Shares in UK digital TV set-top box maker Pace Micro Technology have plummeted after the company said a revised deal with satellite broadcaster BSkyB would cut its profits.

Pace Micro shares were changing hands at 38.5 pence on Tuesday morning, down more than 40%, before recovering to 42.5p by midday

The sell-off came in response to news that changes to Pace Micro's contract with BSkyB are likely to reduce its profits for the current financial year by £1.7m, and by a further £8m next year.

Analysts had expected Pace Micro's pre-tax profits for the year to 1 June to come in at about £17m, falling to about £10.3m the following year.

Discount sales

Under the new deal with BSkyB, Pace Micro will supply Sky+ video recorders at below cost until April next year, in return for a share of new subscriptions to the Sky+ service.

The Sky+ service, which allows viewers to pause and rewind live television programmes, has attracted about 25,000 subscriptions since being launched in September.

Users must currently pay installation costs of about £300, plus a monthly subscription charge of £10.

Pace Micro said it expects the new agreement with BSkyB, which expires on 31 March next year, to be profitable overall.

"Under ideal conditions we would be happy to take payment upfront," Pace Micro marketing director Andrew Wallace told BBC News Online.

"But Sky is arguably the most successful broadcaster in Western Europe, and if I had to invest anywhere in the sector, that's where I'd put my money."

NTL effect

Yorkshire-based Pace Micro, the world's fifth biggest maker of digital TV set-top boxes, was forced earlier this year to postpone sales of boxes to NTL as the bankrupt cable TV firm's financial troubles deepened.

The supply deal with NTL is now back on track.

Pace Micro's made profits before tax and one-off costs of £44.3m in the year to June 2001, 61% up on the previous year.