May 3, 2016
Executives
Adam David - VP, Investor Relations, Pitney Bowes, Inc. Marc Bradley Lautenbach - President, Chief Executive Officer & Director Michael Monahan - Chief Operating & Financial Officer, Executive VP
Analysts
Kartik Mehta - Northcoast Research Partners LLC George K. F.
Tong - Piper Jaffray & Co. (Broker) Ananda P.
Baruah - Brean Capital LLC Shannon S. Cross - Cross Research LLC Glenn G.
Mattson - Ladenburg Thalmann & Co., Inc. (Broker) Allen Klee - Sidoti & Co.
LLC
Operator
Good morning and welcome to the Pitney Bowes First Quarter 2016 Results Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment.
Today's call is also being recorded. If you have any objections, please disconnect your lines at this time.
I would now like to introduce your speakers for today's conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Mr.
Michael Monahan, Executive Vice President, Chief Operating Officer and Chief Financial Officer; and Mr. Adam David, Vice President-Investor Relations.
Mr. David will now begin the call with the Safe Harbor overview.
Adam David - VP, Investor Relations, Pitney Bowes, Inc.
Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance.
Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our 2015 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations.
Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website.
Additionally, we have provided slides that summarize most of the points we will discuss during the call. These slides can also be found on our Investor Relations website.
Now, our President and Chief Executive Officer, Marc Lautenbach will start with a few opening remarks. Marc?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Thank you, Adam, and thanks, everyone for joining this morning for our first quarter earnings conference call. Last week, we made one of the most consequential announcements in Pitney Bowes' history.
We introduced the Pitney Bowes Commerce Cloud along with several SaaS-based products and solutions. This aligns our physical and digital capabilities, along with our mobile, location and e-commerce technologies, with all the end-to-end requirements that drive commerce.
To my mind, this was more than a product announcement. This is the foundation for all of our future products and solutions, adding digital capabilities and web-based solutions that span all of our business units.
It is also a demonstration of how we're redefining and transforming Pitney Bowes by expanding our reach as we cement existing client relationships and cultivate new ones. And it broadens our addressable market for our 1.5 million clients by an order of magnitude.
This is a substantial opportunity for our company and is consistent with the strategy we've been pursuing for the past three years. While our competitors may have parts for the commerce solution, we're the only company that provides such a broad range of commerce solutions that deliver the functionality, speed, and agility our clients need from small businesses to large global companies.
In addition to the launch of the Commerce Cloud, we achieved a number of milestones during the first quarter that will further advance our transformation. In January, we launched our first major television advertising campaign in 20 years.
We completed our move to a dealer market in Mexico, South Africa and five markets in Asia. And finally, we deployed our newly designed business processes and the accompanying technology in April.
While we sometimes refer to this as an ERP project, it is much bigger. It is a complete redesign of our business processes.
As we've said, this product is key for us to realize the benefits of the investments we have made and delivered new products such as those enabled by our Commerce Cloud. Those benefits are clearly in our sights and we are evaluating the feasibility of accelerating our business case.
Turning to the results for our first quarter, our financial performance was largely consistent and in line with our expectations, save our Software Solutions businesses. We turned in another strong performance in Presort and Global Ecommerce businesses, while SMB revenue trends continued to stabilize and improve.
SMB new equipment sales, a leading indicator of our future reoccurring revenue streams, were positive, highlighted by the largest growth in North America equipment sales in several years. However, our Software Solutions' business performance was disappointing.
Simply put, we did not execute and while the business issues we see are not complicated, we need to fix them. I'm confident that the new leadership team will.
We have the right products and our Software Solutions' strategy is resonating with our clients. During the quarter, we added a new President, a new leader to drive our channel strategy and a new Head of Marketing.
In December, we appointed a new worldwide sales leader to drive sales efficiency and productivity globally. We expect that this business can and should be better.
While the market conditions in the technology industry are currently not great, I'm confident that we will see a slow and steady improvement in our Software Solutions business throughout the year. Now, as I have every quarter, let me update you on our three strategic initiatives for creating long-term value: reinventing Mailing, operational excellence, and growth by providing access to our Digital Commerce capabilities across our business.
First, reinventing Mailing. The positive year-over-year growth in North America Mailing equipment sales and continued moderation of declines in International Mailing revenue reflect the benefits of rules we made to stabilize the business including go-to-market changes and realigning our geographic footprint.
We're not done and we'll continue to focus on enhancing sales productivity globally. Last week's launch of SendPro as an application in the Commerce Cloud is a great demonstration of how we're reinventing Mailing to deliver new value to our SMB clients.
We're integrating physical and digital technologies into more relevant solutions and enhancing their experience with us through digital interfaces. Next, operational excellence.
The new business processes and accompanying technology we're deploying is foundational to the globally integrated and a more efficient company. In two years, the benefits have moved from possible to probable and now to reality, and we did it on time.
Our successful launch in April in the U.S. and ongoing stabilization in Canada, are already starting to provide benefits for our clients in terms of improved business processes, enhanced productivity improvements, and easier access to a web store.
Their early returns are good and the issues are what we'd have expected and are manageable. As part of this initiative, we also deployed a client portal that provides better visibility into transaction data and client activity to help them better manage and anticipate their enterprise-wide needs and help us provide relevant recommendations for next actions.
And finally, grow our Digital Commerce Solutions by leveraging our existing client base. In the first quarter, Digital Commerce Solutions grew 11% despite being negatively impacted by our Software Solutions business.
Ecommerce continued to grow with the inclusion of retail revenue from Borderfree, and marketplace growth in the UK. Today, the Pitney Bowes Borderfree Retail platform has 222 store fronts and we're adding more every month.
We also saw an increase in the outbound package volumes. We're well-positioned to capitalize on the large opportunities that this market represents.
I continue to believe this is one of the most exciting opportunities I've ever seen in the technology industry. We're disappointed with our software performance in the Software Solutions business, but the issues are addressable and the other aspects of our long-term plan are coming together nicely.
We see a clear path forward and we'll not be deterred. I'm confident in our ability to deliver our long-term strategic plans and continue to unlock value for our shareholders.
With that, let me turn the call over to Mike.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Thank you, Marc, and good morning. As Marc discussed, the start to 2016 has been about achieving a number of milestones in the company's transformation; important milestones, in that they are solidifying the key financial drivers of our results over the next two years to three years.
We have now delivered a new operating platform and an initial set of cutting-edge solutions designed to sit on that platform. And, additionally, we completed a first quarter that validated our actions to stabilize and reinvent our Mailing business, but also highlighted areas like Software where we have further work to do.
Over the past two years-plus, we've implemented both a go-to-market channel transformation and a recasting of our direct distribution geographic footprint in our SMB business. Our first quarter results represent an important milestone.
On a constant currency basis, and when adjusted for recent market exits, global SMB grew equipment sales 3%, led by growth in North American Mailing, which had its best quarter of equipment sales growth in several years. In April, we took another critical step forward in delivering operational excellence that will not only reduce costs but dramatically enhances our ability to deliver and manage new products and services.
Following on our pilot in Canada in late 2015, we delivered our ERP platform in the U.S., along with a new web store and client portal that support our new Commerce Cloud solutions. While we remain in ramp-up phase, we have now enabled nearly 80% of our revenue base on the new platform.
This new platform and the solutions it supports, further fulfills the goal of bringing enterprise capabilities to our entire client base. Before turning to the specifics of the quarter, I also wanted to highlight that our investments in the company's future have been balanced with our commitment to managing total return to shareholders.
In addition to providing a competitive dividend, we repurchased 6.8 million shares of our common stock during the first quarter. I will take you through our first quarter results in a moment, but it's important to reiterate market sentiment that we have our eye on the prize.
The business model innovation we are achieving as a company, be it through our brands, infrastructure, technology or the solutions we offer to our clients, all are keeping us on track for attaining our long-term objectives. Turning to the quarter, we again experienced positive trends in a number of key indicators.
SMB equipment sales growth accelerated, which coupled with our recent market exits and previous EBIT margin improvements, reflect the successful transition in our go-to-market model in our SMB Solutions group. Our Presort Services continues to turn in a strong performance, once again, growing revenue and maintaining a strong EBIT margin.
Global Ecommerce also continues to perform well, with improving trends in both retail and marketplace volumes, with particular strength from our UK marketplace. We also continue to add new brands to our retail platform.
Production Mail and Software results were below our expectations and were impacted in-part by a weaker macroeconomic environment. Our Production Mail results, which can be lumpy at times, were a function of a weak pipeline coming into 2016, a shift to third-party mailers and recent small market exits.
As a result of focused pipeline build, we expect this business to strengthen beginning in the second quarter. As Marc discussed, we have more work to do in our Software business as the new management team focuses on improving sales efficiency and expanding our indirect channels to broaden our pipeline of opportunities, while also focusing on our new offerings.
When we provided guidance for 2016, we identified three factors that would affect our year-over-year comparison in the first quarter. First, the sale of our Imagitas business last May.
Imagitas contributed about $0.02 to earnings per share last year, which was not repeated this year. Second, the incremental expenses related to our advertising campaign and ERP implementation.
In aggregate, these lowered earnings per share by $0.04 per share in the quarter compared to the prior year. And third, we announced the exit of direct operations in Mexico, South Africa and five markets in Asia and the conversion of those markets to a dealer network.
In aggregate, these markets generated approximately $6 million in revenue in last year's first quarter, which was not repeated this year and thus had an adverse impact on our revenue comparisons, particularly in the International Mail and Production Mail segments. I will detail this further when I review our segment results.
Let me now take you through the high level financial results and then I'll drill down on each of the segments' results and provide some additional color around our guidance. Please note that a reconciliation of adjusted to GAAP financial information can be found in the financial schedules in our earnings press release and earnings slides posted to our pitneybowes.com website under the Investor Relations section.
Revenue for the first quarter totaled $845 million, which was a decline of 3% on a constant currency basis adjusted for recent market exits; a decline of 4% on a constant currency basis and 5% on a reported basis. Revenue in our SMB segment group declined 3% on a constant currency basis adjusted for recent market exits; declined 4% on a constant currency basis and 5% on a reported basis.
Revenue in our Enterprise Business Solutions group declined 1% on a constant currency basis adjusted for market exits; declined 2% on a constant currency basis and 3% on a reported basis. Digital Commerce Solutions revenue grew 11% on a constant currency basis and 9% on a reported basis.
Adjusted earnings per share from continuing operations were $0.34 for the first quarter. As noted when compared to the prior year, our adjusted earnings per share results were $0.02 lower due to income in the prior year before the sale of Imagitas, as well as $0.03 of incremental advertising expense and $0.01 of incremental ERP systems expense.
GAAP earnings per share were $0.30, which includes $0.02 in restructuring charges and $0.01 in disposition costs related to the recent market exits. Free cash flow was $60 million and we generated $58 million on a GAAP basis in cash from operations.
Compared to the prior year, free cash flow declined in part, due to the early payments to critical vendors resulting from the go-live blackout period of the new ERP program in the U.S. Free cash flow this quarter was also impacted by the lower net income, which was partly due to the incremental expenses related to the advertising campaign and ERP.
The slower decline in finance receivables resulting from favorable equipment sales also impacted the comparison to prior year. During the quarter, we returned cash to our shareholders in the form of share repurchases and dividends.
We spent $128 million on the repurchase for our common stock, buying 6.8 million shares in the quarter. We also paid $36 million in dividends to our common shareholders.
Additionally, we made $22 million in restructuring payments and made a $37 million contribution to our UK pension fund. From a debt management perspective, we obtained $300 million of bank term loans and refinanced a $371 million note that matured in January.
We disclosed this information in our prior earnings call. Turning to the income statement, adjusted earnings before interest and taxes, or adjusted EBIT, was $144 million this quarter, which was $34 million lower than the prior year as a result of the incremental advertising and ERP expenses, the sale of Imagitas, acquisition costs related to Borderfree and the decline in revenue.
Adjusted EBIT margin was 17%. Adding back depreciation and amortization, adjusted EBITDA for the quarter was $188 million.
SG&A for the quarter was $327 million, which was $12 million or 4% higher than the prior year. As a percent of revenue, SG&A was 38.7%, which was 340 basis points higher than the prior year.
The increase in SG&A was the result of incremental costs associated with the new advertising campaign and ERP implementation as well as the net increase in SG&A resulting from the acquisition of Borderfree. SG&A excluding these factors declined year-over-year.
During the quarter, we recorded a pre-tax restructuring charge of $7 million for actions taken in the first quarter to align our operations. Net interest expense, which includes financing interest was $34 million, which was a decline of about $9 million when compared to the prior year.
Average outstanding borrowings during the quarter were $178 million lower than the prior year. The average interest rate this quarter was 4.66%, which was 74 basis points lower than the prior year.
The effective tax rate on adjusted earnings for the quarter was 36.7%, which was 60 basis points lower than the prior year's tax rate, but above our expected tax rate for the full year, which we expect to still be between 32% and 35%. Now, I'd like to discuss the first quarter results for each of our business segments.
This information can also be found in our earnings press release and the slides that we post to the pb.com website, under the Investor Relations section. For SMB Solutions in North American Mailing, revenue for the quarter was $350 million, and EBIT was $156 million.
Revenue declined 3%, both on a constant currency and a reported basis. The rate of decline in revenue was in line with the prior quarter's results, which reflects a portfolio that is stabilizing and the maturing of our go-to-market changes, as well as our targeted marketing initiatives.
On a constant currency basis, equipment sales grew a strong 6% over prior year, which was the highest rate of growth in several years. Recurring revenue streams continue to decline, but are expected to benefit in future periods as the trend in equipment sales revenue improves.
EBIT margin continue to perform strongly at 44.6%, reflecting ongoing focus on productivity improvements. In International Mailing, revenue for the quarter was $104 million and EBIT was $12 million.
Revenue declined 7% on a constant currency basis and 11% on a reported basis. Adjusting constant currency revenue for the recent market exits, revenue declined 5%, which is an improvement from prior quarters.
Revenue benefited from equipment sales growth in France, Germany and Japan, as the go-to-market strategy matures and productivity benefits are being recognized. The decline in the recurring revenue stream was consistent with prior quarters and the trend is expected to improve in future periods as the trend in equipment sales revenue improves.
EBIT margin was 11.4%, which was a 130 basis points higher than prior year as a result of lower costs associated with the change in go-to-market. Turning to Enterprise Business Solutions, in Production Mail, revenue for the quarter was $87 million and EBIT was $7 million.
Revenue declined 11% on a constant currency basis and 12% on a reported basis. Adjusting constant currency revenue for the recent market exits, revenue declined 8%.
Equipment sales declined from prior year, partly due to fewer inserting equipment installations and the timing of closing some large deals. Support services and supplies revenue declined in part as a result of some in-house mailers shifting their mail processing to third-party outsourcers and the recent market exits.
EBIT margin was 7.8%, which was a decline of 130 basis points versus the prior year due to the lower revenue, especially the higher margin inserting equipment sales. In Presort Services, revenue for the quarter was $127 million and EBIT was $29 million.
Revenue and EBIT both grew 5% on a constant currency basis and reported basis. Revenue benefited from the higher volume of First Class mail processed as well as expansion into the St.
Louis market. EBIT margin continued to perform strongly at 22.7%.
Turning to Digital Commerce Solutions in Software, revenue for the quarter was $78 million, and EBIT was a loss of $3 million. Revenue declined 7% on a constant currency basis and 10% on a reported basis.
Revenue declined due to fewer large licensing deals and lower data-related licenses versus the prior year. The company is expanding its channel reach and focus on several high-potential industries and solutions, which have longer sales cycles.
As I mentioned earlier, the new management team is focused on improving sales efficiency and expanding our indirect channel to build the opportunity pipeline. EBIT margin was a negative 3%, largely as a result of the lower licensing revenue which has a high margin and increased selling and marketing investments.
In Global Ecommerce, revenue for the quarter was $98 million and EBIT was about $1 million. Revenue grew 31% on a constant currency basis and 30% on a reported basis.
Results included another full quarter of revenue from Borderfree. In the quarter, we grew the number of retail store front clients and had strong growth in the UK marketplace.
And although, the stronger U.S. dollar continued to have an impact on outbound demand, the recent trading range against key buying currencies resulted in improving volume trends through the course of the quarter in our U.S.
marketplace. EBIT margin was about 1% due to the amortization of acquisition-related intangible assets and investments in the business, which more than offset early synergy savings.
The business remains on track to achieve its synergy run-rate objective by the end of the year. That concludes my remarks on the segments.
Let me now take a moment to discuss our 2016 guidance. The company is reaffirming its annual revenue growth, adjusted earnings per share, and free cash flow guidance.
We expect revenue on a constant currency basis to be in the range of 1% decline to 2% growth. We also expect earnings per share to be in the range of $1.80 to $2 on both an adjusted and GAAP basis.
We also expect free cash flow to be in the range of $425 million to $525 million. It is important to note that the recent market exits will have an adverse impact on revenue comparisons each quarter this year.
In aggregate, the markets we exited generated approximately $26 million in revenue in 2015, and had an immaterial earnings contribution. While we have moved to indirect operations in both of those markets, we do not expect the same level of revenue in 2016, particularly in equipment sales and support services, which will negatively impact our year-over-year comparisons.
We're providing further detail on the timing of advertising and ERP expenses among the quarters. For the year, we now expect incremental marketing expense in the second quarter to have a similar impact on earnings as the first quarter.
The change in timing of the expense is related in part to an extension of the company's advertising campaign and support for the launch of the new Pitney Bowes Commerce Cloud solutions. Total annual expense is expected to remain the same.
Incremental ERP expense is expected to be the highest in the second quarter as the company supports the post launch implementation phase of its ERP platform in the U.S. The aggregate of these incremental advertising and ERP expenses in the second quarter are expected to be at a similar level to the impact on earnings in the first quarter or approximately $0.04 per share higher than the prior year.
As a reminder, we still expect to recognize the early benefits from the ERP implementation sometime in the third quarter and then ramp up more in the fourth quarter. Before I open the line for questions, I'd like to take a moment to note the recent launch of our Commerce Cloud, which is enabled by our new ERP platform.
The Commerce Cloud is a commerce enabler, providing access to solutions, analytics and APIs across the full commerce continuum. Commerce Cloud will enable us to easily and quickly provide our solutions and capabilities to all our clients.
As many of these SaaS-based solutions will be subscription- or usage-based, the financial impact will build over time, especially as we continue to add new applications. The Commerce Cloud and ERP platform are providing new value to our existing clients, and the opportunity to acquire new clients.
Operator, that concludes my remarks. Please open the line for questions.
Operator
Thank you. And we'll go the line of Kartik Mehta with Northcoast Research.
Please go ahead.
Kartik Mehta - Northcoast Research Partners LLC
Hey. Good morning, Marc and Mike.
Marc, I just wanted to ask you a little bit more about the Software business. It seems like you have confidence that the business can turnaround, but it's not performed up to your expectations the last couple of quarters.
I'm wondering what gives you the confidence that that can turnaround? Or what changes have been made that you can talk about that would give others confidence that that business could turnaround?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Thanks for the question, Kartik and I think it's an excellent question, one we've obviously thought a lot about. So, let me start with the market.
If you look at the market in the first quarter, business investment in the United States was down 6%. If you look at several of the large technology companies they had, I would say, similar results, some might have heard.
It's not a great market. And as you know, our long-term aspirations for this business are exactly that, long-term, so they transcend any one quarter.
That being said, I still think we can do better than the market here. And let me kind of give you a little bit of texture on the kinds of execution issues that we talked about.
So, there is different buckets. The first and Mike mentioned it, one of the places where we've been working, and this by the way, isn't the last three months or four months, this is the last several years, is to build an indirect channel with systems integrators.
We're making progress on that, albeit, it's much slower than I would like. And by systems integrators, it's the large technology systems integrators that you'd be familiar with.
Another change that we're making, our services attach rate to our license revenue has been less than we thought. So, we changed the compensation model to pay our sales force for services attach rate.
I'll give you a third example. We had too much of our resource stacked up on our install base.
So, in the first quarter – and by the way, again this was something that was contemplated before the previous regime. So, I don't want to paint this is something that the new guys have thought of.
This was something that started well before. But we have too much of our resource stacked in on our install base.
So, those are three kinds of examples. Now, let me kind of get to the underneath part of your question, why do – continue to be confident.
First of all, if you look at the nature of the problems, these are problems that while frustrating and there is no one more frustrated with our Software performance than me, they're fixable. Secondly, what I take great umbrage in and gives me the ultimate confidence is we got good products.
And you can see it in the affirmation that we've gotten from third-parties, we've gotten important affirmation in the first quarter. You can see it in the quality and the sophistication of the clients that are buying our software.
We just needed to do a better job executing. So, that kind of gives you a texture of how I think about the problem, why I am confident and we will improve going forward.
Kartik Mehta - Northcoast Research Partners LLC
Marc, just, the Software business, over the last couple of years, have you made changes to sales comp that you think could have resulted in this issue or have there been changes in the sales force that maybe as a result are taking a little bit longer for you to see the results you want. Could any of those issues have impacted the business?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
I would say we've fine-tuned the comp model. We've fine-tuned it in 2013, 2014 and 2015; that's kind of what I would say is a ongoing process.
I don't personally consider any of those changes that they made the last several years that material. In terms of things that take longer, it does take longer to build an indirect sales channel.
These arrangements with systems integrators take a while to land. Candidly they've taken longer than I would've hoped.
I've now personally interjected myself in those conversations, reaching out to my peers at these firms to see if we can accelerate it. And finally moving resources to white space are something that I'm highly confident will pay off over the long-term takes a while.
So you've got new folks calling on new clients, they've got to establish those relationship, they've got to reintroduce Pitney Bowes to these clients and it underlines why the advertising campaign is so important. The advertising campaign is important for multiple different reasons, but as you're trying to break into new markets, whether that be systems integrators or other aspects of indirect channel or new customers, having a degree of air cover so that we spend a little bit less time explaining who we are and the technology that we have and more time focusing on the client issues is a good thing
Kartik Mehta - Northcoast Research Partners LLC
And then, Mike, I just wanted to get your perspective on the second quarter. I know you gave some remarks about how you think second quarter outlook is going to be, but I just want to make sure that we're on the same page here.
As you look at the second quarter and some of the expenses related, were your comments more intended to say that second quarter earnings would mirror first quarter or were you saying that second quarter for this year would be equivalent to second quarter last year?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
I was just using year-over-year comparisons to highlight where there are differences. So to the extent that people look at prior year to extrapolate from a given quarter, what I was highlighting is the fact that on a year-over-year basis there is about $0.04 of incremental expenses specifically related to marketing and ERP that was not a comparison to the first quarter, only a comparison on a year-over-year basis in the second quarter.
Kartik Mehta - Northcoast Research Partners LLC
And then just last question, Mike. Obviously the first quarter didn't start off like you wanted to, but you seem confident about the full year, at least from a guidance standpoint, and I'm wondering why the confidence.
Is it the pipeline of business that you see or something else? Is it just greater cost savings than you anticipated?
I guess maybe what are the things that make you comfortable with the guidance?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yes, in terms of what makes us comfortable, I think are all the same things that we talked about really at our Analyst Day and when we gave guidance originally. So you do have a first quarter versus the rest of the year or first half, second half where we have significantly higher marketing costs related to our advertising campaign in the first half versus the second half.
We have higher ERP expenses because of the launch of our ERP program in North America and in sort of settling that out. That kind of reverses itself in the second half where the expenses related to build and all begin to come down, and then the benefits start to accrue to us.
In addition to that, we fully expect to get the full amount of synergies in our e-commerce business that we had outlined and that's part of our confidence as well. So a number of things, as well as obviously we would expect as we talked about improvements in the underlying operations of the business in line with the comments you heard.
Kartik Mehta - Northcoast Research Partners LLC
Thank you very much.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Thank you.
Operator
And we'll go to the line of George Tong with Piper Jaffray. Please go ahead.
George K. F. Tong - Piper Jaffray & Co. (Broker)
Hi. Thanks.
Good morning. With the U.S.
dollar weaker in 1Q, can you discuss how much of a lift that provided to cross-border e-commerce volumes and highlight factors that may have prevented e-commerce revenue growth from accelerating above 4Q levels?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
So, first of all, we did as you point out, George, see the strengthening of other currencies vis-à-vis the dollar, and we noticed that almost immediately in our business. Predominately we realized the benefits more in March than we did in the first two months.
It is one of the things that gives us confidence as we get into the balance – the rest of the year, a particular interest is the Canadian dollar and the Australian currency and both of those strengthened vis-à-vis the dollar. So we think that turns from what has been a headwind for the last several quarters to something that potentially can help us more in the back half of the year.
We'll see how it unfolds. A lot of people have guessed on currencies over the last couple of years and a lot of people have lost.
So while couple months doesn't make a trend, we'd like this currency environment to stay this way and continue to move. But it's going to be predicated on what happens with interest rates in the United States and around the world and that's hard to call.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
George, I would just say relative to the fourth quarter, obviously, there is some seasonality that plays into that as well. Fourth quarter is always the biggest quarter because of the holiday period, and first quarter is generally a slower, if not the slowest quarter in the year from a e-commerce cross-border perspective.
So the performance relative to that is also affected by seasonality.
George K. F. Tong - Piper Jaffray & Co. (Broker)
Got it. Would you expect – if we looked at the growth from a year-on-year perspective, does that help wash away some of the seasonality?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Maybe you can explain a little bit more about what you're asking?
George K. F. Tong - Piper Jaffray & Co. (Broker)
Yeah, we can I guess take that question offline.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Sure.
George K. F. Tong - Piper Jaffray & Co. (Broker)
I guess in the quarter SG&A as a percentage of revenue increased about 300 bps on a year-on-year basis. Notwithstanding incremental costs from the ERP implementation and marketing campaign, could you describe where expenses may have exceeded expectations?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
I think, generally, they were in line with what we would have expected. I think the other big variable from a year-over-year basis is the inclusion of the costs associated with the Borderfree acquisition.
So that would be the amortization of intangibles and the like versus Imagitas, which had a relatively low SG&A load. So that's one of the other drivers of comparability.
I think as we go forward and begin to recognize the benefits of the ERP program, we'll begin to see that reverse back.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
I would just build on your question a touch. If you look at the primary variances in the first quarter from what we expected versus what we saw, it really was as we said, principally around software expense followed pretty much what we thought, the other businesses followed what we thought.
Production Mail, we knew was going to be lumpy. We thought there might be some deals in the first quarter.
It turns out they were second quarter. But when we say the quarter turned out kind of the way we expected, let's say one item, that's kind of how we saw it.
George K. F. Tong - Piper Jaffray & Co. (Broker)
Yes. Yes, very helpful.
And then lastly, last week you introduced your new commerce cloud software offering. Can you discuss when you might expect to see revenue contributions from that launch and what the opportunities and challenges might be from a competitive and execution perspective?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
We expect to see revenue from that in the second quarter. And we've already seen first day orders and we're moving forward.
That said, I think it's important to understand that this is principally a SaaS-based model. And if you look at the evolution of SaaS-based companies and this is salesforce.com in 1999 and several others, it's a slow build and that's what we expect here.
And it was written about by several analysts, we see this as foundation to begin to unlock a whole new dimension of value to our 1.5 million clients. So we're taking orders.
It will help, but this is mostly material from a long-term perspective.
George K. F. Tong - Piper Jaffray & Co. (Broker)
Great. Thank you very much.
Operator
And our next question will come from Ananda Baruah with Brean Capital. Please go ahead.
Ananda P. Baruah - Brean Capital LLC
Hey. Thanks for taking the question, guys.
Yeah, actually I'd like to congratulate you on a pretty solid operational quarter. And I guess I'd kind of like to start, Marc, and my questions from there.
The headline EPS obviously is a bit of a miss, but operationally the revs were just 3% off the Street and software explains all of that. And the EBIT was just 3% off the Street and the software explains all of that.
So our math, Marc, completely aligns with your comments. And, I guess, what was a little bit different in our model aside from software would be interest tax and other income.
So I would love to get, Mike, maybe just kind of thoughts around how we should think about that, the non-operational stuff going forward. And then I have a couple quick follow-ups.
Thanks.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Sure. On interest, as I mentioned, we're year-over-year about $178 million lower in average debt outstanding in the quarter.
So that's a factor. We have a little bit more of a mix because we did some term loans of floating rate versus fixed rate, which has driven the overall interest rate down.
So we would expect interest expense to continue to have some favorability on a year-over-year basis. With respect to taxes, we had a higher-than-projected full-year tax rate in the first quarter in large part because of the concentration of our earnings in the U.S., which has a higher average tax rate.
So to the extent that we start to see a little better mix of earnings outside the U.S., and software being 50% outside the U.S. is part of that factor as well, we're still projecting a annualized tax rate in the 32% to 35% range, albeit we might be trending a little bit towards the higher-end than the midpoint.
Ananda P. Baruah - Brean Capital LLC
Got it. That's helpful.
And so it sounds like some mitigation on tax as we go through the year, but interest expense, should we think of as being relatively stable from a dollar perspective as we move through the year?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yeah. Obviously, it'll all depend on any changes in our overall debt levels, but I think the factors I described of lower average interest rate, which you saw is now at about 4.66% versus 5% plus last year and the lower average balances should keep interest expense down on a year-over-year basis.
Ananda P. Baruah - Brean Capital LLC
Okay, great. And then, Marc, just going back to sort of what's been I guess the success in the core metering business over the last few quarters, I believe this might be the third quarter in a row where you've had equipment sales growth and it sounds like you feel pretty good about the potential for, I guess, maybe than the growth as a whole for the near-term.
I'd love to just get your view on how you'd like us to think about not just the sustainability of what's been the equipment sales dynamic and how that manifested into the revenue growth dynamic, but also where maybe guys feel that you are holistically sort of in the saturation of the inside sales force. I don't think you're quite there yet.
In Europe, what you sort of announced this week ties into the web-based aspect. Is that the entirety of the web-based dynamic, the interfacing, or is there more to go there?
And I guess just the comments on the call you made about St. Louis expansion, an increase in First Class mail volume, I'd love to just get your sort of holistic view on that so we can dimension that appropriately.
I know that's a lot, but sort of talk about it. Thanks.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
That's heck of a question. So I continue to think about our SMB and Mailing business in the same dimensions that I always have.
We can get that business stabilized. That market is between minus 2% to minus 4% or minus 3%ish in the first quarter.
Clearly, with equipment sales 6% that means streams will catch up with that, and you're right that's been for the last several quarters. So we've explained that that takes a year or so to begin to run through the balance sheet, but the trends are clear.
I would take the opportunity to talk about the balance of the year in equipment sales. We think there is more we can do here.
That said, our second quarter maybe with the deployment of impact in ERP, we've got some work to do in the second quarter as relates to equipment sales. So there might be some timing issues second quarter to the third quarter.
But I think the trend over the last few quarters is clear, in that the new go-to-market as we move from face-to-face sales to inside sales is not only stabilizing but it's beginning to work. That being said, there is another turn of the crank, and you intimated to it, as we move to the web.
So one of the important things about the new technology platform that we have rolled out, one of the important things about the commerce cloud announcements is digitally enabling our relationships with our clients, so that it not only allows you more efficiency, but it will provide you a better way to make real-time offers to those clients. So it's one thing to make calls to 1.5 million clients.
It's another thing to send out an email blast to 1.5 million clients targeted based on their particular usage. So I think there is another turn of the crank here that will take us a while to get to, and then you throw on top of that the ability to drive new content into those relationships and then I think you've got a whole new ball game.
And that's why we're so excited about what we talked about last week. It is admittedly to the previous question, it's going to be a slow burn, but to have these 1.5 million client relationships and now have the ability to digitally interact with them and drive new content, new value into those relationships that I believe is a game changer for us.
So we're really excited about where we sit with that.
Ananda P. Baruah - Brean Capital LLC
That's great. That's good context and I appreciate it.
And just to finish that out, just the remarks about St. Louis expansion and increase in First Class mails that were in the prepared remarks...?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Sorry, I forgot. I'll let Mike do that one.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yes, sure. So, in terms of Presort, we continue to have a very solid growth in that business, a 5% top line growth that really was driven by increasing First Class mail volumes, and the reference to St.
Louis is we continue to see opportunities for expansion of the network given our ability to process mail and move it across the country. So we'll continue to look at other market opportunities for the Presort business to leverage the efficiency of that network.
Ananda P. Baruah - Brean Capital LLC
I got it. Okay, great.
Thanks a lot.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Thank you.
Operator
And our next question will come from Shannon Cross with Cross Research.
Shannon S. Cross - Cross Research LLC
Thank you very much. Mike, a question for you.
Just trying to go back to the EPS, given the EPS miss relative to expectations this quarter, at least relative to what Street was at, I'm trying to figure out, how to think about second quarter, and I understand, you have incremental expense related to ERP and the marketing, which is $0.04, tax looks like it will be on a year-over-year basis somewhat negative and then you have some benefit from share repurchase. So I'm just looking at this Street at $0.46 and looking at the fact that you did $0.34 this quarter and trying to think about where we should all, in your mind, come out given the puts and takes.
So maybe if you can just walk us through again, because I'd rather not see another quarter like this where we obviously were off relative to where your expectations were given the underlying strength in your business. So anything you can give us just sort of walk through that would be really helpful.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Sure. So very specifically I would say where we modified our guidance was in the timing of marketing expense.
So where we indicated last quarter that we expected the first quarter and fourth quarters to be the highest for marketing spend, we shifted that. We're continuing some of our advertising spend into the second quarter.
We're supporting our Commerce Cloud launch. So we've increased that marketing spend anticipation.
So, as I said, the marketing expense second quarter versus second quarter last year we expect to be $0.03 higher. ERP now that we're out live with the U.S.
in April, we're now in that, what we call, hyper-care period where we really are going through and invest in all the training and those types of things. We said that's a $0.05 or so higher than the prior year.
I think those are two things that are specific guidance adjustments that we've made in terms of timing of expenses now knowing that we've got the system out and knowing what we want to do in terms of support a Commerce Cloud and advertising. Beyond that I think the biggest variable from the first quarter is what the questions were about, which is the performance of the software business.
And as Marc said, we expect to continue to see some improvement in there, but it's not quite where we wanted to be yet. So I would say those were the major variables on a year-over-year basis.
Shannon S. Cross - Cross Research LLC
Okay, thank you. And then can you talk a bit about as the revenue comes through from the commerce cloud, what segments we should expect to see it because it's SMB and probably tied somewhat to the mail meters, but also I think there are parts of it that are commerce and parts of it that are software.
So how should we think about it as it ramps through your business?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yes, so in terms of the Commerce Cloud, as you saw there were five different solutions that were announced initially and there will be additional as we go forward. Some of those will accrue, particularly the software and ecommerce related ones will accrue to the DCS businesses, ecommerce and software businesses, location intelligence in the software business where you'll see some accruing to the SMB business will be particularly around SendPro, which is the multicarrier shipping solution.
There are add-on products around SendPro, so we have something called a SendKit that provides scale and other solutions for label printer for using the SendPro application, and then we've included the SendPro application in our high end metered series as well, so it's accessible through that, so in that case it accrues as basically a subscription added on to that equipment sale. So those are the main ways that it will affect the SMB business.
To Marc's earlier comment, in most all of these cases it will generate levels of recurring revenue that will help further mitigate the declines we've seen in some of our recurring revenue streams.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Hey, Shannon, can I just build on your question for a second, because it's one we're thinking about a lot as this business evolves, I mean how it is that we portray ourselves in a way that we're easily understandable. But one of the points that we've made for a while is the import of our digital capabilities transcends our Software segment.
So, a lot of these capabilities are things that were – capabilities that were born or nested within our Software business per se, other businesses are accruing the benefits of those. So, it's an important question to Michael, it's an important question how we present ourselves.
But, it's also I think an important question in terms of how it is that we amortize its capabilities over the breadth of the business.
Shannon S. Cross - Cross Research LLC
Great. Thank you.
And then, maybe, Marc, if you can talk a bit about – and now I just absolutely lost my question, but can you hold on for a second, because I did write it down.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Yeah.
Shannon S. Cross - Cross Research LLC
If you can talk a bit about any more divestitures, and you've done a good job of cleaning the business up. I mean, there have been a number of things that have moved and clearly we understand going indirect in some of the countries that you're going indirect in this quarter.
But, as you look at sort of the assets you have right now, do you think we're kind of through that period. And so, we won't have some of these where you got to pull revenue out, even though it's sort of business is still ongoing?
And then, also are there any other areas where you think you might want to augment more, and of course I'm getting back to my usual use of cash question here at the end of this. So, just any discussion about that, and then also you're kind of getting through the end of the share repurchase.
Any more thoughts on what your board is thinking with regard to return of cash to shareholders? Thanks.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Sure. So, again, a great question.
So, the way I think about the portfolio broadly is the portfolio needs to be congruent with three basic principles. They got to be leaders in their businesses, they've got to be strategically coherent, and they have to cover their return on investor capital.
The problem with answering your question is those dynamics move, so as value continues to move in different segments then that equation changes. So, we will continue to evaluate the portfolio in context of what we think is the best decision for our shareholders and best way to create value.
So, in the end, I like all the businesses, I'm wed to none of them. And we will continue to evaluate businesses, rolling the portfolio vis-à-vis those three strategic criteria.
As it relates to potential acquisitions, our focus continues to be within our digital commerce space broadly and ecommerce, I would, say is kind of the first amongst equals, but that's where we think we can get the best return for our shareholders. But again, we've put pretty strict criteria in terms of the types of financial metrics that acquisitions would have to conform to and we're not backing those.
And what I would say is acquisitions appear to us right now to be pretty expensive, so I thought to say, we won't do some, but when we look around the neighborhood, it seems time for us to close the math. So we continue to look, that we continue to think that's important option to have available to us, but at these prices hard to close the math.
In terms of uses of cash, one, again, the question that we think about a lot, I would just double click on your point, I mean, we did $5 million, $6 million or 6 million shares in the first quarter. And if you look at from 2015 to 2016, those two years I think we're close to like $260 million of share repurchases.
If you put that in context of what we said at Analyst Day, we talked about $1 billion of available free cash balance between acquisitions and return of cash to shareholders with a bias towards return of cash to shareholders. And I think we're fulfilling that promise as we saw at that time.
In terms of conversations with the shareholders, you wouldn't expect that – or conversations with the board, you wouldn't expect that I would reveal that beyond that this is an ongoing conversation that we talk about almost every board meeting in terms of trying to balance our uses of cash in a way that generates the best return for our shareholders.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yes, Shannon, I would just note that at the end of the first quarter, we still had about $90 million of authorization outstanding. So, we still have ways to go on current authorization.
Shannon S. Cross - Cross Research LLC
All right. Thank you very much.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Thank you.
Operator
And our next question will come from the line of Glenn Mattson with Ladenburg Thalmann. Please go ahead.
Glenn G. Mattson - Ladenburg Thalmann & Co., Inc. (Broker)
Yeah. Hi, good morning.
I would echo Ananda's comments that the quarter was pretty good ex-Software. But I would add that the SG&A expense is a little higher than expected, about $7 million.
And given the fact that you shifted the expense throughout the year from kind of a barbell approach to more frontend loaded, Mike, can you just give us an update if you include the cost savings expected this year from less expense on ERP netted with the higher marketing expense, kind of what the SG&A would be year-over-year for the full year?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yeah. What I would say is, we have not changed our annual outlook obviously for earnings per share and quite frankly on these expense items, so in aggregate, they're still in line with what we outlined for the full year.
It's really more of a timing related issue. So those are kind of baked into our assumptions with the higher expenses in the first half of the year and those coming down in the second half of the year.
From a marketing perspective, full year, we did talk to the fact that we had higher year-over-year total expense for the year and then we're trying to give some greater clarity on the timing of it. ERP, highest in the first half and then declining in the second half as we begin to ramp down, we still have some smaller markets to implement, but the bulk of the big build done and then beginning to get the benefits.
So, in aggregate, on the year we don't expect to change.
Glenn G. Mattson - Ladenburg Thalmann & Co., Inc. (Broker)
But I guess at this point, you're confident that you're not going to come back in middle of summer and evaluate this and say, you know what, we really need to continue to support these new initiatives, the Commerce Cloud and what not, and raise the marketing expense as we look in Q4?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
I would say that that's something we obviously continue to look at, but our plan right now encompasses the expenses as I laid it out. I would assume if we're having a tremendous benefit from it, we would always reconsider it.
But that is the plan as we have it right now.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
I would say the other thing on the advertising in particular, as we get into the back half of the year with the political campaigns that are going on, the advertising bias get progressively more expensive. So it's a different dynamic as you contemplate the second half of the year than it is right now.
Glenn G. Mattson - Ladenburg Thalmann & Co., Inc. (Broker)
Okay. Thanks.
And then just as we're talking about the Software, the two comments you made; one, that it was somewhat lower in the data related revenue. I'm wondering just a little more clarity on what that means?
And then, secondly, I think, Marc, you mentioned tying the business to high-impact industries, something along those lines that have longer sales cycles. So can you talk about where we are in penetrating that longer sales cycle at this point?
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Do you want to take the first one?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yeah. On the first one, we generally find that with license revenue, there is also the opportunity for data sets to be sold into that as well.
So on the lower license revenue, we did see some lower data as well. So that was part of the overall revenue challenge in Software in the first quarter.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
As it relates to your second question, the changes that began last year and we've continued with the shares, we've taken a portion of our Software sales force, moved them from an industry focus to more of a solution focus. So for example, move people from the finance industry to financial crimes.
As we did that, and this is the part that takes a little bit longer. We've moved them to what we call white space.
So think of that moving the resource from the install base to prospects. So that's what takes a while longer to begin to realize the benefits.
The other thing I'd say about Software is, in the context of the size of this business, 5 or 10 transactions can make a big difference one way or the other in a quarter. So it's one thing when you have a volume-based business that gets behind and trying to catch up throughout the course of the year, it's another thing when you have a business that has the potential for larger transactions to catch up.
Glenn G. Mattson - Ladenburg Thalmann & Co., Inc. (Broker)
Okay, great. Thanks.
Operator
And our next question in line will come from (1:01:12) with Northeast Investors. Please go ahead.
Unknown Speaker
Hi. Good morning.
I know that you haven't talked over, but I'm wondering if you can address the PBIH preferreds and what your plans are for them?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yeah. We continue to evaluate the largest on those and (1:1:33) whether we do a similar type of PBIH offering or if we were to replace it with a traditional PBI debt, but we have an ongoing evaluation of the market.
Unknown Speaker
So it sounds like you'll probably do something with them, not extend them in October.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
I would say it's very probable we will do something with them rather than extend them because the rate on those goes up quite a bit.
Unknown Speaker
Right. Great.
Thank you.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Thank you.
Operator
And our next question will come from the line of Allen Klee with Sidoti. Please go ahead.
Allen Klee - Sidoti & Co. LLC
Yes. Good morning.
In the prior two years, if we look at the first quarter versus the second quarter, we've seen a jump up of $0.04 to $0.05 in EPS sequentially. Could you remind us of what's been behind that and if there's any reason that – anything's changed on that?
Michael Monahan - Chief Operating & Financial Officer, Executive VP
Yeah. There is always seasonality.
First quarter is generally always, particularly for the mailing business, the lightest revenue quarter, and fourth quarter tends to be the greatest, but the second quarter and third quarter are usually bigger than the first quarter. There is also some seasonality in some of the other businesses, particularly in the Software business as well, which generally has its largest quarter in the fourth quarter and its lightest quarter in the first quarter.
So a lot of that's related to just client buying cycles and that generally gets better in the second quarter and third quarter relative to the first quarter.
Allen Klee - Sidoti & Co. LLC
Okay, great. And then on Software, I had two questions and I don't know if I missed this, but first have you said anything or any thoughts about a growth rate for the year?
And, second, it seems like in the last couple of quarters, the competitive environment has gotten tougher I would imagine and can you comment on that also? Thank you.
Michael Monahan - Chief Operating & Financial Officer, Executive VP
In terms of the growth rate, we haven't given a growth rate specific to the Software business. We do expect the DCS business as a whole to be a double-digit grower and that incorporate Software, so that's within that context.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
In terms of competitive environment, I don't think anything has materially changed in the competitive environment over the last couple of quarters. I mean these have been and continue to be competitive marketplaces.
There's a lot of great companies in there. That being said, we've evaluated the competitive dynamics of all of these segments and businesses that we're in and we're comfortable we can manage them.
Allen Klee - Sidoti & Co. LLC
Okay. Thank you.
Operator
And currently we have no further question in queue.
Marc Bradley Lautenbach - President, Chief Executive Officer & Director
Great. So out of deference to everyone's time let me wrap up.
Before I close I'd like to acknowledge Charlie McBride. As you all know, we announced Adam David as our new Vice President of Investor Relations.
Consequently, this would be Charlie's last call with all of us. Charlie has been a longstanding and important contributor to Pitney Bowes.
He has been here for 42 years. He has been in this particular role for 19 years, that's 76 quarters.
For those of you who think of life in that context as I do, and I can't tell you how important he has been to our transformation and to me personally. Charlie has been a tireless advisor.
He has helped us in what has been a very difficult transition over the last couple of years, and I personally will miss him and I want to take this opportunity to acknowledge and thank Charlie for all that he has done for our company for the last over four decades, which is hard to even contemplate. So, Charlie, I will miss you and thank you for all that you've done.
Let me now close. It's easy to get lost and amazed with numbers, but the bottom line is we continue to make good progress in transforming our business.
Our advertising campaign to reintroduce PB to the world, the deployment of our totally reengineered business processes and technology for 80% of our business, setting the stage for substantial benefit realization, resumption of equipment sales, our cash generation machine in North America, and finally the introduction of PB Commerce Cloud opening up a whole new set of opportunities to our 1.5 million clients. Bottom line, we are creating a foundation for our company to be successful well into the future.
I have never been more confident about our ability to deliver long-term strategic value to our shareholders. As I've said a countless times before, transformations are not a straight line.
We admittedly have some things that we need to clean up, but I think as we talked about, if you look at the body of work that we are undertaking, the problems have become very isolated into a single dimension. That's not to say that we won't have future problems in different places, but as we contemplate our transformation, we're now down to a fairly narrow set of problems that I think are manageable.
We've got a lot more to do, but we've created the foundation for those companies to be successful well unto the future. So we'll talk again in 90 days.
Thank you for your attention this morning.
Operator
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