Pace Micro Technology’s share price rose a dramatic 101p (from 498.5p) following its half-year results (to December 4) announcement on Monday.

The share price shows a dramatic recovery since the low period in Pace’s fortunes two years ago when the price was as low as 28p, and not helped by profit warnings. Those warnings now seem ancient history as the company reports buoyant progress in the sale of digital set top boxes especially in the UK, and chief executive Malcolm Miller talks of a ‘next generation’ of new products coming from Pace’s research and development team, in particular the company’s XTV personal video recorder device.

Turnover increased 58 per cent to Pounds 157.2 million (1998: Pounds 99.4 million). Profit before tax and exceptional items increased 53 per cent to Pounds 12.7 million (1998: Pounds 8.3 million). Earnings per share before exceptional items increased 65 per cent to 4.3p (1998 2.6p). Interim dividend per share was 0.30p (1998: 0.25p). Gross margin for the period was 20.3 per cent (1998: 25.9 per cent).

However, Pace’s figures are dominated by its digital sales success in the UK. Far from achieving a dominant position in the supply of set-top boxes on a global basis, Pace seems increasingly dependent on the UK. Turnover within the UK was a healthy Pounds 143 million (up Pounds 90 million on the previous half-year), while non-UK turnover was just Pounds 13.59 million, well down on the previous half-year of Pounds 45.9 million. "What has happened over the past 12 months or so is that [digital TV] is being picked up in real volume in the UK, in the States and in Western Europe," said marketing director Andrew Wallace. He said that the company believed the trend would continue for another six to 12 months." Miller said that the UK represented over 90 per cent of group revenues as Pace was able to take advantage of the launch of free set-top boxes by BSkyB and ONdigital and of the initial roll out of digital cable services by CWC, Telewest and NTL. However, he admitted: "Overseas business was depressed. In Latin America economic difficulties slowed sales and in European markets new products were delayed by component shortages. Whilst performance in Latin America will take time to improve, Pace increased revenues in Europe over the second half of last year and won a new contract to supply Canal Plus with at least 100,000 units next year."

Wallace said that Pace was supplying 50 per cent of set-top boxes to BSkyB and a "strong position" in other UK markets. This had been achieved by focusing on cost and the investment of profit in future product. The result has been a reduction in gross margins, which now stand at 20.3 per cent in the half year to November 1999, compared to 25.9 per cent 12 months earlier." Late delivery of silicon and rising prices in items such as flash memory have contributed a reduction of up to 30 per cent towards the new margins figure. Expenditure on engineering has virtually doubled to Pounds 9.8 million through the combination of growth and acquisition. More than half the company activity is now in engineering. Wallace said this points to a change in the culture of the company away from manufacturing, which is increasingly outsourced.

Pace warned that further action could come over claims regarding alleged misuse of patents within its boxes. "During the first half the largest of the outstanding claims was settled within the amount provided and the excess was released," the company said. "As for the remaining outstanding claims, having taken legal advice, the board considers that there are defences available that may mitigate the amounts being sought."