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Edited Transcript of WSTL earnings conference call or presentation 24-May-18 1:30pm GMT

Q4 2018 Westell Technologies Inc Earnings Call

Aurora May 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Westell Technologies Inc earnings conference call or presentation Thursday, May 24, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred S. John

Westell Technologies, Inc. - President & CEO

* Kirk R. Brannock

Westell Technologies, Inc. - Chairman of the Board

* Thomas P. Minichiello

Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Marc Silk

* Steve Busch

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Presentation

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Operator [1]

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Good morning, and welcome to the Westell's Fiscal Year 2018 Fourth Quarter and Full Year Earnings Call. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference call is being recorded.

I will now turn the call over to Tom Minichiello, Westell's Chief Financial Officer. Tom, you may begin.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [2]

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Thank you, Hilda. Good morning, and welcome to our conference call to discuss the fiscal year 2018 fourth quarter and full year results for Westell Technologies. The news release we issued yesterday afternoon is posted on our website, westell.com. On this call, Kirk Brannock, Westell's Chairman, will begin with the discussion of our accomplishments for the year and introduce you to our newly appointed President and CEO, Stephen John. I'll then update you on our financial results for the quarter and for the year, and we'll conclude by taking questions.

Before we begin, please note that our presentation and discussion contain forward-looking statements about future results, performance or achievements, financial and otherwise. Words such as should, believe, expect, trend and similar expressions are intended to identify such forward-looking statements. These statements reflect management's current expectations, estimates and assumptions. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Westell's actual results, performance or achievements to differ materially from those discussed. A description of factors that may affect our future results is provided in the company's SEC filings, including Form 10-K for the fiscal year ended March 31, 2017, under the section Risk Factors.

The forward-looking statements made in this presentation are being made as of the date and time of this conference call. Westell disclaims any obligation to update or revise any forward-looking statements based on new information, future events or other factors.

Please also note that we present non-GAAP financial information in our news releases because we believe that non-GAAP measures provide meaningful supplemental information to both management and investors. The non-GAAP information reflects the company's core ongoing operating performance and facilitates comparisons across reporting periods. Our discussion of results today will include non-GAAP measures. We've provided reconciliations to the most comparable GAAP measures in our news release.

With that, I'll now turn the call over to Kirk.

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [3]

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Thanks, Tom, and good morning, everyone. Fiscal 2018 was a significant turnaround year for Westell. Actions taken to reset our cost and expense structure have delivered significantly better financial results compared to the year before. Gross margin expanded to 43% from 37.7%. Net income improved by $15.9 million. We generated a positive and healthy non-GAAP operating profit of 7.1%, and we increased our total cash by $6 million, including generating cash from operations of $6.9 million.

When you look at the business side, sales of new building wireless public safety products grew by more than 50% and helped diversify our customer base. Revenue of our remote units for intelligent site management increased by a double-digit percentage. And within CNS, we grew sales of Integrated Cabinets and Power Distribution products. We made very good progress in our 2018 fiscal year.

Turning to the fiscal fourth quarter. Revenue came in below expectations and was impacted by a fairly rapid architecture shift among In-Building Wireless operators, more specifically one service provider that in previous quarters had been a large buyer of our universal DAS Interface tray or unit active conditioner. They abruptly shifted their new deployments from traditional DAS installations to a distributed radio access network, or DRAN configuration, mainly in large venues. Unlike a fully dedicated in-building DAS layout, DRAN does reduce CapEx by deploying only remote units at that venue or building. And these are connected to equipment that already exists at centralized offsite locations. Going forward, we do see in-building network operators favoring DRAN in greenfield situations. However, the ongoing need for carriers to add capacity to a large embedded base of DAS networks will continue to provide a level of demand for our UDIT product line.

Even on the lower revenue in the March quarter, we generated a positive non-GAAP operating profit margin of 3.5% and grew cash by $1.7 million during the fourth fiscal quarter. We have tremendous operating leverage in this business. And let me say this again, we have a lot of leverage. Now we need to grow top line.

On April 1, we began fiscal 2019 strong with our largest beginning-of-year backlog in 3 years, and we expect to rebound in the June quarter. Let me now share with you the revenue growth opportunities we're pursuing across the business. That's where our focus and Steve's focus will be.

As mentioned on previous calls, we like the growth potential of the In-Building Wireless market for public safety. Unlike the commercial market, in-building mobile communication coverage for public safety is driven by mandates from local municipalities, which are still in the early stages relative to the overall market potential. We like the fact that it fits in well with our core competencies. Also, once the FirstNet macro network is completed, we expect the market to develop further. We're encouraged by the traction we have gained thus far with our initial small set of public safety products, and are now in the testing phase for an expanded suite of products that we expect to introduce soon. This will significantly expand our public safety lineup.

We're also excited about opportunities in the industry with respect to network densification, the next-generation wireless transition from 4G to 5G, the continued expansion of fiber broadband access in high-density areas and the emerging fixed wireless broadband in more rural areas, an area that Steve knows very well. We have already seen our ISMS and CNS businesses generate revenue as a result of a densification architecture known as centralized radio access network, or CRAN, and we continue to invest in growing revenue across our existing product portfolio to address our customers' needs. The recent uptick in revenue in our suite of ISM remote units, which we continue to refresh, is a good example.

Last week, we introduced an expanded line of higher capacity Power Distribution fuse panels well suited for CRAN and for densification small cell deployments. We're also continuing to work on rapid OEM initiatives to bring to market Westell-certified solutions from third parties. One of these initiatives that we are currently focused on would give us a presence in the small cell market.

In addition, last month, George Wakileh, former Vice President of Development at TTI Technologies (sic) [Tii Technologies], joined Westell. In his new role, George is responsible for expanding our product portfolio and customer relationships with an initial emphasis on the fiber access solution space. He's also going to assist us in M&A activities.

I think earlier this month, you all saw that we announced that Westell's Board of Directors appointed Alfred S. (Stephen) John, and by the way, he goes by Steve, as our new President and CEO. Steve's sitting right next to me, and I'm going to turn this over to him in a couple of minutes. Steve has more than 25 years of experience in executive leadership, new business development and sales management. He joined us from Rise Broadband, a provider of fixed wireless services, where he headed up engineering and field operations. Steve was previously Senior Vice President and Chief Revenue Officer at Internet provider UNSi. And before that, he was President and CEO of Cheetah Technologies and of American Broadband. We're delighted to have Steve join us. He just started this week and is here with us today. So it's my pleasure to introduce Steve to you. Steve?

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Alfred S. John, Westell Technologies, Inc. - President & CEO [4]

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Thank you, Kirk. Good morning, everyone. First of all, let me say how excited I am to join Westell. I believe we have a great future ahead of us. The company has a solid reputation of high-quality product and some solutions, strong customer relationships developed over many years, and is now generating good profits and positive cash flow, thanks to hard work by the Westell team, especially the leadership of Kirk and Tom. Furthermore, it’s a tremendous opportunity in the industry. And as Kirk just mentioned, I can see real growth opportunities for Westell in existing and adjacent markets. In-building public safety, network densification, small cell, 5G, fiber access and fixed wireless broadband are all areas expected to grow significantly in the coming years. Our #1 mission will be to profitably expand the business and drive increased shareholder value.

A little about myself. My proudest accomplishment is being the husband and father of a beautiful loving family. I am passionate about growing businesses and love a good challenge. I enjoy working with and leading great people, and Westell has amazing and passionate employees. I also enjoy interacting with stakeholders and look forward to meeting you in person soon. With that, I'll turn the call back over to Tom.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [5]

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Thank you, Steve, and we're excited to have you on board. Let me provide some added color on our results, beginning with revenue.

For the fourth fiscal quarter ended March 31, 2018, revenue was $11.1 million compared to $13.7 million in the prior quarter. The sequential quarter change was due to lower IBW and ISMS revenue, partly offset by higher CNS revenue. The IBW change was primarily due to lower sales of our UDIT product line, which as Kirk already mentioned, was impacted by a shift to DRAN at new sites by one carrier that had been a significant UDIT customer in previous quarters.

For ISMS, March quarters are historically down from their December quarter highs. However, while that was the case overall for ISMS this year, it was primarily isolated to lower services revenue. Sales of our remote units, which are the network devices used for on-site processing, and where we consistently generate the majority of our revenue in this segment, were up. An ongoing emphasis backed up by increased investment in remote monitoring by one of our top customers continues to be a positive development for our ISMS business.

As noted, CNS revenue was up sequentially in the fourth quarter. This growth was driven primarily by increased sales of our 2 primary product lines in this segment: Power Distribution products, where we've expanded our product offering, and are gaining traction in new areas like CRAN; and Integrated Cabinets, in which we continue to see good demand coming from customer network expansion projects, including fixed wireless broadband.

For the full year ended March 31, 2018, consolidated revenue was $58.6 million compared to $63 million the year before. The year-over-year change was due to lower IBW and CNS revenue, while the ISMS segment remained essentially flat. The annual IBW change was primarily due to the expected decrease in demand for commercial repeaters as well as lower sales of DAS conditioners, partially offset by increased sales of public safety repeaters and increased revenue from our line of passive system components, which are used in both commercial and in public safety installations.

The annual CNS change was primarily due to the drop-off of late life cycle T1 network interface units and of tower mounted amplifiers, partly offset by increased Integrated Cabinet revenue.

For the ISMS business, while essentially flat year-over-year, we increased sales of remote units, which was equally offset by lower services revenue.

Now moving onto the rest of the operating results. We continued in the fourth quarter and for the year to exceed our gross margin target of 40% or greater. It was 45.5% for the quarter and 43% for the full year. Non-GAAP operating expenses in fiscal 4Q were $4.7 million, the same as 3Q. For the full year, non-GAAP OpEx was $21 million or 36% of revenue, a substantial improvement when compared to the $29.1 million or 46% of revenue the year before.

Gross margin expansion and the OpEx reset have created tremendous operating leverage in our business model. This was clearly evident in the March quarter, where, even in an unexpectedly low revenue period, we still achieved a positive non-GAAP operating profit margin of 3.5%. For the full fiscal year, the business generated a healthy non-GAAP operating profit margin of 7.1%, the highest in 4 years, and moving us closer to our target of 10% or greater.

Fiscal year net income and EPS on a non-GAAP basis were $4.4 million and $0.28 per share compared to the prior year's net loss of $3.4 million and $0.22 per share. On a GAAP basis, we achieved breakeven net income and EPS in fiscal 2018 compared to a $15.9 million loss the prior year.

On an adjusted EBITDA basis, which is our non-GAAP operating profit less depreciation, Westell's business in 4Q achieved positive adjusted EBITDA for the sixth consecutive quarter, and for the fiscal year 2018 generated adjusted EBITDA of $4.9 million or 8.4%.

Turning to the balance sheet. During the fourth quarter, we increased cash by $1.7 million, further strengthening our balance sheet. Our cash and short-term investments totaled $27.7 million at March 31, 2018, compared to $26 million at December 31, 2017. The 4Q cash increase was largely driven by improved working capital. For the year, we generated cash of $6 million. This consisted of $6.9 million of cash flow generated from operations, partly offset by $900,000 used for capital expenditures and share repurchases.

Before we move on to Q&A, let me summarize. Fiscal 2018 was a big turnaround year for Westell. The operating efficiencies we implemented and continue to manage resulted in significant gross margin expansion, substantial improvements in operating profit and net income and cash growing by $6 million to $27.7 million, while remaining debt free. In-building public safety, network densification, small cells, 5G, fiber access and fixed wireless broadband all present us with tremendous opportunities to grow revenue in existing and in adjacent markets. And we are now joined by our new CEO, Stephen John; and our new Business Development VP, George Wakileh, adding leadership strength and depth to the management team dedicated to our top mission of driving increased shareholder value.

So with that, we'd now like to open up the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [2]

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Any questions?

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Operator [3]

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We have a question from Steve Busch from Everglades Resources.

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Steve Busch, [4]

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Welcome aboard, Steve.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [5]

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Thank you.

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Steve Busch, [6]

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A quick question. Can you just delve a little deeper into kind of when you knew that we were going to be short on revenues versus the last call, and just kind of a discussion as to our CRAN opportunity versus this DRAN, which seems to displace us currently?

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [7]

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Sure, Steve. So the unit product, as you know, has been a really good product for us. If you look back at previous quarters during the year and even in years before, it's been our leading product line and, at some point over time, a little bit of a longer trend line. We expected that technology to ultimately get integrated into other network elements. So we knew that, but that was much more of a gradual longer-term trend line. About, I would say, midway through the quarter, we purchased orders that we were expecting to get from this one customer we're not getting. And it was for the reasons we outlined in our prepared remarks here that they moved to what, for them, is a lower cost CapEx solution for new sites going forward. Interestingly enough, we are -- this quarter, we actually are getting some of those purchase orders now in the June quarter. So that's about when we knew, about midway.

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [8]

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And maybe I could add to that, Steve. This was really an abrupt change for one carrier literally our product was designed in. And because they saw a lower-cost solution, we were designed out. And that rarely happens, and it did in this case. We had some really good, strong UDIT sales in previous quarters. Actually, it was carrying the results in a couple of quarters. And it was pretty abrupt, pretty abrupt. Now the good news is we still have a large embedded base of DAS out there and a large embedded base of UDIT. So in existing venues where that is the case, our UDIT will continue. It's not going to go away. However, we do see new greenfield locations being designed with DRAN. Does that help?

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Steve Busch, [9]

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Do we have a solution to partake? Or...

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [10]

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Well, we definitely have a solution on the CRAN side and, when you look at DRAN, where the opportunities are, are in our CNS space with cabinets and with power. As I mentioned earlier, we're now trying to get deeper with our fiber as far as on the edge with bringing George Wakileh on and passive. So yes, we -- I look at CRAN as an opportunity. DRAN did hurt us on the UDIT side. But our job is to figure out, okay, with this change in architecture, where can we benefit with DRAN? And I do think with the cabinets, the power, the fiber and the passives, there is definitely opportunity there.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [11]

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One other thing I could add, Steve, that also is important to note is we've been spending some engineering and development efforts on a derivative of the UDIT. It's not active. It's passive. But what's nice about it is, see what's happening in the large DAS and the DAS market is, our customers are moving more towards smaller venues, where you don't need as much power and UDIT maybe a little bit too much. So we have a derivative product here that will fit more nicely into where the DAS spending is going, which is smaller venues, but more of them. So there's market opportunity there. And we'll continue, as Kirk mentioned, to have a nice market for the pretty large embedded base.

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Steve Busch, [12]

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Okay. Can you guys discuss your backlog a little bit, like how that breaks out? Or where -- are we going to trend our sales up the next few quarters, do you think, in terms of beating the 2017 fiscal year since we're down from there?

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [13]

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Yes, Steve. So as we mentioned in the prepared remarks, we expect a rebound this quarter, and part of that is due to the backlog coming in. We had a -- I'll just give you the numbers. We had about a $2.7 million increase in our total backlog from end of December to end of March, up around $3 million -- up from $5.8 million to $8.5 million. So $2.7 million higher. And a lot of that was in the ISMS business segment with our remote units, which as we mentioned are -- have been doing extremely well in the last 3 quarters. And we don't see that letting up. It is with -- it's with all 3 of our large customers in that segment. But one customer in particular has ramped up their remote monitoring deployments.

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Operator [14]

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We have a question from Marc Silk from Silk Investment Advisors.

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Marc Silk, [15]

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My issue really is, usually, when companies are trading at past their cash value, the market cap is half there. The cash on hand is half their market cap. But better, I usually go in and get aggressively and buy. And even though I have a sizable position, what's kind of stopping me from adding more, even though I believe in you, and I think it's nice to see Steve is encouraged and he's got a nice go-get-them attitude, I really think the elephant in the room is the dual shares because as people I talk to just do not like when one set of shareholders can really control the votes. So I was hoping that maybe you can persuade the holders to maybe merge those 2. If not, maybe they can publicly say why they feel it's beneficial. Because I think it's really impacting the stock, and I think that it's only fair for Steve taking this opportunity to maybe not inhibit him, maybe merge the 2 shares. As AirGig just did it early this month, and I was the founder who did it, stocks up 15% since then. So again, I really would like to see something happen because I do want to add more to this. I believe in what you guys are doing, and I just figured I'd come out and make that comment. So thank you, and good luck going forward.

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [16]

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Well, thanks, Marc. As Chairman of the Board, I will. We have a board meeting coming up in June. I will bring that up. There has been discussion around that. We've looked at those companies that have done that. I would tend to agree with you that there's value that could be extrapolated if there was one class of shares. I'll tell you, I am 100% confident in Steve John, and we are much better positioned today than a year ago. It's night and day. I'm not happy with where we are with growing revenue. We have to grow revenue, but I will take your comments back to the board seriously and bringing up at the next board meeting as an agenda item, given the fact that you've brought it up.

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Marc Silk, [17]

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And I do appreciate that. And if they say no, I would like to know kind of why they feel it's more beneficial. But like said, I would like to add more, but I would like to see this resolved. And thank you so much. I appreciate you commenting.

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [18]

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Okay. Thanks, Marc.

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Operator [19]

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We have no further questions at this moment. I would like to turn the call back to Steve John for closing remarks.

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Alfred S. John, Westell Technologies, Inc. - President & CEO [20]

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Well, thanks, again, everyone, for joining us today. As I mentioned, and I appreciate the comments and the welcome, I'm thrilled to be here at Westell, be part of this great team. I'm going to be focused on growing our top line, growing it profitably and reporting better results as we continue to move forward. We look forward to speaking with you again, and thank you for your participation this morning.

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Kirk R. Brannock, Westell Technologies, Inc. - Chairman of the Board [21]

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Thank you.

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Thomas P. Minichiello, Westell Technologies, Inc. - Senior VP, CFO, Treasurer & Secretary [22]

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Thank you.

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Operator [23]

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