When Maxar Technologies' (NYSE:MAXR) WorldView-4 satellite suffered a gyro malfunction earlier this year, it meant more than just the loss of a multimillion-dollar satellite. It meant the loss of a big income stream for Maxar.
WorldView-4 had $155 million in residual book value left in it at the time of the failure. Luckily for Maxar, the satellite was insured, and last month, Maxar's insurer agreed to pay the entire $183 million value of its policy on the defunct satellite. Unluckily, just getting the insurance payment won't do anything to replace the $85 million in annual revenue Maxar gets from selling satellite photography taken by the digital imaging unit.
Although it's only about 4% of Maxar's annual revenues, this is still a big problem for Maxar, which was already operating at a loss and burning cash before this disaster was announced. With $3.3 billion in long-term debt that needs to be serviced and no free cash flow coming in to pay it, Maxar's situation was looking dire indeed. Maxar's stock, down 88% over the past year, reflected that fact.
But then a miracle happened.
NASA rides to the rescue
Late last month, NASA announced that it has chosen Maxar (and its partners Blue Origin and the Charles Stark Draper Laboratory) to "design, build and demonstrate operations of a spacecraft that could support returning humans to the surface of the Moon by 2024" as part of the Artemis program.
Maxar will lead the project, which requires building and demonstrating the successful operation of a "power and propulsion element spacecraft" (PPE) that will form part of the Lunar Gateway space station that will orbit the moon. (NASA astronauts will dock at this station preparatory to descending to the lunar surface.) Utilizing electricity generated from its 50 kW solar array, Maxar's crucial piece of the space station puzzle will both power the Lunar Gateway and handle its maneuvering, attitude control, and docking functions.
NASA's contract awards Maxar and its team $375 million to build it.
What it means to Maxar
And Maxar will need to build it quickly. With NASA stepping up the schedule for its moon mission -- originally planned to take place in 2028 but now pushed forward to 2024 -- the agency wants Maxar to launch the PPE spacecraft by 2022, then test it for up to a year before sending it on to the moon.
For Maxar, this is both bad and good news. Bad because two or even three years is a pretty tight schedule for designing, building, and testing a brand new spaceship. (NASA has been trying to build a Space Launch System since 2011 and still isn't finished.) And good because the urgency of the timeline means that Maxar can probably get to work right away on earning that $375 million, helping to plug the hole in its budget left by the loss of WorldView-4.
Now, 2022 may not actually be a firm deadline. The entirety of Maxar's contracted period for design, development, and testing could run over 76 months total (and actually appears to go past NASA's targeted 2024 date for landing on the moon). Still, even spread over that entire period, Maxar's $375 million contract still works out to about $60 million a year, which will go a long way toward replacing the revenue lost with the WorldView-4 breakdown.
Plus, following a successful demonstration, NASA says it "could acquire the spacecraft for use as the first element of the Gateway" -- presumably for an additional payment, although this is not stated clearly.
What it means for investors
It still remains to be seen how profitable this contract will be for Maxar. On the one hand, we know from data provided by S&P Global Market Intelligence that imagery is very profitable for Maxar. Last year, $845 million in imagery revenues translated into $518 million in earnings before interest, taxes, depreciation, and amortization -- a 61% EBITDA margin. In contrast, Space Systems work brought in more than $1.1 billion in revenue last year -- but only $5 million in EBITDA.
Given this is how things have played out in the past, I admit I have some doubts that simply plugging the revenue hole will fix Maxar's balance sheet problems -- or repair its free cash flow, either. It matters what kind of revenue Maxar is bringing in. Still, at the very least, NASA's decision to entrust Maxar with such a key element of its Lunar Gateway project speaks volumes about the agency's confidence in the company and its desire to keep Maxar in business.
Any investors thinking about shorting Maxar stock after its satellite disaster should bear that in mind.