Final Results | ZOO Digital
Prelim-Localisation-Reimagined

FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2019

ZOO Digital Group plc, the provider of cloud-based localisation and digital distribution services for the global entertainment industry, today announces its audited financial results for the year ended 31 March 2019.

HIGHLIGHTS

Key Financials

  • Revenue edged up to $28.8 million (2018: $28.5 million)

  • Adjusted EBITDA* of $0.4 million (2018: $2.4 million) – EBITDA* margin of 1.4% (2018: 8.4%)

  • Operating loss of $1.3 million (2018: profit $0.6 million)

  • Reported Profit Before Tax of $1.3 million (2018: loss $5.0 million)

  • Cash at year end $1.8 million with no debt other than convertible loan notes (2018: $2.4 million, H1: $0.9 million)

Operational Highlights

  • Localisation revenues grew by 4% despite disruption in the market due to changes in the supply chain of a major client

  • Continued adoption of cloud-based dubbing service, with number of major studio customers doubling in year

  • Confirmed as a Netflix Preferred Fulfilment Partner

  • Continued investment in R&D including launch of ZOOstudio localisation ecosystem – an advanced project and capacity management platform that has been well received by clients and the industry

  • Continued expansion of capacity including launch of the ZOO-Enabled Dubbing Studio programme with 70 facilities enrolled across 22 key countries together with significant increase in the freelancer network

Outlook

  • Ongoing supportive market dynamics, with the increase in digital entertainment content and expansion of distribution channels driving a growing demand for high quality and scalable content localisation and digital packaging services

  • Gillian Wilmot appointed to the Board as Chairman with effect from 1 July 2019, replacing Roger Jeynes who will step down after serving a nine-year tenure

* adjusted for share-based payments


Copies of the Report and Accounts for the year ended 31 March 2019 are available to view on the Group's website: www.zoodigital.com/investors


Stuart Green, CEO of ZOO Digital, commented,

We have worked hard over the course of the year to enhance our offering, build up our network and differentiate ourselves further from the competition. ZOO now has the technology, the people and the local expertise to enable our clients to deliver content across multiple territories and in multiple languages simultaneously and efficiently. To be chosen as a primary vendor of localisation services for large media companies requires us to demonstrate significant global capacity, and in this regard, we have made excellent progress that puts us in good stead as we continue to grow.

Trading in the new year has begun well. Whilst the significant decline in legacy DVD and Blu-ray formats in our digital packaging segment has continued, now leading us to not forecast any significant income from this business line in the future, this has been offset by strong growth related to Over-the-Top (OTT) delivery. We expect ZOO to be confirmed as a preferred vendor to a greater number of clients and lines of business during the course of the year ahead. Our caution around timing is reflective of the dynamic nature of the OTT marketplace and recent experience.

The end market into which we are selling our cloud-powered services continues growing and the traction that we are gaining with each of our services gives us great confidence that the business is well placed to meet opportunities and growth in the years to come.


CHAIRMAN’S STATEMENT

The Group has continued its programme of planned investment to develop a full suite of services which are needed by the entertainment industry for the global delivery of localised content. These investments are helping our clients – some of the largest creators and distributors of entertainment content – launch and operate their own direct-to-consumer streaming platforms and manage their supply chains across multiple localisation vendors.

During the financial year the Group encountered two challenges: one of our largest clients changed the way in which it engages with its supply chain, and our non-core declining legacy DVD and Blu-ray business shrank at a faster rate than had been anticipated. Despite these adverse factors, the Board is pleased that ZOO’s transition to become one of the most innovative providers of localisation services to the TV and film industry continues to make excellent progress.

Total revenues for the Group edged up to $28.8 million, driven by a 4% increase in our localisation segment as our nascent dubbing service attracted new customers. As highlighted in the previous year’s statement, investments in software innovation, a larger international presence and increased capacity to service our expected growth in demand from the world’s largest entertainment companies resulted in adjusted EBITDA* reducing to $0.4 million compared to $2.4 million in 2017-18. Given the Group’s investment in R&D, the movement in share based payments and depreciation of equipment used in the business an operating loss of $1.3 million was recorded in 2019 (2018: profit $0.6 million). As a consequence of the revalution of the embedded derivative the reported profit for the year before tax, was $1.3 million compared to a loss last year of $5.0 million.The Group was cash positive in the second half of 2018-19, closing with $1.8 million cash in the bank and debt of $3.3 million**. ZOO also has access to more than $2 million in short-term debt financing which was not used at the period end. As such, the Board is confident that the Group is able to exploit the large and expanding market opportunity for its software and services.

The disruptions during the year have been frustrating for ZOO and for shareholders, but our staff’s hard work, adaptability, commitment and undiminished enthusiasm have enabled us to continue to make significant progress with our four strategic priorities:

Innovate – Our software platforms, from which we deliver cloud-based subtitling and dubbing services, have been extended with significant new functionality in the year. ZOOstudio, an advanced project and capacity management platform, was developed specifically to address our clients’ needs to manage the localisation process from end to end and to embrace multiple vendors. The excellent market reaction to ZOOstudio has included being awarded Product of the Year at the recent National Association of Broadcasters (NAB) show in Las Vegas after the period end.

Scale – Our freelance network of translators, voice actors, dubbing directors and audio engineers grew by almost 50% to over 6,500. In addition, we have extended the software to allow studios to use our systems for their own projects, which again extends our reach and capacity.

Collaborate – We have continued to add global partners who work in our systems and help us deliver client projects. We launched a partnership and accreditation programme (ZOO-Enabled Dubbing Studios) and have recruited world-leading dubbing partners in Europe, Asia, South America and the Middle East. We have partnered with specialist educational organisations to enlarge the localisation talent pool and with universities to continue ground-breaking research in machine learning to enhance our services.

Build Long-term Client Partnerships – During the year we were confirmed as a preferred fulfilment partner (NPFP) for Netflix, allowing us to secure contracts for subtitling and media processing. ZOO is currently in the advanced stages of formal tenders at several major companies for the long-term supply of localisation and digital packaging services. Although these have not yet concluded, we remain optimistic of positive outcomes from these for ZOO.

The Board is committed to complying with the QCA corporate governance code and, as I have now been a non-executive director of ZOO for 9 years, I have announced that I will not seek re-election at the next AGM. Following a formal selection process, I am pleased that the Board has appointed Gillian Wilmot who will take up the role from 1 July 2019. Gillian is an experienced chairman and NED with expertise in digital, brand and value creation and in delivering growth strategies. I extend to her my very best wishes as she takes up leadership of the Board in what I expect to be an exciting period of growth for ZOO.

As announced in last year’s report, Phillip Blundell joined in July 2018 as the replacement for our long-serving CFO Helen Gilder. Phillip has settled in well and is now a key member of both the Board and the senior management team. I would like to thank Helen for her commitment, integrity and significant contribution to the current success of the business. We believe the Board is appropriate for the business in its current stage of evolution and, following the new chair appointment, we will again have two independent non-executive directors to ensure the effective representation of all stakeholders’ interests.

The Board and all our staff are determined to grow ZOO into a leading next-generation media localisation business by offering a unique combination of software and customer service to the film and TV industry’s leading players. Our innovative software, established client relationships, extensive partner networks and highly skilled staff give the Board confidence that we can deliver an exciting and rewarding future for our stakeholders from this rapidly evolving $4 billion market.

* Adjusted for share-based payments

** Represented by the £2.6m sterling-denominated convertible loan notes at an exchange rate of 1.3

Roger D Jeynes

Chairman


STRATEGIC REPORT

Introduction

Throughout the course of the year the Company has invested in people, in technology and in infrastructure so that it is ideally placed to take advantage of the continuing changes in the TV and filmed entertainment industries that our services support.

As highlighted in the Chairman’s Statement, we experienced some challenges during the year due to external factors, which is unsurprising given the rapid rate of change and the relatively nascent nature of Over-the-Top (OTT) video delivery. Early in the year subtitling revenue was impacted by disruption, which was experienced by us and other market participants in the subtitling supply chain during the transition of a major OTT operator's partner programmes, and in the second half we were affected by the delay of a single, material localisation project that was scheduled to begin and be completed during the year. Furthermore, the work that we carried out processing legacy DVD and Blu-ray titles showed greater than expected decline in the second half following a poor performance of retail sales of these products over the holiday season. This deterioration confirms our view of the market trends and although these services are not core to the Group on an ongoing basis, representing only 8% of revenues in the year, they did impact on our full year profitability in the period under review. Furthermore, we now forecast this decline will accelerate in the period ahead and have significantly reduced our expectations of on-going revenue from this legacy business line in the new year and beyond.

As a result of the external factors described above, total revenue for the year was $28.8 million (2018: $28.5 million). Within this figure, total localisation revenues grew 4% to $22.3 million against a strong comparative prior year figure that included a one-off project with a value of $2.5 million for a major studio. The impact of this one-off project was to reduce the key metric relating to retained sales from 97% to 88% in the fiscal period. As a consequence of the investment in people, technology and capacity, EBITDA was $0.4 million compared to $2.4 million last year. It also adversely affected our other operational KPI, operating expenses as a percentage of revenues, which increased to 37% compared to 33% in 2018. Despite this investment we ended the year with cash of $1.8 million (2018: $2.4 million).


Strategy and market opportunity

Digital consumption of entertainment continues to gather pace, and with the launch of new direct-to-consumer OTT platforms from some of the world’s biggest media, technology and communications companies planned to take place in the coming year, this is set to accelerate even further.

Consequently, content with appeal to a broader consumer audience will continue to become commercially available in more and more geographies, and as the territorial reach increases so too does the need for subtitling and dubbing into additional languages. We envisage that services aimed at family audiences will become more prominent on a wider territorial basis, which will have an impact on demand for professional localisation services since content aimed at young viewers is always dubbed rather than subtitled. The growth in the number of languages into which entertainment is being localised increases the scope of work for ZOO.

Combined with this, companies are committing greater levels of investment to original content creation to act as a differentiator for their platforms. A number of major media companies are currently engaged in a rigorous and usually lengthy process of selecting their preferred partners for localisation services and it is pleasing to note that ZOO is being considered by each one of them, which is evidence of the quality of the work that we have undertaken to date and of our growing reputation as a partner of choice in the industry.

The growth in demand for premium media localisation services that we observe is supported by recent research findings from MESA Europe, an independent industry body, which reported that total spend on media localisation in EMEA alone exceeded $2.3 billion in 2018 (2017: $2.0 billion) and is anticipated to grow at between 5-8% a year from 2019 to 2021. Within that, dubbing represents 70% of the total spend and 69% of it is related to the localisation of episodic TV titles, with feature films accounting for 18%. MESA Europe reports that the top four vendors in subtitling in EMEA represent 62% of the market, whilst in dubbing the figure drops to 20%, a consequence of the fact that the traditional dubbing industry is highly fragmented across a large number of small operators in many countries. This helps to underline why gaining preferred vendor status is such an important step for ZOO, giving the potential for our multi-lingual dubbing proposition to grow a strong market position.

We remain confident that ZOO is well positioned to capture a significant share of this growing number of localisation projects due to the following factors:

Innovation – ZOO's innovative use of technology enables content owners to distribute their products to additional territories at a faster speed-to-market and to a consistently high quality compared with what has previously been possible, with greater security and at a competitive price. The clear benefits delivered by the Company's differentiated proposition have driven significant organic growth in sales.

Scale – ZOO's software enables the Company to collaborate with a worldwide network of thousands of freelance workers, such as translators, voice actors and dubbing directors, and to significantly reduce the human capital requirements of service fulfilment, enabling the Company to scale its capacity efficiently as demand increases and to capitalise on the on-going trend for global distribution of international content originating in a growing number of languages.

Quality – Over the eight years since we launched our subtitling proposition, we have demonstrated our ability to deliver a service across all global languages, at scale, at the highest levels of quality achieved within the industry. We have become recognised as a leading player and partner of choice for subtitling by some of the largest media organisations. Although our dubbing proposition, launched only two years ago, is at a much earlier stage in its development, we have already been engaged by major studios on initial projects, and the feedback we have received on our performance has been very favourable. This gives us confidence to believe that, given time, we will build a similar reputation for quality in our dubbing service from which we can reasonably expect accelerated adoption will follow.

Partnership – ZOO's long history of service and software provision in the entertainment industry means it has an unrivalled depth of both industry know-how and customer relationships. Recent hires to the Company include senior directors from Walt Disney and traditional industry vendors.


Review of Operations

We have continued to make considerable progress in our localisation services delivered through our proprietary cloud-based platforms, ZOOsubs and ZOOdubs, for the provision of subtitling and dubbing services respectively.

ZOOsubs: Subtitling

The performance of subtitling was affected by the disruption in the supply chain of a major OTT partner during the first half. This normalised after three months and volumes then continued to increase through the second half, resulting in continued strong growth year-on-year. However, our recent experience is that orders placed by this client are at greater likelihood of change than previously, having encountered situations where certain orders have been delayed or cancelled. For example, a large order was cancelled in our final quarter due to a content licensing deal being aborted, and our completion of a second large order was delayed by two months following late receipt of assets from the licensor, pushing some FY19 expected sales into FY20. This combination of factors leads us to be more cautious in our forecasting of sales from this major client.

It has been particularly rewarding to witness the progress of subtitling from its launch and recognition in the form of a number of industry accolades, through to its current status. It now has an excellent reputation within the industry where it continues to be adopted by an increasing number of clients as well as processing increasing volumes within existing clients. As well as the financial confidence this affords, it also affirms our belief that ZOOdubs is on a similar trajectory, being the more recently launched service and which is following a similar path.

ZOOdubs: Dubbing

The supply chain disruption previously mentioned also had an effect on the year’s overall performance within dubbing, which nonetheless grew revenues by 17% in the year. ZOOdubs is still a very recent addition to our services and meaningful adoption of any offering inevitably takes time. This is particularly so of one that is so disruptive due to being in some respects at odds with conventional wisdom within the industry. This is entirely consistent with our experience following the launch of ZOOsubs, where the initial reservations articulated by our clients concerning quality, scalability and security have since been proven to have been unfounded.

We have seen an increase in major studios trialling our solution throughout the year and feel confident that this will result in increased workflow in coming periods, as well as increased volumes from existing dubbing clients. Our innovation has continued, resulting in us delivering further significant developments in ZOOdubs and we were delighted that it received its third major industry award during the year, being the International Association for Broadcast and Media Technology Suppliers (IABM) award at the NAB show in 2018.


Investing for future growth

As previously mentioned there has been exceptional growth in the volume of content consumed across different geographies and in different languages, and this is set to accelerate. With the launch of new OTT market entrants and the continued growth of our existing clients, ZOO has been investing to ensure that it has the appropriate technology, capacity and geographical expertise to partner with content owners and distributors as they bring growing volumes of entertainment titles to greater audiences.

Our freelance network, which gives us scalability at variable cost, grew by 50% during the period and at the year-end stood at just over 6,500 individuals, giving us access to 75 different languages. Included within this are over 800 voice actors who cover 34 languages between them. This readily available access to in-territory talent is a key differentiator for ZOO when clients are looking to release content in multiple countries and in multiple languages concurrently. The growth in the freelancer network again reflects ZOO’s growing reputation globally.

Through our discussions with clients around our dubbing proposition, in addition to the many attractive benefits we can offer, it has become evident that certain clients require some or all of the voice recordings for some languages to take place in traditional dubbing studios. To address this, shortly prior to the end of the period under review we launched our ZOO-Enabled Dubbing Studio (ZEDS) programme, where we provide access to and training on how to use our solutions so that traditional dubbing studios are able to perform voice recording directly into our system. In this way, we are able to preserve many of the advantages of our disruptive approach while still accommodating particular requirements stipulated by our clients. To date, over 70 traditional and reputable dubbing studios across 22 languages have signed up to the ZEDS programme with more expected to follow in the current financial year. In addition to meeting the clients’ criteria this also provides ZOO with much greater capacity to meet future demand.

There has been considerable investment in our technology during the year, resulting in enhanced features in both our dubbing and subtitling offerings as well as the launch of new platforms, with some of the more significant being the following:

  • Launch of lip sync dubbing – Our technology now supports the preparation and delivery of lip syncing, the more demanding, complex and therefore higher value form of dubbing, with initial projects receiving positive feedback from clients, voice actors and dubbing directors. This opens a wider pool of dubbing projects to ZOO. 
  • Launch of a scripting service powered by a new cloud-based platform, ZOOscripts – Cornerstone capability that enables us to process combined subtitling and dubbing assignments consistently, providing our clients with further efficiency and greater control. This is particularly valuable when working on pre-release content, where the work on localisation begins prior to finalising the video edit. In this case localisation operates as an iterative process, necessitating robust version control. ZOOscripts is an important component of our ecosystem that ensures that any changes made to the original language dialogue are automatically propagated to all localised subtitles and dubbed soundtracks.
  • Launch of Delta – software to identify automatically the dialogue changes in different versions and iterations of TV and movie content. This removes the need for manual tracking, visual/audio inspection and duplicated work, which cause unnecessary delays and errors in traditional workflows.
  • Launch of ZOOstudio – Given the size of the localisation market, the sheer volume of content and the level of spend incurred by major producers, it has long been the case that many large companies are unwilling to source their localisation needs from a single vendor and this is unlikely to change in the future. This creates its own unique difficulties for clients in being able to manage global distribution materials delivered by multiple vendors. To this end, the Company recently launched ZOOstudio, a localisation ecosystem management platform that provides transparency, tracks key metrics and enables scenario planning. This is therefore a strategically important tool and we are delighted that we are already in dialogue with a number of large studios regarding its adoption and that post the period end, ZOOstudio achieved critical industry acclaim at the NAB 2019 show, where it won a prestigious ‘Product of the Year’ award.

Outlook

ZOO has the technology, the people and the local expertise to enable our clients to deliver content across multiple territories and in multiple languages simultaneously and efficiently. We have worked hard over the course of the year to enhance our offering, build up our network and differentiate ourselves further from the competition. To be chosen as a primary vendor of localisation services for large media companies requires us to demonstrate significant global capacity, and in this regard, we have made excellent progress that puts us in good stead as we continue to grow.

Trading in the new year has begun well. Whilst the significant decline in legacy DVD and Blu-ray formats in our digital packaging segment has continued, now leading us to not forecast any significant income from this business line in the future, this has been offset by strong growth related to Over-the-Top (OTT) delivery. We expect ZOO to be confirmed as a preferred vendor to a greater number of clients and lines of business during the course of the year ahead. Our expectations of timing are reflective of the dynamic nature and disruption experienced in the OTT marketplace recently.

The end market into which we are selling our cloud-powered services continues growing and the traction that we are gaining with each of our services gives us great confidence that the business is well placed to meet opportunities and growth in the years to come.

Stuart Green

Chief Executive Officer

UK: City Gate, 8 St. Mary's Gate, Sheffield, South Yorkshire, S1 4LW

USA: 2201 Park Place, Suite 100, El Segundo, California 90245

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