Blackfriar: The little player from Saltaire beating South Korea giant

The new double act of former Asda chief executive Allan Leighton as chairman and the head of Pace’s US business Mike Pulli as chief executive have brought around a transformation at the company.

The group was on its knees in 2011 when flooding in Thailand disrupted the supply chain, earnings more than halved and investor confidence was hammered by a series of profits warnings.

Pace is facing challenges from the proliferation of connected devices, from iPads to smartphones, plus increasingly diverse ways of watching TV, which threaten to displace the traditional set-top box in the home.

Online or over-the-top (OTT) services such as Netflix allow users to watch films via a broadband connection without the need for a set-top box.

Pace believes that domestic users will still need a physical unit – tied to a service agreement or contract – to connect their devices in the home.

Pace said developed markets are replacing traditional set-top boxes with media servers – the next generation of boxes that link together all the devices in the home such as the TV, iPad, smartphones with a broadband connection.

“The industry has created this perception that they are going to cook people’s eggs in the morning,” says Mr Pulli, who believes their uses will be far more practical and far less based in science fiction

“It’s just a natural progression as to what was happening. It’s an evolution of the traditional gateway and set-top box coming together,” he adds.

The company said demand for media servers is expanding beyond its most advanced market of North America, and it has won deals for the hi-tech devices in Europe, Asia Pacific and Latin America, with deliveries this year and next.

At the same time Mr Pulli is pushing the company in the direction of software and services sales.

They grew 7.6 per cent last year although they still only make up less than one twentieth of the group’s revenues and therefore have enormous potential for future growth.

Analysts welcomed yesterday’s update.

Jefferies said it shows on-going proof of strategy and describes it has a good start to the year with little impact from the economic downturn.

JP Morgan said in a note: “Pace is the largest provider of set-top boxes and media servers in the world.

“Its competitive position appears stable and trends remain positive and largely unrelated to macroeconomic influences. We believe Pace’s ability to evolve its business to adapt to a changing environment is under-appreciated.”

CanaccordGenuity analysts described it as an encouraging start to the year.

“We remain of the view that the market is underestimating the ongoing relevance and resilience of the pay-TV industry and, by extension, the set-top box industry.

“Pace has spent the past 16 months getting its house in order, a process which we believe has further to run, particularly with regard to its substantial direct cost line.

“The next few months should see the company move into a net cash position, make further progress in its software and services business – which we estimate has gross margins three times those of its hardware division – and continue its mission to expand margins.”

Perhaps the most interesting note came from analysts at Exane, who said the most significant part of Pace’s update is the news that Liberty Global, a leading international cable operator, has selected Pace to provide Media Server products to a number of their operations in Europe.

“We knew already that Pace had been selected by Telenet last year which should translate into revenues in the first half of 2014,” they said.

“This morning’s release emphasises ‘a number of their operations in Europe’, ie, far beyond Telenet.

“We believe Pace is displacing Samsung in the very high end and actually has a shot at winning new countries in Continental Europe and the UK now that the VMED acquisition has been cleared by regulators.

“Liberty Global is the biggest payTV operator in Europe and such a win will definitely fuel growth in the region for Pace in 2014/15.”

Praise indeed. At a time when Apple is losing out to Samsung, a small company from Saltaire is managing to outplay the South Korean multinational giant.

Pace shareholders have had a rocky ride over the past two years, but it appears that their faith in the company is starting to pay off.

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