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3904b4d25bb9e08a32705fbb28113fdc
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Very helpful. If I could just squeeze one more in, so your fourth quarter, the guidance implies that you would do about, I believe about $20 million to $40 million more in revenue in your April quarter then you just reported in your January quarter. Obviously, this implies that you'll be getting productivity expanding during the quarter to meet that -- those levels. And so I presume it's fair to say that you guys are ramping up and feeling like you're seeing that productivity in that run rate improve at this point?
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We are making progress every single month and our ability to make furniture since the month, we opened up back in May, and we expect that progress to continue all the way through back-end of the summer. But again what we found this quarter and what we expect -- as planning for at this point is that they will continue to be challenges and either this past week it's been weather, right? As that is shutdown either the ability for our employees to get to plants or for our suppliers, employees to get to plants or for our trucks of suppliers to get to plants. The -- certainly the holidays, as Kurt's comments alluded to in his comments the holidays were really tough for keeping employees safe and folks having to self report and stay out of work for a while. We've had challenges in our -- with shipping lanes to get finished goods products, some of our international businesses, our case good products and materials in for our component materials and for our parts.
So it just seems like the world stage right now is route with a lot of challenges. So what we can control is continuing to make that pipe bigger on the number of units we can make each month. And plan to be as agile as possible, but yes, no doubt, your opening comment is right, we do intend to be able to make more furniture each month than we did the last month, and that has been true thus far.
Just another input for you, Brad and what you're trying to look at. The fourth quarter has calendar wise more production days than the third quarter, because you have the holidays in the third quarter and so typically we have more production days, although we lost a couple yesterday and Monday was snow that impact on the southern part of the country. And with the freezing and the snow and a power outage and everything that's where we have most -- that's where we have all of our domestic plants that's -- that suspended thing for a few days. But when the magnitude of the quarter, we kind of took that into consideration, but there is we take Good Friday off, I mean, we take Thanksgiving off, we take the week between Christmas and New Year's off and other than Good Friday, there is no holiday dates that our plans aren't working. So that's an added factor as well.
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Can you provide an update on mRNA-1273 and the COVE study? What are your thoughts on the interim analysis timelines and expectations?
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We are pleased with the progress of mRNA-1273 and the COVE study. Enrollment is ongoing and we expect to complete it in September. The study is designed for two interim analyses, with the first potentially occurring in November and the second in December, depending on the event rate. We are working closely with the DSMB to monitor the study and will only unblind if statistical significance is reached. Our focus remains on conducting a rigorous clinical trial to ensure the safety and efficacy of our vaccine candidate.
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How are you thinking about manufacturing scale-up and potential distribution of mRNA-1273 if it's successful?
|
We continue to ramp up our manufacturing capabilities both internally and through our partnerships. We're on track to produce approximately 500 million to 1 billion doses per year beginning in 2021. We've signed several supply agreements with governments around the world. In terms of distribution, we're working closely with our partners and health authorities to develop plans for potential rollout, prioritizing high-risk populations. We're committed to broad, equitable access globally if mRNA-1273 is approved.
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Can you discuss the progress of your other pipeline programs beyond COVID-19?
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While much of our focus has been on mRNA-1273, we continue to advance our broader pipeline. Our CMV vaccine candidate mRNA-1647 is progressing in Phase 2, with data expected later this year. We recently initiated a Phase 1 study for our Zika vaccine mRNA-1893. Our personalized cancer vaccine program with Merck continues to enroll patients. We remain committed to leveraging our mRNA platform across multiple therapeutic areas.
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126d2ca3f9a81a3fc238affe7d3ca303
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What are your latest thoughts on pricing for mRNA-1273?
|
We haven't finalized pricing yet, but we're committed to responsible pricing that ensures broad access. We're considering factors like the urgent global health need, the innovative nature of mRNA technology, and our significant R&D and manufacturing investments. We expect to offer tiered pricing based on country income levels and volume commitments. Our goal is to price the vaccine in a way that supports widespread vaccination efforts while also allowing us to continue investing in our pipeline and platform.
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How are you managing cash burn given the accelerated timelines for mRNA-1273?
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We've certainly increased our spending to support the rapid development of mRNA-1273, but we're managing our cash position carefully. The recent equity raise has strengthened our balance sheet. We're also receiving funding from BARDA and other partners to offset some costs. We're prioritizing spending on mRNA-1273 and other key programs while being disciplined in other areas. Our strong cash position gives us flexibility to invest in manufacturing scale-up and advance our pipeline.
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So, Pedro, I wanted to follow up on the same-day delivery expansion in Brazil. How quickly do you think you can get to full coverage of the country with same day? And can you quantify how much of the customers order velocity picks up as the service level is improving? And I guess, secondarily, the eternal optimist in me wants to believe that as you and your peers take steps to increase selection and delivery service, e-commerce adoption should hopefully accelerate. So do you think you're starting to see that steeper part of the S curve of adoption as of yet? Or is it still too difficult to disaggregate relative to what is happening with the pandemic?
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Stephen, thanks. So first of all, the evolution of our rapid shipping solutions, so same and next day, certainly is one of the strongest pillars of our value proposition today. Taking Brazil, for example, I think we're already at about 2,000 cities where our packages can be delivered same or next day, which when you look back just a few years really is a phenomenal, phenomenal improvement in the value proposition. And I think that's one of the things that's driving the sustained growth in our business and share. Parsing out exactly how much lift comes from that is not something that we disclosed. But I think it's sufficient to say, and we've seen this globally that as you shorten times and you improve predictability and you overlay that with the fact that our free shipping program has done nothing but become more and more widespread, you have a very potent cocktail of improving user experience. And we will continue to focus on expanding as much as we can that. Same day, which is your specific question in a way is really determined by the number of FCs where we can locate inventory within same-day delivery. That's an ever-expanding footprint, I think, in a well-managed and cautious way from a capex perspective because most of these are OpEx. We don't own or build the FCs. And we will continue to grow out that footprint to get closer to our consumers. On the S curve, look, I think the last five quarters have seen tremendous acceleration in the rate of adoption of digital services, obviously somewhat pandemic-driven or very pandemic-driven. But that, I think, has gotten us closer to the more inclined portion of the S curve. And where we're seeing that so far, and I want to remain somewhat cautious until we get through H2, is that like we said in the prepared remarks, the two-year stacks actually look better coming out of the pandemic than they did going into the pandemic, which means that a lot of this demand that has moved online probably stays online, which is one way to define the steeper portion of the S curve.
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I'm curious thinking about the investment stance into the second half. It was another quarter here where -- versus our expectations and meaningful upside on margin. So can you talk about what you're thinking about spending directionally for the back half? And specifically, where that's going to perhaps a bit more color on the marketing, on the loyalty and related initiatives where you could see that incremental OpEx flowing to?
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Yes. Great. So I think it is important to note that we typically look at our efforts to deliver conservative but consistent operational leverage on the business on annual cycles. And so the way money gets invested across a year sometimes isn't necessarily very linear across quarters. The back half of the year has the more heavy promotional activity around Black Friday in Q4. There are certain brand efforts that get staged more in the second half than the first half. I think we've continued to tweak and you've seen that thresholds around free shipping to make the free shipping program more available and even more widespread. There is a lot that we're doing and is showing very encouraging signs in loyalty and content distribution related to loyalty. So these are some of the main areas of potential incremental investment for the back half of the year. So don't assume that H1 necessarily is a readout of what the entire year can look like. I think you need to look at full year chunks to understand how we're leveraging the P&L sequentially from one year to the next. And I think it's fair to say that given the results we're seeing, we could decide to be more aggressive in the second half around specific initiatives that I've just outlined.
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Pedro, in the quarter, you seem to be doing some gamification, AB testing in Brazil. How should we think about your use of gamification elements going forward? And you also seem to be growing more comfortable in your comments with respect to the loyalty stack that you've put together so far. Does it need any further refinement prior to you really hitting the accelerator? And then Osvaldo, I believe you were recently quoted in the press exploring crypto as a store of value for wallet users. In which countries could you legally opt for crypto? And how much development work needs to be done to enable that? And then lastly, Pedro, you mentioned you're doing great in Chile, and it's been going well for some time now. Is the new Colina distribution center or the regional infrastructure that you've built out playing a role yet. I know it had a soft open in the quarter, but it seems a bit early, but I wasn't sure.
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Hi, Bob, thanks for the questions. So on gamification, I think interesting initial trials. One characteristic of ours, and you've seen this as we've always, I think, not only try to innovate and see what works but also learn from what's going on globally. I think gamification is one area that we hadn't made too many advances on. And we are tinkering and toying with it, and we'll see what comes out. But I think not too much else to note there. I think we've seen players globally leverage gamification efforts efficiently for e-commerce. And so hopefully, it's another driver we find to drive engagement. Loyalty, like I said in the previous question, we are encouraged by everything we're seeing. I think our content distribution play continues to add more content providers. It continues to grow the number of users that are signing up for those content partners through MercadoLibre and Mercado Pago as part of the loyalty program. But certainly, there are years of never-ending refinements and improvements ahead for the loyalty program. We do think that the value proposition continues to get better and better. And as a consequence of that, I think you'll see us get more aggressive around communicating it and pushing it and other potential ways to get more users up into higher loyalty levels. but there is still significant innovation and new benefits that we will look to overlay into the loyalty program. And, Bob, with regards to crypto, we don't have anything to announce yet. Basically, the quote you saw in the press, the specific question was whether we were keeping track or what's happening in the U.S. with several large wallets allowing people to buy, hold and sell crypto. And that was pretty much it, and we are just understanding -- looking into that, understanding the market and understanding restrictions. I think the causality there maybe can't entirely be attributed to that. Chile has been the success story of the past 18 months. I think it's a market that a few years back was one of our, I guess, more challenging markets, and it has become in terms of growth and market share gains and user feedback, a very, very strong market for us. Demand has grown the most of any market over the last 15 months, and continues to deliver, as you've seen this quarter, very, very solid results. And that will demand more fulfillment capacity, more distribution capacity. So we will certainly double down in our fulfillment and logistics efforts in Chile, given that consumers are increasingly relying on us for day-to-day shopping needs, etc. So it's part, I think, of a virtuous cycle, but I don't think we can attribute too much causality to the distribution center. I think pandemic, what's being done with distribution of pension funds and just overall fantastic execution by the team in Chile.
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The first question is regarding the same-day delivery. You mentioned that 20% of postal codes can get same day delivery. What will be an estimate on how much of GDP is covered by this postal codes, so just to get a better sense of purchasing power? And the second question is about the live stream initiatives you mentioned in the prepared remarks. Could you give a little bit more detail on what this initiative is about? What are the plans for that?
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So let's see. Logically, those postal codes where it makes sense to aim for same-day delivery are the ones where we will have fulfillment centers, and they are determined by where most of the demand lies. I don't know off the top of my head exactly what GDP those 20% represent. But clearly, it will be the lion's share of the largest metropolitan areas. Today, roughly 50% of our gross merchandise volume is probably being delivered within a 24-hour window. So as we continue to roll out more FCs, that number should only continue to move north. Live streaming, if you look at -- live streaming, first of all, is an incremental discovery opportunity for our user base, obviously, with very, very strong traction in some Asian e-commerce markets. So it has an initial vision, which is how do we generate better discovery on MELI, which has historically been very much search-driven. But if we think bigger picture and longer term, it also ties in well with a lot of the things we're doing around content distribution for partners as this starts a kernel of our own content and complementary content that we can distribute. So another example of something that's very initial. In the early stages, it's more about driving more engagement, more eyeballs and better conversions to products. And then we see if it's working, and we take it from there.
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The first is about the competitive dynamic in Brazil. This is the No. 1 question we're getting from investors. And you made some impressive comments regarding your fulfillment capability in Brazil. So I was wondering if you could perhaps try to talk about or define how many years behind do you think the competition is in terms of their fulfillment ability in Brazil, perhaps focusing on new entrants like Shopee. Second, you talked about increasing sales of more sophisticated point-of-sale payment devices. And I was trying to understand when do you think the larger merchants that you're selling these two will begin to start contributing to acceleration in off-platform TPV growth?
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Look, on the competitive front, I think we always say the market has been competitive. It's a huge opportunity. It will continue to be competitive. And rather than looking at how many years of a head start do we have, it's how can we move consistently faster and accelerate our own pace of rollout of our network to try to continue to drive up same and next-day delivery, continue to expand free shipping. So I think the playbook so far, we've been very successful, and we just need to make sure that we don't get complacent, and we continue to do everything in our power to drive down cost, return a part of that improved cost back to consumers in the form of more free shipping and continue to roll out the network efficiently so that we can get faster and faster. And I think it's an ongoing race, and we don't want to measure how far ahead we are because that could breed complacency. Craig, with regards to our MPOS business, we are already seeing the effects of moving up market, mostly in Argentina, and it's starting to happen in Brazil, too. In Mexico, we are just getting started there. But bear in mind that this mentioned larger segments is really are SMEs basically, in the past, we're addressing mostly individuals and these devices are targeted toward SMEs, but there's already an effect we are seeing in Argentina.
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It sounds like you had some strong progress again in terms of user engagement on the platforms, and that remains something that you continue to call out on your comments. So I was just curious to what extent you're working on bringing on in more personalization into the user experience, whether it's in the interface, in search, discovery, maybe even leveraging sort of the cross-fertilization across Pago into e-commerce to drive product discovery on a more personalized level? And then second question, switching just to merchant, the online merchant service segment where you called out that you're seeing good growth. So I was just curious if you think that you're taking market share there? And whether there is any pressure on the MDRs or whether you're maintaining the same level of profitability there?
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Irma, thanks for the questions. I think more of the focus and the heavy lifting on user interface is still around removing friction. There's work being done around discovery. There are the gamification efforts. I think incremental personalization in the UI and how you interface with the platform probably would be overplaying where our product priorities are right now. So I guess the answer is, look, there's always an attempt to make the experience more and more catered to each user, but it's not really one of the big product pushes right now that are probably more focused on expanding services. There's a lot of product innovation going on, both in the FinTech world and the loyalty programs and even on commerce. Discovery, gamification, not an enormous focus at this point in time in increased personalization of the user interface. Irma, with regards to online merchant and merchant services, we do seem to be growing faster than the market, both in Brazil, Chile, and Argentina. So I would say we are gaining share in those markets. And with regard to MDRs. We have not yet seen a lot of pressure in terms of MDR. What we have seen is, in particular, in Brazil -- sorry, yes, in Brazil PIX growing faster, growing very well and that necessarily have lower MDR than the rest of the car market. So if you were to look at the average, there might be some MDR compression, but it's only because of the part that is coming from PIX.
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So first, can you talk about how wallet use cases evolved during the second quarter? Also, I realize you don't provide any guidance, but as you comp the impact of government relief payout in the second half from last year, how should we think about the impact on those on the year-on-year growth rate? And then second question, GMV growth was pretty strong even as you started lapping some of the benefits from last year. Can you talk about the underlying customer cohorts maybe in terms of category adoption, frequency? Also, if you can provide some color on July trends that would be great.
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So with regards to wallet, I would say that mostly, the -- typically, the payers we count in those 50 million people who paid with our wallet in the quarter are mostly coming from six use cases, and those are mobile top-ups, transportation, paying utilities, QR payments, B2B transfers. And those are mainly -- Now if we were to look also people who are paying -- making big payments or transfers with our wallet that would add another 3 million payers more to the quarter. And so we are excited that we are seeing increased engagement in all three countries and that people who are using the wallet are also using it more often. The second question you asked is with regards to the coming quarters. As you mentioned, we do not provide guidance, but as you also know, we have seen an increased step function with the increase in wallet use in Brazil a year ago. And that happened mostly during the second and third quarter. So those are the two quarters that will be more challenging than as we continue. We expect to continue growing the wallet, the comparisons will become easier. Sorry, in terms of GMV strengths, category mix is a part of the story. I think we're seeing growth -- continued sustained growth in apparel. CPG is especially in units, gaining traction and becoming more relevant, and that's a high-frequency category. I don't think the cohorts have dramatically changed. I think really what we see in the deceleration is just primarily the math of the tougher comps. So that's why we've pointed to looking at two-year growth rates, which have remained quite solid despite rapid reopening in Mexico and gradual reopening across other markets.
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Anil, you noted service provider spending was down 11%. I wonder if you'd talk a bit more about the dynamics there and maybe a little bit more on your large deal pipeline there that might get you more confident on Q4 expectations on the service provider side?
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Well, overall, as, Matt, we have mentioned in the past, I think there has been consolidation changes in the large customer -- large carriers, the top four. There is consolidation and lack of spending with one of them and that has affected as our business over the last few years. And we think we are hitting all the -- bottoms of all the negative effect of these events and so, we don't think that situation will get worse into next year.
But on the international side, our pipeline is improving and I think there is still a lot of 4G spending. And we have spent tremendous R&D energy on 5G. While 5G is not bringing the revenue, it is allowing us to drive 4G business. And so when we're doing 5G trials, traffic for 4G continues to grow. So, I overall feel that I think we have generally hit the bottom in the carrier area.
Second is that there is a lot of interest in being able to use plug-in modules for security, with our service assurance products. So, there's a lot of questions about IoT-based attacks and DDos attacks on the carrier -- on the mobility network, on the RAN. And we are positioned properly in the right places as incumbent in big carrier accounts, where we can sell software modules without the need for them to buy additional hardware. And when they buy it, they spent a lot of money on hardware; that means there's less money left over for us.
So, I think those are the dynamics. And I don't know whether I directly answered your question, but overall, the U.S. situation is normalizing and I think there is improvement outside of U.S.
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Jean, in your prepared remarks, you noted the software-only sales were 31% of service assurance and product revenue. It was a bit lower. I think you noted 42% last year. Just sort of curious on why that's the case. I mean, I guess I would assume that, over time, software-only would continue to mix up rather than down this quarter. Maybe there is a dynamic that caused that?
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The way we discussed it before is that we have many different offerings to customers and they can buy in any form factors that they prefer. So, the mix is generally a function of the preference of customers. Last quarter, last year's Q3, we had many deals that were -- including some deals in the enterprise that were software-only. So, I'd just say it's a function of the customer projects that actually happened in Q3 of this year versus Q3 of last year.
We've made significant -- I'm sorry. We've made significant headway also in some of our software-only in our security products, which we don't have in that particular 30% to 33% that we discussed.
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I also wanted to focus on the carrier spend. Just to clarify, I realize, when I may not quite understand, Anil, when you say carrier spending hitting bottom or... Does that mean that there is kind of a maintenance level of spending from carriers that stops the carrier spend on an annual basis from going down anymore? Or it's hit a bottom and you would expect it to go up in kind of on a longer-term basis?
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I think on the U.S. carriers, the top four U.S. carrier with now there are only three left. I mean, that's what I mentioned, that I think we are doing a reasonable business on both the product side and renewals have stabilized. And that's what I was saying that a further decline into next year is unlikely. And that was a big portion of our total carrier spend and -- total carrier contribution to revenue. But outside of U.S., I think there is an uptick. And as people are continued to be interested in that, we have increased our focus on international and, in a way, reduced our dependency on top-end customers.
And lastly, I think we have talked a lot about Tier ones. And one of the things we are doing now without some pricing model is to see how do we go after the Tier-two market, which is much more price sensitive.
So, I think overall effect of all these things is normalization of service assurance revenue in carrier, with security potential upside and 5G as a potential upside next year.
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You talked about, one of the things in the quarter that took place was a nice renewal and expansion with Vodafone. I know you've had Vodafone, got to be over probably 10 years, if not 15 years, you've had a relationship there. What can you tell us about how that relationship changed on this renewal versus the prior relationship?
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I think it just strengthens the revenue stream coming from them. And so, this -- first of all, this deal is about covering all the OpCos in Europe and so about [Indecipherable]. So, it's a master deal and they get price -- their pre-determined price volumes, if anybody wants to buy the blanket contract. And so, it just solidifies our business in that Vodafone OpCos for the next three years and where there is not going to be a big price negotiation moving forward. And it's the expansion of the deal we had done with them earlier. So, -- And this time, it was a little bit tougher because we had more people bidding for this. There were discussion about cloud-based deployments and 5G direction and in the end, we won. And so, I look at it as Vodafone business is not going up or down; it's a continuation of the similar margins and revenue we had in the last three years.
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The fed, as you characterize, it's somewhat unpredictable as to when that business hits... Given change in administration. Is there anything that allows you to predict that business a little bit better in over the next 12 months versus the prior 12 months, or is it really unrelated to the administration in charge?
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I think Jean may have some other things that points there, but I think it's unrelated. But that doesn't mean there may not be a positive impact. But overall, I see there is a lot of interest in our cybersecurity solution in the federal area. And I think that could be a bigger effect. And as you may remember, we announced a product last year in the security area beyond the DDos, but it has been very difficult to do trials because of pandemic and to put new equipment there. So I -- we feel that the comparison from last year federal was there. I mean, there was a great year. So, a part of it is that. But we think that cybersecurity push of our solution in the coming year, next year will be a bigger contributor to a positive trend than the government change or administration change.
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Given the repurchases that you did in the December quarter, I see the guidance includes your expectations for the weighted average share. Historically, you've had some kind of calculus on the buyback. I know, because of COVID, you revisited that. So, maybe it was nine months ago. The use of cash, you've said in the press release, hey, we're going to pay down $100 million on the revolver. So, how aggressive are we going to be on the buyback?
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Well, when we look at the buyback, we always look at what our future valuations will be based on all plans and where the market is. So, it's really a condition of what the share price is at the moment when we put the grids in place. These grids were put in place back at the beginning of our last quarter after our earnings call, so probably sometime in November. So, they would have been based on market conditions at that time.
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And then if the pay-down on the debt just really have more breathing room on covenants or just aversion to debt?
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Well, we -- When we looked at it, we have -- we generate a lot of cash and a lot of free cash flow, especially sitting in the United States. And rather than keep it on our balance sheet, we thought, at the moment, it makes sense to pay down the $100 million on the revolver. That will bring us down into a slightly lower price on our LIBOR margin. So, we should save some earnings per share in FY '22 on that.
But the important thing is that debt revolver is a flexible vehicle. So, that means that I could pay it down and then in the quarter if I thought I needed to ratchet the debt back up for whatever opportunity arose, I could do that very easily. So, it's a very flexible instrument.
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I wanted to start on the product upside. How much, especially with enterprises, was related to budget slash versus kind of project deferrals coming in from prior quarters versus any demand this quarter following the SolarWinds breach for security?
And just related to the SolarWinds breach, has this caused some enterprises to look actually at the NETSCOUT's services assurance portfolio as a replacement at all?
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So, I'll answer this SolarWinds question about the Sunburst Attack. And -- So, we don't directly -- our products didn't directly detect threat attack, but once the attack was detected, once this threat vector was known, our product was used to provide visibility into how vulnerable people were. Like, it helped in the cleanup attempt. But I think the biggest part was that while it didn't drive any new revenue, I think our approach, which is less vulnerable to attacks because not only security products have to be able to do that -- detect the attack and do forensic analysis, but they themselves cannot be vulnerable. So, it's not just our product, but our approach; the way that's a stand-alone appliance or a software appliance versus being installed on the server is less prone to hacker. And that approach is getting validated for the security guys and there's much more appreciation of what we do. And this will help us indirectly as we launch our new security product, and we don't need to defend our approach too much because of what's happening in the marketplace.
So, it didn't really contribute to any revenue in this, but it solidified our position in the market and people will look at more favorably at our approach and product as we launch our cybersecurity solutions. And maybe Jean can mend, anything about the contribution?
I mean, we had taken the opportunity given the current interest in the cybersecurity analysis to explain a little bit about our DDoS offerings, which are under the brand name Arbor. Within the enterprise, on a year-to-date basis, Arbor has been growing very well. It is growing probably somewhere in the 20% to 25% within the enterprise. And again, we're focused mostly in very high-end enterprises, like financial and government areas. And so, it's already grown very well for this year. I think, as Anil said in his remarks, it has grown in the low teen in total on a year-to-date basis at this time.
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But really, I'm trying to understand if there's any way to flush out really what the upside -- like how -- why enterprises look pretty good this quarter, relatively speaking, between budget slash that we're seeing with kind of the infrastructure space as a whole versus kind of the project deferrals. Anything to comment there?
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No, nothing comes to mind about any deals that were pulled forward in the enterprise. I would say, for the most part, the quarter came in line from a revenue perspective with what we had anticipated.
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Is there any way to understand what the penetration of security is actually into the service assurance install base at this point, or how many products per customer you have today for security?
|
I think the number of customers who are actively looking at that -- I would say, maybe 10% of our service assurance customers are actively looking at our Arbor solutions. And out of that, some of them have already purchased and some of the growth that Jean is talking about is original Arbor customer base and some are service assurance customers. And this other product, Cyber Investigator, which complements the Arbor solution, there is lot of interest in that. But as I mentioned, that was introduced recently and there have been some challenges in doing proof of concepts.
So overall, yeah, we are using the service assurance customer base, but also wanted to mention that we are using a sole sales overlay structure this year. We started that. That means that our service assurance sales force also get commission on the security sales. So, that is having some positive effect also.
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First question here, just kind of following up on your last point. Anil, just last quarter, you guys talked about the growth for Arbor Edge Defense. It sounds like that continued so far. But you did also mention that some of the opportunities that demo were limited by COVID-related restrictions. Have you seen those opportunities start to pick up, or if you guys identified other ways in which you can get this product in front of customers and get them to purchase?
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Yeah. So, right now, Kevin, as mentioned, bulk of the growth in the enterprise is on the Arbor side and not for the new product. And bulk of that also is the existing expansions of AED, where the evaluation has not been a big issue, like going from 5 gig mitigation to 10 gig or changing the model number. We are only relying on our incumbency and maybe something like a refresh. But the new opportunities in -- winning new opportunities in NETSCOUT's service assurance account are going through this low cycle because of the POCs. And nevertheless, there is much more interest than it was at the beginning of the fiscal year.
And lastly, there is a -- next year, there is an up-sell opportunity to all AED programs because AED allows us to detect and mitigate the attack, whereas the Cyber Investigator sort of gives you some insight into what the hacker was doing before and after the attack, which prevents the model's attack. So, there's been a lot of interest and I've done, I mean, 30 to 50 calls, say, with customers. And -- So, it's low traction, but very positive news for the next year.
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And then maybe just shifting toward Arbor, within the service provider environment. You guys talked about kind of an interesting use case for DDoS at the subscriber edge with MSO customer. I'm just wondering if you see that as more kind of a one-off where this does actually open the door for additional growth opportunities with other cable MSO providers?
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No, that was more of a one-off and because people try to deploy that. I mean, they could have easily got with Arbor Edge Defense, but this was more practical for them. And so, we see bigger opportunity on the enterprise side for security. And on the carrier side, we have still similar challenges of carrier spending in the overall business, like in the service assurance side. So, while this is a good thing, this is another way of deploying our solution. But this mode of deployment, I don't see that as a big opportunity in other carriers.
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Just as we head into your fiscal '22, obviously, you're still going to be virtual with Engage Conference. But how are you guys thinking about kind of the return of pre-pandemic travel and marketing-types events? Is that more kind of a back half '22 type of event for you, or do you actually see that starting to trickle in even earlier in the year?
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Yeah. I would say, follow our first half of our fiscal year and in the end of September. So, I would have to agree with your assumption or your statement that probably travel will pick up again in our Q3 and Q4. So, that's calendar year last quarter and the first quarter of calendar year 2022. I mean, it just makes sense with the vaccines and everything and how the rollout is coming. I heard a comment, and everyone has their own thoughts, that he thought that people thought they would be. Anybody that wanted to be vaccinated in the U.S., adult, will be vaccinated by the end of July. So, that would lead to belief that you could start traveling again sometime right after that, hopefully, fingers crossed.
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John and Marc, if you're AWS, you know exactly who you're calling at any given company. But for Unity, it was not always clear to us who you're placing that call into -- on the create side. So as you talk about how create's nongaming revenues now accounting for 40%. How has that selling motion and particularly to those companies outside the game industry evolved over time?
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So Steve, a couple of thoughts here. One, we've gone through a pattern over the last few years where we were originally doing things that were -- they didn't know who we were. They didn't know how to use real-time 3D. And the deals are very, very small. Now what we're seeing is a continued inbound from the top of the funnel and we got a good go-to-market strategy. Mark will talk about that. And we're seeing second and third deals with the same customers. So we got a land and expand going. And we're also writing larger deals as we continue to progress because people are understanding what they can get with real-time 3D community. So -- the reason we're seeing the gain as a percentage of our business, more customers, larger customers land and expand. And Marc, do you want to build on that one? Yes. Thanks, John. And the other part there is certainly over the last several years, we've been building unique solutions that are helpful for all sorts of different industries as they look at how they can take advantage of real-time 3D. And you can see that in tools like Forma, which is used for a lot of product configurators and auto and other spaces to reflect in visual live, which are used around architecture, engineering and construction to other tools that we have like Pyxis, which is about how do we manage large amounts of 3D data, which is extraordinarily common problem in that space. So as we've understood the needs of these customers, we've also built the parts that work in conjunction with the core Unity engine an editor to make it easier for them to work. And then the last part that I'll just sort of add on top of what John said is this is a real place where our Accelerate Solutions team has been incredibly powerful because these -- many times, we have companies coming to us just getting started in their journey of transformation around real-time 3D. And together, through our professional services organization, we can build something together help them learn and then often leads to repeat business both in kind of continuing ARR and in future professional services support. And it's one of the big reasons we went after other partnerships like Capgemini because we see more and more opportunities to enable a broad ecosystem of channel partners to help in similar ways. Just one last point on this. If you go back a couple of years when we were preparing for our wood show around the IPO, I think a number of investors kind of looked at me when I said that we expected it would be three to five years where our -- we would catch up with our games business, but games would continue to grow strongly. It's actually happened exactly like that. And frankly, just there's so many more industries out there for whom real-time 3D answer. What they're doing is they're creating essentially digital twins, real-time digital twins, where they're using them to simulate the future and understand the presence, the way that makes their business is stronger, their customer relations more less than more engaged. So they're winning and they're coming on to the platform in a bigger way than they were a year ago or we feel great about the trend line.
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John, you talked about how you have a good handle on data, data versus macro versus competitive impact? I mean how much better informed is the company on all these three potential contributors to the issues that caused a shortfall in? And going forward, what are the -- I know you mentioned a little bit about the guardrails that you have in place to ensure that you won't have this issue. If you don't mind elaborating on that, that will be great as well.
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So again, I'll tap this and ask everybody to join. The -- and by the way, Kash, thanks for the 11-part question. I'll try to keep it to a reason. So first off, on macro on the operate side, the majority of our business -- the vast majority of our business and operate within gaming. And as I've said a few times before, the only thing that is in larger numbers than games is pundits talking about the game industry and the recession and all the rest of it. I'd just start by saying this. The game industry remains a very robust industry and it's a growth industry. You can look back at the last five or six recessions, I've looked back all the way to the 80s in a prior life. And over almost any three-year time period, you see double-digit growth, typically averaging out the change or better. Yes, there's short-term headwinds that occur from time to time. And in the present period, we're sort of dealing with extremely high engagement when people stay home for COVID together now that we're looking into a little bit of a headwind, which is driven macroeconomic factors. And you've seen that reported out by a number of game companies where a little bit less revenue from bringing down some forecasts. We understand there's a near-term headwind in the game industry relative to that mid-teens growth or better than we've seen for so many years. And we expect that we'll persevere through that, and this is a long-term growth space. So we feel very, very good about that. Now in terms of the issues around our own platform, at a very high level, I can tell you one of the things Ingrid did, and I'm really proud of the work that she had our team have pulled together here. They pulled together eight task teams. It literally worked seven-day weeks on everything from resiliency and redundancy to the data side, to the engineering issues we wanted to focus on to the new products and features. It has been a magnificent effort on their part. And what they've been able to show me is really strong KPIs around some things that are pre-revenue, but you need accuracy around pinpoint or for the revenue to ultimately grow. And I'm going to let her expand on that, but it's tough coming from a period where we've had some misses, but it's great to see the team rebound top of their game and really start to execute, which is what I'm saying from my vantage point. Ingrid, do you want to add to that? Yes. Thank you, John. On our part, just to build on what John said about the task forces, we've added significant investment in audience pin pointer. And across the board, One of the things just connecting your macro question to this is that constraint drives focus and the best innovation. So during this time, we've become really disciplined in our resources, we've doubled down on those ad products and services that drive the most value to our customers and Unity. And without the luxury of excess spend, this is really an exercise to drive performance with less for our customers such as finding more installs with fewer dollars, right? So this means that we need to innovate and find new ways to increase the velocity of our model development, for example, pushing the boundaries of machine learning, digging into every part of our system optimization opportunities and making sure that our systems are all resilient to anticipate further incidents that happens. And we really expect all of these actions to provide resiliency both in the systems as well as performance in the current challenging environment. So we expect to emerge -- our goal is to emerge on the other side with our products stronger than ever that enables us to best capture the market opportunity and hard not to take cash. We're measuring a lot of things we didn't use to measure and we built redundancy and resiliency aroundit. I see data sets that I wasn't saying around data accuracy in a variety of things that give us an early warning for things that we would otherwise want to deal with. No data-driven business is without errors. And now we're in a position to catch them fast and fix them as we go along and not suffer the kinds of challenges we had earlier in the year.
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I had two, if I may. So the first, I guess, like recognizing what you're talking about, John, with sort of the crosscurrents with macro and sort of visibility relative to, I think, based upon the comments last quarter you're in the second 90-day phase right now where you need to kind of rebuild data. And I'm curious how you guys think about maybe potentially offering customers additional incentives to drive platform usage in what seems like maybe a difficult ad market? And then separately as the solutions and range of products is becoming larger and more compelling for your gaming customers, I'm curious if you guys think you have flexibility or added flexibility now with the approach to sort of bundling products in a way that you could still sort of maximize dollar generation, but maybe push your take rates and monetization in a way competitively where the platform becomes more compelling.
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So one, I can't say that we would never do incentives, but that's generally a very firm solution and doesn't really yield long-term returns. And so that's not high in our playbook, and it never will be hurting our playbook. Again, it is part of the portfolio of think companies like ours do. But we're very cognizant of focusing on the long term, and I know this can be frustrated to investors at times, a little less focused on the quarter. The NPV is higher that way. So that's important to us. The second thing is we're in the very early innings of UGS. And UGS is a very powerful portfolio of tools and products and features that every customer needs as they go to market with their game or application. One of the things that I learned when I got into mobile, this now goes back 20 years. But you build this thing, and then suddenly there's like 50 STKs you need to implement, and it covers a gamut of things. And there's a bunch of services you need to invest. And I think we've all watched game companies go online for the first time or mobile for the first time at just fall flat around the ecosystem and as a soup of all the things that they need to bring on board. Ingrid's team brought really sharp focus to that and took all of these services and built a system but basically, you set it up once that it works across all this portfolio of services. It's a huge advantage. It's one source of truth. Now this isn't completely plumbed to every level, but we've seen good uptick and take on this one. Our customers like it, getting good reports back. And I think it's actually a huge opportunity for us in the years to come because we're really the only company out there in a position to do what we've done. And of course, they start with us and create 74% of the time, but it's a good starting point. When you take -- whether it's matchmaking or hosting, advertising or analytics, voice and the other systems that we pull together, it's a really strong offering.
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On operate, just to zoom in a little bit here. If the data quality and pin pointer issues hadn't occurred earlier in the year, would operate revenue have been at the 160 level you reported this quarter just because of macro? And if not, how much work is left to do there in terms of improving the tools and scaling spend? And then secondly, on the China JV, I think Greater China was about 15% of your revenue last year. It's already a decent sized business. What will the JV allow you to do that you can't do today?
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So, Ingrid, do you want to take that on the Operate question or I can pick up in the beginning of that would be helpful. Yes. I think in terms of the specific numbers, look, it's a combination of all of those things. It's hard to kind of divide up like what component is attributed to macro versus audience pin pointer and data issues. But absolutely, I think that the -- obviously, the data issues and audience report at the beginning of the year, impacted our performance. But now we're at a place where the data incidents are fixed and behind us and the audience product is strengthened day by day. So right now, we're seeing kind of a slower uptick in advertiser spend just because they're more judicious due to the macroeconomic factors. So that's what's what we are seeing right now. You're right, Matt, to recognize there's both in there. For clarity on our last full earnings call. We talked a little bit about the macro, and we talked a lot about the self-inflicted aspect of this. And that's just basically a philosophy of ours as we would rather focus on the things we did wrong or right, more so than the macro environment when it's working against us. We didn't want to give too much of a mix message last time we had things we needed to deal with, and we dealt with them. On China, first off, I want to congratulate Luis and some members of his team in jumbo and China do incredible work here. But at a very high level, we think this sets us up for more sustained higher level growth for years to come than would otherwise would have. What we managed to do is take most of the leading technology companies in and around our space and made the And in doing so, they stand behind us on gaming, but they send the harness in industries beyond gaming. And it also allows us to take advantage of the opportunity to invest in a market where the engineering capabilities are really strong and build tooling that supports very specific use cases in China. Now it may seem like everything is the same, but -- it's not the case, both in the digital twins arena and in the gaming industry. There are a number of things that operators in that part of the world do in terms of business practices and development practices that are different. The way of example, a lot more outsourcing. And so that involves a different way of interfacing with a product, more cloud-centric, more web issues. So by doing this, I think we strengthened our business and set ourselves up for a path for more sustained higher level growth. Louis, you want to add on that one at all? Yes. The only thing I would add, John, is that the 15% math that you quoted, that's the total China business as a percent of our revenue, not all the businesses are in scope. It's just the create business, and that's 5%. So that's the $50 million I mentioned in my prepared remarks, Matt.
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Can I -- just to clarify on the China JV. Am I right that there's going to be an inflow of about $1 billion of cash, and then we're going to be modeling noncontrolling interest on the income statement once this deal closes?
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Yes. We will still consolidate China. We're forming a joint venture, and we will get $220 million, and that will stay within the JV. So there is no cash flow coming into. And we remain a majority shareholder and control the board. And there's a number of operating relationship agreements put in place between our enterprise globally and the China operation. It's also worth noting that leadership team is led by an executive I've worked with around in my last company for well over a decade, go exceptionally well in trust. Junbo Zhang is a very strong leader ex Microsoft EA and now really almost a decade now at Unity. So we feel really good about the team we have there.
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Maybe one since we didn't touch as much on it. I'd love to get in the strategic SI partnerships, but maybe for Mark to a little bit of incremental color on the partnership with Azure with the release yesterday, can you talk about kind of some of the expanded capabilities, what this can mean for creators and potentially enable and unlock that further kind of Create and Operate a combination of tools for the masses?
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Very excited to deepen our relationship with Microsoft. Obviously, we're already very strong partners, especially on the Xbox side and with HoloLens. But when you go in and you think about where real-time 3D is going, we talked about all these use cases around digital twins. And we talk about just the size of games and the amount of content. One thing that's clear is that 3D has a unique set of needs. Often the file sizes are very large. You can be talking about trillions of points in a point cloud billions of polygons and extraordinarily high needs for compute power, whether it's on the creator side when it's being created or on the side when it's actually being consumed. And so we're excited to work with Azure in order to build out the set of services that we believe will most help our creators, whether it's in games, or digital twins or professional art. In the near term, I think some places where you'll see it first are areas like DevOps. We are doing a lot of work around cloud build around source control. Again, it's a space that's very different when you're talking about 3D assets. versus non-3D assets. Digital Twins. It's a place that we've already actually been working closely with Microsoft on the sell side and integrating with their digital twin platform as well as our services together as we build out more cloud services is a very powerful thing. And as you've heard us talk about in professional art with things like Weta Digital, the ability to have access to cloud power is actually a critical component of how we think we can deliver these productivity increases for artists around the world. So the start of a partnership. There's a lot of work to go to sort of be ready for those, but it will impact sort of soup to nuts the things that we're doing across create.
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I guess I just wanted to start off on kind of producer activity and kind of seeing what you're seeing there, private versus publics. And then, also, in kind of your basins I see that, on top of the customer connections and everything like that, we're seeing production go up. So I just wanted to see kind of what you're seeing there.
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Yes. I think we've been experiencing this for some time now, a little bit of a difference between the publics and the privates. I think there's lots of discipline now with the public producers. And the private producers, they seem to be more attuned to growth. However, when we look across our portfolio, Steve, I really think it gets down to the quality of the resource. Our assets lay over high-quality resource across both Appalachia and the Haynesville. And those high-quality resources are the primary focus of both producers, whether you're public or private. And I think the volume growth that we're experiencing is really a reflection of the quality of the resource that we're serving.
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And then if I could kind of pivot a little bit on the guide raise this -- and then also Stonewall for next year, you have the connection coming into 2022. But I just wanted to see if you had a little bit of --- if you could help us out on timing of that when that should be expected to come in and then also keeping the guide steady where it is in 2022, but we're basing it off the original guide. I just wanted to kind of get your thoughts on what's behind that.
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So I'll say this, we're highly confident in our growth for 2022. The Stonewall transaction that we referenced does come into the portfolio in 2022. As we -- I think as we progress through the year and as our key customers sort of solidify their plans, we're certainly going to keep everyone tuned in. But we feel really confident in that range that guidance range that we're laying out for 2022 and we'll update you with new information as it appears.
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I wanted to start off on, obviously, great Haynesville volumes from the gathering side. Just curious if you could talk a little bit about what you're seeing for the Haynesville kind of takeaway balance overall? And maybe just give us an update on the potential for a LEAP expansion?
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Well, we're really pleased with our Haynesville position and the recent activity that we're all observing in the Haynesville, I think, is a function of the quality resource and the proximity to large growing demand along the Gulf Coast. So, again, as I think about our assets and our position, number one, we have assets in the ground. We're currently serving those LNG markets along the Gulf Coast. We are in flight. We announced back in September LEAP expansion. We actually announced a carbon-neutral LEAP expansion, our Haynesville system expansion, which really is first of its kind in North America. We're not aware of any other project that is offering a carbon-neutral pathway from wellhead all the way to market or in this case to the water. So we're really excited about that. We're working closely with about half a dozen customers, working through the details of that. I feel very optimistic and we expect we'll be able to provide more color on that around year-end or early in first quarter next year.
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Maybe, one just quick follow-up and just one on the weeds. But just on the new Appalachia Gathering and the new Stonewall contracts, are those kind of in addition to the kind of existing EBITDA base or are either of those kind of replacing maybe some contracts that have rolled off?
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These are new incremental contracts on those assets. So they'll be new and incremental.
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I was wondering if you could give us a little more detail on the NEXUS open season. Just trying to understand is this an expansion of capacity? Are you just signing up existing capacity? And how should we think about rates going forward, assuming you have a successful open season and what's timing of getting the open season wrapped up?
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So the open season closed. It closed about a week ago and we've received favorable responses from the market on that open season. So commercially, the commercial team is working with those customers to work through the details to move those expressions of interest into definitive agreements. In terms of mechanically what we are doing, we're really doing two things. One is the part of the open season was to connect Generation Pipeline directly to NEXUS. So targeting what I'll call the greater Toledo market. The other part of the open season was for mainline capacity on NEXUS. So it's really two different components to that open season. And as I said, we're working through the results. And as we progress those into definitive agreements again, we'll be sharing that with you folks.
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And then second question I wanted to ask was around Southwestern's very recent acquisition of GeoSouthern. Just curious if that acreage is already dedicated to you? Is this an opportunity? Just want to understand, how this could impact your overall Haynesville position?
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Well, first I'd like to congratulate Southwestern for this they continue to execute their strategic goals of consolidating and gaining in scale. When I looked at their strategic rationale, it really aligns with the strategic rationale that we -- that guided us to the Haynesville 2.5 years ago, just high-quality resource large growing markets that are proximal to that resource. So just congratulate them for what looks to be a really excellent transaction for them. It's early days. I did look at a map yesterday, Michael. And there are -- some of the GeoSouthern acreage is adjacent to the Indigo acreage that they acquired. So I think there will be some economies of scale that they will be able to realize, as they develop that acreage. And we just look forward to working with Southwestern. We've got a really strong relationship with them. And as they digest this and actually close the transaction look for opportunities to work with them with this new acreage. And I don't have the details Michael in terms of what acreage is dedicated and not dedicated.
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Just a question on the carbon-neutral service in the Haynesville. And thinking about some of your proposals that we're seeing in these reconciliation goals about a higher 45Q credit. Just wondering as you think about the economics of the project due to -- if there is an increase in the carbon credit, did that -- would there be economics that accrue to you, would be shared with any customers? Just thinking about what that means obviously a higher credit probably means this asset is more attractive, but I'm just curious about how those economics might work?
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So the economics work with the current tax credit regime that exists today. So we'll just start there. We are very tuned into what's happening in Washington right now. There's a lot of drama going on in Washington right now. But we're optimistic that the 45Q tax credit will see some reform and probably see some what I'll call improvement, where the threshold level is lowered, potentially the actual credit has increased, options for direct pay. So any and all of those would be beneficial to our project, but our project is not dependent upon those. So it works in the current regime.
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And maybe just a follow-up on the 2021 and 2022 guidance, again, just thinking about the potential growth into 2022, and having high confidence in that, but obviously 2021 has gotten a lot better. Is that really just a question of things that you've been looking acceleration of either cost efficiencies, or operational efficiencies, or the new connects that has happened quicker in 2021 than anticipated? Just trying to think of maybe thoughts about what might carry from the strength in 2021 into 2022 incrementally for the past couple of quarters since you've been on your own?
|
Yeah, great question, Alex. We definitely have seen some commercial activity pulled forward. The one item that, I mentioned in the opening the treatment plant that, we were able to get done early that's been very positive to our financials here in 2021. And just the new customers also coming in and some of those coming in early are beneficial. But we have been seeing just positive activity around all of our assets. It isn't just one asset. We've been seeing nice activity around all of our assets this year that contributing to this favorability so.
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B
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So on the proposed carbon-neutral expansion, just wondering, how much capacity on that system can be carbon-neutral. I'm wondering, if this is maybe the first step toward a larger expansion. Just hoping you could frame that up for us?
|
Sure, Rob. The way we've laid it out to the market is that we have the ability to expand up to two Bcf a day. So that would be a one Bcf a day expansion. And we can do all of that carbon-neutral through combinations of CCS electric compression. And those are really compression and the treatment plants are really the two big emission sources on the expansion. And we've got a plan and a pathway to eliminate those through electrifying the compression and then feeding that with renewables and through carbon capture and sequestration of the treatment plant emissions.
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A
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4ed8626720dc6aaab313bcd3ea9f9fe7
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Got it. So the entirety of the expansion would be carbon-neutral then?
|
Yes. And obviously that depends on what the shippers elect, right? The shippers can elect the green projects, or they can elect what I call the blue project which is a more of a conventional project. My anticipation is Rob, it will be some combination of the two.
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A
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0ca033c7ecd5cae30897148e03a90ac0
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And then maybe shifting to the Northeast, just wondering, if you could talk about that long-term agreement you had signed on the Appalachia Gathering System? 25% system capacity seems like a lot assuming that might be a mix of fee-based and other more commodity sensitive, but can you just frame that up for us as well?
|
Sure. It's the typical contract structure that, we have across our portfolio, Rob, where we have a significant take-or-pay component to that agreement. And yes, it is a sizable contract on the Appalachia Gathering System. It represents approximately 25% of our mainline capacity. So it was a very important transaction. It's -- the counterparty is a strong counterparty, and a significant producer in the basin with a great operational track record. So we're really encouraged by that and it gets back to my earlier comment about the quality of the resource. The producers are drilling their best resource into a really favorable price environment right now. So we're really happy to work with that producer and be able to establish this agreement. And yeah, it just puts -- it puts term and more MVCs into our Gathering portfolio, which as you guys know we love to do that whenever we can.
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[
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A
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055b21610d273ad70f55f0c02ad557b1
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How do you envision the role of MicroStrategy's participation in the Bitcoin network evolving in the future? And will the company look to build a software business that leverages the growth of the Bitcoin monetary network where you expand the company's world beyond being a leader for Bitcoin treasury education?
|
We have a scrum team, and we're actively studying the Bitcoin industry and all the activities and the process in the industry and all the data in the industry to determine the best way for us to add value with our existing business intelligence and HyperIntelligence. Although we don't have anything that we are ready to announce right now, we're enthusiastic about the opportunity to bring our intelligence to the industry at the right time in the right fashion.
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B
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8eca4c82b02005a0d7b6d6050f5d1751
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How should we think about the growth of license in 2021 given the momentum around cloud and subscription?
|
Yeah. Thanks, Jeremy. Obviously, we're pretty excited about the ability to transition to the cloud. We are still early in that process. I think as I noted, we saw a 21% growth in our cloud revenue on a year-over-year basis and 41% growth on our cloud billings on a year-over-year basis. That was off of Q3 where we saw an 80% growth in cloud billings on a year-over-year basis. So although early on, we're starting to see good momentum. Obviously, when we see subscription revenue come through, it's recognized on a ratable basis. So it ends up depressing slightly our product license revenue. And many people study cloud transition models and have experienced that. So if not for that cloud growth in Q4, we would have seen higher product license revenues. All that said, our revenues, generally speaking, were flat in Q4 and flat for the full year. I think as we start to accelerate our growth in 2021 across perpetual licenses and cloud, my goal is to not see a significant change in our product license revenue and not a significant impact from our transition to cloud and see growth in both. And I think with the momentum that we've seen in our business, that is a potential positive outcome. It's growth across all of our revenue segments.
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A
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4eeb4f39244efae24eb6ab155b1a1084
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Are you planning to do another convertible debt offering, or have you considered issuing equity debt or other securities to allow you to purchase more Bitcoins?
|
We're continuing and continuously evaluating our capital position, as well as the market conditions in the capital markets. We have sufficient liquidity to operate our business as it's currently conducted. While it's possible we'll raise additional capital if we think it makes sense to, it would be inappropriate for me to comment on any future financial plans.
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fully_evasive
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C
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ddc2e5ad92baea39dce84cbbce92fa41
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Will you purchase additional Bitcoins in future periods?
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Well, Bitcoin is an important part of our overall strategy. So going forward, we will continue to plan to hold our Bitcoin. We will invest additional excess cash flows in Bitcoin. And we'll explore various approaches to acquire additional Bitcoin as part of our general corporate strategy.
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[
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A
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be9a28d72f77c54122e553333e9ed31e
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Are you a software company or just a Bitcoin investment vehicle?
|
We're a global leader in enterprise analytics, software, and services. We continue to operate the software business, as we have over the last 30 years. But at the same time, Bitcoin is an important part of our strategy. We have a Bitcoin strategy in addition to our software strategy. So if you just keep in mind that we've got two strategies, we're going to pursue them both very enthusiastically, then I think that's the best way to think about the company. We're going to grow our enterprise software business, and we're going to acquire additional Bitcoin on the balance sheet.
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A
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498a7a6efdf694194fdc9d5ada894fb7
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Does your Bitcoin strategy depend on selling high and buying back more Bitcoin at lower prices?
|
No. No, it doesn't. Our belief is that Bitcoin is the first effective digital monetary network, and it's going to grow over time. We're early adopters, the early Bitcoin holders or adopters. It's the solution to every company's problem and every individual investor's problem. And so as more and more corporations adopt the Bitcoin's standard and they use it as a store of value, as more investors and mutual funds and hedge funds use it as a store of value, as more individuals use it as a store of value, the overall amount of monetary energy, the total amount of capital flowing into the network is just going to increase in time. And because there's a fixed amount of Bitcoin, that just means the price is going to go up. And as I've said to many people, the nature in the free market is in a free market capital flows from the weakest assets to the strongest assets. If you were in an economy that had a collapse in currency like Venezuela, and you had dollars and you had Venezuelan Bolivar. Well, the dollar is going to go up in value versus the Bolivar continuously and forever, as long as the one currency is weakening, the other is strengthening. And I think free capital markets were continuously adjusting as the capital flows to the place where you get the highest return. I think because Bitcoin is the technically superior asset, it's thermodynamically sound money, I think that more and more monetary energy or capital will flow into it. I think the price will continue. And certainly, there's no reason why it shouldn't replace gold as a non-sovereign store of wealth, and gold is a $10 trillion asset class. So we don't try to time the market. We don't think there's any particular point at which you would ever trade out of the market. Bitcoin is a better safe-haven asset than gold. If, in the future, God comes down and invent something better than Bitcoin and more money and more people adopted that, and that becomes bigger and stronger and better, and we see that, well, we'll share that with our shareholders. And we may incorporate that into our treasury reserve strategy. But right now, Bitcoin seems to be a dynamically strongest asset and a technically superior asset. So we just intend to progressively acquire more Bitcoin. And we'll probably do it at prices that are going up. I think when we acquired Bitcoin at $11,800, then we did it at $10,000 when it dipped down, and we did it at $19,000, then we did at $21,000, then we did it at $31,000. We're not really attempting to time the market. We're strategic buyers, and we're looking out a decade or longer, which we think is the right way to think about this.
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[
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A
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35a306835215b30c170dbadaf19e1c15
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From the time a CFO or a CEO of a publicly traded company mentally commits to buying Bitcoin for their company, to the time it confirms on the blockchain and is on their balance sheet, what's the average time frame for the whole process?
|
Yes, it's a good question and something actually we'll be addressing in our Bitcoin for Corporations Summit next week. There's really no sort of straight answer or one-size-fits-all answer. It depends on how a publicly traded company might decide to invest in Bitcoin. If they decide to invest in a fund, it could be quite a bit faster. There are corporate governance issues and treasury issues that need to be worked through. If they decide to invest directly into Bitcoin on the exchange and through a custom solution, that could take longer as they identify the right platform, the right custodian or custodians, and the associated controls to it. So it literally can be done in a matter of weeks if somebody wanted to invest via a fund, and it could take months, as long as six or nine months, depending on the corporate governance structure and how detailed the corporation wants to be in.
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direct
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[
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A
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a97a49c4a31f0fb13aed7f693fbee563
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Is MicroStrategy using a self-custody cold storage solution for the company Bitcoin holdings, or are services of a third-party custodian being utilized?
|
We can't comment on that for security reasons, unfortunately. But thanks for asking.
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fully_evasive
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"direct",
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C
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d07719430aa44c629684af324e65aae4
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Are you interested in acquiring other cryptocurrencies or diversifying beyond Bitcoin?
|
Yes. Our view is that Bitcoin is an institutional-grade treasury reserve asset. It's 95% dominant as a proof of work crypto asset network. That makes it the crypto asset winner if the use case is money or long-term store of value, i.e., digital gold. So what we wanted with our treasury was, in essence, digital gold from the dominant monetary network in the world, the one that was most secure, the one that was most adopted by other institutional-grade investors. And that would be Bitcoin. I think the other cryptos are investment theses. They are more like venture capital investments, and they have a different risk-reward profile. And so we don't have a portion of our treasury allocated to venture capital, so it wouldn't be appropriate for us.
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A
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21457619283100dc4b832d9ecfabdf5d
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When do you think your subscription revenue will become over 50% of total revenue? And would you agree that it's conservative to assume, based on the current product offering, your total revenue to grow, let's say, 7% to 9% CAGR during the next five years and generate over $500 million of free cash flow?
|
Yes. So a lot of interesting questions in there. First, on our split of revenue, subscription revenue versus support revenue, I think it's probably the way you think about it. We're, right now, we have about $280 million in support revenue and $35 million in subscription revenue, so maybe 10% of total subscription. We are looking to aggressively change that mix shift, right, and move customers who are currently on-prem perpetual maintenance paying customers to subscription customers. We think it's a higher quality customer, a better level of engagement, and it's something that the whole organization that is working hard on. That said, not every customer is ready to move to the cloud, and we're not going to force them to move to the cloud. So like in 2019, when we had a big program to upgrade all our customers to our latest version of MicroStrategy, this year and going forward, we'll have a program to move our customers to what we call our enterprise cloud. And then over time, we'll have them move to our SaaS cloud. We think it's an important core part to the business. What is that pacing? I think we'll know a lot better after this year at what pace we can move because we're not forcing our customers and we'll move as fast as can with respect to our customers. As far as our growth levels, we've talked about a long-term plan, call it three to five years, where we think we can achieve 10% revenue growth. We talked about that in our analyst day. Now does that translate to 7% to 9% CAGR over the next five years? I don't think we can get quite that specific yet. But we think that range is not unreasonable. And as a result of that, we think we can see some more incremental cash flow generated from the business so that we can reinvest it for corporate purposes or into Bitcoin.
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intermediate
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[
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B
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366bd5c0d17008d48265f6764fae6b87
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How are you hedging the volatility in the price of Bitcoin in your financial statements? If Bitcoin is being accounted for as an indefinitely lived intangible asset with annual impairment tests, will there not be a lot of volatility in the financials year over year?
|
Yes. It's a good accounting question, but it's sort of the, I'll call it, book value of our Bitcoin versus what may be perceived as the market value of our Bitcoin. How we get to, based on the accounting of Bitcoin as an intangible asset, is every single quarter, we take each and every one of our wallets of Bitcoin and we look at the prevailing low price on our current exchange that we look at and we writedown or impair each of those wallets' stock price. And that's what's led to, I'll call it, sort of GAAP changes in our balance sheet that you saw in Q3 and Q4. And there, it creates a perceived disconnect between the book value and what one might interpret as the market value of our Bitcoin. What we've done is we provided non-GAAP financials that back out that impact in our financial statements and in our earnings report. And as a result, I think there's transparency into both means, the book value and a potential market value that someone can understand better. And I think the market understands that very well and it's very mature. So we don't really need to do any other, I'll call it, hedging of the volatility of our Bitcoin assets as a result.
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A
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dec531b34bd491810420592b4e0d44e3
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Jeff, I'd like to dig in a little bit in the lower expectations for Q4. So how much of that was sales disappointment in Q3 versus higher churn? And then on the sales front, maybe you could define for us is this a new account issue? Is this an upsell, cross-sell issue? What's the leading to this poor sales productivity, especially in Asia Pac?
|
Thanks, Steve. Good to hear from you. Looking at all the aspects of this, I think you've hit it, that which impacted us the most this quarter was sales. As Rob noted, we are progressing with the renewals business in the right direction. And I feel good about the progress that that team is making and the nature of the kinds of deals that we're renewing. I'm also thrilled that we have a lot more insight downstream on the renewals business. So that is on-demand. The big challenge with sales is -- I know it oversimplifies it, but it's consistent, predictable execution. It's one of the key reasons why I'm happy that we promoted Brian Froehling, who ran Americas sales into the global job. He is introducing that same rigor and discipline into Asia Pac that he did for the Americas. As he crawled through the pipeline and interviewed and spent time with literally each sales rep, and looked at every deal, he just discovered that we weren't demonstrating the same rigor and discipline that we are in Americas. So, you know, in his words, it's a problem, but it is imminently fixable. I think the other thing I'm encouraged by is the team there is really embracing this. They also want to see the business grow and succeed. And so we're not really getting any pushback from the Asia Pac sales teams in getting this done. So that's the most important one. Certainly, we can improve around the world. And you know me, I'm never satisfied, but we've got a real discipline area in now running sales. And we are doing a much, much deeper level of investigation and inspection of deals. We've also introduced some new technology that literally lets us track the number of customer touches and prospect touches. And so we know we have the data that demonstrates that if you have touched a prospect end number of times over a period of weeks or months, you have a correlating much, much higher opportunity to win that deal. The other thing he did was he inspected every proposal that has been delivered in the last six months, every proposal that went out, and he sees great opportunity for changing the dynamic of how we're delivering proposals. So it's consistent and predictable execution on the sales side. That will drive expansion, but it will also drive new logo acquisitions.
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intermediate
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B
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1337e4c4d4bb3e22cdf665082d987f9c
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And in North America, are you satisfied with your ability to upsell and cross-sell on the enterprise side of the business? Or is there still a lot of work that needs to be done there?
|
Yeah. Again, I'm never satisfied, but I feel that the Americas team is in pretty good control of their destiny. The predictability, the insight, the hard data that we have to support that puts us in a much, much better position. Yeah. And just to add to that, Steve, this is Rob, just to add to that real quick. You know, we mentioned in the script that the challenges really came on the upsell side. We actually had a really strong quarter on the new business acquisition. So while you don't necessarily see it roll through the customer count from a dollar perspective, we had a really strong new business in the quarter.
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intermediate
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[
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B
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d598086ffad4df8e9fb4abeb71d100c9
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OK. That's good. And walk us through the divergence between the two retention metrics, I kind of would have thought they would directionally go the same way, but they diverged this quarter. So help us understand that.
|
Yeah. I think, Steve, the big difference there is the calculation in the two. If you recall, the recurring dollar retention rate that came in at 93 that is actually for those contracts that happened in the quarter, right? Those contracts that were up for renewal and what happened in the quarter. The second metric that net revenue retention rate looks at the ACV of every customer that was a customer 12 months ago and what the retention of that is. So it includes upsells throughout the time, of course, the contract, any deals that up-sold or downgraded throughout. So that net revenue retention rate will catch up. It's just a lagging indicator. And it will take a couple of quarters to catch up.
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A
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68a6f4570ae1a9cbce8e5e72ba1af3d2
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OK. Jeff, do you fundamentally still believe this is a business that can grow double digits?
|
Absolutely. Perhaps I've never felt better about it. Look, I don't like the performance right now, any better than anyone else. But when you look at the underlying strength of the business and the work that we've done, especially in the last six months to reconfirm and revalidate that we have the right target market, that it's a sizable target market, and that we're bringing really new innovative products to that market, I feel great about it. I also just see it in the energy and excitement of the core staff, the team that works directly for me. You know, we are putting more products out, more innovation out than ever before. Obviously, we would love to be able to ship everything tomorrow. It will take a little while to get those out the door. But everything that we see says that we're heading in the right direction. I'll give you just one example of why I feel good about that. You know, we noted NetApp and their launch of NetApp TV. And what they're doing is not unlike what Salesforce did with their TV. In this case, NetApp took a true OTT approach. So it will send videos to any device anywhere. So it's much more robust and open than what Salesforce is doing. But they get it. They understand that the future of connections is video. That the days of people sitting and reading static screens or looking at graphics or images are best going behind, and they get it. And so when they first approached us about this back in the spring, it was a perfect time for us to talk because we were well underway in developing CorpTV. So it's a great affirmation that this is the way companies will communicate. There are certainly a lot of challenges. Probably the biggest challenge is the ability to capture and use interesting sticky content, but that problem will get solved. We don't -- we're not worried about that whatsoever. We also are thrilled with the work that we've been done, that has been done for our Marketing Studio product because it literally was built up from scratch by watching how users who are not video experts try to get their job done. And this will be a sea change, because up until this point, everyone who is out there, no matter what they say about ease of use, basically, companies go to the video expert to get help to do things. And what we're doing with Marketing Studio will make it easy for anyone who needs to deploy video to do marketing campaigns and communication, to be able to do that. It will no longer be in the hands of the video expert. And then certainly, we announced prior to PLAY TV, the developers' marketplace. And I was just -- I was so encouraged by the fact that we had 40 developers around the world sign up on day one to be participants in that marketplace. So a great traction came out of PLAY TV. Also, the numbers were dramatically up. So I've never felt better. I am not satisfied with our performance at this moment, but I've never felt more confident about the future.
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A
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974075d7e1aa5ba4e8b93b6bea369c10
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OK. Great. And then one last quick one for Rob. What were overages in the quarter?
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Yeah. Overages were about $1.7 million.
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direct
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A
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3893d2b6eba9e47ea9fb75bf54620729
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Yeah. I wanted to focus on the Q4 outlook here. If I have this right, it looks like the subscription business is relatively flat given the services guidance. And I would have expected that given your color there, Rob, on the new sales going up, help me understand why the subscription line would be relatively flat at the midpoint between the two quarters?
|
Yeah, Eric, there's two pieces there. One is a small headwind on overages. We're bringing that down to $1.6 million. And the second piece is, my comment around new business was net new customers and selling the net new logos, where we were challenged in the quarter is on the upsell side. So from a dollar perspective, it was the upsells that gave us the challenge in the quarter.
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A
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f34cb3bab214bcdab5a85b22b6b8dad4
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OK. As I look at your -- the premium customer count though, I've got that actually -- and I guess it is a net number, but I see that declining sequentially. I guess it's just a question of not all customers created equal. Is that the color here?
|
Yeah, that's 100% right. When you think about it and you put it in conjunction with our ARPU, we continue to drive stronger customers and the ability to grow our customers. So you see that growth happening on the ARPU side. Again, customer count is not something we focused on. We understand that it's critical over time to get that number moving in the right direction. But we're really focused on maximizing dollars and share of wallet from our existing customers and from those customers that do come on.
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[
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A
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f1166cf246a2cf5b44d883248cb258ae
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OK. And then, Jeff, you talked a little bit about your kind of moving on here at the end of the year and test driving retirement again. I can't remember if it was golfing or fishing that you did or didn't do. But I know you got to be leaving with some regrets, given what you saw, the potential as you came aboard back a little over three years ago. But just kind of if you could get a little bit of introspective for a moment. One or two things that maybe you would have focused on more intently or done differently? You know, you've been in the seat now for three and a half years, what is it that's kind of kept this company from realizing the full potential that you talked about coming out of PLAY 2021?
|
It's pretty -- it's a great question. I try not to spend too much time looking over my shoulder. It's kind of dangerous to do. And I live in Florida. And quite frankly, when you go out with people around here, they spend a lot of time talking about the past. And it's a freaky place to be. I'll just stay with what I shared in the last quarter, and that is I should have jumped on the renewals much more aggressively the day I walked in the door. More than anything else that has been, I think, a real source of frustration. That being said, awesome team running it. You know, like I said, just TSIA recognized again, great insight into the underlying health of the relationships with our customers that we just didn't have before. I sit in on a lot of those reviews with customers, and I feel very good about that. And I'm just kicking myself because I should have just been much more aggressive, I was paying attention to it, but I think I was a little too trusting, and I just didn't move fast enough on the renewals business. On innovation, I feel great about it. We've dramatically grown the R&D, engineering headcount around the world, and we're putting out more innovation each quarter than I would challenge that we did in a year's time before I arrived. And you certainly saw the evidence of that with what we delivered at PLAY TV. Sorry, this is the joy of doing this at home. But we have a dog that barks at everyone who walks in the door. So I feel great about that. Sales execution, consistency, I think, is the biggest challenge there, consistent and predictable. And as I said, Brian definitely has that under control, and we'll see that deliver the kind of results we need. And I'm not going anywhere. I've given the world's longest notice period, telling the board, it's 14 months.
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A
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db7260b9c1867f2399757e02ec5101b7
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Yeah. And there going to be a consultant for all of 2022. So I definitely picked up on that. Lastly, you know, the shares are weak here after hours. It looks like they're a little below $10. Is the balance sheet, is the board talking at all about perhaps using the balance sheet on a buyback more aggressively? I can't recall, I think you have one in place, but what's the thinking on use of cash for the money that you've got on the balance sheet?
|
It never comes up. Rob, let me go first, man. Rob was coming in on that one. No, it does not come up, period. And we just had our board meeting yesterday. It does not come up. We are now in a position where we're in an enviable position where we're EBITDA positive, cash flow positive, generating cash, building a bigger war chest. You know, I want to see the equity go up, of course, because that's the gear effect for the war chest, that lets us do a lot more M&A. But no, that is absolutely not in the cards whatsoever. We want to invest in the things that will grow the business, not just taking shares off the street. And I just want to clarify, you said that I'll be on the sidelines in 2022. I want to make sure that we all understand, I will stay in this role through the end of 2022. Sometime between now and then, if and when the new CEO is appointed, I will step out of this role, I'll be reporting to the CEO in whatever capacity I can help that person, and I'll continue to be an employee of the business through the end of 2022. This gives the board all the time in the world to get exactly the right person into the job.
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A
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a340bae2775d07ba5de49e504b14a476
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Hi, I'm Sharon on behalf of Mike Latimore. Well, I have two questions for you today. One, how is the demand for events relative to the last nine or 12 months ago? And is the media segment the main focus of your revenue retention effort?
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Great. I'll start with that. Rob, feel free to break in. So the first is, where is the evolution of events, especially as we're thankfully finally starting to wind down from COVID? And where is that going? I'll be happy to comment on that. And the second is media in terms of its priority and retention. Did I cover that correctly? Great. So, please give Mike our best. Events a year ago, and we were discussing this in last year's earnings calls, COVID compressed the adoption cycle. And so we saw things happening in a fraction of the time that we normally saw. And certainly, we benefited from that. We saw a significant improvement in growth in events. We were careful to make sure that the kind of events business that we were doing would give us an opportunity to have an ongoing relationship with customers as we come out of COVID. And that has not changed one bit. Certainly, the events activity has calmed down quite a lot, but we've got a much, much larger set of candidates now and prospects for going back into and building more relationships. And that's one of the reasons why I'm so excited about the new products that we'll be bringing to market early next year. The second, on media and retention, quite frankly, we focus on both media and enterprise. We don't play favorites. We know that our customers, be they media or enterprise, every day count on video to help them grow their business, do a better job of engaging. That's mission-critical for them. And we enjoy the fact that we are kind of on that high end of when it really has to be perfect and flawless and broadcast quality, we're the ones to do business with. So we take that very seriously for both media and enterprise. What I love about the media market is there is no tolerance for anything less than perfection. There is no tolerance for anything less than perfect security, scalability, reliability. Those things are great because by building technology that satisfies big media companies, we know we can handle anything that an enterprise may want to throw at us. And we see that over and over again in our wins.
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OK. Thank you. And my next question is on the churn rate. So I believe sometimes media customers give you a forewarning in third quarters about whether they will churn in the next year. Did you get any notable ones this year?
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No. I haven't seen anything notable that changes anything. Again, I feel good about the fact that we have more insight than we've ever had before and that it's earlier insight so that we can act pre-emptively. And certainly, we saw that with the renewal of Seven Network. That was a great example of a really, really big renewal. They signed up for two years instead of the traditional one. And ITV, which was another really big renewal that was very, very competitive. So I feel very, very good about the progress we've made there. Again, we need to do a lap so that we know that we're back in control of the recurring revenue business. We're not there yet.
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How do you feel about the sustainability of this growth? And I guess, what kind of sort of signals or feedback you're getting from your advertising clients that may suggest that this elevated growth can be sustained through the year?
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Yes. So there's sort of three pieces to the monetization piece, Maria, that you're sort of talking to.
One is obviously demand from the advertiser and how we get and how that demand has increased and that is basically based on a revenue per user or revenue growth that they're willing to pay. And we continue to see our big brands continue to lean in and ask for more supply and be willing to pay out, especially for that quality. So the TQI, as we've talked back in the past, has really driven a higher-quality consumer, which we are able to drive a higher ROI and get a higher price for. So that's sort of the first piece of really that monetization.
The second piece is around CRM, where when the user comes on to our property, we are now engaging with that consumer in a more meaningful way in a longer time period. We are still in early stages there, but we believe that ultimately, we'll be able to look at it from a lifetime value perspective and really extend that relationship with the consumer in a much longer way than we currently do. And the third piece, which we talked a lot about the Fluent Sale Solution, that business greatly expands our performance marketplace. So we are now able to go after higher consideration, higher-value industries where in the past, we usually would not and hand it off to intermediary.
So the fact that a consumer can come on to our properties, and we can continue to engage them from CRM and then also continue to bring them down in a meaningful way into the higher value, higher considerations really what's driving that monetization of that growth.
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Should investors think about you managing your business to growth in media margin dollars here in the near term? Or sort of what are some levers that you could pull to improve your media margins, sort of as a percent of revenue over time? And I know you mentioned some of the initiatives that have higher margins, but sort of how should investors think about that dynamic?
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Yes. We -- those are the exact same metrics, Maria, of revenue growth and media margin. So from a revenue growth perspective, we have a very simple view is that if we're growing at or above the industry standard and how the industry is growing, then we are positioned right within the industry and have the right products and services for our advertisers. So revenue growth clearly is the metric we're using in order to judge ourselves externally.
Internally, it's around media margin, right, and how well we can bring and manage that mix of media across our various businesses. And that's the thing that's really changed over the past year, whereas we bring -- brought on other businesses that we've talked about that are relatively early stages. The media margin might -- may take time to bring up to that level that we go after. But we have a very disciplined approach in terms of what range our media margin should be in.
And if it's below a certain range that we're very clear about the investments we're making, if it's above a certain range, we're very clear about how -- we're mindful of how we might not be investing enough into that business.
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You mentioned expanding into mobile app as well as one of the sort of growth initiatives here, sort of launching new products. What are some key developments or key milestones for you here? And is this something that we could see sort of developing or contributing to revenue this year?
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Yes. Yes, Maria, you can. And we've always been a mobile-first company, primarily on the mobile web. We began testing and incubating our rewards product, primarily on the Android platform.
So we've been testing that. We have the KPIs right, and we're ready -- we've launched it and we're ready in a larger way. So just to give you a feel for the market size, according to eMarketer, the mobile app space is an $80 billion market. And if you take away Google and Facebook, it's about $30 billion available to us, that is two times the size of the market, the mobile web market that we're in now.
So we're quite excited about the market opportunity in front of us. It's less than 5% of our revenue right now, but it has been -- it's expanding, and we believe there's a lot of opportunities for that in the later part of this year.
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Just summarizing a little bit of what you've been saying, your financial statements are trying going to go through somewhat of a redo because you're going to have a higher cost of customer acquisition but better follow through. I'm wondering if you might give any targets for key accounts as we might think about it.
And does the bottom-line rate of profitability improve or deteriorate with maybe a higher turnover benefiting the growth?
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So I would not say it's a redo of our financial statements. I think the way we're really looking at it is an expansion of how we're able to interact with the consumer and monetize that consumer. So we went through a little bit of the monetization with Maria about what's driving that and how we can continue to look at.
So we don't really look at it as a redo, but we certainly look at it as an ability to drive that margin, keep the margins within the range, we talked about it, just drive revenue at a higher level. From a bottom-line perspective, we are investing from a perspective of both gross profit and operating margins. But we are very consistent in our outlook from where we were in early part of 2021 is that we look to return to industry growth rates, and then we sequentially will drive that margin up over time as we lean into the opportunities that are in front of us.
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It does seem like the new shift will adjust somewhat your mix of end markets and perhaps even the mix of competitors you would be dealing with. Is there any comments you make in terms of those markets, you'll be addressing?
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Sure. Sure. And you're absolutely right, Jim. It does open up some different places to us.
So let me just hit a little bit on the verticals. The verticals you'll see that we've traditionally, as you know, are very diversified across our verticals. And it is still diversified, and it's one of our strengths in terms of how we build our marketplace. But you're going to see higher consideration higher value verticals like insurance and financial and home services, things like that come into our mix, right? So that will be point number one.
Point number two, strategically, you're bringing up a great point because there's a lot of people that are in that higher consideration. I just want to point out sort of what our differentiation is. Most of our competitors go at it from a sales perspective, which is let me win the client, and then I'll work back toward the consumer or back toward supply. We're taking a very different approach.
Our approach is starting with the consumer and starting with quality and then moving toward the advertiser or brand and matching up to the brands that can best drive meaningful experiences for consumers and also drive the right ROI for the clients. So from a competitive standpoint, we feel very -- if we were going after the volume game, I would tell you that we're obviously at a disadvantage. But the fact that we get -- we have a deep first-party database that we can utilize as a strategic advantage, it is a major opportunity for us to go at this in a much different way than people are doing currently.
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About a year ago, you undertook this adjustment to your business model. And it sounded like, at that time, it would be a quarter or two before you would sort of stabilize and start to generate some renewed growth.
We're about a year into it right now, and I'm wondering how you are thinking -- where you think you are in this process? Obviously, it's taking a little longer than you thought, but maybe it's worth it if it gets you where you need to be. So how would you say you are relative to that process?
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Yes. Well, what we originally laid out, Jim, was that we've sort of returned our traditional growth rates in the later part of 2021. So I believe we've gone back to that and 22% in Q4, obviously, is higher than what we've traditionally done. So we're happy with our ability to drive that value for our brands and then to be able to bid up for our inventory.
So I think we're ahead -- we're very much ahead on that monetization part than we are. I think on the traffic quality initiatives, to be blunt, we probably thought that we could work with media suppliers and get them to move over and have our intense quality, and it would be slightly easier than we thought, but it hasn't. There was a number of media people that have not chosen to go to court with us, which just has required us to test and learn and be more aggressive in the platform side and on other media things that we're working on. So I think the journey over 2021 did not -- either was ups and downs compared to where we thought it was going to be, but when we ended the year, we believe we are at where we thought we'd be going into 2022.
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So I wanted, George, to start off with some of your thoughts, commentary possibly here in the U.S. Marshals Service. You mentioned that they don't own any of their beds. So where are they putting people? I mean, how far away from the court houses are they? How are they transporting these people? It just seems to me to kind of be a policy that from the top, they think this sounds good, but it seems to have some difficulty being implemented reasonably and rationally on the ground. I kind of wanted to get your thoughts on that. And also on the facilities, not just the U.S. Marshal, but the -- also the BOP facilities. I mean, I understand that you will look to go to other -- repurpose those facilities for other government agency use. But if we weren't successful on that, I mean, what other uses could there be for your facilities if they were not being used as a secure facility or detention center?
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Well, on the first question, I think it is a complex challenge for the U.S. Marshals Service to identify alternative locations for their prisoners that are being held predominantly in urban areas near federal court houses. We don't have access to the details of what they're doing or how they're doing it, but we surmised it, it's quite a challenge for them. As to alternative uses of our facilities other -- we are hopeful of repurposing them with other governmental agencies as time moves on. But some of our smaller facilities have apparently lent themselves interest by developers for alternative purposes other than secure facilities. So we expect several sales of that nature as nonsecured facilities for nonsecured purposes.
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OK. And just kind of a follow-up on that on the U.S. Marshals. I understand you don't have access to their detailed plans. But as being someone that's been in the industry for such a long time, I mean, are you aware of thousands of beds that in secure facilities are just being -- going unused. Setting aside yours and your competitor facilities for a second here, that would make it easy for the U.S. Marshals to just transfer people?
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Yeah. There may be some extra empty beds this year because of COVID, but because the court systems have closed for all intents and purposes. But as the COVID, the pandemic is ended, we would think the court system will reactivate in due course and there will be a greater flow of people going into jails and prisons.
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OK. And on ICE, if I can switch gears for a moment here. Your competitor was mentioning how their ICE populations had increased significantly since the beginning of this year. I was wondering if you guys are kind of seeing the same trends there. Then also a little bit on the Title 42. I understand it's being used to -- against single people to put them back across the border. But as my understanding, and correct me if I'm wrong, please, that's -- it's a health emergency. So-and I quite understand what is the difference between someone that is single and someone that's part of a family. Wouldn't the health be the same?
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Well, with regard to the first question, we have seen an uptick in our ICE populations, particularly on the southern border. Title 42 to my understanding is, is a temporary situation because of COVID pandemic. And once that's resolved, I would think Title 42 will be amended to allow the detention of individuals inside the U.S. rather than immediately deporting them to their country of origin.
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OK. One final one for me, and I'll get back in queue. So you talked a lot about, obviously, the difficulties here due to the president's executive order and renewing contracts. Can you speak to efforts on potential new business out there and where you might be looking for some new business, maybe in some of the -- with the state -- your state partners?
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Well, I think we've seen growth in our reentry business and our day reporting business, in particular, as described by Ann Schlarb. There's been more of a focus and interest in the rehabilitation programs post release of the nature required reentering facilities. Ann, could you comment on that? Yeah, we've seen, as I discussed, the residential reentry center with the Bureau of Prisons that we were awarded earlier this year that will be activated in September. The state of Tennessee, the state of Idaho in the past year have started new day reporting centers that we've implemented and are looking at potential expansions in and we're continuing to look at other opportunities across all of our reentry services areas.
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Yes, good morning. Thanks for taking the questions. First, I just wanted to maybe get a little more color on the favorable cost trends that you saw in the first quarter and how sustainable, how comfortable you feel that you'll be able to kind of forward.
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This is Brian. So the cost trends really are driven by, I think, some of the lower occupancy levels in the facilities you're seeing less resident related costs as a result of that. And then also, I think, due to lower occupancy levels, there's less off-site medical, there's less hospital runs. So there's better overtime or better labor management going on as well. So I think as long as these trends continue with the occupancies being lower, we'll continue to manage the cost that way. And then, obviously, as occupancies pick up, we'll see some of those costs increase but we'll also see revenues start to increase to offset that. So I think even when the occupancy start to improve, we should be on equal footing or even better.
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OK, no, that's great. And speaking of occupancy, any sense -- I mean, we see a lot of states are increasingly lifting COVID-related restrictions and with the vaccine rollout well under way, curious if you're sharing anything in terms of when you might be able to get back to more or increase capacity from the 75%, maybe at ICE center etc.
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We only have a guess and that guess would be toward the fall, we would think that things could get back to a more normalized state. That's just our guess.
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OK, thanks. And then, recently, you were seeing some states indicating that, again, sort of following the federal policies as it relates to maybe not engaging in private prison contracts when those expire, etc. I'm just curious if there's anything you can do in terms of whether from a lobbying perspective, etc., given the political climate there to maybe stem some of the activity coming out of the space right now.
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Well, we are essentially a service provider, and we stand ready to provide services when our clients need them. And those needs can fluctuate seasonally and periodically due to administrations and implementing new policies. And I think we said in the first quarter, we expect this year to be a transition period in which different policies will be brought forth and tested and implemented and revised as the situations on the fields require. And we stand ready to work with all the agencies to make those accommodations as time goes on.
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OK, thanks. And then, finally, again, on the investments you're making on, for example, on the growth capex, is there -- given the political climate here in the U.S., is it more likely that you might be looking to explore more international opportunities? Or again, the focus is still pretty much gonna be here?
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Well, the capex, I mean, we reduced some of the capex that was related to improvements in existing facilities. And I think -- so what we had forecasted for the balance of this year and next year is pretty minimal for the most part in our correctional facilities and our reentry facilities. And then, the bulk of the capex is in the BI business where we're seeing growth and we also have to transition technology to a newer generation cellular technology.
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Yeah, thanks for the call. And reading a press release from February 19 on the new bond issue, congratulations. But I noticed it was issued at a subsidiary. Is that where the other two bond issues are issued from?
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I'd have to look at that. I'm not sure exactly which ones they're all issued from.
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OK. And it would be great if -- I don't know if there's an offering memorandum or if you 8-K-ed it, it'd be nice to see the full prospectus. The other question I had was --
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It was a private placement. So I don't think there's a public offering perspective now.
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But as a public company, wouldn't you look to -- you put that in an 8-K?
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Some of it is.
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OK. The other question was you mentioned the goal was to pay down $150 million in debt. How would you think of allocating that between the revolving credit, the term loan and bonds or I think you actually said reduced net debt, would you just allow cash to accumulate?
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Well, as I said during the call, we're working with some financial advisors. So I think that that will all be part of that process evaluating how to apply the cash flows of the business and the timing of when we do that.
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Hey, good morning, guys. Tanks for the time. Just a quick follow-up on the Marshals Service relationship. Could you just clarify how you're thinking about the difference, if there is any between the direct contracts and the ISGAs and whether you think it's possible, but the ISGA contracts will remain even if the direct contracts are canceled?
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Well, currently, our discussions with the Marshals Services have only been on the direct contracts.
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Do you expect the executive order to apply to all contracts? Or is there a reason to think that the way that it was worded would allow them only to apply it to the direct contracts?
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Well, we're responding to the discussions and concerns of the Marshals service as they identify them. And right now, those discussions are exclusively on the direct contracts. Yes, we don't have the ability to speculate as to the entirety of their concerns. But as they've expressed them thus far, the discussions have been just on direct contracts.
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OK, great. And then, one other one, if I may. On the ICE relationship, how are you thinking about -- I understand that the executive order didn't apply to the ICE in the homeland security. But as you just think about the populations in your facilities and the occupancy levels, how do you expect ICE to address, I guess, what is currently excess capacity in the system might be made from the White House? Is there a -- will there be a rationalization expecting to keep the footprint intact until there's more visibility on the population longer term?
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Well, again, we don't have in-depth knowledge of what the White House planning is, but we are aware that there is excess capacity, and that's in part due to the large number of locations that ICE has. I think it may be a couple of hundred locations. And many of those are small jails around the country that don't actually meet the latest ICE standards that were promulgated by the Obama administration. So that may be one of the issues that they confront when deciding which facilities to retain and which to close. Whether facilities meet the standards that were developed by the Obama administration.
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I was wondering if we can get a sense of where we are with the SEC rule changes based on your Q1's actual and your guidance for Q2? How much of that $130 million to $140 million in revenue reduction is kind of baked into the first half of this year?
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Yeah. So Charlie, in the first quarter we said print was down $25 million just based on the historical seasonality of when we see most of the print hit. The second quarter will have kind of disproportionately larger impact than what we saw in Q1 and it will be the largest impact of any quarter during the full year.
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And then shifting a little bit to the transactional work, obviously, SPACs have been a big percentage of the IPOs that came out in Q1. I think we saw probably a record growth. I think Q1 was higher than all of last year. What percent of your transactional revenue in the quarter was related to SPACs? And then, also, are you starting to see any pickup at all in De-SPACing work at this time?
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Sure, Charlie. So I'll start and then, Craig or Dan can jump in. When we look at our performance in the SPAC market, and obviously, as you said, it was up substantially relative to last year, but from a share perspective, we did very, very well there and it's historically been an area that we hadn't focused on until more recently and so we did very, very well there. With respect to some of the De-SPAC transactions, we're starting to see some of that, but from an overall M&A perspective, we commented on the Venue growth being strong at over 30%, obviously, tied to the M&A activity, some of that De-SPAC related and then others just more on the traditional M&A space.
And Charlie, this is Craig. To build on that, Dave mentioned the reset. We expect on the other side of that, it will be less manic, but certainly brisk, and there are 426 SPACs that are searching for a business combination right now. There were 92 that were announced in Q1. We did see a drop off in April, but it was equivalent honestly to the January, February numbers. So we, from a long-term perspective, as Dave mentioned, believe the SEC attention will actually legitimize and we will see this move forward as a strong product.
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Great. And then the companies that are De-SPACing and working with you on kind of the transaction part of that, are they also signing up for -- do they then sign up for kind of recurring long term compliance work as well?
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Yes. So we're seeing, certainly when they do the initial set up of the shell SPAC, we're seeing them also sign up for ActiveDisclosure, our compliance solution, and new ActiveDisclosure. We're also seeing during the De-SPAC process they use Venue supported by eBrevia which is helping with their M&A diligence. And then, certainly, at the acquisition time, we're seeing them continue to report using ActiveDisclosure. So it's a real opportunity for us.
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Spectacular results and good to see that the share -- your share of filings both on capital markets and investment continues to be real strong. I certainly think that that a lot of the investments that you're doing in upgrading the technology are helping you keep here, but do you think there is also the opportunity to gain share? If so, what areas of the business do you think based on your current technology rollout plans, do you think you have the best opportunity to gain some share?
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Sure. Thanks, Pete. So when we step back and we look at our relative position in our markets, we are number 1, 2, or 3 in each of the markets in which we play. And so, to your point, we start from a very strong position as the only full-service provider in our markets. It offers us a great opportunity to sell across the house. And so you take each of these individually very high share on the transactions parts. We did see that market change a bit and we adapted, and have been increasing share in SPACs.
When you look at our compliance software side, ActiveDisclosure has a great opportunity. We rolled out a new product as we mentioned, the new ActiveDisclosure, brand new build of the product, and have seen a very good interest and very good adoption. And as we mentioned in our comments on Venue, we can surmise that at 30% growth, that was a share taker. So we continue to see very good opportunity in those areas. Those are all the capital markets transactions compliance areas.
When we jump over to the investment companies side, the mid-30%s of growth on our software offering, which was really supported by -- the team did a fantastic job of developing solutions for the markets in a changing market with what was taking place with regulation with 30e-3 and 498A, and we saw that come down on the print side, but obviously, saw a great opportunity to develop a well-received solution and have seen outsized growth there that we think continues through the year. So we feel very good in all of our core offerings.
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That's great. And then in terms of just the capital allocation, I mean, you've done a fabulous job of deleveraging here over the last couple of years. And so you're now -- that's down to 1 times. I guess how are you thinking about capital allocation? Are you starting to see some seller expectations come down on the M&A market so that might be some opportunity or for now are you just going to continue to deploy free cash flow toward debt reduction and opportunistic share repurchases?
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Sure. Yeah. Absolutely. So we went into or I went into a fair amount of detail on our last call and our perspective on it remains unchanged, which is really continue to drive performance, generate the strong cash flow, and be disciplined and thoughtful on how we deploy shareholder capital to grow the business profitably.
When we look at the various -- the five ways of deploying capital, we have been accelerating investments into the organic growth initiatives, and that's really to your comment, multiples and ex-seller expectations remain extremely high. So as I said, we put more into organic investment, we've been paying down debt, we've done a little bit of share buyback and I would expect more of the same but overriding continuing to be very disciplined.
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direct
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[
"direct",
"intermediate",
"fully_evasive"
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A
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109250590b109c700714021d82bd876e
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Hi. Sure, absolutely. So just if you could touch upon the cash flows for a second and you talked about there were some extraneous items in there because of LSC bankruptcy settlement and also seasonally the cash flows are supposed to be negative in the first quarter. Could you isolate the incentive comp and the LSC impact on cash flows?
|
Yeah, Raj. So the LSC multi-employer pension plan payments were pretty small in the first quarter. I think around $1 million or so. The two settlements that we talked about, while one of them happened in the first quarter, the payment was actually made in the second quarter. And then, on the second settlement, that payment will also be made in the second quarter. Frankly, the biggest impact on the first quarter cash flow on a year-over-year basis and we were roughly flat, I think down a couple of million dollars in free cash, but the big delta from year-over-year was really driven by the increased incentive comp payments, including annual bonus payments and 401(k). We wouldn't break that out as a discrete number, but given the performance last year, those plans paid at a higher rate than -- at a much higher rate than they typically have in the past.
|
intermediate
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[
"direct",
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] |
B
|
1811937ef6af8de1c1fedee503331617
|
Okay. All right. And then just, off the -- two more questions, off the $130 million decline that you are expecting in print and had allowed for, I know Q1 was down $25 million, how much would Q2 be? I heard you say primarily the entire amount would be taken in Q2. So in the first half you would have taken most of the $130 million decline in print?
|
No. Sorry. And if I said that, let me clarify. What I intended to say was that the second quarter will be the largest decline of any of the four quarters of the year. So it will likely be substantially larger than what we saw in Q1, and then Qs three and four, ballpark should be roughly similar to what we saw in Q1.
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intermediate
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[
"direct",
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"fully_evasive"
] |
B
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222745f892b3a0048346d806a87829da
|
Got it. And then just lastly the software solutions for the rest of the year, do you expect similar sort of robust growth in software solutions?
|
Yeah. So as we talked about on the software side, expecting double-digit growth and that's really across the board. When you look at it on a product-by-product basis, the momentum we have in ActiveDisclosure, grew 16% in the quarter. We expect that to be in the kind of mid-teen range. Venue was 30% in the quarter and that has been ticking up the last couple of quarters. This was our highest growth quarter. And again, a lot of that will be tied to the M&A activity and as we said from a perspective on Venue, the pipeline is very strong there.
And then, when we think about Arc Suite, we had a very aggressive plan coming into the year. The first quarter at plus 35% was a little bit ahead of that plan. But we do expect that the combination of these offerings within the Arc Suite and especially ArcDigital and total compliance management will continue driving strong growth throughout the year.
Yeah. And the only thing I would add to it is that if you reflect on last year, Venue's growth started to pick up in the back half commensurate with M&A picking up. And so you'll run in the comparables in terms of quarter-over-quarter or year-over-year growth within each quarter, but not withstanding that we would expect to be in that mid-teens.
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direct
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[
"direct",
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A
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abbfd06ff60f394178e70a874f9dea5b
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Right. And then just lastly, the guidance for Q2 assumes a capital markets transactional activity in line with Q1 or lower?
|
No so our guidance they rise -- we think Q1 transactional activity will be up not nearly the amount that we saw in Q1, right. Q1, we said in our prepared remarks that transactional activity almost doubled from the first quarter of 2020. In the second quarter, our guidance implies somewhere around 20% or roughly $15 million increase in transactional. So to the extent that from a market perspective, it's stronger or weaker than that expectation, there is some plus or minus in that guidance.
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direct
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[
"direct",
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A
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ecc624e5822204460fa0bc03d96ae789
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Hi. Just one quick follow-up. Just looking at the balance sheet and the debt remaining on the balance sheet, any thoughts there on potential refinancing taking advantage of the kind of robust capital markets that you're seeing on your own business?
|
Yeah, Charlie. So we look at this all the time. To your point, we had 8.25% notes that become callable at 102 [Phonetic] in October. Given the strength in the markets and hopefully, that continues, right, we believe that it will and that there'll be an opportunity to refi that debt at a significantly lower rate, but a lot of that will just depend on what market conditions are at that time.
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direct
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[
"direct",
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A
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6e0d7f5714bfa960db6ca7c1f1710074
|
May I ask given the recent update in our regulation from governments, what do we see is the potential impact on our operations for the rest of the quarters over for the next year? Could you share a bit more color? And also, my second question is for our advertising ROI. Could just share a little bit more color on the ROI in Q1 and what do we see going forward?
|
Thanks, Mark. For your first question about the regulation impact. So we have been following the openings on regulating all these Gaotu institutions in 2018, and further openings on regulating our office -- institute -- our online office guru institutions issued in 2019, in the past year. And recently, the government has issued regulator guidance on several aspects of online education, including, first, prepaid tuition fee management.
May 21, four departments in Beijing jointly release a guideline listing out specific requirement on the tuition fee collecting in advance, including tuition fee coverage period, advance tuition fee collection timing, and tuition fee monitoring. They provided very detailed guidelines. And second, about advertisement. All companies should follow the law of advertising and the law of -- against -- on fire compensation.
The department also provided a list about what our company should now do in commercials. It's a very detailed list. Also, regulators provided guidelines on teaching accountant course format, courses scheduling, teacher qualifications, homework and student rest timing, etc. So to better implement these regulations, we have proactively activated a cost department compliance team within the company.
This team consists of all senior management teams and we have organized several rounds of meetings, initiate rounds of study on the new regulations. We've taken down noncompliant advertisement and adjusted our homework procedures and adjusted the class schedule to meet the requirement from all of those regulators. And with regard to the instructor qualifications, except for the paper, the certificate of the teacher's qualifications, we also [Inaudible] the teaching qualifications online and from other channels. So on May 21, the same day was the prepaid tuition fee management rule.
The Central Commission of Comprehensively Deepening Reforms launched its 19th meeting. They eventually also approved the opening on reducing burden from homework and after-school training for compulsory education students. That is called [Inaudible]. So we haven't received the specific accountant yet.
Once the opening is published, we will immediately take measures to comply in all levels. So after-school tutoring a -- is part of the education industry, and education especially for K-12 education should focus on the social impact and core values. The regulations provided timely and clearly directions for the industry. We will proactively embrace the policy and take solid actions and closely monitor the following executions.
We believe only when all the companies comply with the government policy at the highest level, the whole industry can achieve a lasting, healthy, and sustainable development.
I want to add several more points. So first point, the demand for premium education, for customized education from students and parents is eternal, always exist. Secondly, the benefits brought by online education at very affordable price will provide a secure for equal access to education. And the third point, the online education is able to collect data with all assets from the students, so it's easier for online education to provide more customized solutions for each student.
So in short, me, personally, I am very optimistic about the future of online education and I believe that as long as we view education with our true hearts, with our consciousness, then I believe this sector will have a very long time and sustainable development.
And your second question is about the ROI in Q1. So the Q -- the ROI in Q1 is actually lower than normal. And if you can recall, during our last earnings call, we mentioned that we would like to spend less of our customer acquisition budget on traffic acquisition from social platforms and invest more on innovation channels such as livestreaming platforms, [Inaudible], etc. and even offline channels.
Still one of the reasons like our observation is -- and it's actually the traffic acquisition on social platforms actually drags down the ROI level. So this quarter, we gradually reduced the spending. And now, we have completely stopped traffic acquisition on social platforms. So we expect students to come from other channels in the future.
For instance, through our passive branding activities, promotional courses, and free courses. We have accumulated a fairly large student pool. Gaotu K12 brand has improved the brand awareness and the reputation over the past quarters. So which we -- we expect it can grow up the organic traffic that flow to our app and the website.
Second, as for word-of-mouth referrals. We are ramping up our explorations such as adding key referral campaign or providing more coupon or benefits to encourage these referrals. In the future, we will focus more on education accountants to help our students and parents to actually resolve their questions in order to increase trust and our visibility of our brand. We are also starting in localized student recruitment.
We will provide a more differentiated personal lines of services and content to further attract the students to join us. Thanks, Mark.
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intermediate
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[
"direct",
"intermediate",
"fully_evasive"
] |
B
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cab5e19b10fbe75dc7ac9b970c8eff0d
|
Well, can I check why and how we saw such a drastic deterioration in building and in enrollment this quarter? I mean, it's particularly surprising because as sales and marketing as you mentioned went up quite a lot to be twice of gross. This quarter wasn't even hurt materially by the regulatory pressure yet. And following question is for the second-quarter guidance. Could you break down the growth in first half of second quarter versus second half to gauge the impact from the change in marketing that you just mentioned, say, like -- and do you think that this termination in traffic costs is temporary or more lingering change, say, into some of the promotional trends?
|
OK. So I will break down the reasons for several points. Firstly, the net revenues of Q1 and Q2 of this year, on a very large level, relies on how much we spent in the second half of 2020, especially last Q4. And also, the gross billings of the first quarter of 202, part of it is also relying on December of last year, how much sales and marketing we spent.
And as you can see last Q4, our gross marketing margin is relatively low. And last December, we actually implemented some cost control on the sales and marketing spending. And that is why if we look in all the FX with Q1, the gross margin goes down slightly.
So I guess the second reason is in the first quarter, within all our sales and marketing channels, the capex, acquisition of some performance channel do account for a pretty high proportion. And because of this year's market competition, the customer acquisition cost of the performance channels this quarter is up by several times compared to the same period of last year, which somehow also caused the change in available selling.
Thirdly, this Q1, for the first time, we started a scout lending activities spending. We believe our spending for these planning activities for this quarter might not produce an immediate significant impact. However, in the long term, it will become an investment in assets. Fourthly, for the first quarter, our R&D expenses also have reached a historical high.
We believe that it will also create long-term leverage. Lastly, for the first quarter, we also extended our recruitment and training for instructors and tutors. Those will also create value for our long term.
Lastly, in March, we very significantly reduced our spending on this traffic acquisition and performance channels. And at this moment, we have completely stopped our spending in traffic acquisitions from the performance channel. On the one hand, we want to be in full compliance and resolution. On the other hand, we really want to return to the essence of education, return to quality building growth. We believe in the next several months, we will see some benefits.
Internally, we are not satisfied with our operating efficiency in the first quarter. Internally, we have done a very comprehensive review and legal action. As of today, with our current size, current brand recognition, and the ways our gathering of so many talents, I believe, in the following days, we will be able to review whatever we have learned, whatever we have observed, and whatever we have absorbed into our operations and it will bring us better efficiency and impact.
As for the sales and marketing budget for the second quarter, there's nothing to do that also relates to the student recruitment size for the spring and summer semester in the second quarter. And it also will affect the revenues of Q3 and Q4. Based on the data we have collected so far, we see operating efficiencies in the second quarter have improved significantly, especially for conversion rate and retention rate. We see some significant positive movement.
So we are positive about the future. And I believe, we definitely want to return to our original goals about the operation and we hope sometimes, in quite a few years, we will see profitable growth.
|
intermediate
|
[
"direct",
"intermediate",
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B
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e6b0ccc84523497da78a26c829398dd1
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Yes good morning Dave, I wonder if you could -- I know you're always reluctant to talk about sort of spot price dynamics between needle coke and UHP, but it seems like our channel checks relative to the 4,200 you booked this quarter for non-LTA is now moving significantly above that, closer to 6,000 or even higher. And we understand the needle coke market is tightening a little bit as well with some of the EV pull. So just any color you can kind of give on how you see supply/demand. If you can give any kind of reference points on pricing, that would be appreciated.
|
Sure, we can do that. So I think just to kind of set the stage a little bit, on the last earnings call, you'll recall, Curt, that I referenced that we thought that pricing would bottom out somewhere in the first quarter and that we were seeing the beginnings of a demand pickup. And that projection turned out to be correct. And having said that, please remember that the lags that I spoke to, so steel starts to see more demand. They start making more tons. Once they start making more tons, they begin to chew into their electrode inventory. And remember, we went into the COVID pandemic with a high electrode inventory that we spoke about almost 1.5 years ago. I also commented in our earnings call that we expected by the end of Q1 that because of the improved demand that electrode inventory would begin to normalize. It has done that, and we exited Q1 with the graphite electrode in our customer base normalized. So that meant, at that point in time, that people were now in balance and using their -- needing to purchase electrodes consistent with their production cycles. So as that occurs, our demand improved, and we acknowledge that. And as in any market product, shortly after demand begins to pick up, you start to see price following at some point. All of this has happened quite as we expected.
And remember that when you buy an electrode in early Q2, it's not going to get delivered until early Q3. It's a 3-month process thereabouts to make an electrode. So the fact that we bottomed out in Q1 -- or during Q1, on pricing, is reflected about what you're going to see in our performance in the second quarter with, as we acknowledged, the second half being better, with pricing -- the realized pricing that hits the P&L beginning to see the increase in the third and then subsequently fourth quarters. So with that in mind, that explains why we're talking about Q2 and obviously provides an indication as to why we're still talking about mid single-digit EBITDA changes from the first half of last year when we provided that guidance back -- earlier in the first quarter. So with respect to exact numbers, obviously, we had -- you now know that we had $4,200 in the first quarter, which was the guidance we also provided at that time. I think from what I'm describing, you should be able to think about what the second quarter is going to bring.
And then from there, an improvement in the third and fourth quarter. In terms of needle coke, yes, we see that because there's an improvement in the overall electrode steel world, that there will be positive influences there and expect it to have commensurate impacts on the pricing of needle coke. I think we've spoken in the past of numbers in the $1,300 to $1,800 range in the last earnings call. And I would suggest that we would anticipate that we'll start to see things more in the top end of that range. And we have procured the needle coke we need for this year, and we'll soon be thinking about 2022 as we expect that the market for our products will continue to improve. And I think we're going to have a good second half as well as into 2022. Hopefully, that assists you and provide some insight, Curt.
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direct
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[
"direct",
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A
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1d9cb96a0be69d60c9883c6a7b149a73
|
Yes. No, that's helpful. And then I guess with respect to the non-LTA book, when we look across a lot of your competitors there, they seem to be running at relatively high utilization rates. So it does seem like the market is definitely getting tight. Can you provide any sort of guidance on how we should think about spot volume progression or the cadence of that volume trend over the back half of the year?
|
Sure. Out in the market, obviously, GrafTech has the advantage of a sizable part of its order book secured through the LTA process. And therefore, we're not selling as many spot tons as most of our competitors. But I think your view is reasonable, although I will tell you that there -- we know that some of our competitors are still working hard to fill their -- some of the specific plants, and it would be inappropriate for me to name those plants, but I'll go so far as to say that they're competing hard to fill some of those plants at numbers that are not in the genre that you suggested in the first part of your call, not -- yes, so that's probably where I should stop, so I don't get myself in trouble with our General Counsel. Yes, they're working hard. They are starting to fill their plants. But based upon their actions, they're not quite there yet. I think we're in a much better place that's allowing us to behave in a way that's a little more beneficial to our shareholders.
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intermediate
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[
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