Interim Results Statement | November 2018 | ZOO Digital
Team ZOO – Interim Results Statement

Interim Results Statement

Interim Results for the 6 months ended 30 September 2018

Strategic investments in the period provide platform for significant expansion


ZOO Digital Group plc, the provider of cloud-based localisation and digital distribution services for the global entertainment industry, today announces its unaudited financial results for the six months ended 30 September 2018.

 


 

Highlights

Key Financials

  • Revenues increased by 17% to $14.9m (H1 FY18: $12.7m)
  • Gross profit of $4.9m (H1 FY18: $4.8m) driven by sales mix shift to localisation
  • Adjusted EBITDA¹ of $0.5m (H1 FY18: $1.3m) reflecting investment across the business to support future growth
  • Cash balance of $0.9m (H1 FY18: $0.7m)

Operational highlights

  • Important investments made across the business to drive additional growth
    • Significant technological enhancements and new features to ZOO platforms
    • Expansion of freelancer network to 5,400 (H1 FY18: 2,700)
    • Launch of new facility in Dubai for Arabic language services
    • Upgrades to Dubbing service in line with technology roadmap
  • Reconfiguration of its supply chain by major OTT operator now completed
    • New engagement favourable to ZOO’s differentiated cloud-based multi-language service
    • Recent subtitle orders higher than previous levels
  • Upscaling of management team
    • Appointment of Phillip Blundell as Chief Financial Officer
    • Expanded international business development initiatives under ex-Deluxe Executive

Outlook

  • Second half of the financial year expected to be significantly cash generative
  • Full year performance in line with expectations – order book stronger now than start of H1
  • New programmes will be favourable for ZOO in terms of increasing market share as well as the size and visibility of the order boo


Stuart Green, CEO of ZOO Digital, commented, “I am pleased to report on a period of continued growth alongside strategic investment to support business expansion in the second half and beyond. We have made significant enhancements to our cloud platforms to support new services, operational efficiencies and scalability, further building on the Group’s competitive advantages and raising the barriers to entry.

“Trading in the second half of the year has begun positively, with the flow of subtitling orders returning to levels higher than prior to the disruption of the first half, and dubbing orders continuing to grow. We are confident in the prospects for a strong and cash generative second half and anticipate overall full year performance will be in line with market expectations.

“All the indicators are that the global media localisation market is continuing to grow strongly, fuelled by demand for a greater volume of original content, delivered through an ever-expanding number of digital channels in a growing number of languages. The expansion of our localisation service into dubbing has significantly increased the breadth of our offering, the size of the addressable market and enhanced our competitive positioning. We are just at the very start of our journey and look to the long-term future of the Company with great excitement.”

¹Adjusted for share-based payments

 


 

Chairman and Chief Executive's Review

Overview

We are pleased to report on a positive first half of the year, which has seen further endorsement of the validity of our growth strategy. The expansion of our localisation service into dubbing has significantly increased the breadth of our offering and the size of our addressable market, as well as enhancing our competitive positioning, as we move towards becoming the leading provider of software-driven localisation services for movie, TV and video content around the world.

Key successes in the half have been the significant growth in dubbing projects and revenue, which have exceeded our expectations for the period, demonstrating growing market acceptance of our innovative cloud-based dubbing service. Our freelancer network has doubled in size, ensuring that talent is available to scale sufficiently to meet the growing levels of demand in both our dubbing and subtitling offerings, and we have extended our affiliate network in Dubai to ensure we are well placed to benefit from the rising trend for global distribution of non-English original content. Innovation has continued in the half, with the addition of several significant technology-based localisation capabilities, increasing the efficiency and speed to market for high quality dubbing and subtitling projects and adding to our competitive strength. While subtitling revenue growth was impacted in the half during the reconfiguring of a major OTT operator’s partner programmes, this transition is now complete, and we are now experiencing normal operations under the new frameworks, with projects related to this operator now at a higher level than prior to the disruption. Early indications are that the new programmes will be favourable for ZOO in terms of increasing market share as well as the size and visibility of the order book.

The increase in digital entertainment content, the expansion of distribution channels and disruptive innovation in the sector by vendors such as Amazon, Hulu, Apple and Google are all combining to drive a growing demand for high quality and scalable content localisation services. ZOO’s technology is a powerful differentiator and we believe that this, combined with our extensive freelancer and affiliate network and our in-depth industry know-how and connections, means we are uniquely positioned to capitalise on the long-term growth opportunity within the TV and film entertainment market.

Financial Results

Revenues of $14.9 million represent a 17% increase over the corresponding period last year (H1 FY18: $12.7 million). The growth has predominantly been in dubbing services delivered using our ZOOdubs cloud platform. As previously announced, subtitling revenue was impacted in the half by disruption, experienced by us and other market participants in the subtitling supply chain during the transition of a major OTT operator’s partner programmes. The disruption has ceased, and normal operations have been restored, with projects related to this operator now at a higher level than prior to the disruption.

Gross profit is slightly ahead of last year at $4.9m (H1 FY18: $4.8m). There has been a temporary drop in margins to 33% from 38% last year, primarily due to the increase in direct staff recruited in line with our ongoing plans to support the significant growth in revenues anticipated in the second half and beyond. The impact of this move was a full 3 percentage points and the balance due to the effect of less subtitling in the period (which, as a more established revenue stream, carries higher margins than dubbing whilst it grows in scale).

It is pleasing that underlying gross profit margins (excluding additional investment in people) showed year on year improvement, with the stand out performance being dubbing up a full 9 percentage points. Our investment in the first half means that our current direct staff capacity can deliver the anticipated increase in revenues without the addition of further costs. This would indicate a return to previous gross profit margin levels.

We have also continued to invest, in line with our expectations and in a disciplined fashion, in operational capabilities to ensure that we remain at the forefront of our industry. This has included expansion of our in-house project coordination team and our global network of freelancers, extending our business development capability and expanding our participation in industry trade shows, activities that we expect to continue in line with increasing demand. As a result, operating costs have increased by 20% in the half to $5.3m (H1 FY18: $4.4m) leading to EBITDA adjusted for share-based payments reducing to $0.5m (H1 FY18: $1.3m). Again, the new level of operating expenses is sufficient to support the forecast second half revenue growth and therefore is expected to deliver a significant uplift in EBITDA margins.

We are pursuing multiple initiatives to continue to diversify our revenue sources; the introduction of our dubbing services is a natural diversification, being subject to differing purchasing processes to that of subtitling. Across our three key service lines of subtitling, dubbing and digital packaging, 74% of sales in the period under review were generated from clients that have taken two or more services (H1 FY18: 67%).

We are optimistic of expanding beyond the “early adopters” of cloud dubbing to include media companies where there is the potential for growing sales outside our largest clients. We are becoming increasingly active in other geographies where we are seeking to secure business with regional media companies, with recent successes in the Middle East and Australia, and have added a business development head in Hong Kong.

The cash balance at 30 September was $0.9m (H1 FY18: $0.7m) and is down from $2.4m at 31 March 2018. The cash outflow of $1.5m relates to the investment in new products ($0.4m), expansion and refit of the US office ($0.2m) and an increased working capital requirement of $1.1m. The second half of the financial year is expected to show a return to a positive cash flow.

The Group has no short-term debt and no borrowings other than its unsecured convertible loan note of $3.6 million (maturing in October 2010 with a conversion price of 48p) and lease commitments of $0.6 million. Should it be required, the Group has unused credit facilities. With regard to the convertible loan notes, as the current share price is above the conversion price, a non-cash provision of $4.7m was created in the March 2018 financial statements reflecting the embedded derivative and is also shown in non-current liabilities.

Market opportunity and Competitive positioning

The transition towards digital consumption of entertainment has been the greatest single change to the industry in modern times and, now that this form of delivery has been widely welcomed and adopted by the mass market, it is difficult to envisage such a cultural change again any time soon. It is now easier for content owners to reach a much wider audience through digital rather than physical products as the supply chain is simplified.

Consequently, content has 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. The growth in the number of languages into which entertainment is being localised increases the scope of work for ZOO.

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

  • 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 higher quality than 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.
  • 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 fulfillment, 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.
  • ZOO’s long history of service and software provision in the entertainment industry means it has an unrivaled depth of both industry know-how and customer relationships. Recent hires to the Company include senior directors from Walt Disney and traditional industry vendors.

Operations

Given the scale of the market opportunity described above, the principal focus of the Group has been on the continuing progress of our localisation services delivered through our proprietary cloud-based platforms, ZOOsubs and ZOOdubs, for the provision of subtitling and dubbing services respectively.

Dubbing

It is clear from the substantial increase in dubbing orders that the launch of this service has opened a significant new axis of growth for the Company in a market where, due to the complexity and high levels of labour required to create dubbed audio, we estimate the global spend to be approximately five times larger than that of subtitling. We have seen a growing number of orders from both existing and new customers, for which our ability to deliver a “one stop shop” for all multi-lingual localisation and digital packaging services worldwide is a key differentiator.

ZOOdubs facilitates the use of dubbing talent from anywhere in the world, while providing full visibility of work in progress to clients. A recent project saw two of the most in-demand dubbing talents from Latin America work concurrently on a project while one was in Mexico, the other on tour in Argentina, overseen by a dubbing director located in Los Angeles. Using the platform, a four-hour recording session was completed seamlessly and securely, all connected via the cloud.

Cloud dubbing is also opening more choice and opportunity for content owners. Using the cloud, the service can access a huge pool of voice talent, not restricted by geography or proximity to a traditional dubbing facility, meaning clients and casting directors can select the best artist for each role. Combining talent and technology means the service is hugely scalable and both time and cost-efficient. For example, a recent urgent project requiring the casting and recording of eight characters in three languages, resulting in a total of 24 separate recording sessions, was completed in one afternoon with all 24 voice artists working simultaneously. All audio was finished and ready to mix by the end of the day. In a traditional setting, allowing for studio and recording engineer availability, diarising of recording sessions, travel and other logistics, such a project would take significantly longer.

Following an initial test period, we are now moving into a phase of greater efficiency and scalability for our dubbing service. With a software platform that is more developed and established, the level of manual administration is decreasing, while high levels of quality are maintained, which has contributed towards an improvement in dubbing margins and scalability. This transition will continue into the second half of the year and beyond.

Subtitling

Our subtitling proposition continues to be attractive in a market that is calling for professional services delivered to high standards of quality. While we saw some disruption to order flow in the first half, it is important to note that this was related to a transition of the supply chain that affected all leading providers of media localisation services, and that the outlook is undiminished. The board is satisfied that this period of disruption has now passed, and that the changes to the supply chain are favourable for ZOO. The value of the subtitling order book has subsequently recovered following the period of disruption.

A pleasing trend in subtitling orders is that they are becoming increasingly broader in scope and are fulfilled over a longer period. This is contributing to extending the Group’s visibility over future business.

Expansion of our Freelance network

We have been pleased with progress in our programme to select, train and engage freelance translators, dubbing directors, voice actors and audio mixers to ensure that talent is available to scale sufficiently to meet the growing levels of demand in both of our dubbing and subtitling offerings, helping us to be more effective and efficient than our competitors. Our freelance network has now increased to around 5,400 professionals, growing from around 4,400 at the end of the previous year, including members from across multiple territories and languages. This network now provides the capability to deliver 81 subtitle languages (of which 35 are frequently ordered) and 25 dubbing languages (nine of which are high frequency), and its continued expansion will remain a focus for the remainder of the year.

Technology and platform innovation

We have continued to make further investments in both dubbing and subtitling offerings to capitalise on our position as a preferred vendor to many of the leading names in an industry undergoing unprecedented growth and upheaval. Three key innovations developed in the half were:

  • Launch of lip sync dubbing – in the prior year the majority of our dubbing assignments called for a voiceover approach. We have now extended our technology to support the preparation and delivery of lip syncing, the more complex and therefore higher value form of dubbing, with the 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, which is a cornerstone capability that will enable the Company 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 one 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 inspection and duplicated work, which cause unnecessary delays and errors in traditional workflows. In a recent project that involved eight language dub streams and 30 subtitle streams, just one round of changes to the original language stream resulted in almost 1,200 affected events and over 13,000 affected words. When producing 38 language versions, with four more rounds of changes, this can give rise to as many as 2.5 million word changes in just one show. Delta enables the differences to be determined accurately and reliably, streamlining the dubbing and subtitling process.

The Company had previously been awarded a grant to explore machine learning within entertainment media localisation. The three-year project, in collaboration with a research partner, commenced in the period and is expected to deliver innovative new localisation methods that the Company will seek to protect by extending its portfolio of international patents.

Affiliate Network

We continue to develop relationships with in-territory partners in order to provide us with additional capacity to meet client demand, particularly in relation to processing of media assets that reside with content owners in their countries. In addition, these affiliates assist us in securing access to skilled linguists, dubbing directors and voice actors in territory.

The newly-built facility in Dubai, established by our affiliate Lime Green Media, is now fully operational and is already engaged to provide cloud dubbing in Arabic on behalf of our OTT clients who wish to extend their service in the Middle East region.

Board Changes

Roger Jeynes will step down as Chair of the board on or before the ninth anniversary of his tenure in April 2019 and will resign his position on the board in that year. In making this decision, Roger considered guidance set out in the Quoted Companies Alliance Corporate Governance Code 2018. The board has initiated a search for his successor.

We were pleased to welcome Phill Blundell as Chief Financial Officer in July 2018. Phill joins ZOO with a strong pedigree in senior finance and operational roles within UK technology public companies, including DotDigital Group plc, Eagle Eye Solutions Group plc and Intelligent Environments plc. He has over 20 years’ experience building strong software businesses through product innovation and global strategic partnerships. Phill qualified as a Chartered Accountant with Coopers & Lybrand, now part of PwC.

We would like to thank all our staff, our growing network of freelancers and our shareholders for their continuing support in these exciting times.

Outlook

Trading in the second half of the year has begun positively, with the flow of subtitling orders returning to levels higher than prior to the disruption of the first half, and dubbing orders continuing to grow. We are confident in the prospects for a strong and cash generative second half and anticipate overall full year performance will be in line with market expectations.

The board is very confident in both the long-term opportunity for this market and ZOO’s ability to capitalise upon it. All the indicators are that the global media localisation market is continuing to grow strongly, fuelled by demand for a greater volume of original content, delivered through an ever-expanding number of digital channels in a growing number of languages. The expansion of our localisation service into dubbing has significantly increased the breadth of our offering, the size of the addressable market and enhanced our competitive positioning.

ZOO combines the power of cloud computing with its deep understanding and experience of the industry to create a highly valuable proposition, providing localisation and digital packaging services to a growing number of the world’s leading creators and distributors of film and TV entertainment. We are just at the very start of our journey and look to the future of the Company with great excitement.

 


 

About ZOO Digital Group plc:

ZOO Digital is a provider of services allowing TV and movie content to be subtitled and dubbed in any language and prepared for sale with all major online retailers. ZOO's clients are some of the best-known brands in the world including major Hollywood studios, global broadcasters and independent distributors.

ZOO's point of difference in the marketplace is its development and use of innovative cloud technology. This ensures that content is localised in any language and delivered to all the major online platforms such as Amazon, iTunes, Google and Hulu with reduced time to market, higher quality and lower costs. ZOO's agile, cloud-based business model enables clients to respond to market trends, scale easily with business growth and capitalise on new routes to market in the fast moving and evolving digital industry.

ZOO operates from the entertainment hubs of Los Angeles and London with a development and production centre in Sheffield. Its full-service proposition includes digital distribution, subtitling & captioning, metadata creation & localisation, dubbing, artwork localisation, workflow and asset management.

www.zoodigital.com

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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