ZOO has delivered a strong AGM update, highlighting a solid performance in H1 to date, with profitability buoyed by high-margin technical work. The industry appears to be (albeit very slowly) establishing procurement platforms to build and manage the multiple new systems needed in the rush to direct-to-consumer models. We make no changes to forecasts, but look forward to further announcements during H2 and beyond.
The AGM update provides no specific financial detail but it appears that EBITDA is ahead of expectations for this stage of the year, although we infer that revenue may be slightly lagging. The RNS states that the previous year’s softening of localisation sales “continued into the first months of the current period”, but there is also commentary around a major content producer whose new content and back catalogue need to be digitally packaged and localised. This leads us to conclude that H1 has benefited from a good level of high-margin digital packaging or reconforming revenue – valuable in its own right, and a good precursor to subsequent involvement in broader localisation revenue streams from the same customer(s). DVD packaging has continued its previously-described decline, and we assume that it now represents a relatively immaterial proportion of overall group sales.
The global markets for TV and film content are changing rapidly. Spurred by the success of Netflix and others, the major film and TV studios are, en masse, moving to offer “direct-to-consumer” subscription-based platforms . This is likely to lead to significant additional work for ZOO and others, but the changes involved have led to a degree of dislocation of the usual buying patterns; this is what led to part of last year’s disappointment. We are pleased to see the group now describe itself as “a de facto preferred vendor for a major content producer” as mentioned above – this bodes well for additional localisation (subtitling and dubbing) revenues over time, as the procurement processes become more established.
Overall the group appears to be benefiting from some high-margin work normally sold alongside (or in advance of) its traditional subtitling and newer dubbing services. This is offsetting the ongoing delays as the industry continues to build new supply chains, and we believe bodes well for future relationships, inclusion in the most valuable vendor programmes, and long-term value creation.