7 July 2022

ZOO DIGITAL GROUP PLC

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

 FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2022

Capturing significant opportunity, taking market share with a year of outstanding, profitable growth

Significant progress towards medium term $100m target

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 2022.

HIGHLIGHTS

Key Financials

·      Revenue grew organically by 78% to $70.4 million (FY21: $39.5 million)

·      Adjusted EBITDA* grew to $8.3 million (FY21: $4.5 million) - EBITDA* margin increased to 11.8% (FY21: 11.5%)

·      Operating profit of $3.1 million (FY21: $1.0 million)

·      Reported profit before tax of $1.1 million (FY21: loss of $3.6 million) after non-cash fair value movement on embedded derivative of $1.6 million

·      Net cash at year end $6.0 million (FY21: $2.9 million)

·      Completion of a $10.1 million placing in April 2021 to fund accelerated growth, deployed in global expansion efforts, particularly Korea, Turkey and India

·      Conversion of the 7.5% unsecured convertible loan stock into 5,273,959 new shares, removing the majority of Group borrowings from balance sheet and associated interest payments

Operational Highlights

·      ZOOstudio deployment expanded by existing major media client and adopted by a second multinational entertainment industry client

·      Media services grew by 51% due to both catalogue content work and regional launches of streaming platforms

·      Media localisation grew by 108% as demand for new production work rebounded strongly in H2 -dubbing revenue rose by more than 170% half-on-half

·      The Company's worldwide freelancer network grew by 20% to 11,028 (FY21: 9,207) enabling and positioning for higher volumes

·      The Group successfully maintained an ongoing high level of customer satisfaction - retained sales KPI was 97.6%

·      Strengthened end-to-end offering with the establishment of mastering services division - as a result, commenced a significant engagement with a leading media organisation in FY21H2

·      Launched global growth initiative with investments in fast-growing, high-demand regions, including India, South Korea, Turkey, and Denmark with others in the pipeline

Broader Market Highlights

·      Global spend on original programming reached $220 billion in 2021 and is expected to grow strongly in 2022 and beyond

·      In 2021 27% of the world's 100 most popular titles were made outside the US (2017: 15%)

·      Three recently introduced global streaming services from major US media companies are now working on their international rollouts

·      In 2021 the average number of subscriptions per US household reached 4.7 services

·      The market is seeing unprecedented demand for media localisation services

Outlook

·      Trading in Q1 has been very strong with sequential growth over FY22Q4 and significantly ahead of prior year

·      Visibility through H1 indicates further significant progress towards our 2020 goal of delivering $100 million in sales in the medium term

·      H1 sales expected to exceed the second half of the prior year which was in turn 60% ahead of FY22H1

·      In dialogue with multiple streaming platform operators regarding adoption of ZOOstudio

·      Expect investments made in building multilingual dubbing capability and capacity will result in strong growth in FY23

·      The Board remains confident of continuing to deliver strong growth

* Adjusted for share-based payments

Copies of the Report and Accounts for the year ended 31 March 2022 are available on the Group's website www.zoodigital.com and, in accordance with AIM Rule 20, will be distributed to shareholders in August 2022.

Stuart Green, CEO of ZOO Digital, commented:

"These results reflect an outstanding year of operational delivery and growth across the whole business. ZOO is taking market share in a growing market, benefitting from our cloud-based platforms, extensive freelancer network and embedded client relationships. With our global scale and end-to-end offering, we are one of the few vendors capable of meeting the requirements of major media companies to take their content to international audiences.

"The streaming market continues to evolve as media companies invest billions of dollars in content to capture and entertain international audiences. We are scaling ZOO's operations to match continuing growing demand. During the year, we introduced new services such as mastering and expanded our presence in some of the fastest-growing regions for our customers, particularly across Asia. These are strategic investments that strengthen our operations in some of the most exciting territories for content expansion and will support our ambitious growth plans.

"We are excited about the scale of the opportunity ahead and confident of delivering further profitable growth."

For further enquiries please contact:

Investor engagement

The Company wishes to draw attention to the posting on its website (www.zoodigital.com) of a presentation to shareholders regarding its final results, and of an investor presentation (www.zoodigital.com/prelims2022) that will be live streamed on Tuesday 12^th July at 6:00pm BST.

CHAIRMAN'S STATEMENT

It gives me great pleasure to report an outstanding year for ZOO Digital. The Company has delivered organic revenue growth of 78% and EBITDA (excluding share-based payments) growth of 84% during a period in which significant investment has been made in people, infrastructure, offices, and international operations.

In September 2020, we introduced for the first time our ambitious medium-term target to reach $100 million in sales - a steppingstone towards our long-term aspirations to become the largest vendor in our sector. This was accompanied by a 'bridge' to indicate how we expected the gap to be filled by contributions from our largest client and from others across our key revenue sources of subtitling, dubbing and media services. At that time our revenue for the full year to March 2020 was $29.8 million. Following each subsequent results announcement and trading statement we have updated the market with a revised bridge to indicate changes in our expectations. The most recent version indicates FY22 sales achieved of $70.4 million, well ahead of initial expectations at the beginning of the year.

Whilst FY22 has been a remarkable year for ZOO, we anticipate further significant market developments which will continue to be favourable to the Company in the year ahead. Indeed, we expect that the profound changes that are taking place across our industry will vindicate ZOO's strategic plan and the role the Company has played in bringing about a digital transformation in the media localisation supply chain.

Three Direct to Consumer (DTC) streaming video platforms from leading US media companies have recently begun their international rollouts, further compounding the already record high volumes of premium localisation services required by longer established participants. Consequently, demand is outstripping supply, and the industry requires expansion in capacity that is unlikely to be satisfied by traditional approaches alone. ZOO's scalable cloud-based approach provides an efficient and effective solution to the industry's evolving requirements.

Increased competition amongst consumer services, combined with subscribers exercising greater caution over discretionary spend, has resulted in a changing picture of the progress of the streaming video market. Our view, consistent with independent commentators, is that the overall market will continue to grow strongly, particularly in international markets, although the relative market shares of leading participants may change. This heightened competition will require media companies to invest more heavily in original content and make this content go further by localising it for international markets. As a vendor to all the major media companies, and as one of the few service providers with the scale to deliver simultaneous, single-day global launches, ZOO is optimally positioned to benefit from the evolving market backdrop.

Upon raising £7.4 million ($10.1 million) in a share placing in April 2021, the board outlined how market conditions were presenting a unique opportunity for ZOO to seize market share. Our plan would invest the proceeds by growing the R&D and service delivery teams, establishing regional hubs, expanding international business development, and strengthening our infrastructure. I am pleased to report that we have made significant progress on all fronts and delighted that we have expanded our capabilities in Turkey, South Korea, India, and Denmark during the period.

Together with my board colleagues, I would like to extend my appreciation to our supportive former holders of loan notes who, in September 2021, agreed to convert those notes into the share capital of ZOO, thereby eliminating all the Company's long-term debt. This, combined with the proceeds of the fundraise, leaves ZOO with a strong balance sheet and well placed for its continued rapid growth.

I should like to take this opportunity to welcome the newest member of our board. Nathalie Schwarz, who became a non-executive director in January 2022, brings 20 years of board-level international experience. She has expertise in the media and digital technology sectors with a career spanning broadcasting (television and radio), mobile and digital interactive platforms and information/data services. Nathalie will chair the Remuneration Committee from summer 2022 and is an experienced Remuneration Committee chair.

Finally, I would like to express my sincere thanks to all my colleagues globally, in the UK, USA, Europe, Middle East, South Asia and Southeast Asia for their instrumental role in delivering such a successful year.

I look forward to reporting on the exciting period ahead and remain confident in the Company continuing to deliver strong profitable growth.

Gillian Wilmot
Chairman

STRATEGIC REPORT

Introduction

This report covers an exceptional period for the Group, bringing into sharp focus the strengths of its strategic plan. ZOO makes life easier for the streaming companies who now lead in entertaining the world by providing a comprehensive suite of software-enabled services to allow feature films and TV series to be adapted for and delivered to global audiences. Our aim is to be our customers' most trusted partner to help them deliver engaging, entertaining, and immersive content experiences to their consumers around the world.

ZOO's primary customers are major media organisations, predominantly in the US, almost all of which now offer streaming services and seek to differentiate their propositions through diverse catalogues of frequently updated premium original entertainment content. With the rapid decline in demand for packaged media (DVDs and Blu-ray discs) and PayTV which were previously significant generators of cash and profits for major media organisations, the future of these companies rests on monetising content through streaming. Both Subscription Video on Demand (SVOD) and Advertising Video on Demand (AVOD) are being variously pursued as the operators seek to maximise the return on their substantial investments in entertainment content through the streaming market.

Most of this content, made up of episodic TV series and feature films, is developed by independent production companies whose key deliverable in each case is a 'master' of the audio-visual materials. Before a programme can be streamed to consumers there is significant further work necessary. This work falls into two broad categories: (1) the video, audio and other assets must be converted into formats and combined into packages that meet the specific technical requirements of the target platform(s) as well as certain creative requirements of local markets and audiences (collectively referred to as "media services"); and (2) the original dialogue in the programme must be adapted into potentially many other languages through the creation of culturally-sensitive subtitles and dubbed soundtracks (collectively, "media localisation"). These services are highly specialised and demanding; their complexity is illustrated by the number of deliverables required for each original programme which can often be counted in thousands.

ZOO is one of very few 'End-to-End' (E2E) vendors in the industry with the capability to deliver the full range of media and localisation services to the high standards demanded of the major industry buyers, and with coverage of over 40 languages that are now regularly required for global distribution. A key differentiator of ZOO in the market is the cloud-based software systems that have been developed by its in-house R&D team over many years, bringing efficiency and scalability to the Company, its customers and its large community of freelancers including specialist media translators, directors, and actors.

In the past, it was common practice for large buyers to divide work amongst many vendors, with each vendor providing a subset of the services required. In the current market both the volume of original programmes produced each year as well as the number of languages into which those programmes are delivered are at record levels. The decline in their traditional sources of income has led buyers to look for greater efficiencies in their internal operations, and one strategy that has become popular is to outsource all media services and localisation across a much smaller number of more capable vendors. Thus, there is growing attraction to vendors such as ZOO that provide an E2E service.

A further strategy that may be employed by these buying organisations is the adoption of Enterprise Resource Planning (ERP) software to support internal staff in managing the complexity of these services and the high number of deliverables. Generalised ERP systems are not well suited to the required degree of specialism and the task is best served by special-purpose solutions that are tailor made for this domain. ZOO has developed such a system called ZOOstudio that it makes available to its customers as an integral component of its offering.

From an ESG standpoint, we believe ZOO's strategy makes it environmentally superior to its competitors given that the Group does not need to own and operate dubbing facilities in every country nor require high levels of travel by acting and directing talent. The Company has strengthened its ESG credentials more broadly through several initiatives and has developed a sustainability strategy around its three core value themes of 'think smarter', 'make it easier' and 'be better'. These include our ZOO Academy programme, apprenticeships, university partnerships, innovation, employee engagement, charity partnerships and our ZOOgooders initiative that are explained later in this report.

Market Overview

Following a year in which new original title production was significantly disrupted due to the global pandemic, the trend continued into the beginning of FY22. Throughout this period the projects assigned to ZOO by customers were predominantly related to titles that had already been produced prior to the pandemic. A significant proportion of this work was to support the launch of existing streaming services in new territories which entails (1) taking the catalogue of titles available on a platform in other countries and producing new language versions, and (2) preparing a range of content for distribution in the languages of a region, usually through licensing of pre-existing third-party content.

Production of new titles resumed during the year and resulted in associated orders for media services and localisation returning in August 2021 at which point the mix of catalogue versus new content began to shift. By the end of the period, the work relating to new titles accounted for a much greater proportion of the pipeline.

Three DTC streaming services were launched before or during the period of the pandemic by major US media companies: HBO Max from Warner Bros Discovery (the merger of AT&T's WarnerMedia unit and Discovery Inc. which was completed in April 2022), Peacock from NBCUniversal (a subsidiary of Comcast) and Paramount Plus from Paramount Global (formerly ViacomCBS, the merger of Viacom and CBS which completed in December 2019). Following their availability in the US and some English-speaking markets, these services have only recently begun their international rollout. Although in this regard they lag the first of the major DTC services, Disney+, by over two years, all three have publicly stated their commitment to making their services available across many countries.

The growing availability of multiple global streaming services in many countries is creating increased competition for viewers. The appeal of each of these services rests entirely on the strength of the catalogue of content they offer. To maximise this appeal the operators are discontinuing their licensing of some or all owned content to other services so that these titles are exclusively available on the operator's platform. This means that some high value content that was previously included on other services is being withdrawn, thereby potentially diminishing the perceived value of those other services.

Since content is the key differentiator of one service from another, each service is compelled to continue to add new, fresh, high-quality titles to attract viewers and retain those who already use the service. This has propelled the volume of new original programme production to an all-time high. Market commentator Ampere Analysis reported that the global spend on original programming reached $220 billion in 2021 and is expected to grow strongly in 2022 and beyond. Of this total, around $50 billion was estimated to have been spent by major streaming services.

Major US media companies already generate most of their revenues outside their domestic market. For example, two thirds of Netflix subscribers live outside of the US and account for 55% of its revenue. Given that the US has high household penetration of streaming services (around 85% according to data analysis firm, Kantar), subscriber growth across the industry will come predominantly from markets where penetration is much lower, such as Southeast Asia, the Middle East and Africa. Consequently, those who commission and license entertainment content increasingly make choices based on its appeal across multiple international markets.

A separate study by Ampere Analysis notes that historically, US content has tended to dominate on the global stage, while in individual countries local content has often held the balance of power. But this is beginning to change. In 2017, 15% of the world's 100 most popular titles were made outside the US and by December 2021 that figure grew to 27%. Ampere's analysis shows that the audience for internationally produced content is growing in the key revenue-generating English-speaking and European markets. SVOD subscribers in the US, UK, Australia, and Canada, in particular, are tuning in to content produced overseas, and the major global SVOD platforms are driving this trend by both commissioning high quality non-English language titles and increasing the number of foreign language titles in their catalogues.

The pandemic offered a boost to internationally produced content as production shutdowns and release delays led to locked-down viewers looking further afield for shows and movies to watch. As the SVOD players expand geographically and continue to make high production value titles in a multitude of global markets, Ampere expects the demand for overseas produced content to further increase.

With record volumes of new original content, which is required to be made available in many countries, the market is seeing unprecedented demand for media localisation services. Major media companies, especially those who are at earlier stages of their international rollout, are finding that the capacity for subtitling and dubbing in the market is inadequate to meet their needs. As traditional bricks-and-mortar providers of these services reach their capacity, for them, scaling up is a capital-intensive and slow process. In contrast, the flexibility afforded by ZOO's cloud software delivers unprecedented levels of capacity and access to talent all around the world. Therefore, the Company is well placed to grow in part by servicing projects that cannot be expediently satisfied by traditional vendors.

The attractiveness of the E2E model is also driving demand for ZOO's services. We expect more of the large buyers to transition to this approach in the future, thereby strengthening ZOO's position in the market as a leading supplier. One effect of this is that more customers will take multiple service lines offered by ZOO which plays to the strengths of the Company's proposition and enables efficient execution through its technology-enabled offerings.

Growth in demand for the services offered by ZOO to media clients is being fuelled by the competitive dynamics of the consumer market that is expanding through new entrants. The principal competitive arena for global streaming providers is in capturing viewers for their respective services. According to research published by Kantar in January 2022, the average number of subscriptions per US household reached 4.7 services in the final quarter of 2021 and is unchanged over the following quarter. Recent reports of subscriber volatility have heightened competition, however, Kantar maintains that U.S. streamers are not leaving the streaming category.

The second area of competition for major streaming services is in relation to content. A differentiated and attractive catalogue that is updated regularly is essential to win and retain viewers, and therefore the rights to highly valued TV shows and feature films are selling to the highest bidder.

The board expects a third area of competition between streamers will likely intensify over the period ahead, namely access to capacity for preparing content for international distribution. This is a highly favourable dynamic that supports the ongoing expansion of the ZOO business. In this regard, ZOO is more closely aligned with the market dynamics of content production than with the business of streaming and the number of consumers who view that content.

Media Localisation Market Size

The market dynamics described above are giving rise to expansion of the market for media localisation. In its Video Localisation Report published in July 2021, language industry intelligence company Slator estimated that video localisation services and technology constitute a market that it estimates to have been worth $4.97 billion in 2021.

In a recent quarterly earnings call, Netflix provided some statistics that illustrate the level of spend on media localisation by large buyers in the sector. The company disclosed that in 2021 it commissioned 7 million minutes of subtitles and 5 million minutes of dubbed soundtracks. We estimate that this corresponds to a spend of the order of $500 million, which equates to just under 3% of the content budget disclosed by Netflix for the same period.

Netflix is long established in the industry and is progressive in the scope and extent of localisation. Not all industry players are currently supporting as many languages as Netflix, but to remain competitive it seems likely that market participants will need to expand their propositions with a similar international reach to Netflix, at which point 3% of content budgets may become the appropriate level of expenditure necessary to support this ambition.

Strategy

The increasing appeal of ZOO's proposition - as evidenced by the strong organic growth in FY22 - is attributed to its strategy, built on the five pillars of innovation, scalability, collaboration, customer, and talent, that differentiate the Company amongst its competitors.

Innovation

During the period, the Company increased its resources in ZOO Digital Labs, its research and development function, with headcount increasing by 33%. The enlarged team has the capacity to develop its products more quickly as well as to embark on internal research projects.

ZOOstudio, the Company's specialised ERP and procurement platform, has been a major focus of development. A wide range of new features have been added to create enhanced levels of integration between ZOO and its customers as well as to continue to enable greater levels of efficiency through automation of workflows and elevated security. The system now supports a range of financial planning and management features, integrated capabilities for review and approval of materials such as scripts and dubbed soundtracks, and support for capacity planning.

The Company's cloud dubbing platform, ZOOdubs, is now being used for over 40 languages and has been enhanced further, particularly to support various territory-specific requirements needed in different locations.

During the period, ZOO Digital Labs pursued further research projects, mostly in collaboration with partners. These include several initiatives to develop machine learning approaches that we envisage will deliver new product capabilities and competitive advantages in the future.

Scalability

ZOO's network of independent freelancers provides the Company with flexibility and scale. The number of freelancers grew by 20% in the period to over 11,000 individuals located around the world, each providing language-specific expertise in the areas of translation, adaptation, direction and acting. To continue to grow its capacity ZOO must increase the number of freelancers across these disciplines in over 40 languages. The Company accelerated this process during the period with the launch of its global growth initiative to establish points of presence in several critical regions of the world.

During FY22 the Company made capital efficient investments in long-term partners in South Korea and Turkey - two strategically important locations for the industry due to their tradition of high-quality entertainment content production - and established ZOO Korea and ZOO Turkey through close strategic alignments with WhatSub Pro and Ares Media respectively. The Company acquired the award-winning media services and localisation business of long-time partner Vista India, based in Mumbai, to establish ZOO India. Finally, the Company has established ZOO Denmark in Copenhagen to provide a Scandinavian point of presence. Each of these operations provides a strategic hub in fast-growing regions and will be pivotal to the expansion of ZOO's talent pool.

The Company also launched ZOO Academy during the period, an important strategic initiative that will help develop talent, particularly where there is a shortage of certain services in particular languages. ZOO Academy will provide a range of online courses, workshops, and other learning resources to deliver both the support to equip new talent with the required industry knowledge and skills, and the experience required to hone those skills and become effective practitioners. The first ZOO Academy course has now launched and teaches the skillset necessary to adapt scripts for dubbing. Several further courses across multiple disciplines are in the pipeline and will be launched in the current period.

Collaboration

An important component of the ZOO Academy programme is the educational partnerships we have developed over several years which are being expanded and accelerated. Our cloud platforms, including ZOOscripts, ZOOsubs and ZOOdubs, are now being taught by educational providers around the world with approaching 20 partners signed up to this programme, including teaching centres in the UK, Europe, Latin America, and Southeast Asia.

ZOO Digital Labs continues to collaborate with our primary research partner, the University of Sheffield, where we currently have active projects in the areas of computer science and linguistics.

It is through our approach to collaboration that we were able to identify highly suitable targets for our global growth initiative by building on the long-term partnerships we have established with certain organisations. This significantly de-risks these investments due to the strong and productive working relationships that have already been established with management, and the willingness to embrace a more technology enabled approach to the delivery of localisation services (which is not the norm in our industry).

Customer

The strategic rationale for our ZOOstudio platform received a further endorsement during the period: a major media company that adopted the system in 2019 to support the roll-out of its global streaming video service has deployed it more widely across its operations. ZOOstudio has now been adopted by additional operating groups within this organisation and the new functionality that has been added is being widely used. The platform has proven to be highly effective in supporting the complex workflows and processes associated with preparing content for distribution via streaming, delivering operational efficiencies, providing visibility and transparency, measuring the performance of vendors, and ensuring high levels of reliability and accuracy.

Furthermore, a second multinational entertainment industry client adopted the platform during the period and is now using it to support its operations. Discussions with further customers regarding adoption of ZOOstudio are in progress. These are highly significant developments since they result in the embedding of ZOOstudio, an integral part of the Company's offering, within customers' operations.

The period included the launch of an important addition to ZOO's service offering: mastering, which involves optimising a digital original copy of audio-visual materials for playback through specific channels, such as broadcast and streaming. This new mastering service creates an additional revenue stream and provides an important adjacent capability that was requested by existing customers under the scope of E2E engagements. The costs associated with the capital infrastructure to support this service and the recruitment and training of a new team were incurred in H1. A significant engagement with a leading media organisation was secured in H2 which has delivered a new revenue stream during the period. This provides good visibility into FY23, 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.

Talent

In FY21 we launched our Advocate programme to engage with experienced and progressive practitioners of the dubbing markets across key countries and territories, bringing the benefit of their insights, expertise, and contacts with local buyers as well as relationships with talent for voice acting, directing, mixing and script adaptation. Our advocates have been invaluable in enabling us to expand our talent pool across their territories.

We strengthened our Advocate programme further in FY22 with several key appointments in Japan, Singapore, Korea, and Dubai. Key appointments include:

·      Anna Chew, a seasoned media localisation executive, has joined us as Territory Manager for Southeast Asia. She has worked across Malaysia, Singapore and Taiwan for companies including Disney, Nickelodeon and Blizzard.

·      Through our acquisition of Vista India, Rajiv Raghunathan has joined our senior management team. His career spans 25 years spent in digital distribution, film production, post-production, and media localisation.

·      In South Korea, we welcome to our team Jonghyun Oh. His company has been a leading provider of media localisation services in the country.

·      Our efforts in Turkey are led by Ender Albayrak and Emre Sahinkanat who have each played leading roles in the localisation industry in Istanbul.

During the period Chris Oakley was promoted to Chief Technology Officer for the Company. In his 18 years with ZOO, Chris has helped spearhead flagship platforms such as ZOOstudio, ZOOdubs and ZOOsubs. In his new role as CTO, Chris will be responsible for continuing to grow the ZOO Digital Labs technical centre of excellence to support and future-proof the globalisation industry.

Our ZOO Academy programmes are being led by Ambrish Acharya who joined us as Head of Education. He has over 10 years' experience working in audio engineering and sound design for companies including Fox International, as well as roles in audio-visual education at the Hong Kong Design Institute where he received a Teaching Excellence Award.

During a year of significant growth, our headcount grew from 298 in April 2021 to 413 by the end of March 2022. This figure excludes the 75 staff who have joined us through our Vista India acquisition.

Review of Operations

A significant contributing factor to the strong growth delivered in the period has been the regional launches of our customers' streaming platforms in Southeast Asia, Central and Eastern Europe and the Middle East and Africa. This led to strong demand for localisation, particularly subtitling, and for a range of activities that fall into ZOO's media services revenue stream.

Our global growth initiative has given the Company a presence in new locations. This provides the opportunity to expand our operations in those countries where it may be more convenient to have staff working locally, such as in project management, and to access specialised industry skillsets such as dubbing management. With an international footprint that now includes Turkey, South Korea, Denmark, and India, we are shaping the future of the organisation to capitalise on the benefits of having a presence in these locations.

KPIs

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

Financial

·      Revenue up 78% to $70.4 million (FY21: $39.5 million)

·      EBITDA¹ 11.8% (FY21: 11.5%)

·      OPEX as a % of Revenue improved by 5 points to 27% (FY21: 33%)

Operational

·      Number of freelancers² 11,028 (FY21: 9,207)

·      Retained Sales³ 97.6% (FY21: 98.5%)

1.     Adjusted for share-based payments

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

Media Localisation

Revenues generated from media localisation more than doubled in the period to $42.2 million (FY21: $20.3 million). Dubbing revenues grew by 84% while subtitling increased by 135%. Assignments relating to catalogue content, which dominated the first half, typically include a lower requirement for dubbing than new original titles. Consequently, the influx of new titles in the second half led to half-on-half growth in dubbing revenue of over 170%.

With strong growth in non-English content production, we are now seeing increasing demand for high quality dubbing services into English. Except for content aimed at children, there has not been a significant requirement for English dubbing in the past, but this is now changing. The limited number of English dubbing studios in the UK and US means that capable providers are in high demand, and this provides an excellent opportunity for ZOO to resource this demand through its scalable proposition.

We have also seen significant growth in demand for Audio Description (AD) services during the period. Whilst subtitles for the deaf and hard of hearing have been commonplace in the entertainment industry (and, indeed, are mandated to some countries including UK and US), streaming providers have been slow to adopt AD and historically there have been relatively few titles that support it. This is now changing with regulatory requirements for streaming platforms also looking increasingly likely.

Media Services

Media services revenue grew by 51% during the period to $26.4 million, driven by assignments relating to catalogue content as well as those to support regional launches of streaming platforms. Service lines that grew particularly strongly were digital packaging/post-production and metadata preparation.

As previously mentioned, we generated maiden revenues for our mastering service following the recruitment of a Los Angeles-based team of specialists. Having acquired the necessary infrastructure and recruited the team in the first half, monthly revenues grew significantly through each month of the second half. The levels of demand that we see for this service have led us to expand the team further and to seek to extend our operations across some of our other international locations.

We have grown our artwork services team during the period to satisfy the growing demand from our customers for the processing of images that are used in the user interfaces of streaming platforms. This is also an activity that is increasingly included in E2E services and where we anticipate strong growth.

Investing for future growth

The oversubscribed fundraise completed in April 2021 provided ZOO with approximately $10 million net proceeds that we indicated we would invest to support future growth. A proportion of the proceeds has been used to support our working capital cycle for the much higher levels of business that we have transacted. Our progress in the areas of investment has been:

Capital equipment

We have invested around $4.4 million in capital equipment to extend our capacity. We have upgraded our internet connectivity at our sites in Los Angeles, London, and Sheffield, thereby enabling a significantly higher throughput of digital assets into our facilities and deliveries to our clients. We have acquired computer systems and local storage devices to support our new mastering service. Our Sheffield headquarters has been relocated to larger, more suitable premises and we have refitted our facilities in Los Angeles and London. New facilities in Dubai and Copenhagen have been fitted out.

International locations

We have completed capital efficient investments in Ares Media (Turkey) and WhatSub Pro (South Korea) and we have acquired the business of Vista India. A hub for Scandinavian operations has been opened in Denmark. We have in our pipeline several opportunities that we expect to complete and announce in due course.

Expansion of services

We have recruited heavily throughout the period and have added a mastering team in Los Angeles, and a larger business development team that now includes advocates in Southeast Asia and the Middle East.

Expansion of capacity

We have expanded our R&D team in ZOO Digital Labs, including the new position of Research Manager, such that we are now able to pursue internal research projects. In anticipation of strong growth for dubbing, we have enlarged our project management team significantly by recruiting ahead of higher levels of orders being received. We have assembled a team to work on mastering.

Outlook

Trading in the first quarter of FY23 has been very strong with sequential growth over FY22Q4 and significantly ahead of the equivalent period in the prior year. The period has included work that is related to ongoing territory launches of major streaming platforms as well as the processing of a significant volume of new original titles that have been completed and adapted into an increasing number of languages for global distribution. Visibility through until the end of H1 indicates further significant progress towards the goal that we set in 2020 of delivering sales of $100 million. We expect H1 sales to exceed the second half of the prior year which was in turn 60% ahead of FY22H1.

We are in dialogue with multiple streaming platform operators concerning the adoption of ZOOstudio to manage global distribution operations and are increasingly confident of adding to licensees during FY23.

We expect that the significant investments we have made in building our multilingual dubbing capability and capacity across many languages will result in strong growth in the year ahead in our localisation revenues. In the previous period, this investment has had the temporary effect of incurring inflated cost of sales for localisation while we have been building additional capacity, but we now expect to both grow sales strongly and expand dubbing margins.

The record levels of investment across the entertainment industry in new original content is creating unprecedented demand for localisation and media services. For some services and languages, this is already exposing shortages in capacity that are prompting buyers to place orders with extended notice periods. We expect that this will result in improving visibility of revenues during FY23.

ZOO's scalable and efficient technology-enabled services place the company well to capitalise on the industry's surplus demand. Consequently, the Board remains confident of continuing to deliver strong growth in the year ahead.

Stuart Green
Chief Executive Officer

FINANCIAL REVIEW

Introduction

The last financial year has been truly transformative for the Group as we have laid the financial foundations to truly scale the business to compete with the largest suppliers to the global localisation market. In April 2021 we completed a fundraise injecting $10.1 million of cash into the business. This has allowed us to expand our global footprint through organic growth and also taking strategic stakes in companies operating in the significant media markets of the world. In September 2021 the 7.5% unsecured convertible loan note stock was redeemed reducing future liabilities by $3.5 million and eliminating future interest payments of roughly $0.3 million per annum. The financial performance in the year has reinforced the financial strength of the business with an operating profit of $3.1 million contributing to Net Assets growing to $26.2 million (FY21: $2.8 million).

Revenue

The Company achieved revenue growth of 78% in the financial year ended 31 March 2022, with total revenues of $70.4 million compared to $39.5 million in FY21. 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 grow their subscriber bases.

Most of the Group's operations are in the United States, where revenues were up 80% at $61.2 million. The balance of work was performed in Europe which grew by 67% to $9.2 million. The split in geographical production illustrates the international launches of US-based streaming services.

In FY22 we experienced greater customer concentration with the revenue contribution from our largest client increasing to 78% of sales as a consequence of their international expansion being ahead of their US competitors (FY21: 72%). The second largest customer accounted for 6%, up from 4% last year. These two contracts are expected to continue 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 108% in the year to $42.2 million, as the industry came out of the global pandemic and production of new titles returned to normal levels. As other US streaming services launch their international services and our expanded dubbing service gains traction, we expect strong future growth in revenues.

Media services revenues increased by 51% as we launched new services including mastering and continued to support further international launches by our biggest customer.

Software solutions, the segment that has been a reducing proportion of our business, decreased by 1% in the year to $1.8 million. We believe this segment has another two years before it will reduce significantly.

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 increased to $22.1 million in FY22 from $13.6 million in FY21, an increase of 63%.

Media localisation contribution grew in the year from $2.9 million to $9.2 million, an increase of 217% driven by the revenue growth in both subtitling and dubbing. The growth in contribution of this stream was higher than that of the revenue as the significant revenue growth contributed to higher utilisation of our staff. The contribution percentage of 22% still reflects our investment in people to expand capacity and will trend upwards in future years.

Media services contribution grew to $15.3 million up 35% on last year. The contribution from this revenue stream of 58% was lower than the previous year's margin of 65%, and this is due to the mix of services favouring activities that require a high level of translation services that have a slightly lower gross margin.

Software solution segment contribution held steady at 93% in the year.

Overall gross profit increased by 62% to $22.1 million compared to $13.6 million in FY21. This represents a gross profit margin of 31%, down from 35% last year. The deterioration is due to a higher proportion of revenues coming from dubbing and metadata services with a lower gross margin than the mainstream media services that were the dominant revenue stream in FY21.

Other operating expenses

Operational fixed costs, which are defined as operating expenses less share-based payments, depreciation, and amortisation, have increased by 50% in the year as we invested heavily in people and IT to support our growth plans. Overall, operating expenses increased to $19.2 million, including share-based payments, depreciation, and amortisation and property costs of $1.0 million under IFRS 16. The 49% increase in operating expenses is explained by the above, higher depreciation and amortisation costs, due to the expansion of office space and a provision for an onerous lease and the increase in R&D.

Finance costs

The main component of the Group's finance costs relates to the conversion into equity of 7.5% convertible loan note stock as they matured in the year. This gave rise to a final non-cash charge relating to the revaluation of the loan stock on maturity which totalled $1.6 million. Interest on the principal in the year was $0.2 million, down from $0.3 million in FY21. The other component of finance costs is non-cash items, relating to the Right of Use asset totalling $0.2 million calculated for IFRS16 purposes.

Despite the non-cash accounting entries, above, the profit before tax for the year ended March 2022 was $1.1 million compared to a loss of $3.6 million for FY21.

As a result of the increase in revenues and a slight leveraging of our costs, the operating profit of $3.1 million is significantly better than the profit last year of $1.0 million. On the Company's preferred measure of profitability, being EBITDA before share-based payments, the profit was $8.3 million, up from $4.5 million in FY21, an increase of 84%.The Group has reviewed the recent profitability of its US subsidiary and the expected growth in profits over the next 2 years and has concluded that it is appropriate to include a deferred tax asset of $1.3 million in this years results to reflect the probable utilization of unused tax losses in the US subsidiary.

New equity raise

In April 2021 we completed a 10% placing of new equity raising a gross $10.1 million. This money has been used to accelerate our international growth brought about by the favourable market conditions. The details of the placing are that the Company raised gross proceeds of £7.4 million ($10.1 million) through the oversubscribed placing of 7,454,727 Ordinary Shares with certain existing and new institutional and other investors at a price of 100 pence per New Ordinary Share. The shares were admitted to trading on 6 April 2021.

Statement of financial position

Non-current assets more than doubled in the period which is explained by three strategic investments. Firstly, we invested in new premises in Sheffield to accommodate the significant increase in headcount in the past two years and also to provide expansion for the next ten years. This investment included $2.1 million in leasehold improvements and $8.0 million increase in the ROU asset. Secondly, we invested $2.3 million in computer equipment to expand our production capacity and to support the uplift in staff. Thirdly, we invested $4.3 million in international companies to expand our reach in key geographical locations. This involved acquiring 100% of Vista India, 35% of Vista USA, 51% of Whatsub Pro in South Korea and 20% of ARES in Turkey. In addition, the deferred tax asset has been increased to reflect the probability of utilising tax losses in the US over the next two years.

The capitalisation of research and development costs increased by 31% to $1.7 million as we accelerated the product roadmap to support customer requirements and upgrade our internal production systems. This also increased the depreciation charge resulting in the balance sheet asset increasing by only 1% to $2.6 million.

Trade and other receivables have increased 211% compared to last year to $26.0 million reflecting the strong sales performance in the second half of the year. This increase was mirrored in trade and other payables as work performed by suppliers and freelancers peaked to support our customer deliveries. The increase still only represents 88 debtor days and the majority of the balance has been received in quarter one of FY23. Contract assets which represent work in progress on customer projects increased 67% to $3.6 million reflecting the increased activity in quarter four.

Current borrowings have decreased from $9.5m to $1.3 million (excluding lease liabilities). This is due to the conversion of the 7.5% convertible loan stock in September 2021 into equity which eliminated the loan liability and also eliminated the embedded derivative.

Current liabilities have grown significantly in the period due to the high level of sales in quarter four which has resulted in both trade payables and accruals increasing to support the cost of sales figure. In addition, the year-end bonus accrual has increased to $1.7 million (FY21: 0.8 million).

Cash and cash equivalents of $6.0 million at year end (FY21: $2.9 million) were up 107% as a result of the proceeds from the fundraise not having been completely invested in the capacity-increasing projects.

Non-current liabilities increased significantly in the year due to the increase in the "right to use" liability as our property leases reflected the long-term commitments arranged in the year in both Sheffield and Los Angeles. The lease in Sheffield runs for 10 years and the new lease in Los Angeles for 6 years. Non-current leases increased from $1.8 million to $8.0 million as at 31 March 2022.

Consolidated statement of cash flows and going concern

Net cash generated from operating activities was $5.2 million, down from $6.8 million in FY21. The drop of $1.6 million is attributable to the increase in trade receivables compared to last year only being offset by the increase in trade payables and the increase in the operating profit. The inflow from operating activities was more than offset by a $6.4 million increase in investing activities, which included an additional $2.1 million spent on property, plant and machinery and the investment in international expansion of $3.9 million. These outflows were offset by the equity fundraise of $9.6 million that closed in April 2021.

Going forward the business remains confident that it has sufficient headroom to trade for the foreseeable future, as the recent completion of a $5 million invoice discounting facility from HSBC gives us the working capital headroom for the next phase of our expansion. This is further validated by the strong start to FY23, with record orders which we expect to deliver another operating profit for FY23 and has been stress tested by our financial modelling. For this reason, we continue to adopt the going concern basis in preparing the financial statements.

By order of the Board

Phillip Blundell
Chief Financial Officer and Secretary

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 March 2022

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 March 2022

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2022

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 March 2022

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 March 2022

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 both the UK and US.

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).

2.     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.

2.1     Basis of preparation and going concern

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

The preparation of financial statements in accordance with international accounting standards in conformity with 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. The areas involving a higher degree of judgement or complexity, or areas where assumptions or estimates are significant to the financial statements are disclosed in note 3.

A separate Statement of Comprehensive Income for the parent company has not been presented as permitted by section 408 (2) of the Companies Act 2006.

The directors have prepared trading and cash flow forecasts for the group for the period to 31 March 2024 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 July 2023.

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.

The summary accounts set out above do not constitute statutory accounts as defined under section 434 of the Companies Act 2006. The Consolidated Statement of Comprehensive Income, The Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the Notes to the Financial Statements for the year ended 31 March 2022 have been extracted from the Group's statutory financial statements upon which (i) the auditor's opinion is unqualified and (ii) did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006. The audit report for the year ended 31 March 2021 did not contain statements under section 498(2) of the Companies Act 2006. The statutory financial statements for the year ended 31 March 2021 have been delivered to the Registrar of Companies. The 31 March 2022 accounts were approved by the directors on 6 July 2022, but have not yet been delivered to the Registrar of Companies.

New and revised standards that are effective for annual periods beginning on or after 1 April 2021

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

Standards and interpretations in issue at 31 March 2022 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.

2.2  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.

2.3     Segment reporting

Operating segments are reported in a manner consistent with the internal reporting regularly reviewed by the group's chief operating decision maker (chief executive) to make decisions about resource allocation to the segments and to assess their performance.

2.4     Foreign currency translation

2.4.1   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 2022 was 0.762 (2021: 0.726).

2.4.2   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.

2.4.3   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 and all resulting exchange rate differences are recognised in other comprehensive income with the foreign exchange translation reserve.

3.     Profit/(loss) per share

Earnings per share 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.

.

The convertible debt has not been included in the 2021 diluted earnings per share calculations due to being anti-dilutive.

In 2021, the share options have been excluded from the diluted EPS calculation due to these being anti-dilutive and the Group incurred a loss in the year.

4.     Notes to the cash flow statement

4.1  Significant non-cash transactions

During the year the group acquired property, plant and equipment and computer software with a cost of $12,969,000 (2021: $2,290,000) of which $8,495,000 (2021: $1,043,000) was acquired by the means of a lease.

4.2  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 and parent company statement of financial position amounts.

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

5. 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:

6.           Borrowings

The group has recently signed with HSBC Bank US to provide 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 30 June 2023

The UK banking partner, HSBC, continues to provide an overdraft facility of £250,000.  The principal outstanding at 31 March 2022 was nil (2021: 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. 

In September and November 2021, the 7.5% unsecured convertible loan stock was redeemed by the issue of 5,336,459 new ordinary shares in ZOO Digital Group plc at a conversion price of 48p. This means that both convertible loan notes under CLN1, have been redeemed in full and the Group is free of any outstanding liability and future interest payments.

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. Finance lease liabilities are secured against the leased assets.

Annual report and Accounts

Copies of the Report & Accounts for the year ended 31 March 2022 are available to view on the Group's website www.zoodigital.com

The Report & Accounts for the year ended 31 March 2022, together with the notice of annual general meeting, are expected to be posted to shareholders during August 2022; 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 ZOO's Sheffield offices on 20 September 2022 at 4pm.