Rosetta Stone Inc. Reports First Quarter 2014 Results

  Rosetta Stone Inc. Reports First Quarter 2014 Results  70% Growth in Enterprise and Education Business Reflects Continued Momentum in                          the Company’s Transformation  Business Wire  ARLINGTON, Va. -- May 7, 2014  Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language-learning, reading and brain fitness solutions, today announced financial results for the first quarter of 2014.    *Company demonstrates continued progress and growth in Enterprise &     Education (“E&E”) business with 70% bookings growth   *Results from acquisitions on track and meeting or exceeding plans   *Consumer business trending similar to last year but beginning to leverage     marketing capabilities, including acceleration of Fit Brains results   *Excluding the shuttered North American Kiosk channel, total bookings of     $61.2 million grew 6%, while total revenue was down 1% to $60.8 million   *Adjusted EBITDA of ($6.7) million versus guidance of ($8-$10) million   *Confirms full year 2014 guidance  “The first quarter further demonstrated that we are making solid progress in transforming Rosetta Stone,” said Steve Swad, President and Chief Executive Officer of Rosetta Stone. Swad continued, “The expanded product portfolio from acquisitions and new development helped generate solid 70% bookings growth in our E&E segment. I was particularly encouraged by the immediate contribution from sales of the Tell Me More product and strong growth from Lexia Learning. Our Consumer business continued to reflect the effects of varying channel performance with the web channel continuing to drive positive results but retail creating significant drag on overall results. The addition of Fit Brains to the Rosetta Stone portfolio and our ability to accelerate their performance was evidence that we can leverage our marketing platform and cross-sell to our growing user base, now over 9 million.”  First Quarter 2014 Operational and Financial Highlights  Bookings: Total consolidated bookings, excluding the shuttered North American Kiosk channel, increased 6% to $61.2 million from $57.8 million in the year-ago period. North American Consumer segment (“NA Consumer”) bookings excluding Kiosk decreased 7% to $36.1 million from $38.8 million, primarily reflecting a $4.0 million or 47% decrease in retail channel bookings. Bookings from the direct-to-consumer (“DTC”) channel were flat, while bookings from Fit Brains added an incremental $1.4 million to NA Consumer. Rest of World (“ROW”) Consumer segment bookings declined 18%, primarily reflecting decreases in Asia as the company downsized these markets in the first quarter, partially offset by $0.3 million of incremental bookings from third-party partner sales. Bookings in the Global Enterprise & Education (“E&E”) segment increased 70% compared with a year-ago. Bookings from E&E Language decreased 4% on a pro forma basis while bookings from Lexia increased 35% on a pro forma basis compared with the first quarter of 2013.                                                      US$ thousands                     Three Months Ended                                   March 31,                                   2014      2013       % change Bookings from: N.A. Consumer ex Kiosk            $ 36,141  $ 38,758   -7    % Rest of World Consumer              6,817     8,310    -18   % Global Enterprise and Education    18,282   10,758   70    % Total ex N.A. Kiosk               $ 61,240  $ 57,826   6     % Total                             $ 61,240  $ 60,371   1     %                                                                Revenue: Total revenue excluding the shuttered North American Kiosk channel decreased 1% year-over-year to $60.8 million from $61.4 million. NA Consumer revenue excluding Kiosk decreased 7%, primarily reflecting weakness in the retail channel, which declined 37%, and a 1% decrease in DTC. Fit Brains contributed $0.2 million during the quarter. ROW Consumer revenue decreased 22% due mainly to decreases in Japan and Korea. E&E revenue grew 28% in the first quarter compared with a year ago.                                                        US$ thousands                     Three Months Ended                                   March 31,                                   2014      2013       % change Revenue from: N.A. Consumer ex Kiosk            $ 36,214   $ 38,859   -7    % Rest of World Consumer              6,669      8,570    -22   % Global Enterprise and Education    17,882    13,969   28    % Total ex N.A. Kiosk               $ 60,765   $ 61,397   -1    % Total                             $ 60,765   $ 63,924   -5    %                                                                   *Adjusted EBITDA: Adjusted EBITDA in the first quarter was negative $6.7     million vs. negative $1.1 million a year ago. The decrease in the quarter     is mainly due to the $4.0 million decrease in retail bookings and the     inclusion of the results from acquisitions this quarter, which operated at     a seasonal loss in the first quarter. These decreases were partially     offset by contribution from higher bookings from acquisitions and benefits     from restructurings in Japan and Korea in the ROW Consumer segment. In     connection with the downsizing of its operations in Asia in the first     quarter, the company recorded a $2.2 million non-cash goodwill impairment     charge for the ROW Consumer segment, which is excluded from Adjusted     EBITDA.   *Balance Sheet and Cash Flow: Cash at the end of the quarter was $56.0     million compared with $98.8 million at 12/31/13. The decrease in cash was     mainly due to the acquisition of Tell Me More S.A. of $28.0MM, the     negative Adjusted EBITDA in the quarter and other one-time cash expenses     for restructurings, severance and acquisition transaction and integration     expenses. Deferred revenue increased $2.7 million in the quarter to $81.5     million compared with $78.9 at 12/31/13. Free cash flow in the first     quarter was negative $15.0 million compared with negative $8.2 million a     year ago. The decline in free cash flow reflects the lower Adjusted     EBITDA, higher one-time items of $4.1 million vs. $0.8 million a year ago     and a decrease in working capital, which was partially offset by a     decrease in capital expenditures to $1.4 million in the first quarter     compared with $2.5 million a year ago.  Guidance  The company is maintaining its guidance for the full year 2014 as follows:   FY 2014 Guidance                                                                                Amount/Range       Commentary Consolidated Bookings          $315MM to $325MM   Mid-single digit % growth                                                    Adjusted EBITDA                $18MM to $22MM     ~5% margin                                                    Shares outstanding             ~22MM                                                    Capital Expenditures           $10MM to $14MM     Acquisition Integrations                                                    Long-term effective tax rate  39%                                                                    Non-GAAP Financial Measures  This press release contains several non-GAAP financial measures.    *Bookings represent executed sales contracts received by the Company that     are either recorded immediately as revenue or as deferred revenue.   *Adjusted EBITDA is GAAP net income/(loss) plus interest income and     expense, income tax benefit and expense, depreciation, amortization and     stock-based compensation expense, goodwill impairment plus the change in     deferred revenue (excluding acquired deferred revenue) less the change in     deferred commissions. In addition, Adjusted EBITDA excludes any items     related to the litigation with Google Inc., restructuring and related wind     down costs, severance costs and transaction and other costs associated     with mergers and acquisitions as well as all adjustments related to     recording the non-cash tax valuation allowance for deferred tax assets.     Adjusted EBITDA for prior periods has been revised to conform to current     definition.   *Free cash flow is cash flow from operations less cash used in purchases of     property and equipment.  Management believes that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations. Management uses these non-GAAP measures to compare the Company's performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budgeting and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the Company's board of directors. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company's financial measures with other software and education-technology companies, many of which present similar non-GAAP financial measures to investors.  Management typically excludes the amounts described below when evaluating the Company’s operating performance and believes that the resulting non-GAAP measures are useful to investors and financial analysts in assessing the Company’s operating performance, due to the following factors:    *Amortization of Acquired Intangibles. Amortization costs and the related     tax effects are fixed at the time of an acquisition, and then amortized     over a period of several years after the acquisition and generally cannot     be changed or influenced by management after the acquisition.   *Stock-based Compensation. Although stock-based compensation is an     important aspect of compensation of the Company’s employees and     executives, stock-based compensation expense is generally fixed at the     time of grant, then amortized over a period of several years after the     grant of the stock-based instrument, and generally cannot be changed or     influenced by management after the grant. In addition, the impact of     shares granted under these plans is considered in the Company’s EPS     calculation to the extent the shares are dilutive.   *Bookings. Although revenue is an important aspect of measuring Company     performance, the Company believes total sales bookings can be a valuable     indicator of the Company's performance. The Company is transitioning to a     greater amount of subscription sales, which results in an increasing     portion of sales being recorded as deferred revenue.  Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company's financial statements. In addition, they are subject to inherent limitations, because they reflect the exercise of judgments by management about which expenses and items of income are excluded from these non-GAAP financial measures and may not be calculated in the same manner as other companies’ similarly titled non-GAAP measures.  In order to compensate for these limitations, management presents its non-GAAP financial measures in connection with its GAAP results. The company urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing earnings information, including this press release, and not to rely on any single financial measure to evaluate the company's business.  Reconciliation tables of the most comparable GAAP financial measures to the non-GAAP measures used in this press release are included at the end of this release.  Earnings Results Webcast  This news release and the accompanying tables should be read in conjunction with the additional content that is available on the company’s website.  In conjunction with this announcement, Rosetta Stone will host an Earnings Results webcast today at 4:30pm eastern time (ET) during which time there will be a discussion of the results and the company’s business outlook.  The webcast will be available live on the Investor Relations page of the company’s website at http://investors.rosettastone.com.  A recorded replay of the webcast will be available on the “Investor Relations” page of the company’s web site http://investors.rosettastone.com after the live discussion.  About Rosetta Stone  Rosetta Stone Inc. (NYSE: RST) is dedicated to changing the way the world learns. The company’s innovative technology-driven language and reading solutions are used by thousands of schools, businesses, government organizations and millions of individuals around the world. Founded in 1992, Rosetta Stone pioneered the use of interactive software to accelerate language learning. Today the company offers courses in 30 languages, from the most commonly spoken (such as English, Spanish and Mandarin) to the less prominent (including Swahili, Swedish and Tagalog). In 2013, Rosetta Stone expanded beyond language and deeper into education-technology with its acquisitions of Livemocha, Lexia Learning, Vivity Labs, and Tell Me More. Rosetta Stone is based in Arlington, VA, and has offices around the world.  Cautionary Statement Regarding Forward-Looking Statements  Certain information contained in this presentation and certain comments today constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including demand for our language learning solutions; the advantages of our products, services, technology, brand and business model as compared to others; our strategic focus; our ability to maintain effective internal controls or to remediate material weaknesses; our cash needs and expectations regarding cash flow from operations; our product development plans; our international operations and growth plans; our plans regarding our kiosks and retail relationships; our plans regarding our Enterprise and Education business; the impact of any revisions to our pricing strategy; our ability to manage and grow our business and execute our business strategy; our financial performance; our actions to realign our cost structure and revitalizing our go-to-market strategy; our plans to transition our distribution to more online in the consumer business; our ability to expand our product offerings beyond our core adult-focused language learning solutions, including the launch of Kids reading and brain fitness; our ability to introduce successfully Lexia’s Core5 reading product to the consumer market; our ability to expand our offerings to more devices and apps, our ability to identify and successfully close and integrate additional acquisition targets; our plans with respect to and our ability to successfully integrate Lexia, Livemocha, Tell Me More and Vivity into our business; adverse trends in general economic conditions and the other factors including the “Risk Factors” more fully described in the Company's filings with the U.S. Securities and Exchange Commission (SEC), including the Company’s annual report on Form 10-K for the year period ended December 31, 2013, which is on file with the SEC. We encourage you to review those factors before making any investment decision. You should not place undue reliance on forward-looking statements because they involve factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements.  Today’s presentation and discussion also contains references to non-GAAP financial measures. The full definition and reconciliation of those measures is available in our Form 8-K filed with the SEC on May 7, 2014. Management uses these non-GAAP measures to compare the Company's performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budgeting and planning purposes. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. Our definitions of non-GAAP measures may not be comparable to the definitions used by other companies, and we encourage you to review and understand all our financial reporting before making any investment decision.                                                                  ROSETTA STONE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)                                                                                                                        March 31,     December 31,                                                      2014         2013     Assets Current assets: Cash and cash equivalents                           $ 55,974      $  98,825 Restricted cash                                       50             12,424 Accounts receivable (net of allowance for doubtful accounts of $1,542 and $1,000,               44,932         60,342 respectively) Inventory                                             8,416          6,639 Prepaid expenses and other current assets             13,257         12,294 Income tax receivable                                947          197      Total current assets                                  123,576        190,721                                                                    Property and equipment, net                           23,350         17,766 Goodwill                                              78,560         50,059 Intangible assets, net                                39,610         29,006 Other assets                                         3,317        3,224    Total assets                                        $ 268,413    $  290,776                                                                     Liabilities and stockholders' equity Current liabilities: Accounts payable                                    $ 11,740      $  10,326 Accrued compensation                                  11,461         16,380 Obligations under capital lease                       667            256 Other current liabilities                             33,497         41,936 Deferred revenue                                     68,861       67,173   Total current liabilities                             126,226        136,071                                                                    Deferred revenue                                      12,681         11,684 Deferred income taxes                                 10,548         9,022 Obligations under capital lease                       4,092          217 Other long-term liabilities                          2,369        2,539    Total liabilities                                     155,916        159,533                                                                    Commitments and contingencies                                                                    Stockholders' equity: Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares issued        —              — and outstanding March 31, 2014 and December 31, 2013, respectively Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 22,832 and 22,588 shares issued and 21,832 and 21,588 shares     2              2 outstanding at March 31, 2014 and December 31, 2013, respectively Additional paid-in capital                            172,982        171,123 Accumulated loss                                      (49,533 )      (29,292 ) Accumulated other comprehensive income                481            845 Treasury stock, at cost, 1,000 shares at March       (11,435 )     (11,435 ) 31, 2014 and 1,000 shares at December 31, 2013 Total stockholders' equity                           112,497      131,243  Total liabilities and stockholders' equity          $ 268,413    $  290,776                                                            ROSETTA STONE INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)                                                                                                                                                                                                                                  Three Months Ended                                              March 31,                                               2014          2013                                                                (As Adjusted)* Revenue: Product                                      $ 32,371      $   37,592 Subscription and service                      28,394        26,332   Total revenue                                  60,765          63,924                                                             Cost of revenue: Cost of product revenue                        7,824           6,940 Cost of subscription and service revenue      4,347         3,324    Total cost of revenue                          12,171          10,264                                                            Gross profit                                  48,594        53,660                                                               Operating expenses Sales and marketing                            39,096          37,273 Research and development                       8,773           7,357 General and administrative                     16,054          12,588 Goodwill impairment                            2,199           - Lease abandonment                             3,571         793      Total operating expenses                      69,693        58,011                                                               Loss from operations                           (21,099 )       (4,351  )                                                             Other income and (expense): Interest income                                5               41 Interest expense                               (56     )       (45     ) Other income (expense)                        226           419      Total other income                             175             415                                                             Loss before income taxes                       (20,924 )       (3,936  ) Income tax (benefit) provision                (683    )      968                                                                  Net loss                                     $ (20,241 )   $   (4,904  )                                                             Net loss per share: Basic                                        $ (0.96   )   $   (0.23   ) Diluted                                      $ (0.96   )   $   (0.23   )                                                             Common shares and equivalents outstanding: Basic weighted average shares                 21,125        21,360   Diluted weighted average shares               21,125        21,360                                                                            * Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.                                                                ROSETTA STONE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)                                                                                                                    Three Months Ended                                                   March 31,                                                    2014         2013                                                                      (As Adjusted)*                                                                  Cash Flows From Operating Activities: Net loss                                          $ (20,241 )   $  (4,904   ) Adjustments to reconcile net loss to cash used in operating activities, net of business acquisitions: Stock-based compensation expense                    1,406          1,668 Bad debt expense                                    957            (238     ) Depreciation and amortization                       3,434          2,372 Deferred income tax provision (benefit)             (756    )      289 Loss on disposal of equipment                       106            141 Goodwill impairment                                 2,199          - Net change in: Restricted cash                                     60             32 Accounts receivable                                 17,916         11,135 Inventory                                           (1,034  )      (746     ) Prepaid expenses and other current assets           (213    )      (2,446   ) Income tax receivable                               (639    )      413 Other assets                                        62             105 Accounts payable                                    512            (209     ) Accrued compensation                                (8,123  )      (6,412   ) Other current liabilities                           (9,461  )      (4,253   ) Other long-term liabilities                         (172    )      371 Deferred revenue                                   358          (2,953   ) Net cash used in operating activities              (13,629 )     (5,635   )                                                                  Cash Flows From Investing Activities: Purchases of property and equipment                 (1,366  )      (2,528   ) Decrease in restricted cash related to Vivity       12,314         - Labs acquisition Acquisitions, net of cash acquired                 (40,161 )     -         Net cash (used in) provided by investing           (29,213 )     (2,528   ) activities                                                                  Cash Flows From Financing Activities: Proceeds from the exercise of stock options         454            349 Payments under capital lease obligations           (61     )     (193     ) Net cash provided by financing activities          393          156                                                                        (Decrease) increase in cash and cash                (42,449 )      (8,007   ) equivalents                                                                  Effect of exchange rate changes in cash and        (402    )     (872     ) cash equivalents                                                                  Net (decrease) increase in cash and cash            (42,851 )      (8,879   ) equivalents                                                                  Cash and cash equivalents—beginning of period      98,825       148,190                                                                    Cash and cash equivalents—end of period           $ 55,974     $  139,311                                                                     * Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.                                                      ROSETTA STONE INC. Reconciliation of GAAP Net Loss to Adjusted EBITDA (in thousands) (unaudited)                                                                                                Three Months Ended                                         March 31,                                          2014          2013                                                           (As Adjusted)*                                                        GAAP net loss                           $ (20,241 )   $   (4,904  ) Interest (income)/expense, net            51              4 Income tax (benefit) expense              (683    )       968 Depreciation and amortization             3,372           1,757 Depreciation related to restructuring     62              615 Goodwill impairment                       2,199           - Stock-based compensation                  1,406           1,668 Other EBITDA adjustments                  8,006           2,088 Change in deferred revenue                475             (3,553  ) Change in deferred commission            (1,377  )      213      Adjusted EBITDA**                       $ (6,730  )   $   (1,144  )                                                         * Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.  ** Adjusted EBITDA is GAAP net income or loss plus interest income and expense, income tax benefit and expense, depreciation, amortization, goodwill impairment, and stock-based compensation expenses, plus the change in deferred revenue excluding increases in deferred revenue from acquisitions less the change in deferred commissions. Adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring and related wind down costs, severance costs, and transaction and other costs associated with mergers and acquisitions. Adjusted EBITDA for prior periods has been revised to conform to the current definition.                                                                Rosetta Stone Inc. Business Metrics (in thousands)                                                                                      Quarter-Ended                                        Quarter-Ended                                                                                       3/31/13  6/30/13  9/30/13  12/31/13  2013        3/31/14 Net Bookings by Market                                                                       North America   41,303    39,321    38,629    52,620     171,873     36,141 Consumer Rest of World   8,310    6,879    7,471    7,300     29,960      6,817 Consumer Worldwide       49,613    46,200    46,100    59,920     201,833     42,958 Consumer                                                                       Global Enterprise      10,758   16,883   24,594   24,067    76,302      18,282 and Education Total           60,371   63,083   70,694   83,987    278,135     61,240                                                                       YoY Growth (%) North America   -1%       5%        -9%       -9%        -4%         -12% Consumer Rest of World   -34%     -15%     -29%     -27%      -27%        -18% Consumer Worldwide       -9%       2%        -13%      -12%       -8%         -13% Consumer                                                                       Global Enterprise      -2%      -4%      27%      47%       18%         70% and Education Total           -8%      0%       -2%      0%        -2%         1%                                                                       % of Total Net Bookings North America   68%       62%       55%       63%        62%         59% Consumer Rest of World   14%      11%      10%      9%        11%         11% Consumer Worldwide       82%       73%       65%       71%        73%         70% Consumer                                                                       Global Enterprise      18%      27%      35%      29%       27%         30% and Education Total           100%     100%     100%     100%      100%        100%                                                                                                                                             Revenue by Market                                                                       North America   41,385    39,934    38,699    53,998     174,016     36,214 Consumer Rest of World   8,570    7,478    7,165    7,207     30,420      6,669 Consumer Worldwide       49,955    47,412    45,864    61,205     204,436     42,883 Consumer                                                                       Global Enterprise      13,969   14,727   15,008   16,505    60,209      17,882 and Education Total           63,924   62,139   60,872   77,710    264,645     60,765                                                                       YoY Growth (%) North America   -4%       8%        -3%       2%         1%          -12% Consumer Rest of World   -30%     -7%      -28%     -29%      -24%        -22% Consumer Worldwide       -10%      5%        -8%       -3%        -4%         -14% Consumer                                                                       Global Enterprise      -1%      -7%      4%       5%        0%          28% and Education Total           -8%      2%       -5%      -1%       -3%         -5%                                                                       % of Total Revenue North America   65%       64%       64%       69%        66%         60% Consumer Rest of World   13%      12%      11%      9%        11%         11% Consumer Worldwide       78%       76%       75%       79%        77%         71% Consumer                                                                       Global Enterprise      22%      24%      25%      21%       23%         29% and Education Total           100%     100%     100%     100%      100%        100%                                                                                                                                             Unit Metrics                                                                       Product Unit Volume          141.8     148.6     157.7     233.5      681.6       132.6 (thousands) Paid Online Learners        80.6      85.1      88.6      94.1       94.1        100.4 (thousands)                                                                       YoY Growth (%) Product Units   -1%       15%       8%        11%        8%          -6% Paid Online     95%       75%       54%       38%        38%         25% Learners                                                                       Average Net Revenue Per Unit ($) Average Net Revenue per     $312      $275      $250      $234       $263        $273 Product Unit Average Net Revenue per Online          $26       $25       $24       $23        $25         $22 Learner (monthly)                                                                       YoY Growth (%) Average Net Revenue per     -15%      -14%      -20%      -15%       -16%        -13% Product Unit Average Net Revenue per     -7%       -6%       -1%       -5%        -3%         -15% Online Learner                                                                                                                                             # of Kiosks (end of period)                                                                       North America   56        -         -         -          -           - Europe          -         -         -         -          -           - Asia Pacific    22        20        9         3          3           - Total # of Kiosks (end     78        20        9         3          3           - of period)                                                                       Revenues by Geography                                                                       United States   52,791    52,163    51,013    67,485     223,451     49,410 International   11,133   9,976    9,859    10,226    41,194      11,355 Total           63,924   62,139   60,872   77,710    264,645     60,765                                                                       Revenues by Geography (as a %) United States   83%       84%       84%       87%        82%         81% International   17%      16%      16%      13%       18%         19% Total           100%     100%     100%     100%      100%        100%                                                                       Prior period data has been modified where applicable to conform to current presentation for comparative purposes. Immaterial rounding differences may be present in this data in order to conform to Financial Statement totals.   Contact:  Rosetta Stone Inc. Investor Contact: Steve Somers, CFA Vice President, Corporate Development & Investor Relations 703-387-5876 ssomers@rosettastone.com or Media Contact: Jonathan Mudd Head of Global Communications 571-357-7148 jmudd@rosettastone.com  
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