We ran out of time to answer all investor questions during the recent webcast. Below you will find answers to the questions we did not have time to cover during the event
Revenue, Visibility and Growth
Is the visibility of orders from the major customers in Q3 normal or slower than previous years?
The visibility we reported into Q3 is in fact better than we have had historically. Services of the kind provided by ZOO to the entertainment industry tend to operate transactionally. Historically our visibility has been around three months. However, more recently we have seen this extend further, partly because of large buyers planning further ahead as more of them shift to an end-to-end approach and a more embedded and engaged model.
Regarding the uncompleted order book for H2, is this a matter of cadence or is there perhaps some risk of major studios further limiting their content spend as they steady their business?
At this point in the year, it would not be usual for us to have clear visibility of H2. There is of course the possibility of major studios reducing their content spend, but overall, market research firms expect industry levels of spend to return to those of 2022 and continue to grow, albeit at a slower rate than we have seen through the early years of direct-to-consumer streaming services.
Why is it not until FY27 that we get back to FY23 income levels given that the strikes are over, we have increasing spend from content providers and all of the tailwinds that you describe?
Given that our industry is in recovery and the pace of that is out of our hands, we have taken a cautious position. In our preliminary results statement, we have cited market commentators, specifically Moffet Nathanson and Ampere Analysis, each of which has prepared independent forecasts for the levels of industry spend. These indicate a return to 2022 levels during 2025. If this is correct, it would suggest that industry content spend will be restored during ZOO’s FY26. There is no publicly accessible market research that we are aware of that forecasts industry spend on the services that ZOO delivers, and therefore spend on content is at best a crude proxy for the specific market in which ZOO operates.
How much visibility do you have on business or revenues?
About three months for ad-hoc project assignments and about six months from regular recurring work.
Given that ZOO's revenue is still highly vulnerable to (i) full recovery from the industry disruption and (ii) ZOO's heavy reliance on one large customer, shouldn’t management efforts be focused on improving the spread and profitability of future revenue and finding a way to achieve this without the need for significant further cash investment?
This is indeed management’s focus.
In case demand is back to levels seen in 2022, what is your revenue potential? Please focus on the largest new offices you opened and if these increased your revenue potential.
Our long-term goal remains to achieve revenues of $400m which we still believe is achievable by taking an increasing share of a market that is returning to growth. The international locations we have opened are primarily to provide additional capacity for servicing work, including expertise in different languages and cultures. We anticipate that for the foreseeable future our revenues will be dominated by work performed either directly or indirectly for large US streaming providers and content creators.
Forecasts and Guidance
You are on target to hit EBITDA estimates for the current year. What are your brokers forecasting on revenues, EBITDA, post-tax earnings and free cashflow?
Four equity analysts that publish research on ZOO are listed at https://www.zoodigital.com/investors/analysts/. Please refer to their latest reports, at least some of which are accessible to retail investors.
Is your guidance to be EBITDA profitable or operating profit profitable?
Both
Although you demonstrated the profitability of the ZOO business in FY23, isn’t this now uncertain again, given the market changes and significant losses in FY24 and the forecasts for breakeven EBITDA/FCF (at best) for FY25?
The board is confident that ZOO’s former levels of growth and profitability can be restored as the industry recovers. According to independent market forecasters the recovery of the industry is expected to continue through calendar 2025. Therefore, analyst guidance for ZOO in FY25 is consistent with this. As visibility improves, analyst guidance for FY25 will be revised accordingly and FY26 will be introduced.
Working Capital
You survived the period of disruption partly due to the 2023 capital raise. What about your customers – did you see some of them exiting the market or at least being unable to invest into their products?
Some smaller customers produced few new titles during the period. While we have not seen any customers exiting the market, there has been a high level of corporate activity in the industry as content producers and distributors transition their business models for sustainable growth. The market disruption led to lower levels of content investment in 2023.
Will there be a further equity placing later in FY25 or FY26 to strengthen the balance sheet that would cause heavy dilution to shareholders, given the currently depressed share price?
The company has no current plans for an equity share placing. The board is confident the company has adequate resources to meet its working capital requirements.
Can you please describe how your Working capital will develop in case demand is picking up? What are your payment terms towards customers and suppliers?
Payments to suppliers are typically 45 days. Customers pay usually on roughly 60 days. However, there is on average 30 days between supplier invoices being raised and customer invoices being raised. Therefore, we potentially must fund 45 days of working capital, which is why we have the HSBC facility of $3 million.
Customers
When a customer offers a contract, is that done through competitive requests for proposal to multiple vendors, you being among them? Do you expect less price-based competition when there are fewer relevant vendors?
Each customer works slightly differently. For the large media companies that make up our major customers, most work with a panel of suppliers that are selected (typically every three or four years) following a competitive tender process. Each of the chosen vendors enters into a master service agreement with the customer that includes rate cards, consequently, at the time of assigning projects pricing has been pre-agreed. While price is, of course, always important, what our customers value most are quality and turnaround time.
Why is there lack of customer demand from back catalogue and content from other countries?
We believe that our customers prioritise their content budgets on sourcing new original programming since this is the best way to attract and retain larger audiences. We are seeing an increase in content that is sourced internationally.
Are the Hollywood Studios commissioning language content in local markets, rather than from the US?
There is an ongoing shift by major studios to source a greater proportion of their content outside of the US. For example, both Netflix and Amazon now source around 55% of their content from international locations. This is centred around key territories such as South Korea, Turkey and India where we have expanded our operations to ensure we are strategically aligned with our customers.
Can you give us some colour on the risk of customers insourcing the services you provide? What is the current split of customers insourcing versus outsourcing and how is that trending? What is the % cost of ZOO’s service vs total cost of producing a TV series, for example?
Over the past 20+ years we are aware of only one major studio that has chosen to insource any significant scope of localisation work. Media localisation as a discipline is highly specialised, and the degree of specialisation extends to each language (that is to say that most of the talent required to perform the services work in only a single language). Therefore, the amortisation of fixed costs required for insourcing are unlikely to yield unit costs lower than those that can be purchased in the market from specialist suppliers with the benefit of scale. The current market environment makes this even less appealing for our customers. In fact, the reductions in costs that have been implemented across all major US studios in 2023, resulting in reduced headcount for those organisations, are contributing factors in the accelerated shift to working with end-to-end vendors. We estimate that the localisation budget for a major studio represents 2-3% of their total content budget.
Operations
Has overall capacity for localisation services contracted due to the hiatus?
In the wider industry most large vendors, including ZOO, have contracted during the period in response to temporarily subdued levels of demand. We are aware of smaller vendors that have ceased trading. As a result, overall industry capacity for these services is lower now than in 2022. Demand continues to be at lower levels while recovery is in progress. We expect capacity to increase as the industry recovers, but at a slower rate than actual demand.
In Q1 this year what was the overall utilisation % of your production staff?
In Q1 staff utilisation was about 70%, however, going forward this is dependent on the mix of services that we deliver.
I have noticed several posts on a few social media platforms where translators voice frustrations in ZOO. Whether well founded or not, this doesn’t paint a positive brand image of ZOO. Is enough attention being given to brand image on social media platforms?
We take brand image very seriously and have worked hard over many years to present a positive impression with all our stakeholder groups. Since early 2023 our industry has been in a state of flux that has negatively affected both companies such as ZOO and the many talented freelancers across multiple disciplines with whom we work. Translators, actors and directors have all experienced challenging economic circumstances – there has not been enough work to go around. At ZOO it has been necessary for us to reduce headcount and in several areas, such as relationship management with our freelancers, we have not recently had the capacity to maintain standards as high as previously. We expect this situation to improve as the industry continues its recovery.
How much more revenue can you do without increasing your fixed production staff costs?
Our estimate is we can currently support revenues of about $6 million a month but this is dependent on the mix of services ordered.
Cost Cutting
Is it fair to say you have had to react to order flow by adjusting costs?
It has been necessary to reduce our costs as order levels have temporarily fallen considerably. It is difficult to cut costs quickly, so we talk regularly to customers and other industry insiders to assess overall demand and our likely allocation of work. This information, coupled with our cash forecasts, informs our 12-month cost projections.
Was the management response to a very significant change in the external market conditions fast and effective enough?
Through the period of disruption, the company remained in regular dialogue with key contacts at each major customer to gain insights into the progress of negotiations between studios and unions and to gauge the likely duration of the hiatus and pace of subsequent recovery. This informed the timing and decisions relating to ZOO’s cost reductions given that the company’s aim was to ensure the availability of sufficient capacity to meet customer demand once work resumed. Discretionary spend (including contractors, marketing, capital expenditure, travel, etc.) was curtailed at an early stage. Subsequent cuts to headcount were made when it became clear that strikes would be protracted but given the scale of these reductions and the requirement for employee consultation, these took some time to implement.
Markets
Given that the recent Hollywood strikes had such a significant impact on your finances, does your future strategy entail engaging with other global film industries?
Most of the work we process is commissioned by global distributors of the content (primarily, video streaming services) rather than its producers, and these are mostly located in the US. Our strategy is to focus on customers that commission large volumes of content and distribute that content in many languages. We already engage with other global film and TV content production locations, such as India and South Korea, but the addressable market for our services is significantly lower in these countries than in the US.
What are the underlying reasons for the slower Hollywood recovery?
There are many factors at play, the most significant of which are that buyers have moved to sourcing more content from international sources rather than from North America, and acquisition strategies have been revised to ensure the roll-out on each streaming service of a mix of content that is optimised for audience expansion and retention (for example, by spending less on creating feature films and more on episodic TV type programming).
Do you think ZOO can offer a differentiated service to the podcast industry?
This is a market that we may explore in the future. However, its requirements are quite different from and much simpler than those of film and TV entertainment. For example, voice-based services in our current target market require synchronisation with on-screen action, and often with lip movements. These are challenges that require specialisation that we have built over many years, and which create barriers to entry. By comparison, the requirements for localisation of podcasts are much simpler.
Can the gaming industry become a target market for you given that studios create titles for the global market and employ localisation through both voice and subtitles?
Gaming represents an interesting adjacent market. Subtitles are used infrequently for videogames, and although there are many new games created each year, only a small proportion of these incorporate human voices that require localisation. Consequently, the global annual spend on media localisation for gaming is estimated to be around $500 million compared with over $3 billion for linear entertainment. ZOO continues to focus primarily on the film and TV entertainment market.
Artificial Intelligence
Can you please explain a bit more about how you are using AI, for example, are you training your own data models?
We are already using AI for transcription purposes for which we take advantage of off-the-shelf software and models from suppliers such as Amazon Web Services but augmented for our specific use cases using proprietary training data (for example, for certain vocabulary such as character names). In several other areas we are actively evaluating third party products and developing proprietary solutions. This usually requires some level of training to create targeted and optimised data models that are suited to our use cases.
Do you envisage developing proprietary IP around AI tech?
Yes, as a technology company by origin we have been working in certain areas of AI for several years and have proprietary IP already with more in development.
M&A
Have you been approached for a takeover?
Communication regarding takeovers or approaches is tightly regulated in the UK and we are only able communicate on this area in compliance with those rules, which would have to be via a public announcement, if any were necessary.
Competition and Competitive Advantage
Given that the most recent Nimdzi 100 report implies that ZOO has declined more than other media localization companies, can you comment on how to interpret this and more generally how you are competitively positioned relative to the other end to end providers?
For several years ZOO has had a high level of revenue concentration with a major media company that in 2023 put many projects on hold while undergoing a root-and-branch review of its business. Consequently, ZOO was disproportionately affected by the disruption when compared with other vendors that were less exposed to concentration with this customer. We consider ZOO to be strongly positioned against other leading end-to-end suppliers with several competitive advantages and remain confident of taking market share over the medium and long term.
Can you say a bit more about the competitive advantage? What market share does ZOO have? What differentiates ZOO from competitors?
During 2022, the year prior to the current ongoing disruption, we estimate that the addressable market for ZOO was over $1.5bn. Therefore, the $90m in sales delivered in FY23 represents a share of around 5% of a fragmented market. Across the wider industry ZOO is differentiated from most other vendors through its end-to-end servicing capability (i.e. capable of delivering all required services across all languages). Amongst the handful of E2E vendors ZOO is a technology-first provider, delivering tech-enabled services that are efficient and scalable, and enabling consistent high quality and fast turnaround. In addition, our ZOOstudio platform is a one-of-a-kind cloud software solution that is used by several customers to their advantage and sets us apart from all our competitors in the market.
International Expansion
I can understand the long-term attraction of the Japan acquisition announced in 2023 to strengthen ZOO’s position in this important market, however, how can this acquisition offer an attractive return for shareholders if it cannot be funded from internally generated cashflows?
There are many successful deals which are funded from other sources than internal cashflows. We would not undertake this acquisition if the return would not be attractive to shareholders.
What kind of talent are you planning to attract in Chennai office, and what is the real purpose in that geography?
To provide comprehensive always-on services ZOO has adopted a follow-the-sun strategy that involves employing teams at production centres in the USA, UK, India and South Korea. Chennai represents an attractive location to source talent to fulfil a range of media services. In addition, the location acts as a hub for localisation services for the languages spoken in the South of India.
How far out can you push the Japan acquisition given the share price is quite depressed (implying a high cost of equity)?
We have an open dialogue with them, but rest assured, as the environment has dramatically changed, so will any price we agree if we proceed.
What are the reasons for continued investment to improve long-term market position, with c$7m spent in capitalised R&D and acquisition in FY24?
Innovation is a strategic imperative to ZOO that provides competitive differentiation and advantage, and this hinges on our in-house resource. The capitalised R&D is directly related to the cost of ZOO’s product development team that had been expanded during FY23 to meet the requirements that we anticipated at that time going into FY24. While cuts have been made to this team, these inevitably took time to yield savings. Some of the costs of acquisition in FY24 were the result of contractual commitments made in FY23 and were therefore unavoidable. We did proceed with some modest non-contracted acquisition costs in situations where we judged there was a strategic imperative to secure capability that would be essential during the period of industry recovery.
Investor Relations
Why are fund managers and equity research analysts invited to attend a presentation seven hours earlier than retail investors on the day of results? Why not allow all public to listen in to your morning presentations?
Since we have investors based in North America, we schedule the retail investor presentation at a time that is socially acceptable for the wider audience given time zone differences. We do not consider that retail investors are materially disadvantaged by this and make every effort to be accessible and transparent in all our communications.
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