Q2 2023 ADTRAN Holdings Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to add train Holdings, Inc. Second quarter 2023 earnings release Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer period.
Ask a question at that time, Please press star followed by the number one on your telephone keypad.
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During the course of the conference call I'd turn representatives expect to make forward looking statements that reflect management's best judgment based on factors currently known.
However, these statements involve risks and uncertainties, including the ability of component supplies to align with customer demand the successful development and market acceptance of products competition in the bucket for such products, the product channel product and channel mix components costs.
And logistics cost menu.
Manufacturing efficiencies are.
Our ability to efficiently integrate mergers and acquisitions.
Other risks detailed in our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly report on Form 10-Q for the quarter ending June 32023.
These risks and uncertainties could cause actual results to differ materially from those in the forward looking statements, which may be made during the call.
The Investor presentation found on our Investor Relations website has been updated and is available for download.
It is now my pleasure to turn the call over to Tom Stanton Chief Executive Officer of I try and holdings. Sir. Please go ahead.
Thank you Julien good morning, everyone. We appreciate you joining us for our second quarter 2023 earnings Conference call.
With me today is I tried holding CFO really Doppler.
Following my opening remarks, and we will review the quarterly financial performance in detail and then we will take any questions that you may have.
I'll start out by looking at the performance. This last quarter and then we will discuss our current market positioning both near and long term.
The results in Q2 were within the guidance range that we said on the last call and closely followed what we expected from both a product mix mix and regional shifts split excuse me.
Q1, the revenues in the quarter were led by our optical networking solutions and our access and aggregation solutions.
From a regional revenue split the U S was 40% and non U S came in at 60%.
This split is consistent with the past couple of quarters.
Looking across our various market segments. The U S retail service provider for one of the strongest customer groups in the quarter, particularly with fiber access platforms. As these customers continue to build out fiber footprint in underserved markets.
Due to the German capital requirements, we did issue a pre announcement on lower revenue projections for the second half of this year.
This lower forecast is primarily attributable to inventory optimization in optic optical networking solutions as customers adjust their inventory and corresponding bookings.
Our access and aggregation solutions, along with our subscriber solutions.
Are not expected to see any further forecast adjustments this year due to ongoing inventory scrutiny.
The investment thesis has not changed and we remain upbeat on our industry in 2024 and thereafter.
We made great progress this past quarter and executing on the strategic initiatives of maximizing the broadband funding opportunity being the leading option for Huawei replacement in fiber networking and driving cross selling synergies with our comprehensive fiber networking portfolio.
I want to remind our listeners that this success is coming at a time of unprecedented funding for fiber based broadband networks and an ongoing shift away from high risk vendors led by Europe .
And we have one more huawei replacement business than any other in our segment.
To put it bluntly, we are seeing a reshaping of the vendor landscape across Europe , and we are well positioned to be the largest beneficiary of this market shift.
Starting with customer acquisitions, we had our second highest quarter ever for new fiber to the home operators, adding 26, new customers in the second quarter.
And this past quarter the growth came primarily in the U S with regional service providers.
This customer group is benefiting the most from broadband stimulus funding in the U S. This customer growth is also aligns with our strength in the U S retail service provider market and the growth in fiber access platforms that we expect to continue in the second half of this year.
Yes.
Highlighting our continued momentum in Europe , we added another large multinational operator for access continuing our run of success in the EMEA region and bringing the total large fiber access customers in that region to seven.
Most of these customers have not yet reached scale deployment and even without these contributions hedge add trend has moved to the number two position, surpassing Huawei and market share for fiber access platforms in North America and EMEA combined.
This underpins our belief that we are that the work we are doing today will lead to significant revenue opportunities as we exit the current environment.
Similarly, our vendor replacement strategy for Europe is seeing similar access.
Our success gives me and the optical transport space during the quarter, we secured a key metro WDM win with a large multinational operator in Europe building on the ongoing success, we have had in that region.
We are also improving our cross selling capabilities as we integrate our teams and processes. Just this last quarter. We had two large service providers expand their business with US one customer was an existing optical networking customer selecting our fiber access platforms and another was an existing fiber access cost side that has now selected our optical networking solutions.
As we enhance our optical portfolio focused on regional operators.
Further integrate our solutions under a common management system and introduce our complete portfolio to our customers, we expect to accelerate these cross selling synergies.
On the software side, we added a record number of new customers to our latest mosaic one SaaS offering we now have more than 275 service operators that have adopted mosaic one up from 200, just the end of last quarter.
This growth in SaaS customers helped us significantly grow our recurring software revenues over the past year and we expect to accelerate this growth in the year ahead.
To recap our strategic approach to the market. Our plan is to capture new foot, new fiber footprint with our optical transport and fiber access platforms in the markets, where we see the highest growth potential led by the U S and Europe .
We then want to cross sell our entire portfolio, including attaching our software and subscriber platforms.
This past quarter was very successful that helping us continue to build momentum in this strategy.
While we remain very confident in our long term outlook, we understand that we are still in a period of uncertainty as customers rationalize their inventory and near term capital plans as a result as a result, you saw <unk> decreased its non-GAAP operating expense levels during the quarter and we will continue to reduce our expenses throughout the rest of this year.
Overall, the focus on fiber networking, our customer growth and improving inventory situation and operational cost synergies have us positioned to be the largest beneficiary in this historic investment in fiber networks globally.
Although near term headwinds are a reality we are they are just that they are near term and the outlook remains as strong as ever.
With that I will turn things over to Julie to provide a review of the financials and following <unk> remarks, we'll open it up to any questions you may have Julie.
Thank you Tom.
Hello, everybody.
I will cover our second quarter 2023 results and provide our expectations for the third quarter.
Please note that Q2 2023 sites include a full quarter consolidation of the airtran networks financials, which affect effect year over year comparisons.
Since this is the case of a refrain from repeating the consolidation effects when discussing the year over year comparisons of our results I.
I will be referencing non-GAAP information with reconciliations to the most directly comparable GAAP financial measures presented in our press release and also certain revenue information by segment and category, which is available on our Investor Relations Web page at investors <unk> com.
In addition, we have updated the investor presentation to the site, which is available for download.
Unless stated otherwise all financials are presented in U S dollars.
Yes.
Q2, 2023 revenue came in at $327 4 million within our guidance range of between 325 and $335 million.
Revenue was up 93% year over year, and up one 1% quarter over quarter.
Our network solutions segment accounted for 86, 4% of revenues in Q2 2023 compared to 97% in Q2, 2022, and 87, 2% in Q1 2023.
Our services and support segment contributed $13, 6% of revenues in Q2 compared to nine 3% in the year ago quarter, and 12, 8% in the previous quarter.
Temporary softness in order behavior in the subscriber solutions and experience category, especially with <unk> and Ethernet needs continued in Q2.
However, SSN E grew two 4% year over year, and two 9% quarter over quarter and contributed 24, 9% of Q2 revenues.
Access and aggregation contributed 31, 4% of revenue and grew 11, 3% compared to the year ago quarter, and six 1% compared to the previous quarter.
Our optical networking solutions category contributed 43, 7% of revenues and was down three 2% from a record quarter in Q1 2023.
On a regional basis for year over year second quarter domestic revenue grew by 24, 8% and international revenue increased by 194, 7%.
Similar to Q1 International revenue made up 59, 7% and domestic revenue contributed 43% to total Q2 revenue.
We had 110% or more of revenue customers in Q2.
Q2, non-GAAP gross margin was 38, 6% and increased by 216 basis points year over year, and 132 basis points sequentially.
The year over year.
And quarter over quarter increase is due to improved purchasing and transportation costs and a more favorable product mix.
Our non-GAAP operating expenses were $122 7 million, increasing by 126% year over year, but decreased by 3% quarter over quarter.
The quarter over quarter decrease was mainly due to savings in the R&D area, partially offset by higher legal costs.
Okay.
non-GAAP operating expenses were 37, 5% of revenue compared with 31, 5% of revenue in Q2, 2022, and 38, 9% of revenue in Q1 2023.
Okay.
non-GAAP operating expense was three eight.
Excuse me non-GAAP operating income was $3 6 million, which translates into a non-GAAP operating margin of one 1%, which was within our guidance range of between one and 2% of revenues.
non-GAAP operating margin decreased by 377 basis points year over year, but improved by 272 basis points compared to a negative one 6% sequentially.
The third quarter over quarter over quarter improvement in profitability is attributable to higher gross margins.
And lower operating expenses.
We're making great progress with the execution of our synergy plan and expect now to realize the majority of our run rate synergies already in 2023.
As a result, we expect Q3 non-GAAP operating expense to further decrease.
The company's non-GAAP tax provision for the second quarter of 2023 was $4 7 million.
The company's GAAP tax was a benefit of $8 4 million.
The difference between the GAAP and non-GAAP rates was mainly driven by the two distinction mix after non-GAAP adjustments during the quarter.
Closing out our income statement results total non-GAAP net loss was $5 2 million and net income.
77000, after adjusting for minority shareholders interest in <unk> networks.
This resulted in diluted earnings per share attributable to the company of zero cents per share.
Yes.
Turning to the balance sheet and cash flow statement.
Cash and cash equivalents totaled $124 3 million at quarter end cash flow used for operations was $16 2 million and improved by three points.
$7 million compared to Q1 2023.
Trade accounts receivables were $239 6 million at quarter end, resulting in Dsos of 67 days compared to 73 days in the prior quarter.
Inventories were $416 8 million at the end of the second quarter, resulting in turns of two 3% compared to two two in the first quarter.
Accounts payable of about 100 at 171 7 million, resulting in <unk> 59, compared to $69 in the previous quarter.
<unk>.
Okay.
Tom explained earlier, how customers adjusted their order behavior to the new to the now shorter lead times. Additionally, inflation and the increase in interest rates, leading to more emphasis among auto customers on short term cash flow.
All of this is negatively impacting our revenue expectations for Q3.
We don't expect any changes to our mid term mid term opportunities and long term growth catalysts as carriers worldwide proceed with network upgrades to fiber.
Due to the tremendous amount of customer activity related to future project opportunities.
The tailwind arising from high risk vendor replacement initiatives as well as government funding, we anticipate that the current softness in orders are only of temporary in nature.
Our comprehensive product offerings architectures and solutions as well as our rich.
Feature roadmap positions us well in all of our target markets.
We will continue our prudent management of non-GAAP operating expenses anticipating a further sequential decline in the third quarter.
Yes.
For the third quarter of 2023, we expect revenues.
To range between 275, and $305 million and we expect our non-GAAP operating margin of between minus 5% of revenues.
Once again additional financial information is available at <unk> Investor Relations webpage at investors <unk> com.
Now I will turn it back to over to come and we could take your questions.
Thanks Ali.
Julien we're ready to open it up for any questions people may have.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Michael Genovese from Rosenblatt Securities. Please go ahead. Your line is open.
Okay. Thanks, a lot.
Our first question, Tom when I look at the guidance for.
For the third quarter.
And maybe what's implied in the back half of the year.
Given the network's release in Germany.
I am I right in assuming that the core.
I'd say the organic Nonorganic peak the classic <unk> business, the broadband piece of that trend in the subscriber solutions related to that that the.
Guidance is actually better for the third quarter than consensus and that.
More than 100% of the lower guide versus consensus is coming from the optical business.
Is that right.
Yes, let me phrase it a different way if you don't mind. So it looks like if you think of classic AD trend legacy AD trend business.
Access and AG is doing well and we expect growth through the.
Second half of the year, we expect subscribers subscribers.
We talked about the <unk>.
Inventory situation with subscribers.
That's kind of flattish.
And then so so yes is the majority if not all of the decline is in the optical piece and really the way that I would characterize it in a way that we think about it is going through this downturn.
The AD trans side of the business kind of hit the downturn person that may be because we're in access and Thats where.
She is kind of a different buying cycle.
And.
And then the AD the AD piece kind of followed after that and that was both in the uptick in in the downturn and I think thats. The same thing thats happening right now so that trend is kind of the legacy <unk> pieces.
Slackening out.
We expect that to turn quicker and then add but we'll follow that so the premise of your question is correct.
Okay, Great I just wanted to follow up then quickly.
There's three pieces here in the bedroom.
Quick follow up on each of them so for assets and obligations.
Can you just sort of characterize how the European tier one too.
We've already started to deploy so.
We're thinking about.
The U K in particular, maybe Germany, I'm not sure, but how those are looking in the second half of the year the.
The European tier ones are.
They're very strong in the second half.
Europe Europe in general will be strong in the second half.
Okay, and then can you characterize for US just in the CPE.
Subscribers solutions.
I mean, how far are we towards the inventory correction being done.
So a quarter later sort of where are we with inventory and CPE.
Okay.
Not great visibility there so it's tough to tell.
To put a real number on it it feels like we're just kind of bouncing around the bottom I mean, it feels like.
There's still a lot of inventory in the field, but there are specific projects that we're winning and actually there is some incremental market share.
That we are picking up and will start shipping in the fourth quarter, that's kind of still offsetting but the original flow with so I would say, we're kind of just flattish and I don't expect that will change in that through this year. So I would expect that to carry forward all the way through the end of this year really any growth you see in that and need to some extent even offset.
Slowness is being offset by just new wins.
Okay, and then I guess, just any color you can help us sort of understanding how.
On the optical piece on the add the piece.
That this sort of inventory.
Inventory correction sort of hit all at once so just any color on I mean, it's such a big magnitude just more color there and just across U S. Europe .
Enterprise service provider it seems like the whole business will be affected so I'd just love some more color there.
Then my real final last question look I'll leave you with here in past pass it on.
Is any any early thoughts on 'twenty four.
Do you think that should be a strong growth year in 'twenty for or against any congestion as well.
Kind of makes the visibility in 'twenty for hard to say thank you.
Well, yes, I mean in that last question is it really.
Good question.
Okay.
So first of all on the timing is that that's not dissimilar to what we saw in the AD trend. If you can if you remember that.
The impact on the subscriber piece came.
Very quickly.
On the if I look back and if I look at the aggregation the aggregation product line went through a very similar phenomenon that difference was the magnitude.
Of the new customer wins offset the declines.
And let's say to some extent offset until a large X that offset the declines that we were seeing in <unk>.
Does have inventory corrections from existing customers. So I think I think the phenomena with similar so on the optical piece, we're adding customers right.
No doubt if I take a look at the <unk>.
The new customer wins over the last six months, it's probably the biggest that I am looking at doing here, but it's probably the biggest we've ever seen in such a short period of time, we're adding new customers as you know those customers take a long time to turn off.
And.
So it just doesn't have and it doesn't have the same runway that we did on the access and AG, which kind of grew market size wise.
At a different pace.
Earlier so.
I don't think I don't I don't think there is a change in.
And.
In kind of the way that <unk>.
Impact is being felt.
So.
I think that answer that and then as far as next year. So yes for next year.
I mean I.
I mentioned that.
The majority of the customers that we have out there are either very slowly online are just coming online and thats just on the access piece.
There is still significant number of opportunities that are out there that haven't been awarded yet.
We're picking up over 26 customers or something like that this quarter.
So sooner or later.
That eclipses the slowness in the existing base.
And I think that the slowness in the existing base on the access I would expect that to recover the quickest.
So on AG assets in AG, we should have a fantastic year next year.
Service subscriber.
Read about the magnitude of the inventory and kind of because that inventory is not just add trend inventory that inventories everybody's inventory.
Because customers do swap Rgs <unk> are routinely so.
That one is just more difficult.
I guess I am willing to say expect it through this year.
It's very difficult to call and into it I'm going to.
Yes, I do.
Don't think it last into the second half of next year could be still some hangover in the first half.
In aggregate, though thats a relatively <unk> if we're at the bottom, which we believe then it'll just be kind of hanging out there.
And then on the optical piece.
Okay It could actually.
Could see that.
I could see the bottom of the bottom I would expect in the second half when we actually see a rebound I would expect it.
Here again, I don't expect it in the <unk>.
To be as long as the second half of next year.
So if you look at that in aggregate and you got two pieces of business that come online at latest in the second half and that kind of a different trajectory than.
And then the bottom that we're starting to feel right now and then you got access and AG, that's going gangbusters. So do I expect next year to be a.
Solid growth year in aggregate.
Okay. Thanks for all the color Tom.
Okay.
Our next question comes from Greg <unk> from West Park Capital. Please go ahead. Your line is open.
Yes. Thank you for taking my question.
Tom you referenced several times.
The Huawei replacement.
Situation Thats playing out.
And in Europe , and I guess to some extent here in the U S.
Yes.
Could you give us some sort of color on what inning, we're in it.
That process I mean, how much of a tail do we have left for that thanks.
Sure I'll give you some color so basically if you are in Europe .
Maybe we should do a heat map.
On kind of where.
Wildly as stellar and because I think we could do that with just public data.
Which would give you a better bet.
Feel for it but the way to think about if you're in western Europe .
And you are still using Huawei, then youre still yet to be used to help work to do.
And.
My sense is we're probably in.
In process right now, so thats, either awarded RFP or contract.
My sense is we're probably.
I mean, it's got to be less than 30%.
So because in each of these is each of these countries you have multiple carriers.
And usually in those cases, you have one carrier that's made a move.
Potentially but not the entire carrier base within that customer.
So.
I would say that's it.
That's kind of the way I would see access and then you have the optical piece, which is later it has just absolutely started later and some of that may be inherent capacity that they had.
And to their network, but we really saw a big movement in.
Let's say activity and awards six months ago.
So and where we saw that a year.
At least a year ago on the access fee. So I would say, they're not as far into that.
So I hope that answer your question sure. So we're talking at least several quarters out.
Yes, yes definitely.
Without a doubt absolutely just even on the access piece, that's still several quarters out.
And thank you for the win right that's for the wins and then you still have to operationalize them. So yes.
Okay.
Alright.
Alright.
And comes from George Notter from Jefferies. Please go ahead. Your line is open.
Hi, guys. Thanks, very much I wanted to ask about lead times in the optical business can you just give us a sense for where lead times are now and maybe where they were.
At the peak of the supply chain Crunch and.
I'm just curious how those are changing.
Yeah, maybe a good rule of thumb is think about it as <unk>.
12 months four months.
Got it.
There are some that are long or there are some that are shorter, but I think in general lessor.
That's a good real estate.
Got it and then do you expect those lead times.
To shorten from the formats level going forward does that does that makes sense.
Hi.
In aggregate, probably not because some of it is.
A way towards some of these optical <unk>.
<unk> just takes a while to build.
So I think a comfortable if you gave me the latitude of three to four months, that's kind of historic So we're kind of in that range right now.
Got it and then are you are you letting customers reschedule deliveries I assume so is that is that fair.
Yes, that's fair.
Yes, okay.
Got it doesn't help me if they have a bunch of inventory. It may help me near term that have been long term alright.
Alright.
So.
So yeah customers are rescheduling.
Got it okay. So.
And then the other question I was just curious about your thoughts.
Thought process on the minority interest is obviously there is a piece of the Abbott business that.
Yes, Directionally youre looking to take out over time and any new thoughts on how you handle that how you finance it what the pacing would be thanks.
Sure.
So we're not in a hurry to actually retire that investment base.
Initially depending on interest rates and things we were looking at doing that earlier and Thats whats kind of earlier in the overall process with where things sit right now I think we're comfortable.
Letting that sit out there.
And.
And looking at it again it is something that comes up.
And our board meetings, but it's something that we're just comfortable with the current situation is right now.
Great. Okay. Thanks, very much guys.
Thanks.
Next question comes from Brian <unk> from Needham <unk> Company. Please go ahead. Your line is open.
Thanks.
Wanted to touch on the Opex, you talked about cost cuts.
These are primarily synergy related cost cuts you've talked about historically and looking to pull those in.
<unk>.
Give us any color there on kind of the.
The slope of the curve down here and what.
What you might say.
24 at an Opex run rate. Thank you yeah.
Kind of easy math as a kind of rule of thumb to think about 5% 5%.
5% next quarter, 5% again.
Quarter and.
Exit out of the year will be at that level.
Got it really helpful and.
The U S side, it sounds like some kind of ongoing strengths in access and aggregation.
You look across your kind of tier ones twos and threes. It sounds like you saw some strength in some tier twos executing sorry, Richard in the RSP regionals.
Yes, yes.
That business actually just on a sequential basis was up.
Kind of high teens ish, so definitely and then they buy a lot of subscribers to have no subscriber was still down but just the access and AG <unk> and stuff was actually had a really good quarter.
And how are.
Lead times are on the kind of <unk> type products that you're rolling out.
Some product transitions there so.
Any comment it is training.
Yes.
That's a good point it is still a bear it is still.
It's not that we can't ship them at us So somebody talked about the European business will that European business.
<unk> is predominantly our new products $63 <unk> and.
So the magnitude of the ramp that we're doing in the second half on that $63 <unk> is pretty gargantuan, it's probably the biggest.
Biggest ramp the company has ever gone through.
I mean, we're literally going to be shipping tens of millions of that this quarter.
So.
And some and some of that is gated by product availability, but I wouldn't call. It a supply chain issue I would call that.
Just a significant ramp.
Got it and how about in the U S. How the.
<unk> product.
Yes.
I think the U S. We're doing okay. I mean, there is some there is some tightness.
The U S customer basis.
Traditionally Ta 5000 base.
Eight port combo cards are.
I am gated by supply there, but here again I wouldn't call that a <unk>.
Supply issue I am just gated by the just the sheer number that we're actually shifting there.
I mean <unk> access to Meg in general is just doing really good.
Thank you.
Thanks for that.
Our last question comes from Bill Kieselmann from Titan Capital Management. Please go ahead. Your line is open.
Thank you.
Circle back too.
Yes.
Yes.
The guidance and why.
Changed that you didn't anticipate I guess, that's what I'm really trying to get my head wrapped around it is how did this end up surprising you given that you had the.
The inventory correction on the.
On a historic AD trend business.
Why wasn't it more.
More obvious that this was the next shoe to drop.
Yes so.
And we touched on on the last call. So the real drop in the AD trend business the significant drop in the <unk> business with subscriber.
Solution. So it was really March.
<unk>.
And we source we saw that also on the avid business, but it was on here again kind of a subscriber to the last point, which was IP IP needs.
Ethernet niche.
We didn't see that big of a drop on access and AG.
And looking.
Access and AG, we were adding new customers.
Had been adding new customers and some of that is new customers coming online. Some of that is just different pieces.
I would say.
The surprise was.
The number of.
Push outs.
In the quarter.
And then just a substantially slower order rate.
Quarter to quarter.
Was.
It was maybe not as bad but it is currently.
Talk a little bit like subscriber.
So it was kind of in between there. So it was that it was the kind of halting of.
And when we go and talk to customers I mean, so the slide out is not just existing orders to slide out is also customers that were saying hey, I want to start this this quarter.
Now all of a sudden they are saying hey, we've gone back and we want to start.
Next year, we want to start Q1.
And that was.
It wasn't so much the number of customers. It was just that it was fairly significant customers that we are doing that.
Okay.
Tom using that last comment customers that were just starting their program in choose to move it to Q1 from Q2 do you think that's specific to lead times being shorter and therefore, they didn't have to plan ahead of us and.
And as far or something totally different.
No I do think that that is a different I do think that in that particular case. So first of all there is weight on both right. So theres weighed on inventory and that is weighing on project starts and the other thing thats different about the optical business as there is a significant amount of that optical business that is project related and those projects don't.
Necessarily last multiple years, sometimes last year, they sometimes last six months. So they go in and upgrade our footprint and Theyre done right. So it's not subscriber add base like it is with fiber fiber to the Prem.
So what we saw is explicit that I can think of like two right now that literally we're going to start in Q3 and now are starting in Q1 and that they didn't have inventory.
So, yes that was literally kind of a rethinking of their capital for this year.
Great. Thank you I appreciate the additional color.
Okay, I think that.
That handles our question queue. So I appreciate all of you guys joining us on the call today.
And I look forward to let me just make sure because I think last time I listen people hanging out there.
That's all I see.
Julian do you see anybody else in the question.
In the question queue now.
No we have no further questions in queue, Okay, alright with that thank you everybody for joining us today.
Really not.
Not happy about that.
News that we have to deliver but we do think this is a and we will answer any questions anybody has business as a near term issue that I think is the.
A broader issue than just add trend, we will get through this issue and then all of the pieces that we've been talking about will come together. So thanks very much everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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