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Here’s the entire text of the Q&A from Palm’s (ticker: PALM) fiscal Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you very much, sir. And again ladies and gentlemen, if you wish to ask a question, please key “*” “1” at this time. If your question has been answered or you wish to withdraw your question at any time, please key “*” “2”. Questions will be taken in the order they are received. Please key “*” “1” now to begin. Our first question comes from the line of Paul Coster of JP Morgan. Please proceed.

Q - Paul Coster

Good afternoon. A quick question on Europe, first of all. We’ve had a wonderful start with the Treo in Europe, what’s different this time around, Ed? Sounds like you’ve got some binding commitments. What is the nature of those commitments?

A - Edward Colligan

Yeah, the Treo has done okay in Europe so far but we’d like it to do better and we’re going to continue to work on that. We’ve really realigned our focus more sharply on smartphones; in fact we recently restructured really our sales effort to be more directly focused on accounts rather than geographies. I think we were probably aligned not exactly right and now I think we’re much better aligned. As I said we put John Hartnett in charge. John has a lot of international experience and he has quickly moved to realign the team and to get us more capable, I think, of working with our carrier partners there. Part of the results of that and also a lot of hard work over the last year in developing new relationships is some additional commitments from carriers in Europe. I think part of that is the result of a good sales effort and also a great product development effort, some of which was really targeted directly at those European customers and allowing us to have some success with some large partners in the future. We won’t name exactly who they are today, but we do expect them to contribute to our business in calendar 2006.

Q - Paul Coster

But you did mention one international carrier, implying multiple properties for that one carrier and that there was, it sounded like the relationship was deeper than typical, this was not an on spec development of product.

A - Edward Colligan

I’m not going to go into details about it, Paul, but as I said, there is a carrier partner that we are working closely with to deliver products in calendar 2006.

Q - Paul Coster

Okay. And then my last question is stateside channel inventory compared to this time last year and can you give us some sense of how it stands, and what’s different this year relative to last year when it felt like there was a bit of a backup of channel inventory?

A - Edward Colligan

On the handheld side of the product line or the smartphone side of the product line, in fact we’re in better shape from an inventory perspective. The weeks on hand on the handheld is down by about a week relative to last year at this time, and we feel a lot more comfortable about the position that we’re in on the smartphone side, a), relative to last year, and then, b), relative to the relatively lean position that we entered the quarter at.

Q - Paul Coster

Okay, great. Thanks very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jonathan Hoopes of ThinkEquity Partners. Please proceed.

Q - Jonathan Hoopes

Yes, thank you very much. Ed, I understand there at Palm there’s been a considerable effort recently to determine how to improve the diversity of the revenue makeup. I’m specifically interested if any decisions have been made or if management is any more inclined or closer to deciding on a strategy that moves Palm more into a recurring revenue structure?

A - Edward Colligan

Jonathan, we’re consistently looking at opportunities to improve our business metrics, in particular, our gross margins. We are doing some of that through just more efficient product development and better cost structures on our products and improving our costs in a number of ways. In addition to that, we certainly are consistently looking for ways to reach out to our customers and monetize that relationship in different ways. We have some elements of services business today. We do have a pretty significant resale of software over the Internet today to our customers through various partnerships and we’ll continue to look to expand that. As we look at our cash position, we feel more and more comfortable that we have an ability to invest that in some potentially ways of expanding our IP portfolio and also our technology footprint. And hopefully those investments will reach potentially some types of recurring revenue opportunities. So that’s something we’re focused on. It’s something we’re working hard on. And hopefully we’ll be able to deliver that in the next year.

Q - Jonathan Hoopes

Thanks Ed. Congratulations on the quarter as well.

A - Edward Colligan

Okay.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jeff Kvaal of Lehman Brothers. Please proceed.

Q - Jeffrey Kvaal

Thank you very much. My question is regarding the seasonality comment Andy that you made. I’m wondering, does that apply to each segment itself or just the overall business is becoming more Treos, which is therefore less seasonal?

A - Andrew Brown

Yeah, my comment reflects for the business and its overall the whole portfolio. As you noticed, if you take a look at our year-over-year comparisons we’re now 61% smartphones and 39% handhelds; a year ago we were completely flipped around. And as we see things, the handheld business will continue to be somewhat seasonal, particularly in the November quarter but we haven’t seen that seasonality in the smartphone business. What we’ve seen, really, is just continued strong growth regardless of the season.

Q - Jeffrey Kvaal

Okay, so we should expect the handheld business to continue its seasonal pattern as just a smaller mix of the overall pie?

A - Andrew Brown

Yeah.

Q - Jeffrey Kvaal

Okay. That makes sense. And then secondly would you, I mean could you give us some sense of which direction the Treo ASP might head in the upcoming quarter? It seems as though you have a couple things at your back, whether it’s the removal of rebates or the pricing for the 700?

A - Andrew Brown

Yeah, well as we look into Q3 in particular, although we don’t give specific ASP guidance we would anticipate that in fact the overall blended ASP for Treos will increase as a result of the introduction of the Treo 700w.

Q - Jeffrey Kvaal

Okay. And have you given us any sense of where that might come in for the range?

A - Andrew Brown

As far as the ASP range, no, like I said, we don’t give guidance on ASPs.

Q - Jeffrey Kvaal

Sorry, just for the 700 itself?

A - Andrew Brown

No, we have not.

Q - Jeffrey Kvaal

Okay, we’ll look forward to that.

A - Andrew Brown

Great.

Q - Jeffrey Kvaal

Thank you both very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Mike Abramsky of RBT Capital Markets. Please proceed.

Q - Michael Abramsky

Thanks, it’s RBC. Congratulations on a very good progress this quarter, guys. Could you talk a little bit about the timing of the 700w that you’ve built into your guidance? As much as possible, just give us some idea of what you’re betting on in terms of scope of initial sell-in into Verizon and the timing of the release. I understand there’s some rumor that the product is going to be out as early as January.

A - Edward Colligan

Mike, we had stated that we would do it early in 2006 and we will deliver against that. I don’t want to give you an exact launch date yet because that is a competitive thing that we’d like to hold back at this point but we’re planning to launch in early 2006. We do, it’s very early on the Windows Mobile platform and products on that platform, so it’s certainly not something we want to get ahead of ourselves on. We’d like to see some results from that. But we do have some very strong interest from our carrier partner Verizon and also from enterprise customers in this product from what we can see, and so we expect to contribute at a reasonable level to next quarter’s revenues.

Q - Michael Abramsky

Okay. I guess the question is there’s a bunch of moving parts on the 700w because you obviously have Microsoft itself and the timing of both deployment on the server side of Exchange as well as your completed OS, your hardware, carrier qualification, could you just talk a little bit about how you’re managing the risks of that? We saw with RIM, Ed, that they had a little bit of trouble getting EVDO out with Verizon with the 8700 and just wondered how you’re considering that in terms of your guidance going forward?

A - Edward Colligan

We’ve taken all that into consideration. I’m very confident we will deliver early next year. We have already moved beyond EVDO certification so that is not something that would be standing in the way of us delivering. We will have Exchange ActiveSync support out-of-the-box. As Microsoft delivers their next generation of that platform level effort, then we will be prepared to deliver the update to our customers, which would enable that to be deployed. And so we’ve taken all those elements into consideration and we think we’ll deliver a very compelling product early next year.

Q - Michael Abramsky

Okay, great. Just on your gross margin guidance, I think you had sort of talked about several contributions to that guidance in terms of product mix and lowered product cost and seasonality, which one of those has the biggest impact?

A - Andrew Brown

Yeah, Mike, I think the two that have the largest impact right now are clearly the product mix. I mean, moving from 39% smartphones to 61% smartphones year-over-year is a fairly significant move. Smartphones are the growth part of our business. But the other part of this is we are starting to see some very nice product cost reductions, a), as a result of what our team is doing, but then, b), as a result of the volume increasing. As we’ve mentioned earlier I mean, our year-over-year Treo growth, we’re at about a million, almost about 1.1 million units, it is up almost 0.5 million units just year-over-year, so we’re seeing that growth contribute to those product cost reductions also.

Q - Michael Abramsky

Okay. And just the last question, we’ve heard that, I mean the pricing of the 700w could be quite healthy so we say. Just wondering if you could make any comments on the pricing strategy for that product and how you see that affecting demand?

A - Edward Colligan

Well, we don’t, Mike, we don’t set the end user street price. We work with our carrier partners to do that. Our pricing to our carrier partners is competitive relative to other products that have the same basic functionality in them. We hope that we are able to demand hopefully a slight premium for our differentiation and the design of our product. And certainly the carriers recognize how much ARPU we’re driving for these products and so they’re excited about bringing them in as part of the line. In the end, Verizon will set the pricing to the end user. We think it will be very competitive relative to products in the marketplace and that people will think they’re getting a great value.

Q - Michael Abramsky

Thank you, Ed.

Operator

Thank you very much sir. And ladies and gentlemen, your next question comes from the line of Tavis McCourt of Morgan Keegan. Please proceed.

Q - Tavis McCourt

Good afternoon, a couple of questions. First, Ed, on the new handset launches for next year, are we talking a combination of both new platforms and potentially new brands beyond Treo or simply new models within Treo?

A - Edward Colligan

I would not expect us to do anything beyond the Treo brand. I think the Treo brand is getting enormous traction in the marketplace. As we mentioned earlier, the loyalty and the perception of Treo as a brand is tracking very strong in our surveys. So I don’t expect we’d do something beyond that. Certainly what we’re focused on is new radio technologies, exploiting both platforms that we’re on more effectively, in continuing to add new capabilities from an application level, and also in conjunction with new carriers and new geographies adding new capabilities, and finally focusing on improving consistent improvement in our form factor and in our design, so we’re always looking to how can we improve the design and make it even more compelling for users in the marketplace and that’s something you can expect to see next year.

Q - Tavis McCourt

Got you. And on the channel inventory issue, I’m not sure if you answered this question before, but the, obviously we’ve seen a lot of demand for the 700 as well but the channel inventory now consists largely of 650s. Can you give us some kind of measure of the channel inventory for the 650s right now or kind of qualitatively how it compares to last year at this time?

A - Edward Colligan

We think channel inventory is in great shape certainly relative to last year, it was a very significant position. This year it’s in much better shape and we’re confident that the 650 will continue to sell. It’s on every one of our other partners’ networks. It’s, the 700 is only on Verizon, which is, I think, going to do really, really well but the 650 will continue to be in our other products. I expect the 650 to be at a discount. You’ve seen recently the 650 as low as $199, even $189 at Sprint with a multi-year plan. So that should continue, it should continue to be a robust seller in the marketplace and we think our inventory position is great going into the, following through on this seasonal time and also just that product’s success.

Q - Tavis McCourt

And I guess the elephant in the corner here is the issues with, with RIM’s potential injunction. It looks like Good’s enterprise customer growth ramped up a little bit in the quarter ending November, but do you have any insight on perhaps how your numbers were helped or not helped in this particular, in the November quarter related to issues in the enterprise market?

A - Edward Colligan

Yeah, I think our market share gains have been very consistent throughout the year so I don’t know, I don’t believe that that, RIM’s issues in the courts are really making a significant impact on us at this point. I really believe that we are winning in the marketplace because of a differentiated product on a broad range of e-mail platforms, and now going to be on a broad range of underlying platforms that we can deploy to. So I think our open standards, industry standards strategy is going to play off, play out, and that in particular, as we deliver this product based on the Microsoft platform, I think we’ll get additional traction in the enterprise.

Q - Tavis McCourt

Got you. And a couple questions for you, Andy. What is the valuation allowance now, after the partial reversal?

A - Andrew Brown

The valuation allowance after the partial reversal; what’s your second question? We’ll get that for you.

Q - Tavis McCourt

My second question was, you talked about one of the reasons gross margins expanding in the back half of the year, potentially better returns data and lower warranty expense. Can you give us any data on what the warranty expense was this quarter and maybe what you expect it going forward?

A - Andrew Brown

Well, certainly that, we look at reducing our returns, thus, reducing our warranty expense as, it could be a key contributor to future margin expansion. We did see it come down a little bit this quarter. And we continue to work on making, A, the out-of-box experience better for our customers, and developing higher quality products. But we would, like I said, that would be, it’s a key opportunity for us to reduce margins as we move into ‘06.

Q - Tavis McCourt

I would agree. And then finally on, it looks like your, basically, OpEx is pretty flat for the back half of the year after a big ramp-up in Q1. Are we just getting to a point now in kind of your scale where we may see a little more operating leverage than we’ve seen in the past or is this kind of some unique factors that have allowed kind of operating expenses to kind of remain steady here for a couple quarters?

A - Andrew Brown

Well, I think you already are seeing operating leverage. If you take a look at the guidance that we’ve given for the fiscal year, our operating margins are expanding from last year. We do think there’s some opportunities as we continue to scale and we, as we believe we will, that we’ll get additional leverage on the operating margins, I mean, the, one of the key things we decided about a year ago was to make the investment in our product development engine and I believe you’re starting to see that really pay off in the marketplace with the introduction of the 700w early in 2006 and the other three smartphones that we plan on delivering during that timeframe.

Q - Tavis McCourt

Great, thanks, a lot.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Daryl Armstrong of Citigroup. Please proceed.

Q - Daryl Armstrong

Thank you very much, first, quick question. Relative to components, are you seeing any constraints at this time that could potentially impact any of your shipments, and then I have a follow up.

A - Andrew Brown

Well, we are not seeing any constraints at this point in time. I mean, certainly there’s always components that you need to make sure we have the volumes to deliver against, for the next quarter’s build, but so far our team is doing an excellent job delivering those components at competitive costs. As we said, we shipped 602,000 Treos this quarter which is a record for us, certainly, on total volume and so we didn’t see any supply constraints this quarter and we don’t foresee any in the next quarter.

Q - Daryl Armstrong

Thank you. And then also, in terms of the gross margin improvements for the February quarter, you said that mix was a pretty significant contributor to that improvement. How does seasonality within the handheld part of your business impact your thinking of what the mix will be in the February quarter compared to the quarter you just reported?

A - Andrew Brown

Well, handhelds generally are very strong this, the Q2 it’s, you know, gift giving holiday season and our $99 products, for instance, from a volume perspective, do very well. So we would expect that to come back a little next quarter relative to unit volume. And so you can expect smartphones to be even a bigger part of the mix.

A - Edward Colligan

Yes, I mean, smartphones clearly will be a bigger part of our mix as we move into Q3 that clearly has a positive impact on our gross margins. But also the introduction of the Treo 700w, and what I’d mentioned earlier was the, we’re getting better than expected product costs as we increase our volumes of Treos I think it’s really contributing to our gross margins as we move into the second half.

A - Edward Colligan

Yes.

Q - Daryl Armstrong

Great. Thank you.

A - Andrew Brown

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Pablo Perez of ThinkEquity Partners. Please proceed.

Q - Pablo Perez-Fernandez

Hello, guys, excellent quarter. I have a couple of questions regarding your gross margins. Obviously, your gross margins are expanding because of mix, which is what we were looking for, but it’s obviously better than we were looking for. So the first question is when I look at the gross margins of the 700w compared to the gross margins of the 650 when it sort of came up first, Jonathan and I are wondering, if they’re much better, relatively the same, can you give us some color?

A - Andrew Brown

Yeah, Pablo, we obviously don’t get into gross margins per product that would be a fairly lengthy spreadsheet. But as you’re aware, as we introduce new products they typically come out at higher price points just like the 600 did, the 650 did, the 700 will and obviously this price breaks as volumes increase. But from an overall standpoint, we believe gross margins for the Treo 700w are pretty comparable to what we’ve seen with the Treo 650. And I think a bigger component here on the gross margin really is the total mix of smartphones relative to our business as a whole and then, secondarily, just the overall ability to get better product costs as we increase our volumes.

Q - Pablo Perez-Fernandez

Okay. Another question has to do with the, you mentioned that a lot of enterprises are, and obviously carrier customers are looking at your new smartphones. Do you have a, can you give us some sense of how much more of your business came from enterprise sales as opposed to prosumers buying the smartphones this quarter and how that relates to evaluations of the 700w?

A - Edward Colligan

Pablo, our business continues to be driven by the prosumer, no question about that. But we’re expanding in enterprise as we work closely with Good and our other partners, it has continued to be a successful element of our business. We, I do expect it to become a bigger and bigger part of the business as we launch the Treo 700w. I think that product is particularly well positioned for the enterprise. Not only is it a Windows-based product, which has been in demand in the enterprise but also as Microsoft delivers their push-based e-mail solution, I think that there’s a real opportunity to drive volume deeper into companies, into businesses, than it has been to-date. If you look at most of our deployments and RIM’s, they’re generally at the director and above level. And these are incredible productivity tools for businesses. And I can’t believe they won’t deploy them more deeply if the costs become more reasonable, and I mean the recurring monthly costs become more reasonable relative to an out-of-box solution that will be deployed with the Treo 700w on the Microsoft platform. So I expect it to continue to grow, and as a part of our, a significant part of our business.

Q - Pablo Perez-Fernandez

Okay. Finally, one last question is, both Jonathan Hoopes and I have been sort of trying to push you to see how you guys can do some recurrent revenue and to that effect we just saw something interesting happening in Italy and I’d like your comment. Telecom Italia Mobile just started deploying selling Treo 650s by adding about 5 to 10 euros in the monthly bill of customers, and not charging for the actual device outright? Was that driven by you or the carrier or do you know any other of your carrier partners anywhere else are looking at this sort of model which we see as a really good way of lowering the bar on ownership?

A - Edward Colligan

Well, the carriers get real creative trying to figure out how to put these devices in people’s hands because they are seeing significant ARPU increases. Our average ARPU is more than double the average of a standard handset, and it is higher than any other smartphone that certainly I’ve ever seen the carriers put out relative to information on various ARPUs. So I think you will see the carriers get more and more aggressive and creative in getting these devices in people’s hands. It’s one of the things that as people get exposed to access to the web, MP3, e-mail, a lot of very powerful applications on these devices, we expect smartphones to become a bigger and bigger part of the overall cell phone business and that certainly would be a very positive trend for our business. So I think, I can’t comment whether other carriers are doing the specific thing that Telecom Italia is doing. We certainly work with all the carriers to look for creative ways to get these Treos into people’s hands and we will continue to do that as well as continue to look for opportunities for us to expand our margins and our business through a more direct relationship in offering services and applications to our customers.

Q - Pablo Perez-Fernandez

Thank you very much. Great quarter.

A - Edward Colligan

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Ted Chung of Bear Stearns. Please proceed.

Q - Ted Chung

Yes, hi. Just to drill down on the gross margin question again, can you discuss more in detail how much the warranty, warranty reserve changes have impacted your full guidance?

A - Edward Colligan

On the gross margin, Ted?

Q - Ted Chung

Yes.

A - Edward Colligan

You know, quite frankly, we have a relatively conservative expectations for warranty improvements in the second half. Like I said earlier, I think the two really key elements of what we believe is driving our gross margins in the second half is the product mix, which is clearly shifting to our growth engine which is smartphones. And then secondarily, it’s the increased volumes that we’re seeing in the smartphones space through product cost reduction, give us product cost reductions, not the warranty.

Q - Ted Chung

Okay. And the second question, the exclusivity for 700, when would that expire from Verizon? When should we expect to see it from other carriers?

A - Edward Colligan

Well, we’re, we can’t get into the specific contractual relationships with our partners. But suffice it to say that next year there will be other partners who have Windows Mobile-based products from Palm and we are working on those products today and we hope to roll them out in reasonably short order but we just can’t get into the, particular contractual relationships with each one of the carriers.

Q - Ted Chung

To retrace it, I mean, should we expect 700 in the European market, would that be part of the exclusivity or it is just the US market?

A - Edward Colligan

You can expect products from us in other geographies around the world both on CDMA and GSM/UMTS networks over the next year.

Q - Ted Chung

Okay. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Andrew Neff of Bear Stearns. Please proceed.

Q - Andrew Neff

All right, just to follow-up a question just on what your anticipation and expectation is for competition, as you’re well aware there’s a number of comparable products that are emerging and they’re, I guess, February March April time-horizon. How do you plan to react to that? And I guess the other thing in terms of the four products you talked about obviously you said that one’s coming soon, I just wanted to clarify, is that four incremental beyond the 700, and two, can you give us any sense on timing of those?

A - Edward Colligan

We have, let me talk about the four products next year that includes the 700w. And as far as the competition is concerned, I think what we have to continue to do is differentiate our products and make sure that people do understand that differentiation. As you will see in our Windows Mobile product in particular, we have added a number of application capabilities on top of the standard Windows Mobile platform. Those capabilities do make it a unique Palm experience. We expect users and reviewers will recognize that. And continue to make that a differentiation for us going forward. We obviously have to continue to innovate as well on our other platforms, the Palm OS, and create new design centers and new products that put us in a very competitive position. So, we think we have a great start. We think the Treo brand is really well positioned. We think we’re gaining market share right now and have a lot of momentum and I think with new competitors coming into the market like the Nokias and Motorolas of the world, I believe they’re going to validate this category and that will result in additional sales of Treos because I think we will still have the better product. So as people walk in looking for those products because there’s a lot of advertising and other communications from those companies, I think we’ll get our fair share of that growth.

Q - Andrew Neff

Okay. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Dominic Vignola of Merrill Lynch. Please proceed.

Q - Dominic Vignola

Congratulations, guys. My question is around your channel opportunity. As you look around the world at your channel partner opportunities, what should we expect from sales into your existing channel, and the balance would be sale into new channel and carrier opportunities in 2006?

A - Edward Colligan

Dominic, I really believe there’s really, the vast majority of the upside, since we have reached 72 carrier partners, we certainly have some strong upside reaching new partners in other geographic areas. But here in the United States we’ve done very well reaching the core, the major carrier partners in the United States and I expect the growth to come from additional growth of the smartphone segment of the overall cell phone business and so us getting a bigger and bigger share of that and continuing to work with our partners to have a bigger and bigger share of that. There will be additional growth, obviously, from bringing on new partners in Europe and in Asia and so in those areas of the world the vast majority of the growth will come from new partners so it will really probably be, you know, to a certain extent, probably 50/50 on some level because a big part of the international growth will be from new partners and a big part of the domestic growth will be from existing partners.

Q - Dominic Vignola

Thank you.

A - Edward Colligan

You’re welcome.

Operator

Thank you, very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Brian Harvey of Wm Smith. Please proceed.

Q - Brian Harvey

Thanks, just one quick question. I thought we’d just get a little more insight on your take on how much the 700w affected the sell-through this quarter.

A - Edward Colligan

It’s really impossible to tell relative to which customers actually postponed purchases. We do, we do expect that some of it came from that because we did see some falloff in Verizon in particular which is going to get that product so, and we also have our own anecdotal evidence of customers we’re talking to in the marketplace, so we do think that made some impact. But we also believe that that is, that business is coming forward so as we release the 700w, we hope those customers waiting will see that product and move forward with their purchases, so we think it’s more of a delay than having lost that opportunity.

Q - Brian Harvey

Okay. I appreciate it. That’s all I had.

A - Edward Colligan

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen that concludes our Q&A session for today we’d like to turn the call over to the management team for any closing remarks they may have.

Edward T. Colligan, President and Chief Executive Officer, Director

Thank you everyone. In conclusion, I believe our momentum will continue and I have great confidence in our long term performance. We appreciate your interest in Palm as we execute against our vision. Delivering profitable growth, great products, satisfied customers, and reaching out to new markets globally. Thank you for your time today and I look forward to speaking to you all soon.

Operator

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today’s conference call. This concludes your presentation. You may now disconnect. Have a good day.

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