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Executives

Fiona Darmon - CCGK IR

Ronnie Kenneth - Chairman and CEO

Josh Siegel - CFO

Analysts

Vujon Sof - Banc of America-Merrill Lynch

Tom Earls - RBC Capital Markets.

Glenn Hanus - Needham & Company

Nahol Choksy - Thomas Weisel Partners

Voltaire Ltd. (VOLT) Q1 2009 Earnings Call May 6, 2009 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Voltaire’s First Quarter 2009 Results Conference Call. All participants at present are in a listen-only mode. Following managements' formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded May 6, 2009.

I would now like to handover the call to Ms. Fiona Darmon of CCGK Investor Relations. Ms. Darmon, would you like to begin.

Fiona Darmon

Yes, thank you and good day everybody. I would like to welcome you all to Voltaire’s first quarter 2009 results conference call and thank Voltaire’s management for hosting this call today. With us on this line are Mr. Ronnie Kenneth, Chairman and Chief Executive Officer; and Mr. Joshua Siegel, Chief Financial Officer.

Before I begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today’s earnings release also pertains today's call. If you have not received the copy of the press release, please call CCGK Investor Relations at 1-646-797-2868 or view it in the Investor Relations or News section of the company's website www.voltaire.com.

In addition, during this call certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results, and evaluate the company’s current performance. Management believes that the presentation of non-GAAP financial measures is useful to investors understanding and assessment of the company’s ongoing cooperation and prospects of the future, a full reconciliation of non-GAAP to GAAP financial measures is included in the first quarter 2009 earnings release.

I will now handover the call to Mr. Ronnie Kenneth, Voltaire’s Chairman and CEO. Ronnie.

Ronnie Kenneth

Thank you, Fiona and welcome everybody and thank you for joining us today to discuss our first quarter results.

Revenue for the quarter came in at $7.7 million revenues were weaker than last quarter given both seasonality and certain customers waiting for the availability of next generation processor technologies. Overlaid by the challenging IT spending environment.

Gross margin for the quarter remained strong at 67% substantially higher than the first quarter last year.

In terms of liquidity we continued to preserve a healthy balance of just under $55 million of cash and marketable securities with no debt. Qualified pipeline and [RFUs] are increasing in the recent weeks, we have been witnessing strong interest.

This for both our existing product families and product expected to start shipping in the second quarter. As it stands now we are in a better position in terms of pipeline going into the second quarter, than we were going into the first quarter of this year.

Our strong qualified pipeline grants us the cautious confidence to reiterate our annual revenue guidance in the $50 million range to the seasonably strong second half of the year.

Now for the quarter in further detail. Looking at the vertical market we witnessed growth in our main commercial verticals compared to the first quarter last year. This was offset however by a decline in new orders from our classic high performance computing verticals.

Financial services was the strongest vertical this quarter. Revenue gained nearly 40% share of our total orders. Even with the acquisitions and consolidations occurring on Wall-Street. Technology projects are still at the forefront of their agenda.

The energy verticals were close to six fold contributing roughly 10% orders.

In manufacturing vertical we announced that customer testimonial on the Clemson University Computational Center for Mobility Systems. This is a new HPC facility that provides design and engineering services to the auto market and transportation industry.

Since deploying Voltaire's switches and gateways computational simulations that previously required weeks of processing time are now completed within hours, saving both time and cost.

In our classic high-performance computing, research, education and government verticals we saw decline in orders. Though still contributing over 20% of our orders we noted that several potential customers elected to wait for the system using Intel’s Nehalem processor given the accelerated performance gained by using Nehalem with our 40 Gigabit per second product.

We believe that demand for this vertical remained strong and anticipate we will see many of these orders come through during the second half of 2009.

We are beginning to see the telecommunication vertical among others grow from quarter-to-quarter. This is largely attributable to sales of Oracle-XL data which includes four Voltaire switches in every system.

Both, Larry Ellison and Charles Felix, Oracle's CEO and President commented on Oracle's recent March earnings call that the solution performance in customer environment has been stunning.

Furthermore the pipeline is the largest field they have ever seen in terms of new product. We continue to see our partnership with Oracle as a significant revenue generator for 2009 and beyond.

On the OEM front, our partners are reading the Nehalem based solutions that fits nicely with Voltaire 40 Gigabit per second switches. In fact at the end of March HP officially began operating Voltaire Grid Director 4036 switch for HP Cluster Platform that use our new HP ProLiant G6 servers based on the Nehalem processor.

The 40 Gigabit per second internal blade switch we are building for IBM is slated for availability at the end of the second quarter. As I mentioned on the last call this is a key win for Voltaire and represents our first internal blade switch design project with a Tier-1 server OEM.

This new switch will deliver increased performance, scalability and virtualization capabilities to BladeCenter customers in both the HPC and enterprise markets.

In the Asia-Pacific, Japan region we recently added a new OEM. This new partnership will enable us to further penetrate this region and to serve as an additional order drivers starting in the second half of 2009.

Lastly, to further strengthen our non-OEM channels we introduced Voltaire adVantage Partner Program to our retailers, buyers and system integrator partners. This program created additional value and incentives for them to sale Voltaire solution. We intend to sign up additional [to] resellers worldwide by year end.

With regard to our product offering our 20 Gigabit per second director switch continues to be our leading product for both enterprise and commercial HPC customers. At the same time, we have shipped over 100 units of Grid Director 4036, the first of our 40 Gigabit per second switches [GA] in December last year. And have been getting excellent feedback on the product from the channel and end users.

The director class version of this switch will be available at the end of this quarter and we already started to see customer orders placed with our OEM. This is adding to our confidence that QDR family will be a major revenue generator for the second half of this year.

We are preparing our UFM software to [GA] this quarter. We have recently completed an installation with an earlier adopted customer in Europe. Using UFM software in a 700-node supercomputer they experienced at 50% cut in latency for their applications as well as simplified the management of the fabric.

More details on this customer win will be announced very soon. It is an exciting and differentiated product for Voltaire and represents a new avenue to bring added value through software to our customers.

I would now like to turn to our CFO, Josh Siegel for the financial review and then return to you and spend a few minutes on our 10 Gigabit Ethernet strategy which we announced two days ago. Josh?

Josh Siegel

Thank you, Ronnie and hello everyone. Before I begin I would like to reiterate that in order to better understand our business my review relates to our non-GAAP results, a full reconciliation between our GAAP and non-GAAP results is available in our earnings release published earlier today.

Revenues for the quarter totaled $7.7 million compared to $16.6 million in the first quarter of last year. This quarter was challenging for several reasons which we anticipated going into the quarter.

First we still see the extended sales cycle resulting from the economic downturn. That is large deals remaining in the pipe over two or three quarters and consequently pushing back revenues.

We are also witnessing a reduction in the amounts of inventory. Our OEMs are carrying during these lean times or alternatively being more efficient at managing their inventory across their global hubs.

As Ronnie also mentioned in a number of cases customers choose to wait for the availability of the Nehalem processor mainly in the high performance computing space.

In terms of our large customers for the quarter, HP exceeded 10% and Rackable which reports our strong FSI base also exceeded 10% with IBM representing 9% this quarter.

Gross profits for the quarter totaled $4.4 million declining from the $8.1 million in the first quarter of last year as a result of the lower revenues though offset by our improved gross margins.

Gross margins for the quarter in fact came in at 56.8% up significantly from 48.6% in the first quarter last year.

Our increased revenue mix towards our DDR switching solution as well as towards our global support services proved to be a prime driver for our continued gross margin expansion.

Operating expenses totaled $9.7 million in the first quarter. I would like to point these expenses include $1.7 million provision for doubtful debt. Here, we took the conservative approach and recorded the specific provision following SGI chapter 11 and the lack of clarity at this time and to the extent Rackable assumes SGI’s obligations and agreements.

Excluding this doubtful debt provision, operating expenses totaled $8 million almost $1.2 million reduction compared to Q4 of 2008.

R&D expenses for the quarter came in at $4 million lower than the $4.5 million guided partially due to prudence expense management and partially due to the timing shifts between the quarters.

As mentioned last quarter, we are increasing R&D annual expenses as we step-up development mainly of our recently exposed dual technology product line for both InfiniBand and Ethernet.

This increase is being offset by initial and sequential declines in SG&A expenses. As we saw the initial contribution of our efficiency plan already initiated in the first quarter.

We succeeded to reduce our SG&A by $500,000 to $4.1 million in the first quarter of '09 compared to the $4.6 million in Q4 of '08.

Net loss for the quarter including the doubtful debt provision totaled $5.5 million compared to $385,000 net income in the first quarter last year. Net loss for the quarter excluding the provision totaled $3.8 million.

Looking at cash our net cash equivalents, marketable securities and deposits at the end of March were a sound $54.8 million compared to the $55.8 million at the end of December.

All-in-all we still have a very healthy cash position and zero debt which is critical in the current environment.

Our DSO for the first quarter was up at 80 days, mainly due to the overdue payments from SGI. Excluding this overdue receivable, our DSO was approximately 66 compared to the 62 days in the fourth quarter of '08.

Looking ahead, we are still operating in a challenging market. However, our costs have been encouraged by the strong pipeline for our existing products, initial demand for our new products and a new OEM channel targeting the Asia-Pacific Japan region, which Ronnie mentioned earlier.

Therefore, we are comfortable reiterating our forecast for annual '09 revenues to be around $50 million for the seasonally strong second half. Furthermore, we continue to expect the annual gross margin to fall in the range of 50% to 55%.

On the operating expense side, the proactive efficiency measures are already enabling us to maintain expenses of roughly the '08 levels, excluding the one-time bad debt provision this quarter and expect this to continue through 2009.

With that, I would like to turn it back to Ronnie for more detail on our exciting Ethernet technology launch that we did this week. Ronnie.

Ronnie Kenneth

Thank you, Josh. For years, Voltaire has invested significant development and marketing resources to position the company to lead in the delivery of scale out fabric for data centers that are running high performance applications.

Looking ahead, we believe that an additional growth engine in this space will be driven by data centers scaling out using 10 Gigabit Ethernet technology. For the last 18 months, Voltaire has been working internal with R&D and also behind the scene, qualifying our approach with our OEMs and industry experts to prepare for this evolution and two days ago, we unveiled our scale-out Ethernet technology.

The switching product we are developing will address the top trend in the data center of consolidation, virtualization and cloud computing. Voltaire solution will stand out for the addressing performance, scalability and low latency, at costs 50% lower than the competition.

We are able to bring these advantages to the customer by leveraging certain characteristics inherent in InfiniBand technology. Specifically, low latency, lossless and higher virtualization.

Voltaire’s approach to scale-out Ethernet represents a complete paradigm shift in the world of data center networking. But the current approach is expensive and complex, lacks innovation and encourages vendor locking. Feedback on our breakout approach from our partners, customers and industry analyst has been phenomenal so far.

Let me give you an example. For a customer building a 1,000 node data center, Voltaire’s solution will deliver 10 times lower latency and four times faster core performance for using three times less power than alternative solution.

In this way, Voltaire’s new Ethernet offering will improve the user experience and economics of data center networking by orders of magnitude giving Voltaire an unfair competitive advantage in this space.

With regards to timing, we anticipate announcing more details about the product during the summer and general market availability before year end.

Voltaire will leverage its strong OEM relationship as the route to market for our 10 Gigabit Ethernet solution enabling this OEM to adjust their portfolios to effectively compete with Cisco’s strategies of offering server platforms.

I am confident that we are well positioned to take a leadership position in this market because of our superiority feel and end user benefit that can be achieved with Voltaire’s approach. As well as by Cisco's recent move which strained their relationship with the server OEMs creating better opportunities in the channel for Voltaire.

All that said, I would like to make it absolutely clear that we have no intention whatsoever of compromising our market leader position in the InfiniBand Switching business.

While our 10 Gigabit Ethernet strategy has been underway for a while and is an integral part of our long term strategy. We continue to have a robust detailed InfiniBand product line supported by a multiyear InfiniBand product roadmap.

In addition, our key software products have been designed upfront to work closely with InfiniBand and Ethernet. This will ensure revenues from our InfiniBand product line both today and into the future. We believe the timing of our Ethernet product is exactly right given the refresh cycle in today's datacenters. This coupled with the market demand for the scale-out using standard protocols and server elements serving as a key driver for this opportunity.

Farther more this is about leveraging our core expertise and scale-out properties to grow our total available market from hundreds of millions to billions of dollars in a relatively short timeframe and to meet our aggressive organic growth target while offering choice to our customers.

Our Ethernet strategy has created substantial excitement among our partners and end user customers and we are confident in our ability to drive this new approach to datacenter networking forward as we leverage a decade of expertise and market leadership in scale-out fabric.

With that I would now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Tal Liani and Banc of America, Merrill Lynch. Please go ahead.

Vujon Sof - Banc of America-Merrill Lynch

Hi, this is [Vujon Sof] on behalf of Tal. Ronnie just a quick question on the Oracle relationship has the evolved at all post merger announcement?

Ronnie Kenneth

Can you repeat the question, sorry?

Vujon Sof - Banc of America-Merrill Lynch

Your relationship with Oracle?

Ronnie Kenneth

Yes

Vujon Sof - Banc of America-Merrill Lynch

Has that evolved at all, post the Sun announcement?

Ronnie Kenneth

Right you know both Oracle you know we have been working with Oracle as a strategic partner for couple of years now. And Sun has been also, I think a big proponent of InfiniBand and has been also a strong partner of Voltaire in the go-to-market approach.

So, I view this combination in fact as increasing the opportunity for us to work with Sun and Oracle as I'm confident they will continue both companies in the combined entity when it happens to rely on Voltaire expertise and InfiniBand. So bottom-line I see this as in fact enhancing our opportunity you know in this area.

Vujon Sof - Banc of America-Merrill Lynch

Okay great. Clarification on the guidance I know that Ethernet product is coming out or market availabilities into the year, but are you including any of the Ethernet revenue as part of guidance for the '09 guidance?

Ronnie Kenneth

Obviously we are assuming several millions of revenue for this you know towards the end of the year. I would add though that right now we are more focused on making sure that our potential go-to-market partners are supporting this product and taking it to market. So I would really expect this to scale more significantly in 2010.

Vujon Sof - Banc of America-Merrill Lynch

Okay great and then lastly in terms of the HPC market and the pipeline development and how you are seeing the pipeline developing second quarter thus far. And then what are your expectations of the conversion of the pipeline for the HPC vertical in the second quarter?

Ronnie Kenneth

So, I mean, first of all, we identify more opportunities and put it in our forecast system. So, obviously, we look at these numbers and we see them growing, especially starting in April timeframe, which is giving us really a good indication. The Nehalem impact is clearly a big one as we are starting to see more and more [RF skews] now that we are basically waiting until the release or the availability of Nehalem. But I can also tell you that I attended our internal sales conference couple of weeks ago and clearly the energy, the number of opportunities that are being identified now versus couple of months ago is completely different.

Vujon Sof - Banc of America-Merrill Lynch

Great. Thank you.

Operator

Our next question is from [Tom Earls] of RBC Capital Markets. Please go ahead.

Tom Earls - RBC Capital Markets.

Hi guys, thanks for taking my question and congratulations on the new 10 Gigabit announcement, really exciting one. First question for me is regards the reiteration of guidance. It is really cut at this quarter at 7.7 we are talking about $14 million run rate through the rest of the year, something like that. How do you see that building out throughout the quarter and, what's being like a little bit over a month and two to quarter. Could you give us some more color on what gives you the confidence for the $50 million number?

Ronnie Kenneth

I think, Tom, it is a combination of several factors. First of all, if you look at the history of the company, clearly there is a seasonality where the second half is much stronger 50% and above than the first half. So first of all seasonality kicks in. Second, if I look at the ramp up of the Oracle-XL data it was evident from call that Oracle executives had and that has a revenue generator for us. Combined these product are going to be GA in June. Our Director switch for QDR and Blade switch for IBM that is also QDR.

And then on top of it people now having the Nehalem processor from Intel available for deployment and have been sitting on the fence for quite a while are moving on. And as I said before it's reflected on a number of [RFUs] that we are participating in right now.

So, if I look at all of that and on top of it the new channel that will probably kick-in in the second half of the year all of that plus I think that some of the positive sensing and in respect of the macro environment, need to believe that annual guidance is clearly achievable.

Tom Earls - RBC Capital Markets.

Okay. Great. Thanks. By the way do you think the new channel in Apac could evolve to be 10% customer say over a year or two?

Ronnie Kenneth

Absolutely.

Tom Earls - RBC Capital Markets.

Great, okay. The next question I have regard to your announcement on the 10-gig product line, could you give us sense on what is the projected margin profile for such products and also what is your intention of just looking ahead one, two, three, four even years ahead of the mix of the revenue mix Voltaire is aiming at InfiniBand versus Ethernet. And also if you can give us a sense on the, in the marginal costs associated with keeping both lines?

Josh Siegel

So, Tom this is Josh, welcome to the call. I will take the first and third part and I will hand it over to Ronnie to talk about the mix going forward. But if you talk about margins, this looking could be in our switching family and we are confident that we will be able to match our switching types for our gross margins.

We believe additional upside in the fact that we are talking on an Ethernet product with many components and players and so forth and a much bigger total available markets to address. So we are confident that the margin profile from our switches will be quite favorable to the investment community.

With regards to the marginal costs going forward as you, as Ronnie talked about we have already been working on the release and the product for more than a year now. So a lot of the incremental R&D costs have already been showing up in our P&L for the last 12 months.

Clearly maintaining two robust technologies, InfiniBand and Ethernet will require a very robust R&D as well as sales and marketing team. But we have already started to incorporate that so I don’t think at this point, you need to include any you know unusual expectations going forward other than the standard growth that goes along with our growing revenues.

Ronnie Kenneth

Its Ronnie here, just couple more comments before I talk about the mix moving forward. I think that overall, if you look at our R&D efforts. We are trying to maximize our investment in InfiniBand and to Ethernet. So for example, also on the hardware level there are lot of common part that we will be using, for both InfiniBand and Ethernet on the hardware side. In addition to it every line of call that is being developed in Voltaire now is compatible with both InfiniBand and Ethernet. So overall, I think as Josh was alluding to, we do not expect to see any significant additional cost by the fact that we are, offering scale-out fabrics relying on to technology.

In terms of the mix obviously we expect a ramp up but given that Ethernet is a couple of billion dollar addressable market versus InfiniBand that this hundreds of millions. I think, over the course of the next three to five years will see probably Ethernet at least, gaining share of about 50% and in more longer future probably even more than that.

Tom Earls - RBC Capital Markets.

Great, thanks a lot for the color, much appreciated. Last one for me regards the competitive landscape and if you can just talk about what's happened over the past quarter, and now into the second quarter in terms of competition who do you see more and in terms of potential pricing pressures?

Ronnie Kenneth

Right, so I think that over the years we always had competition, fighting on the OEM channels and I think with our dedicated sales and support team and of course our differentiated technology and partnership. We were able to really get the lion share of the market when it comes to the switching business. And I clearly see this moving forward, remaining the same.

However as you may now Cisco in fact deemphasized their purpose on InfiniBand and as a result QLogic took some market share of that. But I do not think that this was at the expense of Voltaire at all. And we still remain as leaders in the switching segment of the InfiniBand market.

Tom Earls - RBC Capital Markets.

And in terms of pricing pressures do you see anything changing, has anything changed over the past I don’t know three four months.

Ronnie Kenneth

We are obviously experiencing pricing pressure, but I think that the macro environment is probably a key factor in that I would say.

Tom Earls - RBC Capital Markets.

Okay great. Good luck going forward.

Ronnie Kenneth

Thank you.

Operator

The next question is from Glenn Hanus of Needham & Company. Please go ahead.

Glenn Hanus - Needham & Company

Good morning guys. Could you may be just expand a little bit more on your competitive positioning and 10-Gigabit Ethernet and where you think you are really going to find your niche if you will. As you compete with Cisco and is it more of a de-leveraging relationships with OEMs competing with Cisco or through channels. So just kind of flush out little bit more towards strategy and from, where you are going to gain in roads initially and then sort of going forward.

Ronnie Kenneth

Thanks for joining the call and thanks for the question Glenn. You know we are using 10-Gigabit Ethernet technology for the future products line. But you know we, yourself as a company that is basically the 10-Gigabit Ethernet switching provider you in the general sense of it. And what I mean by that Voltaire’s expertise is in scale-out fabric. We are making a difference for people that are connecting hundreds and thousands of servers together to provide a very powerful and compute environment. And we have done that today for people who are specifically hungry for performance. But the very same fundamentals apply to the mainstream data center but not with InfiniBand now and more with 10-Gigabit Ethernet because they don’t need the horsepower of InfiniBand.

So, we are leveraging the expertise we have and not take it into general enterprise deployment that’s focused on people that want to scale-out their environment. Now, luckily enough it is exactly the refresh that is happening now in data centers because people are moving into scale out compute environment. And this is why we see people are not deploying you know class compute environment and being more and more relied on sound of components sound of servers and so on.

So, from a technology standpoint with our switches and our software we think that we are very well differentiated for people that want to connect hundreds and thousands of servers together. We think as we I said before that if you do so with Voltaire versus Cisco for example not only that you get better performance lower latency. But also a fraction of energy consumption as well as the half part of the price and this is because our Ethernet switches are optimized for the scale-out. And in that respect are simplifying the problem if you will. So I think from a technology standpoint we are clearly differentiated against Cisco and other potential vendors that may want to go into this market segment.

And in addition to it and I think you mentioned that I think the Cisco announcement of severance on their behalf really changed the dynamics in the market and the server OEMs, I would think would look for way to partner with company participle there that our offering very innovative technologies that in combination with their servers and software and storage can offer customers much more a practice solutions at Cisco.

Glenn Hanus - Needham & Company

Okay. And just on the Nehalem why was the commercial business, you did not see any pause in the commercial business was more on the HPC side and just why was Nehalem just not as important on that side of the business, sir, can you just explain that?

Ronnie Kenneth

Basically, I think the combination of our 4-Gigabit per second switches and Nehalem processor that is so powerful and requires really, fat pipes on the IO is really pushing the performance of the overall system very dramatically. And this is exactly what people in the high end of the HPC market are looking for. So they are constantly pushing the envelope and they really squeeze every piece of performance of any given system and they would not compromise on that. So if they have to wait 3-6-9 months to get the best technology they will do so.

Glenn Hanus - Needham & Company

Okay. Thank you.

Ronnie Kenneth

Thank you Glenn.

Operator

(Operator Instructions) The next question if from Doug Reid of Thomas Weisel Partners. Please go ahead.

Nahol Choksy - Thomas Weisel Partners

Hi this is Nahol Choksy for Doug Reid. Just a quick on gross margins first. Nice jump on the gross margin that have been there. Want to understand why gross margin may not be sustainable based on the guidance that you provided to gain 55% for the rest of the year?

Josh Siegel

Yeah this is Josh. Basically when we gave the guidance for annual guidance of 50 to 55% it's based on the fact that we touched a little bit about it. And I think in the last question when we pour on regarding expected price erosion going in to the year. As we go further and further in to the year from the economy and also from the competition.

So we do anticipate some cost for gross margin erosion from reduction of prices. Also as we are launching our QDR business heavily by the end of the this quarter with Director level QDRs. Typically our gross margins are lower upfront until we get in to the volumes where we are able to increase the gross margins for those products.

So I think from a conservative view and they can show that we give the proper guidance for the gross margin. Of course to date we have been able to not only hold our gross margin but to improve them, and I think that goes to our business in the enterprise business which is less sensitive to price and where they know how to save their value and are looking specifically to Voltaire equipment.

Nahol Choksy - Thomas Weisel Partners

Okay thank you very much

Operator

There are no further questions at this time. Mr. Kenneth would you like to make a concluding statement.

Ronnie Kenneth

Yes thank you everyone for joining us today and for your ongoing support for the company. In the coming weeks we will be attending several conferences in North America including RBC's Technology and Media Conference as well JPMorgan Annual Technology Conference. We also intend to hold an investor event later in the year to provide more detail on our 10-Gigabit Ethernet strategy and product and we will update you as we get closer to the time.

We look forward to hosting you again on our next call. Have a good day.

Operator

Thank you. This concludes Voltaire’s first quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.

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