ZOO Digital Group plc (ZOO) Earnings Call Transcript & Summary

Welcome to our 2023 AGM. It is now 5:00 p.m. A quorum of members is present and I can declare the meeting open. I am Gillian Wilmot, the Chairman of your company. May I introduce you to my fellow directors, being Dr. Stuart Green, CEO; and Nathalie Schwarz, the Chairman of the RemCo; Phillip Blundell, our CFO; Mickey Kalifa online; Gordon Doran, unfortunately cannot attend but we have Duncan Wayne, our COO, in attendance in the event of any questions for us on that operational area. Before moving on to the formal business of the meeting, I would like to say a few words about the company's performance over the last year and also about our recent activities and progress. The market disruption and temporarily subdued demand for localization and media services outlined in the full year results on the 10th of August 2023 are continuing. Major media organizations are in the process of realigning for profitability and industrial action by writers and actors is ongoing. Consequently, visibility remains limited and resolution of the strike is essential for normal order flow to resume. There has been encouraging progress over the last week in negotiations between the Writers Guild of America and the Association of Motion Pictures and Television Producers, resulting in a provisional deal that it is expected will pave the way for writers to resume work. Despite this progress, the ongoing disruption continues to have a significant short-term impact and market expectations for ZOO's '24 outcome assumed former order levels would resume from October '23. This now looks unlikely and therefore, a range of revenue outcomes for the second half of the financial year is possible ranging from a similar level to the first half, to an increase in revenue in quarter 4. Whilst orders are being processed monthly, they have been and continue to be at historically low levels, such that half 1 revenues are expected to be approximately $21 million, leading to a significant EBITDA loss for the first half of the current financial year. However, the company is in a strong financial position with net cash at the 30th of September 2023 expected to be no less than $16 million. The Board has taken steps to mitigate ZOO's position through the implementation of cost reductions with the objective of achieving breakeven in respect of fiscal Q4. The terms of the planned acquisition of the company's partner in Japan have been renegotiated. And the parties have agreed to defer completion until the order flow has normalized. The Board is confident that the changes arising from strategic reviews by ZOO's major customers will be favorable for the group. These include accelerated transition to an end-to-end approach, studios engaging with fewer, more capable suppliers and greater dependence on ZOOstudio, all of which will strengthen ZOO's market position. ZOO continues to make good progress in cementing its relationships with existing and potential new customers even during this period of temporary disruption. ZOO's strategy is in alignment with the needs of its current and potential customers. And the Board expects the group to be well positioned for enhanced growth once former order levels resume, in line with our medium and long-term aspirations. The structural drivers for international multilingual content remain firmly in ZOO's favor. The Board will manage ZOO's cash position carefully whilst protecting production capability and capacity to enable a rapid rebound of revenues when orders return. To support this, the Board will continue to pursue small investments in strategic locations at attractive valuations that strengthen ZOO's proposition for international dubbing. I'm now pleased to deal with any questions you may have on any of today's agenda items. I would prefer that we take all questions now before the formal business of the meeting gets underway. However, you are not precluded from asking a further question or questions later in the meeting if you so wish. I would like to remind you that the chairs of the Audit and Remuneration Committees are also available to ask questions -- answer questions. Before asking a question, please give your name and state whether you are a shareholder, proxy or corporate representative. If you are a proxy or corporate representative, please state your name and the name of the shareholder that you are representing.

So we have questions that have been posed online but I propose we take them after we cover the formal business. I think that will be easier, I guess.

Okay. So we're going to cover those after the full business, the online questions. Okay. So the formal business of the meeting, may I remind you that when it comes to voting on resolutions, ordinary shareholders here in person, proxies here in person who have been duly appointed by a member entitled to vote and those who are here as corporate representatives are all able to vote on a show of hands or on a poll. This year, you are asked to approve 8 resolutions. Resolutions 1 to 7 will be proposed as ordinary resolutions. This means that for each of those resolutions to be passed, more than 50% of the votes must be in favor of the resolution. Resolution 8 is a special resolution. So this means that for that resolution to be passed, at least 75% of the votes cast must be in favor of this special resolution. May I also remind you that whilst you are free to abstain from voting and abstention is not a vote in law and will not be counted in the calculation of the votes for and against any particular resolution. Resolution 1. The first resolution is to receive the company's annual accounts, strategic report and directors' and auditors' reports for the year ended 31st of March 2023. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise the proxies received in respect of shares comprising: For, 51,781,097 votes; against, 93 votes; withheld, 206,505 votes. I declare the resolution carried. Resolution 2. The second resolution approves the directors' remuneration report other than the part containing the remuneration policy for the year ended 31st of March 2023, which sets out how the remuneration policy has been implemented in paying the company's directors in the year ended the 31st of March 2023. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of the following shares. For the resolution, 49,752,144; against, 2,018,254 votes; withheld, 217,297 votes. I declare the resolution carried. Resolution 3. The third resolution approves the reappointment of Maneck Minoo, known as Mickey Kalifa, who retires by rotation pursuant to the company's Articles of Association as a director of the company. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

I advise that the proxies were received in respect of following shares. 51,241,000 for; 506,384 against; 240,310 withheld. I declare the resolution carried. Resolution 4. The fourth resolution approves the reappointment of Gordon Doran who retires by rotation pursuant to the company's Articles of Association as a director of the company. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to the following shares. For, 43,189,881; against, 8,579,984; withheld 217,830. I declare the resolution carried. Resolution 5. The fifth resolution approves the reappointment of Grant Thornton UK LLP as auditors of the company. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to the following shares. For, 46,964,979; against, 4,810,699; withheld, 212,017 shares. I declare the resolution carried. Resolution 6. The sixth resolution authorizes the directors to determine the remuneration of the auditors. I have put -- I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to the following shares. For, 51,772,344 shares; against, 8,645 shares; withheld 206,706 shares. I declare the resolution carried. Resolution 7. The seventh resolution authorizes the directors to allot shares up to an aggregate nominal amount of GBP 325,879.78. In line with current institutional shareholder guidelines, this represents approximately 1/3 of the company's current issued ordinary share capital. The authority will expire at the next AGM of the company or on the 18th of December 2024, whichever is the earlier. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect to the following shares. For, 51,727,540 shares; against, 47,837 shares; withheld, 212,318 shares. I declare the resolution carried. Resolution 8. The eighth resolution empowers the directors to allot shares for cash without first offering them to existing shareholders on a pro rata basis. In line with current institutional shareholder guidelines, the power is limited to a nominal amount of GBP 97,763.94 which represents approximately 10% of the company's current issued ordinary share capital. The resolution also empowers the directors to deal with technical problems arising in relation to offers such as rights issues and open offers. For example, in relation to fractional entitlements and overseas shareholders. The resolution will expire at the next AGM of the company or on the 18th of December 2024, whichever is the earlier. I now put this resolution to the meeting. Please raise your hand to vote. Those in favor? [Voting]

Those against? [Voting]

Those abstaining? [Voting]

For the information of shareholders, I advise that proxies were received in respect of the following shares. For, 46,909,007 shares; against, 4,866,370 shares; withheld, 212,318 shares. And I declare the resolution carried. Ladies and gentlemen, that completes the formal business of this AGM. Thank you all for coming. There is now an opportunity -- I declare the formal part of the meeting closed but there is now an opportunity to ask us questions and we have some questions online.

Thank very much, Gillian. What I'd like to do -- actually before that, is just go through a short presentation to really elaborate on Gillian's statement from this morning. And then hopefully, that will set the scene and then we can take Q&A. So for those who are joining this meeting online, on the right side of your screen, you should see a tab labeled questions. So at any point, you can dive in there and type your -- the question you'd like us to answer. And then we'll answer those questions in turn when we get to the Q&A section. We have -- mainly for the benefit of those who are actually attending in person, in addition to the Board, we also have Chris Oakley, who's our CTO, who is present and who will be able to provide demonstrations after the meeting. Okay. So I'll -- as I said, I'll just take a few minutes to take you through a presentation just to elaborate on the key points of the statement and also talk about what's happening in market at the moment. So a quick recap on what we do. We provide services into the entertainment industry involving preparing media for distribution, primarily through streaming services. We work for all of the major U.S. streaming services and large content producers, such as big Hollywood studios. If you indulge me for just a few moments, I'll just say a few words about our FY '23, which is the year to March 2023. It was our fourth year of revenue growth with improved margins and profits. We've grown at a rate over 34% CAGR since 2016. And we established ourselves as a premium provider to the global streaming companies around the world. And we've continued in the period to differentiate ourselves through our technology-enabled approach. So we are a part a software company that can develop proprietary technologies that give us competitive advantage. But the way in which we monetize that is by presenting services into our industry to deliver a combination of media localization to adapt content into different languages through subtitling and dubbing, as well as a range of media services which are to do with ensuring that the content will playback property when it goes onto the streaming platforms. In the period, we strengthened our proposition through some international -- establishing international operations in some key strategic locations. We actually raised capital for an acquisition in Japan in April and we'll touch on that in a moment. But of course, these fantastic results from FY '23 have been overshadowed by this temporary industry slowdown, which has led to a weak FY '24 for ZOO. However, the medium and the long-term fundamentals for the company remain exceptionally strong and I'll elaborate on that more in the next few slides. So before I do that, let me just elaborate on the challenges that the industry has been facing, that have then caused the slowdown in business for ZOO, it's a temporary slowdown, caused by a couple of key areas of challenge. So firstly, since the beginning of the year, almost all of the major U.S. streaming companies have been going through strategic reviews. And if you look at those companies, they -- most of them are not yet profitable. And this has then been an opportunity for the industry to pause the breath as these studios reconsider their business model for streaming and ensure that the way in which they're operating will deliver good profitable growth going forward. And as a result of the strategic reviews, it has resulted in some restructuring, some head count reductions, a whole range of changes that these organizations are in the process of implementing in order to reach a point of profitability. Secondly, this has obviously coincided with the first time that writers and actors in the U.S. entertainment industry have been on strike simultaneously, for 60 years. The fact that they have taken this industry action is, in fact, actually a symptom of this bigger challenge the industry is facing, that I mentioned already, namely the need for major media companies to adapt their businesses to ensure that they are well-placed to deliver profitable business long term through streaming. The disputes that have been ongoing are around pay, which, of course, is symptomatic of these challenges that I've just referred to but also there have been concerns about artificial intelligence. So let's just return to what we know as of today based on the latest news in the industry. So these 2 factors have created a hiatus which has resulted in an industry-wide and ongoing situation where it's not been possible to produce and complete content out of North America. But it's really important to note that it is temporary and it will end because, of course, the consumer demand for media and entertainment is absolutely undiminished and indeed, is actually growing on a global basis. Obviously, what, the news of the last week or so that Gillian referenced a moment ago is that terms have now been agreed for the writers. And that means that, hopefully, in due course, once those terms have been ratified by the members of the union, writers will be able to return to work. And of course, then the next step is to address the concerns of the actors. We can expect that, that will take a little bit of time because there is -- there are some complex issues in relation to the craft of acting insofar as AI is concerned. But at some point, we can expect that this situation will be resolved and actors too will be able to return to work. On our working assumption and this is based on conversations we've had with our customers, is that if the strikes are prolonged and if the actors were to continue to -- without distraction for a while longer, then there is always the option for our customers to migrate -- continue to migrate back catalog content, only a relatively small proportion of which has actually found its way to the streaming platforms to date. And that will be a similar situation to what we saw happen during the pandemic when, similarly, the production of new original content came to a halt. And thinking about producing that content, the aim of these producers is, of course, to have programs that attract big audiences. And of course, the easiest way to do that is to find content that appeals to audiences in lots of countries and that in turn means that localization is not only important but it's actually critical to the industry and essential for delivering growth. So turning now to what are our expectations as of today. Well, currently, our visibility of revenues is actually very limited because of the halt in production of content in North America. And of course, that makes planning and forecasting very difficult. Consequently, the short term for us is unclear but we do know that work is going to normalize in the medium to long term. We just don't know exactly when that will happen. What we've been seeing throughout this period has been our major customers taking a much more streamlined approach to their operations. And as part of that, the end-to-end approach of engaging with vendors like ZOO has become increasingly important and sought after. And by that, I mean, rather than work with a large number of vendors who cover different areas of services, increasingly their preference is to work with a smaller number of vendors, each of which has capability across all the different service lines. In this regard, ZOO is a key supplier. And indeed, some of our technology, specifically our ZOOstudio platform has been adopted by major participants in the industry. And that gives us great stickiness, which secures us a premium position within our industry. Because of the way in which we work through a flexible approach, engaging freelancers and an approach which doesn't have the same capital requirements as traditional businesses in our sector, what that means is that, as a business, we have a great flexibility to our cost base. And AI clearly is an emerging area and it certainly has applications into the work we do but it is something where we see opportunity. And indeed, our expectation is that customers will look to ZOO as a trusted party to help them evaluate these technologies to the extent that they are applicable. And consequently, we see this as a source of incremental services that we can deliver. As Gillian mentioned in the statement, we're in a position of strength from a balance sheet standpoint. We have net cash, which can sustain us through this period of uncertainty. And we expect once we come through this period that we will be in a much stronger position because of the changes that are being made by our customers, will in effect favor ZOO's approach to delivering these services. So our long-term strategy and the trajectory of the business remains intact. What I'd like to do now is just very briefly just take you through a few charts, just to paint a picture for what is happening more broadly within the industry and what we might expect going forward. So the chart on the left shows what we know already, really, which is that consumers are transitioning from traditional TV to streaming. And this chart is showing that consumers in the U.S. are now watching more content through streaming than they are through traditional television. And from that, it's clear that streaming represents the future of home entertainment. And indeed, the disruption we're seeing at the moment within the industry, as I mentioned already, is actually related to media companies making that transition, which is not straightforward because that entails, for many of them, moving from a wholesale model into a direct-to-consumer model. The second chart highlights a key challenges -- a key challenge that is faced for streamers as distinct from the era of network television. And that's to do with user churn, customer churn. So streaming has been incredibly good for consumers. It's replaced expensive bundles of services with low-cost packages, allows this very flexible month-to-month billing. But what that means, of course, it is very easy for consumers to dip in and out of different services. And that's led to a high level of churn, up to 50% in some cases. And that compares with levels of churn that were typical in network TV of round about 1%. So clearly, this is a very big challenge that the studios need to address. And indeed, they're looking at multiple strategies to attend to this, such as bundling of multiple services and ironically, taking similar approaches to those that were popularized during the network television period. And then the third chart on this slide shows the investment that's been made in content production year-on-year for a number of years. As you can see, the only dip in that chart was in 2020, which was the period of pandemic when production obviously came to a halt globally. But you'll see that the overall trajectory was actually unchanged. And the expectations are that growth will continue in terms of investment in original content despite the current industry slowdown. Now some streaming companies may trim their budgets but other than this current hiatus, which is obviously caused by the strikes, we -- lot of commentators don't expect spend to materially decline in the subsequent years. The first chart on this slide really just highlights that although there are hundreds of streaming services around the world, there are just a handful that have a dominant place within the industry. And these are precisely the customers that ZOO is targeting. As you can see, they're mostly U.S.-based subscription video-on-demand services. The second 2 charts really highlight the rise that we're seeing in other forms of monetization, particularly advertising-related income that comes from advertising video-on-demand services, which is the middle chart and free ad-supported streaming television channels, which is the chart on the right. And what we're seeing, of course, is that advertising tiers are being added to leading subscription platforms such as Disney+ and Netflix. There's obviously been a shift in gear over the course of the past year to focus on profitability. And on the left, you can see some examples of platform consolidation that we've seen in the industry. And I think we can probably expect there's more of that to come. What this does, of course, is help with the appeal in addressing broad audiences where there's obviously a need for diversity of content and fresh content across many genres, which obviously is much easier if you're a large and diversified provider. We're also seeing that content owners are increasingly open to licensing of their content to other players rather than retaining it exclusively, which has been a feature of streaming that again is another example of where, going forward, it's likely that content owners will revert to the way in which they operated during the network television era. The middle chart highlights the rise in international content. And more and more we're seeing international content on our screens. What's attractive about this to the streaming companies is that the acquisition costs generally are much lower than producing content in North America. And we've seen streaming services investing quite heavily in non-English content across many different locations. What the chart shows is demand for Asian titles have soared, particularly in Japanese and Korean. And of course, what this in turn does is highlight the importance of localization in taking that content and then making it accessible to audiences globally. And then on the right, just some examples of the headlines arising from the widespread cost-cutting that we've been seeing that streamers have been making over the course of the last year in order to reach profitability. So declining revenues from linear television has really caused a greater emphasis on profitability of streaming. And in making these cost cuts, clearly, the internal teams that the studios have, have been reduced in number and that, in turn, creates greater reliance on vendors like ZOO to provide these key services. And then the last chart I'd like to show you just to illustrate, more specifically the trends within ZOO's target market. So in an earlier chart, I showed you some data showing spend on content, which is a proxy for our market but it's a pretty crude proxy, because really what matters to us is not how much you spend on content but how much content is produced in terms of the number of minutes of programming on an annual basis. If you look at the spend on original content, typically, a studio spend on localization, it will be between 1% and 3% of that content budget, just to give a guideline. But as I said, it's actually the duration in run time terms that's important to us. Well, the chart on the left here shows is the size of ZOO's target market from the market commentator Slator, which in 2022 reached about $3 billion. And on the right, some data reported by another market commentator, [indiscernible] indicates that an increasing percentage of the spend on these services is with larger suppliers like ZOO. And in fact, the number of those large suppliers has been declining. So what's happening is that more and more of the spend, that $3 billion spend, is being placed with companies like ZOO and a handful of others in the market, which meant that currently the addressable market for ZOO is about $1.5 billion, as a point of reference. So what is the impact of these things on ZOO? Well, despite this current hiatus, which obviously is protracted and is continuing longer than anyone thought, I think, there are no forecasters who expect a long-term spend on content or volumes of content produced to be -- to materially decline. And clearly, given the growing demand for entertainment globally, so clearly, those 2 things are consistent. Trimming of budgets by some of these major players doesn't necessarily mean that the volume of content that's produced will diminish because, of course, the cost of producing content varies enormously between different types. So where a feature form of 90 minutes might typically cost between $100 million and $200 million, an episode of a reality TV show will cost 1/1,000 of that, between $100,000 and $0.5 million per episode. So for the same budget, studios could produce actually a lot more content depending on how they choose to expense that against different content types. The streamlining of studio operations that I've mentioned already favors the end-to-end vendors of which we believe there are only 5 in the industry and ZOO is one of the major players. The fact that there are more [indiscernible] channels, such as those that provide advertising, together with these content licensing avenues that are now being pursued by some major players, actually will create more opportunities for ZOO. As I mentioned, the spend on localization, typically, when looked at as a percentage of spend on content, is only 1% to 3%. So it's a small incremental cost and a very cost-effective way to reach larger audiences. And finally, this disruption due to the industrial action, it has been going a long time now but there is light at the end of the tunnel. Clearly, there is an agreement with the writers and we expect the -- an agreement with actors to follow in due course and it will resolve at some point in the coming months. So let me wrap up then just with an outlook. This current hiatus that I've covered has had an impact not only on the first half, which is what we anticipated but clearly impacts now, given the protracted nature of the disruption, it will also impact our second half and, therefore, the whole of FY '24. We do expect things to resolve in the medium term and when they do, all this will normalize. The changes that have been made by our clients are all beneficial to ZOO over the medium to long term in that they create a situation that favors ZOO's business model and approach to delivering these services. In the meantime, we have a strong cash balance and the means to be able to set this out, that's clearly supported by cost savings that we have been implementing. And therefore, we are confident that the industry will right itself in due course and that growth will continue through to the ZOO business.

Thank you. So what I'd like to do now then is turn to questions. And we can take questions from the room but I've actually already got quite a few questions that have been passed on by folks who are connected online. So what I propose to do is, address these in the order that they've been asked. And I'll ask appropriate members of the Board to attend to them. So the first question comes from [ Jackson Allen ]. And it says -- the question is how much of a lag do you expect between when actor strike ends to when you return to normal order flows? We think that, that could take probably around a quarter, probably around 3 months. It's difficult to say definitively because there are actually a lot of things that will need to be rescheduled and resources reallocated for production and there could be some contention for studio space, for example, as all these productions spring back into action all at the same time. So for the purpose of our modeling, we've assumed that probably it's a 3-month lag. Next question. It's in multiple parts. The first part is, ZOO burnt through $7 million of cash in 1 quarter, so it actually is $23 million at the 30th of June versus $16 million at the -- on 30th of September. And this excludes any revenue cash inflow. So the question is, why is cash burn so high given that ZOO uses freelancers, i.e., that there's high variable cost structure? So I'm going to ask Phil to answer that.

Thank you, Stuart. Easy question. So the freelancers are a proportion of our costs. But if you look through our annual report, you'll realize that we now also have significant fixed costs. So we have -- last year, we had roughly $22 million of costs relating to full timers who work in production and we had over $25 million of OpEx as well, which goes below gross margin. And the Board took a decision based on the intelligence that we had in the first quarter that things were going to return to normal probably by the end of quarter 2. So our cost-cutting exercises in our -- that fixed cost base, which is quite large, didn't actually take place until August, September. So that's the reason why the cash burn was so high.

Thank you, Phil. And then the next question, which is a follow-on was, in relation to the accounting mistake in FY '23, the question is, what governance was in place when they occurred and why did it not pick up this significant mistake? So perhaps maybe you just want to summarize that?

Yes. I think the accounting mistake, which was to do with the treatment of costs relating to work in progress was something that was signed off by the auditors 5 years ago. And it was only when they changed their audit partner, that the new audit partner felt that the treatment wasn't correct and at which point we obviously had to take professional advice from a third party. And we concluded that the restatement should take place. So it was something that had been signed off before 4 years prior to this restatement.

Thanks, Phil. I think the next one is for you too. This one comes from [ Kristof ] [indiscernible]. Two parts to this question. Firstly, what is the current monthly cash burn during the strike disruption period?

Right. So we've already talked about the cash burn in quarter 2. In quarter 3, with some of the cost savings that are already enacted, we expect the cash burn to drop to near $4 million. And then our expectation is that in quarter 4 the cash burn will drop to $2 million. And that's the worst-case scenario. If orders pick up quicker, we will be trying to get to cash breakeven in quarter 4. So just to conclude, that means we will have at least $8.5 million in the bank, under the worst-case scenario at the end of March.

And then the second part of [ Kristof's ] question is, I thought that given the strikes, the media companies would use the downtime to translate older content in the backlog. Why isn't that happening? It's a great question. A couple of our customers actually indicated to us that there's a good chance they would choose to do that. And we have done -- we have worked on a little bit of back catalog content during the period but not a significant volume. So I don't know the answer to the question. I guess they've been optimistic that the strikes will get resolved, so they can -- so they can spend their capital on new original concept, which is much more viable to them. So it's a question I'm afraid for our customers rather than the one that we're in a position to answer. Next question. Given ZOO's revenue was mostly from studios localizing backlogs, e.g. Disney, when the backlogs are finished, why is ZOO confident that ZOO will get the business instead of in-house teams? So I think this question is, ZOO's revenue is mostly from studio localizing backlogs, that's a sort of back catalog question. Well, actually, the majority of our work is in relation to producing -- preparing our services to new original content rather than back catalog content. We do some back catalog. And where back catalog has been a significant part of our business, it's been in relation to territory launches. So when a particular customer with a streaming service launches in a particular country or a particular region, then there is the need to take all the content that's already on the platform and adapt into one or more new languages. So that is, that's what you would call -- that's an example of what you call back catalog work. And that can, for us, can give writers some lumpy revenues. So I think the question here is, why is ZOO confident that ZOO will get the business instead of in-house teams? Well, the answer to that is that there is only 1 player that we're aware of that has chosen to in-source some of these services and that's Netflix. What all other customers have done is to work with third parties like ZOO, because these services are highly specialized and these studios really want to focus on their -- where they're adding strategic value, which is really all around creating new original content rather than having resources to adapt that content into different languages. So we don't think that -- we do not expect there to be any kind of trend in terms of moving to an in-sourcing type model. On the contrary, the movement seems to be very much in the opposite direction. So to the extent that others may have performed work in-house, increasingly they're looking to make that cost variable by outsourcing to partners such as ZOO. So next question is, why is ZOO unable to charge for ZOOstudio software and also needed to make it vendor-agnostic? Does this mean that ZOO has no pricing power? And this seems to give competitors free software to use. Okay. So just to be clear, ZOOstudio is, you can think of it as a very specialized ERP system that we provide to our customers to enable them to manage their internal operations for placing orders for this kind of work. And it's a pretty complex requirement that. It may seem straightforward but actually, there are so many individual elements that need to be ordered and they will have to be coordinated and tracked and allocated to vendors and so on that, that's a quite an onerous undertaking. So we built a system called ZOOstudio that essentially takes -- does all the heavy lifting as far as that's concerned. So ZOOstudio is actually used by our customers, not by our competitors. Those customers are all large media companies who will -- would never single source any of these services given they're spending, in some cases, hundreds of billions of dollars on them annually. And therefore, there will always be multiple vendors. So ZOOstudio provides a way for them to place that work with -- not only with ZOO but with other providers as well. The contractual arrangement we have with our customers essentially means that we are able to trade that software for a preferential treatment in relation to the placement of work for the actual production services. So actually, on the contrary, that gives us strategic benefit and a unique position in the industry that we can translate into competitive advantage. Next question, also from [ Kristof ]. Can I just clarify, you said you're targeting cost cuts to break even on a run rate basis by the fiscal quarter Q4? Want to take that?

Yes. It's a simple answer. We are in the middle of a program to reduce our internal head count and fixed cost by about 120 people, which will generate savings of between $600,000 and $700,000 a month. That program will be finished in the next few weeks.

Next question. Based on my informal understanding speaking to [indiscernible] ex-employees, [indiscernible] has similar software to ZOO to manage the workflow. What makes ZOO software unique? So for those who aren't with [indiscernible], this is one of our large competitors. In fact, it's the largest player in the industry. So before the current industry disruption, we understand was delivering revenues of around about $500 million annually. It's a traditional business and indeed, our major competitors are all what we would call traditional providers of these services in that they operate from lots of physical facilities across many different countries. So this company says, [indiscernible] has similar software to ZOO. Well, we know from our customers, that ZOO's software proposition is unique in the market. And what we've developed is a complete end-to-end solution that means that we can deliver many of these services virtually without requiring physical facilities in every country. So if you take ZOOstudio, that is a unique product to the market. There is no other product like it that we're aware of. For the customers of ours who have chosen to adopt that platform, we know that they've evaluated other potential alternatives but have not found anything with that same capability. So we do think that we are -- all evidence points to the fact that ZOO is in a unique position with competitive advantage to deliver through its proprietary technology. Next question comes from [ Jackson Allen ]. Do you expect any impact either positively or negatively to how streaming providers engage with ZOO given the outcome of the recent resolution with the writers? What are you hearing from your customers and how they expect to engage with you for localization services going forward? So our expectation is that once the production operations resume and products start to being finished -- and will be -- then move on the translation and the kind of media services we provide, we're not expecting -- there's nothing that our customers have indicated to us that will lead us to believe that there's going to be anything different fundamentally in terms of their use of us and other vendors like us to fulfill these services and the kind of volumes of such services that they'll require. One of the key changes that they're making, as I mentioned already, is that they are -- they are choosing to focus in general on a smaller number of vendors. And therefore, will recognize that they have a greater reliance on a smaller number of partners and will need to ensure that those partners are -- have the capability and capacity to deliver the services that those customers need. So one of the things -- one of the changes -- positive changes we expect to come from this, is that we -- and indeed other -- our competitors too, should expect to receive much better visibility from customers of their production and product completion pipelines going forward. So that is certainly a very favorable outcome of these changes to ZOO and indeed the -- our sector more widely. Next question comes from [ Mark Simpson ], who claims himself to be shareholder. The question is, when was the company first aware that former order levels would not resume from October '23 and hence the company would not meet market expectations for FY '24? Do you want to take that, Phil?

That's information that [indiscernible]. We have been talking to our customers constantly over the last 3 months and we were expecting to have some feedback on volumes before the end of September. And the last meetings that took place that told us that, well, actually things aren't going to improve, were in the last week. So this is really something that has come about in a very short order. Hence, why we've had to put out the warning in the -- today.

Thanks, Phil. The next question comes from [ Barry Singleton ]. What do you say about the proven ability of AI to mimic people, both visually and orally to such an extent that it is difficult to tell the real from the fake? Does this not undermine your dubbing business model? And will AI not also undermine your subtitling business? Again, it's a good question. So clearly, there have been -- AI has come on in leaps and bounds over the course of the last year. I think no one could have thought of -- have missed that. And certainly, products like ChatGPT look very impressive for certain applications. But it's important to recognize that for our business, what we're doing is, we're taking a creative content, a TV series, feature form, something that's been crafted very carefully, involving scriptwriters and all sorts of people, creative people, to produce an artistic work, the job that was entrusted to us is to take that artistic product and adapt it into different languages. And consequently, the way in which we do that is, needs to be sensitive to the cultural differences in the different target markets, the particular linguistic features, a whole host of things that are really quite subtle and nuanced. And we believe and our customers at the moment believe, that the way to do that now to the standard that's expected of our customers, is to do it using people, using real human translators and real actors. Now that's not to say that AI doesn't or can't play a part of this process. And indeed, we are exploring avenues in which AI can play a supplementary role here to improve productivity, to catch errors that might otherwise be missed, a whole range of different possibilities. But we do not expect AI anytime soon to displace the kind of services that we're delivering. So when you think that our customer is spending potentially hundreds of millions of dollars on creating a program, the idea that they could shave a small amount of cost of the localization of that content is -- it would be crazy to do that, if there is a potential that, that could backfire because it wouldn't be done in a sympathetic way and audiences in different countries will be turned off by that content because it's just not -- it just doesn't resonate with them in the way that the original program resonates with the home audience. So I guess in summary, AI is something that we see has been very interesting. It's actually an area that we have been active in for a number of years already. We have a number of projects underway. But we view it as something to support and augment the sort of traditional processes that we're involved in, rather than to displace. The next question, please kindly share how management's incentives are aligned with shareholders, as historically, shares seem to be issued at a high prior to a huge fall in price. Dr. Green has 11 million shares but the other directors have a minimal number of shares. Will this change? Is that a RemCo question? I don't know, how do you want to field that [indiscernible]?

Good question. Nathalie, do you want to talk about RemCo policy and then we'll come back to the history of Stuart having 11 million shares?

So in terms of the alignment of directors' [indiscernible] policies or reward in its general sense, the directors having bonus is very much aligned with performance. There are revenue targets set every year and EBITDA targets and those are only payable to the extent that those performance targets are met. So that's as far as annual bonus scheme is concerned. As far as share options are concerned, in terms of those share options, as opposed to when a director themselves chooses to use their own resources to buy cash in the market, which is different, share options also have targets attached to them and they're only ever awarded or issued in terms of the options itself or granted, I should say, at a time when there is nothing that's price sensitive out there and again, with very, very clear targets attached to them. So that's the remuneration policy. So the bonus is absolutely aligned with performance and the options are only ever granted and issued and exercised when there is no price-sensitive information that's being held internally by the company and trading is abound.

Just worth noting that all share options have only ever been issued at market price. They have not been issued below market price. And in the specific case of Stuart, Stuart has owned shares, a significant amount of shares for many, many years, which he paid for himself. They're not the result of share options. He bought them for cash. And that's why he's ended up with a stake he has. He took the risk when the company was in a very different place than it is today and that's why he has such a shareholding. It's got nothing to do with RemCo policy, whatsoever.

And then next question from the same person is, Dr. Green seems to be approaching retirement age. Thanks for rubbing that one in. Is there a succession plan in place? Are any family members of Dr. Green employed by the company? Well, I can say that I don't have any immediate plans to retire. About succession planning, perhaps anybody want to comment on that, more generally, Gillian, perhaps it's an area that the Board is...

Okay. We don't, to my knowledge employ any of your immediate family members, do you, Stuart?

We do not.

Thank you. Good. Not that I wasn't aware. So we can confirm that. In terms of succession planning, it's a really good question and a fundamental responsibility of Boards and something we've discussed a lot recently. Clearly, we have talent development and succession in the business. We've had a particular focus on diversity and inclusion within that. But currently, it's really tough because we are, as Phil has alluded to, cutting head count. And that is a really tough thing to juggle with our succession planning. But yes, we do have people we have developed, in place in the business, people running key areas of business for us and new areas of the business for us, who we have very much on our radar and want to make sure we very much have engaged and are developing in terms of their skills and abilities and very, very focused on making sure they stay with us through this tough period that we're going into.

Thanks, Gillian. I'm mindful of the time, as we've only got a minute or 2 left. So I'm just -- and we do have quite a lot of questions. So I'm sorry that we're not going to have time to address them all. But I think I'm going to try to get some of that I think, would be perhaps most useful more widely. So this question from [ Mark Simpson ], who is a shareholder, who asks -- Progressive, which is an analyst that writes on us, are forecasting cash at FY '24 year-end to reduce to just $8 million, down from approximately $27 million once accounted for the recent placing. How will the company now fund the Japanese acquisition given that this appears to be below even the required acquisition price?

Okay. That's one for me. So the current situation with the Japan acquisition is that it's on hold. The target company's parent is having the same problems as we are. They understand that we are not going to proceed with the acquisition until the market recovers and that the strikes are over and that we may also renegotiate the price. So we have alluded to in the statement today that the price has already dropped once, there's a good chance it might drop again. So it's on hold. There's no commitment on the part of ZOO to buy it. Obviously, on the other hand, there's no commitment on the part of the seller to sell and there is no break fee. So -- but we have agreed that we will continue to monitor the situation. Once there is visibility on the future, we will try to move forward, because Japan is a strategic market that we would like to have a company in that market.

Thanks, Phil. I think we're out of time now and we still have quite a lot of questions left. So what I'm going to arrange is that we will provide written answers to those questions in due course. And I believe when we do that, you should be -- you should receive notification of that through Livestorm, which is the platform that we're using. So with that, I'd just like to thank everyone for attending those here in person and those online and say that we appreciate your support.

Thank you.

Thank you.

Thanks for your support.