Setting the Pace in TV

It nearly went bust seven years ago, but Pace Technologies could become a world electronics leader, writes Nick Clark

Few Britons outside the electronics industry know much about Pace. Yet millions of households have one of its products in their living room, and after shrugging off a chequered past, the group hopes to be in prime position to embrace TV's digital revolution.

Pace makes digital set-top boxes, primarily for pay-TV providers around the world including BSkyB, Time Warner Cable in the US and Australia's Foxtel. It can trace its roots back a quarter of a century, has links with the Hells Angels and nearly went bust seven years ago.

The group is based in the picturesque village of Saltaire, west Yorkshire, dubbed "Bronte Country" by the local tourist board. Now sitting pretty as the third largest set-top box company in the world, it hopes any wuthering is in the past, and can now look forward to new heights.

Its chief executive, Neil Gaydon, believes Pace can be one of the great British electronic success stories of the digital age, saying: "Some have given up on Britain ever having an electronics leader. That it is the preserve of the Japanese, Koreans or Americans, yet here we are, a fully diversified global company."

The company released strong results for the first half of the year last month, with pre-tax profits tripling to £30.8m over the first six months of 2008. Analysts expect it to hit £1.1bn in revenues and £70m in profits by the end of the year. "We've grown from two customers to over 100 and revenues are rising. I don't think there's a UK electronics company that has ever done over £1bn in annual revenues," Mr Gaydon said.

The indicators are positive. The global digital set-top box market was valued at $16bn last year, and is expected to rise to $19bn by 2012.

A recent survey commissioned by UBS found that a third of British households on terrestrial television plan to move to pay-TV "in the future," with global pay-TV revenues forecast to hit $222bn in four years.

Pace is almost unrecognisable from the modem company set up in 1982 by David Hood and Barry Rubery. The shift into TV set-top boxes came five years later, but the founders didn't have a satisfactory design. Folklore has it that salvation came from an unlikely source: a Hell's Angel. "The story goes that he wanted a new Harley-Davidson, so they bought him one in return for the design. They went on to employ him as well," he said.

Mr Gaydon joined the group in 1995. He was an electronics nut – making his first hi-fi at the age of 12 – and a music enthusiast, playing the blues guitar in his spare time.

When his bands Rock Limited and Sneaking Suspicion failed to hit the big time he ended up at hi-fi maker Linn, and stayed for a decade, before deciding to change industries. "I wanted to split music and business and thought digital television would be interesting. I thought everyone would have to go digital, so Pace was a good place to be," he said.

A year after joining, the founders decided they wanted out, and floated the business in London to rapturous reception. It wasn't long before the company had run into problems as issues with the business model started to emerge.

Mr Gaydon said: "The digital model didn't make sense then. The set-top boxes were way too expensive for the revenues they could generate. Pace caught that head on in 1997. The company lost direction." The share price plunged from 190p in June 2006 to 26p in January 2008 after four profit warnings and delays in shipping products to the US.

This was the start of the rollercoaster ride. The company appointed a new chief executive, and won a contract with Sky to swap out their analogue boxes for digital.

It was swept up by the technology boom and the valuation soared. By March 2000, the share price peaked at 1255p and sent the company briefly into the FTSE 100 index. "The price to earnings ratios were just ridiculous. Everyone was caught up in madness," Mr Gaydon said.

The company suffered in the aftermath of 9/11 and the collapse of the technology bubble. In 2002, the company had issued five profit warnings and teetered precariously on the brink. "Everything ran into a bit of a hole," Mr Gaydon said.

The previous year it made the boxes for the Sky Plus personal video recorders. "It was just a terrible launch," Mr Gaydon said of one of Sky's now flagship products. "We sold 10,000 in the first year because no one knew what it was."

In 2004, Pace was still flagging and Mr Gaydon, back from the US, put together a strategy that would see the group widen its focus from the UK. He also backed the nascent high-definition (HD) technology.

Two years later he was chief executive. "I had wanted to change how the company worked. This gave me the chance," he said. Mr Gaydon set about overhauling the monolithic structure, and the tortuous layers of management. He reorganised the business's culture and upgraded the facilities. The results were almost immediate as revenues doubled in nine months. The company jumped to third globally last year when it bought the set-top business of Philips. Mr Gaydon said: "I thought they were coming to buy us and I was disappointed. Instead Philips said it wanted to sell, it was a great opportunity."

The company now expects to ship 16 million high-end boxes – each new design is bespoke, custom-made for the broadcaster with development costs of up to £1.8m – this year.

Mr Gaydon is bullish about the future. "Everywhere is going digital, analogue is being turned off. It means that in the developed world, every single TV will need a digital device of some description."

HD is the immediate future, and Pace is ploughing forward in it, expecting 80 per cent of revenues from the service in the second half. But is constantly looking to the future. It is launching hybrid boxes, which mix broadcast and broadband, trialling its own multi-room system. Then, of course, there is 3D television. After a few glitches along the way, Pace is gathering.

Neil Gaydon: CV

*Neil was born in Cambridge and is married with two children.

*His interests include music – he plays the guitar and has "thousands of vinyl records" – movies and swimming.

*Appointed chief executive of Pace in 2006 after four years as worldwide sales and marketing director. He's also on the board of Bradford City of Film.

*Joined Pace in 1995 as head of new business development, before building the US business in 1999 to 2003.

*Joined Linn in 1984, after managing a hi-fi shop in Bradford. This followed a brief career in the building industry.