Bright Horizons Family Solutions Inc (BFAM) 2003 Q3 法說會逐字稿

Good afternoon, and welcome to the Bright Horizons third quarter earnings release conference call. At this time all lines have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

At this time it is my pleasure to turn the call over to your host, Mr. David Lissy. Sir, you may begin.

Thank you, [Mauricia], and hello to everybody on the call today. Our earnings release went out right after the market closed and it’s available on the investor relations sections of our website at www.brighthorizons.com. With me on the call this afternoon, as usual, is Elizabeth Boland, our Chief Financial Officer, and before we begin I’ll ask Elizabeth to read our safe harbor statement.

Thanks, and hi to everyone who’s joined us here.

As you know, in accordance with Regulation FD, we use these types of conference calls and other similar public forums to provide the public and investing community with timely information about our business operations and our financial performance, as well as about our 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. Certain non-GAAP financial measures may be discussed during the call, and detailed disclosures relative to these measures is included in our press release and may also be found in the investor relations section of our corporate website.

The risks and uncertainties that may cause future operating results to vary from those we describe in forward-looking statements include our ability to execute contracts for new center commitments, to enroll children in our centers, to retain clients and center management contracts, to expand and operate profitably abroad, and the timing of new center openings, as well as the effect of government tax and financial fiscal policies on employers considering work-site child care. The specific risk factors associated with our business are detailed in our SEC filings, including our Form 10-K filed in March of 2003.

This entire conference call will be available by replay at 973-341-3080, with PIN code 4233450.

Thanks, Elizabeth. And welcome, everybody, again to our third quarter 2003 earnings call. On our call today we’ll read you our operating results for the third quarter, give you our outlook for the remainder of 2003, and take a look ahead into 2004. We’ll also talk to you a little more about the addition of the 20 Marin Day School child care centers that we added to the Bright Horizons network recently and announced today.

I’ll begin by summarizing our third quarter results. Revenue in the quarter of $118.1m was up 12 percent over last year’s $105.4m, while net income of $5m was up 34 percent over last year and earnings per share of 37 cents increased 28 percent over 2002’s 29 cents per share. Our earnings growth this quarter was again driven by our ability to gain operating leverage at both the center and overhead levels. The factors that continue to influence this solid performance include our ability to maintain the optimum balance of staffing at centers, achieving efficiency without compromising our high quality standards, continuing to increase tuition ahead of labor rate increases while reducing staff turnover, which not only helps on the cost side but also improves quality, leveraging our overhead structure as we grow -- even if we make important investments in key places like the UK and Ireland, we’ve been able to move this needle even a little faster than we expected at the beginning of this year -- the stronger influence of the outsourcing piece of our new center growth mix, which results in a higher proportion of new centers which come on board with us at mature levels, and lastly, a continued modest uptick in enrollment in our P&L centers.

I think it’s fair to say that we ended this year with a conservative outlook, given the soft economy and uncertain business environment. Even as the effect of the economic downturn has lingered, we’ve been very pleased to exceed our earnings expectation so far this year, and we remain confident in our ability to continue to execute in a consistent manner we’ve demonstrated through both good and bad economic times. Our results are a true reflection of the expertise and attention to detail of a talented and seasoned team that we believe to be the best in our field.

Our revenue growth this quarter at 12 percent trailed down somewhat from prior levels, and let me take a moment to explain that and discuss where we see top line growth for the remainder of this year and for 2004. As you know, our revenue growth year over year was comprised of the addition of new centers, tuition increases, and the ramp-up of centers not yet at mature operating levels. Our third quarter revenue growth was affected by three primary factors.

First, the timing of new center openings on a comparable basis to last year. In particular, this period marks the first quarter-over-quarter comparison with the 48-center Kinderquest acquisition we completed in late June of last year. We projected to see revenue growth slow somewhat as this acquisition normalized on an annual basis.

Second, we continue to [indiscernible] the [indiscernible] in cost-plus centers. This churn continued this quarter, and as we’ve discussed before, while it had the dampening effect on revenue growth, it does not affect our margins or profitability.

Finally, the typical seasonality we experience this time of year as we lose our older preschoolers and kindergarteners to the public school system. Of course we’re in the process of rebuilding that enrollment as we speak, and will continue to do so for the remainder of the year.

All of this said, given the new center openings that we will have in the fourth quarter of this year and have set up into 2004, we expect top line revenue growth for the fourth quarter and for 2004 to return to more normalized levels in the mid to upper teens. This includes the addition of our new contracts to manage the Marin Day School centers, quite frankly an acquisition we’d expected would close earlier in the year, but needed additional time to be executed appropriately. In fact, had it closed when we expected, revenue growth would have approximated our previous estimates, and both Elizabeth and I will give you a little more color on that in a few minutes.

In the past quarter we added nine new centers to our network, including new centers for Memorial Sloan-Kettering Cancer Center in New York, Saint Joseph’s Mercy Health Systems in Michigan, CIGNA in Connecticut, and we also tripled the size of our center with Microsoft at a new location in Redmond, Washington. We opened our 37th back-up center this quarter as well, a consortium program in partnership with Fidelity and several local law firms right here in the Seaport District of Boston.

This quarter also marked the completion of the development of our employer-sponsored charter elementary school, a partnership with the JFK Medical Center in Florida. The school, which opened in a temporary facility in August of 2002, now has the capacity to serve 540 students, kindergarten through fifth grade, in a new state-of-the-art facility. Enrollment this fall was very strong. We’re 70 percent enrolled in our first school year and the program has been embraced by students, parents, and our client. Enrollment at the Brookfield Academies was also strong this fall, our first school year since the acquisition in July of this year, while Chestnut Hill Academy in Washington remains fully enrolled. All in all, we’re very encouraged by the strong start for the school year by all six schools that comprise our new Schools division.

At quarter end, our pipeline of new centers under development remains steady in the 50-plus range. As is typical when we have an upcoming quarter where we’ll have a high number of new center openings, we’ll be backfilling the pipeline over the next few months. This will provide us with additional visibility through the latter half of next year and into 2005. Two particularly encouraging signs are emerging. First, we’re beginning to see an uptick in front-end activity levels and in the quality of new leads. Second and most importantly, we’ve seen a measurable increase in the quantity of new center feasibility studies that prospective clients engage us to conduct.

While we’re clearly not out of the woods in terms of experiencing the benefits of a full economic recovery, we’re hopeful that this positive momentum will continue into 2004 and beyond. As we see it, the general economic indicators most linked to a sustainable pick-up in our new business development are hiring and a renewed confidence in corporate capital spending. [Indiscernible] and moving in positive directions that lag other areas of the economy, we remain cautiously optimistic that as we continue to see these areas improve, we’ll experience a boost in our ability to close new business with both prospective and existing clients.

In terms of our fourth quarter of 2004 guidance, we’d expect to see returns to our top line growth in the fourth quarter and for 2004 in the range of 15 to 17 percent. We also expect continued leverage on the bottom line to yield fiscal year 2003 earnings per share in the range of $1.47 to $1.49, and to grow 17 to 20 percent in 2004 to the range of $1.73 to $1.77. Elizabeth will expand upon this in more detail in a few minutes.

Finally, I want to speak to you about our recent acquisition of Resources and [indiscernible] Learning, the management company which holds the long-term contract to manage the Marin Day Schools for MDS. MDS operates 20 high-quality child care centers in the San Francisco Bay Area. Their approach to [fully] sponsored child care is very similar to Bright Horizons’, and they’re another example of a high-quality regional provider that’s made up the core of our acquisition strategy over time. This addition to our network solidifies our position in California as the premiere work-site child care provider, with almost 50 centers, and it has a host of new and prospective client relationships. We’ve [indiscernible] with the principal operators there for over a decade, and we’re thrilled to be welcoming them and a talented and passionate team to our family.

Equally exciting is the roster of new clients that this brings. They include the University of California at San Francisco, [indiscernible], PC World, The Gap, San Francisco City Hall and the University of San Francisco, just to name a few. [Indiscernible] these other acquisitions have served to solidify our presence and drive our growth in important geographic markets, this new vision, coupled with our existing presence in the region, expands upon our leadership position throughout the Bay Area.

As we’ve noted in the past, Bright Horizons has grown approximately 70 percent organically and 30 percent through acquisitions over the course of our history. We believe this mix will continue to play out over time as we find and execute on deals that are in our strategic interest, and that meet our stringent criteria for both program quality and financial performance.

And lastly, before I turn it over to Elizabeth, let me say that while most of Boston continues to suffer in the depression after the Red Sox loss, we at Bright Horizons have found a way to move forward as we celebrate a significant milestone in our history as we surpass 500 centers in our network.

So, let me turn it over to Elizabeth to give you more detail on the numbers and guidance into next year.

Thanks, Dave. As you just alluded, I’ll start with a more detailed review of our quarterly results and then go on to talk about our financial outlook.

Revenue grew 12 percent in the second - in the third quarter, excuse me - to $118.1m and we are up 16 percent year to date. As Dave remarked, the addition of the Marin Day Schools happened this last week. Since they will contribute over $3m in revenue per quarter, the later-than-expected timing of this acquisition had the effect of reducing top line growth this quarter from the levels we had previously projected, and therefore we would expect the fourth quarter to return to the forecast of 15 to 17 percent range. In general, revenue growth is driven principally by the addition of new centers, additional enrollment in [indiscernible] centers, and tuition increases, which have approximated 4 percent per year.

Operating income as a percentage of revenue increased to 7.4 percent for the quarter, compared to 6 percent in 2002. Margins are up 100 basis points to 15.2 percent for the quarter. The trend is consistent with the first half of the year, and center margins stand at 15.3 percent year to date. The main drivers for the increase are carefully managed labor [indiscernible] costs and controlled spending on support expenses, coupled with continued price increases and the higher margin percentage we experienced in [indiscernible] centers when the operating subsidy portion of the revenue is relatively lower.

Let me expand a little on the cost-plus contract effect. As we’ve noted in the past, cost reductions in our cost-plus models, which represent approximately 40 percent of our overall mix of centers, have an impact on both revenue and operating margin as a percentage of revenue. This is due to the nature of these contracts whereby we earn a fixed management fee, while gross margins as a percentage of revenue increases when the cost reimbursement component of revenue decreases. Based on our historical experience with these contracts and the current operating conditions whereby certain clients are more closely managing their spending and the operating subsidies in those centers are somewhat lower than originally budgeted, we’ve taken this into effect in our modeling and guidance. However, we estimate that the effect of this kind of operating subsidy compression has been to reduce our current year revenues by $2 to $3m a quarter. The bottom line of this is that we have lower revenue growth, higher margins, but consistent earnings.

Overhead as a percentage of revenue was 7.7 percent this quarter, down 35 basis points from 8.1 percent in 2002, and overhead costs for the year-to-date period approximate 7.9 percent of revenue. The leverage in overhead expense is a result of careful management of expenses and investments. In our business, SG&A is comprised primarily of salaries and benefits, and both our field operations and sales teams continue to expand in concert with our center growth. Although we’ve been cautious about where and when we expand spending, we continue to invest in new systems and processes that we believe will benefit future growth and will also enable us to continue to leverage overhead over the long run.

EBITDA, or earnings before interest, taxes, depreciation and amortization, for the quarter was approximately $11.4m, an increase of 30 percent over the same 2002 period. EBITDA is a good [proxy] for cash flow in our business, and with a year-to-date total of $33.2m, we’re well on our way to achieving the $42m-plus we had previously estimated for the year.

Our cash balance at quarter end approximates $31m. And finally, capital spending for the quarter totaled approximately $6m.

Our tax rate was 41.9 percent in the third quarter. We anticipate that the full-year rate will approach the rate - that rate or our year-to-date rate of 41.8 percent.

I want to review the quarter with a few statistics. As of September 30, we operated 487 centers as we added nine and closed three centers this quarter. While operating - total operating capacity at quarter end was 57,500, with an average center size of 118, U.S. centers average 130 capacity per location, while in the UK our centers have an average capacity of 50. At the end of the quarter, as in prior periods, approximately 60 percent of our centers are profit and loss, and 40 percent are cost-plus.

As Dave discussed, our pipeline of centers under development commands a wide array of industries, and the mix is similar to past quarter, with approximately 20 percent government and education, 20 percent consumer and other, 20 percent industrial and manufacturing, 15 percent technology, 10 percent health care and pharmaceutical, 5 percent financial services, and 10 percent consortium office park models.

I’ll get to detailed guidance, but let me also give you a few metrics on the Marin Day Schools. Twenty centers will add 1,150 to our total capacity, as the programs range in size from 15 to 125. From an operating perspective, the centers’ financial results are proportionately in line with our operating metrics in terms of revenue and margins, given their smaller size. This all-cash acquisition closed in mid-October, and will therefore contribute to our results beginning in the fourth quarter of 2003.

And now on to our projections for the remainder of this year. We project revenue growth for the year to approximate 16 percent. Underlying this projection is our view that the economic recovery will not bring measurable changes to our short-term growth rate, as capital spending will likely lag for several quarters. In addition, it is our view that we should continue to be conservative in projecting tuition increases and enrollment growth in our existing base of business. Our forecast includes capacity growth for the year of 10 to 11 percent, or approximately 45 net new centers. We expect to finish the year having improved both center margins and overhead in 2003, with center margins projected to approximate 15.1 to 15.2 for the full year, and overhead spending to approximate 7.9 to 8 percent of revenue.

After amortization of non-goodwill intangible assets of approximately $450,000, which is up slightly due to the acquisitions, our operating income is projected to approximate 7 percent to 7.2 percent. With an estimated 13.35m shares outstanding for the year, we project earnings per share to approximate $1.47 to $1.49 for ’03, with a fourth quarter earnings estimate of 36 to 38 cents a share.

As you can see, in this quarter we experienced modest seasonality in the third quarter of the calendar year, which affects both margins and earnings, resulting in lower center margins, relatively speaking, and EPS as well, compared to the first half of the year.

Looking beyond 2003, as Dave expanded on earlier, we continue to see strong opportunities for growth, particularly as the recovery takes hold. We would also expect to be able to continue to modestly expand center margins in the long term and to further leverage overhead such that earnings will continue to grow at a pace ahead of top line revenue growth. Given the gains that we have made this year, however, we are cautious in further leverage for next year.

We’re in the process of completing our bottoms-up budget process for 2004, after which we will have more specifics for you on our next call. However, in a preliminary look at ’04, we project revenue growth of 15 to 17 percent based on our pipeline of new centers already open this year and scheduled to open in Q4 and next year. And given the expansion of margins this year, we would expect them to hold steady at the 15.2 percentage point range. We would expect modest expansion of that in future years, but are not planning on anything in 2004.

With overhead leveraging down by 10 basis points, a consistent tax rate and outstanding shares of 13.6m, we would project earnings per share for the full year to increase approximately 17 to 20 percent to $1.73 to $1.77 per share. For the first quarter, we are estimating EPS at 41 to 42 cents.

With that, [Mauricia], we are open for questions.

Thank you. The floor is now open for questions. If you have a question, please press the number 1 followed by 4 on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order in which they are received. We do ask that while you pose your question, that you pick up your handset to provide the best sound quality.

Please hold while we poll for questions.

Thank you. Our first question is coming from Howard Block of Banc of America Securities. Your line is live.

Good afternoon, Dave and Elizabeth, and nice job on the quarter.

The first question is, with regards to Marin Day Schools, it appears as though there’s in this quarter no accretion. Is that just because it’s sort of a stub quarter?

We just closed on the transaction last week, so it wasn’t active at all in the third quarter.

I’m sorry - I’m sorry, I meant in terms of fourth quarter guidance. It’s about the same as it was coming off of the second quarter, so - in that you only have MDS for part of the fourth quarter. Is that why it’s not really accretive at all in the fourth quarter relative to the prior guidance?

Well, it’s contributory like other center acquisitions would be or any other center additions. We did pick up the top end of our guidance from $1.48 up to $1.49, so there’s a little bit of adjustment there. But otherwise it is considered to be contributory but not incrementally accretive to what we had talked about before.

Okay. And then on - Dave, you had mentioned, I believe, previously that we should expect - I think you said three to five more of these by year end in terms of these outsourcing. Is this considered a year end effect? Shall we expect anything else in the fourth quarter?

Well, Howard, in terms of the outsourcing piece of it, I think I said the last time about two or three by year end. In terms of the trend there, it’s been a real positive trend. I think you’ll see a few more in the fourth quarter, single center outsourcings that will be a part of the new centers outside of Marin, and new centers that we’ll add in the fourth quarter. And actually two of the nine centers we added this quarter were outsourcing situations.

Okay. And then, I don’t track those percentages that you share over very quarter, Elizabeth, but I did notice for the last quarter it was a bit of an uptick in the technology percentage there. Is there anything we can read into that in terms of, even broadly speaking, that the technology companies might be spending a little bit more aggressively?

Yeah, I don’t know that I would use the numbers as a basis because, you know, things open and different things happen to move the pipeline every quarter, depending on what opens that quarter and what we could get committed that quarter. But I would say this, Howard, to your question. I said earlier in my - you know, in my piece - I think for the first time we’re seeing a marked difference in the mindset of the average prospect that we’re dealing with. I’m really pleased to see the activity levels on the front end. It’s been about a 10 percent pick-up on prospects in the overall base since the last time we reported.

And it’s not just the numbers that lead me to give you that feedback, but the kind of prospect we’re dealing with - more interested. [Indiscernible] small feasibility consulting study can really study it - the quality of the prospect as well. And I think it’s - it’s not really - I can’t say that it’s [indiscernible] specific. There are [indiscernible] clients in that, you know, [indiscernible] prospects [indiscernible]. But it’s really, you know, [indiscernible] financial services - all of the kinds of industries that have been pretty quiet for the - you know, for the past couple years.

Okay. And one last one, then I’ll jump into the back of the queue. The big acquisition in the UK - sort of anniversaried - I was wondering if, Elizabeth, you might share with us just a little bit of color as to maybe the year-over-year growth and how big those centers are now relative to - at the time of acquisition.

Okay. Relatively speaking, the Kinderquest acquisition is in the range of a $4.5 to $5m a quarter kind of a business. They have had - the growth that they have had this year has been about proportionate in terms of new center adds. They were 48 when we acquired them and I think we have added four to five to that group. And as a result of that, we’ve got the routine growth there with new capacity adds and rate increases.

I think even more to the point of your question about expanding capacity, perhaps, is that we have in approximately ten of the centers been able to expand the existing capacity that is in the facilities. That’s something of a slow process going through with some of those clients, but many of the centers did have existing space that could be converted to attend to more children. And so we are in the process of working that through, and so we have been able to expand capacity as we had planned in about ten of those nurseries.

So that’s proceeding pretty well. And I think that what we have - Dave can probably comment further in terms of general activity over there - but we have had the same kinds of opportunities with transitions of management, some Greenfield opportunities, and just a cultivation of this kind of a prospect and pipeline that’s going over there that looks very much like the U.S. base.

Great, thank you very much.

Thanks, Howard.

Thank you. Our next question is coming from Richard Close of Jeffries. Your line is live.

Congratulations on a good quarter, guys.

Thanks.

Thanks, Richard.

Just a couple questions. Did you talk any about the price you paid for Marin Day Schools? And maybe just how these type of acquisitions differ from a normal acquisition, I guess - these outsourcing acquisitions?

Well, Richard, in terms of - we’re not disclosing the terms of the acquisition other than to say we paid in the range - you know, as we’ve said before, we tend to pay in the range of four to six times cash flow for acquisitions and this one was in - you know, in the range. But in terms of this, this one is - even though it’s - you know, the name is schools, these are - you know, to be clear, these are child care centers. And this really is in the sweet spot of what our traditional high-quality kind of acquisition would look like. We’ve competed with these folks for years in the Bay Area and we’ve had the kind of - even though we’ve competed, we’ve had a very respectful relationship because, you know, we all know those competitors who we consider to be, you know, on the high end of quality, and these were them. And so this was really a straight-down-the-middle core kind of acquisition for us.

Okay. And then, you know, maybe a little bit of clarity on the 50-plus centers that are in the pipeline? In that - are any acquisitions in that pipeline at all?

Yeah. What happens, Richard - we give you a number, obviously - as I talked about the last time, we report on that number every quarter. And in between quarters, that number moves around a lot because acquisitions are going to be in that pipeline until we have absolute visibility on the deal being closed and we’re waiting for the licensing process, which is the last step before we’d announce an acquisition to happen. So it may enter for a short period of time. So at one point, you know, that pipeline may have peaked up into the 60s and, you know, at another point it might eke down into the 30s. But as we get new center commitments, we’ve been able to backfill it enough to keep it at - you know, at that 50 level on a run rate basis each quarter.

So the answer right now is we don’t have visibility on anything - any acquisitions, so there’s none in that pipeline. But, you know, a few weeks ago [indiscernible], the pipeline was bigger than - you know, than it is today. And so that’s just how it tends to work on an ongoing basis.

So implying that it was up in the 70 range, then?

Well, it was up pretty high.

Yeah.

And I don’t want to get into implying anything, because the real thing here is I don’t want to get carried away. We’re basically in the same relative position we’ve been in. I don’t want to project anything that isn’t [indiscernible].

Okay. And then just a follow-up, I guess, on the cost-plus centers. Elizabeth, did you say $2 to $3m of lower revenue per quarter, based on the cost-plus centers? I just want to be clear there.

Yeah. What I attempted to do there in framing the effect of this is that we do our best to estimate what - you know, what this sort of cost effect might be, because we budget annually with each client in the cost-plus centers. We talk that through with them. We estimate growth enrollment and the kinds of programs they want run. And through that process and through our own internal modeling and guidance, we try to take into account, you know, where there may be circumstances that are varying from that.

But in general, if we’re looking at the - you know, the difference between where we had budgeted for those kinds of centers at the beginning of the year and where we end up, you know, looking at them in an actual basis, there’s a disparity between $2 to $3m a quarter for them. And it has an effect - not so much that we haven’t considered it and we - as we look at where we will end up, but it has an effect of reducing our year-over-year revenue growth in a way that doesn’t affect earnings. And it has actually the inverse effect on our margin as a percentage of revenue. And because margin was relatively high this quarter -- it’s been higher, frankly, this year, than we’ve seen it in the past -- I thought it was prudent to give some figures to that to allow you to see what the effect is of that kind of gap between our planning and our best estimates, and then the actual reality in those contracts.

Okay. Okay, thank you.

Thanks.

Thank you. Our next question is coming from Bob Craig of Legg Mason. Your line is live.

Good afternoon, everybody.

Hi, Bob.

Hi, Bob.

Congratulations on the quarter, and condolences on the Sox.

Yeah, we’re still - the truth is, we’re still licking our chops [indiscernible].

I’m sorry. We can relate in Cleveland here to the heartbreak thing.

Anyway, just a couple questions. Marin - you mentioned capacity - I think 1,150?

Yes.

Is there a capacity utilization figure right now?

I don’t have it.

Okay. And you mentioned - the wording in the press release was, you’ve acquired the contract to manage. Does that contract have a duration?

It’s a ten-year contract with a ten-year option, Bob.

Okay. And that’s - start - is that effective now?

It’s at acquisition.

At acquisition? Okay, great.

I guess there’s a question that I’ve asked you before, but I guess I’ll ask it again. I mean, given the business model where it stands now, I mean, with the addition of the K-6 operations and the greater efficiencies you’ve been able to garner from the core operations, any ideas on where margins could ultimately end up for the business model as it now stands?

Well, I’ll take a stab at that and…

Sure.

…see what Dave wants to add. As I mentioned in the guidance for next year, I think that, given the - you know, the visibility that we have, tempered by the visibility we don’t have into next year, we think that planning on a 15.2 percent center margin next year is the appropriate place to land right now. Over time, I think, given the mix of our contracts, how we’re performing and what have you, we have the opportunity to perhaps move that up by another 20 to 30 basis points over time, but it would be a few years out.

On the overhead side, as Dave mentioned, we’ve leveraged overhead down a little more quickly than we anticipated this year. We will have a kick back up here with the addition of the Marin team coming in and we will have, you know, some of the - you know, not to be arcane or what have you - but we will have some costs associated with all the [indiscernible] regulations that will be going into effect. So we want to be cautious about much more overhead leverage as well next year, which is why we’re looking at just 10 basis points there.

That’s a long-winded short-term look, but I think we’re still expecting that it’s a possibility, certainly, for us to be at 7 to - at a 7 to 7.5 percent overhead rate long term. And that, again, is several years out. So that would give us an operating income level that’s 7.5 percent plus.

Okay, that’s very helpful. I appreciate that.

And lastly, it’s encouraging to hear the pick-up at the front end of the pipeline. Is there any - are there any industry sectors in particular where that activity is really strong?

Well, traditionally, Bob, it’s in the sectors that obviously - that have been quiet for a while. And for us that’s principally financial services, tech, a little bit in manufacturing, and then, you know, the traditional more cyclical industries. We still - I mean, as I think we’ve talked about before, you know, as we look forward, our hope is that as the traditional industries pick up, it doesn’t mean it will slow the opportunity in the [indiscernible] which we’ve been executing on hospitals and higher ed. So the hope is we’ll have the two happening in tandem and we will be able to continue to do the outsourcing piece and continue with our acquisition strategy.

It’s been the corporate market, obviously, as you know, that’s been most affected by - that piece of our growth that’s been most affected by the lagging economy.

Right, that’s very helpful. Thanks a lot.

All right, Bob.

Thank you. Our next question is coming from Trace Urdan of ThinkEquity. Your line is live.

Good afternoon. The first question is just kind of a housekeeping one, and I apologize at how mundane it is. But I just wanted to be sure that I understood what we were counting as centers as what we weren’t counting as centers. So the net six new centers in the quarter - do those include the schools that you acquired?

Those include the four Brookfield Academies, Trace.

Okay, they do? All right.

That closed in July.

Okay, understood. That’s what I thought. So to make the 45 year-end target, are we then counting a full 20 Marin Day Schools in that Q4 number?

We are. We’re expecting to net 45 and to - you know, to close roughly 14. So we’re going to gross - you know, we’re going to gross 59.

Okay, all right. So a net three beyond the Marin number? Okay.

And then, I’m sorry to be dense about this as well, but I still - I guess I still don’t really understand the nature of the relationship with - or the body that you’re contracted with for the Marin Day Schools. Are you - and I only ask because it strikes me that maybe the economics are slightly different from the way that you run a normal center. What is the body that is the owner that you’re contracted with?

Yeah.

Are you then out there, you know, trying to sign up corporate clients for the Marin centers? Is that part of the - of what you’re going to be doing there?

Well, first, it doesn’t change our approach at all. The - its economics will flow, much like the rest of the - the way the rest of our centers look. The issue there is that they were structured such where Marin Day Schools is an entity that will continue on, and Marin Day Schools has hired the company that we acquired on a long-term contract to manage all of the centers. And we’ve acquired that management company and, as a result, will be continuing to manage the current Marin Day School centers and will be growing the business under the Bright Horizons, you know, name going forward in the area. But we’ve been working together. I mean, the truth is, their team there is really well integrated into the Bay Area and I’m excited about, you know, putting the two of us together for the sake of growth and just getting better operationally and all of the important relationships that exist there locally that I think we’re going to - our combined team will benefit from.

So you mentioned all these terrific corporations that they’re working with. But those are not going to be relationships that you’re going to enter into directly, then, I guess?

Those are relationships that we, as the managing company, would manage as a result of our contracts with Marin.

Is there anybody out trying to win new deals for Marin Day Schools with local corporations?

There has been, and they’ll now be part of our team. They know - let me take that back. They - the managing company has been doing that on their behalf.

I see. So that is part of what you all will be doing?

Yes, but we’ll be doing it under the combined Marin Day Schools/Bright Horizons combination. That’s what I wanted to make clear.

I see, and…

[Indiscernible] sales efforts.

Okay. And then when, Dave, you say you’re going to be expanding under the Bright Horizons name so that - that means you might be opening up additional centers that will be branded Bright Horizons versus Marin Day School?

No, I just meant that as we go out and approach new clients, we’ll be doing that together and we’ll be doing that under the Bright Horizons umbrella. Obviously the existing MDS centers will be under that umbrella, but our intention is to - with the people from this management company that we acquired joining our team, we’ll be going out together approaching the market there, and we’ll be doing that under the Bright Horizons umbrella.

I see. So the corporations themselves will be, then, aware that they’re working with Bright Horizons?

Exactly.

They know you from another context?

Exactly. [Indiscernible] structure is somewhat complicated. We want to anticipate it being an issue in the marketplace. I think that the important part is that they have a great reputation in the marketplace. So do we. And I’m excited about, when we join together, what we’re going to be able to do in terms of growth in that area, but also [indiscernible] the pipeline centers [indiscernible] that were - that [indiscernible]. So we’ll be obviously helping them to - you know, to bring them along as well.

Okay.

And last question, Dave. Is the MDS organization that you’re contracted with - is it a not-for-profit?

It is.

Okay. So they’re not tempted to somehow try to compete with you at some point down the road?

They can’t compete with us. That’s why [indiscernible] contract it’s not possible.

Got it, sounds great. Thank you.

Thank you. Our next question is coming from Mark Hughes of SunTrust. Your line is live.

Thank you very much.

In the prospect that you’ve got - the growth you’ve seen - is there any difference in motivation - you know, why they’re pursuing the day care alternative?

I think that the motivations are the same. There’s one little twist that I think is out there now, and I think obviously - we all know that there’s been a big push on productivity. And I think that the underlying business case to be made for work-site child care has been traditionally been made around recruitment and retention, which it still will be going forward. It’s still a big piece of it. But there’s a heightened focus now on productivity and particularly the recruitment, retention and productivity of top performers within organizations. And we just put out - I think we talked about it last quarter - the new investment impact study that we did that showed how the higher - our centers tend to attract a higher proportion of top performers than top performers exist in any of our sponsoring companies.

So, we’d long suspected that work/life programs tend to attract people who are really key performers for companies, and I think we’re starting to prove that. And that data is really critical. That data seems to really resonate with clients in driving the business case.

Right.

So that’s [indiscernible] answer to your question.

That’s interesting. How about health care with, you know, health care being another benefit becoming so expensive? Is there a - does that impact your business? Maybe some companies cut back on health care but offer day care or, you know, that’s cut back elsewhere because health care is expensive? How does that fit in?

Yeah, I don’t see us competing with the health care dollars. I mean, there’s obviously a much larger pool of dollars in any organization that go to health care. And our - you know, we invest in what we do once it’s accepted and understood by the client. You know, there’s - there is an initial capital investment which is in - typically made in the facility. And that is - that’s obviously a little different than the ongoing budget commitment that they’ll make. Once they decide to make that initial capital investment and that gets approved, then [indiscernible] investments that our clients make are really all over the map in terms of what percentage of the actual operating costs they want to cover, if any.

Right.

And we have some clients that - the employees pay 100 percent of our operating costs and tuition, and we have other clients that decide they want to pay - it’s a 50/50 split. So…

Right.

…it’s more - it’s more the capital investment that makes it a little bit different. Other than that, [indiscernible] relative to health care costs.

[Indiscernible] shift in that - the structuring of the deal - sort of cost-plus versus P&L, or how much the companies want - foot the bill themselves? How is that piece, Dave?

Actually if you asked me three years ago, I - if in the economy we would have saw more of a shift towards us taking the risk, I would have told you probably. But the reality is, we haven’t seen it. There’s the same proportion of cost-plus deals happening now in the pipeline and, you know, what we’ve [indiscernible] in the past few years, which still maintain a 60:40 split between 60 percent P&L and 40 percent cost-plus.

Thank you very much.

All right, Mark, thanks.

Thank you. Once again, that’s 1 followed by 4 for any questions at this time.

Thank you. Our next question is coming from Brandon Dobell of Credit Suisse First Boston. Your line is live.

Thanks, a couple of quick ones here.

If you can give us a little bit more color on what the structure of the contracts looks like over in the UK and some of the acquisitions that you’re looking at or have made? Are those cost-plus, P&L, kind of a mix? I’m just trying to get an idea of how the overall mix might change as you acquire companies in the UK or acquire companies here in the U.S.

Right. Let me take a stab at that, Brandon. The UK centers that we acquired had a pretty similar mix. It was about 70/30 split and, you know, a very similar structure. There was - they had one consortium lease model, and the remainder of the centers were in the sponsored arena with a little bit heavier weighting toward bottom line kinds of constructs. Here in the States, I think that we tend to see outsourcing opportunities. The transitions of management tend to be maybe 50/50 cost-plus or bottom line opportunities, and the acquisitions tend to be more on the bottom line sort of opportunity.

Now, the resources and active learning acquisition has a little bit of a different construct, with the underlying centers of Marin Day Schools being more bottom line center orientation. But that mix is, in the smaller center size, probably not going to move the needle at all. That mix is, like, 80/20 bottom line cost-plus. And I think that it would take - at this stage, you know, I think a lot of people on the call have been hearing us talk about the cost-plus bottom line being 60/40 - sorry, 40/60 cost-plus, 60 bottom line. And it hasn’t moved over the five and a half years we’ve been public, and I think that it would take a lot - it would take a very substantial in both the underlying business or in acquisitions to see that move.

Okay, fair enough.

Just changing direction a little bit - on the cost-plus issue that you mentioned - I’m going back to an earlier question - I think you guys first brought this up maybe early part of the last year. Just trying to get an idea of - obviously it’s a kind of a continuing issue. Is it the same guys coming back to you saying, we’re just going to keep lowering the subsidy? Or is it new customers coming to you and said we’ve, you know, put this off as long as we can but we have to drop our number down? Just trying to get an idea of kind of, you know…

Right.

…when this trend might end or if it is confined to a certain number of centers or a certain type of center?

Right. It’s a good question, because I think you’ve hit on what makes it a little bit difficult to estimate, which is that it isn’t like some small class or some particular group of the cost-plus centers keeps coming back year after year. It does tend to be a different group, year over year. One particular client may have - you know, have shifted their focus a little bit. They want to belt tighten a little bit in one year, and then the following year they’re content with how the subsidy is doing and how satisfied their employees are with the centers.

So it is a - philosophically it tends to be in - you know, it is in cost-plus centers that this has an effect. But philosophically, those centers also tend to have operating structures, if you will, that are more generous with the cost theme in terms of - sometimes they have more administrative support staff, or they may have longer hours of operation, or they may have specialized programming that has an incremental cost that is certainly discretionary on the client’s part and has - you know, has - they have the ability, then, to pull that back a little bit, or to [indiscernible], which has been the trend that we’ve seen a little bit more over the last couple of years.

And Brandon, [indiscernible] a little more current. It’s something that - another difficult thing that makes it hard to predict is that, you know, we do [indiscernible] deals. A lot of times, when [indiscernible] from scratch and they’re giving the clients, you know, sort of everything that they’re asking for in the initial process - they may ask us to model certain programs, hours of operations - and ultimately [indiscernible].

And then as things get going, both because of belt tightening but also because of just, you know, finding out that for whatever reason, their initial desire didn’t manifest itself in a lot of demand, that they may cut that particular piece back. And it’s just assuming one more course. We [indiscernible] whatever they want to do. Do they want to run a summer camp, for example, one year, and they don’t get enough demand, so they have an over - [indiscernible] it doesn’t make sense for what the actual demand was, and so therefore they may decide not to do that not only because of belt tightening, but because it just didn’t turn out to be something that their employees wanted or worked for their employees, for whatever reason.

So it’s a combination that - it’s not just economics, but I think there’s some element of that that would just continue this on how those contracts work. When we’re on the P&L, obviously we’re a little more diligent about - you know, [indiscernible].

Right, and it certainly [indiscernible]. That was very helpful, thank you.

And one final one. In terms of capacity for the schools versus child care centers, [indiscernible] throw a number at the schools’ capacity as kind of a 3,000 to 4,000 range. And I guess the other question would be, is that included in your number of - I think it was 57.5 as total capacity, or is that something extra that you don’t kind of build into that number?

The schools - you mean 3,000 or 4,000 or total capacity?

Right.

That would be high for our - the Brookfield schools were in the range of [60] percent larger than a typical child care center. So our typical U.S. centers are about 130. They’re - the Brookfield schools are 200, on average, or a little bit north of that.

The - now, the school in Florida, as Dave mentioned, has a total capacity of 540. But we’re talking about, with Chestnut Hill Academy, maybe 1,500 in total.

Okay, that makes sense. Thanks a lot.

Yeah.

Thank you. Our next question is coming from Howard Block of Banc of America Securities. Your line is live, sir.

Thanks again. The metric we always ask for - I don’t know if you have it handy, Elizabeth - the number of centers that were added in the quarter for clients with multi sites? And maybe - I don’t know if you have it - I think the last I have was, like, 42 clients that had 185 or something like that?

Yeah, we have the - the figure - the current figure is 43 clients, with 186…

Okay.

…centers. So if your figure are right, that would infer that we added one, which I think is right.

Okay. And then, do you have any evidence that the centers near your schools, whether it be in Florida or newly acquired Michigan or Chestnut Hill, are feeders? Are you centers or feeders for those schools? I mean, do you have - can you say that there - I don’t know, there were ten kids that have graduated from BFAM that are now sitting in first grade at one of these schools, or…

Well, I think the center that we can say that with the most confidence, Howard, is the one in Seattle, or Bellevue. It was originally founded for that very reason. And virtually, I think, 80 percent of the initial enrollment there four, five years ago, was - were kids who were fed through our system, and a lot of those kids are in third, fourth, fifth grade now. And then - I’d be guessing, but I would guess that about half the enrollment in that school ends up coming from one of our maybe 14 centers we have in that [indiscernible] area, or where that school is.

In Florida it’s the same way because, again, we’ve run a child care center for JFK for a lot of years. The issue, though, is that obviously there’s just not a - I mean, they’re getting a lot of other enrollments too because the school [indiscernible] is much bigger than the amount of kids that would graduate preschool from their child care center. But we’re getting a lot of those preschoolers -- and I don’t have that number exactly -- but that would graduate into that school. In Brookfield it’s too soon. That was just last quarter, so we’re in the process, as we market for next school, of marketing through the network of centers we have there, so it’s too early to tell. But again, I mean, it’s clearly a part of our strategy.

Okay. And then, Elizabeth, do you have a cash flow from operations number?

I gave you an EBITDA number…

Right.

…but I don’t have…

Okay.

…cash flow from operations yet.

Okay. And how many international centers are you up to now? If you stated that, I apologize, I didn’t catch it.

We have 76 overseas.

Okay. And I think - oh, is - if you look at the school in Florida and you sort of think about where it could be in a couple of years, is that capacity limited by some sort of a footprint issue, or could you extend it be a thousand students, or is this something that you never want to get to that [indiscernible]?

There’s a few constraints on it. One is a bit of a footprint issue, and the charter is for a range of size of grades and what have you. So there’s some constraint. We have the opportunity to operate a more extensive and robust summer camp program that will offer some opportunity over time as parents are more aware of the schools and as we, you know, develop that network of things over the course of the summer.

Okay.

So that’s the main thing, I think, that we’re looking at over the next couple of years. But we have - certainly with this first full year of school, we won’t have filled up our fourth and fifth-grade classes yet because we’re growing our own fourth and fifth graders, if you will, as we get the school opened, and just have the third graders matriculate up in that way.

So those classes will fill first. And I think that getting it to its full capacity is Stage 1 for now.

Okay. And the last question is - in terms, I think, Dave, of the revenue guidance you had given for the fourth quarter, I think you said returning to - was it mid teens?

Fifteen to 17 percent.

Fifteen to 17? Okay. So would it be maybe safer to assume the lower end? In other words, wouldn’t the fourth quarter have the same sort of challenging comp as the third quarter because of the acquisition?

It’ll have a similar challenge in comp. It will have two and a half months of [indiscernible] in it, Howard.

Okay. But if - for the two and a half months, we should assume that that’s roughly $2.5m?

That would be the approximate contribution for the fourth quarter. And, you know, I think that we’ve done our best to estimate, you know, what this will be. I - you know, Dave and I can look at this. And we look ahead and try to estimate where the [core] will be. I think 15 to 17 is the range, and there will be comp effects with Kinderquest. We will have the offsetting effect of MDS and we’ll get to talk about it in February.

All right, good. Thanks again.

Thanks.

Thank you. I’m showing no further questions at this time. I’ll now turn the call back over to Mr. David Lissy for any further or closing comments.

Well, thanks, everybody, for joining us on the call today. And as always, feel free to give Elizabeth and I a call with any other questions.

Take care.

Thank you. That does conclude this evening’s teleconference. Please disconnect your lines, and have a wonderful day.