Good day, ladies and gentlemen, and welcome to the first quarter fiscal 2013 Mitek Systems earnings conference call. My name is (Regina) and I will be your conference operator for today.
At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (Operator Instructions)
As a reminder, today’s event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Julie Cunningham, Vice President of Investor Relations. Please go ahead, Julie.
Good afternoon. Thanks for joining us, everyone. Before I turn the call over to Jim Debellow and Russ Clark, I’d like to cover a few quick items.
This afternoon we issued a news release announcing our first fiscal 2013 quarterly financial results. That news release is available on our website at www.miteksystems.com.
As a reminder, this call is being broadcast live over the internet and to all interested parties and the audio of this call will be available on the Investor Relations page of our website and also archived there.
During this call, we will discuss some factors that are likely to influence our business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunities, should be considered forward-looking statements.
These forward-looking statements are subject to a number of risks and uncertainties which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings for a more complete description of these risks.
We will also discuss non-GAAP financial measures during this call. We believe these are useful measures to evaluate the company’s ongoing performance.
Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release on our website. And with that, I’d like to turn the call over to Jim Debello.
Thanks, Julie, and good afternoon, everyone. Russ will provide the first quarter financials in detail in a few minutes but first I’d like to discuss our big picture goals for fiscal 2013 and our accomplishments for the first quarter.
Mitek kicked off the new fiscal year with record bookings for mobile photo bill pay and strong bookings for our entire suite of mobile imaging products. We announced a strategic partnership directly with US Bank as our first major photo bill pay customer and signed another large bank as a premier direct customer for our photo bill pay.
This morning, we announced our first community bank photo bill pay customer in First Financial of Abilene, Texas, a $4.5 billion asset sized institution.
We’re enabling financial institutions to build on existing consumer behavior and deliver a superior user experience to their customers with their smartphone or tablet camera. A recent American Banker article titled Wells Fargo Ally Bank See the Camera as Key to Mobile Banking highlighted the revolutionary aspect of using the camera as a keyboard.
And I quote, “As revolutionary as mobile banking has been, it’s the camera that resides within smartphones that’s lighting the fire under adoption at banks such as Wells Fargo and Ally Bank.”
Mitek is fundamentally changing the way millions of consumers interact with their information. Today, we’re leading the way for consumers to use the camera as a keyboard to simplify their daily financial tasks by avoiding cumbersome keystrokes and fat thumb typing mistakes on small touch screen keyboards.
Instead, we’re enabling millions of consumers to take a photograph of any document from which our technology captures the information automatically and securely.
As one senior executive at a major bank said to me recently, “We’ll buy anything that reduces friction for our customers.” Mitek’s job is to reimagine some fairly routine personal financial tasks and make them simple, secure and even fun.
When was the last time you thought of banking or insurance as fun? Our technology minimizes friction and inconvenience and we convert (inaudible) with data entry task into an enjoyable experience. Some have even used the word gamification to describe that aha moment when you snap a photo to conduct a financial transaction.
We’re focusing our proprietary mobile imaging technology on solutions for three core areas: mobile payments using photo bill pay, funding of checking accounts and prepaid cards by using mobile deposit and mobile enrollment by capturing identity information from driver’s licenses and other documents using our mobile imaging platform.
Recently, in another American Banker article, top bank CEOs see mobile as a way to engage the next generation of consumers. We helped them acquire and retain customers by establishing trust through easy-to-use but secure innovations like mobile deposit, photo bill pay and our mobile enrollment solutions.
As I describe our performance this quarter and large market opportunity during the next few minutes, consider our four levers of growth. First, the number of institutions we are signing; second, the penetration of their consumer base; third, the usage growth of our solutions among those same consumers; and finally, the number of new mobile imaging products we can cross sell.
On all accounts, Mitek continues to perform at a high level with each of these metrics growing, laying the foundation for our long-term growth.
We had a terrific first quarter and I’m very pleased with our progress. On the innovation front, with the leadership of our CTO, Mike Strange, we’re delivering on our product and technology roadmap and we will continue to execute in the field under the field leadership of Mike Diamond, our Senior Vice President of Sales.
Now let me now address each of our core solutions, first with mobile photo bill pay. Clearly the big news of the first quarter was announcing a strategic relationship with US Bank, the fifth largest retail bank in the nation and our first mobile photo bill pay customer.
US Bank deployed mobile deposit in 2010 and they have demonstrated a commitment to a mobile imaging strategy. We are very excited to expand our relationship with US bank and look forward to their commercial launch early this year.
We also signed our second major bank customer for photo bill pay during the first quarter and you’ll hear more on that when we announce that customer soon.
And I’m also pleased that we announced our first community bank customer, First Financial of Abilene, Texas, supported by our partner and bill payment processor, Allied Payment Network. I love First Financial’s new TV commercial because it clearly demonstrated the simplicity and undeniable value of paying a bill or depositing a check with a snap of a photo combining two mobile imagining solutions from Mitek.
Just like the Wells Fargo and Allied headline I reference earlier, the camera is driving the future of mobile banking. If you haven’t seen the First Financial TV commercial check it out on YouTube. The link is listed on our photo bill pay press release from earlier this morning.
We view the market opportunity for mobile photo bill pay to be as large or potentially even larger than mobile deposit. Our customers tell us that they see at least two primary mobile photo bill pay use cases. The primary use case allows the consumer to snap a photo of any bill allowing payment through your bank directly from the information that our software captures from the bill.
Well over half of all Americans still pay paper bills every month. They can now use their smartphone to snap and pay with information our mobile imaging software securely reads from a photo.
Alternatively, if you happen to use online bill payment offered by your bank, mobile photo bill pay provides an easy way of adding a new payee to your existing online bill pay account right from your smartphone or tablet. No more hunting and pecking at the keyboard to add a new biller to your list.
For example, if you happen to get a new car lease, simply snap a photo of your new payment coupon to onboard your new biller information for recurring payments. Banks see mobile photo bill pay as a competitive weapon to lower switching costs and gain new customers who can now easily move their existing bill payments from a competing bank with a snap of a camera.
I’m just as excited about these launches as I was for our first mobile deposit launches. Just as the use of mobile deposit evolved into funding brokerage accounts and prepaid cards, I fully expect that the market will uncover additional uses for our mobile photo bill pay.
One thing, however, that I think is constant is that I believe consumers will always gravitate to the easiest way to do anything. And in my opinion, there is nothing easier than paying a bill with a single photo snap rather than the traditional type look up and pay online or even offline.
We truly believe that 2013 is an important year for mobile photo bill pay and we look forward to announcing a wave of customer adoption. That’s exactly how mobile deposit got started. And I’d like not to address our continued success with this product.
We now have 708 banks signed with the addition of 144 banks signed just last quarter alone. This growing list includes now all of the top 10 retail banks and 32 of the top 50 banks reflecting momentum and our first key growth driver.
We’re proud of that accomplishment and our ability to influence an industry. And by the way, if you haven’t noticed, we believe that every mobile deposit customer is a candidate for mobile photo bill pay, just like US Bank and First Financial.
Of the total banks that have signed agreements for mobile deposit, 318 are live today compared to 205 live banks at the end of last quarter, a record growth of 113 launches last quarter.
We remain focused on helping our customers get to market as quickly as possible. Significantly, we had both Bank of America and Wells Fargo go live with mobile deposit over the last few quarters and both are doing just great.
Recently I read that Bank of America’s CEO, Brian Moynihan, said that they’re adding an average of 10,000 new mobile users per day. That’s truly amazing and important to us because all of those new mobile users are potential mobile deposit users, our second lever of growth.
According to consumer research from (Alex Partners), 37% of all mobile bankers have used mobile deposit at least once, up from 27% during the second quarter of last year. That represents about 18 million Americans of the estimated 50 million mobile banking consumers today.
We believe there’s a lot of runway left as the market for mobile papers is expected to grow to approximately 100 million Americans by 2017 and among those Americans and users, we’ve seen transaction usage continue to grow with over 25% increase in usage in mobile transactions for the third consecutive quarter.
Obviously we’re focused on that metric because the faster those transactions are consumed, the closer we’ll be to reorders, which is key to our longer term growth strategy and our third lever of growth.
When I tell investors that we’ve secured the nation’s top retail banks as mobile deposit customers, they mistakenly think that the hunting job is done. However, we’re not done yet. There are many more target customers to land as we look to diversify our revenue streams and build on the success of mobile deposit and there are many ways to expand our reach with existing and new product offerings.
As an example, during Q1, we announced that we have more than 20 initiatives to serve the underbank market, which is estimated to be over 60 million Americans.
You may have read about how mobile check deposits are being used to fund the American Express Bluebird prepaid card sold by Walmart. And recently Green Dot launched a new product enabled by Mitek’s mobile deposit.
Even Justin Bieber has endorsed a prepaid card, although it doesn’t use mobile deposit funding yet. So I used to get lots of pressure from my board but now I even my teenage daughter is all over me to get them enabled.
These (inaudible) initiatives I’ve mentioned even include a leading wireless carrier in the prepaid market and this is an example of how our core mobile deposit technology is being deployed to address a completely new and growing market segment to fund prepaid cards.
In addition, we’ve expanded our relationship with Progressive Insurance to enable mobile auto quotations by capturing the information from driver’s licenses and vehicle ID numbers.
Through this and other relationships, we’re now working with three out of the top five insurance companies. The insurance market is ripe for mobile imaging solutions to shop for better quotes, faster claims processing and easier consumer enrollment in new services.
Mobile enrollment by capturing information from identity documents is our third area of core solutions focus. The mobile lifestyle of millions of Americans and millions more internationally requires the ability to enroll in new programs and services from the convenience of your phone.
Much like the convenience of depositing a check remotely, enrolling in a new service remotely is increasingly desirable behavior yet the complexity of multiple keystrokes must be minimized to optimize the consumer experience.
Companies in many industries try to manage the balance between customer service and acquiring the required and often time consuming consumer information when enrolling new customers and this is where our mobile imaging innovations shine.
Often, when you apply in-store for credit or see an offer on TV, the consumer must engage in a tedious application process that needs confirmation of identity that is often provided by a driver’s license.
(19:03) driver’s license when you travel at ticketing, at TSA, at the hotel. With our mobile imaging of driver’s licenses, we can shorten the enrollment process and engage the consumer on their time at any location of their choice adding to their pleasure and less opt out for the service provider. We thin this is another exciting growth area for our mobile imaging technology.
As we all know, innovation and talent are essential to succeed in this marketplace. During the first quarter, we continued to invest in R&D and we’re extending our skills in engineering and product management to support the development in commercialization of our new products.
We’re also focused on aggressively building our intellectual property portfolio. I’m happy to say that we now have 13 total issued patents including our sixth mobile imaging patent that we recently announced.
In addition, we have 14 patents pending. We’ve also made significant investments in talent acquisition to build our small but mighty team of direct sales and support people. This supports our goal and success of engaging directly with large customers on our non-deposit related products, including mobile photo bill pay and our mobile enrollment solutions.
Our goal is to build a durable business with more predictable revenue streams, cash generation and earnings. I’m excited about the future and I look forward to updating you on our progress as we move forward.
Now, I’ll turn the call over to Russ Clark to go over the first quarter financial results. Russ?
Thanks, Jim, and hello, everyone. As I review the numbers, all figures quoted are on a GAAP basis unless specifically called out as non-GAAP. We provided a full reconciliation from GAAP to non-GAAP along with the earnings release which is posted on our website.
I’ll begin with the first quarter results. Total revenue for the first quarter of fiscal 2013 was $3.3 million compared to total revenue of $3.5 million for the year-ago period.
First quarter revenue was comprised of approximately $2.6 million in software sales and $739,000 in maintenance and professional services. We had four mobile deposit reorders and one MIP reorder during Q1.
As Jim mentioned earlier, we signed a number of large software licenses for mobile deposit, mobile photo bill pay and other products, a portion of which was recurring in nature and, therefore, not reflected in first quarter revenue.
These revenues will be recognized in future periods and you’ll see that deferred revenue increased sequentially to $2.17 million, including around $300,000 that is non-recurrent.
We have said for some time that we expect to see more recurring revenue models for bill pay and our other mobile imaging products and we now have some market data points that support just that.
Total operating expenses were $4.7 million compared to $3.5 million in the year-ago period. The year-over-year increase in OpEx was primarily driven by higher investments in personnel to grow the business, sales and marketing expenses and r&D associated with product development.
Non-cash stock compensation expense during Q1 was $657,000 compared to $502,000 in the year-ago period. Now let me break down Q and expenses by category.
Cost of revenue in Q1 was $340,000 of which $147,000 was related to cost of maintenance and professional services. This compares to cost of revenue of $302,000 in the year-ago period.
Gross margin for Q1 was 90%, which was roughly flat year-over-year. Selling and marketing expenses were $1.3 million or 38% of total revenue compared to $850,000 in the year-ago period.
I’d note that the sequential increase in sales and marketing costs largely reflects hiring as well as a redeployment of personnel from R&D to sales and marketing to support operations.
This includes three people in professional services whose time was largely non-billable during the first quarter as the new team is focused on building the book of business.
The corresponding $200,000 sequential decrease in Q1 R&D expenses was primarily due to this redeployment as well as utilizing fewer outside contractors. R&D expenses were $1.4 million or 42% of total revenue in Q1 compared to $1.2 million in the year-ago period.
The year-over-year increase in R&D expenses reflects our continued product development efforts. G&A expenses were $1.7 million or 50% of total revenue during the first fiscal quarter compared to $1.2 million in the year-ago period.
The year-over-year increase in G&A was primarily driven by litigation expenses and personnel costs including stock compensation. As an update on the litigation front, the USAA case has been consolidated and is proceeding in the western district of Texas and our suite against Top Image Systems is proceeding in Delaware.
Our litigation-related expenses were approximately $300,000 during the first quarter and we expect those expenses to continue to fluctuate each quarter depending on the level of litigation activity.
Our headcount at the end of Q1 was approximately 50 versus 42 in the year-ago period. Since the end of the first fiscal quarter, we have added approximately five people primarily in sales.
GAAP net loss was $1.4 million or $0.05 per share. This compares to net income of $26,000 and break even on a per diluted share basis in the year-ago period. Non-GAAP net loss in Q1 was $703,000 or $0.03 per share compared to non-GAAP net income of $453,000 or $0.02 per diluted share in the year-ago period.
Non-GAAP net income excludes stock compensation expense and our share count for Q1 was $26 million basic and fully diluted shares.
Turning now to the balance sheet as of December 31, 2012, cash, cash equivalents and investments increased by $500,000 and totaled $15.1 million. This compares to $14.6 million at September 30, 2012.
The sequential increase was due primarily to stronger-than-normal collections during Q1 as well as upfront payments received on the two bill pay deals that I mentioned earlier.
Accounts receivable was at $1.6 million as of December 31, 2012 compared to $1.1 million at September 30, 2012, an increase primarily due to the sequential revenue increase tempered by the strong collections during the quarter.
I’d also like to address a couple of questions we received about a proposal on this year’s proxy to increase the number of authorized shares by 20 million shares. We view this as a normal course of business given that we’re now down to 20% of our original authorized shares available.
We believe that the additional 20 million shares will provide us with capacity for several more years. We’re at the epicenter of a rapidly changing mobile technology market and we want to stay ahead of the pack, maintain a high degree of flexibility and plan for growth.
That concludes our prepared remarks. Operator, please open the line for questions.
(Operator Instructions) Your first question comes from the line of Mayank Tandon – Needham & Company.
Mayank Tandon – Needham & Company
Jim, could you give us – I don’t know. In the past you haven’t quantified some of the reorder sizes. Could you give us a sense of the deal sizes this quarter as they be in relation to what you’ve seen in the past?
Of the four mobile deposit reorders we had, three were relatively more moderate in terms of block sizes and we did have one fairly large reorder from a channel partner.
Mayank Tandon – Needham & Company
And then I also wanted to get some sense on pricing. Have you see any change in the economics in terms of mobile check deposit, again, just given some of the fall out from the litigation that you guys have been discussion?
We really haven’t seen any change in economics from a pricing perspective. I think our pricing model for mobile deposit has held through in the marketplace.
Mayank Tandon – Needham & Company
And finally, the other question regarding OpEx, as we look ahead and given some of your expectations which obviously you haven’t given guidance but just as you look at your revenue outlook over the next several quarters, how should we be modeling OpEx?
Well, we will continue to invest, as we mentioned, hiring personnel if I had to rank order it on the R&D side and then the sales side. We’ve been in a $4 million to $5 million range in terms of total OpEx per quarter and we would expect too continue to stay in that range if you exclude any litigation expenses as those are a little bit tougher to predict.
So again, in that same range of $4 million to $5 million; we will continue to hire. We added eight heads over the last year, as we mentioned probably that same pace maybe a little faster during the upcoming year.
We’ve added some terrific people to the team, both in our research development groups and in our field sales group and professional services. So we’re really clicking on all cylinders, executing on the plan to engage directly with major customers on all products other than mobile deposit in which we still have allegiance to our channel partners and they are doing a terrific job for us.
Mayank Tandon – Needham & Company
Finally , before I go, could you just remind us, Jim, in terms of how the model is going to work for bill pay and your imaging solutions versus the mobile check deposit in terms of the revenue monetization?
As we’ve said all along, with respect to pricing models as we move into bill pay and our mobile imaging platform products, we expect to see and now we have seen more of a hybrid model that would include both some platform fees upfront with maintenance and recurring click charges on the back end.
So we’re encouraged to see some data points that are consistent with that and what we’ve expected all along.
Your next question comes from the line of Joel Achramowicz – Merriman Capital.
Joel Achramowicz – Merriman Capital
Jim and Russ, I just want to get a reset and calibration with you guys again. We had talked last quarter about changing – moving secularly towards a more transaction-based model. I’m not complaining about the $3.3 million in the top line this quarter but it’s definitely a pretty big jump sequentially, which, once again, I’m not complaining.
But I was thinking that maybe this transition would create more of a stable sequential ramp. But are we going to still see this volatility going forward?
Again, if we take it down to the product level and talk about pricing models, the block model for mobile deposit has been in our portfolio for several quarters now. We have existing deals with channel partners, negotiated terms and, equally as important from a technical (rev rec) perspective, we’ve complied with (rev rec) rules all along.
Once you do that, it’s difficult to change pricing models, so the lumpiness in mobile deposit for all those reasons will continue. Again, as we transition into a larger portion of our revenue mix attributable to mobile deposit and MIP with both platform fees and ongoing recurring fees, we should see more normalization or stable revenues, so we have a couple deals this quarter.
It’s going to take some time. It’s not going to happen quickly but we, again, hope over time that that transition will lead to more – less volatility on the top line.
Let me add to that. We find it very desirable to migrate towards a recurring model and we are in the process of doing that. I think having the record bookings for bill pay is a great sign towards that and those deals are on a recurring basis.
But still, we maintain our pricing models for mobile deposit and those have been very well received in the marketplace. So we’re working the issue. It’s going to take some time to migrate that way.
So we didn’t intend to set your expectation for complete cross over. It will be a period of transition.
Joel Achramowicz – Merriman Capital
I guess fair enough and, of course, your transactions continue to grow, as you mentioned, in the RDC area, so that’s a positive sign. With regard to the patent issues here, over the last few quarters, two or three quarters, you received a couple of additional patents, so your intellectual property library and portfolio seems to be increasing in a positive manner.
Do you see this – how do you see this affecting your legal battles right now? Any comments in that regard, Jim?
Let me tell you, we’re investing in our patent portfolio. We think intellectual property is the lifeblood of this company. We have some outstanding scientists and engineers. We’re creating it. We’re filing it rapidly as this market evolves.
We’re the innovator. We’ve been in this area since 2007 and actually doing recognition technologies well before that.
So we have a demand expertise and we want to validate that and protect that IP. We think that’s on behalf of our shareholders and the company employees so we are investing in that and we will continue to do so.
We added our sixth mobile imaging patent, as you know, 13th overall and we have 14 more in the queue plus more that we’re creating as we speak. So we’re pedal to the metal in terms of filing and protecting our intellectual property.
Joel Achramowicz – Merriman Capital
And last question, Russ, could you just – I missed the – you definitely booked order, bill pay order revenue this quarter but you’re not going to quantify that, right?
Joel, what I mentioned was two bill pay deals that we did are both recurring revenue models and will recognize the vast majority of those revenues over the upcoming quarters.
Joel Achramowicz – Merriman Capital
But you have definitely booked some revenue in the first quarter.
A small amount.
Your next question comes from the line of (Patrick Sebrasky) – William Blair.
(Patrick Sebrasky) – William Blair
Obviously we saw the announcement with Ally this morning for mobile photo bill pay. I guess I’m just curious. Obviously it sounds like that’s a little bit more geared towards the smaller regional banks and financial institutions. How does that partnership affect the economics and the pricing model for you guys?
What we think it represents is that this product applies to both top tier banks as well as smaller community banks creatively used throughout the country, which are 8000. So much like mobile deposit, we’re going to see broad adoption across a big slough of Americans.
So if anything, I think it supports our model both economically. It supports our ability to engage consumers and have them use this product frequently.
(Patrick Sebrasky) – William Blair
So let me just understand that correctly. So I would assume it’s still going to be more beneficial for you to go and sell it directly to the bank, correct?
Absolutely right. We feel it’s very important to engage with banks and we have done so and we are doing so. And so that has helped us create a list price, if you will, for our product and market validate of that with some big players and we’ll use that as we pursue our business with all segments of our banking industry.
(Patrick Sebrasky) – William Blair
Then still on the topic of mobile photo bill pay, you said that US Bank would be launching hopefully sometime here soon and then the two others, one being the small regional. Do you have a timeframe for when you think those two will go live?
Specifically US Bank I said early 2013 and separately First Financial is live. And thirdly, the bank that we have not yet announced is actively in the integration phase and we expect them to be live early in 2013 as well.
(Patrick Sebrasky) – William Blair
Then finally just obviously during the quarter there was some announcements by Bank of America at one of the conferences – I think it was the Goldman conference – which talked about their mobile deposit solutions specifically, some pretty encouraging statistics.
I’m just wondering how do you quantify those statistics and then comparing them to your other let’s say top five banks as customers? Are you seeing similar trends or how are they comparing?
And then also, as a result of them releasing that information, do you assume or expect any of your other bigger customers to release similar type of information here in the future?
We always speak with our customers and we encourage them as the leaders in their industry to reveal their performance metrics and we’re going to wait for them to do that. We’re not authorized to do that.
But we do see the trends clearly. They are consistent across the major players an they are on a growth path and that’s very exciting to us.
There’s two things, Patrick, you should consider. One is number of new mobile bankers who use the product and I mentioned that at 37%, a number provided to the industry by (Alex Partners).
The second thing is among those consumers what’s the rate of repeated usage? And we’re seeing that grow as well. And so for the third consecutive quarter its’ been over 25% growth in usage pattern, so that to me says that this is a very powerful product. It’s absolutely hit the nerve with the consumers and we think the same thing will happen in with our mobile photo bill pay product.
(Operator Instructions) Your next question comes from the line of (Leonard Deprasso – Jannie).
(Leonard Deprasso – Jannie)
I just had a question on incremental margins. Just looking at revenues going forward in the longer term, what – how much are you expecting to fall directly to the bottom line and how much will you reinvest in the business? I’m just trying to get a feel for the incremental margins going forward.
We’d expect from a gross margin perspective consistent with what we’ve seen historically, somewhere in the mid 80% to low 90% gross margin range. When we get down to OpEx, obviously a lot of those relationships don’t hold true with the size of the company but as we grow over time, if we’re dropping 85% to the gross margin line, we should be able to approach somewhere around 50% on the OpEx side and have operating margins 30%, 35%. I don’t see any reason why we couldn’t get to that point over the longer term.
(Leonard Deprasso – Jannie)
Just my other question was what is the proportion of revenues that is recurring just as of today?
Our maintenance stream has grown steadily over the past several quarters. We are around $700,000 in maintenance that we reported in this fiscal Q1. So at a baseline level, that’s really the starting point for our recurring revenue.
As we go forward with a couple of these deals that I mentioned that will come in over time, it’ll help grow that base as well but at this stage of the game, our maintenance at $700,000 is the recurring base.
Ladies and gentlemen, this concludes the question-and-answer portion of today’s event. A replay of today’s event will be available by calling 1-866-233-1854. The replay pass code is 31374365. The replay will be available approximately one hour after our conclusion today.
Again, the number is 1-866-233-1854 with the pass code of 31374365. We would like to thank everyone for joining us for our event today. Thank you for your participation. You may now disconnect.
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