Setback for Pace as client delays big order

Core 2011 business revenues at the Saltaire-based company are expected to be flat as a result.

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.

“It’s very straightforward,” said Mr Gaydon. “They want to accelerate bringing the next generation product to market.”

He added that Pace’s organic core business is growing and profitability is going up.

But the market took fright and Pace’s shares closed down 44.1p at 176.4p.

House broker RBS said the revenue outlook was “marginally lower than our expectations due to deferrals at one specific customer and implies flat revenues in the core business”.

Analysts at Altium Securities said they expect to lower their 2011 pre-tax profit forecast due to the company’s “weak” and “disappointing” outlook.

The share slump followed better than expected results for the year to December 31.

Adjusted core earnings rose 36 per cent in 2010 to £103.6m after it shipped 22.2 million devices for cable, satellite and IPTV customers such as Comcast, DirecTV and AT&T. This was up from 17.2 million devices in 2009.

Sales rose 17.4 per cent to £1.33bn in the year to December 31.

Pre-tax profits rose 1.7 per cent to £71.1m. This was after £19m of exceptional costs from transaction related expenses, acquisition integration costs and restructuring post acquisition.

Despite the blow to 2011 revenues from the cancelled contract, Pace is 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.

“Going forward the capabilities of the company have grown so much,” said Mr Gaydon.

“We have got complex smart home technologies in established regions such as the US and Europe. The US is further ahead of Europe and the UK, but as they say, America today, Europe tomorrow.”

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

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.

“With these new services there is so much to play for as the whole world starts to embrace digital,” said Mr Gaydon.

“We’re feeling very good about the company. Organic growth is higher. Yes one customer will cause revenues to go flat this year, but the topline growth will be 17 to 18 per cent.”

The group said it would pay a final dividend of 1.45p per share to give a total for the year of 2.175p, an increase of 45 per cent.

Pace said 2010 revenues were boosted as it expanded its share of the pay-TV market, helped by three acquisitions last year.

The company bought Bewan Systems, 2Wire and Latens Systems which all made a positive contribution to the 2010 results.

In Europe, revenues declined by 14 per cent to £367m in 2010 as BSkyB brought its set-top box supply in-house.

But these declines were offset by growth in the US, where high definition services are in demand, while countries like South Africa and Malaysia also showed strong performances.

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