Universal Electronics CEO Discusses Q1 2013 Earnings Results - Earnings Call Transcript

May. 2.13 | About: Universal Electronics (UEIC)

Universal Electronics, Inc (NASDAQ:UEIC)

Q1 2013 Earnings Call

May 02, 2013 04:30 pm ET

Executives

Becky Herrick – Investor Relations, LHA

Paul Arling – Chairman, Chief Executive Officer

Bryan Hackworth – Chief Financial Officer

Analysts

Jason Ursaner – CJS Securities

Steve Frankel – Dougherty & Company

Andy Hargreaves – Pacific Crest Securities

Ian Corydon – B Riley & Company

Operator

Good afternoon. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics’ First Quarter 2013 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Ms. Becky Herrick, of LHA, you may begin your conference.

Becky Herrick

Thank you, Hope. And thank you all for joining us for the Universal Electronics first quarter 2013 conference call. By now, you should have received a copy of the press release. If you have not, please contact LHA at 415-433-3777.

This call is being broadcast live over the internet. A webcast replay will be available for one year at www.uei.com. Also, any additional updated material non-public information that might be discussed during this call will be provided on the company’s website, where it will be retained for at least one year. You may also access that information by listening to the webcast replay. After reading a short Safe Harbor statement, I will turn the call over to management.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events and the future financial performance of the company, including the benefits anticipated by the company, due to the continued strength of it’s core businesses, the continued innovation of products and such as the Control Plus, QuickSet and other associated technologies that will attract new customers and existing and new markets. And that a mode or input confusion, eliminate remote control setup and transform smart devices such as smartphones, tablets, Smart TVs, game consoles and over the top services into Universal Remote Controls, the benefits the company expects via the continued strength of it’s subscription broadcasting businesses in certain geographic areas including the Americas and Europe and the continued global general economic conditions.

Management wishes to caution you that these statements are just projections and actual results or events may differ materially. For further detail on risk, management refers you to the press release mentioned at the onset of this call and the documents the company files from time to time with the SEC, including the Annual Report on Form 10-K for the year ended December 31, 2012. These documents contain and identify various factors that could cause actual results to differ materially from those contained in management’s projections or forward-looking statements.

Also, the company references adjusted Pro Forma or non-GAAP metrics in this call. The adjusted Pro Forma metrics are provided because management eases them in making financial, operating and planning decisions and then evaluating company’s performance. Management believes these measures will assist investors in assessing the company’s underlying performance for the period being reported.

UEI continues to incur certain expenses as a direct result of these acquisitions, which we believe did not reflect its true operating results. Adjusted Pro Forma results exclude the following expenses, amortization expense relating to intangible assets acquired, depreciation expense relating to the increase in fixed assets from cost to current market value and other employee related restructuring costs.

In its financial remarks, the company will reference adjusted Pro Forma metrics. A full reconciliation of these adjusted Pro Forma measures versus GAAP is included in the company’s press release that was issued after the close of the market today.

On the call today are Chairman and Chief Executive Officer, Paul Arling, who will deliver an overview, and Chief Financial Officer, Bryan Hackworth, who will summarize the financials, and then Paul will return to provide closing remarks.

It’s now my pleasure to introduce Paul Arling. Please go ahead, Paul.

Paul Arling

Thank you, Becky, and welcome everyone. Our results for the first quarter reflected strong performance across all our business areas. When comparing to the first quarter of 2013, when comparing first quarter of 2013 to the same period last year net sales increased 11% and operating income increased 33%.

Subscription broadcasting continues to be a strong contributor to sales. Consumers are upgrading and adding services as new technologies and features are rolled out with particular strength in the Americas and Europe in the first quarter. In addition, growth regions across the world continue to add new subscribers, contributing to a still growing international market.

As I’ve said before, a significant opportunity for growth exists in the smart device space. The adoption of Smart TVs, tablets and smartphones continues to increase. The smartphone market alone is roughly triple the size of the market for TVs. And in just a few short years, the overall margin opportunity for us in smartphones and tablets could be equal to or even exceed the opportunity in today’s traditional audio/video market.

Our Control Plus QuickSet and other associated technologies transform these smart devices in the simple to use and intuitive universal remote controls that operate every entertainment device in the home regardless of brand or connection protocol.

Earlier this year, we announced the UEI Control Plus platform, a groundbreaking technology that enables as seamless simplified home entertainment setup and control experience across all AV devices. Control Plus utilizes CEC technology and our extensive IR and IP device control databases to determine the device type, model and brand of all devices in the AV stack to enable one-touch control and viewing functionality.

Control Plus eliminates a long-time frustration for consumers, mode or input confusion, which occurs when you have to determine which mode or input needs to be selected to switch between watching cable and then the DVD or listening to music and then playing a videogame.

In the coming months we will release the first version of Control Plus to our subscription broadcaster accounts. This release solves one of the most pressing needs for operators which is to ensure that subscribers have instant access to their service regardless of which input on the TV the service is connected.

Control Plus benefits our customers as the elimination of input confusion results and fewer frustrated users, which in turn makes the fewer service calls and all the associated costs.

UEI QuickSet is another key technology addressing the proliferation of connected smart devices. QuickSet is an onscreen device programming function that enables an affordable, intuitive, step-by-step interface that simplifies the programming on the smartphone, tablet, remote or other control device.

The latest release of our embedded UEI QuickSet enables automatic setup through an HDMI cable connection. The TV sends data to the set-top box and our QuickSet software will automatically read the data and program the relevant connected devices without any user involvement.

In January, we announced LG, became the latest Smart Device provider to select a mobile version of QuickSet technology for its latest Optimus Vu Smartphone, which launched late last year. LG is using our technology to transform the LG Smartphone into a comprehensive platform that can control all of the entertainment devices in your home.

This same QuickSet technology is also been selected by major game console brands, to transform the interactive game controller into a universal touch-screen remote control. We remain actively involved in development projects and incorporate our leading QuickSet technology into the next generation of smart devices which is fast becoming a standard in the industry. We now have more than 30 products, either shipping or in development that have this exciting new feature.

Before I turn the call over the Bryan, I’d like to provide a brief overview of the direction in which our industry is headed. Several years ago, many surmised that the introduction of satellite television which shrink cable provider’s market share, resulting in reduction in UEI’s customer base.

Fast forward to today where we count the world’s largest satellite providers as well as cable operators, as our longstanding customers. Instead of the market being compressed by the introduction of new services and technologies, the competition drove more innovation among the standing players. As a result, our market opportunity greatly expanded.

The birth of new home entertainment technologies results in the need for innovative control solutions. This has been and will continue to be UEI’s specialty. The market is clearly moving in our direction. We are excited about what lies before us as our market expands to include smart devices such as mobile phones, tablets and game consoles as well as Smart TVs and over the top services.

Much like satellite, over the top services are another innovation of advancement in home entertainment. They are driving technological advancements, pushing the need for innovation industry-wide.

Major technology companies are making large investments in this market space and are at various stages of introducing their own hardware to deliver over the top services direct to consumers. All of these new services will require advanced remote control technologies and UEI is the clear worldwide leader in this area.

In addition to having the world’s largest database of control codes, we have a significant portfolio of intellectual property, embedded software and hardware designs to cover today’s and tomorrow’s market needs. We are also actively involved in the development of standards for such emerging technologies as Bluetooth Low Energy and Wifi Direct that are being integrated into these new devices.

We’re at an interesting stage in evolution of home entertainment where the landscape is becoming increasingly rich and dynamic. As such, this is opening the door to significant opportunities for UEI and I’m more excited than ever about the implications for our long-term growth.

We are talking to all the players in the midst of their development plans and the future has never looked brighter.

With that, I’d like to turn the call over to our CFO, Bryan Hackworth, to discuss our financial results.

Bryan Hackworth

Thank you, Paul. As a reminder, our results for the first quarter of 2013 as well as the same period in 2012, we’ll reference adjusted Pro Forma metrics.

First quarter of 2013 net sales were $114.7 million, compared to $103.7 million for the first quarter of 2013. Business category net sales were $104.6 million compared to the first quarter of 2012 net sales of $92.4 million. The key driver of this growth was subscription broadcasting in both the Americas and Europe, as we continue to increase our market share and subscribers continue to upgrade and add new services. In addition, we gain traction to smart device channel as we increase our chip sales which include our embedded technology.

Our consumer category net sales were $10.1 million compared to the first quarter of 2012 net sales of $11.3 million. Gross profit for the first quarter was $32.8 million or 28.6% of sales compared to a gross margin of 27.6% in the first quarter of 2012, an increase in units produced internally versus by third party manufacturers as well as an increase in chip sales for Smart Devices contributed to the gross margin increase.

Full operating expense was $27.7 million compared to $24.8 million in the first quarter of 2012. R&D expense increase to $4.2 million in the first quarter of 2013 from $3.5 million in the first quarter of 2012.

SG&A expenses increased to $23.5 million in the first quarter of 2013 from $21.3 million in the first quarter of 2012.

Operating income was $5.1 million for the first quarter of 2013 up 33%, compared to $3.8 million in the first quarter of 2012.

The effective tax rate was 13.6% in the first quarter of 2013, compared to 17.9% in the first quarter of 2012.

Net income for the first quarter of 2013 was $3.9 million or $0.26 per diluted share compared to $2.8 million or $0.19 per diluted share in the first quarter of 2012. Next I’ll review our cash flow and balance sheet at March 31, 2013.

We ended the quarter with cash and cash equivalents, net of debt of $28.7 million, compared to $44.6 million at December 31, 2012 and $10.1 million at March 31, 2012.

During the first quarter, we purchased approximately 81,000 shares for $1.6 million for an average price of $19.23 per share. DSOs were approximately 69 days at March 31, 2013 compared to 64 days a year prior.

Net inventory turns were approximately 3.7 turns at March 31, 2013 compared to 3.5 turns a year prior. Consistent with the prior year, we expect inventory returns to improve throughout the year, approximately 4.5 turns by the end of the third quarter.

Now, turning to our guidance. The second quarter of 2013, we expect revenue between $124 million and $130 million, compared to last year’s second quarter revenue of $116.7 million.

EPS for the second quarter is expected to range from $0.36 to $0.46 per diluted share compared to $0.41 recorded for the second quarter of 2012.

I’d now like to turn the call back to Paul.

Paul Arling

Thanks Bryan. 2013, is obviously off to a great start for UEI. We had a strong first quarter accentuated by our subscription broadcasting business and continued traction in smart devices. We believe we are well positioned for a very successful year.

Our ability to grow our business has and will continue to be enabled by our focus on innovation, namely our ability to introduce the products and technologies that apply to the many changing options and features in home entertainment devices and content.

We will continue to win new customers and expand relationships with existing customers across multiple markets. And we will expand and invest in regions that show promising market opportunities. Our efforts are aligned to our ultimate mission to supply the technologies and solutions that simply the increasingly complex and ever-changing home entertainment environment. Stay tuned.

I’d like to open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jason Ursaner, CJS Securities.

Jason Ursaner – CJS Securities

Congrats on a very nice start of the year.

Paul Arling

Thank you.

Jason Ursaner – CJS Securities

Just first, I want to concentrate more on the embedded solutions that are going into mobile devices. Can you talk a little bit about what the revenue run rate is today and then, you mentioned the 30 projects that are either shipping or in development. How should we think about the market opportunity on sort of within the pipeline today versus the current revenue run rate and where that opportunity could go as you look you are too down the road?

Paul Arling

Yeah, I’ll comment a little bit on that. We’re not going to provide a breakout of the embedded solution sales just yet. I will tell you, it’s a small percentage of the overall in our sales per quarter, in the $120 million range and the embedded solutions aren’t rifling that just yet. But so, but the effect on sales over time will be less than the effect on the both the gross and then net margin, because this is the type of business where the dollar rate per unit will be lower than the average product but obviously the profitability higher.

So, as time goes on we will talk more about these to the extent possible. As Bryan mentioned in the first quarter, there is a lot of elements to predicting these things as commencement, we have a lot of projects already commenced that we have not, we’re not able to talk about because the products are yet unannounced and unreleased by our customers. So we definitely don’t do long lead announcements on them. But we are working on projects.

The next, is the timing of those which we’ve been typically given a schedule and then the velocity of sales after they’ve launched, which in many cases we actually know pretty well because sometimes there are product that are replacing an existing product. So, in terms of giving breakouts of that at this point, we’re not doing that. But we’re pretty excited about the design wins we’re getting.

As far as QuickSet Jason, the 30 projects apply to both AV products, televisions and set-top boxes mainly, although we’re doing some work in AV receivers as well as mobile devices, tablets and smartphones and game consoles.

Jason Ursaner – CJS Securities

Okay. And I guess, just getting to the first comment about the effect on gross in net. Your gross margin has improved 28.5% in the quarter. How much of that would you attribute to I guess just more efficient operations, the fact that you’re now sort of fully involved with the CG acquisition and integration versus the effect that the embedded solutions having today on gross margins.

Bryan Hackworth

Yeah Jason, it’s Bryan. It’s a little bit of both, it’s primarily the former. I mean, in the first quarter, the majority of the increase to the gross margin was the be more efficient and in manufacturing and producing internal units in-house versus using third party manufacturers. However, as I mentioned previously, we did have an increase in chip sales, for mainly smart devices. So that’s also helping a bit. But I think, what you’re going to see in the long run, is you’re going to see that be more pronounced versus, right now we’re just starting off.

Jason Ursaner – CJS Securities

Okay. And cash flow, your pretty significant outflows, I’m just wondering how are you seeing that seasonally versus was there anything?

Bryan Hackworth

Yeah, it’s going to build, it will build throughout the rest of the year. Q1 is typically our low point in terms of cash, for a variety of reasons. One in the Netherlands, where we have the resale business we payout cash discounts and rebates, we typically stretched tenders out in Q4 and we pay it down a little AP in Q1. So, that’s not A-typical.

The one thing that was a little different this year in Q1 was the inventory is a little higher than we expected, it’s not for that reason. We have a large customer that delayed a launch for new products so we’ve got about $5 million or $6 million of inventory on hand that we’re going to sell very quickly, the launch got delayed, so we’re carrying about $5 million or $6 million more in inventory than we originally expected.

Jason Ursaner – CJS Securities

And that’s in embedded solution to customer or traditional?

Bryan Hackworth

No, that’s a traditional core business.

Jason Ursaner – CJS Securities

And then, I just didn’t hear the numbers you gave on the share repurchase and way of what’s on the authorization, so if you can?

Bryan Hackworth

81,000 shares we repurchased for about $1.6 million and we’ve got about 1 million shares authorized to repurchase.

Jason Ursaner – CJS Securities

Okay, great. I appreciate it.

Operator

Your next question comes from the line of Steve Frankel, Dougherty & Company.

Steve Frankel – Dougherty & Company

Good afternoon and again congratulations on nice strong quarter. Paul, could you tell us if there are any other smartphone manufacturers besides LG that are shipping your solutions today, whether it’s a software solution or some kind of embedded chip?

Paul Arling

Unfortunately I can’t. But I’m sufficed to say that we have met with and are at various stages of development and/or in the sales process with, I think I can say everyone in that market.

Steve Frankel – Dougherty & Company

Okay. How about updating us on, you talked about strength in the US and Europe, but update us on health of the subscription broadcast business in Asia and Latin America?

Paul Arling

Yeah, it’s going very well. I mean, the subscriber growth there is obviously typically is outpacing the more consumer centric markets of the world. We’ve done fine there, I mean, obviously the bulk of the business over time has been in the US and Europe and those were actually – I shouldn’t say the US, the Americas, including Canada, the US and all the way down to Latin America.

So, the entire region actually exhibited some growth. And in Europe we’re seeing a lot of activity not just in Western but obviously Eastern Europe with wins that we’ve had in other parts of the world. So subscription broadcasting is actually going really well so far.

Steve Frankel – Dougherty & Company

Okay. And do you think GC’s Japanese TV business has followed – is it stabilized?

Paul Arling

Yeah, I think it’s stabilized. I mean, it’s not where it was at its peak but it’s going well. I guess, I would say that there to our internal expectations, everything is going fine.

Steve Frankel – Dougherty & Company

Okay. And then, the philosophical question, what investors hear about the innovation in remotes, things like voice control, gesture control and they worry that that might be something that negatively impacts your business. Should we be thinking about those technologies as incremental ways to get more money per remote or is that a replacement technology for IP that that you might be getting in a different way today?

Paul Arling

Yeah, I think it meant more as the former obviously. All of these things replacing the traditional remote, and this is not just me speaking, our customers are telling us this that they don’t see these as replacements for but rather supplements to the traditional control environment. So, there isn’t really a good analogy but in other products there has been voice control for years but hasn’t replaced. In some cases its supplements but does not replace the original control.

Now, there has been voice control in PCs for instance for more than a decade, it hasn’t replaced traditional control methods. So, I think they are more supplements to. We do think though that smart device technologies do bring an extra layer of value add and that they run protocols that are going to make it easier to setup and easier to use. But the traditional lean-back mode, just picking up a remote and operating your transport keys with your thumb, I don’t think is really going anywhere anytime soon, going away anytime soon for certain.

So, I do think these technologies are coming, actually maybe slower than we would like because we have a lot of interesting technologies and IP around some of these concepts of next generation products but they are coming. We are working on some developments in that area with some major players. And but we don’t really see it replacing or diminishing the traditional remote.

Steve Frankel – Dougherty & Company

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Andy Hargreaves, Pacific Crest Securities.

Andy Hargreaves – Pacific Crest Securities

Hi, thanks. Any material change in ASPs in the business category, meaning was that a contributor to growth or was it mostly just unit based?

Paul Arling

Yeah, I think it’s primarily unit based right now, Andy. We don’t give average ASPs but right now because we are at the beginning stages of the smart devices, that’s going to include licensing in chip sales, I wouldn’t say it’s a huge impact but there is an impact but it’s not significant to change the ASPs too much in the short run.

Andy Hargreaves – Pacific Crest Securities

Okay. Are you seeing these changes in ASPs, I mean, just not for the categories as a whole but just looking at full remote sales. Are those changing the demands for functionality, they go up?

Paul Arling

Yeah, I would say – I would say the last couple of quarters we’re seeing some higher end remotes being sold, that’s a true statement.

Andy Hargreaves – Pacific Crest Securities

Any material impact from, I mean, in the consumer category just looking at year-over-year. What was the FX impact there?

Bryan Hackworth

The FX impact?

Andy Hargreaves – Pacific Crest Securities

Yeah.

Bryan Hackworth

Not much, it was minor our net income was very minor. There is kind of a natural hedge there between sales and OpEx where we sell and the functional currencies in the jurisdiction, but we also have OpEx, its functional currency though. Over now appropriately hedged, there is a natural hedge there. So the FX is pretty minor. I mean, right now retail, in Europe right now there is – are aware, the economy is a little bit sluggish. So, we had a slight decrease in sales, year-over-year for Q1 but it’s nothing to worry about.

Andy Hargreaves – Pacific Crest Securities

Okay. And then, just a bigger picture question on the embedded technologies and the QuickSet stuffs. Are the projects that you have involved with right now and working on most of those guys targeting holiday back of the year type of product launches or they spread out even longer than that?

Paul Arling

Yeah, I would say it was more of a waited towards the Q3, in the Q4 for that very reason, they were looking at introductions in the fall for the – the holiday selling season.

Andy Hargreaves – Pacific Crest Securities

Okay. Thank you.

Paul Arling

Yeah.

Operator

(Operator Instructions). Your next question comes from the line of Ian Corydon with B Riley & Company.

Ian Corydon – B Riley & Company

Thank you. Paul, I’m not sure if I caught the commentary on videogame consoles correctly. Do you expect to be in any of the next generation consoles expected to launch?

Paul Arling

We do, yes.

Ian Corydon – B Riley & Company

You do. And in terms of smart devices, there have been some smart devices obviously shipping with remote control capability. Can you just talk about what gives you confidence either from a technological perspective or given the conversations you’re having with potential customers, what gives you confidence that you can get some material wins there?

Paul Arling

Well, a whole host of things. I mean, I think when you think about it, one of our leadership positions in the world is the – our control codes for the main content device which is that – typically that set-top box that is in the usage home. In fact, if you would monitor what commands are snapped to these devices, which most people wouldn’t do but we do.

You’d notice that most of the commands you send to your AV stack in the evening are to that box because it’s pulling up the guide, it’s your transport key for your DDRUs, there is a lot of usage of that device. Obviously, with our market share position on that subscription broadcasting side, we have by far the best and most complete database of code for that device, as well as for those that have setup home theater for AV receivers because we have a relatively good share there as well.

So, we are confident that just that base level building block is going to be important for people to have. On top of that we build in some easy-to-use features which we’ve mentioned, QuickSet and even Control Plus as an embedded app. And we also have a whole series of IP around some of these concepts that dig back pretty far, because these ideas were originated by us and worked on by us, in some cases a decade ago.

So, we feel that we have all the building blocks for a really great product. Now, in terms of the presentation layer, some of the customers want to build their own app so to speak. So, what we do is sell the building blocks and we’re real confident that as they look at those building blocks they need to build a great consumer experience, they are going to look at our stuff as well as our IP and say these guys are a good solution for us, a great solution for us. Because they knit all that together, the codes we need, some of the technologies that make a better user experience, and they saw some IP that’s important, we knit that altogether and we think we’ve got a great selling proposition for that market, for smart devices.

Ian Corydon – B Riley & Company

That’s very helpful. Thank you.

Paul Arling

Okay.

Operator

Your next question comes from – it’s a follow-up question from the line of Jason Ursaner, CJS Securities.

Jason Ursaner – CJS Securities

Thanks for taking my follow-up. I just wanted – I guess to follow-up on the question you just got asked. And the position you do have in the control codes with the MSOs, and kind of reconciling that with persuaded Q3, Q4 shipment. Samsung just released the S4 it does have the built-in infrared capability and a companion app to control TV. So, I guess I’m wondering why – who is the other competition if you’re not on that device and if you are why wouldn’t, it be more of an impact short term?

Paul Arling

Well, look, what this should be seen as proof that this is coming. I mean the mobile devices and actually this has been going on for a little bit of time now, the tablets – there is already a number of them that have this technology embedded. It’s just now moving into the smartphone. So we think as many on the street, like, to say this is very early innings.

This is, but and everything you read about the mobile device market, particular smartphone says that the device makers, it’s a race to see how many features they can pack into the smartphones, this to me is an easy selling proposition.

So, we think this is going to take off. It’s going to be like other things that are very development of the Universal Remote, it becomes something that a few do and then six months later, many are doing and then years hence, everyone is doing. And we think this is going to a very common feature.

Again, as we said on this call for a long time now, the average Americans watching 5-hours TV a day, 12 years ago they were watching four. This is the most common activity probably in everyday life in America. And the average global citizens watching over 3-hours a day of TV, what better app to have on these devices than this, and we’re the world leader in it.

Now, speaking specifically about products we will be in or not in, we’re not going to discuss that on this call. We’re not – have liberty to discuss our customer’s product plans or make announcements that aren’t authorized by our customers. We want our customers to pay us the fair margin and pay us for our work, that’s what we ask of them.

As far as announcements, sometimes we’re going to have to wait. But we feel our numbers are good and we’re very positive about the development that are happening in smart devices, smart TVs, game consoles, over the top services, there are lot of people working on very interesting products in this area. And we think that leads them to our door.

Jason Ursaner – CJS Securities

Right. I guess, without talking about your customer, I guess, I’m asking more on the competitive side, with keeping the presentation layer separate. Just, who else is competing on the underlying control codes?

Paul Arling

Yeah, there is – well, there is always competition. There is a few companies out there, but most of them are very small companies that have tried to put together a competitive offering. But again, most of them don’t have very much resource they don’t have the implementations with subscription broadcasters or TVs. They don’t have – to my knowledge, anyway, any IT in this area. They don’t have features like QuickSet or Control Plus or really any other features. So, but in any market we get into there is going to be someone out there that is used to compare you to. So that will happen here too.

Jason Ursaner – CJS Securities

Okay, great. I appreciate it, thanks.

Operator

And we have reached the allowed time for questions. I would now like to turn the call back over to Paul.

Paul Arling

Okay. Thanks everybody for participating today and your continued interest in UEI. We’ll be presenting at the 14th Annual B Riley Investor Conference being held in Southern California on May 22, at 9:00am Pacific. We hope to see you there. Thanks for being on the call today. And talk to you soon. Goodbye.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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