ZOO Digital spreads its wings beyond Hollywood

Creative media is one of those “new industries” that governments of all political persuasions have been touting as the key to the UK’s future economic success as the country relies less on manufacturing to pay its way in the world.

Sheffield, once a recognised centre of the steel industry, now plays host to media workflow business ZOO Digital (LON:ZOO). The company has developed a suite of software that is used by its clients to manage a range of processes that are common in the creative media industry, and particularly within Hollywood movie studios.

For example, its Templated Authoring System is used by major studios to help them create DVDs of movies and other productions in a cost-efficient way by providing a template approach to basic disc functionality.

Meanwhile, ZOO’s Translation Management System helps its clients manage complicated projects, where creative media products are being created for a worldwide audience, by assisting in the translation process with such features as a graphical display of a project’s progress, a dictionary of standard translations and the capacity to learn phrases as they are used in specific contexts.

"Our clients never automate the translation. They always want humans to do it, but our technology can memorise translations that have already been used,” says the firm's CEO, Stuart Green, who explains that ZOO’s technology is designed to help speed up the overall process so that studios can save money.

Movie production studios are a major part of ZOO’s business, but the firm has recently begun to look at the music and electronic book industries as natural extensions to its market.

In September last year, ZOO announced the availability of its toolset for iTunes production and it has been working with a number of film studios, such as Warner Bros., to adapt video content for sale through Apple’s iTunes store as well as expanding the range of services it offers to content owners for EST (‘electronic sell through’) production. 

More recently, the firm announced that it believed it had identified further opportunities within the EST market with regards to e-books and the music industry. In line with this, it has augmented its ‘Media Collaboration’ platform to include an ‘eBook Builder’ that provides an efficient, cost-effective way for publishers to repurpose traditional books for sale online across a wide range of genres.

Green explains that e-book readers are, so far, being used predominantly for reading mainly text-based formats, which makes sense since text and computers have co-existed very happily for some decades now. “Almost all of the e-books available to buy at the moment are predominantly text, such as novels.

But the early versions of the e-book formats are terrible for genres of books where images, diagrams and illustrations play an important part of the book. Comics, recipe books and so on,” he says. "It turns out that if you have something like a novel and want to repurpose it, then it’s very straightforward. But something that is more complex, with images, is much more difficult."

This is where ZOO can step in. "What we’ve been doing is building automation systems that enable publishers to adapt all genres of content for e-books," he explains.

The eBook Builder works in conjunction with ZOO’s software for managing collaborative workflows, adapting materials into different languages if required and providing storage and distribution of content for a number of eBook vendors. The firm has begun working with traditional publishers in the US and Europe to enable high-quality adaptations of existing products for sale online.

"We think this whole e-book area will become a significant sector for us," says Green, who points to a report from Futuresource Consulting that showed the global e-book market grew by more than 200 percent last year to more than US$900 million.

While, for the moment, ZOO Digital is focused on supplying its technologies to the entertainment and e-book industries, Green says “there are quite a lot of markets where we can take our technologies”.

One of these markets is the pharmaceuticals industry, where firms need to produce packaging and literature for many thousands of pharmaceutical products in hundreds of languages before they can distribute them to countries around the world.

ZOO took a step in the direction of the pharma industry in June 2010 when it formed a strategic relationship with Multi Packaging Solutions. “Our strategy for moving into new markets is to form partnerships,” says Green, who explains that MPS already had hundreds of customers in the healthcare, pharmaceuticals and consumer goods markets.

As ZOO pointed out at the time of the deal, all of these firms have products requiring printed packaging materials that would benefit from the standardisation and streamlining of production, and which need to be localised for distribution in many regions.

MPS also made a strategic investment of £860,000 in ZOO, which ZOO’s management believes will help incentivise the US firm to leverage its relationships to help ZOO sell its knowhow since MPS will benefit from any accretion in shareholder value that might arise from such activity.

In April, ZOO announced that revenues for its 2011 financial year would come in around US$14 million, compared with sales for last year of US$15.1 million. This was due to a change in the sales mix towards higher-margin work and a short-term slowdown in orders from one particular customer. “One of our customers – a major film studio – has been going through a reorganisation,” explains Stuart. “This led to a low volume of work for us for quite an extended period. But it’s over. That’s dealt with now.”

ZOO also said profitability for its 2011 financial year would be in line with market expectations. It said earnings before interest, tax, depreciation and amortisation (EBITDA) would be around US$2.2 million, with operating profit of approximately US$1.3 million.

The company has benefited from a change in sales mix, where certain non-core outsourced services (mainly translation work done by people) are being invoiced to clients directly by third parties rather than through ZOO. “Providing people to do translation is not our business. It’s not what we do,” says Green. “We used to get small margins for outsourced translation. It’s a large volume of work that in our financial year 2010 was too distorting a component of our revenue mix.”

At the end of March, the company had a cash balance of US$0.6 million that, in addition to a bank overdraft facility of US$0.8 milllion, it believes gives it sufficient working capital for the foreseeable future.

FinnCap expects ZOO to deliver sales for the year ended 31 March 2011 of US$14 million and adjusted pre-tax profits of US$0.8 million. These profits should translate to earnings per share of four US cents. Last year, the firm made a pre-tax loss of around $600,000.

FinnCap has set a target price of 75 pence per share for ZOO’s shares.

Market: AIM

Symbol: ZOO

Price: 43p

Market cap: £10.3m