Pace Micro returns to profit

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Pace Micro Technology has edged back into profit after shipments to the US by the television set-top box maker rose sharply.

Revenue more than doubled to £180.2m (£78.9m) in the six months to December 2, pushing its share price up 3p to 66p.

Pre-tax profits were £512,000, against a loss of £9.8m previously. Stripping out restructuring costs of about £900,000, Pace said it made a profit of £1.4m compared with a loss of £8.9m last time.

Pace maintains its business is “lumpy” and last year’s full-year results brought a substantial loss that was, in part, because of delays in shipments to the US and its failure to secure another significant European deal, a factor that had boosted the previous year.

In the first half of this year though, shipments to the US rose from 100,000 to 600,000 units as the US accounted for 50 per cent of revenue. The company has been attempting to position itself towards the US market. Europe accounted for sales of 1m set-top boxes but success in a number of countries was offset by a cut in demand in Germany where Premiere, a Pace customer, lost screening rights for leading football matches.

Gross margins fell in the period from 15.8 to 15.3 per cent. The company said this was because it was selling through older design products.

Mike McTighe, chairman, said competition between pay-TV operators and new entrants would drive demand for new and existing products. The phase-out of analogue television as well as the shift towards high definition TV were also long-term drivers.

Sue Cox, analyst at ABN Amro, said Pace had “cracked the US for the first time” and market conditions there looked promising for a company that had proved both innovative and able to maintain market share.

In the second half, the company expects to be cash generative and to meet market forecasts.

In spite of the return to profit, the board decided to waive the dividend.

Analysts at Oriel Securities said the results were well ahead of their forecasts although the gross margin was lower than they had expected. Like the company, analysts said the emphasis should now be on increasing profitability.

FT Comment

■ The share price has plenty of potential but the market will wait for evidence that gross margins are rising. The company is targeting the 20 per cent area. If it achieves that, forecast earnings will be some 30 per cent higher than the more conservative assumptions for the full year. The backdrop of increasing competition in an expanding US market, plus solid European performance, is promising in spite of inherent difficulties in forecasting sales volumes.

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