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Pace stock trashed by over 20% by one unspecified US customer delay

In the US, investors love a winner, in the UK, we are serial winner beaters, and as Pace ended its strongest year ever as the world’s largest set top

By PETER WHITE

Published: 10 March, 2011

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In the US, investors love a winner, in the UK, we are serial winner beaters, and as Pace ended its strongest year ever as the world’s largest set top maker and, more importantly, looks forward to a year where it is more or less master of its own destiny for the first time, investors have decided it’s time to sell.

The company mentioned that one US customer (of which it has many now) had decided to skip a generation of DVRs, probably going to Pace’s highly regarded design for multi-room DVRs directly, and that this would shift cash out of its order book for 2011 into 2012 – but in the worlds of the CEO Neil Gaydon, “this makes the deal more profitable.”

Investors took this as a trigger to sell off and the stock lost 21% of its value, down to £534 million ($863 million) in just a day or so. Given it had revenue of £1,331 million in 2010, this puts its value way under half of its revenues. And given that its return on revenue was around 7.8% and rising, that’s worse than harsh.

All of the rest of the news was good. Revenues were up 17.4%, with 9.7% of that organic growth and the rest from its three recent acquisitions. EBITDA was up to £103.6 million, with higher margins and operating profit up 32%. The company said it was on track for integrating 2Wire, and it has also bought both conditional access firm Latens, so that Pace can offer low-end integrated systems in places like India and Latin America, and French gateway firm Bewan, which strengthens its grip on the cable market, with a DOCSIS 3.0 product.

The Latin America pay TV market grew 100% for Pace, and it is expecting more growth there this year (confirmed by our recent Rethink-TV report on Pay TV in Latin America) and has a deal with one of the biggest satellite firms in India, Tata Sky, just shipping. It is also the incumbent at satellite DTH players Canal+ and Viasat, which saw a lot of growth this past year, though it is losing out on some BSkyB orders because set top manufacture has been taken in-house to what was once Amstrad.

Clearly the US customer is thought to be one of the bigger players, perhaps Comcast, which is unlikely since it has shipped a HD DVR there for some time. There may be underlying concerns that Pace has not kept up with Over The Top set top design wins, and that it is de-emphasizing its low margin, high volume European free to air set top market. But for our money, given that Pace has a broad base of 160 operators as customers and is now asking the question, can we look after your home gateway business, not just set tops, this would be a time to buy Pace, not sell.

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