Margin Squeeze Hits Pace Shares


Fueled by increased sales of digital set-top boxes, U.K.-based Pace Micro Technology plc more than doubled revenue for its fiscal year ended June 3.

But high prices for key components of its equipment, coupled with a plan by two directors to sell off 6 percent of their holdings, prompted a sell-off of Pace shares on the London Stock Exchange last week.

Pace sold more than 2 million digital set-tops last year, mostly in the United Kingdom, an increase of more than 146 percent. That helped to boost revenue to £ 377.6 million ($572.6 million), up from £ 182.8 million ($277.2 million) in fiscal-year 1999.

But the company's gross margin was down nearly seven percentage points in the period-19.7 percent, compared with 26.5 percent in fiscal-year 1999-largely due to high component prices.

"The rate of decline of component prices was less than anticipated at the time we agreed to terms with our customers," Pace said in a prepared statement. "In the short term, we do not see that this situation will improve, and we anticipate continued tightness in component supply."

That, coupled with the announcement that directors David Hood and Robert Fleming planned to sell 13.2 million Pace shares-6 percent of the company's outstanding stock, worth £120 million-sent Pace shares into a tailspin.

Pace stock, which had outperformed the sector by about 40 percent for the year, fell 78.5 pence ($1.19) per share to 896 pence ($13.59) July 10. The slide continued July 11, when the stock closed down 19 pence (29 cents) to 877 pence ($13.30) per share.

Hood and Fleming said that combined, they would still control about 25 percent of Pace stock after the sale, according to published reports.

Although Pace shares took a beating, the company appears to be on track to continue its impressive growth.

About 92 percent of Pace's sales were in the United Kingdom in fiscal-year 2000, up from 65 percent in 1999. Pace said it expects its overseas business to increase as shipments to the United States begin and European broadcasters compete more actively.

Pace has focused on the U.K. market because it believed it was the fastest-growing segment for digital cable.

But now that it has landed deals with all six major British cable and satellite operators-British Sky Broadcasting Group plc, Cable & Wireless Communications plc, Kingston Communications plc, NTL Inc., ONdigital and Telewest Communications plc-Pace has set its sites on overseas markets as the industry matures.

Last month, Pace announced a three-year contract to supply 350,000 digital set-tops to Comcast Corp.'s cable unit. And in November, the vendor agreed to sell a minimum of 750,000 digital set-tops to Time Warner Cable over the next three years.

Pace Gets Boxed In

<p> </p><p> <span class="small" id="d9e45-21-small">FY '00</span> </p><p> <span class="small" id="d9e50-25-small">FY '99</span> </p>




Operating Profit



Net Cash Flow



Operating Margin