Apple 2.0

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Apple's Q2 2013 earnings: What the analysts are saying

April 24, 2013: 10:16 AM ET

Solid quarter. Surprising cash plans. Worrisome guidance and lack of new products.

Screen Shot 2013-04-24 at 5.56.43 PMFORTUNE -- The reactions of analysts who tuned into Apple's (AAPL) earnings call Tuesday were all over the lot. There were things they liked, things they didn't and things they have to ponder some more.

Excerpts from the notes we've seen are posted below. This is our third and hopefully final take. Scroll to the bottom to see the notes we added after the second take.

Bernstein's Toni Sacconaghi: Debrief -- Several Puts and Takes; GM Erosion Worrisome, but the Fundamental Debate Remains the Same. "Overall, Apple's FY Q2 results were largely in-line with expectations, with revenues modestly higher and gross margins somewhat weaker. However, guidance was disappointing, even relative to our expectations, which were well below consensus... Apple announced a material increase (more than 2x) in its cash return to investors, which we had not expected would be announced coincident with earnings. On balance, we were pleased with the magnitude of the return, but would have preferred a higher dividend and lower buyback, and a cash return commitment that was expressed as a percentage of free cash flow... Apple executives stated twice that they expected "exciting" new products "in the fall" and "throughout 2014": this suggests that FY Q4 could potentially be very weak as well, depending on the exact timing of new product announcements (September vs. October), pointing to a possible overhang on the stock through earnings next quarter (FY Q3)." Lowers price target to $600 from $725. Maintains Outperform.

Goldman Sach's Bill Shope: $100 bn capital allocation partly eases sting of big EPS cut. "Apple reported better than expected March quarter results, but June quarter guidance was far worse than feared. The financials, however, were partly overshadowed by a remarkably large capital allocation program. Our sense is that the tepid guidance and increasingly depressed earnings trajectory will remain the key focus for investors, and concerns on this front are unlikely to completely subside until it becomes clear that Apple's next product and ecosystem refreshes can begin to form a bottom for earnings power. Meanwhile, the $100 billion capital allocation program through 2015 should provide a critical downside buffer for the shares in the short-term; over time, as the downside risks to Apple's steady state earnings power and cash flow subside, this hefty capital allocation activity and the prospects for steady increases in the dividend and buyback should provide a powerful accelerant for the share price recovery." Lowers price target to $500 from $575. Maintains Buy. 

J.P. Morgan's Mark Moscowitz: Results Beat; Soft Outlook Might Weigh Momentarily; Boost to Dividend/Buyback Could Set the Floor. "We are ... removing Apple from the J.P. Morgan Analyst Focus List, as we think the soft Jun-Q outlook could weigh momentarily and our estimate revisions result in our price target declining 25%. Despite the reset, we think that a compelling part of the stock's risk-reward profile is that upside potential can return to the model moving toward C2014. The company signaled on its Mar-Q earnings call that new products/categories stand to be introduced this fall and in F2014, which could render the softer Jun-Q outlook as near-bottom, in our view. Lowers price target to $545 from $725. Maintains Overweight. 

Deutsche Bank's Chris Whitmore: These Apples won't harvest before fall. "Apple more than doubled its capital return program from $45B to $100B by 2015 through a combination of: 1) share buyback authorization increased from $10B to 60B, 2) dividends increase and 3) RSU net share settlements of ~$1B per year. These shareholder friendly initiatives will certainly appeal to investors but does not hide the fact that Apple needs to introduce a 5 inch iPhone, a new 5S and a low cost iPhone for Emerging markets. We believe there is substantial appetite for a lower priced iPhone & believe AAPL would be well served to address the market with a 'good / better / best' segmentation strategy. Moreover, until investors get more visibility on new product launches, we expect AAPL to remain range-bound." Lowers price target to $480 from $575. Maintains Buy.  

RBC Capital's Amit Daryanani: Awaiting Product Innovation... Now Till Fall. "There was plenty for both bulls and bears to hold onto during the March-qtr call. Bulls will point towards - better capital allocation and new product launches, while Bears will focus on declining gross-margins and delays in new launches. We believe the stock is stuck in a trading range ($375-425) till we witness the launches in "fall" time frame." Lowers price target to $475 from $550. Maintains Outperform. 

Morgan Stanley's Katy Huberty: New Products and Easier Comps Drive Growth in Dec. "The key to AAPL working from here is 1) consensus Sept Q estimates moving closer to our $35B Rev / $7 EPS, 2) iOS7 preview with hints of new services, like mobile payments, at June WWDC, 3) return to EPS growth in C4Q13 on the back of new product launches and annualizing iPad Mini introduction." Lowers price target to $540 from $600. Maintains Overweight. 

Piper Jaffray's Gene Munster: Soft Guidance Offset By Capital Allocation And Talk Of New Products. "Our thesis on AAPL remains intact as CEO Tim Cook stated during the company's March earnings call that the company is looking at new product categories and has exciting product launches planned for the fall and throughout 2014. The announced additional $50B in share repurchases (using debt) was at the high end of buy side expectations. Additionally, we expect many analysts on the Street to re-set forward expectations to adjust for lower core iPhone growth. As we approach these product launches, paired with re-set numbers, we continue to believe that AAPL shares can trade higher through the back half of 2013." Maintains $688 price target and Overweight rating. 

Merrill Lynch's Scott Craig: Later product launch(es) offset by capital allocation. "1) Disappointing guidance means another negative revision... (2) New product launches later than expected. New iPhone(s) likely in late F4Q13/F1Q14, not F3Q13 as some expected. (3) Increased dividend (15%) and buyback by $50 billion through C2015, a clear positive, although dividend increase modest. Maintains $540 price target and Buy rating. 

Citi's Glen Yeung:  Buyback in Rearview Mirror, Weakening Fundamentals Now in Focus. "While bulls will laud Apple's substantial buyback increase, we note that its impact to EPS is more than nullified by Apple's below-consensus guidance. With capital allocation no longer a future catalyst, investor attention will likely revert back to fundamentals. Here we remain concerned about Apple share, noting that loss is clearly evident in F3Q13(Jun) guidance. Meanwhile, with iPhone mix already negatively impacting GM, our concerns about Apple's longer-term gross margin sustainability are supported. When then factoring in a relatively weak result from China (another area of concern for us), and the likelihood that iPhone5S is delayed, and we think the bear case outweighs the bull case. Although it is fair to say much has been built into the shares, in our view, we found little from Apple's results to warrant buying the shares: we remain in the minority by NOT recommending Apple shares." Lowers price target to $430 from $480. Maintains Neutral rating. 

Credit Suisse's Kulbinder Garcha: Cash Today, Recovery to Follow. "We see the recent announcements as mixed. On the one hand, the June quarter guidance suggests that investors will need to wait until 2H13 for new products. On the other hand, the company is returning $100bn to shareholders which should prove to be a near term benefit. Fundamentally, with a structural advantage in the compute market, Apple could deliver [long-term] EPS power of $60. Lowers price target to $525 from $600. Maintains Outperform.

Nomura's Stuart Jeffrey: Creaking Fundamentals Offset Cash Returns. "Falling ASPs, gross margins and market share might be a product-cycle issue, but it seems unlikely to us. Rising demand for iPhone 4 and lower storage versions all point to saturation of high end – at least for 4" screens – and point to further ASP and gross margin weakness. An evolutionary iPhone 5S will likely struggle to change this dynamic, while a mid-range iPhone could further pressure gross margins and ASPs... We had anticipated a late July to August launch of the iPhone 5S and mid- range iPhone, a date which component supply timings seem to support. Yet CEO Cook spoke of a Fall product release cycle, suggesting that the September quarter may see little benefit. Lowers price target to $420 from $490. Maintains Neutral. 

Barclay's Ben Reitzes: The Cash and the $7 Guide We Expected – Now What? "In line with our lowered estimates from last Friday, Apple issued guidance for $7 in EPS for the June quarter. While this guidance may provide a "jolt" to some investors, it does serve the purpose of reigning in outlandish predictions while maintaining margins above the key 36% level and helps make the stock investable into new product cycles that likely start in September (with builds hitting in June). The share repurchase also could help smooth the ongoing transition from growth to value holders. While the reception of the iPhone 5 and execution of late has tested our patience, the cash announcement, performance and guidance sets Apple up better into product cycles predicated on platform/service innovations." Maintains $465 price target and Overweight rating. 

BMO Capital's Keith Bachman: Using Increased Capital Allocation to Step to the Sidelines. "Apple posted a solid Q in terms of units/revenues, but disappointed with gross margins at the low end of the range (37.5%). As we had suggested, Apple materially increased its dividend and buyback. By our math, Apple will now have a 3% dividend yield and ~2% annual share buyback. However, we think the March Q results were also consistent with our longer- term concerns about Apple having to trade off revenue growth vs. margins. Moreover, while the material increase in capital allocation is a positive, we think the challenges of 1) increased competitiveness in the smartphone market, which we believe will pressure ASPs and margins – will largely offset 2) improved capital allocation. Lowers price target to $435 from $440. Downgrades to Market Perform from Outperform.  

Evercore's Robert Cihra: Revs Solidly In Line But Gross Margin Cloud Continues. "We believe AAPL remains too strong competitively (pioneering thin-client mobility w/ hardware+ software integration) and too cheap a stock not to own, with a big unlevered balance sheet to boot ($145B net cash). BUT the stock may keep struggling to turn until investors can get some sense of when/where GM's stabilize, with major new iPhone/iPad product cycles set to refresh but an impending low-cost iPhone looking to prove expansionary to TAM yet also further dilutive to margins as we've modeled." Lowers price target to $550 from $675. Maintains Overweight.  

Wells Fargo's Maynard Um: Sept Transition Should Be Better. "With an anticipation of a relatively soft Sept, investors may feel little reason to rush into AAPL shares until the June report. However, with what we feel is the worst behind us, we believe investors should not wait as we expect sentiment and supply chain news to start improving (with the caveat of whether sell-side Consensus sets the bar too high for the Sept. or Dec. qtr). Lowers "value range" to $485-525 from $600-630. Maintains Outperform.  

Oppenheimer's Ittai Kidron: Falling Far From The Tree. "Apple delivered an in-line bottom line for March and as expected weak June guidance. The poor guidance shouldn't surprise investors and likely reflects preparations for a Sept. qtr. iPhone transition and a June earnings trough. The new product anticipation, combined with the new capital return program (dividend increase and expanded buy-back authorization), could support the stock near term. However, multiples will still likely be permanently hurt as mix increasingly goes mid-tier and comes from international markets, competition rises and margins potentially remain under pressure... The next product cycle will make or break the stock. Lowers price target to $480 from $550. Maintains Outperform. 

Canaccord Genuity's T. Michael Walkley: $100B CASH RETURN TO INVESTORS HELPS OFFSET WEAK JUNE QUARTER GUIDANCE. "Consistent with our global wireless surveys indicating seasonally softer iPhone 5 sales combined with a stronger mix of legacy iPhone 4S/4 sales, Apple reported March quarter results in line with our estimates and slightly ahead of consensus. However, June quarter revenue and margin guidance failed to meet even our below-consensus estimates, as refreshes of key iPhone and iPad products are not expected to occur until the fall. Apple did announce a material increase in its buy back and dividend programs from $45B to $100B. We maintain our belief that Apple is well positioned to leverage its leading iOS ecosystem and large installed base, and new product launches expected in 2H/C2013 should result in reaccelerating Y/Y earnings growth during the September quarter. Lowers price target to $560 from $600. Maintains Buy.

Topeka's Brian White: On the Road to a Sustainable Stock Recovery - Better Times in FY14. "Last night, Apple reported 2QFY13 results and offered up a soft 3QFY13 sales outlook as we expected; however, the Company finally opened up the cash spigots and hinted at major innovations for a Fall release. As we indicated going into the print, we believe FY13 will prove to be a year to forget but FY14 will prove to be a year of new product innovations. Trading at less than 6x our CY13 EPS estimate (ex-cash), we believe Apple represents an attractive stock heading into this new product cycle in FY14." Maintains $888 price target and Buy rating.  

Oracle Investment's Laurence Isaac Balter: Grandma, time to buy Apple. "As we noted in our previous report, we expected Apple to give shareholders a jumbo dividend and buyback. They delivered. In pure dollar terms, Apple is now the largest dividend paying company in the world, surpassing Exxon by $1 Billion... Now that Apple has finally made that painful transition from a Growth stock to a Growth & Income stock, incoming shareholders will find it an excellent place to park their idle capital. We lower our target price to reflect the new reality. New shiny devices that come out of the belly of Cupertino are a bonus. Lowers price target to $600. Strong buy. 

ISI's Brian Marshall: Dealing with imperfect information... "AAPL enjoyed "faster- than-expected" share gains in the 5-year period starting in mid 2007 (i.e., 0% to ~10% share of the ~2 billion unit global handset industry) while most stories ultimately ended with "faster-than-expected" share losses (e.g., NOK, MOT, BBRY, PALM, SNE, HTC, etc.). It is therefore not surprising to see investors question whether AAPL will ultimately experience a similar downfall with iPhone market share going forward (e.g., no longer the hardware innovator, lacking certain price points, etc.). Despite the old saying the four most dangerous words in investing are "this time it's different," in our view, AAPL is different from the aforementioned companies due to the "competitive moat" created by the company's best-in-class software (e.g., iOS, graphical user interface, etc.) and a robust ecosystem (e.g., iTunes, App Store, iCloud, etc.). No doubt AAPL is at a critical juncture currently and we sincerely hope management navigates the waters accordingly over the next several months (e.g., introduction of low-cost iPhone, 5.0" iPhone, etc.)." Maintains $600 price target. Strong Buy.  

BGC's Colin Gillis: Haiku: March quarter was good, June guidance was very weak, buyback is massive. "Our thesis for upgrading the stock on Monday while shares were below $400 remains intact. 1)    The developer conference in June should showcase the impact of Jony Ive on iOS7, and update the look and feel of the operating system. 2)    The share repurchase program should provide a degree of support to the stock. 3)    The market has absorbed the June quarter outlook and remains above its 52-week low of $385.10 on April 19th. 4)    The product refresh cycle is coming... Structural problems of declining prices and margins remain an issue for Apple, but we see that the stock has troughed. We expect the stock trades in a range until the developer conference." Maintains $500 price target and Buy rating.

Jefferies' Peter Misek: Results Helped by Channel Fill; We Expect GM Pressure to Continue. "Channel fill increased iPhone shipments by 1M and iPad by 1.4M. FQ3 guidance was even lower than our pessimistic expectations and mgmt commentary of Fall product launches places CQ3 St ests at additional risk... Two positives: 1) the new product category implies iWatch or iTV or both. 2) Screen commentary suggests Apple has smartly reversed course on 5" screens. We think the single biggest determinant for the stock over the next 6-12 months will be the timing of the iPhone 6. We see a June 2014 launch as most likely though Apple is trying to bring it forward. Maintains $420 price target and Hold. 

Atlantic Equities' James Cordwell: Improving trajectory pushed out a quarter. "Q2 saw revenue upside but gross margin fell short due to a mix shift to lower ASP iPhone/iPads, a trend which seems set to continue. Commentary also implies no new products until fall, meaning Q4 may not offer the inflection we'd expected. More positively, the FY14 product pipeline sounds stronger and Apple raised its dividend/buybacks." Lowers price target to $500 from $550. Maintains Overweight. 

Societe Generale's Andy Perkins: Short-term problems as we wait for the next big thing. "The main problem is slowing iPhone sales and adverse mix (more older handsets in the mix). But the biggest news was a huge acceleration in returns to shareholders. The company will increase its dividend to $3.05 per quarter for a yield of over 3.0%. Additionally, Apple plans to buy back some $60bn in shares over the next three years, borrowing where necessary, reducing share capital by over 5% per year... Management implied that there would be no new products until fall, which probably means significantly lower results for both Q3 and Q4. The CEO flagged that the "potential for growth" was in new product categories but did not give any further details. The key here is new products. Apple customers are hugely loyal, at least for now. This means they have proved to be willing buyers of the next Apple product at high prices as long as the product is sufficiently innovative. Lowers price target to $500 from $560. Maintains Buy. 

Pacific Crest's Andy Hargreaves: FQ2 Results Support Our View That the High-End Market Is Saturated. "We believe Apple's FQ2 results support our thesis that the high-end smartphone market is rap- idly approaching saturation and that the tablet market is quickly transitioning to smaller form factors. This is likely to continue pressuring Apple's profit growth potential by driving slower unit volume and a mix shift to lower-end product, which typically generates lower gross profit dollars per unit. While new product introductions within the iPhone and iPad categories are likely to alter our earnings estimates over the next year, we believe total profit growth will remain stagnant unless Apple is able to create a massively successful new product or service category." Lowers "fair value" range to $415-$505 from $425-$520. Maintains Sector Perform.

Baird's William Power: Buyback Plan Positive, but Financial and Product Guidance Disappoint: "We applaud the long-awaited buyback and dividend increase, but remain concerned with increasing competitive pressures and the lack of a near-term product catalyst. In addition, company comments suggested that its next products might not launch until this fall, which could also create a challenging September quarter." Lowers target price to $438 from $465. Maintains Neutral rating.   

Janney's Bill Choi: How Much Gap Until Next Product? Assume September Launch, To Be Conservative. "Continued gross margin downside may keep investors on the sideline. GM of 37.7% (sic) was below our est. of 38.4% estimate. Overall product mix was a net benefit, and ASPs within product categories were largely in line with our assumptions; however, we believe iPhone and iPad product margins were flat and didn't improve sequentially as supply improved and cost reductions set in. We roughly calculate 47% iPhone margins and 22% iPad margins, both down significantly YoY as lower-priced products are doing well." Lowers price target to $500 from $520. Maintains Buy. 

CLSA's Avi Silver: Light at the end of the tunnel. "Apple has four product cycles on the horizon and we expect supply chain data points to reflect this and turn positive beginning in May/June. At current levels, we believe Apple's share price is discounting gross margin in the low-30's. As such, we believe Apple needs to stabilize, not necessarily expand, its gross margin. After significant underperformance YTD, we believe new product cycles and a huge $60bn buyback set the stock up well for outperformance. Lowers price target to $475 from $505. Maintains Outperform. 

Stifel's Aaron Rakers: Big Cap. Return Increase ($100B over 3-yrs), but Growth/Margin Concerns Remain. "While we believe Apple's significantly increased capital return program ($100B over next 3-years vs. prior $45B program; +15% div. increase and $60B share repo) will temper downside share pressure from these levels, we believe key investor concerns/questions remain – [long-term] GM% trend (F3Q13 guide down at 36%-37%), waning growth in China (though note below adjustments), product cycle timing, new product and services categories (e.g., iTV, mobile payments, etc.), and market maturation/competition." Maintains $600 price target and Buy rating. 

Cowan's Matthew Hoffman: Capital Return to Support Shares Until Fall Refresh. "We are lowering estimates to account for the company's "fall" new product launch commentary - our previous estimates had assumed an iPad refresh during the June quarter. We continue to expect a new iPhone in F4Q13 (September). The expanded buyback should provide some support to the shares until new product excitement builds." Maintains Outperform.

Morningstar's Brian Colello: Apple's Plan to Return Cash to Shareholders a Plus, but Soft Forecast and Margins Still a Concern. "We're modestly concerned about the company's third-quarter forecast until we gain further clarity on the timing of a new iPhone launch. Perhaps the biggest news, however, came from Apple's announcement of a 15% dividend increase, and an additional $50 billion stock buyback plan, as Apple distributes more of its vast cash cushion to investors... However, if an exciting iPhone 5S were to arrive this summer, as some of Apple's chip suppliers have hinted,we'd consider the weak guidance to be less of a concern. Maintains $600 "fair value" rating.

Hudson Square's Daniel Ernst: The Lost Year Indeed. "While the iPad Mini has driven margins down, we believe the product serves more as Halo than cannibal; a cheaper iPhone may or may not be helpful, though we do expect expansion to China Mobile at some point; given a history of leap frog product cycles, we expect a larger phone would have to wait till next year if indeed planned (although we note screen size is not a structural barrier), the TV industry remains large and elusive, and we continue to see more opportunity in a service than in hardware. Finally, commentary that new products were slated for the Fall suggest growth will not return this fiscal year." Maintains $700 price target and Buy rating. 

FBN's Shebly Seyrafi: Aggressive Capital Allocation Program Countered by Likely iPhone 5S Push-Out. "We are impressed by its new capital allocation program...however there are four areas of concern (ranked in order of importance): 1.) We now expect the iPhone 5S and low-end iPhones to come out in late FQ4/early FQ1 and therefore lower our FQ4/Sept. iPhone estimates from 41M units to 27M units; investors are going to have to wait an extra three months or so versus expectations before key product catalysts for AAPL start to work. 2.) AAPL is guiding below consensus for revenue in FQ3/June (revenue of $33.5- $35.5B is below $38.6-$39.4B consensus); this is causing us to lower our iPhone unit estimates for FQ3 to 26M from 30M before. We lower our FQ3 NG EPS estimate from $9.07 to $7.54. 3.) Investors are concerned about the continued decline in GMs. AAPL is guiding for FQ3 GM of 36-37%, lower than consensus of 38.6%. However, we see the GM guidance as reasonable in light of our reduction in iPhone unit estimates. 4.) CEO Tim Cook believes that there are many trade-offs to a larger screen iPhone and is implying that AAPL may not counter Samsung's offerings in this product category anytime soon. Perhaps this is posturing to not show the company's cards, but if AAPL is serious about this, we believe that it is making a huge mistake."  Lowers price target to $575 from $650. Maintains Outperform. 

William Blair's Anil Doradla: Reset in Expectations and Capital Announcement Reasons to Cheer, but It All Boils Down to the Innovation Pipeline. "Going into the quarter, we believe there were three key issues on investors' minds: resetting expectations for the June quarter, announcing a progressive dividend policy/share buyback, and providing greater confidence to investors regarding the company's road map and pipeline of innovations. While the first two issues were achieved, in our opinion, management did a poor job in making a compelling case on the third one. Given increasing investor concerns on Apple's competitive position in the smartphone space, we were hoping to receive greater color around Apple's ability to innovate and regain share-gain momentum. From our point of view, the Apple story boils down to one thing—the ability to generate new product cycles over the next six months, enabling revenue reacceleration and leverage." Maintains Outperform.

Berenberg's Adnaan Ahmad: Capital allocations versus fundamentals. "In our view, there are two camps of investors in the stock. First, there are those that think that Apple is in a transition period and that when new innovative products are launched, coupled with its new capital allocation policy, the stock will be extremely cheap on 9x a $50 earnings stream or a 6x PE ex-cash. Second, there are others that believe that as smartphone growth slows and the high end taps out, the main area of growth will shift to lower-priced devices, which will naturally will bring lower margins and potential substitution effects. This second camp's view on return of cash is to ask what good many tech names' capital allocation policies have done them when the fundamentals (growth profile and margins) are at risk... This business is fickle and the notion of an ecosystem is also waning, with Spotify, Gmail, Dropbox, Evernote and others all allowing users to switch between different platforms if they so wish. The bottom line is that while Apple may stem any near-term share price declines with its aggressive share buy-back programme, we think that the industry is maturing and that margins have peaked – and hence we remain fervent sellers of Apple, Samsung, HTC, Research in Motion, ZTE and Nokia." Maintains $360 price target and Sell rating. 

JMP's Alex Gauna: Apple Ups Dividend and Buyback Plans to Offset the Negative of a Greatly Diminished Outlook. "Apple guided F3Q13 revenue to a range of $33.5-$35.5B. This is the first year-over-year sales guide down in a decade, is significantly below industry trends being reported by supply chain vendors, and hence, represents the likelihood of substantial share loss by the company in coming quarters. Although specifics were scant, conference call comments suggested relief from new product introductions is unlikely until the fall. Target price still N/A. Maintains Market Perform rating. 

Global Equities' Trip Chowdhry: Quick take: "1) Dividends are bad for shareholders and only helps Off-Shore investors located in Tax-free zones. 2) Apple said they would be borrowing money to pay dividends.  This is a bad idea.  Instead Apple should repatriate the money lying outside USA, and pay Tax on it. 3) Apple should instead innovate.  Innovation generates ground breaking products which generate revenues, and with those revenues Apple can do Share buybacks and dividends. 4) Investors are wondering if Apple is Sugar coating lack of innovation following Steve Jobs death, with borrowing money to do Share Buyback and Dividends. Price target: $650. Overweight. 

That's the lot. Over and out.
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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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