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Edited Transcript of JRJC earnings conference call or presentation 27-Dec-19 1:00am GMT

Q3 2019 China Finance Online Co Ltd Earnings Call

BeijingBeijing Jan 9, 2020 (Thomson StreetEvents) -- Edited Transcript of China Finance Online Co Ltd earnings conference call or presentation Friday, December 27, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Julie Zhu

China Finance Online Co. Limited - Former Director of IR

* Zhiwei Zhao

China Finance Online Co. Limited - Chairman & CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the China Finance Online Reports Q3 2019 Earnings Conference call. (Operator Instructions) I must advise you that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, [Dixon Chen]. Thank you. Please go ahead.

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Unidentified Company Representative, [2]

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Thank you, operator. Welcome to China Finance Online's Third Quarter 2019 Financial Results Earnings Conference Call. With us today are Mr. Zhiwei Zhao, Chairman, CEO; and Ms. Julie Zhu, acting CFO. And Mr. Zhao will provide a summary of business dynamics in the quarter, and then Ms. Zhu will review the quarterly financial results.

Thereafter, the management will hold a Q&A session. Before we begin, I will remind all listeners that throughout this call, we may present statements that may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995.

The words believe, estimate, plans, expect, anticipate, project, target, optimistic, intend, aim, future, will, or similar expressions are intended to identify forward-looking statements. All statements other than historical fact, may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs including, but not limited to, statements concerning China Finance Online's operations, financial performance and conditions. China Finance Online cautions that these statements, by their nature, involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including those discussed in China Finance Online's report filed with the Securities and Exchange Commission from time to time.

China Finance Online specifically disclaim any obligation to update the forward-looking statements in the future.

At this time, I would now like to turn the conference call over to Mr. Zhao.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [3]

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(foreign language)

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Unidentified Company Representative, [4]

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[Interpreted] Good morning, and good evening. Thank you for joining today's call.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [5]

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(foreign language)

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Unidentified Company Representative, [6]

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[Interpreted] During the third quarter of 2019, our bottom line loss was significantly reduced. The weak Hong Kong markets and the falling investor confidence in the third quarter of 2019, led to a revenue decline in our brokerage business in Hong Kong. With the improvement of our business model and higher operation efficiency, our gross margin was also strengthened from the same period of last year.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [7]

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(foreign language)

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Unidentified Company Representative, [8]

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[Interpreted] After a weak second quarter, the Chinese stock market continued to soften during the third quarter and the Shanghai Composite Index dropped from 2,979 points to 2,905. However, the traffic to our flagship website, jrj.com.cn continued to rise, reaching #150 in Alexa's Global Ranking and #35 in China, respectively. We remain one of the most trusted financial news hubs with our proprietary content, fact-based journalism, breaking news coverage and analysis on the market trends. Growing traffic attracted not only more readers, but also more advertisers. As a result, our advertising business is growing rapidly.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [9]

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(foreign language)

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Unidentified Company Representative, [10]

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[Interpreted] Similar to the transition of the brokerage business in the U.S., Chinese financial institutions are moving away from a traditional trading, commission-oriented business model to a holistic financial services encompassing wealth management, investor education and asset allocation advisory. In our dedication to leveraging technology, to empower wealth manager and improve customer loyalty has brought us closer to many financial institutions. This paradigm shift in the financial industry also set a stage for us to change the revenue model from one-off project services to annual retainers. Our Genius Zhisheng has received such standard annual contracts from brokerage firms. In short, our institution -- our institutional business is showing good indications.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [11]

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(foreign language)

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Unidentified Company Representative, [12]

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[Interpreted] According to our proprietary asset allocation system, our Robo-Advisor product, Lingxi, continue to provide Chinese retail investors with a wide array of investment combinations and personalized global asset allocation through Chinese domestic mutual funds. Since its inception, Lingxi established a solid track record of balancing performance and risk management. During the third quarter of 2019, Lingxi produced an average return of 1.7%. Once again, among the best-performing product in the marketplace, and outperforming the Shanghai Composite Index that suffer a loss of 2.5% during the same period. The best strategy of Lingxi posted a return of 2.36% in the third quarter of 2019. All strategies of Lingxi managed to control the fluctuation under 5.37%, while the volatility of Shanghai Index reached 14.04% during the same period.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [13]

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(foreign language)

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Unidentified Company Representative, [14]

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[Interpreted] In November 2019, we hosted the 2019 Chinese public companies Innovation Symposium in Beijing. A total of 340 professionals from over 260 prestigious technology companies and public companies listed on the Shenzhen and Shanghai stock markets and influential financial institutions attended the forum. The main topics in the forum were asset allocation in 2020, state-owned enterprise reforms, sustainable development and investing with social responsibility.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [15]

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(foreign language)

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Unidentified Company Representative, [16]

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[Interpreted] Also during the symposium, we released a research report of A-share Public Companies Growth Review, which is based on China Finance Online's proprietary algorithms, dynamically tracking a series of data points, including financials, valuation, growth trends, ESG, which stands for Environment, Social and Governance and other metrics, which enable investors to identify investment opportunities and discover valuable companies.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [17]

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(foreign language)

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Unidentified Company Representative, [18]

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[Interpreted] In December 2019, we hosted 2019 Leading China Annual Awards in Beijing. The key discussions for investment was artificial intelligence, 5G, biotech, big data, quantum computing, insurance technologies and block-chain. This conference is committed to promoting the long-term health of financial industry in China and has received high recognitions from financial regulators and institutions. There were senior government officials and over 1,000 professionals from over 400 financial institutions in attendance at the event.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [19]

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(foreign language)

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Unidentified Company Representative, [20]

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[Interpreted] Looking into 2020, we will continue to optimize and upgrade our services and products and also remain confident to leverage our fintech capabilities to add value to our institutional customers and grow our market share and earning power.

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [21]

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(foreign language)

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Unidentified Company Representative, [22]

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[Interpreted] With that, I will now turn the call to our acting Chief Financial Officer; Julie Zhu, to go over financial details on the quarterly results. Thank you.

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Julie Zhu, China Finance Online Co. Limited - Former Director of IR [23]

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Thank you, Mr. Zhao. Let me walk you through our major items for the third quarter. Please note that all financial numbers are unaudited and presented in U.S. dollars rounded to one decimal point for approximation. Net revenues were USD 8.1 million compared with USD 8.6 million during third quarter of 2018 and USD 8.9 million during the second quarter of 2019. During the third quarter of 2019, revenues from financial services, financial information advisory business and advertising services contributed 44.5%, 29.7% and 25.4% of the net revenues, respectively, compared with 54.7%, 27.3% and 16.8%, respectively, for the corresponding periods in 2018. Revenues from financial services were USD 3.6 million, a decrease of 23.9% compared with USD 4.7 million during the third quarter of 2018 and USD 4.2 million during the second quarter of 2019. The year-over-year and quarter-over-quarter decreases of revenues from financial services were mainly due to a decline in equity brokerage business. Revenues from the financial information and advisory business were USD 2.4 million compared with USD 2.4 million during the third quarter of 2018 and USD 2.9 million in the second quarter of 2019.

The quarter-over-quarter decrease of revenues from the financial information and advisory business was mainly attributable to the weakness in subscription service from individual customers, which was negatively affected by the continued soft stock market during the third quarter.

Revenues from advertising services were USD 2 million, an increase of 41.4% compared with USD 1.4 million in the third quarter of 2018 and USD 1.9 million in the second quarter of 2019.

The increased traffic to our sites and readers' recognition of our premium content also helped to strengthen our advertising revenues on a year-over-year basis. Gross profit was USD 5 million compared with USD 5 million in the third quarter of 2018 and USD 5.6 million in the second quarter of 2019.

Gross margin in the third quarter of 2019 was 62.3% compared with 58.2% in the third quarter of 2018 and 63.1% in the second quarter of 2019, respectively. The year-over-year increase in gross margin was mainly due to the revenue mix with higher advertising revenues. G&A expenses were USD 2.3 million, a decrease of 25.2% from USD 3.1 million in the third quarter of 2018 and a decrease of 8.8% from USD 2.5 million in the second quarter of 2019, respectively.

The year-over-year decrease was mainly due to effective cost control measures and the ongoing streamlining of the operations. The quarter-over-quarter decrease was mainly due to the adjustment of the agency fee related to the Hong Kong sector.

Sales and marketing expenses were USD 2.8 million, a decrease of 41.2% and from USD 4.8 million in the third quarter of 2018 and a decrease of 26.6% from USD 3.8 million in the second quarter of 2019, respectively. The year-over-year decrease was mainly attributable to the further streamlining of sales and marketing as well as improved operational efficiency. The quarter-on-quarter decrease was mainly due to the terminated commodity trading business. R&D expenses were USD 2.2 million, a decrease of 36.7% from USD 3.5 million in the third quarter of 2018 and a decrease of 14% from USD 2.6 million in the second quarter of 2019, respectively.

The year-over-year and quarter-over-quarter decreases were mainly attributable to improved efficiency after the consolidation of the R&D team. The company continues to maintain a team of senior software engineers, data scientists and capital market professionals to support further development in its fintech capabilities.

Total operating expenses were USD 7.3 million, a decrease of 35.5% from USD 11.3 million in the third quarter of 2018 and a decrease of 18% from USD 8.9 million in the second quarter of 2019, respectively.

The year-over-year and quarter-over-quarter decreases were mainly due to improved operational efficiency and effective cost control. Lost -- loss from operations was USD 2.3 million compared with a loss from operations of USD 6.3 million in the third quarter of 2018 and a loss from operations of USD 3.3 million in the second quarter of 2019, respectively.

Net loss attributable to China Finance Online was USD 2.1 million compared with a net loss of USD 6 million in the third quarter of 2018 and a net loss of USD 3 million in the second quarter of 2019. Fully diluted loss per ADS attributable to China Finance Online was USD 0.09 for the third quarter of 2019 compared with fully diluted loss per ADS of USD 0.26 for the third quarter of 2018 and fully diluted loss per ADS of USD 0.13 for the second quarter of 2019. The basic and diluted weighted average number of ADS for the third quarter of 2019 were USD 23 million compared with the basic and diluted weighted average number of ADS of USD 22.8 million for the third quarter of 2018.

Each ADS represents 5 ordinary shares of the company.

Now let me walk you through some of the highlights of our first 9 months financial results. Net revenues for the first 9 months of 2019 were USD 26.8 million compared to the USD 34.8 million in the first 9 months of 2018. Gross profit for the first 9 months of 2019 was USD 17 million compared with USD 21.7 million in the first 9 months of 2018.

Net loss attributable to China Finance Online for the first 9 months of 2019 was USD 7.9 million compared to a net loss of USD 15.5 million in the first 9 months of 2018. Fully diluted loss per ADS attributable to China Finance Online was USD 0.34 for the first 9 months of 2019 compared with fully diluted loss of USD 0.68 for the first 9 months of 2018.

As of September 30, 2019, total shareholders' equity of China Finance Online was USD 27.7 million. Total cash and cash equivalents and long-term investments were USD 9.3 million.

With that, this wraps up my prepared summary. And operator, we're ready 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 the line of Bob Wilson.

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Unidentified Analyst, [2]

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You mentioned your Hong Kong business was affected by the market's environment. Is this impact temporary or long term?

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [3]

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(foreign language)

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Julie Zhu, China Finance Online Co. Limited - Former Director of IR [4]

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[Interpreted] Thank you, Bob, for your question. Indeed, there has been some challenges in Hong Kong as the brokerage business is highly correlated with the market environment. During the third quarter, due to the weak Hong Kong market and low investment confidence, the revenue of our brokerage service in Hong Kong did decrease on a year-over-year basis. However, we remain confident as our Hong Kong subsidiary Rifa Securities has over 40 years' history, impeccable reputation and large customer resources. So -- and we're also proactively exploring how to improve and upgrade our offshore financial services. For example, to leverage our long term -- long-established fintech capabilities to enable our offshore wealth management and asset management capacities. We also believe that with the further implementation of Hong Kong and Mainland China stock connecting trading program, the policies, we expect our Hong Kong brokerage, futures and asset management business as well will achieve long-term growth. I hope that answers your question.

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Unidentified Analyst, [5]

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Yes. I have another question, please. About 5 months ago, there was an announcement you received a deficiency notice from NASDAQ. As we are approaching the grace period of 180 calendar days, are you working on a solution to regain that compliance?

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [6]

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(foreign language)

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Julie Zhu, China Finance Online Co. Limited - Former Director of IR [7]

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[Interpreted] Again, thank you for the question. Yes, we are fully aware of that, and we've been working on that for the past few months. You should expect us to regain compliance with NASDAQ very soon. Thank you.

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Operator [8]

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Your next question comes from the line of [Ken Boyd].

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Unidentified Analyst, [9]

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Your advertising business is growing, who are your main customers? And what is then driving them to advertise with your site?

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Zhiwei Zhao, China Finance Online Co. Limited - Chairman & CEO [10]

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(foreign language)

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Julie Zhu, China Finance Online Co. Limited - Former Director of IR [11]

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[Interpreted] I'm glad that you asked that question. As we mentioned earlier, during the third quarter, under the sluggish market conditions, we did manage to grow our website traffic and influence. Encouragingly, in the first 9 months, our advertising revenues grew 39% year-over-year. So this not only reflected our customer recognition of our valuable in-depth, content and services that showcase the huge market demand for the value-added professional services. For example -- let me give you some examples. For example, our service make solid progress during 2019, our service to the public companies except the traditional counter relation service for the public companies, we also integrated our fintech applications with financial data services, news services and investment opportunity identification. So we provide public companies with a wide variety of services, such as industry analysis, trend analysis and letter discovery. So these services, they are very well welcomed and received by our public company clients. Another example, with our deep diving to the market opportunities and our ongoing service improvement, the total number of advertisers in our traditional advertising business is also increasing. We have also explored new advertising models, such as mobile digital marketing, also caused algorithm advertising. So such a new service has led us to forge partnerships, not just with domestic partners and also with international digital advertising platforms, which enables the advertisers to do more customized and precise targeting. And lastly, we always believe that high-quality content is the foundation of our customer service. We have also maintained our focus on producing the best-in-class and more valuable content and news reporting. So with our content continue to improve, traffic increases and our new service models gain traction, and we believe there will be further long-term growth in our media service in the future. Yes, the answer is a bit long. I hope this answers the question. Thank you.

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Unidentified Analyst, [12]

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Yes. I have another question. It seems that your Robo-Advisor performed barely well in 2019. Perhaps, it benefited from a strong stock market there. With the ceasefire of trade war between the U.S. and China, do you see the stock market continuing to rise? And how is the Robo-Advisor adjusting investment strategies for the customers?

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Julie Zhu, China Finance Online Co. Limited - Former Director of IR [13]

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Thank you for your question. Lingxi, our Robo-Advisor products utilize leading fintech methodology. Tailored-mix wealth management service with AI tools and enables users to make top quality, high efficiency intelligent asset adaptation. This is build upon our proprietary research of global market trends and core algorithm of asset allocations. Lingxi has demonstrated its ability to weather the market volatilities and produce consistent returns, facing various market uncertainties in the past 3 years. So our goals are that through global asset allocation, our investment strategies will help customers to navigate through the market turbulence impacts. Our top priorities have always been how to provide each investor with the suitable investment portfolio that meets his or her investment goals and with tolerance. To achieve the best mid- to long-term investment returns, is not only every family scope for wealth management, but also our mission as well. I hope this answers your question.

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Operator [14]

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There are no further questions at this time. I would now like to hand the conference back to the company. Please continue.

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Unidentified Company Representative, [15]

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Thank you, everyone, for attending China Finance Online's 2019 third quarter and First 9 months financial results earnings conference call. We look forward to speaking with you.

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Operator [16]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.