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Edited Transcript of ISD.AX earnings conference call or presentation 23-Aug-19 10:59am GMT

Full Year 2019 Isentia Group Ltd Earnings Call

SYDNEY Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of iSentia Group Ltd earnings conference call or presentation Friday, August 23, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ed Harrison

Isentia Group Limited - MD, CEO & Executive Director

* Peter McClelland

Isentia Group Limited - CFO

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Conference Call Participants

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* Andrew Tan

Bell Potter Securities Limited, Research Division - Dealing Desk Analyst

* Nick Harris

Morgans Financial Limited, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the iSentia Fiscal Year '19 Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Ed Harrison, CEO. Please go ahead.

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Ed Harrison, Isentia Group Limited - MD, CEO & Executive Director [2]

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Good morning and thank you for joining us for the presentation of iSentia's FY '19 results. I'm Ed Harrison, CEO and Managing Director of iSentia. With me on this call is our Chief Financial Officer, Peter McClelland.

Today, I'll begin by providing an overview of the 2019 financial year before handing over to Peter, who will cover the results in more detail. I'll then address the FY '20 outlook and our strategic priorities for the year ahead. We'll then open up for questions.

Turning to Slide 4. iSentia remains the leading provider of media intelligence across the Asia Pacific region, with over 3,000 subscription customers in 11 markets. 78% of our revenues are recurring and more than 1/4 of our revenue comes from Asia.

Slide 5 shows that iSentia has a number of unique strengths that underpin our market position, including our long-standing client relationships throughout the Asia Pacific and our capability to ingest, search and analyze content in all media channels. In fact, we are the leading provider of social media analytics in many Asian markets and we are in the process of incorporating that functionality into Mediaportal, our primary platform.

Turning to Slide 6. iSentia's revenue of $122.5 million and underlying EBITDA of $23.1 million in FY '19, both of which are within the guidance provided in August 2018. We had underlying net profit after tax and amortization of $9.2 million. A $41 million write-down of intangible assets led to a net profit after-tax loss of $34.3 million, which Peter will go through in more detail shortly.

Our strong operating cash flow conversion from underlying EBITDA was again evident and contributed to our net debt being reduced by $14.8 million to $28.3 million at 30th of June 2019. There's 4 years since our gross and net debt levels were at these levels.

Slide 7 highlights that FY '19 has been a transformative year for iSentia in a number of ways. First, we appointed a new leadership team that has driven a material shift in our culture and capabilities in every area of the business, including in sales, product development and technology. Second, we launched a new strategy and road map for growth in February and have subsequently delivered -- met the milestones that we set for the second half of FY '19.

Third, we've restructured our cost base, introducing variability to our favorable interim corporate outcome, realizing numerous operational efficiencies and reinvesting to further improve our client's experience and drive future growth.

Turning to Slide 8. I want to briefly revisit the strategy we implemented earlier in the year, which is designed to fundamentally shift the way we work. Slide 8 shows that this is based on 3 key pillars: first, establishing an efficient operating model underpinned by a single technology platform; second, delivering world-class, market-centric product innovation; and finally, creating regional scale to strengthen our Asia Pacific leadership. In essence, our strategy is simple: Take cost out of operations where we can and invest those savings back into technology and our platforms to meet our clients' evolving requirements.

Slide 9 shows that in terms of key milestones, we've delivered on the objectives set out in our road map for the second half of 2019. For iSentia, achieving efficient operating model depends on automating core, production and data pipeline workflows whilst using our Asia Pacific footprint to gain the benefits of scale. In the past year, significant cost-outs have come from making sure that we have the right investments, in the right people, in the right functions and locations.

We've been able to leverage our regional network to move administrative functions from high-cost Australian locations to lower-cost Asian markets. For example, we've relocated our sales administration teams to our Manila office, which has allowed us to free up resources in ANZ to focus on important account management and business development.

This year, we've also made great strides in implementing a market-validated iterative product development process that allows for rapid responses to market changes. This approach has resulted in a threefold increase in our product release velocity in FY '19 and provides us with a pipeline of new differentiated product features, while also reducing our investment risk profile.

Finally, driving scale in Asia will come from better leveraging of our core products, technology and infrastructure across the region. And as mentioned, we are integrating our strong Asian social media analytics functionality into our Mediaportal platform.

We expect to achieve additional growth in Southeast Asia through investment in multi-market sales and marketing, and our focus on North Asia will be on profitable Insights revenue. We've also appointed a new Chief Executive Asia, James Meritt, who will join iSentia in November.

Slide 10 provides a couple of examples of the investments we have made to streamline core processes in Press Automation and Daily Briefings. Beginning with Press Automation, we've reduced labor and production by use of natural language processing and improved search technology to automate the processing of newspaper content and how it is passed for relevance and delivered to clients.

When I joined iSentia, less than 1/3 of the press workflow was automated. Now a year later, it is 80% and growing. This change has not only reduced cost but increasingly has increased -- importantly has increased the speed and accuracy of the content delivery to clients.

Turning to Daily Briefings. We've built a new proprietary production platform, which has enabled faster and smooth delivery of this important product, which lands in tens of thousands of corporate and government mailboxes daily.

The timeline on Slide 11 shows how the shift to continuous incremental product delivery has yielded impressive results. We are releasing new products and features at the fastest rate in iSentia's history. With 66 new releases in FY '19 alone, we have tripled the rate on the prior year.

Slide 12 provides further detail of 2 major FY '19 product releases, Live Alerts and Dashboard Analytics. These new products have been well received by existing clients. And just as importantly, enable our sales teams to have fresh conversations with prospective clients.

Turning to Slide 13. Our action in the Australian Copyright Tribunal led to the issuing of an interim license in April 2019 which applies from the 1st of December 2018. This action was important for 3 reasons: first, it's a crucial step towards establishing a level playing field among competitors; second, it introduces a variable component into what had been a fixed cost; and third, it results in lower cost copyright in FY '19 and beyond, which is important given this is our second largest cost after labor. Our action in the Copyright Tribunal is ongoing and a final hearing date has been set for late 2020.

I'll now hand over to Peter McClelland, our CFO, to cover the FY '19 result in more detail.

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Peter McClelland, Isentia Group Limited - CFO [3]

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Thanks, Ed. In 2019, the business generated $122 million in revenue, delivering a very solid $23.1 million in underlying EBITDA. This is a very pleasing result in a year that has seen continued competitive pressure in Australia, many changes in the senior leadership team of the business in line with the strategy and, in fact, the launch of a significant turnaround strategy within itself.

These results are also in line with guidance, both for revenue and EBITDA. At the top line, we've seen continued competitive pressures in Australia where the loss of a few larger clients in H1 had a significant bearing on the full year results. We did see continued strong performance in New Zealand and in Southeast Asia, with Asia's overall performance impacted by North Asia, particularly China, where there's been a structural decline in traditional print monitoring.

Over the last 18 months, the business has been undertaking a number of initiatives to restructure the cost base. We've reduced costs through automation of a number of processes and also the relocation of a number of activities to low-cost environments, leveraging the international footprint that the business has through the establishment of a large center in Manila, as Ed referred to previously.

We've also begun programs to deleverage the cost structure of North Asia given the revenue pressures and structural changes. These cost-out programs have been important to offset the cost of inflationary pressure and also, and more importantly, to invest in key areas necessary to deliver the strategy and future growth, such as our product development teams, our tech teams and business development. The impact of these cost initiatives were particularly noticeable in H2 of 2019 where the total cost were lower than H1 by $3 million.

Turning to Australia -- sorry, turning to ANZ on Slide 16. The revenue declines in Australia were due to competitive pressures. Approximately 45% of the year-on-year decline was driven by the net of new client wins and client losses. The balance of this movement relates to pricing on renewals and transaction volume declines. A key point to call out is that the net decline was driven by key larger client losses in H1 that flowed through to H2, most notably, New South Wales government. In fact, 5 clients represent 25% of the $10 million lost in the year, and these were all lost during H1.

On the next slide, I will show you the significant improvement in H2 net monthly win/loss run rate compared to H1. As it is outlined, a key thrust of the strategic plan is about addressing the drivers of churn. Firstly, the increase in velocity of the new product releases to reestablish a leadership position and stimulate new reasons to engage with the business. Secondly, the successes in the Copyright Tribunal mean that business now is operating on a more level playing ground.

Our VAS revenue has proven to be more resilient, declining only 1% over the prior year. Particularly in H2, we benefited from Royal Commissions and new product releases, which saw the H2 revenue grow by 4.5% over H1, giving us strong momentum into the end of the year.

From a cost perspective, there has been significant work done to deleverage the ANZ business. The benefits of the interim copyright orders commenced in H2. So we've not seen a full year impact. But not only was this important from a perspective of how we go to market, but we've now moved from what was largely a fixed cost structure to variable, which means we can now flex our cost structure in response to competitive pressures. The business has also delivered a number of cost initiatives and transformation activity which was previously mentioned.

As a result, the total cost in ANZ were $4.3 million lower than the prior year, which allowed the business to maintain a contribution margin of around 40%.

Turning to Slide 17. We're addressing some of the key metrics on this slide. We believe that we've strengthened our offering to the market as evidenced by the continued improvement in the conversion of new business and the reduction in the net win/loss run rate. What the first chart represents is the annualized billings or annualized new subscription billings in each half. This is not the billings realized in that half, but an annualized view of the contracts that started in the half and will be realized into the future. What this shows is a step-up in 2019 over 2018 in both H1 and H2.

The second chart shows the net change in the subscription billing run rate over each period due to customer wins and losses. What it emphasizes is the negative impact on FY '19's revenue of the net win losses in H2 2018 and H1 in 2019. As mentioned previously, H1 was heavily influenced by the loss of a few large clients. What you can see is the strong sequential and year-on-year improvement in this run rate in H2.

In summary, and to be clear, the ANZ -- sorry, the AUD business is facing a strong competitive environment than it did in previous years. However, the business has a clear strategy to maintain itself as a market leader and to grow through innovation and service, the result of which is a slowing of the rate of decline over previous periods.

If we turn to Asia's results on Slide 18. This is really -- the story remains in 2 parts. Southeast Asia grew. The Southeast Asia revenue was up 17%, with some markets well over 22% on the back of market penetration and market growth. This was, however, offset by declines in North Asia, largely due to the structural decline of print monitoring in China.

Total costs grew by 6% to $31.8 million in 2019. Costs in Southeast Asia grew in line with the business growth and included the establishment of a regional hub in Singapore and an investment in the cross-regional business development function. In fact, if we excluded the investment in the regional hub, Southeast Asian costs would have largely been flat. Our cost-out restructured program is underway in China to rightsize the cost base of the business However, this takes time to implement and, hence, the impact on Asia's margin.

While still a small profit contributed to the overall group results, we see these markets having significant upside from both an economic growth and from the growth of the countries and also through further penetration into each market. As Ed indicated, the primary focus of the new management team since starting has been on the overall strategy of the group and delivering momentum into ANZ. Now we're turning our attention to Asia and looking forward to the commencement of a new leader of the region in October.

In relation to our expenses, on Slide 19. Total expenses for the group was flat year-on-year. The business has undertaken some significant cost restructuring programs over the last 18 months, delivering in excess of $7.5 million of cumulative cost savings. These cost-out programs have largely been in labor, cost of sales and tech-related communication costs. These savings have been offset, and hence the sort of the 2019 costs being in line with 2018, because of 3 key areas.

Firstly, inflationary pressures, especially with the high headcount and tech-related cost pressures. Lower capitalization of labor and some software costs as we move to a continuous delivery model and some of the initiatives moved from development to delivery. This is really just the distribution between P&L and CapEx and not internal cash spend. The third area is the investment in -- of some of these savings into key areas necessary to deliver the strategic plans as we've outlined: business development, product development and technical areas. So while year-on-year costs remained flat, pleasingly, total cost for H2 of 42 -- sorry, $48.2 million is $3 million below H1.

If we talk -- move to the cost waterfall chart on Slide 20. This chart largely represents the narrative that I've just provided. What it does is that it serves the purpose to demonstrate the importance of the cost restructuring that the business has undertaken to allow the business to invest in these strategic areas.

Slide 21 overlays or overviews some of the strategic initiatives that have been undertaken, and is a summary of our cost transformation programs and shows the cumulative contribution of these programs over the last 18 months of $7.5 million, with the incremental impact in 2019 results of $5.2 million.

Of the $7.5 million, over 80% was delivered through labor cost savings, which is being made up of restructuring, relocation, outsourcing and automation across several key initiatives. These programs are now embedded in the business and we remain confident in our team's ability to continue to reengineer our processes and platforms to deliver better services and more efficiently.

Turning to our cash flow on page -- on Slide 22. The business has generated operating cash of $26 million against an underlying EBITDA of $23 million, which has allowed the business to reduce the debt -- or to reduce net debt by $14.8 million to $28.3 million, which is the lowest position since 2015. This strong conversion benefited from the improvement of collections across all parts of the business, a tax refund and also about $5 million relating to timing benefits -- sorry, related to timing of payments.

The payments for prior year acquisitions relate to earn-outs for businesses acquired in Korea and Hong Kong, and we don't anticipate further payments in 2020. A key focus of the business is to continue to pay down debt. And as such, no dividends were paid or declared during the period. And this has allowed the business to reduce gross debt by $12 million during the year.

In respect to our debt facility on Slide 23, you can see how much the business has been able to improve our net debt over recent years. This has reduced by 45% in June 2017 to $28 million, which is the lowest position since 2015 and leaves the business operating well within our banking covenants.

During the year, turning to Slide 24, we did undertake a review of the carrying value of our intangibles in light of current trading conditions, market capitalization and reviewed the ongoing use and associated economic value of some previously recognized assets with consideration of the strategic plan. In H1, there wasn't an impairment taken against internally generated software, development costs associated with applications no longer used in the business and also against the ANZ cash-generating unit, representing a write-down of about 25% of goodwill.

At the time of the H1 results, we flagged the commencement of the accelerated amortization of the brand names that were remaining on the balance sheet. We have subsequently reviewed the planned utilization of those brands as part of the business strategy and formed a view that they won't generate future economic benefit and have therefore derecognized them.

I think it is important to point out that other than the software assets, the balances of intangibles impaired or derecognized in 2019 all relate to assets recognized as part of prior year acquisitions and transactions. It is also important to note that these are non-operating adjustments, and they are noncash and have no impact on our banking covenants.

I'd now like to hand back to Ed.

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Ed Harrison, Isentia Group Limited - MD, CEO & Executive Director [4]

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Thanks, Peter. I'll now address the outlook for the year ahead. Slide 26 provides a high-level view of some of our strategic milestones. I'll not take you through each of these in detail, but you will see that we continue to work to transform the business in FY '20 and then grow through '21 and '22.

Slide 27 shows our estimates of the impact of our strategy on our financial performance through to FY '22. These estimates have not changed since February, and we remain confident that these strategic initiatives can be funded from existing cash flow.

Turning to Slide 28. In FY '20, iSentia's Board and management will be focused on the successful execution of the next phase of iSentia's 3-year strategic plan. The media intelligence market in Australia is expected to remain competitive in the year ahead. As outlined in the strategic plan, we expect the rate of revenue decline to slow in FY '20 and we will begin -- we will be making significant operating and capital investments in building new products and technology.

As a result, we expect FY '20 EBITDA to be in the range of $20 million to $23 million, and that's excluding the impact of the change to the AASB16 lease accounting standard.

So I'll now hand back to the operator to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Nick Harris at Morgans.

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Nick Harris, Morgans Financial Limited, Research Division - Senior Analyst [2]

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Congratulations on the results. Just really interested in Slide 17 where you talked about the win/loss ratio and, obviously, improvement in the second half of '19. From memory, that copyright case got settled in April. So presumably the second half '19 number is a blend of before and after that. So I was just wondering, post the copyright, have things improved substantially on top of what we see in that chart? First question.

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Ed Harrison, Isentia Group Limited - MD, CEO & Executive Director [3]

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I'll leave -- Peter will take that.

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Peter McClelland, Isentia Group Limited - CFO [4]

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I mean, I think remembering that these metrics that are provided here are forward-looking metrics. And I would say that the impact on the win/loss run rate were primarily driven by the momentum around our product and our product launches, around the go-to-market position of the business. So while we're very happy with the outcome of the tribunal and the go-to-market position that, that will allow or present with, I think the run rate that we've seen in the second half of 2019 is more to do with the operations of the business, our go-to-market position, our packaging of products to the market more than copyright within itself.

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Nick Harris, Morgans Financial Limited, Research Division - Senior Analyst [5]

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I think that sort of answers my second question, it was just what's the customer feedback been on your new app and on your new products. Clearly, it's been quite well received, I guess, is the answer.

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Ed Harrison, Isentia Group Limited - MD, CEO & Executive Director [6]

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Yes. Most definitely. The Live Alerts is in the hands of many clients now and we've had great individual experiences where clients are being notified of events they wouldn't have known of otherwise in real time. So yes, some very positive feedback on that. The huge suite of analytics tools we've got now are to be the best in market. They really are quite comprehensive. The app, we're still beta testing. That's just with a very small number of clients. And so our new approach is -- the a market validated approach means that we spend a good bit of time testing before we move to full release. But yes, we're getting very positive feedback on that whole range of new products.

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Operator [7]

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(Operator Instructions) The next question is from Andrew Tan at Bell Potter.

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Andrew Tan, Bell Potter Securities Limited, Research Division - Dealing Desk Analyst [8]

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Just wondering the impact of the interim copyright license. So I guess, if you look at the copyright line in the P&L, it's reduced from 15.6 in the second half '18 to 13.5 in second half '19. Can we attribute that to mostly the copyright license reduction?

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Ed Harrison, Isentia Group Limited - MD, CEO & Executive Director [9]

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Yes. Yes. So Andrew, just to be -- so I'll let Peter maybe handle some of the numbers on this. But I just want to be clear around copyright as a whole, because I know a lot of people have got this top of mind. We just need to be clear that the major benefit that flows through from this is the level playing field. We know for some time that we've been at a disadvantage to some of our competitors here. So leveling the playing field is, by far, the #1 benefit outcome. The variability is the other.

In terms of the quantum, we've learned from experience. And given we're now operating in such a competitive marketplace, we've just taken a view that, that needs to be held in commercial confidence moving forward. So we're not going to be talking about the quantum. But Peter might want to add a little bit more in terms of how we're looking at cost of sales as a whole.

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Peter McClelland, Isentia Group Limited - CFO [10]

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Yes. I mean, the line that's disclosed in the results, there is a cost of sales, which includes copyright, but it also includes all our other cost of content, access to social media, et cetera. So we really look at managing those costs in totality for which copyright forms one part. But there are other items within that cost that have become really important for us to manage moving forward. What is pleasing is that we're moving that cost line from what is being heavily influenced by a fixed cost base to a variable cost base into the future which is very important for us to help managing those margin ratios into the future.

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Andrew Tan, Bell Potter Securities Limited, Research Division - Dealing Desk Analyst [11]

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Okay. But would it be fair to say that second half cost of sales figure is more reflective of what it will be going forward?

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Peter McClelland, Isentia Group Limited - CFO [12]

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I think it's fair to say that the copyright savings are reflected in the second half results and, therefore, do have a bearing on the reduction half-on-half. But there are other cost items within there, some of which are higher, some of which are lower. I mean we manage that line with quite a big team across the entire region. And the part year impact, there wasn't any part year impact of the copyright into 2019. It just does remain an important part of how we're going to manage the business -- how we do manage the business and the opportunities moving forward to really leverage that variability.

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Andrew Tan, Bell Potter Securities Limited, Research Division - Dealing Desk Analyst [13]

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Okay. And I guess, with the net debt position, you mentioned $5 million timing benefits from, I guess, working capital. So does that mean that net debt is really circa $23 million -- or $33 million rather than $28 million?

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Peter McClelland, Isentia Group Limited - CFO [14]

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Look, in any year-end, you have different timing benefits. What we do want to make sure is that we're disclosing that there were those timing benefits there. So that would be reflective of the payments that do need to go out. I mean what's really important also is regardless of where that $5 million sits, even adjusting for that, that is still the lowest debt position the group's had since 2015. And managing our entire cash envelope remains a really important part of what the business is focused on.

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Operator [15]

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(Operator Instructions) There are no further questions at this time. I'll now hand this back over to Mr. Harrison for closing remarks.

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Ed Harrison, Isentia Group Limited - MD, CEO & Executive Director [16]

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Thank you. Look, I'd just like to thank the Board and the iSentia team for their commitment over the year. Look, thank you, everybody, for joining the call and I look forward to updating you later on this year. Thank you.

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Operator [17]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.