Dulles, Va.-based Orbimage assembled its top officials last week for a quarterly conference call that gave the clear impression they are looking toward the future with a bold sense of optimism.

CEO Matthew O’Connell told analysts and investors participating in the call that he believes the company can become a good business whether or not it wins the NextView contract it is pursuing from the Bethesda, Md.-based National Geospatial-Intelligence Agency (NGA). That contract, by the way, is worth between $400 million and $500 million.

NextView is needed to enhance the resolution of imagery that the government can buy from the commercial sector. Today, the best resolution available is between 0.6 meters and 1 meter — or roughly two feet to three feet.

Orbimage’s NextView bid was submitted to NGA last Tuesday but rival Space Imaging of Thornton, Colo., is expected by industry observers to win that award because it is the best-established and the strongest of the two companies. Although other bidders were eligible to participate, only Orbimage and Space Imaging are known to have put forth proposals.

Last fall, NGA declared that it wanted a second supplier of imagery for NextView, and it obtained funding to double the size of the program. The NGA then proceeded to negotiate directly with Space Imaging, as it was the only bidder left in the procurement at the time. However, the two sides failed to reach an agreement, and the NGA halted those talks March 10 and announced it would open the procurement to other bidders.

O’Connell told his listeners his company had presented what it considered to be a competitive bid that included the participation of large aerospace companies as partners. “We have assembled an Orbimage-led team of best-in-class service providers, including several major defense contractors and information- technology companies, to ensure that we meet or exceed NGA’s technical requirements within budget and on schedule,” O’Connell said.

“The collection and geo-location performance of our NextView satellite design is far greater than OrbView-3 and the other current-generation satellites,” O’Connell said. “While we can’t share any specifics at this time, since we just submitted our proposal to NGA, we believe our concept leaves us with enough residual capacity after meeting NGA’s stated needs to support between 10 and 15 international ground stations.”

Orbview-3 became the newest commercial remote sensing satellite in operation when it was launched June 26, 2003. The satellite, insured for $35 million at an annual premium equaling 4.3 percent of its value, began commercial service in February, a month later than planned.

Questions have been raised about whether the NGA is planning to offer sufficient financial support as part of its second NextView award. Longmont, Colo.-based Digital Globe won the first contract of $500 million for next-generation, commercial, high-resolution NextView imagery program. NextView aims to provide the NGA with greater access and priority to commercial satellite imagery as well as more advanced capability and capacity than previously has been available.

Challenges

A big factor working against Orbimage is that it has fallen behind the revenue projections that it provided in its bankruptcy plan. The shortfall primarily is due to its late receipt of a ClearView imagery contract from the NGA. That award also was for a lower dollar amount than expected.

Space Imaging also could put additional competitive pressure on Orbimage by gaining a third major backer to supply it with additional funding for a next-generation satellite. Lockheed Martin [LMT] and Raytheon [RTN] currently are supporting Space Imaging but both big investors previously had stopped pumping additional funds into the remote-sensing company.

J. Armand Musey, a partner with the boutique investment-banking firm NearEarth of New Canaan, Conn., said Space Imaging has the oldest remote-sensing satellites in orbit, compared with DigitalGlobe and Orbimage. For that reason, Space Imaging needs to obtain additional financing to proceed with plans to launch a successor satellite.

“What happens to Space Imaging is the $64-million question,” Musey said. “Space Imaging can build a new satellite quick or sell the company.”

However, remote-sensing companies are chasing an unproved and developing market, Musey said. For that reason, it is difficult to determine the true value of remote-sensing companies.

Another complication for Space Imaging is that it has “an enormous amount” of debt, Musey said, adding,

“Investors are reluctant to put additional money behind all that debt. Investors need to decide whether to convert debt to equity or to make other accommodations to attract additional investors.”

As far as the NextView award, both Orbimage and Space Imaging took the bid seriously and the successful bidder will have a “leg up” on the other company, Jurkevics said.

“The contract is important to both of their business cases,” Jurkevics said. “It is sort of a home run opportunity for the winner.”

Financial Advisors

To explore possible financing options if the NextView contract is awarded, Orbimage has retained Rothschild and Houlihan Lokey Howard & Zukin as its financial advisors. Both investment firms affirmed that Orbimage’s business plan is “reasonable,” O’Connell said. Rothschild and Houlihan Lokey also are looking into developing a NextView financing plan for Orbimage.

NextView, without a doubt, is the biggest opportunity Orbimage is targeting. When the first NextView contract was opened for bid last March, Orbimage was in Chapter 11 bankruptcy protection and, therefore, could not put forth a “credible” proposal, O’Connell said.

A key challenge for whichever company wins the NextView contract is to generate revenue from commercial sources to supplement whatever funding is supplied by NGA.

For Orbimage, O’Connell said the intent would be to sell basic imagery and value-added products to the U.S. government and to such commercial markets as international ground- station partners.

“Our international ground station partners commit to purchasing large volumes of capacity each year from our OrbView-3 satellite,” said Timothy Puckorius, Orbimage’s senior vice president of sales and marketing. “After sales to the U.S. government, this is our largest revenue source. Most direct-access contracts are long term; they have a minimum term of three years, with options to extend for an additional two years.”

Those contracts include a guaranteed annual minimum paid to Orbimage even if no imagery is used.

Orbimage recently hired Brenda Burroughs as its senior director for marketing and sales to lead the company’s commercial sales and value-added reseller support program. She brings with her more than 16 years of professional sales and marketing experience in remote sensing industry.

Asian Inroads

In Japan, NTT Data Corporation began using Orbimage imagery Dec. 19, 2003, well-ahead of schedule. Similarly, KAI in South Korea started commercial operations March 25, also earlier than had been expected.

On April 2, Orbimage’s third ground station partner in Asia – whose name has been kept under wraps –began commercial operations. “Like our other ground station partners in Asia, this ground station began commercial operations ahead of plan,” Puckorius said.

To sign up additional international ground stations this year, Orbimage is targeting opportunities in the Middle East, Europe, Latin America and Central Asia.

“In the Middle East region, we are pursuing one additional ground station in the next quarter of this year,” Puckorius said. “We expect it will be operational before the end of the year and that it will require between 50 percent and 65 percent of our available capacity over the region.”

In Europe, Orbimage is looking to sign up one additional ground station by year’s-end that would be operational early next year. That prospective European partner would require between 50 percent and 65 percent of the available capacity in the region, Puckorius said.

In Latin America, at least one additional station could be signed by second-quarter 2005, with operations cutting over between six and eight months later. Puckorius explained, “As this is a lesser developed market than Asia and Europe, we only expect to initially sell approximately 35 percent to 45 percent of our available capacity, but this will grow as the Latin American market develops.”

For Central Asia, Orbimage is trying to line up one new ground station customer by the first quarter of 2005, and possibly a second later in 2005. “Although our available capacity is almost completely sold out over Eastern Asia, we have ample capacity over Central Asia for such sales,” Puckorius said.

Orbimage may well sign deals with more than 10 foreign ground stations operators that have the capability to downlink the imagery directly and to pay an annual access fee for that right to the company, said Ed Jurkevics, a principal with the Arlington, Va.-based Chesapeake Analytics, a remote-sensing consulting firm.

“That business model is very attractive because the marginal costs to Orbimage are nominal,” Jurkevics said. Investors should be encouraged about Orbimage’s developing relationships with ground-station operators in various regions of the world, he added.

Stimulating Sales

To further drive sales, Orbimage will compete for additional awards in 2004 from supplemental funds held back by NGA under the ClearView program. The company’s elite photogrammetric production business in St. Louis will be marketed aggressively to attract more production task orders from NGA under both two contracts the company already has with the agency. The sales team also is bent on securing work from other U.S. Department of Defense and civil federal agencies, Puckorius said.

Orbimage also is working to secure requirements and orders for high-resolution commercial satellite imagery from its OrbView-3 satellite through a multi-year, indefinite- delivery, indefinite-quantify order it announced June 9 with the U.S. Geological Survey and its partner agencies.

In addition, the company is expanding its sales to commercial users, primarily through value-added resellers now encompassing 57 companies. With the recent completion OrbView- 3’s check-out, Orbimage is competing for sales in such established markets as mapping and surveying, land use and land cover, national security, forestry and agriculture, disaster planning and monitoring, and mineral exploration.

A challenge for Orbimage has been trying to boost the revenue from its OrbView-2 satellite. OrbView-2, launched in August 1997, and it soon will pass the seventh year of its 10-year design life. On the plus side, the satellite has had greater than 99-percent service availability. For the remainder of the year, the OrbView-2 sales team primarily will focus on introducing a new OrbBuoy product line, hosting training workshops on the latest version of its OrbMap Fish Finding Software, and seeking feedback for the next release of its OrbMap software currently scheduled for January 2005.

The new OrbBuoy is an extension of the company’s existing SeaStar Fish Finding subscription business aimed at complementing Orbimage’s subscription service that now serves 200- plus vessels that fish primarily for tuna. The new software version has improved plankton detail, featuring 250 color levels, and higher compression ratios to help reduce the communication costs Orbimage customers must pay to receive the company’s Fish Finding data at sea.

–Paul Dykewicz (Matthew O’Connell, Orbimage, 703/480-7502; J. Armand Musey, NearEarth, 646/452-9931; Ed Jurkevics, Chesapeake Analytics, 703/525- 6730)