Q3 2022 Cutera Inc Earnings Call
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Pardon me. This is the operator. Please standby this call will begin shortly thank you for your patience.
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Thank you for standing by this is the conference operator, welcome to the Q Terra Inc. Third quarter 2022 results conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
The discussion today includes forward looking statements. These forward looking statements reflect management's current forecast or expectation of certain aspects of the company's future business, including but not limited to any financial guidance provided for modeling purposes forward. Looking statements are based on current information that is by its nature dynamic and subject to.
<unk> forward looking statements include among others statements regarding financial guidance regulatory approvals productivity improvements and plans to introduce new products and expand into additional geographies for words that may identify forward looking statements. We encourage you to refer to the safe Harbor statement in our press release earlier today.
All forward looking statements are subject to risks and uncertainties.
Including those risk factors described in section entitled Risk factors in our Form 10-K as filed with the Securities and Exchange Commission and updated on our Form 10-Q subsequently filed Q. Tara also cautions you to not place undue reliance on forward looking statements, which speak only as of the date. They are made Q Terra undertakes no.
Obligation to update publicly any forward looking statements to reflect new information events or circumstances or to reflect the occurrence of unanticipated events future results may differ materially from management's current expectations.
In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into <unk> ongoing results of operations, particularly when comparing underlying results from period to period.
Please offer please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with but not as alternatives to the operating performance measures prescribed by GAAP with that I would like to turn the conference over to Dave Mowry CEO of key Tara. Please go ahead.
Thank you operator.
So the impact the call Toubro Huh, who will provide you with greater detail of our financial results as well as our updated 2022 financial guidance before handing the call back to me to make a few final comments on the business.
Following are prepared remarks, we will then turn the call over to the operator, who will then open up the call to your questions.
Starting with burst with some high level of observations of the aesthetic market seems appropriate given the macroeconomic environment and the amount of discussion and speculation that we have heard from other market observers and participants.
<unk> continues to remain vigilant in regards to the broader economic and market conditions impacting the environment in which we operate.
We rely upon a set of leading indicators from our customers, which we believe will alert us to the potential future disruptions in our business should they occur.
We regularly review certain qualitative metrics, including patient treatment traffic clinical appointment cancellation rates and overall practice scheduling metrics to help calibrate ourselves and inform our plans.
In early August during our second quarter earnings call. We indicated that we believed that the underlying treatment and procedure volumes were steady and that the customer demand for capital remains strong.
Even in light of typical third quarter seasonality.
Indeed, these trends continued through August and September , enabling a strong core business performance.
<unk> with noteworthy year over year growth rates in both our capital equipment sales as well as a consumable product sales.
Look at it the same metrics as we moved deeper into the fourth quarter of 2022. Our current view is that the treatment volumes remain intact and mostly unchanged from the rates we saw in the third quarter of 2022.
Practice performance indicators, such as patient <unk> appointment cancellation rates.
Also continue to track with prior quarter rates instilling confidence in the core capital equipment and considerable run rates as we bring in the full year results.
A final data point for consideration on the health of our business comes from our annual Keturah University clinical Forum or C. U C F.
This is being held in southern California, This coming weekend.
R 2022 C. UCF enrollment is already eclipsed 600 attendees. This is up more than 35% from the high water Mark of any previous year. This level of interest is especially telling and later the requirement for non faculty customers to pay for their admission and cover their own expenses.
Sticking with macroeconomics I would be remiss not to mention the ongoing effects of our business from the dramatic weakening of the Japanese yen.
Japan represents the second largest market Freaky Tara behind North America.
Since the beginning of 2022 the end as lost approximately 30% of it's value versus the U S dollar putting significant pressure on our results in Japan as well as the overall financial performance of the company.
He ends rapid devaluation has significantly reduced top line revenues from Japan, with lower currency exchange rates as well as creating some moderate dampening of consumer demand from the regional economic environments within Japan.
While we have been able to source some additional top line growth from other areas in our business to offset this impact on revenue we have been unable to absorb the full impact that this devaluation has caused on our profitability.
We're also looking beyond Japan and remain watchful in other areas being impacted by macroeconomic or sociopolitical challenges.
We're working with our partners across our distribution markets to keep them current on accounts receivable as well as proactively addressing in scheduling deliveries to avoid unwanted deal exposure.
Additionally, we remain vigilant to many European countries and later the ongoing conflict in the Ukraine, and the increasing pressure on the euro in British pound <unk>.
Nevertheless, we harbor few concerns for these regions based upon current trends and the extent of our business exposure in these areas.
Now turning to some positive news futures third quarter 2022 performance.
During the period total revenue for the third quarter was $62.8 million, representing approximately 17% growth on a constant currency basis.
This result was driven by strong capital and consumable product sales are results were further bullshit by the contribution of more than $1 million from our army clear product or new Acme product and procedure with two quarters of limited commercial release in North America now under our belt.
Specific to capital equipment, we benefited from the constructive underlying market fundamentals previously mentioned posting 32% capital equipment constant currency growth over third quarter of 2021.
North America delivered 23% capital equipment constant currency growth and posted sequential growth over the second quarter of 2022, a first for this business in the seasonally slower third quarter.
International capital equipment constant currency growth of 50% was also noteworthy at each of the international regions delivered strong year over year capital equipment constant currency growth, reflecting contributions from the continued sales process improvements in sales team development efforts ongoing in each of our direct sales GR.
Graffiti.
Recurring revenue defined as the combination of skincare consumer product Avi clear and field service was $21.8 million in the period.
This performance reflects a significant decrease from prior year, when and announced skincare price increase let do prebuying activity within the third quarter of 2021.
A portion of the skin peer decline was offset by strong consumable product sales in the period up 43% on a constant currency basis, excluding Avi clear.
Shifting now to acne as I mentioned earlier, we are two quarters into the limited commercial release and are pleased with the performance of our business as well as the learnings we have been able to gather from our customers and their patients.
During the third quarter of 2022 are actual placement activity gain momentum as we slightly outpaced our previous commitment of 100 additional active placements in the period.
Our plan would have expanded the total number of active Avi clear units to 150.
At the close of third quarter 2022, we actually had greater than 160 active devices in the field treating over 600, new patients throughout the periods as patient volumes ramped steadily over the quarter generating procedure revenues of approximately $1 million.
Moving to fourth quarter of 2022.
We remain committed to our plan of adding an additional 200 active avi clear devices in the period and increasing the active installed base to greater than 360 units exiting fiscal year 2022.
With that let me turn the call over to <unk> to provide some additional color on our financial performance.
Thank you David.
Cause I review my prepared remarks, I want to note that I will be discussing some non-GAAP results.
A complete reconciliation of GAAP to non-GAAP is included in our earnings release.
We encourage listeners and readers to review our non-GAAP metrics in conjunction with the gap results as contained in this earnings release.
Total revenue for the third quarter was $62.8 million compared to $57.4 million for the same period in 2021, representing an increase of approximately 9%.
Bring the quarter, we continued to face meaningful foreign currency headwinds and our constant currency revenue growth was approximately 17%.
R. Skincare segment was particularly impacted by negative foreign currency fluctuation in the yen down 36% reported and down 21% in constant currency.
Based on current exchange rates, we expect that we will continue to face ongoing challenges from foreign currency for the foreseeable future.
As I mentioned last quarter and as a result of the continuing chern and the foreign exchange markets. We had 50% of our projected cash flows from Japan in the third quarter and have expanded aren't hedge positions through the end of one Q2 thousand 23.
Mark to market gains or losses from these hedges are reflected in the other income and expense line of our income statement and are immaterial.
Third quarter, North American capital equipment revenue of $25.4 million increased 23% over the prior year.
International capital equipment revenue for the third quarter was $15 $6 million up 36% is reported and up 50% in constant currency from the third quarter of 2021.
Recurring revenue defined as our consumables global service skincare and I'll be clear product lines was $21.8 million in the third quarter down 13% is reported and down 2% in constant currency.
The decrease over the priority was driven by skincare revenue of $9.4 million down, 36% is reported and down 21% in constant currency as well as services revenue of $6 $3 million down, 6% is reported and down 1% in constant currency.
As Dave mentioned, the skin care results in Q3 2021.
Normally high.
Due to customers stocking up ahead of the <unk> draft price increase in September 2021.
These declines were partially offset by growth in Arkansas Robles product, excluding I'll be clear.
35% of supported and 43% in constant currency.
non-GAAP gross profit for the third quarter of fiscal 2022 $34.8 million for the gross margin of 55.4%.
Scenting, a decrease of proximately 290 basis points compared to the same period last year.
Excluding 130 basis points impact due to the Acme program and the 240 basis points back from foreign exchange headwinds the non-GAAP gross margin in the third quarter would have been 59.1%.
Proximately 80 basis point improvement over the prior year.
Why we did experience supply chain and macroeconomic inflationary pressures during the quarter, we were able to offset them with ongoing cost improvement initiatives as well as continued leverage of our fixed cost base.
Total non-GAAP operating expenses for the third quarter of 2022 or third.
<unk> $36 $8 million compared to $28.4 million for the same period last year.
Included within this number or seven $7 million in expenses related to Avi Claire.
non-GAAP sales and marketing expenses for the third quarter of 2022.
$23.9 million compared to $17 9 million for the same period last year driven by continued expansion in our sales force higher commissions increased travel as well as six $3 million in expenses associated with Avi Claire.
non-GAAP R&D expenses for the third quarter of 2022, where $5.8 million compared to 4.7 million for the same period last year, driven by increased investments and not be clear and additional clinical studies.
Finally.
non-GAAP G&A expenses for the third quarter of 2020 $271 million compared to $5.7 million in the same period last year, driven by an expansion in our head count.
For the third quarter of 2022 are non-GAAP operating income.
Which we refer to as adjusted EBITDA was a loss of $2 million compared to a profit of $5.1 million in the prior year period.
As anticipated.
Our investment analogy clear with the most significant driver EBIT declined on a year over year basis.
Excluding Acme program impacts of seven 9 million for the third quarter of 2022 and.
And foreign exchange headwinds over the prior year of $3 $1 million adjusted EBITDA would've been $9.1 million.
As I mentioned earlier embedded with a non-GAAP opex, we had seven $7 million in spending on our Acme program.
80% of which is in sales and marketing investments with most of the remainder in R&D.
Finally, there were no material or significant changes toward tax position.
Turning now to our balance sheet.
We ended the quarter with $258 million of cash and marketable securities compared to $278 $2 million at the end of the second quarter.
<unk> within this $27 million sequential decrease our 11 million and inventory investments and $3 million and supplier advances.
Secure the necessary parts needed for the next couple of quarters of increased production.
A commitment we've made to our suppliers given the relatively low volume, but high value added nature of our product portfolio.
In light of the positive findings and our limited commercial release.
We now plan to accelerate our North American full commercial release, this month and anticipate investing an additional $20 million in Q4.
As a reminder.
Innovative <unk> business model.
<unk> a much slower capital revenue inflow for significantly higher procedure fees over the life of the device.
This is a compelling financial arrangement, but one which requires a heavier upfront financial commitment on our part of.
Accordingly over the course of 0.3, we will move from cash consumption to cash generation at the active installed base expense and overall treatment revenues outpaced the investments and new placements.
With this in mind, we established the funding and capital structure.
And the year to ensure we had a clear pathway and the adequate capital required to achieve our goals.
Before I turn the call back over to Dave I would like to provide you with an update on your outlook for the full year of 2022.
While we are encouraged by our third quarter results. We also continue to be faced with previously noted foreign exchange headwinds and the core business.
We are reiterating totaled 2022 revenue guidance for the company of 255, two $260 million, we expect to be at the upper end of our revenue guidance. Despite absorbing the entirety of unprecedented foreign exchange rate declines in Japan, Europe Britain and Australia.
The full impact of these foreign exchange headwinds is expected to be more than $17 million, implying a constant currency growth of 18% to 20%.
Moving on to adjusted EBITDA.
For Dave's comments earlier and given are favorable findings from the limited course release, we are accelerating our full north American launched in November and making the necessary Avi tears sales and marketing investments ahead of 2023.
FX pressures have worsened during the third quarter.
Continuing to trend unfavorably in early for the border.
In light of our previous projections, we now expect full your FX impacts on adjusted EBITDA to be more than $12 million.
Considering all these factors we are revising our full your adjusted EBITDA guidance to be in the range of breakeven to negative $5 million.
With that I will now pass the call back over to Dave.
Thank you Ron I.
I am pleased with the continued momentum as demonstrated by our performance during the third quarter of 2022.
But frankly I am much more encouraged by what still lies ahead for Tara.
To be clear our focus on the Acme was never only about a product. It has always been about a bigger strategic outcome for the business.
He'll be clear device that are obviously, a business model are enabling true transformation a teacher.
First.
We are engaging medical terms in their space and effectively expanding our core customer group second.
We accessed a new and expansive total addressable market with long term growth of what we expect to be a more recession resistant procedure.
Third we have begun to shift to more procedural revenue channels that are aligning our interest was that of the practice.
And finally, we have gained line of sight into how these model changes can and will accelerate the evolution of <unk> financial profile.
To include improving margins and visibility.
Based upon the performance during our limited commercial release of Avi clear and the ability for us to see and validate impact on these critical factors. We are now confident and expand into a full north American launch of the obviously a product.
Going forward, we expect to continue to grow our Acme market participation overtime due to the expansion of treatment indications. The addition of new customer channels and the inclusion of new geographies serviced by the Avi clear product.
Beyond Avi clear our core business has never been better positioned with the right people scalable processes and an innovative new product portfolio with new product introductions to be delivered over the next 18 months.
And the next year and a half will be an exciting fulfilling an exceptionally busy time for us at Q Tara as we work as one team to deliver upon our goals.
With that I'd like to turn the call over to the operator and open the call to your questions.
Operator.
Thank you.
Now begin the question and answer session.
Question Q, you May press Star one on your <unk>.
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For a moment as color as China Q.
Our first question comes from John Block of Stifel. Please go ahead.
Great. Thanks, how are you doing here on.
Maybe.
First question.
You know you ought to be clear Fox's are just running ahead of our early thoughts and maybe talk about.
What changes with the full launch this month so.
Well every rep now have it as part of their sales quota and then.
You know maybe attack on there are there any only high level thoughts around utilization per Avi clear box as we enter 2023, and then I'll wait for my follow up with banks.
Alright, great. Great question is John and thanks for those I think in terms of expectations I wanted to be very careful not to let people get out too far in front of us.
As everyone knows and I think we've set a few times that as you place a box there's kind of a lead time to the activation of that box. So while we may be going more broadly with the entire sales team to start to place. These boxes invalidate certain customers and make sure that they have access to the product.
Want to be very careful not to think that these boxes become active almost overnight, there's still quite a bit to move through to get these to be active you have to be installed then we have to show up and train the clinical staff on how to use it effectively and efficiently and then we have to show back up and bring on the the kind of the the back office administrative.
[noise] functions to make sure they understand how to enroll patients and then process and then the last thing we've always talked about as in most cases. These practices have a lead time of new patients and when they can bring them on so I just want to be careful that while we're pulling the trigger now to start looking at and placing new.
Boxes are a little bit more broadly the activation of those boxes are probably more of a a first quarter impact and they are a fourth quarter. It back.
In regards to like what we expect we are expecting to start to think more broadly knowing what we've proven to ourselves.
During the limited commercial release, so like we are going to look at other places and other other opportunities to place these boxes.
Also I wanted to be very very thoughtful not to do so in a way that harms the longterm utilization of the boxes that are out there. So.
Not gonna give you a number to target around utilization.
But I think we kinda think about it in a very broad manner that we don't want to be placing it at clinics that aren't going to be seeing a volume of patients that would support.
Kind of a number of of three or so more new patients.
Months right. So many of them need to ramp some of them are already there some of them need to learn how to use it and deploy it in their practice. So there's quite a bit of work that still needs to be done I think the reason we moved in full full launches because we now understand what that worked looks like and I think we now know what it takes to kind of execute upon those things.
Got it got it very helpful and maybe instead of a good tune into my second question. If you can talk about where you are from a sales infrastructure standpoint, I believe you hired a good amount of reps over the past 18 months I mean, we're obviously seeing the results are capital was phenomenal and three Q22, but I'll be clear is now in full launch do you need more <unk>.
Do you do you need a specialized cells force you know for for Avi clear utilization to go ahead and drive that maybe you just talk about any plans on the infrastructure standpoint from the infrastructure simpler as I'm sure you want to properly support you know the exiting 350 boxes. This year and then ramping at the 2000. Thanks guys.
Another great question I guess, the way I would coach Couch My answer around that question is this way.
We haven't expanded customer base that need different things and as we think about servicing those customers and surrounding those customers, we're going to need to provide different customers with different support. So as we think about scaling we have to think about not just scaling the number just more more of the same we have to think about making.
Sure that we're bringing the right talent to the right locations to do the right things.
And each of those accounts like I said earlier I think from the limited commercial release, we understand that and what might be a midterm may need different help in different support then what are the aesthetic practitioner may need.
So we think we understand those things I think we just need to continue to grow into them.
As we move forward and you're right. We did at a number of what we call key account managers over the last year year, and a half and I think those people you know I think.
Everyone I think.
Totally triple a number before of around 40 of those we're going to continue to look at them and make sure that we scale to a point, where they're not only keeping pace with a new accounts, we ads, but they're able to kind of keep helping existing accounts continue to hit their utilization targets. So that'd be the balancing act for for the better.
23, and and it's likely we will need to add more as our our our placements increase and we hope to drive greater.
Effectivity or productivity of those boxes and each practice.
Got it got it perfect got it thanks, very much and then I'll follow up offline.
Great.
Our next question comes from Luis.
Gerald Please go ahead.
Hi, guys. This is Wayne also Louise and congrats on quarter and thank you for taking our questions. So.
Maybe two of the two combos first of that I know, it's the only six most things that'd be cleared up food and has a limited commercial release what are the physician feedback you have received so far in could you provide us with the latest thoughts on the market opportunity antique sales and then probably a bit too early too goodbye.
About this but what's your plan before outside of North America. Thank you.
Well you didn't take any time you are right for it.
That's a great question is Wayne and we appreciate that I'm looking at I'm Gonna Perry on a couple of those points that I don't think we're prepared to to get out in front of yet, but I will tell you the physician feedback has been phenomenal.
There's a number of folks that I've interviewed physician users I think the commentary continues to be exceptionally strong.
We were just at the fall clinical meeting, where we reduced released or 12 months.
Follow up which was outstanding and continues to show improvement over the six month data. So we are exceptionally proud of the clinical outcomes and I think the physicians are coming onboard.
More and more to understanding of this needs to be part of their practice as they evolve.
So we're pleased with that being said I think we still need to figure out how to make sure that we can put it into their practice effectively.
Many of them treat patients in seven minutes cycles as normal Derms and we have to figure out how do we help them put a half hour treatment package together.
It allows them to still treat that patient without being disruptive to their practice flow. So we have some work to do as I said to John earlier, and we're going to continue to work through that so I think getting to a peak volume I don't think is something that we're prepared to kind of talk to yet.
So I'll Perry on that a little bit I do think that there's a huge demand that's out there for us I think there's a lot of opportunity, but it's gonna take a while for us to really achieve that peak number and I think as we evolve and gain more insights will be able to share more insights with the investment.
Alrighty.
In terms of outside North America.
We're not we're not in a position to mentioned that yet, but I will tell you that you know.
Myself and rohana, even our chairman the implants, we've traveled through many countries around the world and we're going to continue to look at and evaluate where we think we have the greatest opportunity for expansion of where we think we can have.
Opportunity for contribution both on top and bottom line and make those decisions at the right time with the right support and at that point I don't think I'm willing to comment any further.
Got it. Thank you so much and congrats again.
Thank you.
Once again, if you have a question please press star.
<unk>.
Our next question comes from George Sellers Stephens, Inc. Please go ahead.
Thanks for taking the question and congrats on a great quarter.
I want to follow up with with have a clear and maybe some feedback you're hearing from from some physicians on the demographics in the patient population that they're targeting in these early stages, maybe in terms of agent and act. The severity are they going after the younger teenager.
At this point and the.
More severe acne or.
Any feedback you have from physicians at this stage.
Georgia, that's a great question I'll be really careful to first state and stipulate to the to the audience.
That I'd be clear is approved for all skin types and all severity, so mild moderate and severe and skin types, one through six where we get relatively the same outcomes for all skin types.
Cross those those categories and it's been a rather remarkable and quite frankly rewarding outcome to see at 12 months. The clarity that these people are achieving using avi clear.
Said I think in certain demographics and certain geography's, we see a higher propensity for young professional women to be treated.
I think generally speaking these are folks that are probably more opposed to the country indications associated with.
Threat known.
You obviously have concerns about.
I'll say burst effect with ice a threat now and you have concerns on the contraindications alcohol consumption, while on the drug there's challenges with people that have been on it two or three times previously.
At that at that point in their evolution and I think there probably are a little bit more frustrated and fed up by the same joke and we see more of the suburban environments, a high propensity of parents to be taking their their teenager adolescent children for treatment. So I want to be careful not to just kind of lump it into what we think the <unk>.
Number one demographic is.
I think there's opportunities for a full coverage and the results. We see certainly stipulate that basically all folks are treated C. Rather dramatic improvement. So we're not gonna kind of favor one over the other but I think the demographics of where certain aesthetic practices are versus where.
<unk> practices are may drive a kind of a.
Change in the patient population.
Okay. That's that's helpful. Thank you for that context.
And then.
You know given the economic backdrop and expectations for next year and in the context of the cost to the patient for this treatment.
What are you doing to sort of mitigate some of the the issues and concerns of a weakening consumer and and I guess, how are you thinking about.
The.
Impact of a potential deterioration in the underlying market.
Thank you for the time it is.
Is a great question and I first of all I just tell you that while we do believe that acne is probably quite a bit more recession resistant than.
A brow lift or or wrinkle reductions et cetera.
And we do feel like.
This kind of opportunity is something that is obviously come to us at the right time through a lot of hard work and effort on our part.
That said, we recognize that there's always gonna be economic pressures.
And we have Christ the device and the procedure in a way.
For our physicians and we've given our physician certain market data to allow them to price their procedures to the to the customer.
And I think that's all been market based.
And obviously in the backdrop of recession.
The less we think that this is a little bit more recession proof as I had indicated but beyond that we've done. Some other things you may recall that when we launched this we came out with a financing plan that.
That physicians were able to kind of help finance the program.
Through care credit, but we've taken that one step further and maybe I can have raw and just speak to the new program that will be rolling out as part of our our our national full launch in North America painted.
And very rightly said that we do expect that this will be.
Ah.
Even though it's patient be a lot more versus recession resistant than than others direct procedures, given the medical conditions that treats so so george to answer your question on patient financing, we're going to be launching a program here in the upcoming weeks that will allow the patients to finance this program to <unk>.
Manses procedure at $99 a month.
Over a period of 36 months in.
In our partnership with Carecredit, and we think there'll be one of the steps and helping us unlock this market and the value that this can create for our shareholders. What's really amazing is.
We were able to establish this as an exclusive arrangement for us in this.
And this treatment.
Segment, if you will so so we're really happy about not only having this extending into the patients but also what it does for us competitively to differentiate and lockout. So some some thoughts so are some folks so.
I think it's been well crafted and couldn't.
Couldn't be happy with the partnership we're establishing with care credit.
Okay. That's that's really helpful. Thank you both for the time I appreciate it.
Oh great.
This concludes the question and answer session I would like to turn the conference back over to Mister Mallory for any.
Closing remarks.
Thank you I appreciate all the support we've got from you today.
What I would like to lead people with is just some some final comments.
First of all I want to thank you for your continued support and interest in Kuchera, We're really excited with what we're doing here and could not be more.
Excited for what the future holds for the company, we look forward to giving you an update and later in February of 2023 on our full year results and look forward to catching up at that time.
All the best.
This concludes today's conference call you may disconnect your lines.
You for participating and have a pleasant day.
Yeah.
Yeah.
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Mhm.
Okay.
Mhm.
Mmm.
Okay.
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