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Edited Transcript of ONMOBILE.NSE earnings conference call or presentation 2-Aug-19 5:00am GMT

Q1 2020 Onmobile Global Ltd Earnings Call

Bangalore Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Onmobile Global Ltd earnings conference call or presentation Friday, August 2, 2019 at 5:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Francois-Charles Sirois

OnMobile Global Limited - Executive Chairman & CEO

* Ganesh Murthy

OnMobile Global Limited - CFO of Global Group

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Conference Call Participants

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* Arshad Mukadam

Vibrant Securities Private Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. I'm Ranjita, the moderator of this call. Thank you for standing by, and welcome to OnMobile Q1 FY 2020 Investors Conference Call. (Operator Instructions) Joining us today on the call are Mr. FC, Chairman and CEO; Mr. Sanjay Bhambri; Mr. Ignacio Martin Velasco; and Mr. Ganesh Murthy from management team.

Before we begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For a list of such considerations, please refer to the earning presentation. OnMobile Global undertakes no obligation to publicly revise any forward-looking statement to reflect future, likely events or circumstances.

Please be advised this conference is being recorded today.

I would like to now hand over the conference to Mr. FC. Over to you, sir.

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [2]

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Thank you. Thank you to all.

Let me start by saying that it's been a very busy quarter in terms of new service launch. We launched 16 new services only in this quarter. We know that we started with the kids service -- a brand-new kids service in Europe. We launched a lot of games clubs. We have a lot of sports service that were launched, some traction on contest, also digital contest. So really in our strategy to have many services in many geographies is really working out. At this space, I can share with you that we're expecting that within the next 2 years, we'll have about 100 new services live.

So just so you understand the business case because I know you're looking at the quarterly results again, and as you can see, there's a bit of a decrease in revenues. But I just want to share with you that when we launch a new service, we start from scratch, so the first year revenue of a new service is probably 0.1 or 20% of the service at maturity. So we expect about a good 3 years before these services can get cruising speed. But obviously, with the number of services that we're launching right now, we're seeing that, normally, we should clearly have an increase in revenues in the coming quarters.

Just to highlight also because, as you know, we've done the acquisition of Appland, now it's been about 9 to 10 months, and we're really focused on game subscriptions. Just this quarter, we had a 46% increase in game subscription revenues quarter-to-quarter. And back on the strategy that I was just mentioning that the earliest the service are, the maturity over time will increase and benchmarking with our competitors. So if I just highlight on gaming, for example, the average game club revenue that we have today for Appland -- and keep in mind that Appland is dealing with resellers where we're having people managing services with the other operators, so we don't have a direct relationship with operators in some cases. So the average revenue for Appland is $3,500 a month today per game club. And our competitors with mature clubs in this -- in these categories when -- is delivering about $25,000 a month. So we see a pretty impressive growth coming in front of us obviously. And we're putting a lot of efforts on R&D to make the product even better, more engaging to make sure that we capture these revenues. But keep in mind that these clubs are really early in the process, so just by getting more maturity, we'll increase.

Also we have a games club that we signed directly at OnMobile. And one of them -- just to give you an example, one of them that we signed last year, now we're raking in over $150,000 a month of revenue. So we're really seeing the maturity curve in some cases can deliver real revenues in gaming. The gaming market, I keep saying it, is a very big market globally and will stay big. The key is to make sure we have our niche in there. And when we count the number of new services that a game club or a new service on contest or kids, we really see that growth going from the first year revenue to the third year revenue really generating real revenues. So with the 100 new services coming in, in the next 2 years, this will have an impact on our revenue.

So that's the highlight I wanted to give you as a start for this quarter. I'm now going hand up to Ganesh to talk about the financial results.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [3]

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Thank you, FC.

Moving to the financials. Our current quarter revenue registered a decline of 2.7% at INR 139.5 crores as against the previous quarter figure of INR 143.3 crores. Roughly half of this decline was due to currency fluctuation. We had the Indian rupee appreciation in this quarter both against the euro as well as against the U.S. dollar. We also had a onetime revenue reversal of INR 9.6 million for product development with one customer where the [vote] was suspended. So if you exclude the currency fluctuation and the onetime revenue reversal, our revenue decline would be around 0.7%.

Our ongoing cost optimization initiatives has kept the OpEx under control, and we have witnessed a 15% reduction in OpEx quarter-on-quarter. Head count is down from 797 people at the end of last quarter to 759 people in the current quarter with savings expected to materialize from this action in the coming quarters.

There is a higher depreciation in the P&L which is on account of adoption of the new accounting standard. So from 1st April, we are mandated to adopt India's Ind AS 116, which is on lease accounting, and this involves a reclass of the rent to depreciation amounting to INR 11 million.

Now coming to the balance sheet items. Our cash from operations was adversely impacted this quarter due to delays in receiving remittance from one large customer and due to delay in releasing invoices with another customer with whom we were negotiating a renewal of the contract. Now this -- the good news is this contract has now been renewed, and all the invoices have been raised. Our cash balance continues to be robust at INR 251 crores, and we remain -- continue to remain debt-free.

Now with these comments, I now hand over the call to the moderator for opening it up for questions. So moderator, over to you, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Arshad Mukadam from Vibrant Securities.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [2]

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I want to know, is the Appland revenue included in the total revenues?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [3]

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Yes. Appland revenue is included in the total revenue.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [4]

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Okay. So then if you look at the gaming revenue trend, how much will be from Appland, sorry?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [5]

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We don't disclose now -- we don't disclose Appland separately. It's an integrated part. And gaming revenue is not only Appland. So we have gaming revenue from the Appland legal entity plus also we have gaming revenues coming from various other legal entities which were part of the erstwhile OnMobile. That is excluding Appland.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [6]

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Okay. Got it. Got it. So I think if you (inaudible) [selling IPs] for a few quarters, and I think we've been concentrating on videos and games, it's also growth going forward. Now if I look at the video trend over the last few quarters, it has been on the decline. So I just want to know will we see the top line growth of the company coming from in the next few quarters because, to be fair, it's only been going down recently?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [7]

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You're right about that. But there has been an overall decline due to various reasons. I won't get into them. But I think the growth in future is going to be coming mainly from our games revenues, subscription games. And if you understand a bit about this, there are 2 types of gaming products and services that we provide. One is the -- one is where you download the games from the app store. And the second one, which we launched last year, the subscription games, which FC mentioned, which has grown by 47% quarter-on-quarter is the subscription games, where a person takes a monthly or a weekly subscription, and he can download any number of games. So that is the area of growth. That is the way the gaming market is moving towards subscription revenue. And that is where we see the growth in the future.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [8]

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Okay. And also Tones business, it's been -- also it's been declining over the last 2 quarters. So do we see any way we can [cull] with this decline? Or is it a last call businesses now?

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [9]

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No honestly, I know there are some region now we're growing actually. In Bangladesh and -- that most of the decline, honestly, was in India for many reasons now. With the bundling, we're getting more and more go with the bundling and part of the package, so I believe we're pretty much at the -- stabilized this decline now.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [10]

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Okay. My next question is really on manpower. We've been -- we've been doing very well in terms of reducing the number of employees we have, the count we have. So I just want to understand the slight jump on a quarter basis in the absolute manpower, is it like incremental salaries or something like that?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [11]

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No, it is not incremental salaries. In fact, there has been no salary increment to employees. What I think the slight jump that you see is primarily because last quarter, we had a reversal of the variable pay. So we accrue variable pay depending upon company performance. And since company performance last year was not -- was slight -- was below our planned figures or below our targets, we had a reversal of the variable pay. And that's the reason why you see a decline in the -- I mean increase in the manpower cost. Many of the figures that I mentioned about the head count is actually the quarter-end head count. So the full impact of the reduced head count, 759 people at the end of June. But these people were -- but these people, it was a higher figure in the month of April, May, so the full impact of the reduction will actually be felt in quarter 2.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [12]

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No, I get that. I get that. You've done really well in reducing the operating expenses over the last few quarters. I will give you all that. So I just had to understand also there's this INR 20.7 crores outflow into -- outflow in trades payable is also on the cash flow statement. So why is that actual heavy figure? And could you explain this, please?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [13]

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So you mean the figure is 207 -- INR 21 crores, is it?

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [14]

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Million.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [15]

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INR 207 million.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [16]

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Yes.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [17]

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So that is the payables. That is the normal creditors. It's nothing exceptional. These are -- mostly, these are payments to our content providers. So the content providers were paid -- there was a whole bunch of them who were paid in -- just in the last week of June.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [18]

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Most of that payment happened in June itself because, I mean if you look at cash flow statement, this is what has probably eroded our cash flows. If the statement wasn't [mentioning] producing cash flow positive for the quarter.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [19]

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Yes. If you look at the previous quarter, you will see INR 135 million increase in the trade payables. So there, what happened is our contracts are all back-to-back with the content providers. So we paid the content providers only after we received the revenue from the operators. And since we received revenue a little late in the month of March, we paid them only in the month of April. And that was the reason why there was an increase in the trade payables in the previous quarter. Now that increase has been removed because they are now -- we have shifted to a normal payment cycle.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [20]

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Okay. Okay. And I just had just one last question. In the balance sheet, I think you've added this time right to use assets 16 -- or INR 165 million. So could you just explain to me what exactly this includes?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [21]

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Yes, absolutely. So as I mentioned, we have introduced -- from 1st of April, we are required to go by accounting policy Ind AS 116, which talks about lease accounting. So what happens is there is the value of all our long-term leases, rentals basically, building rentals and office rentals, which are more than 1 year in duration. You need to find out the fair value of the future rent payments and bring the fair value as an asset in the balance sheet. So that is the right to use asset, INR 16.5 crores, which represents a fair value of the future lease payments. And we also have to show that as a liability. So if you notice in the balance sheet, the current liabilities have increased from INR 86 crores to INR 106 crores. So that represents the offset of the right to use asset. So essentially, the fair value of the future rent payments is treated as an asset and also treated as a liability.

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Operator [22]

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(Operator Instructions) We have a next question from private investor. (Operator Instructions) There is no audio from this line. (Operator Instructions) It appears there are no further question at this time. Sir, I would like to turn the conference back to you for any additional remarks.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [23]

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No. I think there are some questions which are raised offline. There are some calls which have been unmuted, so could you make the request again, please, operator?

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Operator [24]

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Sure. (Operator Instructions) We will take the next question again from Arshad Mukadam from Vibrant Securities.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [25]

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I want to know, if all our payments to (inaudible) -- I think there were some variable payments that were needed to be paid, so has that been paid up yet? Or does that have to be paid going forward?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [26]

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No. That has not yet been paid. So that earn-out payments are -- will be paid out in 4 tranches for -- in equal installment, in installments from each first half. So there is a payment due in August for the first half of this year, first half of this calendar year, then there'll be a payment for December half year and so on until 2020 December.

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [27]

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But keep in mind that's linked 100% on performance.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [28]

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Correct.

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [29]

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So we have to increase both the number of game club and the revenue per month.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [30]

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Got it. Got it. And if I may ask how much of our cash is now in India?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [31]

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60% of our cash is in India. The reason why it's only 60%, last quarter, it was 75% was in India, we had a major payment to be made of EUR 4.3 million to be made to one of our large customers in Europe. So that was -- but the payment happened on 1st of July or 2nd of July. And for that, we had to transfer the funds to Europe in the last week of June.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [32]

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Okay. Okay. Got it. And so Appland is now debt-free right, I'm guessing?

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [33]

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Appland is debt-free. I mean as a whole, OnMobile is debt-free. We have repaid -- Appland did have debts at the time of the acquisition, but those are all paid out. From our perspective, it doesn't make sense. We have INR 251 crores of cash. So it really doesn't make sense for us to burden our balance sheet by taking debt.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [34]

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Got it. Got it. Also so just could you tell me, did you have [also a] target manpower count going forward? Like you have been reducing it recently, so what is the target you all have in mind?

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [35]

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Arshad, I think we're pretty much on the target now. With the number of new services that we're launching, I mean we need people to be able to support all these deployments here. So I think we're pretty much at the good optimal level.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [36]

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But at the same time, I just want to add on to what FC said. When there is -- if we find -- I mean this cost optimization is a constant endeavor. So if we find any areas where we can adopt automation, increase the use of various automation tools, we'll do that, and we'll try to optimize on the head count.

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Operator [37]

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(Operator Instructions) We will take our next question from private investor. (Operator Instructions) There is no response from this audio line. (Operator Instructions)

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [38]

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Okay. If there is no further question, we're going to end the call then.

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Unidentified Company Representative, [39]

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Give your closing comments.

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Francois-Charles Sirois, OnMobile Global Limited - Executive Chairman & CEO [40]

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Okay. No more questions, so I'm going to just thank the investors for showing up on this call. Again, I'm seeing it that it's been a very successful quarter on launching new services. The next quarters also we're planning a lot of new services to be launched. And we're really working to increase that revenue per month for each of the services that we're launching, so it will impact the revenues in the coming quarters. So thank you very much, and I look forward to speaking to you next quarter. Thank you.

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Ganesh Murthy, OnMobile Global Limited - CFO of Global Group [41]

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Thank you, operator. With that we can…

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Operator [42]

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Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect your lines.