A Look at the Eye in the Sky

By Eric Jackson
RealMoney Contributor
7/26/2010 5:06 PM EDT
Click here for more stories by Eric Jackson

Have you taken a look at some geospatial imagery stocks lately? Probably not, but you should. You have probably seen these companies' end products on Google (GOOG - commentary - Trade Now) maps.

The two leading public companies in this space are GeoEye (GEOY - commentary - Trade Now) and DigitalGlobe (DGI - commentary -Trade Now). They both got their start working closely with the U.S. military as private companies. They launched their own satellites into space to take images of Earth. Their initial customers were the U.S. government - specifically the National Geospatial-Intelligence Agency (NGA). Of course, this agency is tasked with keeping tabs on all the "evildoers" out there who might inflict harm on U.S. interests.

This agency and the rest of the U.S. government have had an interest in seeing both of these companies develop and strengthen over the last few years. To support them, they've provided their largest customer orders over the greatest period of time and given them the support needed to raise financing to build and launch their newest satellites.

The industry (at least in the U.S.) basically operates as a duopoly for GeoEye, which is based near Washington, D.C., and DigitalGlobe, which is based in Colorado. The two companies play leapfrog in terms of which one has the latest and greatest satellite in the sky, taking images.

The quality of the imagery keeps getting better in terms of color, resolution and how small a space they can capture. They're now at the point where they can capture an image of home plate on a baseball diamond, so they are extremely powerful.

Because of this, GeoEye and DigitalGlobe have found eager buyers of their imagery from the Web portals Google, Microsoft (MSFT -commentary - Trade Now) and Yahoo! (YHOO- commentary - Trade Now). These geospatial companies produced striking images of the recent Iceland volcano ash, the Iranian protests last year and President Obama's inauguration 18 months ago.

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DigitalGlobe IPO Could Be Boon for GeoEye

5/12/09 - 01:08 PM EDT

GEOY , V , MA , GOOG , MSFT , YHOO

[Note: after this story was published GEOY saw its shares sink when management mentioned on their conference call that 1 type of photo taken from their new satellite was a mix of black and white with color. They discovered it 2 days ago and couldn't say what, if any, impact it would have on future revenues as they were determining what happened. Investors sold first and asked questions later and -- to be fair -- GEOY management should have been more crisp in their answers. The stock has bounced off its lows. It's also a volatile stock during options week.]

GeoEye(GEOY Quote), the geospatial imagery company that sells images to corporate and government customers taken from its satellites, has received extra attention this past week because primary competitor DigitalGlobe (which will hold the ticker DGI) is holding a rare IPO on Thursday.

This situation could be similar to what happened when Visa(V Quote) went public after MasterCard(MA Quote) -- DigitalGlobe's IPO should bring a big boost to GeoEye's valuation.

In the two months leading up to Visa's IPO last spring, MasterCard's stock price increased 26%. Following the IPO, MasterCard kept chugging, rising 24% over the two months post-IPO, which was better than Visa's 18.6% growth over the same period.

DigitalGlobe and GeoEye essentially operate a duopoly in the United States. Although they both compete fiercely for new business, they share a number of the same customers such as the National Geospatial-Intelligence Agency (NGA).

They have expertise in launching and deploying specialized satellites that can take pictures of a home plate from space -- in color. That's helpful for mapping, planning and, of course, national security.

There are very high barriers to entry in this business and it's not well known that the NGA funds the development and launch of these two companies' satellites. Their largest single customer has a built-in incentive to buy images from both.

Until Thursday's IPO, GeoEye has been the only public company in this duopoly, so the comparisons to judge valuation have been not ideal. Being a smaller-cap company also has led many to pass over GeoEye in the last year, especially as delays occurred around the launching of its latest satellite last fall and NGA giving the thumbs-up to the quality of the images coming from the new satellite (which was finally launched in March).

GeoEye's first-quarter numbers released last night were a positive surprise. Quarter revenue of $45 million exceeded analyst estimates of $41 million and was up significantly from a year-ago $35 million. Earnings per share were -9 cents, down from -5 cents a year ago but way ahead of analysts' estimates of -25 cents.

What's most impressive about these numbers is that the NGA only gave the green-light to the new GeoEye-1 satellite in late February. At that point, the previously announced service agreement had NGA committed to purchase at least $12.5 million per month for the next year or $37.5 million per quarter.

However, on the earnings call management indicated that very little revenue from this agreement was recognized in the quarter, suggesting that demand from other customers for GeoEye-1 images - those who didn't have to wait on the NGA's operational approval before purchasing their images -- was high.

It's especially intriguing to speculate how much Google(GOOG Quote) is paying for these images. GeoEye struck a deal with Google last fall prior to the satellite launch and stuck the Google logo on the side of the rocket.

This precluded GeoEye from selling images to Microsoft(MSFT Quote) or Yahoo!(YHOO Quote). GeoEye's management has yet to reveal the financial terms of its deal with Google, but the strong revenue growth gives some hope for continued ramp-up in the coming quarters.

From a cost perspective, some in the media have discussed GeoEye cash situation vs. the large costs of developing new satellites. The latest quarter's loss might make observers wonder if there's a lot to get excited about this business, even with growing revenue.

These concerns are overblown for a number of reasons. GeoEye went through a recent accounting restatement that ended in the first quarter and significant professional service fees were associated with this. In fact, SG&A for the quarter was up $3 million to $10 million compared to a year earlier, but most of those costs are one-time.

Revenue should continue to ramp up to historical operating margins of 45%. The company should be growing its earnings and cash over the next 18 months. Management also discussed several new hires the company is making in different areas of the business in anticipation of future demand. In addition, any new satellite development costs will be shared with the government as has been the case over the last few years.

In the last two months, GeoEye's stock price is up 34%. I suspect the stock will keep chugging as a much wider audience comes to understand the geospatial industry, thanks to the media attention focused on Thursday's DigitalGlobe IPO.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider GeoEye to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Originally published in TheStreet.com

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GeoEye (GEOY) Staffing Up

5/7/2009 3:18 PM EDT

GeoEye (GEOY) just announced it will be hiring 12 people in their production facility in St. Louis, which is responsible for professional services relating to the satellite images they take for their government and commercial customers. They've also increased the physical space at this location to do this.

It's always a bullish sign for a stock price to see staffing increase -- especially in today's environment. It speaks to their confidence in future earnings.

In the case of GEOY, their new GeoEye-1 satellite is now collecting images and generating revenues. We should start to hear about how this is translating into earnings on next Tuesday's Q1 earnings call for the company.

As I've also noted here before, next Thursday will be the IPO for GEOY's top competitor: DigitalGlobe (DGI). This IPO should actually be a good thing for GEOY, as it will provide the first true apples-to-apples public comp for the company.

Position: Long GEOY

Originally published in RealMoney.com

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DigitalGlobe (DGI) IPO in mid-May Should help GEOY

Following my earlier post this morning on how GeoEye (GEOY) was started at a "buy" at Canaccord Adams, a reader pointed out to me that GEOY's duopolistic partner DigitalGlobe (DGI) finally announced yesterday that it will go public in mid-May.

DGI filed its S-1 to go public a year ago, but it hasn't been able to because of the general markets. It will be only the 5th IPO this year.

DGI's IPO is a positive for GEOY and -- I don't believe -- is yet reflected in the GEOY stock price. GeoEye has done a poor job communicating its strong story but, as a small company, it's been at a disadvantage getting people to pay attention. With increased analyst coverage, as we see today, plus future earnings calls and DGI's IPO in a couple of weeks, there will be a lot more attention given to this industry of satellite imagery and GEOY.

I bought some June out-of-the-money calls this morning, as I expect the good news of May to be reflected in the stock.

Position: Long GEOY

Originally published in RealMoney.com on 4/30/2009 11:35 AM EDT

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Key Assumption for GeoEye (GEOY): Forward Earnings

I've written several times in TheStreet.com and RealMoney.com about GeoEye (GEOY). It's been a long holding of mine since March of 2008 and it's been a big disappointment overall.

It sells its Earth imagery take from its satellites to the US government, foreign governments and to commercial customers including Google (GOOG) for maps and their mobile apps.

The reason for my heartburn with this stock has been chronic delays of launching GEOY's latest satellite last year and then waiting on its approval by the federal government to begin the $12.5mm a month revenue payments. While the company has waited, its stock drooped.

Now, the satellite is approved and the company has switched on the meter for beginning to charge the government (we should start to hear more about this when the company holds its Q1 call). We also are still in the dark about how much GOOG is paying GEOY for its images (which are currently the state-of-the-art in that industry).

Assumptions about earnings for the next year are key in determining whether to buy in to the stock. At the moment, consensus EPS estimates for 2010 range from $0.78 - $1.84. Yet, analysts appear to be under-estimating how well this company does when revenues are flowing, with historical operating margins of 45%.

Back in 2007, the last time GEOY launched a new satellite, 15% of its $183MM in sales dropped to the bottom line. If GEOY hits its high revenue estimate of $320MM next year (and remember it just switched on a guaranteed contract from about half of that from 1 customer), 15% of that would be $48MM or $2.59 in EPS. That's giving the company an 8.8x forward P/E -- way too low in my book. Other comparable tech companies trade at double and sometimes triple that.

Originally published in RealMoney.com on 4/22/2009 12:24 PM EDT

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A Look Into the Micro Crystal Ball

Published in RealMoney.com

By Eric Jackson

12/31/2008 12:00 PM EST

In these final days of 2008, we turn our eyes to next year and how the stock market will fare. Rather than adding to the chorus of predictions about the price of oil, gold and the dollar -- as well as the S&P 500 in general -- I wanted to offer some predictions that are micro in nature.

1. New York Times (NYT - commentary - Cramer's Take) will be sold to avoid shutting down. The sales of its Boston properties, cutting of its dividend and mortgaging of its headquarters will not be enough to refinance its debt in 2009. The Times will be forced to seek out a friendly purchaser, more likely to be Mort Zuckerman, Eli Broad, Terry Semel or Ron Burkle than Rupert Murdoch because of News Corp's (NWS - commentary - Cramer's Take) own financial challenges.

2. Yahoo! (YHOO - commentary - Cramer's Take) will appoint an inside board member as CEO by the end of February (either Gary Chapple, Maggie Wilderotter or V.J. Joshi), which will be panned by the business media and employees as uninspiring. Current President Sue Decker will immediately leave the company and take a job later in the year working for Warren Buffett at Berkshire Hathaway (BRK.A - commentary - Cramer's Take). Microsoft (MSFT - commentary - Cramer's Take) and Yahoo! will announce a friendly "merger" by the end of the summer.

3. Terry Semel will buy a media property through his investment firm and effectively run it (a la Sam Zell). After all the bad press from his days at Yahoo!, Semel won't be content to stay on the sidelines.

4. CBS (CBS - commentary - Cramer's Take) will be spun off from Sumner Redstone's control and Les Moonves will be removed as CEO. Redstone's debt restructuring talks with the banks will force him to jettison his stake in CBS and hang on instead to Viacom (VIA.B - commentary - Cramer's Take). The network will be sold to another media company and Les Moonves will immediately move on. Home Depot (HD - commentary - Cramer's Take) cofounder Ken Langone will be among the new owners of the company.

5. Howard Stern will announce he's not re-signing with Sirius (SIRI - commentary - Cramer's Take) and instead retire; Sirius will restructure through Chapter 11 with Mel Karmazin staying on. Disappointed in his lack of influence as part of Sirius, Stern will throw in the towel and announce he's retiring after his five-year contract ends in 2010. He will stay retired for nine months before announcing he's returning to terrestrial radio.

6. Google (GOOG - commentary - Cramer's Take) will buy geospatial satellite operator GeoEye (GEOY - commentary - Cramer's Take). Google will see providing the map images (and searching any location on Earth) that appear on Google Maps, Google Earth and its G1 mobile phone as strategic, as well as in line with its interest in space in general. Google's stock will end 2009 at $350.

7. Women's retailers will face bankruptcy. Ann Taylor (ANN - commentary - Cramer's Take), Talbots (TLB - commentary - Cramer's Take) and Charming Shoppes (CHRS - commentary - Cramer's Take) will all announce bankruptcy before the summer, as cautious women shoppers stay away from these retailers and tighten their purse strings. Chico's (CHS - commentary - Cramer's Take) will teeter on the edge of bankruptcy but survive the year.

8. Bill Gates' investment firm will orchestrate a takeover of Crocs (CROX - commentary - Cramer's Take) in his first active investment. Faith in the Crocs products, which are used by the Bill & Melinda Gates Foundation with children in Africa, as well as frustration with the current management, will spur Gates into taking over the footwear company.

9. Hugh Hefner will make a lowball offer to take Playboy (PLA - commentary - Cramer's Take) private with several other friendly individual investors after disillusionment in the low stock price. This action will spur interest from a larger foreign investor to buy the company with the promise of letting Hefner continue to run it independently.

10. Dry bulk shippers like DryShips (DRYS - commentary - Cramer's Take) and TBS International (TBSI - commentary - Cramer's Take) will triple in value before June 1 as the general market rallies, before declining 50% in the second half of the year.

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RealMoney.com: Take the Long View With GeoEye

From RealMoney.com

By Eric Jackson

12/11/2008 1:59 PM EST

GeoEye (GEOY - commentary - Cramer's Take) operates three geo-spatial satellites that take images of Earth up to a color high-resolution of 0.5m. The company sells these images to governmental and commercial customers. Starting next month, these images will start appearing on Google (GOOG - commentary - Cramer's Take) Maps and Google Earth.

The stock trades at a major discount to its earnings potential next year and should appreciate considerably in the coming months. Yesterday, after the close, GeoEye announced a $144 million contract with its largest customer for 2009; this almost equals its trailing 12 months of revenue.

GeoEye is part of a duopoly in the U.S. with DigitalGlobe (a smaller, private and less well-capitalized competitor). GeoEye had been doing $183 million a year in revenue with 45% operating margins until six months ago, when the company gave up some market share to DigitalGlobe, which launched its newest satellite in the fall. GeoEye's revenue and earnings have recently dropped, as customers opted to use DigitalGlobe's newer satellite. The market has punished GeoEye's shares -- especially during the recent selloff of small caps -- taking the price from a 52-week high of $37.37 in January to below $19 yesterday, near its 52-week low.

A number of events are about to happen in the coming weeks -- beginning with yesterday's new contract news -- that should dramatically reverse the direction of GeoEye's shares.

Recall that the primary reason for GeoEye's stock slide this year was that its nearest competitor launched its latest and greatest satellite. In the geo-spatial imagery industry, higher-resolution images keep improving. GeoEye is now about to leap-frog DigitalGlobe's technology, as it launched GeoEye-1, the newest and most advanced geo-spatial satellite in space, in early September. GeoEye-1 will have the best images in its industry in full color for the next 18 months, until DigitalGlobe puts up its next-generation satellite. However, if DigitalGlobe fails to go public during that time, there is a possibility its launch gets delayed, and that would give GeoEye an even longer advantage.

BCC Research estimates that GeoEye's industry market is increasing from $1.9 billion this year to $3.2 billion by 2012. The key buyers of geo-spatial images are U.S. governmental agencies such as the National Geo-spatial Intelligence Agency (NGA) and Homeland Security. The NGA is GeoEye's largest customer, accounting for half of its revenue last year. The NGA also paid half the $500 million in costs to launch GeoEye-1. The agency is therefore expecting to continue to buy a significant amount of images from GeoEye in the coming years. The NGA's investment came, in part, from a presidential directive for governmental agencies to rely as much as possible on buying services and products from best-in-class companies, as opposed to replicating such services or products internally.

Earlier this fall, the Pentagon floated the idea of building and launching some new geo-spatial satellites of its own to supplement its reliance on GeoEye and DigitalGlobe. This plan was quickly quashed by Congress in November, because of budget concerns. This clears the decks for increased business for both GeoEye and DigitalGlobe in the coming six years.

In yesterday's announcement, GeoEye signed a service-level agreement with NGA, whereby NGA will pay $12.5 million a month up to $144 million in 2009. These payments are for planned purchases of images from GeoEye-1. There might be more. If the payments stay at just that level, they will represent a doubling of GeoEye revenue from NGA compared with 2008.

NGA still needs to certify the quality of the images from GeoEye-1. The images are at a high resolution now, but GeoEye is trying to make them even more finer-grained. This certification is expected to happen on Dec. 15 or slightly thereafter. Once that certification takes place, many other commercial and governmental customers for GeoEye's images will likely begin to strike their own deals and purchase the images.

GeoEye's trailing price-to-earnings ratio yesterday was below 9. Its forward P/E, assuming it does $250 million in revenue next year with 45% operating margins, is 3. Other satellite and space/defense companies trade currently at forward P/Es of 7 to 21.

The key reason why the stock has been at depressed levels since the launch is that it wasn't yet clear that the satellite was operating properly. Yesterday's announcement suggests that NGA is ready to spend money on the new images from the satellite once it certifies the images. NGA's planned spending next year almost equals GeoEye's 2007 total revenue of $183 million, after which the stock hit its all-time high of $37.37. That stock price was achieved prior to worries about delays in the launch of GeoEye-1 that depressed the stock.

The table has now been set for significant revenue and operating margins to accrue to GeoEye over the next 18 months, as NGA, Google and other commercial and governmental customers purchase these images. It is highly unlikely that a technical flaw will crop up this long after the launch. The customers who buy these images (e.g., governmental agencies and Google) are also much less affected by the broader economic malaise compared with most companies operating today.

Assuming GeoEye can double its sales and earnings by the end of next year and is rewarded with an increased price-to-earnings multiple more comparable to its related peers, I believe it could trade up to between $60 and $80 by early 2010, up from its current price of $19.

Days before GeoEye launched GeoEye-1, the company announced a relationship with Google. GeoEye would provide its images from GeoEye-1 to no other online portal except Google. Google is not under any restrictions, meaning it could still buy images from DigitalGlobe. No financial details about the agreement between GeoEye and Google have been released. The first hint of what those details might be won't come until early February, when GeoEye holds its fourth-quarter analysts' call.

However, here is what we do know about the relationship and about Google's interest in space:

• Google's co-founders (Sergey Brin and Larry Page) attended the September launch of GeoEye-1.
• Google's logo was on the side of the rocket that launched GeoEye-1.
  Google will begin using images from GeoEye-1 on Google Maps and Google Earth in January and start paying GeoEye for them.
• GeoEye recently paid Google to get its help in improving their search tools so that GeoEye customers could more easily search GeoEye's inventory of images. (DigitalGlobe has no comparable search tools to offer its customers.)
• Google's first acquisition post-IPO was for a small company called Keyhole, which is now the basis for Google Earth.
• Larry Page has signed up to be launched into space himself in 2011.
• Google has recently been investing in building up its relationships with the federal government, to which it sells its Search, Apps and Earth products. Recently, Google was a Gold Sponsor of an NGA Industry Day, of which GeoEye was also a sponsor and DigitalGlobe wasn't.
• Google received special permission from NASA to land its corporate jets at Moffat Field near its Mountain View, Calif., headquarters.

It's difficult to say what this adds up to in terms of a long-term relationship between GeoEye and Google. It's quite possible that Google would look to acquire GeoEye in the future to control the images and search tools from GeoEye and develop a deeper relationship with the NGA and the federal government. And Google could be interested in the possibility of designing proprietary search-imagery applications to use within Search and Android (its mobile operating system used in Google's G1 mobile phone). Google is deeply interested in space and space-based imagery. What is clear is that the market is assigning no value to GeoEye from its ongoing revenue relationship with Google or the possibility that Google might acquire the company in the future.

When GeoEye-1 was launched in September, the company said that the NGA should certify the satellite's operation and sign off on a service-level agreement (outlining its planned imagery purchases from GeoEye) within 60 to 90 days. The service-level agreement with NGA was signed on Tuesday, and certification is expected within the week. Expect new customer announcements to trickle out, now that NGA has gone first. In February, GeoEye will hold its next analysts' call, at which time it should start to shed light on its revenue ramp-up with the GeoEye-1 satellite and on the expected revenue from the Google relationship.

Four remaining risks could negatively affect the stock:

• The satellite could suffer a technical error whereby it becomes inoperable. This is highly unlikely at this point but possible. A major malfunction would slash the company's future earnings dramatically. GeoEye has insurance for this scenario, but it would still not prevent a sharp drop in the stock price. This possibility always exists for the lifetime of every satellite.
  
• Management offers poor communication. I have been an activist investor in GeoEye since March. Its CEO and management team have done a poor job in managing the Street's expectations and communicating the GeoEye story. This still remains a problem area, despite criticism from me and from other investors. Management needs to win over the trust of institutional investors and hedge funds to see its price-to-earnings multiple increase.
  
• The company has had delays in filling the CFO position. In yesterday's announcement about its new contract with NGA, GeoEye disclosed that its current CFO would be leaving. There are many possible reasons for this, and I don't take it as a sign of problems. The company restated its financial statements recently. The board could have decided to make a change. What is important is that GeoEye hire a first-class CFO to fill the role before the next analysts' call in February.
  
• DigitalGlobe could move up the launch of its next-generation satellite sooner than 18 months from now. This is almost impossible. In fact, it's more likely that DigitalGlobe will delay their launch, given that it is waiting to go public to raise needed capital, and the IPO window appears to be shut for the foreseeable future.

In GeoEye, you are getting a world-class leader in a growing and recession-proof industry. Its stock has the chance to triple or even quadruple in the next 15 months. What's more, you're getting a call option on a potential buyout by its partner Google. Put it together, and you have a compelling entry-point at these levels.

[Eric Jackson's fund holds a long position in GEOY.]

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Google's Interest in GeoEye and Geospatial Imagery

A few days ago, I wrote about Google's potential interest in buying geospatial imagery company, GeoEye. Here are some additional reasons for why Google might want to acquire GeoEye and control the actual satellites and additional analytical tools which GeoEye possesses as a supplement to their Google Earth product.

One of the first companies which Google acquired after it went public in 2004 (for an undisclosed sum) was Keyhole -- the foundation piece for Google Earth. As a carry-over from that acquisition, Google has continued to sell its Google Earth imagery to end users for a fee: Google Earth Plus (for a $20 annual subscription) and Google Earth Pro (for a $400 annual subscription).

At first glance, it doesn't seem to make sense for Google to keep such a subscription model in place with its dominant Google AdWords Search model. Yet, Google aspires to make money beyond AdWords. They have continued to invest in a competitive suite of applications as an alternative to Office (called Google Apps). They have done so, because they believe people will save their data and files through Web services in the future (in the cloud) rather than on their PC. If this occurs, Microsoft is tremendously weakened and Google grows.

Google Earth is yet another way for Google to make money. However, it is less a money-maker on its own, rather than a way of driving loyalty and therefore revenues back to Google Search and Google Apps. For Google to keep its Google Earth subscription model in place 4+ years since the Keyhole acquisition suggests it has further plans for this model of selling its high-end earth imagery. It is not a mistake that it has maintained this model.

Consider this also. Google is interested in developing its relationship with Government (the largest customer for satellite imagery). Go to www.google.com/federal for more evidence of this. Google's focus in this niche centers on 3 services: Search, Geospatial Images, and their Google Apps suite of Web services (Gmail vs. Outlook, their own apps vs. Office). (To see an example of a government client that has used Google Earth to improve their efficiency, see this case study on the US Forest Service.) As Google develops their relationships with such a client, it becomes much easier to go back and communicate the benefits of search and Google Apps. Microsoft would have to more heavily invest in its Virtual Earth offering to keep up with Google (or perhaps acquire GeoEye's smaller competitor, DigitalGlobe -- who's revenues at the time it filed its S-1 earlier this year were smaller than GeoEye's).

One government client that Google has great interest in developing a relationship with is the National Geospatial-Intelligence Agency (or NGA). NGA also happens to be GeoEye's largest customer. This coming week, Google is a Gold Sponsor of the NGA's Industry Day. This is a classified conference for US citizens only at which the NGA will lay out their plans for the coming year. (GeoEye is a Silver Patron for the conference.) Google will be continuing to push the benefits of Google Earth and Google Search Appliance (its tool for pulling key information from government clients' own records) at this conference and afterwards. They would not sponsor this conference if they did not see opportunity in this government vertical in the years ahead. (GeoEye's chief competitor, DigitalGlobe, is interestingly not a sponsor at this event.)

Some evidence that the NGA has big plans in the years ahead came out last week when the IT consulting firm NJVC, who works closely with the NGA and is also a Gold Patron at the conference mentioned above, announced that it is expanding its square footage by 33% and hiring 100 new employees in expectation of significant growth in the firm in the coming 4 years. NGA is NJVC's largest customer.

Matt O'Connell, CEO of GeoEye, has also discussed rapid expansion to keep up with planned growth in orders from NGA and other customers now that the new GeoEye-1 satellite was successfully launched last week. GeoEye did $200 million in annual revenues a couple of quarters ago and will certainly exceed that in the coming 2 quarters now that they've successfully launched their newest GeoEye-1 satellite last week. The NGA will continue to be a very important customer to GeoEye.

Google also clearly sees opportunity here in this space. The question for Google is how can it take Google Earth to the next level? This is where GeoEye becomes interesting as an acquisition target. By owning GeoEye, Google would own the proprietary images it captures from its satellites. There would continue to be the need to invest in future satellite launches to stay ahead with the most up-to-date technology but Google certainly has the capital and the interest in space to do this. Owning the satellites also allows Google to develop the tools and unique services which can become integrated into Google Earth but (perhaps more importantly down the road for Google) its Android operating system which it will roll out on future mobile handsets (think highly unique location-based services here).

Google could sit back and just buy images (as Microsoft and Yahoo! do) from GeoEye and DigitalGlobe, letting them take the risk of launching the satellites, but their opportunities to develop proprietary location-based services would diminish (or become easier for Microsoft, Yahoo! and others to copy down the road).

GeoEye is a more compelling potential acquisition target for Google than Digitalglobe for two reasons: (1) it has the newest satellite in space today with the most advanced features and (2) it has a cadre of tools for using the images which their private competitor DigitalGlobe lacks. These tools came, in large part, from the MJ Harden acquisition done last year by GeoEye. More tools, from Google's perspective, means more usage of Google Earth from its clients and therefore more usage of Google Search and Apps.

Additionally, Google and GeoEye have grown closer in these last few weeks. The two companies agreed that GeoEye would not sell its images from GeoEye-1 to any other online portal. Google's co-founders, Larry Page and Sergey Brin, were at the launch of GeoEye-1 in California last Saturday (Page remember has signed up to be launched into space himself in 2011).

Google doesn't buy GeoEye for $200 million a year in revenues. It buys GeoEye to make Google Earth and Android truly remarkable in the years to come, as well as cementing Google's place in the Government vertical with its core Search and Apps offerings.

A deal before the end of the year would make sense as GeoEye is beginning discussions with other parties about funding its next satellite GeoEye-2. Google has the opportunity to control the specs of what that would look like if they do the deal now instead of waiting and having to share the specs with other parties.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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TheStreet.com: Activist Investor: Why Google Cares About GeoEye

09/11/08 - 10:00 AM EDT
By Eric Jackson
TheStreet.com

GeoEye (GEOY Quote - Cramer on GEOY - Stock Picks) is a relatively small company that takes pictures of the Earth from three satellites it operates in space. You've probably never heard of it. However, Google (GOOG Quote - Cramer on GOOG - Stock Picks) co-founders Sergey Brin and Larry Page have. In fact, both attended last Saturday's launch of GeoEye's newest satellite at Vandenberg Air Force Base in California. In fact, Google's logo was on the side of the rocket that launched the satellite into space.

Why were they there, and what does it mean for Google and GeoEye investors?

I wrote about GeoEye earlier this year and have a large long position in the company. While the company has had issues largely of management's own making (delays in the launch of the satellite, minor earnings restatement and poor communication with investors), it has now overcome all of these with the near-textbook launch of the GeoEye-1 satellite last week.

GeoEye operates in a duopoly in the U.S. with DigitalGlobe, a smaller, private and less well-capitalized competitor. Both companies take geospatial images of Earth and sell those to governments and commercial customers. Until the last six months -- when GeoEye gave up some market share to DigitalGlobe, which launched its newest satellite in the sky last fall -- GeoEye was a $200-million-a-year company with 45% operating margins. It will now quickly return to that size and much more in the next year.

GeoEye-1, the satellite launched last weekend, is a game-changer for the industry. It's the first satellite to take color images of earth with the highest resolution. If you want to snap some images of a baseball plate at your local park, GeoEye-1 is up to the task. DigitalGlobe, assuming it goes public in the next year, will not leapfrog GeoEye with a better satellite for at least two years.

From a valuation perspective, GeoEye is compelling. The stock closed Wednesday at $26.31. Assuming the company returns in 2009 to its revenue run rate of six months ago, GeoEye is trading at 5.2 times 2009 earnings. BCC Research estimates that GeoEye's industry market is increasing from $1.9 billion this year to $3.2 billion by 2012. With that type of growth rate, a valuation of 12-15 times 2009 earnings is more than justified for GeoEye today, which would put shares at $60-$76.

The largest risk facing GeoEye -- and weighing on the stock -- had been the prospect of an unsuccessful launch of GeoEye-1 last Saturday. That risk is now past. In 30-45 days, GeoEye's largest customer, the National Geospatial-Intelligence Agency for the U.S. government, will sign off on the quality of the first images and start to place orders with the company.

The Google Factor

All of these valuation assumptions don't take into account that GeoEye announced, just days prior to the launch, that it would provide images from GeoEye-1 to Google exclusive of other online portals. The company has yet to give financial details of the arrangement, but Google clearly cares about GeoEye, as the attendance of the founders at launch confirm.

GeoEye is strategic to Google from a couple of angles. First, GeoEye will provide images to Google Earth and Google Maps. More importantly, GeoEye is intimately tied with Google's plans for Android, the mobile operating system it will roll out to handset providers later next year. Google is effectively buying proprietary mapping technology from GeoEye that can be later integrated into new location-based services we have not yet seen.

For example, with high-resolution images from a satellite that circles the earth several times a day, it becomes possible to integrate real-time traffic information when plotting traffic directions. It also becomes possible to easily track GPS-equipped vehicles.

GeoEye also has significant mapping tools that can be used to analyze multiple or time-series images, an interesting feature that could be interesting for Google Earth and Google Maps to implement.

If the connection between Google and GeoEye came down to merely improving Google Maps, you might have expected a Google product manager to attend last week's launch, not the co-founders. The fact is that Brin and Page have a personal interest in space. From investing early in Google Earth to last year's news that Brin signed up to take a personal space flight in 2011.

While some Google critics have poked fun at the company's interest in space, you cannot watch a news broadcast now without seeing some wide-angle image of a country that zooms into the city or location of interest to the story courtesy of Google Earth. There is also a long-term secular trend that we want to know exactly what's happening now in any place globally. The most accurate and up-to-date images of earth are part of that trend, and GeoEye-1 falls in the sweet spot of that demand. Google intends to take advantage of that (to say nothing of the government's continued interest in this information).

Put all of this together and you need to attach a premium to GeoEye's shares as a potential takeover target by Google beyond the price target I mentioned earlier. GeoEye is currently putting together plans to build GeoEye-2, its next-generation satellite for launch in 2011. Google just might want to have that satellite exclusively for its own use. If so, Internet giant would likely want to purchase the company in the next six months, before others agree to funding terms with GeoEye to develop that satellite.

Keep your eyes on the sky for a fast-rising GeoEye stock price.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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TheStreet.com: Activist Investor: GeoEye's Seeing Things My Way

08/25/08 - 02:22 PM EDT
From TheStreet.com
By Eric Jackson

My first Activist Investor column for TheStreet.com in March featured GeoEye (GEOY - Cramer's Take - Stockpickr), a satellite company in which I had just started an activist campaign.

This investment is down more than 20% since the start of the year (despite a 50% run-up since mid-July); however, the company's management has been receptive to recent behind-the-scenes activist efforts. GeoEye looks ready to make significant gains in the remainder of this year and into next year after the launch next Thursday of its newest satellite (GeoEye-1).

GeoEye leads the market, in terms of revenue, in operating satellites that capture geospatial images used by government and businesses. Its images are used by such customers as Google Earth, the U.S. Department of Homeland Security as well as agriculture companies, city developers and planners, real estate developers, video-game makers and companies that develop location-based applications. GeoEye offers a whole set of tools and services for customers to package its images (including historical images from its library) and help them analyze and dissect the information.

What first attracted me to small-cap GeoEye was its low valuation. It had a trailing price-to-earnings ratio of 12 in February, despite projections of growing earnings by 20% each year for the next five years. Unfortunately, that figure kept dropping until it was below 6 in early July.
Up until the last couple of quarters, when the company started losing some orders to competitor DigitalGlobe, which currently operates the newest satellite in the sky, GeoEye was generating $200 million in revenue with operating margins in excess of 45%. If you assume a rapid return to these numbers (and likely higher) once GeoEye-1 launches next week, this company's shares can be bought for just above 4 times next year's earnings.

The company's stock price has slumped in the past six months for several reasons. Its planned launch of the GeoEye-1 satellite had been delayed several times and investors have worried it would be delayed again. The successful launch of the satellite is a gate for future earnings potential. Until the launch happens, however, customers will go to GeoEye's competitor, which currently has the best satellite in the sky.

Other uncertainty has weighed on the stock price. GeoEye announced earlier this year that it would need to restate a small part of its previous year's earnings based on advice of its accountants to ensure they had properly accounted for previous net operating loss carry-forwards.

One of GeoEye's greatest problems has been poor communication. Management has done a lousy job outlining its competitive advantages to investors. This poor communication only exacerbated investors' concerns about the GeoEye-1 launch delay and the earnings' restatement.

It got so bad that one analyst, during the first-quarter earnings call, excoriated GeoEye's CEO and CFO for their poor job of communicating. He directly blamed this failure for the company's low P/E ratio.

Positive Signs

But some things have gone on behind the scenes in the past six months that should please investors. First, GeoEye's No. 1 competitor, DigitalGlobe, filed to go public. This meant it had to open its books to the public in an S-1 filing with the Securities and Exchange Commission, a disclosure that revealed it was smaller than GeoEye. DigitalGlobe's decision to go public also allowed Matthew O'Connell and Henry Dubois, GeoEye's CEO and CFO respectively, to speak more freely about their business without fear of giving their private competitor an unfair advantage.

The second thing that has happened is that O'Connell and Dubois have listened to the criticism of shareholders and learned from it. The recent second-quarter earnings call was much improved over previous ones. On the most recent call, held earlier this month, they laid out all the details of the Sept. 4 satellite launch and cleared up what they had recently concluded about their recent restatement in a way that comforted investors. The stock has held its recent gains, instead of dropping precipitously as it did after the first-quarter call.

GeoEye has also been responsive to private criticisms I've directed to management, so I would like to give them public credit for this.

When I launched my activist campaign against GeoEye in the spring, I outlined in a letter to GeoEye's chairman and CEO three important but fixable problems I urged them to correct:

1) raising the company's price-earnings ratio through better investor relations and better communication in general,

2) clearing up the earnings delay immediately, and

3) ensuring management and the board had enough "skin in the game" and adding new board members to strengthen the overall team.

I have spoken to Matt O'Connell and Henry Dubois several times since I sent my first letter. In my view, communication with investors is much improved when it comes to discussing what the company is doing to achieve its immediate-term goal of a successful satellite launch, frequent pitching of the strong GeoEye story through investor meetings. Speeches at investment banking conferences have clearly laid out why GeoEye is significantly ahead of DigitalGlobe and why the market for geospatial images is expected to explode in the years ahead.

On its most recent call, GeoEye specifically mentioned how it's spending much more time talking to investors and telling its story. GeoEye is now covered by four analysts (all with buy ratings) compared to the one analyst it had last quarter. GeoEye has spelled out how its newest satellite will be the industry-leader for the next two years until DigitalGlobe launches its next satellite.

Also, last week, they hired their first chief technology officer, whose job it will be to better communicate the technical advantages of GeoEye's images and how they will play a part in the burgeoning location-based services market. This last point is still what has been missing in the recent GeoEye presentations and speeches.

The earnings restatement has now occurred, and it did not prove significant. Past years' lost earnings should be equaled out by a tax credit awarded later this quarter. There has been no cash impact on the company and the company still has a strong balance sheet to see it through the successful launch of GeoEye-1.

In terms of management and the board improving its makeup, there is still some work to do. O'Connell, Dubois and some others on the management team purchased some stock earlier this spring. I had encouraged them to do so as a sign of confidence in the company. Unfortunately, they only bought about $18,000 each. In my opinion, that's not enough -- especially given the generous executive pay they receive.

The CEO, O'Connell, deserves a pass on this issue, as he came from Wall Street to run GeoEye a number of years ago and had to make a big personal investment in the company. I know he understands the concept of "skin in the game." I wish he would encourage other officers and directors to follow his lead. Management needs to realize that stock options given to them as part of their compensation is "found money," compared to open market stock purchases.

On the issue of improving the board, there are already a number of strong individuals on this board, many with a government background (which makes sense as the government is GeoEye's largest customer and a co-investor in the new satellite). This board still could use some people with more of a commercial background, as that's a growing customer area for GeoEye.

However, when I spoke to O'Connell, I made it clear that I was much more interested in seeing the company tell its story effectively, clearing up any restatement uncertainty and encouraging insiders to buy some more stock than discussing the board composition issue. I believe they've prioritized the criticisms appropriately.

The bottom line is that GeoEye has listened to its critics and taken action to address many of the criticisms. Management needs to go further in some areas, but they deserve credit for what they've done to date. As an investor, I feel much more confident in this company's prospects based on my interactions with management and seeing them make some progress against these weak points.

GeoEye's biggest weak point remains communicating its powerful story to investors. It can't rely on its CTO to explain its competitive advantages to Wall Street. This is the job of the CEO and CFO, and they've only improved from a "C-" to a "C+" on their communication skills in the last three months.

All eyes are now on the Sept. 4 launch of GeoEye-1. The company needs to continue to actively communicate with investors on the day of and the day following the launch. The launch team has a 98% success rate over the last 150 launches. After launch, the company will perform tests to ensure everything is working correctly, and its largest customer, the National Geospatial-Intelligence Agency, will sign off that everything looks good at the end of October. That sign-off will allow the agency to agree to a new service-level agreement with GeoEye to buy images in the quarter ahead. Other customers will likely follow.

The launch should therefore have a large catalyst effect on the stock price. A more reasonable valuation for the stock would be 12 times next year's earnings, or triple its current price. It might take a few quarters to get there, but patience and activism are likely to be rewarded.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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GeoEye-1 Ready for Launch

General Dynamics has completed its testing of GeoEye-1, the next-generation satellite to be launched later this August by GeoEye (GEOY).

The press release is here.

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Communicating with GeoEye

This morning, I had the opportunity to speak with GeoEye management for about an hour about my previously expressed points as a shareholder about what could and should be done to increase shareholder value.

I do not want to disclose the contents of the conversation, but I was pleased with their willingness to talk and their openness to the ideas put forward.

Actions speak louder than words, of course. Shareholders will only be happy when the price starts to go up again, but I am confident they will implement some of the ideas we discussed.

I will be watching, but I was heartened by the conversation and am glad the 10K is now out and we can look forward to continued strong performance in the coming months.

This is a dominant company in a fast-growing industry that will only be more important to commercial and government customers in the years to come.

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GeoEye Files Its 10K with the SEC: Lifting the Cloud

After close today, GeoEye (GEOY) released its 10K, which is located here.

The bottom line is that they have clarified the NOL tax issue with the IRS and it is not all that significant. They did restate their net earnings from 3Q07 (and for Q1 - Q307 as a whole).

Fully diluted EPS for 3Q07 is now $2.20 instead of $2.67 (a 17.6% decrease). Fully diluted EPS for the first 3 quarters of 07 is now $1.87 instead of $2.38 (a 21.4% decrease).

All these do not obviously affect operating performance. GeoEye states that it is still going to press the matter "vigorously" about whether this conservative treatment is in fact warranted.

In the meantime, for shareholders, this news will be welcome to turn the page on the uncertainty hanging over the company since the last earnings call which, otherwise, had some very strong news.

Now, we look to GeoEye-1's successful launch: scheduled for August but hopefully sooner.

In the meantime, I will continue to press my previous points to management and the board.

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Relevant Comps for GeoEye (GEOY)

It's been a week since I launched my newest public activist campaign, this one aimed at geo-spatial satellite imagery company GeoEye (GEOY).

In general, the response on this blog, to TheStreet.com article, and in discussions I've had with others has been extremely positive about GeoEye.

Some very smart and significant shareholders have exited their positions in the company in the last 6 - 12 months. A cause for concern about GeoEye now? No. Simply smart money exiting their very profitable positions in a company they've seen grow significantly over the last couple of years - not a reflection on where the company is now and the opportunities which lie ahead for it. One person commented to me on what a good company it still is.

The most common response to the campaign is how cheap the company is given what it's doing. Its forward P/E ratio for this CY is 12.99, it has $13/share in cash, and its Enterprise Value/EBITDA ratio is at 5.2. With a signficantly enhanced satellite (GeoEye-1) launching by August, the company will have a major driver of growth in the coming years.

Some didn't like the industry comps I previously provided to justify how cheap GeoEye was, especially Trimble Navigation (TRMB) because it is a positioning/navigation company, not a satellite company. Part of the problem in finding a relevant comparison for GeoEye is that its primary competitor, DigitalGlobe, is private.

However, 12.99x this year's earnings is cheap, when compared to an S&P500 average of 19.6x for this year.

And here's another way to figure out where GeoEye should be valued. What companies does GeoEye's board look at when setting executive compensation? Well, according to last year's proxy, they are:

1. Cubic Corporation
2. Input/Output, Inc. - now private
3. Measurement Specialties, Inc.
4. MTS Systems Corporation
5. Nanometrics Incorporated - now private
6. OYO Geospace Corporation

and - lo and behold

7. Trimble Navigation Limited

It turns out those companies have a trailing P/E average of 19.54 vs. 12 for GeoEye. If GeoEye attained that valuation, its price would rise to $45 from $27.

It should get there sooner than the August launch date of GeoEye-1, and rocket past that afterwards.

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TheStreet.com: GeoEye Beams a 'Buy' Signal to Investors

The following is a cross-post from TheStreet.com, which appeared today.

Editor's Note: With this column, TheStreet.com is pleased to debut Eric Jackson. Our newest contributor has led online activist campaigns in the past, and will share his latest investment ideas with our audience. As always, let us know what you think.

I built a position in satellite company GeoEye(GEOY - Cramer's Take - Stockpickr) over the last couple of months.

Initially, I wasn't anticipating launching an activist campaign aimed at the company, which provides space-based imagery to government and commercial customers. The stock has gone up 62% in the past year, and GeoEye seemed well positioned to announce a very positive quarter and year-end results, which it did last week.

I was attracted by the stock's incredibly low valuation relative to projected earnings and peer comparisons. Trailing P/E sits at a paltry 12.66, whereas larger competitors Orbital Sciences(ORB - Cramer's Take - Stockpickr) and Trimble Navigation(TRMB - Cramer's Take - Stockpickr) have trailing P/Es of 25 and 29, respectively. What's more, GeoEye is expecting to increase earnings by 20% per year for the next five years.

However, the market was cool to last week's results even though fourth-quarter EBITDA doubled to $15.9 million from $7 million in the previous year and revenue rose to $45 million from $42.2 million a year earlier. Why?

GeoEye has not released full EPS numbers, as it is waiting for the IRS to rule on how to account for an acquisition it made in 2007. The company promised to release complete numbers before filing its 10-K, which is due at the end of March. The delay is not entirely management's fault, as it is waiting on the IRS. However, the company could have anticipated the snag and should have clarified sooner.

Activism is not just for broken companies. It can be equally important for solid but undervalued or overlooked companies. GeoEye is a perfect candidate because it's been overlooked.

Therefore, I recently launched an activist campaign aimed at raising the value of GeoEye, using the tools of the Web. As I emailed a letter to GeoEye's Chairman, Lieutenant General James Abrahamson, and its CEO, Matthew O'Connell, I posted it to my blog, inviting comments and suggestions from other shareholders.

Reaching out to shareholders of Yahoo!(YHOO - Cramer's Take - Stockpickr) and Motorola(MOT - Cramer's Take - Stockpickr) in two campaigns I ran over the past 15 months, using blogs, YouTube videos, wikis, polls and Facebook groups, was particularly helpful in disseminating my message and soliciting suggestions from an army of similarly frustrated shareholders. I hope the same will happen with GeoEye and in future Web-based activist campaigns.

GeoEye is much smaller (with a $500 million market capitalization) and less well-known than Yahoo! or Motorola. Furthermore, I don't believe it requires a major reshuffling of the board or management. This is a solid company.

The stock's price has appreciated 62% over the last year, as the company has delivered operationally for investors and started to be more widely followed by a larger institutional base.
The board and management team have also shown that they can plan ahead and do the right thing for shareholders. Earlier this year, one of GeoEye's two satellites in orbit (the OrbView-3) failed. For most small companies with poor planning, this would have been disastrous. However, GeoEye had appropriate insurance in place. That settlement ($20 million) on the aging satellite ended up being more positive for shareholders than if the failure hadn't happened.

GeoEye's newest satellite (GeoEye 1) is expected to launch in August and provide significant new revenue-enhancing opportunities to the company's existing and future customers.

However, no company or person is perfect. GeoEyes clearly must take steps to properly reward shareholders by fully realizing the inherent value of the company.

Here is a summary of the activist suggestions I raised to GeoEye's Chairman and CEO in my recent letter to them.

Raise GeoEye's P/E ratio to be in line with its peers: At the moment, GeoEye's trailing P/E is only 12.66. Yet, the company has projected to grow its earnings at 20% a year over the coming five years. Competitors sell at trailing P/Es in the mid- to high-20s. If GeoEye sold for a P/E of 20, the result would be a 58% increase in the stock's price to $45.82. If GeoEye were trading at a premium to its peers, which I believe is warranted, of 40, its stock price would appropriately be valued at $62.62.

I believe that the market has failed to see the inherent value in GeoEye because the company has not sufficiently articulated its strategy moving forward. It's not enough to simply estimate to investors when GeoEye 1 will launch or provide timelines for GeoEye 2 (its next-generation satellite that won't be launched until 2011), for that matter.

Investors want to know what the company will provide to its customers better than its competitors and in a sustained fashion. They also want to know that GeoEye is unique and better positioned to deliver to a large and fast-growing market. This hasn't happened as effectively as it could, in my opinion. I believe that, with a much more focused and vigorous explanation of GeoEye's inherent value relative to its peers, the market would properly value the company.

Rectify the earnings delay: Despite strong revenue announced during last week's quarterly call with analysts and investors, the company's stock was immediately punished, falling to $28 from $33. The reason was the management team's inability to communicate GeoEye's 2007 EPS because it couldn't account for net operating losses from the acquisition of M.J. Harden Associates from GE in early 2007.

These days, the markets abhor uncertainty. Investors shoot first and ask questions later, sometimes when it's unwarranted, as is the case here. The current stock price appears to me to be a market overreaction. However, this is partly management's fault for failing to move more swiftly in 2007 to clarify this point. They need to get this information out to the market as soon as possible.

Get a better board with more skin in the game: GeoEye has a prestigious group of directors. Its chairman, Lt. Gen. James Abrahamson, formerly headed up Ronald Reagan's "Star Wars" project. James Simon, former Assistant Director of the CIA, is also a director. However, a disproportionate share of directors on GeoEye's board have government/military backgrounds. There is also a plethora of lawyers and accountants. Such backgrounds aren't objectionable in themselves (the government, after all, accounts for over half of GeoEye's revenue). But it is a concern that there are no directors who represent the perspective of GeoEye's commercial customers.

Additionally, I'm concerned about the low stock-ownership levels of several of the outside directors. In research I collaborated while at Columbia Business School, we found that no single governance characteristic mattered more to improving a company's share performance than the percentage of outside directors on the board who held meaningful equity stakes they had purchased themselves.

The solution to improving the board comes in two forms. First, the board needs to look for possible directors with a commercial background and seek to bring them in as quickly as possible. The Chairman and CEO need to do a full review of GeoEye's current outside directors and their stock ownership.

I do not believe stock holdings are the same as the stock that someone has dug into his or her own pockets and purchased. The two are different as motivators and as predictors of future stock appreciation. There are several GeoEye outside directors whose stock holdings likely have only come through grants and options paid to them for their service -- the equivalent of found money. That's not enough "skin in the game," in my view. I would like to see each of GeoEye's outside directors purchase at least $500,000 in stock within the next six months.

I would not be a shareholder in this company if we didn't believe GeoEye had a bright future. I expect the clarification of GeoEye's earnings before the end of the month will be a major catalyst for the stock. It should be appropriately valued at $45 today. It will be worth much more upon successful launch of GeoEye 1 later in August.

If it takes some activism to help unlock some of this unrealized value, I am happy to oblige.

At the time of publication, Jackson was long GEOY, YHOO and MOT.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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BloggingStocks: Eric Jackson: Shareholder Activist talks up social media

Posted Mar 19th 2008 4:09PM from BloggingStocks

by Tom Taulli
Filed under: Google (GOOG), Yahoo! (YHOO), Motorola (MOT)

No doubt, there are many shareholder activists. But with Eric Jackson -- who manages Ironfire Capital LLC -- he is a bit different. That is, he uses social media, like Google Inc (Nasdaq: GOOG)'s YouTube, to help with his campaigns against companies like Yahoo! Inc. (Nasdaq: YHOO) and Motorola, Inc. (NYSE: MOT).

Well, I recently had a chance to interview him:

Why did you setup your fund? What's your take on shareholder activism?

After last June's Yahoo! annual meeting, when they changed CEOs following a high "against" vote by shareholders towards the current board, several friends and supporters encouraged me to think about setting up a fund. Frankly, they and I were a little surprised what I had been able to accomplish owning only 96 shares of the company. Many people had told me it was a waste of time and I had no chance of gaining support for an alternate "Plan B" for Yahoo! But we showed that the quality of ideas matter more to other shareholders than the quantity of shares owned. My hard costs were negligible for the campaign: a $30 webcam and a couple of JetBlue tickets to California. Several people said: "You need to do this on a larger scale." Ironfire Capital will allow me to do that.

My take on shareholder activism is that it's going to continue and be an exciting new asset class unto its own. Last fall, some nay-sayers said the tightened credit markets would cause activism to go away, because companies couldn't pay out cash to shareholders as easily as before. Now, there are many smaller shareholder activist funds out there who follow a "color by numbers" approach. No matter the company, their solution is: (a) put the company up for sale, (b) do a dividend to shareholders, or (c) do a stock buyback. Those are all valid recommendations in the right situation, but if you advocate them at all times and with all companies, you have less credibility in the eyes of targets and shareholders. The best activists -- and the ones who will do well in this environment and moving forward -- will come up with recommendations that suit the situation and obviously promise to deliver value. Sometimes, they'll take a hard-line approach, but sometimes a softer approach can be effective (as we've seen in recent days with Harbinger and Firebrand being awarded board seats at the New York Times).

You've been innovative in using social media. What are some of the things you've learned?

It's never been easier or less expensive to express your point of view. With that said, just because you have an opinion doesn't mean that others will listen. Anyone who wants to speak out and attract supporters needs to spend a lot of time at it and make sure they can back up their arguments. But, once you have something to say, I found blogging and YouTube videos were very helpful in attracting attention to my messages. Using a wiki to invite comments and changes to a plan was also a very effective way of getting better ideas, and also making others feel more engaged in the process.

That said, not every social media outlet I tried drove more traffic to my campaigns. I like Facebook, but creating a Facebook group didn't seem to help bring incremental awareness, because anyone who joined the group was sent back to the blog or YouTube.

Your next target is GeoEye Inc. (Nasdaq: GEOY). Why?

I invest in a company because I believe it will be an outstanding investment. The first two companies I targeted (Yahoo and Motorola) were high-profile, but GeoEye isn't - its market cap is $500 million. But I believe my brand of activism using social media will work just as well if not better with smaller and less well-known companies. I expect many people will hear about this company and give it a look because of the activism.

GeoEye is a solid company; it's not broken. Due to the vagaries of the market and because management hasn't outlined the exciting story it has as well as it could, it happens to be severely under-priced. It delivers spaced-based imagery to government and commercial customers. It has a trailing P/E ratio of 12 when its competitors' are in the mid- to high-20s. So, if properly valued at a P/E of 20, the stock deserves to be at $45, not $28. But they also will be launching a new satellite this summer which will help drive new revenue from new and existing customers. Additionally, during their analysts' call last week, they weren't able to disclose full net earnings and EPS numbers because they're waiting on an IRS ruling for how to account for a 60 person acquisition they made last year. This is expected to be resolved and disclosed by the end of the month.

All that said, I believe this board and management team can benefit from some activism. Management needs to do a better job outlining the story and the opportunities in front of it to investors. That's part of the answer as to why they've been over-looked to date, I believe. Their board could be better as well. They've got some great people, but no one representing the commercial customer views. They also need to encourage their outside directors to dig into their pockets and buy some stock reflecting their confidence in the business. We'd like to see each one own a half a million.

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