Blackfriar: Picking up the pace without homework excuses

SHARES in set-top box maker Pace leapt more than 10 per cent this week after the firm said first-half profits more than trebled and full-year profits will beat expectations.

The Saltaire-based company is blooming under new chief executive Mike Pulli and the share price has doubled over the past 12 months, closing up another penny last night at 312p.

Pace is confident about its future in a rapidly-changing home entertainment market after putting a turbulent spell in 2011 well behind it.

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The interim results mark a major turnaround from the previous year, when flooding in Thailand disrupted the supply chain, earnings more than halved and investor confidence was hammered by a series of profits warnings, which prompted one analyst to say the company had used every excuse apart from the dog ate its homework.

The issues prompted a boardroom overhaul, with former Asda chief executive Allan Leighton taking over as chairman and Mike Pulli stepping up from head of Pace’s US arm to become chief executive.

A strategic review prioritised cutting costs, improving efficiency and transforming its supply chain. It also emphasised the need for the company to expand into software, services and integrated solutions.

The review appears to have paid off.

The world’s biggest maker of TV set-top boxes has been boosted by strong US sales of its media servers – the next generation of super-clever boxes that link together all the devices in the home such as the TV, iPad, and smartphones with a broadband connection.

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Pace has shipped over two million Genie Advanced Whole-Home HD DVRs for DIRECTV in the past year.

In the meantime, the next generation HR44 Genie Media Server and C41 mini Genie client devices are now in production.

The big news this week is that demand for media servers is now picking up outside the North American market.

Get TV in Norway has launched a whole home solution supported by a Pace media server, Pace’s first media server outside North America.

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More recently Liberty Global, a major international cable operator, awarded Pace a contract to provide media servers to a number of operations in Europe.

Despite the ongoing economic hardship in Europe, cable operators are keen to roll out media servers in order to keep up with rivals.

“In Europe the big thing is competition.

“Our operators have to make sure they don’t fall behind,” said Mr Pulli.

The next market expected to see a surge in demand is Latin America and this is before the company gets its teeth into the Asian market, where demand for Western goods and technology is insatiable.

The results got the thumbs up from investors.

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Analyst Jonathan Imlah at Canaccord said: “We are highly encouraged and not at all surprised to see another period of good performance and solid outlook at Pace.

“We remain impressed with the measures that the (now not so new) management team has implemented over the past 18 months and expect further progress in the second half and beyond.”

Analyst Alexander Mees at JP Morgan added: “Global demand for set-top boxes has been resilient through recent difficult economic conditions.

“The evolution of technology towards hybrid devices and media servers is a development of which Pace is at the forefront.”

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Following the disruption in Thailand, Pace is switching over to two core manufacturers, a process it expects to complete later this year.

“We have done a really big scrub of our supply chain,” said Mr Pulli. “We’ve done a lot of work although there is still work to be done. We’re feeling happy with dual sourcing.”

The argument is that if natural or man-made disasters wipe out one of Pace’s suppliers, its other supplier is at a sufficient distance to pick up the slack.

Analyst Vijay Anand at Espirito Santo said: “Pace notes that it has now moved 85 per cent of its manufacturing to two main suppliers and expects the transition to complete by the third quarter of 2013.

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“This is likely to boost gross margins in the second half of 2013 with the full benefits to come through in 2014.”

Pace has come a long way since its “dog ate my homework” excuses.

The signs are that global demand for media servers will pick up rapidly in the next few years as Europe comes out of its economic slump and demand picks up in emerging markets.

If you have a view on this or any other City story please contact Blackfriar at [email protected]

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