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Edited Transcript of PRGX earnings conference call or presentation 1-Nov-18 9:00pm GMT

Q3 2018 PRGX Global Inc Earnings Call

ATLANTA Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of PRGX Global Inc earnings conference call or presentation Thursday, November 1, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Limeri

PRGX Global, Inc. - CFO

* Ronald E. Stewart

PRGX Global, Inc. - President, CEO & Director

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Conference Call Participants

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* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q3 2018 PRGX Global, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Pete Limeri, CFO. Sir, you may begin.

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Peter Limeri, PRGX Global, Inc. - CFO [2]

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Thank you, Jimmy, and good morning, afternoon or evening to each of you around the world. Let us note at the outset that certain statements in this conference call may be considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These statements include statements relating to management's views with respect to future events and financial performance that are based on management's current expectations and beliefs and are subject to risks, uncertainties and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. For additional information on these factors, please refer to PRGX Global, Inc.'s filings with the Securities and Exchange Commission, including but not limited to its reports on Form 10-K and 10-Q. PRGX undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This presentation also contains references to certain non-GAAP financial measures, such as EBIT, EBITDA and adjusted EBITDA, metrics that we use internally to measure our operating performance. A reconciliation between these non-GAAP measures and net income/loss to the most directly comparable GAAP measure is available under the Investor Relations portion of our website at prgx.com.

I will now turn the call over to Ron.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [3]

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Thanks, Pete, and thanks to all of you who joined us today. We completed another strong quarter at PRGX, where we delivered solid revenue and adjusted EBITDA growth, won 3 sizable deals that we believe will deliver significant revenue in future quarters and achieved important milestones in delivering 2 advanced technology platforms.

This quarter was our ninth consecutive quarter of year-over-year revenue and adjusted EBITDA growth. Both Recovery Audit and Adjacent Services grew, with Adjacent Services delivering its second consecutive quarter of sequential growth, expanding revenue 155% compared to the third quarter in 2017. This strong performance was primarily driven by continuing demand for data-led analytics capabilities using our PRGX OPTIX SaaS solutions. Pipeline in Adjacent Services remains very strong, and we expect for the fourth quarter to be another quarter of Adjacent Services growth.

Our global Recovery Audit business delivered solid revenue results for the quarter against the tough comp versus the third quarter of 2017, which posted year-over-year growth of over 20% compared to 2016. Our Q3 2018 Recovery Audit results were led by a very strong performance in the Europe/Asia-Pacific segment, which grew more than 12% compared to the same period in 2017, primarily driven by the significant wins in the U.K. retail market described in previous earnings calls. Revenue from these wins started to ramp up in Q3, and we expect to see further increases in Q4 and beyond.

Our global revenue in Recovery Audit was slightly behind our expectations primarily due to over $2 million of revenue in the Americas which was delayed at the end of the quarter. A large portion of this delayed revenue was invoiced in the month of October, and we expect the remainder to be billed before the end of the year.

Adjusted EBITDA for the third quarter was $6.4 million or 14.9% of revenue. This was an increase of 3.7% compared to 2017 on a constant-dollar basis. Our comparative results are particularly impressive given our strong adjusted EBITDA performance in the third quarter of last year, which reflected a 31% increase over the prior year.

In addition, we continued to make significant investments in sales and marketing and technology development during the quarter. I described our significant investment in building our global go-to-market team in our Q1 earnings call. I am pleased with the significant progress and momentum in our global sales engine due to these investments.

We have signed more new clients with higher projected new contract value at this point in 2018 than we did in all of 2017. Our dedicated team of experienced sales and marketing professionals is building an impressive pipeline of new sales opportunities for Q4 and going into 2019.

We also made considerable progress in our technology development efforts in Q3, including completion of initial releases of our next-generation Recovery Audit platform and our foundational data processing infrastructure which we call DX3. We are beginning migration of our clients and client data into these technology platforms during Q4 and expect to accelerate migration in 2019. I will provide more color on these technology components later in my remarks.

Overall, we delivered a solid third quarter. On the revenue side, our pipeline looks very strong, and we have great momentum in the fourth quarter. We are also making consistent and meaningful progress on improving our operating and EBITDA margins through more high-value solution offerings for clients and a more efficient technology platform to deliver them on.

I will now turn it over to Pete, who will walk us through a detailed review of our financial performance for the quarter.

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Peter Limeri, PRGX Global, Inc. - CFO [4]

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Thank you, Ron. I will begin by reviewing our financial results from continuing operations for the quarter ended September 30, 2018, compared to the same period in 2017.

Consolidated revenue from continuing operations for the 3 months ended September 30, 2018, was $43.3 million, an increase of $853,000 or 2% compared to the third quarter of 2017. On a constant-dollar basis, adjusted for changes in foreign currency exchange rates, consolidated revenue from continuing operations for the third quarter of 2018 increased $1.5 million or 3.5% compared to the same quarter in 2017.

Some additional constant-dollar revenue highlights for the quarter include: This is our ninth consecutive quarter of year-over-year revenue growth, with growth in both Recovery Audit and Adjacent Services. The global retail Recovery Audit growth was led by Europe, which had year-over-year growth of over 25%. Our Adjacent Services segment had its second consecutive quarter of year-over-year growth, increasing revenue by over 155%. This is our second straight quarter of year-over-year triple-digit percentage increases.

Total operating expenses from continuing operations for the quarter ended September 30, 2018, excluding depreciation and amortization, transformation and stock-based compensation expenses, were $36.9 million or 85.1% of revenue compared to $36 million or 84.9% of revenue for the third quarter of 2017. The increase was primarily driven by increases in variable compensation, which is directly related to increased revenue; and by our investment in our sales, marketing and technology development teams.

Adjusted EBITDA from continuing operations for the 3 months ended September 30, 2018, was $6.4 million or 14.9% of revenue, which was basically flat for the same period in the prior year and on a constant-dollar basis increased over 3%.

Now I will review our financial results from continuing operations for the 3 months ended September 30, 2018, on a more detailed level. Revenue from each of our reporting segments was as follows. Recovery Audit Services - Americas revenue was $28.8 million compared to revenue of $30.8 million in Q3 2017, a decrease of $1.9 million or 6.2%. On a constant-dollar basis, Q3 2018 RA Americas revenue decreased by 5.2% compared to the same period of the prior year.

As Ron mentioned, in Q3, we expected to deliver an additional $2-plus million of revenue, which was delayed. This delayed revenue was associated with some very large claims, which are on the final stages of approval, and other normal billings which did not clear our clients' systems. A large portion of this revenue has already been invoiced, with the remainder expected to be billed before the end of the year.

Recovery Audit Services - Europe/Asia-Pacific revenue was $12.2 million compared to revenue of $10.8 million in the third quarter of 2017, representing growth of $1.4 million or 12.5%. On a constant-dollar basis, Q3 2018 revenue for this segment grew by 15.9% compared to the same quarter of the prior year. This growth was led by our Europe retail RA business, which included a contribution from the previously discussed multiple U.K. client wins in late 2017. As expected, these client wins started generating revenue in Q3 and should continue generating revenue in Q4 and beyond.

Adjacent Services revenue for the quarter ended September 30, 2018, was $2.3 million compared to $926,000 for the same period in 2017, a year-over-year increase of over 150%. On a constant-dollar basis, Q3 2018 revenue for this segment grew by over 155% compared to the same quarter of the prior year. The increase was primarily driven by SaaS-based subscription revenue in multiple advisory projects, which are being performed using the PRGX OPTIX tools. We are pleased with the growing momentum of the Adjacent Services revenue and expect to continue investing in building our team and expanding our service offerings.

Our gross margin from continuing operations excluding transformation and stock-based compensation expenses was $17.3 million or 39.9% of revenue in the third quarter of 2018 compared to $16.1 million or 37.8% of revenue in the same period of the prior year, which is an improvement of over 200 basis points on a percentage of revenue basis. The year-over-year improvements were primarily related to the flow-through of the higher revenue and our continued technology and operational process improvements, partially offset by the costs associated with new regional senior operation leaders and other Recovery Audit staff that were not in place in the prior year.

Total SG&A expenses from continuing operations excluding transformation and stock-based compensation expenses were $10.9 million or 25.1% of revenue in the third quarter of 2018 compared to $9.7 million or 22.7% of revenue in the same period of the prior year. The increase is primarily a result of the investment in our sales and marketing and technology development teams. These increases were partially offset by cost reductions in other areas across the company.

In our discontinued operations for the quarter ended September 30, 2018, we incurred a loss of $325,000 compared to $342,000 loss for the same period in 2017. For the quarter ended September 30, 2018, we had net income from continuing operations of $2.6 million or $0.11 per basic and diluted share compared to net income of $733,000 or $0.05 per basic and diluted share for the same period in 2017. The year-over-year improvement was primarily driven by the increase in revenue, the improvement in gross margin and included a $1.6 million acquisition related earn-out adjustment that is recorded as income for the quarter.

With regards to our results from continued operations for the 9 months ended September 30, 2018, I would note the following constant-dollar basis highlights compared to the same period in 2017. First, revenue grew $6.7 million or approximately 6% compared to 2017. We've had a year-over-year revenue growth in each operating segment, which includes Recovery Audit - Americas, Recovery Audit - Europe/Asia-Pacific and Adjacent Services. On a percentage basis, Adjacent Services has increased over 36% and Recovery Audit has increased approximately 5%. Gross margin increased by $5.1 million or over 225 basis points as a percentage of revenue. Last, adjusted EBITDA increased $1.6 million, a 13.2% improvement over the prior year.

I will now highlight certain balance sheet and cash flow information. As of September 30, 2018, we had net unrestricted cash and cash equivalents of $10.5 million and had $17.6 million of borrowings against our revolving credit facility. $1.9 million of our September 30 cash was in U.S. bank accounts, with the remainder held outside the U.S.

Cash flow from operations for the third quarter of 2018 was $3 million compared to $2.3 million in the same period in 2017. Cash flow from operations for the 9 months ended September 30, 2018, used $3.5 million compared to $3.6 million provided for the same period in 2017. A significant use of cash in the first quarter of 2018 was the payout of $6.5 million related to performance-based incentive awards granted in 2016. Excluding this payout, net cash provided by operating activities for the 9 months ended September 30, 2018, was $2.9 million.

Capital expenditures on property and equipment for the quarter ended September 30, 2018, were $2.6 million compared to $2.4 million in Q3 2017. For the 9 months ended September 30, 2018, our capital expenditures were $7.9 million compared to $6.4 million in 2017.

Last, in regard to our stock repurchase program, the company's Board of Directors recently approved a $15 million increase to $75 million and extended the duration of the program to December 31, 2019. As a reminder, since the February 2014 announcement of the program, we have repurchased 8.6 million shares of our common stock for an aggregate cost of $44.5 million. And as of October 26, 2018, the company had approximately 23.6 million shares of common stock outstanding.

With the completion of the financial review, I'll now turn it back over to Ron.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [5]

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Thank you, Pete. So as you can see from Pete's remarks, we delivered a solid Q3 and have excellent momentum going into Q4. I would like to add a few color comments on our progress at this point of 2018 and why believe -- why we believe we are well positioned to continue our growth and expansion into 2019 and beyond.

On the sales and marketing front, over the past 12 months, we added 20 new sales and marketing professionals from some of the world's top technology consulting firms, including Accenture, A.T. Kearney, Oracle and others. After an initial period of orientation, training and ramp-up, we have seen considerable improvement in pipeline development and new client activity. Thus far in 2018, we have added 37 new clients, which surpasses our total new client wins in all of 2017.

Year-to-date, we have signed 87 new contracts, in addition to our normal Recovery Audit and SaaS services renewals. Based on our revenue projections from these new contracts signed year-to-date, we have significantly surpassed projected revenue for new bookings for all of 2017. And over 1/3 of this projected revenue is from Adjacent Services, with the remainder split between retail Recovery Audit, commercial Recovery Audit and Contract Compliance.

Two of the new Adjacent Services contracts are based on our data-driven sourcing service offering, which utilizes advanced SaaS-based global spend aggregation, category intelligence and AI-based sourcing technology tool sets to realize savings in indirect and direct spending categories. The 2 clients being served through these agreements are significant players in their respected industries of pharmacy retailing and global natural resources. We have additional data-driven sourcing opportunities in our pipeline, and we expect to see further new sales activity this quarter.

During the quarter, we also signed the second largest multiyear SaaS subscription in our history for a significant U.S. grocery retailer with multiple banners. This company is a longtime PRGX Recovery Audit client and is expanding beyond Recovery Audit Services to use the robust PRGX product -- OPTIX SaaS platform to analyze item true net cost and margin contribution to guide merchandising decisions down to the SKU level. This client's merchandising and finance teams will now be positioned to make better decisions, boost margins, inform category and assortment strategies and drive best practices in supplier management and negotiations.

So we're seeing a range of industries associated with our new bookings with approximately 1/3 coming from retail, and the remainder coming from our commercial business, including industries such as natural resources, industrial manufacturing, energy, technology/hardware, telecommunications and others. We view the commercial business as a significant opportunity for expansion since, according to World Bank, 92% of the Global 2000 total direct, indirect and capital goods spending comes from non-retail industries. We are very well positioned in many of these industries, and we believe there's a lot of whitespace for PRGX.

And the momentum continues. After very strong third quarter bookings, our pipeline of new opportunities remains strong and continues to build. We have a lot of runway to support future growth. Marketing and brand development will be key investment areas for 2019 as we are now well positioned to sell a much bigger value proposition around Source-To-Pay and demonstrate our truly differentiated and higher-performing Recovery Audit capability. And we are now going to market with a suite of service and technology solutions rather than Recovery Audit Services alone.

With our newly strengthened sales organizations, we are heightening our ability to sell into the C-suite, in addition to our solid relationships with mid-level purchasing and finance managers. Our sales growth is supported by the significant investment we have made in technology in the past several quarters. We now have an evolved audit platform we will be taking to our commercial clients that includes a much improved management dashboard, payment and accounts payable analytics and advanced audit capabilities. The first release was introduced in Q3, and we will begin to roll it out for new clients and across our existing clients in the fourth quarter and into 2019.

Our next-generation Big Data platform is also now in final stages of testing, and we will begin rollout and data migration this month. This data processing platform is truly unique in comparison to other Source-To-Pay technology solutions and is the lynchpin in our ability to rapidly and intelligently aggregate, enrich and analyze our clients' spend data. This platform not only enables our Recovery Audit Services but also supports advanced analytics and advisory services. In time, we strongly believe our technology investment will drive greater revenue and improve gross margins.

Overall, we are more bullish than ever on our positioning in the Source-To-Pay market. Our overall market opportunity continues to grow as companies become more and more focused on the missed profits caused by their Source-To-Pay leakage. The Global 2000 spends more than $16.6 trillion in direct, indirect and capital goods and services, of which, based on our experience and research, 5% to 10% or even more of this spend is leaked due to organizational and supporting systems' complexity and misalignment.

I recently met with a C-level executive at a major automotive supplier with operations all over the world, supported by over 200 ERP solutions. When I described the level of Source-To-Pay leakage we typically see across our client base, he was confident that their leakage was more than 15% and was keenly interested in how we might assist his companies in this rich opportunity area. This Source-To-Pay leakage is pervasive across companies. It's real, it's structural and it's getting worse with the explosion of cloud-based solutions and ever-increasing levels of data being generated directly and indirectly around Source-To-Pay processes.

Our position is truly unique because our data aggregation and Recovery Audit business model gives us the platform for self-funded global data aggregation through Recovery Audit and incremental value-creation opportunities through advanced Source-To-Pay analytics and SaaS-based spend management solutions. Importantly, we also now have a delivery platform that is highly efficient, providing a higher margin opportunity for PRGX.

As this model generates additional cash flow, we will continue to maintain a balanced capital allocation strategy. Our first priority is to use our cash flow to grow the business with additional investment in sales and marketing, technology development and other areas driving growth and improved adjusted EBITDA margin. We will continue to look for appropriate acquisitions for Recovery Audit firms with good client logos as well as innovative technologies which drive increased value for our clients through our platform.

The third major use of capital will be on stock repurchases. Our Board of Directors recently expanded and extended our share buyback authorization.

With strong growth and momentum and a pipeline that continues to build, we are confident in our 2018 guidance and our growth potential going into 2019. We believe that the fourth quarter will be a very big one for us and that we have the work in progress in both Recovery Audit and Adjacent Services to generate over $50 million in revenue, our largest quarter in over 4 years. But now we need to execute, and our team is focused on just that. Based on our strong momentum going into Q4, we remain confident that we will grow revenues in the 8% to 10% range and adjusted EBITDA in the 17% to 22% range for the year compared to 2017.

Thanks again for your interest in PRGX. And now I'm going to turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Zach Cummins with B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [2]

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Congratulations on the really strong results and also the really strong pipeline of opportunities as you move forward. But starting off, can you talk more about those core recovery audits, those engagements that were pushed into Q4? Can you talk about kind of what really pushed it through Q3? And then it sounds like part of those have already been booked, but what's -- can you talk about just your related confidence level in really securing the rest of that by the end of Q4?

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [3]

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Sure. So first of all, we track work in process with inventory of claims and our findings very, very closely, and we work with our clients to get them settled and get them recognized internally so that we can invoice for them. In this particular quarter we had 4 or 5 large claims from different clients that we had in our forecast that we expected to get settled that, for clients' internal processing reasons, they didn't get closed out. And so -- and this was about -- it's over $2 million of claims. So a large portion of those have already been invoiced in the first part of Q4 through October, and we have every confidence that the rest of it will be invoiced before the end of the year.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [4]

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Understood. That's helpful. And then in regards to the Adjacent Services segment, you've seen some really strong growth there over the past couple of quarters. And even to top that off, you have 3 advisory and analytics engagements that have been pretty significant in size. So with regard to the 3 new engagements, can you give a little more color in times required to ramp these up to the full level of revenue recognition and essentially, how those are tracking right now or if it's still just kind of early stages with all those deals?

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [5]

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So of the 3 deals we recently announced, 2 of them are in our data-driven sourcing offering that we use our SaaS data aggregation tools to aggregate all the data and find opportunities and then work with our clients to actually do the sourcing and deliver it. So these are contingent-based deals that we have and is based on identifying the savings opportunity and actually executing or cutting purchase orders. So those are contingent-based. They're already underway. We expect to start generating revenue this quarter. They will ramp up -- and we think they'll ramp up significantly in 2019. But we're pleased with the progress so far and feel good about where we'll be in Q4 and into 2019. The other one was a SaaS subscription that we will begin recognizing revenue this quarter. The majority of it will be in 2019 and beyond. It's a multiyear SaaS

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And then beyond that, we have continuing projects. Our advisory team uses our SaaS OPTIX tools and our other solutions to work with clients in various capacities, and those are continuing. We continue to have opportunities added to our pipeline, and we seem to be building good momentum there.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [6]

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Understood. That's very helpful context. And then finally, going into Q4, you're still remaining pretty confident that you can achieve your guidance. It sounds like you're off to a pretty strong start, really nice pipeline of opportunities out there. Is it just a matter of really ramping up some of the opportunities that you've already secured at this point? Or kind of what is it going to take for you to kind of reach the revenue profile you need to get to that 8% to 10% full year growth rate?

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [7]

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So no, in terms of our visibility to revenue, again, we track our work in process inventory very closely. So these are claims that are typically already generated and either in review with clients or about to, and we have a high degree of confidence that we can convert enough of those claims to generate the revenues for the Recovery Audit and Contract Compliance services. In Adjacent Services, that work has to be booked, it has to be closed, in which we've got all the work needed to meet the projections -- to hit the projections that I mentioned earlier. So that's already arranged and in process, so now it's about executing and getting work -- getting deliverables delivered and getting some of these savings in sourcing that I've talked about earlier. So we feel good about where we are. We've got the work in progress, we've got the inventory, and it's about getting it converted and get the work completed.

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Operator [8]

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(Operator Instructions) And as I'm showing no further questions at this time, I'd like to turn the call back over to Ron Stewart, CEO, for any closing remarks.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [9]

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Thanks, Jimmy. So we appreciate all of you making time to join the Q3 earnings call today. We look forward to performing well in Q4, and we'll rejoin you at the end -- after the end of the year to cover Q4 and the full year 2018. So thanks for your time.

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Operator [10]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.