Bright Horizons Family Solutions Inc (BFAM) 2002 Q4 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Bright Horizons fourth quarter conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation. I would now like to turn the floor over to your host, David Lissy.

Sir, the floor is yours.

Thank you, Ashley, and hello to everybody on our call today. Our earnings release went out right after the market closed and it’s available on our Web site at www.brighthorizons.com. With me on the call this afternoon is Elizabeth Boland, our Chief Financial Officer, and before we begin, I’ll ask Elizabeth to read our Safe Harbor Statement.

Thanks. Hello, everyone. As you know in accordance with regulation FD we use these kinds of caution calls and other public forums to provide you in the investing community with timely information about our business operations and financial performance, as well as better expectations for the future.

We adhere to restrictions on selective disclosure and appreciate your understanding of the limits to which we will be able to comment on items not previously discussed in these forums. The risks and uncertainties that may cause future operating results to vary from what we describe in any forward-looking statement, include our ability to 1) execute contracts for new center commitments, 2) to enroll children in our centers, 3) to retain clients in the center management contracts, and 4) to expand and operate profitably abroad, as well as the effects of governmental tax and fiscal policies and employers considering work-site childcare. The specific risk factors associated with our business are detailed in SEC filing, including our Form 10-K filed last March of 2002. Also, a replay of this entire conference call will be available through Friday, February 21, by calling 973-341-3080 and entering pin code 3701974.

Thanks, Elizabeth.

It’s great to be talking with all of you today about our fourth quarter and year-end results. Since this past quarter was also the end of our fiscal year, I’ll take the opportunity to review the highlights of the year as well as discuss our outlook for 2003 and beyond.

I want to first start with a brief recap of the numbers. For the fourth quarter of 2002, revenues of $108m were up 18% over last year, on net income of 3.9m, and earnings per share of $0.30 cents are both up 30%. Revenue for the year totalled $408m, which were up 18% from the full year 2001. Net income for 2002 at 15.3m was 33% over 2001 levels, while full-year earnings per share of $1.18 was up 31%. As you can tell by the numbers, we’ve performed very well this year, and I’m proud of our performance from many advantage points. We’ve now operated under weak economic conditions for over two full years. Our ability to continue to execute in our plan and produce strong top line and earnings growth on a consistent basis further underscores the resilience of our business model.

2002 also marked our fifth full year as a public company. Since that time, we more than doubled our revenue volume and tripled our earnings. This growth, I might add, was funded internally, as we’ve not returned to the capital of debt markets since our IPO and we continue to generate cash. At a time when many organizations have reduced investment in new growth platforms and infrastructure, we continue to invest in our future through our international expansion and in systems and people to support our growth and improve the quality of the services that we offer.

Perhaps, most importantly, however, has been our ability to continue to attract new clients in a diverse array of industries who understand the impact that quality work-site childcare can have on their workforce.

In 2002, we added 87 new centers to our network, solidifying Brighter Horizons position as the leading provider of high-quality, employer-sponsored childcare in the world. We now have the capacity to serve nearly 54,000 children and 11.5% increase over 2002.

Our growth this year was made up of a healthy balance of new clients and new centers for existing clients. We are proud to welcome to our network new clients such as Reebok, Starbucks, Intel, Vanrover [ph], Blue Cross/Blue Shield of Alabama, Columbia University, MIT, [Sentene] [ph], the European Commission, as well as several regional hospital systems.

We also operate over one-third of our total centers for clients with more than one site. Given the current economic conditions, it was especially gratifying to growth in this portion of our network with the addition of new centers this year and [com] [ph] such as the UAW4, IBM, motorola, General Electric Systems, Staples, Pfizer, JP Morgan Chase, and PNC Financial.

As we projected, we closed 12 centers during the year and ended the year with 465 centers in the U.S., Canada, Ireland, and the U.K.

As you might remember another important event this past year was the acquisition of Kinderquest and Red Apple. This was an important step in building our platform future growth as it expanded our geographic reach beyond central London through England and [Ireland] [ph]. We now operate in the U.K., as we do here in the U.S., as the leading provider of employer-sponsored childcare.

Aside from these acquisitions, we continue to open new centers for new clients in both the U.K. and Ireland, and at year-end we operated a total of 68 centers in Europe. Elizabeth, Mary Ann Tocio our President, and just returned from a visit there last week as part of our ongoing integration efforts. We’re proud to cut the ribbon on our new head office there and are well underway at implementing the back office systems that mirror our operations here in the U.S. We’re integrated the operations management team and have a combined marketing and sales effort underway.

As we’ve said to you in the past, we’re making the appropriate investment in overhead to ensure our long-term success and expecting integration process there to be completed this year. [Indiscernible] centers to open in the U.K. and Ireland this year includes both multinational clients who already work with us in the U.S., as well as new opportunities that we’ve developed there locally. We believe there’s significant market potential for our services in the U.K. and Ireland, and our goal there will be to build our brand as the leader and partner of choice for those importers pursuing high-quality solutions.

In addition to our core growth, there are two other areas I want to highlight from 2002. We opened five new dedicated backup centers and ended the year operating 36 dedicated centers and 44 backup programs within full service centers. Backup childcare seems to be a valuable benefit for the strong underlying business case for a wide variety of employers. As the leader in backup care, we’re able to continue to offer clients a full range of solutions tailored to meet the specific needs of each work site.

In August, we opened the initial phase of our first employer-sponsored charter elementary school with JFK Medical Center in Atlantis, Florida. The school is filled to capacity and is performing well. The permanent building and final phase will open this fall for a total capacity to serve 550 children through grade 5. We have tailored the curriculum that we originally developed at our first school in Seattle and have worked to perfect and excellent academic and economic model that will give us the ability to expand in this area where future opportunities may arise.

In summary, 2002 was another strong year for us in a tough economy. While our core business continued to grow, we made new investments abroad, expanded our leadership position in backup childcare, deepened our expertise in elementary education, and invested in the necessary infrastructure to support our growth and enhance the quality of our services. All of this positions us extremely well for the future.

So looking ahead this year, we project the continued environment of overall economic softness. In that light, our outlook neither contemplates an economic recovery nor material worsening of conditions. All of the lingering effects of the business climate that we’ve discussed with you the past two years have simply become part of our operating paradigm. Our team has stepped up and responded with a sense of urgency. We continue to aggressively market for the community in our centers that need it, and we have opened client centers for community enrollment where need be.

In several cases, we work closely with clients to provide solutions to reduce their spending by becoming more efficient without damaging core quality or eroding our margins. On the flip side, we continue to benefit from an easing of the labor pressure we felt a few years ago. This helps us both on the cost side but it also helps to reduce turnover and enhances overall program quality.

Through this period of economic turbulence, we’ve continued to stay the course on our operating plan. Given the intensity of labor cost and our model, we remain steadfast in our approach of increasing tuitions to outpace our need to increase salaries. In 2003, we expect to increase tuitions an average of 4%, while salaries are projected to rise by an average of 3.

Over the past five years, we’ve leveraged overhead from 9.4% of revenue in 1997 to 8.2% in 2002. Even as we continue to make important overhead investments abroad, we expect to continue on our plan to further leverage overhead as a percentage of revenue to 8.1% this year.

Our sales team’s focus on [indiscernible] cyclical industries has generated a number of new commitments to the pipeline from hospitals, university, and government agencies. Our current focus is to secure the commitments we need over the next six to nine months in order to give us the kind of forward visibility we need for new center openings in 2004.

As we’ve discussed with you before, we’re in a particularly strong position to continue to evaluate and execute on strategic acquisition. As those of you know, who have followed us over time, growth has been approximately 70% [indiscernible] and 30% through acquisition. Current economic conditions have created a good environment for us with fewer [indiscernible] and more attractive valuations.

This past year we focused on a pipeline of acquisition targets that meet our strategic criteria for [indiscernible] programming and financial [inaudible]. A strong balance sheet cash position will enable use to quickly capitalize on the right opportunities. Over time we have developed and excellent track record at successfully integrating new organizations to our company and now have a [indiscernible] all the challenges associated with this critical capability.

The current pipeline of committed centers to open over the course of the next 12 to 18 months continues to hold steady in the mid 50s. Centers under development in over 20 states, U.K., and Ireland. While the overall pipeline is down slightly from its height a few years ago, we have been pleased to [indiscernible] pipeline with new commitments, even as we open a record number of new centers.

Already in 2003, we’ve opened nine new centers and project that we will add between 12 and 14 in this current first quarter and nearly 60 in fiscal 2003. We expect center closings for the year to be consistent with the past few years in the range of 10 to 12, which means we’ll be passing our 500 center milestone later this year and we expect to end the year managing around 510 centers worldwide.

I’d like to finish my part by highlighting one accomplishment this year of which we’re most proud, and that’s being named one of Fortune Magazine’s 100 best companies to work for in America for the fourth time. Not only did we rank 44 out of 100 overall, but also we were ranked again first in terms of workplaces for women. Our [indiscernible] are people. In particular, the 13,000 employees who all work together to make a difference in the lives of the children and families we serve everyday. By combining a supportive work environment with a mission driven culture, we’ve been able to build not only a great place to work but a sustainable and distinctive competitive advantage in our field. And, although we cannot predict or change the world events that continue to happen around us, it’s been truly gratifying to continue our strong performance and consistently deliver on our mission through these difficult economic times.

I’m going to turn it over to Elizabeth and let her walk you through the numbers in more detail and shed some more light on our guidance for 2003.

Thank you, Dave.

I’ll start with a more detailed review of the fourth quarter and then move on to ’03. As Dave said, net income of 3.9m for the quarter grew 31%, while EPS of $0.30 cents was up 30% from the $0.23 cents we reported in Q4 of 2001. Revenues grew 18% in the fourth quarter and for the full year in 2002, and EPS advanced 30% for both periods as well. Weighted-average shares of 13m were 1.5% higher in 2002. Lastly, as mentioned in the press release, EPS this year is up a little over $0.02 cents per quarter $0.08 cents a year, due to the change in goodwill accounting rules and we’re implemented of January 1.

Top line growth is driven principally by the addition of new centers, additional enrollment in our ramping centers, and the tuition [indiscernible] that approximated about 4% this year. As mentioned last quarter, the Kinderquest acquisition added approximately $4m to the fourth quarter revenue compared to 2001.

Operating income margin, as a percentage of revenue, increased to 6.3% for the quarter, compared to 5.7% in ’01, due primarily to the elimination of goodwill amortization in 2002.

Center gross margins were steady at 14.7% as we had projected at the beginning of the year, and overhead as a percentage of revenue declined 10 basis points to 8.3% this quarter compared to 8.4% in 2001.

At the center level, we continue to manage labor and other controllable operating costs [indiscernible] with the price increases we put into place and enrollment [indiscernible]. As a result, center margins held steady, as we had forecast at the beginning of the year at 14.7 for the full year.

In addition, we had set a goal to leverage overhead in 2002 and we moved it down from 8.3 to 8.2 for the full year, inclusive of the investments that we are [indiscernible].

We ended the year was approximately 25 [indiscernible] in cash, so let me run the cash flow numbers with you as that’s a particularly notable figure. Operating cash which for us is essentially EBITDA, was up 20% to approximately 36m in 2002, including [indiscernible] in the fourth quarter alone.

This past year we embarked on a clear effort to reduce receivables and results are evident in the 4m decrease year over year, which further enhances our overall operating [indiscernible].

Finally, capital spending for the year totalled 17m with 4m coming in the fourth quarter, and we would expect to invest in an operating fixed asset at a similar rate in 2003.

Our tax rate, which averaged 41.7% for the year was 42.6 in the fourth quarter. Although we have a lower effective rate in U.K. and Ireland, we were not able to benefit from the rate difference in the fourth quarter due to lower profitability arising from the integration investments we’re making there. We would expect the effective tax rate to approximately the same level as 2002 next year, that is 41.7%, with additional improvements becoming visible with higher profitability in 2004 and beyond.

I’ll end the quarterly review with a few statistics. We ended the quarter with 465 centers, as we added five and closed two centers. As Dave mentioned earlier, we’ve already opened nine centers in this first quarter of ’03. Three of those had originally been expected in Q4 ’02, so sometimes you’ve all seen in the past where we have a little bit of slippage due to the timing of center openings.

Our total operating capacity at quarter end, year-end was 53,830, close to 54,000, with an average per center of 116 capacity. For those of you who keep track, the U.S. centers average 128 capacity per location, while in the U.K. where we’re operating 68 nurseries, we have an average capacity of 47. The blended rate there is the 116.

At the end of the quarter, as in prior periods, approximately 60% of our centers are profit and loss contracts and 40% are operated under a cost plus contract.

So with that, I’ll walk through our current financial projections for 2003. We have given you an early picture on our last quarterly call, and this is essentially an update of that now that we have completed our annual budgeting process.

We’re projecting revenue growth this year in the range of 17 to 20% which considers our pipeline [indiscernible] centers scheduled to open in ’03 and the inclusion of Kinderquest for the full year. This growth level presumes a continuation of the current economic conditions and our view that we should be conservative in projecting tuition increases and enrollment growth in our existing base of business.

Our forecast, therefore, includes capacity growth of 10 to 12%, which will translate to net new center additions in the order of magnitude of 45 to 48 net new centers. The second factor in revenue growth will be tuition increases averaging 4% and the remaining growth will come from enrollment increases in our existing centers of 1 to 3%.

We expect center margins, again, to stay steady at 14.7%, consistent with the current year, as well as the year before that, while we would continue to expect to leverage overhead down by 10 basis points to 8.1% of revenue. This will drive a modest increase in our operating income of 10 basis points as well.

With an estimated 13.2m shares outstanding for the year, we would, therefore, project EPS to approximate $1.39 to $1.41 in 2003, and for purposes of your modeling, I’ll walk through some quarterly estimates in the next minute here.

One other note, as you hear the quarterly estimates, is that we would expect the seasonality in both our center margins and our earning trends to closely follow historical patterns.

So the quarterly breakdown of our annual EPS of $1.39 to $1.41 would break down as follows under our current projections: Q1 would be $0.33 to $0.34 cents. Q2 would be $0.35 to $0.37 cents. Q3 $0.34 to $0.36 cents and Q4 $0.35 to $0.37 cents. As you can see from those figures, if you just add up the highs and the lows, you’ll get figures that are wider than the ranger that we’re giving and we wouldn’t be expecting to be either at the high end or the low end every quarter, so just don’t add the quarters. They’re just indicative ranges for the period we’ll be reporting.

In closing, I’ll look beyond 2003, and conclude to say that we continue to see strong opportunities for growth, particularly when an economic recovery really takes hold. Over time we still project that center margins may approach 15%, given our mix of profit and loss [indiscernible] contracts and that we will be able to continue to leverage overhead down to a target of 7.5%. With top line growth in the high teens, and improved operating margins in both centers, and overhead, we therefore would project EPS growth I the same range with a little bit of leverage.

With that, Ashley, we’ll open the call for questions.

Thank you. If you have a question or a comment, please press the number one, followed by four, on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. Thank you.

Our first question is coming from [Richard Close] [ph] from SunTrust.

Yes. Richard Close, SunTrust Robinson Humphrey. Congratulations on a good ending of the year, guys.

Thanks, Richard.

Thanks, Richard.

Just a couple housekeeping questions really quick. I wasn’t writing fast enough so I apologize. On the backup care, I missed some of that. If you could just revisit that real quick. How many centers you have and—

At year end, Richard, we operated 36 dedicated backup centers and 44 dedicated backup programs within full-service childcare centers and that was in addition of the dedicated centers which we measured the additions more closely. There was an addition of five this year over prior year.

Okay. And then what about in the existing – you said there were 44 backup care programs in the existing facilities?

Right.

And what was that last year?

We have to get back to you on that because I don’t have the number.

That’s fine. And then just to go over the charter school. I guess the name again and the phases you’re going through. What are the opportunities there and the margin maybe opportunity? What do you see in terms of profitability of that? Is that in line with the typical preschool?

Well, I think, ultimately, we expect the margins to follow pretty closely our model. As you know, what attracted us to that particular opportunity was not just traditional charter funding, it was the opportunity to work with the employer who was already a client of ours doing childhood center to help make an economic contribution to the model, both in terms of capital and ongoing contribution. So net-net we expect – it started out this year with a capacity for 168 children up through the second grade and it’s full to capacity. It started out fully capacity and we expect to increase that to 550 this fall when we go to fifth grade in the permanent site and we do expect some ramp up at the larger sites. We plan to open at 550 but we’re not counting on that but we may experience some ramp up in the first year of operations or first 18 months of operations that’s consistent with how our childcare centers ramp up. Ultimately the metrics possibility wise should follow pretty closely what our model is.

Okay. And you seem to talk a good amount about acquisitions, you know, stating that traditionally 70% your growth has been organic versus 30% acquisitions. Based on the pipeline maybe in the mid 50s. Are you guys shifting to focus more towards the acquisitions going forward or maybe characterize those statements a little bit?

No. I would say we’re being opportunistic around acquisitions. I think we feel like they have long been a part of our growth plan and strategy. I think what’s different now is the economy has created an even better environment for us with respect to the fact that there aren’t many other buyers out there and there certainly aren’t a lot of buyers that have the financial position that we do. So I categorize our position now as just being opportunistic given what the market conditions are telling us, but in the long run, I expect the 70/30 to be fairly consistent, that there may be a couple of years in between and we have the opportunity to take advantage of the right opportunities if they present themselves, so that might be a little different than the average. But the focus is still the same as it’s always been.

Okay. Just a couple other questions. Here in Nashville you opened up an expanded center for HCA. Are there opportunities for expansions going forward or what’s been your history on that front? And then maybe what’s the sales cycle like now? Is that beginning to [indiscernible] a little or is it a pretty much staying the same?

The first part of your question, HCA, you know, JFK, by the way, is an HCA hospital where we’re doing the charter school as well. But to answer the question on expansions, they’ve long been a part of our – there’s a couple of them that happen each year and it’s pretty consistent numbers that happen a few of them a year for the past five years and I don’t see any change in that going forward. In terms of the sales cycle. The story is still the same as it was the last time we talked, which is the sales cycle ranges from three months to two years and it slid further along the line – it’s certainly not two years on average but it’s skewed further along. So it’s elongated from what it was two or three years ago, which the focus currently, and as we’ve talked about before and for the past probably 12 to 18 months has been on the [counter] cyclicals, and as I said earlier, we’re starting to see that bear fruit in terms of what’s in the pipeline and what we expect to open over the course of the next 12 months.

Okay. Great. Thanks again.

Thanks, Richard.

Thank you. Our next question is coming from [Eric Becker] [ph] from [Trillium Asset Management].

Please go ahead with your question.

Hi. I have the sort of multipart question on options and options expense. Can you give us the expense net income and EPS figures for ’02? That’s part one. Part two, there’s been all the talk about [indiscernible] of options, do you have any plans to alter your [indiscernible] strategy and if you can talk a little about what that strategy has been and then part three, assuming things just stay the same for the time being, any plans to [indiscernible] options [indiscernible]?

Sure. I’ll start off and then Dave can you give you some of the background from the board and management perspective on the strategies.

We don’t have the calculation here yet for the disclosure that we will be putting in the 10-K for the pro forma effects of the [Black sholl] [ph] calculation of option expenses in our financial statement, so I’ll need to wait a couple of weeks until we get on file. So I apologize for that but it’s – and you should know in the future that does need to be included in our quarterly information, so it won’t have to be a disclosure. But the philosophy in our approach, I’ll turn that over to Dave.

I think overall our philosophy has been done that, we believe, that options are an important part of our competition in terms of lining our key managers with that of shareholders. So we’ve had a history of giving options throughout the organization down to our center director level and we’re in the process of reviewing the overall strategy for the distribution of options going forward and we’re going to be looking at that for the coming year. It will include giving our more options whether how far through the organization that will extend itself is currently under review. Overall, to directly answer your question, we have no plans to dispense options currently. We’re monitoring the debate on that and, obviously, like everybody else monitoring their debate, we’ll continue to have the debate internally about what’s in the best interest, but for now we have no plan to dispense option.

Just so I understand. The 10-Q for Q1 is the first quarter where you actually have to disclose that, is that right?

That will be the first quarter that we need to disclose it, but we will need to have it in our annual 10-K, so that will be filed before the first quarter.

Okay. Thank you very much.

Thank you. Our next question is coming from Roy Hamrick from Hamrick Investments.

Thank you. [Indiscernible] and I wanted a clarification on two things. One has showed a split of 60/40 in terms of your business model. I wondered if you had a preference for one model over the other or if you’re sort of mutual on that. And then one other quick clarification with [indiscernible]. Thank you.

I’ll do the first one first, and that is the current split remains and has been 60% P&L models versus 40% cost plus model, and that’s been consistent now for a few years, and so we don’t foresee any change. With respect to a preference, I get asked that question a lot, and the reality is make those decisions based on the inherent factors that are presented to us in each different situation we enter into. So we’ve gotten pretty good over time understanding the risk profiles in the areas we operate. We do a lot of diligence on new areas where don’t operate. Obviously, we’re working in concert with a client and we’re on both sides accepting the risk factors, the client preferences, control issues that might exist, and those things sort of work themselves out on a case-by-case basis. But over time they tend to work themselves out 60/40, and that’s the way we see it going forward.

The second part of your question was about backup childcare. Backup childcare is a service essentially designed to provide care for employees when their other form of childcare breakdown. Not somebody who is using one of our centers everyday but somebody who might be using a family member, it might be a stay-at-home spouse, it might be somebody in the neighborhood watching their child, it might be any other sort of form of childcare, those forms of childcare are the most likely to break down. A caregiver gets sick, something happens, you get a call as a worker the night before that you’re not going to have childcare tomorrow. You have an important meeting the next day and you need to get to work, what do you do? With an employer offering a backup childcare solution, they’re able to offer them something in that situation, in that time of breakdown. Other times it can be more of a routine thing. Most of our backup centers are for school vacation programs so the most common form of concern among parents who have school-age kids that work is that what do on those days that work is in and school’s out? That service also provides a solution for children up to age 12 on all those teacher in service days and all those days that make life crazy with people with school-aged kids.

Thanks for the clarification.

Sure.

Thank you. Our next question is coming from [Christine Alvez] [ph] who is a private investor.

Please go ahead with your question.

Hi. It’s Christine Alvez. I had two questions. One is why [indiscernible] and the second question is what are the future plans to extending to other regions such as Latin-America?

Okay, Christine, good questions. For many years, we’ve been asked – we serve a base of many multinational employers. We serve 90 of Fortune 500 and many companies and clients that have employees in many countries. So for years, we’re been asked would we go to other places to operate and we’ve had up until a couple of years ago we’ve had enough challenges keeping up with our growth here. A couple years ago, we go funded by a group of clients to go to Europe and actually do a market assessment for them, research project, about what was going on in – I think it was 8 or 9 countries. Through that [indiscernible] that we had, we were able to connect with what was happening in various countries and we became convinced that there was not only a good deal of our clients who had interest of us being in several of these countries, but also growing childcare, group childcare businesses or markets in several countries. The two that most appeal to us based on the number of clients [indiscernible] and given the state that they were in were the U.K. and Ireland and once we decided that we were going to go there, we decided that the best means of entry would be finding like organizations in early stages [indiscernible] so we entered both the U.K. and Ireland through acquisition essentially a management team building a platform for us to grow. We were really pleased with how the U.K. was going and we had an opportunity to acquire last year another larger provider of what we do and brought them into the family last year. And so our current focus, to answer the second part of the question, is to really get ourselves set up well to be the leaders in both the U.K. and Ireland. We want to operate from the same position we do here and that is the market leader. In the U.S., we have five times the market share of any competitor, and we want to build that same position there. We think that gives us a lot of competitive advantages. With respect to where we’ll be next, we don’t have any current plans to expand the company to any additional countries in the short term. In the short term, it will be more about integrating and getting ourselves positioned well, getting our sort of organic growth efforts underway. In the long run, there may be other opportunities for us to be in other countries but it will be down the road.

All right. Well, thank you, and congratulations again.

Thank you.

Thank you.

Thank you. Our next question is coming from Brandon [Dobell] [ph] of Credit Suisse First Boston.

Hi, everyone. Congratulations.

Hi. Brandon. Thanks.

Thanks, Brandon.

Just one general and one housekeeping question. If you could review your comments on how many centers were for existing versus new clients and then secondly you mentioned part of the economic situation was opening the centers to more of the community. Can you give us an idea of how many centers have kind of an open enrollment policy now versus at the same time last year, how that has progressed over the last 12 months or so?

Okay. Let me take the first part of the question. In the quarter we opened five centers and we had one of those centers was for an existing client and the other four were for new clients. I think when you look at the pipeline going forward, we have a pretty even mix 50/50 range for new versus existing.

Okay.

And Brandon, on the second part of your question, I don’t have exact numbers for you. I can only say that it’s been a handful over the course of the couple months where they haven’t been open to community in the past. It provides, as we talked about before, sort of an opportunity where the client, you know, in some centers the hardest hit by layoffs, it’s sort of a backdoor opportunity for clients who have traditionally been able to fill those centers, but we’re only talking about a handful that moved in that direction over the past few months. I don’t have the exact numbers.

Okay. No that’s plenty. I appreciate it. Thanks a lot.

Okay.

Thank you. Our next question is coming from [Trace Erding] [ph] from ThinkEquity.

Please go ahead with your question.

Good afternoon. I’m wondering if you could comment on the average center capacity of the Kinderquest centers whether you’ve been able to move that up and whether we should even, what kind of pace we should looking for for expansion in that capacity?

Trace, first, you sound loud and clear. I wouldn’t have guessed you were on a cell phone. Secondly, it’s too soon to have moved the capacity on the Kinderquest in any direction. What we do believe in the U.K. is the average capacity for new center has the potential to move normal. In terms of [indiscernible] Kinderquest, Kinderquest base of business there’s an opportunity to expand a group of centers. As you know, that does take some time, particularly when you’re working with the corporate clients. So one of the pieces of expertise that we have that most of the providers of the U.K. don’t is the experience in managing larger centers, both in terms of how you design them and how you manage them and most of the providers there are used to managing lower 40 capacity kinds of centers. We think we can get people confident so that we can do it, talk about examples, show them real examples of where we’ve done it, and make it happen, but it’s too soon to model that and I wouldn’t in terms of the existing base expect [indiscernible].

So that should be something we should maybe look for moving on an annual basis but not try to check in every quarter, is that fair?

I think that’s probably a good way to do it. We’ll move the overall needle over time by adding new centers that have larger capacity, but as you know, when you haven’t installed base it takes a little bit of time to move that needle.

Okay. Fair enough. And then, the second question, I was wondering in the past you’ve been kind enough to sort of characterize what the pipeline looks like by vertical market segment, and I was wondering if you might be able to go through that again or bring [indiscernible] there’s any meaningful change with any of the segments that you serve?

Let me just take that because we do sometimes run through that as a tabular format, and I’ll just preface it by saying our movement in actuals has not changed significantly. The movement that we’ve seen in overall vertical segments in the pipeline is that the healthcare segment, as David mentioned, we’ve gotten a few more commitments on the hospital side, so we’ve seen healthcare move from 10 to 15% and we’ve seen the higher education and that sector move from 5 to 10%. So we’re seeing both of those really is where we’re seeing movement in the pipeline. Otherwise, we’ve seen pretty good, steady, continuous on the tech side with the pipe that we have in that sector and in our office park consortia and financial services.

Okay. Thank you very much.

Thanks, Trace.

Thank you. Our next question is coming from Howard [Block] [ph] of Banc of America.

Please go ahead with your question.

Hi, Elizabeth and Dave.

Hi, Howard.

Hi, Howard.

I wanted to offer a bit of an apology to you guys and the listeners. I missed the healthy portion of the opening comments so if I ask any questions that you answered, please just say, Howard, read the transcript. The first question is with regards to the European operations, I remember we talked last quarter and it was about 5% of consolidated results, did you update that earlier or?

I did not update that per se. It contributed about 4m to this quarter’s revenue, the new acquisition. If you look at overall consolidated European results -- if you look at 2003 on an annual run rate it’s about 6%.

Okay. And then it may have only been my earnings model but the revenue number was a bit lighter than I had modeled. Was there anything in the quarter that contributed to that because it looks like the European contribution was pretty much on par.

Right. I think that the revenue is at 18%, we had guided at 18, 19% for the year last quarter, so we’re not seeing it as being particularly light. I think that the effects that we continue to see some of the comment on the call that you may have missed that relate to. The lingering effects of the economic slowdown is we’ve seen some centers with a little bit less enrollment, they’ve been more heavily affected by that so sometimes the cost plus center revenue component is a little less than we projected. It hasn’t affected our margins, as you can tell. We have a little bit less visibility on the trend in that revenue, so that component was a little bit lighter, but it’s not having a huge affect on the quarter.

Okay. And then you had mentioned earlier that the labor market was [indiscernible] bit on the cost side. Any change to that over the past three months in terms of the labor market and maybe even any change to your turnover over the last few months?

We’ve actually seen turnover continue to consistently tick down year over year, quarter over quarter, and we’re still seeing that. So it’s slight decreases in the turnover. We already have less than half the industry average in terms of turnover, but I would characterized, Howard, the environment as pretty similar to the way it’s been and that it’s a much different environment than it was two, three years ago. It’s eased quite a bit, and yes, it does help on the cost side but also help on, as you know, program quality, because with the reduction [indiscernible].

Okay. And then just to maybe follow up on, I think it was Trace’s question, about hospitals and healthcare. Do you have the actual number of centers for hospitals and government and nonprofit?

In the pipeline?

No, that are actually open?

I’d have to actually pool that together.

Okay. And [indiscernible] that if you look at pricing over that we should, perhaps, model it a little more aggressively than we would model our pricing variable in the domestic centers?

I would say that it’s not a measurably different blended pricing. Now with the scale that we have at 68 centers at the end of the year, we have a pretty good sense now that it’s not center by center, if you will. So with that scale, we’re seeing a pretty consistent mix of margins. They have about 70% P&L versus cost plus centers, so it’s a slightly different mix and, therefore, slightly higher on the margin side. But their overhead is pretty high relative to our overall base as well, so it’s pretty much of a wash.

Okay. And then the last question is, I sort of jumped in when you offering the tail end of guidance there, I didn’t notice anything, just sort of a quick reaction to it, I didn’t see any change in the guidance.

Well, the guidance, we narrowed our range of overall EPS from $1.39 to $1.41, but otherwise the metrics are pretty consistent.

Thank you very much for your patience, and congrats on a strong year again.

Thanks, Howard.

Thank, Howard.

Thank you. Our next question is coming from [Bob Kritz from Legg Mason] [ph].

Please go ahead with your question.

Good afternoon, everybody.

Hi.

Hi. Bob.

Just a couple of questions. I think I know the answer to this because it has been touched on before, but I guess the people that we talk to are concerned that eventually the economy has a larger affect on your business. Are you seeing any real change in receptivity or client attitudes, even at the front end of the selling cycle among early stage prospects at this point?

Well that’s a timely question. Yesterday we had our client advisory board here and this is made up of 20 of our key clients in many, many large companies, so we’re asking them the same question. The uptick that we’ve seen recently are in the count of cyclicals, but if you look at the rest of the pipeline which still remains in the 50s, and we’re still [indiscernible] of most everything as we open new centers, we’ve been able to put new ones back in that pipeline. But if you look at the rest of the pipeline besides the [indiscernible] cyclical industries, it’s all over the map. There’s no real way to say we’ve got clients in the pharmaceutical industry that you read about everyday in the paper and might think maybe they wouldn’t be interested in making some additional investments in our kind of services but they continue to do it, and yet you have others that aren’t at the present time. So there’s no real consensus around any one industry that maybe with the exception of technology, new tech companies, which has slowed, to get any trend from. But I think that the thing that was reaffirming to us yesterday at the client advisory board meeting was while different companies are at different stages at the point of time with the economy, it was reaffirming to hear that the strategy of work-site childcare and other work life initiatives both in terms of the recruitment and retention proposition but most importantly in terms of productivity of their work force. They see it as being here to stay and for us the economy has continued to make things slightly more difficulty than it was a couple years ago, but we’ve been able to still make progress and feel a lot of confidence that once we move out of this current economic condition, you know, we’ll see the kind of demand again that we saw a couple years ago.

Right. In terms of waiting lists, this is sort of a buffer, do you have any measure that you can convey on how many centers might have waiting lists or just what kind of measurement you might use there?

Well, as we’ve said in the past, this is a statistic everyone would love us to have, but it’s a [indiscernible] measurement, and it’s kept center by center, so it is not something that we collect company wide, if you will, because it’s not particularly meaningful company wide. It’s really a locally based measure. And anectodally which is as much as we can convey – our sense is the wait list continues to be in the range of maybe 15% of center capacity and this is the time of year when we have the centers getting about as full as they get. The first couple quarters of the year is when we’re at peak enrollment and sort of [indiscernible] in the classrooms, and it’s over the summertime that we would begin to see the [indiscernible]. So the waiting lists are not going to be that robust at this stage of the year, but we’re seeing it the best I can say [indiscernible] last year.

Okay. You mentioned earlier about acquisitions. Anything changing in terms of priority, either geographically and/or size?

As I said earlier, Bob, I think it’s about being opportunistic. I think we focused last year in the U.K., and we have a platform there now. I think it’s safe to say that there will be other opportunity there. [Indiscernible] currently integration so we want to make sure we have the right systems built to be able to absorb things going forward. Here in the U.S., I think, you know, where we didn’t do a lot last year, there continues to bubble up opportunities. As you know, most of our competition tends to come from what we call regional [indiscernible], regional providers, many of whom have become – who we acquired in the past. You know, we’ll see what happens. I think I characterized the market as a good one for us before and I’d say that – you know, valuation wise, it’s pretty – expect to continue to pay what we’ve told you before which is about four to six times cash flow.

Okay. And are you going to add any sales development people this year?

I think we’ll probably add one or two.

That’s on a base of 20.

Yes.

Thanks a lot, guys.

Thanks, Bob.

Thank you. Our next question is coming from Richard [Close] [ph] from SunTrust.

Yes. I just had one followup. With first quarter revenues, I don’t think you gave any guidance in terms of growth on that. Should we look for similar as in the fourth quarter similar year over year?

Yes. When we look at next year at 17 to 20, I think they’ve given [indiscernible] that’s the range we’ll be in.

Okay. But maybe take and a little bit iron the first quarter because [indiscernible] acquisition in the U.K. correct?

We have [indiscernible] in the U.K. and for some [indiscernible] to be had in that but you also had seen the growth in Q4 is showing the effects of how we’re seeing the economy coming into some of the cost plus centers with a little bit less cost structure, a little bit less [indiscernible], even though the margin continue to be strong, I would express a little bit [indiscernible] steady through the year.

Okay. So pretty even throughout the four quarters?

Yes.

Okay. Thank you.

Ladies and gentlemen, there appear to be no further questions in the queue at this time.

Okay, thanks, Ashley, and thanks to everybody on the call. Elizabeth and I will be here tonight and tomorrow if there are any followup questions, and we’ll talk to you soon.

Thanks for your support.

Thank you. This concludes today’s teleconference. You may disconnect your line at this time and have a wonderful day.