Bright Horizons Family Solutions Inc (BFAM) 2006 Q3 法說會逐字稿

Good afternoon, my name is Dixie and I will be your conference operator today. At this time I would like to welcome everyone to the Bright Horizons Family Solutions Third Quarter 2006 Earnings Release Conference Call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. David Lissy, Chief Executive Officer. Sir, you may begin your conference.

Thanks, Dixie and hello to everybody on the call today. Joining me as usual is Elizabeth Boland, our Chief Financial Officer and before we get going, I'll have Elizabeth go through some administrative matters.

Hi, everyone. Our earnings release went out over the wire after the close of the market today and it's also available on our website at brighthorizons.com. This call is recorded and is being webcast and the complete replay will be available in either medium. Those wishing to access the phone replay can call 706-645 9291 and use pin code 8563450 and 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 (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 effective of governmental tax and fiscal policies on employers considering worksite childcare; and lastly, the other risk factors that are set forth in our SEC filing, including our 2005 Form 10-K. So, back to Dave.

Thanks, Elizabeth. And again, welcome to everybody who's joining us on the call today. I'll begin with an overview of our third quarter financial and operating results and then I'll talk to you a little bit about our outlook going forward. After that I'll turn it back over to Elizabeth to walk through the results and guidance in more detail.

First, the numbers. Net income of $10 million and earnings per share of $0.37 this quarter, were driven by a 19% increase in operating income. At the top line revenue of just over $172 million increased 12% over the third quarter of 2005. Just to remind everyone, for year-to-year comparative purposes, our 2006 results include stock options expense associated with our adoption of as FAS-123R, which was not included in the 2005 numbers. The bottom line this had the effect of decreasing our earnings per share this quarter by approximately $0.02.

Overall, our operating performance this quarter was once again strong. Our base business continues to perform well with solid enrollment throughout our network of centers and strong margin performance. In fact, center margins this quarter expanded by 130 basis points over 2005 to 19.3%. Overall operating margins rose to 10%.

This quarter we added 21 new centers to our network. They included a diverse array of client's sponsors. The FDIC in Washington D.C.; the Law Firms of Smith Gambrel & Kilpatrick in Stockton and Atlanta; the Capital Metro Transportation Authority in Austin, Texas; the Howard Hughes Medical Institute in Virginia; Stanford Hospital in Connecticut; and the Samuel Goldwyn Motion Picture TV Fund in L.A., just to name a few, as well as several office park consortium centers and small acquisitions.

During the quarter we also closed seven centers. In addition, in September we completed our acquisition of College Coach, which opened up a new and promising market for us in the employer sponsored services surrounding the complicated process of saving for and applying to college. The addition of College Coach on the heels of the launch of our new backup care advantage service last quarter enables us to provide a broader array of services that can touch more of our any of our client's work force, wherever they may live or work.

Going forward, these additions to our service offerings will allow us to further gain competitive advantage and solidify our position as the partner of choice to employers around services that help their working families to better integrate the many challenges of work and life.

One area where we didn't fully meet our own projections this quarter was on the top line and I want to address that up front. In the quarter we landed approximately $3 million short of where we thought we'd be earlier in the year. As most of you know, who followed us over the years, the third quarter is particularly challenging for us as it's the time of year when enrollment in higher preschool ages dips as children move on to elementary school.

Once again, in the first two quarters of this year, we continue to make solid gains in our mature base centers and we're still seeing 1% to 2% higher enrollment levels than the prior year. Therefore, we had a larger group of older children who graduated and although our absolute enrollment still remains above 2000 levels, the seasonal dip was even more pronounced this year than last.

The second factor that's always critical in terms of quarter-to-quarter comparability, as you know is the timing and mix of new center openings. We had anticipated earlier opening dates then we actually experienced for a number of the centers we added this quarter.

The majority of our third quarter additions as well as our acquisition of College Coach happened in September, thus muting our expected offset of some of the seasonal enrollment dip.

Lastly, we once again saw our revenue in the cost plus portion of the business slightly lower than planned, and while this has an effect on revenue, there's no effect on profit, given the fixed nature of our management fees in those centers. In order of magnitude the timing and new center ads accounted for just about half the difference in the projection while the other two factors accounted for the remainder.

As we look ahead, we're pleased to see that enrollment appears to be rebounding at a pace consistent with prior year trends, and most importantly the demand for both our core center base services, as well as our newer service offerings continues to be strong. Our pipeline and new centers under development remains at more than 60 centers. These centers span a range of employers and geographies and provide a solid base for future growth.

Underlying sales activity which is a leading indicator of future pipeline commitments continues to show positive trends, including continued progress in some of the more cyclical sectors, such as financial services and consumer goods.

At the same time, we're maintaining good momentum in the legal, higher education and health care areas. Our new backup care advantage service is being received very positively in the market and we expect to see this begin to make an impact on our financial results in 2007 as employers interested in this service will look to add it in their overall benefits open enrollment period or at the beginning of their fiscal years.

We have a new class of both full service and backup consortiums models under development and rolling out, and see a good market for this in the coming years. With respect specifically to 2006, we expect to add another 15 or 16 new centers in the fourth quarter, which combined with this quarter's additions, will create a strong class of ramping centers as we head into 2007.

Keep in mind though that new commitments being booked now are for the most part for centers that will open 12 to 18 months from now, so we'll be closely monitoring the pace of these commitments which will factor heavily into our growth outlook for the latter part of 2007 and for 2008.

Now let me turn a little bit to our bottom line performance. We continue to draw strong improvements in our operating margins once again this quarter. The main drivers again were first, our ability to increase price over our annual cost increases and to that end our average tuition increases remained in the 4% to 5% range, with wage increases averaging 3% to 4%.

The second is our ability to manage appropriate levels of staffing centers without impacting quality.

Third, the mix of new centers including the addition of the Children First consortiums centers and subsequent ability to sell additional backup memberships in to those centers.

And finally, controlled overhead spending.

The gains in these areas are partially offset by the operating losses that were associated with the newer P&L centers and the associated expense we incurred throughout this year in those centers where we were responsible for the build out of the space prior to the centers opening. In these leases, we begin to recognize rent expense six months to a year earlier than center openings, thus creating operating expense with no corresponding revenue. The other principal effect offsetting the gains in operating margins was again the effect of stock options this quarter.

In summary, we remain very comfortable with our longer term outlook for both growth and profitability and believe that a top line growth rate in the low teens is achievable. As most of you know, however, we continue to roll out new centers currently in the pipeline and to ramp enrollment in new organic centers and with that there remains some potential for quarterly fluctuation in the overall trajectory. Given all this, and estimating the continued revenue effect that's inherent in our cost plus center model, we believe the full year revenue growth will approximate our current run rate and we project that our 2006 earnings per share will be in the range of our current guidance of $1.50 to $1.53.

Looking ahead for a minute to 2007, at this point we would expect to see a slight up-tick in top line growth and continue to deliver on our goal of improving our operating margins.

As we said earlier this year, we believe that a realistic expectation for annual operating margin improvement over the next few years is in the range of 25 to 50 basis points. And while we're still in the process of completing our ground up 2007 budget, our preliminary projection would be for us to achieve operating margin improvement for 2007 in the range that I just mentioned, resulting in approximately 20% EPS growth to the range of a $1.79 to $1.85.

Let me turn it back over to Elizabeth who will go through the numbers with you in more detail and elaborate on the guidance. I'll join you again during the Q&A at the end of the call. Elizabeth.

Thanks, Dave. Again, just recapping the headline results for the quarter. Revenue of $172 million was up $18 million or 12% from the third quarter of 2005. Operating income in the quarter increased to 10% from 9.5% in the same period last year, while net income rose $900,000 to $9.9 million, just shy of $10 million for the quarter. Earnings per share of $0.37 is up 16% from the $0.32 that we reported Q3 last year, and includes as Dave mentioned, approximately $0.02 a share of expense associated with stock option.

The revenue growth is attributable to our new centers under management, to additional enrollment in our core basis centers and to price increases which do continue to average between 4% to 5% annually, close to the budgeted levels that we had told you about before. In addition to the revenue growth from centers added in 2004 and 2005, they continue to ramp up their enrollment. The third quarter of 2006 includes approximately 8.5 million from the 33 Children First Centers that we acquired in September of 2005, compared to about 1.5 million that we included last year.

As Dave discussed, our revenue growth this quarter was below our projected range by about $3 million, due to the timing of new center openings during the quarter, coupled with slightly higher enrollment turn in the older preschool ranks as we entered the fall enrollment season. And to a lesser extent, lower revenue from certain cost plus contract centers.

As we previewed last quarter, we expect that our new center openings to be back end weighted this year, but we did experience some slippage of several centers that were slated to open earlier in the quarter and even a few that are now slated to open into Q4.

In addition, the relatively higher level of center closings this year, which have totaled 21 through September, has also contributed to a drag on the top line growth rate as this group of centers contributed over $3 million more in revenue to the third quarter of 2005 than they did in 2006. As we previously discussed, we had decided to close a number of underperforming centers that we acquired as part of larger groupings over the last several years in the U.K. and that has contributed most specifically to the increase in total closures this year.

As Dave mentioned, enrollment in our core based business continues to trend above prior year levels, with our mature P&L centers showing modest gains in 2006 over 2005 levels of 1% to 2% in total enrollment.

Shifting to margins, the positive trend in center margin improvement continues this quarter with margins increasing to 19.3% for the quarter versus 18% last year in the third quarter.

Dave reviewed the primary factors in improved margins, notably strong execution in the core business fundamentals, contributions from our consortiums backup, and solid enrollment across the core basis centers. Offset by the pre-opening in early stage operating losses in a relatively larger group of P&L contract centers we are opening this year.

To give you some context for that, we've opened 10 of these centers so far this year and have approximately 10 additional in the pipeline to open over the next 6 to 9 months, compared to only a handful affecting 2005.

SG&A as a percentage of revenue of 8.9% for the third quarter of 2006 was essentially consistent with the first half of the year and increased 70 basis points from the 8.2% we reported in Q3 of 2005.

The incremental overhead associated with the acquired Children's First Centers contributes about half of the overhead increase as a the percentage of revenue and stock option expense of approximately 600,000 represents the remainder.

We continue to project total expense of roughly $2.7 to $2.8 million for options in 2006, of which $2.4 million will hit the overhead line.

We've already begun to see some overhead leverage in the Children First business as that integration has been completed and we expect to further leverage over head in future years once the effect of these initial year items and acquisitions are embedded in our full year run rate.

Amortization of identifiable intangible assets totaled approximately $850,000 in the third quarter, and we now project amortization to approximate $3.4 million for the full year, reflecting the full quarter effect of acquisitions made late in the third quarter.

With ongoing investments in the business through new center investments and acquisitions as well as regular stock repurchases, we have also been a borrower under our working capital line of credit and are therefore reporting net interest expense this quarter compared to a net interest income figure in the same period of 2005. Our strong financial performance so far this year has driven a 20% increase in EBITDA, to approximately $66 million for the 9 months, while capital spending totaled $10 million for the quarter and $24 million year-to-date.

We ended the quarter with approximately $8 million in cash. Weighted average shares decreased in the quarter to $27 million, due to share repurchases made under our existing stock repurchase program. During the third quarter of 2006, we acquired 217,000 shares for approximately $7.3 million, and we've now acquired a total of 1.35 million shares this year for a total of approximately $47 million. At the end of September, we therefore had 2.8 million shares remaining in the share repurchase authorization adopted by the Board of Directors in the second quarter.

We expect to continue to be active in this program making open market share purchases to judiciously deploy portions of the cash we generate from operation. Based on current cash balances and cash flow forecasting for the remainder of 2006, we would expect to see net interest expense of approximately $500,000 in Q4 2006, with a gradual reduction in 2007 as cash from operations absorbs the short term borrowing.

Now let me recap our usual operating statistics. At September 30, we operated 629 centers, with 68,200 total capacity. Approximately 60% of our contracts are profit and loss; 40% are cost plus. Excluding our backup centers for whom center capacity is less central to the relative operating performance, the average capacity per center remains at 130 in the U.S. and 58 in Europe.

Dave previewed you on our guidance for the rest of this year and I'll expand on that now.

As a general observation, we estimate, as I said, that stock option expense will reduce 2006 net income by approximately $2.1 million, that's net of tax effect or about $0.075 a share. Given the options currently outstanding and what we project to grant for the rest of this year. A large portion of the options are not tax deductible. The adoption of FAS-123R has therefore also increase overall effective tax rate in 2006 and this element is factored in to the $2.1 million net of tax figure I just noted.

Our growth outlook for the remainder of 2006 includes the contributions from additional centers under development that will open in the fourth quarter, as well as incremental growth in enrollment and membership sales in our existing basis centers. Based on our estimates of the timing of this new business, we expect revenue growth to approximate the current run rate for both the fourth quarter and the full year of 2006.

We expect to sustain the operating margin in 2006 and are projecting to expand this by 50 to 60 basis points for the full year. Once again after factoring in options expense around 10.25% for the year.

Our projections include assumptions about the variables and impacts center margin such as tuition pricing power, 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 later this year as well as into early 2007.

So with an effective tax rate of 42% and 27.4 million shares outstanding for the full year, our projected EPS is in the range of about $1.50 to $1.53 for the full year, which implies Q4 2006 EPS in the range of $0.39 to $0.40 a share.

We're currently completing our annual budget process and we'll come back to you next quarter with more detailed guidance for 2007, but in terms of our general outlook, the pipeline of new centers under development and the ramp of newer [inaudible] centers will clearly be the key contributors for 2007 performance.

We expect to continue this year's revenue growth performance and considering the variables that impact margins, such as the ones I just mentioned on pricing power, labor management and personnel costs, enrollment levels, contract mix, timing of openings, etc., we believe that we will generate 25 to 50 basis points of operating margin improvement in 2007.

The combination of top line growth and margin leverage leads us to project EPS in the range of a $1.79 to $1.85. And for the first quarter of 2007, we're estimating EPS in the range of $0.42 to $0.43 a share. So with that, Dixie, we are ready to go to Q&A.

Dixie, just a quick reminder - we're only showing one person in the queue, so I just want to remind - that looks a little low to us. So if there's some problem with technical difficulties I just want to remind you to instruct people how to get into the queue. That would be helpful. Thanks.

[OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q&A roster. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Howard Block with Banc of America Security.

Good afternoon, Dave and Elizabeth.

Hi, Howard.

Hi, Howard.

Elizabeth, just maybe revisit the fourth quarter revenue guidance that you use a new terminology for me in terms of run rate. I just want to instead speak in dollars in growth rates or can you put it back into the historical context that you normally do?

Well, now you lost me Howard.

When you say run rate - can you specify normally you would give us a more exact figure or growth rate or something for a quarter of revenue.

Yes, well the growth rate for the current quarter is rounding to 12%, so that's a general range that we would be at currently looking at a similar performance in Q4 to what you're seeing in Q3.

Okay. And then Dave, you said in your opening comments that it would be fair to expect - and I think you're only words were and I think I should quote you on was "slight up-take in revenue growth". Does that mean sort of modest acceleration from the 12% growth rate that we may exit 2006?

I think that's a fair way to put it, Howard.

Okay. And then Elizabeth, you also mentioned that - I think you quantify May for the first time I recall, the revenue contribution that was sort of lost in the quarter from centers that had closed.

Right.

So the 7 that closed offered $3 million more revenue into 3Q 2005 than those centers offered in 3Q 2006. Is that right?

It's not just the 7, that quantification was trying to look at the class of centers we closed this year, and so-

Oh, I see.

The magnitude - the centers that we closed this year had $4 million last year and they are only contributing as they tailed out this year $1 million.

Okay.

And the reason I mention it is that it's a much larger affect than what we saw for similar class at the same time of year last year. Overall for this year it's about double the revenue effect on the numbers of centers that we've closed this year versus last year. So I thought was an important element of the drag on the growth rate, although it's not something that we weren't forecasting into results. It's a factor in the overall growth rate.

Okay, and so is that - let's call it per closed center contribution or something. Is that statistic a bigger number this year? Not in total, obviously, you said is, but are those centers on a per center basis? Were they just larger than the ones that closed last year? Was there something abnormal about the contribution from close this year versus last?

No, it has to do with the time when they open, because the number centers that came from the U.K. In fact, the average is probably slightly smaller than our overall average. I think it's more the timing than it is anything else and when they are closing in the year that it just has a bigger effect this quarter.

Okay, just a couple more and I'll jump back in the queue. So when a center does not open on time, let's say, or on your plan and it opens let's say in September or late September, versus let's say August or July, it would seem to me that there are some parents who would be forced to make alternative arrangements for school starting for their other kids and so forth, and they may opt to choose an alternative to you because you haven't opened the doors yet. Does that ever happen? Are you able to recapture those lost customers?

Howard, I think it does happen. I think it's -- usually we are able to recapture them because the slippage is - before a parent is thinking they're going to enroll - slippage is a month to so or even six weeks, eight weeks. Usually they're in some sort of care currently switching to us and they're usually able to maintain that current care or find alternative care until the center opens. So, it is fair to say there are times where we may have to wait and delay - it takes longer to recapture that enrollment, but usually we're able to maintain it.

Okay. And lastly again, I think you both answered this question, but my notes are so bad. The order of magnitude in terms of the contribution of the shortfall was first, timing; second, kids graduating; and third, cost plus?

Yes. That's exactly right. You may want to just kind of specify or maybe give a sort of more clear example about what we mean about kids graduating, in that it was the steepness of the effect of that relative to prior year.

Yes. And because we, of course, have been digging in on this ourselves and analyzing and I think this example is simplified, but if you're looking at a center that has say four more children, four more FTE's this year than they had last year and the enrollment decline as some of the preschoolers graduated, the estimate of that goes from four down to one or two children. We're still at an enrollment level that's above prior years, but the numbers of children that dropped off may have dropped down by two or three, rather than - last year we may have been up three and then dropped one. Or we were up three and dropped two rather than three.

And across the system, because we have a high cost, low numbers of children if you will, service that we offer and tuition is in the neighborhood of $1000 to $1200 a month, those elements can have a fairly large effect across the system when you're talking about one to two children across the number of centers. And in some centers it was more than 1 to 2; in others it was less.

It's that kind of order of magnitude where the reduction in enrollment from the second quarter, if you will, to the third quarter fall enrollment season was a bit more, even though our enrollment levels continue to be above prior year levels. And so we see strong enrollment in the base and 1 to 2% more enrollment overall, though we did have the decline that I'm describing in that example.

Right. Very helpful. Thank you.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

It's Jeff Silber. Thanks for taking my question. I know you said next quarter you're going to give a little bit more granularity in your 2007 guidance. Roughly, in terms of net new center openings for next year, should we see that accelerate compared to what you've had in 2006?

I think, Jeff, you'll see some modest acceleration in that comparatively to 2006. I think probably more importantly is that I think we'll see a return to a more normalized timing of openings in the year. As you know, this year was heavily back end weighted and I think next year we'll see a more normalized quarter over quarter openings, at least on what we have visibility of today. And lastly, we'll also expect to have fewer closes next year than we had this year because of some of the deliberate approach we took in the UK.

Okay. Actually that was my next question. And just a follow up on the closing. I think last quarter you were expecting roughly 20 centers to be closed in the year. You're already there. Are there going to be any centers closed in the fourth quarter you're aware of?

There'll be a few more in the fourth quarter; probably end up being another two or so that will close in the fourth quarter.

Okay. Great. And just a couple numbers details questions. You had mentioned that you had a debt balance. Can you roughly quantify roughly how much the debt balance was at the end of the quarter?

Yes. We have about $20 million outstanding on the line, rough figures at the end of the quarter.

And how large is that line?

The line itself is $60 million and we have an accordion feature that takes us up to $100.

Okay. Great. And then in terms of the 600,000 in stock option expense, is the bulk of that on the SG&A line again?

This $600,000 is SG&A. There's another $100,000 or so that's in the center costs. [inaudible-overspeaking] So it's $700,000 --

Okay. I'll let somebody else jump on. Thanks.

Your next question comes from a line of Jerry Herman with Stifel Nicholas.

Stifel Nicholas. Good afternoon, everybody.

Hi, Jerry.

Question with regard to the closures. You guys mentioned that a disproportionate amount of those are in the U.K. Could you specifically state how many are in the U.K. and how many in the U.S.? And are there characteristics of the U.S. closures worth noting?

There are 7 so far for the third quarter in the U.K. and we expect one additional there. So, approximately 40% 35%, 40% of the closures will be in the UK.

And then Jerry, with regard to your -- second part of your question -- in U.S. there's no real difference in the -- if you look at the group of closings, roughly 15 or 16 that will be in the U.S. this year, which is pretty much on historic run rate. There's no real difference in terms of numbers of closings that are just our normal things happening. There's no real difference in the reasoning, why centers are closing. In certain cases we have been merged out of locations based on our clients going through mergers and acquisitions and downsize sites.

In other cases, we've seen some downsize in the sites that have nothing to do with mergers and acquisitions. In some cases the centers are underperforming and coming to the end of their long term lease and we'll decide to close or relocate them. And then, every once in while there is a situation where a client will decide that a center no longer makes business sense for them. Those are pretty much the reasons as I think back over 10 years that we've closed centers.

With regard to that Dave, can you give any insight on what you might be expecting out of some of the automotive companies, given their cost reduction announcements in light of the deal that you sign with UAW Ford a couple years ago. Any visibility on that piece of business?

Yes. I think we're obviously - we've been watching those centers closely and that contract closely. Our contract is through 2007 in that case, and it syncs up consistently with the overall UAW contract, both with Ford and GM, which comes up at January 1 of 2008.

So, I think the centers are all doing well. There's been some enrollment here and there and there in that cost plus grouping of centers, so part of the fluctuation in revenue that we talk about in cost plus comes from those centers as well as from many other centers. We really don't have any new information in terms of what's going to happen after 2007. We're obviously working closely with our client there and as the year progresses next year; my guess is we'll have a little better visibility on that as we head into 2008.

Dave, you mention the pipeline numbers which you guys do. In the past you talked on occasion about inquiry levels and feasibility studies. Any sort of read there?

Well, just as I commented earlier I think the underlying sales activity that generates commitments that go in the pipeline is as robust as it's been since we started talking about the uptake in activity a little over year ago. So, I think the good news for the future is that we are seeing strong client interest across a lot of sectors and that's evidenced by not only by the centers we're opening now and the things that will open in the tear term -- in the next few quarters but also on the front and in terms of feasibility studies and all the things we look at internally to give us the indicators for what the pipeline might continue to look like going forward.

Thanks. And one last question, maybe for Elizabeth. I guess I'm wearing down today, but I'm trying to understand this churn issue. Definitionally, you count an enrollment regardless of the amount of time they're there, or differently based on your comments does that mean that the older student generates more revenue?

No. We count - when we're talking about enrollments, its full time equivalent enrollment, so that's the equivalent of a child who's in a center at a full time 8 to 9 hours a day. So-

Every day?

Yes. The preschoolers, it's not so much that they generate more revenue as much as when a preschool class is fuller, the ratios that a preschool class operates are less intensive than younger age groups. There are -- tend to be 20 in a group and a classroom of 20. So you have the opportunity to have more than the age that they're graduating.

Not sure of that quite answers your question, but there are a class of five children might leave a center at the same time and in estimating that you're keeping every four year old, we might be off on that by one or two children. So, if we have five more, four more enrolled children and three of them leave, then we have two more than last year, but we are still down more than we may have estimated.

Jerry, just reiterating what was said earlier in getting back your question. It's a full time equivalent, so in effect we serve more children than we have FTE's.

Right.

We do have some part time kids as well.

Got you. Okay. Thanks guys.

Yes.

Your next question comes from the line of Mark Hughes with SunTrust.

Thank you very much. Looks like you added about 2% to your seat count sequentially which is a very good number. Any specificity you can give on fourth quarter when you take into account the closures and what you've got that you anticipate will open in the fourth quarter how might that seat count will look at year end?

Let me just see if I can look that up, Mark. I don't know if you have another question you can throw out there while I check that out?

No, in fact, I don't. So if you come back to it, that's fine.

How about if we calculate it, Mark, and circle back to your question?

Yes, that sounds good. Thank you.

Okay.

Your next question comes from the line of Kirsten Edwards with ThinkEquity.

Hi. Can you guys break out the new centers that you opened in the quarter? How many were consortium verses backup versus a single sponsor model?

Kirsten, in the quarter we didn't open any backup centers. So, actually all 21 additions were full service centers. And in terms of consortium full service centers - I'm just going to need a second to pull that stat out for you. I think roughly 80% of the ads were P&L vs. 20% management contracts. We'll get you the consortium number in a second as we pull that up for you.

Okay. And in the past you've talked a little bit about the consortium centers having longer ramp up times than the single sponsor centers. Can give a little more color on how long that you estimate that to be verses what it is for a single center?

Well, in general we would look to see a consortium full service centers become mature in their third year of operations. As we've talked about in the past, it's going to lose money. When we're on the lease, we actually start incurring expense when we occupy the space to do the build out, which is about six months to a year prior to us actually opening the center.

So as I said in my comments earlier, we're incurring more of that expense because we have more of those that were doing now and then once the center opens we incur some operating losses; the rent is still obviously an expense, and we have operating losses. If we look at the class as an average, those losses, we'll lose money in the first year and ultimately get to a place where we're breaking even in 18 months or so. And then ultimately getting to where our expected operating margins are for these centers in the third year of operation.

And as we talked about before, of course, where we are committing capital to a project, we have higher expectations with respect to return on sales than we do when obviously we don't put in any capital. So when I say ramp up, it's ramp up the higher margin that we expect out of it.

Okay. Great. And how does that compare to your single corporate sponsor?

In a corporate sponsored model we can do a lot better than that. In fact, the P&L single corporate sponsor model, we may be able to shave up to a year off that schedule, depending on the actual site. So it's just a far more - you sort of have a baked in partner who has a lot of incentive to have the enrollment, kind of a captive audience. You're assessing the demand prior to sizing the center and you have a head start with a captive audience on marketing.

And in a consortium model, some of that is true because in many cases we have part of those spaces with several client partners. But also, it's just more of a complex marketing process and some of it is community enrollment as well in certain cases and then obviously it takes a little more time, too.

What you end with the real issue as it relates to ramp up is getting full in your older age groups and there's - typically in most sites we enter, whether it's with a client or whether it's in the community, there's lots of pent up demand for infant and toddler and younger age groups. Because that's where the supply is shortest in virtually every community around the country. And what ends up happening is when you have children who are already in a preschool, where the client says a lot of times they'll move for convenience, but it's a harder move for a parent of a four year old who might have been with a program for a while and more than not we're having to grow our own and so that's why in the third year of operation we'll have the time for those toddlers and those older infants to become preschoolers and stay with us.

Got you. Okay. Great. Thank you.

I'd like to cycle back on Mark's question before the sequential growth into Q4 estimated - it's just under 2%. It's about 1.75% adds to the next capacity.

Okay, Dixie, we're ready for our next question.

Our next question comes from the line of Michael [Lessier] with Lehman Brothers.

Hi, guys.

Hi, Michael.

We know it's Lessier.

Yes, that's what they call me in France. Lessier. Historically, the model has been 8% capacity addition, 1% to 2% mature center ramp in 4% to 5% drive pricing driving mid-teens revenue growth. Should we be thinking about the model differently moving forward? Do you feel like the market is more penetrated that will limit the ability to get future capacity addition?

I think that where we are right now is in a stage of developing the openings of all those centers that we've been talking about; the pipeline growing and the recurrence of the reinvigoration of client commitment to this actually over the last couple years. We have a long sales cycle. We have a long opening cycle. And we're now, you're seeing in this quarter a number of openings; you're seeing next quarter a number of organic openings.

And that's the biggest part other than rate and ramp, obviously part of our top line growth is coming from the new center additions in that way. So that factor is a bit lower these quarters than we've seen, but I think looking forward is where we see that coming back and the ability of the organic centers that are coming in opening with 10, 20, 30 children and ramping up to their full enrollment, being more contributory year over year as they reach full enrollment capacity.

I think I would just add to that, Michael, that as you look back on our year this year, you can see that given the back ended nature of the openings we have, we haven't had a class of ramping centers in a while like we're going to have going forward. And all that's going to take some time to manifest itself. It's a little easier to achieve the overall growth rate acceleration when you're having more of a contribution from your ramping class than we've experienced in the past 12 months.

So, I think that will be different going forward. And I think the other difference will be our ability to continue to execute on the backup advantage and the additional membership's spaces and consortiums centers and that will be another element of our growth going forward. It really won't manifest itself until 2007, but it's another dynamic that I think will be important compared to historical metrics.

Can you offer some additional details on the College Coach acquisition? Perhaps, a purchase price or expected revenue contribution?

We had disclosed the revenue contribution and approximate run rates at about $6 million.

$6 million?

Yes. And they do generate similar higher level margins than our overall child care center business, not unlike the backup care business after a slightly more intensive overhead factor. So, they're at a run rate of about $6 million. The acquisition will be disclosed in more detail in the 10-Q.

Okay. I just - the contribution in the quarter. Is there seasonality?

Not dramatic seasonality. Of course they have - their business tends to run from when the juniors start to get interested in the spring and then through the end of the year, so maybe their first calendar quarter isn't their most robust, but other than that it's relatively stable.

What drove the delay in the new center openings?

I think was a combination of factors, Michael. As we said before, in many cases the actual openings or construction process is out of our control. There are certain cases where we're actually hiring those folks and we do have some level of control with consortiums, but client sponsored centers it's a little out of our control. So if I look at it in retrospect and look at what happened, I would say it's a combination of just some planning to open sooner than what proved to be realistic due to final construction things that needed to happen, to get the C of O. Once you get a C of O, you typically have a 30 day window to get the center license, to occupy it, train staff, and open.

And all those - there was some moving parts in that process in a number of different centers that created the delays. Of course, as we go forward, given that this is -- we've had a bigger class now than we've had in a while. So the effect gets larger when you have a lot of these micro delays. So we're being a little more conservative in terms of our estimation of when these centers are going to open and try to bake some of the delays into our forecasting going forward, as you might expect.

In the 15 to 16 centers that you talked about opening in the fourth quarter, is it net of closures or gross?

That's a gross number of adds.

Okay. And historically, you guys have done a good job of selling additional centers to existing clients and it seems like in the past couple years that has slowed. Could that be an area of growth in the future?

Well, I wouldn't say it's slowed. I would say that it's an area that we've been working a lot on. When you look at what's in the pipeline today, we've got about 25% of the commitments are for new centers for existing clients and when I talk about the activity levels, I should say that that's inclusive of both activity with prospects and with clients.

One of the big trends that we've seen over the course of the past year, year and a half, and we think we responded to it really well, is that clients are now evermore focused on providing solutions to more of their employees, wherever those employees might live or work. And the fact that in the past our business has been largely only about centers in certain sites and by nature of that kind of service, it only can affect that particular work site or maybe a couple of the surrounding close work sites.

Now, with the addition of the Children First Membership consortiums centers in the larger cities, we have a broader offering and we sort of completed the gap with the launch of backup advantage. And so the reason for really doing backup advantage and the logic of the continued strategy with backup care on the heels of Children First, is really in many ways to both deepen the relationship we have with clients, because they're telling us they want to now bring child care solutions to more of their employees and this is a way for us to touch virtually all of them, wherever they are. So that's really what's been afoot.

That will help us win new business because it helps us get over the equity objection we get from time to time when clients are saying, well, we want to think about center, but we're worried that some of our other employees will have a little bit of envy over what one site might get and now we can initially offer - we can overcome that by offering the backup care advantage service. And for existing clients, it just helps fills the gap for what already exists.

Last question. Can you offer any color on how backup care advantage is going?

I think I offered in my opening comments that we've been very impressed with the level of interest in backup advantage. I think I was at a meeting of our sales team yesterday, where I spent half a day with them, and I think it's safe to say that there's good progress being made and we'll be in a much better position to comment on that when we talk to you next. As I said earlier, we expect to have its impact on our financials beginning in 2007.

Thank you very much.

Thanks, Michael.

The next question comes from the line of Brandon [Dobell] with Credit Suisse.

Thanks. A couple quick ones. Elizabeth, maybe you could quantify the impact College Coach business has assumed, either in Q4 or for your 2007 thoughts. And then kind of leveraging on Howard's earlier question about the impact of the timing issue and things like that versus revenue impact, what would the profitability impact have been with the stuff kind of moving around. If you could quantify that? And then finally is there any difference between a backup center for consortium deal and a backup center for a single client?

Can we work backwards on that?

Yes, I would imagine so.

I wrote them down in that order

Either one first is fine.

I'll answer the last one and let Elizabeth go from there.

Perfect.

There is a difference with respect to backup centers for one client versus a consortium. There's obvious differences in the characteristics of those centers. You're dealing with 20 to 30 different client plan sponsors versus one. But from a financial point of view, the difference is you can think of a single site backup center, all the ones we do for J.P. Morgan Chase or Land's End or PNC or whoever might be - very much like the cost plus full service center in that we get paid a management fee. It's a cost plus arrangement.

Our margins are higher than our full service cost plus management contracts simply because it's a lower revenue model. So you're going to see approximately 20% margins on those cost plus centers, but on roughly about a $0.5 million in revenue on average in a single client managed centers. In terms of the consortium centers, where we are kind of aggregating the needs of a variety of client's sponsors, the margins are higher than the single site center.

Of course, from a revenue standpoint they're about double the size of roughly about $1 million in revenue per consortiums center. And then depending on where we are in terms of the amount of memberships sold in any given center, the gross margins are in the 30% to 40% range on that model, although it's important to note that as we do our own cost accounting, there is incremental overhead associated with the consortium's centers. It's a lot easier to manage and deal with one client than it is to service the needs of 20 or 30.

Right.

So we have more intensive overhead on the consortium centers. Still a better after overhead margin, but a little more on the overhead line than the managed centers.

Thank you.

And so, let me take a stab at the others. The College Coach question I think would quantify the effects either in the quarter or fourth quarter of the year.

Right.

The annualized revenue in the neighborhood of $6 million is going to generate an operating profit in the neighborhood of 15% to 20%, so that's after their incremental overhead and they have somewhat higher margins like the backup care business Dave just described. So, it's certainly contributory in that way.

So in the fourth quarter we're at a magnitude of $1.5 million of revenue and it was a slight contribution in the third quarter, but not large, for just the one month they were in there. Next year, we certainly have hopes and expectations that we'll be able to drive some additional services through this business, but at this point the $6 million seems like a good estimate for next year cause it's the current run rate and we'll give you more as we see again on the year cycling how they're doing - selling into some of our network in their own new business development.

Okay.

On the timing of openings and the effect of that, there's a lot of moving parts there, but if I were to try to quantify the effect of both the delay in centers where we have these organic P&L centers where we have responsibility for the leases and a pre-opening costs, those all continue while we work to get the center through all of its licensing and construction delays and what have you. That is offset by centers that have a cost plus component and if they delay, then we have profitability right away. So overall, I'd estimate that we probably have .5 million or so of less contribution coming in as a direct result of those delays.

Okay. Great. Thanks a lot.

Yes.

Your next question comes from the line of Mark Hughes with SunTrust.

Thank you very much. Anything you can say about the acquisition of prospects? Did you acquire any centers this quarter? What's your appetite going forward?

I think, Mark, as we said before, our appetite is still that we expect about 1/3 of our growth over time to come from acquisitions and feel like the environment and work that our team has done through the pipeline gives us that understanding that that's achievable. As you know it's always going to be lumpy. We're not the position to predict exactly when they're going to happen.

We did have some smaller acquisitions in this quarter that also require a College Coach. Although I put that outside the realm when I talked to you about 1/3 of growth coming from acquisitions. That sort of one-off was a new business opportunity for us. But I would say that the environment remains pretty similar to what we talked to you about in the past and our appetite still remains the same and we're going to continue to be optimistic and proactive in that way.

Right. Is there any private equity out there that's buying day-care centers?

Not that I'm aware of. Some of the larger child care chains are owned by some private equity companies that have been in there for a while; some buyout firms that have been into them for a long time. So, we've always competed with the larger chain for acquisitions and still probably will going forward here and there. Not all the time. It could be a different one in a different place and sometimes they won't even be in the mix. We're not seeing other newer ones.

Would you consider buying any of those bigger chains?

Unlikely.

Okay. Thank you.

Your next question is a follow-up from the line of Kirsten Edwards with ThinkEquity.

I'd like to add to my question about how many consortiums centers were open in the quarter. Also if you could give us how many were organic versus acquired.

Yes. Roughly 9 of the 21 would be organic and the rest would be acquired, where we assume the management of centers.

Okay. Great. Thanks.

Sure.

You have a follow up question from the line of Jeff Silber with BMO Capital Markets.

Quick ones. In terms of CapEx, I think you had guided initially for the year about $20 to $22 million, and it looks like you're there already. What can we expect in the fourth quarter?

Probably another $5 million or so. Getting close to $30 million for the year.

Okay. And how about in terms of preliminary guidance for CapEx for 2007?

I expect it to be back at the range that we guided for this year, more like $20 to $25 based on what we have in the pipeline and the staging of those. I mentioned that we have 10 centers slated to open over the next 6 to 9 months that we are already in the process of starting to spend some of the capital. That's why we would expect it to come down somewhat.

Okay. Great. And also, in terms of the share count for the $1.79 or $1.85 for next year, what should we be looking for?

I would expect overall, because the effect of interest needs to be considered as well on the use of cash, looking at shares next year in the neighborhood of the same number that we have outstanding for this year, 27.3 to 27.4. The share buyback is certainly accretive over time but it is very modestly accretive quarter to quarter once you factor in the interest costs. So I would not assuming any further share repurchase in that figure, just having the offsetting effects of options being exercised and what have you, and 27.4 average for the year.

Okay. That's helpful. Thanks.

Yes.

There are no further questions at this time.

Okay, Dixie, well thank you for your help moderating the call. We thank everybody who's joined us today and as always Elizabeth and I will be here to answer your follow up questions. Take care.

Thanks. Good night.

This concludes today's conference call. You may now disconnect.