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Pace stock flounders after Tsunami shock, but how well are its rivals?

UK set top maker Pace has suffered a second major loss of investor confidence when it said, in its interim report, that its profit going forwards woul

By PETER WHITE

Published: 12 May, 2011

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UK set top maker Pace has suffered a second major loss of investor confidence when it said, in its interim report, that its profit going forwards would be impacted by the knock-on effects of Japan’s Tsunami plus localized product weaknesses. Two months earlier, when an unnamed US customer had decided to skip a generation of DVRs, and moved orders into 2012, Pace took its first stock price hit.

The Japanese situation seems to be more one of the costs of precautions taken, than anything problematic long term – Pace seems to have built up inventory so that it has components on hand to make all the devices it needs. The other issue is that Pace Europe has been squeezed on margins and also its Pace networks division has been closed.

Pace seems to be saying that all of this will be put to rest in the first half of the year, but that it won’t be able to reverse the damage by having a big second half, that will go to schedule leaving its annual profits short against previous predictions.

The first half operating margin will fall to 5.5% and in the second half Pace will get back to its 8% operating margin target. For the full year Pace reckons profit will be in the range of $150 million to $170million. The build-up of inventory has eaten up some of the company’s cash but it says that will return to normal levels by the half year.

In the US its 2Wire acquisition is in track and Pace says it has continued to win business. Well it must have. A report fresh from IHS Screen Digest, reported by Advanced TV News, says Pace has become the world’s No 1 seller of set-top boxes in terms of unit shipments, overtaking Motorola. It had gone ahead in pay TV set tops last year.

Pace’s set top shipments went up by 21% to 20.7 million units, that means an increase of some 3.6 million units from the previous year while Motorola rose just 4.2% to 19 million units.

Pace’s share price has been trashed from 231 pence two months ago, to 152p before this statement and down to 93p after it, and that’s when it acquired 3.6 million more shipments, which serves to raise the question, “How badly are the other set top companies performing?” Motorola rose by something like 800,000 units by comparison.

“Pace’s strong unit shipment growth in 2010 mostly was driven by huge growth in cable shipments to both North and South America,” IHS said. “Pace has been voraciously taking market share from US incumbents with high-volume deals such as selling boxes to Comcast. The company also fostered new big-volume customers like Net Servicios in Brazil.”

Pace continues to undercut Motorola said Screen Digest, with set top revenue of $2.4 billion last year off 10% while Pace’s revenue jumped to $1.9 billion, up 8%. Pace says it has won deals with Tata Sky in India and Net Servicos in Brazil both market leaders, which rapidly growing set top requirements.

Pace also pointed out that the European Commission has agreed that it doesn’t have to pay duty on its DVR products, which under some local laws have to pay a compensation duty for piracy, which is paid out to content owners.

Pace CEO, Neil Gaydon, said, “It is clear from today’s statement that despite revenues and product shipments being on track, we have made a disappointing start to the financial year with our profitability. We have taken action and are making changes to improve our second half performance and beyond and to ensure we return to our 8% operating margin target.

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