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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 2 23 April 2018 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
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