Bright Horizons Family Solutions Inc (BFAM) 2012 Q4 法說會逐字稿

Good afternoon and welcome to Bright Horizons' fiscal fourth-quarter and full-year 2012 earnings conference call (operator instructions). Today's call is being recorded. At this time, I would like to turn the conference call over to Mr. Dave Lissy, CEO. Please go ahead, sir.

Thanks so much, Robin, and hello to everybody who is joining us on the call today. Joining me on the call is Elizabeth Boland, our Chief Financial Officer. And before I kick things off with more formal remarks, let me let Elizabeth go through a few administrative matters. Elizabeth?

Thanks. Hi, everyone. Our release went out today after the close of the market and is now available on our website under the investor relations section at brighthorizons.com. This call is also being recorded and is being webcast and a complete replay is available in either medium. The phone replay number is 877-870-5176, or for international callers, 858-384-5571, with conference ID number 409846. This information is also in the release. The webcast will be available as well at our website under the investor relations section.

In accordance with regulation FD, we use these conference calls and other similar public forums to provide the public and the investing community with timely information about our business operations and financial performance, along with our current expectations for the future performance. We adhere to restrictions on selective disclosure and limit our comments to items previously discussed in these forums. Certain non-GAAP financial measures are also discussed during the call and detailed disclosures relative to these measures are included in our press release as well as the investor relations section of our website.

The risks and uncertainties that might cause future operating results to vary from what we describe in our forward-looking statements made during this call include our ability to successfully implement our growth strategies, including executing contracts for new client commitments, enrolling children in our childcare centers, retaining client contracts and operating profitably in the US and abroad; secondly, our ability to identify, complete and successfully integrate acquisitions; third, the capital investment and employee benefit decisions that employers are making; fourth, our ability to hire and retain qualified teachers and other key employees and management; next, our substantial indebtedness and the terms of that indebtedness; and lastly, the other risk factors which are set forth in our SEC filings, including our registration statement on Form S-1.

So, now, back to Dave.

Thanks, Elizabeth, and I know you've waited five years to be able to read your Safe Harbor statement.

Having recently met with some of you on the road show in January, it's good to be here today talking with you again about how we finished up 2012 and to give you an update on how we see 2013 playing out. As you know, it's been almost 5 years since we went private and we're excited to once again be telling the Bright Horizons story to the public markets.

Let me begin today with a review of our fourth-quarter operating results and, when I'm done, I'll talk a little bit about where we see 2013 playing out, and Elizabeth will follow up with a more granular detailed review of the numbers and our outlook for 2013, after which we'll open it up for questions.

So, first let me recap the numbers for the quarter. Revenue of $273 million was in line with our forecast and up 10% over prior year. Our adjusted EBITDA of $47 million was up 21% and adjusted net income of $9 million increased 10% in the fourth quarter of 2012. For the full year 2012, our revenue totaled $1.1 billion, a 10% increase over the $974 million we reported in 2011.

Adjusted EBITDA of $181 million was up 22%, representing an expansion of 160 basis points to 17% of revenue. Adjusted net income rose 62% to $38 million for the full year of 2012.

Now let me give you a little more color on our operating performance. In 2012, we continued to deliver on our long-term plan to grow our core center business while expanding our newer lines of business and growing our footprint outside the United States. Overall, we increased our full-service center capacity by 5%. We added 50 new centers last year. Some of these highlights include new centers for new clients like Chevron, Weatherford, the Home Depot, Newell Rubbermaid, United Therapeutics and Tulane University. We also continued along our path of adding centers for existing clients, as we did for Bayer and Georgia Tech, among others, as well as new lease consortium centers in several key markets around the US and the UK.

We continue to execute on our strategy and expansion of market leadership in the UK, specifically with the acquisition of Casterbridge, a 27-center group that we added in May of 2012. Our backup and educational advisory areas continue to grow nicely as we continue to prove the deep value proposition that those services offer to our clients.

Lastly, consistent with what we've done over several years, we continued to have the center closures with a total of 15 closing here in the US and 13 in Europe. Those closures continued to be due to either center underperformance or to client mergers/acquisitions or changes in their workforce geography or strategy. In addition, this year, 10 of the 13 sites that closed in Europe were part of an ongoing initiative by the UK government to shift costs from the public to the private sector. So, when we work with them to go through this process, 10 of the sites closed as a result of that. But these centers were much smaller than average, having come to us through an acquisition many years ago and, collectively as a group, they contributed approximately $500,000 in total contribution. So, the impact is really not that significant.

We are pleased to continue along our long-term plan to improve our operating contribution again this past quarter and for the full year. As I said earlier, gross margin improved 160 basis points in 2012 in both the fourth quarter and in the full year to 23%. Similarly, income from operations excluding one-time expenses associated with the stock option exchange we completed in the second quarter and costs associated with preparing for our IPO and refinancing increased $6 million in the quarter and $26 million for the year, or 160 basis points to 10.5% of revenue for the full year from 9% in 2011.

Let me quickly review the main drivers of how we achieved this performance. First, we achieved tuition rate increases that average 3% to 4% across the network and we're paced ahead of our cost increases in our full-service segment. Second, enrollment growth in our mature group and ramp-up of our class of newer centers contributed. Third, the new centers that we added in 2012. Fourth, expanded client relationships, which led to continued growth and improvement in our backup business; and lastly, growth and associated scale benefits of our UK operations.

So let me now turn and focus my comments to an area which I'm sure you all are focused on, and that is our plan for 2013. Our plan for this year contemplates the addition of 50 to 55 new centers, resulting in 35 to 40 net of expected closures. This is inclusive mostly of organic center growth with some anticipated acquisition growth.

The organic new center growth will be achieved in large part due to the strength of our pipeline of centers that are currently under development. Broadly speaking, the mix of centers in the pipeline is representative in size, geography and operating model of our existing base. With respect to industry mix, we continue to see good momentum within the higher education, technology, healthcare, and energy sectors with both new clients and new centers for existing clients in the pipeline. As we typically do each year, we expect to round out our new center openings in the year with a group of transitions of management of centers that are either self-managed by the employer or by managed -- or managed by a competitor, and also by acquiring centers.

As you know, we've acquired groups of centers in every year over the past 10 years plus and expect that our track record of adding value in this area will continue once again in 2013. The timing of acquisitions is variable, unlike the pipeline for organic growth, which builds more steadily over time. And while we make it a practice not to comment on deal specifics, the quality of our acquisition prospects is very good and, over time, we expect that roughly a third of our growth will continue to come through the acquisition of high-quality centers and providers across the countries in which we operate.

Another important piece of our story in 2013 and beyond will be the growth of our newer lines of business led by our backup dependent care services which we expect to grow and contribute to our margin expansion once again this year. Although still our smallest sector, educational advisory services grew nearly 30% in 2012 and we are particularly encouraged by the interest in our EdAssist tuition advisory business, including the cross-selling success we've had for this service with our existing clients. These services allow us to offer a broader value proposition to the employer clients that we serve, enabling them to reach their employee populations through more key life stages and in more locations than we ever could in the past.

All in, we still only have roughly 15% of our clients who utilize more than one of our four services, and we believe this cross-selling and up-selling opportunity will continue to be an important driver over the next few years. As these services continue to expand, we've made significant overhead investments to establish solid service delivery platforms as well as dedicated marketing and account management resources necessary to realize the growth potential of both the backup and the educational advisory areas.

On the pricing side, we believe that the 3% to 4% tuition increase that's consistent with our track record will continue once again in 2013 and we anticipate that it will track ahead of our budgeted center cost increases by approximately 1%. We also expect to continue the positive trend in enrollment growth in our mature class of profit and loss centers that have been steadily regaining enrollment for the past two years which will also contribute once again to our gross margin expansion.

Another important goal this year will be to continue to enhance the key drivers of quality in our centers. We continue to work very hard in a field plagued with annual turnover rates north of 50% to enhance our culture and work environment which helps us to create our long-term competitive advantage. It's our goal to be the employer of choice in our field and we are encouraged to see our annual turnover rates continue to approximate 20%, which is less than half the industry average.

Our efforts in this area were once again nationally recognized with our designation by Fortune Magazine as one of the 100 Best Companies to Work For in America for the 14th time.

Additionally, we continue to invest in the quality of our programs through new curriculum enhancements, online training and technology that allows for the more efficient communication between our centers and the families that they serve. Overall, we are excited about the opportunities that lie ahead in 2013 and beyond. Our current outlook specifically in 2013 is for revenue growth that approximates 8% to 10% over 2012 levels. This is comprised of 3% to 4% price increase, a range of 1% to 3% growth in the enrollment in our mature and ramping center classes, 1% to 2% coming from net new organic full-service center additions, 1% to 2% growth from our backup and educational advisory services and approximately 2% to 3% coming from acquisitions, including the lapping effect of acquisitions completed last year.

Thus, when you add it up and look at the year, we expect organic growth to approximate 6% to 8% in 2013. We anticipate that this growth will allow us to leverage operating margins 60 basis points to 90 basis points. This will drive expansion of adjusted EBITDA to a range of $205 million to $212 million and adjusted net income to a range of $76 million to $79 million.

Thus, our guidance for earnings per share for the full year in 2013 is a range of $1.15 to $1.21.

With that, we'll get into a little more granular detail on the numbers, specifically focusing on some of the costs related to the IPO and the refinancing, among other things. So I'll turn it over to Elizabeth and I'll be back with you during Q&A. Elizabeth?

Great, thanks. So as Dave said, he's gone through the top-level results for the quarter, and I'll get into some of the details underlying those results.

In general, as a reminder, the figures that I'm going to compare will exclude the $15.2 million in one-time stock comp that we had in 2012 and $1.8 million in IPO and debt refinancing related costs that had been reported in the P&L in 2012. Reported overhead operating income and net income are all affected by these expenses.

Also, our earnings release includes a table that reconciles our US GAAP reported numbers to the additional metrics we report about our results, specifically adjusted EBITDA, adjusted income before taxes and adjusted net income. You can refer to the release for the details on what comprises these measures.

So, top-line revenue growth was $24.5 million for the fourth quarter and $97 million for the year. Overall, the full-service center business increased $19.3 million in the fourth quarter and $78.4 million for the full year, including approximately $26 million from the acquisition of Casterbridge in May of 2012.

New clients and expanded relationships with our existing clients drove increased revenue in both the backup dependent care segment which added $3.8 million in revenue for the fourth quarter and increased 13% for the full year to $129 million, and in the educational advisory business, which overall grew $4 million or 28% in 2012 to a total of $18.6 million.

Gross profits increased $9.7 million to $63 million for the quarter and were 23.1% of revenue compared to 21.5% in Q4 of 2011. SG&A totaled $28.1 million or 10.3% in the fourth quarter and was $106.5 million or 9.9% of revenue for the full year 2012, again, excluding the one-time costs for the exchange of stock options and costs associated with the preparing for the IPO and refinancing described earlier.

Let me add a little bit of color about Europe as we are realizing modest overall overhead leverage as we grow our operations there. This has been offset partially in 2012 by the initial overhead we've absorbed in the UK in connection with the acquisition of Casterbridge which will be reduced over time as we complete the integration, and in the Netherlands as we continue to scale that business.

In our other segments, the backup dependent care and educational advisory divisions both require more intensive levels of overhead than the full-service business, including incremental investments in information systems and support which are fundamental elements of the service delivery.

On the full-service child care side, our rate of overhead spend typically mirrors past periods. As we look ahead the next couple years, continued vigilance on cost management paired with prudent investments to support growth will enable us to regain modest leverage in our overhead rate after 2013.

Amortization expense totaled $6.6 million in Q4 of 2012 which is similar to last year and was just under $27 million for the full year, down only slightly from 2011. Net interest expense was $22 million for the quarter compared to $19 million in the prior year as a result of additional borrowings on the term loan C in May of 2012 that we borrowed to complete the Casterbridge acquisition as well as additional interest on our 13% PIK notes.

Full-year interest expense of $84 million in 2012 and $83 million in 2011 reflect the full-year effect of these two factors and the ongoing interest obligations on our other debt that was outstanding for the year. We had no borrowings outstanding during the year under our revolver, and I'll talk more in a minute about the details of the refinancing that was completed in January of this year.

For 2012, we generated free cash flow of $66 million compared to $109 million in 2011. The main drivers of this decrease were the reduction in tax refunds received of $23 million arising from the one-time benefit we realized in 2011 and $16 million of incremental maintenance capital spending primarily related to certain IT systems and home office renovations that are nonrecurring. We ended the year with approximately $34 million in cash.

Now let me recap a few operating stats. At December 31, we operated 765 centers, total capacity of 87,100, which is an increase of 4.5% from 83,400 at the end of 2011. We operate approximately 70% of our contracts under profit and loss arrangements and 30% under cost plus contracts.

For our full-service centers, the average capacity per center is now 138 in the US and 70 in Europe.

To give a little more detail behind the guidance for 2013, I will first isolate the impact of the recent capital markets transactions, specifically our IPO and the concurrent refinancing which as a reminder were both completed on January 30 of 2013. We expect to incur a total of $81 million in the first quarter in 2013 connected with the one-time or nonrecurring charges associated with these transactions. Let me just break that down for you.

First, we expect to incur $63 million in connection with the extinguishment of the debt $41.4 million for the redemption and $21.6 million for the write-off of unamortized deferred financing fees and OID that were associated with the debt that was repaid. Second, we expect to recognize $12.5 million in one-time costs in connection with completing the IPO. These costs are the $7.5 million fee to terminate our sponsor management fee arrangement with Bain Capital and, second, stock option expense of approximately $5 million for options that vested upon the completion of the IPO. These expenses are nonrecurring and will be included in overhead.

Lastly, interest expense for the first quarter of 2013 will reflect the old debt structure for one month and the new debt structure for two months resulting in $5.3 million higher interest than we will expect going forward.

Our top-line projection for 2013 anticipates revenue growth approximating 8% to 10% over 2012 levels, as Dave said, or growth of $85 million to $105 million for the year. We are projecting, as he said, to generate 60 to 90 basis points of operating margin improvement in 2013, primarily from expanded gross margins as we are not expecting to leverage overhead as I mentioned before in 2013.

Excluding the $12.5 million in one-time charges associated with the completion of the IPO that I just mentioned, this translates to adjusted operating income margins for the full year ranging from 11.1% to 11.4% in 2013. This compares to an adjusted 10.5% operating margin for 2012, which is the level that we are reporting now, excluding the $17 million in one-time charges for the stock option exchange and IPO-related expenses.

Turning to a couple of other items on the P&L, we expect amortization expense to approximate $27.4 million for the year, including $20 million that's related to our May, 2008 LBO. We estimate stock compensation expense will be $10.5 million, including the $5 million one-time charge in Q1 related to completing the IPO. Interest expense, which includes the amortization of deferred financing fees and OID on the debt issue in January of 2013, so the new deferred financing and OID, is expected to approximate $41.5 million for the full year. For Q1, interest expense is projected to be approximately $14.5 million, including the impact of the previous credit arrangement through January 30, which as I mentioned a minute ago, will add $5.3 million to the ongoing expected quarterly interest.

As a result, for the rest of 2013, interest should approximate $9 million per quarter.

We are projecting adjusted EBITDA of $205 million to $212 million for 2013, which is an increase of 14% to 17% over the $181 million that we are reporting for 2012. We are also projecting that we will generate $145 million to $155 million of cash flow from operations, or $120 million to $130 million of free cash flow net of the projected maintenance capital spending of $25 million. As I mentioned before, in 2012 we generated $107 million of cash flow from operations with $66 million of free cash flow net of about $41 million of maintenance CapEx.

Based on the centers in development and slated to open in 2013, we also expect to invest $35 million to $45 million in new center capital which compares to about $28.5 million in 2012. Additionally, our 2013 plan contemplates $20 million for routine tuck-in acquisitions.

Turning to the tax rate for a moment, we expect to have an effective tax rate of approximately 32% on our GAAP reported pre-tax income for the full year of 2013. On an adjusted pre-tax income basis, which will exclude the effects of the one-time costs that I talked about before -- the $63 million for the refinancing as well as non-cash costs for amortization and stock compensation expense and also our management fee paid to our private equity sponsor through the IPO, we project that our effective or structural tax rate will approximate 37% in 2013, which is similar to that illustrated in the earnings release for the full year 2012.

All of this comes together, the combination of top-line growth and margin leverage leads us to projected adjusted net income overall in the range of $76 million to $79 million.

In order to get to EPS figures, we're going to walk through a little bit of detail on the share count, because prior to the completion of the IPO, we had the equivalent of 52.8 million shares outstanding after giving effect to the conversion of our prior class L shares to common stock. We sold 11.6 million primary shares in the IPO and, including the effects of stock options, we have approximately 66 million fully diluted shares currently outstanding. Since the IPO shares will be weight averaged to take into account their issuance dates, and assuming the conversion of the class L shares as of January 1, 2013, we estimate that the weighted average shares outstanding will approximate 62.5 million shares for the first quarter and for the full year will approximate 65 million to 66 million shares.

Based on these share counts, we have arrived at an estimate of our adjusted pro forma earnings per share in the range of $1.15 to $1.21 for 2013.

Now, looking specifically to Q1, because we'll provide forward guidance for one quarter, we are estimating revenue growth of 10% to 11% in Q1 and adjusted EBITDA of $48 million to $49 million. As I had mentioned, the cost associated with the refi and the IPO will be recognized in Q1. Net interest expense will be higher by the $5.3 million, and including these effects using the overall effective tax rate that I mentioned of 37% on the adjusted income before tax, we are projecting adjusted net income in the range of $14.5 million to $15.5 million in Q1. And on this basis, adjusted EPS would approximate $0.23 to $0.25 a share for the first quarter on those 62.5 million shares outstanding.

So that's a lot to digest. But with that, I'm sure some of you have some questions in queue, and so Robin, we are ready to go to Q&A.

(operator instructions). Gary Bisbee, Barclays.

Congratulations on successful completion of the IPO.

Thanks.

Thanks, Gary.

So I guess I'll try to stick to the two questions, but the first one, the backup advantage, can you just give us an update on how successful you've been at up-selling this to existing customers? And where are we in the process? Have you gone out and made a sales call to all the existing customers? What's the penetration? How do we think about how big this can get, how quickly? Just any sort of color on that would be great.

Yes, obviously, backup has been a fast-growing piece of our story, Gary, as you know for a while. And what the backup advantage has done just going backwards and I'll go forwards has really unlocked what had been somewhat of a gating factor when we had a center-based backup business only in that we can only service a certain slice of a given client's population. And now for the past several years, we have the ability to serve the full population of any given employer wherever they live or work, not only with child care, but through other issues that cause backup challenges in people's ability to get to work.

So we've been out there for a couple of years, although the product itself has expanded pretty significantly really in the past, say, two or three years in terms of its full capability. But I think it's safe to say that we are out there talking to clients about it. We've rebuilt our sales force to really contemplate this cross-selling effort, expanded it, focused our team on it. But I still think it's relatively early days with respect to its full acceptance, not only, by the way, to selling it to our existing clients, but to opening the door with new clients which I think if we look at the growth in backup it comes about half from clients who never had a relationship with Bright Horizons before and half from those who expanded.

So we have it growing at slightly higher than the core business in 2013, much like it did in 2012. And I think it's early days to comment on what the ultimate ceiling is on that, but we think there's good growth opportunity in that order of magnitude for several years.

Okay. Great. And then the follow-up. Could you expand a little bit on what you said about what's going on in the UK? Have they changed the policies in a way that makes this a less attractive market opportunity? Or what exactly happened there?

No. No. Not at all. In fact, what happened was, we had acquired a company almost 10 years ago now that had a group of contracts with some of the UK government agencies over there, and they were kind of clustered. There were groups of really small centers. And I think what happened was those agencies have been contemplating really for the past two years rethinking the financial model, how to sponsor it. And we worked with them and what we found was we were very comfortable in continuing to operate some of them, but not all of them, because some -- the ones we were uncomfortable with were either in geographies or were so small that didn't make it attractive to us.

So what we weren't comfortable with continuing ended up closing, and we ended up proceeding to manage the rest of the group within that cluster. So, it was -- while it sort of adds to the number of closures in the quarter, as I said earlier, they were so small that the financial effect was pretty immaterial. And we don't see it -- there's not much other -- there's no sort of -- it's not speaking to some kind of trend that will affect our business we think there in any kind of significant way.

Great, thank you.

Kelly Flynn, Credit Suisse.

Thanks. Is there any chance you'd give us gross margin by segment?

We are reporting on income from ops, so no.

Okay, no problem. I also wanted to understand what utilization assumptions the 2013 guidance I guess bakes in, and maybe just a little bit of color on how we should think about the opportunity for utilization to improve and potentially be a source of upside if and as the economy improves more rapidly than expected.

Yes, Kelly. With respect to where we are for the 2013 plan, you know, just for context for everybody, we are focused on those centers in which we have the P&L responsibility for that are in our mature class. And as we have talked about on the roadshow, in that class, in 2009 and 2010, we saw a reduction in occupancy really for the first time in our history of roughly 9 percentage points of occupancy in total in that class. For the past two years we've been positively comping against that enrollment and we've regained a few points of that enrollment, but we still have roughly 7%-ish of occupancy that we think we can regain to get back to the levels that preceded where we are now.

And we're thinking that between -- and then, also, there's the class of centers that are newer in the past three years that are in various stages of ramp. So we think that between the two of those things, there is roughly 1% to 3% of growth year-over-year. All in, that's there. In the mature class, it's probably more in the range of 1% to 2% regain this year, and that's kind of how we see it going forward. We don't necessarily feel as if -- thinking about a large gain in any one year is achievable in part a little bit due to the sort of schizophrenic economic recovery, but also due to some of the gating factors that exist with our capacity being less in the younger age groups and thus taking us a couple of years to grow our own preschoolers which ultimately is the capacity group that needs to fill in the most. And so, it's just a natural sort of course within our business.

So we expect it to -- based on what we see now, we expect the regain of that enrollment to happen over the next several years.

Okay. I also wanted to end by asking you about India. I know you've spoken mostly about UK as it relates to the international strategy, but at times, you've talked about India. Could you just be a little more specific about I guess the size of that business, if you could and why you are there and how you look at that opportunity in particular over the next let's say five years? Thanks.

Yes sure. You know India is, to be clear, and I think we've talked about this on the roadshow; it's a new market for us. We have one center, so it's very small and not material to our overall Company results. That center is a cost-plus center for a large client of ours who are asked -- who we partner with in two other countries to run centers for, and in Bangalore asked us to come there to partner with them on a center that's doing really well. We are using this as an in-market sort of R&D lab, if you will, to understand how and if we should continue to expand our footprint in India.

So we will be evaluating that decision over the next year or two. There's no sort of rush to it. We think the market has some challenges with respect to us taking commercial risk there, just given what the prevailing rates that people tend to pay for care and a quality model like ours would be poses some challenges. Of course, we are actively talking with other client sponsors about expanding their relationship into India, and we'll do that -- we'll do as many of those as we possibly can. But the real turning point will be on our decision of whether or not we want to take P&L risk there, which we don't have today, and we'll keep you updated on that as time passes.

Okay thanks a lot.

Sara Gubins, Bank of America Merrill Lynch.

I'm sorry if I missed this, but could you talk about what your organic growth was in 2012?

Sorry. So I was focused on what Dave had given for the guidance. It's about -- overall, the acquisition growth was in the neighborhood of 40%, and the organic growth with 60%.

Of the total growth.

The total reported revenue.

Oh, the total reported revenue was about 10% so, 6 percentage points organic and 4 from (multiple speakers) --

That's mostly due, Sara, to the carryover effect of the Netherlands expansion from the prior year and the larger Casterbridge acquisition that was completed in May.

Okay, got it. And then the closures that you mentioned, the 15 in the US and 13 in Europe, is that a fairly typical number as you think about it from year to year? Is that how you're thinking about it going forward?

I think we think 15 to 20 is a good number to sort of look at on average. We have the one-off, as I said -- center closures -- and openings, for that matter -- can be a little -- centers are created differently and are all different sizes rate. So we expanded capacity in the neighborhood of 5% year-over-year net, and I think that sort of expansion, give or take a percentage point either way, is about what we expect to see it net in 2013.

Okay thank you.

Brian Karimzad, Goldman Sachs.

On the backup business projections -- so I think, in 2012, it looks like you ended up with about 15% growth combined with backup in the EdAssist. And then backing into what you're guiding for, it looks like at the high end, it's kind of about 15% growth combined for the two, and in the low-end in the single digits. So I guess the first question is, as you plan for the guidance for that part of the business, are you only incorporating contracts that you have kind of received a green light on for that. And then second, if that's not the case, what are the factors that are leading you to believe that it will decelerate this year?

So I think, just starting off with your question or maybe your supposition around the range of guidance there, I think it's probably fair to say that the range for those lines of business is -- in our view is not taking at the low-end into the single digits. They would both be north of -- collectively, they would be north of 10%. It's a full-service business that is obviously the lion's share of the growth going forward, and we would expect to see it growing at a pace that's in the range to slightly lower than where we are right now.

So, it's -- I think the overall, those lines of business are consistent with the growth we've seen this year, with the range being -- just giving -- I think giving you the room around where the timing of when some of the new contracts may come in.

Yes, and, Brian, with respect to the second part of your question, our forecast takes into consideration what we know about today with respect to sales that have happened that are contracts to start, what the carryover effect of contracts that -- sorry, last year -- that aren't quite lapped yet. And, also, price increases on existing contracts as well as a little bit of speculative revenue that is not sold yet because, unlike the center business, it's very possible to still sell business this year that will actually have affect on the revenue this year because unlike centers, it doesn't need to be built. It starts -- they tend to start relatively quickly after they are sold.

Yes, exactly. Do you have any sense of kind of how much that was to the 2012 growth?

I don't think we're going to talk about the various variables. I wasn't trying to get that granular on it, but I think much like centers, when we give forecasts on these things, we take all those factors into consideration before we put out a number.

Alright, thanks.

Jeff Volshteyn, JPMorgan.

David, you mentioned you went through different industry categories. I didn't hear you mentioned government and financial services. I might have missed it, but I was wondering if you could give us some color on what are some of the trends that you see in those particular industries. Is there any impact from state and federal budget cuts that we might be seeing in the near future?

Yes, Jeff, I was commenting on some of the things that I -- within the pipeline, are areas of momentum for us. I would tell you that, for government specifically, we operate a group of centers through the GSA for a variety of agencies, and those programs are financed in a way where they put up the capital and then both the government employees and the surrounding community can use that -- the centers at varying tuition levels.

But when we look at the pie that we went through on the roadshow, the slice there I think was a little bit misleading in that it included both the government and higher education which we're going to sort of split apart in the future because I think it misrepresented a little bit, particularly in the US, the amount of centers or the amount of revenue that we have with government-sponsored centers.

That's a long-winded answer to say we're not seeing much impact of -- on our existing centers of things that are going on, or sequestration or anything along those lines. But, it's also fair to say that I don't point to the government as one of the key growth drivers in 2013, either.

And what about financial services?

And then with respect to financial services, it's all over the map depending on the financial services company. We've got some really good things going on with some financial service clients who are expanding the services that we offer with them, and conversely, we have some contraction based on mergers and acquisitions and rethinking of work forces that are deals that were done with legacy companies that have now merged. And over time, they rethink how things are going to play out which, as I said earlier, does lead in our history to one of the main reasons for center closures, and we're seeing that play out in certain cases.

I would tell you that, when we add it up, it's probably the positives equal out to the negatives. So it's -- it continues to be -- they offset each other. But, again, I didn't focus on it as a major growth theme for 2013 because it wouldn't be one of those as compared to the other industries I talked about.

That is very helpful. If I could follow up with a question on backup. What percentage of revenues are related to the centers that you own or operate as opposed to network centers in the broader network?

Yes, and again, I'll talk about that broadly. We are not -- that's not something we'll report on in sort of specific measure each quarter, but the way the backup service works is, when you look at utilization as a whole, there are essentially three components. There are the ability to use the Bright Horizons centers, the ability to use other partner centers in our network where we don't have a location or that might be the better choice for the individual user; or, thirdly, the use of an in-home care provider with respect to either child care or elder care.

So, if you were to isolate the center-based use only, which represents about two thirds roughly of our overall use, I would tell you that roughly 60% of it traditionally has been driven into the Bright Horizons centers, maybe 65% of it, and about a third of it is driven to our network partners centers.

Thank you very much.

Jerry Herman, Stifel Nicolaus.

First question is about pricing. Have you guys already raised prices for the year? Has that already happened?

A chunk of our centers do raise price in January, and the largest segment raise price in September.

Great. And then with regard to funding, and I guess government funding in this case, I realize that the Netherlands is a small operation for you, but there have been a couple of tranches of funding cuts and some problems from -- with some of the competitors. Can you talk about what you see as any vulnerabilities in that marketplace?

Well, I think -- you know, I'll just sort of go back two years ago to our thought process for why we entered the market, and what we saw in the Netherlands was a market that had rapidly changed in five years. It went from essentially a market that didn't have a private sector child care system of any magnitude to going through a lot of growth in this sector largely driven by lots of entrepreneurs that then got rolled up into a couple of different companies, one of whom I think is the company you may be mentioning that has had some struggle. And we went over there and looked at the market and our calculus at the time was that part of the reason that a lot of these centers were developed had to do with the disproportionate amount that the government funding represented as it relates to some -- an individual's cost of care. It was a sort of over-the-top compared to any other country, and our calculus was that that would continue to, A, be -- it would continue to drop over time. And if we were going to play in the market, we had -- that consumers would become more discerning with respect to quality.

And, so while you're right to say there has been a series -- even when we first entered -- a series of differences in the subsidy levels, we anticipated that when we went in. And we think that, in part, that really hurts the operators who have operated in a low-quality way and in some geographies where we wouldn't necessarily find attractive.

So our focus is in and around the major cities, Amsterdam, Rotterdam, The Hague and some others, and I think -- we believe that the organization we acquired is among if not the best-quality operator in market, and we think we have a good opportunity to expand around the cities that I just talked about and also to participate in some acquisition -- to be opportunistic around acquisitions as some of the larger players have had some challenge.

Great, guys. I'll turn it over.

Jeff Silber, BMO Capital Markets.

Since you guys took the company public, President Obama has proposed expanding, or trying to get, I guess, universal preschool across the country. I'm wondering if that does happen -- and it's a big if -- what you think the impact on your business would be.

Yes, Jeff, this has been something that we have participated in the debate for years on and, obviously, whenever the President talks about early childhood education in any form, that's a positive because of what we believe in with respect to its effect on children's future success in life and in school.

So, generally speaking, I view it as a positive. I think it is a big if, principally because I'm cynical on whether or not there will be funding to match that rhetoric, and this is probably the third time over the course of the past maybe 15, 20 years where that idea has been discussed in this kind of significant way, only really to fall onto the states and not to be funded in ways that ever allow it to manifest itself into anything that's as expansive as what was desired. So, if it did happen, we see a system where -- and we have this in some states like Florida and Georgia, where we -- our centers would be able to participate. I actually think that a future where there is some level of funded preschool access would actually create a model that would require employers to subsidize less of the pie than they would have to subsidize unless I think be a good thing to add another sort of piece to the funding model to achieve the end result that we do.

So, we do play in universal pre-K systems in three or four states and we've managed to figure out how to do that successfully. So we'll be watching. We'll be participating in the debates. I'm not anticipating anything of significant magnitude based on what I hear actually playing out. I think the first focus will be in children with need and low income, and why support that holistically really has no effect on our business given the families that we tend to serve in our centers.

Okay great, that's very helpful. And on another note, the unemployment rate has been ticking down a bit. It's still fairly high. But I'm just wondering, are you having a little bit more difficulty finding staff for your centers?

I think our challenge for recruiting is always something that is -- we take seriously, and I think the long-term challenge for us is less about sort of economic cycles at this stage and more about the shrinking supply of qualified labor coming out with four-year degrees with early childhood majors around the country.

And so, when we were last public, at the tail end of our time we invested in a system to be able to credential teachers ourselves online. And, since that point in time, several thousand teachers have gone through the system, and we think taking matters into our own hands was critical as it relates to being able to qualify and train talented people we hire that may not have the full degree.

That said, the competition for talent differs in each market we operate in. In some places it's a little more challenging today than it was a few years ago. In other places, it remains the same, but overall I think we're in good shape.

Great, thanks so much.

(Operator instructions). Mark Marcon, Robert W. Baird.

Good afternoon and thanks for taking my question. With regards to the organic growth that you experienced during the quarter, did you see roughly 1% to 2% growth in terms of enrollment within the existing centers?

In the fourth quarter?

Right.

It was closer to 1% or so in the existing centers in Q4. So, it's comping against a year where we're -- we've begun to see the reacceleration of the enrollment. So, that is about what we saw in Q4.

Great. And did you see any regional differences, or any differences related to levels of pricing?

Mark, our centers where we have P&L responsibility tend, for the most part to be concentrated around major metropolitan areas with specific density in places like New York, Washington DC, Boston, Chicago, San Francisco, Seattle. And I say that because I think those areas have outperformed, if you will, some of the other areas of the country with respect to economic recovery. And I -- we don't see major differences between those markets.

I suspect that if we had -- so the answer to your question is, it's pretty much across the board, but I suspect if we had more exposure in some areas that didn't share some of those same characteristics, that it might differ.

Got it. And then, with regards to the backup centers, the profitability levels that you are seeing there, would you expect that to continue to improve as this coming year unfolds, or what sort of leverage would you expect to see on the growth?

Yes. I mean, if we look at the total backup business, which is how we are reporting it, we're expecting to see a continuation of the margins that we generated in 2012 once again in 2013.

Would you get any sort of incremental leverage, or it's because of the investments that you have to put in place in the infrastructure in the IT that would probably keep it down a little bit in 2013, but then we'd see the expansion in 2014?

It's the combination of what you're talking about in terms of investments. I think the business itself, as we become mature in it, I think you fully contemplate all of the overhead costs associated with it. So, we are -- our view on it is, we are unclear about how to answer that question for the long-term at this point. We'll keep you in the loop as time plays out, but our visibility for 2013 is margins that approximate the margins that we had in 2012.

Great. And then, lastly, on the pipeline you ended up with some nice corporate wins. How is the pipeline looking for 2013 in terms of big name-brand wins, like you ended up experiencing in 2012?

Yes, we'll talk about specific client names once the centers become public and open. We're not going to be able to talk about client names that are in the pipeline until they actually become public. A lot of times, that's our responsibility the client when they're ready to announce.

I will tell you that the pipeline, broadly speaking, is representative of in mix and in type of client that you saw in 2012, so, once again, some brand names across a variety of industry sectors.

Great. Thanks for taking my questions.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay, well, thanks, everybody. Thanks for bearing with us through our first public conference call in almost 5 years. We are happy to be back talking to you about the Bright Horizons story. We feel good about what we achieved in 2012 and looking ahead into 2013. We look forward to working with you. As always, we're here with any other questions, and we look forward to seeing you down the road.

Thanks, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.