Blackfriar: There’s a need to look beyond Pace’s reporting oversight

But the real shock came when the market learned the Saltaire-based set-top box maker had told analysts at a morning briefing the reason behind the revenue shortfall.

The problem is the reason didn’t appear anywhere in the group’s 2010 results.

Analysts at the briefing learned that a major order from a key US customer had been pushed back to 2012. As a result core 2011 business revenues are expected to be flat

Pace’s chief executive Neil Gaydon said the key US customer had cancelled the standard product Pace was working on for 2011 in order to bring forward a next generation product due for launch in 2012. The US customer has decided to skip a generation of technology in its home DVR (digital video recorder) product.

Mr Gaydon told the Yorkshire Post: “It’s very straightforward. They want to accelerate bringing the next generation product to market.”

But the company has landed itself in hot water for failing to declare this in its annual results.

As far as anyone reading the results was concerned, the board was “confident that Pace has created an excellent platform for growth” in 2011.

Now there are rumours that Pace’s actions could be looked at by City watchdog The Financial Services Authority.

Under FSA rules, listed companies are not allowed to discuss price sensitive information before they issue a statement to the stock exchange.

In a brokers’ note entitled “A momentary lapse of judgement?”, analysts at Altium Securities said: “A seemingly solid performance was shockingly overshadowed by Pace’s failure to disclose a material contract deferral... Pace now faces an uphill task in rebuilding confidence and undoing the damage caused by its poor disclosure.”

The irony is that Pace will probably be better off in the long run. The cancellation is expected to lead to an increase in overall contract value.

So who is to blame for this damaging oversight?

Pace said that its City advisers, which include KPMG, JP Morgan and RBS, said there was no obligation to disclose the change in the results statement as the group’s 2011 profits outlook would not be affected.

Some commentators have even suggested that analysts used the mistake as an excuse to downgrade Pace – their real worry is that set-top boxes will be overtaken by integrated TVs which allow consumers to download programmes over the internet.

Which is the point where fantasy starts to overtake reality.

Yes Pace – and its highly paid advisers – deserve a kicking for their mistake, but one reporting error does not turn what is essentially a strong, well-run, forward-thinking, ground-breaking business into a basketcase.

Pace has good reason to be upbeat about its future.

It has the advantage of supplying a wide range of global markets from start-up regions such as India, where cable will switch from analogue to digital in the next few years, to highly sophisticated markets such as the US.

In between these two it has highly lucrative regions such as South America where high definition (HD) has only just been launched.

Pace, which has leapfrogged Motorola to take the top spot in set-top boxes, believes the growing complexity and inter-dependency of pay TV and broadband services will drive demand for the group’s services in the year ahead.

Nor is Pace relying on set-top boxes for its future growth.

Over 20 per cent of new revenues are coming from areas outside set-top boxes, which are also proving more profitable.

These include residential gateways, the home networking devices which allow consumers to connect technology such as high definition TV, digital video recorders, video on demand, digital photography, home closed circuit TV and gaming consoles, to create a convergent experience.

The new revenues also include call centre software, which can analyse the network in the caller’s home. It can then diagnose what the problem is, for example that the laptop is not properly configured to the network.

Pace is also well aware of the threat from integrated TVs and has launched its own over-the-top hybrid service, which allows customers to download TV from the internet.

Despite their censure for the poor disclosure, analysts at Altium maintained their ‘buy’ recommendation on Pace, saying it is attractive as the global number one player in a market driven by structural trends such as increasing HD penetration.

Pace deserves a slap on the wrist for this oversight, not a downgrade. The key directors stood firm behind the company yesterday, buying up 65,000 shares between them.

Pace has learned its lesson, but it might be time for it to review its highly paid advisers.