# Zoo Digital Group PLC Another extremely successful year for the Group

- Link: https://www.directorstalkinterviews.com/zoo-digital-group-plc-another-extremely-successful-year-group/412753750
- Published: 2018-07-02T07:43:16+01:00
- Author: Giles Arbor

**ZOO Digital Group plc** (LON:ZOO), the provider of cloud-based localisation and
digital distribution services for the global entertainment industry, today announces
its audited financial results for the year ended 31 March 2018.

**HIGHLIGHTS**

**Key Financials**

· Revenue increased by 73% to $28.6 million (2017: $16.5 million)

· Adjusted EBITDA* increased by 35% to $2.4 million (2017: $1.8 million)

· Operating profit increased to $0.6m (2017: $0.5m)

· Reported Loss Before Tax of $5.0m (2017: profit $0.5m)

· Adjusted Profit Before Tax† increased to $0.5 million (2017: loss of $0.1 million)

**Operational highlights**

· Growing adoption and demand for subtitling services, with revenue almost doubling
in the year

· Successful launch of industry’s first cloud-based dubbing service, with good uptake
from existing and new customers

· Growing international network of over 4,000 international freelancers and 8 affiliates
across 10 locations

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

* Adjusted for share-based payments

† Adjusted for share-based payments, exchange loss/gain on borrowings, conversion
of loan into equity and finance cost of embedded derivative

Copies of the Report and Accounts for the year ended 31 March 2018 are available
to view on the Group’s website www.zoodigital.com.

> **Stuart Green, CEO of ZOO Digital, commented,** “This has been another extremely
> successful year for the Group, delivering considerable revenue growth while expanding
> our offering. It is clear that we are operating in a market which is right for
> our approach, where our technological innovation can facilitate greater scalability
> for all of our client groups.
> “ZOO is increasingly viewed as a significant player in the media localisation 
> market, and with the introduction of dubbing we have achieved a key milestone 
> on our journey towards becoming a one stop shop for all media localisation and
> digital packaging services across all languages. Through the development of our
> innovative technology, we are facilitating the ongoing disruption and growth of
> the digital entertainment market and we will continue to invest in innovation,
> quality and security to ensure we remain at the forefront of our industry.
> “Our sales pipeline continues to grow across our offerings, both from existing
> and new customers, giving us confidence in achieving on-going organic growth. 
> With a strengthened balance sheet, enlarged commercial team and augmented offering,
> we look to the future with confidence.”

**CHAIRMAN’S STATEMENT**

The Board is very pleased with the excellent progress made by the Company in the
execution of its strategy to become one of the leading providers of software-driven
localisation services for movie, TV and video content around the world.

A 73% increase in revenues to $28.6 million from some of the world’s largest entertainment
content creators and distributors has been accompanied by investments in innovative
new service offerings, international expansion, and translation capacity, resulting
in an increase of EBITDA before share based payments to $2.4 million (2017: $1.8
million).

With strong underlying market drivers in its favour, demand for ZOO’s subtitling
services has constituted the largest part of its revenue growth, and the Board is
confident in the long term revenue and profit opportunity from this segment. However,
2017-18 also saw the introduction of ZOO’s new dubbing service, and initial customer
acceptance of this exceeded expectations. This opens up a significant new axis of
growth for the company, since it finds customers valuing the ability to deliver 
a ‘one stop shop’ for all localisation and digital packaging services worldwide.
We therefore plan to make further investments in both dubbing and subtitling offerings
to capitalise on ZOO’s position as a preferred vendor to many of the leading names
in an industry undergoing unprecedented growth and upheaval.

We are also delighted that ZOO was able to strengthen its balance sheet early in
the financial year, thanks to the investment of £2.6 million in new equity by existing
and new shareholders and the conversion of £1.1 million of existing debt into equity.
Combined with the cash generation from operations, this has put the company in a
very strong position to exploit the large market opportunity which is described 
in more detail in the CEO report.

The Board is conscious of the need to develop the Company’s governance and management
structures to cope with the demands of a larger listed entity, so was pleased to
welcome Mickey Kalifa as a non-executive director in October 2017. Mickey is a Chartered
Accountant with nearly 30 years’ experience across the technology, media and gaming
sectors. He was appointed Chief Executive Officer of the betPawa Group in May 2018.
Previously he spent eight years with Sportech PLC, latterly as Chief Financial Officer,
where he led a transformation in the company’s financial strength and played a prominent
role in driving Sportech’s global expansion. The Board has also decided to adopt
the new QCA Corporate Governance Code with immediate effect, rather than wait until
the date next year when the changes to AIM rules would have required the adoption
of such a formal governance code.

Our long-serving CFO Helen Gilder decided to resign for personal reasons early in
2018, and, as separately announced today, I am pleased to welcome Phill Blundell
as Helen’s replacement, who starts work for us during July 2018. Phill joins ZOO
with a strong pedigree in senior finance and operational roles within UK technology
public companies, including DotDigital Group plc, Eagle Eye Solutions Group plc 
and Intelligent Environments plc. He has over 20 years’ experience building strong
software businesses through product innovation and global strategic partnerships.
Phillip qualified as a Chartered Accountant with Coopers & Lybrand, now part of 
PwC. The Board warmly thanks Helen for her many years of loyal service and wishes
her every success for the future.

The progress achieved by ZOO has resulted from a lot of sustained hard work by ZOO’s
staff and the patient support of our stakeholders. However, the Board believes it
represents just the start of an exciting period for ZOO: it can combine the power
of cloud computing with its deep understanding and experience of the industry to
create a highly valuable company which provides localisation and digital packaging
services to many of the world’s leading creators and distributors of film and TV
entertainment. Following the fundraising at the start of the year, and with strong
cash generation during it, the business enters the new year on a solid financial
footing and with confidence in its future success.

Roger D Jeynes

Chairman

ZOO Digital Group plc

**STRATEGIC REPORT**

**Introduction**

I am pleased to report that the year saw the continuation of the considerable progress
achieved in the prior period. Revenue for the year increased by 73% to $28.6 million(
2017: $16.5 million), earnings before interest, tax, depreciation and amortisation(
EBITDA) adjusted for share-based payments grew by 35% to $2.4 million (2017: $1.8
million). The successful launch of our dubbing service at the end of the first half
of the year was a major milestone adding a powerful second arm to our growth strategy
and provides us with the opportunity to become a ‘one-stop-shop’ for localisation
services, although having a short term downward impact on profit margins.

**Strategy**

ZOO’s services allow TV and movie content to be subtitled and dubbed in any language
and prepared for sale with all major online retailers as well as on optical disc
formats. ZOO’s strategy is to develop and employ innovative, proprietary cloud-based
software technology to deliver localisation services to entertainment content owners
that will enable them to capitalise on the growing consumer demand for digital content.
ZOO’s software enables the Company to collaborate with a worldwide network of thousands
of freelance workers, such as translators, voice actors and dubbing directors, and
to significantly reduce the human capital requirements of service fulfilment, enabling
the Company to scale its capacity efficiently as demand increases.

ZOO’s innovative use of technology enables content owners to distribute their products
to additional territories at a faster speed-to-market and lower cost than has previously
been possible, and with a consistently high level of quality. The clear benefits
delivered by the Company’s differentiated proposition have driven significant organic
growth in sales, leading to ZOO being named in March 2018 as the organic growth 
leader in global localisation services by language services market research specialist
Nimdzi.

**Market Opportunity**

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

Consequently, content has become commercially available in more and more geographies,
and as the territorial reach increases so too does the need for subtitling and dubbing
into additional languages. A TV series that was previously translated into fewer
than ten major European languages will now potentially be translated into 30 or 
more global languages, which increases the scope of work for ZOO.

The global home entertainment market reached c.$48bn in 2017, with digital distribution
accounting for 66% of that spend. Since 2012 around 200 over-the-top (OTT) platforms
providing streamed and downloadable content have emerged, with the number of subscribers
to streaming services globally reaching 447 million in 2017. Investment by OTT operators
in new original content reached $13bn in 2017, with growth expected to continue 
as providers commit to increased future spending.

The increase in digital entertainment content, the expansion of distribution channels
and disruptive innovation in the sector by vendors such as Amazon, Hulu, Apple and
Google are all combining to drive a growing demand for high quality and scalable
content localisation services. ZOO’s technology is a powerful differentiator and
we believe provides us with the means to capitalise on the long-term growth opportunity
within the TV and film entertainment market.

**Key Drivers**

The bulk of the growth in the year came from localisation services, of which subtitling
remains a key tenet. The volume of work on physical products, namely DVD and Blu-
ray, continued its expected gradual decline in the year while the main driver of
growth was undoubtedly the preparation of content for sale through digital platforms.

**Operational review**

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

**Another year of strong subtitling revenue growth**

We are delighted to report on another successful year of growth for our subtitling
services, with revenues almost doubling over the period. Following ongoing investment
in research and development and building a pipeline for ZOOsubs, it has been reassuring
to witness its continued growing adoption and demand from customers, both existing
and new. As well as helping to reduce seasonality within the business, it has enhanced
ZOO’s reputation for innovation within the marketplace and driven strong revenue
growth. Enhancements to the platform delivered over the period have enabled freelance
translators who work on ZOO projects to operate more efficiently and productively,
for example, by reducing the administrative overhead of processing purchase orders
and raising invoices. Since many of our translators undertake work for other localisation
service providers, these enhancements benefit ZOO by making our ecosystem attractive
to this community, helping us to retain and grow our network of translators.

**Successful launch of the industry’s first cloud-based dubbing service**

In April 2017 we launched the industry’s first cloud-based dubbing service, powered
by our new ZOOdubs platform, at the National Association of Broadcasters (NAB) show
in Las Vegas, where it was awarded TV Technology’s ‘Best in Show’ accolade. Two 
further awards have subsequently followed: an IABM award for Design and Innovation
at the International Broadcast Convention in Amsterdam and a Broadcast and Media
Award at NAB 2018.

Our software provides a systematic and truly multi-lingual solution for dubbing 
services which significantly reduces the need for dedicated facilities, expensive,
high-tech equipment and the associated technical operators. As such it has been 
imperative to ensure an exceptional quality of service and we were delighted that
the first projects, delivered in nine different languages, received extremely positive
feedback from the client who was particularly impressed with the quality and speed
of completion.

Helped by our success in subtitling, our dubbing service has quickly developed strong
levels of interest given that it addresses a more complex and costly requirement
for content owners. Within a short space of time we have won projects from significant
industry players and are now delivering hundreds of hours of dubbing on a monthly
basis. Even within our first month of delivering the service we were completing 
more dubbing each month than most mature and established dubbing facilities, due
to the scalability of our distributed cloud computing approach.

Two main approaches to dubbing are widely used in the entertainment industry. Voiceover,
sometimes referred to as “UN-style”, is the simpler approach used in some countries
and for certain types of content, and is a style that does not usually convey the
richness of what is being said by the screen actors. With this method, dubbed voices
are not synchronised with the lip movements of the screen actors. The second approach
is known as “lip-sync” dubbing in which voice actors aim to recreate a similar performance
to those on screen, delivering lines that match as closely as possible the lip movements.
This style is popular in more countries than voiceover and is costlier to produce.
While our initial projects were for voiceover, we have subsequently developed ZOOdubs
to deliver both styles, meaning we are in a position to complete any dubbing project
in any language, subject to having access to voice actors and directors, giving 
us the capability to address a significant market opportunity.

We have been cautious to build out demand for ZOOdubs at the right pace, with rigorous
testing, high levels of verification and relatively high levels of human involvement
during the software’s nascence. The foundations are being laid now to build a scalable
technological and service capability to satisfy client demand so that the operational
gearing of the business will be seen in future periods. The experience that we have
gained from ZOOsubs, through early adoption to its current rate of growth in both
volumes and margin contribution, gives us confidence that ZOOdubs will follow a 
similar path.

**Strong growth in localisation services**

Our localisation services, which include subtitling and dubbing, grew by 149% to
$21.4 million (2017: $8.6 million). This is due to ongoing strong growth of subtitling
together with the introduction of dubbing, where the contribution was mainly in 
the second half. In the first half an average of 28 hours of dubbing was processed
through ZOOdubs per month. This increased to an average of 79 hours per month in
the second half, and in the two months following the period under review has increased
further to an average of 154 hours per month.

There has been additional recruitment of talent and the Group now has a network 
of over 5,000 freelance workers, including translators and voice actors, who are
able to collaborate efficiently with us on projects to satisfy an ever-growing pipeline
of demand.

**Further innovation**

In the traditional entertainment localisation ecosystem, subtitling and dubbing 
assignments have followed two detached work streams from the point of inception,
and in the case of dubbing, across different in-territory studios, which tends to
lead to a duplication of work and inconsistencies in translation across the two 
independently crafted approaches. A recent innovation of ZOO is a scripting service
powered by a new cloud-based platform, ZOOscripts, which is a cornerstone capability
that will enable the Company to process combined subtitling and dubbing assignments
consistently, providing our customers with further efficiency and greater control.

A significant challenge when dubbing newly produced titles arises due to the need
to have localised versions available across multiple languages on the day of release.
This necessitates that the dubbing process begins with a preliminary edit of the
content, which is subject to change before the programme is finalised. In practice,
the production company may deliver a number of such preliminary versions for localisation
before final release, each of which may differ from its predecessor through the 
addition of new dialogue. Therefore, rigorous version control is essential to ensure
that the process operates efficiently, with voice actors being recalled to record
new dialogue but only where necessary, and to quality assure the final delivery.
We have addressed this requirement through the development of a sophisticated version
control capability that is integral to our production systems, involving the analysis
of video and audio to identify automatically the changes that occur between successive
versions of the content. This is enabling us to turn around each iteration of such
a project quickly and accurately.

The security of client content is paramount to ZOO’s operations, and we have continued
to enhance our cloud software with further features to enable even greater levels
of protection. This includes a new capability to prepare video content through the
use of facial recognition in order to ‘spoil’ the material without detriment to 
the localisation process.

With the significant number of digital distribution channels now available, together
with the availability of consumer services in over 200 countries, it is becoming
increasingly challenging for content owners to estimate the costs of distribution
and determine the return on investment of a particular strategy. ZOO has developed
a scenario planner to assist clients with this dilemma, enabling language choices
to be evaluated and localisation costs estimated quickly and accurately.

With all of these new innovations the Board believes that the strength of its existing
relationships and its increasing reputation as a technological innovator in the 
industry will help it to cross sell services into its client base as well as attracting
additional new clients. We also anticipate some uplift in digital packaging, as 
an increasing number of customers turn to us for a broadening array of services,
and we expect a growing preference amongst buyers to work with partners that are
able to deliver an end-to-end solution for localisation and digital packaging.

In the year ahead, we plan to continue investment in the development of our cloud-
based platforms to further enhance the production services we offer, and to integrate
our platforms with a number of third party technologies to streamline our end-to-
end service offering. This should deliver improved operational efficiencies, with
benefits that we will be able to pass on to our clients, leading to greater differentiation
and competitive advantage for our services. More recently we have begun a research
collaboration with the Speech and Hearing group in the Computer Science department
of the University of Sheffield. This project will focus on machine learning and 
the application of speech technologies that we believe will lead to further disruptive
innovation within the ecosystem that we are developing.

**Expansion of our Freelance network**

We have been pleased with progress in our programme to select, train and engage 
freelance translators, dubbing directors, voice actors and audio mixers in order
to ensure that talent is available to scale sufficiently to meet the growing levels
of demand in both of our dubbing and subtitling offerings, helping us to be more
effective and efficient than our competitors. Our freelance network has now increased
to over 5,000, growing from around 4,400 at the end of the year under review (2017:
2,000), including members from across multiple territories and languages, and its
continued expansion will remain a focus for the year ahead.

**Growth of the customer base**

One of the Company’s main assets is the quality and breadth of its customer base.
Following the launch of its first cloud services in 2009, the Group has expanded
its customer base to include major Hollywood studios, the BBC, Apple and many more.
It was granted Netflix preferred vendor status in 2016 and has recently been named
a Netflix Preferred Fulfilment Partner. Historically ZOO has been reliant on revenue
from one large customer, which once accounted for over 80% of revenue. Due to the
expansion of our customer base and overall increased workflow, client concentration
has decreased in recent years, with the top two customers representing 34% and 24%
in the year under review. Importantly, both these customers have indicated their
intention to increase their activities with ZOO.

The consistently high quality of services we provide is indicated by the proportion
of client revenues that we retain from one year to the next: after stripping out
sales to one client with which the Group discontinued services in 2016 following
its acquisition by a competitor, the proportion of client business in FY2017 that
continued into the period under review was 98% (2017: 97%).

**Affiliate Network**

Our affiliates provide us with additional capacity to meet client demand as well
as access to skilled linguists, dubbing directors and voice actors in the territories
in which they deliver services to their own networks of clients. During the year,
the Group has been successful in adding new affiliates in emerging markets, bringing
the growing network to a current total of 8 across 10 locations. The new additions
are Studio Ares in Turkey, Bossdom in Taiwan, WhatSub Pro in South Korea, Dragoman
in Turkey, Captivate Arabia in Jordan and Olive Digital in UAE.

More recently we have strengthened our relationship with Kantana Group in Thailand
and Vietnam, one of Thailand’s oldest and largest film studios, to support our expansion
of dubbing services in the region. Staff at Kantana have been trained in our cloud-
powered software and will shortly be using ZOOdubs to work on in-territory dubbing
projects. Meanwhile, Kantana is helping ZOO to build capacity, increase the local
dubbing talent pool and identify suitable in-territory traditional and alternative
recording environments in Asia.

We are seeing an increasing number of traditional dubbing studios approaching us,
which bodes well for future growth. We look forward to building out this network
further and working closely with our chosen partners.

**Investment in people and operations**

We continue to invest in the expansion of our teams to support further growth. Through
the year we enlarged the R&D team to accelerate development and assist in the roll-
out of our dubbing service. In March 2018 we appointed a new Creative Director and
Producer to oversee dubbing projects in Latin America: Raul Aldana has joined the
team to continue to grow ZOO’s in-territory localisation network and bring the very
best talent to the cloud dubbing platform. Raul brings a wealth of experience to
the role, having worked as Disney’s creative head for Latin American Spanish for
the last 20 years.

More recently we have appointed a new Head of Operations and Business Development,
Asia to lead localization and distribution services in the region. Norie Negishi
has joined ZOO to help grow capacity in Asia as we expand our cloud dubbing services
in the region. Norie joins ZOO with a 20-year track record with the Walt Disney 
Company in Asia Pacific including working as Executive Director of Operations for
Disney Character Voices International.

In the year ahead, we will add select resource in our operations to ensure we have
the structure to support the increase in volumes of activity.

Another important operational development in the year was that our new Sheffield
facility received security accreditation from the Content Delivery and Security 
Association. This is in addition to our US office’s existing accreditation under
the Motion Pictures Association of America Content Security Program, both of which
are key endorsements required by some of our existing and target clients.

**Fundraise**

On 18 April 2017, a Placing was announced to raise £2.6 million of additional funds
whilst at the same time converting £1.1 million of debt into equity, strengthening
the Balance Sheet. The funds are being used to accelerate organic growth and the
benefits are already being seen. The Placing also presented the opportunity to welcome
new institutions to the register of shareholders.

**Outlook**

This has been another extremely successful year for the Group, delivering considerable
revenue growth while expanding our offering. It is clear that we are operating in
a market which is right for our approach, where our technological innovation can
facilitate greater scalability for all industry players.

ZOO is increasingly viewed as a significant player in the media localisation market,
and with the introduction of dubbing we have achieved a key milestone on our journey
towards becoming a one-stop-shop for all media localisation services across all 
languages. Through the development of our innovative technology, we are facilitating
the ongoing disruption and growth of the digital entertainment market and we will
continue to invest in innovation, quality and security to ensure we remain at the
forefront of our industry.

Our sales pipeline continues to grow across our offerings, both from existing and
new customers, giving us confidence in achieving on-going organic growth. With a
strengthened balance sheet, enlarged commercial team and augmented offering, we 
look to the future with confidence.

Stuart Green

Chief Executive Officer

**FINANCIAL REVIEW**

The strong growth that was reported last year continued into the period ended 31
March 2018. We are pleased to report that sales have increased 73% to $28.6 million(
2017: $16.5 million) with EBITDA adjusted for share-based payments up to $2.4 million(
2017: $1.8 million). The reported turnover for the second half was $15.9 million
compared to $12.7 million in the first, which underlines the reduction in seasonality
of the business. The reported operating profit for the year was $0.6m (2017: $0.5m)
and the reported loss before tax was $5.0m (2017: profit $0.5m) following a non-
cash charge for the fair value movement on an embedded derivative brought about 
due to the rising share price.

Due to the Group’s origins as a software company, gross profit has previously been
calculated as revenue less only external costs of sale, being the cost of translators
and other freelance workers who provide linguistic services to us. Some other variable
costs, including those associated with internal staff employed to deliver client
projects, have been previously reported as central overheads. As the proportion 
of our revenues from delivery of services is now growing rapidly, it is becoming
increasingly difficult to infer our operational gearing from gross profit reported
on that basis. For that reason we have decided to classify all variable costs as
cost of sales, leading to a lower reported gross profit margin but which, we believe,
is more representative of the dynamics of the business going forward. It bears clarifying
that, as a result of this recategorisation of costs, we would expect that central
overheads should increase at a more modest rate in line with the growth of the business
and the costs of underlying infrastructure required to support it.

The prior full year period has been restated in the consolidated statement of comprehensive
income and is set out below for comparison purposes. This change is presentational
only and represents a change in accounting policy with no impact on current or prior
year loss/profit.

We have also sought to add further clarity to the financial statements by adapting
the segmental analysis of revenues. In previous reports the segmental reporting 
was based on the operating divisions, when UK sales were primarily related to software
licensing whereas US sales were from service provision. As the company has grown
over recent periods, an increasing proportion of service sales are invoiced from
a UK subsidiary. Consequently, this segmental reporting has become less appropriate
for providing an understanding of the constitution of sales. Going forward we will
report revenue analysis using the following three segments in line with the internal
reporting and management of the business:

1. Localisation – this is the fastest growing segment of Company revenues and is
made up of subtitling, captioning and dubbing. Localisation grew very strongly by
149% to $21.4 million (2017: $8.6 million) due to subtitling sales almost doubling
over the corresponding prior period, combined with the commencement of sales from
dubbing services that were introduced at the end of the first half.

2. Digital Packaging – previously referred to as ‘Digital Distribution’, this segment
consists of sales for all service lines, excluding localisation, that are required
for the delivery of video-based entertainment content to distribution channels, 
including to OTT operators and for delivery on optical disc formats. These services
include compression and encoding of video and audio materials, preparation of metadata,
assembly of digital packages and authoring of DVD and Blu-ray formats. During the
period under review, sales in this segment fell to $5.2 million (2017: $5.8 million),
primarily due to the on-going slow global decline in demand for DVD and Blu-ray.

3. Software Licensing – this segment consists of sales generated directly from the
provision of our proprietary software which, during the period under review, consisted
predominantly of recurring revenue from legacy products and declined slightly to
$1.9 million (2017: $2.0 million).

It has been particularly pleasing to see the commercialisation of new dubbing services,
made possible by our innovative cloud software platforms, start so strongly and 
delivering a meaningful contribution to our localisation segment in the second half
of the year.

The much higher billing amounts for dubbing projects compared to those for subtitling
may lead to a significant shift in client concentration in future periods, dependent
on the timing of the adoption of this new service line by existing and new clients.
We have, during the year under review, continued to diversify our client base and
significantly reduce revenue concentration, such that the revenue contribution from
our largest client reduced to 34% of sales in 2018 (2017: 44%), with the second 
largest accounting for 24%.

The initial period of delivering services using the new ZOOdubs platform has followed
a similar pattern to the one we observed five years ago with the deployment of ZOOsubs:
our imperative to provide clients with services of the highest quality has led to
higher costs from extensive verification and quality control while the software 
is being refined. We fully expect these margins to improve as the software is proven
and new features continue to be added. In contrast, our subtitling services and 
the associated cloud software have, over a period of five years, been proven, enhanced
and continually refined and are now delivering strong contribution margins. From
the segmental analysis it can be seen that the contribution margin for localisation
has increased to 31% (2017: 27%), and has the potential to improve further as our
dubbing proposition matures.

The second largest segment is digital packaging where the blended contribution margin
during the period has reduced to 60% (2017: 69%), primarily due to the decline in
demand for DVD and Blu-ray titles.

The different gross margins achieved in the three revenue segments, combined with
the changing sales mix including strong growth in localisation has led to an overall
blended gross profit margin of 35% (2017: 45%).

Operational fixed costs have increased to $7.7 million (2017: $5.6 million) as we
continue to build up the business. Our sales team has been expanded to provide us
with the means to develop business opportunities with a greater number of clients;
the total number of accounts invoiced in the period increased to 158 (2017: 145).
The R&D team has been enlarged through the addition of new staff, enabling us to
accelerate the development and roll-out of our cloud software platforms, ensuring
that we maintain our competitive advantage in the market. Staff additions and other
enhancements in our operations, including in relation to provision of high levels
of security, have led to an increase in IT expenditure in the period. The improved
performance of the business has led to us paying a bonus to all staff, including
executive members of the Board, recognising the significant contributions on which
such performance was made possible. We have also increased our expenditure on marketing,
primarily through exhibiting at a greater number of international trade shows and
other events that provide a cost-effective way to reach existing and prospective
clients.

The post balance sheet event mentioned in the financial review for the period to
March 2017, consisting of an equity fundraising, the conversion of debt into equity
and extending the maturity of the conversion of remaining loan notes, has led to
a significant strengthening of the balance sheet. Whilst we continue to have access
to a facility of up to $2.5 million in the US and a further £250,000 overdraft in
the UK, we have no borrowings outstanding with the associated providers, and the
only debt on the balance sheet is the residual £2.54 million convertible loan note.
This instrument pays a coupon of 7.5%, has a conversion price of 48 pence and its
term now ends in October 2020. For so long as the share mid-price trades above this
amount, as it has since mid-December 2017, it would be reasonable to expect that
holders will choose to convert their holdings into equity prior to the end of the
term rather than request repayment.

A further consequence of a convertible loan note denominated in pound sterling, 
whilst our financial statements are denominated in US dollars, is that the consolidated
statement of comprehensive income includes an exchange adjustment on borrowings 
due to the conversion of the value of the debt on 31 March. In the period under 
review, the strengthening of pound sterling relative to US dollar led to an exchange
loss of $0.5 million, while in the equivalent prior year period the statement showed
a gain of $0.6 million, giving rise to a year on year variance of $1.1 million. 
However, since the loan note can reasonably be expected to convert into equity rather
than be repaid, we do not expect an exchange profit or loss to crystalise. In addition,
the conversion of £1.1 million of the loan note in May 2017 has resulted in a charge
to the consolidated statement of comprehensive income of $0.1 million (2017: nil).

Due to the fact that the remaining loan note is convertible, compounded by its denomination
in pound sterling while the Group’s reporting currency is US dollars, the instrument
needs to be treated as an embedded derivative for accounting purposes. Movements
in the share price of the Company can therefore have a considerable, non cash effect
on reported profit or loss before taxation as these embedded derivatives are linked
to the Company’s share price performance. ZOO’s share price at the close of business
on 31 March 2017 was 10p, which contrasts sharply with its price of 97.5 at close
of business on 29 March 2018 (being the last business day before the year end date).
Consequently, the statement of comprehensive income includes a charge after EBITDA
of $4.7 million and the long term borrowings reported on the statement of financial
position are increased by $4.7 million. The long term borrowings reported on the
statement of financial position show a total of $8.8 million which is made up from
$3.6 million for the convertible loan note, which is expected to convert into equity,
$4.7 million for the non-cash embedded derivative movement and $0.5 million for 
finance lease liabilities. Only the latter item is expected to have any cash impact.

These non-cash accounting entries have a material impact on profit/loss before tax
where the reported figure for the year to March 2018 is a loss of $5.0 million (
2017: $0.5 million profit). After adjusting for share-based payments, the exchange
gain/loss on borrowings, the charge for the conversion of loan into equity and the
charge for the embedded derivative, profit before tax was $0.5 million (2017: loss
of $0.1 million). None of these adjustments have any cash implication.

The statement of financial position shows trade and other receivables have increased
significantly over the prior year period to $7.4 million (2017: $3.8 million) and
up 4% on the half year end position (September 2017: $7.1 million). This figure 
includes debtors together with a contribution for work in progress , sales accruals
and other items. The much higher volume of projects that we are processing has led
not only to a significant increase in these assets. Despite a much enlarged debtor
book, this is being converted into cash in the normal course of business and, as
of the date of this report, 93% of year end debtors have since been paid.

This will be my last report as CFO of the Group. In February I took the difficult
decision that after 18 years with ZOO, the last 12 of which have been in the role
of CFO, it is time for me to move on. Having worked as a senior member of the management
team, I feel proud to have contributed significantly to the transformation of the
Company from a small business providing DVD authoring tools for one large customer,
to become one of the leading providers of localisation services to most of the major
Hollywood studios and global digital entertainment distributors. ZOO is at a really
exciting point in its development. While it will feel strange not to be involved
as the business moves forward, it is the right time for me to pursue the next stage
of my career. As I pass the baton to my successor I am pleased to do so for a company
that has the strongest balance sheet for many years, is on an exciting growth trajectory
and has a wide range of excellent opportunities for strong continued growth in a
rapidly expanding market. I wish the business ongoing success and growth in the 
coming years and will continue to take an active interest in my capacity as a shareholder.

By order of the Board

Helen P Gilder

Director and Secretary

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