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Q3 2024 23andMe Holding Co. Earnings Call

Participants

Anne Wojcicki; Chief Executive Officer, Co-Founder, Board Member; 23andMe Holding Co.

Joseph Selsavage; Interim Chief Financial Officer, Interim Chief Accounting Officer; 23andMe Holding Co.

Jennifer low; Head of Therapeutics Development; 23andMe Holding Co.

Presentation

Operator

Hello, and welcome to 23andMe's fiscal year 2024 third quarter financial results conference call. As a reminder, this call is being recorded. (Operator Instructions)
I would like to turn the call over to you Ian Cooney, Senior Director of Investor Relations at 23andMe to lead off the call. Thank you. Please go ahead.

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Thank you, Valerie. Before we begin, I encourage everyone to go to investors.23andMe.com. To find the press release we issued earlier today reporting our financial results for the third quarter for a replay of today's webcast will also be available on our website.
Please note that certain statements made during this call regarding matters that are not historical facts, including but not limited to, management as management's outlook or predictions for future periods are forward looking statements. These statements are based solely on information that is now available to us. We encourage you to review the section entitled Forward-Looking Statements in our press release, which applies to this call. Also, please refer to our SEC filings, which can be found on our website and the SEC's website for a discussion of numerous factors that may impact our future performance.
We also discuss certain non-GAAP measures. Important information on our use of these measures and reconciliation to US GAAP may be found in our earnings release.
Joining us on our call today are Anne Wojcicki, our Chief Executive Officer and Co-Founder; and Joe Selsavage, our Interim Chief Financial and Accounting Officer. Jennifer Low, our Head of Therapeutics Development will join us for Q&A.
I'd now like to turn the call over to Anne.

Anne Wojcicki

Thank you, Ian. The third quarter was busy and productive at 23andMe, we made meaningful strategic progress across our three businesses. We introduced our first integrated care offering with total health, signed a nonexclusive research agreement with GSK and filed our second IND in therapeutics. I am extremely proud of the effort put forth by our team as we work toward creating a new future of health care powered by genetics.
Starting with our consumer business, the third quarter saw the company execute on our strategic shift towards actively engaging with our customers on managing their health based on their unique genetics and lifestyle. In November, we introduced a new membership called Total Health, a personalized preventative care service and includes clinical-grade exome sequencing, biannual blood testing and access to clinicians from our Lemonade acquisition with unique training in genetics.
Members of total health received all the reports and features offered in our existing 23andMe plus membership, along with personalized guidance for ongoing disease prevention and early detection. This is an exciting step in our vision to bring accessible genetics driven preventative care to millions of our U.S. customers. In addition to the introduction of total health added more value to the 23andMe plus membership with the introduction of 23andMe health action plan and 23andMe help track these personalized action plans are part of our broader effort to help our customers take action based on their genetic insight and other data.
Over time, we will continue to add more dynamic recommendation contents and intuitive ways to track phenotypic inputs with the ultimate goal of helping customers improve their health span. 23andMe HealthTrust is a digital health tool that helps customers gain a more holistic picture of the risk for developing a particular condition by integrating lifestyle and genetic factors into a single model. For the first time with the goal of motivating behavior change, health action plan helps customers take the next step to improve their health by drawing on genetics health history and blood and biomarker data to provide tailored bite-sized health recommendations. We will continue to innovate in this area to create a dynamic, meaningful experience to help our customers optimize their health. We also continue to refine and improve our genetic reports and insights. Our updated rocket test allows us to report 44 additional variance in the Rocket one and Rocket two genes known to be associated with higher risk for breast, ovarian, prostate and pancreatic cancer. Many of these additional variants occur more often in populations that have traditionally been underserved by genetic testing, including the African-American and Hispanic Latino communities.
As part of our August FDA clearance, we were granted the first ever FDA predetermined change control plan, allowing us to continue to update our broker report with additional validated variants without additional pre-market review as we continue to invest in our personal genomic service business. We also focus on creating value for our customers through the uptake of membership services. We see repeated engagement by our customers, and they have shown interest in learning more about their genetics and how to apply those learnings for their lives. We are focused on moving to a membership model so that we can meet customer demand for more services as well as develop a recurring revenue stream that will allow us to continue to innovate and grow the business in a way that is most helpful to our customers and shareholders. We continue to prioritize price and efficient marketing spend.
As we look to move our PTS segment toward cash flow breakeven, we recognize this effort is likely to cause some uneven results in our business in the short term, and we saw some of that effect in Q three PGS. kit volumes were impacted in the quarter as we entered the holiday promotional period with firmer pricing discipline after raising prices for the first time since 2015. This plus an environment of macroeconomic and consumer uncertainty led to lower PGF. kit sales volume. We remain confident in our ability to transform our PDS segment into a sustainably growing and profitable business, and we are incredibly excited to help build towards the future of personalized preventative.
Hello transitioning over to therapeutics. We continue to advance our pipeline of clinical and preclinical programs. In November, we presented positive safety and preliminary efficacy data from a Phase one 2a clinical trial of our wholly owned immuno-oncology program, 23andMe six 10 at the Society for Immunotherapy of Cancer Annual Meeting.
The study demonstrated that 23andMe six 10 is well tolerated and shows promising preliminary efficacy and a number of patients with advanced solid malignancies. In December, we announced the further expansion of the ongoing Phase one 2a study to include an additional 30 patients with advanced neuro endocrine and ovarian cancers above the original enrollment goals. We are encouraged by the progress of six 10 and anticipate reporting further data later this year. The Company recently announced the U.S. Food and Drug Administration has cleared the IND application for 23 and me 1473 a natural killer cell activator intended to treat cancer 23andMe made plans to evaluate 1473 in participants with advanced solid tumors in a Phase one clinical study beginning in the first half of 2024 1473 targets. You will be P6 to restore antitumor immunity through NK and T cells. ULBP.s are stress induced ligands found on the surface of cancer cells that bind to the receptor and KG. two G. on NK and T cells cancers escape immune cell recognition by shedding ULBP. ligands from their cell surface, which acts as immunosuppressive molecular decoys blocking the binding of soluble your VP6 to NKG2D may restore immune cell recognition and killing of cancer. Further 1473 is Fc effector enhanced, which provides an additional mechanism for NK cells to induce cell death of your VP6 expressing cancer cells. 1473 also has the potential to address a major unmet need in cancer treatment patients who may who may have or may develop tumor resistance to checkpoint inhibitors. By combining NK and T cell activation, 1473 may initiate a broader and deeper response of the immune system to treat cancer cells, Andalay tumor resistance seen in treatment with traditional checkpoint inhibitors. This program validates the power of the 23 ME database for identifying novel therapeutic targets and highlights the team's ability to develop molecules and advance them into the clinic. But I also want to highlight that we launched our new therapeutics website at the end of December. We think the new site does a great job explaining how our team turns genetic insights into potential new therapies with a higher probability of success in the clinic and provides a great initial diligence refer for potential partners, collaborators and investors. I encourage everyone to visit the new site at therapeutics.23andMe.com.
Moving to the research business. In Q3, extended our collaboration with GSK into the six year. The new one year nonexclusive data license pays 23andMe $20 million upfront in exchange for GSK using the 23andMe database to conduct drug target discovery and other research. Importantly, this new collaboration is a sign of the significant value in the 23andMe database and the potential for continuous new insights and discoveries as we grow in size. The new collaboration is important for 23andMe as it generates $20 million and enables us to continue to collaborate with GSK, but in a nonexclusive way.
We are actively pursuing new partnerships with other therapeutic companies. The excitement around AI and data opens up a tremendous opportunity for 23andMe as companies are establishing their data strategies. Genetics is fundamental to the world of AI driven drug discovery. We look forward to updating you with as discussions progress.
As I look to 2024, I'm excited about the opportunities for 23andMe. There is a growing recognition about the potential for data and AI in drug discovery and we have an incredible asset that can accelerate and improve drug discovery for the industry for customers. We are getting closer to our ultimate vision of having a complete solution for people who want to actively engage in their wellness and prevent disease. We look forward to an exciting year.
With that, I'll turn the call over to Joe to review our financial results for the quarter. .

Joseph Selsavage

Thank you, Anne, and hello, everyone. I'd like to reiterate [Anne's] excitement about the future of precision health care 23andMe and I'm proud of our ability to execute while maintaining cost discipline amid our shift towards a more sustainable operating profile.
Revenue for the quarter was $45 million, representing a 33% decrease on another strong prior year comparable. Similar to last quarter, the year-over-year decrease in revenue was primarily due to the conclusion of our exclusive discovery term under the GSK collaboration in July as well as lower consumer services revenue in our PGSK. and telehealth businesses.
The decrease in consumer revenue was driven primarily by lower sales volumes as we entered the holiday promotional period with higher pricing than prior years. These efforts were intended to increase product margin through improved average selling prices and advertising efficiency, which remain a core focus of the company. But resulted in lower than expected unit sales for the quarter as we believe the combination of higher prices and extended macro headwinds placed the temporary damper on demand for our products, these decreases were partially offset by nonrecurring payments from other research partners in the current quarter and continued growth in our subscription services.
Looking at the composition of our revenue, consumer services revenue represented approximately 96% of total revenue for the quarter. And research services revenue, which is primarily derived from other research partners, accounted for approximately 4% of total revenue for the same period.
As a reminder, the new GSK data license announced in Q3 is expected to have minimal impact on this year's results, with the majority landing in fiscal year 25 given the terms of the agreement. Our gross profit for the third quarter was $20 million, representing a 35% decrease over the same period in the prior year. The decrease in Q3. Gross profit was driven primarily by the decrease in research services revenue while subscription revenue and improved telehealth margins. Following the August 2023 disposition of Lemonade Health Limited in the UK helped to offset to continued margin accretion within their respective categories.
Turning to our expenses, total operating expenses for the quarter were $301 million compared to $128 million for the same period in the prior year. The increase in operating expenses was primarily due to a $199 million noncash goodwill impairment charge taken over the quarter, which was partially offset by lower personnel-related expenses following work workforce reductions in prior quarters and the disposition of the UK entity. A noncash impairment charge for intangible assets in the prior period and lower therapeutics related R&D spend due to significant IND enabling activities also in the prior year.
Looking at the bottom line. Net loss for the quarter was $278 million compared to $92 million in the prior quarter. The increase in third quarter net loss was driven mainly by the lower revenues and goodwill impairment charge mentioned previously.
Next, our adjusted EBITDA. For details on how we define adjusted EBITDA as well as the corresponding reconciliations to GAAP, please see our earnings press release.
Total adjusted EBITDA deficit for the third quarter was $48 million compared to a $43 million deficit for the same period in the prior year. The increase in the adjusted EBITDA deficit was primarily due to lower revenue, partially offset by lower personnel costs and lower R&D spend described previously, we ended the quarter with $242 million in cash and cash equivalents compared to $387 million as of March 31, 2023. We intend to be judicious with our cash usage and believe the current level of cash supports 23andme plans for targeted investments in high ROI growth initiatives.
Now turning to our guidance. As a reminder, the company's full year fiscal 2024 guidance is based on the conservative approach, recognizing challenges in recent performance, continuing uncertainties in consumer sentiment, the macro economic environment geopolitical conditions. The company is adjusting its full year guidance for fiscal year 2024, which ends on March 31, 2024.
For revenue, we are updating our fiscal year 2024 guidance to be in the range of $215 million to $220 million, with net loss adjusted to be in the range of $520 million net loss to $525 million net loss. Full year adjusted EBITDA deficit is adjusted to be in the range of $180 million deficit to $185 million deficit for fiscal year 2024.
Our focus within the existing lines of the PGS and telehealth consumer businesses remains unchanged. We continue to prioritize margin expansion and progress towards cash flow profitability. These efforts include remaining disciplined with our pricing strategy to realize higher average selling prices ongoing value additions to our current services like the health action plan and help track features within 23andMe plus, expanding the recently introduced total health membership to a broader audience and streamlining the expense profiles of our consumer and therapeutic segments. Within the therapeutics and research businesses, we are investing only in projects we believe are most strategically and financially valuable and continue to explore potential partnerships and collaborations.
Wrapping up, we are pleased with the company's strategic progress and improved operating discipline. Given the current operating environment, we are being prudent in our planning and project prioritization while remaining incredibly optimistic about the future of the company and our ability to help people access understand and benefit from the Unum genome.
With that, let's open it up questions.

Question and Answer Session

Operator

(Operator Instructions) Steve Mah, TD Cowen.

Okay, great. Yeah. Apologies for the background noise. Could you comment on the recent and this questioner and I know kind of came across the wire of could you comment on your recent interview you gave on the consideration of splitting the consumer and therapeutics business, how would that look? Would it be a spin out of the therapeutics business into a private company with external financing or some other structure? How should we think about that?

Anne Wojcicki

Yeah. So that is the power that we are definitely pursuing and exploring all the time options or being able to fund progress going forward on the therapeutic side. So as you know, discovering and developing drugs is expensive. So if you look at where we are with the Phase two program with Peter Sachse and just initiating PGR 14 into the clinic as well as a very robust pipeline behind it. That's going to require capital.
So we have not made any definitive decisions about what we are going to do, but there's definitely opportunities and things that we are exploring with potentially having therapeutics the independents versus consumer either all just ideas that we are exploring right now. There's nothing definitive alliance opportunity that we're considering about what is -- what's going to be the best way to make consumer successful in the therapy interim.

Okay, thanks. We appreciate the color come in. With regards to 1473 ratio on track to initiate the Phase one clinical trials in the first half of this year?

Jennifer low

Yeah. I'm Jennifer Low as well. LoyaltyOne further question. But yes, we are on track for that.

Okay. Got it. Okay. I'll get back in the queue. Thanks.

Jennifer low

Okay. Thanks.

Operator

(Operator Instructions) David Lebowitz, Citi.

Hi guys. John for David, thanks for taking my questions. I got a few on our end. So building off of that report in Bloomberg about the potential split between the consumer business in the therapeutics business. Just wanted to dive into that a little bit more for you guys don't mind when thinking about potential implications as it relates to the different segments in your business, you have a consumer business, tech business, and a biotech business basically all in one. I guess can you just talk to the implications as it relates to? Yes, maybe expanding your investor base and better teasing out the individual value of the components within your business.

Anne Wojcicki

Sorry, I want to repeat the core part of the question?

Sure. So just as it relates to potential spin out. Can you talk about the potential implications as it relates to expanding your investor base and potentially better teasing out the value of the individual components of new business?

Anne Wojcicki

Yeah. I mean, look, I think that you you again, you deal with and you interact with different investors all the time and you recognize that people have very specific mandate. So there are some investors who are on everything, a biotech and some investors that are only looking at consumers and others that are focused on AI. And you are absolutely right that we are an unusual company in that we have all of that. We have a very robust consumer business. We have a very robust research database business, and we have a very robust therapeutics business. So that is definitely been brought to our attention that there's a number of different and then say well enough. And what's the best way to make sure that we're maximizing value.

Got it. Okay. That makes sense. And then one on the product launch with respect to total health, can you just walk us through some of your key learnings from the staff launch over the holidays and how you plan to use that experience to inform your rollout going forward?

Anne Wojcicki

Yeah. You know, total health, I mean, total health is has an incredible potential. And where we look at that may be taking off is in the world of self pay preventive care against a market that I think does not people want it, and it doesn't really exist right now. So total health right now goes in the line that was on the website. It goes in the lineup with other tests you have Ancestry, you have how many assets or you have health and ancillary plants and you have total health.
Well, we're really offering here is care. It is an opportunity to engage with a clinical product that are clinicians, health care providers that are looking all industrial genome and really thinking thoughtfully about how can you leverage your genetic information, your blood information, your wearables, your lifestyle, your family history or your medical records to think about a true preventive care plan. So in the deal we've soft launched, it really was, you know, knowing that there's going to be an early market of people who just want an XL. But but the product is a very different type of experience. And I think that more and more what you can imagine us doing well, well, telehealth is being able to help people not to get access to this information and to leverage it and integrate into their life.

Okay. No, that's helpful. Thank you. And then one more one last one on just on your new drug candidate, 1473 targeting ULB P6, can you just talk a little bit more about the target, like how it was determined if there are any other therapies going after your ULB P6 and if there's any clinical data that you're aware of that has helped to validate or de-risk the target?

Anne Wojcicki

Yes. Let me point you over to Jennifer Low

Jennifer low

Hi. ULBP6 target was one of those that have been identified through our genetic database and the premise of how we've been discovering potential targets at 23andMe immunotherapeutics. And this was right along on that line. And we're really interested in this because it highlights a jump of ways of approaching immune cells to attack cancer. And there are a lot of different other modalities out there right now that are on activating NK cells or trying to Covanta NK cells. We believe that our new drug that we're bringing into the clinic addressable monitor shortcoming of other on a bunch of programs and so this is a dual mechanism and the antibody that has on monoclonal antibody like half-life, it should be fun tolerated. It should really provide a novel way of activating NK cells and interest and unmet need.

Got it. And then just lastly, I'm sorry if I missed that. Did you say on if there's any clinical data that you're aware of that has helped to not a derisking.

Jennifer low

There are other programs that are also looking at the NK. pathway. So we have a lot of reasons to believe that this is a better way of addressing the issues that have plagued us on certain other programs programs. We are recharged CareAware competition but on. But we really feel that this is a novel and better way of addressing and say five dimensions.

Okay, great. Thanks for the questions.

Operator

(Operator Instructions) Steven Mah.

Yeah, hi. Great, guys.Thanks for taking the additional questions and apologies again for the noise back here. Maybe just digging in a little bit more on the total health launch. Maybe give us give us some color on how that's going, how you guys are measuring internally the success of that launch. And then yes, if there's any learnings that can be instructive to the margin to the existing customers, which I believe is slated for the spring?

Jennifer low

Yeah, we're not giving much on on total health. I think that more and more just it's the first meal integration with Lemonade and being able to have on one system access to care, being able to order blood being able to order medications at some point being above all in all in one and all of the 23andMe new brands. So I think that is one of the big milestone front. I think what you can also anticipate in the future as more and more, how do we bring what we're learning from total now also to all of our existing customers. So the 14 plus million customers that we have, how they can get a version of this type of care platform. So I think there's a lot that we've learned every time we have launched something new customers. I think there's a fair amount that we can learn about what is it they want, how are they adopting was the right way to explain it to them. As I mentioned before. I think that this is a and it's a big shift for us, too, from just being a test where people are getting information and learning about themselves to where they are now getting that information, but we are helping them apply it.
I also would just point to things like Health Tracks as a way that it held action plans as ways that we are looking more and more to be able to give you that genetic information, your wearables self report data all into a score that helps you understand really where you are at on a risk curve for specific disease conditions. So I think more and more you can see us integrating lots of different datasets to give you something that is truly personalized towards deals. And I think you can see us emphasizing more and more subscriptions, which we call membership membership product that help people get affordable for Ventiv's care.

Okay. That's helpful. And then one more question on the effort and the BD effort. In terms of partnering.

Jennifer low

We lost you there.

Operator

I would now like to turn the call back over to Ian for further questions.

Thank you. Must even jump back on. I will now read the top shareholder questions from our state technology Q&A platform. I'll probably go through five or six here. The first one, which is top of mind for shareholders versus the plan to stay compliant with Nasdaq listing requirements.

Anne Wojcicki

Yeah, it does something that Bob has been covered by breadth as well. We are actively monitoring market and staying on top of it in that fashion, considering things like a reverse stock split, but also the importance of continuing to execute on that show and confirming shareholder value.

Great answers on that theme. So the value of the kind of a second part of your question was, what are you doing to increase the value of the company we've talked about for the last call, but maybe you can go back and reiterate.

Anne Wojcicki

Yes. So three areas that I think are really looking for people just to remember that we focus on value. So as I mentioned on the consumer side, we are really focused on expanding the offerings we can provide to customers and very much and people buy our product and a one-time sale. And we think about lots of opportunities where we can engage people to come back and provide true value for them in the role that preventive care. And we can also establish and shouldn't be viable membership business where our customers are returning value with a solid and stable recurring business model for the company. And that is number one in consumer and that is very much focused this year.
On the search, the search is a fascinating area right now, particularly because of our incredible interest in the world of AI and how many are looking at how to even change their approach to drug discovery in started in many different ways, but the foundation builds in genetics, understanding human genetic understanding how that translates to biology and how you can leverage genetic information to identify drug targets and be more efficient in a tighter process. So we are very excited about our collaboration that we signed the term aggressive defendants to obtain the opportunity to do more and for us to meet our June July trends in February and L.A. and Therapeutics is a long journey and it's a very exciting journey. And I'm translating all the way into novel therapeutics. And I'm very excited about 1473 and the potential and the opportunity. And so we look forward to updating you on 1473 as aggressive, but I am very inspired and excited about what we have been able to do that translation of data information.

Okay, thank you. Problem. Is the cost of the data breach and what is the plan to increase security and restore trust, and that will.

Joseph Selsavage

We've incurred $2.7 million in expenses related to the data breach and data subscribers.
Turning to Finland, we to date have also booked$ 1 million and our financials in the 10-Q, which has been actually dropped $1.7 billion in anticipated insurance recoveries. And so we continue to invest in data security. We now require two factor authentication from all of our customers and our business, for example, the trust of our customers, right? It's probably the highest regard dependents doing this a long time and continue to drive innovation and using genetic comfortable managed helpers to improve their uptime. And for us, we will continue to look at how we can continue to increase data security as a payment.

Anne Wojcicki

And I would say the company has been a top priority inside the company, but given security and privacy and transparency are core values for the Company. So we have, as Jim mentioned, we have instituted feedback to that occasion. And it is, of course, a critical priority for us to gain new insight again on steel will continue to see the private gives you the confidence that the venture into a new era of how people are thinking about all that data.

Okay, thank you. Next question comes from Macquarie Group and then a little further and causing a new photographic quality data, you have the best product out there.

Anne Wojcicki

Are you engaged with Verizon specifically for a U.S. based business that use the value of that opinion for the bumping that Jaime events came by maintaining tight today and anything data trends are often better industry, and it did not come in place. Interiors for the entire healthcare space is particularly exciting for the broader drug discovery because discovery is so challenging and so expenses. So anything you can do that is going to make it more efficient for us to have a higher likelihood of success in some of the chip about that have queued up a huge, huge benefit for them available. So we see a lot of opportunities for our data on behalf of our clients just because ethanol can effectively and base pricing out there to do design investments. We started the companies vying for research. So we have been engaging in Swedish project product selection as a company, we have a tremendous amount of experience with translating that data lake and or our therapeutics. So we are working on partnerships that mark to mine the data and beverages. There's all kinds of areas that everybody in the industry and people who I'm very familiar with AI models and that this could fit in with some of the work that they're already doing.
And then you get other groups that have different types of approaches of how we leverage genetics for drug discovery for the very exciting time. There's no doubt that having lots of data is that going to be a foundation for therapeutic discovery in the future. And we are also leveraging all the data for Actuate Remy internal research and meaning that we are translating that for customers, what are ways that we can leverage all of these insights and be world leaders in risk prediction. And we're also doing a fair amount of work, understanding how you can do G&A language models and how we can be best at predicting financial target, targeted innovation for therapeutics. And so there's a lot of great opportunities out there, and we continue to stay on top of this industry.

Excellent. So last one here for Joe. Can you address how to the extent you can any way how you plan to move the business toward profitability.

Joseph Selsavage

We were pleased with the progress we've made to date over the past year and moving the business to profitability is really a two-pronged effort the most important thing, driving our growth in both membership and research businesses to have ongoing recurring revenue. And we can also continue to look at how we can optimize our cost structure and really have a high bar for how we invest in the business in the near term.

Right. That's it for us.

Operator

Thanks for joining us. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great evening.