Bright Horizons Family Solutions Inc (BFAM) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for holding, and welcome to the Bright Horizons fourth quarter earnings release for 2005. Your host today is Mr. David Lissy. Mr. Lissy, you may now begin, sir.

Thanks, Chris, and greetings to everybody from snowy New England. Joining me on the call today is Elizabeth Boland, our chief financial officer, and we'll begin, as usual, with Elizabeth going through a few administrative matters. Elizabeth.

Thanks, Dave. Our earnings release did go out over the wire after the close of the market and is available on our website at Bright Horizons.com. We understand the business wire is having a little trouble getting it out there, so if anyone hasn't been able to retrieve it, you can get it under the Investor Relations section and push "conference calls" and the press release is there.

This call is recorded, and it's being simultaneously webcast, and a complete replay will be available in either medium.

Those of you wishing to access the replay via phone can call 973-341-3080 and use the pincode 6926200, while the webcast will be available at our website under the Investor Relations section.

In accordance with Regulation FD, we use these conference calls and other similar public forums to provide the public and the investing community with timely information about our business operations and financial performance along with our current expectations for the future.

We adhere to restrictions on selective disclosure and limit our comments to items 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 as well as the Investor Relations section of our website.

The risks and uncertainties that may cause future operating results to vary from those we describe in our forward-looking statements made during this conference call include, one, our ability to execute contracts for new client commitments to enroll children, to retain client contracts, and to operate profitably abroad; two, our ability to successfully integrate acquisitions; three, the capital investment and employee benefit decisions that employers are making; four, the effect of governmental tax and fiscal policies on employers considering worksite child care; and, lastly, the other risk factors, which are set forth in our SEC filings most recently in length in our 2004 Form 10-K. Dave.

Thanks, Elizabeth, and hello to those of you who might have just joined us. Let me begin today with a recap of 2005 including some specifics of our fourth quarter results, and I'll talk in a little more detail about our strategy and projections for 2006 and beyond. Elizabeth will then discuss our financial results in more detail before we come back for Q&A a little bit later on.

Let me begin with the numbers. Revenue for the quarter of $163 million was up $18 million over last year's fourth quarter while operating income rose 26% to $16.4 million. Net income of $9.8 million generated earnings per share of $0.35, up 30% over the $0.27 we reported in 2004's fourth quarter. For the year, revenue of $625 million was up $73.5 million over last year, and operating income increased $14 million, or 30% in 2005. Net income for the year increased to $37 million resulting in earnings per share of $1.29, a 32% increase over the $0.98 we reported for 2004.

On the revenue side during the fourth quarter, we experienced the typical uptick in enrollment that we'd expect to see as our preschool enrollment had dipped in the third quarter. As we spoke to you about last October, we had consistently experienced improvements in our mature base of centers over the last two years, which made our normal seasonal dip more pronounced this year than it had been in prior years. That, coupled with the timing of new center additions, more efficiency in cost-plus centers, and a less favorable foreign exchange rate all contributed to our slightly lower comparable revenue growth quarter over quarter.

Given that we're now halfway through the first quarter of this year, we are pleased to see our overall enrollment continuing to pick up as we move through our traditional peak periods in the first and second quarters of the year, we expect we will once again see modest enrollment growth from our existing base of centers.

We are very pleased to continue our trend of improving operating margins in the fourth quarter. All of the factors that I have spoken to you about in the past came into play once again in this past quarter. These include maintaining our tuition increases ahead of average wage increases, management of appropriate levels of staffing in centers, a heavier mix of acquisitions and transitions to our management of self-managed centers and centers managed by other providers, better-then-budgeted employee benefit costs, and closing or fixing under-performing centers.

As we look ahead to 2006, I'll review and update you on some key areas of our business strategy including, first, identifying and executing on growth opportunities; second, achieving modest but sustainable margin improvement; and, lastly, maintaining our competitive advantage based on the quality of our programs and our employer-of-choice status in our field.

In terms of the first element of our strategy -- identifying and executing on growth opportunities, in 2005 we added 72 new centers and closed 16 and ended the year at 1,616 centers with the capacity to serve more than 66,000 children and families.

The strategy behind much of our growth in 2005 positions us well for the future. First, the acquisition of ChildrenFirst last September solidified our position as the leader in backup care. Bright Horizons operates the largest dedicated backup childcare network in the country with 70 centers in operation for more than 300 clients. The addition of the ChildrenFirst consortium backup centers broadens our target market by opening up opportunities with smaller-sized employers, those with less than 500 employees at a single location. We can now offer each other's legacy clients a much wider array of opportunities to serve more of their overall workforce for both backup and full-service care. Our ability to cross-sell our services will be a win-win for both our clients and for Bright Horizons. We'll serve more employees in more locations and the additional financial sponsorship in our combined mature base of centers provides us with a strong incremental margin. We now have a dedicated sales and client-service team focused exclusively in this area, and they've already begun to produce results. While this type of sale will yield a much smaller revenue per client than a dedicated worksite center, we expect it to become another important factor in our ability to improve our margins, over time.

Second, in 2005, we entered the Denver market through our acquisition of the 11 Seven Oaks Academies establishing Bright Horizons' presence in this area. This is one of the few major markets we have not had any locations, and our past experience suggests to us it's difficult to sell in areas without any local centers. With employer presence and demographics that support our high-quality model of childcare and early education. We see this market as poised for further growth.

Our overall sales activity in the employer market continued to pick up in 2005, and our pipeline of centers under development remains strong in the mid-50s. The segments of the market that continue to show the most promise are financial services, legal and professional service firms, consumer services, healthcare, and higher education. We've just begun to reach the point where enough time has passed since the bottom of the economic cycle that our lengthy sales cycle should begin to produce more organic new startup centers. Despite the mixed nature of the economic recovery, we are seeing early signs of a pickup, however, we'll need to wait until we get further into 2006 to see if this will be a marked trend over the prior two years.

On the existing client side, we continue to add to our multi-site client network throughout the year and now manage 230 centers for 48 clients who have more than one site with us. Just a moment ago I spoke to you about selling spaces into existing consortium centers, and in 2006 we will be looking for opportunities to add more backup consortium centers that will expand our network across the UK, U.S., and Ireland.

Looking outside the continental U.S. we celebrated our 100th international center in 2005 with the opening of the state-of-the-art center for the Royal Bank of Scotland in Edinburgh. From just nine centers five years ago, Bright Horizons is well along the way to establishing ourselves as a market leader in high-quality worksite childcare center in both the UK and Ireland. We are poised to grow in both countries through a mix of new employer-sponsored centers, consortium centers, and through further acquisition.

Lastly, as you know, we've grown the company roughly one-third through acquisition over time and expect that our future growth will reflect this same mix. We've continued to demonstrate our ability to find and integrate organizations with track records that fit our stringent criteria for quality and financial performance. Most importantly, the majority of acquisitions we do help us to improve our future growth prospects by adding new clients, opening up new markets, and adding talent to our team.

The overall childcare market in which we operate remains highly fragmented in both the U.S. and the UK. We continue to believe that we can find and execute on accretive deals that are good fits for us. On the elementary school side, we continue to be very pleased with the results of our schools and remain interested in expanding the number of schools in our network.

I'd now like to switch gears a little bit and talk about the second element of our strategy, achieving modest but sustainable operating margin improvement. During 2005, we continued to appropriately pace tuition increases ahead of average wage and other cost increases. As you are aware, January is the second-biggest month for tuition increases, right behind September, and the increases were 4% to 5%, on average, consistently ahead of our estimates of average labor cost increases of 3% to 4% on a market-by-market basis. The visibility we have at this point on projected tuition and overall labor increases for this year indicate this strategy will continue to hold in 2006.

Also impacting our margin performance in 2005 and heading into 2006, was the mix of acquisitions in organic growth. The mix in '05 included a heavier weight of acquisitions given the addition of ChildrenFirst. As Elizabeth will discuss further, the ChildrenFirst consortium backup centers, in particular, generate a higher-than-overall average center margin in the range of 30% to 40%, and they also carry higher-than-overall-average overhead structure of 15% to 20%.

Conversely, we expect to have a larger class of organic startup profit-and-loss centers open in 2006 because we incur losses in many of these centers during the initial year or two of operation. Their ramp-up will be an offsetting factor to our center margin expansion in 2006 while positioning us well for future years.

Our European operations had a strong year, yielding meaningful operating margin improvement. Now we've fully integrated our past acquisitions, we are proactively evaluating the small group of under-performing centers that came with the acquired legacy companies. In 2006 you'll see us begin to prune that group and make decisions to close or not continue contracts or leases as they come up for renewal. This is consistent with our operating discipline and strategy in the U.S. and will help to ensure the long-term financial health of our European operations.

While we still have a disproportionately large overhead structure for our scale, our investments are bearing fruit, and we remain optimistic about the long-term opportunities in both the UK and Ireland.

Overhead spending in 2005 increased over 2004 as we continued to judiciously invest in our people and infrastructure. As a percentage of revenue, overhead is higher in 2005 primarily due both to investments associated with Sarbanes-Oxley compliance and the higher incremental overhead associated with the ChildrenFirst Centers. We do expect to gain some further leverage at the overhead line in 2006 as we fully integrate ChildrenFirst throughout the year. Elizabeth will talk about that in a little more detail in a few minutes.

Moving on, let me talk about the third element of our strategy, differentiating ourselves on the basis of quality and maintaining our position as the employer of choice in our field. The quality of our programs and services is directly related to the quality of teachers in our classroom, our center directors, and all the rest of us who support them every day. For that reason, we are proud of our turnover rate in 2005, which, in the low 20s is less than half the industry norm of approximately 50%. Our mission orientation and focus on building our strong culture enables us to deliver high-quality care and education, which, in turn, leads to high parent and client satisfaction ratings, both of which stand over 97%.

In 2006, we'll roll out Bright Horizons University, a comprehensive, online learning program that will greatly improve our ability to link specific training and development opportunities to our employee performance assessments. This will be far above and beyond anything that exists in our industry and provide us with the unique ability to provide basic teacher certification and ongoing professional development.

I am also really proud of the fact that Bright Horizons was once again selected as one of "Fortune" magazines 100 best companies to work for in America this past December. This is the seventh time we've been included on this prestigious list, and the fact that two-thirds of the ranking is based upon independent employee surveys makes it even more gratifying. This announcement is a fitting start as we celebrate our 20th year, and we've designated it the "Year of the Teacher."

This will include a series of events and educational opportunities that spotlight the important contributions of our early educators whose work and dedication with children during their most formative years is too often under-recognized by our society.

All in all, 2005 is another strong year for Bright Horizons. Before I turn it over to Elizabeth, let me recap for you our outlook for 2006. We are projecting revenue growth in 2006 in the range of 13% to 15%. Operating margins expanding 50 to 75 basis points, and are moving up our estimated earnings-per-share range to $1.53 to $1.57. This excludes the effects of FAS 123 options expense. We are estimating that that options expense will approximate $0.08 a share for the full year with a predominant effect in overhead, and Elizabeth will talk about that in a minute. In fact, I'll turn it over to her to run through the financial results in a little more detail, and I'll talk to you again during Q&A. Elizabeth.

Thank you. Again, just setting the stage for the financial discussion, revenue of $163 million was up $18 million, or 13% from the fourth quarter of 2004. Operating income in the quarter increased to 10% from 9% in 2004, while net income rose $2.3 million to $9.8 million. Earnings per share of $0.35 is up 30% from the $0.27 we reported for Q4 of 2004.

Revenue growth continues to be driven by three main components -- new centers under management, additional enrollment in ramping as well as mature centers, and price increases, which continue to approximate 4% to 5% across the network.

We've added a total of 56 centers net of closures over the last 12 months and an additional 51 net centers in 2004. Breaking this down a bit further, revenues in Q4 include approximately $8 million from the 33 ChildrenFirst centers acquired in September of 2005 as well as the incremental effect from the other centers opened in 2004 and 2005 that are ramping their enrollment and/or contributing a full quarter of operating performance.

The 13% revenue growth this quarter is shy of our projected growth by approximately $3 million to $4 million, attributable primarily to the following factors -- first, the effect of cost-plus contract model centers. As we've noted in prior calls, cost management and efficiency measures in our cost-plus model, which represent about 40% of our centers, impact 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, and our revenue is a blend of parent tuition and client operating subsidiaries. Our estimates of the operating subsidiaries, which are a function of staffing levels, hours of operation and enrollment, were higher than the actual subsidiary revenue that we earned as certain clients more closely managed their spending.

Second, the pound/dollar exchange rate has come down as the dollar strengthened with more than a $0.10 reduction since the first half of 2005 and Q4 of 2004. Although we saw some modest effect for this in the third quarter, it was more pronounced in Q4 of 2005.

Third, as Dave commented earlier, our estimate of when we would backfill the enrollment in our existing base of centers was somewhat optimistic as to the timing. Although we did see enrollment levels climb through the end of the year, overall utilization remains consistent with the prior year rather than outpacing those levels by 1% to 2% as we had seen earlier in 2005, and we therefore did not realize the revenue gain we had estimated for Q4. So far in 2006 we are encouraged at the solid enrollment levels we are seeing in this class of centers with continued modest growth and utilization consistent with this time last year.

The last element affecting overall revenue growth is the timing of new center openings and the counter effects of center closings. We opened three new centers in the fourth quarter, as a couple of planned openings were delayed until early 2006. We also closed three additional programs in the fourth quarter, bringing total center closures to 16 for the full year.

Shifting to margins, the trend in center margin improvement continued this quarter with margins increasing to 19.5% for the quarter versus 17.3% in the fourth quarter of 2004. Dave touched on the primary factors in improved margins. First, and most significantly, the inclusion of the ChildrenFirst backup centers, which not only produce higher center margins but also contribute at full maturity as acquired centers. Second, pricing discipline such that tuition increases modestly exceed personnel cost increases. Third, labor cost management and operating efficiencies, and, fourth, contribution from new cost-plus centers and transitions in management of existing programs as well as the improved performance in our UK operations.

As we touched on briefly last quarter, the proportionately higher gross margin contribution from the ChildrenFirst centers, which alone added approximately 80 basis points to the center margin in Q4, arises from the business model for the consortium backup centers. These centers serve a wider base of clients who buy memberships, which entitle their employees to utilize a prescribed number of backup care days. In this model, center margins averaged 30% to 40% depending on the numbers of memberships sold while the attendant overhead for the sales, client relations, and operations support is proportionately higher as well, as Dave mentioned, ranging from 15% to 20%.

That leads me to more details on overhead. SG&A as a percentage of revenue was up 9% in the fourth quarter of 2005. In addition to the higher overhead support required for the consortium backup centers, which add approximately 40 basis points to the overhead rate in Q4, we incurred a modest amount of integration costs upon completion of the acquisition, which we expect to diminish over the first couple of quarters of 2006.

Also, as previously discussed, the ongoing spending for Sarbanes-Oxley compliance has caused an uptick in overhead rates throughout 2005 including slightly higher estimated audit fees during Q4.

We do expect to regain our trend in overhead leverage with future growth but with the full-year effect of ChildrenFirst, our projections for 2006 approximate 8.5% before stock options expense with the first half of the year slightly higher as we complete the integration spending.

Amortization of identifiable intangible assets totaled approximately $700,000 in the fourth quarter. We now project amortization to approximate $3 million next year. Interest income declined due to lower levels of [investable] cash after the all-cash purchase of ChildrenFirst and stock repurchases made in the fourth quarter.

Our strong financial performance so far this year has driven the 27% increase in EBITDA to approximately $75 million, while capital spending totaled $16 million for the year, or $6 million in the fourth quarter.

The weighted average shares outstanding also increased slightly in the quarter to $28.4 million. The dilutive effect of outstanding stock options were countered this quarter by share repurchases made under our existing stock repurchase program -- a total of 320,000 shares for approximately $11 million. We have 1.1 million shares remaining in the board-authorized program and intend to be opportunistically active in it to judiciously deploy a portion of the cash that we routinely generate from operations.

We ended the year with approximately $22 million in cash.

Let me recap our usual operating statistics. At December 31st, we operated 616 centers with 66,300 total capacity. As in prior periods, 60% of our contracts are profit-and-loss, and 40% are cost-plus. In excluding our backup centers, for whom center capacity is less central to the relative operating performance, the average capacity per center remains 129 in the U.S. and 56 in Europe.

Now I'll expand on our specific guidance for 2006. As we've alluded to, along with most companies, we will be adopting FAS 123 in the first quarter of 2006. Given the options currently outstanding and what we project to grant for 2006, we expect that that options expense, overall, will approximate $0.08 a share or $0.02 a quarter. Given where options are allocated, approximately 85% of the estimated pretax expense of $3 million will be reflected as an incremental overhead cost with the remainder in center-based costs.

For clarity, I will walk through our projections without options expense and then provide you with the line item details for your models. Our growth outlook for 2006 includes grand openings of centers under development that are in the pipeline and incremental growth in enrollment and membership sales in our existing base of centers. Based on this as well as continued ramp-up of enrollment in our newer centers opened in 2004 and the full-year effect of those added in 2005, we are projecting revenue growth of approximately 13% to 15% in 2006. So for the numbers that equate to the current year's presentation; that is, excluding options expense, we expect to sustain the improving margin trend in 2006 and are projecting to expand operating margins by approximately 50 to 75 basis points for the full year.

With overhead approximating 8.5% center margins are estimated to increase to 19% to 19.5%. Our projections include assumptions to address the variables that impact center margins such as tuition pricing power, overall salary and benefit costs, enrollment levels, contract mix, and the numbers of organic P&L contract centers that are scheduled to open with initial year losses, the timing of new center openings, and the volume of incremental membership sales throughout the consortium backup center and full-service center systems.

With amortization of $3 million, net interest income of approximately $1 million, and 28.4 million shares outstanding for the full year, the projected EPS would be in the range of $1.53 to $1.57 with Q1 '06 EPS at $0.36 to $0.37 a share.

Now for the effect of the options expense. The total expense impact is, as I mentioned, estimated to be $3 million pretax with $500,000 going to center costs and $2.5 million going to overhead. The estimated tax rate will again rise to approximately 41.25% due to the non-deductibility of a significant portion of the options. With these effects considered, we are projecting EPS in the range of $1.45 to $1.49 for 2006 with EPS of $0.34 to $0.35 per share for the first quarter and $0.37 to $0.38 for the second quarter.

That's the end of our prepared remarks and, with that, Chris, we will open the call for questions.

[OPERATOR INSTRUCTIONS]

Howard Block of Banc of America Securities.

Hi, guys, Jason here for Howard. A quick question on the Bright Horizons/ChildrenFirst integration -- I think last quarter you mentioned the combined sales force. If you could just give us an update on how that integration is coming and maybe any other cost synergies you're noticing.

Well, first, the integration is well under way, Jason, and we felt like, going in, that there would be some rationalization of the overhead costs when we combined both companies, and we're on our way to achieving them, I guess, is how I would characterize it. There have been some that have come out already and, as Elizabeth mentioned in her remarks, throughout 2006 we'll begin to make some other changes that will positively affect the overhead line.

So from a numbers standpoint, that's how it looks. On a less quantitative basis and more on a qualitative basis, I would tell you that for a couple of months now we've had both the sales, client service, and operations teams fully integrated. In that, there are specific people in specific territories or on the operations side, regional managers responsible for certain sets of centers that are fully going as one team.

Of course, there are some back-end things that take some more time, like systems to put together, but in terms of all of our client-facing people, we are completely integrated and, most importantly, as I said earlier, we are beginning to -- we've been selling proactively and are beginning to see some of the results that we had hoped to see when we thought about trying to cross-sell our services to each other's legacy clients.

So we have a lot to offer each other's clients. ChildrenFirst had a lot of density in major cities with backup consortiums that BrightHorizons didn't, vis-à-vis, Bright Horizons had a larger presence with some consortiums in suburbs, places where there are a lot of employers in more suburban locations. So I think when you put them together, we have more to offer each other's total workforces than either of us had as stand-alone companies.

Okay, great. And just one follow-up -- any change in the center mix by industry and if you could break that out that would be wonderful.

So are you talking about the actuals?

Yes, in the past, given the financial services, government and so on -- just the trends you're seeing.

Yes, there isn't a lot of change in the actuals, but I'll run through those briefly. In the general categories, financial services comprise about 15% of our total centers; technology clients, 10%; healthcare and pharmaceuticals, about 15%; consumer services, about 5%; industrial and manufacturing, about 10%; government and education about 15%; office park consortia models, 25%; and other cats and dogs, about 5%.

We do, once a year, update the pipeline with those same categories, so I'll walk through that as well. Financial services comprise 10% of the pipeline; healthcare and pharmaceuticals, 25%; consumer, 5%; industrial and manufacturing, 5%; government and education, 15%; office park consortiums, 30%; professional services, 5%; and other, 5%, take a fairly broad cut there with the 5% range, so there may be a little bit of movement from your prior notes, but that's the pipeline summary.

Great, and any change to what you're seeing within those pipelines, or pretty much the same as it was?

Well, I think I commented earlier, Jason, that the areas from a prospecting standpoint, that our sales folks are seeing the most activity in our financial services, our legal and professional services, healthcare and higher ed, which is not a big change. And I think those encompass most of the major areas we're seeing increased activity in.

Bob Craig of Stifel Nicolaus.

Congratulations on a great year. A couple of questions for you -- I take it, based on your guidance of 13% to 15% revenue growth and 4% to 5% price, 1% to 2% growth in existing centers, you're looking at about 8% capacity expansion this year, which would be another net 50 centers additional?

I think that's what we have visibility on right now, Bob.

Okay, and as far as your -- you mentioned an acceleration in the organic center openings. Are those going to be front-end loaded, back-end loaded, even keel throughout the year?

I think they'll be somewhat even throughout the year, starting in the late first quarter into the second quarter. As you know, those centers tend to fit in the pipeline for longer periods of time, and so many of the centers that we sold in those areas have been under development now for a while and are in the final stages of finishing up construction. So our guess is that they'll be pretty much scattered throughout the year with the bulk of them in the middle of the year. Whether that will be Q2 or Q3, I think, is still somewhat subject to final construction schedules.

And likely number of closings, Dave, is that something you can peg at the start of the year or is that something that just evolves as the year goes on?

I think that we're, to a certain degree, we can peg a portion of it, because some of that's proactive on our part as far as under-performers, and will continue to prove under-performers. One area that I would point to that you'll see, you should expect to see a little bit of a spike in some centers will close in the UK because that's an area where we had kind of laid back as we integrate. We don't really like to do much of that, but once we feel good about things being integrated, we'll take a strong look at them and say will there be a chance for us to fix them, going forward, and if not, we'll probably pass on renewing. And we have a number of them coming up this year that we'll probably act on.

All in all, I think you'll see total closings approximate what our numbers were this year. I know, I was looking back on it. I think we closed the same number of centers this year that we closed back in 2003, and yet we closed a little bit less in the next year, and it's a little bit lumpy, but I think you'll see the numbers kind of approximate the run rate that we've been on.

That's helpful. You mentioned the development people in the backup side, how many total business development folks do you have now and if you could break them out between the regular folks in the backup centers.

Well, we had 24 going into the ChildrenFirst acquisition, and we added 12. So we are now at 36, Bob.

Thirty-six, that's great. And as far as branding there, has that already taken place? Is that being marketed under the Bright Horizons brand now, or is that going to transition, over time?

Yes, we have a transition plan in place, but the ultimate goal will be to market it under the Bright Horizons name.

Okay. One last question, and I'll turn it over -- you look back to original guidance for '05, I think you had called for about 20 to 40 basis points of operating margin improvement, and you've alluded to all the contributing factors to margins increasing. I guess a question would be, relative to that guidance, where did you do better than you really planned as the year wore on?

Well, if you take ChildrenFirst out of the mix, because I don't think we had -- we didn't have visibility on that when we gave you that guidance, so that clearly is a higher margin business and, granted, like we talked about, slightly higher overhead. But, clearly, that was contributed, and we didn't have visibility on.

If you take that out of the mix, it's hard, really, to point to any one factor and say to you that we really -- we got really surprised on just one factor. I think, rather, it's much like what I said last year, which is the confluence of all the factors that have come together and the stars lining up a little bit around seeing each of them contribute just incrementally more than we had planned for. And, like we've said to you before, we don't believe that we're going to continue to be able to leverage operating margins to the degree we have on a year-over-year basis for the past few years, but we still believe we have -- we can sustain improvement over the long -- over the next few years, and as we look at it this year and tried to budget for all those factors again, some of them we think will continue and others, like the additional offsetting factor of the centers that will lose money in the first year, as an example, will offset that a little bit. So that's how we landed on the 50 to 75 basis points that we expect to get in 2006.

Great, that's helpful, Dave.

I'll just add one other thought, Bob, to that, because I think some of the same things that came into play when we were talking to you all at this time last year that we had -- we had been somewhat cautious about how the economic rebound might affect wage rates, and we had slightly better experience there -- not as much wage pressure as we may have planned. That was a small factor, as Dave says, at the margin, a bit of it. We also had slightly better benefits experience than we had planned for. We had a good year on that side, and when we look ahead and budget and project for the coming year, we don't budget for all the stars to line up, and we also don't budget for an asteroid to hit. You know, it's somewhere in between that, where our best guess on where the costs will land, given all the factors we have. So we'll continue to update you as 2006 goes along, but it is -- the elements that we have best in our control and the discipline around pricing and wage increases, you know, is the best long-term driver of modest margin improvement, and that's where we feel really good about what we've got baked into our operating performance.

Michael Lasser of Lehman Brothers.

Congratulations on a solid 2005. Coming back to the revenue guidance a little bit, are you looking for fairly stable -- to be fairly stable throughout the year and consistently in that range or will it be above or below the range in the first half of the year and maybe, perhaps, above in the second half of the year? Maybe you could provide a little more commentary there.

It's a good question. We have basic visibility with the pipeline and the centers coming in pretty much within that range throughout the year. I think the fourth quarter comp will be a little bit tougher with ChildrenFirst having been in the first full quarter this year. But, other than that, if we see it as in that range of 13 to 15, pretty steady throughout the year.

Okay. And then looking over the next few years, do you anticipate the 13 to 15% as kind of the new target? Or do you anticipate maybe, perhaps, a little bit of acceleration with the 10% capacity addition, and then 4 to 5% pricing, and then modest increases in utilization?

I think we're going to be cautious, Michael, in talking about too far in the future as far as that goes. But I think what we're looking at now is that range of 13 to 15% and, again, we're going to be opportunistic at looking in other ways to grow the company through acquisitions and other things that may happen, over time. But from what we can see right now, what we're comfortable with is the range of 13 to 15%.

And then the outlook for employee benefits for 2006, is there any change there?

Our projections for that include the general market increases as well as our own increases for additional enrollment from new center adds. But we're projecting those costs to go up in the range of 8 to 10%, which is pretty consistent with general -- as I say, general guidance from our carrier and from the trade press. So it's higher, obviously, than general wage rate increases, which are closer to the 3 to 4% range across both the U.S. and the UK, so it has the effect of pulling that overall labor cost up a bit, but we had slightly better experience than that this year and, as I say, we don't plan for the better experience, we're still planning for the 8 to 10% cost plus growth.

And, lastly, maybe you could update us on the year-end closing-the-books process and how -- specifically how remediating the internal weaknesses that were cited in the 2004 10-K went?

Sure, I'll tell you what I can. We are in the process of completing the year-end audit, and the release is sort of an interim step to that. We'll file the 10-K next month, and we feel good about all the steps that we've taken to remediate the weaknesses that were cited last year. We feel like those processes have been in place throughout the year, right as we were having the conversation at this time in '05. So we feel good about having taken all the steps we need to and that our auditors will be comfortable with that result. But we're not through the process yet, and they are not through all their testing and documentation, and we'll need to wait for the final report until March.

That sounds good, thanks for the comments, and keep up the good work.

Jeff Silber of Harris Nesbitt.

Thanks, I've got a few numbers questions first. Did you give the same-store center growth for the fourth quarter? Revenues per -- excluding acquisition, that's what I'm looking for.

I don't think that we did. We had ChildrenFirst contributed about 8 million to the fourth quarter, and they were in for close to 2 million in the third quarter. So excluding the effect of the incremental ChildrenFirst growth, a little over 2 million.

And in terms of the guidance for the first quarter, did you give revenue guidance? I'm not sure if I missed that.

We do not specify quarter-by-quarter on anything except earnings.

Is it possible to nail you down a bit for revenue guidance that's incorporating your first quarter estimates?

I think, Jeff, we just answered Michael's question by saying we expect to be in the range of 13 to 15% on a pretty steady basis throughout the year with the one notable exception being, at least from what we see now, a challenging come up in the fourth quarter, again, based on the visibility we have now. I think that's the extent of what we're going to be able to answer for you.

I thought I'd try. In terms of the stock-based compensation -- if you had reported it in the quarter that just ended 4Q '05, roughly, what would it have been?

It would have been about a penny and a half. So we have a slightly higher effect estimated for Q1, because we do have annual grants that happen after the end of the year. Our comp committee has just completed their voting on that, and so the options that are granted in the course of any calendar year tend to be weighted toward the first quarter. So we'll have a slight uptick as a result of that as it's compared to Q4.

Okay, great, and I'm just going through my notes. I believe last quarter you did give first quarter EPS guidance of $0.36 to $0.37. I just want to double-check, that's the same guidance you're giving now, and that excludes stock-based comp? Or does the prior guidance include and, forgive me, I don't have my notes in front of me.

I think $0.36 to $0.37, we're giving the same guidance for Q1, and then you have to take $0.02 a share out for stock options expense.

Okay, great, and now that the UK or Europe is becoming a bigger component of your business, would you disclose roughly how big it is. I think you said you had 100 centers, but I'm just curious, as a percentage of revenues, in how the operating margins may differ accordingly?

It's about 8 to 9% of revenue, Jeff, and the center margins are very comparable to the U.S. The overall company consolidated margins in the 18 -- 17, 18% range. The operating margins, though, are considerably less. Their overhead is in the 12, 14% range. So their earning at the operating margin line, but they still have an irrationally high overhead level that will take some time to work down to the overall U.S. level.

Okay, one quick one, and I'll let somebody else jump in. You had mentioned, I think, in the risk section at the beginning of the call, about government regulation. Can you tell us generally how you think the company would do if some of these universal pre-K proposals go through?

I think, Jeff, in general, first, we do live under universal pre-K legislations in two states that I know of now and, actually, in many ways, little bits of that legislation in some other states. But in Georgia and Florida, they've passed UPK over the course of the past few years. Our viewpoint is that provided -- it's a system that allows the private sector to participate, which we believe it will do in most places; that it will provide another opportunity for Bright Horizons and for our employers to gain kind of additional sponsorship to a center that they now have to contribute to themselves, pretty much, or through getting other employer partners to participate.

So I guess the long and short of it is we view it as an opportunity with the caution that, of course, on a state-by-state basis, it's going to dictate both how the private sector participates and also what the level of payment is to providers for however many hours of care they subsidize for.

So we are actively engaged, along with many others in our field and trying to participate in that debate in the key states where that's being talked about right now. But, in general, we view it as an opportunity.

Kristen Edwards of ThinkEquity Partners.

Dave, you mentioned earlier about the pipeline. You said that it was in the mid-50 level, and last quarter you said it was more than 50. Is that just language difference or does it mean the pipeline is getting a little higher?

I just think it means the pipeline is in the mid-50s, Kristen.

And not to harp on the revenue guidance again, but can you just review what -- I think previously you had given out 13 to 17% growth, is that correct?

I think it was mid-teens.

Mid-teens, okay. Is the reason why it's at the 13 to 15 instead of above the 15% level because you expect to close more centers in the UK? Is that a contributing factor? Or are there other reasons for the change?

Well, I think there are a few reasons. One is, as you say, we do expect to close centers but, again, I think, all in all, that may be slightly more on a year-over-year basis, but it will be within the range to approximate what we've done in prior years. I think we've tried to be diligent about looking forward and factoring in the effects of cost-plus centers that we've talked to you about before so that, I think, every year we get a little better at being able to budget what we expect some of the efficiencies that will happen in our cost-plus mix, and so we've tried to really take a good, hard look at it through our budgeting process this year and come up with a range that we think, based on what we have visibility today on, in the pipeline to open, that we feel comfortable for for '06. So we don't see it as a major departure from where we've been in the past, but rather a little better, deeper looking at what we can truly expect based on what we have visibility on today.

Should we assume that the same -- about one-third of that 13 to 15% growth -- will be through acquisition?

I think that, over time, you should expect that one-third of our growth will come from acquisition, but as I said to you, I think, before, acquisitions are always going to be lumpy, so ChildrenFirst is going to make a big impact in the time that it's here, and we're going to execute on acquisitions when they're right and when we think we have deals that make good sense for us and pass on others where they don't. So I would much rather see us making decisions about that than to do them because it smooths out how our revenue growth looks. So I think the short answer is, over the long run, yes, about one-third through acquisition but I think that's always going to be lumpy -- sometimes for the better and sometimes for the worse as it relates to the year-over-year comparison.

One last one -- can you give a little more color to this university -- Bright Horizons University that you talked about? I guess professional development for the workers?

Well, there are a couple of things going on in our field, as I, I think, talked to you about in the past. A critical thing for us is being able to find and keep good teachers in our classroom, and on a state-by-state basis, there are minimum teacher qualifications and certifications required by each state, sometimes one in each state, each county in which we operate. And so the first thing that this online university is going to give us the opportunity to do is to provide an opportunity for teachers to gain that basic certification and, again, that's going to be slightly different in each state, and that, we think, is going to be an important part of our ability to recruit and provide people with education and opportunity and do that ourselves within our system in a way that both gives them certification and prepares them to work for us in our kind of environment. So we feel great about it.

Secondly, from a succession planning standpoint, we've made some strides in our annual performance assessment of employees, but what this will do is provide us with the ability to link those assessments with specific training opportunities so that we can grow our own managers, which is probably the second-biggest thing for us other than finding and keeping great teachers, is training our future center and regional managers because, as we've grown the company, as we achieve more scale, really, being able to train our own in that regard, allows us to maintain the kind of mission orientation levels of quality that we believe in. We've done that well in the past, but I think manually and on the backs of our own people who have done it, this has just given us a better mechanism, a better tool, to make that happen. It's in development now, and it's being piloted, and we expect to roll it out starting in the middle of 2006.

[Edward Kimeaux] of [Four Rivers Capital].

Could you give us a little more detail on the UK and Ireland operations? I guess, specifically, if you do fully load in all the overhead that's there, is it a profitable division for you?

The UK certainly is profitable for us. The Ireland operation, with seven centers, is in a longer stage of ramp-up. They have a modest overhead structure there, but they also are in a development mode with the building up of centers opening and then ramping them up over several years. So Ireland is fairly small. It's only seven centers, so it's not a huge factor, but it has longer-term potential that we see in terms of servicing more employers that are locating there.

The UK operation is certainly profitable, albeit in the EBIT line it's going to be more like the 4, 5% because of the overhead structure versus the center margin that I mentioned before.

And I guess in terms of fixing that, other than just growing out of it, does an acquisition over there make any sense, or would you rather just organically grow the business and have it get up to your levels of profitability over time?

Well, I think a few things, Ed. First, we made a conscious decision to make a significant investment there in overhead that really kind of solidifies us for the long run. So that we didn't over-burden our U.S. resources, which were already growing and taxed, so we wanted to be able to have a team over there and an infrastructure over there that could support the UK and Ireland, for the most part, on a self-sufficient basis.

So we think we have that in place. To specifically answer your question on scale, I think we'll do both. I think we'll be looking to grow the business organically. We have been doing that, but now that we've integrated the past few years of acquisitions, I think we'll once again be looking for opportunities to grow through acquisition. If and when that will be possible, we're still not sure, as we continue to evaluate the market and the other to play there.

Okay, a last question -- on the backup centers, I might have missed it, but did you give us a number for how many backup centers you plan to open this year, and then if you could distinguish between new backup centers versus ones that you are integrating into your existing primary centers.

We didn't give you a number, but I'd say there's a handful of backup centers in the pipeline. And what I did say in my comments is we are actively looking to find new sites to open consortium centers in the ChildrenFirst mode, or model. So that's sort of on the front end, not yet in the pipeline. So we are actively looking to do that, and we'll be able to report to you in the future how that activity is going.

It's unlikely that we'll add many, if any, more backup centers through acquisition. These will be centers we'll either develop with a client, single client, or with a handful of clients in a consortium.

Michael Lasser of Lehman Brothers.

Just a quick follow-up -- given where, in the valuation of your stock and the valuation of a recent transaction in the early childhood education space, has that translated into valuations that are being demand or being expected for some of the people that you're talking to? Or does it really not have any impact on the transactions that you might be looking into?

Well, I think, Michael, when we look at the market for acquisitions, by and large, most of the market -- and there are some exceptions to this -- there remain a few others of the ChildrenFirst size out there, but, by and large, the majority of people we're looking at are what I call "regional chainlets" -- folks that are running really high-quality operations between, say, three and 15 centers. And I don't really think that the other large acquisition that happened or even -- you know, we've had our valuation, be as it is, for a while now in the public market, so it's hard for a smaller organization of the size I just mentioned to point to us -- our public valuation. They can do it, but it's hard to do with a lot of -- in a way that makes a lot of sense.

So I guess the long and short of it is, I think that what you'll see -- or we expect to be able to continue to execute on things that are in the range of what our historical valuations have been.

Chris, are there any more questions?

Not at this time, sir. [OPERATOR INSTRUCTIONS]

Sir, we do have a follow-up question from Mr. Bob Craig.

Sorry to prolong things -- you've mentioned in the past, Dave, I think a 10% increase in interest from early-stage prospects and engaging the front end of the pipeline. Is that a statement that still holds, or has that percentage changed materially?

I think it's fair to say that that statement still holds, Bob, and certainly in the area of -- that holds true for new center development. I think in the area of membership kinds of sales like I talked about before, would be even more than that, given the fact that we've really ramped up that team as of recently combining with ChildrenFirst.

Okay, well, let me thank everybody for joining us today on the call, and, as always, Elizabeth and I are here if you have any further questions, and if we don't talk to you soon, hopefully, we'll see you on the road during our many visits during 2006. Thanks.

Thanks, bye-bye.