McIntire Investment InstituteAt the University of VirginiaAt the University of Virginia

DigitalGlobeg(NYSE: DGI)

M c I n t i r e I n v e s t m e n t I n s t i t u t e1

Prepared by James Rogers| 24 February 2010

DGI is a High-Growth Play on the Satellite Imagery Market

• Company Overviewp y

• Industry Analysisy y

• Investment Thesis

• Risks and Catalysts

• Recommendation

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DGI Sells Satellite Imagery to Governments and Corporations

• DGI operates three satellites that take pictures of the Earth p pand sell this imagery to the US government, individuals, and companies

• DGI is based in Longmont, Colorado and had its IPO on May 14, 2009 at a price of $19.00/sharey , p $ /

• The company’s executive team includes a scientist and se er l b sinesspe ple ith e perien e in te hn l ndseveral businesspeople with experience in technology and engineering firms

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Commercial Satellite Imagery is a Duopoly with High Barriers

• Only two companies, GeoEye (GEOY) and DigitalGlobe (DGI), sell commercial satellite imagery in the United States

• The industry has high fixed costs (satellite construction and launch) and very low marginal costs, so high margins can result in explosive earnings growth if imagery demand significantly increasesearnings growth if imagery demand significantly increases

Porter’s Five Forces Analysis

L Th t f N Hi h B P M d t S li L M d t Ri l ALow Threat of New Entrants

High Buyer Power Moderate Supplier Power

Low Substitute

Threat

Moderate Rivalry Among Existing Competitors

- High capital and technical barriers to entry exist.

- Due to a few buyers (US government, Google, Microsoft)

- Suppliers provide specialized technology for satellite launches

- No viable, publicly available

- DGI and GEOY compete for the same contracts and have a moderate rivalry.

- The US government has shown no interest in supporting another commercial imagery company.

accounting for most revenue, buyers have high negotiating power over companies.

and have moderate negotiating power. Once launched, satellites are self-sufficient.

substitutes exist for satellite imagery.

Fixed-rate contracts prevent price wars and both companies sell their imagery on quality and processing speed rather than price.

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Commercial Satellite Imagery is a Duopoly with High Barriers

• The National Geospatial-Intelligence Agency (NGA) wants to supplement government spy satellites with viable public satellites

• NGA subsidizes satellite construction and, once launched, approves satellites for image streaming to the US Government

• NGA guarantees contracts called Service Level Agreements, which are typically issued for nine or 12 months at a time

• DGI’s contract is worth $12.5 million/month and lasts through March 31, 2010. NGA has an option to extend DGI’s

f h h J 30 2010contract for three months, to June 30, 2010

• GEOY has a contract through March 31, 2010 at a rate f $ ll / h

M c I n t i r e I n v e s t m e n t I n s t i t u t e5

of $12.5 million/month

DGI is the Best Satellite Imagery Company

Operational Comparison Financial Comparison (in millions)*

Satellites Three Three

Time to Full Operational Status

Three months with no delays

Four months with significant delays

Problems with None GeoEye disclosed

Revenue $209 $197.85

Gross Profit Margin 89.51% 62.58%

EBITDA Margin 56 55% 42 06%Satellites

ymechanical problems

with a GeoEye-1 mode in May

Premier SatelliteCapabilities

Eight multispectral bands that aid id ifi i

Highest resolution satellite available

i ll

EBITDA Margin 56.55% 42.06%

EBITDA 121.2 94.024

Capital Expenditures 128.6 61.731

identification commercially

Valuation Comparison

Enterprise Value 1,252 633.5

LT Debt/Equity 74.16% 96.30%

FY09 Results: Wednesday, 2/24 at Thursday, 3/11 at 5:00pm 8:30am

Accounting Problems None Delayed 2009 regulatory filings

because of accounting

i l iti

EV/EBITDA 10.34x 6.74x

Price/Book 2.13x 1.78x

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irregularities; replaced CFOPrice/Sales 2.83x 1.92x

*Through Q3 2009

DGI and GEOY are Dependent on Government Contracts

$35.5

GEOY Revenue AnalysisDGI Revenue Analysis

$173.5

Defense and Intelligence

Commercial $129.7

$63.3 Defense and Intelligence

Commercial

$173.5

$35.9

United StatesInternational

$57 9

$22.0United States

International

$173.1

Th NGA r m nt nt d f r

$57.9

Th NGA d f

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The NGA agreement accounted for 75.8% of revenue through Q3 2009

The NGA agreement accounted for 68% of revenue through Q3 2009

Since its IPO, DGI has Underperformed GEOY and its Index

Russell 2000 IndexGeoEye

DigitalGlobe

DGI Trading InformationClosing Price (2/23/10): $21.91

k $ $

GEOY Trading InformationClosing Price (2/23/10): $24.01

k $ $52-Week Range: $16.95 - $26.39Outstanding Shares: 44.95MM

Market Capitalization: $984.9MMAverage Volume (10-day): 148,700 shares

Short Interest (as of 1/31/10): 1.96%

52-Week Range: $17.60- $33.00Outstanding Shares: 19.08MM

Market Capitalization: $458.0MMAverage Volume (10-day): 132,400shares

Short Interest (as of 1/29/10): 6.9%

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( ) %P/E Ratio: 15.93x

( ) %P/E Ratio: 31.33x

DGI Has a Superior Constellation of Well Segmented Satellites

Launch: October 2001

Use: Natural resource

Launch: October 2009

Use: Map and

Launch: September 2007

Use: Map imagery forUse: Natural resource exploration and fishing imagery

Lifespan: 2010

Use: Map and navigational imagery; NGA approved

Lifespan: 2017

Use: Map imagery for customers and Image Library; NGA approved

Lifespan: 2018Lifespan: 2010 Lifespan: 2017Lifespan: 2018

M c I n t i r e I n v e s t m e n t I n s t i t u t e9

DGI Has High Growth Potential in Public and Private Markets

Defense, Intelligence, and Disaster Relief Entertainment

• Includes digital modeling for video games and television

• DGI images of North Korea and Iran are regularly released to the media to demonstrate and television

• ImageLibrary sells photographs to private customers

regularly released to the media to demonstrate potential nuclear sites

• During a cyber attack, the US government would use DGI and GEOY imagery

• GEOY imagery was used in a Tom Clancy’s H.A.W. X airplane video game

would use DGI and GEOY imagery

• DGI imagery is helping rescuers in Haiti

NavigationNatural Resources, Fishing, and Farming

• Oil/gas and mining companies use imagery to analyze remote terrain

• GoogleEarth and Bing Maps both use DGI and GEOY imagery

• Commercial fishermen use QuickBirdphotos

• Farmers and forestry agencies track

• DGI recently signed an agreement with

• Navigation imagery use could explode as h bil i

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Farmers and forestry agencies track logging, drought effects, and fire risks

smartphones access mobile map services

Growth Potential – Humanitarian Response

GeoEye-1 QuickBird

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Growth Potential – Entertainment

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Value-Added Research Attests to Exciting Potential for Industry

• Harvey R. Beaulieu, NGA Imagery Analyst (CLAS 1980)

• John Cole NGA (SEAS 1982)• John Cole, NGA (SEAS 1982)

• James Luzius, NGA (SEAS 1989)

• Robert Lojek, Google (CLAS 1998)

• Darcy Bingham, FEMA (CLAS 1982)

• Jeanine Montgomery GeoEye (COMM 1983)• Jeanine Montgomery, GeoEye (COMM 1983)

• Paolo D’Odorico, UVA Environmental Sciences

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A Bunch of Black Swans…

• Satellite failure would be catastrophic. DGI insures all three of its satellites

• Star Wars: foreign k lligovernment attacks satellites

• Space debris damages or• Space debris damages or destroys a satellite

M c I n t i r e I n v e s t m e n t I n s t i t u t e14

DigitalGlobe: Ready for Takeoff

• My pitch hinges on the market underestimating the growth potential of DigitalGlobe in relation to commercial applications

• Due to its high margins and capital expenditure patterns, DigitalGlobe is poised to have significantly higher earnings and free cash flowsignificantly higher earnings and free cash flow

• I recommend MII initiate a 5% position if the remainder of VAR due diligence indicates thatremainder of VAR due diligence indicates that DigitalGlobe is well-positioned and undervalued.

• If 2009 earnings beat analyst expectations, MII g y pshould reevaluate the thesis and determine if the market is fairly valuing the stock.

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• Disclosure: The analyst is long DGI.