Digital TV technology group Pace has shocked the City by announcing lower profit expectations for 2011 – the first blip in its relentless growth for several years.

The Saltaire-based company has been hit by the cost of buying components up front to ensure deliveries of set top boxes, along with a supply shortage caused by the Japanese tsunami and lower demand in European markets.

At one stage, Pace shares had slumped by 40 per cent on news that profit expectations had been slashed. They closed at 93p last night down 60p on the day.

Pace also announced that, due to a lack of demand, its Networks division had been closed as a separate business and subsumed back into the Pace Enterprise gateway and software business.

More than 20 engineers have been re-deployed.

Pace said shipments and revenues had met expectations between January and May, with revenues 24 per cent higher than in the first quarter of 2010.

But costs had risen due to the need to build up a stock of vital components in a tight supply environment, which had been worsened by the disaster in Japan.

Profitability in the Pace Europe business had been below expectations during the period, even though it achieved its revenue and volume targets.

Pace bosses are expecting first half operating margins to be at around 5.5 per cent but are confident that in the second half margin will return to around eight per cent , close to the medium term target.

Full year operating profits expectations, which were predicted to grow by around 17 per cent, have been reviewed downwards to a range of between £97m-£110m.

The Pace Americas business unit performed ahead of plan, with integration of the 2Wire business fully integrated into a new Americas Telco customer account team, which performed well.

Pace Europe continued to win business, including new contracts with Tata Sky in India and Net Servicos in Brazil. Pace made its one millionth shipment of standard definition set-top boxes.

The company also won a long-running case to prevent a change of classification by the European Commission to impose duty charges on set-top boxes with a recording function.

Neil Gaydon, chief executive, said: “It is clear that despite revenues and product shipments being on track, we have made a disappointing start to the financial year with our profitability.

“We have taken action and are making changes to improve our second half performance and beyond and to ensure we return to our eight per cent operating margin target.

“Although we will now not be able to make up this first half under-performance in the second half we continue to drive long-term growth and profitability.

“The demand for our products and technologies continues to grow, ensuring our ongoing market leadership.”