Bright Horizons Family Solutions Inc (BFAM) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen welcome to Bright Horizons first-quarter earnings release conference. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is my pleasure to turn the floor over to your host, David Lissy. Sir, you may begin.

Thanks; and welcome to everybody on the call today. Our earnings release went out right after the market closed in it's available in the investor relations sections of our website at www.BrightHorizons.com. With me on the call today as always is Elizabeth Boland, our Chief Financial Officer. And before I get started I will ask Elizabeth to read our Safe Harbor statement.

Thanks. 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 the investing community with timely information about our business operations and 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 also be discussed during the call, and detailed disclosures relative to these measures are included in our press release and also may 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 our forward-looking statements include, one, 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 two, the effects of baromental (ph) tax and fiscal policies on employers considering worksite child care and the capital investment decisions such employers are making.

The specific risk factors associated with our business are detailed in our SEC filings including our Form 10-K filed in March of 2004. A replay of this entire conference call will be available by calling 973-341-3080 and entering PIN code 465-2609. Now back to Dave.

Thanks, Elizabeth, and welcome again to everybody on the call. Today I will review our first-quarter operating results and provide you with our current outlook for the remainder of 2004 and beyond. Elizabeth will then review our financial results in more detail prior to turning it over to our Q&A session.

We are pleased with the first-quarter results and for the strong start to the year it represents. Revenue of 131 million is a 17 percent increase over last year's first quarter, while net income growth 35 percent to 6.1 million for the quarter. Earnings per share of 44 cents increased 26 percent over the prior year.

This quarter's performance continued to build on the momentum we established last year and expect to continue going forward. It is gratifying to see the fundamental strengths of our business model continue to play out as our talented team across the U.S., UK, Ireland, and Canada continues to produce strong and consistent results.

We added eight new centers to our network this quarter, six here in the U.S. and two in the UK. New clients this quarter included JanSport, the maker of those backpacks that you seem to see kids wearing everywhere today; the New York Racing Association at Belmont Park; the Sea Island Resort; and Detroit Diesel in Michigan. We also continued to broaden our presence in two major countercyclical industries, higher education and healthcare, with the addition of new centers in the UK for Cambridge University and Robert Gordon University, along with a new center for Savannah Memorial Medical Center in Georgia, and the expansion of our center for Grant Riverside Medical Center in Columbus, Ohio. On a net capacity basis we added 450 spaces, having closed two centers during the quarter.

Enrollment this quarter was strong, both in terms of new center ramp up and utilization at our mature centers. Overall, we're optimistic about positive trends we're seeing throughout our network as the economy continues to rebound. We remain on track to grow top line in the range of 15 to 17 percent this year, and are moving up our guidance for fiscal year 2004 earnings per share to a range of $1.77 to $1.80.

All of the trends that we spoke you about in February continue to play out and contribute to our strong operating performance. To reiterate, these key factors include, first, our ability to increase tuition slightly ahead of average salary increases. Second, managing appropriate levels of staffing at centers without impacting quality. Third, executing on our plan to consistently leverage our overhead spending as a percentage of revenue. And lastly, the influence of a heavier weight of transitions of management and acquisitions as a percentage of our overall growth mix.

Looking forward, the timing and pace of the economic recovery still remains the largest single variable in our future performance. It impacts our sales cycle and client budgeting sensitivities. As I said to you before, our long sales cycle, ranging from three months to two years, will not make us a leading indicator of economic recovery, although we are quite encouraged by the pace of recent activity.

We continue to build on our successes in the healthcare, higher education, and government sectors, the so-called counter -- or maybe better said, noncyclical -- industries, while also beginning to see the benefits of the groundwork and relationships that we've continued to cultivate in those cyclical industries; namely, tech, financial services, manufacturing, and consumer services, where our growth had been most impacted by the economy.

As we close the quarter our pipeline of centers under development remains steady at over 50 centers. Equally important, we've been seeing a steady build-up in early-stage prospects, with activity at these earlier stages of the sales cycle continuing to sustain a 10 percent increase over last year's levels.

The mix of these centers is still weighted slightly towards countercyclical industries, but we're seeing early signs of renewed interest across the board. All in all, as we look ahead we're encouraged by the depth and breadth of our pipeline and our overall prospect base, and we remain optimistic in our ability to meet our growth targets that we've outlined for 2004 and beyond.

We also remain active in our pursuit of quality acquisition candidates both here in the U.S. and in the UK. As you know, we've grown the company approximately 30 percent over the years through acquisition, and we believe that there will be many good opportunities to either enter new markets, or deepen our presence in existing ones, in this manner over the next few years.

Longer term, we believe that work force demographics and social trends paint a positive picture for us. Our growth over the past 10 years has been largely attributable to long-term shifts in the makeup of the American workforce. Perhaps the most influential factor that's driven our growth over time is that women with children under the age of six have been the single fastest-growing segment of the work force since 1980, according to the U.S. Census Bureau.

These issues formed the central theme of our annual client conference which we held earlier this month, -- or we held late last month in Florida with more than 125 of our existing and prospective clients in attendance. The primary focus as employers continue to look forward is that now that their workforce has changed and will continue to do so over the next 10 years, how will they need to respond and adapt their workplaces in order to sustain competitive advantage?

We have witnessed a powerful sea change in recent years that has led to important attention on work life supports like employer-sponsored child care. Moreover, it has led to a critical focus on quality child care and early education, a service that is in short supply in most communities everywhere around the country and around the world.

A recent cover story by Time Magazine highlighted the issues faced by many families today, and in particular those facing many women in the workforce as they try and balance work and life. It seems like this story is written by a different publication every year. While the gist of this particular article focused on a few women who for various reasons chose to put their careers on hold, our experience tells us that the opposite is more the norm.

These parents are exactly the types of employees that employers are most desperate to retain, bright productive lawyers, engineers, marketers, financial staff, most of them at mid to senior levels and at the peak of their abilities to contribute to their companies. What is more, for many families simple economics drive these decisions. Recent studies indicate that in almost one-third of dual-earner families the wife earned more than the husband. Women now outpace men in four-year college degrees and in masters degrees. In the end even the Time article pointed out that not only do most families need to have both parents working, but our overall economy is now dependent upon it.

Our client partners at this year's conference were keenly aware and focused on workforce trends and demographics, particularly the longer view, out 5 to 10 years. What is clear is that there will again be stiff competition for talent; and we believe this will continue to motivate employers to pursue concrete solutions to their employees' work-life needs. Bright Horizons is uniquely positioned in terms of program quality and market position to continue to capitalize on these trends.

Finally, I am excited to tell you that we will be opening the NASDAQ market in New York this Friday.

All this week we've been celebrating the Week of the Young Child as designated by the National Association for the Education of Young Children. The focus this week has been our commitment to early education and to NAEYC and the accreditation process, which we applaud for its dedication to increase the quality of programs across the country. NAEYC accreditation is the gold standard in our field and requires significant investments in staffing and educational programming. It's a commitment that we take very seriously at Bright Horizons as evidenced by our industry-leading 80 percent accreditation rate, compared to a national rate average of only 7 percent.

Since our inception 17 years ago we have believed that we can make a clear difference in society by helping to raise the bar for quality early education and bring the field the respect it deserves. We have continued to prove that we can achieve this mission with a strong underlying financial model that will allow us to sustain it for the long run.

So we thought was fitting that we should close out our weeklong celebration of quality education in this way. Look for us on the NASDAQ website on Friday as we open the market. So now let me turn it over to Elizabeth to review the numbers with you in a little more detail before the Q&A session. Elizabeth.

So to recap, revenue for the quarter of 131 million was up 19 million or 17 percent from the first quarter of 2003. Operating income increased 35 percent to 10.5 million, as did net income which rose 1.5 million to just over 6 million. Earnings per share for the quarter grew 26 percent to 44 cents a share from 35 cents a share last year on a 6 percent increase in weighted average shares outstanding.

The 17 percent revenue growth was given by three main components -- growth in the number of centers; additional enrollment, primarily in new and ramping centers; and price increases. Growth from new centers includes the effects of centers added since this time last March, including the year-over-year impact of our Brookfield (ph) Academy schools and the Marin Day Schools management contract acquired in July and October of 2003, respectively.

We have seen solid enrollment growth in our class of ramping centers as well as modest, meaning 1 to 2 percent growth, in our mature centers which comprise over 80 percent of our center base at this stage.

Average tuition, the final component of top-line growth, were up about 4 to 5 percent over last year, as we continue to increase price in step with the demand for our various services.

At the operating income line, expanded center margins and continued overhead leverage combined to produce 110 basis point increase in operating margin as a percentage of revenue to 8 percent. Center margins increased 70 basis points, reflecting a continuation of the trends we saw in 2003. Our operations team continues to find the optimal cost structure to deliver the quality service for which we are known and to pace tuition increases in concert with our labor cost experience. As the economy begins to rebound, we have some caution about increased labor pressures although we're not yet seeing these effects.

Solid overall enrollment in our core base as well as new centers and acquisitions generated the remaining margin improvement. I should also note that our business cycle typically reflects the strongest enrollment levels in the older age groups during the first and second quarter of each calendar year, while the third quarter reflects the graduation of preschoolers to the public school system; and that enrollment rebuilds again during the fourth quarter.

At 7.8 percent of revenue, overhead improved 40 basis points for the first quarter of '03. We continue to be prudent in our overhead investments as would grow, and with a focus on systems and technology, marketing resources to drive growth, and operations oversight, to maintain our quality and service.

Amortization of identifiable intangible assets increased 70,000 from last year, simply reflecting the run rate of acquisitions made in mid to late 2003.

Our strong financial performance this quarter resulted in a 30 percent increase in EBITDA or earnings before interest, taxes, depreciation, and amortization, which we have become accustomed to reporting to you. It is approximately 13 million for the quarter while capital spending was a modest 3.3 million. We would expect capital spending to tick up over the remainder of the year with total spending projected at 16 to 18 million. It is simply is a timing difference in terms of when we spend during the course of the full 2004.

Lastly, on balance sheet items we ended the quarter with approximately 46 million in cash.

I would also like to update you on two other areas, our schools division and our European operations. As we have said before, due to their relative size and the financial impact of these operations, which is immaterial, we don't plan to break out their operating results separately. However, they are two areas that provide momentum to our overall growth and we will believe it's helpful to periodically update you on their status.

Starting with the schools division, we are pleased to see the excellent performance across our six schools at this midpoint in the 2003-2004 academic year. Attendance is high, and as you might recall, the operating margins in schools are slightly higher on average than those in our early care centers, averaging 18 to 20 percent due to the older ages served and the corresponding lower teacher-to-student ratios. Registration for next year, the '04-'05 school year, is just underway, but early indications are very positive and we are encouraged that the coming school year will build even further on this year's performance.

Our European operations also continue to operate on plan. With 76 centers and 3,600 total capacity, this division represents approximately 6 to 7 percent of our consolidated revenue. Over the last couple of years we have invested in the overhead structure so we have a strong local presence, with regional operations management and a sales team that mirrors the U.S. structure, and with a centralized administrative support structure.

We're confident that these investments will bear fruit over time and will provide the right kind of flexibility and breadth to successfully expand these operations. Now the focus is on building the base of centers to leverage this infrastructure. With the growth we had in 2003, the 10 percent projected unit growth for 2004, and a building pipeline of centers and prospects we're optimistic about the future in Europe.

I will end my review of the quarter with a few operating statistics which I know are near and dear to your heart. At March 31 we operated 515 centers, having added eight and closed two centers during the first quarter. Our total operating capacity approximates 60,000 with an average per center of 116. U.S. centers average 128 capacity per location, while in Europe our centers have an average capacity of approximately 48.

At the end of the quarter, as in prior periods, approximately 60 percent of our centers are profit and lost, and 40 percent our cost-plus contracts.

In summary, we are pleased with the strong start to the year and are confident that earnings performance in 2004 will outpace revenue growth as we continue to leverage overhead and modestly improve center margins. With these factors in mind, and considering the general market conditions which Dave has discussed in more detail, let me expand on the guidance that he previewed.

Top-line revenue growth is projected at 15 to 17 percent, consistent with our previous guidance and reflecting approximately 10 percent capacity growth. We're looking for operating margin expansion in the range of 30 to 40 basis points for the full year. Lastly, we've moved EPS projections up to $1.77 to $1.80 for the full year with the next two quarters detailing as -- in the second quarter 46 to 48 cents, and in the third quarter 43 to 45 cents, reflecting the seasonality that I mentioned earlier.

With that, we will open the call for questions. We're ready for the first caller.

(OPERATOR INSTRUCTIONS) Jerry Herman of Legg Mason.

Good afternoon, everybody; great job, you guys. Question with regard to the conference, Dave. You guys had quite a grouping of potential clients there. Is that the type of forum that typically results in new business? And if so can you sort of put parameters on that this year relative to previous years?

We're pleased to see the attendance up probably 20, 25 percent over last year. I think that is simply people's travel budgets being a little better this year than they were in prior years. But the strategy in having the client conference is to have a forum for existing clients to get together.

Every year we have a grouping of prospects who are seriously considering working with us, and there is no better way to get them to really know us well and meet with people who are hopefully very happy with our services -- there is nothing better to help get them over the hump than that kind of environment. While I don't have any specifics to tell you in terms of numbers of new closed situations that have developed, I can tell you that it is definitely a piece of our strategy.

Great. The relationship between tuition increases and wage changes? I know you guys typically like to position maybe a percent above. Can you give us an update in terms of what you're seeing this year? Is there any chance that that gap has widened this year?

I think at this point we're comfortable with that same approach that we've taken, which is we feel comfortable with tuition increases being about a point ahead of average salary increases. With average salary increases being in the 3 to 3.5 percent range and tuitions being in the 4 to 5 percent range.

One last and I will turn it over. Elizabeth, can you more specifically cite the impact of acquisitions in the quarter, in terms of what it did to the top line?

You mean in terms of quantifying the effect of Brookfield or the MDS centers? Let me just look through some papers here and I will come back to you in a minute.

That's great. Thank you.

Howard Block, of Banc of America Securities.

Good afternoon and congratulations again on a great quarter. I guess the first question, I think, if I recall, is one you're not going to answer. Which is on the mix in terms of existing centers and the pipeline. Is that the one you are not going to comment on quarterly anymore?

Yes, we just felt like we will comment on that annually in the pipeline, because the changes just are not that dramatic every quarter.

Was that in terms of the existing centers as well, that mix? Because you used to offer that mix as well, I think.

You mean going through the different industry sectors? We can do that.

I'm ready.

Financial services are about 15 percent; technology are 10 percent; healthcare is about 17 percent; government and education, 16 percent; consumer services 10 percent; industrial 5 percent; office park and other is the remainder. That is how I am going to make sure that I didn't --.

Right, mess up the math. You'll let us do that for you. If you are ready for Jerry's answer, I won't ask the same question.

Well, I'm not quite ready (multiple speakers) looking at that (multiple speakers).

In terms of the international centers, can you remind me? Over the last year, how many international centers have you opened?

In the last year, in 2003, we added seven.

Is there a plan for '04 in terms of total? I know it is already at two. Will there be more than five in the remaining?

(multiple speakers) for '04 was a 10 percent unit growth there as well; so in the same zone, around 7 to 8.

Okay. Were there any sort of single site management contracts acquired in the quarter?

There were no acquisitions in the quarter, Howard.

None at all? Okay. The last question is, until I guess if you're ready for Jerry's answer I will wait for that as well. But the last question is, is a student typically in your center for three years? Is that right? The 2 percent growth you get at a center, is that growth coming from the incoming three-year-old population or the incoming first-year student population? Or is there growth along the age spectrum?

The year-over-year growth in terms of same-center? Are you looking for the same-center growth?

Exactly.

It is more typically in the earlier age group, getting back-filled as they age up into the preschool classroom. So the preschool classroom typically will fill with children who have started in the center as an infant or a toddler, and so the newer enrollment tends to be in the younger age groups, although it is because the younger children have aged into preschool.

That is exactly what I was looking for. Thank you.

Trace Urdan, ThinkEquity Partners.

I'm glad you corrected yourself in describing the higher ed segment as acyclical, because that countercyclical word, those are fighting words where we come from.

I imagine so, Trace. I just hope they continue to be good opportunities for us. How about that?

Sounds good. A couple of questions. One is the 15 to 20 percent growth you describe for the school business, where are those? I'm presuming there is not some kind of freakish population bubble in Michigan. Where are you getting those students from?

15 to 20 percent.

Did I not hear that right when Elizabeth was going through the enrollment? I may have misheard her. I may have been mixing up margin characteristics with growth. I will put the same question to you. Where do you see the growth coming from? Is it in line with the growth of the population? Are you actually taking share away from public and/or private schools? And do you have a sense of that?

I think that in Michigan, for example, where we have acquired the schools, we acquired them at reasonably full levels. So our goal there is just to keep enrollment up; and I think we are on well on pace to do that. In terms of the kinds of students we're seeing, we're doing a little bit to create more of a feeder system from our existing child care centers in the area, which we think will drive more students with more of a directed marketing approach like we do in Seattle, where our centers are a definite feeder for our school there.

I do think we are seeing numerous students come in on the younger end on those mature schools, rather than just taking a lot of fourth graders from someplace else and having them join us at that level. They are mostly joining us at the younger ages and then they are matriculating up through the grades with us.

I get you. It was just kind of a false question. So basically you are at capacity and you are sort of keeping it.

With the exception of Florida, where we have the employer-sponsored charter school with JFK Medical, where we opened really from scratch and have now over 400 students at that school. It has got a capacity to serve about 550 K through 5. We didn't open fifth grade the first year; and I think we didn't open fourth grade even the first year.

Now we have got I think through -- we are going to have fourth grade this year and maybe even part of fifth grade opened. We expect to have that school either pretty close to full, either this coming school year or well into the next one. But there we are taking kids -- because it is a charter school, we're taking kids mostly from surrounding public schools or other charter schools that exist in that area.

The sort of regulatory or legislative environment there, is everything copacetic?

As far as we can see for now, in terms of the effects on us, we still feel good about that model. Again that model is partially funded -- it is funded by the charter funding in addition to the corporate sponsor.

Understood. The second question I had was about the performance in the quarter. Clearly the sort of margin gains are looking to be strong. I guess my question is, what is it that surprised you? Why are the earnings coming in so much stronger than your guidance? Why are you raising the guidance now? What did we learn in the quarter that you didn't know back when you were offering us the guidance in the first go-round?

I think the biggest variable has been the external factors in which we operate, which has caused us to have caution about the way we manage the business. We are traditionally conservative, and we wanted to be sure that we would not get surprised by labor pressure on the salary side or all the other factors that affect us.

So, I think we're happy to see that we have outperformed; that our worst fears didn't come true, and we were able to perform even better than we expected. So I would attribute it mostly to appropriate caution when we set those targets; and now having better vision as to the environment in which we are actually operating; and feeling good that now we're in April that we have, given the visibility in the short term of our business, that we feel good about what we might look at for the rest of the year.

Do you guys typically do an annual salary increase at one time of year? Or does it vary by center?

We actually have two different approaches with our two main factors. Tuitions are generally increased once a year; but salaries increase on the employee's anniversary date. So, there is a gradual change to salaries in any one center, and then you have tuition increases that are -- more often than not they happen in September. And a fairly large group of our centers have tuition increases in January; and then there is a small percentage that do other dates.

But, for the most part, it rolls like that. As I mentioned, the strength of the first half of the year is generally premised on having slightly better enrollment in the preschool classrooms than we have at other times during the year. When summer is upon us and parents begin to take the children out, to get them ready for elementary school. And then we're rebuilding those classrooms. That is a factor that when we're budgeting in the fall time we don't have perfect clarify on either.

Understood. Okay. Thank you.

Just in the interest of answering Jerry Herman's question earlier on the effect of the two larger acquisitions we did in the second half of last year, they contributed a little bit over 5 million in revenue during the quarter, relative to the first quarter of last year, when neither one were in the results.

Those figures are not sequential revenue gain because they were both in the fourth quarter of 2003, although the acquisition at the Marin Day Schools management contract happened in mid-October.

Jeff Silber, Harris Nesbitt Gerard.

Good afternoon and let me add my congratulations as well. My first question deals with the number of centers. If I remember correctly your guidance for the year was about 45 to 48 new centers.

That's right.

You added a net six in the quarter. Can you tell us a little bit about maybe the seasonal pattern for net new additions over the next three quarters?

I will tell you that there is no perfect science to quarterly openings of centers, in the sense that the numbers, if you look at history, they tend to be a little bit all over the map in terms of when we have opened bulks (ph) of centers in quarters.

By telling you that we think we are on pace for the targets that we set for the year, I think you can get from that that we feel like the next few quarters you are going to see an uptick in the numbers of centers that we expect to open relative to what you saw in the first quarter.

Fair enough. Will any of those new centers be backup centers?

We do have a couple backup centers in the pipeline. We did not open any backup centers this quarter.

Great. One final just small numbers question. Is your tax guidance still about 41.5 to 41.7 percent for the year?

It is. It is in that range. We're a little bit higher than that this quarter. So it's order of magnitude between 41.5 and 42.

Okay. That will be great. Thanks a lot.

Mark Hughes of SunTrust.

I had a question regarding same-center enrollment growth. I do not recall that you provide a specific number, but has that accelerated recently?

I did mention that our same-center enrollment growth is about 1 to 2 percent higher. That is our enrollment gain this year over last year in our mature. Mature cost of centers is slightly higher.

In terms of it accelerating, I would say that we feel like the enrollment is at a strong level because of that mature class having the enrollment that it has. The last couple of years I think we have seen some spotty enrollment pressure in selected centers, although not across the board. And we see that uptick of 1 to 2 percent, it is fairly consistent, but we see it as a sign of strength in this economy.

So it is 1 to 2 percent increase year-over-year?

That's right.

And that you feel like a little bit of a firming over more spotty results in prior quarters; is that right?

That's right.

I don't think you provide a capacity utilization number either, but I guess we could assume with 1 to 2 percent same-school growth that we could make our own assumptions there.

Right. It is still in the -- overall we're still in the mid to high 70s.

Right. Okay. Great. Thank you very much.

Brandon Dobell of Credit Suisse First Boston.

Just one quick one. Maybe you could talk a little bit about your definition of what a mature center is? Then give us a little bit of color around how that 80 percent number has looked, maybe last year at this time? Kind of a progression over the last couple of years in terms of mature versus immature centers.

A mature center for us is typically a center that has been open more than two years. That is because of the typical arc our ramp up, where a center will be building enrollment in the first couple of years and reaches full maturity generally sometime in the third year.

Over the last couple of years, that percentage of mature centers has gone up from about 75 percent to just over 80 percent now, which is a natural evolution with just the numbers of centers that we have overall in the company and the numbers that we have opened over the last couple of years.

I think we have seen the new center growth, and in our discussions around size of the pipeline and new commitments in the general marketplace being a little bit flatter than the historical right before that. So, we have naturally seen the mature base grow versus say three years ago. But it has been modest year-over-year.

That was it. I won't throw any more in there for you. Thanks.

(OPERATOR INSTRUCTIONS) Mark Hughes of SunTrust.

I was curious. You had closed only two centers in the quarter. I think that is a slower pace than you had said last year in prior quarters. Is there anything to that? Is that that centers are performing better, so there is less pressure to close them? Or is that just sort of a timing issue?

I will start off and Dave may have something to add to this, but I think that the general closings -- we had seen a relatively larger number last quarter. It was the timing of when that happened. I don't think there is any major change.

We would continue to expect to see around 10 closings a year; and even a similar percentage of closings as has been the historical pattern. But I think it is probably fair to say that in a grander view than one year at a time there is probably a little bit of an arc to that as well, where a client may have reached a point where they have relocated a workforce and they may need to close a site. And that comes in some seasonal way. But there is no -- I wouldn't say there is a major pattern.

Any strategic things you're kicking around? I guess I have heard about elder care being a meaningful issue for a lot of corporations. Anything that might represent a shift from your core business?

No, I think we're pretty focused on what we have in front of us now. We think we've got great opportunity in the core business, particularly as the economy rebounds. I think we've got a real good opportunity to put ourselves in a real leadership position in both the UK and Ireland, and have the same market position that we have earned here over time.

We think schools have some more opportunity to grow. So, we feel like the plate is pretty full. Although there might be some other opportunities we will continue to look at as time passes. But for the near term I think we are feeling good about what we currently have.

Okay. Thank you.

Jerry Herman of Legg Mason.

I was hoping to get a clarification on a comment you made about the pipeline and the steady build in the early part of the pipeline. You used a 10 percentage, you used 10 percent. Is that measure inquiry levels? What does that 10 percent apply to?

That 10 percent applies to what I would define as clients where we actually have dialogue in the early stage. Like most companies we have a way of measuring our prospects, the number of people at the team. A difference between somebody who is somebody who we are targeting and somebody who is actually active.

There is a base of those that obviously don't make it. You only make it to the pipeline when we have a commitment. So it is the base starting from early stage all the way up to near close that I am talking about being up 10 percent.

Great. That's helpful. I appreciate that. Is there any better quantification or newer quantification of the waiting list that might be existing at the centers at this point? I know historically that has been up (ph).

Nothing really knew there. I think we continue to see reasonable wait lists, particularly in the younger age groups. But there is no discernible difference there or pattern there either.

Not necessarily increasing then?

Not necessarily increasing. I think that we are more focused on the overall enrollment than just those waiting lists. Some centers have seen a slight uptick, but it is not a general pattern.

Great. Just one last question for you, Dave. Has the developmental staff been enlarged at all? I guess what made me ask that question was the developments in the UK and the education market. Are you adding to developmental staff?

Yes, we have added to the team principally in the UK over the past year. We now have three people there, and that is up by two people. So.

Big percentage increase.

A significant percentage growth. And then we have somebody in Ireland as well, but he has been there, so that is not a new add. With respect to schools, we do have a schools division that is being run by a lead operator, but right now the growth function is reported by that person and our business -- and somebody who has taken the lead on that, who was part of our existing business development team.

That's great. Thanks a lot.

Howard Block of Banc of America Securities.

First question I ask you was, have you ever evaluated the pipeline to give us a sense of how those leads were sourced? Were they sourced by referrals from existing clients; were they sourced in other ways? Just to see it if we can get a sense as to whether the contributions from referrals is becoming a greater driver of leads and ultimately business.

We haven't quantified it specifically relative to who is in the pipeline versus in the past. But obviously we track for our own purposes where we get our leads from, as you might expect us to do. I would say that referrals have always been a strong source of our business.

Given the marketshare that we have, when we go to talk to the next financial services company, usually somebody has some contract or some relationship with either Citigroup, J.P. Morgan Chase, Banc One, Wachovia, Bank of America, on and on, with all the companies that we do business with.

So it is net -- HR people do network with each other a lot, particularly in industry. It amazes me how much HR people network, compared to say people on the other sides of the business. So that has always been an important part of it. But I don't have any way to quantify that relative to last year over year-over-year for you.

Okay. That's it. Thanks again.

At this time we have no further questions. Are there any closing comments?

Yes, thanks to everybody on the call today. As always Elizabeth and I will be here to field any additional questions; and look for us on Friday as we push the button on the NASDAQ at about 9:30 AM. Take care.

Thank you all for your participation. This does conclude the teleconference. You may disconnect your lines at this time. Have a great evening.