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Optical/IP

Nortel to Sell Carrier Ethernet, Optical Biz

Nortel Networks Ltd. is to quit the optical and carrier Ethernet markets, the company announced today.

Nortel says it is to undergo a significant revamp in the coming months, part of which will be an attempt to sell its Metro Ethernet Networks (MEN) division, which supplies optical and Ethernet equipment to carriers and cable operators. (See Nortel Rolls On With 40-Gig, Nortel Wins PBB Deal With Verizon, Virgin Deploys 40-Gig, Nortel Intros 40 Gig, 100 Gig, and Comcast, Nortel Put 100G to the Test .)

The news, a further indication that the company sees its future primarily as an enterprise technology provider, came hand-in-hand with a profits warning and plans for further cost reductions, in addition to the cuts announced earlier this year. (See Nortel Slashes 2,100 Jobs.)

In a statement released shortly after 6 a.m. (Eastern), Nortel's CEO Mike Zafirovski noted: "It is clear that the business environment in which we operate requires additional immediate and decisive actions... A comprehensive review of our business is taking place and we are determined to reshape the Company to maximize its competitiveness, drive a significant increase in effectiveness and efficiency company-wide, and re-focus to establish a clear path for growth, profitability and renewed shareholder value."

That review includes planning for as yet unspecified additional restructuring and cost-cutting measures that will result in a "more competitive business structure," and moves to mitigate the risks associated with Nortel's planned 4G wireless investments. (See Nortel Flunks WiMax and Zafirovski: We'll Get 4G Right.)

The restructuring also includes the intended sale of the MEN business, which Nortel describes as a "premium asset with a highly differentiated offering." (See Nortel Aims for Ethernet Profits.)

So why sell? Because the market, which is populated by the likes of Alcatel-Lucent (NYSE: ALU), Ciena Corp. (NYSE: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), ECI Telecom Ltd. , Ericsson AB (Nasdaq: ERIC), Fujitsu Ltd. (Tokyo: 6702; London: FUJ; OTC: FJTSY), Huawei Technologies Co. Ltd. , Juniper Networks Inc. (NYSE: JNPR), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and many others, is just too competitive. Zafirovski has long said he is only interested, long term, in markets where Nortel can be a market leader and make money. (See Nortel CEO Maps Out His Vision.)

While it might be regarded as one of the leading players in the optical and carrier Ethernet equipment markets, where it has pushed hard to establish PBT (Provider Backbone Transport) as a viable technology, Nortel has struggled to make money from the division. (See Infonetics Reports on Optical, Nortel: There's More to PBT Than BT, and A Guide to PBT/PBB-TE.)

In the second quarter of this year, the MEN division reported revenues of $378 million, up 4 percent year on year and up 16 percent sequentially. The division's operating margin for that quarter was 4.5 percent, resulting in an operating profit of $17 million, but for the first half of this year MEN's operating margin was minus 1.1 percent for an operating loss of $7.8 million from revenues of $705 million.

Zafirovski noted: "Monetization of this asset is in line with the further consolidation necessary in the industry and will provide MEN customers and employees with a clear path forward. Throughout the process, Nortel will maintain MEN R&D investments, new product introduction timelines and all customer commitments."

The news came as Nortel announced that the second half of 2008 is to be weaker than expected, forcing the company to revise its revenue estimates.

The current "sustained and expanding economic downturn" means Nortel is "experiencing significant pressure as Carrier customers cut back their capital expenditures further than previously expected and certain Enterprise and Metro Ethernet customers defer new IT and optical investments."

Nortel isn't alone in being hit hard by the current global downturn. (See Ciena CEO: Slowdown Looks Shortlived, Sonus Slumps on Slower Growth Outlook, Cisco: Economic Troubles Aren't Over, and AlcaLu's Q2 Dragged Down by CDMA.) As a result, Nortel now expects its third-quarter revenues to be about $2.3 billion, compared with the $2.66 billion that Wall Street had been expecting.

In addition, Nortel now expects full-year revenues to be down between 2 and 4 percent compared with 2007, with gross margins of 42 percent for the year.

Only six weeks ago Nortel had advised that full-year revenues were on course to grow in the low single digits (between 1 and 3 percent inclusive) and achieve gross margins of 43 percent. (See CDMA, Charges Knock Nortel.)

In 2007, Nortel reported revenues of $10.95 billion. So now, instead of the previously forecast 2008 revenues of between $11.06 billion and $11.28 billion, Nortel is now expecting full-year revenues of between $10.51 billion and $10.73 billion. That represents a potential shortfall of $770 million in terms of anticipated 2008 sales.

On average, financial analysts had, until today, been expecting 2008 revenues of $11.2 billion, so there are some spreadsheet revisions to be done this morning.

Nortel's share price ended Tuesday at $5.30 but is trading down $0.80, more than 15 percent, to $4.50 in pre-market trading this morning.

— Ray Le Maistre, International News Editor, Light Reading

rjmcmahon 12/5/2012 | 3:31:38 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz mg; I sorta agree that new thinking is required. I'd probably word it differently though, calling it accurate thought (or its inverse, the removal of thought errors.)

History reveals that about every form of finance and ownership mechanisms used to motivate human behavior have been tried. From Samuel Insull to Skilling. From Wall Street printing equities to states printing bonds. All the ideas are out there and not much new thinking seems required here.

If the challenge we face isn't lack of ideas maybe it is a distortion in perceptions? Let me start with one possibility being the fear of monopoly. Our judgment says that monopoly is bad or evil as it can produce excessive profits for owners at expense of customers. The reality is that natural monopoly is can not be this when the capital has not been sunk. Sadly our society's approach to cope with this perceived "fear" of future monopolistic behavior is really ineffective. (Better may be to exploit the greed component which could motivate actual construction.)

So let's look at what broadband networks are (at least as of today._ While we agree that communications networks are natural monopolies, this is not a stagnant thing. On the front side it is much different than the back side. The difference between a build ahead of demand piece of infrastructure the enables a society vs. the exploitation of inheritance that the PSTN represents (and not only in trope.)

Broadband is not a pay as you go nor is it incremental. It doesn't work that way. It is and must be a step function. An improvement in and of magnitude.

To date no sweated labor has been done nor has capital been sunk, no regulators have been captured nor have profits been exploited. Why not?

Why hasn't a broadband monopoly been realized? For fear that monopolies are evil? That regulators will be captured? That profits will be exploited at the expense of customers? That the status quo will destroy those that strive for continuous human progress?

I think these are all cognitive distortions that are holding us back. Correcting these seem like the first order of business to me.
materialgirl 12/5/2012 | 3:31:41 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Dear RJM:

That is my point. We don't know what will work as much as what won't work. I fully agree that networks are natural monopolies, yet monopolies fail to address user needs with time. They also capture their regulators.

That just means we need to try new thinking, with trials of different strategies playing out over time to determine what unintended consequences raise their heads at scale. That in turn, takes time and money, which are the very things we are pissing away.

In eight years, while the ultimate goal has been clear to many, we have collectively:

1)Tried nothing new.
2)Invested existing cash in failed attempts to extend the status quo of service providers.
3)Squandered the rest of the capital of our system in unproductive real estate.

What fools.
Fibre Bundle 12/5/2012 | 3:31:43 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz new Nortel webside! -).

rjmcmahon 12/5/2012 | 3:31:44 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz re: "You want competition, open the barrier to the market --- I don't care how, legislation, regulation or whatever."

I don't really care much about competition though I do care about outcomes. The outcome needed here is investment and access to opportunities which support things like self expression. If that enables competition, so be it. But using competition as proxy to measure performance here is sorta a tautology which assumes incorrectly and measures the wrong thing.

Competition is a rivalry between individuals, groups, or nations for territory or resources. It arises whenever two or more parties strive for a goal that cannot be shared.

For the idealists amongst us, what we want to measure is access to opportunity and things like liberty.

Liberty, the freedom to act or believe without being stopped by unnecessary force. In modern time, is generally considered a concept of political philosophy and identifies the condition in which an individual has the ability to act according to his or her own will.

IMHO, those that focus on the latter will be doing more for society than those that idolize the former.
rjmcmahon 12/5/2012 | 3:31:45 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz mg; I don't think a bunch of co-ops will get the job done in scale. I think what is needed are new monopolies. The first gals to build real broadband win exclusivity for 30 years. The only way she loses it is for non performance. Something like that might attract capital, capital that didn't flow towards these infrastructures despite two of the largest financial bubbles in recent history.
materialgirl 12/5/2012 | 3:31:46 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Make that RJM.
rjs 12/5/2012 | 3:31:46 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz RJM:

The two issues are independent. Separation of of Bit Carriers from service providers without tie-in is an end result. You are going into the detailed mechanics of how to.

What I am stressing is that once you separate the services and make the system open and transparent enough, you will have the market competition. It sure is a good place to start. Looking for an all or nothing solution is sure fire way of getting nothing done.

I am looking for the end result and I don't care how you skin the cat.


Finally, let me assure you that even with regulated utilities, barriers to market get erected very quickly. Case in point, the energy crisis in US. The power companies owning the power lines will fight tooth and nail with all their political power to prevent an open electricity market. No competition here, even if
the renewables could come in lower in price than coal.


You want competition, open the barrier to the market --- I don't care how, legislation, regulation or whatever.

Keep in mind that
corporations, unlike humans, DO NOT suffer from pangs of altruism.

-RJS
materialgirl 12/5/2012 | 3:31:46 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Dear JRM:

Everything you said is right, hence the problem. This administration has chosen to pretend the free markets, as defined by telco vs. cableco competition, will provide users what they want. The whole premise is hogwash.

We need to all hold hands, sing Koom By Ya, and admit to ourselves comms is fundamentally a monopoly, at least at the local level. It should be owned at the local level, with a financial incentive not to maximize profits for remote shareholders, but to provide local bandwidth at the lowest price. A co-op if you will. This is happening by accident in VT, where a smart couple is fibering the state.

This is not an easy nut to crack, which is why it is sad we spent the last 8 years not discussing how to do this.
rjmcmahon 12/5/2012 | 3:31:47 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz re: "The regulations preventing competition have killed the teleco market."

With all due respect, when one turns towards blaming in order to cope with perceived failures it's time to look deeper and make sure our cognitions reflect reality.

In this case here are some other perceptions which I believe to be accurate.

o These networks are natural monopolies
o Natural monopolies are an economic condition, i.e. they are not created by government
o Best attempts at regulating into existence competition under these conditions, e.g. the 96 Telco Act and ILEC competition, have proven futile.
o Regulatory capture is par for the course in utilities
o Market failure combined with regulatory capture has occurred for US broadband networks
o Competition as a solution is based on belief rather than making observations of what has worked in the past under similar conditions.

So yes, the regulators have failed. But so has the misguided belief in markets and competition. The pot calling the kettle black and vice-versa isn't going to stimulate investment into natural monopolies. For that we'll need to resolve the false dualism.
rjs 12/5/2012 | 3:31:47 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz You NAILED it Materialgirl.

The regulations preventing competition have
killed the teleco market.

The Cable MSO and teleco 3 have consistently insisted on tying-in bit carriers with content and services. Commoditization of bit carriage (also called "dumb pipes") is what makes the network useful and that is what these oligopolies will fight with their last breath.

No hope for the NA teleco market. It is dead.
It reminds me of the Soviet Union.

-RJS
GemfireCanada 12/5/2012 | 3:31:49 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz This would be a great buy for Huawei in my opinion and give them instant legitimacy in the NA market. Also given their buying power they could substantially reduce costs very quickly.
davallan 12/5/2012 | 3:31:49 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz mtb826.....

Would you care to elucidate the differences between PBB and PBB-TE? BTW This is not a trick question....

chechaco...

Why do you think PBB-TE is not suited to legacy and limited to p2p for Ethernet UNI only?, Once packetized, stuff does not tend to care about the wrapper....

I get the feeling you've read propaganda and not gone to primary sources....Facts please!

D
mtb826 12/5/2012 | 3:31:50 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Abashford,
Get a clue, PBB is not PBB-TE and none of the key vendors in the ME space are supporting PBB-TE.

stephencooke 12/5/2012 | 3:31:50 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Hi,

My connections to Nortel include an interview for the CTO position a few years ago when Mike Z was first brought on board (he had already decided that he didn't want an x-Nortel person for the position) and about 10 years in the optical development and sales organizations. I have many friends who are still there (a lot fewer than years ago).

The way the accountants have destroyed this formerly prestigious company makes me sick. There is absolutely no medium-long term thinking there anymore. Suggestions of new ideas in this timeframe could make one a layoff candidate... quickly.

In a downward, competitive market you do NOT want an accountant running the company. This leads to short-term cost-cutting and layoffs that slowly kill the company. The innovation that NEEDS to occur for corporate health is simply stifled and/or punished.

GoodBye Nortel, it was fun while it lasted. I wish all the MEN employees well.

Steve.
jepovic 12/5/2012 | 3:31:51 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz They should've sold the entire company while they could. What's the point of selling it piece by piece like this? Customers get scared and choose other suppliers, thus lowering the value even more. Is there anybody who believes the remains of Nortel will be able to succeed on its own? Essentially a North-American PBX business.

I would've done it the old-fashioned way: Talk to all the prospective buyers, lower the price until one of them accepts it. THEN I would announce the deal. It hurts, but it's better long-term.

Look at Lucent. Sure they are now dragging the once prosperous Alcatel into the mud, but from a ahreholder perspective it was a great idea to sell while it was possible.
freetoair 12/5/2012 | 3:31:52 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz K28 makes a good point...

But even broader is the management of the "communication" in the press release - yes they are calling the Qtr down - but the wording in the PR essentially guaranteed the stock would tank (from its already pitiful level) and put a fatal bullet into the company???

Zafirovski has failed and with this poor handling of his own failure - he should go ASAP (although I advocated his departure long ago).

I have no affiliation with the company nor do I own stock - but it just amazes me....
chechaco 12/5/2012 | 3:31:52 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz "... I don't understand why so many of the VPLS/MPLS players are now taking advantage of PBB to scale their network edge."
Please keep "apples" and "oranges" separate. PBB is clearly p2p solution and can be compared with PWE3. The VPLS/H-VPLS so far has no alternative even though it scales badly, has issues with redundancy and so on. PBB might be attractive alternative to PWE3 if and when you have Ethernet UNIs and no legacy circuits to support.
tmc1 12/5/2012 | 3:31:54 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz "You haven't made a single point about PBB-TE/PBT and its lack of technical merit.

You are simply using the same logic that a 5th grader uses to decide if they should wear long baggy pants or not. Who are the cool kids and what are they wearing..."
-------------------------------------------

boo..hoo... waaaaaaaaaaaaah.

(the same could be said of PBT and it's lack of technical merit)
abashford 12/5/2012 | 3:31:54 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz >boo..hoo... waaaaaaaaaaaaah.
>(the same could be said of PBT and it's lack of technical merit)

I will assume from your mature response that you must be of the VPLS/MPLS camp.

If that technology is so infallible, I don't understand why so many of the VPLS/MPLS players are now taking advantage of PBB to scale their network edge. I guess there was no problem in the first place?
abashford 12/5/2012 | 3:31:55 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz You haven't made a single point about PBB-TE/PBT and its lack of technical merit.

You are simply using the same logic that a 5th grader uses to decide if they should wear long baggy pants or not. Who are the cool kids and what are they wearing...
hyperunner 12/5/2012 | 3:31:55 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Some good points made here.

With this announcement confidence in the MEN products will disappear.

Here's an idea. Nortel should KEEP the MEN division and see if they can unload the rest of the company instead.

hR.
catalyst 12/5/2012 | 3:31:57 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz If NT sells MEN and optical BU, what's left?

Two main divisions will be enterprise and wireless. LR says, NT's 4G is up in the air. Meaning relay solely on enterprise division? Meaning go head to head with CSCO? Interesting!!



tmc1 12/5/2012 | 3:31:57 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz You go girl! You are on a roll... keep it up. Ignore those NT cheerleaders.

PBT joins great Bay/NT ideas like lattiscell, CR-LDP, etc.

;)
K28.5 12/5/2012 | 3:31:58 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Such an announcement practically sentences the MEN division to death, since I don't see a carrier that will buy into it now (except for small purchases of current clients, and these will also look for alternatives). This means $1.5 billion in annual sales will evaporate.

Unless, they already have a buyer. I can't think of any particular company that will be interested. Any suggestions?
mtb826 12/5/2012 | 3:31:58 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz And so does Extreme, Avici, Tellabs, Hammerhead... Reads like a who's who of Companies that had to respin failing product lines. Seems appropriate to lump Fujitsu into the fold. I guess you couldn't find any facts that make it a viable solution???
materialgirl 12/5/2012 | 3:31:59 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz The whole optical market is a mess, thanks to horrible regulation IMHO. No one is selling optical gear. While the banking mess is pressuring the economy, in a competitive telecom market this type of total freeze would not happen.

As it stands now, we have users who want and would be winning to pay for "real" broadband, not the content infested fraudband being offered. They cannot get what they want because the ologopoly of service providers don't want to sell "dumb pipes" and therefore just sit there. With no market to sell into, the MEN is not worth much at all.
NorthernLight 12/5/2012 | 3:31:59 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz DP-QPSK is the best 40G technology. There is a reason why it was picked as the 100G standard. that makes nortel 40/100G leader. they're the only ones to demo 100G on a real life network.

electronic dispersion compensation is also worth something.

anyone wanting to spring to front on 40/100G should consider this (major vendors included). the question is if it's worth buying the entire unit just to get your hands on some technology. that's beyond me.
abashford 12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz http://telephonyonline.com/eth...

Why does Fujitsu bother then? And before you go and 'correct' me... PBB-TE = PBT
davallan 12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz viable = "capable of life"

I'm afraid the "genetically modified" ethernet genie is already out of the bottle....

... and current attempts to clone PBT are a more appropriate target for the term "white elephant" esp. from the point of view of "bloat"

D
mtb826 12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Abashford,

The orginal quote calls it a "viable technology". Point to the facts that back that up? There doesn't appear to be any service providers that are in that camp. NT punting on their golden child is further evidence that this White Elephant is dead.
Pete Baldwin 12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz If the optical business were smaller, I'd suggest that a newer player could buy it as a way to shore up revenues, much like Cortina bought a chunk of Intel.

Or, they wouldn't even have to be "newer." Sycamore could use a boost, right? But this seems awfully big for them to swallow.

Problem with the Ethernet piece of MEN is that everyone else is already doing carrier Ethernet, it seems. I haven't completely thought it through yet, but I'm not sure there's a huge pool of obvious buyers.
hyperunner 12/5/2012 | 3:32:01 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz My 2 cents...

NTs DP-QPSK implementation seems to work well enough, but I'm not sure how valuable or unique it is. We've seen at least three other vendor pitches claiming they're doing, or will do the same. And it's not like most people are in a hrry to implement 40G - we'll probably wait for 100G. Also Nortel's board is hellish bulky and seems to be a power hog. OK, before you flame me I know it's basically a prototype, but I guess they have a lot of work to do to turn it into a production system.

Nortel's dispersion compensation technology. That's pretty impressive. And I think they make the ASICs for it, as well as having patents. I think that has real value.

PBT. Well, we've talked about it a lot on these boards. I'm not a fan - it's one technology too many in my book. But let's put that aside. There's no IPR around PBT - it's supposed to be a standard (right!). So anyone can do PBT, and most of Nortel's competitors have much better platforms and a lot better track record with packet technology than Nortel. Let's face it - how many packet platform projects did Nortel sh*tcan in the past ten years - including stuff they acquired? As a service provider I wouldn't buy a packet platform from Nortel because I'd never know if I could still buy it from them next year. And that's when Nortel owned it - it goes double if they're selling off the division - literally any of the current products could be terminated.

hR.
abashford 12/5/2012 | 3:32:01 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
>I think your editors are asleep at the wheel. The phrase:
>Gǣ...where it has pushed hard to establish PBT (Provider Backbone >Transport) as a viable technologyGǪGǥ

>Should read:
>Gǣ...where it has pushed hard, but failed to establish PBT (Provider >Backbone Transport) as a viable technologyGǪGǥ

Unlike you, editors have to worry about being factual.
ProductMan 12/5/2012 | 3:32:02 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Thats a little harsh mtb826! Given the status of the standard, operators were always going to be cautious.

Nortel seemed a little ahead in PBT, but time will tell. Unfortunately, time that Nortel feel they have run out of.

ProductMan
USA 12/5/2012 | 3:32:02 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz The MEN business may have value, but I can't see anyone wanting the optical business. Their current product set has been around a long time and is dated. The proprietary 40G modulation technique will always be too expensive because it isn't mainstream and they won't have the critical mass to see the price declines as the industry leverages common volume parts
mtb826 12/5/2012 | 3:32:03 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz I think your editors are asleep at the wheel. The phrase:
Gǣ...where it has pushed hard to establish PBT (Provider Backbone Transport) as a viable technologyGǪGǥ

Should read:
Gǣ...where it has pushed hard, but failed to establish PBT (Provider Backbone Transport) as a viable technologyGǪGǥ
ProductMan 12/5/2012 | 3:32:03 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz DP-QPSK is a worthwhile technology in the short-medium term for 40G and possibly some of the 100G advances as Nortel have patent on the technology. Some of the Metro Ethernet features around have strong merits in them.

As for what it is worth; it has to be worth taking seriously with the customer base, sales channels, experienced R&D etc etc.

Buyers will be cautious at the task of integrating some of the features into an existing product lines.

A medium sized vendor probably could take the MEN products on if they can finance, or perhaps with VC cash.

Is the offering differentiated enough for a major Vendor ?

Asking what it is worth is hard unless more about the sale is understood, but for someone who has worked at Nortel in the boom days, it is a little sad to see this happening, but vendors are in a hell of a competitive market at present and probably for the near to medium term.

ProdMan
digits 12/5/2012 | 3:32:04 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz What sort of price could Nortel get for the MEN division?
Its annual revenues are on course to be around $1.5 billion, and it looks like it could swing either way in terms of operating margins.

And who might buy it? Any takers?

Ray
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