Zoo Digital looks to target additional sectors as revenue momentum continues

Shares in ZOO Digital (LON:ZOO) have zoomed higher in recent months, more than doubling from 15 pence per share to 38 pence, driven by a combination of solid results and increasing confidence that the company will continue to deliver good top line growth in the future.

ZOO Digital has developed a suite of software applications that can help large organisations cut costs associated with creating and adapting marketing campaigns for international markets. For the last few years the company’s primary target has been Hollywood studios and other large entertainment companies who spend large amounts of capital not only creating films, but also preparing massive marketing campaigns and adapting those campaigns for dozens of markets all around the world. No longer does Hollywood focus solely on the English speaking parts of the world, instead they attempt to maximise revenues from each production by launching them almost simultaneously into multiple markets.

A classic example of this is James Cameron’s Avatar film.  As little as a decade ago, a film like Avatar would have generated the majority of its box office takings in the United States.  In 2009/10 Avatar took an impressive US$2.7 billion, far surpassing Cameron’s Titantic film. However, while the total gross takings of Avatar are impressive, what was more impressive was that 72.5% of the total came from outside of the United States.  Gone are the days when the major US film studios worry about domestic box-office takings.
This is exactly where ZOO Digital comes into play. The company’s software has essentially automated the process of converting marketing material for one target audience or format and editing it quickly and efficiently to suit all other markets and formats (DVD, digital, broadcast, print).

ZOO Digital’s software not only allows the client to adapt its marketing to any language with the click of a button, but also provides a powerful desktop application which can allow the designer to test, for example, a billboard sized advertisement, in different colours, fonts, languages, shapes and formats, all with the click of the mouse.  No need to send the creative back to the designers if you need a 250x250 web banner adapted for a poster, etc.

The power of ZOO Digital’s software has attracted several studios, including Walt Disney and Sony as clients. In just the last few weeks, ZOO has signed up another (undisclosed) major studio and also recently announced that it had licensed its automated DVD title creation software to CBS Home Entertainment. 

Results from ZOO Digital released this morning underlined that studios are becoming increasingly reliant on ZOO Digital’s applications.  For the 12 months ended 31 March 2010, ZOO reported a 33% increase in revenues to US$15.1 million. This helped lift adjusted EBITDA to $1.6 million and an operating profit (excluding intercompany exchange gains and exceptional intangible impairment) of $0.8 million.

Today, FinnCap said that the preliminary results close a year where momentum has been highlighted by a string of positive news-flow, crowned by April’s trading update which highlighted that the results would be ahead of expectations. “Prelims underlined increasing financial strength ... Investor patience has been rewarded and the momentum is extremely positive”, FinnCap stated. The broker upgraded its forecasts for FY to March 2011, rating ZOO at 8.7x maiden earnings, “highlighting significant remaining upside”.

“2010 has seen new products and new customers, lowering perceived risk and providing the typical opportunity profile of the strong revenue growth generated from increasing run rate after customer sign up and increasing product set adoption”. Like many software providers, ZOO Digital has opted for the licensing model, or Software as a Service (SaaS). Licensing software allows the company to build more regular and predictable cash flow and reduces the reliance on large, one-off contract wins.

So attractive is ZOO Digital’s platform, the company confirmed today that it had cut a deal with Multi Packaging Solutions, a backed supplier of print-based packaging solutions with fourteen production facilities across the United States.

Clearly there is a huge opportunity for ZOO Digital to license its software into this market, and indeed into any other sector were marketing a product is a crucial part of a company’s business (household goods, food, beverages, cosmetics, auto, drugs…).  Perhaps the biggest hurdle for ZOO Digital is simply penetrating these markets where it has opportunities. Today’s proposed commercial relationship agreement - which will see the two companies jointly market ZOO Digital’s products - with MPS at least partially, addresses this.

 “Our technology is relevant to any company that distributes in multiple territories and languages. Our offering scales very well – we can add significant extra revenues at little extra cost. This proposed partnership with MPS provides ZOO with a no-risk way to enter new markets outside of entertainment. MPS’s proposed investment in ZOO at a premium to the market price shows their commitment to this partnership and we look forward to working alongside them and welcoming them as shareholders,” highlighted Stuart Green, CEO of ZOO Digital.

Perhaps most encouraging of all for shareholders in ZOO Digital, MPS has not only entered into an agreement to sell ZOO Digital’s products to its own client base, but has also agreed to subscribe for approximately 2.15 million shares at 40 pence, giving MPS a 9.1% stake.  ZOO Digital has also issued 2.15 million warrants to MPS with an exercise price of 50 pence; if exercised they would double its stake to 18.2%.

This company appears to be on a roll.