WorldSpace Oddity

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Global satellite-radio provider WorldSpace (Nasdaq: WRSP) closed out its first year as a public company with heady subscriber gains, but it's still got a long way to go to match the success of its stateside peers.

The company closed 2005 with 115,306 subscribers. Most of its gains came in India, where it began the calendar year with just 8,335 subscribers, but finished with 74,574. Since October, WorldSpace has been running a popular promotional campaign, selling users a satellite-radio receiver and three months of service for just 1,999 rupees (roughly equal to $45).

The current quarter will be a critical one for WorldSpace. If the churn rate spikes, with many of the fourth quarter's 40,235 net additions in India failing to continue with the service, the highly subsidized promotion will be a costly failure.

WorldSpace's average revenue per user is just $3.35 a month for Indian subscribers and $5.11 in the rest of the world. That's a mere fraction of the $12.95 that XM Satellite Radio (Nasdaq: XMSR) and Sirius (Nasdaq: SIRI) charge their U.S. users. It's also why subsidizing hardware takes a longer time to pay off. The average cost per gross addition of $154 in India implies that a user would need to stay subscribed for longer than three years to let WorldSpace recoup that cost on the top line.

The company lost $0.90 a share in the December quarter on just $4.4 million in revenue. The net loss has widened significantly over the past year, and the company burned through $24 million more during the fourth quarter.

Even though the shares have been cut in half since going public at $21 in August, WorldSpace isn't necessarily cheap yet. That's especially true in comparison to the faster-growing North American providers.

	2005 Rev.	Rev. Growth	Price/Sales
WorldSpace	$11.7 million	35.9%	26.8
Sirius	$242.2 million	262.0%	24.9
XM	$558.3 million	128.4%	8

WorldSpace isn't worth that kind of premium, despite its potential. The disparity gets even worse if you were to base your valuation on enterprise value, given WorldSpace's fat liabilities. The company sports negative shareholder equity of $1.5 billion.

I'll still keep an eye on WorldSpace, because it's doing a few things right. It has XM as a technology-sharing partner, and it 's apparently picking up on some of the stateside tricks of the promotional trade, too. WorldSpace is opening up kiosks in area retailers, and just as XM's music is streamed at Starbucks (Nasdaq: SBUX), WorldSpace is broadcast at India's leading coffeehouse chain.

But as much as India's economy is likely to grow, WorldSpace's bottom-heavy balance sheet doesn't grant it the luxury of patience. It's why XM and Sirius are actually the safer bets in this speculative sector. XM's rock-bottom relative valuation to its peers is part of the reason why it XM was recommended last year to Motley Fool Rule Breakers newsletter service subscribers.

Longtime Fool contributor Rick Munarriz loves his satellite radio, but he does not own any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.