Bright Horizons Family Solutions Inc (BFAM) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Bright Horizons Family Solutions fourth quarter earnings release conference call. Today's conference is being recorded. For opening remarks and introductions, I'd like to turn the call over to David Lissy. Please go ahead.

Thanks, Steve, and greetings to everybody from frigid Boston. Joining me on the call today is Elizabeth Boland, our Chief Financial Officer. And we'll begin today, before I get going, with Elizabeth going through some administrative matters. Elizabeth.

Hi, everyone. Our earnings release went out over the wire after the close of the market today, and it's available at our Website at www.brighthorizons.com. This call is recorded and is being Webcast and a complete replay will be available in either medium. Those who would like to access the phone replay, can call 719-457-0820 and use pin code 7354961. While the Webcast will be available at our Website under the Investor Relations section.

In accordance with Regulation FD, we use these conference calls and other similar public forums to provide the public and the investing community with timely information about our business operations and financial performance, along with our current expectations for the future. We adhere to restrictions on selective disclosure and limit our comments to items previously discussed in these forums. Certain non-GAAP financial measures may be also 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 liking statements made during this conference call include; One, our ability to execute contracts for new client commitments, to enroll children, to retain client contracts, and to operate profitably abroad. Two, our ability to successfully integrate acquisitions. Three, the capital investment and employee benefit decisions that employers are making. Four, the effect of governmental task and fiscal policies on employers considering worksite child care. And lastly, the other work risk factors, which are set forth in our SEC filings, including our annual report on Form 10-K. And now, back to Dave for the body of our remarks.

Thanks, Elizabeth, and hello everybody who just joined us on the call. Let me begin today with a recap of the fourth quarter and our fiscal year 2006 performance. I'll update you further on our current outlook for 2007 and beyond, including touching on the overview of the impact of the previously announced UAW Ford center cutbacks. Elizabeth will then go through a review of the numbers, including our detailed guidance for 2007.

For the fourth quarter, revenue of $181 million was up 11.2% from 2005. While operating income rose to $19 million from $16 million in last year's fourth quarter. Net income in the quarter of $11 million was up from $9.8 million in 2005's fourth quarter, resulting in earnings per share of $0.41, a 17% increase over last year. For the full year 2006, revenue of $698 million was up 1%. While operating income was of $72 million was up 18%. And net income of $42 million produced earnings per share of $1.52, up 18% over 2005.

Once again, as a reminder for your year over year comparative purposes, our 2006 results included stock options expense associated with the 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 by approximately $0.02 for the fourth quarter, with a total effect of just over $0.07 for the full year. Overall, our financial results in 2006 were once again strong. We added $70 million in new revenue and continued on our long term plan to improve our operating margins, which increased 55 basis points over 2005 levels.

The revenue growth rate was slightly behind our original expectations at the outset of the year, due mainly to the timing of new center additions in 2006 being more heavily back weighted in the year. The effect of lower revenue than expected in our cost plus models. And lastly, a slightly higher number of closed centers driven by our pruning strategy in the U.K. On the margin side, we finished the year ahead of our original expectations, which was the result of strong performance on the center line, combined with modest cost leveraging at the overhead line, offset by the impact of stock options expense, which as you all know, primarily hits us at the SG&A line. All in all, income from operations grew by $11 million during the year to $72 million.

During 2006, we also made significant investments in our future growth. Deploying approximately $25 million in capital for new consortium center development and expansions, and $20 million for acquisitions. While at the same time we returned $54 million to our shareholders through the repurchase of 1.5 million shares under our buyback program. Our return on equity is further increased this year to 19%. At the end of the year, our balance sheet is strong, and the cash flow dynamics of our model will continue to enable us to make strategic investments in our future that we believe produce increased shareholder value.

As I review 2006 and look at 2007 and beyond, I thought I'd frame my comments today around the key elements of our business strategy, which, to review are; First, identifying and executing on growth opportunities, including logical extensions of our service offerings. Second, achieving modest but sustainable margin improvement. And lastly, enhancing our competitive advantage based on the quality of our programs and services and our position as the employer of choice in our field.

We would expect that our growth in 2007 and beyond will be driven by four primary factors. First, the addition of new centers and schools, both organically and through acquisition and expansions of existing ones. Second, consistent tuition and price increases. Third, the ramp up of prior year classes of immature centers and marginal enrollment increases in our mature base. And, fourth, the growth of our new suite of back up services and College Coach.

With respect to the new center additions, we've added 36 new centers in the past six months, which compares with 13 centers added in the six months prior to that. We're seeing the effect of the upswing in sales activity manifest itself in new center adds and expect this to continue through 2007. These additions from the past year, coupled with the new center openings we expect in 2007 helped to form a solid class of ramping centers, which will contribute to future top and bottom line growth. Perhaps the best illustration of this is our ability to maintain a strong pipeline of more than 60 centers under development, even as we've opened a significant number of centers in the past six months.

In addition, we'd expect that as we look ahead, that approximately a 1/3 of our growth over time will continue to come through acquisition. While the field of potential buyers has increased somewhat this past year, the market remains highly fragmented and continues to present a good opportunity for us. We're also encouraged by the financial strength of our consortium full service and back up group of centers, and will continue to add to that portfolio in 2007. Tuition increases averaged 4% to 5% this past year and we expect that to continue through 2007.

We've also recently taken some exciting steps to both enhance and expand our scope of services. This past summer, we launched our new Back-Up Care Advantage service, or as we like to call it here BUCA . This new program enables us to provide a broader array of services including Back-Up Care for child and elder care, through the Bright Horizons network of centers and through other select in home and center based providers. It also enables us to reach a greater number of our clients workforce wherever they might live or work. This new service has taken off rapidly and has been adopted by over 40 clients since its introduction in July of last year.

In addition to the incremental business this will bring to us, BUCA also plays an important strategic roll in helping employers to provide a solution that can reach the vast majority of their workforce, thereby advancing the sales process for new centers and our other services. In September, we also completed our acquisition of College Coach, entering the new and promising market of providing employer-sponsored services that assist families in navigating the complicated process of saving for and applying to college.

Together, these two expansions of our service offerings allow us to gain further competitive advantage and solidify our position as the partner of choice to employers for services that help their working families better integrate the challenges of work and life. While these new service offerings are admittedly smaller revenue generators than our core center base business, they produce strong operating margins and will continue to have a greater impact on our results as this year progresses and over the next few years.

Let me move on to my second point, achieving operating margin improvement as we grow. As I mentioned at the start, in 2006, we achieved a 55 basis point increase in our operating margin, even after you include the dampening effect of stock options expense. This past year is the latest in a succession of several years of strong operating leverage.

As we look ahead to 2007 and beyond, we would expect we'll be able to sustain modest margin expansion for the foreseeable future through the following operating strategies. First, competitive pricing. As I mentioned a moment ago, we expect annual tuition increases in 2007 to approximate 5%, continuing to outpace our average personnel related costs increases, which we expect to approximate 4%. Second, continued modest enrollment growth in our mature and maturing class of centers. Third, careful management throughout our organization -- cost management, that is, throughout our organization, while still making important investments to support our continued growth.

Fourth, through the expansion of those portions of our business which generate higher operating margins, such as Back-Up Care, schools, consortium centers, and College Coach. And lastly, successfully integrating transitions of management and acquisitions to our network, in addition to our organic new center growth, thus producing a balanced portfolio of new centers, some of which begin with us at full contribution, and others that will ramp up over time.

Now moving on to the third element of the business strategy, leveraging our competitive advantage based on the quality of our programs and services, and our position as the employer of choice in our field. This was a key element of the strategy, as the quality of our programs and services is a direct result of the quality and experience of our caregivers and educators, our center directors, and all the rest of us who support them in providing our high quality programs and services. In our industry, 70% plus as annual turnover can be the norm. And we're proud that our average turnover rate of 22% in 2006 continued to be well less than 50% the industry average.

This focus on strengthening our culture and work environment, coupled with our continued investment in training and curriculum development enables us to maintain our position as the high quality leader in our field and obtain high parent and client satisfaction ratings, both of which stand over 97%. I'm also immensely proud of the fact that Bright Horizons was once again named as one of Fortune Magazine's 100 Best Companies to Work for in America this past January. This is the eighth time we've been included on this prestigious list, and the fact that the ranking is heavily weighted towards the results of independent random employee surveys makes it even more gratifying.

Our most critical competitive advantage remains the talent, passion, and commitment of the 18,000 members of the Bright Horizons family who shape our reputation every day in centers, schools, and our worksites around the world. These three key strategic elements combined to create the platform for our sustainable growth and strong financial performance moving forward. Before I pull this all together in financial terms for 2007, I want to specifically talk with you about the impact we expect on our future financial results, based on the recent announcement by UAW Ford about the closing of the centers we manage for them.

By way of reminder, we began this partnership back in 200, and we currently manage their seven full service child care centers, 26 family enrichment programs, including six of them that coexist in the buildings with the child care centers, and a national network of in home care and other preferred providers. As part of the contract, we're also reimbursed for our administrative management staff, who's dedicated solely to this client relationship. Over the past couple of years, as Ford and the UAW have worked to adapt to changes in their own business, we've continued to provide them with quality programs and services, while working with them to help reduce their subsidies.

Recently, as you may have seen in the media, they made a decision as part of an overall cost reduction plan to scale back the scope of the services they offer. Specifically, they have announced they'll close their seven child care centers on July 1 of this year. As a result, they plan to move the six family enrichment programs that are co-located with these child care centers to new locations within the plants that they serve.

Although the broad outline of the operating changes have been communicated, the specifics of how all these changes will be affected still need to be determined. Since this all operates under a cost plus contract, we will bear no exposure for closing costs. That said, we're still discussing our post-close responsibilities, so the actual impact on our financials remains somewhat unclear until we finalize these negotiations.

In addition, we will continue to manage a network of care providers and a network of family centers for them. Child care centers that are closing each have the capacity to serve over 230 children and are highly subsidized by the employer and the union. In addition, unique to this arrangement, we manage both the program itself, as well as all the facility-related issues and costs for the client. So in total, the revenue associated with the seven child care centers and the family enrichment programs, as we plan -- as we see them being restructured, approximates $24 million per year.

From an earnings point of view, the reduction in our management fees, the loss of the recovery of overhead expenses, and fees related to the facility management fees total approximately $3 million in annual operating contribution. Since the terms of the center shut downs are not yet finalized, we can only estimate the effect on the second half of this year to be as if the whole change occurred as of July 1. This would reduce revenue by approximately $14 million and reduce our earnings per share by approximately $0.03 to $0.04 for 2007.

I'd expect that we'll gain more clarity on the actual timing of all of this and be back to you with more details in the coming months. Of course, we're disappointed by this decision, however, we take comfort in knowing that the outcome was unrelated to any operating issues on our part and was made for reasons that are far beyond our control. Given the unique nature of this company, union joint program and the dire financial situation at Ford, we believe this to be a unique set of circumstances that's unrelated to any other areas of our business or our future growth potential.

In closing, let me say I'm proud of our strong operating results this past year and our outlook for the long term remains equally as strong. All in all, as I said earlier, we continue to expect to see solid performance across our business in 2007 and beyond. Although results beginning in the second half of this year will be tempered somewhat by the UAW Ford reduction, we still expect steady operating margin improvement in the range of 25 to 50 basis points, yielding earnings per share in the range of $1.77 to $1.82 for fiscal 2007.

Let me turn it over to Elizabeth now to give you more detail on the fourth quarter and our overall results. She'll provide a little more detail on 2007, and then I'll be back to talk with you during Q&A. Elizabeth.

Thanks, Dave. Again, just recapping the headline results for the quarter. Revenue of $181 million was up $18 million or 11% from the fourth quarter of 2005. Operating income in the quarter increased to 10.3% from 10%, flat in the same period last year, while net income rose more than $1 million to $11 million. Earnings per share of $0.41 is up 17% from the $0.35 we reported for Q4 of 2005, and includes approximately $0.02 a share of expense associated with stock options.

The revenue growth for the quarter in the year is attributable to the new centers that we are operating under our management, additional enrollment in our core basis centers and the price increases which continue to average between 4% to 5% a year. As Dave mentioned, we added 15 centers in the fourth quarter and a total of 36 centers in the second half of 2006, which not only contribute to revenue growth this quarter, but will also continue to ramp over the next 12 to 18 months. The back end weighting to the 2006 openings, coupled with the relatively higher number of center closings has slightly impacted the top line growth this year.

As previously discussed, we closed a number of centers acquired over the last several years as part of our larger groupings in the U.K. And you see the effects of this pruning strategy in the 23 closings this year. There are a handful of additional centers that are slated to close in 2007, and we will continue to monitor and close underperformers at appropriate times. In addition to the revenue growth from centers opened in prior periods that continue to ramp, enrollment in our core base business also continues to trend above prior year levels. With mature P&L centers showing approximately 1% higher enrollment levels in 2006, as compared to 2005 levels.

Shifting to margins, the positive trend in center margins or gross margin improvement continued in 2006, with margins increasing to 20.3% for the quarter versus 19.5% in the fourth quarter of '05. Dave reviewed the primary factors in improved margins. Notably strong execution in the core business fundamental, contributions from our consortium back-up centers, contributions from centers acquired in transitions of management and solid enrollment across the core center base. A significant counter-factor that I wanted to mention in 2006 and expected for 2007 is the drag on margins associated with preopening and early stage operating losses from the larger group of consortium P&L centers. We opened 12 of these centers in 2006 and have 20 additional consortium centers in the pipeline to open over the next 18 months, compared to only a handful that were affecting 2004 and 2005.

Of course, the long term benefit of investing capital in these consortium centers comes in the form of higher average center margins at maturity and access to a broad group of smaller employers for fractional sponsorship. SG&A, as a percentage of revenue, increased to 9.4% for the fourth quarter 2006, an increase of approximately 40 basis points. The modest leverage we've achieved in overhead spending in the U.S. as well as the U.K. and in the Children First business has been offset by the incremental overhead associated with the College Coach operation and equity expense. Stock option expense in the overhead line approximates $625,000 for the quarter and $2.3 million for the full year.

As a reminder, there is an additional $400,000 of options expense in center costs for the full year of 2006. Amortization expense totaled approximately $1.2 million in the fourth quarter and $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 for new center investments and acquisitions, as well as regular stock repurchases, we have been a borrower under our working line of credit. And are therefore, reporting net interest expense of just over $400,000 for the fourth quarter, as compared to interest income in the same period of 2005.

Our strong financial performance so far this year has driven a 20% increase in EBITDA to over $90 million for the year. While capital spending totaled $11 million for the quarter and $35 million year to date. We ended the year with approximately $9 million in cash and $35 million outstanding on the line of credit. We ended the year -- the quarter with weighted average shares outstanding at about 27 million, the same as in the third quarter.

During the fourth quarter of 2006, we acquired approximately 180,000 shares for $6.5 million, bringing the total reacquired under our repurchase program to 1.5 million shares for $54 million during '06. We expect to continue to be active in this program, making open market share purchases as part of our balanced strategy to maximize shareholder value.

So, let me recap our usual operating statistics. At December 31, we operated 642 centers with 69,000 total capacity. Approximately 60% of our contracts are profit and loss and 40% are cost plus. Excluding our back-up centers, for whom center capacity is less central to the relative operating performance, the average capacity per center remains at 130 in the U.S. and is now 57 in Europe.

So looking ahead, we've now completed our annual budget process, which gives us a clearer view on quarterly performance and the timing of new center growth. We've also recalibrated estimates to incorporate the impact of the UAW Ford contract change. The pipeline of new centers under development and the ramp of newer class of centers will be key drivers in building on the 2006 foundation. We expect to add 50 to 55 new centers this year, and in addition to the known closures of the seven UAW Ford child care centers, we expect that we will close approximately 10 to 12 centers, consistent with historical levels.

Although we were previously projecting top-line growth just north of 12%, we've now reduced this estimate for the changes in the UAW Ford contract by the $14 million that Dave discussed. This change reduces the revenue growth rate to approximately 10%. Based on all of the assumptions previously described, we also estimate that there will be a further residual effect from the UAW Ford reducing revenue in 2008 by approximately $10 million due to the midyear timing of these closures. Considering the variables that impact margins that we've discussed throughout the call, we're projecting to generate 25 to 50 basis points of operating margin improvement in 2007.

This considers the estimated effect of approximately $2 million less in operating contribution associated with the UAW Ford contract restructure, which is concentrated, of course, in the third and fourth quarter. We are projecting a modest increase in overhead as a percentage of revenue for the full year in 2007, as we continue to absorb increments in overhead for College Coach and for stock option expense. Specifically, options expenses projected to increase over 2006 levels by approximately $1 million in 2007 to a total of $4 million.

Based on current cash balances and expected cash flow for early 2007, we would expect to see net interest expense in the first quarter approximate the same levels as the fourth quarter of 2006. With a gradual reduction in '07, as cash generated from operations absorbs these short term borrowings. So factoring in amortization expense, which we estimate to be about $4.5 million in 2007 and an effective tax rate of 41.5%, driving 27.4 million shares outstanding for the year, our projected EPS is in the range of $1.77 to $1.82 for the full year '07. This range reflects the estimated effect, as Dave mentioned, of approximately $0.03 to $0.04 a share for the changes in the UAW Ford contract.

Looking specifically to the first quarter of 2007, we're estimating EPS at $0.41 to $0.43 a share. So, Steve, with that, our prepared remarks are complete, and we're ready to go to Q&A.

[OPERATOR INSTRUCTIONS] We'll go to Bob Craig, Stifel Nicolaus.

Just a couple of questions for you. First on the Ford situation, the remaining centers, I think there were, what, 19 of them. What is the contract duration there, and what -- do you have any expectations as to what might happen to those centers ultimately?

Bob, as we had talked about earlier, our overall contract with Ford runs through the rest of this year, to the end of 2007, the master agreement. So, that was renegotiated a while back. And that coincides sides with the union's overall negotiation with the company. So they're going to -- they can't renew with us until they've reupped their overall labor agreement. As you can see and as we've talked about before, the family center portion of the business is much smaller from both a revenue and contribution standpoint than the child care centers, which were very large and highly subsidized. So the -- we won't know anymore -- we know for sure that will be in place through the end of '07. And we won't be able to comment further on that until we get more clarity once those overall negotiations between the union and management take place.

Dave, I think I know the answer to this but can you put any kind of quantification parameters on the family center portion of that business?

Overall, the Ford overall contract relationship, Bob, approximates about $30 million in annual revenue.

Okay.

So, there will be roughly $6. It won't be exactly $6, but roughly $6 million associated with what's left after all of this closes, both the family -- the child care center piece and our responsibilities for the facility.

Okay. And per your comments, there are no other traunches of centers that are planned to be closed by any other major client at this point. Right?

That's correct.

Switching gears for a second to BUCA. Can you give us some help there on what the revenue and/or operating profit contribution from that activity might be in '07?

Well, the way that I would it is we'll be in a position, first of all Bob, to comment more specifically on BUCA when we're talking about '07 results. Because BUCA really just started in '06 and most of the client starts happened as of January 1. So, it's had a very minor negligible impact on 2006. But by way of reminder, our back up suite of services, both memberships and existing centers and we anticipate BUCA, have both higher gross margins and higher operating margins, even though they have slightly higher income than overhead than our center business; it's still higher operating margins than our core business. And the gross margins on it are just north of about 30% on this whole suite of back up services taken as a whole. So going forward, I think if you looked at sort of the incremental memberships that were sold in sort of just non-BUCA business and maybe a little bit of BUCA it was roughly maybe $2.5 million, approximately, of revenue addition to 2006. And we expect that in 2007, the incremental revenue we'll generate will probably be a little bit more like double that.

2X, okay. That's helpful. One question, given the magnitude of share buyback activity last year, the question that we've asked before is priorities for uses for cash? And did that activity in anyway indicate that the pipeline of potential takeovers and/or acquisitions was diminished in some way, shape, or form, pricing just out of whack?

No, I think you should look at our buyback and acquisition strategy as sort of not either or, but both. And continue to evaluate what's in -- as we've always done, be disciplined about; What's the strategic value of an acquisition? What we ought to be paying for it. And then also being disciplined about; When is the right time for us to be buying back shares based on adding to overall value? So I think we'll -- you'll continue to see both in the 2007 and beyond. Of course, as you know, on the acquisition side, we can't comment that -- while I'd say 1/3 of our growth over time will continue to happen from acquisitions, it's lumpy, so you can't predict exactly when that's going to hit. It could hit it once and then be a while before another one hits. But we feel good that there's a pipeline separate from our center development pipeline. We've had a pipeline of deals in the works for awhile and continue to have conversations that are live in that pipeline.

Last one and I'll turn it over. Any change in momentum and activity, Dave, at the front end of pipeline?

It continues to be as I've reported before.

Okay. Great. Thank you.

We'll go next to Howard Block, Bank of America Securities.

The first question is just the order of magnitude that you offered in terms of growth drivers next year. You said new capacity, then tuition, then maturing centers, and then BUCA. I know you didn't quantify them exactly, but is it something along the lines of sort of 5% or 6% growth from capacity and 4% or 5% from tuition and 1% or 2% from maturing, and then maybe something else from BUCA?

I think that as Dave just quantified the BUCA growth, at the margin, it's $2 couple million of increments. So I wouldn't necessarily put that level of a percentage you just described on it. But capacity adds -- before the reduction in capacity that will be associated with the Ford centers, it would be closer to probably 7% or so coming from capacity and rate increase and marginal improvement from additional enrollment growth and the expansion of these new services.

Okay. And then if we look at the SG&A in the quarter, I was wondering if -- I know it's hard to say, but if not for the Coach hit to the SG&A margin, would there have been that year-over-year improvement that we had anticipated?

There was some -- the one alternative to that, there was leverage in the core U.S. business and we saw some leverage in the U.K. And we've been leveraging down from the Children First acquisition, since that closed in September. So that's been proceeding and the leverage, as you say, 10 basis points, 20 basis points. The College Coach increment plus options is really the driver year over year. So, you would see leverage notwithstanding that. And then just we've also been investing some in the -- we've talked about on prior calls, Bright Horizons' University has seen slightly higher investment level this year than last year. So those are really the only other factors.

Okay. And then just to clarify on Ford. The -- I thought I heard Dave say there was a $3 million contribution, and then I thought I heard you say $2. And they may be different numbers.

Yes, let me just clarify. Dave's -- we were trying to frame out the full-year effect for you. So, if we were looking at the entire contract as we expect to see it, reconstituted what we know now with both the child care centers closing and the restructure of the family enrichment programs from where they are now to being embedded within plants. And again using a lot of assumptions on that. We expect that the revenue associated with all of those elements to be $24 million and the associated contribution on that $3 million, on a full-year basis.

Okay.

So if you were able to look at a 12-month period, it would be operating contribution goes -- is affected by $3 million. What I framed out at the end in my remarks was the effect in 2007, looking at the contract that -- the child care centers closing on June 30, and seeing a little bit of ramp down as Ford executes on its decision and its plan during this year. And, therefore, having the $2 million effect in '07, and that's associated with the $14 million in revenue.

I got it . Okay. And then just two more quick ones. The new center pipeline, did you say it would be 20 over the next 18 months? Is that --?

We said that there would be 20 consortiums.

Now, on the last call, you said something like 10 centers over the next six to nine months. Is this sort of the same pipeline, just with an extended time frame?

Yes, I think that's fair. And some recent decisions since the last call as well.

Okay. So no sort of change in the momentum of that line of business?

No. I would say that we've made some calls on new opportunities since we've talked to you last time to accelerate that. We've been pleased with the experiences we've seen in that class of centers. Even the newer ones we've opened, albeit a smaller number of them in the last few years, and feel like really post the Children First, coming together with Bright Horizons. We're in a lot better position to leverage core corporate sponsorship over a larger group of consortium based centers than I think either organization was separately. So that's giving us a little more bullishness in that class.

Okay. And then my last one was, the 40 clients you mentioned with BUCA, was that the number?

Yes.

Those are -- they were existing clients with the base business, or are there some new --?

No, about 1/3 of them are new clients to the Company, meaning they'd never done any business with us at all. And about 2/3 of them are either clients who have centers with us or had purchased a membership with us in one of our consortium centers.

Thank you very much.

We'll go next to Ryan Mahoney, ThinkEquity.

Could you break out the percentage of new clients and existing clients in your pipeline for 2007?

In the pipeline overall, Ryan, so the over 60 centers that are underdevelopment, about 25% to 30% of them are for existing clients, and the rest are for new clients.

Okay. And do you have an estimate as to the mix of P&L and cost plus?

In the pipeline, it's about 40% cost plus and 60% P&L. So, it's kind of similar to our overall mix. And that moves around a little bit and doesn't always line up exactly like that, so that's the look as of right now.

Okay. Thanks. And then how much organic centers did you open in Q4?

9.

Okay. And so far as the stock expense of $625,000, was that all SG&A?

Yes, the $625 is the SG&A element. There was about $100,000 of options expense in center costs.

And that's gross?

That's gross, yes.

And then your $4 million guidance for '07, is that net?

No, that's also gross. It associates about $3.5 million in overhead and about $400,000, again, still in centers. So, $3.9 million.

Okay. Thanks. I'll pass it on.

We'll go to Jack Sherck with SunTrust.

I was just curious in terms of the 50 to 60 centers you're going to open next year -- or this year, what will the timing on that be? Will it be fairly even throughout the year or kind of back half weighted, sort of like this year?

Jack, to recapitulate what we said, 50 to 55 centers for 2007. And while we're not in the position to comment exactly how many each quarter, I think we expect to see a more even progression of centers this year than we saw in 2006.

Okay. And then just out of curiosity, in terms of the consortium centers, roughly what is the number of sponsors you have for those, in terms of say, each individual consortium center has six sponsors or --?

Yes, it really is overall the map, Jack. It can range from two sponsors just really sharing one center, all the way from a maximum of say 40. So some of our centers in New York City, for example, that have a lot of surrounding smaller law firms and others that would never come close to being able to sponsor more than a few spaces in a center all get together and work there. Conversely, some of the more rural locations, you tend to have fewer sponsors who team up for one individual center. So, it's a large range.

Okay. And then also just in terms of the UAW centers. Was the -- I know you don't break it out, but how would you kind of characterize? I think some of the articles I saw was that the utilization rate was kind of low for those centers. Is that somewhat the case?

No, I wouldn't say that.

Okay. And then just finally, and just in terms of capacity utilization, I know you don't share that, but has there ever been any thought to kind of co-locating to some of the back-up services with the existing centers?

Yes, in fact, again, we should be clear, because maybe we haven't been as clear on this, that in many cases, the class of consortium centers that we've been opening in really the past year and expect to open in 2007 are what we internally refer to as a hybrid model. Where a portion of the center would be dedicated to full service capacity and a portion of the center would be dedicated to back-up capacity. And we'd sell back-up spaces, and we'd also sell to employers who were interested in sponsoring full service under the same roof. In some cases, we do a community-based full-service center with a corporate sponsored back-up space. So they're all created a little bit differently. But it is very common now to see our newer class of centers have pieces of both full service and back-up under one roof.

Okay. Great. And then my final question is just how many consortium centers did you open up in 4Q? Like 4Q relative to 3Q?

Yes, let me just compile that here.

Okay.

And we'll answer it in a second.

We'll go next to Michael Lasser with Lehman Brothers.

Hi, guys, I hope you're trying to stay warm at least.

No issues here.

Can -- you talked about 10 to 12 closings for 2007. After that, how should we think about annual closings moving forward? Do you feel like you'll have pretty much right size -- the base will -- or the number of closings will go down, or will it sustain at that rate?

Michael, I think that if you look at our historic performance really since we've been a public Company, aside from last year where we had the uptick based on, as we've talked about, sort of some of our own initiatives, the center closings had been between 8 and 15 a year, depending on the year. And my guess is that's about the range you'll see. I would not want you to think there will be a year where we'll have to model less than that but it could happen in one given year.

I think the better way to think about it is there is always going to be contracts that come up for renewal that have sort of outlasted their ability to give us the returns that we want in that situation or enroll to the levels that we want. We're going to continue to make conscious decisions on underperformers. We're also going to continue -- one of the things that's just part of doing the kind of business we do with the partners that we work with is; they buy one another, they merge with one another. And therefore, locations are always subject to close down or change or be downsized. So that's always been a part of our past and I expect it to be part of our future.

Of those that fall into perhaps an underperforming category, is there any commonality to them? Does it tend to happen in particular industries or more on a geographic basis?

I would say there is really no commonality I could point to. It's on geographic and again, it's really all over the map. And in certain cases these are centers that we may have done ourselves in office park locations 15 years ago and the lease has come up. And we just decide that it's run its course and we can't get additional corporate sponsorship, more than what we already have to make it work, and we just need to exit.

I think historically, you talked about 30% of the growth coming through acquisition and now it sounds like we should expect perhaps a 1/3. Do you think within the industry as a whole, not just within the worksite aspect of the industry but broader speaking, in terms of all the different child care solutions that families have available to them; that we're reaching a point of where we're closer to capacity? And so, perhaps you're moving away from a strategy of expanding part of the capacity of the overall market into more of a consolidation approach?

First, let me comment on -- I think we've been saying about a 1/3 of our growth of acquisition over time for awhile. That's been our read on our outlook for awhile and I think it continues to be that way. But in terms of the go-forward, where our growth will come from, I would say that we still expect to drive new center growth and have that be the lion's share of our top line growth for as long as we can see. And it's based on -- there's a long sales cycle associated with that, there's a capital investment that needs to be made on the part of the employer in order to make that happen. That's principally what drives the longer sales cycle.

But by no means do I believe that the prevailing child care supply that exists in most every geography around the country is even approaching capacity as it relates to quality of care or as it relates to the availability of spaces for young kids, meaning infants and toddlers. Working parents are struggling everywhere with trying to find those options. And I don't think we're even close as a country to being there. That said, getting employers to do something about it takes time and it takes capital. And what we think we bring to the table now, given the fact that we have relationships with over 700 companies and have developed a reputation is the ability to bring services to the table in addition to centers that help employers offer other kinds of solutions to that -- to the issue, back-up care, the school-age care, all of those things.

And so I think our decision to expand the scope of our services, as I said earlier, it's deepening the relationships we have with clients. And I think it opens up our ability to do business with more companies than we would be able to do business with sooner -- more companies faster than we'd be able to do business with just growing the center portion of our business.

Okay. And just two last questions. If you look at the percentage of your centers that are open to any member of the community, how does it compare now to two or three years ago?

It's a -- that's a figure that's pretty stable over time. The few clients who operate cost plus contracts, who chose to open to the community remain only a handful, and, therefore, the majority of our centers that are profit and loss, that we're on the bottom line for, are open to the community. So that has remained pretty stable, Michael.

And lastly, I missed it but what was the share count guidance -- or assumed share count for the guidance for this year?

About 27.4 million is what we have forecasted for 2007.

Sounds good. Thank you.

We'll go next to Brandon Dobell, Credit Suisse.

Thanks, a couple of quick ones. On the pipeline, any sense of the geographic split on U.S. versus Europe on a percentage, maybe?

In the pipeline, Brandon?

Yes.

I would say it's about 15% of the pipeline on an ongoing basis has been outside of the U.S.

Okay. And over time, has there been any change in terms of how you view center performance for the purposes of kind of culling the ranks? I know some things are out of your control, mergers and the UAW kind of thing. But beyond that, does the bar get higher as time goes by? Do your metrics change? Is it that much different from a consortium center versus a P&L center versus a contract center? I'm just trying to get a feel for how you guys -- does that bargain higher time, I know you're looking for better performance from everybody?

I think it's safe to say that we've -- I think our team has figured out how to continue to sustain improvement in the business over time. So I think we've -- it's fair to say that over time we've become better at understanding how it is -- the economic terms under which you -- the economic terms that drive high quality and drive sustainable margins. So, I think we've -- if we just look at the class of centers, I think we're doing it better. We're making better decisions on new centers today than we were five years ago.

Five years ago, we made better decisions than we did five years before that, in terms of the kind of deals that we get ourselves into. And not just the kind of deals but the risk profile associated with those deals. And we know a lot more about the markets in which we operate today than we did in the past. There's virtually no major metropolitan market in the United States where we're not.

And five, 10 years ago, we were going into new markets a lot with new growth and needed to really understand what the risk profile is and what the threshold is on tuitions and salaries and the things that drive our business in those markets. So, I think it's fair to say we've gotten a lot better at understanding the factors that drive sustainable margin improvement and the factors that drive -- serve the threshold for deals for us.

Okay.

The only thing I'd add to that is, that I think that having developed an effective suite of solutions to centers that are underperforming, here are the things that we can do, and we can deploy; sometimes we're able to pull the trigger on those a bit quicker and come to resolutions quicker.

Okay. Maybe three or four years ago, I remember having a discussion with you guys about how much leverage there are or there is on the people that kind of manage a city or a metro area. One person for kind of six centers. With the increased capacity per center or the complexity of the customer base but also with the broadening of the geographic scope, is that same kind of metric still in place? Do you still get the same kind of usability of the people in the field? Or are you finding there's more leverage because you've got more density in certain areas?

Well, it's really a good question and kind of timely because we always review every year kind of our strategy in that regard. But I would tell you, Brandon, that I think one of the key underpinnings of our ability to both grow and also leverage our margins and most importantly, keep strong the culture that really is the defining factor and drives who Bright Horizons is; is maintaining that span of control that you're talking about. So, as we've doubled the size of the Company in the past five or six years, back then we had one regional manager, as you're referring to for roughly six to maybe eight centers at the most, depending on the geographic spread.

And today as we've now doubled the size from that period of time, we still have that span of control. And I think there are other areas in the business that we've leveraged and expect to leverage over time. But I would not -- we wouldn't put that on the list as one of the things that has a lot of leverage. On paper, you can do it but I think we'd be sacrificing one of the key management structural things that really allows us to do what we do well, and that's something we don't envision relinquishing any time soon.

Okay. And then a final housekeeping question I may have missed it if you mentioned it. But the contribution from College Coach. I know it's pretty small in the quarter but just to get an idea of how big it was?

Yes, College Coach, their current operating run rate, from a revenue standpoint, is about $6 million per year. And they have an operating contribution that's similar to what Dave was describing as for the back-up care and suite of services, in that 15% to 20% range after growth margin and after their overhead load.

Okay.

So, a contribution certainly in the quarter but they have still a fairly small part of the mix.

Okay. Thanks a lot.

We'll go next to [Neal Maccer,] Robert W. Baird.

Good afternoon. A couple quick questions here. On Back-Up Care advantage and College Coach, what's the sales life cycle for in those two things, now that you've had them in the mix for a couple of months?

I'd reserve judgment on the College Coach site because literally, we've had them five months, so I think we'll get a chance to learn that more. I think their historic sales patterns have been similar to what we experience on the back-up side, which is 3 to 12 months in terms of the sales time, as opposed to the two-year sales cycle that it takes to do centers. So, that's where I would put BUCA right now and that's where I expect College Coach is in that same area.

Okay. And I know that it's been quick but what number of sort of prior clients have picked up College Coach so far?

Well, it has been quick but we've just celebrated a little while ago our first success, in what I would call cross-selling. College Coach has added a couple of clients since they've joined us, but I think it's fair to say they had a pipeline themselves. And so they're continuing to close out what they already had. We just celebrated what I think to be our first combined client that was really the reason -- that was really as a result of us joining together. And that's what we're focused on now, the marketing to cross-selling.

Okay. And then just one quick question about the marketplace here. ABC Learning obviously bought out one of your competitors recently. Have you seen any effect in the U.S. or the U.K. with that? And do you anticipate seeing any effect?

I think that ABC has clearly been pretty acquisitive and have been moving fast in that regard. I would say that to date, anyway, they're -- many of the targets that they've ended up acquiring are in predominantly the retail child care space. And that's -- and have a lot of scale in that area and that's really not been the area that we've been interested in. So, I think that in the acquisition area, they'll be out there. We'll probably have sort of like some -- we'll have two circles, places where they'll be and we're not. And there will be probably some places in the middle where we might both be interested. So, we haven't bumped into them too much in that regard yet but maybe will over time. With respect to the employer space, I haven't seen it much.

Okay. That's all I had. Thanks.

We'll go next to Amanda Miller, Opstock Securities

Yes, good morning. A couple of macro questions, if I may. I was just wondering if you provide any breakdown of the industries that you're currently exposed to? And I was wondering if you do have any auto exposure outside the current Ford situation?

Yes, let me -- Amanda, good morning to you by the way.

Good morning.

I know we're on a different time cycle. First, I would -- let me comment on the auto piece and then I'll let Elizabeth give you the overall read. In addition to the Ford centers, we have one center for General Motors, and then we have other centers, probably a half a dozen other centers for Toyota, for Mercedes Benz, for Subaru Isuzu. I think they may have changed that name but Subaru. So I think in total, I think seven other centers within the auto industry. But I would characterize -- I want to be clear that the UAW Ford arrangement, given that it was a joint program, negotiated by the union and management. The GM center is similar to that, but the Toyota and Mercedes and the Subaru Isuzu are completely different in terms of the nature of that contract. But I'll let Elizabeth see if she can cycle through the --?

Where the industry breakdown is, yes. So just to -- we do capitulate this once a year. So, let me just walk you through the breakdown. Financial services clients are 15% of our mix. Technology clients, 5%. Healthcare and pharmaceuticals are 15%. Consumer goods clients are 5%. Industrial manufacturing clients are 10%. Government and education for 15%. Consortiums and office park centers are 30%. And professional services and other are 5%.

Okay. Thank you very much. And I have been reading about proposed increases to the minimum wages or federal minimum wage. Was just wondering if -- I'm not sure what the status of that is currently but was just wondering if you're expecting any material changes in wage costs going forward?

No. We wouldn't expect any material changes. We're typically paying at levels that are high enough that we wouldn't have exposure there.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] We have a follow-up question, Jack Sherck, SunTrust.

Sorry, I may have misheard you, but did you say that you were rolling out the hybrid back-up traditional services only to new centers, or are you also kind of retrofitting your existing centers?

Good question. There are a handful of retrofits that happen over time but the majority of what we're doing is on the newer centers we're opening.

Great. Thank you very much.

We'll go next to Ryan Mahoney, ThinkEquity.

Just a follow up. On the tax rate, it was a little bit lower than we expected this quarter. Was there any reason for that? And if that is normal, should we expect the tax rate to trend down in '07?

The tax rate that we're projecting for '07 is 41.5%, which is pretty even with our overall rate for 2006. I think what you're seeing in Q4 is -- what we've habitually seen is the rationalization of the rate after we have our annual tax return file and everything sorted out with respect to the positions there. So nothing unusual, per se, in the quarter, it's just tidying up the year so that 41.5% is right going forward.

Okay. Thanks.

And having no further questions, I'd like to turn the conference back over to David Lissy for any additional or closing comments.

Thank you, Steve, and thanks to everybody, for joining us on the call. And as usual, Elizabeth and I will either see you on the road, or we're here for any further questions. Thanks.

Thanks, everybody.

And this does conclude today's conference. Thank you for your participation. You may now disconnect.