NOTE 3. Deferred Revenue
Deferred revenue represents cash received in advance of revenue recognition. The Company’s period-end deferred revenue balance varies based on the timing of revenue recognition and the timing of payments within each period presented. The Company has $455.9 million of deferred revenue recorded on its balance sheet as of December 31, 2013. This balance is primarily attributable to the Company’s EnhancedView Contract and NextView contract with the NGA, with the remaining balance arising from upfront payments received from the Company’s DAP, imagery hosting arrangements, or arrangements which require that we refresh previously delivered imagery. The Company evaluates revenue recognition for each arrangement on a case-by-case basis in accordance with the related accounting literature. A roll forward of the deferred revenue balance from December 31, 2012 to December 31, 2013 is as follows:
|
|
|
U.S. Government |
|
Diversified Commercial |
|
|
| ||||||||||||
|
(in millions) |
|
Enhanced |
|
Value Added |
|
Pre-FOC |
|
DAP |
|
Other |
|
Total |
| ||||||
|
Balance, December 31, 2012 |
|
$ |
173.4 |
|
$ |
67.4 |
|
$ |
137.2 |
|
$ |
45.5 |
|
$ |
6.2 |
|
$ |
429.7 |
|
|
Deferred revenue acquired in GeoEye acquisition (Note 4) |
|
— |
|
— |
|
— |
|
12.1 |
|
— |
|
12.1 |
| ||||||
|
Cash collections |
|
248.1 |
|
101.8 |
|
— |
|
69.0 |
|
39.9 |
|
458.8 |
| ||||||
|
Revenue recognized from deferred revenue |
|
(227.2 |
) |
(69.9 |
) |
(25.5 |
) |
(80.9 |
) |
(41.2 |
) |
(444.7 |
) | ||||||
|
Balance, December 31, 2013 |
|
$ |
194.3 |
|
$ |
99.3 |
|
$ |
111.7 |
|
$ |
45.7 |
|
$ |
4.9 |
|
$ |
455.9 |
|
EnhancedView Contract and EnhancedView SLA
On August 6, 2010, DigitalGlobe entered into the EnhancedView Contract with NGA. The EnhancedView Contract has a ten-year term, inclusive of nine one-year options exercisable by NGA, and is subject to Congressional appropriations and the right of NGA to terminate or suspend the contract at any time. The NGA has exercised the first three options under the EnhancedView SLA, collectively extending the SLA through August 31, 2014.
The EnhancedView SLA totals $2.8 billion over the term of the contract, payable as $250.0 million per year ($20.8 million monthly) for the first four contract years commencing on September 1, 2010, and $300.0 million per year ($25.0 million monthly) for the remaining six years of the contract beginning on September 1, 2014. The Company is required to meet certain service level requirements related to the operational performance of the WorldView constellation and related ground systems.
The Company recognizes net revenue for the EnhancedView SLA using a proportional performance method. Under this method, net revenue is recognized based on the estimated amount of capacity made available to NGA in any given period compared to the total estimated capacity to be provided over the life of the contract. As increasing levels of capacity are made available to NGA, EnhancedView SLA revenue increases proportionally. The contract requires DigitalGlobe to increase the capacity made available to NGA through the addition of its WorldView-3 satellite (scheduled to launch in the summer of 2014) as well as the installation of seven additional remote ground terminals. The Company installed all remote ground terminals required to increase the capacity available under the EnhancedView SLA as of July 31, 2012. The Company anticipates a material increase in net revenue once WorldView-3 reaches full operational capability (“FOC”) as a result of the significant increase in satellite capacity across the constellation that will be made available to NGA at that time. Accordingly, when WorldView-3 reaches FOC, approximately 90 days following the launch, the Company will begin to earn and recognize previously received cash payments that are classified as deferred revenue.
During the first and second quarters of 2012, DigitalGlobe and NGA agreed to modifications of the EnhancedView Contract that included increasing the amount of capacity made available to NGA and adjustments to the performance penalty (formerly “holdback”). The modifications did not result in a material change to the EnhancedView SLA accounting and the Company continues to use the proportional performance method of net revenue recognition.
Each monthly EnhancedView SLA payment is subject to a performance penalty ranging from 3% to 10% through February 28, 2013 and 6% thereafter, depending upon the Company’s performance against pre-defined EnhancedView SLA performance criteria. A performance penalty is assessed in any month that NGA determines that not all of the EnhancedView SLA performance criteria were met. The Company retains the full monthly cash payment; however, the penalty amount will be applied to mutually agreeable future products and services or to a pro-rated extension of the EnhancedView SLA beyond the current contract period. Accordingly, all penalty amounts will cause the Company to defer recognition of a corresponding net revenue amount until the performance penalty funds are consumed as described above. During the year ended December 31, 2013, there were no holdbacks for penalties. During each of the years ended December 31, 2012 and 2011, the Company incurred a penalty of $0.2 million.
U.S. Government Value Added Services
U.S. Government value added services arrangements include arrangements whereby the Company meets NGA’s more advanced imagery requirements using its production and dissemination capabilities. Value added services contracts generally include production and hosting of imagery for specified periods of time.
NextView
In connection with the Company’s NextView agreement with NGA (which was entered into September 2003 and was the predecessor to the current EnhancedView Contract), the Company received $266.0 million from NGA to offset the construction costs of WorldView-1, which was recorded as deferred revenue when received. When WorldView-1 reached FOC in November 2007, the Company began recognizing the deferred revenue on a straight-line basis over the estimated useful life of WorldView-1. If the life of WorldView-1 were to be modified, the amortization of deferred revenue would be modified accordingly. Based on the current estimated useful life of WorldView-1, the Company recognized $25.5 million of net revenue related to the pre-FOC payments for each of the years ended December 31, 2013, 2012 and 2011.
DAP
Under the DAP, up-front fees are paid by the customer for the initial facility construction and delivery. The up-front payments are recognized ratably over the estimated customer relationship period, for which the estimated life of the longest-lived satellite accessed by the DAP customer is used. Customers also generally pre-pay for their access minutes resulting in deferred revenue until the minutes are consumed.
Other Agreements
The Company enters into various commercial relationships that sometimes include obligations that are paid for in advance and recognized over a contractual period of performance. These obligations are typically related to the hosting of imagery or the obligation to refresh previously delivered imagery.