Pace warns on profits as Japan quake hits supply

The set-top box maker Pace stunned the market yesterday with a warning on profits after it was hit by the supply chain issues exacerbated by the earthquake in Japan. The news wiped £190m off the company's value, almost 40 per cent, as the shares closed at 93p on the day.

The warning came just two months after a significant US customer pushed back its order from 2011 by a year and adds to something of a fall from grace for the company.

Pace overtook Motorola to become the largest set-top box maker last year. Shortly afterwards it was heralded by David Cameron, as the Prime Minister launched his new economic strategy for the UK from the company's headquarters in Yorkshire.

Pace revealed yesterday that a poor first quarter had forced it to slash full-year profit expectations from £128m to as low as £97m. Neil Gaydon, the chief executive, bemoaned a "disappointing start to the financial year".

He said: "Although we will now not be able to make up this first-half under-performance in the second half we continue to drive long-term growth and profitability. The demand for our products and technologies continues to grow, ensuring our ongoing market leadership."

The interim management statement did report a 24 per cent rise in revenues during the first quarter over the previous year earlier. Yet profits were hit by supply-chain issues. Costs had soared as it built up inventory and bought components ahead of schedule. Yet the supply chain was hit by disruptions following the natural disaster in Japan, which has "increased risk for the year".

Pace's management admitted that profitability in its European arm, bought from Phillips in 2008, was below expectations despite hitting revenue and volume targets on the supply-chain issues and what one source called the "lack of efficient running of the business". The poor performance of its Pace Networks arm, which was designed to allow pay-TV companies to target hard-to-reach customers, also dragged on the bottom line, forcing its closure last month.

Altium Securities' analyst Arun George said the statement stood in "stark contrast" to the performances of Pace's two closest rivals, Motorola and Technicolor. He said Pace's statement "offers a list of reasons that contributed to the lowered margin expansion, none of which seems credible".

Mr George said the company needed to "refresh" its leadership team, even though under Mr Gaydon's stewardship Pace had risen from the brink of bankruptcy five years ago to the biggest set-top box maker in the world.

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