Underlying earnings were US$1 million and operating profits US$0.2 million in the six months to March. That compared respectively to losses of US$0.4 million and US$0.9 million in the first half when DVD sales collapsed.

ZOO supplies cloud-based software to edit and add to films, TV programmes and other audio/visual and print content. The major Hollywood studios are among its largest customers.

As a result of the better second half, the creative media group now expects to report full year underlying earnings of US$0.6 million (2011: US$2.5 million) and an operating loss of US$0.8 million (2011: operating profit of US$1.5 million). 

Overall, ZOO said trading was as it expected in its second half. Sales for the year will be about US$11.2 million (2011: US$13.8 million), which includes an increase in the number of titles prepared using ZOO's Blu-ray and eBook platforms.

Measures to cut costs and an increase in the proportion of sales derived from ZOO's more advanced toolkits helped profits, Zoo added.

Stuart Green, chief executive, said: "We are pleased to report a stronger second half of the financial year. 2011 was a very difficult year for the home entertainment industry due to the significant changes that have taken place in consumer markets. 

The innovation and diversification within our business has helped ZOO to broaden its offering into complementary markets and we believe that the business is in a strong position to take advantage of growth in a number of areas."

The company had a gross cash balance of US$1.2 million at end March.

In addition, the firm said today that James Livingstone, non-executive director and portfolio manager at Foresight Group, bought 4,240 shares - representing 0.01 per cent of the capital.

The firm's largest shareholder is Herald Investment Trust with a 20.1 per cent stake.

Zoo said the poor economic environment also meant consumers buying fewer disc based products, with revenues overall falling to $5.9 million in the six months to September from $8.1 million.

The Sheffield-based firm, which supplies audio/visual software for all forms of creative media, said a reduction in the number in the number of DVDs being made generally had meant a drop in the number of titles being processed. 

There was a rise in the number of titles prepared using software for both Blu-ray and Electronic Sell Through (EST) platforms, a trend that the firm expects to continue, although this was not sufficient to offset the decline in the DVD market. 

The volume of work carried out by ZOO as a percentage of clients' overall throughput had not decreased, it added, while it is also targeting the fast growing e-book market.

For the six months, the group posted a loss of US$1.3 million against a profit of US$388,000.

The group has restructured its US cost base to give a lower fixed overhead, but the timing of new revenue streams such as Electronic Sell Through, Blu-ray and eBook means that full year results will also fall short of expectations, it added. 

Zoo said it remains confident moves to diversify its revenue streams will improve the predictability and resilience of the business model and return it to profitability.