Bright Horizons Family Solutions Inc (BFAM) 2006 Q2 法說會逐字稿

Good afternoon. My name is Jenny and I will be your conference operator today. At this time I would like to welcome everyone to the Bright Horizons Family Solutions Second Quarter 2006 Earnings Conference Call. (Operator Instructions.)

I will now turn the conference over to Mr. David Lissy.

Thanks, Jenny, and hello to everybody who's joining us on our call today. Joining me on the call as usual is Elizabeth Boland, our Chief Financial Officer. And before we get started, I'll ask Elizabeth to go through some administrative matters. Elizabeth?

Hi, everyone. Welcome to our second quarter call. Our earnings release went out over the wire just after the close of the market and it's available on our website at brighthorizons.com. This call is recorded and is being webcast and a complete replay will be available in either medium. Anyone wishing to access the phone replay can call 706-645-9291 and use pin code 2693939, and the webcast will be available at our website under the Investor Relations section.

Also, 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 future results. We adhere to restrictions on selective disclosure and we 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 our future operating results to vary from those we describe in any forward-looking statements made during this conference call include (1) our ability to execute contracts for new client commitments, to enroll children, to retain client contracts, and to operate profitably abroad; (2) our ability to successfully integrate acquisitions; (3) the capital investment in employee benefit decisions that employers are making; (4) the effect of governmental tax and fiscal policies on employers considering worksite childcare; and lastly, the other risk factors that are set forth in our SEC filings, including our 2004--2005 Form 10-K. So back to David.

Thanks, Elizabeth. And welcome again to everybody who's joined us. Today I'll go through our second quarter results and also talk with you about our outlook going forward. After I'm done, I'll turn it back over to Elizabeth who will walk you through the results and our guidance in a little more detail.

Let me begin with a review of the numbers. Earnings per share of $0.40 this quarter increased 21% from the second quarter of 2005, on net income of 11 million. Revenue of 175 million increased 12% over the second quarter of 2005. And just to remind everyone, for year-to-year comparative purposes our 2006 results include the effect of stock options expense associated with our adoption of FAS-123R, which was not included in the 2005 numbers. At the bottom line this had the effect of decreasing our earnings per share $0.02 this quarter.

We had another solid quarter with operating margins expanding 80 basis points even after the effective options and revenue growth coming in just about where we had expected it to be when we talked to you last quarter. We added eight new centers for clients including Mercedes-Benz in Alabama, the Marine Institute in Galway, Ireland, a second center in the Mission Bay Area for the University of California at San Francisco, a dedicated back-up center for Blue Cross and Blue Shield of North Carolina and a new location for GlaxoSmithKline in King of Prussia, Pennsylvania. We also opened three new office park or building consortiums--centers in Chicago, New York City and in Northern Connecticut.

We closed four centers during the quarter, three in the U.S. and one in the UK, returning to a more normalized pace after our larger number during the first quarter, which was driven as you might remember by our planned closures of underperforming centers in the UK.

As we look ahead, we begin to see a very positive 12-month forward look on new center openings as compared with the past 12 months. This comes as a direct result of the pick up in organic new commitments that we began to realize at this time last year. As we discussed with you last quarter, beginning in the third quarter, this will result in the opening of a larger number of client-sponsored organic centers and consortium models than we've seen in the prior periods.

Our pipeline and new center commitments continues to be strong with over new--over 60 new centers under development. These centers span a broad range of geographies, industries, and clients, and provide a solid base for future growth. As I've noted to you before, we're seeing a steady pick up in underlying sales activity, including continued positive trends in some of the more cyclical sectors, such as financial services, that had slowed in prior years. At the same time we're maintaining good momentum in the legal, higher education and healthcare areas.

At this point in the year, with the exception of some opportunities to transition the management of centers that are self-managed or run by a competitor, or sell memberships into our consortium centers, most of our new sales are for centers that will open 12 to 24 months from now. As you might expect, we'll be closely monitoring the continued pace of new commitments over the next few months as this will give us further insight into our growth outlook for the latter part of 2007 and 2008.

As we've talked to you about before, acquisitions will continue to comprise approximately one-third of our growth over time. As part of this piece of our strategy, we continue to identify acquisition targets in the early and elementary education sectors as well as those who provide services to employers that align with our core offerings to working families. We continue to see strong interest from organizations looking to partner with us and our team is currently focused on a variety of opportunities that we believe can meet our stringent criteria for quality and financial performance.

In summary, given what we see at this point in the year, we believe we're on track to achieve our target growth range of 13% to 14% for fiscal year 2006. Now let me shift gears and turn to margins. Our performance this quarter was once again strong with operating margins expanding by 80 basis points over last year, even after you include the effect of stock options.

The key factors to our strong margin improvement continue to be managing appropriate levels of staffing at our centers, maintaining pricing discipline on tuition increases ahead of our cost increases, solid and modestly growing enrollment in our mature basis centers, and the positive contributions from our consortium Back-Up centers driven by the addition of the Children First Centers last September and the follow on sales we've made since.

The first half of the year is typically our highest margin period prior to our seasonal summer enrollment dip and we therefore expect that as usual margins will pull back slightly in the third quarter and begin to rebound again in the fourth quarter as enrollment picks back up. That said, we feel good about the overall sustainability of our base margins across the network, given the current strength of enrollment and the mix of new centers we expect to add between now and year end.

We now project we're on track to improve our operating margins 40 to 60 basis points and are therefore increasing our projected earnings per share for fiscal 2006 to a range of $1.50 to $1.53.

Before I turn it back over to Elizabeth, let me briefly update you on two areas we discussed on our last call. First, in the UK, we're in the process of closing a number of underperforming centers, the bulk of which closed during the first quarter with several more to follow throughout the year. As a reminder to you, the Albert Center in the UK has a capacity that's roughly one-third the size of our U.S. centers. Although our European operations are still a relatively small part of our overall company mix, we continue to be very pleased with the results and remain optimistic about the opportunity to grow and realize the operating margin performance that will come as we further leverage the overhead investments we've made there.

Turning to the Back-Up area, our integration of Children First is now complete. With the successful rebranding and integration behind us we're leveraging our strength in this area across our marketing and sales teams, expanding memberships across the network, and also expanding the network itself through strategic site selection and the development of new consortium centers.

As I mentioned on our last call, earlier this month we began rolling out our new Back-Up Advantage Program, which allows employers and their working families to access backup services for child and elder care through the Bright Horizons networking centers and through other select in-home and center-based providers.

The early response to this program has been exciting with roughly 100 clients and prospects now actively reviewing and evaluating proposals for service and a few clients already signed up and using the service. We expect that the impact of the new service will begin to take hold during 2007 as most prospects are looking at a rollout for January 1st or thereafter.

Although it's too early to talk about the projected financial impact of the new program, we're encouraged by the interest in the service and by the opportunity to talk with our clients about yet another avenue to assist their employees as they integrate the many demands of working life. As we continue to grow, we'll continue to evaluate new services that can help our client partners provide solutions to their work force across multiple locations. At the end of the day, our client partnerships are a critical core asset that we believe can be further developed over time.

Let me close my section by talking about what I believe makes Bright Horizons such an outstanding organization and leader in our field. The services that we provide are so personal and so important that our people truly are our key competitive advantage. Our team of talented professionals celebrated our 20th Anniversary this past June at our Annual Leadership Conference in Arizona. We've spent the past 20 years building a unique organization that has proven that with steady growth can come the improvement of the quality of our services, the strengthening of our mission and culture, and the delivery of consistent, strong, bottom line results.

As proud as we all are of all of our past achievements, we're even more excited about the opportunities that lie ahead as we continue to enhance our leadership in this field. Let me turn it back over to Elizabeth now to run through our financial results in more detail and provide you an update--a more detailed update on our guidance for the rest of this year, and then I'll be back to talk to you during Q&A. Elizabeth?

Thanks Dave. Again, setting the stage for the financial discussion, revenue of $175 million was up $18 million or 12% from the second quarter of 2005. Operating income in the quarter increased to 10.7% from 9.9% in the same period last year, while net income rose $1.4 million to $10.9 million. Earnings per share of $0.40 is up 21% from the $0.33 we reported for Q2 of last year and includes approximately $0.02 a share for the expense associated with stock options.

As you've heard from us in the past, revenue growth is attributable to three primary factors. One is new centers that are under management; second is additional enrollment and ramping as well as mature centers; and the third element is price increases, which continue to approximate 4% to 5% annually. In addition to the revenue growth from centers that we added in 2004 and 2005 that continue to ramp up their enrollment this year, the second quarter of 2006 includes approximately $8 million from the 33 Children First Centers that we acquired in September of 2005.

Also, as previewed last quarter, the top line growth this quarter is at the lower end of our projected range for the full year due to the timing of new center openings, which are back end weighted to the third and fourth quarters of this year. In addition, center closings are more concentrated in the first half of 2006, as we had decided to close a number of underperforming centers that we had acquired as part of a larger group--as part of the larger groupings over the last several years in the UK.

An ongoing factor in our overall revenue growth also continues to be the portion of client operating subsidies associated with our cost plus contract models. These contract models, or [selective] clients, continue to closely manage their spending at centers. We have seen these operating subsidies stabilize at these locations, which results in relatively lower year over year revenue growth at these centers.

Enrollment in our core based business continues to be strong and it's consistent with our expectations for this time of year, with our mature P&L centers showing modest gains in 2006 over 2005 levels of approximately 1% on the overall utilization.

Shifting to margins, the positive trend of center margin improvement continues with margins increasing to just over 20% for the quarter versus 18.3% in the second quarter of '05. We've reviewed the primary factors in improving margins - notably strong execution in the core business fundamentals and solid enrollment, but I'll spend a little bit more time on overhead. SG&A as a percentage of revenue remained at 9% for the second quarter of '06, an increase of about 90 basis points from the 8.1% we reported in Q2 of '05.

The incremental overhead associated with the acquired Children's First Centers contributes about half of the overhead increase. And then, stock option expense of approximately $600,000 in the quarter represents the remainder.

Just giving you a little bit of a preview on option expense for the full year. Given the timing of when options are granted, which is principally during the first calendar quarter, this expense should increase only slightly over the rest of the year, so we continue to project a total of approximately $2.8 million for the full year for options in total, of which $2.4 million will hit the overhead line. The remaining $400,000 is included in our center operating costs.

Amortization of identifiable intangible assets totaled approximately $750,000 in the second quarter and we now project amortization to approximate $3 million for the full year. Interest income declined in relation to last year due to lower levels of investable cash, after the all-cash purchase of Children First, coupled with stock repurchases we have made in the last three quarters, which I will expand on in just a minute.

Our strong financial performance so far this year has driven a 22% increase in EBITDA to approximately $45 million for the six months, while capital spending totaled $6 million for the quarter and is $14 million year to date. We ended the quarter with approximately $15 million in cash, and again, are not carrying any debt at the end of the quarter.

The weighted average shares outstanding decreased at--the quarter ended at June 30--to 27.5 million shares due to share repurchases that we've made under our existing stock repurchase program. During the second quarter of '06 we acquired 470,000 shares for approximately $17 million and we've now acquired a total of 1.1 million shares this year for a total of approximately $40 million. Having essentially completed the original 1999 share repurchase authorization, the Board of Directors adopted a new plan last month authorizing a repurchase of up to 3 million shares in open market transactions. We therefore expect to continue to be active in this program over time to judiciously deploy a portion of the cash that we generate from operations.

With the substantially lower average cash balance and ongoing investments in the business through new center investments and acquisitions, as well as regular stock repurchases, interest income has decreased over the last couple of quarters and we would expect to see net interest income continue to decline in the near term as these investments are made.

[Now let me] recap our usual operating statistics. At June 30, we operated 615 centers with 66,760 total capacity. As in prior periods, approximately 60% of our contracts are profit and loss models and 40% are cost-plus. Excluding the 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 the broad strokes of our guidance for the rest of the year and I'll expand on that now.

As a general observation, as I mentioned, we estimate that stock option expense will reduce net income by approximately $2.2 million, so a total of $2.8 million gross and then the net effect is $2.2 million, which translates to approximately $0.08 a share, given the options that are currently outstanding and the small amount that we would project to grant for the remainder of the year. A large portion of the options are not tax deductible and the adoption of FAS-123R has therefore also increased our overall effective tax rate in 2006 and this element is factored into that figure I just quoted.

Our gross outlook for the remainder of '06 includes the contributions from additional centers under development, as Dave discussed, that will open in the second half of the year as well as incremental growth and enrollment and membership sales in our existing Back-Up centers. Based on our estimate of the timing for this new business, we estimate--we expect revenue growth to approximate 13 to 14% in 2006.

We also expect to sustain the improving operating margin trend in '06 and are projecting to expand operating margins by 40 to 60 basis points for the full year. Once again, after factoring in options expense to just over 10% for the full 12-month period. Our projections include assumptions about the variables and impacts on our margins, including our tuition pricing power, the overall salary and benefit costs, enrollment levels, the 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 in the second half and which have a slight drain on margins.

With an effective tax rate of 42% and 27.6 million shares outstanding for the year, our projected EPS is in the range of $1.50 to $1.53 now for the full year, with Q3 '06 EPS estimated to range from $0.36 to $0.37 per share. So with that, Jenny , we have completed our prepared remarks and we are ready to go to Q&A.

(Operator Instructions.) Your first question is from Howard Block.

Thank you, Operator. Congratulations. Nice job on the quarter.

Thanks, Howard.

The first question though is on the guidance. As you know, Elizabeth, I'm a little slow with my abacus here, but at 13 to 14% for the full year, it seems like it's implying about 15% growth in the second half of the year. Is that right?

It would be at the upper end I think of the 13 to 14% range is what we'd expect in Q3, Q4, so it's not quite 15. Closer to the higher end of our range.

Okay. So that--so again, though, in the third and fourth quarters your guidance then really is at the higher end of the 13 to 14, which doesn't seem like it will get you to 13 to 14 for the full year then.

Well, we're giving you a range for the overall experience, so within the half a percentage point range is a--that's a general--.

--Okay--.

--[Indiscernible] the total detailed forecast.

Well, irrespective maybe of the variance here of 100 basis points or so, it seems like in the second half, your organic growth guidance, because you do have some tougher comps, particularly in the fourth quarter with Children First, it seems like the guidance for the fourth quarter's organic growth is pretty robust to what we've seen in the past let's say year.

I think the second half of the year Howard in total, including the effective centers that will open in the third quarter and what they'll have on the fourth quarter, plus the ones who open in the fourth quarter, would contribute to exactly what you're saying.

Okay, so I guess I'm just--I was just sort of inviting you one last time to maybe back off a little bit on the full year guidance, but you're not going to take that bait I guess.

No. We think we can hit the full year in the 13 to 14% range.

Okay, another one and then I'll jump back into the queue. David, you--about a year ago you mentioned this concept of expansion at some length I think on the conference call. I haven't heard much about that since then. Can you update us as to the status of the so-called expansions, and if you can quantify that at all?

Yes. What I can tell you is currently we have 18 center expansions that are happening, so the last time I talked to you about it that was--I think the number was 15. So it's up slightly from where we see it. Obviously, the ones that have been completed have washed out of there, so it's a good to sign to us that we still--it's a healthy sign that we still see centers expanding. Some of that added capacity will actually happen this year and some obviously won't happen until 2007. But that's the total number that we've got--that we're working on now.

And the other factor in our expansion is in addition to what you might--you have come to know of clients just adding 30 capacity or 40 capacity is as we have now gotten older as an organization and we have some of our older centers that--where we might have a lease responsibility coming up for renewal, we're consciously making decisions to find new locations for many of these centers that come up for renewal. Most of the time when we do that we add in the neighborhood of about 30% to 40% additional capacity to those centers when we make the decision consciously to relocate them.

So that doesn't come up--we don't talk about that and they're not counted as an opening and they're not counted as a closing. It's just extra capacity that's added in the same way an expansion would happen. So those factors are starting to play a slightly larger role because more of those leases are coming up. Many of them were done on 10 or 15-year leases years ago. And as we--as they come up for renewal we find the opportunity to find more suitable, larger locations often times.

Just a couple of questions on that then. So in the 18, there's still some of the 15 from last year in there?

There's probably a few in there, yes, from last year.

A few? Great. Thank you.

Your next question is from [Michael Blasick].

Hey, guys. Nice quarter.

Thanks, Michael.

Thanks, Michael.

To dig down deeper into the revenue guidance a bit, I'm trying to get an order of magnitude of how many new centers to expect to come online in the second half of the year, and when those centers might fall into place. Not including closures, there were 13 added in the first two quarters of the year. Is it reasonable to expect that there may be three times as many in the second half?

Yes, that's exactly what the figures would look like. We're on a growth basis, looking at somewhere between 50, 55 growths for the year with--currently what we're seeing slated to open would be more heavily weighted to the third quarter than the fourth quarter in that mix.

Very helpful. And how are sign-ups going to utilize the centers that are coming on during this quarter going?

How are--I'm sorry, Michael.

Sign-ups. So how is it looking to utilize the centers?

Oh I see, yes. The centers, for the most part, ramping according to the way we would expect them to ramp up. When we're ramping a new lease model it starts out slow, and then, of course, we're expecting to get to a place where we're approaching break even around 18 months of operation. So we're--for the most part, we have some that are slightly ahead of where we would expect them to be at this stage in terms of pre-enrollments even before they open, some that are slightly behind. But when you average the class as a whole, I would guess--I would look at the list and say we're about where we'd expect to be.

Sounds great. And the--just to clarify. The real benefit from the centers should really come in the fourth quarter as they are--as they continue to ramp?

Well, I think that the real benefit will over time. I think--let me be clear. There's a mix of centers. These aren't just--while it's true to say that as a grouping we're going to have more organic P&L models than we might have had in prior periods, we're also going to have some cost-plus centers in there as well and probably have a few centers where we transition the management from other providers. So therefore, it won't all be--the whole class won't all be on that same trajectory as one another from the standpoint of gaining. But it is also safe to say that because we have a larger class of organic P&L centers, that over the course of the next 18 to 24 months we'll continue to see progressively the benefit of those centers, not just in the fourth quarter, but going forward.

Got it. And then, you offered me a great lead-in. As you look out over the next 18 to 24 months and should the consumer spending environment weaken and perhaps unemployment rise, and now that you're really 50% larger than you were through the last business-led recession, how do you think your-you may be impacted in a weaker economic environment, both from the perspective of center utilization as well as your ability to sign up and work with new clients?

Well, I think that we've--I think that we've shown over the course of the past probably seven years or so that we've operated successfully in pretty--really good sort of go-go economic times, and then followed by some pretty soft times we continued to perform well. So I think we've shown the ability to not be recession-proof. I don't think anybody truly is. But I think we've been able to maintain ourselves well in both times. Both economic times have different effects, both on the revenue side and the cost side because of the issues of wages and the effect that that has on our business, too. And that fluctuates in good and bad times.

But from the point of view of employers, I think what we're now proving is that we tend to be--we tend to sort of lag recovery from an economic point of view in the sense that much of the benefit that we're now seeing from pick up and interest in clients is coming from commitments that were generated last year at this time or even before that. And then, that's continued up through now. And so, we weren't a leading indicator of recovery. We lagged it a little bit. We're now benefiting from that.

To the degree we're selling now and have a continued up tick in sales and getting commitments, these are commitments that will sit in the pipeline for another 12 to 24 months. So the last time around what happened was we had the benefit going in to the recovery, or the down side of many centers that had been committed a while back and they continued to play out. We didn't see a lot of turn back from employers that already committed to doing new centers.

So I think on the employer side that's sort of the picture that in the cyclical sectors of the economy, if it gets really bad we get a little bit of concern on the part of employers for committing to new projects. But for a while we've got the benefit of stuff that had committed prior to the downturn that helps make up for some that. And then, obviously, I think you know from a cost perspective we're--we've done well in terms of maintaining our--continuing to improve our margins and expect that we'll be able to do that even if the--regardless of what might happen with the economy, based on what we see today.

Okay. And two quick questions. You mentioned in your prepared remarks the--that the pipeline was over 60. And I think last quarter you said it was at 60. I just want to confirm that.

I think last year--last quarter, we did say it was over 60--.

--Over 60--?

--And I think we're saying the same thing.

Okay. And perhaps you could just briefly talk about success you've had with--in more detail about selling additional consortium memberships to existing centers.

Yes. We're--as you know and we talked about before, we've been pretty focused on trying to sell additional memberships in consortium centers. That's going well. We continue to execute on that. And where we see that - as Elizabeth and I noted during my--during our prepared comments - where--what that ends up doing is having as much an effect on our continued ability to improve our center margins as it does revenue because the actual membership sales don't generate the kind of revenue that new centers ultimately do. But from an improvement of margins, that's another--that's been another factor.

So when we talk about the addition of the Children First acquisition, we're talking about both what we acquired and what we've been able to sell since we've acquired Children First and sort of power of having the Bright Horizons client network--client partnerships and the Children First client partnerships put together. And so we're pleased I guess I would say with the memberships that we've been able to sell since the acquisition.

All right. Thank you for taking my questions.

Sure.

Your next question is from Mark Hughes.

Thank you very much. Could you talk about the M&A environment? It seems like a good use of capital to buy back shares, but you've done very well with centers that you've acquired in the past. Can you talk about whether prices are still attractive and whether that--how you think about that relative to share repurchases?

Yes. Sure, Mark. I think that from our standpoint we should be clear that we don't view sort of the opportunity for acquisitions or share purchases as an either/or kind of proposition at this stage. We believe that what we've been able to do on the acquisition front we've done well and expect to continue to be able to execute on acquisitions, and expect that the acquisitions will remain about a third of our forward growth, as they've been historically. So--but we also believe that given the cash that we generate from our operations, that buying back our shares also represents a good deal for our shareholders.

And so, our position at the moment is it's kind of not either/or, it's both. Judiciously, wisely, and appropriately. Obviously we're not going to do deals for the sake of doing deals. They have to meet our criteria. They have to make sense strategically. Anything we buy back we have prices where we think--where we've felt it's accretive to our earnings. And we'll continue to move forward on that, again, judiciously.

But in terms of the M&A market itself, again, as I said earlier, our team is focused on a variety of opportunities. We think we'll be able to execute on the deals that we need to comprise about a third of our growth in the foreseeable future.

Got you. And then, CapEx in the quarter, I know you gave it. Could you give it again? I didn't catch it.

Yes, it was about $6 million in the quarter, Mark, and $14 million year-to-date. We would--if we're forecasting that out for the rest of the year, we had initially set out with an expectation in the 20 to 22 million range, which is--it's still about the range we expect to spend for the full year.

All right. And then, the stock option expense - 600K in SG&A, and then, 100 in [indiscernible]?

Right, only 100 in centers.

[Inaudible.] Okay. And then, you talked about the ramp up in the new centers kind of following your model. As you look at the normal P&L center as it ramps up, what kind of utilization do you get at say six months or however you would like to--.

--Yes. It's--.

--Describe it.

When a P&L center ramps up, there's probably two separate answers there. If it's a client center, it tends to have had more pre-selling in the construction timeframe. So a client center at six months will probably be closer to 25 to 30% enrolled, and it's getting closer to 40% by the end of 12 months. And the infants and toddlers are comprising the majority of that enrollment, and younger preschoolers are the early enrolled. In a lease model, that would be perhaps three months behind that, so that by the end of the first year you're averaging--you're at like the 30% mark at nine to 12 months, and ramping up to the 60% at the end of the second year.

Got you. Thank you very much.

Your next question is from Kirsten Edwards.

Hi. Good afternoon.

Hi, Kirsten.

Sorry. I've got my headset on now. Elizabeth, I think you mentioned what the guidance for '06 was for organic new center openings. Can you repeat that?

Total--I don't know that I split it out. Total growth expectations gross of closings would be around 50 to 55 centers.

That's a net number, the 50 to 55?

That's a gross number.

Oh, okay.

Yes. We have a pretty high level of closings, as we had 10 closures in the first quarter. So for this year, the total number of centers closing is around 20 that we expect, although it's the equivalent because between seven and eight or nine of those will be in Europe and they're about a third the size of the U.S. center, so it's fairly equivalent to 12 or 14 centers.

Right.

On--in the overall average.

Okay. And do you still expect capacity expansion of 8 to 10% for the year?

Capacity expansion will probably be more like at the 7 to 8% range for this year in isolation.

Okay. And is that--had it been 8 to 10% before? Did I have that right?

I think when you're talking about the overall revenue growth model, 8 to 10% is an over time average. So it's just a mix of what's opening this year, what's in the pipeline to open. For example, last year, the Children's First Centers came on and they averaged 40 capacity. So [since] the new center capacity is only one real measure of the top line growth, it's a--sort of a handy metric for new centers. I think if you look at the overall between the number of centers and the capacity adds, it's on the lower end of our general range.

Okay. And then, can you repeat what--the eight new centers that opened this quarter, just how many were Back-Up versus how many were acquired or transitioned? And then, international versus the U.S.?

One was international for the Marine Institute in Ireland. One was a dedicated Back-Up center for Blue Cross/Blue Shield of North Carolina. One was a hybrid, both full service and Back-Up consortium model. None were acquired. I think I hit all your--.

--Okay--.

--Questions.

That's great. Thanks a lot.

Yes.

Your next question is a follow-up from Howard Block.

Hello there. The question is, on the conference call last quarter I think you mentioned the contribution to sales I think of the memberships from--I think you said there were 100 new memberships in consortium centers in the quarter, and 10 to 15% were aided by Children First. Can you update those statistics for the second quarter?

I think, Howard, just to be clear on the last quarter, I think we said we sold 100 new memberships since we acquired Children First.

Okay.

That's including from September of last year.

I got you.

So it really wasn't in the quarter. So we'd have to get back to you if we're going to isolate the second quarter in that same respect.

Okay. So anything, even anecdotally, though in terms of just sort of cross-selling efforts?

Yes. I think, as I said earlier, as we--just as we started out, we've been targeting the Bright Horizons clients that have locations that match up to where the former legacy Children First Centers are. And I think we've sold a good amount, I'll say. We'll get back to you. I'll reserve the right to come up with a number.

Okay.

But a good number of those memberships that we've sold have been directly because of that situation.

All right. And I know it's extremely early for Back-Up Care Advantage, but it's on schedule and you're still optimistic there'll be some traction by year-end?

I think we're going to see some--we've already seen--we've already had some clients sign up, a handful of clients. But the real traction we don't begin--we don't expect to begin to see until 2007 because most of the clients and prospects who are evaluating it are larger organizations that tend to do things on a budget for something like this for next year and they're in that process now. So we expect to see a--the bulk of the clients to sign up in the next few months, and actually start to offer the benefit as of January 1st.

Okay. And Elizabeth, you may have mentioned this before. But I know that, again, on the last call you had attributed about half or something more then half of the gross margin improvement to Children First. Would it be about the same level of contribution again this quarter?

Yes, it's approximately the same level. I think it's starting to get baked into some of the performances Dave's talking about. Some of the cross-selling opportunities. We're seeing some improvement in the overall business from that, too, that's modestly contributing. But I--overall, I would say that the whole Children's First relationship's probably half of the improvement.

Okay.

The rest of it really is--it's strong enrollment--.

--Okay--.

--Across the network and good cost management. And we have been able to maintain 4 to 5% tuition increases this year. That's what we're looking at on average again for the September round of increases. And labor costs remain well controlled.

All right. And then, did you--the revenue results - certainly, it's healthy growth year-over-year, but a bit short of the consensus estimate, and ours as well. Would you say that the shortfall was maybe primarily, if not solely attributable to cost-plus contracts?

With respect to the cost-plus contracts, it's similar - about $1 million or so--.

--Okay--.

--Is my estimate for the quarter of that differential. Otherwise we're in the ballpark to what we thought we'd be.

Okay. And then, the last question for Dave. You had mentioned at the beginning of the call that the 12-month outlook, which I guess is looking forward from sort of July 1st, it sounds as though it's markedly better than sort of the trailing 12 months in terms of openings. Would you care to sort of quantify that? And is it heavily skewed by what sounds like an exceptionally high number of openings coming in the current quarter?

Well, part of the reason why I think it's useful to look at the business from a 12-month forward versus a 12-month trailing is because we have this--we saw the pick up in sales activity and commitments specifically happen at a time where it drove a lot of the openings to the back half of this year. And so, it will look different. And I guess the best way to look at that would be, we would--we have the most certainty of what's going to open in a given quarter, one quarter out. And then, we've got a good--a better idea of what's going to open in the next 12 months. Some of that might move from quarter to quarter because timing of construction schedules is never exact, so we have a little bit of movement.

So as we look at it 12 months out, we get a better idea, rather then trying to fixate on exactly what's--what we expect to open in Q1 of next year versus Q4 versus Q2. And we say that the run rate that we expect to be on in the third quarter, that Elizabeth talked about before from a growth perspective, we think we see that carrying forward for the 12 months going forward. We'll be in a lot better position to comment more specifically on time periods beyond that as the sales activity continues to play out this year and the pipeline builds for openings that aren't going to open until the end of 2007 or into 2008.

Okay. So just one last follow-up on that. So again, the 12-month outlook, it's not just a matter of catch up for what didn't open in the trailing 12 months. It seems as though some of that favorable or incrementally more positive outlook is--it seems like it's as much secular as it is just a catch up?

We believe that, again, the spike in new center commitments started happening last year and it's continuing to happen now. Some of the activity continues to be strong. We can't say for sure that six months from now that we'll continue to see the trend that we're on today. But based on what we see today, we see it as a continuation, not just a catch up, but a continued increase in numbers of commitments as compared to where we were a year and a half ago.

Very helpful. Thanks for your patience, David.

Yes.

Thanks.

Your next question is from Jeff Silber.

I don't know why I had so much trouble getting into the queue, but at least I'm here now.

Sorry, Jeff.

Sorry about that, Jeff.

Just one quick follow-up. You mentioned about labor costs being controlled. I know the Bureau of Labor Statistics measures wage inflation in your sector, and your company doesn't always correlate against that. But some of that has shown slower growth in terms of wage inflation recently. Are you seeing that at all, or is it kind of steady as she goes?

Jeff, our approach, and I think we've talked about this before, is while I think the BLS statistics are useful--we obviously look at them because it's helpful for us to know what's going on in the field. We took the approach years--several years ago that, of course, part of our mission is to keep improving the amount that teachers can earn. Teachers, obviously, are the biggest sector of our employment base and they're also the people that drive the success of our business day-to-day.

And so our--it's an area that's not compensated as well as they need to be. So our idea is that we need to be consistent in getting those folks wage increases. And I think if you look back at the BLS numbers, you'll find years where the industry would have said wages increased--were flat or increased 1% and in those same years we're increasing wages 3 to 4%. And in part, I think that's what's helped us have a smoother landing in the time when I think we saw some wage pressure in certain markets. I would guess the competitors who follow the BLS kinds of increases found themselves with the need to create--have big spikes in what they were paying. And we felt like we landed in a much better situation.

Our outlook for this year is wage increases in the 3 to 4% range. And if--although we're not yet into our 2007 budgeting process, what we see and look out now, we'd say--we would expect wage increases, as far as we can see today, to be in that range.

Okay, that's great. And one more numbers question. Elizabeth, I'm not sure if you had given cash flow from operations in the quarter. Is that something you--that's available?

I don't think that I had cited it, but it's--we're still processing our 10-Q data. So EBITDA is a bit of a proxy for it, although it has options expense in there now. So I know for the first quarter--I don't have that right in front of me, so sorry I can't extrapolate it.

Okay, I've got that data. I guess we'll look forward to the Q. Thanks.

Okay.

Thanks, Jeff.

Your next question is from Jason Anderson.

Hi, Jason.

Bob, that's you.

Sorry about that. This is Bob Craig. Can you hear me?

Yes, Bob. How are you?

I'm doing fine. Most of my questions obviously have been answered at this juncture, but just a gauge of demand. The pace of new commitments or feasibility studies - I think before, Dave, you had indicated somewhere in the neighborhood of 10%. Is that still the case or has that changed much?

No. I think the number that I commented on, Bob, was the earlier stage sales activity prior to commitments. And I think that's up and--I think it's still maintaining itself in the same range as it was before. That is, numbers of new prospects that we're actively engaged with as opposed to numbers of commitments--contracts for centers.

Okay. And I think before we've asked the question of the percentage of centers with waiting lists. Has that changed much? Is it still in the range of 15 to 20%?

Yes, it's similar to where it's always been when we've commented on that recently.

Okay. And a last question. The total capacity of the centers that you will close this year. You mentioned 20 centers. Any rough guess as to what that capacity in aggregate would be?

I could compile it, Bob. I don't have it right in front of me, but I'm guessing that it's around 1,500 or so.

1,500. Okay, great. Thanks a lot.

You're welcome.

Your next question is a follow-up from Kirsten Edwards.

You know what? My questions have been answered. Thanks.

Okay, Kirsten. Thanks.

Thanks, Kirsten.

(Operator Instructions.) At this time there are no further questions.

Okay, Jenny. Well, thank you, and thanks to everybody who joined you--who joined us today on the call. And as always, we're here to answer any additional questions. Bye.

Thanks everyone. Bye-bye.

Thank you for attending today's conference, you may now disconnect.