Q3 2020 New York Times Co Earnings Call
Ladies and gentlemen, thank you for your patience.
We'll begin in a few short please continue to hold thank you.
[music].
Good morning, and welcome to the New York Times Company's third quarter 2020 earnings Conference call.
All participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
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Please note. This event is being recorded I would now like to turn the conference over to Harlan Toplitzky Vice President Investor Relations. Please go ahead.
Thank you and welcome to the New York Times Company's third quarter 2020, <unk> earnings conference call on the call today, we have Meredith Kopit, Levien, President and Chief Executive Officer, and Rolling Computer Executive Vice President and Chief Financial Officer.
Before we begin I would like to remind you that management will make forward looking statements. During the course of this call.
Actual results could differ materially some of.
The risks and uncertainties that could impact our business are included in our 2019 10-K.
As I've stated in subsequent quarterly reports on form 10-Q.
In addition, our presentation will include non-GAAP financial measures and we've provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors <unk> and White T C O dot com.
That I will turn the call over to Meredith Kopit Levien.
Thank you Harlan and good morning, everyone.
As I said when I was named CEO in July it's the honorable lifetime to lead the New York Times company and to support the work of our extraordinary news let.
Let me start by thanking our shareholders and the investor community for their comp.
As we continue to evolve from a legacy print newspaper business into a growing subscription first digital enterprise.
I assumed my new role in the same quarter that our digital only subscription revenue overtook print subscription revenue for the first time.
Digital subscriptions are now not just the company fastest growing and most important revenue stream, but also well on the way to becoming a larger.
That's a mild said many years in the making and a testament to the enduring nature of our strategy.
Since this is the first conversation I'm waiting with you I'm going to take a few minutes to reiterate our strategy and to share my view by long term opportunity also try and put that all in the context of this historic news.
Now you've heard us talk for sometime about an addressable market of 100 million serious people worldwide, who are likely to pay for the type of English language journalism the times producer.
We increasingly believe the market is at least that large they're nearly a billion people around the world to read news digitally and more than 80 million should pay for news today.
It's easy to assume that more will do so in the future as people get more comfortable paying for digital subscriptions generally.
And the supply of advertising first alternative.
When used to face pressure.
There were confident that the market is there and also in our ability to penetrate a large portion of it.
Our model creates a virtuous cycle large names Ram made up the world that's journalists widely.
Widely recognized and trusted brand and a differentiated digital products enable us to attract and retain more subscribers. The larger our subscriber base becomes the more we can invest in our journalism in standalone products and the more we can spread fixed cost across a wider base of users.
That means strong unit economics that improve as we scale. It further contributions from advertising licensing and affiliates.
Now given that we're in the midst of it.
Historically, and thus far inconclusive election, I want to talk for a few minutes about our journalism and how its differential value fuel our strategy.
Let me first say, how proud I am of our news room, and the manner in which they're covering the selection they've reported deeply on the candidates chronicle the key issues facing the country eliminated the views and experiences the voters and they're tracking the race itself.
You spent the last few days immersed in our App, you're not alone yesterday, our pepperidge brought hundreds and 20 million readers to the time and more than 75 million came the day before and they're coming not just to read but also to experience life coverage intact.
Multimedia interactive graphics and already.
At the same time that we have reporters covering this election on the ground across the country. We've deployed a vast number of journalists to also report on the still surging pad.
Effort continues to yield one of the most comprehensive datasets available to understand the virus that spread and in particular, its exacerbation of underlying inequality.
And while much of the world's attention remains focused on politics. The pandemic the time since work to keep other important issues in the public consciousness from hunger in America, which made up the entirety of a recent issue of our Sunday magazine to the ongoing conflict between media and Azerbaijan.
This journalistic range plays an important role in our business, which brings me to one of the biggest question I hear from many of you.
What do we believe happens to the business if or when the news cycle changes.
First let me say, it's hard to imagine that we're entering a quieter period for news anytime soon nor.
Nor do we expect a change of pace in the fundamental issues that demand understanding from technology reshaping our lives to Richland wealth inequality to the rise in China and the effects of climate change people will continue to turn to the times for understanding when things feel less certain.
We're also not reliant on any single story or topic to drive our growth in fact, the breadth of our core news report is a differentiator and a driver of our business.
Our App this week offered.
The best real time view of the election, and the virus and also a guide for how best to distract oneself from but.
Our user data tells us that each additional topic that someone engages with increasing their likelihood of subscribing by 50% and wall politics isn't important topic for our readers around 80% that'd be on politics to read other subjects each week.
We've also begun to prove that the time has a bigger role to play in People's lives game and cooking together have nearly 1.4 million subscription and we'll continue to invest significantly that's products and other efforts like why were cut or an audio.
And it's also worth noting that over time, the model is becoming more resilient to big swing. The news cycle, we saw that after the 2016 election, and we see it after other big news about net subscription additions go up significantly and after they crest they settle in at a higher point than before.
Art, because with each passing quarter Indian we get steadily better and execute.
With that said a lot of hard work remains in order to make the product and our underlying tech platform match, our ambition and at least some of that will require additional investment.
This has been an extraordinary year so far for net subscription additions. We ended the third quarter with approximately 6.9 million total subscription and we crossed the 7 million Mark already in the month of October which means we've added more than 2 million digital subscription last year Oh.
No we have a lot of confidence in our ability to continue to grow 2020 is an unprecedented here and we don't expect to repeat its results.
That said, we are well on our way to surpassing the 10 million goal. We had initially targeted to hit by 2025.
Turning to advertising or digital results wall down were slightly better than we expected as Weve told you for the last year or so we've been steadily tilting the business back to the unique value of our media.
First party audience data use and privacy board ways has enabled pockets right indirect <unk> media and its also now the foundation the new thought leadership platform called pivotal which are add team launched during the quarter to help marketers consider their creative and brand strategies.
In the context of broad consumer insights.
Oh advertising has also been an area of continued resilience driven by the daily and then the third quarter, we entered into a multiyear augmented reality collaboration with Facebook and we also advanced our work with brides and by Jeep with the launch of our first five Gi franchise from here.
As we said in previous quarters, the advertising business continues to be important to the Companys economics, but we do not expect it to be a significant driver of growth in the near term.
Before I hand, it off to Roland I want to take a moment to thank my time colleagues working across news and business.
I've told you what makes us confident in our strategy, but I'd be remiss, if I didnt say that our ability to execute that strategy lies in the talent passion and commitment of the 4600 plus times people who've been working tirelessly in.
Unprecedented circumstances I couldn't be prouder of how they've shown up in the mission for our business and for one another and this intense here.
Pretty you Roland.
Thank you Mary and good morning.
<unk> said, we remain pleased with the progress we're making as we continue to execute against our strategy and Q3 was yet another strong quarter for the company.
Adjusted diluted earnings per share was 22 cents in the quarter.
10 cents higher than the prior year.
Reported adjusted operating profit of approximately $57 million, which is approximately $13 million higher than the same period in 2019.
We added 275000, net new subscriptions to our core digital news product and 118000 net new subscription for Standalone digital products for a total of 393000 net new digital only subscriptions.
Each of these figures represent the highest third quarter net add numbers.
Net adds brought us to over 6 million digital only subscriptions at the end of the core.
Putting 775000 games subscription and nearly 600000 cooking subscriptions.
We made two significant changes to our model from the prior two quarters.
We restored the pay wall to the vast majority of the site using only the most critical corona virus coverage outside of it.
Returns were normal promotional cadence of $2 per week during non sale period and one dollar per week went on sale.
Well subscription revenue increased approximately 12.5% in the quarter with digital only subscription revenue growing 34% to $155 million, making Q3, the first full quarter that digital only subscription revenue exceeded print subscription revenue.
The acceleration in the rate of sequential quarterly digital subscription revenue growth from 30% in the second quarter to 34% in the third quarter is largely a result of three factors.
First the number of new subscriptions, we added in the past year.
Ongoing strength in retention of the dollar per week promotional subscriptions were graduated the higher prices.
And finally, the positive impact from our first ever digital subscription price increase which began late in the first quarter.
Digital news subscription ARPU for the quarter declined approximately 11% compared with the prior year and approximately 3% compared to the prior quarter largely consistent with the quarterly rates decline was reported for the last year.
Newly acquired subscriptions, mostly on the dollar per week promotion domestically and a deeper promotional rates in many areas outside of the U.S. continued to more than offset the benefits from both subscriptions graduating from introductory promotion.
It was from price increases on our more tenured full price subscriptions.
ARPU related solely to domestic news subscription decline close to 9% versus the prior year and 3% versus the prior quarter.
Our digital pricing strategy is yielding strong results and we expect this to continue over time. This strategy utilized the dollar per week your long introductory price point to stimulate demand increase conversion among more casual readers, whose willingness to pay is initially lower.
At the conclusion of a promotional period be subscribers moved to one or two higher priced either full price or in cases, where data suggests their willingness to pay remains lower a midpoint increase before moving to a full price at the end of the second year.
As we said in the past the dollar per week subscriptions continue to retain nearly identical rates as our historical 50% off promotion no more than 25 months after introduction.
Our digital pricing strategy also includes a price increase for almost 10 years subscriptions in September we resumed rolling out this price increase on our most engaged in Kenya subscribers guar, the most value from the product and whose willingness to pay its highest.
Churn on the initial 690000 long tenured subscriptions, who received a rate increase earlier. This year has been significantly lower than we expected and has generated more than $11 million incremental revenue for the company through the third quarter, almost all of which falls directly to the bottom line.
Given the price increase on our tenured digital subscriptions and the impact from subscriptions, graduating from discounted promotions, we should begin to see a slight moderation in the rate of ARPU decline in the fourth quarter.
As we look forward, we expect our digital pricing strategy to provide a tailwind to ARPU through out 2021, as approximately 1.6 million digital news subscription graduate from a dollar we promotional discount.
Additionally, we expect approximately 650000 newly tendered subscriptions well see a price increase.
On the print subscription side revenues were down nearly 4% largely due to a decline in single copy and international bulk sales.
Revenue from domestic home delivery print subscriptions grew 2.5% in the quarter as a home delivery price increase implemented early in the year.
More than offset year over year subscription declines.
Total daily circulation declined 16% in the quarter compared with the prior year, while Sunday circulation declined 6.2%.
The wide spread business closures increased remote working and reductions in travel as a result of the pandemic.
Tribute to the approximately seven percentage points to the daily copy decline and two percentage points to someday.
Oh advertising revenues declined approximately 30% in the quarter as both digital and print were severely impacted by lower market demand during the pandemic.
Digital advertising declined approximately 13% in the quarter compared with the prior year. This result is somewhat better than the guidance. We gave on our second quarter earnings call largely as a result of higher levels of spending from our large deals with horizon Facebook and Mastercard.
Print advertising declined approximately 47% with luxury entertainment media and home furnishing categories <unk> harvest.
Other revenues declined approximately 2% compared with the prior year to $47 million.
Generally as a result of fewer television episodes, that's what was lower revenues from commercial printing and life event.
These declines were partially offset by licensing revenue related to Facebook news.
And an increase in affiliate revenue referral revenue from water cut it.
Adjusted operating cost decreased nearly 4% in the core.
Cost of revenue also decreased approximately 4% as lower print production and distribution costs and advertisers servicing costs more than offset higher digital content delivery and journalism costs.
Sales and marketing cost decreased approximately 21% largely driven by lower media spend in advertising sales calls.
Please note that we do not view third quarter marketing expense as representative of future spend given the special circumstances under which we were operating in the quarter.
We've already begun restoring marketing spend to more normalized levels as we entered the fourth quarter.
Product development cost increased by approximately 28% largely due to growth in the number of engineers employed we.
We plan to continue adding to headcount in this area over the next 12 to 18 months as we expect to continue to lean into our investments here and in our journalism to drive further growth.
Our effective tax rate for the third quarter was 17.8%, which includes a tax benefit from stock price appreciation on stock based awards that settled in the quarter.
On a going forward basis, we continue to expect our tax rate to be approximately 26% on every dollar of marginal income the record.
Significant variability around the quarterly effective rate.
Moving to the balance sheet, our cash and marketable securities balance ended the quarter at $800 million, an increase of $43 million compared with the second quarter.
Property remains debt free with a $250 million revolving line of credit available.
Per cent compared with the fourth quarter of 2019 and digital advertising revenues are expected to decrease in the mid teens.
Other revenues are expected to decrease approximately 15% as a result of fewer television episodes and lower revenues from live events.
Both operating costs and adjusted operating costs are expected to be flat or decline in the low single digits compared with the fourth quarter of 2019, as we carefully managed non-essential spending while continuing to invest in the drivers of digital subscription gross.
And with that we'd be happy to open it up for questions.
Cleveland now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
First question today comes from Thomas yet of Morgan Stanley. Please go ahead.
Hi, Thanks, and good morning, I'm Meredith you talked about in your prepared remarks, there a greater resilience severe subscriber basis slower news cycles, obviously, the new cyclists out of your control and what what do you think are the key drivers heading into 2021, either in terms of more content or top of funnel registered user conversion that could deliver the next leg of subscribers.
Both going for it.
Yeah. Thank good morning comments and thanks <unk>. That's a good question I'll I'll take a couple of things about that uhm. The for the first one something we we've said before is you know with every passing month and a quarter, we're adding more registered users. So.
<unk> the the pool of people two we can then essentially engage and get to subscribe is growing so I'd say that that's a really big driver and you should assume that the strong news cycle that we essentially experienced all year means we're adding.
A lot of registered users and you know once they register there are a lot more address and pull the us we we have more opportunities to to engage them directly and and get them to the point of conversion Oh, Oh, let's say a couple more words about some of the things I send my prepared remarks.
We know that subscribers to experienced the time, Brett I'm much more likely pain K and so we you know we've got plenty of work underway to get people exposed to more breath and we we think that plays a really big role and the model.
<unk> and then I'll say, we've gotten much better.
<unk> and with still room head of us at getting people to hit the Reggie well and hit the pay well. So you know we used to have sort of blunt instrument neater applied in the same way everywhere and now we run the meter in a much more.
Customized way, we're we're we're able to account for the way someone comes to the site and you know based based on those signals based on signals of of how they engage at the outset. We we can do a better job of customizing when do we actually ask them to pay.
Some people may need.
<unk> coming from one channel or another you may need to see more stories than than someone else. So all of those things give us real real confidence in and the model going forward.
Thanks, that's helpful. And then maybe another one for me as your subscribers <unk> base has grown over the past here could you talk a little bit about how the demographic audience has evolved on the corneous product in the U S. There have been some reports about competitor efforts to kind of broaden out their younger to get to in a younger audience and would love to hear some color on what success you've been.
Able to chew on that front.
Yeah, I would say all year long, we've been saying a version of the same thing. It's probably goes back to you know high news periods over the last several years uhm the audience tends to be younger that we're bringing in then then you know prior cohorts starts and this particular.
The recorder, we we had a you know a higher number of people under 40 Uhm. So as we you know as we add a lot of met ads and a quarter and as we see these these spikes in the news. We're just you know reaching to the outer edges of our our propensity.
<unk> cycle, and where were you know we've got a number of reasons for that the daily has become a very significant way that people engage with the times.
And the dailies audience Uhm has has a vast majority under certainly under 50 and many many many people under 40 said that tends to bring in a younger audience of people too now have an affinity for the New York Times.
So I'd say used is is is probably the biggest change we're seeing in in the past quarter given the significance of the domestic stories. Obviously the election also the the effects of the pandemic domestically. We also had a disproportionate number starts.
Coming from the United States versus versus internationally.
Great. Thank you so much.
The next question is from John Belton of Evercore ISI. Please go ahead.
Hi, Thank you all stay on the topic of subscribers so <unk> I've.
I've been married if you said in your remarks that historically the pattern you see it is after big periods of subscriber growth you've been able to settle at higher rates of <unk> net additions in the future is this so if if I pick that comment you think a new cycle aside cause you add more subscribers and say 2020.
One that you added in 2019, and then I have a follow up.
So so I I also send my prepared remarks that you know I think in many ways 2020 is an outlier here uhm. So I don't think you shouldn't expect us to to to get them to the same place where we're getting in 2020 given.
<unk> extraordinary nature of the news cycle that said, we're very optimistic that we can continue to grow the model.
In Saddam's, then I'll I'll I'll go back to the answer that I gave Thomas in a minute ago, which is you know with every passing day week month, we we are adding many many more registered users and those register users are a new <unk>.
<unk> from which we we can drive subscription and registered users convert and is substantially higher rate than anonymous users. So that's Ah you know that that's a big part of wire expectation is even if announced a new cycle changes and audience comes down to some degree.
You've got a pool of people right. There who are are easier to convert then anonymous users. So I think you should expect to see real growth, but I think the the this particular new cycle is an extraordinary one and I don't think it will repeat exactly as it did.
This year.
And I guess, the the follow up would be what about this new so like we're worried about cause subscribers you've added over the last several months makes a difference is there anything in terms of engagement or churned characteristics that you're seeing yeah recent cohorts of different than before.
Yeah <unk> those are both good questions, let me, let me actually address.
Dress churn and that cause I I think that is you know it's the base gets larger that's even even more important rolling and I have both said over the last few years that churn has been a great story and when we probably haven't set enough even as we are scaling the base of some.
Scriber as we've been able to hold churn you know within within sort of limited range, but we we've been able to to keep churn cable, which I think is a very big achievement and we're able to do that because with every passing quarter, we get better at two things the sort of mechanical aspects of churn.
How do you keep people through the step up moments, how do you actually deal with it like very straightforward commercial parts of it but but far more importantly, we're just able to engage them better right. So were you know getting people to use the product getting people perform a daily habit with the product, we we we get better and better at that.
As we go and then it's worth saying because I think that this is also and your question, it's worth saying that the cohorts of people who come in around particularly big news events tend to retain even better at least as well if not.
Even better. So for example, we've tracked really closely the original surge cohort around the 20th 16 election early twenties 17 that was an extraordinarily high retaining cohort and we're now what seven and a half months and to uhm the global P. I N.
Demick driving the news cycle and map cohort is also retaining at a really high level. So we're optimistic that you come in come in in the news to them and that you know has that that has a relationship to the affinity. You then have for the brand and we're also optimistic about our tech.
Nicole ability to get better and better at engaging people.
Gotcha. That's helpful. Thanks, I I also wanted to just mention I loved following the upshot need all the other night that was Oh, what a good [laughter].
Great Oh happy to happy to hear you say that and props to NATO in in the whole team who have really work tirelessly uhm on all of that thank you.
Thanks.
The next question comes from Oleksiak <unk> of J P. Morgan. Please go ahead.
Thank you so much I am just wanted to follow up I think on a comment you made an interesting in your opening remarks about you know pulling back a bit on the dollar we meaning having more than next that's a dollar a week or $2 a week uhm one it did I hear that correct.
So you know what what is your thought process behind maybe you could come in a little less promotional if if that's what I'm reading into during this period in that column.
Yeah. Good morning, Alexia on on a dollar a week that thing Uhm Roland mentioned that uhm in the quarter. We did go back to our dollar week only on sale period <unk>. What I'll say is you know that's an instrument, that's really working for us and particularly but the <unk>.
On sale at other points and what my point is is that we've gone back to our normal cadence. So so Q2 was an outlier in terms of of having it always on.
Prior to Q2, we did not and we've just gone back to our normal cadence.
Okay. Okay and then just my second question is on the margin expansion I know Senator out 2021, or whenever we start seeing it really hits I'm curious if you can elaborate really on the the thought of how you see that being driven it did you know really largely reduction and the tightness that something you guys have done.
In the middle of Curcumin here Earth or do we expect to see some natural sort of leverage in the business that I know you guys have talked about for a while.
Yeah, I'll take that and Roland can add as FTC expenses I would say within our core news product were reaching out at scale, where we're starting to see operating leverage improvement I will caution you that we still have a print product in in decline.
And I'll say, we don't rule out investing into this very significant opportunity in front of a yeah, but kind of once in a generation opportunity and and we have a lot of ambition around what we want to accomplish so we don't rule out further investment but we.
We are.
Reaching a scale in the core news product, where we're starting to see it improves.
Thank you.
The next question is from Doug Arthur of Huber Research Partners. Please go ahead.
Yeah. Thanks.
Just wanted to sort of explore the.
Sequential change in digital news ads I mean, typically the third quarter is a seasonal.
You know uptick for you you get back to college.
Contracts kicking in.
I think there's probably people going away.
For the summer and.
Adding digital subs, while they're away. So I mean, obviously youve truck ran a lot of strength in Q1 and Q2.
Was there anything unusual about this third quarter that kind of caused a drop off in ads.
Ads this quarter.
Hi, there I think the unusual thing.
Same thing taken center or the outlier is is really Q1 and Q2.
And and I would say Q3 represents a step function increase over last year and every other every other Q3.
And if you if you annualize the the number from this past quarter and that's a pretty decent number and reflects the kind of step function improvement in the business.
That I'm that I'm I highlighted in my prepared remarks and in answers to some of these questions and I'll just like the sort of Corona virus story at its peak.
Which was mostly in the end of the first quarter and then throughout the second quarter.
I would consider that an outlay liar, even to a new cycle that we think will continue to be strong.
And on the digital advertising you were guiding down 20% you came down you were down 12.6 or so.
So better.
Are you seeing and obviously you cited some big projects. You did are you seeing a little bit of the of light at the end of the total there in terms of going into 2021.
I will say that there I touched each of these briefly in my prepared remarks that there are three things that are working well.
Well in advertising and proving to be quite quite resilient. One is the first party data strategy. So essentially.
Selling our high margin media with.
Superior ability for marketers to target audiences and privacy poured ways using our first party data there seems to be real demand for that that is the.
An area that we'll continue to focus on and and I think overtime will be a really important driver of the AD business then.
And gave us some resilience within certain categories and sort of pockets in in the third quarter.
We're still doing big partnership so I talked about to that one new one with Facebook that launched in the quarter and many an expansion of the Verizon partnership. So that will continue to be a driver and then I mentioned, the audio and what I would say on audio is that's a place where we think there's going to be real demand.
In Q3 fund that adds.
So on the on the first question and let me I I think you're essentially Mike the shortest answer I can give you you know we don't give forward looking guidance, but you know the.
But the differential value the journalism is central to the strategy. So we will continue to invest there. We've also said in the past that and that investment. So we still grow the newsroom, but that investment does not.
Have to scale with with with the opportunities so.
You know we we.
We can add journalists.
Folks to sign up for your news only product.
Yeah, Great Great question I would say the daily is very helpful to a number of things. It's helpful to drive an affinity to the brand we it's harder to track directly Howard drops people into the the or news subscription funnel, but.
We we have every reason to believe it does given how are results have improved with you know in the in the four years now that that we've had the daily. We also know that the ads that we've run on the daily our own uhm journalists talking about the work that they do are quite performative uhm so even.
And just you know the the daily that the program drives affinity the ads with it <unk> drive do you drop people in that the best from as best as we can tell do drop people into the final and then I would say you know it remains and I I said this in my prepared remarks very straw.
Wrong add business and we think it'll continue to to be a growing add business. Thank you asked me about where audiences I make it a correction on this from Roland but I think we're close to 4 million 4 million users a day, so huge audience and and the thing that's remarkable.
<unk> to me about the dailies audiences, that's like almost twice as large as as the paper was at its peak and it's only four years old and it's got an audience with you know the vast majority much younger than say the traditional audience from the newspaper the New York Times, So Uhm L.
I'll say, one more thing which is the daily has also proved to be at a distribution mechanism for other audio products from the times will really excited about that so we can you know the <unk> of the daily as a way to launch new things into the world.
And we think that's gonna have real value both to the AD business and the subs business over time just.
Just two or maybe even a little more context to that 4 million daily downloads number that's more than two times, what it was a year ago. So the grossest is still exploding there as far as audience is concerned.
That's right. It's also a highly highly engaged audience I think most people within four or five times, a week, which is amazing.
Great. Thank you both.
Thank you.
Digital subscription business, we're seeing good leverage they're so we'll put some more money in there, but we will get more money out of that then then we're putting in but I think Meredith mentioned before the print business. Aside you know, we still reserve the right to make discreet investment, where we see the ability to to.
Further accelerate our growth and that may that may not come in the core of the business and they come in the form of of our Standalone businesses. So you know I don't I don't want to give a a specific number there, but again as the business matures as the scale improves we're seeing better and better leverage from the <unk>.
Thats going to be more accretive to the business, we'll do it.
Got it thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.