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Farfetch Limited (NYSE:FTCH)
Q2 2019 Earnings Call
Aug. 8, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farfetch Second Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press *1 on your telephone keypad. If you would like to withdraw your question, you may press #. Thank you.

I'd now like to turn the call over to Alice Ryder, VP of Investor Relations. Miss Ryder, you may begin your conference.

Alice Ryder -- Vice President of Investor Relations

Thank you, Julie. Hello and welcome to Farfetch's second quarter 2019 conference call. Joining me today to discuss our results are José Neves, our Founder, Co-Chair, and Chief Executive Officer; and Elliot Jordan, our Chief Financial Officer.

Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and forward-looking statements may today speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the risk factors that could cause actual results to differ, please see the risk factors section of our annual report on Form 20-F which was filed with the SEC on March 1, 2019.

In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release and the slide presentation, both of which are available on our website at farfetchinvestors.com.

And now, I would like to turn the call over to José.

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

Thank you, Alice. Thank you all for joining us today for our earnings call and to hear about the acquisition of New Guards Group that we have also announced. We are excited to update you on three important topics; first, our acquisition of New Guards Group, or New Guards, a brand platform that is [inaudible]; second, to walk you through our second quarter [inaudible]; and thirdly, to cover some of the big trends we are seeing in the market, including the psychology of luxury brands online distribution and packaging. .

Let me start with the incredibly exciting acquisition of New Guards. As you know, this September marks one year since our IPO, and we decided then that it was our strategy to be the platform for global luxury [inaudible] connecting curators, creators, and consumers. We believe [inaudible] to grow $100 million in incremental online sales in the next [inaudible]. The next 10 years are what we [inaudible] are going to see a revolution in how consumers engage and shop for luxury fashion, online and offline. Our landmark acquisition of New Guards expands our platform vision from a platform enabling transactions to a platform enabling a global culture of fashion.

Let me talk you through how this acquisition underlines our strategy. New Guards are the [inaudible] design, manufacture, and distribute some of the most sought-after luxury brands including Off-White, Heron Preston, Palm Angels, Marcelo Burlon, among others. With these brands, New Guards has demonstrated it is the ultimate brand platform of today, integrating and growing emerging talent into highly sought-after brands through a shared services model. The group operates an asset-light model and strategically produced manufacturing based on other demands. In fact, inventory on hand at end-of-year fiscal 2018 was just 9% of revenue for the period, which provides for low working capital usage and a profitable business with positive cash flow.

Strategically, New Guards brings a very exciting expansion of Farfetch's platform vision to connect the creators, curators, and consumers of fashion, which I believe will transform the luxury industry. On top of our three existing platforms -- technology, data, and logistics -- we now add a fourth, a brand platform. As a result, we can offer the creative visionary in this industry best-in-class design studios, industrial capabilities, and global distribution channels. This is revolutionary for them. Farfetch has the technology, expertise, and vision to take their businesses to the next level and unleash the talent of the future.

We believe this combination of our businesses will create what we call "brands of the future". But what do I mean by that? In the past, luxury brands were built by a mix of investment in traditional media and significant [inaudible] investments in directly operated [inaudible]. All the brands used the traditional [inaudible] which is capital efficient but disconnects them completely from the customer and transaction data [inaudible] and brand evolution.

I believe the brands of the future [inaudible] around this model but rather be made of three ingredients, 1.) A creative [inaudible] that is also able to build a community digitally around her or his vision, 2.) Best in-class global e-commerce direct-to-consumer capabilities in both multi-brand via e-concession and mono-brand by a brand dot com, including critical capabilities to serve Mainland China, and 3.) Amplify the physical stocked items via a new type of wholesale -- an active wholesale where supply and demand are matched in near real-time, avoiding discounting, and great market control. We believe Farfetch and New Guards combined are uniquely positioned to empower the most exciting talents to develop a [inaudible] brand offering totally new [inaudible].

I'd like to take a moment to talk you through how working with Farfetch, Off-White, one of New Guards' brands, has built its business and how it will continue to benefit significantly as part of this acquisition. Off-White is the brain child of Virgil Abloh, an American fashion designer, entrepreneur, artist, and DJ who has been the artistic director of Louis Vuitton's men's wear collection since March 2018. Off-White signed exclusively with New Guards' founders and launch its first season in Spring 2014. That same season, it had its debut on Farfetch.com via our community of boutiques. [Inaudible] tiny $1,000 to GMV, and it ranked No. 1,360 among our best-selling brands.

With Farfetch proprietary data and connections to roll out to boutiques around the world, we were immediately able to identify some customer intent in real-time and [inaudible] boutiques [inaudible]. In parallel, our machine-learning [inaudible] algorithm boosted our demand generation budget to efficiently drive Farfetch [inaudible]. The result, in just three years, Off-White made it to our Top 10 Brands list, which has continued to be the case over the last eight consecutive quarters.

The next step is to take Off-White from a majority wholesale brand via direct-to-consumer online sales outlet and 5% of the total mix to becoming a direct-to-consumer brand online. What is the new brand of the future strategy [inaudible] for Off-White after our acquisition? First, relaunching Off-White.com on Farfetch's platform solution in Q4 2019 globally, including China. Second, launching an e-concession on Farfetch Marketplace in H2, [inaudible] available on the platform and describing you as matching as a result. And three, evolve the wholesale model into connected wholesale [inaudible] the network of more than 650 Farfetch connected retailers and the Farfetch data to match supply and demand in near real time.

By 2020, New Guards expects to have changed the model to a much quicker inventory cycle where accounts get the supply our data shows they need, a volume pricing discipline, or the market activities. We believe this strategy will see Off-White's revenue grow considerably as well as significant improvement in matching while all along protecting the brand's position. This Off-White case study was just one example of many brands we hope to foster with the other six brands of New Guards showing incredible growth patterns in their short history and who have already had an exciting plan for new brands to be launched next year.

The acquisition of New Guards will help to deliver our brands of the future strategy and will have significant benefits to other members of our community as well. Let me explain. For our valuable boutique partners, access to the brands of the future original content offers them differentiation from large-scale retailers and the data-driven supply model for a much faster inventory turn, which affords them lower capital requirements and attractive economics as there will be much fewer markdowns needed. For Farfetch.com consumers, brands of the future's further enrich reach our growing luxury offering with more exclusive [inaudible] and collaborations with existing brands, plus we plan to launch with New Guards some new concepts in the future that will be completely exclusive to Farfetch.

We believe this creates a significant halo effect that will increase the engagement of our global customers around the package brand, and this means that for our cherished brand partners, Farfetch will become an even more strategic direct-to-consumer channel, and we would expect to see even higher organic traffic, full-price sales mix, and the further elevation of brand adjacencies that are so key for luxury brands. However, it won't change the highly capital-efficient nature of our model as we will remain, for the most part, an inventory-light model with added cost stability from the critical integration of the new brand platform.

In summary, I believe the acquisition of New Guards is a gamechanger for Farfetch, but I believe it is also a gamechanger for the luxury industry. As part of this evolution of our strategy, there is a key change in how we organize our team. Focusing on developing our brand around an invaluable capital experience, we are excited with our decision to create the new role of Chief Customer Officer. This new role aggregates all consumer-facing functions in our business, namely marketing, brand, consumer products, [inaudible]clients, as well as [inaudible]. I am delighted to share that Stephanie Phair, our current Chief Strategy Officer, has accepted my invitation and will take this newly created role effective immediately. Stephanie will also be a named Executive Officer of Farfetch.

Separately, Andrew Robb, our Chief Operating Officer, has decided to step down in early 2020. Andrew has worked passionately alongside me over the past nine years, and I'm grateful for all he's done to help establish our market-defining position and for leaving us with an incredibly talented team here [inaudible], and we look forward to working with him to ensure a seamless transition.

Turning now to our Q2 results, I am pleased to report that we, again, delivered strong performance in Q2, with platform GMV grown of 44%, exceeding the high end of our platform GMV growth targets. [Inaudible] platform GMV increased approximately 49%, almost 2.5 times the projected 20% CAGR of the online personal luxury group market through 2025, demonstrating the power of our marketplace model as we continue to take market share. In fact, our strong top-line growth brings our GMV over the last 12 month period to approximately $1.7 billion, which we believe makes Farfetch the largest single destination for in-season luxury fashion in the world, both in valuable transactions and in terms of traffic.

In Q2, we observed an increasingly competitive environment, but we took advantage of our very healthy unique economics and attractive LTV to CAC dynamics and we decided to continue investing in our consumers to drive growth. We were able to do so while also maintaining adjusted EBITDA matching within our guided range as a result of the strong operation leverage we continued to gain in Q2.

Moving across our three geographic regions, Americas, APAC, and EMEA, we saw sequential acceleration in both APAC and EMEA, primarily driven by China and the Middle East. The West grew in line with the overall marketplace, which is a strong performance, given it is already our largest market, while our second-largest market, China, grew even faster. Specifically on China, we were pleased to have launched our star on the JD platform toward the end of the quarter. What we observed at this early stage in our integration is that there is significant opportunity for further optimization. We are working closely with JD to put boost both traffic and conversion, and as we had said on our last call, we remain focused on 2020 in terms of this new growth challenge.

Overall, we are extremely pleased with the performance of our China region. In addition to accelerating GMV growth, we continued to drive improvement to create a more localized experience on our native app and website. With China continuing to be on top of everyone's minds these days, I want to remind everyone that less than 5% of shipments into Mainland China came from the West. We currently have no exports from Mainland China, but we do have a growing luxury fashion supply within China to serve local customers from local suppliers. As such, the Farfetch model is extremely resilient to potential impacts of US-China trade tariffs.

During Q2, we also made great strides on our supply initiatives. We ended the quarter with more than 1,100 brands as we built partners, which includes an additional 45 boutique partners [inaudible] three of which are new geography [inaudible] supply network, further increasing our ability to bring supply focus to our consumers. With brands, we were excited to launch globally with Stella McCartney and signed Brunello Cucinelli, who made available an amazing collection to our global customer base, almost doubling our total SKU count of that collection. We now have about six times the number of Brunello Cucinelli SKUs as compared to our largest online competitor.

We are also thrilled that Stadium Goods continues to reinforce that position as the luxury player in sneaker retail, like with the recent auction together with Sotheby's where 100 pairs of rare sneakers were sold to a single customer for a record $1.3 million. The same auction set another record: the 1972 Walker Moon Shoe designed by Nike's co-founder Bill Bowerman sold for $437,500, which we believe makes it the single most expensive pair of sneakers ever sold.

We are excited by the incredible potential of Stadium Goods, and we will continue our integration plan, including our ambitious international roll out of this plan. In summary, Q2 was an incredible quarter, and I would like to congratulate the Farfetch team for their amazing performance.

Turning to the third key topic I wanted to cover today, the target shift in luxury brands attitude to online wholesale. During H1, we saw increasing discounting as promotions from [inaudible] channel, especially from large online retailers. For example, last season, the largest luxury retailer launched a 50% new-season promotion as early as March. Promotions from most other retailers followed, culminating in unprecedented promotional activities in June and July. We believe this is happening because these players have not found a way to compete on range or [inaudible] expectations in terms of technology and customer experience, especially in China, another key growth markets.

Faced with this challenge, wholesalers [inaudible] and this takes the shape of, A.) Generalized knowledge of geography, B.) Aggressive promotions, and C.) Early and higher markup. This phenomenon is leading to what we believe is a significant tectonic shift for online luxury that will reshape the industry over the next few seasons. We believe the luxury brands have begun to take notice of the fact that large-scale online wholesale leads to price volatility and adds little value in terms of building and preserving luxury brand image. All of our conversations with major brands indicate they are starting to implement strategies to more directly control their overall distribution away from online wholesale and toward e-concession.

Major luxury houses such as Kirin and Prada, while focused on the long-term health of their brands, have already publicly articulated plans to de-emphasize online retailers. At the same time, we have seen them doubling down on [inaudible] ambitious rollout on our marketplace has become Farfetch's most developed e-concession in terms of geographical distribution of [inaudible]. We now have more than 70 group inventory locations available on the Farfetch marketplace across Europe, Dubai, Japan, and Hong Kong. And while Prada has been reducing [inaudible] global retailers, we have in the inventory of Prada's e-concession growth of 275% in Q2 on the Farfetch platform.

Similarly, we've expanded our e-concessions with other major luxury groups, and some of them direct supply from Prada carrying [inaudible] brands on the Farfetch Marketplace in Spring/Summer '19 grew 140% compared to Spring/Summer '18. We are also very happy to have signed our third [inaudible]. Our brand partner count also continues to grow, now totaling more than 450, and we've had 100% retention of our top 100 brand partners over the past three years. These actions demonstrate that the industry is seeing Farfetch as the key path of the strategy to promote brand image and quality, providing a solution to diebacks from large-scale retail into direct-to-consumer.

I would like to highlight the [inaudible] significant industry development [inaudible] Farfetch for long term, it does mean that until the brand reduces supply made available for online wholesalers, we expect [inaudible] the aggression of their [inaudible] tactics, putting pressure on our marketplace trading. Here, Farfetch has two options. Even our LTV to CAC dynamics remains very favorable and we still enjoy payback in [inaudible] Farfetch could subtly reacts to those promotions symmetrically, which is what we have done in H1 to some extent. Or we could demonstrate our leadership in this industry and support the brands in their efforts to move away from promotions and realize the full value of their creations. This means doubling down on e-concessions, reducing our promotional activities as we boost our full prices by exciting collaborations with our brand partners with original content from New Guards. This also means [inaudible] that we will often be more expensive compared to discounted prices from our competitors.

We have decided to take the second option for the remainder of this year and implement it as a long-term strategy. As a leader in online luxury, we believe this is the right thing to do for the entire ecosystem. We are taking the long view, and while this may mean a deceleration of our aggressive market share capture in the short term, we believe it will cement our reputation as leaders in this industry and pay off in the medium-to-long term, translating in to continued, sustainable growth. Our acquisition of New Guards also fits squarely within the strategy, as we've been able to further elevate our brands, boost full-price mix, reduce promotional activity, and offer original and exclusive content. In the long run, I strongly believe that in a world where brands move away from large-scale online wholesale and [inaudible] brands move away from wholesale altogether, Farfetch will [inaudible].

We are the only player operating a global e-concession model with a true omnichannel platform and global operations including Mainland China. These capabilities have been built over 10 years through more than $1 billion investments, and this is extremely hard to [inaudible]. As luxury embraces the e-concession region, Farfetch stands as an enabler for an entire industry to return to full-price sales and protect the value of luxury.

I'll turn it now to Elliot to cover Q2 performance and outlook.

Elliot Jordan -- Chief Financial Officer

Thank you, José, and good evening, everyone. I will run through the results of Q2 and how we have continued to execute in line with our growth strategy. I'll explain the impact of New Guards Group on the financials moving forwards and then provide an update on guidance for H2.

I'm pleased to report that Q2 grew ahead of our previous guidance and that Farfetch continues to lead the growth of the online luxury industry. Q2 was our biggest quarter ever with platform GMV of $484 million, up 44% year-on-year and 49% year-on-year on a constant currency basis. The key drivers to growth were the increasing number of active customers, higher orders per customer, and a stable $600 average order value on the Farfetch Marketplace.

Since our last call, we have added 34 direct brand e-concessions and 45 boutique partners to our marketplace, and we now service 18 clients from within our Farfetch platform solutions business. Third-party take rate was 31.4%, demonstrating the value of the platform proposition to our broad client base. Our first-party business grew at 108% year-on-year to 10% of the GMV mix, contributing to the platform services revenue of $177 million, up 53% year-on-year. This strong growth was achieved while leveraging the fixed-cost base, which has allowed us to react to the changing promotional landscape within the industry, invest into our technology and data platforms, and deliver Q2 underlying EBITDA margin of negative 20.8%, which is in line with the guidance I provided on our previous call. Adjusted EPS loss of $0.15 per share is in line with consensus.

What stands out from the results of the quarter is the platform gross margin of 48% and order contribution margin of 28%, a decline year-on-year as a result of three things. First, the decision to promote across the latter half of the quarter to remain price competitive and to retain our valuable customer base. This accounts for approximately half of the year-on-year decline in order contribution margin. Secondly, investing in longer-term customer engagement strategies such as Access, our loyalty program, and Farfetch communities, plus additional paid digital media spend to drive long-term retention. This accounts for approximately one-quarter of the year-on-year change in order contribution margin. And finally, a charge we have taken to write down and clear excess end-of-season inventory within the first party business.

We execute our strategy by constantly assessing the lifetime value and customer acquisition costs on a cohort-by-cohort basis. These metrics are in a very strong position. The 2016 customer cohort lifetime value now accumulated over 24 months is three times the cohort's original customer acquisition spend, which is an increase over the lifetime value of the 2015 cohort, which was just under three times CAC at the 24-month point. The Q4 2018 cohort is now in positive lifetime value, with payback achieved within the initial six-month period, and the Q1 2019 cohort remains on track for payback within the first six months as well.

Our more established customer cohorts continue to deliver stronger profitability. Orders from customers that first shopped on Farfetch five years ago in Q2 2014 achieved a 55% order contribution across the last quarter, which is approaching the 60% long-term order contribution target we have established despite the promotional environment. This strong position means we have room to invest in our customers, driving loyalty and substantial lifetime values and means we are well positioned to deliver profitable growth over the longer term.

In light of the external environment, we have actively managed the growth of the fixed cost base with technology spend and G&A at 11% and 38% of group adjusted revenue, respectively. This compares favorably to last year and demonstrates our ability to drive significant operational leverage from the fixed-cost space. The investments of previous years are paying back, delivering higher revenue per employee, improved operational metrics in our production and customer service teams, and substantial increases in our capabilities across our technology infrastructure.

As a result, our second quarter underlying adjusted EBITDA was minus $38 million, and our operating cash outflow was minus $28 million, reflecting the negative working capital profile of the marketplace. Depreciation and amortization was $14 million across Q2, in line with Q1 2019, although $9 million higher year-on-year, reflecting an additional $4 million of amortization of right-of-use assets, $2 million in relation to acquired intangibles, and $3 million extra amortization of capitalized development costs. The Q2 2019 share-based payments charge is $46 million, reflecting an ongoing quarterly charge of $40 million, which is increased from Q1 because of additional grants and the one-off charge within Q2.

Loss after tax was $90 million, resulting in a loss per share of $0.29, or loss of $0.15 per share at the adjusted level when reversing out the impact of share-based payments and the amortization of acquired intangibles that are fair valued. Our cash and cash equivalents reduced by $116 million in the quarter, which reflects the operating cash outflow of $28 million and payments in relation to the acquisition of TopLife and CuriosityChina, which both completed in the quarter, the purchase of land for our new Porto campus, and various smaller investments and innovation projects under our Dream Assembly Accelerator.

Turning to the acquisition of New Guards Group for an enterprise value of $675 million, in addition to the strategic value to the group, New Guards will be immediately accretive to Farfetch revenue, profitability, and operating cash flow. As José was outlining the New Guards business model has attractive financial characteristics, similar to the Farfetch model including minimal inventory holdings, low capex requirements, and strong operating cash flows. Revenues over the six months to April 30th, 2019 were $189 million, up 59% year-on-year, earnings before tax over the equivalent period was $57 million, and operational cash inflow was $48 million.

Looking over the last 12 months to April 30th, 2019, New Guards' revenue was $345 million, and earnings before tax was $95 million. With this new acquisition, in addition to the granular reporting on performance within our stores and on the platform, Farfetch will now report GMV, revenue, gross margins, and order contribution delivered from the brand platform, the connected wholesale business.

Going forwards, the Farfetch group will have five revenue streams. First, the primary revenue stream of the group today, third-party transactions on the platform. Revenue is based on our take rate, the long-term target being 30%, including underlying commissions and fees for value-added services such as media solutions. We achieved a 60-70% gross margin on this revenue today.

Secondly, first-party sales on the platform and in our stores, this revenue carries inventory risk, but we believe our wide-reaching data inside will enable us to deliver approximately 45% gross margins in the near term.

Third, our connected wholesale revenue from the new brand platform, we expect to achieve approximately 40% gross margins from the wholesale revenue going forwards. Our brand platform and existing commercial teams will work together to tap into the rich dataset of social media trends, search and demand indicators, inventory movements, and online and offline transactions to identify fashion trends, help forecast production levels, and pinpoint replenishment requirements across the Farfetch community.

Revenue No. 4, selling New Guards' brands directly on the platform, which is our first-party original, or 1PO business. This revenue carries inventory risk, but as the creator, producer, and retailer of this product, we can expect to deliver 70% gross margin from this revenue stream.

And finally, third-party original. This is the combination of brand platform revenue and take rate when an original product is produced by New Guards, sold to third-party retailers who in turn sell this product on our platform. We expect this revenue stream to be a key aspect of the overall partnership with our boutique partners.

As we look to H2, we will be consolidating less than five months of operations from New Guards, which we expect will add approximately $150-160 million in group revenues and GMV and approximately $30-35 million in operating profits. On the Marketplace, we believe the highly promotional stance taken across the industry is here to stay across the next two to four quarters. And [inaudible] the short-term outlook and setting growth targets for Q3 and Q4, we have decided to focus on delivering solid but not overly aggressive market share gains, remaining competitive but stepping back from excessive use of promotions, stabilizing all the contribution matrix, tailoring our customer engagement strategy, focusing on the LTV over CAC of cohorts, and creating enough bandwidth internally to integrate our newer businesses and to focus on executing on our long-term, sustainable GMV growth targets.

This means we will be actively managing our platform GMV growth to 30-35% year-on-year for the rest of 2019. As a result, platform GMV for the year is now expected to be between $1.91-1.95 billion, which represents 37-40% growth year-on-year, well ahead of the market overall. Group GMV is expected to be approximately $2.1 billion with the addition of brand platform GMV from New Guards.

In terms of underlying EBITDA, after afflicting the updated GMV growth across the second half and consolidating our new acquisition, we are now expecting a full year loss of $135-145 million, which is expected to be approximately negative 15-17% of adjusted revenue. For Q3, that means platform GMV growth of 30-35%, an EBITDA margin of negative 18-20% of adjusted revenue. We would expect approximately $30 million of depreciation and amortization charges in Q3, including an increase in the amortization of acquired intangibles following the New Guards acquisition, and we expect the Q3 shared-base payment charge will be approximately $45 million.

Looking further afield, we remain focused on our medium to long-term sustainable growth strategy with group GMV growth above 30% per annum, our past profitability, which is boosted by the New Guards acquisition and our 30% long-term group EBITDA margin target. This financial strategy is underpinned by our strong positioning within the industry, the rapidly growing direct brand e-concession business, the strong underlying customer cohort performance, the growing platform services business unit, launching Harrods in H1 2020, now for period distribution network and now our new brand platform. José?

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

Thanks, Elliot. This time one year ago, I remember writing my founders letter, reflecting my love for this industry, how I saw it evolving, and the role of Farfetch in its transformation. One year on, I am incredibly proud of what our team's achieved and the progress we've made in what I then call Chapter 2, the second [inaudible] of Farfetch ahead of us. Today, one year into Chapter 2, this beautiful industry faces incredible opportunities, but at the same time, some recent challenges. We've recently seen the difficulties of some brands, [inaudible] and retailers to adapt to what is an industry influx. Yet, this is a huge global industry, building resiliently and strongly with the three secular trends of China, new annual consumers, and digitalization gaining speed and shaping it right in front of us.

This industry is very special, very different. Luxury has to revolve around emotions, not price. Farfetch has now commanded its position as the leading technology platform for the global luxury fashion industry. In traffic and sales, we are now the largest single destination for in-season luxury, growing at twice the speed of the overall online market. This comes with a huge responsibility to do the right thing for the industry we love, but it also comes with thrill and excitement. We are reinventing the future. We're doing it for the love of fashion. [Inaudible] model has an inherent mismatch between supply and demand, and the small level of markdowns and promotions could actually help the environment. When participants start to focus mainly on price, I believe the luxury ecosystem will suffer long-term harm.

After a long period of reflection and conversations with our execs, our [inaudible] and our community, I am incredibly excited with the evolution of our strategy. Our platform vision has now extended from a platform enabling transitions to a platform enabling a global culture of fashion. This means empowering individuality, not just for consumers and for curators but also for the creators of fashion. This industry needs to go back to inspiration and move away from the growth of commoditization of luxury. While dozens of online shops sell the same products, competing on price, [inaudible] various online destinations differentiate by inspiring customers and shaping culture in their own way.

Our marriage to New Guards fits perfectly in this strategy, and I am thrilled that the New Guards' Chairman and CEO, Davide de Giglio, and Chief Commercial Officer, Andrea Grilli, absolutely share my vision of transforming the way creators, curators, and consumers interact over years to come. We believe it will be revolutionary for existing and new creators of fashion, but this will benefit tremendously the entire ecosystem. As our global and growing consumer base comes to us organically for inspiration, our regional content, and unrivaled experiences, all our participants benefit. Boutiques and brands will see their brand adjacencies elevated and again enjoy the full economic benefit of their creations. Our [inaudible] are also more excited than ever in how we are leading as a positive force for this global industry for the love of fashion.

...

Thank you all, and I will now open for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press *1 on your telephone keypad. If your question has been answered, please press # to be removed. As a courtesy to all participants, please limit yourself to one question, and for any additional questions, please reenter the queue by pressing *1. We'll pause for a brief moment to compile the Q&A roster.

Louise Singlehurst with Goldman Sachs, your line is open.

Louise Singlehurst -- Goldman Sachs -- Managing Director

Hi, good evening, everyone. José, Elliot, thank you very much. José, just in terms of the acquisition of New Guards Group, let's start with that, you talked about the new dimension of strategy. Can you highlight what that actually means in principle? We're lucky to have you on the call, so if you could think about how we should consider the multiyear strategy and what's really changed over the past 12 months to really focus our attention on the first-party expansion. And then just associated with that, if you could talk about the timing of the acquisition. There's obviously a lot going on in terms of the core business, obviously the drive to really focus on the rollout of Access and the core platform, but if you'd just talk about the platform and the timing of that acquisition.

And then thirdly, just in terms of Off-White and the other brands, is there a plan to have exclusive distribution? I may have misheard this on the call in terms of the commentary, but is that to have the brands exclusive to Farfetch plus the boutiques, i.e., it will not be on Net-a-Porter, MATCHESFASION, etc. going forward? And then, my last question for Elliot, just in terms of guidance, I think we talked about that 50% GMV growth for the full year, but if you could just clarify what that would be excluding New Guards Group? Thank you.

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

Hi, Louise. Thanks for your questions. So, I think, first of all, our strategy has not changed. We want to be the global platform for luxury. I think this acquisition extends the platform vision upstream, so this means that we, as a brand platform to our existing infrastructure, and then New Guards really works as a platform, and this is actually how they define themselves. And I think it's important to note that this is not a 1P business, so for the majority of their business, they do not take inventory risks, so they close with 9-10% of inventory as a percentage of total revenue, most of it roughly translates to retailers that have already placed orders, so the risk is around 5% [inaudible] 1P exposure. So, this really doesn't change much, the 1P exposure that we already had with [inaudible] opens up and [inaudible]. So, it is a platform play. It is a platform play that brings our capabilities upstream.

And I think what's really exciting for us is this ability to elevate the Farfetch brand with exclusive collaborations, exclusive [inaudible] and in the future with totally exclusive brands to our boutiques and the platforms. So, to answer one of your questions regarding the current distribution of Off-White, we will respect these contracts, and this will be ultimately a division by the NGG management, and of course, it's very clear what we believe. We believe in direct-to-consumer, we believe in [inaudible] fashion, we believe in active wholesale, so wholesale that is truly on the channel with real-time visibility of transactions and data. This is where the industry's going. This is where the B-groups are going. This is where New Guards will be going. As long as those patterns, those historical commercial patterns of NGG follow that path, I think they are a tremendous amplifier for those brands, and therefore, I don't see any change there.

Elliot Jordan -- Chief Financial Officer

And Louise, just in terms of guidance, so the 50% year-on-year including New Guards, this is a group GMV level to $2.1 billion. The New Guards is roughly $150 million. That's my estimate for the GMV that will come through after the consolidation period starts. So, if I take that off, we're at around 39% year-on-year excluding New Guards, and that ties into the platform GMV growth, as I say, 37-40% is the updated guidance for the full year. Obviously, 44% over the first half and 30-35% growth across the second half.

Louise Singlehurst -- Goldman Sachs -- Managing Director

Great. Thank you.

Operator

Our next question --

Elliot Jordan -- Chief Financial Officer

I should point out, that's still well ahead of all of our competitors.

Operator

And our next question comes from Douglas Anmuth with JP Morgan. Your line is open.

Douglas Anmuth -- JP Morgan -- Managing Director

Great. Thanks for taking the questions. Elliot, can we stick with guidance? Just trying to understand the platform GMV better, the 30-35% that you're talking about for 3Q and the 37-40% for '19, particularly when you have Stadium Goods and China's earlier integration and expected in there as well. So, just trying to understand the pressures that are there, and then you talked about it as being partly a managed outcome as well or managing the growth. Help us understand that better. And then, just second, and it may be related, if you could help us understand the backdrop around the increased competitive pressure, more the geographies where you're seeing that and the types of retailers. Some more detail there would be helpful. Thanks.

Elliot Jordan -- Chief Financial Officer

Sure. Sure. Hi, Doug. Let's start with that because that I think drives everything we're talking about. Really, over the June period, sort of the second half of the quarter, we saw a substantial step-up in the promotional environment from I guess traditional offline retailers and also online e-tailers. Traditional offline retailers, we suspect it's because the traffic's not there, so they're having to promote. They're going earlier in terms of sales, they're going into mid-season sales, they're going quite deep in terms of discounting -- you know, basket-level promotions on sort of a blanket approach. That then flowed into the e-tailers, so our major competitors online, they're growing low single digits to prevent themselves from going into negative growth. They've had to promote quite heavily to remain competitive, and that all flows into our business in some respects that we've got very valuable customers.

As I said, those customers that have been with us for a few years now driving strong order contribution, we don't want them being tempted away by these competitors' promotions, so we decided to promote across the latter half of the quarter as well, and that's obviously what's taken the order contribution margin down. So, what we did sort of looking at Q3-Q4, given that we've been growing at 44% and everybody else is growing substantially lower than that, the view is, yes, we could keep growing faster than 40%, but that incremental growth would come at the cost of very, very heavy promotions.

We don't think that's the right thing to do. We would much rather work with our boutique partners to find a full-price strategy, and so what we've decided to do is actively manage the P&L and the growth rates to 30-35% across the second half and take off that need to promote. That'll still be substantial market share gains, which obviously is the key point, but also allows us the breathing room to set up for next year, and the year after that, and the year after that with Stadium Goods, TopLife, and New Guards now being integrated into the business. So, very active decision, very intentional decision. We could keep growing if we wanted to, but we decided 30-35% is a much better place to be at.

And then, in terms of the full year, obviously, when you do the math, it's sort of 44% across Q1 and Q2, 30-35% across Q3 and Q4. That gets to 37-40% for the full year at the platform, and then as I said on the back of Louise's call, adding New Guards' wholesale connected GMV gets us up to $2.1 billion, which is the 50% year-on-year.

Operator

Our next --

Elliot Jordan -- Chief Financial Officer

Sorry, sorry. Doug asked about the parts of the market. I think in China, as José said, we're extremely pleased with how China is going. It accelerated from Q1 into Q2, so Q2, China growth was faster year-on-year than Q1. It's closing the gap on the US as our No. 1 market. I think the key thing to point out though with TopLife is, we've always said, it's a 2020 and beyond opportunity. There's still opportunities or integration, and aspects of tailoring the model fully, working with JD to target the right customer base, and so we're looking forward to that coming as a major part of the growth story next year rather than this year. And Stadium Goods, as we've always said, much smaller than the platform overall, contributing growth of course, but we're not breaking it out at this stage.

Operator

And our next question comes from Ike Boruchow with Wells Fargo. Your line is open.

Ike Boruchow -- Wells Fargo -- Managing Director

Hey, good afternoon, everyone. So, first, just to piggyback off Doug's question, I understand kinda what played out at the end of the quarter and the commentary on the plan on the back half of the year, but Elliot, is there a reason why I think you said you expect the competitive pressures in the market to last the next 2-4 quarters? I'm just curious where the analysis came from, where the thought process on that is. And then, just on the acquisition of New Guards, how does that impact the long-term targets on profitability that you guys have talked about in the past, and does it impact the timing of your ability to scale or eventually hit breakeven?

 Elliot Jordan -- Chief Financial Officer

Great questions. Hi, Ike. So, the 2-4 quarters, as you know the luxury industry works relatively slowly and is a season-over-season type sort of basis, and I'm sure you've heard the fashion houses -- Prada has said this publicly, Kirin has said this publicly -- they will be looking to pull back on the distribution in some of the traditional retailers and the e-tail model and focusing more on e-concessions, which Farfetch is the only e-concession. So, we expect that will take a couple of seasons to work its way through. In the meantime, those retailers are gonna be overstocked. Obviously, there's the demand they're gonna experience, and so they're gonna presumably continue to mark down and promote to try and drive top-line growth, or at least stem the loss. So, while the industry adjusts to the supply and demand and moves more toward Farfetch as an e-concession model, we expect that promotional environment to stay for a few more quarters.

In terms of New Guards Group, it absolutely contributes to the overall 30% EBITDA margins, so the last 12 months to April, profit before tax was $95 million versus revenue of $345 million. There's opportunities, I believe, to continue to drive EBITDA margin in that business as we leverage the synergies of joining Farfetch. So, very strong in terms of the margin targets. And in terms of route profitability, obviously a profitable business will help that path to profitability and the positive operating cash flows moving forward.

Ike Boruchow -- Wells Fargo -- Managing Director

Thanks.

Operator

Our next question comes from Eric Sheridan with UBS. Your line is open.

Eric Sheridan -- UBS -- Managing Director

I think a continuing recurring theme, I wanna stick to sort of the business mix and some of the back and forth that's going on. So, I guess we're just trying to really understand why 2-4 quarters again is the right number. What do you think sort of breaks the temperature in the industry or fever in the industry that that's the right way for investors to think about it? Because you can imagine, investors are now trying to really understand what sort of growth to run to writing in this business over the next couple of years, not just the next quarter. And then, now that we've got five lines of revenue or five different buckets of revenue, maybe following up on the last question, can you walk through a little bit more what investors should expect either in terms of linearity or volatility with respect to gross and contribution margin structure for the business going forward and how to think about that, not only just in the second half of this year but into 2020 and 2021? Thanks, guys.

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

Hi, Eric. So, I think as Elliot pointed out, moving further afield beyond Q3 and Q4, we are definitely extremely, extremely confident that we're looking at 30% growth rate, and we are absolutely managing the growth. You have seen we have been keeping our growth [inaudible] and we could continue to accelerate market share capture. Given the promotional sense of the market, we could still do that profitably because, as Elliot shared, our [inaudible] duration are extremely healthy, and we still have [inaudible] six months in spite of the promotional environment.

But we just don't think it's the right thing to do. We think it creates a vicious circle. It's not what our cherished brand partners are asking us to help them do, and we think we are going to capture market share still very aggressively but smoothing the curve to that 30%-plus growth, which absolutely remains the target for many years to come, and obviously the [inaudible] profitability and the 30% long-term EBITDA profitability that we are very confident we are going to have [inaudible]. So, the 2-4 quarters is really an estimate. The industry [inaudible] moves slowly. Could be faster. It really depends on the brands and how fast they will restrict the volume of the private brands into wholesale. They have indicated that they are doing that. We know they are doing that. We don't know how fast. It's not in our hands, but we know -- and it's in our hands -- is the expansion of the supply on e-concession, which is absolutely remarkable.

As you can see, 275% growth of supply from Prada, high triple-digit growth from the main luxury groups, but then if we look at the 450 brands that now operate direct e-concessions on Farfetch, of which we've had 100% retention rate, by the way, in the last three years, and it shows the industry is really moving to a direct-to-consumer model of which in the multi-brand realm, Farfetch is the only global e-concession player. The fact it will trend is definitely strongly, strongly in our favor. We just think that right now, we will help the brands in the transition, and we will ease on the response to the aggressive promotional stance, and slightly motivate what is a very, very aggressive market share capture. But long term, this 30% growth is something we always had in our model and something that we are actually increasingly bullish about.

Elliot Jordan -- Chief Financial Officer

Just in terms of the five revenue streams, so obviously, we're very confident on the 30% GMV growth moving forward over the long term that we've already always said that from the outset of the IPO that that's the target for us. And if you break that out and look at the new revenue streams, clearly the third-party business is growing very strongly with new clients within the platform solutions business coming onstream next year. That will help drive that growth next year. If I look at what we've purchased in terms of New Guards, the connected wholesale revenue grew 50% year-on-year across the first half. That's at 40% gross margins, and it should continue to grow at good levels as we bring on new brands. It's not just about the brands that are currently in existence within New Guards. It's a factory of brands and can achieve more growth from new brands coming onstream next year.

The 1P business and the 1PO business, obviously, 10% of our revenue at the moment. With 1PO coming on board, we can expect that probably to go to 13-15%, but of course, the third-party business with e-concessions growing will be hard to match, even with the first-party business that we've acquitted through New Guards. And then, lastly, the third-party original, that's really just a combination of what we're already seeing with third-party sales already on the platform, but obviously adding in the fact that the wholesale margin will also be captured for brands bought and sold on the platform by our third-party boutiques.

Operator

Your next question comes from the line of Luca Solca of Bernstein. Your line is open.

Luca Solca -- Bernstein -- Senior Analyst

Good afternoon. Thank you very much for taking my question. I wonder what is prompting you from a strategic viewpoint to be so actively engaged on M&A. You've been laying out a very long list of acquisitions starting with Stadium Goods, TopLife, New Guards Group, and others, Curiosity China, and this is making your business model more complicated. The original idea of building an Uber of luxury and fashion, digital distribution, is it possibly the case that you're seeing this original model is not working and not producing enough of a profitability so that you have to complement it with other activities? Where is this logic coming from? If you could explain it, that would be great. Thank you.

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

Absolutely, Luca. Thank you. So, I think we always said that our strategy was to give people a platform to [inaudible]. That has not changed. If you look at the acquisitions, Stadium Goods is a category that we had already. There were a seller actually on the marketplace [inaudible] that very much has shown positive growth in the industry, and it's definitely the luxury realm. The China acquisition, it's written in the mission statement, "the global platform for luxury". So, China, obviously, being a key market for us. And New Guards Group brings another dimension -- a brand dimension -- to the platform. We always [inaudible] to be one of the tools in the toolbox. We were very passionate to have the patents for this company. I think it reflects, in fact, the extraordinary execution.

We're talking in the terms of New Guards, the company with give or take $500 million in annualized sales and almost 30% profitability know that some of the cash in the bank. They were not looking for a financial transaction. They were looking for a strategic partner that could really elevate their business. So, the result of the success of our model is precisely why these very, very successful companies wants to partner with us. And when we see opportunities for making progress on our platform vision, we will seize them. We will seize them studiously, cautiously. As you may imagine, there are hundreds of opportunities that every single day are put in front of us, but when they are absolutely world-class companies, such as New Guards, these are opportunities that absolutely make sense [inaudible] in our strategy, then we will take them.

Operator

Your next question comes from the line of John Blackledge of Cowen. Your line is open.

John Blackledge -- Cowen -- Senior Equity Research Analyst

Great. Thank you. Just a couple questions. I've been hopping between calls, so I apologize. On the guide in the lower platform GMV guide, was it just promotions? Just curious is you saw maybe a slowdown or something as the quarter progressed, which maybe led to the little bit of a lower guide in the back half of the year. Second would be if you could talk about the Stadium Goods integration and maybe I don't know if you can call out the impact or what it added to the platform GMV growth in the second quarter? And then, the third question would be the JD integration. Sorry if you've talked about this already in the Q&A. Just any color on kind of traffic differences you're seeing in browsing and/or purchasing with the Farfetch store on JD versus your consumers using the local app and/or the webpage? Thank you.

Elliot Jordan -- Chief Financial Officer

Hey, John. Good questions. So, in terms of the quarter, it was excellent. As we were saying, it was the promotional environment really that it's across the board, and to sort of follow-up on one of the earlier questions, it wasn't in one particular market. It was pretty much global. With Europe, within Asia as well, we saw very, very heavy promotions, and obviously, we wanted to go toe-to-toe to be competitive for our customers, so it's very hard to unpack within that anything other than the competitors are really feeling it. With Farfetch growing at 44%, we're obviously stealing significant market share from the e-tailers, and obviously, the shift from offline to online, we are helping drive that because we've got one of the best propositions out there and the broadest range of products for the customers. So, I think what we were seeing was the retaliation on Farfetch's position, and that's what we're seeing.

My view -- and shared by the board as we discussed the second half -- was let's moderate the growth. Let's focus on long-term, sustainable growth. Let's not carry on down the road, which could lead much further down in terms of profitability of the whole industry by continuing to promote and much better to focus on long-term customer value and drive that view rather than promote. But that's really the view on the guidance and why we've decided to go for 30-35% versus higher than that.

In terms of Stadium Goods, we're not really breaking it out. It is a small part of the overall platform and obviously helps over the longer term but really isn't worth breaking out of the numbers. We're talking overall platform growth, and that's what we're guiding toward.

In terms of JD, we're seeing interest from customers on the JD platform. Clearly, China is an environment where you need to learn as you go what suits for customers on various channels. The team has done an absolutely fantastic job driving faster growth across Q2 than across Q1. That has come from not only JD's go-live, but more importantly from the core product out in China being the [inaudible] and the portal itself more broadly, the website more broadly. So, we're very pleased with China overall. We think we're well set up as the luxury gateway for China to be able to have more brands as we have been saying, and now with us as an e-concession model, so we've now got over 450 brands e-concession, and China obviously is open to them via Farfetch. So, a huge opportunity and a huge opportunity for Stadium Goods to go live with their own app in China as well. So, very excited about what that opportunity could be. JD will be a part of that from 2020.

Operator

Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

Anthony -- Oppenheimer -- Analyst

Hi. Anthony on for Jason. Just a quick question. Does owning brands through New Guards put you in conflict with any of the 3P customer brands?

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

José here. Thank you for your question. So, this is something that I have actually personally [inaudible] obviously in a very confidential way and without naming the targets. We have key partners and have got a very, very strong level of confidence. I think it's on the contrary. I think luxury brands wants to be on Farfetch because Farfetch has amazing brand adjacencies, amazing other luxury brands and other products that they want to be seen next to. To put it in perspective, we have 3,000 designers represented in the platform. 450 are direct, the others are [inaudible], and this is what attracts the likes of Gucci, and Prada, and other [inaudible] the incredible level of luxury and brand adjacencies. This move, I will take that even further. So, I am entirely, entirely confident that we will reinforce and elevate the image of our [inaudible] around original content that will benefit [inaudible].

Operator

Your next question comes from the line of Ed Yruma with KeyBanc Capital Markets. Your line is open.

Ed Yruma -- KeyBanc Capital Markets -- Vice President, Equity Research Analyst

Hey, good afternoon. Thanks for taking the questions. I guess, first, given this very difficult trading conditions in luxury, what is the overall health do you think of the boutique partners that you have? Are you seeing maybe potentially higher rates of going out of business given some of the discounting? And then, two, as it relates to overall industry inventory levels, is your expectation that the luxury houses are able to pull back on inventory? Do you think the demand improves and kind of what underpins maybe some of the improvement you're hoping for longer term? Thank you.

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

So, in terms of the boutiques, actually, we have seen a lot of health. A lot of health coming from small multi-brand luxury boutiques that have embraced another channel vision. We have extremely high retention, I think it's very close to 100% on our [inaudible] network. And I think that actually is in contrast with the [inaudible] who unfortunately have had a much harder time. And in general, I think the smaller [inaudible] in good health. It's really the last [inaudible] e-tail that is obviously much more demanding in terms of the sheer amount of dollars to drive the next [inaudible] even working capital technology and construction to stay relevant, and this is where we see most of the time in the industry.

I think the general dynamic, the brands I think are very clear, some very publicly and [inaudible] they've added privately [inaudible] and in private from other brands. The brands have been very clear, and the model, they can move to direct-to-consumer being their own brand of [inaudible] obviously but also multi-brand e-concession because we all understand that the consumer shops multi-brands [inaudible] so in the future [inaudible] and in the online world, we see that more exacerbated because no one downloads 200 apps on the phone. So, the brands are clearly trying. It's not that they can't move [inaudible] wholesale but into more direct-to-consumer models of which Farfetch is the only global e-concession model.

How fast they'll get here to make the transition, it's a question I don't have the answer for. At hand, we estimate 2-4 quarter time frame. On our side, we will do everything to accelerate it, and as you've seen, e-concession, we're adding every quarter to the platform, and we've guided over 40 e-concessions to the platform. The main ones are global [inaudible] supplies in triple digits, so we're doing out part of the equation, which is welcome the brand, provide the resources and the themes of reintegration so that they can move as fast as possible to our model. Then, the brands will have to do their [inaudible] in terms of taking a little bit of a hit on their wholesale revenue and diebacks from that channel, so [inaudible].

Operator

The final question will come from Marvin Fong of BITG -- BTIG, I apologize.

Marvin Fong -- BTIG Research -- Director and E-Commerce Analyst

Great. Thank you for taking my question. Just a question on demand generation expense. Given the promotional environment, is that something you're either gonna dial up to generate business, or is that something you might dial back down just to maintain good return on your spending? And then, second question, just to give us some additional comfort that this is mainly a promotional phenomenon, could you maybe comment on how orders or growth in active consumers is behaving? It was very good in the second quarter. Could you maybe give us some update on how it's trending thus far in the third quarter? Thank you.

Elliot Jordan -- Chief Financial Officer

Hey, Marvin. So, just in terms of demand generation, you'll see actually from Q1 to Q2 as a percentage of GMV the demand generation dropped back a little bit, so we were able to pull back on the demand generation as we are targeted to the right level of customers [inaudible] reliance on paid search, moving more toward lower-cost channels such as social media and retargeting display, of course, and affiliates, and then into more organic channels, including what's coming through from the loyalty program, Access, in terms of organic engagement. And we saw quite a lot of organic traffic build on the back of the Farfetch communities initiatives, so we are seeing a lot more customers on the website or predominantly through the app actually on a more organic profession as they start to be inspired and engaged by the content that we're now putting through on a day-to-day basis.

So, that's a significant opportunity for us at 7.1% of GMV. That's roughly 19.5% of our revenues, and so still opportunities to bring that down even further as we build that organic engagement. At the moment, we are making sure we focus on new customers and bringing them into second, and third, and fourth-time orders, so we are pinging them a little bit more in terms of media spend, particularly on that retargeting to drive that. It's a flip between new customers into existing, as I said earlier on. Once you get to a mature state, we are retaining 55% of the revenue from the lower contribution basis, so very strong profitability from a total-by-total basis, and then [inaudible] payback within six months. So, we're always tailoring the spends, the promotions, and organic traffic to make sure that it's the right cost-to-serve versus this revenue per visit, and those are all in a very good place.

Operator

There are no further questions in the queue. I turn the call back over to the presenters.

Alice Ryder -- Vice President of Investor Relations

Great. Well, thank you all for joining us. We look forward to speaking to you on the call next quarter.

...

Operator

This concludes today's conference call. You may now disconnect.

Duration: 83 minutes

Call participants:

Alice Ryder -- Vice President of Investor Relations

José Neves -- Founder, Co-Chairman, and Chief Executive Officer

Elliot Jordan -- Chief Financial Officer

Louise Singlehurst -- Goldman Sachs -- Managing Director

Douglas Anmuth -- JP Morgan -- Managing Director

Ike Boruchow -- Wells Fargo -- Managing Director

Eric Sheridan -- UBS -- Managing Director

Luca Solca -- Bernstein -- Senior Analyst

John Blackledge -- Cowen -- Senior Equity Research Analyst

Anthony -- Oppenheimer -- Analyst

Ed Yruma -- KeyBanc Capital Markets -- Vice President, Equity Research Analyst

Marvin Fong -- BTIG Research -- Director and E-Commerce Analyst

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