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8-K - FORM 8-K - Spok Holdings, Inc | w79350e8vk.htm |
EX-99.1 - EX-99.1 - Spok Holdings, Inc | w79350exv99w1.htm |
Exhibit 99.2
USA Mobility, Inc. Investor Conference Call
July 29, 2010
10:00 a.m. Eastern Time
Operating Results for the 2nd Quarter Ended June 30, 2010
Operator: | Good morning and welcome to USA Mobilitys Second Quarter Investor Conference Call.
Todays call is being recorded. Online today we have Vince Kelly, President and CEO, and Tom
Schilling, Chief Operating Officer and CFO. At this time for opening comments I will turn the
call over to Mr. Kelly. Please go ahead, sir. |
|
Mr. Kelly: | Good Morning. Thank you for joining us for our second quarter investor update.
Before we discuss our operating results, I want to remind everyone that todays conference
call may include forward-looking statements that are subject to risks and uncertainties
relating to USA Mobilitys future financial and business performance. Such statements may
include estimates of revenue, expenses, and income, as well as other predictive statements or
plans which are dependent upon future events or conditions. These statements represent the
Companys estimates only on the date of this conference call and are not intended to give any
assurance as to actual future results. USA Mobilitys actual results could differ materially
from those anticipated in these forward-looking statements. Although these statements are
based upon assumptions that the Company believes to be reasonable, they are subject to risks
and uncertainties. Please review the risk factors section relating to our operations and the
business environment in which we compete, contained in our 2009 Form 10-K, our second quarter
Form 10-Q, and related Company documents filed with the Securities and Exchange Commission.
Please note that USA Mobility assumes no obligation to update any forward-looking statements
from past or present filings and conference calls. |
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I want to start this morning by highlighting what we believe was an excellent second quarter and
first half operating performance for USA Mobility. We ended the quarter ahead of our goals for
subscribers, total revenue, cash flow and operating expenses, while ARPU and recurring operating
margins remained strong. Despite a very challenging economy, our sales force continued to meet the
Companys plan for gross additions. We continued to provide cost effective and reliable wireless
communications services to our nationwide customer base. In addition, we generated sufficient cash
flow to operate profitably while returning capital to our stockholders. |
||
Tom will discuss our financial results in more detail in a few minutes, but first I want to review
a few highlights of the quarter. |
1. | Subscriber trends again showed improvement in the second quarter, maintaining the positive momentum from the previous two quarters. Our annual rate of subscriber erosion for the second quarter was the lowest since the third quarter of 2008, while our quarterly loss rate was the best in more than five years. | ||
2. | Total Revenues met our performance target for the quarter, although the rate of Revenue erosion increased slightly as paging ARPUs declined from prior periods. | ||
3. | We again made substantial progress in reducing Operating Expenses during the second quarter consistent with our goal to manage a low-cost operating structure. Operating expenses...excluding depreciation, amortization and accretion...were nearly 25 percent lower at June 30th than they were a year earlier. This accomplishment is a credit to the commitment and hard work of employees throughout the organization. |
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4. | The success of our cost management efforts, combined with a solid revenue performance, resulted in second quarter earnings before interest, taxes, depreciation, amortization and accretion (or EBITDA) of $20.4 million. We also reported a very strong EBITDA margin of 34.6 percent for the quarter. | ||
5. | We again met our goal of generating sufficient free cash flow during the quarter to return capital to stockholders consistent with our capital allocation strategy. We produced $21.9 million in cash from operations in the second quarter, allowing us to pay a regular quarterly cash distribution of $0.25 per share on June 25, 2010. In addition, our Board of Directors yesterday declared a regular quarterly cash distribution of $0.25 per share to be paid on September 10, 2010. | ||
6. | We continued to repurchase the Companys common stock during the second quarter under our Stock Repurchase Program, buying back 176,839 shares in the quarter. Since the program began in August 2008, we have repurchased a total of 5,399,809 shares of our common stock. As of June 30th, approximately $18.1 million remains available for purchases under the currently approved plan, which extends through the end of this year. |
Overall, we are very pleased with our results for the second quarter and believe were well
positioned for a solid year in 2010. At this point Ill ask Tom Schilling, COO and CFO, to review
our quarterly financial results and provide additional comments on
our recent operating performance......
Tom. |
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Mr. Schilling: | Thanks Vince, and good morning. |
|
As Vince noted, we were pleased with the Companys second quarter operating performance.
Improvement in subscriber churn combined with strong ARPU and lower operating and capital expenses,
contributed to high EBITDA margin and strong cash flow for the quarter. |
||
We were particularly pleased with the improvement in subscriber trends as the pace of unit erosion
improved for the third straight quarter. While unit losses are still high, the positive trends in
recent months have reversed the accelerating churn rate we experienced during late 2008 and
throughout most of 2009. We ended the quarter with 2,027,000 units in service, a net decrease of
72,000 units during the quarter, compared to a decline of 83,000 units in the first quarter and
158,000 in the year-earlier quarter. |
||
The quarterly rate of subscriber loss improved to 3.5 percent from 3.8 percent in the prior quarter
and 6.0 percent in the year ago quarter. Our annual rate of net unit loss improved to 17.2
percent, compared to 19.5 percent in the first quarter and 22.9 percent in the year-earlier
quarter. |
||
Total Gross Placements decreased slightly to 72,000 in the quarter from 76,000 in the prior
quarter. However, Disconnects declined to 144,000 from 159,000 in the prior quarter. |
||
Healthcare continues to be our most stable market segment with the highest rate of gross placements
and lowest rate of net unit losses. For the quarter, the gross placement rate for Healthcare
improved to 4.4 percent, compared to 3.5 percent |
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in the prior quarter, while the net unit loss rate was 0.8 percent, versus 1.4 percent in the
previous quarter, reaching its lowest level since the second quarter of 2007. Healthcare accounted
for over 70 percent of all gross additions during the quarter and at June 30th, accounts
for 56.1 percent of our total subscriber base, compared to 49.8 percent a year earlier. |
||
Total Paging ARPU was $8.87 in the second quarter, compared to $9.00 in the first quarter and $8.96
in the second quarter of 2009. Despite the modest decline in ARPU, we are pleased that overall
pricing levels remain relatively steady given the challenging economy over the past year, and our
continue customer base migration toward larger customers with lower ARPU.
Paging Revenue for the second quarter was $54.9 million, a decrease of 5.1 percent from $57.8
million in the first quarter. The annual rate of decline was 19.3 percent in the second quarter,
compared to 19.7 percent in the prior quarter. |
||
Product Sales declined 18.6 percent to $2.7 million in the second quarter from the prior quarter,
due mostly to lower Lost Pager Revenue resulting from the improvement in disconnect rates.
Cellular phone sales declined 11.9 percent from the prior quarter. Other Revenue was essentially
flat with the first quarter. |
||
Total Revenue for the second quarter was $59.1 million, compared to $62.8 million in the first
quarter and $75.1 million in the second quarter of 2009. The quarterly rate of Revenue erosion
declined to 5.8 percent, compared to 4.0 percent in the prior quarter and 5.7 percent in the
year-earlier quarter. Revenue declined 21.3 percent on an annual basis in the second quarter
compared to 21.2 percent in the first quarter and 18.4 percent in the second quarter of 2009. |
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We continued to reduce Operating Expenses in the second quarter, at a faster pace than the rate of
revenue decline on both a quarterly and annual basis. Total Operating Expenses (excluding
depreciation, amortization and accretion) were $38.7 million, a reduction of $12.5 million, or 24.4
percent from the year-earlier quarter. Second quarter Operating Expenses declined 5.3 percent from
the first quarter and represented 65.4 percent of revenue compared to 68.1 percent for the second
quarter of 2009. |
||
Payroll expense, the Companys largest expense item, decreased 16.1 percent in the second quarter
to $15.2 million from $18.2 million in the same quarter of 2009. |
||
Headcount at June 30th was 599 full-time equivalent employees, a reduction of 15.8
percent from 711 a year earlier. Going forward, we will continue to adjust staffing levels as
necessary to best meet our current and anticipated business needs and customer requirements. |
||
Site Rent expense, our second largest operating expense, declined 8.8 percent to $8.3 million in
the second quarter versus the prior quarter and 19.0 percent from the year-earlier quarter. Site
rent reduction reflects continued progress in our network rationalization program, including
deconstructing sites, renegotiating site leases and moving to less costly sites. At June
30th, we operated 6,319 active transmitters, compared to 7,123 at year-end 2009. We
have reduced the number of paid active transmitters to 3,892 at June 30th from 4,601
at December 31, 2009, a 15.4 percent reduction. Customer provided sites, which have no associated
rent cost, now represent over 38 percent of our active transmitters. |
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Beyond Payroll and Site Rent, all Other Expenses totaled $15.1 million in the second quarter,
compared to $16.1 million in the first quarter and $22.8 in the year-earlier quarter, a
year-over-year reduction of 33.5 percent. Please note that the second quarter 2009 expenses
included a $4.0 million litigation settlement charge. Adjusting for that non-recurring cost all
other expenses declined 19.7 percent from the year ago quarter. |
||
EBITDA for the quarter was $20.4 million, compared to $22.0 million in the first quarter and $24.0
million in the second quarter of 2009. EBITDA margin was 34.6 percent, compared to 35.0 percent in
the prior quarter and 31.9 percent in the year-earlier quarter. A schedule reconciling Operating
Income to EBITDA has been included in our earnings release. |
||
Capital Expenses were $563,000, compared to $1.7 million in the first quarter and $4.4 million in
the second quarter of 2009. The unusually low capital expense in the quarter and year to date is a
result of fewer pager device purchases. We refurbish and reuse pager devices returned to us by
canceling customers. Given the large subscriber churn experienced during late 2008 and throughout
2009 our inventory of used equipment has increased and reduced our need for additional purchases.
We do expect new pager device purchases to return to more normal levels in the third and fourth
quarters, and that is reflected in our revised guidance. |
||
Net Income for the second quarter was $13.1 million, or $0.58 per fully diluted share, compared to
$44.7 million, or $1.93 per fully diluted share, for the year-ago quarter. Net income for the
second quarter of 2009 included a one-time income tax benefit of $37.0 million due to the
settlement of uncertain tax |
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positions and tax refund claims, and a litigation settlement expense of $4.0 million. Absent those
non-recurring items, net income would have been $10.1 million, or $0.43 per fully diluted share. |
||
The significant change in our second quarter income tax expense resulted from a $4.7 million
decrease in our deferred tax asset valuation allowance that also reduced income tax expense. In
the second quarter we reassessed the expected level of our 2010 taxable income, which resulted in a
reduction of the deferred tax asset valuation allowance. The corresponding reduction in income tax
expense resulted in a quarterly effective income tax rate of 6.0% and a year-to-date effective
income tax rate of 23.3%. Absent the reduction in income tax expense, net income would have been
$8.4 million or $0.37 per fully diluted share. |
||
As noted in our press release, we expect $0.02 of our September cash distribution of $0.25 per
share will be treated as a dividend distribution and the remaining $0.23 as return of capital. |
||
I would also point out that any taxable income we generate in 2010 will be substantially offset by
our tax net operating losses, so we do not expect any significant cash liability for Federal and
State income taxes. |
||
With respect to our financial expectations for full-year 2010, we are revising the guidance
provided earlier this year to tighten the revenue range and lower the expected operating and
capital expenses. We now expect revenue for full year 2010 to be between $230 million to $235
million, Operating Expenses (excluding depreciation, amortization and accretion) to be between $156 |
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million and $159 million, and Capital Expenses to be between $7 million and $9 million. I would
again remind you that our projections are based on current trends and that those trends are subject
to change. |
||
With that, Ill turn it back over to Vince. |
||
Mr. Kelly: | Thanks, Tom. |
|
Before we take your questions, I wanted to briefly address a few other items that may be of
interest: |
| First, Ill provide a brief update on our Sales and Marketing activities during the second quarter; | ||
| Second, Ill briefly review our current capital allocation strategy; | ||
| And, finally, I will comment on our long-term business options as we look out over the next several years. |
With respect to our selling and marketing activities in the quarter, we continued to focus
on providing wireless messaging solutions to our target market segments of Healthcare, Government
and Large Enterprise. These core segments represented approximately 88 percent of our direct
subscriber base at June 30th, up slightly from 87 percent at the end of 2009 and 85
percent in the same quarter a year ago. They also accounted for approximately 82 percent of our
direct paging revenue in the second quarter compared to 79 percent in the year-earlier quarter. In
particular, our Healthcare segment continued to be the major contributor during the quarter,
generating approximately 54 percent of total direct paging revenue. |
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Again this quarter our sales and marketing teams remained focused on the acquisition of new paging
accounts. This process requires a continual effort to identify new opportunities and demonstrate
the Companys superiority as a long-term partner. As previously noted, the result of this hard
work and dedication by our knowledgeable and experienced sales force enabled us to again meet our
plan for gross additions for the quarter. Going forward, we believe the Companys expanding range
of products, services and partnerships, coupled with the sustained focus of our sales teams, will
help us attract an increasing number of new accounts, especially in our key market segment of
Healthcare. Moreover, as the industrys largest service provider, we believe decision-makers in
all of our core market segments can be confident that we will meet their organizations needs
because of our ability to consistently provide high-quality service and network support. |
||
During the quarter our Sales and Marketing teams also continued to emphasize retention of key
customer accounts. An essential part of this process is to continually monitor the account and
evaluate potential problem areas. By relying on input from multiple sources, we believe we have
greatly improved our ability to identify customer concerns earlier in the process and move quickly
to resolve them. We believe this added focus on maintaining and improving existing customer
relationships has been a critical factor in our ability to retain a significant portion of our
account base. |
||
Importantly, we recorded our first I-LAND system sale during the second quarter. The customer is a
large hospital facility on the West Coast and we expect to deploy the system in the third quarter.
The I-LAND System is USA |
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Mobilitys proprietary campus-based two-way messaging solution, which combines the speed of an
in-house network with the broad coverage of a wide area system. We also began deployment of two
beta sites at existing paging customer locations to demonstrate the systems performance
capabilities. I would also note that we are in active discussions with numerous other potential
I-LAND accounts. |
||
We regard the I-LAND System as a key product for us going forward because it not only demonstrates
our commitment to serving the evolving needs of our customers, but it reinforces the importance of
paging technology, especially for those customers within the Healthcare and Emergency Response
sectors. |
||
To quickly review our current capital allocation strategy, you should know that our Board
and management remain committed to creating value for our stockholders. We have also been
committed to returning capital to our stockholders. We have been true to this goal for many years
and we intend to continue to pursue it. |
||
As you recall, we began paying special cash distributions in 2005 and paid our first quarterly cash
distribution in 2006. Since then we have continued to pay regular quarterly cash distributions.
The Board also has declared special cash distributions from time to time. In addition, we
initiated a share buy back program two years ago and have extended it several times since then. |
||
Looking ahead, the Board will continue to review our options. As of today, given our projected
cash flow, we expect to continue paying quarterly cash distributions of 25 cents per share for the
foreseeable future. We believe this payout continues |
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to represent an excellent yield based on our current share price. In addition, we may consider
paying special cash distributions from time to time. With respect to extending our share
repurchase program beyond this year, the Board expects to re-evaluate the program later this year
as our existing program runs through December 31st. |
||
That said, and notwithstanding our improved operating performance over the past few quarters, I
would caution investors that our ability to return capital to stockholders will diminish over time
as our revenue and subscriber base continue to contract. Therefore, as weve discussed on recent
earnings calls, decisions regarding capital allocation will be weighed against other opportunities
for creating long-term stockholder value. Such opportunities could include acquisitions or related
strategic approaches that might provide enhanced revenue stability and allow us to utilize our
existing assets. |
||
Finally, I wanted to take a minute today to comment briefly on USA Mobilitys long-term
business outlook as well as some of the variables management and the Board review internally as
we contemplate the future. |
||
Since our first full year of combined operations in 2005 after the merger of the #1 and #2
independent paging companies, Arch and Metrocall, which formed USA Mobility, our revenues have
decreased from over $600 million in 2005 to approximately $230-$235 million estimated for this
year. Each year our subscriber and revenue base has decreased and in order to stay profitable we
have worked hard to reduce costs. While we have seen significant slowdown in the rate of
subscriber erosion this year, we nevertheless expect that meaningful subscriber |
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and revenue erosion will continue for the foreseeable future and our business will continue to
contract. |
||
Those business facts leave us with a couple of long-term options going forward. First and
foremost, we must continue to right size our cost structure. We believe this is possible and we
believe we can continue to generate robust margins well into the future, however, the absolute
value of our cash flows will continue to go down as they have in the past. This means we continue
as a profitable, but ever-smaller company. |
||
Another option we have mentioned in the past is to acquire another company or companies with a more
stable revenue and cash flow outlook. To that end we have spent a lot of time looking at
opportunities and will continue to do so, but in a very disciplined manner. We feel we have a
solid management team, mature back office systems capable of absorbing a higher workload and
valuable tax assets, all of which can be used to pursue transactions that are accretive to our
stockholders and grow cash flow. All of this leads our management team and Board of Directors to
feel evaluating alternatives makes a lot of sense. |
||
In summary, we are very pleased with our second quarter and first half results, and believe we are
well positioned for a solid second half of 2010. Over the past 5 1/2 years USA Mobility has made
tremendous progress in an extremely challenging industry. We have generated significant free cash
flow, retired all debt, distributed approximately $334 million in tax-free cash to our
stockholders, repurchased approximately $50 million of Company stock and currently have substantial
cash on our balance sheet. Despite this progress, we believe we have much more work ahead of us.
As a result, you should rest assured that we are |
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actively and aggressively pursuing all opportunities to create even greater value for our
stakeholders. |
||
At this point I will ask the operator to open up the line for your questions. We would ask you to
limit your initial questions to one and a follow-up. After that, we will take additional questions
as time allows. Operator? |
||
Operator: | Thank you very much sir. The question and answer session will be conducted
electronically today. If you would like to ask a question, you may do so by pressing the star
followed by the digit 1 on your telephone keypad. If youre using a speakerphone, please make
sure your mute function is turned off to allow your signal to reach our equipment. And once
again to signal for a question, thats star 1 and well pause for just a moment to allow
everyone a chance to queue. |
|
Well take the first question from Will Hamilton of Granite Point Capital. |
||
Will Hamilton: | Good morning guys. |
|
Mr. Kelly: | Good morning. |
|
Will Hamilton: | A question first on the transmitters count. I think you mentioned the
total was 6319 and that 38% was free. So does it roughly come out to about 3918 for the paid?
Is that accurate? |
|
Mr. Schilling: | Yeah I think its total paid active is 3892. |
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Will Hamilton: | 3,892, okay. So if I take that number then and look at what you paid for
the site expenses, it doesnt it seems like the average cost per transmitter is creeping up.
And I was just wondering is that due to, you know, some cost increases from the tower
operators or is it a factor of the transmitters left that are still operating? |
|
Mr. Schilling: | Its a combination of a couple of things. One, as we decommission
transmitters we dont always we cant always get out of a lease obligation immediately so
there is a certain amount that were paying in lease payments that are for inactive
transmitters. In addition as you think about it, as we have continued to migrate our networks
towards where our customers are through the reduction in subscriber base, we tend to have more
concentration in higher cost areas. |
|
So some of the transmitters we take out in more rural areas are lots of times the lower priced
ones. So theres a couple of dynamics there but as all the old transmitters come out for the
inactive transmitters we should see that decline in future periods. |
||
Will Hamilton: | Okay, and then just a question on the unit counts and churn and such.
Encouraging to see the sequential improvement in the disconnect rate. I was wondering if you
could comment whether you think, you know, this quarter is maybe sustainable going forward now
that maybe labor markets are have stabilized although we havent seen improvement yet. And
do you need to see in your opinion the improvement to get the placement, you know, maybe
picking up or declining less, you know, quarter to quarter? |
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Mr. Kelly: | We think that the slowdown that weve seen in the gross subscriber
cancellations should hold for the foreseeable future. It was accelerated in the past primarily
as a result of the recession and the amount of layoffs that were taking place throughout the
business segments in which we market our services. And that volume of layoffs has, you know,
abated and were just not seeing the cancels that we once saw. Were not seeing a lot of
hiring yet were still able to meet our gross add targets. |
|
So I think, you know, from our perspective, and this was one of the reasons why you might have
noticed we lightened up a little bit on our valuation allowance on our tax assets, because our
outlook, has improved as a result of the improved subscriber retention. |
||
Will Hamilton: | All right, thanks. |
|
Operator: | Just a quick reminder if you do have a question, thats star 1. And well next
move to Cross River Managements Rich Murphy. |
|
Rich Murphy: | How are you doing guys? Great disclosure on your financial statements by
the way. My question is around the M&A comment you made. What given your low valuation, what
markets are there for is it outside the paging world, is it are there where can you use
this cash? |
|
Because I project you guys to trade at about 1.8 times enterprise value to EBITDA if your cash -
based on my projected cash in this year. So what I guess, whats cheaper than your stock or whats
a good vertical for you guys? |
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Mr. Kelly: | Well, I mean, thats obviously one of the considerations that we have. It
probably would not make a lot of sense to use stock at this kind of a multiple to go out and
buy something. Perhaps wed use cash, wed look within the paging segment which weve done and
well continue to do. |
|
Wed also look in the broader communications segment as well and within some of the specific market
verticals that we operate in on a daily basis. And so youd more than likely be looking at an
acquisition that would use cash as opposed to stock. Thats kind of number one. |
||
Number two, I think I mentioned and maybe Ill just underscore it for you a little more
emphatically that weve been doing this in an extremely disciplined manner. Were just not going to
go out and do a deal for the sake of doing a deal to expand the size of this company unless we
think that it makes sense for our shareholders. You know, given that alternative wed rather just
distribute the cash. |
||
So well continue to look. We have looked, weve walked away from a number of opportunities because
we have been very disciplined in our approach and well continue with our main focus, which is to
create value for our shareholders. |
||
Rich Murphy: | Great and can I follow up with one follow-up real quick? On the second half
guidance, the OPEX, what is going to margins seem to be getting your operating margin is
going to go down a little bit. Are the costs, can you squeeze like service rental maintenance
or G&A, are they going to go up as a percentage |
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of revenue? What how do I look at that second half in terms of operating margin or category? |
||
Mr. Schilling: | Yes as weve laid out for the last, several years, we do expect margin
compression to begin at some point and we do think that well have some margin compression in
the latter half of this year. Weve done a number of things heading into this year, because of
the strong rate of subscriber erosion that we experienced in 2009 heading into 2010, to get
ahead of a lot of our expense reduction initiatives in 2010. We do expect the expenses to not
decline on a quarterly basis as they have in the last two or three quarters. So we do expect
in our guidance that we just issued some margin compression at the end of or in the third
and fourth quarters. |
|
Rich Murphy: | Okay thanks. |
|
Mr. Kelly: | That looked like its the last question. Is there another question? |
|
Operator: | Not at this time sir. |
|
CONCLUDING COMMENTS: |
||
Mr. Kelly: | Thank you for joining us today. We look forward to speaking with you after we
release our third quarter results. Thanks again and have a great day! |
|
Operator: | That does conclude this conference call. Thank you all for joining us. |
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