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CEE Software Development M&A Report 2019

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Comprehensive coverage of M&A activity in Software Development (IT Outsourcing) industry in CEE region

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CEE Software Development M&A Report 2019

  1. 1. CEE software development: M&A report 2019 April 2020
  2. 2. * Growth rate estimated by AVentures Capital based on the financials of a set of market players who disclosed their results directly to AVentures Capita ** For other factors influencing valuation see slide #6 CEE Software Development M&A in 2019: Executive Summary 2 Growth 4-5x faster than globally Consistently high M&A activity in 2018 and 2019 Leaders` M&A à IPO / exit play • CEE outsourcing grows much faster than global average: 20-25%* y-o-y vs 5% globally* • Peak number of M&A / investments in CEE in 2018-19, with 24 deals announced in 2019 and 31 in 2018 • Key valuation principle in most deals: single digit EBITDA multiple for <$50M revenue companies and double-digit EBITDA multiple for $50-100M+ revenue companies or those with strong vertical focus and high gross margin profile** • 5+ well-funded CEE players with revenue of $100M or more continued to expand through M&A with the goal of an IPO / exit play • Most recent IPO is Grid Dynamics in 2019 at ~x12 EBITDA “Seller`s” M&A market in Ukraine • Limited number of companies put for sale with more demand to acquire than interest to sell until 1Q 2020 Before COVID-19 epidemic expanded globally in 1Q 2020, the industry has been performing strongly
  3. 3. Note: growth rate estimated by AVentures Capital. Based on the financials of a set of market players who disclosed their results directly to AVentures Capital Covid-19 full impact on the performance in 2020 remains unknown while the industry sees the first signs of slowed growth and decline in other metrics 3 Likely growth slowdown Cost rationale to remain strong Slowdown in M&A activity in 2020 Usual productivity amid remote conditions • As of late March 2020, many companies report less leads, new clients, and more positions cancelations. The industry, however, is likely to continue growth but at slower than usual (20-25%) pace within CEE • Proven by previous recessions, IT outsourcing space could recover fast during this crisis due to strong cost cutting rationale the offshore industry offers to its global clients • Both financial and strategic investors are likely to postpone any M&A activity until more certain times. For well-funded players, however, the crisis presents an opportunity to buy assets likely at lower multiples • As most IT service companies are used to managing work remotely, there is likely to be minimal impact on the productivity under the quarantine lockdown Temporary wages decrease • As clients ask for bill reduction, the wages for IT workers can freeze or decrease, at least temporarily Vector for optimization • Companies have started cutting costs to get into leaner shape, operational and financial. The jobs of marketing, recruiting, and sales professionals as well as those on a bench will be first to get cut Decline of growth focused R&D activities for global clients • Global clients, leveraging CEE R&D capability for growth, delay expansion and innovation plans, which results in less inflow of new clients or scale-down and freeze of some of the existing contracts
  4. 4. Note: Data as of April 10, 2020. Source: Yahoo Finance Covid-19 impact on public CEE companies EPAM Systems (NYSE:EPAM), 2019 - 2020 Endava (NYSE:DAVA), 2019 - 2020 Grid Dynamics (Nasdaq:GDYN), 2019 - 2020 Amid Covid-19 outbreak, the stock of public companies is down significantly starting with March 2020. The public companies are likely to miss quarterly and yearly earnings targets
  5. 5. Superior growth and high profitability attracted interest from both large international and local financial investors Consistent growth of outsourcing globally Faster-than-market-average growth of outsourcing in CEE Attractive growth and financial performance of CEE outsourcing leaders + + High global demand for development capabilities to deliver increasingly complex and short time-to-market projects Projected CAGR: 5% 25% YOY CEE outsourcing market growth in 2018 - 2019 by our estimations 2015-19 revenue CAGR, % 2019 EBITDA margin, % Source: AVentures CapitalSource: Gartner CEE Source: public data Restoftheworld Financial investors: capitalizing on superior growth and profitability 5 15,2% 12,6% 5,2% EPAM Luxoft Endava 20% 20% 30% EPAM Luxoft Endava 13% 10% 10% Altran Alten Devoteam 11% 11% 9% Altran Alten Devoteam
  6. 6. What most of large acquirers seek for… 6 1 Mid-market and/or enterprise clients Above the market average 30+% y-o-y consistent revenue growth Company’s ability to retain and win new large contracts, so most of the revenue is recurring High EBITDA (over 15%) and Gross margin (over 40%) Founders’ willingness to stay for 2-4 years post acquisition Other strategic rationales might play a role depending on an acquirer: type of delivery, technology specialization or broad stack etc. 2 3 4 5 7 6 Distinguished employee culture resulting in solid talent retention
  7. 7. Vertical capabilities • Acquisition of new verticals or deepening of existing capabilities Deal example: Luxoft – IntroPro, 2017 (Media and Entertainment vertical) Delivery diversification • New delivery geographies to diversify market / political risks • Delivery in new countries/regions enables to tap into talent pool Deal example: Endava – Velocity Partners, 2018 (delivery centers in Argentina, Uruguay, Colombia, Venezuela) Client acquisition • Acquisition of new clients or enhancement of current client profile • Small players can be attractive depending on their client profile Deal example: GlobalLogic – Rofous Software, 2011 (e.g. LinkedIn, Stryker) Scale • Enables companies to bid for larger projects Deal example: Helmes – Solbegsoft, 2018 We expect established players to continue consolidating a fragmented market Technical / language capabilities • Enhancement of tech teams is faster via M&A than through organic growth Deal example: Smile – Adyax, 2018 And key strategic rationales driving M&A roll-on strategy 7 Inorganic growth is a way for established players to expand capabilities, client portfolios and scale
  8. 8. Selected PE funds active in the region Selected strategic players active in acquisitions Count of M&A deals announced in Ukraine, Poland, Belarus, Romania in 2015-19 Source: AVentures Capital 8 • Attractiveness of the software development outsourcing industry persists • 2018 and 2019 had the highest number of M&A/cash out deals during the last decade 5 19 22 31 24 2015 2016 2017 2018 2019 Result: consistently high M&A activity in the region in 2018 and 2019
  9. 9. Industry leaders expand through M&A, pursuing IPO / exit play 5+ well-funded CEE players with revenue from $50M up to $100M+ are expanding through M&A with the aim of IPO / exit play Our insights into recent deals demonstrate that implied EV / Revenue lies in 1.0x-2.0x range and EV / EBITDA in 7.0x-14.0x range Germany Argentine Merged from: Krakow Note: “Ukraine / Belarus” or “Lviv” – main delivery locations Belarus / Russia Russia / Ukraine / Poland / Argentine Lviv Ukraine / Belarus / Poland / Spain Russia / Ukraine / Central Europe Russia / Ukraine / Poland Lviv 9 Germany Examples Selected larger players raised minority investments or exited at more than x2 revenue valuation, or over x10- 15 EV/EBITDA multiple. Examples include Grid Dynamics IPO, Astound Commerce and OSF from Salesforce Ventures, Star from NTT Data and Softvision exit to Cognizant
  10. 10. Appendix 1: consolidation / IPO way of the largest CEE players
  11. 11. Revenue GBP 288m (FY 2019) EBITDA GBP 30m (FY 2019) Revenue CAGR, 2017-19 36% y-o-y # of engineers 5,143 (Q3 2018) Delivery geography Central Europe, EU: 53%; Central Europe, non-EU: 27%, Latin America: 14%, Western Europe: 5%, North America: 1% Revenue % by vertical Payments and financial services: 53%, tech, media and comm-s: 27%, other 20% (Q3 FY 2019) 2014 2015 2016 2018 2014. Alpheus Solutions (Germany / UK) 2015. PSTECH (Serbia) and Nickel Fish Design (US) 2016. ISDC (Romania and Bulgaria) 2018. Velocity Partners (Argentina, Uruguay, Colombia and Venezuela) 2018. IPO on NYSE. 2019 2019. Exozet (Germany), Intuitus Limited (Scotland) Acquisitions PE funds attracted
  12. 12. Revenue US$ 2.29bn (FY 2019) EBITDA US$ 303m (FY 2019) Revenue CAGR, 2014-19 26% y-o-y # of engineers 32,600 (Q4 2019) Delivery geography Belarus: 30%, Ukraine: 22%, Russia: 16%, Central Europe: 11%, North America: 9%, APAC: 8%, Western Europe & Middle East: 3% Revenue % by vertical Financial services: 22%, travel & consumer: 20%, software & hi-tech: 19% (Q1 2019) PE funds attracted Acquisitions 2003 2004 2006 2008 2009 2010 2012 2014 2015 2016 2006. Siguler Guff 2008. Renaissance Investment Management, Da Vinci Capital, Euroventures Capital 2010. VTB Capital 2006. Vested Development Inc. (Russia) 2003. Lintec Project (Belarus) 2004. Fathom Technology (Hungary) 2008. B2BITS Corp. (US / UA), Plus Micro (KZ) 2009. Rodmon Systems (US / BY) 2007. Spline Software (UA) 2010. Instant Information (US / BY) 2012. Thoughtcorp (Canada) + Empathy Lab (US) 2014. GGA Software Services (Russia) + Joint Technology Development (China) + NetSoft, Great Fridays (US), Ozsoft (AM) 2015. NavigationArts, Alliance Global Services (US) 2016. Dextrys (China), InfomatiX (Hungary) 2018. Continuum (US), TH_NK (UK) 2012. IPO on NYSE. 2018 2019 2019. NAYS (Israel), Competentum Group (RU, BY), test IO (US, DE, UA)
  13. 13. Revenue US$ 650m+ Revenue growth 22-25% y-o-y # of engineers ~16,000 (2019) Delivery geography India, Ukraine, Argentina, Poland, Slovakia, Croatia, USA, Canada, Israel, China Revenue % by vertical Media & communications: 30-35%, high tech and commerce: 30%, medical devices and industrial engineering: 20-25% Acquisitions 2000 2006 2008 2009 2010 2011 2013 2016 2018 2000. Founded, investment by New Atlantic Ventures 2006. Westbridge Capital and New Enterprise Associates 2008. Sequoia Capital, New Atlantic Ventures and New Enterprise Associates 2010. Goldman Sachs 2013. Apax Partners acquires GlobalLogic 2017. Canadian Pension Plan Investment Board acquires 48% stake from Apax 2006. Lambent Technologies (India), Bonus Technology (US / Ukraine) 2009. InterObject (Israel) and Cubika (Argentina) 2011. Rofous Software (India), Method Incorporated (US/UK) 2016. REC Global (Poland) 2018. Apax sold remaining 48% stake to Partners Group 2019 2019. Skookum (US), Assign (Sweden) PE funds attracted 2020. Meelogic (Germany, Poland) 2017 2020
  14. 14. Revenue US$ 907m (FY 2018) EBITDA US$ 112m (FY 2018) Revenue CAGR, 2014-18 23% y-o-y # of engineers 11,035 (Sep 2018) Delivery geography Western Europe: 9%, Poland / Romania / Bulgaria: 31%, Ukraine: 28%, Russia: 18%, North America: 9%, APAC & MEA: 6% Revenue % by vertical Financial services: 57%, digital enterprise: 26%, automotive: 18% (2018) PE / IPO funds attracted Acquisitions 2006 2008 2012 2013 2006. IT Consulting International (US) 2008. ITC Networks (Romania) 2013. Freedom OSS (US) 2014. Radius Inc (US); Mecel Populus Suite (Sweden) 2015. Excelian (UK) 2016. Pelagicore (Sweden), Symtavision (Germany), InSysGroup (US) 2014 2015 2016 2017 2018 2019 2017. UnafortiS (Swiss); derivIT (Singapore); IntroPro (Ukraine) 2018. Objective Software (Germany); Smashing Ideas (US) 2012. VTB Capital 2013. IPO on NYSE 2019. Acquired by DXC Technologies at ~2x EV / Revenue 2020 2020. CMORE Automotive (Germany)
  15. 15. Revenue ~US$ 117m (FY 2019) EBITDA ~US$ 24m (FY 2019) Revenue CAGR, 2015-19E 30% y-o-y # of engineers ~1,200 (2019) Delivery geography Russia, Ukraine, Poland, US Revenue % by vertical Financial services: 57%, digital enterprise: 26%, automotive: 18% (2018) 2016 2019 2016. ASL acquires Grid Dinamics 2019. Acquired by ChaSerg Technology, a shell NASDAQ company 2020. IPO on NASDAQ via spin-off with a MCAP of US$ 600m March, 2020. Grid dynamics listed on NASDAQ 2017 2018 20192016 2015. Raised US$1.5M Series B from BGV 2020 PE / IPO funds attracted Acquisitions
  16. 16. Vertical expertise: Pharmaceuticals, financial services, TMT, Automotive # of engineers 2,500 (2019) Delivery geography Poland, Ukraine, Asia, US, Germany PE / IPO funds attracted Acquisitions 2012 2013 2014 2015 2016 2017 2018 2019 2018. CoreValue (Ukraine), Solid Brain (Poland) 2017. Cornerstone Partners and Oaktree Capital Management acquire IT Kontrakt 2019 - 2019. A series of acquisitions and mergers to form a platform company 2020 2019. IT Kontrakt, Sevenval (Germany), CoreValue (Ukraine) and SolidBrain (Poland) join forces to form Avenga Formerly IT Kontrakt 2012. WorkService acquires IT Kontrakt Revenue >US$ 125m (FY 2019)
  17. 17. Vertical expertise: Automotive, Financial Services, Consumer Services, Industrial, High Tech, Media & Communications # of engineers ~1,600 (2020) Delivery geography Poland, Ukraine, Asia, US, Germany PE / IPO funds attracted Acquisitions 2012 2013 2014 2015 2016 2017 2018 2019 2017. Investment in FDV Solutions (Argentina) and iNTENCE (Germany) 2014. Acquisition Kupferwerk (Germany) 2014 - 2019. A series of bolt-on acquisitions. In 2019, acquired by Mid Europa Partners 2020 Formerly IT Kontrakt 2012. Investment from Enterprise Investors Revenue ~US$ 100m (FY 2020) 2015. Merged with SMT Software (Poland) 2019. Investment from Mid Europa Partners
  18. 18. Appendix 2: deal table 2015 - Q1 2020
  19. 19. Year Target # of employees Transaction Value, USD mln Buyer 2019 Aducera 200 (2020) - Beetroot 2019 Grid Dynamics 1,227 (2020) - IPO 2019 Acceptic 150 (2020) - Yael Group 2019 Rozdoum 40 (2020) - InSoft Software 2019 Rademade 60 (2020) - InSoft Software 2019 Logicify 20 (2020) - DataArt 2019 Ciklum 3800 (2020) - Dragon Capital, AVentures Capital 2019 Dynamo Development 40 (2020) - SeriesOne 2019 Luxoft 12900 (2019) 2000 DXC Technology 2018 Adyax 350 (2018) - Smile 2018 CoreValue 385 (2018) - IT Kontrakt (Avenga) 2018 Intellias 1220 (2018) - Horizon Capital 2018 Applikey 160 (2019) - SSA 2018 DataArt 2500 (2018) - Da Vinci Capital 2018 WebCodium 12 (2019) - Apriorit UKRAINE (1/2) One can estimate a range for deal value with indicative median annual revenue per engineer at $40-60K and range of x1-2 EV / Revenue 19
  20. 20. Year Target # of employees Transaction Value, USD mln Buyer 2018 GlobalLogic 12000 (2019) 960 Partners Group 2017 Stanfy 20 (2017) - IntellectSoft 2017 GlobalLogic 12000 (2019) - CPPIB 2017 IntroPro 500 (2017) 28 Luxoft 2017 Grossum 57 (2017) - The APP Solutions 2017 Grid Dynamics 1000 (2018) 118 ASL 2016 Lohika 700 (2016) - Altran 2016 CoreValue 385 (2018) - InSoft Capital, AVentures Capital 2015 Ciklum 3500 (2019) - Soros Funds UKRAINE (2/2) 20
  21. 21. Year Target # of employees Transaction Value, USD mln Buyer 2020 Meelogic 300 (2020) - GlobalLogic 2019 Javeo Software 25 (2020) - TenderHut 2019 BlueSoft 650 (2020) 50 Orange Polska 2019 Sevenval 200 (2020) - Avenga 2018 ORBA 90 (2020) - Lingaro 2018 Intive 1600 (2018) 100 Mid Europa Partners 2018 ORBA 80 (2019) - Lingaro 2018 Fast White Cat 100 (2019) 0.64 SARE S.A. 2018 Order of Code 15 (2019) - TenderHut Group 2018 Appchance 37 (2019) 0.3 R22 2018 Bitcraft 40 (2018) - Netguru 2018 Nexelem n/a - Virtus Lab 2018 Solid Brain 200 (2018) - IT Kontrakt 2018 Goyello 120 (2018) - Aspire Systems 2018 GSW Technologies n/a - TenderHut Group 2017 ReeWise 11 (2019) - Exadel 2017 itWORKS n/a - Euvic, 3S Group POLAND (1/3) 21
  22. 22. Year Target # of employees Transaction Value, USD mln Buyer 2017 Coders Center 75 (2017) - SoftServe 2017 iNTENCE 100 (2017) - Intive 2017 IT Kontrakt 1300 (2016) 33 Oaktree Capital / Cornerstone Partners 2017 FDV Solutions 100 (2017) - Intive 2017 Sensinum 16 (2017) - Virtus Lab 2017 Qburst Poland n/a - TenderHut 2017 LIT n/a - TenderHut 2017 Edisonda 30 (2017) - Grant Thornton Poland 2017 Team of developers of Vorm n/a - Netguru 2016 AKME Software n/a - Exadel 2016 SMT, BLStream, Kupferwerk merged into Intive 1200 (2016) - Enterprise Investors 2016 DCC Labs 70 (2016) 7 SeaChange 2016 Operations of Ericpol in Poland and Ukraine 2300 (2016) - Ericsson 2016 Sigmapoint 12 (2019) - Grand Parade 2016 LemonTea n/a - TenderHut 2016 REC Global 500 (2016) - GlobalLogic POLAND (2/3) 22
  23. 23. Year Target # of employees Transaction Value, USD mln Buyer 2016 ProService 350 (2016) - Oaktree Capital / Cornerstone Partners 2016 Ardeo 14 (2019) 0.05 Venture Inc 2015 SMT Software 700 (2015) 38 Enterprise Investors 2015 El Passion Next 59 (2019) - Daftcode POLAND (3/3) 23
  24. 24. Year Target # of employees Transaction Value, USD mln Buyer 2019 Successyou 25 (2020) - OSF Global 2019 Blueleaf 13 (2020) - OSF Global 2019 Soul Ecommerce 15 (2020) - OSF Global 2019 Vauban 266 (2020) - GFI 2019 PitechPlus 240 (2020) - Webhelp 2019 Architected Business Solutions 32 (2020) - Totalsoft 2019 BeeSpeed 100 (2020) - ZF 2019 UCMS Romania 14 (2020) - AROBS 2018 iQuest 580 (2019) - Allgeier 2018 BSS-ONE Dueenne 80 (2018) 0.8 Right of Reply 2018 648 Group n/a - Tremend 2018 SAS Grup n/a - Arobs Transilvania 2018 CoSo 10 (2018) 1 Arobs Transilvania 2018 OSF Global 900 (2019) - HSBC, BDC Capital, Salesforce Ventures 2018 Softvision 2850 (2018) 478 Cognizant 2018 Architected Business Solutions 50 (2018) - Logo Software ROMANIA (1/2) 24
  25. 25. Year Target # of employees Transaction Value, USD mln Buyer 2018 SkyShield Magyarorszag n/a - Arobs Transilvania 2017 MindMagnet 24 (2019) - Pitech Plus 2017 It Six 140 (2019) - QuEST 2017 Zitec 160 (2017) 2 eMAG 2016 ISDC 300 (2016) - Endava 2016 Software Paradigms International n/a - Softvision 2016 LaunchPodium n/a - Qualitance 2016 Kepler-Rominfo 250 (2016) - Alten 2016 Inotec Plus n/a - Zitec 2016 TotalSoft 400 (2016) 30 Logo Software ROMANIA (2/2) 25
  26. 26. Year Target # of employees Transaction Value, USD mln Buyer 2020 Deltix 80 (2020) - EPAM 2019 Naya Technologies 76 (2020) - EPAM 2019 Competentum Group 80 (2020) - EPAM 2019 Test IO 283 (2020) 17.3 EPAM 2019 OCSICO ~90 (2020) - ScienceSoft 2018 Solbegsoft 250 (2018) - Helmes 2018 Itransition 2000 (2018) - Baring Vostok 2018 Continuum n/a - EPAM 2018 TH_NK 120 (2019) - EPAM 2017 Softline 3500 (2019) 9 Zubr Capital 2017 Cactussoft 111 (2019) - Litussoft 2017 PointSource 76 (2017) - Globant 2016 Softline 3500 (2019) 36 Da Vinci Capital 2016 Dextrys 300 (2019) - EPAM 2015 NavigationArts 90 (2019) - EPAM 2015 Alliance Global Services 1100 (2015) 45 EPAM BELARUS 26
  27. 27. AVentures Capital: M&A advisory
  28. 28. • M&A strategy development & implementation • Sell-side advisory • Buy-side advisory Professional, client-tailored investment banking services: M&A Advisory for IT Services companies in Central Eastern Europe AVentures Capital: what we do 28
  29. 29. What makes us proud A network of 100+ outsourcing companies around the globe Unique vertical focus on IT Services and outstanding sector experience US$ 150m+ in completed transactions in CEE over last few years AVentures advised on some of the landmark deals in CEE SoftDev • M&A team fully focused on Software Development Outsourcing in the CEE region • Vast Software Development sector experience based on both investor and M&A advisor perspectives • Trusted advisor for exits and partnerships in CEE tech sector • On-the-ground analytical support and unmatched execution capabilities • Top-level contacts with the decision makers of over 100 largest Software Development companies in 20+ countries on 4 continents • We have been the advisor of choice for the largest strategic and institutional investors doing M&A deals in CEE Tech 29
  30. 30. Selected M&A transactions 30 Investments Minority investor, extensively helping with strategic business tasks Exited2015 Buy-side advisor to Soros Funds on acquisition of a minority stake Ciklum 2018 Buy-side advisor to a financial investor on majority stake acquisition CoreValue 2019 - ongoing Sell-side advisor to the shareholders Undisclosed 2019 - ongoing Sell-side advisor to the shareholders Undisclosed • Ciklum: global market focus with 3,500+ developers across 12 delivery centers in Europe and Asia • AVentures: buy side adviser and BoD for 4 years • CoreValue: US market focused Salesforce consulting with 400+ developers across delivery centers in Ukraine and Poland • AVentures: buy side adviser for buy out of majority stake, minority investor and BoD member for 3 years • AVentures exited in 2019 • EU and global market focus with 450+ developers, delivery centers across Ukraine • Dedicated teams model for custom software development • US market focus with 150+ developers, on-shore delivery in North America and off-shore centers in Ukraine • Mix of dedicated teams and end-to-end solution development Viseven • 350+ developers, outsourcing and product company • #1 Pharma vertical player from Ukraine • Clients – top pharma companies globally
  31. 31. Industry thought leadership Software Development report: Poland, Romania, Ukraine and Belarus DealBook of Ukraine: annual overview of tech investments Publications in global media First-of-a-kind industry overview. Comprehensively covers industry metrics, trends and M&A activity in the region “Tech entrepreneurs see Ukraine as future IT leader” Link to the article “First Ukraine House to open at World Economic Forum in Davos” Link to the article “Why we are undervaluing Ukraine`s tech scene” Link to the article “Diane Francis: Turning Ukraine from the world`s bread basket to the world`s brain basket” Link to the article 31Click to access
  32. 32. First-of-a-kind industry overview. Comprehensively covers industry metrics, trends and M&A activity in the region Full Software Development Report: Poland, Romania, Ukraine and Belarus Download the full report: https://software-development-cee-report.com/ The region in numbers Total IT exports generated by Poland, Romania, Ukraine and Belarus$13bn+ Software development and technical specialists580k+ Technical graduates from 200 local universities and colleges annually 60k+ Count of IT Service M&A transactions in four countries in 2015-1876 Please find more details for each of the countries in the full report 32
  33. 33. Yevgen Sysoyev Managing Partner ys@aventurescapital.com • Technology advisory and investments background • Board Member and investor in a dozen technology product and service companies • INSEAD MBA with distinction, Math and Economics degree Yuliya Sychikova Associate yuliya@aventurescapital.com • Tech entrepreneurship and VC background • BA degree in Economics from the University of Pennsylvania Let`s talk? 33

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