Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

How ZOO Digital is Making its Hollywood Dream a Reality

ZOO Digital’s (LON: ZOO) client roster includes a number of the powerful Hollywood studios.

And while it is headquartered in Sheffield, the majority of the workforce is based in Los Angeles.

However, you won’t see the company’s name written in neon, or its distinctive logo tagged onto the closing credits of the latest big money movie.

But if boss Stuart Green has his way, ZOO’s software will be as indispensible to the business of merchandising films as CGI and digital animation are to the process of creating a blockbuster.

Its suite of products automates and simplifies highly labour intensive ancillary parts of the film-making process. They help the back-room produce marketing material, posters and DVD sleeves and video based products for both packaged media and electronic sell through.

Its latest masterstroke is a program that adapts films to the Apple iTunes format.

And the news last week that an as yet unnamed major studio has adopted the technology has propelled the share price more than 20 per cent higher to 58.5p in just three trading sessions.

Mostly ZOO’s products are about simplifying many of the more mundane processes as well as saving studios money.

Where it comes up with a new innovation ZOO works closely with a partner to ensure that the resulting product, when developed, will meet the customer’s requirements.

This has the effect of de-risking development and minimises speculative investment.

“ZOO Digital’s prudent modus operandi remains the development of new products but with announcement of the product contemporaneously with first customer adoption,” said Andrew Darley, an analyst at FinnCap.

Last week the company used its annual meeting to showcase its translation management tool.

It is a truly remarkable piece of software that has the potential to eradicate many hundreds of man hours from the laborious process of preparing promotional and marketing material for a major film.

It allows posters to be redesigned for the local market and simultaneously translated into any major language.

The internet based product also allows the designers to make changes and project managers to track revisions automatically, where currently this is done using spread sheet and emails.

“Our solutions redefine the way customers work,” chief executive Green says.

“We are transforming the workflows and using automation through our tools.

“This displaces human-based labour with automated software that does the same function without any compromise to quality at a fraction of the time and cost.”

ZOO hasn’t gone down the traditional route of charging a one-off fee for its products.

It takes the Software as a Service model and typically bills clients based on the "work they put through the system", Green explains.

“This way we can build recurring and scalable revenue streams that increase the more our customers use the system,” he adds.

In June it signed a collaboration deal with the American firm Multi Packaging Solutions (MPS), a premium packaging company focused on the multi-media, pharmaceuticals and cosmetics industries. The aim of the tie-up is to sell ZOO products to MPS customers.

The US group subscribed for 2.15 million shares at 40p each as part of the agreement. ZOO could also issue up to 2.15 million warrants exercisable above 50p. The terms of this particular part of the JV are interesting – and indicative of the aspirations for the co-operation.

MPS will only receive the full award if it can generate in excess of US$10 million of incremental ZOO sales in any one of the three years of the agreement. If new ZOO sales are below US$5 million no warrants will be issued.

“We began speaking to MPS a little while ago and recognised there may some great synergies between us,” said Green.

“They have aspirations of expanding their business globally.

“In so doing they are looking to establish relationships that enable them to work with their customers across multiple languages.

“We have solutions that help adapt their products very effectively to different languages.

“So there seems to be great match here in terms of taking our propositions to those organisations through MPS relationships.”

The company’s commercial director Gordon Doran is guardedly optimistic about the tie-up.

“It is early days,” he cautions. “But they seem to have a real genuine interest in this.”

“We’ve had an encouraging start and there’s been a really good dialogue with their customers.

“MPS has been really proactive in getting us in front of their customers.”

Understandably, the analysts following ZOO haven’t yet taken into account the potential revenues from the MPS deal as the partnership is in its infancy.

FinnCap is predicting ZOO’s sales of US$16.2 million in total in 2011, up by US$1.1 million from a year earlier and giving a maiden pre-tax profit of US$900,000.

Putting a 75p price target on the shares (current price 58.5p), FinnCap analyst Darley tells us: “We are cautious not to model potential until a run rate develops.

“However, this product development beyond the already strong DVD and Blu-ray niche expertise presents the opportunity for capturing more revenue from existing customers and strengthening the product set for potential customers.

“Alongside the use of products outside of media content, through the strategic but nascent relationship with MPS, unmodelled upside is considerable.”

Disclosure: The author of holds no position in the company