Zoo Digital Software & Computer Services

23 April 2018

ZOO DIGITAL SOFTWARE & COMPUTER SERVICES

Nothing lost in translation ZOO.L 102.5p Positive dynamics set to continue Market Cap: £75.6m ZOO Digital is a provider of services to showcase, localise, and distribute TV and movie content globally. ZOO is targeting a very large, fast-growing market with a high quality agile proposition that is both scalable and efficient. Over the last few years, ZOO Digital has been rapidly growing market share, supported by its proprietary SHARE PRICE (p) cloud-based technology which drives quicker time to market, to a high standard and attractive price point. We believe the robust market dynamics in the home entertainment market experienced over the last 150 few years appear set to continue, which should positively underpin ZOO Digital’s prospects. 100 ▪ Positive market dynamics - Growth in the localisation market is being 50 driven by the proliferation of high bandwidth broadband and increased demand by consumers for localised content. The global home 0 entertainment market reached c.$48bn in 2017, with digital distribution May '17 Aug '17 Nov '17 Feb '18 accounting for 66% of that spend. Since 2012 nearly 200 streaming platforms have emerged, with 447 million subscriptions to over the top (OTT) services for streamed content over the internet globally in 2017. 12m high/low 110p/9p OTT investment in content reached $13bn in 2017, with growth Source: LSE Data expected to continue as providers such as Netflix commit to increased future spending. ▪ Unique technology proposition - Although other firms employ technology, ZOO appears to be unique in its ability to manage all its activities within one technology ecosystem driving a scalable and KEY INFORMATION efficient footprint, faster time to market, high quality deliverables and a lean cost structure. Enterprise value £77.2m Index/market AIM ▪ Clients – ZOO Digital counts the major Hollywood studios, the BBC and several major OTTs among its client base. The Group has been Next news Prelims w/c 2 July 2018 increasingly winning market share driven by its service quality rankings, Gearing 2.0% product innovation, pricing structure and technology enabled services, supporting a quicker time to market and are less prone to human error. Interest cover 1.1x ▪ Estimates – In line with today’s trading update we look for FY2018E revenue of $28m and adj. EBITDA of $2.3m. For FY2019E we estimate ZOO DIGITAL IS A RESEARCH CLIENT OF revenue growth of 15% and adj. EBITDA growth of c.45%. We believe PROGRESSIVE our forecasts are prudent and would anticipate upward pressure on estimates over the period driven by positive market dynamics and the

Group’s ability to gain market share.

ANALYSTS FYE MAR ($M) 2015 2016 2017 2018E 2019E Maggie Schooley Revenue 11.5 11.6 16.5 28.0 32.1 +44 (0) 20 7781 5312 Adj EBITDA (0.7) 0.2 1.8 2.3 3.3 [email protected] Fully Adj PBT (2.7) (1.7) (0.1) 0.5 1.6 Fully Adj EPS (c) (6.6) (2.4) 0.4 0.9 1.8 Gareth Evans EV/Sales (x) 9.6 9.4 6.6 3.9 3.4 +44 (0) 20 7781 5301 EV/EBITDA (x) (159.5) 702.4 61.9 48.0 33.1 [email protected] PER (x) N/A N/A 368.3 163.5 80.9

Source: Company Information and Progressive Equity Research estimates www.progressive-research.com This marketing communication has not been prepared in accordance with requirements designed to promote the independence of investment research. Please refer to important disclosures at the end of the document.

23 April 2018

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 3 Market backdrop ...... 3 ZOO Digital ...... 3 Financials and Estimates ...... 4 Conclusion ...... 4 COMPANY OVERVIEW ...... 5 MARKET BACKDROP ...... 6 Digital Media Content ...... 6 Language service market ...... 8 Machine Translation ...... 9 ZOO DIGITAL GROUP ...... 10 ZOOcore ...... 11 ZOOscripts ...... 11 ZOOsubs ...... 12 ZOOdubs ...... 13 ZOOvault ...... 14 ZOOhive ...... 14 ZOOecho ...... 14 Clients and Partners and target market ...... 14 COMPETITIVE ADVANTAGE ...... 16 Competitors ...... 16 UK-QUOTED PEERS ...... 17 FINANCIALS ...... 18 1H18 Interim results ...... 18 ESTIMATES ...... 18 MANAGEMENT AND BOARD OF DIRECTORS ...... 20 RISKS ...... 21 APPENDICES ...... 22 Glossary...... 22 Workflow Diagram ...... 23 Global 4G Coverage ...... 24

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Executive Summary

ZOO Digital is a provider of digital production, distribution and localisation services to the film and TV industry. ZOO Digital’s strategy is to use its innovative cloud-based software to provide differentiated services that are far superior to its competitors. The Group has developed a global collaborative network of translators and other freelance workers, who are supported by the Group’s easy to use software and a solid team of ZOO Digital project managers. The Group currently has 3 offices globally, 9 affiliates, a network of c. 4000 freelancers, which includes translators and a growing network of dubbing directors, voice artists and audio mixing engineers, and can localise content into more than 55 languages.

Market backdrop

The home entertainment market has undergone immense change driven by the proliferation of high bandwidth broadband, as well as increasing 4G coverage and devices capable of supporting media consumption. Since 2013, digital spend on home entertainment has increased 161% globally. (MPAA 2017). Changes in technology have supported new distribution channels allowing over the top providers (OTT)/ Subscription video on demand (SVoD) providers to enter the market with subscription streaming services that are challenging traditional cable and TV providers. Over the last 5 years nearly 200 streaming platforms, such as Netflix, Amazon, Apple, Hulu, Vevo, Google Play, Tencent, iQiyi, have emerged to deliver entertainment to the home. In 2017 there were 447 million subscriptions to online video services globally. More sophisticated international audiences are demanding more and better localised content. Streaming service providers are seeing international demand surpassing that of home markets as can be seen in Netflix’s most recent quarterly update. To solidify market share, streaming service providers are competing through the creation and production of own content. According to Parrot Analytics, OTT/SVoDs increased investment in original content to $13bn in 2017 from $5.5b in 2013. Growth in content investment is set to continue. For example, Netflix announced it would be spending $10bn in own content in 2018 (FT.com).

ZOO Digital

ZOO Digital has a key competitive advantage through its proprietary cloud-based software which provides global reach, centralised security and access to practically limitless resources within the global translator, dubbing director, voice actor and audio mixer/editor community. Its software allows the projects it undertakes to have a quicker route to market with far fewer people, and a consistently high standard at high volumes therefore allowing it to pass on pricing benefits to its customers. Having spent several years building a strong position in the market for subtitle-focussed localisation, the Group is now pushing into the much larger and potentially more lucrative dubbing segment.

The Group has created a series of cloud-based computing platforms that may be easily accessed via a web browser, discussed in more detail starting on page 11, to manage, create and deliver its end-product. ZOO’s software allows the business to control work flow, scale its business and adapt to the changing needs of the client in contrast to the way the market traditionally functioned. Although other firms employ technology, ZOO appears to be unique in its ability to manage all its activities within one technology ecosystem. Its competitive advantage is underscored by its 141% organic revenue growth from FY2015A to FY2017E and its increasing market share. ZOO Digital partners with the major Hollywood studios, the BBC, several major OTT providers and other global intermediaries and affiliates.

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Financials and Estimates

ZOO Digital is benefiting from exceptional growth in the streaming market. The Group has been experiencing robust revenue growth because of its positioning to the positive trends in the home entertainment market. The Group has been actively investing in R&D and its localisation services to support future growth. Its growing exposure to the dubbing market is providing a positive revenue effect given the segment’s high growth. In today’s full year trading update, the Group reiterated it expects FY18E revenue to be at least $28m versus $16.5 FY17A and Adjusted EBITDA of at least $2.3m versus $1.8m FY16A, in line with the trading update released on the 5th March. Subtitling and Dubbing services continue to grow robustly and are to represent c. 74% of overall revenue. The Group noted cash and cash equivalents as of the 31 March 2018 of $2.4m, an increase of $0.2m from the last trading update. The Group reiterated the only expected material borrowings are to be its long-term convertible notes with a par value of c.£2.57m (c. $3.9m MTM value) outstanding, implying expected FY18E net debt of $2.2m versus FY17A net debt of $5.6m. As such our estimates are in line with guidance of the trading update for 2018E and can be found in more detail in the Financials section on page 19 and in the Financial Summary on page 25.

Conclusion

ZOO Digital Group plc offers an exciting proposition in a high growth market that is not yet widely understood by the broader investment community. The Group has a strong balance sheet and ample resources to continue to invest in R&D and localisation services to support future growth.

We would encourage investors to meet the ZOO management to gain a greater understanding of its technology, its offering and its prospects.

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Company Overview

ZOO Digital is a provider of digital production and distribution services for the film and TV industry. The Group focuses on the localisation of content with its primary end segment being the home entertainment market. Localisation is the preparation or modification of film or TV content to make it consumable for international audiences. The Group provides dubbing and subtitling services to migrate content into local languages. The Group makes audio and visual content suitable, both culturally and legally, as well as customising it to local tastes. Predominantly localisation occurs from one language to another, but localisation also encompasses the same language for different geographies. For instance, ensuring relevant reference for the UK from US content, or US to Australia. ZOO Digital provides other services, such as archiving, conforming, terminology management and closed captioning, as well as artwork, metadata and menu localisation. The ZOO product offering can be split into software, localisation services and distribution with a 2017 revenue split across the offering of 12%, 53% and 35% respectively. ZOO Digital Group plc was formed through a merger of Kazoo3D plc and ZOO Media Corporation Ltd in 2001 and is listed on the UK AIM market. The Group’s initial focus was on interactive entertainment development and publishing, but in 2006 it changed its senior management and focus to DVD technology and swiftly grew its service portfolio to encompass production services, launching its first DVD production service in 2006. The Group materially increased its production capabilities with the acquisition of LA based Scope Seven in 2007. In 2009, the Group launched its first cloud-based service, a translation management system, with its subtitle production service based on its ZOOsubs platform following in 2012. ZOO Digital enjoyed the swift adoption of its offering by all six major Hollywood studios, the BBC, iTunes along with a host of others. It was granted Netflix preferred vendor status (NPV) in 2016 and is an iTunes preferred vendor. In 2017 the Group launched ZOOdubs, which has been extremely well received and is one of the drivers of its robust financial performance in FY18E. The Group currently has 3 offices in Los Angeles, London and Sheffield. In addition, it has international affiliate partners, which are international in-territory providers of services to the entertainment industry which act as outsourcers, in Turkey, Dubai, Pakistan, South Korea, India, Thailand, Taiwan and Vietnam.

ZOO History

Source: ZOO Digital

ZOO Digital’s strategy is to use its innovative cloud software to provide differentiated services that are far superior to its competitors. The Group has developed a global collaborative network of translators, dubbing directors, voice actors and audio mixing engineers, who are supported by the Group’s easy to use cloud software and a solid team of ZOO Digital project managers. The Group currently has a network of c.4000

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freelancers, has been building its network of dubbing directors, voice artist and mixing editors, and is currently capable of translating into c.55 languages. ZOO Digital is targeting a very large and fast-growing market with a high-quality agile proposition that is hugely scalable and efficient. Over the last few years ZOO Digital has been growing significant market share quickly. The Group’s route to market is through its direct sales team in both the US and UK, with a growing global presence supported by the expansion of its network of international in-territory providers of services to the entertainment industry known as affiliates. Market Backdrop

Digital Media Content

The media content industry, both film and TV, is experiencing one of the most dynamic periods in history. Although the mainstream box office is mature, achieving mid-single digit growth rates supported by increasing consumption of film in international markets like China, growth in home entertainment is double that of the box office. The home entertainment market has undergone immense change driven by the proliferation of high bandwidth broadband, as well as increasing 4G coverage and devices capable of supporting media consumption. (See appendix 1 for Global 4G coverage map). Since 2013, digital spend on home entertainment has increased 161% globally. (MPAA 2017). Changes in technology have supported new distribution channels allowing over the top providers (OTT) to enter the market with services, for instance transactional video on demand (TVOD) and/or subscription video on demand (SVoD), that are challenging traditional cable and broadcast providers. Over the last 5 years nearly 200 streaming platforms have emerged to deliver entertainment to the home. According to the Motion Picture Association of America (MPAA) consumers spent c.$48bn on home entertainment in 2017, up 11% on 2016. In 2017 there were 447 million subscriptions to online video services globally, which is an increase of 33% on 2016. Within home entertainment spending, subscription services grew by 28%, with online video content viewing up 49% in 2017 over the prior year. Statista estimates that by 2022, 32% of global households will be SVoD subscribers. Although the US rate of growth has slowed over the past four quarters, International growth is robust. China for instance, is one of the fastest growing markets, with eMarketer forecasting 37% of digital video viewers will do so through a SVoD in 2018.

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Global Home Entertainment spending

Source: Motion Picture Association of America (MPAA), IHS Markit and Digital Entertainment group (note: digital spend includes subscription service, video on demand and electronic sell through products)

The adoption of on-demand digital video entertainment (streaming/downloading) and an explosion in the number of channels available globally is driving immense change in consumer demands. International digital home entertainment spend now exceeds US spend. More sophisticated international audiences are demanding more and better localised content, which distributors and advertisers are willing to pay for, therefore driving robust growth rates for localisation services. The rapid growth of digital streaming services has produced both negative and positive side effects for the home entertainment and localisation industry. Given consumers can instantly access a vast catalogue of titles, they are moving away from media content ownership. Sales of DVDs and rentals declined by 6% in the US in 2016 with other geographies showing similar trends. (Digital Entertainment Group). This trend is in direct contrast to the on-demand home entertainment market which is growing rapidly, most recently specifically driven by the rise on SVoD subscriptions rather than TVoD. According to BroandbandTVnew.com, global SVoD subscriptions are forecast to grow by 73% between 2016 and 2021. Positively, the rise of OTT services has changed viewer expectations for both the amount and timing of content. Effects of this are already being seen with international release windows of films into the cinema being shortened to weeks or days, versus years or months historically. As digital distribution providers (SVoD /OTT) compete for market share, content creation will be the differentiator with more content being created specifically to service 2nd and 3rd screens. According to Parrot Analytics, SVoDs increased investment in original content to $13bn in 2017 from $5.5b in 2013. Netflix announced it would be spending $10bn in own content in 2018 (FT.com). Not only is there more content, it is award winning with 2017 Golden Globes going to an Amazon series for Best Actor (Drama) for Goliath and Netflix winning both Best Television Series and Best Actress (Drama) for The Crown.

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Original Content Creation

Source: Parrot Analytics

Therefore, not only are localisation providers enjoying growth from the conversion of back catalogues, a stream of new content provides reassurance of robust future growth rates as such content is distributed globally. Some commentators would argue there is an over-supply of content and spending is at risk of being scaled back, but we believe that all indications from the OTT operators suggest this is not a near or midterm risk. In addition, big traditional media players are adapting their businesses to positively position themselves to the growing trends and the challenges new entrants have created. For example, Disney has signalled its intentions to launch its own OTT service. Its recent merger with Fox will provide not only ongoing content creation but expansive back catalogue, which the Group can offer over its own platform. Strategic moves such as these will be positive for the localisation market.

Language service market

According to Nimidzi, the language service provider market is estimated at c. $50bn in 2018 and is expected to grow to $66.5bn by 2022, a 7.4% CAGAR. The Language service market as defined by Nimidzi, is wide including services from translation and multilingual desk top publishing through to localisation services subtitling and dubbing as well as machine translation. Nevertheless, one can observe it is a large and growing market. According to the Media & Entertainment Services Alliance Europe, in 2016 the entertainment localisation market in EMEA alone was c$2bn for title localisation, ex - advertising and metadata. Of the $2bn, 70% was driven by dubbing with the remainder driven by subtitling (12.5%), access services such as closed captioning, Subtitles for the Deaf and Hard of hearing (SDH), and Audio Description (AD) services (17.5%) and video localisation services (7%). The localisation market is currently growing at 8-10%. It is interesting to note that in the subtitling market the top 4 vendors control 60% of the spend, while dubbing is a more fragmented market with the top 4 vendors controlling only 20% of spend, given dubbing studios typically only provide services into local languages. It is conceivable that the dubbing market spend will be controlled by fewer

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players in the future given companies like ZOO are employing technology with global reach.

Machine Translation

For completeness we have chosen to explain machine translation in the localisation market. Machine translation (MT) is the use of software to translate text or speech from one language to another. MT is a useful tool that has long been used in the localisation market for very technical documentation and prescriptive translations. For instance, printer manuals, car manuals, patent documents and training videos are often translated with the use of MT with quality reviews by humans. This often also includes the creation of so-called Translation Memory (TM) – effectively a dictionary of previously-translated phrases or terms. The use of MT (and TM) is not as prevalent in film and TV localisation, as dialogue is contextual and although a MT translation may work perfectly well for a printer manual, it fails to cope with many of the features of spoken dialogue, including sarcasm, jokes, and slang. Research into AI and other machine learning processes remains ongoing, but the combination of low levels of repeated content, and the importance of nuance and quality, suggests to us that content localisation in the media space will need a significant level of human intervention for the foreseeable future. Technology nevertheless has a useful place in the market for media content localisation. Although it cannot replace humans in the localisation process, it can assist the sector by driving more efficient production of localised content with end market drivers dictating differing levels and uses of technology.

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ZOO Digital Group

In our opinion, ZOO Digital has a key competitive advantage through its proprietary cloud software. Its software allows its projects to be completed quicker and more efficiently with far few people, and at a consistently high standard, therefore allowing it to pass on pricing benefits to its customers. The cloud-based software provides global reach, centralised security and access to practically limitless resources within the global freelance translator community. Its software platform is developed using agile methodology, allowing for incremental upgrades, ease of deployment and the ability to react to a dynamic market. The Group has created a series of cloud-based modules, to manage, create and deliver its end-product. ZOO’s software allows the business to control work flow, scale its business and adapt to the changing needs of the client in contrast to the way the market traditionally functioned. (See appendix page 24 for a full workflow diagram)

ZOO localisation ecosystem

Source: ZOO Digital

Traditional localisation process

Source: ZOO Digital

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ZOOcore

ZOOcore is a configurable workflow platform which integrates all platforms within the ZOO environment allowing various modules to talk to each other. ZOOcore is accessible via the cloud by all internal and external stakeholders in the project. Clients can upload a project and its accompany files, track progress, edit and securely access previous projects at any time. By way of example of the operation of ZOOcore in the case of subtitling, when a piece of work is agreed, a project coordinator is assigned to oversee the project from inception to delivery. The client (or a ZOO operator acting on behalf of the client) uploads to ZOOcore a defined rule set, proxy video, optional script and basic glossary which can be accessed by ZOOscripts, ZOOsubs and ZOOdubs, which are described in more detail below. While the origination process deliverables are being executed, aided by ZOO’s systems, a translation-coordinator will be selecting translators for the work based on the needs of the project and the capabilities of the translators. Once the project is released, one of the selected translators for each language may accept the project. As the translator starts on the project the translation coordinator can view statistics such as % of completion, status of the project overall, among other key performance indicators. As each language is completed, the work is reassigned to a second translator for quality assurance. The ZOOcore module is a huge advantage given many other competitors manage workflow on large complex spreadsheets, that are prone to human error and easily lost or corrupted.

ZOOcore

Source: ZOO Digital

ZOOscripts

ZOOscripts sits at front end of the production process, where the ZOO English team creates an original language script which is used as the basis for subsequent translations. In addition, the team reviews and enhances the glossary known as a translation memory to ensure consistent use of terms and references and updates or enhances the production’s metadata. ZOOscripts allows clients to process combined subtitling and dubbing assignments in one work stream rather than the traditional two separate workstreams. ZOOscripts aims to provide greater project control, reduce inconsistency, decrease turnaround time at a more efficient cost.

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ZOOsubs

ZOOsubs is the production module for subtitling and captioning new productions or conforming older subtitled works. Within the ZOOsubs module the initial rules relating to the appropriate reading speed, placing of subtitles and use of italics or other fonts are also set out within the module by the ZOO technical team. A subtitle translator will spend most of his working time in the ZOOsubs module. Once assigned a project, the translator can access and launch the project within ZOOsubs. ZOOsubs is presented in a browser-based system where the translator sees the proxy video in the main screen as well as the English script frame by frame on the right-hand side of the module. The screen allows the translator to enter the translation, as well as monitor and adjust the reading speed, positioning and style of the subtitles, view predefined glossary terms and other rules. As the translator works through the translation, he can see various KPIs such as percentage completed, average word speed, among other useful indicators. Prior to completion, the translator must complete a final browser-based check list, which is automated by the system, to ensure the translated script has been spell checked, stylised and other basic rules have been adhered to. The translator completes the translation and submits the deliverable. After submission the translator is no longer able to access the ZOOsubs stream to ensure version control and content security. The deliverable then undergoes a series of checks to ensure a ZOO project is of the highest quality. A second assigned translator reviews the deliverable for errors and other qualitative assessments. The deliverable is then sent back to ZOOcore, where the ZOO technical team performs the final quality control checks to ensure the deliverable conforms to the client rule set initially outlined as well as identifying any errors. The system monitors the rate of identified errors associated with each translator which is used to provide feedback and support continuous professional development, and to refine the proficiency ratings of each member of the freelance pool. The project is then ‘digitally packaged’ to ready it for digital distribution adding trailers, menus, or other content in a digitised format. The project must then be formatted into the correct technical format for distribution, which is performed by video and audio compression software that sits outside of the ZOO systems.

ZOOsubs

Source: ZOO Digital

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ZOOdubs

ZOOdubs is a cloud-based production module which works in a similar vein to ZOOsubs but is focused on the more complex dubbing process. A dubbing project will typically involve multiple languages, with each language version managed by a dubbing director who is a native speaker of that language. The dubbing director manages the dubbing process. He selects the voice talent, makes the character assignments, provides creative direction to the voice talent and oversees the post production mixing and editing. Unlike subtitling where one translator is needed to originate and one to perform a quality check, dubbing requires a dubbing director, a translator, multiple voice actors, an audio mix engineer and more complex quality control. Prior to working on a ZOO Digital project voice actors and audio mixers must be trained and have access to ZOO-approved microphones and a suitable acoustically-treated recording environment to ensure the sound quality of the product. The security aspects of the ZOO environment give the Group’s dubbing capabilities additional competitive advantage. Security is a paramount focus in the industry to ensure content is not pirated or leaked. The ZOO software parses the video into loops by specified metadata, only allowing the voice talent access to those loops which are relevant to his or her character. As part of the ZOO process, the original language script is enhanced with metadata to indicate the identity of each speaker and timing information. This metadata flows through all dubbed language projects enabling the relationships between different language adaptations of the same dialogue to be preserved, which is invaluable in situations when the content has not been finalised (and is therefore subject to change) before localisation work commences. This metadata is key to the efficient running of ZOOdubs recording sessions, since it permits the dialogue to be filtered by each screen character, and for each line of dialogue to be cued for recording fully automatically. In addition, it is used to provide dubbing directors and project coordinators with real time information about the progress of each project across all languages, enabling accurate project management. As with ZOOsubs, a ZOOdubs production undergoes post submission quality checks by the ZOO in-house production team.

ZOOdubs

Source: ZOO Digital

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ZOOvault

One of the key differentiating features of working within the ZOO ecosystem is that it offers an active repository through ZOOvault. The files are easily accessible to expediate the ordering of work in new formats for distribution on multiple platforms or in multiple languages. Importantly all files are stored in a secure environment that adheres to industry standards, employing various application program interfaces (API) allowing ZOO to easily integrate with client systems and add client-specific security features, for example.

ZOOhive

ZOOhive allows clients to perform quality assessments, repurpose, package and deliver existing subtitled files. The ZOO system currently supports 50 different formats, allowing compatibility across various distribution platforms, be it Amazon, iTunes, Netflix or others. ZOOscreen ZOOscreen provides functionality that is an integral part of the ZOOdubs platform. As a stand-alone service, it is designed to stream and showcase video materials and screening copies securely and privately to intended recipients for events such as film festivals, award ceremonies and trailer and press releases. It can be used to showcase TV content for potential buyers/syndicators.

ZOOecho

ZOOecho is a financial module which interfaces with ZOOcore to create purchase orders for the freelance translators, voice actors and other freelance workers. A purchase order is automatically triggered by ZOOcore when a worker accepts a project. Post completion and checks of the project, the freelancers can arrange for multiple purchase orders for completed assignments to be aggregated automatically and submit their invoices via the ZOOecho system quickly and conveniently. The ZOOecho system cross references the metrics entered into ZOOcore to ensure an invoice reflects the parameters (duration) on which payment for the work is based. ZOOecho feeds the Group’s financial reporting system. The module also efficiently manages certain legal administration functions which are onerous and error prone under the traditional system. The module manages the issuance of waivers for subtitling, allowing translators to waive their rights to be credited by name for the translation is they wish. Also, it will soon manage the assignment of rights for dubbing, which is a legal requirement from each voice actor for each performance to legally transfer their intellectual property rights in the recording.

Clients and Partners and target market

ZOO Digital sells to all the major Hollywood studios, the BBC and several major online retailers. ZOO is not able to disclose many of its partners due to confidentiality agreements, but the chart below allow investors a better understanding of ZOO’s client segments, route to market and target clients.

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Clients

Client Segment Description Route to market/Target Clients Content Producers Owners and licensors of video entertainment Major studios including Disney, BBC Worldwide, 20th content, particularly feature films and TV series Century Fox, Universal, HBO, Paramount, Sony Pictures, serviced by the direct sales team Online Retailers (over the Providers of consumer video services operating all Streaming services including Netflix, Amazon, iTunes, top -OTT) around the world, including Subscription Video on Google Play, Vevo, PlayStation Vue, Hulu, Roku, Xbox Demand, where consumers usually pay monthly Video serviced by the direct sales team subscriptions to stream content to their TVs and mobile devices, and Electronic Sell Through where Consumers pay a one-off fee to purchase their own copies of programmes. Intermediates Businesses providing a wider range of production Network relationships serves as an efficient route in to services, usually to content producers, where ZOO medium and small content providers acts as an outsource partner for localisation and digital distribution. These include content aggregators and post-production facilities. Affiliates International in-territory providers of services to the Network relationships are serving to expand reach entertainment industry which act as outsourcers to beyond North America and EMEA to Asia and the Middle ZOO. Currently consists of 9 partners East

Source: ZOO Digital

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Competitive Advantage

The key advantages of ZOO Digital over its competitors are its ability to provide a stable and consistent end-product on a global scale while employing a lean physical footprint. The Group is supported by ample resource capacity, producing deliverables at a high standard, with accelerated time to market at an attractive price. Its cloud-based software is at the heart of its competitive advantage. Its efficient workflow allows ZOO Digital to maintain a small group of permanent staff while leveraging a vast pool of freelance talent. The Group has 3 offices from which its c.200 full time employees manage a pool of approaching 4,000 freelancers covering c.55 languages. ZOOcore drives an extremely efficient workflow process as both internal and external stakeholders access information and communicate on a real time basis in a highly secure and easy to use environment. ZOO has a high service quality rating, driven by a reduction in reliance on human intervention, and multiple quality control checks the Group employs throughout the ecosystem. Such checks ensure the final product is of the highest standard resulting in few rejections from clients. Although other firms employ the use of technology, ZOO appears to be unique in its ability to manage all its activities within one technology ecosystems. The benefits of an efficient footprint and workflow translate into a lean cost structure, allowing ZOO to pass on some of the benefit to its clients. Its 141% organic revenue growth from FY2015A to FY2017E underscores its increasing market share gains.

Competitors

As mentioned previously in this report the language services market is large, fragmented and has many sub-sectors. ZOO Digital’s most relevant competitors are SDI, Deluxe, BTI and Technicolor for which we provide an overview of each below. SDI Media Group is a private company based in Los Angeles, CA with owned and operated facilities in 35 locations, covering 80 languages. The Group is a media localisation provider offering subtitling, dubbing, access services (closed captioning, subtitles for the deaf and hard of hearing and audio description), digital content preparation and speech services (voice recognition and text to speech services). Its end market segments are film, broadcasters, video on demand providers, interactive entertainment (gaming) and multi-media agencies. It employs the use of technology for casting through its InSync casting tool and a workflow management tool called Media Track. SDI’s revenue is estimated at $220m according to Nimidzi. Deluxe Entertainment Services is an end to end services provider which creates and distributes media content. The Group is headquartered in Los Angeles and New York with operations in 38 markets. Deluxe utilizes a network of 7,500 artists, engineers and translators, of which 2,300 estimated to be full time employees. The Group offers subtitling, dubbing, access services, digital content preparation, DVD/Blu-ray authoring, archiving, steaming service, 2D-3D conversion service, visual effects, colour artistry, and immersive experiences (AR/VR). Financial details are not disclosed. BTI Studios is a provider of localisation services including dubbing, subtitling, access and media services. It has 21 facilities in 17 countries globally and provides service in over 50 languages. The Group has 400 full time employees and 4000 freelancers. Revenue estimated at $108m, according to Nimidzi. Technicolor SA is French publicly listed company that trades on the Euronext exchange. The Group delivered €4.2bn of Revenue is 2017 and Adjusted EBITDA of €291m, within which Entertainment Services delivered an adjusted EBITDA of €230m. Technicolor offers production services including dubbing, content preparations and post production services. It has DVD/Blu-ray authoring capabilities. The Group offers a host of other services including connected home services, and visual effects. Technicolor has announced a strategic refocus and is the process of selling its Patent licensing activities with its business model currently undergoing an evolution.

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UK-quoted peers

Investors will naturally consider ZOO Digital in the context of its UK peers. The group has elements in common with SDL, RWS and Keywords Studios. Both SDL and RWS are involved in localisation of content for more technical, patent or product documentation – they are active in a modest way in the media space, but their skills and core markets lie elsewhere. Keywords Studios is arguably a more-comparable business, offering services for localisation of media content, but while ZOO Digital’s staple content is media footage (film or TV), Keywords Studios works almost entirely on games software content.

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Financials

As outlined in the market backdrop section above ZOO Digital is benefiting from exceptional growth in the streaming market. The Group has been experiencing robust revenue growth because of positioning to the positive trends in the home entertainment market. The Group has been actively investing in R&D and its localisation services to support future growth. Its growing exposure to the dubbing market is providing a positive revenue effect given its growth as well as anticipated margin benefits as ZOOdubs matures. Although ZOO Digital also has exposure to the less favourable dynamics of the DVD/ Blu-ray market, the segment remains a profitable income stream for the group and the positive online market dynamics affecting the Group far outweigh negative effects of the deterioration in the physical market.

1H18 Interim results

The 1H18 interim results delivered robust revenue performance of $12.7m versus 1H17 of $7.8m, an increase of 63% y/y. 1H18 Adjusted EBITDA rose to $1.3m versus $1.0m in 1H17 up 34%. The group launched ZOOdubs during the period and saw the completion of its first dubbing projects for a global client. The group also launched its cloud-based scripting service. ZOO Digital was able to broaden its client portfolio resulting in a reduction in revenue concentration of its largest client from 47% in 1H16 to 28% in 1H18. ZOO successfully completed a fundraising with £2.6m in equity issued and converted £1.1m of debt into equity. The raise serves to further strengthen the balance sheet to support the future ambitions and growth of the Group. At the time of the Interim results the Group reported cash and cash equivalents of $0.7m and net debt of $3.9m at the end of the period. ZOO expanded its affiliate network and strengthen the board with the appointment of Mickey Kalifa as a Non-Executive director in the period. Estimates

In today’s full year trading update, the Group reiterated it expects FY18E revenue to be at least $28m versus $16.5 FY17A and Adjusted EBITDA of at least $2.3m versus $1.8m FY16A, in line with the trading update released on the 5th March. Subtitling and Dubbing services continue to grow robustly and are to represent c. 74% of overall revenue. The Group noted cash and cash equivalents as of the 31 March 2018 of $2.4m, an increase of $0.2m from the last trading update. The Group reiterated the only expected material borrowings are to be its long-term convertible notes with a par value of c.£2.57m (c. $3.9m MTM value) outstanding, implying expected FY18E net debt of $2.2m versus FY17A net debt of $5.6m. As such our estimates are in line with guidance of the trading update for 2018E. A full Financial Summary is available on page 25.

18 23 April 2018

Estimates

2018E 2019E Revenue 28.0 32.1 Adj EBITDA 2.3 3.3 Adj EBIT 1.0 2.0 Reported PBT (0.1) 1.6 Fully adj PBT 0.5 1.6 NOPAT 1.0 2.0 Reported EPS (p) 0.2 2.0 Fully adj EPS (p) 0.9 1.8

Source: company information, Progressive Research

We estimate continued revenue growth with FY2019E of $32.1m. The 2019E/2018E growth rate of 15% is very prudent and we would anticipate upward pressure on market estimates underpinned by the ongoing robust market dynamics. A full overview of our financial summary may be found on page 25.

We note with the publication of the full year results the week commencing 2nd July, the Group intends to re-classify costs of the internal staff dedicated to client projects as a cost of sale rather than its current classification as a central overhead. The reporting change will have no change of profitability but will give investors greater transparency in its margin structure.

19 23 April 2018

Management and Board of Directors

Roger D Jeynes - Chairman Roger has over 20 years’ experience in the technology sector, encompassing senior sales, marketing and general management roles in the UK, Italy and the USA with IBM, Pyramid Technology, and EMC Corporation. From 1997 to 2006 he was Chief Operating Officer at AIM-listed technology merchant bank Interregnum Plc through which he served on the boards of more than a dozen technology companies. He is currently a non-executive director of Downing Three VCT plc, The Development Bank of Wales plc, mxData Limited and Charborough Capital Limited, and is a trustee of a charity, The Lloyd Reason Foundation. Roger chairs the Remuneration Committee and is a member of the Audit Committee. Mickey Kalifa – Non–Executive Director Mickey is a Chartered Accountant with nearly 30 years' experience across the technology, media and gaming sectors. Previously, Mickey spent eight years with Sportech PLC ("Sportech"), 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. Prior to Sportech, Mickey served in a number of executive and finance director roles with some of the world's largest media and technology companies, including Liberty Global, BSkyB PLC, Time Warner, Disney and Young and Rubicam. Dr Stuart Green – Chief Executive Officer Stuart brings over 25 years of experience of team building and executive management in the software industry to his role as CEO. Prior to his appointment as CEO Stuart was Chief Technical Officer, where he was responsible for determining the technology strategy and expanding the core intellectual property of the company. Previously he founded Kazoo3D plc and prior to that was the co-founder of LightWork Design Limited where he served as Technical Director. Stuart received a PhD in Computer Science from the University of Bristol in 1989 for his research into multiprocessor systems for advanced computer graphics. He is responsible for securing over 30 patents in the fields of image processing and digital media processing. Helen P Gilder – Chief Financial Officer Helen has been employed within the technical and services industry for over 15 years. After qualifying as a Chartered Accountant with PKF in 1991 she moved into a more commercially focused role. Her extensive managerial and transaction experience came through her role as Finance Director within a highly acquisitive listed IT company. She joined ZOO to assist with the initial float in 2000 as Group Financial Controller and has gathered an invaluable knowledge of the companies in the group. She was appointed as a Director in 2006. Gordon Doran – Commercial Director Gordon has held senior positions in sales and marketing roles for a variety of companies in the software industry since the early 1990s, both in the UK and US. Most recently he was Chief Operating Officer for MedioStream Inc., a consumer DVD software developer, and joined ZOO in 2005 to establish a North American division. In his role as President he is responsible for all ZOO’s North America operations and has been pivotal in establishing relationships with a number of large US entertainment companies. Gordon became the Commercial Director in 2009.

20 23 April 2018

Risks

Risk Risk/Impact Management Action / Comments Currency Risk The groups functional currency is dollar, reporting in The directors regularly review and agree policies for dollars. The group has foreign currency exposure as managing these risks. Foreign currency risk is managed its incurs various debtor and creditors in GBP or by matching payments and receipts in foreign currency to EURO. In addition the group has GBP denominated minimise exposure borrowings Credit Risk The group is exposed to the usual credit risk and The Group manages this risk through credit control cash flow risk associated with selling on credit . procedures. The group regularly monitors cash flows and cash resources and has the ability to draw down funds from invoice financing facilities in both the UK and US. Concentration Risk The largest client now represents 28% of Group The group has been actively broadening the client base sales. in order to reduce concentration risk. Its largest client has reduced from 60% of sales in 2016 to 44% in 2017. Political Uncertainty Brexit and other political tension globally The directors monitor emerging news and trends and remain alert to any potential impact on the trading of the group Operational Risks Peaks or troughs in ordering The Group works to ensure resources are staffed appropriate to address varying levels of demand. The group maintains a highly qualifies core staff and a pool of temporary staff. In addition the technology employed serves to mitigate risk through a streamlined process. M&A Mergers of key clients can present a risk to sales Zoo management are maintain an awareness of news in disruption. the market and have continue to focus on diversifying the client base to mitigate disruption risk Technology Risk Development of technology that substantially The Group has displayed is ability to cope with changes changes the end market dynamics in technology. For instance, managing DVD/Blu-ray exposure while growing exposure to high growth areas. ZOO is focused on innovation to meet changing market drivers Key Staff The departure of certain key staff could negatively ZOO Digital has employed incentive programs such as impact the group. share ownership to assist in the retention of staff. In order to manage the risk of key staff departure the group has succession plans in place. Rapid Expansion The group is currently experiencing rapid growth rate The group actively monitors its financial and human which could stretch resources and working capital. resources capacity to address stress points in periods of expansion. Reputational Risk Security breaches could damage the Group's The group employs stringent security protocols within its reputation and ultimately its ability to maintain and ecosystem to ensure a the highest levels of security. win client work. Reliance on freelance ZOO relies on its network of freelance translators, The Groups aims to be a respected and high quality network dubbing directors, voice over talent and engineering. partner to its freelancers. In addition, it has taken care Any disruption to its network would have a negative and diligence to build a network of quality freelancers. Its impact on the groups ability to secure and deliver continued monitoring of the output ensures chosen projects. In addition, ZOO relies on its network to freelancers are meeting the quality expected. produce work to a high standard. Entrants to the market There remains the risk that a large buyer could enter ZOO provides a high quality offering to solidify its market the market. position. The localisation market is large which should support multiple players. Content Saturation The is a risk too much content reaches the market Current forecasts suggest this is not a near or medium and budgets are scaled back while such content is term risk. The Group does acknowledge this may prove absorbed to be a longer term risk and monitors the market closely

Source: ZOO Digital Group and Progressive Research

21 23 April 2018

Appendices

Glossary

Term Definition Over the Top Application 'OTT' An over the top application is any is any app or service that provides a product over the Internet and bypasses traditional distribution, normally associated with media and communications. An OTT is often cost disruptive, as it generally has lower cost than a traditional service provider. 2nd & 3rd Screens The terms are used to describe alternative means for a customer a to consume media. For example, a 2nd screen is the device may be a tablet, mobile, etc. SVoD Subscription video on demand. Machine translation The use of software to translate text or speech from one language to another . Translation memory A glossary created at the inception of a project to provide consistent references for certain names, location or references in a work to be subtitled or dubbed. AR/VR Augmented Reality/Virtual Reality Access Services Closed Captioning, hard of Hearing (HoH), Synchronous Digital Hierarchy SDH), and Audio device (AD) Closed Captioning Displaying text on a TV or other visual display to provide additional or interpretive information. Caption normally is used typically as a transcription of the audio portion of a program as it occurs, sometimes including descriptions of non-speech Blu-ray Digitalelements. optical (wiki) disc data storage format which proceeded the DVD

Source: ZOO Digital Group and Progressive Research

22 23 April 2018

Workflow Diagram

ZOO Digital Ecosystem

Source: ZOO Digital

23 23 April 2018

Global 4G Coverage

Source: The Worldtimezone.com March 2018

24 23 April 2018

Financial Summary: Zoo Digital Year end: March (U$m unless shown)

PROFIT & LOSS 2015 2016 2017 2018E 2019E Revenue 11.5 11.6 16.5 28.0 32.1 Adj EBITDA (0.7) 0.2 1.8 2.3 3.3 Adj EBIT (2.1) (1.1) 0.5 1.0 2.0 Reported PBT (2.1) (1.5) 0.5 (0.1) 1.5 Fully Adj PBT (2.7) (1.7) (0.1) 0.5 1.6 NOPAT (2.0) (0.7) (0.9) 1.4 (2.0) Reported EPS (c) (6.3) (2.4) 2.4 0.2 2.0 Fully Adj EPS (c) (6.6) (2.4) 0.4 0.9 1.8 Dividend per share (c) 0.0 0.0 0.0 0.0 0.0

CASH FLOW & BALANCE SHEET 2015 2016 2017 2018E 2019E Operating cash flow 0.7 (0.4) 1.5 (0.9) 3.9 Free Cash flow 0.1 (0.1) 1.0 (2.1) 2.6 FCF per share (c) 0.3 (0.3) 3.1 (2.8) 3.6 Acquisitions 0.0 0.0 0.0 0.0 0.0 Disposals 0.0 0.0 0.0 0.0 0.0 Shares issued 0.0 0.0 0.0 3.0 0.0 Net cash flow 0.2 0.0 0.3 1.8 2.2 Overdrafts / borrowings (5.6) (6.3) (6.2) (4.6) (4.3) Cash & equivalents 0.3 0.3 0.6 2.4 4.7 Net (Debt)/Cash (5.2) (6.0) (5.6) (2.2) 0.4

NAV AND RETURNS 2015 2016 2017 2018E 2019E Net asset value 2.5 2.6 7.4 9.0 11.1 NAV/share (c) 7.7 7.8 22.7 12.2 15.1 Net Tangible Asset Value 0.4 1.1 1.0 1.6 2.2 NTAV/share (c) 1.3 3.3 3.0 2.1 2.9 Average equity 2.5 2.1 2.2 5.0 8.2 Post-tax ROE (%) (31.1%) 36.8% 5.2% 29.3% 25.5%

METRICS 2015 2016 2017 2018E 2019E Revenue growth 19.9% 1.5% 41.7% 69.8% 14.7% Adj EBITDA growth 78.9% (122.7%) 1,034.0% 29.1% 44.9% Adj EBIT growth 0.5% (47.5%) (145.5%) 95.8% 104.3% Adj PBT growth 10.8% (38.1%) (94.6%) (707.8%) 197.2% Adj EPS growth 10,730.6% (63.9%) (116.6%) 125.3% 102.2% Dividend growth N/A N/A N/A N/A N/A Adj EBIT margins (18.3%) (9.5%) 3.0% 3.5% 6.3%

VALUATION 2015 2016 2017 2018E 2019E EV/Sales (x) 9.6 9.4 6.6 3.9 3.4 EV/EBITDA (x) (159.5) 702.4 61.9 48.0 33.1 EV/NOPAT (x) (53.5) (166.3) (116.3) 79.0 (54.7) PER (x) N/A N/A 368.3 163.5 80.9 Dividend yield N/A N/A N/A N/A N/A FCF yield 0.2% (0.2%) 2.1% (1.9%) 2.5%

Source: Company information and Progressive Equity Research estimates

25 23 April 2018

Disclaimers and Disclosures

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