebottom end of the revenue guidance range consists of actual booked revenue to date, as well as backlog expected to be recognized through the end of the year. Meanwhile, the upper end is based on "closing and delivering a reasonable amount of current pipeline for the remainder of the quarter."

He further explained that DigitalGlobe's original guidance this year assumed growth in LBS, stability in its Russian business, growth in U.S. government value-added services, and growth in business driven by the adoption of 30cm imagery from Worldview-3. As for why DigitalGlobe is reducing guidance now, he elaborated:

As a result, DigitalGlobe anticipates achieving roughly "flattish" growth in the near term, and the company will provide guidance for 2016 along with its next quarterly report in February.

This certainly doesn't mean DigitalGlobe's long-term story is broken. And though not selling at too low a price to LBS customers isn't without consequence in the near term, investors can take solace knowing DigitalGlobe is still solidly profitable, and also determined to continue rewarding shareholders through aggressive capital returns.

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