Bright Horizons Family Solutions Inc (BFAM) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the Bright Horizons fourth quarter earnings release teleconference.

At this time all parties have been placed on a listen-only mode and the floor will be open for your 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.

Thanks, [Maricia], and welcome to everyone on the call from the home of the Super Bowl Champions. You have to forgive us, those of you outside of Boston, for continuing to want to say that, we'll stop by the next call.

Our earnings release went out right after the market closed today. It's available on the investors section of our website at www.Bright Horizons.com.

With me on the call today, as usual, is Elizabeth Boland, our CFO, and I'll get Elizabeth to read the Safe Harbor statement.

Thanks, Dan.

As you know, everyone on the call, in accordance with regulation FD, we use these types of conference calls and other similar forums to provide the public and investing community with timely information about our business operations and about our financial performance, as well as our expectations for the future. We adhere to restrictions on selective disclosure and appreciate your understanding on the limits we will be able to comment on items not previous discussed in these forums.

Certain non-GAAP financial measures may be discussed during the call and detailed disclosures relative those measures are included in the press release, and also may be found in the Investor Relations section of our website at Bright Horizons.com.

The risks and uncertainties that might cause future operating results to vary from what we describe in any forward-looking statements include our ability to, one, execute contracts for new center commitments, two, to enroll children in our centers, three, to retain clients and center management contracts and, four, to expand and operate profitably abroad. As well as the overall effects of governmental, tax and fiscal policies on employers who are considering work site child care.

The specific risk factors associated with our business are detailed in our SEC filing, including our Form 10K filed in March of 2003. A relay of this entire conference call will be available by calling 973.341.3080 and entering PIN code 4408818.

Now, back to Dave.

Thanks, Elizabeth.

On the call today, I'll review our 4th quarter and full-year results for 2003, and I'll update you on our outlook for 2004 and beyond. Elizabeth will then come back and review our financial results in more detail, and provide additional insight into our financial expectations for 2004.

First, let me start by re-capping the numbers for you.

For the year, revenue of $473 million was up 16% over prior year. On the bottom line, net income rose 31%, resulting in a 27% increase in earnings per share to $1.50 for fiscal year 2003.

The 4th quarter results were similar, with 16% revenue growth, 37% net income growth, and earnings per share of $0.39, a 30% increase over the 4th quarter of 2002. We ended 2003 with a total of 509 centers in our network, having opened our 500th center with our long time partner Citibank in San Antonio, Texas this past October.

2003 represented another successful year for us at Bright Horizons, and I'm really proud of the outstanding effort and commitment to constant improvement that our team has continued to demonstrate.

When I reflect back on 2003 and the past few years, it's really gratifying to see what we've accomplished. Like many companies, we faced a considerable challenges of a sustained economic slowdown. That said, our results have been strong and, most importantly, we've achieved them, not with one-time fixes or restructurings, but by delivering on five key fronts.

The first, identifying and executing on new opportunities for growth.

The second, continuing to work with our existing client base to expand our relationships, and help our clients manage through tough times.

Third, achieving modest margin improvement, while continuing to make important investments in people and systems that will ensure that we're well positioned to manage our future growth.

Fourth, building and strengthening our culture and work environment in order to maintain our position as the employer of choice in our field.

And, lastly, staying focused on maintaining our position as the high quality leader in our field.

In terms of the first point, identifying new growth opportunities, the clearest indicator of our success is the nearly 200 centers we've added to our network since the beginning of the recession in early 2001, including 70 from multi-site clients. In 2003 we added new centers for such premier employers as Astra Zenica, Microsoft, Memorial Sloan-Kettering, IKOS, The Mohegan Sun, Georgia Tech, the LPGA tour, SIGNA, the UK Ministry of Defence and the Henry Ford Health System, to name a few.

Another trend that has grown stronger over this past year is the opportunity for Bright Horizons to outsource, or transition the management of existing work-site child care centers that are either self-managed by the sponsoring employer or managed by a small local provider. Over the last three years, approximately 25 of these centers have been added to our network.

Our expansion in the UK and Ireland is going well, and we're seeing our growth effort there continue to take hold. With 74 centers serving a diverse array of clients, we're well on our way of achieving our goal of being the high quality employee sponsored child care center in both the UK and Ireland.

Although there is much to do there, this past year we integrated our field operations and back office administration and we've rebranded our entire European organization under the Bright Horizons name. We extended our leadership in backup child care as well, and we now manage 38 dedicated backup child care programs and have another 45 programs in our full service centers.

With our acquisition of the Brookfield Academies in Michigan and the opening of a employer sponsored charter school in Florida, we now manage six elementary school programs. We're excited about what we're learning in this area and our schools division is poised to grow where we can find opportunities to leverage client relationships or our presence in a given geography.

Finally, we've continued to execute on acquisitions that meet our stringent criteria for quality and financial performance. As we announced last October, we acquired Resources In Active Learning and now manage the 20 Marin Day Schools in Northern California. We've continued to prove over time that we can successfully integrate new acquisitions and have financed all of them using cash generated from operations.

Our second key area of emphasis, that is, working with existing clients, is based on a two-pronged approach, expanding the breadth and depth of these relationships and partnering with clients to help them maximize the benefits of their existing centers. The results are a clear success in both fronts.

In 2003 we added 12 new centers for existing clients. A couple of highlights to share with you. Our eighth for Citibank, our fourth center for Bristol-Myers Squibb, our third for Toyota, and our second from Microsoft, this time over in the UK. And as of year-end, our multi-site network had grown to close to 200 centers for 45 clients, double what it was 5 years ago. We've continued to be successful over time helping our clients balance their cost and quality goals, as evidenced by our 97% client retention rate.

As part of our investment with our client partners, we conducted a study to further quantify the impact and return on investment of employee sponsored child care. Participating clients included Staples, Household Financial, Citibank, New York Hospital, Abbott Labs and Bank of America.

The result of this work, which we released last June, detailed reductions in turnover of up to 50% among top performing employees who used the work-site child care centers. It also indicated annual cost savings of $3.5 million for this group of clients. The study's results show that employee sponsored child care has a measurable impact on a employers bottom line.

As a result of the published findings, we've conducted a series of webinars, and the response from both our current and prospective clients was better than we expected, further underscoring the importance of the underlying business case for work-site child care.

The third part of our strategy can really be summed up as attention to detail. That is, achieving modest margin improvement while investing in people and system to manage our growth.

This past year we continued to move the needle in this regard, and our earnings were considerably better than we projected at the start of the year. These results have mostly been due to the confluence of several factors.

First, our ability to consistently increase tuitions. Second, the contribution of transitions of management, outsource centers and acquisitions to our growth mix. Third, our ability to manage appropriate levels of staffing in our centers without impacting quality. And, fourth, leveraging our overhead cost as a percentage of revenue.

And I think it's important to point out that even as we've been successful in leveraging overhead, we've continued to make important investments in such areas as new technology to get better reports, an enhanced company intranet, our UK-Ireland operations, our client support team, new training in educational programs for teachers and new curriculum and support materials.

Now moving on to my fourth point, our goal at Bright Horizons is to be the place where talented early childhood educators and other like minded professionals can build a career. This is a critical element of our strategy, since in our field, this is a direct -- quality is a direct result of the teachers in our centers, our center directors, and the rest of us who support them in making it happen every day.

This past year, we were gratified to see our teacher turnover rate decline by 12% to an annual level of 23%. In a field where 50+% annual turnover is the average, this is an important achievement. In fact, 98% of our employees in our latest survey tell us they're proud to tell others they work for Bright Horizons and once again, this past September we were honored to be selected for the fifth time as one of Fortune Magazine's 100 Best Companies To Work For in America.

To my fifth point, one of our basic principles guiding our operating and business decisions is that we cannot afford to have profit at the expense of quality, nor can we afford to have quality at the expense of profit. Clearly, with growth comes the challenge of maintaining our high standards. And as in every world-class service organization, this requires a great deal of dedication and attention to detail by a team of 15,000 across four countries.

We are really proud of our industry leading track record for any NAEYC accreditation, which is widely viewed as the gold standard in the field. Over 80% of our eligible centers are accredited, with the remainder in progress.

As both the CEO of the company and a father of two children in one of our centers, I can directly relate to the high expectations of the families we serve. Again, this year we're pleased to receive a 98.8% satisfaction rating from the parents who use our centers and schools.

So looking ahead to 2004 and beyond, I believe Bright Horizons is stronger than ever, and well positioned strategically, operationally and financially. We have solid growth prospects, strong margins, great cash flow and a clean balance sheet. All of which will enable us to take full advantage of a uptick in the economy.

We're not yet experiencing activity levels in the corporate market that compared to those of the late '90s, but I am encouraged by the pace of early stage sales activity and by a uptick in our front end consulting work. This front end feasibility consulting is paid work that offers us another early indicator of future new business.

As you know, for the past few years we've concentrated heavily on countercyclical areas such as healthcare, higher education and government agencies. This has paid off in achieving solid growth in these areas. In fact, in the last three years alone we've added 40 new centers in these three sectors.

These efforts have created a growth engine going forward which will strengthen our overall growth prospects once we finally see a sustained upswing of new business in our more traditional industries such as financial services, high-tech and pharmaceuticals.

We also project a trend in outsourcing and transitions in management to continue as well. Our growth prospects in the UK and Ireland are strong and we're carefully pursuing growth opportunities with elementary schools.

And finally, as we've done in past years, I would fully expect that we'll continue to execute on acquisitions that are in our strategic interests and either help us to gain new clients or strengthen our position in a given market.

Our pipeline of centers under development remains steady in the 50s. As you know, the pipeline fluctuates as we open new centers and add commitments. But we continue to have good forward visibility in our growth prospects over the next 12-18 months.

In 2004 we would expect to add a similar number of new centers as we did in 2003. These centers will mostly come from the commitments already in our pipeline and will be complemented by the transitions of management and acquisitions that may happen during the year.

Overall, we expect to add approximately 10% to our capacity in 2004 as a result of a similar number of net new openings as this past year.

As we look at the long term view of the business and the external client in which we operate, we remain confident we have the right strategy in place though produce strong results.

We believe that changing demographics in the workforce will require employers to continue to make investments in work-life supports such as work-site child care in order to remain competitive over the long run. This, combined with a clear undersupply of quality child care available to working parents, will continue to drive our growth.

At the macro level in 2000, the US Census Bureau projected a 12% increase in under-five year olds by 2015.

That said, we've only begun to tap the potential in the employer market. Three key areas of focus for us are, number one, work sites with more than 500 employees, number two, Fortune 500 employers, and, thirdly, existing clients.

With just over 4% penetration of the estimated 17,000 US work sites with more than 500 employees, our sales team is aggressively prospecting in this area. We currently do business with just under 20% of the Fortune 500, and certainly see greater opportunity there as well. And, finally, we know there are over 900 sites of over 1,000 employee without child care solutions among our existing group of 45 multi-site clients alone.

While the signs of generally economic recovery abound, we're just beginning to witness the effects of a upswing and remain cautiously optimistic that we will see an uptick in new center commitments in cyclical industries over the next two years. This, of course, is not a given and will take us some time considering our three month to two year average sales cycle.

Operationally, we expect to continue in our path of modestly leveraging our operating margins. As always, this is a careful balance that needs to be done in sync with maintaining our high quality standards and investing in our infrastructure.

In terms of how this translates into results for 2004, we expect to see a continuation of our top line growth in the mid-teens and bottom line growth approximating 20%. The net result is an increase in our guidance for 2004 earnings per share, to a range of $1.75 to $1.79.

Lastly, let me mention as I did last week in our press release, how thrilled we are for our Co-Chairman and founder Roger Brown, who has been appointed as the new President of the Berkeley College of Music here in Boston. Those of you who know Roger and his passion for both music and education can understand just how great a fit this is. And fortunately for us, Roger will continue to serve Bright Horizons as our Co-Chairman.

Now let me turn it over to Elizabeth who will give you a little more insight into the numbers and to our outlook for 2004.

Elizabeth.

Thanks, Dave, and hello to everyone on the call.

To recap a couple things, revenue grew 16% in the fourth quarter to $125.2 million, while the year's revenue of $472.7 million were also up 16% over last year's $408.

Earnings per share grew 30% in the 4th quarter to $0.39 a share on a 5% increase in weighted average shares outstanding. For 2003, EPS of $1.50 increased 27% over 2002 levels.

Top line growth for the quarter was comprised of new center additions, additional enrollment in ramping centers and tuition increases which have approximated about 4% in 2003. Operating income as a percentage of revenue increased from 6.3% in '02 to 7.5% for the quarter, driven by higher center margins, up 70 basis points to 15.4, as well as the 50 basis point reduction in overhead to 7.7% of revenue.

Certain identifiable intangible assets acquired in connection with Bright Horizons' purchase of early care and education centers are subject to amortization. The acquisitions of Brookfield Academy in Q3 of this year, and Resources In Active Learning in Q4 of 2003 have therefore resulted in an increase in amortization this quarter, compared to the prior year.

For the full year 2003, operating margin improvements to 7.3% were also driven by higher center margins, up 60 basis points to 15.3 and lower overhead, down overall for the year, 30 basis point to 7.9%.

At the center margin level, the improvement we saw this year was attributable to tuition increases exceeding salary levels, a careful management of staffing patterns to appropriate levels and an influence of the more mature centers as part of our new center growth mix. In addition, we have noted -- as we've noted in previous quarters, we have realized slightly higher center margins this year in our cost-plus centers, which represent approximately 40% of our overall center mix.

Just a further note on this, as we've discussed in the past, cost reductions in our cost-plus models do have an impact on both revenue and operating margin.

As we work with clients to balance their cost and quality goals, the outcome of which can be a reduction in overall center operating costs, we've seen a compression in operating subsidies in some client centers. We earn a fixed management fee, so our gross margins as a percentage of revenue increase when the cost reimbursement component of revenue decreases. We estimate the effect has been to reduce our 2003 revenues by $2 to $3 million per quarter from the levels we had estimated at the beginning of the year.

Just to reiterate, the growth rate in revenues is affected, but the operating result is a higher margin percentage, and consistent earnings performance.

Overhead, as a percentage of revenue, remained even with Q3 levels, but was down 60 basis points from Q4 of '02. The continued improvement in overhead as a percent of revenue was achieved through expense management and the natural leveraging of our overhead base as the business continues to grow. Overhead expenses consist primarily of salaries and benefits, as well as investments in the various support systems to support the field.

Our centers in the UK and Ireland continue to perform on plan, with margins roughly in line with the domestic business, but an overhead structure that is still disproportionately high for the size of the related business. We opened 7 new centers in Europe in 2003, and with further grow in '04, we will continue to rationalize the overhead structure there in the near term.

UK and Ireland operations represent approximately 6% of consolidated revenues and therefore we don't intend to segregate the results at this time, however we do believe that the underlying growth prospects and market opportunities are very strong and we are excited to have such a significant presence in this emerging market for work-site child care.

EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization for the quarter, was approximately $12 million, an increase of 28% over the same 2002 period. For the full year, EBITDA of $45 million compares to $36 million in 2002, a 25% increase.

At December 31st of '03, the cash balance approximates $33 million, an increase of 22%.

And finally, capital spending for the quarter totalled approximately $2.5 million, bringing us to $19 million for the full year.

I'll end the review of the quarter with a few statistics.

At December 31st, as Dave mentioned, we operated 509 centers as we added 27 and closed 5 centers during the 4th quarter. For the year we opened 60 centers and closed 16 for a net add of 44 centers.

Our total operating capacity at the end of the year was 59,300 with an average center size, therefore, doing the math of 116. US centers average 128 capacity per location, while in Europe our centers have an average capacity of approximately 50.

At the end of 2003, as in prior periods, we are seeing a consistent 60% of our centers profit and loss contracts and 40% cost -- sorry, 60% are profit and loss contracts and 40% are cost-plus contracts.

So based on the existing pipeline and the other growth areas that Dave described in some detail, we are projecting revenue growth for 2004 to approximate 15-17%.

We remain cautious about projecting any near term economic upswing especially as several of the basic underpinnings that directly influence our business, specifically hiring and capital investment, will in all likelihood lag behind the general economy for several quarters. In addition, it's our view that until the timing and extent of any potential economic recovery becomes clearer, we should continue to be conservative in projecting tuition increases and enrollment growth in our existing base of business.

Our outlook of 2004 is based on capacity growth of approximately10% or 45-48 net new centers, tuition increases averaging 4%, and enrollment growth from existing centers of 1-3%. Based on the factors that Dave outlined earlier, we're projecting continued modest expansion of operating margin in the range of 20-40 basis points in 2004.

With an estimated tax rate of approximately 41.5% to 41.7% and outstanding shares of 13.7 to 13.8 million, we project earnings per share to increase 17-20% in the range -- to the range of $1.75 to $1.79 per sar share.

In terms of quarterly EPS performance in 2004, we are therefore projecting a range of $0.41-$0.43 in the 1st quarter and $0.46-$0.48 in the 2nd quarter. For the remainder of the year we would expect to see similar seasonal operating trends that we've experienced throughout our history, but we'll update you on detailed projections for Q3 and Q4 on our next call.

In closing, we believe it's useful for you as investors and interested parties in the company to have some color on what we see as the risks and the opportunities in the coming year.

First, the risks.

We have modeled our 2004 projections with the assumption that current operating conditions will continue throughout 2004. Should the recovery stall, or the recession worsen again, our assumptions around enrollment growth, new center opening, maintenance of client contracts and cost-plus center revenues may prove to be optimistic.

Our ability -- second, our ability to maintain tuition increases in line or slightly better than labor costs -- sorry, tuition increases in line or slightly better than labor costs escalations are happening may erode if the economy begins to recover faster than expected in some labor markets.

Third, our European operations have sustained respectable growth since we entered that market, but this division needs additional scale to ultimately rationalize our investment in their infrastructure. We have modeled early stage enrollment rampup losses for immature profit and loss centers open or slated to open in 2004. However, our estimates of enrollment ramp up may vary in this newer market, and in the current economic climate. We therefore have market risk in Europe that could delay the ability of these operations to contribute on a meaningful basis.

The opportunities we see, conversely, include one, an uptick in the economy whereby we could outperform our estimates for enrollment in new centers where we tend to be most conservative, thereby reducing start-up losses in these centers, or experience stronger enrollment in our maturing base -- in mature base of centers.

Second, continued weakness in the economy or a more measured economic recovery may better enable us to keep tuition increases in check with or ahead of labor costs.

And, third, we may add more centers than projected, through acquisition or the assumption of management and outsourcing of existing programs.

With that, we will open the call for questions. [Maricia], We are ready for the first caller.

Thank you, the floor is now open for questions.

If you have a question, please press the number one, followed by four on your touch tone phone. If at any point your question is answered, you may remove yourself from the cue by pressing the pound key. Questions will be taken in the order that they are received.

We do ask while you pose your question, that you pick up your handset to provide the best sound quality. Please hold as we poll for questions.

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

Good afternoon and congratulations on the quarter, on Super Bowl, on Roger's new position.

Thank you, Howard.

Thanks, Howard.

Sure.

Did you disclose the contribution in the quarter from Marin Day or I think that you mentioned last call it was around $2-2.5 million. Is that right?

In terms of revenue?

Right, right.

It would have been around $2.5 million to $3 million in revenue. That's right.

Okay.

And some of the efficiency improvements that we saw in -- throughout the year that enabled the margin to improve, is that something that is -- on a ongoing basis we'll see it, or will the rate of improvement slow a bit in '04, or will this -- has it normalized?

I think, Howard, that the fact factors that I talked about will still contribute to -- to an increasing. I just -- our projection is for it to not increase quite as much as it did year-over-year this year compared to last year and in our -- in our projections we're projecting 20-40 basis points of additional operating margin leverage.

So just to add on to that, I think that's at the operating margin level so not -- it's a combination of center margin improvement and/or overhead leverage.

So I think that in terms of has it normalized, we're looking at being able to sustain and slightly improve the margins on a continual basis, given both the mix of our center base, the factors that we have in our existing client contracts, and offset by the newer centers that do come in and introduce losses during a ramp-up stage.

Okay.

And then, the variance, at least that we had in our model on amortization, was I think about 130,000. So should we look in '04 for, like, 250 a quarter or 270 a quarter?

Yeah. It will probably be slightly less than this quarter, because we had just a little bit of catch-up where we recorded the -- the full purchase accounting elements, so 250 is a reasonable quarterly statement.

Okay.

And how far are we from seeing the elementary school business become a meaningful contributor in such a way that it might influence the margins, or the growth of the business?

I think we're -- our mindset towards growth in that area, Howard, is to take a careful approach. So are now looking both in the markets where we exist today, the three different markets where we have schools, and in a couple of other places, at expansion opportunities. But I wouldn't project that for this year.

Okay. So where -- it's really -- ?

Let me take that back. I would project additional growth but I wouldn't project it would get to a place as you described where it would have a material effect on margins.

Okay.

And then the last question is, were there any outsourcing contracts or any other acquisitions in the quarter of business in any way that -- nothing of scale, but anything even on the smaller level?

We had a couple of transitions of management in the quarter, but that -- it's sort of the routine stuff that we would have done. So of the -- I think Dave mentioned over the last three years, we've had 25 transitions of management in total.

Great. Well again, congratulations.

Thanks.

Thanks, Howard.

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

Good afternoon, Dave and Elizabeth.

Hi, Bob.

Hi, Bob.

Quite a quarterly shift from lamenting on the Sox to euphoria on the Pats.

We'll take it.

Yeah, we'll take anything we can get up here, Bob. As I'm sure you, in Cleveland, would agree.

I'm not sure we'll follow that up with the Celtics, but ...

Just a couple of questions for you, you're looking at 45-48 net new centers in '04, wondering if you can give maybe some color on that, regarding, you know, the domestic versus international split, whether that is going to likely include any new centers out of Marin Day.

Yeah. When we -- well, let me answer the last part and then I'll kind of circle back.

Part of -- any of -- most of the acquisitions that we've done, there is -- at least in some cases a committed pipeline that we have come to us as a result of that, and in other cases there's good prospects that are well on the way to becoming committed. And I would expect that, whether it's this year or 2005, that there will be some influence to our growth mix based on Marin, directly based on Marin.

Okay.

So I think that will happen.

I think that -- you -- you know, our sales cycle is such that would I project -- we are projecting that in 2004, the mix will be somewhat similar to what we saw this year with the -- with the hope that we'll see the employer's side of the business, the corporate market, contribute a little more -- in a little more meaningful way than it has since the recession began.

Okay, great.

And you were -- you mentioned before, as you had, I think, on the prior call, about the front end activity picking up. And I think that last quarter you indicated that that pickup approximated roughly about 10% on prospects.

Yeah.

You care to throw out a revision on that number?

No. I would say it has held steady at a consistent 10% pickup.

Okay, great.

And as far as outsourcing opportunities '04 versus '03, do you see the opportunity for greater activity there this year.

I would see -- I would see a continuation of the trend we're seeing which, as Elizabeth mentioned, about 25 over the past three years, and it's ticked up -- you know, each year it's ticked up just a little bit over the prior year, and I would expect that in 2004 we will see about the same number, maybe a few more transitions of management than we saw in the past.

Okay.

In terms of universe, there's probably 1,000 to 1,500 of them out there that would fall in to our universe of long-term potential, between the centers our competitors manage and some that are self-op.

And Dave, could you comment on the acquisition environment relative to what you had been seeing, and the priorities that you had mentioned before, domestic core first, elementary school second and international core third, does that still hold?

Yeah. I would -- I would put those three things still out there as our -- as our priority, I wouldn't -- I wouldn't necessarily rank them one-two-three, I would just say those are the three areas in which we're -- we still remain focused.

And, again, I think if we look back to the acquisitions we've done over the past few years, they were either about helping us to improve our client base and thus be able to leverage those client relationships further, or to strengthen our position in a given market.

Does the -- does the pickup in activity at the front end of the sales cycle you're seeing, does that likely -- will that likely influence acquisition availability and pricing?

No. I think that -- I think that when we look at the corporate market, I think it's important to separate it. There's really no acquisition that we've executed on in the past few years that we would have done any differently, frankly, or chosen to do anything any differently if the corporate market was better than it was.

So the hope is that -- and still see a good opportunity for a continued pace of acquisitions over the long term that make good sense for us. Our hope, obviously, is that'll be complemented by a pickup in the more cyclical side of the corporate market.

Okay.

And last one, waiting lists still about 15% of center capacity?

Roughly.

Okay, great. Thanks a lot, guys.

Our next question is coming from Mark Hughes of SunTrust.

Thank you very much.

The compression in subsidies that you talked about, was there any, I guess, spread throughout the year, did that come in early in the year in '03, so therefore you may be lapping that, or was that something that was more consistent throughout the year?

Mark, I'll take a stab at that, and Dave can jump in. I think we would characterize it as being fairly consistent throughout the year in terms of that effect.

We take a -- an approach at the outset of the year with our clients, we go through a detailed budget process on each center with them, and we do our best to work out a projection of both enrollment and cost in the center that is going to marry up with what their marketing strategies are, their client -- their employment -- employee need is. And -- and the outcome of that process is a joint budget that we then try to take into consideration what actually will happen from a forecasting standpoint. That's what flows in to our budget.

So each year we have seen some of this effect, and we do our best to estimate what the client subsidies will be, but since it is more under their control than under our control, we haven't been as accurate with that as, you know, as we would like to be. So the fact that I'm -- I'm noting it this year, I think there's no significant change in how we've experienced that over time, and there's no specific trend, quarter to quarter, to speak of.

Right. I understand.

And then the -- the transition of -- transitions of management, I'm not sure if you gave this number earlier, but did you -- did you give a number for '03 of the centers that fell under that category?

I did not. I think we talked about 25 over the last three years.

Okay.

And it looks like it was 11 in total this year.

Okay. Great. Thank you.

You're welcome.

Thank you our next question is coming from Richard Close of Jefferies and Company.

Congratulations on a great year.

Well, thanks.

Thanks, Richard.

Hey, I just had a -- you know, just a quick question. It's pretty open-ended but, you know, you've been in Ireland, I guess, and in the UK with the acquisitions, and then some de novos out there. If -- taking a step back here, now I think it has been two or three years, how pleased are you with the international operations and, you know, how would you rate yourself in terms of the success over there, and then maybe the opportunities going forward?

Well, let me -- let me start with that one, Richard. And I'm very pleased with what I'm seeing in both the UK and Ireland. Now, you know, I think that when we went there, we made the call to go there because we saw a long-term opportunity, not because we saw -- you have to remember obviously the U.S. market was in a much different place then, we were growing pretty rapidly and the economy wasn't as -- in the place that it is today.

So all the way along we looked at it and said, you know, this -- as we look at the long term growth of the company, can these be markets in which we can ultimately achieve the same position that we achieved here in the States, which is to be the high quality leader and to be the partner of choice for companies who want to do this right? And so, you know, I think the acquisitions, you know, in retrospect were really the only way to get the -- not only to get a beach head, but to get the talent pool of people working for us on our team that are going to set us up, you know, for -- for the future to do it right.

Now, you know, the challenges are all the challenges that you would expect. It's integrating a couple of the different acquisitions to get them, not only -- integrating them together and then with Bright Horizons.

But I think, you know, we've -- we've -- we've had our share of learning experiences but as I reflect on it in total, it's been better than what I would have projected or happened faster than what I would have projected.

So, you know, I think we've proven that we can drive some organic growth. I'm not quite satisfied with those levels, frankly I think we can do better, and I'm hopeful that, you know, now that we've gotten some of the integration behind us that we can focus even more of our efforts externally on organic growth.

Okay.

And then just a second question, in terms of sort of the elementary schools here in the US or private schools, do you -- have you set up a different management structure for those schools, or do you have someone solely focused in on the -- on that, the -- sort of K-12, educate -- or K-6 education area? How is that structure set up?

It is -- we do, Richard, have a school's division that's led by a very talented person here who has got a strong educational background and I think combines both the educational background with a good business sense, and has been a long time contributor to Bright Horizons. So this was the perfect area for her to take on as we -- as we went in this area.

So between -- between she and a couple of others who have helped to focus particularly on the integration side, you know, we have -- we have a division that's -- that's poised to grow.

Okay. And then I -- just one final one.

I think you, in your opening statements, you sort of emphasized consulting, and maybe if you could circle back with, you know, with that thought, because I only caught half of it. I apologize. But are you seeing more in the consulting work?

We are. And -- and just to remind everybody, you know, part of what we do on the front end with a lot of clients is they will engage us to do a -- either a center feasibility study, or a general sort of work/life evaluation of their workforce. And we have a group of people in a -- a small group of people in a consulting practice who will do that work.

We get paid for it, but really we're just trying to cover the time and cost of the people who do the work because, at the end of the day, it's really a first opportunity to develop a client that we hope to run a child care center or some other programs for later on.

And so it's long served for us as a way, since it is a paid -- a paid study, it also serves as kind of a qualifier, because although it is not a lot of money, if a client is serious enough to pay for a feasibility study it's always suggested to us that it's more -- it -- it is on a different level of prospect than somebody else. So what we've -- what we've seen over the past few -- you know, we talked about it last quarter, and we've talked about it again today, is we've seen a solid uptick in the numbers of projects in that area, relative to what we were seeing in the 3rd quarter and now this time last year.

And how many of the 50 centers in your pipeline would have been sort of feasibility study clients as well?

I don't have the answer to that exact number, Richard, but I can tell you that if you look at the corporate side of our business, if you were to backtrack on our center openings, I would say it's probably a third to 40% of the clients that we ultimately will -- who will open a center with us who we've done front end consulting with.

Great, thanks, congratulations.

Thanks, Richard.

And look forward to the coming year.

Will do, thanks.

Thank you, our next question is coming from Brendan Dobell from Credit Suisse First Boston.

This is actually Chris Pitt for Brandon.

Hi, Chris.

Hi. Just a couple of related questions.

As you look at your portfolio of P&L centers, what percentage would you characterize as mature, that is with a full margin, kind of what is that margin, and have you noticed any change in the time or -- or acceleration in the ramp time throughout the year?

Uh huh. About -- overall about 80% of our centers are considered to be mature, that is operating more than two years, and I think the -- the P&L centers, given the mix of centers we've opened over the last couple of years, is pretty close to that number. So as a benchmark, we've talked about that in the past, so it used to be higher than that, and obviously as we get some scale we've got a lower figure that's immature.

Typically our P&L centers are still ramping up over that two to three year time frame that we've talked about, with full operating maturity typically at the 75% to high 70% enrolled. Most centers can't operate much over 80% because you need to leave room in the classrooms for the younger children to matriculate and grow -- sorry, grow up in to the next older age group.

So we're seeing that consistent this year, last year, as we have over the last few years. And I think you had a third element to that question, but you'll have to refresh my memory.

Have you had -- have you noticed any acceleration in the time to ramp up a new center as you -- as you look at kind of the beginning of 2003 versus the end of 2003?

We haven't seen it on the P&L side and acceleration like that. I think certainly we've seen over time, as more companies have looked at this, that in a cost-plus model, sometimes we see a greater intact workforce starting off out of the gate, but that tends to have been a workforce that the client has been looking at this for quite awhile. So overall P&L centers are ramping up over a similar time frame.

Okay.

And I think I just -- I might have missed this, but did you give capacity utilization for the quarter.

I actually did not. It is consistent.

Seasonally, we have enrollment growing from September through December and then it tends to peak in the 1st and 2nd quarters of the year, just by way of background, so we're still seeing overall enrollment in the centers in the mid-75 to high 70s overall, mature centers are operating at the higher end and immature at the lower end.

Okay. Thanks.

You're welcome.

Thank you, once again as a reminder it's one followed by four for any questions at this time.

Our next question is coming from Trace Urdan of ThinkEquity Partners.

Good afternoon.

Actually, my question was a little bit about -- about capacity as well. So forgive me if it's a little bit redundant. I'm -- it almost looks-- I think, Elizabeth from the -- from the numbers that you gave, unless I didn't catch these right, did you say that the average center capacity in the quarter was 116?

At the end of the quarter, overall, it's 116, yes.

Was that the -- was that the rate for -- on average during the quarter, or just at the -- the number at the end of the quarter?

That was the quarter-end figure. We don't --

Okay.

That is the total capacity.

Right.

So --

So there was no -- there was no kind of spike in occupancy in the -- in the December quarter relative to sort of what you did last year?

I think you're thinking of utilization rather than capacity.

Yeah, sorry, I am. Utilization.

So the capacity was the 116.

Right.

No spike in utilization in the fourth quarter of this year compared to last year?

Yeah. I guess part of what I'm wondering is whether maybe the Marin centers have a particularly high occupancy relative to some of your other centers.

No. I wouldn't say that there's a measurable difference in overall enrollment, 4th quarter of last year to this quarter.

Okay.

The only other question I -- I had really was that relative to the margin guidance, I seem to recall last quarter you saying pretty definitively that any expansion in the margins into next year would -- would not be happening at the gross margin line, it would strictly be below that line. Is that still your belief?

I think -- the reason we characterized the projection for next year at the operating margin level was, I think, in recognition that we may see a slight improvement at the center margin and slight improvement at the overhead margin, the mix of which, you know, we just haven't tried to break down when we're talking about 20-40 basis points overall. We actually would expect to see a little bit at both, because there is, as Dave characterized it, I think, sort of a continuation effect of some of the factors that went into the outperformance this year.

So, I wouldn't say that it is all overhead and I would not say that it is all center margin.

Okay. So this is -- this is just sort of a more nuanced take. There's not -- there's nothing that's materially changed in your stance versus the prior time.

Right.

We talked about this?

Right.

Okay. Thanks.

You're welcome.

Thank you.

Our next question is a follow-up coming from Howard Block of Banc of America Securities.

Hi, David, Elizabeth, it's Derek here. A couple of housekeeping items on the -- in the past you've given the pipeline by sector, if you could maybe break that out.

Okay.

I will break that out, and I think that I'll just take this opportunity to say we'll look at this on an annual basis, so I think it's a good time of year to be able to provide this, and where the pipeline is versus the actuals by sector and then we'll look at that on an annual basis so, because it doesn't move tremendously from quarter to quarter.

So, the breakdown of the pipeline -- I'll read the actual percentage first, and then the pipeline percentage.

Great.

So for financial services, actuals is about 15%, the pipeline is about 5%. Technology, actuals is about 10%, the pipeline is about 5%. Healthcare and pharmaceuticals, the actual is about 15%, and the pipeline is about 10%. Consumer products, the actual is about 10%, the pipeline is about 15%.

Manufacturing and industrial, the actual is about 5%, pipeline is about 15%. Government and educational agencies, the actual is about 15%, pipeline is 30%. Office consortia model and other is approximately 30% in the actual portfolio, pipeline is 20%. And then we have a residual 5% of other in the pipeline.

Great, and --

A new category.

The -- and then just to clarify, so the -- the JFK school and the Chestnut Hill school, are those counted as -- as centers in your center count?

Yes.

Yes.

They are. Okay.

And just to remind me, what was the -- what was the timing of when those came about, both those two?

The charter school opened a year ago in August, that is in 2002. It opened in temporary space and then moved to its permanent facility this past August in 2003. The capacity went from 170 in that first year to 550 capacity now.

And the Brookfield Academy schools joined the team in July of 2003. So they're in here for the fall semester.

Chestnut Hill has been in our portfolio since 1998.

Okay. Great.

And then the -- the last one, on the management transition, those -- how are those treated, as new centers as well?

Yes.

Great. And I believe that is all. Thank you very much.

Thanks, Derek.

All right, Derek.

Thank you.

I'm showing no further questions at this time, I will now turn the call back over to the speakers for any further or closing comments.

Thanks, [Maricia], and thanks to everybody on the call.

As always, we're here with any questions and we look forward to either seeing you on the road or seeing you -- or talking to you next quarter. Take care.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines and have a wonderful day.