Q2 2021 Fair Isaac Corp Earnings Call
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Yes.
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Yeah.
Greetings and welcome to the Fair Isaac Quarterly earnings Conference call. During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session at that time. If you have a question. Please first of the one followed by the for on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded today Wednesday may 5th 2021.
I'd now like to turn the conference over to Steve Weber, Vice President of Investor Relations and Treasurer. Please go ahead.
<unk>.
Good afternoon, and thank you for joining FICO of second quarter earnings call I'm, Steve Weber, Vice President of Investor Relations and I'm joined today by our CEO will Lansing and our CFO Mike Mclaughlin.
Today, we issued a press release that describes financial results compared to the prior year on.
On this call management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business.
Certain statements made in this presentation may be characterized as forward looking under the private Securities Litigation Reform Act of 1995 of.
These statements involve many uncertainties, including the impact of COVID-19 on macroeconomic conditions and the company's business operations and personnel that could cause actual results to differ materially.
Information concerning these uncertainties is contained in the company's filings with the SEC in particular in the risk factors and forward looking statements portions of such filings.
Copies are available from the FCC from the FICO website or from our Investor Relations team.
This call will also include statements regarding certain non-GAAP financial measures.
Please refer to the company's earnings release and regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure.
The earnings release and regulation G schedule are available on the Investor Relations page of the company's website at <unk> dot com or on the SEC's website at SEC Gov.
A replay of this webcast will be available through May five 2022.
And now I will turn the call over to will Lansing.
Thanks, Steve and thank you everyone for joining us for our second quarter earnings call.
I'd like to start by saying that I hope you are all safe and healthy and I want to thank our dedicated employees, who have done an exceptional job of meeting the challenges in the last year and never wavering in their commitment to FICO for their colleagues and our customers.
We have a tremendous team and great culture at FICO and I'm really honored to reported that FICO was ranked number one on Forbes annual list of America's Best Midsized employers.
On the Investor Relations section of our website, we've posted some slides that offer financial highlights of our second quarter today.
Today I'll talk about this quarter's results and how we view our business at the midpoint of our fiscal year and I'll discuss how we continue to refine our strategy to optimize our scores assets and <unk>.
And our focus on our World class decision management platform.
We reported revenues of $331 million, an increase of 8% over the same period last year.
We delivered $69 million of GAAP net income and GAAP earnings of $2 33 per share up 18% and 20% respectively.
On the non-GAAP basis, net income was $90 million up 40% and earnings per share of $3. Six was up 42% from last year, we continued to deliver very strong free cash flow growth as well.
Second quarter free cash flow was a record 152 million up of 178% from last year.
I'm pleased to report that we continue to execute well against our strategic initiatives throughout the company.
As we've said for the last several quarters, we're continuing to migrate more of our business towards the subscription based model, including SaaS software subscriptions.
In terms of license subscriptions for on Prem software.
This strategic decision will provide a more representative view of the growth trajectory of our business, but it also gives us some difficult comparisons for last year, when we had significant upfront license revenues in.
Our applications segment, we delivered $130 million of revenue down 8% from last year due to a 29% decline in upfront license revenues and the 21% decline in professional services revenues.
And our decision management segment, we delivered $33 million of revenue up versus our Q1, but down 14% due to reduced upfront licenses and lower services revenue.
Transactional revenues in Dms were up 34% and as we continue to transition more of our software business two of recurring SaaS model.
We continue to have a lot of interest in this technology in our pipeline contains more big deals.
<unk> gained traction in the space.
We remain committed to becoming the preeminent platform player in Decisioning analytics, and we're focusing our resources to make that vision a reality.
On the score side of the business continues to perform very well scores were up 31% in the quarter versus the prior year on the <unk> side revenues were up 25 per cent.
There was continued strength in mortgage originations, which grew substantially year over year and also sequentially.
We will see more difficult comps in the back half of our year is it's now been a year since the refi boom began auto origination volumes were fairly flat, but revenues were up versus the previous year.
We're continuing to see positive signs in parts and other unsecured loan activity volumes.
Volumes were still down from last year, but were higher than Q1.
The price increases we instituted are starting to have an impact, giving us revenue increases and pockets where volumes are weaker.
On the consumer side, we continue to drive impressive growth of our BDC revenues were up 47% versus the same quarter last year the.
The growth of my FICO Dot com is particularly remarkable up 82% this quarter versus last year.
The continued strong demand is a testament to the quality of our offering and an understanding by consumers. The FICO is the score that lenders use.
Finally, as you know today, we announced the divestiture of our collections and recovery product line, Mike will provide some financial details in a few minutes, but I'd like to explain the strategic rationale behind the Smith.
We're extremely focused on our strategic vision to enhance expand and distribute the FICO decision management platform. We believe we have an incredible opportunity to be the best in class leader in the next wave of the business analytic technology.
In order to fulfill our potential we need to make choices to be able to allocate all of the resources, we can to the platform strategy.
The price of oil collections and recovery products help customers make important decisions throughout the lifecycle of collections and recovery.
<unk> delivered excellent functionality and sort of an important customer need.
Complexity of the underlying architecture makes it impractical to migrate to our platform coupled with the need for high touch professional services engagements in customization it doesn't fit within our strategic framework. So as we did with our E. S. S divestiture and as we do with our China joint venture, we've chosen to sharpen our focus and align our resources on our decision.
Not for them.
Would like to thank the team that built and delivered an industry, leading set of products and solutions that have helped our clients enhance our collections and recovery efficiency effectiveness and compliance.
I want to assure the collections and recovery customer is the FICO and Joan the software are committed to serving our clients without disruption. During this transition period, we're confident that Jonas software will continue to invest in the solutions and support our clients and colleagues with the same commitment and partnership they've come to expect.
Hudson for final comments in a few minutes the first I'll turn the call over to Mike for further financial details.
Thanks will and good afternoon, everyone. Today I'll walk you through our second quarter results in more detail and provide some information on the impact of the divestiture of the collection of recovery products that we announced today.
Revenue for the quarter was $331 million, an increase of 8% over the prior year, our applications revenues were $130 million down 8% versus the same period last year.
The decrease in revenue was primarily driven by a decrease in upfront on front of license revenue and the professional services revenue.
Of our decision management software segment Q2 revenue was more of a $33 million down 14% over the same period last year.
We had an increase of 34% in the SaaS subscription subscription revenue in the D&S segment, but that was offset by decreases in upfront on Prem of license and services revenue.
Now before turning to our scores segment I would like to remind you of the key moving parts that are impacting our applications and DNP share our D N.
The segment revenues.
First our on premise license revenues will continue to be negatively impacted as we move away from perpetual license sales to a ratable subscription revenue model.
Second we have changed our revenue recognition of assumptions for on premise license subscription sale as a result, we now recognise less license revenue upfront and we recognized more revenue ratably over the term of the deal and.
The net impact this quarter was lower license revenue on our applications and Dms segment of about $6 million versus what it would've been under our prior methodology.
We anticipate the full year impact will be between $45 million to $50 million lower software license revenue. This year, all of which will be recognized in future periods.
We expect an especially difficult year over year license comparison in our fourth fiscal quarter, where last year, we booked more than $60 million in upfront license revenue under the prior methodology.
As we pointed out in the past and this change in timing will not have an impact on free cash flows or the total revenue recognized from the software license sales over the term of each subscription contract.
Finally, as we explained last quarter, we are deemphasizing low margin non strategic professional services engagement, which is resulting in lower P. S bookings and revenues.
This is driven by our core strategic goal of selling more high value of recurring revenue software for.
First of all services are a very important component of our business model, providing installation and configuration services for our software and advisory and consulting expertise that enables our customers to leverage the power of cutting edge analytics in the business.
These parts of our professional services business are here to stay the reductions you are seeing in our services business are the result of our strategic decision to focus our energies on the value added services.
Now turning to our scores segment revenues were $169 million up 31% from the same period last year.
<unk> was up 25% over the same period last year, driven by continued the high volumes and mortgage originations as well as some unit price increases across our different score categories.
In the <unk> business. We also had a royalty true up and an annual license deal this quarter that had a small positive impact on overall revenues.
The police scores revenues were up 47 per cent from the same period last year, both of them lifecycle of dot com and B to C partner revenues grew significantly.
This quarter of 79% of total revenues were derived from our Americas region, Our EMEA region generated 15% and the remaining 6% was from Asia Pacific.
Recurring revenues derived from transactional and maintenance sources for the quarter represented 85 per cent of total revenues consulting and implementation services revenues were 11% of total revenues and license revenues were 4% of total revenue.
SaaS software revenues, not including related P. S revenues were $62 million for the quarter up eight 8% from the prior year.
Q2 bookings totaled $84 million flat with the previous year, those bookings generated $9 million of current period revenues of 10 per cent heal.
SaaS bookings, including the associated professional services for 25 million for the quarter down 19% from the previous year for.
<unk> services bookings of $22 million were down 35 per cent from last year.
However, overall software bookings, excluding professional services bookings were up 5% year over year.
We continue to see a strong pipeline for our software products and we feel good about the bookings outlook for the full fiscal year, but again, we do expect bookings to trend lower overall compared to historical numbers as a result of our de emphasis of professional services sales and somewhat shorter term length of typical of SaaS and on Prem term license.
As a side note, we remain committed to providing our shareholders with more of the common metrics that subscription software companies typically provide in order to give investors a better understanding of our software business we.
We continue to work to extract and validate the necessary data and we hope to be able to provide it sometime this fiscal year.
Our operating expenses totaled $230 million this quarter compared to $218 million in the prior quarter, which included a $7 million gain on sale of a product line assets, excluding that onetime gain expenses were up $5 million, primarily due to increased incentives expense.
Turning to Q2 2020 operating expenses were down $2 million we.
We do expect expenses to step up somewhat in the back half of the year as we gradually redeploy the restructuring savings.
We incurred last year to add strategic head count primarily related to the development of our decision management platform software.
We also expect our travel and entertainment expense to increase once we were able to resume in person meetings with our customers and colleagues.
Our non-GAAP operating margin as shown in our Reg G schedule was 39 per cent for the quarter of margin expansion of 700 basis points from the same period last year.
GAAP net income this quarter was $69 million up 18% for the prior year corner of our non-GAAP net income was $90 million for the quarter of 40% for the same quarter last year.
The effective tax rate for the quarter was 25%, we expect our FY 2021 recurring tax rate to be approximately 26 to 27 per cent and we expect the net effective tax rate for the year to the about 19% that's prior to the impact of the divestiture of our collection and recovery business, we do expect.
Book of taxable gain on the sale and we will provide more details on that next quarter.
Free cash flow for the quarter was $152 million compared to $55 million in the same period last year, an increase of 178% for.
For the trailing four quarters free cash flow was $461 million.
At the end of the quarter, we had $198 million in cash of $53 million from last quarter.
Our total debt now stands at 975 million with the weighted average interest rate of three 9%.
Turning to return of capital we bought back 441000 shares in the second quarter at an average price of $466 per share.
During the quarter of the board the prior board repurchase authorization was exhausted in the new $500 million authorization was approved at the end of March we had about 470 million the remaining on that authorization and continue the view share repurchases as an attractive use of cash.
Finally, I'll walk through the expected impact of the divestiture of our collections and recovery products as will said, we made the decision to divest of these assets to increase our focus on our decision management platform.
The collection and recovery of products, we sold accounted for less than 10 per cent of total company revenues.
Because they often involve significant P. S engagement as much as half of total revenues they had a much lower margin profile than our platform products.
There will be some noise in the next few quarters as we work through the transition, but we expect that this divestiture will not have a significant impact on our pretax income.
We expect to close the deal sometime in our third fiscal quarter and the sales proceeds will contribute to the funding of a 200 million dollar of accelerated share repurchase program that we plan to execute once the transaction closes.
I'll turn it back over to the well for his closing thoughts.
Thank you Mike as I said in my opening remarks, we remain focused on our strategy and committed to taking our decision management platform to a growing number of interested customers at the same time, we are innovating and providing a cornerstone value in scores and both b to b and B to C.
Finally, as you know we haven't provided guidance for this fiscal year, we still see a lot of volatility as we see the global economy begin to open back up if true.
<unk> confidence in our business model, but are far more focused on providing long term value than hitting specific numbers for the next few quarters.
I used to drive us to favor ratable subscription revenue over upfront license revenue. So for now we're not providing any formal guidance until we see how the credit market stabilized and we understand the full year impact of our recognition of license revenues now.
Now I'll turn the call back to Steve So that we can do some Q&A.
Thanks will.
This concludes our prepared remarks, and we are now ready to take your questions. Operator, Please open the lines.
Thank you if you would like to register a question. Please press the one followed by the for all of your telephone keypad right. Now you will hear of three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please first of the one followed by the three one moment. Please for the first quarter.
And the first question comes from the line of.
Manav Patnaik with Barclays. Please proceed with your question.
Hey, this is actually a credit calling on for Manav I think the divestitures you've made so far.
Make a lot of sense when you explain them just wondering if there's any smaller products left out there that could be candidates for a similar treatment for it from here, it's more about being selective in the contract.
Going forward.
I would say that this is this is pretty much the end of the re prioritization of our resources.
So we don't see any significant divestitures in our immediate future.
Okay, and historically M&A hasn't been a big part of the story.
As you go through this process of re prioritization of I'm thinking about capital allocation is there a potential for M&A to be a bigger part of the story going forward.
I'd say that the potential in the future is about the same as the potential in the past it's always been there and we've always had trouble finding anything that we find as attractive as investing in ourselves.
Our current plan is to deploy all of the proceeds.
From this transaction and stock repurchase.
Okay, and maybe last one for me.
So some of the sales pipeline.
For the software business I think you said youre pretty bullish about what you're saying.
Any color by geography, as we see different fits and starts of reopening of biases.
I can see if there's any areas that you're seeing more attraction that up for or any color there would be helpful.
I'd say that.
South America is strong.
But we're seeing signs of the economy waking up kind of across the board.
Mike I don't know if he pointed out of anything to that.
I guess, what I would add is the nature of our sales on the software side are lumpy and.
The long sales cycle for the most part and so month to month, even quarter to quarter changes in.
The ability of our customers to have people in the office to meet face to face due.
Due to the pandemic and other things.
It doesn't necessarily show up with the same frequency of it might for a company that had a shorter sales cycle and more higher frequency.
Lower ticket sales so.
The.
Pipeline that we see in the major regions we serve.
Looks healthy.
All things considered in all regions.
I wouldn't be able to identify anything specific that would make one region or in other stand out.
Yeah.
Yeah.
And the next question comes from the line of Kyle Peterson with Needham. Please proceed with your cash.
Hey, good afternoon, guys. Thanks for taking the question I'm, just kind of talk a little bit about the expense trajectory I know you guys said that.
Do you expect those to go up a little bit next quarter, given some investments, particularly on the Dms side does that outlook include the the transition of some of the costs associated with the the debt collection.
Business or how should we think about kind of the ex.
<unk> trajectory and what transition costs and stuff you guys expect to occur.
We will be able to provide more.
Can you hear me, yes, sure. So we'll be able to provide a little bit more detail on that when we get.
For the closing so stay tuned next quarter for any more specifics, we're able to share.
In general as we said in our remarks, we don't expect it to happen material impact on profitability, which means that the expenses that we expect to remove Ah you know.
We're in the ballpark of the revenues that.
We are selling.
Hum.
And Furthermore, we do continue to believe that our expenses for the year relative to last year.
We'll be about.
About the same if not download of that so all of the trends that we saw on our expenses.
Not including the impact of collection recovery divestiture continue.
Continue to play out and we still feel good about the full year.
Okay. That's helpful. And then I guess just on the scores business quarter came in very strong is there any additional color you guys could give us on you know what drove some of that strength between some of the recent pricing initiatives that you guys have taken.
Just volume look some of the with healthy credit markets and the strong would be the C business.
I'd say, it's more on the volume then on the pricing all the other pricing is trying to feather in as as card and some of the places where we put price increases in last year of start to pick up in volume. So it's both but I kept the volume.
I mean, I think the real strength.
Mortgage continues to be strong and the real strength I think is a b to C. It's just remarkable.
Got it that's helpful. Thanks, guys nice quarter.
Yeah.
And the next question comes from the line of surrender thinned with Jefferies. Please proceed with your question.
Good afternoon.
The question on the B to C. Can you provide a little bit of additional color. Obviously, you've provided some metrics, but the the revenue growth sequentially was particularly strong after there was a temporary pause.
In the corner and kind of what what drove that was there additional marketing Parker.
Partner, So we should be thinking about maybe some seasonality.
And any outlook you can provide debt that would be helpful.
Well I would I could put it in two categories because of the strongest part of it was my FICO and I'd say, it's attributable to the.
Very strong execution, there's some seasonality of course, but how you distribute.
Some of the strength of the very strong execution.
And to and to consumer and consumers increasingly interested.
Got it.
What is the current mix between my frankly dot com and your partner at this point in terms of the BDC revenues.
I'm not sure we break that out Mike I don't know the we disclose the of doing yeah.
Yeah, we don't disclose that I'm sorry.
Got it.
And then in terms of the the special price decreases that went into effect. If I believe I heard you correctly you talked about the feathering in at this point so how should we think about or the currently at the full run rate in this the Libya at the full run rate in this quarter or maybe you did half of them hit last quarter.
Two thirds of them, how should we think about that mix.
Well I think you shouldn't think of in terms of flow.
Fully and except that the volumes that they were applied to the kinds of the scores. They were applied to had lower volumes and so as those volumes returned to see a little more impact but at this point is the volume going forward.
Got it and if I understand correctly.
It was it was mostly on the card and auto side for for the impact.
It was spread around the there was card increase there were current increases.
Got it and how far below normalized levels as card volumes at this point, obviously auto volumes of fully recovered.
We can pretty much truck mortgage volumes on a daily basis, theres less insight into card volumes and the.
The additional color you can provide there.
I really can't.
I will kind of any of that that we have seen a sequential increases in cards, which you can also see from the results this quarter of the <unk>.
Card issuers and and and the bureaus. So we're seeing the same trends they see and an overall across our categories or whether it's the cards auto it's for mortgage the volume trends that we've seen are not inconsistent with what you.
You can see from them.
The others.
And the businesses.
Got it.
Does that set up of my part thank you.
Okay.
And the next question comes from the line of Caroline Conway with Alliance Bernstein. Please proceed with your question.
Okay. Thank you for taking my question I'm curious about the implications of the divestiture on the customer who comes from and the strategy of crisp on some of the new service areas perfect system customers.
Seems to me to be better for startup Super volatility per suite of financial services products developer of Christian is that up for grabs the M. S adoption, but that maybe other perhaps making the bulk of product lines for which you can put your thoughts on that.
No you're absolutely right your debt.
You're absolutely right that our customers we have many customers who are customers of the questions of recovery product line as well as many other solutions that we provide them and we've always believed that the the broader suite of capabilities is has high utility for our customers.
This is really of it.
In our Christmas won't suffer from them. So our customers are going to wind up with continued a tremendous support and innovation and investment in this product line from.
From Jonas and and we are of course relationship with Jonas will be doing coverage together and so I you know I I.
I don't worry very much about weather.
Whether our customers will be well taken care of because I'm confident that they will be well taken care of.
What it does do is it frees up the resources and investment for US the focus on the on the platform side of the solutions that was a bunch of our customers. So no question that that's that's the right place for us to be focused.
Great and that's the part of that.
So that over any other pending other.
The components of the relationship of Tennessee, we're expecting to the merits are there any products for their crop of terminal side.
No. It's really a collection of run collections and recovery, but then we have some parts of our of.
FICO that will continue operating in in the near and around the collection space of for example of FICO Advisors will continue to provide consulting.
Advice around collections.
But the generally speaking the business is turned over to Jonas and we'll make sure that the transition of seamless.
Thank you.
Yeah.
Okay.
And as a reminder to register for a question press. The one followed by the for on your telephone Keypad right. Now. The next question is from the line of Jeff Mueller with Baird. Please proceed with your question.
Yeah. Thank you good afternoon.
On my FICO, So recognize your brand strength recognized that the part of the market is.
Doing well.
In terms of the branded paid channel.
And I guess, the indirect and some lead Gen players pulled back I'm not talking about your partners I'm talking about alternatives in the market pulled back at points over the last year.
What are the benefits of the Mifi co channel anything further you can say about execution. If it's changes in how you go about marketing or changes in product.
I guess, what I'm trying to get comfort with is some sustainability of my FICO strength if for some of those lead Gen partner start total lean back into the market.
Yeah. That's the good question and I, it's hard for us to say, whether the impact is from them pulling back or from our own excellent execution.
What seems to be happening is there's a lot of at least in my mind is that there's a lot of appetite and interest in monitoring credit, particularly in times like these.
And it's.
It's a very natural place to go is my if I caught that comment and as you know, we do actually relatively modest marketing around it but the brand is very strong we have over 90% aided awareness of the FICO brand in the U S and so it's not surprising that you know that we got a lot of attention. There I think we will always be positioned.
We'll always position ourselves as an.
On the innovation leader and having really robust and fully featured product and you know the premium we try to be the premium product in the marketplace as well as a bit of of lab for experimenting with the with offerings that we then turn it over to our partners and encourage them to to replicate.
Okay and then.
Just maybe any update on the.
Uptake or usage of the resilience score index.
It continues to be used.
Used in it it's in test essentially we have a we actually have quite a number of lenders who are using it now.
And so part of the feedback is very positive.
And you know, we're not charging for it but it doesn't have any revenue impact.
Right right.
Okay, and then last night I get that we're going to get the new more typical software SaaS.
Reporting financial metrics later in the year, but just.
So can you help us ring fence like what is on strategy revenue like you you talk about it it feels to me like in several different ways you have of thing Tms. The M. P. There as you know the SaaS versions of different products, you gave us a metric of ex professional services. So could you just help us ring fence the.
You're viewing as kind of the core on strategy of where it sits today.
Let me let me let me turn this over the mic in just a minute to answer that question more fully but what I would say is everything the way of loss net of portfolio is is what we want to have in our portfolio and it's a combination of legacy products.
And in our platform products, we've been in the process of heart of migrating them.
And moving the capabilities from legacy products to the platform and so increasingly the new sales happened on the platform, we consider that to be truly strategic so it platform sales of where we want to be lends itself well to the land and expand lets our customers who leverage the platform.
For small incremental investments that a lot of incremental benefit I mean, there's there's benefits book FICO and for our customers on the platform that said, we have a really large business of HEICO solutions that are in place on Prem some of the cloud, but most of the on Prem and we anticipate that those will be of.
News for our customers for many years to come and so we continue to invest in those we will continue to maintain those will continue to make sure that our customers are getting the full benefit of the investment that they made over past years and as theyre ready to migrate to the platform will be ready to take for them there, but the business really has both sides.
And what you'll see is that the you know call it legacy solutions the.
The off platform solutions, we were not selling nearly as much of that going forward and the energy is going into selling platform, but will be supporting both.
Mike I don't know someone the other.
Anything.
Sure Hey, just a day.
Look as we said as we think about how to recast our.
Reporting to be more helpful to you and our shareholders.
The principles are the focuses on recurring software revenue hence.
Hence are beginning to shine more of a spotlight on the services revenue because those are declining.
Now we're trying to make some decline, but we're just trying to focus on the services that really really add value and let them reach their natural level in terms of revenue the Mart.
The profile is not such that.
We generate a whole lot of value out of the services directly this value to our customers and increase the stickiness and all of that but.
Revenue for the P. S Reddy, who say it because it's not something for.
Seeking so our focus is on the recurring software and so our metrics will help you see that more clearly.
Second is the apps versus BNS, the sanction is less and less relevant.
It's been in place for a long time, and our disclosure, but it's.
Outlived its usefulness so.
We're likely to simplify and talk more about software versus scores as opposed to the applications scores and.
And DNS.
And then finally.
The.
Key.
The Prime directive of in our software business is platform the platform platform and so we'll help you get better insight into what our platform revenues are doing and what's happening in our revenues that are I'll call them to be platform [laughter] not yet but on the on the roadmap. So.
The those are the things we're trying to achieve as we.
Think about how best to expose the T V.
Excellent. Thank we all look forward to that thanks, guys.
Sure.
And there are no further questions at this time I will now turn the presentation back to Mr. Webber.
Thank you. Thank you everyone for joining today's call.
Good day, and we look forward to speaking with you again soon thank you.
And that does conclude today's conference. We thank you for for your participation and ask that you. Please disconnect your line.
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