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Pace Micro Technology plc
Interim Report 2001
8 January 2001

Contact:Malcolm Miller
Chief Executive, Pace Micro Technology plc

John Dyson
Finance Director, Pace Micro Technology plc

Ginny Pulbrook,
Director, Citigate Dewe Rogerson

Telephone: 020 7282 2945 until 17:30
Thereafter: 01274 537 118

Pace Micro Technology plc

Interim Report 2001

8 January 2001

For the 26 weeks ended 2 December 2000


Turnover increased 31% to £205.8m (1999: £157.2m);

Profit before tax increased 41% to £17.9m (1999 before exceptional item: £12.7m);

Earnings per share increased 41% to 5.99p (1999 before exceptional item: 4.26p);

Interim dividend per share 0.35p (1999: 0.30p);

Strong financial performance: Net cash £18.7m (3 June 2000: £26.4m);

Engineering headcount increased 41% to 511;

Additional revenue streams initiated: integration services and information appliances;

Expansion of products: VoIP, DSL and home networking.

Chairman’s Statement

I am pleased to report on Pace’s results for the half year ended 2 December 2000. The market for digital TV around the world continues to grow strongly. Pace provides home gateways and integration technology to the broadcasters, cable operators and telecommunication companies that deliver digital TV, voice, data and interactive services into consumers’ homes.

Results and Dividend
Profit before tax increased 41% to £17.9m (1999 before exceptional item: £12.7m, after exceptional item: £9.4m). Earnings per share were up 41% to 5.99p (1999 before exceptional item: 4.26p, after exceptional item: 3.15p).

The Board has declared an interim dividend of 0.35p (1999: 0.30p).

Trading and Financial Review
Turnover from the sales of Pace digital TV home gateways and additional services grew 31% to £205.8m (1999: £157.2m). Business within the UK grew in value as shipments to Telewest and NTL increased sharply and the UK represented 87% of revenues (1999: 92%). Overseas, we shipped significant quantities to Israel and New Zealand, but less than we would have wished to continental Europe. Shipments re-commenced to Televisa in Mexico. DSL shipments continued with Kingston in the UK and commenced with a number of new customers in North America. Vegastream began shipments, mostly in the US, of trial quantities of its VoIP office gateway.

The results were achieved despite the most difficult supply environment in recent years. Shortages of components caused disruption to the manufacturing processes, and the achieved levels of revenue were only possible through the most exceptional efforts of our team. We expect more consistent supplies of components to be available in the new calendar year, as seasonal demand for retail electronic products falls and new capacity comes on stream.

During the period, Pace won new cable business from TV Cabo in Portugal and ONO in Spain. We are about to start field trials for ONO and for Time Warner Cable in the US. Both expect product shipments to begin in the spring of 2001.

Gross margin for the period was 20.5% (1999: 20.3%). Overheads, net of other income, increased by 26.0% to £24.6m (1999: £19.5m). Engineering costs increased 40% to £13.7m (1999: £9.8m), being 6.7% of revenue (1999: 6.2%). Selling, General and Administrative costs increased 12% to £10.9m (1999: £9.7m), being 5.3% of revenue (1999: 6.2%).

Over the last 12 months, we have increased our engineering headcount by 41% to 511 employees. They are designing many new products and cost-reducing existing products to ensure that Pace remains a leading provider of enhanced digital TV and VoIP technologies. The intellectual property created by our engineers is reflected in the increased number of patents applied for - currently over 150 applications are in progress.

Net assets increased to £97.8m (3 June 2000: £86.6m). Within net current assets of £70.0m (3 June 2000: £56.5m), net cash was £18.7m (3 June 2000: £26.4m). The outflow of funds arose from the increase in working capital consequent upon the increased inventories that resulted from the lack of regularity in component inputs. In addition, £5.1m was used to purchase 700,000 Pace shares for the ESOP. The Company has lines of credit totalling £75m.

There has been substantial evolution in Pace’s product and service portfolio in the last six months. Our success will continue to be linked to the extent we are able to move with the changing environment and widen the markets we can address. In three to four years’ time, the existing range of home gateways could represent two-thirds of our net margin. The remaining third will be made up of new market segments such as network development (the provision of additional services), home networking and new telecommunication (VoIP) products. To provide the necessary focus on new product and market opportunities, dedicated teams will be created for each of the various home gateway digital carrier technologies of satellite, cable, DSL, terrestrial and fixed wireless. In addition separate groups will manage network development, home networking and new telecommunication products.

Whilst the Company depends on its customers continuing to invest in their digital TV and other interactive services, the Board expects, for the remainder of this financial year, a continuation of the growth in business shown in the previous six months. Furthermore, the Board believes that Pace has an excellent product and service portfolio and looks forward to the future with confidence.

Sir Michael Bett

8 January 2001

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