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Microsoft Corp. (NASDAQ:MSFT)

Microsoft & Facebook Partnership Announcement Call

October 24, 2007 5:00 pm ET

Executives

Vivek Varma - General Manager for Windows Live and MSN Division at Microsoft

Owen Van Natta - Chief Revenue Officer for Facebook

Randy Barker - Director of Corporate Communications for Facebook

Kevin Johnson - President of the Platforms and Services Division at Microsoft

Analysts

Brad Reback - CIBC World Markets

Charlie DiBona - Sanford Bernstein

Brier Dudley - Seattle Times

Michael Arrington - TechCrunch

Karen McCarthy - CNETnews.com

Josh Quittner - Fortune Magazine

Michael Liedtke - Associated Press

Earl Barker - Financial Times

Joe Menn - Los Angeles Times

Om Malik - GigaOM

Ellen Lee - San Francisco Chronicle

Sasa Zorovic - Goldman Sachs

Brian Morrisey - Adweek

Operator

Good afternoon, and thank you all for standing by for today's conference call. I would like to inform all participants that your lines have been placed on a listen-only until we open for question-and-answers. I would also like to inform all participants that today’s conference is being recorded. If anyone does have any objection may be disconnect at this time.

I would now like to turn the conference over to Vivek Varma. Thank you, sir, you may begin.

Vivek Varma

Thank you. Thank you for joining us. I'm Vivek Varma with Microsoft. I'm joined for the announcement today by Owen Van Natta, Chief Revenue Officer for Facebook, Randy Barker, Director of Corporate Communications for Facebook, and Kevin Johnson, President of the Platforms and Services Division at Microsoft.

First, a couple of housekeeping notes. There will be a replay of this call available for one week. The toll-free number is 866-435-1324 and the international number is 203-369-1020. Also, a note from Microsoft, on today's call we will not be discussing results or guidance for our quarter just ended or the fiscal year or other topics normally handled in our earnings call, which takes place tomorrow.

I wanted to take a quick moment to run through the press release. We had a couple of errors on the press release that went over the wire. There will be a reissue. I am going to now read the press release, the final press release between Facebook and Microsoft. And sorry for the confusion on that.

So, Facebook and Microsoft Expand Strategic Alliance. Two companies expand advertising deal to cover international markets. Microsoft to take equity stake in Facebook. Facebook and Microsoft Corp today announced that the two companies would expand their advertising partnership and that Microsoft will take a $240 million stake -- equity stake in Facebook's next round of financing at a $15 billion valuation.

Under the expanded strategic alliance, Microsoft will be the exclusive third party advertising platform partner for Facebook and will begin to sell advertising for Facebook internationally in addition to the United States. "We are pleased to take our Microsoft partnership to the next level," said Owen Van Natta, Chief Revenue Officer, Facebook.

"We think this expanded relationship will allow Facebook to continue to innovate technology leader and major player in social computing, as well as bring relevant advertising to nearly 50 million active users of Facebook."

"Making this investment and expanding this partnership will position Microsoft and Facebook to better take advantage of advertising opportunities around the world," and is a great win not only for our two companies, but also our collective users and advertisers," said Kevin Johnson, President of the Platform and Services Division at Microsoft.

We have partnered well over the past year and look forward to doing some exciting things in the future. The opportunity to further collaborate as advertising partners is a big reason, we have decided to take an equity stake and is a strong statement of our confidence in the long-term economics of this partnership.

Facebook continues to experience strong growth both in the U.S. and international markets. Almost 60% of Facebook's users are outside the U.S. with an average of 200,000 new users registering each day. Facebook continues to be one of the most trafficked sites on the Internet.

On August 22, 2006, the companies announced a U.S.-only strategic alliance that named Microsoft, the exclusive provider of standard banner advertising on Facebook, using Microsoft's digital advertising solution and the Microsoft adCenter platform. In early 2007, the terms were extended to 2011.

With that titillating reading of the press release, I'm going to turn it over to Owen and Kevin, and if there are any additional comments from the two of them, and then we'll go to questions, Operator. So with that, Owen?

Owen Van Natta

Thanks very much. Hey, everybody. We're really excited to announce this partnership today, the deepening of this partnership. It's consistent with our focus as a company on innovation and our continued focus on growth.

Facebook is a technology company and these two dimensions are areas that we focus on as a company. With nearly 50 million active users, we're really focused on creating the best user experience that we possibly can and we think that this strategic alliance even better positions us to deliver on that.

Kevin Johnson

I'll just add to Owen's comments. This is Kevin Johnson. I think this deal represents a major advertising syndication win for Microsoft. And I think this signals an enormous vote of confidence from our largest advertising partners, the fact that this is a global relationship and a deep partnership.

From my perspective, I think this is really a win-win-win. I think certainly from a Microsoft advertising platform standpoint this is a win because it increases the amount of inventory that we have on our advertising platform.

Certainly, working with Facebook, it's a strategic win. And as Facebook innovates around new ad types that are unique to the social experience, that's going to enable us together to deliver a win to users and advertisers. The ability to continue to drive and improve not only on the user experience of the social networking experience, but also on the value proposition to advertisers globally.

And so, we're very pleased with the scope and the depth of this partnership and it just continues to build on the great work that we've had the opportunity to do with Facebook over the last year.

Vivek Varma

Thank you both. With that, Operator, we'll take the first question.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Brad Reback. And please state your affiliation.

Brad Reback - CIBC World Markets

CIBC World Markets. Kevin, could you just help us out here for a minute. Obviously, 15 billion is a pretty big number for Facebook. In light of Steve's comments a couple of weeks ago around the potential faddishness of the platform, maybe if you could put in some of your thoughts around that.

Kevin Johnson

Yes. I'll start by putting this in context of the overall online advertising marketplace, which today is projected at about 40 billion and it's going to grow significantly over the next two to three years to over an $80 billion marketplace. So that's point number one. This online advertising industry is a big industry.

Number two, the equity stake that we're taking in Facebook is a strong statement of confidence in this partnership. It's a statement of confidence in the fact that our ad platform is going to get stronger and stronger and help monetizing Facebook. It's a strong vote of confidence in the innovation that Facebook is doing to deliver on the social networking experience. And so, it really reflects that strong vote of confidence.

Now, if you peel back, if you look at this round of financing they're doing that we're in for 240 million, the fact that you look at just the run rate of users, and if you believe that they have the opportunity to get to 200 million users, 300 million users, which we believe is certainly in the realm of possibility and on the path that they're on you can figure out when you think that might occur.

You combine that number of users with the monetization opportunities and you can figure out a fairly modest average revenue per user per year and you can very quickly get to these level of valuations. And so, I think at the end of the day, we see this growing marketplace, we believe in our partnership with Facebook and this is a strong statement of confidence in this partnership and in Facebook.

Brad Reback - CIBC World Markets

Excellent. Thank you very much.

Vivek Varma

Next question, Operator?

Operator

(Operator Instructions) Our next question does come from Charles DiBona. Please state your affiliation.

Charlie DiBona - Sanford Bernstein

Yes. Charlie DiBona with Sanford Bernstein. Kevin, can you comment on any other--does this go beyond the advertising platform? Does this sort of telltale any sort of deeper technological relationship around the mashup and development platforms that both of you guys are working on?

Kevin Johnson

Charlie, I think certainly a couple of things. Both parties have decided that there's certain elements of this that we're not going to disclose specific terms of the agreement. But you can certainly look at what we're doing together and the work, whether it's things that we've done around some of the live platform APIs that we've exposed and the way that those are being used in Facebook, the advertising relationship expanding globally, and the fact that I think both of our companies have a strong alignment around innovation and technology in a way that has a positive impact on users.

And I would say you can sit back and watch how this partnership is going to develop. There's a lot more we're going to be doing together.

Charlie DiBona - Sanford Bernstein

Okay. Thank you.

Operator

Our next question comes from Brier Dudley. And please state your affiliation.

Brier Dudley - Seattle Times

Hi. Seattle Times. Say, Owen, can you tell us a little bit about what happened with Google and why you chose Microsoft over Google?

Owen Van Natta

No. We were very fortunate to have a lot of folks that were interested in partnering with us around advertising. We've been working with Microsoft for over a year now in the U.S. and it's a relationship that I think has been really great for both of us.

We've had a lot of success. It's a partnership that six months into the partnership, we decided to expand substantially in terms of the term of the relationship. And expanding that relationship beyond the U.S. borders to make it a global relationship was directly in line with all of those results and all of the experience that we've had together.

So, C technology company, which is the way that we certainly view ourselves, being able to deepen a partnership with one of the greatest technology companies on the planet was absolutely a -- something that made sense for us.

Brier Dudley - Seattle Times

Great. Will this also affect the way companies can advertise, other companies can place like small ads or we've got start-ups in Seattle that are working on things that will kind of bring advertising type stuff onto Facebook. Are there going to be new restrictions or changes in the way third parties can display ad type content on Facebook as a result of this agreement?

Owen Van Natta

There won't be any restrictions for the third party platform developers that have come to Facebook and built platform applications. And we now have literally tens of thousands of developers who are building applications on Facebook today, and they continue to have all the flexibility and freedom to evolve their business and create a user experience that's consistent with what they're trying to accomplish.

What we're really excited about here is that this is going to create new opportunities for those folks to be able to tap into Microsoft technologies and also adCenter as we continue to go forward and find ways to make those things available to those platform developers, should they choose to take advantage of them.

Brier Dudley - Seattle Times

All right. Thank you.

Vivek Varma

Thank you, Brier. Next question, please, Operator?

Operator

Michael Arrington. And please state your affiliation.

Michael Arrington - TechCrunch

Yes. This is Michael Arrington from TechCrunch. Are you announcing any other investors in the round? You're not -- the press release is a little bit vague on that.

Owen Van Natta

Hey, Michael. We're not announcing any other investors in this round. Microsoft is the investor that we're announcing today.

Michael Arrington - TechCrunch

So you're not saying if there are or are not any other investors?

Owen Van Natta

Correct.

Michael Arrington - TechCrunch

Thank you.

Vivek Varma

Next question, Operator?

Operator

Karen McCarthy. And please state your affiliation.

Karen McCarthy - CNETnews.com

I'm with CNETnews.com. My question is are we going to see any reciprocity, and if so, are we going to see Facebook integrating into any of Microsoft's existing web properties?

Kevin Johnson

Well, Owen, do you want -- yes, let me take a shot at this. Look, we've had a broad strategic relationship and partnership. What we're announcing today is the expansion of our advertising platform globally.

And so, the scope of this announcement really is the fact that Facebook has made a decision for Microsoft to be the exclusive third party advertising platform partner for Facebook, and we're delighted to be that partner. And we're delighted with the broad strategic partnership that we continue to develop and grow with Facebook.

Karen McCarthy - CNETnews.com

Thank you.

Vivek Varma

Next question, Operator?

Operator

Josh Quittner. And please state your affiliation.

Josh Quittner - Fortune Magazine

Hi, Owen. This is Josh Quittner from Fortune Magazine. You said that you were fortunate to have a lot of folks who were interested in partnering on advertising with you guys. Can you tell us who else was interested?

Owen Van Natta

Yes. We're not talking about the folks that we were talking to as part of this. We're really focused on announcing our Microsoft partnership today. Needless to say, we've had a lot of folks that have interest in partnership with Facebook, not just in the advertising space, but other areas as well. Today, we're really focused on our announcement with Microsoft, which we're excited about.

Vivek Varma

Operator, next question?

Operator

Thank you. Michael Liedtke, your line is open and please state your affiliation.

Michael Liedtke - Associated Press

Yes, Michael Liedtke Associated Press. Just a question. It sounded -- a few weeks ago, it sounded like Microsoft was talking about getting a larger stake than what ultimately happened. Could you talk about how that evolved and why you decided on this? I guess it’s a 1.6% stake now. And also, for Facebook, how this -- raising all this money may affect your plans for doing an IPO?

Kevin Johnson

Yes, I think there has been a lot of rumor and speculation about financings and other things related to Facebook. As we sat down and started working through this next phase of our relationship and evolution of that with Microsoft, we effectively came up with the set of terms that we're announcing today as the ones that best fit for both companies.

And so, we think that creates the type of incentive alignment and the type of deep strategic partnership, both in terms of how we do it internally as companies, but -- and as well as what type of message does it send externally as well, that, again, positions us the way that both companies are looking to be positioned here. So that's really -- that's really been the focus here.

Michael Liedtke - Associated Press

And Facebook -- how about how does this affect Facebook's plans for an IPO?

Owen Van Natta

We're not talking about anything related to an IPO at this stage. Again, we're really focused on and excited about the deepening of the ad partnership. We also have an equity investment that's coming alongside of that and that's really where all our attention's been focused.

Michael Liedtke - Associated Press

Okay, thanks.

Vivek Varma

Next question, Operator?

Operator

Earl Barker. And please state your affiliation.

Earl Barker - Financial Times

Financial Times. I just wanted to clarify, is this deal just for banner ads? And if you -- if so, if you decided to extend it into a search deal along the lines of the MySpace/Google deal, would that be a totally separate negotiation?

Owen Van Natta

Yes. We're announcing an advertising partnership today. It's a partnership that extends across the adCenter platform for Microsoft. And we're not disclosing anything or announcing anything today as it relates to web search.

Earl Barker - Financial Times

Right. But this doesn't include web search.

Owen Van Natta

No, it does not include web search.

Kevin Johnson

Yes, I think, as I mentioned, certainly both parties, we've decided not to disclose certain aspects of the terms of the agreement. But certainly I'll reinforce Owen's comments that this is really about creating a win-win-win situation, one which looks at the unique assets that Microsoft brings to the table with our advertising platform, building on the aQuantive acquisition, the things that we've done organically to have a global ad platform at scale.

And this deal brings more inventory and more value to that ad platform. At the same time, it enables both parties to collaborate as Facebook looks at developing new ad types that are unique to the social experience. And because we're doing this together as partners, this really creates overall end-to-end value for users and advertisers.

So you should think about this in the context of the broad value proposition of value delivered to the user experience and value delivered to the advertisers in terms of the advertising capabilities that we're building.

Earl Barker - Financial Times

So are you saying it would effectively include search, if that were to happen? I didn't quite understand. Are you saying it does include it or it doesn't?

Kevin Johnson

No. We're not disclosing -- there are certain terms of the agreement both parties have agreed that it -- we're just not going to disclose at this time. Really, what we're focusing on here in this announcement is the overall ad platform and the work we're doing together.

Earl Barker - Financial Times

Okay.

Vivek Varma

Operator, next question.

Operator

Joe Menn, your line is open and please state your affiliation.

Joe Menn - Los Angeles Times

Los Angeles Times. Is there any minimum payment that's guaranteed under this for the right to advertise internationally or coordinate the advertising internationally? And if so, is there a number that's going to be disclosed today or tomorrow, because Steve Ballmer alluded to the fact that the partnership to date in the U.S. hasn't been immensely profitable with Microsoft.

Kevin Johnson

Yes, I'll comment first, and then, Owen, I'll let you jump in. This global partnership that we're announcing today, from a Microsoft perspective, we're very pleased with the economics on that commercial partnership alone.

But the fact that we've got that commercial partnership as the exclusive third party advertising platform partner for Facebook is one aspect of it. It's also the strategic relationship that we have and the way that we're collaborating together.

The equity position we've taken, from my perspective, not only provides the economic value we look for in terms of the advertising relationship, but also the broad strategic value that together we're trying to accomplish in the marketplace.

And we're not going to disclose specific terms, but there's certainly a responsibility that Microsoft has in this agreement. There's responsibility that Facebook has in this agreement, as we have in our past partnership. And we feel very good from a Microsoft perspective about both the shorter-term economics and the longer-term strategic value.

Owen?

Owen Van Natta

I don't have a lot to add to it except to just reinforce the point that -- we're really focused on is with 50 million active users we want to try to create the best user experience we possibly can. Advertising is a big part of that. And we think this relationship allows us to continue to focus on innovation and continue to focus on how it is that we create an even richer experience for users.

Joe Menn - Los Angeles Times

Thanks.

Vivek Varma

Operator, next question?

Operator

The next question comes from Om Malik. And please state your affiliation.

Om Malik - GigaOM

Hey, guys. Om Malik from GigaOM. Kevin, can you give me a sense of what kind of performance you've seen on the Facebook network from your previous advertising efforts? And, Owen, if you can explain to me what you would be using the money for? You raised 240 million. Is it for infrastructure spending or is it -- if you can give some guidance around that.

Kevin Johnson

Yes, let me start with your first question, which had to do with sort of our Microsoft view of what we're seeing on this overall ad platform partnership with Facebook. And the short answer is that we continue to see the monetization continue to improve and we've got many initiatives and actions underway that we believe will enable us to even drive that monetization even higher.

The partnership that we have with Facebook is very important in that. And it involves work we do not only in the user experience, but the work that we do in the different mix type, the work we do with our advertising sales force. But the trend is we see continued improvement and great progress with the overall monetization of the Facebook inventory.

Om Malik - GigaOM

Can you give some more specifics as to like what you've seen so far, I mean, in terms of like click throughs, how many ads or what kind of inventory status you are having?

Kevin Johnson

I'm sorry. Go ahead.

Om Malik - GigaOM

It sounds a little -- it is a little ambiguous, so I just was hoping maybe you can frame it with numbers a little better.

Kevin Johnson

Yes. I think unfortunately, I think both parties have agreed to certain aspects to this that are part of the business arrangement and the way that we're working together that are not things that we've decided to disclose at this time.

But I certainly appreciate the question. At a high level though, we both see the monetization on an eCPM basis and all that goes into that continues to improve. Owen, you want to take the second question?

Owen Van Natta

Sure, I'd be happy to. Hey, Alam. So in terms of what it is that we're going to be using the capital for, it's really continue to fund all the innovation and growth that we're seeing today. We've already talked a little bit publicly about how we're planning on expanding our user base -- I'm sorry, expanding our employee base dramatically next year.

We're hiring a lot of developers at Facebook. We expect to end the year at over 700 employees next year. And our user growth continues to be explosive as well. We're doubling our user base every six months. International has become an incredibly rich area of growth for the company. And obviously, there's a lot of technical operations that come along with that, that we want to be able to provide people with an incredibly rich experience.

And having very fast response times and having the type of technical infrastructure that allows us to build what it is that we can -- that allows us to build around all the innovation that it is that we want to continue to do and provide people with response times and so on, that's effectively what it is that we're focused on and what we'll be using our capital for.

Om Malik - GigaOM

Thank you.

Vivek Varma

Next question, Operator?

Operator

Ellen Lee. And please state your affiliation.

Ellen Lee - San Francisco Chronicle

Hi. It's Ellen with the San Francisco Chronicle. I guess I have two questions. One of them is just if you could provide some color on how this deal came about. It seems like it's been -- talks have been going on for the last couple of weeks.

I wasn't sure what the turning point was. And also, if you can maybe also add some color on how, what kind of collaboration we're going to see between the two companies, how deep it's going to be. Are we going to see people going back and forth between Redmond and Palo Alto?

Owen Van Natta

Kevin, maybe I'll start and you can jump in here.

Kevin Johnson

Great.

Owen Van Natta

We've been working with Microsoft for over a year now, and we already have a very deep partnership. So as you can imagine, there's discussions that are going on at all different levels of the company on an ongoing basis.

And evolving the partnership is something that we continually talk about as both are focused on innovation. Microsoft is doing a huge amount of building around adCenter. aQuantive has been a big strategic move for them.

And you can see how those discussions would evolve into what it is that we're able to announce today, which is a pretty substantial deepening of the partnership, as well as an equity investment that I think continues to advance both of our goals on those different dimensions.

Kevin Johnson

Yes. The only thing I would add is that I'm in the Valley a lot. And Owen and I have spent a lot of time together, especially over the last week or so.

But we've spent a lot of time together, and I think the time we've spent together really having some good candid open discussions about the future and strategic things that are strategically important to Facebook and strategically important to Microsoft, I think are key to any good partnership.

And I think that we've certainly had a good ongoing dialogue over the last year and certainly over the last several days. We've been heavily, heavily involved in finalizing the details of this global partnership.

Ellen Lee - San Francisco Chronicle

So was there a turning point? Did it happen today?

Kevin Johnson

This was signed today, but…

Owen Van Natta

Partnership discussions end up having bit -- starts in the areas where they accelerate and the areas where both parties need to go away and kind of think about how it is that you solve different problems and figure out how it is that you put these pieces together in a way that truly is accretive for everybody users, advertisers, both companies.

It's a challenging and complex thing and this is a deep strategic partnership that really requires a lot of that thinking to happen. So not inconsistent with that, these discussions have definitely had points where they accelerate rapidly and where both sides go away and really think about how it is that we put those things together.

Let’s say that we definitely -- as Kevin said, we've spent a lot of time together and you start to get to know each other and you start to really figure out how it is that you fit those pieces together. And once you can see that pass-through, getting these partnerships completed and memorialized in a contract tends to happen pretty rapidly and I think that's consistent with what happened here.

Ellen Lee - San Francisco Chronicle

So did it happen this morning?

Vivek Varma

Operator, we have time for two more questions.

Operator

Okay. Sasa Zorovic, your line is open. And please state your affiliation.

Sasa Zorovic - Goldman Sachs

Hi. This is Sasa Zorovic here with Goldman Sachs. Let me ask you this. In your partnership here that you've just established with Microsoft, does it really preclude you in any way or how do you look at building your own sales force to kind of go to customers directly here?

Owen Van Natta

Well, Microsoft is our exclusive advertising platform partner. And again, we're announcing today that that's going from U.S. territories to expand globally. And the way that the two companies work together today and the way that we plan on working together going forward is there's a huge amount of different needs that advertisers have.

We have incredibly explosive growth around users and we think a lot of the movement that is occurring right now around the socialization of the Internet requires a lot of innovation in terms of figuring out how to best serve advertisers and users with the best possible user experience.

And the Microsoft partnership allows us to take the unique assets that adCenter has, and combine them with a lot of the unique assets that we have ourselves to provide that overall experience. Facebook has an advertising sales force.

We work in coordination with Microsoft to make sure that we're serving advertisers and not creating confusion for advertisers. And consistent with that, and I think what we've done in terms of serving advertisers well up to this point, we're going to continue to work together to make sure that we just serve advertisers needs and we serve users needs and at the end of the day everybody's going to win from that.

Sasa Zorovic - Goldman Sachs

Thank you.

Vivek Varma

Great. Last question, Operator?

Operator

Brian Morrisey. And please state your affiliation.

Brian Morrisey - Adweek

Hi. I'm with Adweek. I'm interested, how are you going -- does this change at all how you're targeting the ads? Do you have access to Facebook's profile data in order to tailor the ads to user interest both on Facebook and perhaps on Microsoft's site?

Kevin Johnson

Owen, you want to take a shot and I'll add to it.

Owen Van Natta

Sure. User trust is core to what it is that we focus on every day at Facebook. And making sure that we are both able to provide a highly relevant and targeted advertising experience, not just in terms of what ads to what users, but also in terms of the context of those users who are seeing those ads and consuming that information, that's what we focus on every single day.

But we also at the same time want to make sure that users feel like we don't violate their trust in any way. And we certainly think about that in terms of how it is that we use information that they provide to target advertisements.

And we think even more deeply about how it is that information might be available to third parties. And so, again, there's just certain details of the partnership that we're not disclosing today in terms of how it is that we're piecing this all together.

But consistent with what it is that I just said, we're going to be innovating around how it is that we find the best way to target ads. And the other thing that I'd just point out, and Kevin, maybe you can expand on this, is adCenter is a big platform with massive scale.

And they do targeting on many, many sites across the West. And the ability to leverage that scale is core I think to that overall strategy. And so, I would imagine that a lot of the things that Microsoft is able to do with adCenter on other sites is going to be leveraged in terms of how it is that they are able to do that on Facebook. I don't know if you want to expand on that, Kevin.

Kevin Johnson

Yes, I'll just add to Owen's comments. I said, look, at the end of the day, this partnership -- one of the wins this partnership delivers is a win for users and for advertisers. And that win is delivered through highly relevant targeted ads, things that relevant to the user experience and that deliver a great ROI to advertisers.

And so, this partnership is all about delivering on that. And as Owen said, there's a lot of things we do together to deliver on that. The fact that with our adCenter and the continued growth of adCenter, with Atlas toolset and the broad reach we have of Atlas in advertisers with DRIVEpm in our ad network.

We've got a significant amount of opportunity to utilize those assets in the complementary way to what we're doing with Facebook to deliver on that goal of highly relevant targeted ads to the Facebook user base.

Vivek Varma

Thank you both. With that, we will conclude this call. As I mentioned earlier, there will be a replay of this call available for a week. The toll-free number is 866-435-1324 and the international number is 203-369-1020. Also, a press release would have crossed the wire during the early part of this call. That is the correct press release. And with that we'll conclude the call. Thanks, everyone, for joining.

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