Blackfriar: A little less hooray for Hollywood as Zoo sees magic fade

The Sheffield-based company has felt the pain of customers freezing spending at a time when pirate copies and cheap downloads have made DVDs and Blu-Ray look like yesterday’s technology.

Studio customers have massively cut the number of new home entertainment products they launched.

Zoo reported an operating loss of £580,000 in the year to March 3, up from a loss of £450,000 the previous year.

The group said the results were disappointing after encouraging results in the six months to September when Zoo reported operating profits of £130,000, up from losses of £710,000 a year earlier. Zoo blamed the slump into the red on delays at one of its biggest clients.

Analyst Andrew Darley at house broker FinnCap said: “After a strong interim result, temporary internal disruption in a major production services client became apparent in January.”

This customer made up 87 per cent of Zoo’s revenues in 2012, which is far too high.

While Zoo is being very coy about who this customer is, it is no secret that Disney has implemented a cost-cutting review that could include lay-offs at its studio and other units.

Disney, whose empire spans TV, film, merchandise and theme parks, is exploring cutbacks in jobs it no longer needs because of improvements in technology.

Disney executives warned in November that the rising cost of sports rights and dead in the water home video sales would dampen growth.

In terms of profit margin, Disney’s studio is the least profitable of the group’s four major product divisions. It has invested a lot of money in its theme parks business, which means cuts need to made elsewhere.

If the major customer is Disney, then the news that Warner Brothers also initiated a company-wide restructure in the Spring could spell further mishap in Zoo’s relationship with the Hollywood Studios.

As a result of the problems at its major customer, Zoo has had to axe jobs.

The majority of job losses were in the US, but the Sheffield workforce was reduced by 10 employees to around 30. Zoo declined to say how many jobs were lost in the US.

Zoo’s chief executive Stuart Green said he doesn’t anticipate any more job losses as the group enters a new area of growth – a must if the group is to return to profit and become less dependent on its biggest customer.

Mr Darley said: “The company is acutely aware of this concentrated exposure, and the three areas of focus for product development during 2013 should lead to an improvement in diversification.”

Zoo has two big, new areas that are really starting to take off – Zoocore and Zoosubs.

Zoocore is a cloud-based workflow management system that can make the big film studios far more efficient at a fraction of the cost of traditional software companies.

Zoo says it has the software to make it possible for the work to take as little as a day or two.

Zoosubs is a subtitling solution aimed at the entertainment industry that uses translators to swiftly and cheaply provide subtitles for new films, TV series and move back catalogues.

Mr Darley said both areas have seen strong client interest, with opportunities for growth that can also diversify the customer base.

Zoopubs, which sells tools that help publishers prepare digital books, is also expected to take off.

Zoopubs is aimed at publishers of books with illustrations such as text books, travel guides, recipe books and encyclopaedias that are hard to publish on Kindle or other formats.

Mr Green said Zoo is waiting for the eBooks market to take off. If it does Zoo is hoping to ride the wave.

Analysts at house broker FinnCap expect the company to become profitable at the operating level this year.

At the pre-tax level the group made a loss of £780,000 in the year to March 31.

FinnCap expects it to break even in 2014 and produce a pre-tax profit of £130,000 by 2015.

It doesn’t sound much, but after a torrid few years Zoo appears to have learned its lesson – be less reliant on one major customer and diversify into new areas.

The group’s clients include video game developers, music publishers, toy companies and book publishers such as the BBC, Apple, EMI, Harper Collins, Hasbro, Mattel and National Geographic.

It needs to exploit these high profile names and extend its customer reach.

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