AT&T's Management Presents at Bank of America Merrill Lynch Media, Communications & Entertainment Conference (Transcript)

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AT&T Inc. (NYSE:T) Bank of America Merrill Lynch Media, Communications & Entertainment Conference September 11, 2013 1:15 PM ET


John Donovan - SVP, AT&T Technology & Network Operations


David Barden - Bank of America Merrill Lynch

David Barden

All right, guys, we will start the next session. Thanks, everybody, again for being here. We are very pleased to have with us coming up on stage John Donovan, who is the head of all network and technology at AT&T, both wireline and wireless; reports directly to Reynolds Stevenson and basically has control over almost everything at AT&T that is not a sales and marketing function. So we have had some really interesting talks about a lot of different parts of the US and global wireless and wireline business over the last couple days. He is here to present a couple prepared remarks. Then we will sit down for little chat. Please welcome John Donovan from AT&T. Thanks, John.

John Donovan

Good morning folks. Let me start with a Safe Harbor statement. No shock to you. I would refer you to our website for additional details today we may be talking about are forward looking and making forward-looking statements. Let me start with where we are on the 4G LTE and provide a couple of highlights for you. We have been working feverishly getting our 4G LTE network built out, but I wanted to highlight for you couple of things that we have done that I think have making material differences in the customer experience. The first is we’re -- this network is performing as the premier network in the United States for reasons that are architectural, so if you look at some of the things highlighted there, a highly distributed core allows us to get lower latency, faster speeds. Our deployment includes the deployment of remote Radioheads, which is really splitting the electronics and taking the normal loss that one gets from the ground to the tower and putting active components in the tower, which affords us a faster speed. We were much more aggressive much earlier than our competitors at getting Ethernet over Fiber for Backhaul, which allows us a software or parametric upgrade for the faster connections and well over 90% of our traffic right now was handled over Ethernet. As a result of technology that we launched first globally is the Circuit Switched FallBack which really allows us to have one radio in the handset which means that the battery power performance is going to be better. And so that we really have a seamless interaction between our HSPA+ in our LTE network, so I wanted the bottom of the slide there today announce that our LTE-Advanced is now ready and so what that means for us is that our network is now ready to do carrier aggregation which is the capability to take spectrum that is not contiguous and have that operated as if it were contiguous block of spectrum, so you get a capability there that allows the better performance for the spectrum that we have.

The second key capability is the self-optimizing network capability and then the last and certainly an important element for LTE-Advanced is a higher order multi-in multi-output capability at both antenna and the tower and then in the handset. So lot of things going on and extending our build, just to highlight on some of the numbers there on our 4G LTE network we are at 397 markets launched. I’m going to update you today that we’re announcing on the right side there that we’re nearly 240 million people that are covered with the LTE networks, so that’s an update on the number there, 397 markets and 240 million pops. If you look at some of the other dimensions there of the network, we have now external parties that have validated that we have the most reliable and the fastest network in the LTE technology. So we’re excited about what that does for our customers.

We are excited it’s been a long road to get here, but we have captured the crown of the fastest and most reliable 4G LTE network. And it’s external parties that are doing the validation it’s not just the internal measurements and as you can see over and over again the more recent independent studies really have us in a good position relative to our competitors. And then just a quick update on Project VIP we’re coming out on the -- nearing the first anniversary -- the announcement of that Project VIP and so we’re on track right now with both the footprint expansion that we had announced last year and with the speed upgrades. We will see that we are now up to 17 markets, 17 states of our footprint that have the 45 meg speed upgrade. The footprint itself has expanded according to plan and we’re also on track with the fiber into the multi-dwelling business locations.

So we have had success with accelerating some of our customer ads in this broadband footprint and I think we’re in a very good shape with that and as well as the wireless network, our wireline network is also award winning. The Video Company of the Year Award by Frost and Sullivan was something that we’re very proud of and so, in addition to the wireless network accolades, the wireline network accolades are starting to pile up as well. So with those couple of quick comments and highlight, I will let Dave take us to the next step. You’re ready?

Question-and-Answer Session

David Barden - Bank of America Merrill Lynch

Yes, sure thank John. So thanks for that update. I think that obviously as you said, you were coming up on that first anniversary of Project VIP. There is actually a lot that goes on inside Project VIP, it’s wireless it’s wireline, but I get you’ve kind of got such a vast mandate. Within the context of what AT&T’s focused on, could you kind of give us like you cardinal ranking of what you’re focused on first, second, third and then we kind of work through where you stand on each of those kind of key priority?

John Donovan

Sure, the first priority for us is the wireless network quality. Given the history and the journey, there is a significant brand overhang by how you perform in the wireless network and so while it sounds pretty straightforward there just a whole host of things within establishing and maintaining wireless network quality whether that’s staying in front of capacity curve with the announcement of all the new handsets, but changes in operating systems the explosive growth in social networking moving from basically text based to more of pictures and video and the upstream downstream dynamics, what happening at venues that all of those sort of things are process intensive. They are built intensive and they’re also engineering intensive. In order to do this well, it’s a highly complex technology in a very rapidly changing demand environments, so that’s our first priority it will forever be our first priority because that’s our face to the customer and within the network team while we certainly have made a lot of progress in last couple of years and we’re proud of what we’ve accomplished. We never declare a mission accomplished, it’s always an ever changing game. And so that’s the number one priority that we face to the customer.

The second thing is maybe it has a little further horizon Dave and that is that the opportunity that real architecting of the network of [indiscernible] and generally I’ll call it in the cloud space. But more specifically it includes an evolution from a hardware centric environment to a software centric environment where not only our internal enterprise but our service delivery network to customers takes advantage of a modern architecture. I think the new architectures are materially more cost effective, we’re highly flexible and I think provide us an excellent opportunity to be more capital efficient, to be much faster in our cycle times. So that’s an important element.

The third one which is somewhat linked to the second but the cost curve. I mean we have to every year pumped more and more of Moore’s Law and actually based on some of the math the Moore’s Law is not enough. We have to drive the cost of the business down. And so we are very, very focused on taking advantage of the scale that we do have to deliver an effective cost not only for the current environment but as we start to project some of these new architectures out, we want to make sure that the cost side of the business transforms.

David Barden - Bank of America Merrill Lynch

So just looking at -- so to start with; number one, the network quality perspective. I think to your comments that there's a brand overhang about network quality that can emerge, and I think that one of your competitors, T-Mobile, is trying to take advantage of that at the margin by highlighting weaknesses that have existed in the past and past experiences people might have had with the AT&T network. At the same time, you are out there projecting an image that you are now the most reliable network, the biggest, the best, and Verizon doesn't seem to actually have come back at you with a very significant pushback. It almost seems like you kind of assumed that mantle. But it doesn't feel like it's actually kind of totally owned the presence of AT&T. AT&T isn't really the most reliable network in the minds of the consumer on the street. And it seems like there's an opportunity you might have if this is in fact where you are today from a network perspective to change people's minds. How do you do that?

John Donovan

Well, I think that there is a series of steps that you take, both internally and externally. The first thing you have to do is you have to get your employee base loud and proud about what you do. I mean we have millions of contacts with customers every day and if there is a seed of doubt with somebody’s mind it projects in the confidence of the conversations that they have their customers, whether that’s in a retail store or whether that’s a customer care interaction. And so what we’ve done is we’ve really made sure that we believed the story ourselves. And so we sort of have to go to employees and say we are loud and proud about this and we’ve showed all of our data and I think we’ve got the internal belief that’s necessary.

Externally, I think, we’ve been really pushing the message. And whether that’s be through broadcast media, whether that’s through the broader reach or whether that’s through customer-to-customer interaction that you have with an enterprise customer. We have been trying to make this a data driven not a marketing driven approach. And I think right now the data, as it relates to network quality, is really working in our favor because every month that goes by we’re picking up more cities where we’re independently being validated as the best network. And that momentum is starting to build. And I think it’s going to take some time. I mean wireless networks train customers around what’s there. And so customers get accustomed to not using phones where they don’t think it’s good. And you sort of have to reacquaint them to use it everywhere, it works great. And so there is a lag in perception.

I highlighted for the last night at dinner I had recently a situation where a CEO was talking about network quality and then he said your network quality isn’t what it needs to be and asked him if he would permit me to go back and take his number and kind of look at it and he had dropped eight of his last 2,700 calls and when I told him that he was shocked and said thank you but I really, really have not been dropping calls, it’s just you got to get him out of that perception. So we have internal activity, we have external activity.

David Barden - Bank of America Merrill Lynch

So two questions on that. One is you refer to these external surveys that are the arbiter of goodness of the network, but it's kind of a secret as to who they are. Why is this a secret? Why isn't AT&T more loud and proud about who's telling everyone that you are the best network?

John Donovan

Well, I think that there are certain of the -- what we have to do is we have to stay consistent with the measurement principles of the survey. So whether it’s J.D. Power given us an award for the in store experience, whether it’s Matrix that does things. We have to stay consistent with what -- how the evaluation was done what a structure they do. You can’t say because I’m the best in 50 states, I am the best nationally. There are structured approaches that each of these types of surveys are doing, we’re doing our best. We’re doing our best to try to be as transparent on all other sources that are out there and then we’re just going to let the facts play out over time. And I think right now the facts work in our favor.

David Barden - Bank of America Merrill Lynch

So when you go to a market like -- pick a market like Chicago for instance and you say, we are the best network here in Chicago. Can you quantify the difference between how customers respond to that? Does your churn go down 2 basis points? Do you take 4 percentage points of incremental gross add share? Does it translating into real results?

John Donovan

Yes, it is unique to every market Dave. So it’s funny you should pick Chicago, Chicago was one of the markets where we made the most progress in the last 24 months, and it’s real challenging market because of the density and high rises. But it is the market where Matrix said we have the best network and we put it on the back end of the commercials that say now the number one network in Chicago. It does make a difference. Now, it does make -- our brand is differentially positioned by market depending on whether where the wireline provider we’re not the wireline provider. And so the dynamics are going to be unique to the market so this really is a local game when it comes to wins and losses. And what it does that is how it manifests. It manifest in churn rates, it manifest in win rates and port ratios and those sorts of things.

David Barden - Bank of America Merrill Lynch

So I think a lot of your competitors would agree right now that a lot of the competitive tangent point seems to be around network, maybe not today's network but the network that everyone wants to have when their LTE network is built out in another year, in another six months, whatever that happens to be. And so you guys feel pretty good about where your network is, but it's pretty clear that Verizon wants to take that title back. They've increased their capital expenditure for the second half of the year, presumably to try to improve their capabilities. Sprint was just on stage talking about how in the second half of next year, they want to really be able to wow the market with their 2.5 gig speeds. It kind of feels like there's a window of opportunity where maybe you are the best network right now.

But is that, whether you are or you aren't the best network, does the conversation get much more confusing for the consumer and pretty soon having the best network will just not really matter anymore? It's about who can convince people they have the best network.

John Donovan

You know it just paraphrase what you just said because the first part I fell in love with it. I think what you just said is they are increasing their investment to catch-up. If you think about that compared to where we were in ’08 and ’09, would you have pictured that you’d be saying that?

I think that it’s going to be fiercely competitive around the network. But from the standpoint of how do we think about it internally that AT&T, the network should be ubiquitous and invisible.

So, the phrase I always use internally is it’s like oxygen. It’s only visible in its absence. And so at some point the value proposition of the industry is at some point should shift from the network in to what the customers do with it and I think you’ve seen more of a branding activity at a local level shifting to how does your life get better.

So if you look at the enhanced services that we’re stacking on to our all IP network end-to-end with digital life. The digital life, an extension of U-verse or is it an extension of mobile. Its IP based, it’s in the home. You roll a truck. But it’s all over wireless.

So the more of these sorts of services connected car, digital life that we begin to stack on, that’s where I think the industry itself is going to move from, I have a network, it’s fast, it’s where I need it, to how is my life get different and I do think that our emphasis in these new growth areas will provide for us a significant growth opportunity as people move from just simply carrying devices for communication and applications to managing a digital home and kind of the whole life management.

David Barden - Bank of America Merrill Lynch

Is LTE Advanced carrier aggregation enough of an evolution in your ability to maximize network capability relative to what the kind of advertised capabilities of the TD LTE network architecture that's coming down the road might bring?

I think there's a theory that TD LTE is just more dynamic. It offers greater download speeds. Speed is equivalent to capability; ergo TD LTE is going to be inherently advantaged over any kind of paired spectrum or carrier aggregate spectrum approach.

John Donovan

I think that there are phases to how you think about network performance and theoretical speed is one of them. But then network start to get loaded and actual speed starts to matter. And so theoretically having a high speed network but doesn’t have the right backhaul can produce the wheel of death that you can stare at and have a theoretically fast network not delivering basic performance.

And so I think that we’re going to go through a curve of nominal speeds and theoretical claims to the practical performance. And so from our standpoint what LTE advance does is it moves from a game of exactly where your spectrum to a game where total spectrum is going to be the important determinant of your capacity if you will, for the network.

But I want to point out that the two dimensions of getting quality on top of your spectrum, you have a spectrum position but the first thing that one has to do to get quality out of it is get a grid that matches it and that’s why high, medium low band matters a lot.

So, if you look at where we’ve been on Tower Count and Project VIP. Project VIP has two important elements of it in intensifying our network; the first is new site (builds) of 10,000 plus sites. When the T-mobile merger was first contemplated for us, one of things we were looking for was those 16,000 sites that gave us the denser network and we’ve had to kind of re-grid and go back and build those sites. Now that’s matched to the spectrum that we have; the 700 to 850, so that we can get a good coverage later.

The second thing that you need on top of your spectrum position and your grid is you need the platforms to be able to manage across them and I feel that’s where LTE advance helps. Because if you think about this you have all these spectrum bands and we also have three technologies we still operate a GSM network, we have an HSPA+ and we have an LTE network.

So with complexity of managing across many spectrum bands and many technologies creates explosive complexity. And so one of things LTE advance does is it removes one of the degrees of complexity. It takes some of the complexity off the table and that’s what is important to us.

David Barden - Bank of America Merrill Lynch

So then moving into that spectrum discussion, another part of the network quality is the spectrum availability and what you're going to be able to have available, when you are going to have it available.

I think a couple interesting things just came out in the last couple of days, one of which was that AT&T has now adopted an interoperability perspective on the 700 band, where the B and C blocks were useful to AT&T and the A block was not and so then you didn't really bake it into devices and guys with A block spectrum felt like the big guy with the scale was boxing them out of handset availability and roaming opportunities.

You guys have changed your minds now a little bit on the A block it sounds like. Could you kind of walk us through what the importance of that vision is?

John Donovan

We didn’t change our mind, we solved the problem, and so we broke through with an innovation. And the big concern that we had with these band 17 and band 12 in that interoperability down in lower 700 was that we didn’t want to create there is the interference problem with channel 51 and then there is the number of slots that you have available and those are precious real estate.

So when we’ve got a chip set what we didn’t want to do is we want every handset to see our whole spectrum portfolio and as you start to add slots for roaming and with such things, you would have to either, for the choice of having a handset that can roam across those two not seeing that whole network portfolio or take the risk of having interference.

From the breakthrough for us technologically was as feature that allows a single slot that 700 to communicate from the handset to the network and dedicate me as either band 12 or band 17 and then to lock that in.

That was a vital breakthrough and that was great work by the partners at Qualcomm and you know our technical teams and our infrastructure guys with Ericsson and AOU to come up with a solution that was not a political compromise, but it made political compromise possible because we have the technology that afford us to do.

We’ve always wanted to do it but haven't been in a position where it didn't put us at risk and those risks of either interference or not, or having to make choices about handsets that roamed and therefore see our full spectrum portfolio. That's a quality compromise for us that was until recently just not acceptable.

David Barden - Bank of America Merrill Lynch

So I think that just the reason why I asked about this is it sounds very technical, but the bottom line is that for a long time the A block has been considered relatively useless and un-developable because there was no interoperability and because there was this channel 51 interference issue.

How significant is this to making A block a usable resource for the telecom industry at the margin?

John Donovan

You know I think that for us it looks an awful lot like the WCS play that we made, in that you have a series of hurdles now and so the art of the possible has expanded and we're thrilled about that.

And now what we have to do is, we have to go in and see what that strategic capability affords us tactically to go get done. So WCS if you look to the time there was no global use for the spectrum. It required some complex stuff to get through standards and it really caused us to drive, you know have to drive things.

We have to actually go back and do that really hard work now and it isn’t just strategic kinds of work. There are those technical things to get these features built in and gain confidence about the time frames that, with which you could do that but it does open up some strategic possibility.

David Barden - Bank of America Merrill Lynch

So kind of shifting gears a little bit and making, segueing into kind of the wire line conversation of the Project VIP and what else is the focus of AT&T; is one part of Project VIP was identifying a core of wire line assets that made sense to incrementally invest in to bring higher speeds and IP DSLAMs etc. And another part of Project VIP was making the determination that some part of that market place was just going to have to get served with LTE services and kind of basically harvesting the legacy copper investment in the plant.

Now that you I think have announced that you are basically 240 million POPs covered, you are basically getting out to the very periphery of the LTE build. What is the game plan solution for co-mingling your LTE capability in these areas where the copper plant is not worth putting new money into upgraded to U-verse type speeds?

John Donovan

Well I think that the logical roadmap that you would have as you look at LTE and your spectrum position is that it does afford you the opportunity to do fixed broadband into the home where you have spectrum available and where you have the ability to mount on the side of the home, you know some antennas that are higher powered.

So, I think we have a wireless home phone in the market place, we added the date, just recently added data capability to it in a device in a home the logical next step is to try to get an externally mounted capability that allows you more effective use of the spectrum.

But then what we've got to do is it becomes a very geographically local game because you're going to have to look at where you can and can't do that based on your market share in wireless and the growth in the demand curve and what your total spectrum position is.

And so it becomes a very local game, but it certainly is in the kit bag for us to roll out as we think about moving from a copper based network that is TDM based to a copper or fiber based network that's IP we really are excited about the opportunity to move to all IP.

David Barden - Bank of America Merrill Lynch

Then I think you said that you obviously have had some incremental success on U-verse and kind of selling into the original footprint that you built out as the kind of footprint started expanding. But I think you've got now into the meat of the actual new builds and putting new capital into new territories and bringing new speeds to new businesses.

Has that had, have you had material success on generating a return on investment on those dollars yet or is that kind of a multiyear type of timeframe to start seeing that flow through the income statement?

John Donovan

I think the answer is both, we're seeing the momentum that gives us confidence and will propel us, I do think that the benefits get bigger as you go downstream, the first, there're a couple of synergies that the IP footprint works with, the first is that as we get a denser wireless network, you still, whether it's wireless or not, the physics of getting a packet in the ground are better.

So you want it to ground as fast as you can, so your network becomes denser and so we find things like small cells, Orange County, they say where would we want small cells in Orange County and would place them all, 40% of those locations can be served by U-verse fiber as it’s back half.

So we start to see those kinds of synergies in the business, the second type of synergy that you see is just operationally as we roll trucks and those sorts of things we get some operational synergies in that footprint as well.

And thirdly just on the marketing and how we face off with customers, so I think project VIP was really about an integrated capability and I think that's consistent with some of the improved capital efficiency of VIP that we've announced over the last year, a move from 66 million is our guidance in CapEx to 61. That progression is about gaining some of these efficiencies as being an integrated carrier.

David Barden - Bank of America Merrill Lynch

We've got about eight minutes left. There will probably be some questions in the audience for John and then I think we've got one up front here.

Unidentified Audience Member

So on digital life, I was wondering if you could just expand more on the vision and where you guys are so far in execution and kind of what the plan is. And then just specifically, you mentioned I thought an intriguing point on how you feel that a digital life is really very tied to the wireless part of your business rather than just the U-verse side.

Jessica put out a piece today talking about the cable opportunity in home security and it's not lost that they don't have that wireless capability from what I understand how you see your competitive plans versus cable on the whole home automation front?

John Donovan

We do think of digital life as more of a wireless play. There are certain synergies that can occur with wire line, the traditional wire line because it's operationally it starts when the truck roll. It starts with a in home experience with a trained technician with blue booties on.

It needs high net promoter scores, because it was a great experience in the home. So those synergies exist with a wire line type of business where you have excellence at dispatch and maintenance and those sorts of things.

So those are uniformly regardless of geography. But the wireless dimension allows you come over the top where you don't have that local force. We would have to get the trucks launch in markets where we have to build that infrastructure, we'll get the operational efficiencies but we don't need a wire line broadband connection in order to land that franchise in.

And then it really integrates with the wireless business very, very effectively.

David Barden - Bank of America Merrill Lynch

Thanks, John you talked about the goal of making the wireless network essentially invisible from a customer perspective. If we fast forward to say three years do you think this is a goal that smaller wireless players won't be able to achieve and if they can what will be the barriers in your mind to them getting there?

John Donovan

I think that the lifeblood of the industry is spectrum. So we always it's almost never do we get on stage anybody in the company who doesn't say we have to sustain enough spectrum to be able to keep the demand curve there and it's about goodness and greatness for America but it's also about the industry health. So that's there. But at some point if you are going to build ubiquitous network, you are going to have to deploy multiple technologies, both Wi-Fi, so it's not only the last mile in traditional terms it's the last room.

So wireless becomes cordless, the capability of jumping to the network should span across that, so now obviously you are saying you are better off if you have a broadband box in the home and you are in there dispatching, can I make sure the wireless works in the last room, and then you say yourselves can I get the handset to work effectively moving between Wi-Fi and the macro network, the answer to all of those things are part of what we're working on.

So can a little guy compete? Yes. Is it hard? Really hard. What are the impediments? A dense enough grid that you can have ubiquity and integration across Wi-Fi where you might not have a gateway in home or a broadband connection, backhaul is a big thing as an integrated carrier.

And then lastly scale. There are certain things that scale can provide forgiveness on and you just have the ability to gain more cycles, to gain more experience, to gain greater efficiencies.

So I think those are the biggest impediments that I think about. But we have to take every one of the little players seriously because they are innovating and they want some of our revenue? They are not dispatching about it, they are coming after it and we have to treat everyone as a fierce competitor and we intend to do that.

David Barden - Bank of America Merrill Lynch

Question about the status of you backhaul, what would you say is acquainted to 1 gig optical and do you have plans on going to 10 gig with LTE event. And if you can give your best guess if you will, let's say a couple of years out from now where you have a good balance on the new network, what’s the cost pet bit looks like then versus what it looked like a year ago?

John Donovan

On the back haul question, we in our LTE deployment. We tried to with 100% one-for-one capability ensure that we were putting Ethernet over fiber. That is the modern architecture of backhaul and we have been very uncompromising.

So we have been giving this stats externally as to where we sat today I told you we carry well over 90% of our traffic is carried on Ethernet over fiver and so therefore our upgrade cycles for the up speed are simple to do mostly software or parametric in just changing a parameter.

And then externally what we're trying to do is we’re trying to manage cost efficiency so when we buy circuits externally when we're out of our footprint we're going to buy more when we need for cost reasons so we want to be economical.

So feel extremely well positioned to continue with the performance that comes from that, I think many of our competitors have Ethernet over SONET over copper. They rush to get out and making some of those cost trade off. And so I feel really good about where we're to be able to up speed it.

But as far as the cost per meg, we're really happy with where our cost per meg on LTE is. So in the natural progression we still have a lot of 2G subscribers out there and so we have announced the shut down date is December 31st of 2016. So we have been aggressively moving our 2G footprint into our HSPA+ LTE planning for that retirement. That provides inefficiency and cost per meg.

Then you move from HSPA+ to LTE, that improves the efficiency of your cost per meg. Then when you get into the back haul that I talked about that improves your cost per meg. Generally the way that we view it is that for the foreseeable future, we forecast roughly on a per subscriber basis of 50% plus growth rate per annum on that horizon and then we got to manage that with a decline in cost curve.

So none of those things to us look formidable, there is two elements out there, the first is to get on the modern architecture and the second is to get more software based performance improvement. So it's Moore's law plus software and the math of that works out very effectively for us.

David Barden - Bank of America Merrill Lynch

We got 10 seconds left, time for one quick question.

Unidentified Analyst

I was just curious as to what portion your handset base is ready for LTE advance and how quickly you are going to migrate at that direction?

John Donovan

I don't think we have announced externally but I would say t there are very few handsets in our portfolio in the stores today that are not designed for the LTE networks. So one of the things the exception to that rule is on some networks where we want to manage utilization on the HSPA+ network, there are certain handsets that have a more limited range of speed, that we want to put in there to fill the capacity in the HSPA+ networks.

Those are alone exceptions, otherwise we're head long into LTE that's the preferred network for everything we're selling.

David Barden - Bank of America Merrill Lynch

John, thank you so much. I really appreciate everybody.

John Donovan

Thank you.

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