Sorting Out the Details of the NRO's EOCL Contract Awards
Sorting Out the Details of the NRO's EOCL Contract Awards
Maxar Holds Steady; BlackSky and Planet Take Share
Hello fellow space enthusiasts! đ°ď¸
Today was a big day in the world of earth observation, and not just because of all the new satellites launched on SpaceXâs Transporter-5 mission.
The National Reconnaissance Office finally announced the results of its Electro-Optical Commercial Layer (EOCL)âthe largest-ever commercial imagery contract effort âvalued at billions of dollars over the next decadeâ (~$6B by my estimates).
The NRO did not provide a summary of details for BlackSky, Maxar, and Planet Labsâ contracts, so I wanted to quickly share my understanding of the awards given the magnitude of these contracts.
I also wanted to share my thoughts on why Maxar and BlackSky saw such large movements in their stock prices (+18% and +97%, respectively).
GENERAL EOCL NOTES
BlackSky, Maxar, and Planet have all anticipated winning EOCL contract awards for some time, so it is no surprise that they were announced as EOCL winners today given strong existing relationships with the NRO.
While expectations for timing of contract awards slid from 1Q22 to âsummerâ 2022, it turned out that the reality was in between the two. Industry veteran Tim Farrar gave an interesting take on why the contracts were announced sooner than expected đ:
Each company received a 10 year dealâan initial five-year guaranteed base, followed by five one-year options for years six to 10.
Now letâs go through the specifics of each company:
MAXAR DEAL SPECIFICS (PRESS RELEASE, SLIDES)
EOCL Contract Total Value: $3.2B ($1.5B for years 1-5, $1.7 for years 6-10)
Years 1-4 are $300M/yr.
Year 5 is $300M with an option for up to $340M.
Years 6-10 are $340M/yr.
Maxarâs stock was up +18% on todayâs news. You may wonder why the stock went up so much on a flat contract value, as the company previously had a deal with the NRO that paid it $300M/yrâwell rumor has it that investors were expecting a significant reduction in contract value, so maintaining $300M/yr with growth in later years is seen as a win.
Additionally the EOCL provides stability, with its five year base period vs the prior dealâs series of one-year options.
BLACKSKY DEAL SPECIFICS (PRESS RELEASE, SEC FILING)
EOCL Contract Total Value: 1st five years of the deal have a value of $85.5M; total deal value could be as large as $1B over the course of 10 years.
The NRO plans to award $71.7M of the initial $85.5M in years one and two.
Beyond year two, as demand grows from the NRO they will fund additional amounts, maxing out at $1B.
While BlackSkyâs deal may seem small relative to Maxarâs deal, $BKSY went up +97% todayâso clearly it was GREAT news! đĽł
âŚBut why did $BKSY go up so much in one day?
Letâs do some back-of-the-envelope math to see if we can figure it out (feel free to comment below if you disagree with my math):
BlackSky reported $13.9M of revenue in 1Q22âat a full-year run-rate, this is ~$56M ($13.9M x 4 quarters = $55.6M).
Previously, management had given 2022 revenue guidance of $58m to $62M (we will use the $60M mid-point).
$60M guidance less the run-rate of ~$56M (which did not include any impact from EOCL) suggests that management was anticipating only $4M of revenue from the EOCL contract in 2022.
I am skeptical that management anticipated this small of an amount from the EOCL due to how much they talked about the contract, but letâs run with it.
BlackSky is now officially receiving $71.7M from the EOCL over the next two years, starting 5/22.
These deals always have annual escalators, so letâs assume the $71.7M is split 40/60 in years one and twoâthat means ~$29M in year one, and ~$43M in year two.
Now letâs reconcile how much of the $29M of the year one award will fall in 2022.
$29M / 12mo * 7mo (June through December) = $16.7M.
Remember that I estimated management included just $4M of EOCL revenue in its prior 2022 revenue guidance:
$16.7M of actual EOCL revenue minus $4M of expected EOCL revenue = ~$12M of revenue upside based on todayâs announcement, or 21% upside vs prior guidance.
Okay, great. But does this warrant a +97% one-day pop in the stock?
Given that BlackSky was trading at a $142M market cap before todayâŚand the EOCL contract will provide for up to $1B in future revenuesâŚI think it is safe to say the stock absolutely should have gone upâŚbut ~100% in one day?
Letâs look at valuation:
Prior to today BlackSky was trading at 0.7x Enterprise Value / 2022E Sales; after today, it is trading 2.5x (including the incremental $12M from 2022 EOCL impact, or 3.0x without it). This compares to the earth observation SPAC group average of 3.1x EV / 2022E Sales (prior to today). So BlackSky was trading at a material discount to the group average before the EOCL contract, and now it is not. Why?
In the context of the negative macro outlook through 2023, the EOCL is a lifeline for a cash flow-negative company like BlackSkyâit provides a steady base of revenue for the foreseeable future.
The readthrough is that $BKSY shares were re-rated higher today due to greater confidence in BlackSkyâs outlook following the EOCL award.
As a result, $BKSY is no longer trading at the major discount that it was just a day ago, and is now trading between Spire (1.8x) and Planet Labs (5.8x).
Speaking of Planet LabsâŚ
PLANET LABS DEAL SPECIFICS (PR)
EOCL Contract Total Value: N/A
The details of Planetâs EOCL contract are currently unknown.
The company was not able to comment on the contract award as it is in a blackout period leading up to its C1Q22 earnings on 6/14; however, it is safe to assume management will address this topic on the earnings call.
I would expect that Planetâs EOCL deal is as big as BlackSkyâs, or maybe even bigger, given its more established constellation and longer-tenured relationship with the NRO.
CONCLUSION
The EOCL exemplifies that there is currently enough demand for EO imagery that challengers are not yet usurping business from the legacy EO companiesâMaxar maintained its $300M/yr NRO revenue, while at the same time BlackSky and Planet gained a material allocation of NRO spend.