888 Holdings' CEO Q4 2013 Key Performance Indicators and Interim Management Statement (Transcript)

Jan.30.14 | About: 888 Holdings (EIHDF)

888 Holdings plc (OTCPK:EIHDF) Q4 2013 Key Performance Indicators and Interim Management Statement Call January 30, 2014 5:30 AM ET

Executives

Brian Mattingley – CEO

Itai Frieberger – COO

Aviad Kobrine – CFO

Analysts

James Hollins – Investec

Ivor Jones – Numis Securities

Vaughan Lewis – Morgan Stanley

Nick Batra – Peel Hunt

Brian Mattingley

Good morning, everybody, and thank you for joining us on the call today. As the young lady has said I am Brian Mattingley, Chief Executive of 888 and I am joined as usual by Aviad Kobrine, our Chief Financial Officer and from Israel, Itai Frieberger, our Chief Operating Officer.

I take it as read that you have seen our announcement this morning and I will briefly take you through a few key points before opening the call up for questions.

I am delighted to say that we have delivered a very good performance in the final quarter of the year, building on an already strong Q3 performance and resulting in record revenue in 2013 as a whole, up 7% from the previous year. If we focus firstly on the fourth quarter results, revenue rose 10% from the previous year driven by very strong performance in Casino, up by 15%. This not only reflects the continued enhancement and improvements we are making to our Casino product offer and the results of our CRM initiatives but also our extended proposition in regulated market such as Italy and Spain where we have continued to perform very well and the further inroads we are making in our mobile technology.

At present almost 20% of our Casino revenue is generated on mobile platforms. Poker also performed well in a tough market with revenue up 2% on the same quarter in the previous year. Throughout 2013 we have continued to make market share gains in what is a highly competitive environment and I am pleased that we have now advanced to number two in the global poker rankings according to Pokerscout.

Whilst Bingo remains a challenging and competitive market our new team in place has now started to make improvements to our Bingo performance. And the period only saw a decrease of 4%, reflecting a recovery with 7% revenue increase compared to the previous quarter. Our re-launched slots offer has continued to show encouraging results and we remain committed to improving and growing this part of our business.

The final quarter has seen momentum building across our U.S. operation. And in November we launched in both New Jersey and Delaware, making us the only operator live in all three regulated U.S. states. All three launches have been successful with all systems going live on time and as planned. And through our leading Poker platform we currently hold leading positions in New Jersey, Nevada and Delaware. This is testament not only to our technology but the dedication of our team and we are confident that we can replicate this success as and when further states regulate.

I think it is also important to highlight here that the substantial financial firepower of our partners means that we are well positioned to take advantage of the ongoing opportunities in the U.S market as regulation continues to take place.

Now reviewing 2013 as a whole I am pleased to see the reward of what has been an incredibly busy year for us, reflected in these numbers. We have made continued progress on our core business with record revenue coupled with solid growth driven by strong performance from our B2C business with a number of active customers across both Casino and Poker rising 16% year-on-year. 2013 saw us submit our U.S. strategy and established trading operations in all three regulated U.S. markets as well as continuing to develop our presence and offer in other regulated markets across Europe, notably Spain and Italy.

Finally trading in the first quarter of 2014 to-date started well with the strong trends witnessed at the end of Q4 continuing and daily average revenues for the first 27 days of the quarter being approximately 3% higher year-on-year with much of the performance being driven by our Poker offering.

With that I’ll now hand you back to the operator to open the call up for questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from James Hollins of Investec. Please go head your line is now open.

James Hollins – Investec

Hi, good morning three from me please. The first one is on New Jersey I think as while you reported the data from the first month showed that it was a pretty slow start. I was wondering what your views on the start of it is, what trends you are seeing in January and what, if you can what your marketing budget or marketing plans will be for your own dollars in that full year ‘14?

The second one is on current trading, the plus 3% in January you said it’s led by Poker, can you just let us know whether all products are showing growth or not? And then the final one is on B2B revenue. I think you’re flat year-on-year for first nine months and obviously up 22% in Q4. Is that all you U.S. upside or was there a bit of growth elsewhere in B2B year-on-year? Thanks.

Brian Mattingley

Thanks, James. If I start off quite talking about the introduction to New Jersey, I will then ask Itai to come in and talk about the trend and the marketing program. I also then Aviad, I myself and Itai will hit the other items. Yes, I think it’s true to say that in New Jersey the numbers in December if you add [new launches] then gave about $100 million to $120 million worth of market share, was a slow start. I think the whole market was driven in the own games by the activity that was actually driven because of licensing. WSOP Ceasers were licensed very late in the day so any marketing activity coming from WSOP Ceasers sort on our sales were somewhat delayed. [Gibraltar] were straight out of the block. They were doing significant marketing in the first week of the opening.

But overall very, very early days. I think the figures there are not indicative of what the market will end up with. We have seen trends going forward since AAPN and WSOP have been aggressively marketing. And if you look currently at the liquidity ratings you will see that WSOP and AAPN are now jointly above that of [inaudible] and we have significant market share. Do any if any other point you want to add on market type?

Itai Frieberger

I think may be couple of the first month till December this was a trial, the trial phase when people were just getting around and launching the services. So the revenue numbers that we received I think is a bit short and what will be the run rate. And I do expect the market to grow and there are a few challenges for all of us being online operators, mostly around payments and geo-location which are being resolved right now but that actually does is limit the ability of casual players to come in as they get rejected, what you see right now in my view mostly the market is driven by the land-based customers which I believe that as we go along the proportion of these customers will go down.

So I do believe that the market will grow, will grow in terms of numbers and will also grow in terms of new customers coming in. You see the liquidity trends which are the overall market liquidity trend which increased we see our market shares of the platform significantly increasing through launch. So we’re very happy and satisfied with those.

Brian Mattingley

Okay. In terms of current trading James, yes I think we picked out Poker because Poker is showing a significant growth year-on-year. We still are seeing good numbers coming out of Casino. I think Bingo itself is actually flat against that of the previous year, which frankly is very encouraging because really we saw the dip in the Bingo last year in the summer, where we were 22% down. And sport we’ve had some very, very good results in sports.

So overall I think most of our verticals are performing well, led from Poker, I don’t know if Aviad has anything to comment on that. No, I think we are – and Itai, no, so shall we talk then about the piece then I will ask Aviad to run through that?

Aviad Kobrine

Sure. So James answering your question the increase in the B2B revenue in Q4 there was some U.S. revenue in it but actually there was a significant chunk of Bingo B2B increase in revenue. And that is primarily driven by our own global scheme network which has grown very significantly from last year and we outperformed our B2B licenses and the industry as we can see. So yes there is some U.S. but it’s not all U.S.

James Hollins – Investec

Okay. Very good. Thank you.

Operator

Our next question comes from Ivor Jones of Numis. Please go ahead. Your line is open.

Ivor Jones – Numis Securities

Good morning and on Bingo B2C, what’s happening, you said a new team, you mentioned before that you’re moving it across back office, is that what happened? But new team doesn’t sound like enough of an explanation for the change in the growth rate or decline rate?

Brian Mattingley

Isaac, we’ve said at quarter, sort of the half year and quarter three that what we were doing is we were changing the style that we manage Bingo which is predominantly UK driven into an environment which was similar to that of Casino, Poker based out of Australia, out of the Australia office. They have looked at the product, they have adopted different marketing strategies, they changed the look of AJK ladies. We have delivered aggressive marketing campaigns, we’ve looked at the overall pricing policy.

At this moment in time we haven’t yet connected to the back office. So we’re still operating as we have done in terms of technology but in terms of our marketing skills to look at the product the way that we are positioning ourselves in the overall market, that has undergone a significant change. And that change has actually started to drive the recovery, sort of fresh look, fresh feel and we are marketing what is considered to be a newish product.

Ivor Jones – Numis Securities

And is the change of the back office still an upside opportunity?

Brian Mattingley

Yes it is it is most definitely an upside opportunity, it remains in the pipeline of work that needs to be done and we hope it will be done at some stage during 2013/ beginning of 2013 – so not ‘13, 2014/2015. It is not necessarily a top priority when you look at the roadmap of our development issues.

Ivor Jones – Numis Securities

Thank you. And on the mobile can talk a bit more about I guess how much of the growth is coming from it? And really how do customers behave, is it just a separate new isolated channel that mobile customers are people cross selling more revenue to customer from operating in both platforms just talk about what mobile means, how much further it’s got to go?

Brian Mattingley

If I could ask Itai to talk about that and also may be Aviad will want to chip in when it comes to be what portion of the growth of the business is coming from mobile. But Itai could you fill that one?

Itai Frieberger

Yeah, sure we see different play behavior on each one of the verticals, which is likely different than the one we have on PC. Whether that would be on sport, they have different margins and different types of games that are being played on poker and on Casino. And I think what we’re doing right now as we identified different focus points that are relevant to each one of the different products when it comes to mobile and again mobile is also different when you compare smartphone and tablets, then we actually developing or pushing more the additional functionalities into mobile that we see that within that trend.

I think in each one of the vertical we see significant growth. When it comes to mobile mind you today that if you don’t have a mobile product there is no way to compete in the marketplace. And I think we can all agree that in a few years from now the majority of the services, not only game, anything else that you consume on your computer will actually move into a handled device. I hope that answers your question.

Ivor Jones – Numis Securities

What about lifetime value then for people who sign up on mobile?

Itai Frieberger

Well the lifetime value of the customers with a combination of PC and touch is naturally higher than it is for people that are using only one device. And I think this is where our unique back office kicks in and allows us to seamlessly cross between the different platforms. So we can actually drive customers between PC into mobile or people that were acquired on mobile into PC, it’s all one seamless environment with significantly tools that we have a new CRM functionality that we introduced virtually every day to allow us to expand lifetime value through migrating customer within the different platforms.

Ivor Jones – Numis Securities

Okay, okay, thank you.

Brian Mattingley

I would like to add to that Ivor. If you look at some numbers and the importance of mobile going forward, if you look at the UK market which is our most developed market for mobile devices, at the moment close to 60% of new customers are generated through the mobile devices, which is an incredible number and actually tells you that in the near future as Itai mentioned the majority of business will be mobile.

Ivor Jones – Numis Securities

And so mobile, Itai partly answered the question about lifetime value because he said if they use both platforms lifetime value was higher. What about mobile only versus desktop only?

Brian Mattingley

It’s implied in his reply. If you look at a customer that only plays mobile his lifetime value was lower, although in itself not necessarily a bad thing. Remember we’re not about necessarily maximizing lifetime value without maximizing the return on marketing investment, in other words difference between the lifetime value and the CPA. And over there we actually see very good result as well. So it’s not an – it’s a non-issue but clearly it’s a very strong recruitment channel and the Holy Grail is the cost selling into the other desktop as well and this is what we’re doing pretty well at the moment.

Ivor Jones – Numis Securities

Okay. And could I ask about casino in New Jersey, you touched on poker but I don’t know what to think about the revenue split between casino and poker, has it not got started yet is it the same revenue as poker? How are customers behaving?

Brian Mattingley

Definitely has started without a doubt. We are trading with three brands. We are trading with Rio on the WSOP platform and we are trading [Harvard] separately and AJK casino. The put FTDs are strong. The amount actually reported is strong. Naturally bonusing is pretty prevalent but we’re seeing some good opportunities. It’s very difficult to see how we perform against the rest of the market because nobody breaks out, there is no independent person or body which breaks out who is performing in what market.

In terms of our own platform I think it’s true to say that we’re performing as we had anticipated. It is very much geared towards marketing campaigns. I think a lot of work has been done quite naturally on marketing poker to ensure that we have liquidity to ensure that the player experience is good. So that will wax for our majority of our work that’s being done in recruitment of new players onto the poker platform. We have undertaken a couple of small marketing campaigns and they appear to be generally very successful. And I think as time goes on we will market more and more towards the casino brand, bearing in mind that we – 45% of our overall turnover comes out of casino.

I think that is one of our major strengths and we removed. Where we are at this moment in time, Ivor I think we’re very happy with it, how we perform against everybody else, we don’t know.

Ivor Jones – Numis Securities

Brian you may be underestimating how ignorant I am. I don’t know whether we’re talking about casino business, that’s 10% the size of poker business, maybe in terms of FTDs or revenue or 50% the size of poker business.

Brian Mattingley

I would have said it’s nearer 50 than it is 10. But it’s not as see elsewhere and if you look at poker is 25% of our dotcom business, casino is 45%. It’s not that ratio, the ratio spun around. So we have a bigger poker business in New Jersey than we do our casino business.

Ivor Jones – Numis Securities

Looks like Aviad is saying something.

Itai Frieberger

If I can jump in, it’s Itai, Ivor. these are very early days and you know we have made a decision, it’s a debated decision that the focus that we are going to put at least in the beginning will be around poker to create a liquidity pool and to a create the network, networks that we can work off that and when we work in the future. We know that there is very strong synergy and a very strong [profit] between poker to casino. Poker drives the crowd and casino is a more focused product if you want. So everything that Brian said is absolutely correct. We are focusing more on poker.

We’re starting now casino, casino started after poker, when it comes to marketing. Caesars have not started yet to promote all their casino brands but I believe that at the end of the day a very strong poker will generate a very strong casino, and the urgency is to create a steady and a stable poker platform that off that we can do perfectly whatever we want in the market.

Ivor Jones – Numis Securities

Brilliant. And last one quickly from me. I can’t quite make what you said about the first quarter so far tie-up. Did you say growth was led by poker? Casino is good. Well casino has been moving double digit, bingo was flat, very good results in sports you said and yet year-over-year growth is 3%. Something must be going backwards I think as everything you said is performing well what’s the missing piece?

Brian Mattingley

To be honest with you Ivor, maybe what we are saying here is they are all performing well. I don’t think anything is going backwards. Casino isn’t seeing double digit growth but it’s still showing growth. It’s still showing a very, very respectable income coming through. Poker is probably a slightly better performer than anything else, bingo is flat and we’re very happy with that. Sport, which is a very good performer only represents 3% of our business so probably it doesn’t that make that much for our Group. There is nothing going backwards.

Ivor Jones – Numis Securities

But if it is led by poker, I mean poker is growing faster than casino, I know it’s a more number of days just to understand the language.

Brian Mattingley

That is correct, Ivor.

Ivor Jones – Numis Securities

That’s great. Okay, that’s lovely. Thank you very much.

Brian Mattingley

Thank you.

Operator

And our next question comes from Vaughan Lewis of Morgan Stanley. Please go ahead. Your line is open.

Vaughan Lewis – Morgan Stanley

Good morning. Just following on from James’s question on the B2B revenues, those were a record level in Q4. So was there any sort of one-off benefit in that from U.S. launches I mean sort of the fees or anything or should we assume that that’s up again in Q1 given a full quarter contribution from the U.S. side and are you basically fully invested within that business. So is there any additional B2B revenues contributing almost fully to profits or that’s moving cost on the cost as well?

Brian Mattingley

In terms of the U.S. yes there was a relatively small element of one-off in that Q4 which is not recurring, several hundreds of thousands, it’s a very small number. In terms of the B2B cost I am not sure if I understand the question, I mean the business is now running. It has a revenue stream, B2B revenue stream from our activities in the U.S. It has a cost associated with it, which we will expand through the P&L as normal. So when we will report Q1 or Q2 you will see the profitability of the business including these elements but as we mentioned before the B2B preposition we try to finish in profitability, EBITDA level, because that’s how they do in the past. Having said that we are also going to recognize below the EBITDA line in the income from JVs, we are going to recognize our share of the JV with AAPN, Avenue which is generating losses initially in order to penetrate the U.S. markets. So there would be several million of negative impact on profitability for the full year.

Vaughan Lewis – Morgan Stanley

All right. Thanks. And then on the sort of core business, can you comment on the marketing ratio and whether it’s changed at all and particularly in the UK whether you have seen any change in competition ahead of the point of consumption tax in the last few months? Thanks.

Brian Mattingley

We haven’t – we are not publishing full year results on profitability, et cetera. As for the marketing ratio it has not changed dramatically from what you have seen in previous releases. It moves slightly. What we have said at year-end that we are confident that with market consensus estimate and I am happy to repeat that we will make the numbers fairly easily.

In terms of the UK competitive landscape you can see all sorts of phenomenon. Some people are spending a lot of marketing, trying to get capture market share ahead of point of consumption. On the other hand we definitely see people running to the door trying to sell businesses, especially on the Bingo side, sell databases or sell on the M&A activity. So it’s moving all over the plate, I have to tell you that we are not participating in that game. We are here for the long run to make money for our shareholders and we are not taking part in short term predatory pricing if that’s what you are alluding to.

Vaughan Lewis – Morgan Stanley

Okay. And then can you give us an update on the – I think of the Q3, you are talking about four states in the U.S. that you were optimistic could regulate on the sort of 12 months here if you gotten any updates on those and particularly the California?

Brian Mattingley

We are naturally involved in all states discussions. We are bullish about activities in California, we are in discussions with potential partners in that, those partners give us an indication that there is a willingness by the native North American tribes to forge a single belt which again very encouraging. So California not really sure whether it will be in 2014, but I think there is a forward movement. We are in discussions with the regulator of Pennsylvania. I met with them a fortnight ago, that’s again looking quite exciting. I think there is a reconciliation of the Pennsylvanian budget and there is going to be a potential shortfall which again will raise interest in online gaming.

We believe in New York there is some activity around that, likely there is likely to be a movement in terms of interstate cooperation, like a compact to have interstate liquidity on Poker. If that occurs and again we are aware that two of the current smaller states are actually talking at regulator level and also at government level. If that happens, we believe that will open the door for some of the smaller states to join the compact and again that’s quite exciting.

So overall I am really quite buoyant about the movement of more states and I anticipate one, if not more but one state will actually go through the regulatory process, I not too sure they will open in 2014, but they could be there ready for 2015. I don’t know if you got any different take on that, Itai?

Itai Frieberger

Yeah, Brian I am in agreement with you in this.

Vaughan Lewis – Morgan Stanley

Great. And one follow-on if I can. Have you noticed any impact from the re-launch of Party Poker since the new product came in?

Aviad Kobrine

I’ll take that Brian if you don’t mind. We look at the industry, and we look at the trend. I think the most important thing for us is to ensure that the growth of our Poker creates a positive momentum that we will be able to use next year and in the following month. The more we grow on that, the more we are excelling in terms of growth compared to the rest of the industry. It seems we collect more momentum which we’ll be able to use later on. So we are – it will be the only thing possibly we can comment on.

Vaughan Lewis – Morgan Stanley

Great. Thank you.

Brian Mattingley

Thank you Vaughan.

Operator

(Operator Instructions). Our next question comes from Nick Batra of Peel Hunt. Please go ahead, your line is open.

Nick Batra – Peel Hunt

Good morning chaps. Several questions if I may. Wanted just a little bit color on the Poker performance, obviously if you look at the data coming out Spain and Italy, it’s pretty weak overall and there you are gaining heavy market share. But have you seen any successes outside of those markets as well and if so could you mention those?

And just on the B2B performance in Bingo, is that sustainable because clearly there are a lot of small operators spending an awful lot of marketing money at the moment ahead of TOC which just doesn’t look sustainable from what I see going forward? And I think finally, if we look at last year you talked about – you gave a special dividend a $0.02 dividend, given where the cash position is today, is that something that we should possibly be looking forward to when you report in March?

Brian Mattingley

I will answer the last question, Nick because that’s one I feel very confident about saying to you that we have a dividend policy. Dividend policy is to pay 50% of accounting profit by way of dividend; we have over the last five years declared a special dividend. We as a Board will make a recommendation to the Board prior to announcement of full year. We haven’t yet made any recommendation and as soon as the recommendation is agreed, we will make an announcement, but naturally we do not at this moment in time have not made any decisions.

We do have substantial cash flow, I think we would always prefer to give our shareholders good value back but at this moment no decision has been made. In terms of Poker performance, if I could ask Itai to fill that one.

Itai Frieberger

Thanks. And while we see growth in Poker across the board, it’s not specifically for any specific country or region. And as I said in my previous comment the positive momentum that we have on liquidity generates additional liquidity and liquidity at the end of day are activity and activity at the end of the day drives revenue. So this is in effect, if you want something that you hear right now is potentially a result of something that happened potentially a few months ago. But since we see the activity and the increase in the momentum driving forward, and I would expect to see the same trend in Poker for the near future at least.

I think at the end of the day it’s mostly based on the network activity which we have done in terms of ecosystem, the CRM content that we run, our ability to control and to manage the Poker room activity, our tournaments that we have there, it’s a whole bunch of different details which eventually provided this revolution.

Nick Batra – Peel Hunt

So we are not looking at any exceptional growth from new markets that you sort of entered in the last sort of say 12 months?

Itai Frieberger

Well it’s all standard business. It’s the market that we are launch you know about, we haven’t launched any new markets outside the U.S. We have launched three new markets in America in the last few months. And again we believe that Poker is the driver to be a successful operator in America and therefore when we look at the activity level in America, we are very encouraged. We see the revenue and I know exactly what you meant before about the soft performance of New Jersey in the first month. I am optimistic I think they will pick up, I am sure they will. This is only the first month.

And then the second thing I am looking at our activity levels and at the end of the day those activity levels also in the U.S. will bring the revenue. So being the only operator in America, launching in all three states, taking the lion’s share of the market in all three states, picking up so much liquidity in Europe, I think our poker today is positioned in a very, very good place.

Brian Mattingley

Yeah, Nick answering your last question about sustainability of Globalcom and B2B. Listen, I will be honest with you. I don’t have a crystal bowl but what I can say to you is that Globalcom has gone from strength to strength over the past three years. Part of it was organically, part of it was unorganically by recruiting new customers and new schemes.

It is now our biggest, our largest B2B revenue generator which is a good thing. And as I mentioned to you the market in the UK especially the Bingo market is going into a period of uncertainty and it’s very difficult to know what’s going to be the outcome once the dust is settled. But we are confident that our platform is leading, it’s very successful, it’s very sticky on our customers and our partners like it very much and we are optimistic about it.

Nick Batra – Peel Hunt

Thank you. And can I just ask one more question about New Jersey if I may. I mean I think the issues surrounding geolocation and payment processing is pretty well known. Well it would be interesting to know what your thoughts are in terms of how they are being resolved and when you think that market might actually be a bit more fluid than it is now?

Brian Mattingley

Well, I’ve got to say we spent two weeks ago a trip around all the regulators in all the states, we are trading in. And there is no doubt about it that the regulators are well aware of some of the issues in New Jersey, in particular. They increased the level of [tolerance]. So there is a triangulation operation which sort of fixes where you are as a potential customer and the ability, the sort of the tightness of U.S. customer locking on to the state line was very, very strong.

And they have now opened that window a little bit which is allowing more customers to be identified as bonafide players in the state. The government, the regulator there has worked with the supplying company and tracks people who come on, people who are rejected. So I think in all markets geo-locate will be flexed in terms of opening the window for people to come in. Don’t forget I think everybody and I think both the major regulators Nevada and New Jersey were very, very conscious that the lights of fed will be crawling all over them to ensure that they weren’t taking bets from outside and therefore that tolerance level was very, very tight, very, very slim.

In terms of payment processing all I can say is everybody is in the same boat. I think the competitive we talked to party, we talked to Ultima, they talk to us we work with Caesars but more importantly the regulators are talking to banks. Now [David Rebar] sat there in he said he never believed as a regulator he would be talking to Wells Fargo and Citibank about allowing payment processing to be going through.

So I genuinely think there is an awareness, I think it’s not only the operators which are trying to resolve that problem, it’s the regulators and dare I say even the state Governors. We sat with the state Governor of Nevada and he – the next meeting was with one of the big banks, one of the big payment providers. So I think they are well aware that there is a problem and they are all working together and we are all working together to get some better results. I don’t think it will resolve it until the whole U.S. market becomes more attuned to online gaming. If you imagine the 90% of the population still are banned from playing online.

So the banks are very reluctant at this stage to open the flood gates.

Nick Batra – Peel Hunt

That’s very helpful, thank you very much.

Operator

And we have no further questions at this time. I would like to hand back to our speakers for any additional or closing remarks. Thank you.

Brian Mattingley

Well once again ladies and gentlemen I’d like to thank you all for giving up your time to attend the conference call this morning. I hope we have given you the confidence that we are on top of that business, we are driving our core European market. We are working hard in the emerging U.S market, our product verticals are strong and technology is good and more importantly we have a dedicated and talented team of people who are driving our business forward.

I think we are in good health. I think 2014 is going to be another busy year and yet another different year as we start to see America opening up further and are positive all around for America but we are very confident that business is good. And we hope to see you or speak to you in March with the update on our 2013. So again thank you very much for your time and have a very good day, thank you very much. Goodbye.

Operator

That concludes today’s conference call. Thank you for your participation ladies and gentlemen and you may now disconnect.

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