News Column

VISA INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 24, 2014

This management's discussion and analysis provides a review of the results of operations, financial condition and the liquidity and capital resources of Visa Inc. and its subsidiaries ("Visa," "we," "our" or the "Company") on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are identified by words such as "believes," "estimates," "expects," "intends," "may," "projects," "could," "should," "will," "will continue" and other similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make about our revenue, client incentives, operating margin, earnings per share, free cash flow, and the growth of those items. By their nature, forward-looking statements: (i) speak only as of the date they are made; (ii) are not statements of historical fact or guarantees of future performance; and (iii) are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from our forward-looking statements due to a variety of factors, including the following: the impact of laws, regulations and marketplace barriers, including: rules capping debit interchange reimbursement rates and expanding financial institutions' and merchants' choices among debit payment networks promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act; increased regulation in jurisdictions outside of the United States and in other product categories; increased government support of national payment networks outside the United States; and



increased regulation on consumer privacy, data use and security;

developments in litigation and government enforcement, including those affecting interchange reimbursement fees, antitrust and tax;



new lawsuits, investigations or proceedings, or changes to our potential

exposure in connection with pending lawsuits, investigations or

proceedings;

economic factors, such as:

economic fragility in the Eurozone and in the United States;

general economic, political and social conditions in mature and emerging markets globally; material changes in cross-border activity, foreign exchange controls and fluctuations in currency exchange rates; and material changes in our financial institution clients'



performance

compared to our estimates;



industry developments, such as competitive pressure, rapid technological

developments and disintermediation from our payments network;

system developments, such as:

disruption of our transaction processing systems or the inability to process transactions efficiently; account data breaches or increased fraudulent or other illegal activities involving Visa-branded cards or payment products; and



failure to maintain systems interoperability with Visa Europe;

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costs arising if Visa Europe were to exercise its right to require us to

acquire all of its outstanding stock;

the loss of organizational effectiveness or key employees;

the failure to integrate acquisitions successfully or to effectively

develop new products and businesses;

natural disasters, terrorist attacks, military or political conflicts,

and public health emergencies; and

various other factors, including those contained in our Annual Report on Form 10-K for the year ended September 30, 2013 and our other filings with the U.S. Securities and Exchange Commission. You should not place undue reliance on such statements. Except as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future developments or otherwise. Overview Visa is a global payments technology company that connects consumers, businesses, financial institutions and governments around the world to fast, secure and reliable electronic payments. We provide our financial institution clients with a global payments infrastructure and support services for the delivery of Visa-branded payment products, including credit, debit, and prepaid. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Each of these constituencies has played a key role in the ongoing worldwide migration from paper-based to electronic forms of payment, and we believe that this transformation continues to yield significant growth opportunities, particularly outside the United States. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment solutions we provide. Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during the nine months ended June 30, 2014 reflects the impacts of a sustained global economic recovery. Interchange Multidistrict Litigation (MDL). On January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to the adjudication of any appeals. Takedown payments of approximately $1.1 billion related to the opt-out merchants were received on January 27, 2014, and were deposited into the litigation escrow account. The deposit into the litigation escrow account and a related increase in accrued litigation to address opt-out claims were recorded in the second quarter of fiscal 2014. See Note 2-Retrospective Responsibility Plan and Note 13-Legal Matters to our unaudited consolidated financial statements. Interchange reimbursement fees. On March 21, 2014, the Court of Appeals for the D.C. Circuit reversed a district court ruling invalidating the debit regulations implemented by the Federal Reserve in accordance with the Dodd-Frank Act. The appeals court agreed with the Federal Reserve on its interpretation, except for a single issue related to the interchange cost calculation which was referred back to the Federal Reserve for reconsideration. The current rules remain in place while the case is ongoing. Reduction in as-converted class A common stock. During the three and nine months ended June 30, 2014, we repurchased 6 million and 16 million shares, respectively, of our class A common stock using $1.2 billion and $3.4 billion, respectively, of cash on hand. As of June 30, 2014, the October program had remaining authorized funds of $1.9 billion. All share repurchase programs authorized prior to October 2013 have been completed. See Note 9-Stockholders' Equity to our unaudited consolidated financial statements. Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Compared to the prior year periods, overall payments volume grew in all categories worldwide. The number of processed transactions continues to increase at a double-digit growth rate, reflecting the continuing worldwide shift to electronic currency. 26



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The following tables present nominal volume.(1)

U.S. International Visa Inc. 3 Months 3 Months 3 Months 3 Months 3 Months 3 Months Ended Ended Ended Ended Ended Ended March 31, March 31, % March 31, March 31, % March 31, March 31, % 2014 (2) 2013 (2) Change 2014 (2) 2013 (2) Change 2014 (2) 2013 (2) Change (in billions, except percentages) Nominal Payments Volume Consumer credit $ 204$ 185 10 % $ 387$ 364 6 % $ 591$ 550 8 % Consumer debit(3) 281 264 7 % 111 99 13 % 392 362 8 % Commercial(4) 90 81 11 % 34 33 3 % 124 114 9 % Total Nominal Payments Volume $ 575$ 530 9 % $ 533$ 496 7 % $ 1,108$ 1,026 8 % Cash volume 115 110 5 % 507 514 (1 )% 622 623 - % Total Nominal Volume(5) $ 690$ 639 8 % $ 1,039$ 1,010 3 % $ 1,729$ 1,649 5 % U.S. International Visa Inc. 9 Months 9 Months 9 Months 9 Months 9 Months 9 Months Ended Ended Ended Ended Ended Ended March 31, March 31, % March 31, March 31, % March 31, March 31, % 2014 (2) 2013 (2) Change 2014 (2) 2013 (2) Change 2014 (2) 2013 (2) Change (in billions, except percentages) Nominal Payments Volume Consumer credit $ 640$ 579 11 % $ 1,193$ 1,119 7 % $ 1,832$ 1,697 8 % Consumer debit(3) 831 771 8 % 336 289 16 % 1,167 1,060 10 % Commercial(4) 270 246 10 % 107 104 2 % 377 350 8 % Total Nominal Payments Volume $ 1,741$ 1,596 9 % $ 1,635$ 1,512 8 % $ 3,376$ 3,108 9 % Cash volume 347 331 5 % 1,589 1,548 3 % 1,936 1,880 3 % Total Nominal Volume(5) $ 2,088$ 1,927 8 % $ 3,225$ 3,060 5 % $ 5,312$ 4,987 7 %



(1) Figures in the table may not recalculate exactly due to rounding. Percentage

changes are calculated based on whole numbers, not the rounded numbers presented.



(2) Service revenues in a given quarter are assessed based on payments volume in

the prior quarter. Therefore, service revenues reported for the three and

nine months ended June 30, 2014 and 2013, were based on payments volume

reported by our financial institution clients for the three and nine months

ended March 31, 2014 and 2013, respectively. (3) Includes prepaid volume.



(4) Includes large, middle and small business credit, and small business debit

and prepaid volume.

(5) Total nominal volume is the sum of total nominal payments volume and cash

volume. Total nominal payments volume is the total monetary value of

transactions for goods and services that are purchased on Visa-branded cards

and payment products. Cash volume generally consists of cash access

transactions, balance access transactions, balance transfers and convenience

checks. Total nominal volume is provided by our financial institution

clients, subject to review by Visa. From time to time, previously presented

volume information may be updated. Prior period updates are not material.

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The table below provides the number of transactions processed by our VisaNet system and billable transactions processed by CyberSource's network.(1)

Three Months Ended June 30, Nine Months Ended June 30, % % 2014 2013 Change 2014 2013 Change (in millions, except percentages) Visa processed transactions(2) 16,662 14,972 11 % 48,001 42,981 12 % CyberSource billable transactions(3) 1,890 1,648



15 % 5,643 4,836 17 %

(1) Figures in the table may not recalculate exactly due to rounding. Percentage

changes are calculated based on whole numbers, not the rounded numbers

presented.

(2) Represents transactions involving Visa, Visa Electron, Interlink and PLUS

cards processed on Visa's networks.

(3) Transactions include, but are not limited to, authorization, settlement

payment network connectivity, fraud management, payment security management,

tax services and delivery address verification.

Results of Operations Operating Revenues The following table sets forth our operating revenues earned in the United States, internationally and from Visa Europe. Revenues earned from Visa Europe are a result of our contractual arrangement with Visa Europe, as governed by the framework agreement that provides for trademark and technology licenses and bilateral services. Three Months Ended Nine Months Ended June 30, 2014 vs. 2013 June 30, 2014 vs. 2013 $ % $ % 2014 2013 Change Change(1) 2014 2013 Change Change(1) (in millions, except percentages) U.S. $ 1,699$ 1,632$ 67 4 % $ 5,073$ 4,756$ 317 7 % International 1,403 1,314 89 7 % 4,242 3,883 359 9 % Visa Europe 53 55 (2 ) (4 )% 158 166 (8 ) (5 )%



Total operating revenues $ 3,155$ 3,001$ 154 5 % $ 9,473$ 8,805$ 668 8 %

(1) Figures in the table may not recalculate exactly due to rounding. Percentage

changes are calculated based on whole numbers, not the rounded numbers

presented.

The increase in operating revenues primarily reflects continued growth in our underlying business drivers: nominal payments volume; processed transactions; and nominal cross-border volume. These benefits were partially offset by increases in client incentives. Our operating revenues, primarily service revenues and international transaction revenues, are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. The effect of exchange rate movements in the three and nine months ended June 30, 2014, as partially mitigated by our hedging program, resulted in a negative two percentage point impact to our total operating revenue growth compared to the prior year. For the full 2014 fiscal year, we expect the effect of exchange rate movements to reduce total operating revenue growth by about two percentage points, net of offsetting hedges. 28



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The following table sets forth the components of our total operating revenues.

Three Months Ended Nine Months Ended June 30, 2014 vs. 2013 June 30, 2014 vs. 2013 $ % $ % 2014 2013 Change Change(1) 2014 2013 Change Change(1) (in millions, except percentages) Service revenues $ 1,417$ 1,298$ 119 9 % $ 4,298$ 3,967$ 331 8 % Data processing revenues 1,321 1,191 130 11 %



3,819 3,456 363 10 % International transaction revenues 860 854

6 1 % 2,622 2,490 132 5 % Other revenues 195 179 16 9 % 558 533 25 5 % Client incentives (638 ) (521 ) (117 ) 22 %



(1,824 ) (1,641 ) (183 ) 11 % Total operating revenues

$ 3,155$ 3,001$ 154 5 % $ 9,473$ 8,805$ 668 8 %



(1) Figures in the table may not recalculate exactly due to rounding. Percentage

changes are calculated based on whole numbers, not the rounded numbers presented.



Service revenues increased primarily due to 8% and 9% growth in nominal

payments volume during the three and nine month comparable periods, respectively. Data processing revenues increased mainly due to overall growth in processed transactions of 11% and 12% during the three and nine month comparable periods, respectively, combined with solid growth in CyberSource billable transactions. International transaction revenues for the three and nine month comparable periods increased reflecting 6% and 7% growth in nominal



cross-border payments volume, respectively. The growth in international

transaction revenues was slower than the growth in nominal cross-border

payments volume for the three month comparable period primarily due to lower volatility in a broad range of currencies.



Client incentives increased during the three and nine month comparable

periods mainly due to incentives recognized on long-term customer contracts that were initiated or renewed after the third quarter of fiscal 2013, as well as overall growth in global payments volume. The



three month period increase also reflects the absence of retroactive

adjustments recorded in the third quarter of fiscal 2013 due to the

execution of an issuer contract. The amount of client incentives we

record in future periods will vary based on changes in performance

expectations, actual client performance, amendments to existing contracts

or the execution of new contracts. We expect incentives as a percentage

of gross revenues to be around 17% for the full 2014 fiscal year. 29



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Operating Expenses The following table sets forth components of our total operating expenses. Three Months Ended Nine Months Ended June 30, 2014 vs. 2013 June 30, 2014 vs. 2013 $ % $ % 2014 2013 Change Change(1) 2014 2013 Change Change(1) (in millions, except percentages) Personnel $ 463$ 493$ (30 ) (6 )% $ 1,379$ 1,433$ (54 ) (4 )% Marketing 228 252 (24 ) (9 )% 659 640 19 3 % Network and processing 127 117 10 9 % 379 346 33 10 % Professional fees 82 103 (21 ) (20 )% 234 282 (48 ) (17 )% Depreciation and amortization 109 101 8 7 % 323 291 32 11 % General and administrative 126 108 18 17 % 354 322 32 10 % Litigation provision - (1 ) 1 NM - 3 (3 ) NM Total operating expenses $ 1,135$ 1,173$ (38 ) (3 )% $ 3,328$ 3,317$ 11 - %



(1) Figures in the table may not recalculate exactly due to rounding. Percentage

changes are calculated based on whole numbers, not the rounded numbers

presented.

Personnel decreased mainly due to lower incentive compensation and reductions in our net periodic pension cost. Personnel cost for the nine month comparable period was also lower due to one-time share-based compensation expenses recognized in the first half of fiscal 2013. The



decrease was partially offset by an increase in headcount throughout the

organization reflecting our strategy to invest for future growth. Marketing decreased during the three month comparable period and



increased over the nine month comparable period primarily due to elevated

spend supporting the 2014 Sochi Winter Olympics campaign beginning in the

third quarter of fiscal 2013 through the first half of fiscal 2014. The nine month comparable period also increased due to spend supporting the



2014 FIFA World Cup campaign. We anticipate continued spending during the

fourth quarter of fiscal 2014 in support of our growth strategies and new

product initiatives.

Network and processing increased mainly due to continued processing

network investment to support growth.

Professional fees decreased primarily due to the absence of certain

project costs incurred in fiscal 2013, partially offset by costs incurred

to expand and support our network capabilities and applications.



Depreciation and amortization increased primarily due to additional

depreciation from our ongoing investments in technology assets and

infrastructure to support our core business and eCommerce initiatives.

General and administrative increased primarily due to facilities costs

and other corporate expenses in support of our business growth, partially

offset by a decrease in travel activities.

Non-operating Income Non-operating income was $10 million and $29 million for the three and nine months ended June 30, 2014, respectively, compared to $5 million and $3 million for the three and nine months ended June 30, 2013, respectively. The increase during the nine month comparable period was primarily due to the absence of a $15 million other-than-temporary impairment loss recognized during the nine months ended June 30, 2013 and increases in investment gains. See Note 3-Fair Value Measurements and Investments to our unaudited consolidated financial statements. Effective Income Tax Rate The effective income tax rates were 33% and 29% for the three and nine months ended June 30, 2014, respectively, and 33% and 31% for the three and nine months ended June 30, 2013, respectively. The effective tax 30



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rate for the nine months ended June 30, 2014 differs from the effective tax rate in the same period in fiscal 2013 primarily due to: a $245 million tax benefit related to the deduction for U.S. domestic

production activities, of which $189 million related to prior fiscal

years, as a result of the completion of a study in the second quarter of

fiscal 2014; and

the absence of a $76 million tax benefit recognized in the first quarter

of fiscal 2013, as a result of new guidance issued by the state of

California regarding apportionment rules for years prior to fiscal 2012.

During the three and nine months ended June 30, 2014, our gross unrecognized tax benefits increased by $43 million and $223 million, respectively, $42 million and $219 million of which, respectively, would favorably impact our effective income tax rate if recognized. The increase in gross unrecognized tax benefits is primarily due to potential audit exposure related to various tax positions across several jurisdictions. Liquidity and Capital Resources Cash Flow Data The following table summarizes our cash flow activity for the periods presented. Nine Months Ended June 30, 2014 2013 (in millions) Total cash provided by (used in): Operating activities $ 5,412$ 977 Investing activities (442 ) (1,354 ) Financing activities (5,098 ) (244 )



Decrease in cash and cash equivalents $ (128 )$ (621 )

Operating activities. Cash provided by operating activities during the nine months ended June 30, 2014 reflects the return of our portion of takedown payments of approximately $1.1 billion in connection with the interchange multidistrict litigation. Upon receipt, we returned these funds to the litigation escrow account and reestablished the related accrued litigation. The return of funds to the litigation escrow is reflected as a use of cash under financing activities. Cash provided by operating activities during the prior-year comparable period reflects payments from the litigation escrow account totaling $4.4 billion in connection with the interchange multidistrict litigation. See Note 2-Retrospective Responsibility Plan and Note 13-Legal Matters to our unaudited consolidated financial statements. Investing activities. Cash used in investing activities was lower compared to the prior year, primarily reflecting a decrease in purchases of available-for-sale securities and an increase in proceeds received from the sale and maturity of available-for-sale securities. These effects were offset by net cash paid of $134 million in the third quarter of fiscal 2014 to acquire a business in which we previously held minority interest ownership. Financing activities. Cash used in financing activities during the nine months ended June 30, 2014 reflects the use of $3.4 billion to repurchase class A common stock in the open market, the return of takedown payments totaling $1.1 billion into the litigation escrow account, as described above, and dividend payments of $758 million. Activity in the prior-year comparable period primarily reflected the use of $4.1 billion to repurchase class A common stock in the open market, combined with dividend payments of $653 million, offset by the funding of payments from the litigation escrow account totaling $4.4 billion in connection with the interchange multidistrict litigation. Sources of Liquidity Our primary sources of liquidity are cash on hand, cash flow from operations, our investment portfolio and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents and short-term or long-term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and the returns that these holdings provide. We believe that cash flow generated from operations, in conjunction with access to our other sources of liquidity, will be more than sufficient to meet our ongoing operational needs. 31



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Cash and cash equivalents and short-term and long-term available-for-sale investment securities held by our foreign subsidiaries totaled $5.2 billion at June 30, 2014. If it were necessary to repatriate these funds for use in the United States, we would be required to pay U.S. income taxes on most of this amount. The amount of income taxes that would have resulted had these funds been repatriated is not practicably determinable. It is our intent to indefinitely reinvest the majority of these funds outside of the United States. As such, we have not accrued any U.S. income tax provision in our financial results related to the majority of these funds. Uses of Liquidity There has been no significant change to our primary uses of liquidity since September 30, 2013, except as discussed below. Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we believe that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions and other relevant circumstances. Covered litigation. On January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to the adjudication of any appeals. Our portion of the takedown payments of approximately $1.1 billion related to the opt-out merchants was received on January 27, 2014, and deposited into the litigation escrow account. Receipt of the takedown payments increases our current taxable income by $1.1 billion, and income tax payable by $387 million. Of this amount, we have paid approximately $290 million, which negatively impacted our free cash flow for the three and nine months ended June 30, 2014. The remaining income tax payable amount will be paid by the end of fiscal 2014 and will negatively impact our free cash flow accordingly. We continue to expect annual free cash flow to be about $5 billion for the full fiscal 2014 year. See Note 2-Retrospective Responsibility Plan and Note 13-Legal Matters to our unaudited consolidated financial statements. Reduction in as-converted class A common stock. In October 2013, our board of directors authorized a new $5.0 billion share repurchase program. During the nine months ended June 30, 2014, we repurchased 16 million shares of our class A common stock using $3.4 billion of cash on hand. As of June 30, 2014, the October program had remaining authorized funds of $1.9 billion. All share repurchase programs authorized prior to October 2013 have been completed. See Note 9-Stockholders' Equity to our unaudited consolidated financial statements. Dividends. During the nine months ended June 30, 2014, we declared and paid $758 million in dividends. In July 2014, our board of directors declared a quarterly cash dividend in the amount of $0.40 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on September 3, 2014, to all holders of record as of August 15, 2014. See Note 9-Stockholders' Equity to our unaudited consolidated financial statements. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. Class B and class C common stock will share ratably on an as-converted basis in such future dividends. Visa Europe put option agreement. We have granted Visa Europe a perpetual put option which, if exercised, will require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. Visa Europe may exercise the put option at any time. At June 30, 2014, we determined the fair value of the put option liability to be approximately $145 million. While this amount represents the fair value of the put option at June 30, 2014, it does not represent the actual purchase price that we may be required to pay if the option is exercised. The purchase price we could be obligated to pay 285 days after exercise will represent a substantial financial obligation, which could be several billion dollars or more. We may need to obtain third-party financing, either by borrowing funds or by undertaking a subsequent equity offering in order to fund this payment. The amount of this potential obligation could vary dramatically based on, among other things, Visa Europe's adjusted sustainable income and our P/E ratio, in each case, as negotiated at the time the put option is exercised. Acquisitions. In April 2014, the Company acquired a business in which we previously held a minority interest using $134 million of cash on hand. This amount primarily reflects the purchase price of $170 million less cash received. The acquisition extends our processing capabilities internationally. Fair Value Measurements-Financial Instruments As of June 30, 2014, our financial instruments measured at fair value on a recurring basis included $6.8 billion of assets and $177 million of liabilities. Of these instruments, $152 million, or 2%, had significant unobservable 32



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inputs, with the Visa Europe put option liability constituting $145 million of this amount. See Note 3-Fair Value Measurements and Investments to our unaudited consolidated financial statements. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk



There have been no significant changes to our market risks during the nine months ended June 30, 2014, compared to September 30, 2013. ITEM 4. Controls and Procedures

Disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) of Visa Inc. at the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures of Visa Inc. were effective at the reasonable assurance level as of the end of the period covered by this report. Changes in internal control over financial reporting. There has been no change in the internal control over financial reporting of Visa Inc. that occurred during the fiscal period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 33



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