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ZOO Digital Group plc, the provider of software and software-led services for the filmed entertainment market, today announces its financial results for the six months to 30 September 2011.

While encouraging progress continues to be made in developing ZOO’s products that address the eBooks and wider publishing markets, the turmoil and changing dynamics within the home entertainment industry, highlighted at the time of our AGM in September, has continued to impact upon the Company’s financial performance. Revenue for the six months to 30 September 2011 is lower at this stage of the year than last year at $5.9 million (2010: $8.1 million) which has led to an operating loss of $1,087,000 for the first six months (2010: profit of $880,000).

The decline in DVD sales has been well documented. Although ZOO’s revenues are not directly related to the number of DVD units sold, our large customers are reducing the number of titles being released on DVD and this leads to a decreased number of titles being processed by ZOO’s software tools and by our production services team in Los Angeles. The decline in the number of new episodic TV releases on DVD, which have made up the greatest proportion of ZOO’s volumes, has been particularly sudden since the summer months.

We have already reduced our US headcount and restructured our cost base to give a lower fixed overhead, better equipping us to deal with volatility in the market. Costs associated with this have caused our operating expenses to increase slightly compared with 2010, but the changes should result in an annualised reduction in our fixed costs of approximately $1.2m. Support from our shareholders and loan note holders helped us to redeem part and reschedule the remainder of the convertible loan note of $5.6m which had been due to mature in October 2011. This leaves us with a much stronger balance sheet and cash at the period end of $1.5m.

In contrast to the decline in our traditional business, there has been an increase in the number of titles that are being prepared using ZOO’s software for both Blu-ray and Electronic Sell Through (“EST”) platforms. We expect this trend to continue, although it has not yet been sufficient to offset the decline in the DVD market. Reassuringly, the indications are that the volume of work carried out by ZOO as a percentage of our clients’ overall throughput has not decreased. In fact, the success that ZOO has had within its largest customer of reducing the cost of title production, reducing the time to market and enhancing the overall quality of the end product, has led to this customer looking to use our automated workflow management tools within other business units.

ZOO has changed its operations and focus markedly over the last few years to ensure that it can respond to the changing needs of the industries in which it operates. This is evidenced by our increasing participation in the eBook market, where we continue to gain traction and enhance our reputation with publishers and content delivery partners. Whilst still a nascent market, the pace of growth within this area has been staggering; some US publishers have reported that 20% of their total sales are now attributed to eBooks, and Futuresource Consulting, a specialist research consulting firm in the area of entertainment media, forecasts that by 2015 one in every five titles sold in Western Europe will be an eBook.

As with many new technologies the initial approaches for converting printed titles to electronic formats have been effective but crude, meaning that the titles converted so far have been predominantly text-only in genres such as fiction. Our fixed layout conversion solution supports highly designed content, enabling conversion of a much wider range of genres of books such as children’s, travel and cookery to be adapted to the same high standards digitally as in their print formats. The leading players in this industry, such as Amazon (Kindle), Apple (iPad) and Barnes & Noble (Nook) are investing in enhanced products and new formats to improve readers’ experience which we believe will stimulate demand for these higher quality, content-rich titles. Importantly, each of these three devices uses a different technical format, meaning that publishers and authors need to find a way to publish and tailor their content for a number of different platforms – a job for which ZOO’s eBook Builder software has been designed. ZOO has a highly differentiated offering for eBook production, and delivery of our tools under a ‘software as a service’ (SaaS) model is particularly well-suited to the needs of many publishers; we are therefore making significant investments in software development and sales resource for this market opportunity, and expect it to become a major contributor to the Company’s revenue and profit.

We have also continued to make progress with our iTunes® Extras and iTunes®LP software, which eases the process for content owners of movies, TV programming and musical albums to provide and regionalise enhanced content for the EST market and we expect further growth in this area.

Within the six month period we were also pleased to be able to announce the first significant contract to be won through our collaboration with MPS, working with a leading international video game publisher to regionalise their packaging materials for multiple territories and languages. We continue to target a number of other opportunities with MPS where our solutions provide significant value for the preparation of global print and packaging materials.

Outlook

The decrease in revenues from the production of DVDs has been caused, we believe, by a fundamental shift in consumers’ purchasing patterns accelerated by the poor economic environment, where a number of factors have led to consumers buying fewer disc based products as they move away from building physical libraries of filmed and TV entertainment. While the studios have previously been confident that these declines could be arrested, we do not expect to see revenues generated from DVD work to return to previous levels. However, these same dynamics have also created many opportunities for ZOO, both through existing customers such as the film and TV studios that are looking to use our automated workflow tools to generate efficiencies in other areas of their businesses, and through our entry into new markets, such as eBook publishing and music where we previously had no presence.

The decline in our traditional revenues during the first half of the year was steeper than we had expected, and although we are now seeing increases in the new areas of business such as Electronic Sell Through, Blu-ray and eBook production, the timing of these new revenue streams means that the full year results for the Company will fall short of the Board’s previous expectations. The Board does remain confident that the work being undertaken to diversify the Company’s revenue streams will improve the predictability and resilience of the business model while allowing the Company to return to profitability. While the progress of these new initiatives has been slower than the Board had hoped for, we look forward to updating shareholders on our progress in due course.

The Company’s ability to adapt its products and business model to meet the new opportunities presented by the radically changing nature of digital media preparation, marketing and consumption, coupled with the actions we have already taken to reduce our fixed cost base, give the board confidence in the future success of the Company.

Tuesday, December 6, 2011