Bright Horizons Family Solutions Inc (BFAM) 2006 Q1 法說會逐字稿

Good afternoon. My name is Mark, and I will be your Conference operator today.

At this time, I would like to welcome everyone to the Bright Horizons Family Solutions First Quarter 2006 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn the Conference over to Mr. David Lissy, Chief Executive Officer.

Please go ahead, sir.

Thanks, Mark. And good afternoon, and hello to everybody on our call today.

Joining me on the call, as usual, is Elizabeth Boland, our Chief Financial Officer. And we’ll begin today’s call with Elizabeth going through some administrative matters.

Elizabeth?

Hi, everyone.

Our earnings release went out just a little while ago on the wire, after the close of the market. And it’s available on our website at brighthorizons.com.

This call is recorded and is also being webcast, and a complete replay is available in either medium.

Whoever wants to access the phone replay can call 706-645-9291, and use PIN code 7811172; while the webcast is 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 and at the Investor Relations section of our website.

The risks and uncertainties that may cause future operating results to vary from what we describe in our forward-looking statements made during this call include -- one, our ability to execute contracts for new client commitments, to enroll children, to retain client contracts and to operate profitability abroad; two, our ability to successfully integrate our positions; three, the capital investment and employee benefit decisions that employers are making; four, the effect of governmental tax and fiscal policies on employers considering work-site childcare; and lastly, the other risk factors which are set forth in our SEC filings, including our 2005 10-K.

Dave?

Thanks, Elizabeth. And welcome again to everybody who’s joined us today.

Today I’ll review our first quarter results and also talk with you about our outlook going forward. After that, I’ll turn it back to Elizabeth to walk through the numbers in more detail and talk about our guidance.

Let me begin with the numbers.

For the first quarter of 2006, revenue of $169 million was up just over 12% from the first quarter of 2005, while net income rose 20% to $10 million, generating earnings per share of $0.36; a 20% increase over last year’s first quarter.

I do want to take a moment to remind everyone that for comparative purposes, our 2006 results include approximately $0.02 a share of options expense, which is included in our results for the first time this quarter.

We’re pleased with these results, which continued [as trended] out-performance and were slightly ahead of our expectations.

Before I get to an update on our prospects for the rest of this year and look ahead to 2007, let me review the main drivers of our results this past quarter. And I’ll start at the top, with revenue growth.

As we talked about on the year-end call just in February, we expected that revenue growth for fiscal 2006 would approximate the low teens. Enrollment growth in our base in ramping business, along with year-over-year price increases, provide the solid base for continued growth in 2006, leading the timing of center additions and closings -- which, as you all know, is never linear in nature -- as the final key determinant of the pace of revenue growth in the quarter.

Our revenue growth this quarter was in fact driven by additional enrollment from our newer centers and modest enrollment gains across our mature base of centers, both in line with our expectations. Our annual tuition increases came in on target, in the 4 to 5% range across the network, as we continue to proactively and appropriately price our high-quality services slightly ahead of our expected cost increases during the year. One element of revenue growth which was counter to our plan once again this quarter continued to be slightly lower subsidy revenue from our cost-plus contract centers.

In terms of center additions, we added five new centers this quarter. Included in this mix were two additional back-up centers -- one for a law firm in Washington, D.C. and the other in San Diego -- our first new consortium back-up center since acquiring ChildrenFirst -- along with two new centers in the UK and one here in Massachusetts. These centers are the beginning of a relatively larger class of organic P&L centers that will be opening throughout the remainder of this year and 2007. And I’ll get into more detail on that in a minute.

As we previewed in our call in February, we began our anticipated closing of a number of underperforming centers in the UK this past quarter. As I outlined to you back then, we’ve reached the operating stage with the legacy companies that we’ve acquired there over the last couple years, where it’s appropriate to apply the same discipline around closing underperformers that we employ here in the U.S.

During the first quarter, we closed six of these sites in the UK and expect to close another four to six during the remainder of this year. The remaining four closures in the first quarter were our periodic closings.

In terms of numbers -- when you factor in the pruning plan that we talked about in the UK, we’d expect to close a total of approximately 20 centers in 2006. However, it’s important for me to note and point out that the net capacity reduction will be lower than the absolute number suggests, given the relative small size of the UK centers.

Looking ahead at expected center openings -- the pipeline of center developments continues to be strong, with over 60 centers under development. As we noted to you back in February, we’ve been pleased to continue to see a pickup in sales activity and, in turn, the new center commitments from both new and existing clients. We’ve been experiencing more success in some of the cyclical sectors, like financial services, that had previously slowed in prior years.

In addition, we continue to see good momentum in the legal, higher-education and healthcare areas. Given the long length of our sales cycle, we now have a relatively large class of organic new center openings that will begin to open in the middle of this year, with particular strength in openings in the third and fourth quarters. We’ll be watching closely the pace of new commitments and conversions over the next six months to better understand the sustainability of this trend and get better visibility for 2007 and 2008.

In addition, we expect that over time, approximately one third of our growth will still come through acquisition. There continues to be positive activity in this area as well. Our team continues to develop relationships and focus on deals that fit our stringent criteria for quality from both the operational and the financial viewpoints. As it relates specifically to our growth outlook for fiscal 2006, we’re on track to achieve revenue growth in the range of 13 to 14%.

Moving on to margin performance during the first quarter -- we improved on operating margins by 80 basis points, to 10.1%. This included a center margin of 19.5%, up 170 basis points over the first quarter 2005; and overhead spending at 9%, up 70 basis points over last year.

The key factors in our operating margin improvement continue to be the positive contribution from the ChildrenFirst acquisition that we acquired back in September of last year, managing appropriate staffing levels at centers, maintaining pricing discipline on tuition increases, slightly ahead of cost increases; and the maintenance and modest growth of enrollment in our mature base.

The [noise] in overhead this quarter is primarily the effect of stock options, which added approximately 30 basis points to the overall overhead rate this quarter. We do expect to again leverage overhead down as we grow in the next few years, as recent upticks in spending for things like Sarbox, the added ChildrenFirst infrastructure and options expense all become embedded in our base. In addition, we’d expect to gain some additional overhead leverage over time, as we added more scale in the UK and in Ireland.

As you know, our first and second quarters are typically our higher-margin quarters, as a direct result of rebounding enrollment from our seasonal enrollment dip. We feel good about the sustainability of our base margins across our network, given the current strength of enrollment in existing centers.

Looking ahead to the rest of the year, we’re on track to improve operating margins slightly ahead of our original plan, and are therefore moving up our projected earnings-per-share guidance for the full year to a range of $1.47 to $1.50. Elizabeth will walk through that guidance with you in a little more detail in a few minutes.

So for the rest of my time, let me switch gears and talk briefly with you about our back-up division.

First, I want to give you an update on the integration [and] cross-selling efforts resulting from our acquisition of ChildrenFirst last year. We’ve successfully re-branded under the Bright Horizons name, integrated our financial systems, and have consolidated support functions here in Watertown.

As I mentioned earlier, we opened our first new back-up consortium center directly resulting from the acquisition and are actively pursuing a number of additional opportunities. Our fully integrated sales team have begun to cross-sell across our consortium back-up centers and into our full-service network. And the early results are encouraging, as we’re just beginning to witness the effects of our combined service offerings to our combined clients. It’s our expectation that we’ll be able to drive better results in this area than either of the legacy companies could have achieved on their own.

As some of you may have read, we also recently announced the launch of a new program in our back-up division, the Bright Horizons Back-Up Advantage. This new program is strategically important to us, because it expands our footprint and allows us to provide an equitable back-up solution to all employees of our many national clients, including those that do not live or work in areas that have access to Bright Horizons centers. It also allows us to begin to address the growing need for elder-care services.

Back-Up Advantage is scheduled to roll out this summer, and services will be accessed through a 24/7 call center and online service delivery. The center-based childcare aspect for this program will be offered through a network that includes hundreds of Bright Horizons centers, along with a select group of other quality childcare centers that will fill out the geographic spread.

In addition, a pool of trained, licensed in-home-care providers, accessed through the same call center, will be available to provide home-based back-up services for mildly ill children, well children, along with back-up elder care.

This program augments our current back-up offering and fills two important pieces of the work-life puzzle that have proved to be particularly challenging for working families. While we’re not yet in a position to quantify the effect this will have on future financial results, we believe it’s an important strategic step in allowing us to offer the most comprehensive back-up solution available.

In closing, two weeks ago, we hosted our annual client conference in St. Petersburg, Florida, which was attended by over 200 professionals, including existing clients and some prospects. We focused on sharing best practices around people strategies that will better position them to attract and retain the talent they need to maintain competitive advantage in their respective businesses.

It’s clear that while a large segment of the U.S. workforce will age over the next 10 to 15 years, there are fewer younger workers to replace them, thus creating a heightened awareness around the long-term challenge to attract and engage good people. The business case for employer-sponsored childcare, back-up child and elder care and school-age care are compelling and, when combined with a sheer lack of community supply of quality care, will be an important part of the overall people strategies of leading employers, and thus will continue to drive the demand for our services over time.

So now let me turn it back over to Elizabeth to run through our financial results with you in more detail. She’ll also provide an update on our guidance for the rest of this year. And then I’ll be back with you during the Q&A.

Elizabeth?

Thanks, Dave.

Again, to set the stage for this financial discussion, revenue of $169 million was up $18 million, or just over 12%, from the first quarter of 2005. Operating income in the quarter increased to 10.1% from 9.3% in the same period last year, while net income rose $1.6 million, to $10 million.

Earnings per share of $0.36 is up 20% from the $0.30 we reported for Q1 last year and includes approximately $0.02 a share of expense associated with stock options.

Revenue growth is attributable to new centers under management, additional enrollment in ramping and mature centers, and price increases of approximately 4 to 5% annually. In conjunction with the revenue growth from centers added in 2004 and 2005 that continue to ramp up their enrollment, the first quarter of 2006 includes approximately $8 million from the 33 ChildrenFirst centers we acquired in September of 2005. The growth rate this quarter is at the lower end of our projected range, due in part to the timing of center closings that occurred during the first quarter.

In addition, we continue to see some variability in actual client operating subsidies relative to our projections at some of our cost-plus contract-modeled centers. Given the operating nature of these contracts, our focus is less on the trends in overall revenue and more on working closely with our client partners to drive enrollment and to manage costs against their internal budget objectives.

It is the interplay between this overall cost structure and the tuition fees clients choose to charge parents that drive the client operating subsidy levels. Therefore, although we continue to earn the same fixed-management fee, there will always be variability in our revenue for these contracts. The effect of this approximated $1 million in the first quarter of ‘06.

A couple of our other factors also affect the overall rate of revenue growth in relation to the first quarter of ‘05. One is a lower foreign exchange rate this year versus last year, which reduced the U.S. dollar reported revenue by just over $1 million. The other factor is the actual timing and the number of center openings and closings in this reported period versus last year, which also cause some drag on the overall growth rate.

Enrollment in our core base business continues to be strong and consistent with our expectations for this time of year. As Dave mentioned, the first and second calendar quarters of each year tend to be seasonally our strongest, with our mature P&L centers showing modest gains in ‘06 versus ‘05 levels of approximately 0.5% on the overall utilization rate.

Shifting to margins -- the positive trend in center margin improvement continued, with margins increasing to 19.5% for the quarter, versus 17.8% in the first quarter of ‘05. Dave touched on the primary factors in improved margins.

First, and most significantly, the inclusion of the ChildrenFirst back-up centers, which not only produce higher center margins of 30 to 40% but also contributed at full maturity as acquired centers. Second, pricing disciplines, such as tuition increases, modestly exceed our personnel cost increases. Third, the solid enrollment levels that I just mentioned, coupled with labor-cost management and operating efficiencies; and fourth, contributions from new cost-plus centers and transitions of management of existing programs.

Moving on to overhead -- SG&A as a percentage of revenue was again 9% in the first quarter of 2006, consistent with last quarter; but up 70 basis points from 8.3% reported in the same period of ‘05. The inclusion of ChildrenFirst in the quarter represents about 40 basis points of the overhead increase. In addition, we recorded approximately $500,000 in stock-option expense in overhead this quarter.

Given the timing of when options were granted -- that is, some in the middle of the quarter -- this expense will increase slightly over the remainder of the year to a total of approximately $2.4 million for overhead alone. We do expect to regain our trend in overhead leverage in future years, once the effects of these initial-year items are embedded in the full-year run rate.

Amortization of identifiable and tangible assets totaled approximately $600,000 in the first quarter, and we’re now projecting it to approximate $2.8 million for the full year 2006. Interest income declined in relation to last year due to lower levels of investable cash after the all-cash purchase of ChildrenFirst, as well as stock repurchases made in the last two quarters.

Our strong financial performance so far this year has driven a 23% increase in EBITDA, to approximately $21 million; while capital spending totaled $8 million for the quarter. The weighted-average shares outstanding decreased in the quarter to $28 million, due to share repurchases made under our existing stock-repurchase program.

During the first quarter of 2006, we acquired 660,000 shares for approximately $23 million. We expect to continue to be active in this program over time to judiciously deploy a portion of the cash we generate from operations. We ended the quarter with approximately $23 million in cash.

Let me recap our usual operating statistics. At March 31st, we operated 611 centers, with 66,250 total capacity. As in prior periods, 60% of our contracts are profit [and loss], and 40% are cost-plus.

Excluding our back-up centers, for whom center capacity is less central to the relative operating performance, the average capacity per center is now 130 in the U.S. and 58 in Europe.

Dave previewed you on our guidance for the rest of this year, and I’ll get into a few more details on that in a minute.

But before I do, I’m also pleased to report to all of you for the first time here, since we’ve filed our 10-K in March, that we did successfully complete our audit for 2005 and had a clean opinion on our internal controls from our auditors, including the confirmation of the forward mediation of the prior-year material weaknesses that we had reported.

So on to guidance -- for clarity, the figures I’ll go through do now include the effect of stock-option expense, which we estimate will reduce net income by a total of approximately $2.2 million, or $0.08 a share, in 2006, given the options that are currently outstanding and what we project to grant for the rest of this year.

As previously noted, approximately $2.4 million of the estimated annual pretax expense will be in overhead. And $400,000 will be in center-based costs. A large portion of the options are not tax-deductible. The adoption of FAS 123R will therefore increase our overall effective rate in 2006. And this element is specifically factored into the $2.2 million net-of-tax estimated effects that I just noted.

Our growth outlook for 2006 includes the contributions from additional centers under development in the pipeline, as well as incremental growth in enrollment and membership sales in our existing base of centers. Based on our estimates of the timing of this new business, we do estimate revenue growth to approximate 13 to 14% in ‘06.

We’re expecting to sustain the improving margin trend in ‘06 as well and are projecting to expand operating margins by 25 to 50 basis points, approximately, for the full year. Once again, this is after factoring in options expense, so that we end the year at around 10%.

Our projections include assumptions about the variables that have an impact on center margins, which include our tuition pricing power, overall salary and benefit costs, enrollment levels, contract mix, the timing of new center openings, the volume of incremental membership sales, and lastly, the short-term effect of ramp-up losses associated with increased numbers of organic P&L contract centers that are scheduled to open this year.

With an effective tax rate of 42%, and 28 million shares outstanding for the year, our projected EPS is therefore in the range of $1.47 to $1.50 for the full year, with Q2 ‘06 EPS estimated to range from $0.37 to $0.38 a share.

Well, with that, that’s the end of our full formal remarks.

And Mark, we are ready to go to the Q&A session of the call.

[Operator Instructions] Howard Block, with Banc of America Securities.

Good afternoon, everybody. Congratulations; nice start to the year.

Thanks, Howard.

Thank you, Howard.

First question is -- Dave, you mentioned that the pricing increases came in line with plan, 4 to 5%, and that they were ahead of the expected cost increases. I was wondering, what range of growth were you expecting in terms of cost increases?

The cost -- the salary increases are in the neighborhood of 3 to 4%, and pricing’s about a point ahead of that.

Okay.

And then, Elizabeth, you mentioned, I think, that there was a $1 million effect from the subsidy revenue coming in. Was that a $1 million below your plan, or just a gross effect from lower subsidies? I’m just trying to understand --

Yes. It was -- it’s about a $1 million difference from what we had planned for the quarter. So we started off the year with the budgets that we’ve gone through with our clients. And it was -- that was the order of magnitude of the difference from our --

I got it.

-- for the plan.

And then, in terms of the 60 centers under development, how many of those are for existing customers?

In the pipeline, roughly 25 to 30% are for existing clients, and the rest are for new clients, [however].

[Okay].

-- of over 60 centers.

Okay.

And then you mentioned, Dave, a pickup, I believe, on the pipeline. And you had also commented about more success in financial services. Is the “pickup” attributable to financial services solely, or just primarily, or --?

No, I think what I was trying to -- actually, just to take a step back -- if I were to comment on the pipeline -- we’re pleased with the continued growth of the pipeline. But also, we can’t comment on specific names in the pipeline, because of confidentiality, until centers open. But we’re also pleased, I would just say, with the quality of names that we’ve been able to add to the pipeline across a number of industries.

I point to financial services, because it’s probably the one that probably suffered the most when the economy was down, and has picked up nicely the most, now that we’ve seen a pickup. But I would add the legal area, the healthcare area, consumer services, higher-education -- all for the mix of industries where we’re seeing some of the high-quality names with those -- in those industries get committed over the past six months.

Okay.

And one last question -- I’ll jump back into the queue -- Elizabeth, you mentioned that there were 30 bps of growth in the SG&A margins from stock options. I imagine the rest was because of ChildrenFirst --

Yes, it was about 40 bps from --

Right.

-- ChildrenFirst, [yes].

And so is it safe to assume that in the fourth quarter of the year, we might once again see some leverage in SG&A and some year-over-year improvement?

I think that it would be -- that’s about the right timing to see a bit of overhead leverage down from the 9%. We’ll have a little bit of a higher-option expense in Q2 through Q4 because, as I mentioned, just a little bit of the timing effect on newer options that came in in mid-quarter, that’s just when they’re granted. So that will pick it up a little bit that we’ll absorb what modest leverage we might have in Q2, Q3.

So, yes, toward the fourth quarter you might see that begin to show what we’d expect to see in ’07.

Okay. Great, thank you, and again, congratulations.

Thanks Howard.

Jerry Herman, Stifel Nicolaus.

Morning everybody, hi guys. Question with regard to numbers of centers. Dave, you mentioned that you’re looking to close 20 this year. What about openings? Give us a ballpark on that?

Yes, I think we’ll open 55 to 60 centers based on what we have visibility on right now, Jerry. And that’s obviously what we have visibility on now and excluding any acquisitions that might happen that we don’t have confirmation on now.

Let me just add on other point to that because on the-- Dave mentioned this but I think the quantification on the closing. As we would estimate the closing numbers of the relative reduction in terms of an equivalent average center size, with the 20 closings it would be more the neighborhood of 10 to 12. So from a capacity effect standpoint.

It’s more like 10 to 12 than 20 because the U.K. centers are so much smaller.

Okay, so the…

You still net back to roughly an 8% capacity add, Jerry.

The other way to say that is the net capacity increase is going to be greater than the absolute number…

Numbers would indicated, yes.

Yes okay. And the other question, with regard to the U.K. could you maybe quantify the-- I’m assuming that those are under performing centers that are being closed, the 10 to 12 I guess that you guys will do. Can you maybe quantify the losses or the impact of the closing of those businesses on the bottom line?

I think on average the centers are a combination of-- in a couple of cases they may be incurring modest losses but for the most part they would be more on the very low performer, you know, a contract that may have been negotiated under older terms that when we rebid on it under the terms that we would operate to drive the right quality in the center, neutral-- overall sort of a neutral to sort of modest contribution from the group of centers. It’s a revenue loss but it’s not going to be something that you see hold down the margins even though-- the margin dollars much at all for the year.

What I will say operationally, Jerry, is, as you might know, a center that is under performing oftentimes consumes as much overhead if not more than- in terms of people’s time than ones that are performing. So in terms of our longer term plan in the U.K. we see it as a very healthy way to right size the business and rationalize the overhead structure so that as we continue to add scale we are able to not have some of the time or the folks there dedicated to some of those centers be sent on places that aren’t fruitful.

So that’s-- we think it’s a healthy step. And it’s happening now because whenever you acquire a group of companies I think you want to wait until you fully integrate and don’t want to send the wrong signal so that the timing was appropriate. That coupled with some contracts that are coming up for renewal this year made 2006 the right time.

Your response might actually have answered this following question. But when you guys are- I don’t remember you guys closing that many centers in a quarter. I realize you’re a bigger company but besides that are there any key reasons why centers are being closed or typically closed or--?

Well [inaudible] I don’t think you should expect the close rate to pick up any. In fact, you know, when I look at this quarter I see, you know, we closed four typical closings that we would have had and six in the U.K., which acquaint-- really those six add up to two. So, you could say we had six closings, which we’ve had in the past, if you wanted to look at it that way.

So I don’t-- I guess my reaction would be we don’t look at this as sort of any kind of change in what you might expect on a ongoing runrate basis. We would expect that we’ll still close about the same number of centers that we’ve closed traditionally and we don’t see any reason to expect that’ll change if you take out the ones that were-- the inordinate number of absolute closings we’ll have in the U.K. this year.

And then just one quick one as a follow-up to Howard. So the composition in the pipeline, how about a feel for backup versus full service?

Well a handful of backup centers in there, Jerry.

Great, thanks guys.

Michael Lasser with Lehman Brothers.

Hi guys, good afternoon. If I heard you correctly, you said $8 million in capex for the quarter?

That’s right, yes.

Is that going to be the indication of the runrate for the year?

Yes, good question. No, we would expect to still be in the neighborhood of $20, $22 million for the year. The $8 million that you see in the first quarter is really reflective of both some of the P&L centers, the organic startups that we talked about opening later in the year, and so that’s what it’s more of an indication of and the routine refurbishment. So we’re still on track to be $20 to $22 million probably for the full calendar year.

Okay. And as far as the clients that were looking to reduce the subsidies, is that a different set of clients that had taken that approach at the end of last year or is that a further retrenchment of a similar set of clients?

No, I think it’s really all over the map, Michael. There’s no real way to point to it. I think there are some clients that fall into what you said second, where it’s just a continued tight time and managing costs has just continued. And then there are other clients that have been added to that.

There’s no-- it’s really more about what’s going on with that particular client’s business cycle and also periodic shifts in demand in enrollment for a six month period and then it spikes back up. And so we see some periodic movements in some of those cost plus centers where you don’t see that as much on the P&L side.

So that’s just-- it’s hard to point to any one specific answer to your question.

And is there any way to predict or better predict what the rate might be that employers will look to do that throughout the remainder of the year?

Yes, we’ve tried and I would confess that we’ve tried to get better and better at this from the standpoint of looking at this every time we do our annual budget. And then within-- you know, during the year try and keep up with what the pace is that’s happening.

The challenge, as you might know, is we’re talking about a little bit of revenue at a lot of centers. So it’s not-- it’s hard on a micro level to be exact with this and, to be truthful, although we are trying to expand-- to get better at it for prediction purposes, when we think about our operating priorities it’s not one of the things that consumes a lot of our focus only because we’re trying to a) meet the clients’ needs, which is ultimately helping them achieve their budget expectations, and then secondly, we’re earning a fixed fee and therefore there isn’t the bottom line effect of variability of revenue like there might be on the P&L side of which we’re obviously pretty laser focused on that. So I guess that’s the background.

To directly answer your question, when we look at the 13% to 14% of the year we’ve tried to do our best to factor in what we might expect as a continued trend here. And I would just caveat that by saying-- I’d couch it by saying that would be one area of some potential smaller variability. We hope we’re getting better at it but that would be one area that would be the potential to slightly deviate from the forecast that we think is pretty tight for the rest of the year.

Got it. And I guess if you could accurately predict what foreign exchange rates might be next year you wouldn’t be in this business.

And I want to be careful about that, we’re not hanging the issue on the foreign exchange rate. We’re not trying to use that. It’s just a reality for comparative purposes for what happened in the first quarter of ’05 against the first quarter of ’06. That’s all we’re trying to point out there.

No doubt. But I guess just for-- to be fair that $1 million is 60-basis points on the year revenue growth rate. Is that appropriate?

I think that’s-- yes, that’s right if the exchange rate had been as high this year or if it had been that low last year we would have had a higher growth rate reported. But that’s something-- the actual foreign exchange rate is not very different from what we had budgeted. As Dave said we’re not attributing the difference to that. It’s just a factor in the growth rate.

Juts two other quick ones. Could you comment on any success you might have had in selling additional consortium memberships to new clients that you haven’t been working with before?

Yes, I can give you some background on that. As I said earlier, since September we’ve been actively trying to do that cross selling. And I would say this, that I think we’ve sold somewhere in the neighborhood of 100 new memberships in centers across both networks since we acquired ChildrenFirst. And that’s-- in fairness some of that was expected in that there is continued growth built into the ChildrenFirst system.

But I would guess we’re probably doing about 10% to 15% better from a revenue point of view than we had expected this-- up until this point. And the key will be less about what we’ve done to date because we’ve really just begun to have the teams fully integrated. So we’re going to be monitoring that closely and obviously we’ve very focused on it. And we’ll probably have a better way to give you metrics on how that’s impacting the overall results later on this year.

And the last question. Have you given any thought to pricing for the Back-Up Advantage program? And in relation to that, how might the accounting work? Will you book all the revenue and then pay the providers or will you just book a fee to that program?

Yes, from that standpoint we’re not in a position yet to talk about specific pricing but the best way to think about it is much like an organization purchases a back-up membership from us we’ll be selling access to the Back-Up Advantage network on a per employee basis. And unlike childcare where there’s only a portion of the population that can potentially use it, with eldercare it broadens the number of potential users of the program.

So, we’ve gone kind of like on a per employee per head pricing model. And we are in partnership with another organization who’s going to deliver the call center service delivery piece of it who we will be paying on kind of a per use basis and Elizabeth can comment on how that would hit from an accounting standpoint.

Yes, we’ll have the revenue as it relates to what we’re able to charge the clients for the per head count fee that’s based. So it’ll be the fees that we’re collecting from the clients to have access and then we’ll be paying out an expense on that to the people who are providing the care.

So as soon as we have, as Dave said, more visibility and color on how much it is we’ll be able to quantify it for you. But it would be that kind of a revenue recognition.

Got it, thanks for you taking my question.

You’re welcome.

Kirsten Edwards with Thinkequity Partners.

Hi. Elizabeth, can you give us what the Children’s First effect was on the center contribution margin?

Sure. I had mentioned that the revenue was a little over $8 million for the quarter and their overall-- their contribution, including the incremental membership that we’ve been able to sell, as Dave mentioned, since the completion of the acquisition was about 90 to 100-basis points or so on the center margin.

Okay, great. And then getting back to the pipeline, is the-- do you think the pipeline as it is now will allow you to maintain that same ratio of profit loss to cost less center mix or is there any change in what the pipeline looks like in that regard?

Well, you know, the pipeline-- if I were to look at the straight pipeline, Kirsten, and answer the question, I would say it’s skewed a little more towards P&L as we speak. Whether or not that’s going to move the needle on the overall mix, probably not for a while unless it sustains itself for a long while, just because the embedded base is so big.

Okay. Can you offer any color around the corporate decision making process and maybe why they’re leaning toward profit loss and why they’re doing the cost cutting given that corporate spending has rebounded somewhat?

Yes. Again, I think that first off-- I’ll take a step back and say, if I look at kind of why it is we’re experiencing the up-tick that we’re seeing in pace of commitments in organic centers I would have to say if you look back on it I think you can safely conclude that we’re not a leading indicator of economic recovery. And given the capital spend that clients make on our centers I think we started to report to you an up-tick in sales activity at the end of 2003. And with our two-year-- up to two-year sales cycle just started to see that manifest itself in more of these organic conversions towards the middle to later half of last year.

And so, then they take a while to build and open, so thus the third to fourth quarter wade of new openings on those centers.

While I think it’s important that we point it out that there is a large class of P&L centers, we do that in part to emphasize that many of those centers will lose some money in the first year so that that’s factored into the model. But it’s not to say there aren’t a number of management contracts also committing too in that organic class. They’re not all P&L centers, there just happens to be a large class of P&L centers that we talk about from that standpoint.

So, I don’t really think there’s any big change in why a client would look at a P&L center versus a management contract center. That still has to do with the client’s preferences and the inherent factors that exist in every situation we get into.

And with respect to cost plus I don’t know, I wouldn’t hang the cost plus variability in revenue to any sort of economic condition. Now that we’ve operated in a great economy and then a soft economy and now this rebounding to pretty good economy for the past few years, it seems like we’ve had variability in our cost plus base consistently in both situations. So to me that ties more into the unique issues that exist in each of the clients that we serve.

And also the fact, we have to remember that in a cost plus situation many times we’re developing a proforma when we open these centers of what the centers should like. The client- and we’re assessing all the needs. And over time the client’s needs change and in a cost plus center we really are able to follow the client’s desires to change hours and we can change back. You know, we can move that around-- move the things that might drive that a little more flexibly than we could do in a P&L situation where it’s our bottom line.

So, you know, I don’t-- I wouldn’t-- I guess I can’t comment really on the link between the variability of our cost plus revenue and general economic conditions.

Okay. And then just one other quick macro question for you. In this stage of the rebounding economy, have you noticed any change in who’s making the decisions for opening the corporate childcare centers given the trend toward outsourcing healthcare-- sorry, HR?

Yes, no, our decision makers are typically still senior level HR in partnership with somebody in finance and somebody in facilities. So it’s usually that triangular kind of relationship that we find ourselves in and I wouldn’t say that’s any different than it was over the course of time.

Great, thanks a lot.

Jeff Silber, Harris Nesbitt.

Thanks. Can you hear me?

Yes, Jeff, we can hear you good.

Okay, great. Just a clarification on the Back-Up Care Advantage program. You mentioned the eldercare services. Are the folks that are going to be providing those services, are they going to be your employers or are you going to be outsourcing that service to a third party provider?

No, we’re contracting with-- our service provider who’s running the call service center delivery is contracting a network, a preferred provider network, of in-home care providers that are trained in either childcare or eldercare.

And there’ll be some sort of set price with them based on the services that they provide?

Yes, they’ll be contracting with us on a price per hour that we will be baking into the cost structure for the program.

Okay, great. And then on the stock case, I just want to clarify something that I missed. How is that broken out in the quarter that just ended between cost of services and SG&A?

It’s about $100,000 in cost of services and about $500,000 in SG&A.

And we think that that kind of breakout will continue going forward?

Yes, the cost of services will be around $400,000 for the year and the overhead will be about $2.4 million. So it’ll tick up modestly from the $500,000 for the last three quarters.

Okay, great. Thanks again.

You’re welcome.

Mark Hughes with Suntrust.

Thank you very much. And thanks for making the call idiot proof this time.

Don’t do that to yourself Mark.

Did you acquire any centers in the quarter?

What was the question?

Did you acquire any centers in the quarter?

Yes, we acquired one center in the quarter.

And that was it. The other questions I had have been asked. Thank you.

[Operator Instructions] Howard Block with Banc of America Securities.

Thanks again, operator. Just two quick follow-ups. You had mentioned I think on a quarter or two ago activity in Puerto Rico. I was wondering any update there with new centers or growth or--?

Well we opened our center towards the-- last October for Amgen in Puerto-- in Huncos, which is our first center in Puerto Rico. We have since then gotten a commitment for a second center that’s in the pipeline for another needy employer their on the island.

And we-- it’s safe to say we have good activity. It’s never going to be a place where we’re going to have a huge amount of centers but, you know, could we envision a half a dozen over the next few years? Probably.

Lot of activity in pharmaceuticals because just as Amgen is trying to recruit similar employees so are many of our other pharmaceutical clients like J&J and Eli Lilly and Abbot Labs and others. So there’s a lot of activity in that sector.

And then the other place is financial services, which is the sector in which the other committed center is for a client in and there are some other of our financial service companies that have sites on the island.

Okay. And, Elizabeth, I didn’t get a chance to pull out my slide rule yet for the map on this, to follow up on Kirsten’s question, does that mean that the gross margin for ChildrenFirst in the quarter was about 38%, something like that? Does that sound possible?

Their revenue was about-- was a bit more than-- I’d have to go do that math but it’s- their average is 30% to 40%. So it could be-- if I was little less than 38% but I’d have to- I’d probably have to-- I’d get a calculator myself rather than a slide rule which I haven’t yet mastered.

Okay. But again we should continue to expect that rough level of contribution for the rest of--?

Yes, their contribution is really strong there. I think the nature of that business is certainly dependent on getting that first 15 to 20 membership sold because of the high initial fixed costs and the rent that’s involved in opening centers in dense urban environment. So there’s a heavy fixed cost that goes in and you’ve got to have a strong initial pop to the memberships before you make that commitment.

But once you do the incremental memberships are very contributory because the actual take-up on usage is modest much of year and then has spikes for vacation weeks and summer camps and what have you.

So that’s why there’s a little bit of seasonality. The ChildrenFirst business has higher utilization over the summertime and so overall their margins tend to be a little big lighter in the summer as well for different reasons than the full service centers that we have which are generally seeing some preschool graduation rates.

Okay, great, thanks.

Michael Lasser with Lehman Brothers.

Real quickly, have you seen any change in the rate of turnover of your teachers in your centers?

No, Michael, it’s been pretty consistent with what we talked about to you in February -- in the low 20s.

Perfect, thank you.

Kirsten Edwards with Thinkequity Partners.

Hi, can you guys give us the cash flow from operations in the quarter.

I’m sorry I don’t have that available yet Kirsten. So, unfortunately EBITDA is no longer a proxy for cash flow. With all of the stock option expenses in there it’s non-cash and so we’ll have that in a couple of weeks when we file the Q.

Okay, sounds good. Thanks.

And we have no further questions at this time. Do you have any closing comments for the group?

Okay, Mark, thanks and thanks everybody for joining us on the call. We look forward to seeing many of you on the road over the course of time and as always if there are any questions Elizabeth and I will be here. Thanks.

Thanks everyone.

And this concludes today’s teleconference. You may now disconnect.