Pace Micro Technology plc results for the full year ended 2 June 2007

Tuesday, July 24th, 2007 
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Operating Highlights

  • Significant success in North America with ongoing solid performance from EMEA and APAC regions
  • Volume shipments increased by 77% to 3.9m set-top boxes (2006: 2.2m)
  • Growing operator demand for specialist high definition technology across all main payTV markets
  • Increased consumer demand for digital TV, high definition and PVR products
  • Company restructure and new management team are delivering results

Financial Highlights

  • Revenues more than doubled to 386.5m (2006: 178.1m)
  • Full year gross margin of 15.9% (2006: 18.0%), with uplift in H2 to 16.6% (H1 2006/07: 15.3%)
  • Profit before tax and exceptional items 6.1m (2006: loss 15.6m)
  • Earnings per share of 3.0p (2006: loss per share 13.0p)
  • Net cash position 11.9m (2006: net borrowings 6.1m)
  • On track to deliver against expectations for shortened financial year ending 31 December 2007

SALTAIRE, UK — Pace Micro Technology, the leading independent developer of digital TV technologies for the global payTV industry, announces its audited financial results for the full year ended 2 June 2007.

Commenting on the results, Neil Gaydon, Chief Executive Officer, said: “These results reflect our ability to support many of the world’s leading payTV operators with high value, specialist technology. Our company wide restructure and new management team is delivering greater customer focus with an improved operating model, and we have begun to see the benefits of this work. With flat panels, digital TV, high definition and PVR all becoming ‘must haves’ for the consumer, alongside increasing competition for subscribers amongst the operator community, the consequent demand for set top boxes gives us an exciting market to address and one that we are well positioned to capture.”

Overview

Pace is a specialist technology company delivering digital TV products to the world’s most successful payTV operators. The Group is building on the new foundations established by the management team over the last year and is delivering against plan.

The balance of Pace’s global shipments has shifted with over 50% of the Group’s revenues now coming from the North American market, the result of Pace’s strategy to target the world’s largest payTV operators and early investment in new technology platforms. At the same time organisational changes implemented over the last year, which have restructured Pace’s business around the technologies and needs of its customers, are beginning to deliver encouraging results.

Improving profitability is a key priority and over the year Pace has returned to profit, with profit before tax and exceptional items of 6.1m (2006: loss 15.6m) on revenues that more than doubled to 386.5m (2006: 178.1m). The business restructure that took place in 2006 included the establishment of Customer Account Teams, which are responsible for all aspects of the customer relationship, including product development. As a result, product execution is better, quality is increasing and margins are improving. The full benefits are expected over the next 12 months as these improvements work through the typical set-top box development cycle.

North America is the world’s largest market for digital television technology and Pace is making good progress in both satellite and cable. Significantly, Pace commenced new product shipments to DirecTV and Comcast in the US, two of the world’s largest payTV operators. During the year, Pace delivered its high definition (HD) MPEG-4 personal video recorder (PVR) to DirecTV and its standard definition (SD) PVR to Comcast. The Group also now has over 30 North American cable customers, selling a broad range of SD and HD products and has launched its CableCARD range, anticipating regulatory changes in the US market.

In EMEA and APAC Pace enjoyed solid revenue and volume growth as additional business was secured with new and existing customers from basic to high specification products. The market dynamics remain attractive with the prospect of analogue switch-off in some countries and increasing competition for subscribers in many key markets.

Global consumer demand for high definition and PVR products and services is one of the most important drivers in the payTV market. According to Screen Digest there will be over 228m homes by 2010 with high definition ready flat panel TVs and over 200 high definition channels, requiring a high definition set-top box to access them. There is also strong competition between payTV operators and new market entrants such as telcos providing video services over broadband. This will drive demand for high definition and PVR services as operators use them to differentiate their platforms to win and retain subscribers. Pace’s strategy of building long term relationships with the world’s leading payTV operators, as well as being first to market with new technologies, means it is well placed to serve those markets and deliver returns for shareholders.

Results and Financial Review

The focus on delivery and customers has started to show improved results. Shipments increased by 77% to 3.9m set-top boxes (2006: 2.2m) and revenues more than doubled to 386.5m (2006: 178.1m). Average selling prices have risen from 81 to 100, reflecting the growing demand for higher specification products such as HD PVR, a demand Pace has been able to meet due to its ongoing early investment in new technology.

While gross margin improved from 15.3% in the first half to 16.6% in the second half, the full year outcome was lower than last year at 15.9% (2006: 18.0%). As expected, this was a feature of some high volume products, in particular for the US market, with lower margins. In addition, the full benefit of the Group’s improvements to product design and operations have not impacted some of the older and less cost-efficient designs still in production.

Overheads, excluding restructuring costs and the impact of IAS38, were 55.7m (2006: 55.6m). R&D spend before capitalization of development expenditure in line with IAS38 was 31.3m (2006: 28.7m) as Pace continued to invest in higher specification products such as HD PVR. The IAS38 adjustment was a net credit of 2.4m (2006: net credit 7.3m) as the delays in launching certain products in 2006 have been resolved during 2007. Profit before tax and exceptional charges was 6.1m (2006: loss of 15.6m). Exceptional costs were 1.2m (2006: 11.9m) representing the remaining costs of the 2006 restructuring and organisational changes. The interest charge was 2.2m (2006: credit 0.6m) due to the increased borrowing position during the year and the tax credit was 1.8m (2006: charge 1.3m), reflecting an increased recognition of deferred tax assets relating to brought forward tax losses. Retained profit for the year was 6.8m (2006: loss 28.8m). The Board does not recommend the payment of a dividend.

The net working capital position improved in the year by 13.3m (2006: worsened 1.3m) due to a combination of inventory reduction 9.5m (2006: increase 24.7m), debtor increase 10.2m (2006: decrease 9.5m) and creditor increase 14.0m (2006: increase 13.8m). Inventory reduced principally as products developed in the previous financial year were delivered to customers. Debtors increased due to turnover more than doubling, however debtor days improved slightly to 46 days (2006: 48 days).

During the year the Group negotiated a new Asset Based Lending Facility of 35m secured principally against debtors. The Group finished the period with a significant improvement in its net cash position at 11.9m (2006: net borrowings 6.1m), due mainly to the return to profitability within the period and the reduction in inventory levels following the resolution of delayed product approval in the prior year.

Regional Operating Review

During the first half of the year, Pace successfully worked through some challenges faced by the entire industry in the transition to MPEG-4-based high definition platforms, which had impacted deliveries of some new and highly complex set-top box products. The resolution of these issues, combined with changes put in place by the new management team, is enabling the business to move forward.

Americas

Shipments into the Americas increased six-fold to 1.2m units (2006: 200,000) as Pace developed its relationships with DirecTV and Comcast, two of the world’s largest payTV operators, and executed well on its contracts.

For DirecTV, Pace is delivering its MPEG-4 HD PVR and has order visibility through to mid-2008. For Comcast Pace is delivering the SD PVR and there are committed orders in place for the rest of 2007. At the same time Pace’s North American cable customer base has expanded to over 30 operators, selling a broad range of SD and HD products.

As of 1 July 2007 US cable set-top boxes must, under Federal Communications Commission (FCC) regulations, incorporate ‘separable security’, similar to the card-based conditional access systems used by many European payTV operators. To meet the new market requirements Pace has developed a full range of CableCARD products (it includes SD, SD PVR, HD, HD PVR and analogue options). Pace’s CableCARD boxes are also fully OpenCable Application Platform (OCAP) compatible.

OCAP is a software layer many operators intend to introduce over the next few years to improve software compatibility among various set-top vendors. Unlike other potential new entrants into the US cable set-top market, Pace has the necessary licences and software assets to sell boxes running today’s applications and OCAP applications in the future.

Pace launched its CableCARD range in June 2007 and all products are now commercially available and shipping to multiple customers. Pace’s ability to launch CableCARD products so quickly to multiple operators with varying software requirements, was enabled by a core asset that took over three years to develop, a Pace middleware called Engineware™. The switch to CableCARD has influenced operator buying patterns across the market. This was anticipated and factored into our forecasts as there will be a lower level of box orders during the third calendar quarter of 2007.

Overall the Group is very pleased with the progress that has been made in the Americas given the particularly high barriers to market entry. Progress has been both in terms of the breadth and depth of customer relationships and the product range, which addresses a wide range of customer needs.

EMEA and APAC

Pace has achieved long-term strong performance in these markets. Shipments into the EMEA region increased by over 37% to 2.2m set-top boxes (2006: 1.6m), with APAC shipments increasingly slightly to 432,000 (2006: 401,000) as additional business was secured with new and existing customers. In EMEA Pace’s customers comprise a large number of this region’s major payTV operators, including BSkyB, Sky Italia, Viasat and UPC. In Australia and New Zealand Pace works with the majority of significant players, Foxtel, Optus and Sky New Zealand. At Foxtel, Pace is the lead supplier and has recently celebrated its one millionth box shipment.

During the year, Pace won new business with the majority of its customers for both basic boxes and standard definition PVRs, with an increasing number also ordering HD PVR designs for 2007 and 2008. Of the new HD PVR business that has been signed, Digiturk, a major Turkish operator, will be the first to market toward the end of 2007. The product range we are developing for Digiturk introduced a new technical integration challenge through its use of the Irdeto conditional access platform and OpenTV middleware. The Group expects that a number of other payTV operators in this region will want to utilise a similar combined solution.

Pace has a proud history of leading new technology developments in these markets and has created a strong product range. In addition to the growing demand for HD and HD PVR, there is a new trend for integrated satellite and IP enabled hybrid products and Pace’s product capability has been showcased at European trade shows during the year.

Board and Executive appointments

Stuart Hall, joined the Pace Board in April 2007 as Chief Financial Officer. Previously Stuart was Finance Director at IQE plc and has held a number of Finance Director positions. In addition David McKinney, Pace’s Chief Operating Officer, who has been with the Company for over one and a half years, was appointed to the Board last September.

Outlook

The Board is pleased that this year significant improvements have already been shown against key metrics and short-term goals for the business in North America have been achieved. Going forward, senior management is working with a highly motivated and accountable organisation, one that is focused on delivering and innovating leading products for its customers. Through this focus, on the Group’s strategy and structure, Pace is much better placed to address the key company targets of margin performance, technology innovation and operational excellence.

The Board acknowledges that while significant progress has been made, the Group is not complacent as there remains much to do as this is a highly competitive and difficult market for all suppliers to predict. Pace is working hard to deliver against our critical success factors in an effort to try and deliver a more predictable business within this market.

The Board is pleased with the progress of the last year, and is confident that Pace is on track to meet its expectations for the shortened financial year to 31 December 2007.