Sky Still Falling for Worldspace

Let me be blunt. Worldspace (NASDAQ:WRSP) is a horrible, horrible company to be invested in. Seriously, I never thought I'd see a company I wanted to stay away from more than Vonage (NYSE:VG) (which recently flopped as an IPO), but Worldspace has reclaimed the prize, by my math.

You need look no further than the chart, or the financials, but if you want a final reason to stay away from this money-burner -- or short it if you're lucky enough to find a borrow -- start with today's press release.

It begins, as do all obfuscating investor-relations wonders, with whatever can be painted as good news. Subscriber base increased 150%, while subscription revenues were up 140%. It mentions some problems with a late promotion in India and churn, but turns on the happy juice to claim that these will all be remedied in short order by a new team of co-COOs.

Thereafter, there are more "highlights," and it's not until the bottom of page 2 that management fesses up to yet another gargantuan net loss, $36.7 million, or $0.98 per share. If that sounds like a minor worsening compared to the -$0.95 per share of red ink from last year, consider that the net loss figure last year was $22 million, meaning that a 60% increased share count spread the per share losses more thinly, making it look better than it is. Further down, the best thing that can be said is that subscriber acquisition costs (SAC) remained unchanged, and cost per gross addition (SAC plus marketing and advertising) dropped from $135 to $131. That's still a mighty steep price to pay to sign people up in a Third World country when you're sporting a 67% churn rate and targeting 20%-25%.

Here's a look at what that kind of business model does to margins.

If you're wondering how anyone could have considered this business plan a decent idea (cough,UBS, cough), join the club. Actually, we in the club suspect that investment banking may have something to do with it. You may recall that UBS called Worldspace a buy back at $18 per share, shortly after it took Worldspace public. It changed its mind today, but only enough to call it "neutral." I guess truth is the first casualty of investment banking.

Worldspace is sometimes compared to XM Satellite Radio (NASDAQ:XMSR) or Sirius Satellite Radio (NASDAQ:SIRI), but I think those comparisons are pretty unfair. While XM and Sirius seem greatly overvalued, at least they've got viable services already in place. Worldspace, in contrast, has a fledgling subscription service in India, plans for Italy, and hopes for China. But if you remember the history, you'll recall that even this is something of a tacked-on business plan, an afterthought to CEO Noah Samarra's original dream of satellite radio as a worldwide information equalizer, beginning with his native Africa.

Nice dream -- but then, aren't they always when they're funded with other people's money? I suggest you let Worldspace continue to burn its own bread, because there's little to suggest that it will turn a profit any time soon, if ever.

Keep in mind that Worldspace still doesn't have a system in place to let subscribers take that snazzy satellite radio with them in their autos, and therefore can't rely on the likes of GM (NYSE:GM), Ford (NYSE:F), or Toyota (NYSE:TM) to do some of the heavy lifting on subscriber acquisition. True, this earnings report says that Worldspace has "commissioned" terrestrial repeater "prototypes," but given the problems to be resolved, and Worldspace's voracious appetite for cash, I'm guessing there won't be much left of Worldspace by the time that technology is ready.

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Seth Jayson is fascinated by what he considers horrible businesses. At the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here. XM Satellite Radio is a Motley Fool Rule Breakers recommendation. Fool rules are here.