DigitalGlobe Defies Drought With 2009’s Third Technology IPO

By Tim Mullaney

May 12 (Bloomberg) -- DigitalGlobe Inc., the provider of satellite images to Google Earth and U.S. intelligence agencies, plans to sell $264.6 million in stock, becoming just the third U.S. technology initial public offering this year.

The deal, scheduled to price tomorrow, will raise $16.6 million for the Longmont, Colorado-based company, with the rest going to hedge funds and institutional investors, according to a regulatory filing.

DigitalGlobe is bigger and more established than most technology startups looking to go public, making it less of a bellwether for other IPOs, said Paul Bard, an analyst at Renaissance Capital. Smaller companies have been shut out of the IPO market over the past year, the industry’s worst drought in at least 38 years.

"It has to be a very large company to go public now," said Tim Draper, a managing director at Draper Fisher Jurvetson in Menlo Park, California. His venture-capital firm backed Skype and Yahoo! Inc. "The pendulum of risk tolerance has swung back way too far."

DigitalGlobe is launching a second satellite this year, a bid to almost double its sales, Bard said. Instead of using the IPO money, the company borrowed $355 million last month to pay for the launch. DigitalGlobe vies with Dulles, Virginia-based GeoEye Inc. in the satellite-imaging market, making most of its revenue from government customers.

Need for Images

The company was able to do an IPO in a tough market because its business model and growth path are very clear, Bard said.

"The investment case is pure and simple: The U.S. government has a gap in the unclassified images they need, they’re going to be outsourcing, and there are only two companies to go to," said the Greenwich, Connecticut-based analyst. "With their new satellite, they can support up to $500 million a year in revenue."

The offering will include 14.7 million shares at $16 to $18 a share, according to the filing. Morgan Stanley, which owns 37 percent of DigitalGlobe, is an underwriter. It will sell about 1.62 million of its 16 million shares, leaving the firm with a 32 percent stake. The stock will begin trading May 14 under the ticker "DGI."

DigitalGlobe had $275.2 million in sales last year, five times as much as OpenTable Inc., a prospective IPO that Bard sees as a better barometer of the industry. DigitalGlobe also raised its initial funds from the government, rather than venture capitalists.

ExactTarget

ExactTarget Inc., an Indianapolis-based e-mail marketing company, canceled its planned $75 million IPO last week. It raised $70 million in venture capital instead.

Digital Globe expects profit to fall in 2009 from $53.8 million last year because of interest payments on the new debt and depreciation expenses from the company’s capital investments. First-quarter net income dropped 25 percent to $10.6 million as marketing costs and overhead expense jumped.

DigitalGlobe gets about 85 percent of its sales from defense and intelligence customers, according to the company’s filing. It doesn’t disclose how much revenue it gets from Google Inc., owner of the world’s most popular search engine, which uses DigitalGlobe images for its maps service. Microsoft Corp.’s MSN portal is another customer.

The shares would be cheaper than those of DigitalGlobe’s rival, GeoEye, said Francis Gaskins, publisher of the IPODesktop.com newsletter in Marina del Rey, California.

DigitalGlobe’s proposed market valuation of about $765 million is 2.8 times its annual sales and 14 times its trailing year’s profit, Gaskins said. GeoEye’s $505 million market value is 3.5 times sales and 19 times profit, Gaskins said.

The market for remote image-taking technology was $7.3 billion in 2007 and will expand to $9.9 billion by 2012, the company said in its filing, citing a report by BCC Research of Wellesley, Massachusetts.

A 2003 contract with the federal government paid for DigitalGlobe’s first satellite. That deal provided $266 million to offset construction costs.