Sure, it's already been whacked for more than an 80% loss over the past 25 months, but it's tough for me to imagine how WorldSpace's (NASDAQ:WRSP) stock isn't trading for less than a buck a share.
I mean, stateside money-burners Sirius Satellite Radio (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR) may be overpriced, and they may burn through obscene amounts of capital, but there's a decent hope they'll make (some) money in the future. At WorldSpace, I see no hope at all.
The hits just keep on coming
The latest numbers do nothing to change that opinion. For Q3, WorldSpace lost $28.9 million, or $0.77 per share, having lost $15.4 million, or $0.48 per share, in the prior-year quarter.
Note that the slightly smaller operating loss only shrank because of a big decrease in non-cash, stock-based compensation. And that was more than offset by a decrease in income tax benefits.
The latest release didn't include enough cash flow information to make an informed judgment on the nine-month burn rate, but things look worse than they did at the halfway point. By the end of Q2, WorldSpace had already burned through $115 million, and my calculations suggest that the well will run dry sometime next year.
WorldSpace seems to admit as much, noting in the recent release that it has hired UBS (NYSE:UBS) to "evaluate strategic partnership alternatives." That, I believe, is a veiled way of saying "Our stock is tanking so bad, there's no way we can float shares to the public, so we're hoping UBS can rustle up some money."
Worse than that
That's why I believe this is isn't just a bad company -- it's also a dangerously disingenuous one.
The earnings release, of course, leads with every happy-looking figure the firm can muster: a 136% increase in subscriber base, an 89% increase in revenues. I suppose it's unreasonable (although it would be refreshing) to see WorldSpace just own up to the bad news up top: "Net loss nearly doubles despite 136% increase in subscriber base."
And it only gets worse. Just how on earth can CEO Noah Samara remark with a straight face that "strategic opportunities," which will likely involve debt or dilution galore, can possibly "enhance shareholder value?" WorldSpace is fighting for its life here, and this money won't enhance shareholders' stakes. It will only put off failure -- and for how long?
This sort of performance is par for the course here. This earnings release tries to drum up enthusiasm for the business model by noting sheer numbers: WorldSpace is "positioned to offer a satellite radio experience to consumers in more than 130 countries with five billion people, driving 300 million cars." But that overstates the case, to say the least.
You have to go deep into the annual report to find the truth.
Landmines in the filings
There, far from the prying eyes of most business journalists (and, sadly, investors) you find out, "In order to provide a mobile service for automobiles, we intend to enhance our infrastructure with the addition of networks of terrestrial repeaters (i.e., "gap fillers") in our target markets and a next generation of receivers designed to receive broadcasts from our networks of terrestrial repeaters as well as from our satellites."
To put it more clearly: One of the key drivers of satellite radio (satrad) growth in the U.S. -- automobile use -- isn't something WorldSpace can yet do. That's not good, because it's easier to convert people to users when they've already got a set sitting in the dashboard of their new ride from Toyota (NYSE:TM), Ford (NYSE:F), or GM (NYSE:GM).
Give the expanded filings a read, and you'll also see that 130 countries means 130 opportunities for government meddling. Now, factor in the reality that a large proportion of people in those places would have a hard time coming up with the cash for a regular radio. Signing them onto WorldSpace means doing so at prices far below what stateside satellite radio providers can command. Finally, note that to reach this population, WorldSpace must develop and market programming in scores of different languages.
In other words, there's no way WorldSpace can scale like XM or Sirius. It's got more expenses, lower revenues, countless government hurdles to clear, and it's burning cash. Lots of it. How much is this company worth, then?
In the past, I've noted that equity investors can't even count on the scrap value of the company when trying to put a value on this stock, because 60% of any liquidation will go to some of WorldSpace's early investors. These same folks also have a right to 10% of any EBITDA WorldSpace might earn, and they also have a veto over any decision to liquidate until the end of 2007.
Foolish bottom line
There's a reason this stock has dropped like a rock since the IPO, and nothing has changed since then. I don't think anything will. The company still seems to be run according to the hybrid charitable-commercial principles that initially inspired it. Don't even get me started on the way this company wastes shareholder money and assets through things like satellite bandwidth giveaways, and excessive management and director compensation. I find it unfathomable that WorldSpace paid its top three executives more than $25 million in total cash and stock compensation for 2005. But then again, what kind of compensation oversight do you think you'll get when you shell out $100,000 per year to non-employee directors?
WorldSpace looks like it's dug itself a hole so deep that no amount of top-line growth can possibly pull it out. That will likely mean debt, dilution for current investors, or a combination of the two. And even that will keep the wolves at bay only so long. If WorldSpace isn't bankrupt within two years, I'll buy one of those Indian receivers myself.
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At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
