Author's note: This article has been edited to correct a mischaracterization of WorldSpace's cash burn rate. I regret the error.
Yesterday, I wrote about looking for companies that are in the Street's Dumpster. Today, I write about one that I firmly believe deserves to end up there, and stay there.
I'm talking about satellite-radio provider WorldSpace (Nasdaq: WRSP ) , a non-competitor, by the way, to the U.S. satellite-radio duopoly held by XM Satellite Radio (Nasdaq: XMSR ) and Sirius Satellite Radio (Nasdaq: SIRI ) .
WorldSpace did the IPO thing just last month, so some might argue that it's a bit too early to judge the prospects for the business. Perhaps. But I think it's a perfect time to judge prospects for shareholders, and those prospects look grim.
WorldSpace used to generate its revenue on government contracts, satellite capacity leases, and "other" means. These days, the growth engine is supposedly going to be subscription service revenues from India. If you look only at subscriber growth, things do look good. This quarter's $799,000 is a 390% increase over the prior-year quarter. But don't make the mistake of extrapolating that growth rate across the entire $2.3 million revenue base, because other means of revenue are not going to do the same. Also remember that the major catalyst of satellite-radio growth in the U.S. -- in-car receivers -- is not an area WorldSpace can currently enter. That's right, for some time to come, expect no help from the likes of Toyota (NYSE: TM ) , Ford (NYSE: F ) , or GM (NYSE: GM ) .
Where WorldSpace gets really raunchy is on the bottom line. The headlines yesterday contained doozies about WorldSpace's "narrowing loss," but look more closely and you'll see that this is not much of an accomplishment. First of all, the $27.6 million loss from operations was actually 11.6% larger than last year's loss.
The net loss of $22 million was less than half last year's $52 million, but don't forget that this year's quarter included a hefty $6 million tax benefit. And the rest of the reduction is due to a situation that came with significant costs for shareholders: Last year, the firm was still paying hefty interest charges of $27.6 million. Most of that debt is now gone, but in its place is a royalty agreement that will sap WorldSpace of 10% of any forthcoming earnings before interest, taxes, amortization, and depreciation.
Other stuff I don't like:
- WorldSpace pays $175 to get just one subscriber in India, and that subscriber in turn generates $2.35 a month. That means that in its target market, the big growth space, WorldSpace doesn't break even on adding a subscriber for more than six years.
- If WorldSpace continues to burn cash at the $70-plus million rate for the past six months, it will burn through the IPO's proceeds in less than two years. Guess what comes after that.
- While management may deliver something like $10 million in revenues this year, it recently granted $26 million in stock-based compensation, including hefty grants to founder and CEO Noah Samara, who recently sold $7 million worth of stock anyway. Lest you think these restricted stock grants are the kind of thing that will encourage long-term thinking and align management with outside shareholders, remember that these grants vest in only six months.
Let's get to the point. If you enjoy companies that pay management at a rate of 2.5 times your company's entire revenue, burn cash like crazy, but have a story that sounds good until you listen closely, this may be the stock for you. Knock yourself out.
If you're looking for a good investment, look elsewhere.
For related Foolishness:
- If you like garbage, at least look for the right kind.
- Will WorldSpace put a terrorist in your portfolio?
- Beware the next big thing.