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Edited Transcript of INOD earnings conference call or presentation 8-May-18 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Innodata Inc Earnings Call

HACKENSACK May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Innodata Inc earnings conference call or presentation Tuesday, May 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy R. Agress

Innodata Inc. - Senior VP, General Counsel & Corporate Secretary

* Ashok Kumar Mishra

Innodata Inc. - Executive VP & COO

* Jack S. Abuhoff

Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer

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Conference Call Participants

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* Christopher Beach

* Timothy Clarkson

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Presentation

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Operator [1]

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Good morning, and welcome to the Innodata First Quarter 2018 Earnings Conference Call. Today's call is being recorded.

And at this time, I would like to turn the conference over to Amy Agress. Please go ahead.

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Amy R. Agress, Innodata Inc. - Senior VP, General Counsel & Corporate Secretary [2]

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Thank you, Vicky. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and AK Mishra, our COO. We'll hear from AK first, who will provide a detailed review of our results for the first quarter, and then Jack will follow with additional perspective about the business. We'll then take your questions.

First, let me qualify the forward-looking statements that are made during the call. These statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including, without limitation, that contracts may be terminated by clients; projected or committed volumes of work may not materialize; the primarily at-will nature of contracts with our Digital Data Solutions' clients and the ability of these clients to reduce, delay or cancel projects; continuing Digital Data Solutions' segment revenue concentration in a limited number of clients; inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; depressed market conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans, which give rise to requirements for our services; difficulty in integrating and driving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairments of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we may acquire; changes in our business or growth strategy; the emergence of new or growing competitors; various other competitive and technological factors; and other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking information, and actual results could differ materially.

I will now turn the call over to AK.

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Ashok Kumar Mishra, Innodata Inc. - Executive VP & COO [3]

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Thank you, Amy. Good morning, everyone. Thank you for joining us today to review our financial performance for the first quarter of 2018.

Total revenue this quarter was $14.1 million compared to $15.7 million last quarter. In the prior quarter, we had onetime charges of $2.3 million, which included $1.1 million restructuring charge and $1.2 million loss contingency reserve. Excluding the impact of these onetime charges, our adjusted EBITDA for quarter 1 2018 was $1.3 million compared to $500,000 in the fourth quarter of 2017, an increase of $800,000, 160%. The increase in adjusted EBITDA was mainly due to the cost optimization and rationalization that we undertook late last year, which we expect will reduce our 2018 costs by approximately $3.5 million.

I will now review key line items and segment performance on a sequential quarterly basis, comparing the first quarter of 2018 with the fourth quarter of 2017. There were onetime charges in the prior quarter, so my remarks on comparative results will exclude the effect of onetime special charges in the prior quarter as I would indicate.

In addition, in order to simplify nomenclature and align to our business narratives for 2018, we are making certain changes in our segment reporting. The segment we previously referred to as Media Intelligence Solutions or MIS, which consisted of our Agility PR Solutions business, will hereinafter be referred to simply as Agility segment. The segment we previously referred to as Innodata Advanced Data Solutions, which consisted of our Synodex and docGenix businesses, will consist only of the Synodex business and will be referred to simply as the Synodex segment. Our docGenix business will be subsumed into our Digital Data Solutions or DDS segment.

Now to the segment level. DDS revenues decreased by $1.7 million or 14% to $10.5 million this quarter compared with $12.2 million in the prior quarter. This decrease was due to completion of onetime project in the fourth quarter and seasonal volume fluctuations this quarter on an ongoing engagement.

docGenix revenue, which is now included in both quarter 1 period and, for the comparison purpose, quarter 4 period, was $132,000 in quarter 1 and $244,000 in quarter 4. Synodex revenue was $1 million compared to $1.1 million in prior quarter. Lower revenue of $100,000 was a result of volume seasonality.

Agility revenue increased to $2.7 million, a 14% improvement over revenues of $2.3 million in the fourth quarter. This increase is primarily a result of onetime additional revenue from one of Agility's resellers and the seasonal revenue from our annual Bulldog awards program.

Moving on to gross margin. Gross margins in DDS were at $3 million or 28% of revenue this quarter compared to $3.6 million or 29% of revenues in the fourth quarter of 2017, a decline of $600,000 or 17%, mainly on accounts of lower revenues. Gross margins in our Synodex segment decreased to $200,000 in the current quarter from $295,000 in the fourth quarter due to lower revenues. Gross margins in the Agility segment were $1.35 million or 50% of revenues this quarter as compared to $1.1 million or 46% of revenues in the prior quarter, an increase of $250,000 or 24% on account of higher revenues in this quarter.

We will now take a look at the selling, general and administrative or SG&A expenses. SG&A expenses were $3.9 million or 28% of revenue this quarter as compared to $5.1 million or 32% of revenues in the prior quarter. The $1.2 million or 24% decrease in SG&A expenses was mainly on account of lower professional fees, reversal of an allowance for doubtful accounts and lower labor costs.

SG&A expenses for DDS in quarter 1 2018 were $2.3 million or 22% as compared to $3.1 million or 25% of revenues in the prior quarter after excluding onetime restructuring charges, a decrease of $780,000 or 25%. In Synodex, SG&A expenses were approximately $200,000 in both the quarters.

SG&A expenses for Agility were $1.4 million or 53% of revenue this quarter as compared to $1.8 million or 77% of revenues in the prior quarter, a decrease of $470,000 or 26%. The decrease is attributable to adjustment of allowances for doubtful accounts on account of improved accounts receivable and lower headcount.

Our adjusted EBITDA was $1.3 million this quarter compared to $500,000 in the prior quarter, an increase of $800,000 after excluding onetime restructuring charges and reserves taken in the prior quarter. This increase is comprised of $200,000 EBITDA from DDS, $700,000 adjusted EBITDA from Agility, offset by $100,000 adjusted EBITDA loss in Synodex.

Moving on to net earnings. We recorded an income tax provision of $0.6 million this quarter compared with tax benefit of $0.5 million last quarter. After deducting tax expenses and minority interest, our net earnings this quarter were [at about] $57,000 compared to $400,000 in the prior quarter.

Pertaining to the U.S. Tax Cuts and Jobs Act, 2017 tax act, in the fourth quarter of 2017, the company recorded an adjustment of $6.4 million to income tax expense pertaining to the toll charges, which we offset against our available net operating loss carryforwards. In the first quarter of 2018, the company performed calculation of GILTI, that is, global intangible low-taxed income, provisions and concluded that it had no impact on account of the net losses of the company's foreign subsidiaries. At the end of this quarter, we had approximately $15 million in net operating loss carryforwards after taking into account the offset against foreign income under the new tax provision from this 2017 tax act.

Our cash and investment balances were at $12.2 million this quarter compared to $11.4 million in the fourth quarter. Approximately 48% of the balances were held in United States, and others were held overseas. Our CapEx this quarter was $0.6 million compared to $0.5 million in the previous quarter. In the second quarter of 2018, we expect our CapEx to be in the range of $500,000 to $700,000.

I will now turn to our ForEx hedging program and other items. At the end of this quarter, we had approximately $11.3 million in outstanding forward contracts to hedge a portion of our exposure for foreign currency-denominated revenues and expenses based on mark to market. Our forward contracts had a notional loss of $190,000 at the end of first quarter.

In terms of guidance in the second quarter of 2018, we expect our second quarter revenue to be in the range of $13.1 million to $13.5 million, consisting of DDS revenues in the range of $9.9 million to $10.1 million, Synodex revenue in the range of $0.9 million to $1 million and Agility revenue in the range of $2.3 million to $2.4 million.

Thank you. And now we'll pass on the call over to Jack.

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [4]

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Thank you, AK. Good morning, everyone. Thank you for joining us today. I'm going to provide some additional context for the quarter's performance in each of our segments and touch on other announcements we made recently. I'll start with our core Digital Data Solutions business.

As anticipated, our DDS revenue declined in Q1, although we came out at the high end of the guidance we provided in our last call. As AK mentioned, this decline resulted from a onetime project that ended in Q4 and some seasonal volume fluctuations from another client. Our adjusted EBITDA benefited by approximately $900,000 as a result of the cost reductions that we initiated late last year, which we anticipate reducing our overall 2018 cost base by approximately $3.5 million.

We've taken the cost reduction to align our cost structure to our revenue outlook, in light of disappointing sales performance last year. The cost reductions have come primarily from consolidating production facilities, aligning support costs and lowering production costs as a result of technology innovation. This year, we'll be working to improve sales performance, recognizing that, ultimately, growth unlocks the operating leverage in our business model that will propel earnings and drive shareholder value.

Over the past few years, we have invested in R&D around AI and machine learning, figuring out how to best incorporate these technologies into the work that we do to extract, transform and enrich content. These efforts have shown considerable success, just as they have contributed to our [facilities'] increased production costs. We believe that properly message to the clients in the market will benefit us on the sales side as well.

For example, just a couple of weeks ago, we demonstrated our new AI machine learning capabilities to a senior director at one of the largest information companies in the world. Afterwards, I got an email from him, thanking me and saying that he believes our technology could be likely a "powerful automation solution" for his company and requesting that we explore further this summer.

In our Synodex business, there was a small decrease in revenue as a result of seasonality. In Q4, life insurance applications, which give rise to the need for our services, tend to spike. In the quarter, we successfully started new engagement with an existing client that we value at approximately $800,000 per year. From a revenue perspective, we plugged the hole that otherwise would have been created as a result of one of our other clients curtailing its medically underwritten complex life insurance business, which is the business that our service supports. From a pipeline perspective, we have several million dollars of opportunities that have accelerated since our last call. We're working now at closing these new deals.

I'll turn now to our Agility business. Our Agility business includes both the Agility subscription-based SaaS products for media targeting, distribution and media monitoring as well as our enterprise media monitoring and analysis solutions. In Q1 ,our revenues were $2.7 million, an increase of 14% over Q4. Included in revenue was $222,000 from a data partner that is nonrecurring in nature, representing an adjustment that we were able to make as a result of the API we put in place last year. The API enables us to verify that our channel partner customers are correctly licensed for the data that we provide to them.

We continue to see the Agility business becoming a sequential-quarter growth business with high retention metrics. While this $222,000 should be viewed as nonrecurring, it is worth noting that the channels represent an important part of our plan. Our revenues from channel partners were about $950,000 last year. This year, we are expecting channel partner revenue to grow by approximately 75%.

In Q1, much like Q4, we continue to see sequential quarterly increases in our leading indicators of customer engagements and new business generation. Our marketing qualified leads or MQLs increased by 19% over Q4. We've made some structural changes and personnel changes in our North American Agility sales organization in the quarter, which resulted in some of the bookings we intended for Q1 likely shifting into Q2. That said, we added 63 new customers and 2 new resellers with total bookings of $1.12 million of annual contract value, making this our strongest quarter to date in terms of overall new business generation. Our aggregate retention rate, measured by ACV, is 77% in the quarter, with our SaaS targeting and monitoring platform retention at 60% and our enterprise-level monitoring platform retention at 93%.

As we've spoken about previously, we inherited with the Agility acquisition a large number of non-engaged customers of the targeting and media platform in North America. These customers rolling off has affected our retention rate the past year. The remaining non-engaged customers cycled out in Q1, leaving us confident that, prospectively, retention rates for this portion of the business would be trending towards our targeted levels of 70% to 75%, resulting in overall retention rate improvements as well.

In Q1, we released an AI-powered image monitoring module, which enables our customers to monitor images in addition to text. With this module, companies that have an interest in tracking when their brand references or logos show up in newspapers, magazines and social media can now do so. Our engineering teams are now focused on building and testing 2 major new product components that will be launched in Q3 of this year.

We announced on December 5 that we had initiated a search for new directors whose experience could help us navigate growth. On April 18, we announced that we had, through board action, brought 3 exceptional new directors on to our board: Dave Atkinson, the former CEO of one of the largest U.S.-based life reinsurers; Brian Kardon, Chief Marketing Officer of a fast-growing software company; and Doug Manoni, the former CEO of an innovative digital business information and media company. We have also announced that 3 of our current directors will not be standing for reelection this year.

Our special committee, the formation of which was also announced on December 5, has been proceeding with an in-depth assessment of our segments, benefited by the external input of 2 consultants that have retained. Both of these consultants have delivered their analysis to the committee and at the present time, have no further deliverables to the committee under their current statements of work.

Operator, we are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Tim Clarkson with Van Clemens Capital.

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Timothy Clarkson, [2]

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Just wanted to check now, do we expect that your basic fixed costs will go lower as the year trends?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [3]

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Tim, great question. So we -- if you look at the numbers that we're announcing this quarter, you'll see that there's about a $900,000 benefit coming in the quarter that is a result of the $3.5 million cost base reduction that we announced late last year. So you should see that $900,000 continuing to benefit the company per quarter through the year. That's baked into the cost base. In addition to that, we're also looking at additional opportunities for creating additional efficiencies. The work that we're continuing to do in AI and machine learning is proving to be very impactful, and we see additional opportunity that we're going to be driving through the year that would be -- represent cost efficiency in addition to that.

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Timothy Clarkson, [4]

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Okay. In terms of the AI -- the new technology you're using internally and also using to hopefully get some additional revenues, what's the potential in terms of that new segment? What did the committee -- what does the committee think about where Innodata should be putting its resources?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [5]

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I think the committee is doing its work. I won't be in a position to announce in this form every decision that they're making in advance of taking any kinds of actions. I think it's safe to say though, looking at the reports that we've gotten back from the consultants, which have been very helpful and looking at the market ourselves, there are widely regarded -- widely reported complexities of creating value from raw and disparate datasets that we believe our R&D investment is in the position to affect positively. We've demonstrated that with a couple of very large new customers recently. We're continuing to work and refine those capabilities. And just like I mentioned in the prepared remarks, they've been very helpful in terms of enabling us to shed costs from our operations. We also think that bringing these capabilities to the market in a properly packaged way holds promise. So that will be work that we're going to be doing over the course of the year.

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Timothy Clarkson, [6]

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Is there a potential for alliances with other people that have skills in AI to work within a data? Or does this look more where you're going to be doing this on your own?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [7]

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Yes. I think we're going to be looking at both options. We think that there can be potentials for alliances with other companies. In addition, we think there may be ways to package this for what are addressable markets.

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Timothy Clarkson, [8]

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Okay. In terms of the Agility business, the PR business, do you believe we'll show some kind of meaningful growth this year in revenues there?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [9]

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Yes. I think we're in good shape with the Agility business. This year, we'll be targeting somewhere between 15% and 20% year-over-year growth. And you haven't asked, but I'll volunteer, also, in the Synodex business, we think we're going to be in a position to show somewhere near a 15% growth. And the benefits of both of those businesses, as we've talked about often before, is that they're recurring revenue based. So when you're able to hold on to your customers, have a reasonably high retention rate and effectively manage sales and marketing to win new business, the combined effect of that is much better, much more forecastable year-on-year growth, and we're seeing that opportunity now in both of those businesses. One thing I didn't mention about Agility, but I think may be worth mentioning is we've done some great things with the product. And if you look now on G2 Crowd, which is a website that reports in the sector, they compare us to the 2 leading providers, very large companies, in the sector. And we rank #1 -- of 17 different criteria that they establish, we rank #1 in 15 out of the 17 criteria, so we're doing a real good job there. I think the market is reporting back favorably to us, and we think we're in a good position to be growing that business now.

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Timothy Clarkson, [10]

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Okay, great. How about one last question. In terms of the Board of Directors, will that provide some additional relationships in terms of getting business?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [11]

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I think that the relationships that people bring are the component of what they bring to the table. I think all 3 of the people that we're bringing on have expressed to me their desire to do everything they can do to help contribute to our growth. That will likely include relationships, contacts, knowledge, know-how. I'm looking forward to their partnering with us.

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Operator [12]

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And no one else is in the queue at this time, so I'd like to give everyone a final opportunity. (Operator Instructions) And we do have a question, and that comes from Chris Beach with Hawksbill Holdings.

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Christopher Beach, [13]

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I just had a question about your optimism regarding both Synodex and Agility relative to the guidance that you put forth for the second quarter. If I back out the $0.25 million plus or minus in the first quarter that was onetime in Agility, it still -- I think you're still then calling for a sequential decrease in revenues in that business. And I guess I'm unclear on how that translates into your 15% to 20% growth rate. I mean, that would, I guess, forecast a pretty substantial pickup in business in the third and fourth quarter, and maybe you have visibility on that already, I don't know. That's my first question. And the second question would be just around IADS. I think you mentioned in your prepared comments that -- I'm sorry, in Synodex, that a lot of -- several of your opportunities have accelerated. I'm just curious what accelerated means in terms of where they are in the sales funnel.

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [14]

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Thanks, Chris. Thanks for the questions. Let me start with the last one. We've talked about before how the pipeline tends to move slowly in Synodex, which is true. But when individual opportunities start to move more quickly, they tend to be the result of our client prospects deciding that they need to move aggressively. And once they make a decision, you see things pick up quite a bit. So what's interesting and different from our last call is that we've got 4 or 5 companies who were saying, "We'd like to move forward in near-term time frame." So that's -- I hope that's helpful. In terms of the Agility business, it's -- what I'm trying to do is look a little bit broader from -- look at the year as opposed to just the next succeeding quarter. And in the quarter -- to address your point, in the quarter, we saw lots of very strong leading indicators in terms of marketing-driven leading indicators and demo opportunity. We were lagging a little bit in the quarter in terms of sales strength on the North America side because we made some changes there. But when we look at the business as a whole and look at a lot of metrics and how they cascade into each other, we do think we're in a position to show that 15% to 20% year-on-year growth. Last year, we did about $9.4 million. This year, we're targeting $11 million. And I think, if we can get that under our belt and, again, get the pieces of the business sync up in a way that's positive, then we can continue to build upon the fact that the market is viewing what we're doing very favorably, as I just mentioned in response to Tim's question. Then I think we've got a winner. I think we're -- looking out, we've got a business that will be growing at that kind of a clip. That's what we're working on.

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Operator [15]

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(Operator Instructions) And there are no other questions, so I'd like to turn it back to Jack Abuhoff for any additional or closing remarks.

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Jack S. Abuhoff, Innodata Inc. - Chairman, President, CEO & Interim Principal Financial Officer [16]

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Thank you, operator. So to recap, in DDS, we saw the benefits this quarter of the cost reductions that we announced last quarter and were expected to reduce overall 2018 costs by about $3.5 million. We're now very focused on the sales side of the equation but also working on additional operating improvements through technology and automation.

We're hoping to get additional Synodex deals closed this quarter, thanks to some acceleration we've seen recently in the pipeline. In Agility, we had our strongest quarter to date in terms of new business generation as well as some good onetime revenue as a result of now delivering our content to our channel partners through an API.

So thanks, everybody, for joining the call today, and look forward to next time.

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Operator [17]

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And today's conference is available for replay from 2:00 p.m. Eastern time today until June 7, 2018, at 2:00 p.m. Eastern Time. You may access the recording by dialing (719) 457-0820 or 1 (888) 203-1112, using passcode 3375687.

This concludes today's conference. You may now disconnect.