10 August 2023

ZOO DIGITAL GROUP PLC

("ZOO" the "Group" or the "Company")

 FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2023

Fourth successive year of strong revenue growth with improved margins and profitability 

ZOO Digital Group plc (AIM: ZOO), the leading provider of end-to-end ("E2E") cloud-based localisation and media services to the global entertainment industry, today announces its audited financial results for the year ended 31 March 2023.

HIGHLIGHTS

Key Financials

·      Revenue grew by 28% to $90.3 million (FY22: $70.4 million).

o  3% of sales were from newly acquired operations.

·      Adjusted EBITDA* grew to $15.5 million (FY22 restated: $7.1 million).

o  EBITDA* margin increased to 17.1% (FY22 restated: 10.0%).

·      Operating profit has quadrupled to $8.1 million (FY22 restated: $1.9 million).

·      Reported profit before tax of $7.9 million (FY22 loss restated: $0.2 million).

·      Net cash generated from operations up 197% to $15.5 million (FY22: $5.2 million).

·      Net cash at year-end of $11.8 million (FY22: $6.0 million).

* Adjusted for share-based payments

Operational Highlights

·      ZOO selected as a key vendor by a second major content producer with ZOOstudio adopted to support its content localisation across vendors. 

·      Media localisation segment sales grew by 34% to $56.6 million (FY22: $42.2 million) - subtitling increased by 15% and dubbing by 73%.

·      Media services grew by 22% to $32.1 million (FY22: $26.4 million).

·      Worldwide freelancer network grew by 4% to 11,467 (FY22: 11,028).

·      Leading standard of customer satisfaction maintained - retained sales KPI was 98.5% (FY22: 97.6%).

·      Strong progress in global growth initiative with further investments across hubs in India, South Korea, Denmark and Spain.

Broader Market Highlights

·      Global content investment totalled $238 billion in 2022 and is forecast to reach $242 billion in 2023.

·      Non-English digital originals grew from 5.9% to 8.5% as a percentage of the total demand for streaming original shows in the period 2020 to 2022.

·      Media localisation spend with major suppliers estimated by Nimdzi to have grown by more than 280% between 2018 and 2022, from $420 million to $1.6 billion.

Outlook and Post Period events

·      Raised £12.5 million gross ($15.5 million) via an oversubscribed placing in April 2023 to fund the proposed acquisition of a partner company in Japan with which ZOO continues to have positive, advanced discussions.

·      Current trading has been impacted by several major streaming companies carrying out strategic reviews to refocus on profitability and the first simultaneous strike of US writers and actors in 60 years. This has created short-term market disruption and temporarily lower volumes of localisation and media services work.

·      The Board has been taking steps to adjust the cost base to reduce the impact of the temporary industry slow-down on ZOO's business while there remains uncertainty around the timing of the resumption of former levels of production and orders. The Group remains financially strong with net cash at 30 June 2023 of $23 million.

·      ZOO expects to emerge in an even stronger position once certain customers have rationalised their supplier bases, resulting in ZOO taking further market share once former order levels resume. It is reasonable to expect this will be in H2 FY24.

·      The Board remains confident in ZOO's medium and long-term fundamentals and expects to deliver revenue growth over FY23 in the following years. Our guidance for FY24 remains unchanged and our 2030 strategy remains on track.

Stuart Green, CEO of ZOO Digital, commented:

"ZOO delivered a fourth successive year of double-digit revenue growth and margin improvement in FY23 and we expanded our footprint in strategically important, high-growth regions. We generated strong cashflows and delivered record pre-tax profitability, demonstrating the benefits of the operational leverage in the business.   

"The market has evolved rapidly over recent years as global audiences transition from traditional linear programming to streaming platforms. In this context, we view our customers' strategic reviews and the Hollywood strikes as evidence that the industry is now recognising the structural nature of changes in how modern audiences watch film and television. Localisation is one of the most cost-effective ways to bring new content to global audiences, while also providing access to new markets and millions of additional subscribers. This is why we are investing ahead of the curve to expand our footprint in key international territories, most notably APAC which is a high-priority region for all global streaming services.  

"While the current disruption is frustrating, the Board remains confident that ZOO is fundamentally well positioned to continue our growth once the hiatus concludes. Over the medium and long-term, we expect to emerge stronger and take further market share as customers reduce their pool of vendors to those few with global end-to-end capabilities."      

For further enquiries please contact:

Analyst presentation

Stuart Green, Chief Executive Officer, and Phillip Blundell, Chief Financial Officer, will host an in-person presentation for sell-side equity analysts, followed by Q&A, at 09:30 BST today. Analysts wishing to join should register their interest by contacting: ZOO@instinctif.com.

Investor engagement

Management will hold an online presentation for private investors at 17:00 BST today. For those interested in joining, please register via the following link: www.zoodigital.com/prelims2023. A recording of the webinar will be made available via the Company's website afterwards.

CHAIRMAN'S STATEMENT

I am pleased to report another year of significant progress and profitable growth as the business scaled its international operations and continued to take share of the media localisation market. This has been achieved against a challenging economic backdrop and a dynamic marketplace as the behemoths of the streaming market compete for market share globally, demonstrating the strength and resilience of ZOO's offering to customers.

The Company increased revenues by 28% to $90.3 million and grew operating profit more than four-fold to $8.1 million with improved margins, compared to a restated operating profit in FY22 of $1.9 million. The growth without the restatement, which was due to a misstatement of cost of sales relating to work-in-progress at the year-end, was 120%. We have benefitted from the in-built operating leverage in our model which is now starting to come through, together with increasing cash generation. Year-end cash stood at $11.8 million, up from $6.0 million in FY22, and was over $23 million at the end of June 2023 following a successful $15.5 million equity placing.

At ZOO's Capital Markets Day in October 2022, we outlined our longer-term aspiration to reach $400 million of revenue by 2030. This is predicated on taking a greater share of a growing market. The Board estimates that ZOO's addressable market may double from $1.5 billion currently to $3 billion by the end of the decade, based on the industry's investment in original content and international expansion by major US media companies. Given our global, end-to-end offering and embedded operations with several of these media companies, we believe ZOO is well positioned to increase market share from 6% currently to our target of approximately 14% by the end of the decade.  

These assumptions are underpinned by the strength of our services. ZOO is one of only five companies in the world with the capability and scale to operate as a primary end-to-end vendor to major media groups. Importantly, our ZOOstudio platform is now embedded in the operations of two major media companies following our selection in February 2023 as a key supplier to support another high-profile streaming provider with its global roll-out.

For the major US media companies that are seeking to deliver their streaming services globally, competition remains intense. The recent relative slowdown in subscriber growth from established markets has led to an increased focus on profitability and return on investment from content spend. The Board believes that ZOO can benefit from this trend as media companies outsource greater volumes of work to a smaller number of trusted vendors. Furthermore, localisation is proven to be one of the most cost-efficient ways to increase viewership while scaling streaming services to reach new international audiences.

To capture this demand, the Company has continued to invest in establishing hubs in key international locations. These investments have significantly increased our capacity across India and South Korea as well as Turkey, Scandinavia and most recently Spain, helping us to win new business and attract talent.

In May 2023, the Company successfully completed an oversubscribed placing of £12.5 million ($15.5 million) for the proposed acquisition of a trusted partner in Japan, another strategic growth market for content and localisation budgets. The fundraise included investment from existing and new shareholders, as well as giving existing retail investors the opportunity to participate, with several new institutional investors joining the register. I would like to thank all our shareholders for their ongoing support in accelerating our growth ambitions. 

ZOO is proudly a future-facing business. The first course from ZOO Academy - developed in partnership with the University of Sheffield last June - has already started to deliver the next generation of talent in the highly specialised field of script adaptation for dubbing. Our teams are also constantly innovating and drawing on the latest technologies to improve processes, such as AI, which we plan to apply to complement traditional practices and creative talent.

We have welcomed many new team members over the last year, particularly across our international hubs. I would like to express my sincere gratitude to all my colleagues for the passion they show in delivering for clients and building a better business for everyone.

Our mission remains to be the entertainment industry's most trusted globalisation service provider. We have made good progress over the last year and remain well positioned to capture future demand. Despite some customers currently reviewing their content strategies in the short term, and industrial action in the US temporarily disrupting new content production, the structural drivers for international, multilingual content remain firmly in ZOO's favour. Our leading position in the localisation market ensures the business is well positioned to deliver strong growth over the medium-term.

Gillian Wilmot, CBE
Chairman

STRATEGIC REPORT

Introduction

The year ended 31 March 2023 covered a period during which ZOO continued to grow strongly, underpinned by structural market drivers despite challenging macroeconomic conditions that have created operational challenges for several customers. As the competitive landscape for consumer streaming services intensifies, the industry is committing enormous sums of capital to produce original content which has been increasing year-on-year, and with it the demand for premium localisation and media services has grown across many languages. The Board believes that ZOO's innovative strategy and its approach to global growth provide strong differentiators and competitive advantage that will lead to an increasing market share over time. Progress during the period under review includes important milestones on that journey.

Market Overview

The period included some significant developments within the industry and a continuation of several important trends that are reshaping the media and entertainment landscape. Despite the current short-term disruption, the Board is confident that the market backdrop presents significant opportunities for ZOO over the long term.

The changing dynamics of TV entertainment

Prior to the emergence of on-demand services, the business of TV was straightforward for distributors and consumers alike. The TV set in the living room was the hub of consumption, to which cable and satellite operators served their audiences by broadcasting content across terrestrial channels.

Watching video content today is a very different experience now that Over-the-Top services ("OTT") - the delivery of programming over the internet - and Video-on-Demand ("VOD") enable individuals to watch content of their choosing at a time and on a device that is convenient to them. The expectations of consumers today have led to a much more complex economic environment for the production and global delivery of content.

The launch of Netflix in 2007 marked the beginning of this new era. Except for 2020, traditional TV has declined every year since 2013, although it was as recently as 2022 that the hours spent by US adults watching digital video exceeded traditional TV for the first time. This trend is projected to continue, and with it the decline in revenues generated by media companies from both the carriage fees they charge distributors and their share of advertising income.

Some media and entertainment companies are not yet delivering returns from streaming sufficient to offset the declines in traditional TV. Streaming represents the future of home entertainment, yet many media companies are still optimising their commercialisation of content to enhance the return on investments made its production.

Consumer preference for on-demand services

The shift from traditional TV to streaming has been good for consumers. In developed markets expensive bundles of channels have been replaced by low cost, on-demand packages. With most subscription VOD ("SVOD") services charged monthly in advance, the flexibility of these offerings has led to a higher level of consumer churn, with content providers developing strategies to minimise it, partly through careful selection of the content they supply.

Audience growth in emerging markets such as India and China has made APAC a high priority region for all global streaming services. This is further underpinned by the rapid increase in smartphone adoption, which is substantially increasing the addressable market.  Selection of content is a crucial factor that will determine the success of streaming services in emerging markets. For example, in India, services have found success by focusing on original content across genres, targeting niche audiences, and catering to the country's multiple languages. Local content has been shown to be particularly important in growing and retaining local audiences, and as a result global streaming providers are sourcing content from many countries.

Investment in content production

The industry's annual spend on producing original programming has been growing year-on-year, although there are signs that this is slowing. In a March 2023 research report, Moffett Nathanson forecasted that total media-industry content cash spend will grow just 1% to $136.4 billion in 2023, with global content investment in the same year forecast by research firm Ampere Analysis to be $242 billion. Moffett Nathanson expects Disney to continue to be the leader with $26.4 billion in 2023, followed by NBCUniversal ($22.5 billion), Warner Bros Discovery ($18.4 billion), Paramount ($15.9 billion), Netflix ($15.2 billion), Amazon ($8.5 billion) and Apple ($6.1 billion).

2022 was the year in which most media companies reassessed their strategies for streaming subscriber growth and after two years of strong double-digit content budget expansion, total spend in 2023 is expected to grow by just 2% as more companies shift their focus away from solely increasing subscriber numbers to delivering profitability.

Several major media companies that operate streaming platforms have revisited their content investment plans in 2023 in the face of greater competition and the higher levels of consumer churn mentioned previously. Some organisations have indicated that they do not plan to increase content spend above current levels, while others have signalled that they will trim their content budgets in 2023. The investment in content by genre is changing also; according to an April 2023 research report by K7 Media, the production of unscripted titles, which are in general much less expensive to produce than scripted programmes, increased in 2022 compared with other genres and there was an increased number of unscripted format launches across both local and global platforms.

It is unclear whether the wider market will see a shift to lower budget titles or a retracement in the number of hours of entertainment content produced annually, but it seems possible that global levels of spend on content production have plateaued for the time being.

Streaming profitability

In the face of declining revenues from linear TV, several leading players have announced plans to reduce operating costs to restore profitability. In May 2023, Disney announced that a cost-cutting strategy involving budgetary and labour reductions is on track to "meet or exceed" its $5.5 billion savings target. Warner Bros. Discovery announced plans in late 2022 to find more than $3 billion in cost savings. According to the Wall Street Journal, Netflix, which operates a profitable service, has developed plans to reduce 2023 spending by $300 million through layoffs, real estate reductions, and rationalisation of cloud computing resources. Paramount Global announced in May 2023 its intention to lay off 25% of staff in its domestic cable networks. 

Platform consolidation

The fierce competition amongst streaming services is leading to early stages of consolidation of some platforms. In April 2023 Warner Bros. Discovery announced a new streaming service called 'Max' which merged the HBO Max service with Discovery+, combining the content provided by these two offerings. In May 2023 Disney announced plans to combine content from its Disney+ and Hulu services in the US. These efforts help to provide subscribers with a broader offering and greater appeal, which highlights the diversity and range of fresh content across a wide range of genres that will be required for success.

Alternative monetisation models - AVOD and FAST

The commercial propositions of streamers continue to evolve, both through refinements in pricing by country and in their approach to monetisation. For example, in 2022 both Disney and Netflix introduced advertising-supported tiers allowing subscribers to access content at a lower price.

Consumers in the US are adopting Advertising Video on Demand ("AVOD") at a faster rate than their non-ad-based counterparts, a recent report has found. According to Comscore, AVOD services are seeing adoption at a faster rate than SVOD, with a 29% increase in US households streaming AVODs in 2022 compared to 2020 compared with a 21% increase during the same period for SVODs.

Having become well-established in the US over the past two years, Free Ad-supported Streaming Television ("FAST") - a category of OTT services for delivering subscription-free digital channels that stream advertising supported content via Connected TV devices - is now becoming popular around the world. On FAST channels, content plays according to a pre-set schedule with advertising breaks and simulates the linear viewing experience of traditional television. "[FAST] is the fastest growing segment of the viewing economy," said Evan Shapiro, a veteran television executive. "There are people who think it's basically going to eclipse cable before too long."

FAST channels provide another avenue for producers to monetise content, particularly catalogue titles, as well as delivering incremental income through a revenue-share arrangement. In January 2023, Warner Bros. Discovery announced deals with streaming services Roku and Tubi to license 2,000 hours of movies and TV series for the launch of Warner Bros. branded FAST channels. The deal marks an evolution of Warner Bros. Discovery's approach to streaming, which once reserved the studio's movies and series for its own subscription services. Now, the studio has begun selling movies and TV shows to third parties. Similarly, Amazon announced in May 2023 that it will distribute its original films and TV shows to media outlets outside its Prime Video service for the first time. A February 2023 report by Bloomberg claimed that Disney is exploring the possibility of licensing film and TV properties to rival media outlets, shifting from Disney's current streaming strategy of keeping its films and TV shows exclusive to the Disney+ service.

Other providers have been operating FAST channels for some time, for example, Paramount Global operates its own FAST service, PlutoTV, launched in 2014, which already has an international footprint that spans 25 countries throughout the US, Europe, and Latin America. Amazon has operated a free-to-view ad-supported streaming service Freevee since 2019, currently available in the US, UK, and Germany.

Global streaming services

There are only a small number of services that have truly global reach, namely Amazon Prime Video (200 countries), Netflix (190 countries), Apple TV+ (over 100 countries) and Disney+ (60 countries). Three other major US media companies have created their own direct-to-consumer platforms that were initially available in North America only, namely NBC Universal with its Peacock service, Paramount Global with Paramount+ and Warner Bros. Discovery's Max. All three organisations are now in the process of establishing international distribution of their original content, in some cases by launching their own service in multiple countries, in others through partnerships with local operators.

International Content

Streaming services have been investing heavily in global content production and licensing of third-party programmes as English-speaking audiences have grown more interested in foreign content. As a percentage of the total demand for streaming original shows in the period 2020 to 2022, non-English digital originals grew from 5.9% to 8.5%, according to Parrot Analytics' data. An objective here is to create hit shows that are successful around the world following the success of titles such as Money Heist (Spain), Squid Game (South Korea) and Dark (Germany).

In March 2023 Netflix shared data that revealed the rising popularity of non-English language content on its platform.  In the UK, viewing of non-English language programmes on Netflix increased by 90% over the previous three years. In 2022, more than 70% of global Netflix viewing came from members watching a title from a country other than their own.

Over the last few years, the makeup of demand for foreign content in the US has been in transition. Content in European languages including Spanish, German and French has been growing in popularity for some time, but in the past two years demand for Asian titles has soared. In the period from 2020 to 2022, the consumption of Netflix shows in Japanese, Korean, Chinese, and Hindi grew from 35.4% to 59.8%, with Japanese programming becoming the most in-demand foreign language in the US in the last quarter of 2021. Of particular significance here is Anime, a leading genre of Japanese content.

Korean-language programming is set to become the second most in-demand foreign language for streaming originals in 2023. The demand for Korean shows is largely driven by the popularity of K-pop, which has exploded in recent years, especially among younger audiences. This has helped to drive interest in other forms of Korean media, largely benefiting Korean dramas. The demand for Korean content more than doubled during 2021 after the release of Squid Game. More than 70% of the audience for Japanese shows and 60% of the audience for Korean titles is made up of people under 30.

Industrial action in the US

Since early May 2023, 11,500 screenwriters have been on strike against Hollywood studios and entertainment companies for the first time in 15 years in a battle for higher pay and better working conditions. This is the culmination of a dispute between the Writers Guild of America (WGA) and the Alliance of Motion Picture and Television Producers (AMPTP), a trade association that represents over 350 American television and film production companies.

As a result of the wholesale shift of the industry away from TV and towards streaming, the WGA has warned that the future of the profession is at stake. When producing for streaming platforms, in general fewer episodes of each show are ordered, there are fewer writers working on each project and streaming service operators typically limit the residual payments that have traditionally been made to compensate writers for the reuse of their credited work. The writers are also campaigning for restrictions on the use of artificial intelligence.

While initially it was just the short turn productions, such as late-night shows, that were affected by the strike, it's now the case that most productions in Los Angeles have been disrupted by picketing writers. This situation has been considerably worsened by a strike by US actors which commenced in July 2023, marking the first time in 60 years that both writers and actors have simultaneously taken industrial action. This more recent strike, organised by the Screen Actors Guild - American Federation of Television and Radio Artists (SAG-AFTRA), is likely to have far-reaching reverberations across the industry while actors seek higher pay and safeguards against unauthorised use of their images and voices through artificial intelligence. It has brought all US production of new content to a halt and, while all sides in the dispute are motivated to reach a resolution quickly, it is currently unclear how long this will take.

Impact of market developments on ZOO

The market developments described above are expected to provide enhanced opportunities for ZOO to continue to grow and win market share in the medium term.

1.     Resilient content spend

Despite cost-cutting by some major media companies, the expectation is that the already substantial content budgets will not diminish in the medium term, supported by competition between streaming services and structural demand for new content. ZOO's proposition is closely aligned with new content production, and this implies that, once the short term hiatus is over, its addressable market will remain strong.

2.     Increasing reliance on trusted vendors

The cost cutting at several significant media companies will result in fewer internal staff to process similar volumes of content, necessitating greater reliance on vendors such as ZOO that offer a comprehensive end-to-end (E2E) service. We envisage a continuation of the trend of large buyers working with a fewer number of global service providers, since this simplifies the internal operations required to manage these relationships.

3.     Demand from new streaming models

The launch of advertising-supported and free-to-view streaming services provides a greater number of channels through which content is delivered to consumers. The need to maximise the size of the audiences for these services highlights the importance of localisation, which is the most cost-effective way of expanding viewership. The Board estimates that major media companies today spend as little as 1% to 3% of content budgets on localisation.

4.     Localisation unlocks ROI and profitability

To maximise the return on investment in content, producers and distributors are increasingly looking for titles and genres that are attractive internationally, irrespective of the source language, and this too highlights the importance of and need for localisation to and from many languages, performed to a standard that is consistent with that of the original programmes.

5.     Concentrating outsourcing on end-to-end vendors

For major US media companies, the streaming era has brought a change in the practices of adapting content for international audiences, with this being increasingly overseen by the company itself through a central function rather than by many third parties in territory. This has resulted in the buying of multi-lingual services becoming more concentrated on a smaller number of vendors, particularly those with an E2E capability such as ZOO, that can fulfil this remit in-house.

The prolonging of the Hollywood industrial action is now affecting the pipeline of titles that require localisation and media services to prepare them for global streaming distribution. Whilst negotiations are making slow progress, it is reasonable to expect that a compromise will be reached, and normal operations will resume. In the meantime, streaming companies may refocus their short-term content acquisition plans to other countries that are unaffected by the Hollywood strikes, and/or on migrating more titles from their expansive back catalogues as was their practice during the period of the pandemic.

Media Localisation Market Size

Localisation market research firm Nimdzi provides an annual index of the top 100 vendors of localisation services across all verticals. Combining the revenues of specialist media localisation providers in the top 100 positions indicates that revenues for the segment grew by over 280% in the period 2018 to 2022, from $420 million to $1.6 billion. Across all verticals ZOO ranks 28 in the 2023 report, up from 35 in 2022 and 44 in 2021; in the media localisation vertical ZOO ranks 6 in 2023.

In its annual Language Industry Market Report published in May 2023, market commentator Slator estimated the media localisation vertical at $2.97 billion, up 11% in 2022 over the prior year. The Board continues to hold the view that ZOO's addressable market, corresponding to the proportion spent by major global media organisations, is around half of this figure.

Strategy

As a provider of premium media services and localisation, ZOO is one of only five companies in the world with the capability and scale to operate as a primary E2E vendor to major media and entertainment companies. ZOO's differentiation is the result of a strategy consisting of five pillars: innovation, scalability, collaboration, customer focus and talent.

Innovation

ZOO's leading services are delivered using its proprietary technology. Developed by a team of over 70 in-house specialists, the software provides efficient and scalable solutions for the delivery of premium localisation and media services.

During the period under review the team has prioritised the further development and enhancement of ZOOstudio - its globalisation management platform designed to be used by ZOO's customers. These new developments extend the capability of the platform in many areas, including finance reporting, order history analysis and data entry automation. Such functionality can result in the platform becoming embedded more broadly and deeply within customer operations thereby enhancing the strategic value that ZOO delivers and its competitive differentiation.

Amazon Web Services (AWS) has been for some time one of the Company's strategic partners to support the cost-efficient deployment of its cloud-based software services. During the period ZOO joined the AWS Partner Network, having successfully completed the foundational technical review of its ZOOdubs dubbing services platform. This network is a global community of AWS partners that leverages programmes, expertise, and resources to build, market and sell customer offerings, with membership indicating the observance of best practices to reduce risks around security, reliability, and operational excellence. ZOO's membership of the AWS Partner Network provides customers with a further proof point of the calibre of its technology.

Scalability

ZOO's cloud-based platforms form the foundation of the scalability in capacity that the Company can offer to its customers. These platforms enable an expansive ecosystem of partners that, in combination, provide the creative resources needed to fulfil localisation and media services at scale across many languages. Two of the key components of this ecosystem are firstly, the extensive pool of freelancers across multiple disciplines, and secondly, a small number of hubs in key strategic locations.

The freelancer pool consists predominantly of individuals that provide specialised linguistic skills, each delivering localisation of entertainment content into their mother tongue. This includes translators of subtitles, adapters of scripts for dubbing, voice actors and dubbing directors, each of whom receives and performs work through an intuitive web browser interface. The Company performed a rigorous review of its freelancer database during the period and removed those individuals who, for various reasons, are no longer eligible for work. This resulted in a small net increase in the available number of freelancers to 11,467 (up 4%).

ZOO's global growth initiative - the strategy of establishing hubs in key locations - is designed to ensure the company is positioned well to deliver its services across global languages with high availability. The period just completed marks the first full year of the integration of ZOO India following the acquisition of Vista India Mumbai in March 2022. This has provided the Company with a capability both for subtitling and dubbing into several leading languages spoken in the country, and for the processing of a range of media services. The facility positions ZOO very well to operate as a partner for customers that are targeting India as a market for streaming services as well as a source of original content that is attractive in other markets.

Following the success of its investment in 51% of a Seoul-based partner in March 2022, the Company announced in April 2023 the acquisition of the remaining shares in ZOO Korea. The venture has helped to address the growing global demand for Korean content and distribution of non-Korean titles in the country with premium and secure provision of dubbing, subtitling, quality control and media services. The Board estimates that $4.5 million of incremental revenues were recognised across the Company in FY23 because of ZOO Korea and that it will generate significant incremental revenue in future years through its own operations in South Korea as well as services it provides to assist ZOO in the US and UK.

In April 2022 the Company launched ZOO Denmark, based in Copenhagen, to act as its Nordic hub. Content from Scandinavian countries continues to see critical and commercial success around the world, with the region building a reputation for high-quality content with global appeal. Post the period end, the Company launched an Iberian hub through a strategic investment in established dubbing and localisation company, AM Group. The investment brings new facilities in Madrid and Valencia and offers increased capacity and expertise in Spain and Portugal, both of which are territories that hold high strategic importance for ZOO's major studio clients.

Collaboration

Its partnerships with third parties enable ZOO to deliver capability and capacity in a cost-effective way.

The Company is helping to address the shortage of talent in the industry in certain disciplines and languages through various initiatives delivered through ZOO Academy. These include a partnership programme with universities and other educational establishments where ZOO is making its proprietary cloud platforms available for teaching purposes to support the education of translators, script adapters and aspiring dubbing professionals. In the period, 17 new institutions partnered with ZOO, bringing the total number to 32 across Europe, Asia, and the Americas, with a strong pipeline of further candidates currently in discussion. Students who complete the courses offered by these organisations will be trained in the use of ZOO's platforms, which assists the Company's talent recruitment efforts.

In a separate ZOO Academy initiative, the Company is co-developing with academic and industry experts a series of online courses and training programmes to equip learners with the knowledge and practical experience to participate in work for our industry. The first such course, developed in partnership with University of Sheffield and covering the discipline of adapting scripts for dubbing, was launched in June 2022 and has since delivered new talent in this important and highly specialised field.

The Company has for some time partnered in many countries with traditional dubbing studios and businesses where the management teams are progressive and willing to embrace ZOO's cloud-based platforms and methodologies. In addition to their help with access to talent, this approach provides the Company with the opportunity to work closely with partners to inform investment and acquisition decisions. Both ZOO India and ZOO Korea were former partners that have become wholly owned subsidiaries, now fully integrated into the Group.

Customer focus

ZOO's aim is to operate as a primary vendor to the largest buyers of localisation and media services in the entertainment industry. Target companies are predominantly US based organisations that produce original content and distribute to global audiences through streaming services and other channels.

A key strategy employed by the Company to strengthen its relationship with customers is through its ZOOstudio platform. This provides, amongst other features and benefits, a means for customers to manage the complex business of planning, procuring, and tracking services placed with multiple providers. ZOOstudio was adopted by a major global streaming service in 2019 and was selected subsequently by another media company. During the period under review, a further major streaming service adopted ZOOstudio ahead of its global rollout. This represents another success story for ZOO as a strategic technology partner. While longer-term contractual arrangements are still being finalised, a significant number of revenue-generating projects for this client are already underway, and work volumes are expected to increase materially during FY24. Despite the industry headwinds, the Company is in ongoing dialogue with other key players regarding the use of ZOOstudio and the platform forms a key part of tenders for framework agreements with key global strategic target customers. This ongoing dialogue and interest further underpins our belief that localisation is a key focus for global streaming companies and despite the short term disruptions localisation remains a key priority for the industry.

Talent

While ZOO's platforms enable the Company to deliver services in an efficient and scalable way, there remains a requirement for talent, particularly to support the production of premium subtitling and dubbing. The Board has sought to expand internal resources to enable the business to process higher volumes of work required by customers.

The acquired facility in Mumbai has provided an effective base from which to expand capacity not only for fulfilment of Indian language production but also for the cost-effective processing of a range of media services. Since the acquisition, headcount in India has increased over the period by 85% to 120, and plans are at an advanced stage to establish a second facility in Chennai which will become a hub from which to deliver services for the different languages spoken in southern India.

As part of the investment in AM Group in May 2023, we have welcomed to the ZOO family Víctor Martínez, Managing Director of AM Group, and his team of media localisation specialists. The team will support the scaling up of capacity and capability in Castilian and other dialects of Spanish as well as European Portuguese.

Review of Operations

The Group manages on an internal basis the following KPIs which assist in measuring progress against the Group's strategy.

Financial

·      Revenue increased 28% to $90.3 million (FY22: $70.4 million)

·      Adjusted EBITDA¹ margin up to 17.1% (FY22 restated: 10.0%)

·      OPEX as a % of revenue 28.7% (FY22: 27.2%)

·      Operating Profit margin 9.0% (FY22 restated: 2.7%)

Revenue is considered a KPI as it is the headline demonstration of services provided to customers, and of confidence of customers to utilise our services. Operating profit is considered a KPI as this is a key measure of how value is added to the group's net assets, whilst the EBITDA¹ margin is a KPI (and also an Alternative Performance Measure) and considered a key metric as this closely approximates to the cash generated from operations, considered to be a key indicator of the general health of the group.

Operational

·      Number of freelancers² 11,467 (FY22: 11,028)

·      Retained Sales³ 98.5% (FY22: 97.6%)

The operational KPIs have been adopted by the business because they give indicative measures of quality and capacity which are both important to our customers.

¹ Adjusted for share-based payments (as explained in note 11 to the financial statements).

² The number of active freelance workers in ZOO's systems who are engaged directly.

³ Proportion of client revenues retained from one year to the next.

The financial KPIs indicate excellent progress towards the long-term aspiration that the Board outlined at a Capital Markets event in October 2022 to generate revenues of $400 million by 2030. Revenue increased year-on-year by 28%, of which 25% was organic (after excluding continuing sales transacted through ZOO India), this being more than the compound annual growth rate required to achieve the stated long-term aspiration. EBITDA margin, adjusted for share-based payments, showed an improvement over FY22 at 17.1%, up by 7.1 points. Operational expenditure expressed as a percentage of revenue increased to 28.7% from 27.2% in the prior year, as the Board committed to invest in expanding capacity across IT, property, and international operations in support of the next phase of growth. Operating profit also showed an improvement growing from  a restated 2.7% of revenues to 9.0%.

Revenue in the year was strongly weighted to the first half due to two significant factors. Firstly, the Board estimates that around $5 million of H1 sales was associated with work to support the launch of a global streaming service in new countries. Unlike the typical usual month-to-month flow of work orders from major clients, such launch-related work is one-off in nature and no such work occurred in H2. Going forward the Board anticipates that international launches by new global customers may result in further instances of such non-repeating revenues, however, as the business scales, these should result in lower levels of variability.

Secondly, a major client commenced a restructuring programme during ZOO's FY23Q4 which caused a hiatus in the volume of orders from this client, resulting in weaker than expected sales during February and March 2023. Ongoing conversations with the customer are positive and although the restructuring programme is ongoing, we expect this to complete during ZOO's FY24Q2 and have received initial indications that, once the current industrial action has come to an end, orders will return to former levels in due course. In the medium term the Board expects the restructuring to benefit ZOO due to its role as an E2E vendor.

As noted previously, the net number of individuals that make up ZOO's freelancer pool continued to grow. As of 31 March 2023, the number was around 11,500.

The 'retained sales' KPI is a proxy for customer satisfaction since it provides a measure of the proportion of client revenues retained from FY22 to FY23. This metric improved to 98.5% indicating very high levels of customer satisfaction. This is further evidenced by the performance metrics reported to ZOO by several of its customers; over the period under review ZOO's average monthly performance measure as reported by the Company's largest customer was 99.53% which the Board believes places it as one of the best vendors in the industry. The equivalent measure was 99.50% in FY22 and 99.46% in FY21 indicating the consistency of this high level of performance. The quality and reliability of vendors are considerations that are highly important when customers assign projects to their selected partners and ZOO's performance ensures that it is viewed favourably.

The Company announced in February 2023 that it was selected as a key vendor for a major Hollywood content producer to support its content localisation needs. This client will also use ZOOstudio to manage localisation work across all of its vendors. Following its adoption in 2019 by a first major streaming customer, ZOOstudio is now a proven solution for delivering the volume and scale required for an international, multi-language streaming platform. The Company is in dialogue with further major streaming companies concerning the adoption of ZOOstudio.

During the period the Company made good progress on delivering its global growth initiative, first announced in October 2021. Through this initiative, which involves establishing hubs in key locations to support the world's biggest content creators and streaming services as they serve new audiences, ZOO has already significantly enhanced its footprint around the globe.

With accelerating growth in the international distribution of regional content and the roll-out of global direct-to-consumer platforms, ZOO has been pursuing a series of strategic investments that enhance its operations in the key content sourcing and distribution locations. Countries announced previously were Turkey, South Korea, and India, which have complemented ZOO's established operations in Los Angeles, London, Sheffield, and Dubai.

ZOO is one of few global vendors with the proven capability to deliver complete E2E services to prepare content for audiences in all languages and formats, thanks to its cloud-based technology and its ecosystem consisting of a collaborative network of independent dubbing studios, vendor partners and freelance actors and translators. The global investments make ZOO even better placed to address its clients' challenges of localising and fulfilling huge volumes of content, as well as supporting the increasing need to prepare locally acquired TV shows and movies for streaming services around the world.

The Company has taken a low-risk approach in its investments and acquisitions by targeting long-established businesses that have been affiliate partners of ZOO for several years. These companies, which include media services providers and localisation vendors, have accumulated extensive experience of working in the cloud-based technology that ZOO operates throughout its global ecosystem of partners and freelancers. The all-encompassing approach supports unrestricted creativity while enforcing high standards of production quality, workflow efficiency and content security across the entire global Group.

Following an initial March 2022 investment in 51% of a partner in Seoul and a very successful first year of operation, ZOO acquired the remaining shares in April 2023. During the prior 12 months ZOO Korea expanded to deliver an in-territory servicing hub for the most prestigious names in entertainment. The venture has helped to address the growing global demand for Korean content and distribution of non-Korean titles in the country by supplying premium and secure dubbing, subtitling, quality control and media services. In the period, two global streaming platforms worked with ZOO Korea and further significant new opportunities are in the pipeline.

Due to the increased volumes of work, additional investment in people and infrastructure was required to support demand and capture the growing in-territory market for ZOO Korea's services. The Board's view was that it was commercially advantageous for ZOO Korea to become a wholly owned subsidiary of the Group. While in FY23 ZOO Korea generated $1.2 million revenue and $0.1 million profit, the Board estimates that $4.5 million of incremental revenues were recognised across the Group in the year because of ZOO Korea. The Board expects that the hub will generate significant incremental Group revenue in future years through its own operations in country as well as through servicing clients in the US and UK.

In April 2023, the Company announced that it had entered a formal process to acquire 100% of the share capital of one of its trusted partners in Japan - a media localisation subsidiary of a leading Japanese technology company. An equity fundraise was completed to provide sufficient capital to fully finance this proposed acquisition.

ZOO was chosen by the vendor as the preferred bidder for the purchase of the target which has been a trusted partner of ZOO for many years and already works in the Company's cloud-based platforms. These platforms will enable significant capital-efficient expansion of capacity to fulfil Japanese language services at scale. Japan is a leading growth market for all global streaming services and, along with South Korea, is a key target country in the South-East Asia region. Japanese subtitling is charged at the highest rate of any language, and Japanese dubbing is the sixth most expensive. Delivering media localisation services in Japanese requires operations in the country due to cultural factors, and consequently ZOO has to date fulfilled Japanese language services through outsourcing to partners in the country.

This proposed acquisition will provide the Company with experience and capability to deliver these services from within the Group, enabling synergies due to margin enhancement resulting from this move from outsourcing to in-house. Consequently, the Board anticipates that expansion of orders from ZOO's clients will follow in line with the precedents in India and South Korea. The valuation and timing of the acquisition are under negotiation as a consequence of the current industry challenges.

The countries in which dubbing has been established the longest are France, Italy, Germany, and Spain ("FIGS"). Originally the practice of dubbing in these countries arose through a combination of economic, cultural, ideological, and political factors, with the tradition now deeply rooted in their societies. As a result, the dubbing industries of those countries are unionised, and employment legislation requires certain practices to be observed such that ZOO's capability and capacity for delivering Parisian French, Italian, German and Castilian Spanish will benefit greatly from having hubs in each country. The Company's cloud-based platforms enable a flexible approach to the delivery of dubbing services that affords substantially greater throughput from and flexibility of physical facilities than can be achieved by the traditional process alone.

In May 2023, ZOO announced that it had acquired a 30 per cent. stake in AM Group for a total consideration of EUR 825,000 payable in cash. The investment marks the continued expansion of ZOO's geographic footprint in EMEA, with AM Group acting as a primary hub for ZOO's operations in Spain and Portugal. It will deliver dubbing services as part of ZOO's global E2E offering for major studios and streaming services in Iberia, while also supporting local content creators to expand their reach to global audiences.

Founded in 2004, AM Group has been a partner of ZOO since 2021 and is an approved service provider under the industry-wide Trusted Partner Network. AM Group generated EUR 352,000 in profit before tax for the year ended 31 December 2022. It boasts state-of-the-art facilities in both Madrid and Valencia with an adjoining dubbing school that actively provides practical training for voice talent, with courses in dubbing, voiceover, and vocal technique.

Iberia is an increasingly important market for global content producers with Spain having become established as a key European hub for audio-visual production and distribution. Building on the success of international hits such as Money Heist, Netflix launched its first European hub in Madrid in 2019 and has since doubled the size of its operations. Other major US media companies have located their European headquarters in the country. As well as strengthening capacity for Castilian Spanish and European Portuguese, ZOO's presence in Iberia will facilitate localisation into the co-official Spanish languages, bringing content from around the world to life in Valencian, Catalan, Galician and Euskera.

The Company is in advanced stages of negotiations to establish hubs in the other FIGS locations, as well as in a select few countries where a physical presence will be commercially advantageous.

Media Localisation

The services that fall into ZOO's media localisation segment are predominantly subtitling and dubbing. Both services performed strongly: subtitling grew by 15% over the prior year and dubbing by 73% to deliver segment sales of $56.6 million, up from $42.2 million in FY22. This reflects underlying expansion of business, increase in market share and, in the case of dubbing, greater penetration of ZOO's proposition across additional languages.

Gross margins for media localisation also improved. ZOO's cost of sales includes components that are external (freelancers and partner studios) and internal (staff directly engaged in fulfilling these services). While subtitling delivered an incremental improvement with margins up to 40% from 33% in the prior year, the period marked a step change in the development of the dubbing service with gross margin improving from a restated 3% to 26%. This excellent performance was due to several factors including sales being significantly improved and operations gaining the benefit of greater scale, a larger proportion of direct-to-talent projects as opposed to outsourcing to traditional studios, and the investments in capacity that were made in earlier periods becoming productive.

Included in dubbing is the production of Audio Description ("AD"), a form of narration used to provide information surrounding key visual elements in media for the benefit of blind and visually impaired audiences. Like subtitles for the deaf and hard of hearing, there is greater demand to provide AD for more content not only in English-speaking countries (US, UK, and Australia) but increasingly for other regions. In the period ZOO fulfilled for the first time AD orders for Latin Spanish, Brazilian Portuguese, Castilian Spanish, Turkish, Italian, German and French.

Media Services

The media services segment includes a range of different activities in which the most significant categories are digital packaging, metadata preparation and artwork. The segment overall delivered $32.1 million in sales, up 21.5% from $26.4 million in the prior year. Sales relating to artwork production grew particularly strongly, while metadata, for which demand is greatest when delivering territory launches, declined. Overall gross margin, after the FY22 restatement, improved from 55% to 61%, without the Fy22 restatement margins would have remained flat at 58%.

The period delivered strong growth of the mastering service introduced in the prior year, which involves optimising a digital original copy of audio-visual materials for playback through specific channels, such as broadcast and streaming. Revenues have grown from $0.9 million in FY22 to $6.5 million in FY23. This service provides good visibility, not only for the incremental mastering assignments but also for the wider scope of work that is frequently bundled with such E2E projects in the areas of localisation and media services.

ESG

After setting up our social responsibility committee in FY22 and publishing our purpose statement, we have spent the last 12 months setting up subgroups to manage our 16 objectives relating to our ESG strategy. This has resulted in the publication of our Environment statement, Innovation statement and Diversity Equity and Inclusion statement, all of which can be found on our website. We have taken steps to codify our approach to our local communities' involvement through the launch of our ZOOgooders programme which allows all staff two working days a year to devote to the charity of their choice. In addition, we have partnered with the RNIB to support greater accessibility for all to media and entertainment. A similar scheme is being finalised with the Braille Institute of America. Finally, we are calculating our carbon footprint and producing a plan to both reduce the footprint and look at ways to offset the impact.

Investing for future growth

On 27 April 2023, to support its proposed acquisition of a Japanese partner, the Company successfully completed an oversubscribed placing of £12.5 million ($15.5 million) through the issue of 7,812,500 new ordinary shares in the Company with existing and new institutional and other investors at a price of 160 pence per share. This price represented a discount of approximately 13.5% per cent. to the middle market closing price on 26 April 2023. The shares placed represented approximately 8.7% per cent. of the issued share capital of the Company prior to the placing. The Board, having consulted with several major shareholders prior to the placing, was pleased by the support received from both existing and new shareholders and is delighted to welcome several new institutional investors to the share register.

Alongside the placing the Company undertook a retail offer to enable existing shareholders to participate which raised additional gross proceeds of £0.16 million, for which a total of 101,742 new ordinary shares were issued at 160 pence per share.

The Board intends to use the proceeds of the placing and retail offer to finance the acquisition of a partner in Japan and to provide capital to fund several further investments and acquisitions that are in the pipeline, each of which will provide a hub in another key location.

In the year capital expenditure grew 7% to $4.7 million compared to $4.4 million in FY22. The bulk of the spend was on computer equipment to support our growth plans especially in media processing and mastering. This expenditure totalled $3.4 million and covered our locations in Los Angeles, London, Dubai, Mumbai and Seoul. The expenditure on leasehold improvements dropped significantly to $0.8 million from $2.1 million as we upgraded both Sheffield and Los Angeles in FY22.

The Board expects that by the end of FY24, through a combination of minority investments, acquisitions and organic growth initiatives, the Company will have established hubs in each of the key territories that will be pivotal to enabling continuing strong growth and the furtherance of the Company's mission to be the entertainment industry's most trusted globalisation service provider.

ZOO's proprietary cloud platforms are central to the operation of all its international locations, delivering consistency of service offerings, high quality, efficiency, security, and scalability. This ensures that the Company can flex quickly and efficiently and adapt to changing volume requirements of customers as new industry developments unfold and further direct-to-consumer streaming services from US media companies move ahead with their global roll-out.

Artificial Intelligence

Whilst Artificial Intelligence (AI) is a branch of computing that has been growing in applicability over recent years, the level of media coverage and widespread interest in it increased substantially following the launch in November 2022 of ChatGPT, an AI chatbot developed by OpenAI. ChatGPT is technology built on a Large Language Model (LLM), which is a computing system inspired by the biological neural networks in human brains, that has been 'trained' on enormous volumes of text. LLMs are general purpose models which excel at a wide range of tasks, as opposed to being trained for one specific task.

One of the areas where ChatGPT performs well is in natural language translation. A combination of the sophistication of its underlying neural network, the expansiveness of the text data used for training purposes and the enormous computing resources that have been deployed for building its LLM and operating the ChatGPT service have led to translation performance and quality that outstrips many popular dedicated machine translation systems.

The Company has investigated the application of ChatGPT and, indeed, LLMs more generally, to determine their suitability for providing some degree of automation to the services delivered by ZOO.

In the area of translation, it is important to recognise the profound differences between the tasks of, on the one hand, producing convincing literal translations of the written word - an area where ChatGPT performs well - and on the other hand producing authentic adaptations of dialogue. The latter is characterised by being highly contextual and where the capability (whether human or computer) required to perform it entails an appreciation of culture, the motivation of speakers, ethnicity, social dynamics, and a host of other considerations. Consequently, a process that works only with a transcript of the words spoken will be devoid of the broad scope of information that is essential for producing authentic adaptations.

ZOO's target customers are major global operators of streaming services and producers of premium entertainment content and therefore the quality expectations for localisation and media services to fulfil their requirements are the highest in the industry. Here, quality includes the authenticity of a language adaptation of an entertainment product and the extent to which it resonates with an audience that speaks another language and operates within a different culture. At present, while technologies such as ChatGPT may be effective in processing certain genres of media content (such as documentaries, where the commentary may suit a literal translation) or low value catalogues (such as user-generated content or old materials that will be distributed through FAST channels in emerging markets), they are not viable for the type and calibre of content processed by ZOO. However, the Company has since 2020 been actively exploring opportunities to adapt such technologies to provide productivity and other benefits in certain scenarios where such use may be beneficial.

There are other applications of AI that may be suitable for ZOO's business and, indeed, another emerging area of commercial activity is in various approaches designed to perform what has been termed 'automated dubbing'. These too are areas where the quality of output is improving rapidly due to advances in the application of neural networks, but where the technology is not currently capable of displacing traditional practices for premium entertainment content.

Whilst the standard of these automated dubbing approaches applied to generalised content falls a long way short of the quality requirements of ZOO's clients, the Board believes that there may be applications of these technologies that can provide some operational benefits to augment and complement the process of dubbing, rather than as a replacement for the creative human efforts that are crucial to the production of authentic language adaptations. Indeed, the Company is actively engaged in several projects to develop capabilities that are applicable to ZOO's business, including through the exploitation of third-party tools, and where the approach is to augment rather than displace established practices.

In summary, AI is an exciting field of computing that is being developed at pace and holds much potential, including in the field of ZOO's business. Its successful application in media and entertainment, particularly for premium content, will inevitably be alongside traditional practices and the use of creative talent, and where ZOO's heritage as an innovator and trusted partner to the leading names in the industry places it well to become a leader in the field. Consequently, the Board regards AI as an opportunity for ZOO's business rather than a threat.

Outlook

Two recent and ongoing market developments mentioned previously have created a temporary reduction in the production of new entertainment content and its localisation across the industry.

The first of these is the cost-saving measures that were initiated by several of ZOO's largest clients beginning early 2023. These have resulted in headcount reductions and operational reorganisation in major US media organisations that have caused a temporary disruption of new title production and its distribution across streaming platforms.

The second is the industrial action by writers and actors which is unresolved as of the date of this document. It is not possible to have certainty yet of when the strikes will end and there is media speculation they may continue until October 2023. This is causing a delay in completing new programmes which is temporarily having an impact on the current volume of localisation and media services work on new titles that is being commissioned.

However, despite this short-term industry-wide uncertainly, ZOO expects to be in an even stronger position with several customers following a rationalisation of their supplier bases and to take further share of the media localisation market once former order levels resume. At this stage, it is reasonable to expect this will be in H2 of our financial year.

Subsequent to the period end the Board has been taking steps to adjust the cost base to reduce the impact of the temporary industry slow-down on ZOO's business while there remains uncertainty around the timing of the resumption of former levels of production and orders. The Group remains financially strong with net cash at 30 June 2023 of $23 million.

ZOO continues to have positive, advanced discussions with a leading Japanese technology company regarding the acquisition of its localisation subsidiary.

The Board remains confident in the medium- and long-term fundamentals of the Company and expects to return to profitable growth once market conditions normalise.

Stuart Green
Chief Executive Officer

FINANCIAL REVIEW

Introduction

During the year the Group built on the success of the financial foundations of the prior year to scale the business and increase margins providing confidence of our long-term ambitions. We are now recognised as one of the major suppliers to the global localisation market.

Our acquisition in India has exceeded our initial projections and we are in the process of scaling up its capacity to more than double revenues in FY24. After the year-end in April 2023, we completed a fundraise injecting $15.5 million of cash into the business to further expand our global footprint which we expect to use to acquire one of the Company's trusted partners in Japan to act as a hub to assist us to achieve our medium-term financial goals. This will allow us to support our major customers in strategic markets and cement long-term supply agreements. The financial performance in the year has reinforced the strength of the business with an operating profit of $8.1 million (FY22 restated $1.9 million) contributing to Net Assets growing to $35.1 million (FY22: $25.0 million) and a net cash balance of $11.8 million (FY22: $6.0 million).

The FY22 cost of sales has been restated to reflect the correct interpretation of IFRS 15. More details can be found in note 8.

Revenue

In the financial year ended 31 March 2023, total revenues grew 28% to $90.3 million (FY22: $70.4 million). This reflects the success of our strategy to focus on being an end-to-end supplier of localisation and media services to the global entertainment streaming providers. As our customers concentrate on their international launches, we have increased our capacity to support the expansion in work required for both the initial launch and the ongoing pipeline of new work required to support their subscriber bases.

Most of the Group's operations are in the United States, where revenues were up 16% at $71.2 million. The balance of work was performed in Europe which grew by 85% to $17.0 million and India which made an initial contribution to work of $2.1 million. The split in geographical production reflects the international launches of US based streaming operators.

Customer concentration reduced during the period with the revenue contribution from our largest client falling slightly to 74% of sales (FY22: 78%) as a consequence of growth in orders from four US based content owners. The second largest customer accounted for 4%, down slightly from 6% last year. These two contracts are expected to continue over the long-term due to the close relationship and technology integration achieved by ZOO.

We report two revenue segments: media production and software solutions.

The media production segment has two revenue streams: localisation and media services. Media localisation revenues increased by 34% in the year to $56.6 million (FY22: $42.2 million), as our dubbing service gained further commercial traction in the market. As other US streaming services launch their international services, we expect future growth in revenues from new customers.

Media services revenues increased by 22% to $32.1 million (FY22: $26.4 million) as our mastering service delivered a full year's contribution which offset a drop in services related to international launches.

Software solutions, the segment that has been a reducing proportion of our business, decreased by 13% in the year to $1.6 million. We expect this segment will continue to decline in future years.

Segment contribution

The Company reports gross profit after deducting both external and internal variable costs to reflect that an increasing proportion of our revenues are derived from the provision of services to our customers. To add clarity to our financial statements we include a table of performance by our two key reporting segments. This shows that overall gross profit grew by 63% to $33.9 million (FY22 restated: $20.8 million). This represents a gross profit margin of 38%, up from 30% last year, driven by increased gross profit of the dubbing service.

Media localisation contribution grew in the year from $8.8 million to $18.9 million an increase of 115% driven by the revenue growth in both subtitling and dubbing and the improvement in project profitability as well as the restatement of costs contributing 8%. The growth in contribution of this segment was higher than that of the revenue as the significant revenue growth contributed to a higher utilisation of our staff. The contribution percentage of 33% is in line with our long-term ambitions.

Media services contribution grew to $19.5 million up 35% on last year. The contribution from this revenue stream of 61% was up 6% on the previous year due to the restatement, prior to the restatement margins were flat at 58%. This is expected to improve in future years as metadata work reduces leading to an increase in the contribution margin.

Software solution segment contribution fell 9% points to 84% in the year, as a result of the drop in revenues.

Other operating expenses

Operational fixed costs, which are defined as operating expenses less share-based payments, depreciation and amortisation, have increased by 32% in the year as we invested heavily in people and IT to support our future growth plans. Overall, operating expenses increased to $25.9  million, including share-based payments, depreciation and amortisation. The 35% increase in operating expenses is explained by the above, higher depreciation, and a one-off charge for share based payments.

Finance costs

Finance costs dropped considerably in the year from $2.1 million in FY22 to $0.4 million in FY23. The major reason for the decrease was the redemption of the loan notes in FY22 which gave rise to a non-cash charge of $1.6 million in that year. There was also an exchange gain of $0.2 million in the year which further improved presentation of finance costs.

As a result of the increase in revenues and a major improvement in gross profit, the operating profit increased 330% to $8.1  million compared to a restated $1.9 million last year. On the Company's preferred measure of profitability, being EBITDA before share-based payments, the profit was $15.5 million, up from a restated $7.1 million in FY22, an increase of 119%.

Profit before tax was $7.9 million compared to a restated loss of $0.2 million, resulting from the revenue growth, the improvement in margins and the absence of a fair value provision offsetting the increase in overheads.

The Group has reviewed the recent profitability of its US subsidiary and the expected growth in profits over the next two years and has concluded that it is appropriate to include a deferred tax asset of $1.7 million in this year's results to reflect the probable utilisation of unused tax losses in the US subsidiary. This has resulted in a profit and loss credit of $0.2 million (FY22: $1.3 million).

Statement of financial position

Non-current assets increased by 8% in the period. The Company invested $4.7 million in computer equipment to expand production capacity and increased lease commitments by $0.8 million to support the uplift in staff.

The capitalisation of research and development costs increased by 29% to $2.2 million as we accelerated the product roadmap to support customer requirements and upgraded our internal production systems. This also increased the depreciation charge resulting in the balance sheet asset increasing by 25% to $3.3 million. The deferred Tax asset increased by $0.2million reflecting the recoverability of net operating losses in the US.

Trade and other receivables decreased 28% to $16.5 million (FY22 restated: $23.0 million) reflecting the strong sales performance in the first half of the year. This decrease was mirrored in trade and other payables as work performed by suppliers and freelancers peaked in H1 to support our customer deliveries. Contract assets, which represent work in progress and sales accruals on customer projects, increased by 33% to $4.8 million as certain projects had not completed at year-end and were invoiced in April and May 2023.

Current borrowings increased by 7% to $1.4 million and represent the lease commitments over the next 12 months.

Current liabilities have fallen significantly in the period due to the lower level of sales in FY23Q4 which has resulted in both trade payables and accruals decreasing due to the pause in customer orders.

Cash and cash equivalents of $11.8 million at year end (FY22: $6.0 million) were up 97% as a result of the improvement in profitability and strong cash collections.

Non-current liabilities decreased in the year due to the reduction in the "right to use" liability on our property leases with both Sheffield and Los Angeles having one less year to run.

Consolidated statement of cash flows

Net cash generated from operating activities was $15.5 million, up from $5.2 million in FY22. The increase of $10.0 million is attributable to the decrease in trade receivables compared to last year offsetting the increase in trade payables and the increase in the operating profit. The inflow from operating activities was reduced by a $8.2 million spend on investing activities, which was a reduction of $2.1 million on FY22. The reduction was due to the acquisitions in FY22.

Overall, the Group had a net inflow of $6.0 million compared to $3.0 million in FY22 as the cash flow from operations more than offset the fundraise in FY22.

Post balance sheet events and going concern

On the 5^th April 2023, we completed the acquisition of the remaining 49% of ZOO Korea that was owned by minority shareholders. We issued 550,000 ordinary shares in ZOO Digital Group plc to the exiting shareholders of ZOO Korea and made a one-off payment of $200,000 in consideration for their 49 per cent stake. The acquisition reflects the success of the initial investment and the outlook for media localisation in the region.

In April 2023 we completed a placing and retail offer of new equity raising a gross $15.8 million to fund the proposed acquisition of a business in Japan and accelerate our international footprint. The Company raised gross proceeds of £12.7 million ($15.8 million) through the oversubscribed placing of 7,914,242 Ordinary Shares with certain existing and new institutional and other investors at a price of 160 pence per New Ordinary Share. The shares were admitted to trading on 4 May 2023 and 12 May 2023.

On the 4^th May we acquired 30% of AM Group in Spain for €825,000. The investment marks the continued expansion of ZOO's geographic footprint in EMEA, with AM Group acting as a primary hub for ZOO's operations in Spain and Portugal. It will deliver dubbing services as part of ZOO's global end-to-end offering for major studios and streaming services in Iberia, while also supporting local content creators to expand their reach to global audiences.

Going forward the business remains confident that it has sufficient headroom to trade for the foreseeable future, as the recent fundraise coupled with the renewed $5 million invoice discounting facility from HSBC gives us the working capital headroom for the next phase of our expansion. The budget for FY24 has been stress tested by our financial modelling. For this reason, we continue to adopt the going concern basis in preparing the financial statements.

Principal risks and uncertainties

Company law requires the Group to report on principal risks and uncertainties facing the business, which the Directors believe to be as follows:

International business

While the Group is domiciled in the UK, its main country of operations is the US and over 79% of ZOO's revenues come from overseas clients. As with most small international businesses cash flow and exchange rate fluctuations management present a risk. The Group continues to focus closely on conservative cash management and monitors currency transactions taking proactive actions when appropriate.

Political uncertainty

The political climates in the UK and US are currently challenging due to the global economic environment.  Although the terrible situation in the Ukraine is having a major impact on the world economy, the current impact on ZOO is negligible. The Directors monitor emerging news and trends and remain alert to any potential impact on the trading of the Group.

Technology conservation

The Group continues with a patent protection policy, with 16 patents granted and a further three pending, having allowed some legacy patents which are no longer beneficial to lapse. These active patents are integral to the business in the protection of our unique technologies.

Operational risks

The main operational risk is managing any unexpected peaks or troughs in production orders and ensuring that the appropriate levels of resource are available to provide the quality of services expected by our clients.  This risk is managed by having a core of highly skilled permanent staff along with a pool of temporary staff that can be brought in at short notice to help at times of high volume.  In the current year we have supplemented these resources by engaging international businesses to operate within our technology platform, giving us further variable cost capacity. The use of technology helps mitigate this risk by streamlining processes as much as possible and enabling efficient access to a large, global and scalable pool of independent contractors.

Loss of the Group's key clients

Client relationships are crucial to the Group and the strength of them is key to its continued success. The Group mitigates this risk by a diverse number of contacts working closely with the largest clients across different business units and seeking to secure long term contractual agreements for supply of technology and services.  The Group focusses on providing high quality services to all clients to ensure an attractive and differentiated offering thereby reducing the likelihood of client loss.

Corporate activity within key clients

Merger and acquisitions within key clients represent a risk as they can disrupt sales.  This risk is mitigated by ensuring an awareness of news in the market and focussing on diversifying the client base.

Financial risks

The main financial risks faced by the Group are in relation to foreign currency and liquidity.  The Directors regularly review and agree policies for managing these risks.

The functional currency and presentation currency of the Company are US dollars as the majority of the Group's transactions are undertaken in US dollars, however, the Consolidated Statement of Financial Position can be affected by movements between pound sterling and the US dollar as the parent company and UK subsidiaries have some pound sterling debtors and creditors. Foreign currency risk is managed by matching payments and receipts in foreign currency to minimise exposure. Further information on the financial risks is given in note 28 to the accounts.

The Group is exposed to the usual credit risk and cash flow risk associated with selling on credit and manages this through credit control procedures. The Group regularly monitors cash flows and cash resources and has the ability to draw down funds from financing facilities in the UK and the US.

Phillip Blundell

Director and Secretary

9th August 2023

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 March 2023

*see note 8 for details regarding the prior period restatement.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 March 2023

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2023

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 March 2023

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 March 2023

1.     General information

ZOO Digital Group plc ('the company') and its subsidiaries (together 'the group') provide productivity tools and services for digital content authoring, video post-production and localisation for entertainment, publishing and packaging markets and continue with on-going research and development in those areas. The group has operations in the UK, US and India.

The company is a public limited company which is listed on the AIM Market of the London Stock Exchange and is incorporated and domiciled in the UK. The address of the registered office is Floor 2 Castle House, Angel Street, Sheffield.

The registered number of the company is 03858881.

The consolidated financial statements are presented in US dollars, the currency of the primary economic environment in which the company operates (note 2.4.1). Monetary amounts in these financial statements are rounded to the nearest $000.

2.     Statement of compliance

The financial information set out in this preliminary announcement does not constitute the Group's statutory financial statements for the period ended 31 March 2023 or 31 March 2022 as defined in section 435 of the Companies act 2006 (CA 2006) but is derived from those audited financial statements. Statutory financial statements for 2022 have been delivered to the Registrar of Companies and those for 2023 will be delivered in due course. The auditors reported on those accounts; their reports were unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.

Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group.

3.     Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been applied consistently to all the years presented, unless otherwise stated.

3.1     Basis of preparation and going concern

Group financial statements

These financial statements have been prepared in accordance with UK adopted international accounting standards and the requirements of the Companies Act 2006.

The preparation of financial statements in accordance with international accounting standards and the requirements of the Companies Act 2006 requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts in the financial statements.

Going concern

The directors have prepared trading and cash flow forecasts for the group for the period to 31 March 2025 which show a continuation of the growth in profitability and cash generation.  In line with industry practice in this sector the directors have had informal indications from major and smaller clients to substantiate a significant proportion of the forecast sales.  The directors have considered the consequences if the sales volume is less than the level forecast and they are confident that, in this eventuality, alternative steps could be taken to ensure that the group has access to sufficient funding to continue to operate. The group has a facility with HSBC Bank which provides invoice financing of up to $5m against US clients invoices raised by ZOO Digital Production LLC. This facility is in place until 1 June 2024.

The directors believe the assumptions used in preparing the trading and cash flow forecasts to be realistic, and consequently that the group will continue in operational existence for the foreseeable future. The financial statements have therefore been prepared on a going concern basis.

New and revised standards that are effective for annual periods beginning on or after 1 April 2022

There are no new or revised standards that will have a material impact on the Group.

3.1.1   Standards and interpretations in issue at 31 March 2023 but not yet effective and have not yet been adopted early by the Group

At the date of authorisation of these financial statements, there are no new, but not yet effective, standard, amendments to existing standards, or interpretations that have been published by the IASB that will have a material impact on these financial statements.

3.2      Consolidation

Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is obtained until the date that control ceases.

The consolidated financial statements of ZOO Digital Group plc include the results of the company and its subsidiaries.  Subsidiary accounting policies are amended where necessary to ensure consistency within the group and intra group transactions are eliminated on consolidation.

The Group applies the acquisition method when accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and equity interests issued the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred.

Assets acquired and liabilities assumed are generally measured at their acquisition date fair values. However, such fair values and all associated accounting entries are subject to revision during a period not exceeding 12 months following the date of acquisition, insofar as the accounting for the business combination is incomplete by the end of the first reporting period date. As a result, ZOO Digital Group plc revises any provisional amounts retrospectively to reflect further evidence received in respect of acquisition date values.

3.3     Foreign currency translation

3.3.1   Functional and presentation currency

Items included in the financial statements of each of the group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in US dollars which is the company's functional and presentation currency. The functional currency of the company's subsidiaries is US dollars, therefore the majority of transactions between the company and its subsidiaries and the company's revenue and receivables are denominated in US dollars.

The US dollar/pound sterling exchange rate at 31 March 2023 was 0.813 (2022: 0.762).

3.3.2   Transactions and balances

Transactions in foreign currencies are recorded at the prevailing rate of exchange in the month of the transaction. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the year end exchange rates are recognised in the profit/(loss) for the year in the Consolidated Statement of Comprehensive Income.

3.3.3   Group companies

The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

-     assets and liabilities for each entity are translated at the closing rate at the year end date;

-       income and expenses for each Statement of Comprehensive Income are translated at the prevailing monthly exchange rate for the month in which the income or expense arose.

4.     Earnings per share

Basic earnings per share ("EPS") is calculated by dividing the profit/(loss) attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year.

Diluted EPS is calculated by dividing the profit attributable to the equity holders of the Parent by the weighted average number of ordinary shares outstanding plus the weighted average number of shares that would be issued on conversion of all the dilutive share options into ordinary shares.

5.     Notes to the cash flow statement

       5.1 Significant non-cash transactions

During the year the group acquired property, plant and equipment and computer software with a cost of $5,392,000 (2022: $12,969,000) of which $686,000 (2022: $8,495,000) was acquired by means of a lease.

       5.2  Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and balances with banks. Cash and cash equivalents included in the cash flow statement comprise the following consolidated statement of financial position amounts.

The fair values of the cash and cash equivalents are considered to be their book value.

6.     Share capital and reserves for Group and Company

Called up share capital

Reserves

The following describes the nature and purpose of each reserve within owner's equity:

*In the current year the Directors have reviewed the converted loan note reserve and concluded that the losses within here represent realised retained profits to which the Group and Company have unconditional entitlement. As such, the reserve has been transferred to offset against accumulated losses.

7.     Borrowings

The group has renewed on 1 June 2023 with HSBC Bank US an invoice financing facility of up to $5.0 million against US client invoices raised by ZOO Digital Production LLC. The facility is in place until the renew date of 1 June 2024.

The UK banking partner, HSBC, continues to provide an overdraft facility of £250,000.  The principal outstanding at 31 March 2023 was nil (2022: nil).  This line of funding has been secured as a floating charge over the assets of the UK companies and automatically renews on an annual basis. 

Lease liabilities

Lease liabilities are payable as follows:

The lease periods range from between 1 and 10 years, with options to purchase the asset at the end of the term if applicable. Lease liabilities are secured against the leased assets.

8.     Restatement of prior period

The Board has made two prior year restatements, one related to an incorrect basis of accounting for revenue and contract assets / costs at the year end, and one related to the conclusion of fair values on a business combination (as expected under IFRS 3).

Incorrect basis of accounting

During 2023 the Group identified an error relating to its application of IFRS 15 'Revenue from Contracts with Customers' in respect of the recognition of costs incurred on partially completed contracts, where performance obligations were not wholly satisfied as at the reporting date. Under IFRS 15, as the Group applies the output method to account for its partially completed performance obligations, the costs should be expensed in the period in which they were incurred; previously, the Group had incorrectly performed a matching exercise such that costs were accrued or deferred to match the revenue recognised under the output method.

This has resulted in a material understatement of cost of sales in 2022, and a material overstatement in accruals and prepayments. As a result, the prior year has been adjusted as per below (decrease in profit of $1,266,000).

We have assessed the impact of the misstatement and conclude that no material changes to the tax charge in            2022 are required. As the Group has significant tax losses  no tax would be provided for.

There is no change to net cash inflow from operating activities as a result of this prior period adjustment. However, movements in trade and other receivables decreased from a position of $18,453,000 by $3,020,000 to $15,433,000 and movements in trade and other payables decreased from $15,337,000 by $1,754,000 to $13,583,000.

The correction to profit has been shown through the Consolidated Statement of changes in equity.

The correction to prepayments and accruals as at 31 March 2022 can be seen in the Consolidated statement of financial position on page 20, and has also had consequential amendments on other notes to the financial statements, most notably the segmental analysis  and the earnings per share .

Basic and diluted earnings per share for the prior year have been restated. The amounts of the correction for basic and diluted earnings per share was a decrease of 1.5 and 1.3 cents per share respectively.

Annual report and Accounts

Copies of the Report & Accounts for the year ended 31 March 2023 will shortly be available to view on the Group's website www.zoodigital.com.

The Report & Accounts for the year ended 31 March 2023, together with the notice of annual general meeting, are expected to be posted to shareholders during August 2023; an announcement to notify shareholders of this will be made in due course. Further copies will be available from the Company's Registered Office: 2^nd Floor, Castle House, Angel Street, Sheffield S3 8LN.

Annual General Meeting

The Annual General Meeting of the Group will be held at Instinctif Partners, 1^st Floor 65 Gresham Street, London EC2V 7NC on 28th September 2023 at 5pm.