Eye in the Sky

Matt O’Connell re-launches GeoEye’s image and imagery
By Eric Tegler

On the morning of Sept. 21, 2001, OrbView-4 sat atop a Taurus rocket on the launching pad at Vandenburg Air Force Base in California. It was the sixth commercial satellite to be launched in the United States and would be the third in a constellation of imaging satellites operated by a Dulles-based firm called Orbimage. OrbView-4, which was to offer state-of-the-art black and white and color imagery, was vital to the company’s future. Orbimage had completed a financial restructuring that summer after missing an interest payment on its debt earlier that year.

OrbView-4 lifted off as planned, but minutes into its ascent there was a problem. It was becoming clear that the Taurus had failed to gain the altitude or velocity necessary to place the satellite in its proper orbit. The rocket then veered wildly. U.S. Air Force launch controllers attempted to deploy OrbView-4 from the rocket’s faltering second stage but it could not break Earth’s pull. Instead it plunged into the Indian Ocean.

With it went millions in potential business from the government and commercial clients. Orbimage appeared finished. That’s when Matthew O’Connell got a call.

Telephoto

Governments have eagerly sought to mine satellite imagery for national security purposes. But in the 21st century, it is being applied in ways space pioneers may have dreamed about but never realized. Mapping, environmental monitoring, resource discovery and management, agricultural monitoring, urban planning and disaster relief are but a few of the increasingly valued commercial uses of overhead imagery.

The first satellite photographs of Earth were made Aug. 14, 1959, by the U.S. spy satellite Explorer 6. In the decade thereafter, the U.S. and Soviet governments were the sole providers of satellite imagery, and only to their own militaries and agencies and those of allies. The first commercial image was released in 1972 courtesy of Landsat, a U.S. satellite program that began broad area collection of Earth imagery that continues today. Recognizing the value of satellite imagery in a host of applications, the government made the first images available to the private sector at 90 meters resolution.

Over the next 30 years, commercially available imagery became ever more detailed and accurate as both technology and governments grew more sophisticated. Improvements continued until black-and-white imagery was available at less than 1 meter by the late 1990s. In the United States, the passage of the 1992 Landsat Act by Congress and a 1994 presidential executive order encouraged and accelerated the formation of market-funded satellite imagery enterprises.

With the 1990s tech boom, the commercial satellite, or “remote sensing,” industry gained traction and capital. By 2000, the National Oceanographic and Atmospheric Administration (NOAA), designated as the licensing authority for remote sensing satellites, had issued 13 licenses for 17 satellites, approving some $2 billion in commercial spacecraft.

Orbimage was in the game. A subsidiary of Orbital Sciences, the company launched its first satellite (OrbView-1) in 1995 and a second in 1997. Matt O’Connell knew little more about the company. But he didn’t expect to stay in Dulles long anyway. He’d do as the equity guys at Merrill Lynch and J.P. Morgan asked – clean house, find a new CEO and restructure the firm. Shouldn’t take more than a few months, he imagined, and then he’d get back to business in New York.

Seven years on, O’Connell still lives in New York, but he commutes to Dulles every week to fulfill his duties as president and CEO of GeoEye, a publicly traded (GEOY, Nasdaq), geospatial information services company that rose from the ashes of Orbimage. O’Connell contends his commuter-CEO status allows him to work harder and focus more intently than a local CEO.

In August 2008, he needed to focus. The company he had recreated was down one operational satellite, restating its earnings for 2005 through 2008 and set to launch a twice-delayed commercial satellite with the highest resolution yet available. Leading the company at such a critical point would seem daunting. Being at Vandenburg Air Force Base to watch GeoEye-1 liftoff on Sept. 4 would seem at the very least, emotionally draining.

Dodging Beer Bottles

O’Connell is a trim, relaxed figure. On meeting him at GeoEye’s Dulles headquarters, I detected little of the underlying tenseness I’ve become accustomed to in New York financiers. Possibly, it’s because he’s been running a company for the past few years rather than exclusively structuring deals – not a bad place to be of late. GeoEye’s CEO got his start doing M&A work on Wall Street after earning a law degree from the University of Virginia. Before that, he was a musician.

“I always say that was some of my best training because if you can create harmony out of people who want to be solo artists and maintain order on a bandstand while people are throwing beer bottles at you, it’s great preparation for restructuring, which is what I ended up doing.”

In 1979 O’Connell helped create one of the first cable TV companies (Warner MX Cable) and five years later became assistant general counsel for communications industry entrepreneur, HBO creator and Cablevision owner Chuck Dolan. Dolan, he says, gave him a figurative post-graduate degree in entrepreneurialism.

It moved O’Connell from law to operations, from Wall Street to media. Dolan enlisted the M&A lawyer’s help in consolidating the cable industry, which was comprised of many small players in the mid-1980s. That blend of entrepreneurship and consolidation is an important theme in GeoEye’s success. Remove either idea and the company would not be in the position it is today.

The experience led O’Connell to strike out on his own, partnering in Osborn Communications, a company that acquired and operated radio stations in the 1990s. He next served as a vice president at Sony Worldwide Networks, a radio syndication division of Sony Corporation. When Orbimage’s satellite hit the water, he was chief administrative officer at Park Avenue venture capital firm, Crest Communications.

O’Connell had finished restructuring a Lucent subsidiary for Crest when he got a phone call from an associate at Merrill Lynch. Would he go down to Dulles for two months and restructure Orbimage? Merrill had a stake in the company and wanted it transaction-worthy, if not profitable. At the time, Orbimage was the smallest of the three firms populating the U.S. satellite imagery industry. The largest was Colorado-based Space Imaging (a Lockheed Martin/Raytheon joint venture) with another Colorado firm, Digital Globe, in the middle.

That was about all O’Connell knew about the satellite imagery business in 2001. It was as a deal-maker that he was asked to put Orbimage back on its feet – just a temporary assignment. Not a classic entrepreneurial scenario.

“I asked one of the bankers who sent me down, ‘Why wouldn’t you get somebody from one of the incumbents?” O’Connell remembers. “He said, ‘Because the incumbents all follow a business model that’s not working.’”

So he flew down to Dulles and checked into a hotel. When he stepped off the elevator at Orbimage’s headquarters, the first thing to meet his eyes was a row of four scale satellite models. Where others might have been fascinated by the miniatures, O’Connell saw them as emblems of a culture that wasn’t working. But his brief was to restructure Orbimage, a task he began immediately, orchestrating a voluntary bankruptcy for the company. He also separated it from Orbital Sciences.

“Orbital Sciences had a lot of equity in the company, and equity typically gets crushed in a restructuring. If you have too much debt and you can’t pay your debts, then you have to get rid of the equity,” O’Connell says matter-of-factly.

Orbimage filed for Chapter 11 in the spring of 2002. Using contacts without and within the company, O’Connell managed to attract a new group of bankruptcy investors. Their capital combined with proceeds from the launch insurance claim in the wake of OrbView-4’s failure gave the company enough cash to see it through reorganization and to even launch the long-planned OrbView-3 satellite in June 2003. Orbimage emerged from bankruptcy in January 2004. Having set the restructuring in motion, O’Connell could have walked away, job done. Only he couldn’t.

The Deal

“Nobody wanted it,” O’Connell admits. A couple months into resuscitating Orbimage, he couldn’t find anyone willing to step in and run it.

“All three companies in the industry were losing money, and this was the smallest of the three,” he says. “But it seemed to me that post 9-11, if you could look down from the sky and see things on Earth, there was going to be a bright future even though the industry was in disarray.”

That conviction combined with a request to stay on and run the company from Orbimage investors convinced him that the satellite information business might be his future. A frank discussion with his wife confirmed it. Libby O’Connell, Ph.D, remains a senior vice president with A&E Television and chief historian for the History Channel. She serves on the board of the National Museum of American History and maintains affiliations with Long Island University. When Orbimage’s would-be CEO shared his idea with her, he received a skeptical but ultimately supportive response.

“My wife said to me, ‘So you’re going to take a pay cut, live in the Holiday Inn at Dulles airport, and give up your equity in New York for a company that no one else will take the job of running?’ She said, ‘If you think there’s something there, you’ve been right in the past so I’ll believe in you.’ That was a key thing, having your co-pilot say, ‘OK, go over the waterfall. I’m on this ride with you.’”

Matt O’Connell took the helm of the smallest player in the emerging satellite imagery industry not only as a true outsider but as a Wall Street deal-maker with all the baggage such identity brings. Not surprisingly, his reception at Orbimage was a cool one.

“The host body rejected me, if you will,” he says.

Contrary to expectations, O’Connell made no immediate wholesale changes in the company’s staff. Indeed, the last legacy Orbimage only recently left. A glance at GeoEye’s executive team bios shows none joining the firm before 2004. O’Connell says he prefers, “to re-educate and rehabilitate rather than terminate. It’s much easier.”

And by admission, O’Connell had much to learn about an industry that to this day is still in development. “I’d say for the first six months, maybe a year, I listened a lot more than I spoke because I just didn’t know anything,” he says.

What became clear was that Orbimage had a hardware focus in an information services industry.

Remember the scale satellite models O’Connell saw upon walking into the Dulles office? They’ve been replaced by enlargements of satellite imagery proven useful (Hurricane Katrina) or informative (Beijing before and during the Olympics). Their simple placement on the walls reflects the cultural change O’Connell sought to engender.

“One thing that I had to struggle with was that the industry was started by aerospace and defense companies with subsidiaries all focused on aerospace and defense,” O’Connell recalls. “I said, ‘We’re not aerospace and defense; we’re an information services company. We’re going to be customer focused, not focused on the hardware.’ Getting people to change from focusing on hardware to focusing on software and to say, ‘We’re not a space-oriented company; we’re an information-oriented company’ was a big challenge.”

Of course, not everyone was committed to change. Some executives parroted the right words, then went on to make decisions not in keeping with the new philosophy.

“As I look back on the changes in the team, I think I should have probably have moved faster,” O’Connell says. “A lot of CEOs will say that. If I had one fault, it was not moving faster on some people.”

There were new recruits, however. Orbimage’s sales staff was split into a government and commercial team. People with traditional defense experience and contacts formed the government team while a new breed was recruited for the commercial team. O’Connell fingered an individual from the cell phone business to lead commercial sales. He wanted someone who knew how to market and bill for roaming fees, for example, because he envisioned packaging Orbimage’s overhead information in new blended products, which could be billed for in flexible terms like those pioneered by telecom providers.

The experience highlighted the distinction between structural change and cultural change in a powerful way, O’Connell says.

“After you’ve done them for a while, financial restructurings are not easy but not that hard,” he says. “You go to New York, you sit in a conference room on Park Avenue until 2 in the morning, you eat Danish, you yell at each other, and you go home. Changing the way people think about their world is tough.”

Orbimage was fortunate to have a veteran deal-maker and consolidator at the controls. Without O’Connell’s skills and New York experience, the Washington company may not have survived long enough to effect a new culture.

The post 9-11 period proved opportune for satellite imagery providers. Not only was the U.S. government interested in their product, but their detailed view of the world from above also proved beneficial in coping with a succession of natural disasters from the East Asian Tsunami to earthquakes in China. In 2003, the first mass-consumer imagery went online with Microsoft Virtual Earth, Google Earth and Yahoo Maps. The search engines generated new awareness and new demand for space-based information services.

Meanwhile, Orbimage successfully launched OrbView-3, which would provide imagery to its new commercial clients and, with its 1-meter black and white, 4-meter color resolution, would be of interest to the U.S. government. The company kept executing, delivering what it promised, O’Connell says, even while in bankruptcy. Its assets, its performance and its CEO’s reputation helped Orbimage win a $500 million contract to provide imagery to the National Geospatial Intelligence Agency (NGA). Competitor, Space Imaging, appeared to have a lock on the contract, but early in 2004 negotiations with the NGA broke down.

The contract win gave Orbimage a decade’s-worth of government business and half of the necessary funding to build and launch its next, higher resolution satellite. The third industry player, Digital Globe, was also building a new satellite and had its own chunk of the government pie, having won a NextView contract in 2003. For Space Imaging, the loss spelled the end. By awarding the contract to Orbimage, the government effectively created a duopoly.

“What the government did in that instance,” O’Connell explains, “was say, ‘We have three suppliers for the commercial side of imagery but we want two not three.’ That’s why it was so important to us to win that contract. It meant that the third company, Space Imaging, was up for grabs.”

Created by aerospace giants Lockheed Martin and Raytheon, Space Imaging was the first private company to launch and operate a high resolution imaging satellite (IKONOS). In 2005 it was on the block, and the industry’s smallest firm, fresh out of bankruptcy, would bid for it against a larger, Morgan-Stanley-backed Digital Globe. How could Orbimage possibly succeed? Late one evening, O’Connell had an idea.

“Having been a Wall Street lawyer and having done work for people like Morgan Stanley, I knew that the lawyers for the other bidder were going to come in with a lot of legal issues,” he says. “I thought about what Lockheed and Raytheon really wanted. Those two companies are huge and they make plenty of money, so a couple dollars here or there wasn’t going to be as important as a clean walk-away. Those two partners wanted a divorce. We went in and offered them that. We said, ‘Space Imaging has a bunch of issues you have to deal with. We’ll take over all the issues and we’ll solve all the problems for you. You won’t have to deal with anything after the closing date.’ Psychologically, that was very appealing to them.”

It was winning psychology. Lockheed/Raytheon accepted Orbimage’s offer in early 2006. The agreement meant that O’Connell and his team would have to tie up issues with former Space Imaging subsidiaries and clients around the world but the payoff justified the added responsibility.

“What I didn’t know about the satellite industry was compensated for by the fact that I’ve spent my life as a lawyer or a deal guy,” he says. “So we struck a deal. Hand us the assets and we’ll take the liabilities. You can walk away clean.”

Orbimage walked away with Space Imaging for the sum of $58 million. O’Connell claims the acquisition produced over $100 million in revenue in its first year. It also produced a new corporate identity. While it absorbed Space Imaging’s operations and assets (including IKONOS and its Thornton, CO, headquarters and flight control center), the company known as Orbimage took on the new name: GeoEye. In September 2006, it became the first satellite imaging company to go public, taking its place on the NASDAQ exchange. Five years after “hitting the water,” GeoEye had completed an impressive turn-around. In 2007, it was poised to reach new heights – 425 miles up, in fact.

Countdown Hold

During launch sequences, flight controllers often command a “countdown hold,” halting the countdown to deal with anticipated and unforeseen problems. In the past 18 months, GeoEye found itself in a figurative and literal countdown hold.

In March 2007, the company revealed that OrbView-3 had malfunctioned due to an electronics glitch and could no longer produce useable imagery. Gone with the pictures was the revenue they produced.

In September 2007, the company announced a delay in the launch of GeoEye-1, the most advanced commercial imaging satellite yet completed. The $502 million next-generation imager would offer unprecedented 0.41-meter black and white and 1.65-meter color imagery. GeoEye-1 would be able to distinguish something the size of homeplate at Camden Yards and locate it to within 10 feet. But integration and testing delays at manufacturer, General Dynamics, would push its launch back to April 2008.

GeoEye’s stock, held largely by institutional investors, remained strong at around $33 a share. The firm’s 2007 revenues were up over $30 million from 2006. But in January 2008, the company was informed there’d be another delay, this time by launch provider Boeing, which would instead launch government defense satellites in GeoEye-1’s place. A new launch date of Aug. 22 was offered. The loss of potential business and the delay in receiving revenue from pending imagery deals (government and commercial) started a slide in GeoEye’s stock that saw it bottom at about $16 a share in July.

Denied four months of business with an important asset, GeoEye added more negative news in early August when it disclosed that it would have to restate its accounting for 2005 through 2007 due to a tax issue. The hits kept coming. Days later, Boeing informed the company that it would once again delay GeoEye-1’s launch, this time to Sept. 4. GeoEye’s 454 employees kept their heads down and continued to work, starting design and acquiring parts for the even more advanced GeoEye-2.

Whatever irritation or stress O’Connell felt, he maintained his composure. When asked about the delays in mid-August, he leaned back in his chair and explained, “That’s one of the problems of being a small entrepreneurial company. We’re David and they’re Goliath, but if somebody like Boeing [Launch Alliance] says, ‘Thou shalt wait from April to August,’ there’s not much that David can do.”

He explained GeoEye’s tax hiccup with the same equanimity, citing an arcane piece of the tax code dealing with changes in ownership, which triggered a revue and the restatement, lowering GeoEye’s profit by $31 million.

“If you’re a fancy tax practitioner, you know about it,” he says. “Unfortunately, we didn’t have fancy tax practitioners on staff. We’ve since upgraded our financial staff. We’re cleaning up everything at once and we’re going to put it all behind us.”

O’Connell’s confidence satisfied Wall Street, which lifted the stock moderately. As Sept. 4 approached, he traveled to Vandenburg AFB with GeoEye’s senior management. His wife and box of cigars went along, as well. In between causal meetings with Asian and European clients, he took the time to call and express his feelings two days before the launch.

“It’s a great step forward for us,” he says. “It’s a great step forward for the industry and also for the country.”

A small step had already been made. GeoEye-1 sat atop the Delta II booster on the launch pad with a large Google logo emblazoned on its side. Just before Labor Day, GeoEye announced it had signed Google as the sole online distributor of GeoEye-1 imagery. It was a powerful commercial endorsement, but not as powerful as Hurricane Hanna, which threatened the Florida coast as the satellite was readied.

Florida is home to the USAF’s 45th Space Wing at Patrick AFB where Delta II launch specialists are based. Air Force policy stipulated that personnel in the path of a hurricane could elect to remain with their families. Consequently, the few launch specialists in all of America would not be going to California – launch delayed, again.

GeoEye’s CEO was informed early the afternoon of Sept. 2. O’Connell’s first reaction was reinforced by e-mails he immediately began receiving from overseas. “They asked, ‘Has America really gotten to the point where its launch capability is so poorly staffed that a couple people who live in Florida can make the difference between a timely launch and a launch that’s delayed?’ I couldn’t answer that and I didn’t want to.”

On a conference call with investors the same afternoon, he wondered aloud if America was still a leader in the commercial satellite field. But Hanna did not unleash her full fury and to the surprise of many, Boeing rescheduled the launch for Sept. 6. At 11:50 p.m. Pacific time, GeoEye-1 blasted off from Vandenburg and into orbit. The successful launch relieved the company of significant pressure and meant it could go forward with provision of imagery to the United States and other governments and continue to diversify the commercial side of its business.

Successful operation of GeoEye-1 will undoubtedly generate further NGA orders for the company. GeoEye’s revenue balance is approximately 55 percent government and 45 percent commercial. Over a third of commercial sales are actually to foreign governments, which use the imagery for a variety of security and development purposes. Much of the imagery goes to former Space Imaging subsidiaries and clients (Space Imaging Japan, European Space Imaging, Intra Space Turkey, Space Imaging Middle East, Dubai).

In the third quarter of 2008, the NGA muted the possibility of expanding its own satellite fleet, which would curtail its spending in support of DigitalGlobe and GeoEye. O’Connell sits on the National Geospatial Advisory Committee and U.S. Geospatial Intelligence Foundation’s boards and thus keeps close tabs on the issue. At present, he believes expansion of the U.S. fleet of imaging satellites is unlikely.

“In a period where our government has record deficits and everyone’s concerned about the fragility of the stock market, credit, mortgage issues, deciding that the government should spend more money when it can get the same thing from the commercial sector is a pretty bold move, especially in an election year,” he says.

O’Connell points out that since both companies receive almost half of their satellite construction costs from the NGA, the government is essentially paying 50 cents on the dollar for their imagery. Why would it want to pay the full cost? Nevertheless, revenue diversification is a priority for GeoEye.

In 2007 the company acquired M.J. Harden, a Mission, KS, firm that provides aerial imagery and mapping to government and municipal authorities, as well as the oil and gas industry. Oil and gas is the second largest revenue stream after government sales. Combining and overlaying GeoEye-1 and M.J. Harden aerial imagery allows GeoEye to mix even higher resolution aerial imaging with less costly satellite imaging for a variety of products and applications.

GeoEye recently purchased a small Washington firm that specializes in predictive analysis with an eye to crafting a forecasting tool from GeoEye’s satellite and aerial imagery. The company has established a joint venture in Beijing, which is growing at a rapid pace. Business intelligence is another application for overhead imagery, one that GeoEye is happy to serve without getting enmeshed in the details.

“We presume that our imagery is used in the business of competitive intelligence [for example, an oil company wanting to know how long a pier a competitor is building in Persian Gulf] just like it’s used for national security intelligence,” GeoEye vice president of communications and marketing Mark Brender says. “But when we sell an image to an oil or mining company or anybody, we don’t know how they’re going to use it.”

One’s imagination is the limit for applicable uses of overhead imaging O’Connell maintains. Similarly, his company is coming up with innovative ways to package its product. GeoEye has a product for the commercial fishing industry that blends 12 different sources of information, packages them in a user-friendly way, and gives the fishery producers unparalleled information. “It’s kind of like Bloomberg for commercial fishermen,” O’Connell quips.

He likens GeoEye’s general packages to cable television. Basic service provides a raw image. Mid-tier ties the image to a GPS grid, and premium service processes data to compensate for off-azimuth images (makes buildings appear to have been photographed from directly overhead without shadow), for digital elevation, and for layered imagery. GeoEye-1 will provide these in color at less than 4 meters resolution. GeoEye is negotiating with competitors to resell their imagery with its own, further expanding product offerings and opportunities.

“We’ll keep diversifying more,” O’Connell confirms. “The online companies coming into the business have helped with revenue, though it’s small compared to the government revenue. The visibility that it has brought the industry has been terrific. People will use the information increasingly to solve world problems. That’ll be good for them and good for us.”

In June of 2007, O’Connell was named “Entrepreneur of the Year” for communications in the Washington, DC, region by Ernst & Young. Not bad for a New Yorker. He righted a failing company that emerged from bankruptcy as the smallest in its field in 2004. Seven years after he flew to Dulles for a “temporary assignment,” the company has become an international leader in a sector projected to grow on par with bio and nanotech.

O’Connnell’s view of and relationship with GeoEye is like its satellites – overhead. A deal-maker he undoubtedly is, but does he feel like an entrepreneur?

“I’ve always wanted to get in a position where I could have an entrepreneurial play,” he says. “I recently said to my wife, ‘I finally feel like I’m at the right place at the right time with this.’”                               CEO