Third profits warning hits Pace

Shares in Pace Micro collapsed 41 per cent yesterday after the set-top box supplier warned that profits for this year and next would fall well short of expectations after a key contract with BSkyB was renegotiated.

The profit warning, the company's third so far this year, sent the shares down 29.75p to close at 42.5p.

The new Sky contract, Pace said, meant its profits for the financial year just ended would be £1.7m lower than expectations while its profits for the current year to the beginning of June would be £8m light.

While the company attempted to play the impact of the move down, saying that those profits had been postponed rather than lost altogether, analysts were less optimistic.

"There is a risk that the profits will be lost and not deferred," said one analyst who did not want to be named. "This just shows BSkyB has got them over a barrel, that BSkyB has shifted all of the risk on to their supplier and I suspect other companies will try to do the same."

The company blamed the revised contract on changes to the pricing of BSkyB's Sky Plus product, which acts as a so-called "personal video recorder", letting customers record one programme while watching another.

Andrew Wallace, Pace's marketing director, offered no particular explanation as to why the contract had been renegotiated other than to say: "We both felt we wanted to modify the terms we had in place."

The new contract will see Pace shipping the Sky+ product for less than it costs to make while getting an unspecified share of the subscription that customers pay for the service up to the end of March next year. It also won a new digital TV box order.

"What we're doing is foregoing some of the immediate revenue in return for a share of the subscription [fee] that customers pay once they take the service," Mr Wallace said.

However, analysts were far more pessimistic, saying the new contract simply meant Pace would have to shoulder far more of the risk associated with the kit.

"It'll take Pace two years to break even on the box because they'll be shipping at an £80-per-box loss and they'll only make money if subscribers stay on into year three," said one.

Pace Micro, which publishes its financial results next Monday, is widely expected to announce it is taking the axe to its 950-strong workforce. Pace shares have fallen by almost 80 per cent since March, when it revealed that shipments to the cable operator NTL had halted. It has subsequently seen NTL file for bankruptcy protection and another customer, ITV Digital, go bust.