Bright Horizons Family Solutions Inc (BFAM) 2007 Q1 法說會逐字稿

Good day, everyone and welcome to the Bright Horizons Family Solutions First Quarter Earnings Release Conference Call. Today's conference is being recorded.

For opening remarks and introductions I would like to turn the call over to Mr. Dave Lissy. Please go ahead, sir.

Thanks Dustin, and greetings to everybody with us on the call today. Joining me on the call is Elizabeth Boland our Chief Financial Officer and we'll begin as usual with Elizabeth running through administrative matters. Elizabeth.

Hi, everyone. Earnings Release went out just a little while ago over the Wire after the market closed and it's also available on our website at Brighthorizons.Com. This call is recorded and is being Webcast. And a complete replay will be available in either place. Those wishing to access the phone replay can call 719-457- 0820, and use pincode 4327988, while webcast is available at our website under the Investor Relations section. In accordance with regulation FD, we use these Conference Calls and other similar public forums to provide the public and the investing community with timely information about our Business Operations and our financial performance, along with 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 Investor Relations section of our website. The risks and uncertainties that might cause future operating results to vary from those that we describe in our forward-looking statements made during this Conference Call include one, our ability to execute contracts for new client commitments, to enroll children to retain client contracts and to operate profitably a broad, two, our ability to successfully integrate acquisitions, three, the capital investment and employee benefit decisions that employers are making, four, the effective governmental tax and fiscal policies and employers considering work site child care and lastly the other Risk Factors which are set fourth in our SEC filings including our Annual Report on form 10K. So back to Dave.

Thanks Elizabeth and hello again to everybody who joined us. Let me begin today with a recap and discussion of our First Quarter results and then I'll review our outlook for the remainder of 2007, including giving you an update on the status of our discussions with the UAW Ford. As usual, Elizabeth will follow with a more detailed review of the numbers and then I'll be back to participate in Q & A. First, the numbers. Revenue for the quarter of 190 million was up 12.4% over last year, while operating income rose to 19.5 million from 17.1 million in last year's First Quarter. Net income of 11.2 million generated earnings per share of $0.42, up 17% over 2006. The years off to a very good start and right on plan with what we discussed with you on our call in February. We're pleased with both the solid growth and margin improvement that drove our performance this quarter.

As I outlined back in February, we expected four factors will be the primary drivers of our growth in 2007. First, the addition of new centers in schools both organically and through acquisition, and the expansions of existing ones. Next, consistent tuition and price increases. Third, the wrap up of prior year classes of immature centers and marginal enrollment increases in our mature base, and lastly, the growth of our new suite of Back-up Care services and College Coach. I'll touch on each of these points for you as they relate to our performance this past quarter. I'll start with center additions. We added nine new centers in the First Quarter, including second centers from Merill Lynch and New York Presbyterian Hospital, both in New York City, along with a new full service Center for the law firm of King and Spalding in Atlanta. In addition, we began operating the child care center at the Port Niff Medical Center, our first in Idaho, and we opened several new [Inaudible] consortium centers in the quarter including two in Massachusetts, one in the Pen Quarter District of Washington D.C. As well as new sites in the suburbs of Philadelphia and in Dublin, Ireland.

There were no center closing in the quarter and as of the end of the First Quarter, we operated a total of 651 centers and schools. Looking ahead, one important indicator of our future growth is the pipeline of centers under development. It remains strong with more than 60 centers under development across the U.S, The UK, Ireland, and Puerto Rico. We also continue to see favorable trends in the industry mix in the pipeline, commitments for centers in the more cyclical industries such as Financial Services, consumer goods and technology have increased, the newer market and professional service firms has continued to expand while at the same time, commitments from healthcare government agencies and higher education remain steady.

Although the timing of additions to and from the pipeline are never linear, the overall visibility we've had through 2007 and into 2008 is encouraging. Our challenge for the remainder of this year is to continue to build on this with an eye towards filling in commitments for new centers that will transition Management to us later this year or open in 2008. All nine centers in the First Quarter were organic. In addition to our continued organic new center growth, we still expect that consistent with the past few years, roughly a third of our growth over the next few years will come through the acquisition of relatively small high quality Operators. The next factor in our growth is the ability for us to continue our track record of modestly increasing price ahead of our annual cost increases. Tuition increases continue to average 4-5% and we expect this will carry through the remainder of 2007. In addition enrollment, the third growth factor continues to expand with our newer centers ramping up in accordance with historical patterns and our mature basis centers picking up modest incremental enrollment. The last growth area that I'll touch on is two of our new service offerings. Our integrated suite of Back-Up Care services and College Coach.

I touched on each of these with you back in February and with one more quarter under our belt, I'm pleased to say we remain enthusiastic about them. Within our Back-up Care services our membership and our consortium centers continues to grow while our Back-Up Care Advantage program which offers national access to in home or center based back up child and elder care continues to experience strong demand from a wide range of employers with over 70 clients now participating. College Coach's performance is also right on plan and although relatively small vis-a-vis our other service offerings, we see good potential for growth and contribution as we integrate the Marketing and cross selling process to the wider Bright Horizons Client base. In addition to revenue growth our financial performance is also driven by our ability to achieve modest but sustainable margin improvement. We continue to leverage margins in the First Quarter with operating income expanding to 10.3% led by strong gross margin improvement. The main drivers of this improvement were first, our ability to pace our price and tuition increases modestly ahead of our personnel and other cost increases. Second, to have slight enrollment gains in our mature basis centers, and third, the contribution of higher margin Back-Up Care services and College Coach.

Elizabeth will talk about this in more detail during her piece, but I also want to mention that included in the center margin performance is the weight of the pre-opening and ramping losses from our relatively large group of ramping P & L centers. Since the beginning of last year we're invested in and opened 17 of these types of centers. In time as you know they will become strong contributors, but during the ramp up phase, they remain a short-term drag on earnings. At the operating margin level, the overall increase of center margins was partially offset as we previewed with you in February by a modest uptick in our overhead as percentage of revenue reflecting higher SG&A expenses associated with the addition of College Coach, equity expense, and higher amortization. Sustaining our competitive advantage as a high quality leader and employer of choice in our field is a critical element of our business strategy. The quality of our programs and service directly supports our ability to find new growth opportunities and to consistently implement our pricing strategy. Through employer sponsorship and consistent yet modest price increases, we can invest in the salaries, benefits, training and career development opportunities needed to attract and grow our family of educators and professional staff.

In short, our competitive advantage remains our people and our culture. In a field that doesn't often get the respect it deserves in our society, I'm immensely proud of the passion and committment of our family of employees who continue to deliver every day on our mission to make a difference in the lives of children, families, and clients that we serve. Before I turn it over to Elizabeth, let me update you on our ongoing discussions with the UAW and Ford regarding the previously announced closing of their programs. By way of reminder in February, we announced that due to the enormity of the financial challenges, faced by the union and Ford, they will be closing their seven child care centers and restructuring their provider network. We knew at that time this was an evolving process and since then, more of the specifics surrounding the scope and timing of their plans have been formalized. Based on our latest discussions, we now know that in addition to the child care centers, they made a decision to close the family enrichment centers which we manage for them. -The 19 standalone family enrichment programs which are much smaller than the child care centers will close in the Second Quarter while the child care centers will close as previously announced on June 30th. Just like the child care centers, the family enrichment Centers were managed under a Cost Plus contract.

Altogether, the family enrichment centers had a total revenue of $6 million annually, and an operating income of just shy of a million, which will result in a reduction of earnings of approximately $0.02 a share. By way of reminder, the child care centers have a total annual revenue of 24 million and operating income of just over 3 million. Once the child care centers are closed on June 30th, it will mark the end of our operations under this joint company and union contract and there for will have no further exposure to the UAW Ford. A couple of important points to remember: First, due to the Cost Plus nature of this contract, we have no exposure for closing and wind down costs. Second, we're still in negotiations regarding the final details of these closings, including post-closing expense reimbursement and Management fees. As such today we'll again provide an estimate of the financial impact assuming all the factors I just discussed.

The impact on revenue in 2007 from all of these changes approximates 17 million in total with the resulting reduction in 2007 earnings per share of approximately $0.055 We'll know more about the final timing and details of this closing package as we get closer to July 1st and we'll update you further when we talk to you on our next call. In closing, based on our pipeline of centers under development and our solid start to the year, we expect to see strong performance across our business in 2007 and beyond. As we look out through the remainder of the year, and factor in the one-time effect of the Ford closings, we expect steady operating margin improvement in the range of 40-60 basis points. Which we expect will yield earnings per share for fiscal 2007 in the range of $1.77-$1.80. I'll now turn it over to Elizabeth to give you more details on the First Quarter and to expand our financial outlook for 2007, and I'll be back to you again to talk during Q & A. Elizabeth?

Thanks, Dave. Again, just recapping the headline results for the quarter. Revenue of 190 million was up over 12%, or 21 million from the First Quarter of 2006. Operating income increased to 10.3% from 10.1% in the same period last year, while net income rose 1.25 million to 11.2 million. Earnings per share of $0.42 is up 17% from the $0.36 we reported last year. As in prior reports, the source of the top line revenue growth remained consistent. New center capacity additions, enrollment gains and rate increases, and as Dave mentioned, we added nine centers in the First Quarter of 2007 and realized an uptick in revenue from the ongoing ramp up of enrollment in the groups of centers we've opened in the last year or two, specifically from the relatively large class of 36 centers added in the second half of 2006. These centers will continue to ramp up over the next 12-18 months along with new centers we added throughout 2007.

In addition, 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 2007 over 2006 levels. Slightly offsetting these increases was a small effect from our Cost Plus group of centers which generated lower operating subsidy revenue than we had previously estimated of approximately 500,000. Newer services like [Bubka] and College Coach also delivered incremental revenue growth compared to last year and we also continue to realize 4-5% annual tuition increases in 2007. Center growth margins also continue to improve this quarter increasing to 20.2% versus 19.5% in 2006. The primary factors that improved margins include strong execution in the core business fundamentals, contributions from centers acquired and transitions of Management, contributions from our higher margin services such as Back-up and college admissions counseling, and solid enrollment across the core center base. As we've discussed in the last couple of quarters, gross margins are depressed somewhat by the costs associated with pre-opening and early stage operating losses from the larger group of consortium P & L centers that we've opened, a total of 17 since the beginning of 2006.

These consortium centers provide an important growth channel as they generate access to a broad group of smaller employer sponsors who combine memberships or other fractional sponsorships. While we target higher average center margins at maturity given the capital investment we're making, the incremental losses from the larger group of centers will impact margin improvement for all of 2007. For the First Quarter, these losses approximated $1 million, an increment of approximately $350,000 over last year or 20 basis points on the margin. SG&A as a percentage of revenue increased 30 basis points to 9.3% in the First Quarter. We have achieved modest leverage in overhead spending in the U.S. As well as in the UK but this has been offset by the incremental overhead associated with College Coach operations as well as increased equity expense over 2006 levels. Amortization expense totaled approximately 1.2 million in the First Quarter of '07 compared to about half that in 2006 reflecting effect of acquisitions made in the second half of last year. Net interest expense was nearly 300,000 for the quarter compared to interest income of just over 100,000 in the First Quarter of 06. With ongoing investments in the business for new centers and acquisitions as well as regular stock repurchases, we've been a borrower under our working capital line of credit over the last couple of quarters. We have reduced or borrowings outstanding under the line from 35 million in December of 06 to just under 14 million at the end of March of '07.

Our strong financial performance so far this year has driven an 18.5% increase in EBITDA which is our proxy for cash flow to over $25 million for the quarter, while capital spending totaled 6 million. We ended the quarter with approximately 9 million in cash. The weighted average shares outstanding remained at 27 million for the quarter. During the Q1 of '07 we acquired approximately 142,000 shares for $5.2 million in total. We expect to continue to be active in this repurchase program making open market share purchases as part of our balance strategy to maximize shareholder value. So let me recap our usual operating statistics. At March 31st, we operated 651 centers with 70,000 total capacity, approximately 60% of our contracts are profit and loss and 40% are Cost Plus. For full service centers, the average capacity per center remains at 130 in the U.S. and is now 58 in Europe.

Before we get into the detailed guidance for the rest of 2007, I thought it would be useful to first isolate the scope of the UAW Ford contract and then give you the guidance with the financial impact and timing we've discussed. So, first for 2007, we expect the closures during the Second Quarter to have a revenue impact of approximately 17 million and operating income of approximately 2.5 million, which translates to the $.055 a share that Dave mentioned almost all of which will occur in the third and Fourth Quarter. The further residual effect in the first half of 2008 is a reduction of approximately 13 million in revenue and approximately 1.5 million in operating income which translates to about $0.035 a share in 2008. So now let me look ahead to the rest of this year with all of these figures Incorporated. Based on the pipeline of new centers under development plus growth not yet identified through small acquisitions and transitions of Management, we expect to add approximately 50 -55 new centers this year. Although we did not close any centers in the First Quarter, we do expect to have a relatively consistent number of routine closures, say 10-12 centers in 2007 in addition to the 26 UAW Ford locations. Our top line growth estimate for 2007 approximates 10%.

Considering the variables that impact margins that we've discussed throughout the call, we are projecting to generate 40-60 basis points of operating margin improvement in 2007. We expect overhead as a percentage of revenue to approximate Q1 levels for the full year in '07 as we continue to absorb increments in overhead for College Coach and for equity expense. Specifically, equity compensation expense is projected to increase over 06 levels by approximately 1.25 million in 2007 to 4.7 million in total, of which 3.5 million is options expense. Based on current cash balances and expected cash flow for the remainder of '07 we would expect to see a gradual reduction in net interest expense in '07 as cash generated from operations absorbs the short-term borrowings. With amortization expense of approximately 4.7 million for the full year, and effective tax rate of 41.8%, and 279.1 million shares outstanding for the year, our projected EPS is in the range now of $1.77-$1.80 for the full year 2007. Looking specifically to the Second Quarter of '07, we're estimating EPS at 46-$0.47 a share. So with that, Dustin, we are ready to go to Q & A.

(OPERATOR INSTRUCTIONS) Thank you. Today's question and answer session will be conducted electronically. At this time if you do have a question you may signal by pressing star one on your touch tone phone. If you are using a speakerphone today, we ask that you make sure your mute function is turned off to allow your signal to reach our equipment. So once again if you do have a question at this time please press star one on your touch tone phone and we'll pause for just a moment to allow everyone a chance to signal. Once again that the star one if you do have a question. We'll take our first question from Jeff Silber with BMO Capital.

In terms of potential future acquisitions, I know we haven't seen one in awhile, but has the type of acquisition that you're looking for changed or should we expect something similar to what we've been seeing over the past few years? Do you see any other service lines being added, etc?

Yes, hi, Jeff. We would expect that acquisitions would look pretty similar in mix to what we've done over the past few years. I would say that in terms of the bread and butter of what we're looking for is the relatively small, high quality chain (Inaudible) Operator in our core business both here in the U.S. And the UK and Ireland, Canada, everywhere we operate currently. I think as it relates to new lines of business, I would characterize our current view on that as in digestion mode and we are now very focused on being sure that within the back up suite of services that we now have that we effectively make them available in the market and really focus on giving clients both prospective clients and current clients an opportunity opportunity to participate and with respect to College Coach, we're also focused on taking this year to effectively cross market and cross sell their services to the wider Bright Horizons client base so I don't think you'll see any new lines of service for the time being.

And just continuing on this theme, have you seen any change in multiples out there and also would you be willing to lever up a little bit more to make these acquisitions?

With respect to levering up, I think we feel like we've got the right opportunities to pursue any acquisition we thought was within our strategic interest, so it's not, we could fund that, we could fund it through either cash generated through operations and if we needed to, we believe there's opportunity to fund them through either our line of credit or other debt sources. The question will be finding opportunities that we think are in our strategic interest and we believe that for now, most of those opportunities will be relatively small in nature and look a lot like the acquisitions we've done before, where we think they are going to add a lot of value for us and we're paying valuations that are consistent in the range of what we traditionally paid.

Great. And again, I know the College Coach and Back-up are still relatively new but are you finding, are you gaining new clientele because of the services or is a majority of these services being sold to existing clients?

No. I think it's about, on last check roughly 40% of the clients that we signed on to the new Back-up suite of services are new clients and about 60% of them have expanded their relationship with us having done something with us in the past, either we've managed a Center for them or they may have purchased a small number of memberships in one of our consortium centers.

OK, great. One more and I'll let somebody else jump in. This is a numbers question. In terms of stock based comp for the quarter roughly what was it and how do we allocate that between SG&A and cost of services?

It was just over $1 million in total, Jeff, and about 75,000 goes to centers and the rest of it about about 950,000 goes to overhead.

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

Thanks, Jeff.

We'll go next to Howard Block with Banc of America Securities.

Good afternoon, Dave and Elizabeth how are you?

Good. How are you?

Good, thank you. The question to start with is on this 17 number, the large group of ramping consortium P & L's, what was the base number in the sort of Q1 06? In other words sort of attract that 17, that metric?

Right. Let me just try to break that out, Howard, if you want to ask another question?

Okay. And again, as you're digging into those numbers, I guess what we would like to know maybe would be it looks like it was a million of losses for that number for those 17 this quarter, versus 650 last year. How will that compare throughout the year? And then on the guidance, I noticed it looks like the high end was lowered by $0.02 was that right? And if you could explain maybe why that was?

I'll take the latter part while Elizabeth does a little bit of work on the numbers for you, Howard.

Sure.

The reason for bringing down the top end of the guidance was solely related to the new information about the loss of the UAW Ford family centers and the result impact they will have on 2007.

Oh, okay. And so I didn't get a chance to compare all the data on the UAW today versus previously, but in that data that you shared would be about $0.02?

Yes. I think when you look at it compared to what we shared the last time, it's about $.015 related to that and about close to another $.005 as we got better information on what the full impact and timing of closing on the child care side would be.

And then I didn't catch Dave or Elizabeth. Did you share the contribution in the quarter revenue wise from College Coach and if you did didn't, would you mind?

We didn't. College Coach has an annual revenue this year target in the neighborhood of 7 million. They do have a little bit of back end weighting to that, so it's just under a million and a half in the First Quarter.

Okay. And then just again strategically, the centers in the core that opened a second for Merill and a second for Presby, a question that's been coming up quite a bit in the investment community is the challenge of multiple centers for existing clients. Are you seeing momentum in that area of the business or are we still looking at sort of the challenging sales cycle even for a second or third Center for an existing client?

Well, I would say that we're happy to see these two clients add centers and I think that in the pipeline of centers under development, about 25% or so are new centers for existing clients versus the 75% of them that are new, so I think we're seeing continued momentum in that way of seeing some of our existing clients do second, third, sixth sites depending on where they are in their development. Both here and actually beginning to see some of that in the U K.

Okay, but that 25% I haven't asked for that statistic before, is that pretty consistent with what you have been seeing historically?

Well I think it's range between 20-25% and my recent memory may be the past 12-24 months.

Great thanks. I'll jump jump back into the queue.

Let me just answer

Oh, yes, thank you Liz

The numbers we opened three consortium centers in the First Quarter of 2006 and had other six or so that were in process of being in development, so the 17 that we're talking about now is impacting the First Quarter of '07 includes those that are still in ramp up that opened in this quarter and even those that are opening throughout the rest of 2007 and there for are beginning their pre-opening costs time frame, so it's a scale that is about double now the numbers of centers that are open or in process. Some of those are beginning to reach their breakeven levels so they are beginning to turn profitable which is one of the factors that will help improve the overall operating income percentage over the rest of the year but I hope that gives you some context. The losses over the rest of this year, notwithstanding that because we have this larger class and we have 15 further centers that are in the pipeline to open over the next year or two, several of them are opening this year, so we would see that level of losses, the million dollars that we experienced this year pick up this quarter, excuse me, pick up slightly each quarter and peak probably in the third quarter before starting to see the achievement of breakeven in some of those that opened in 06 and are just starting to contribute later on this year. That's the general trajectory.

Okay, I don't know if my line is open or not because I said I was going to jump out but you may not have all of this data available Elizabeth, so I don't mean to catch you off balance but so is it a 17 versus roughly an eight? When you say doubling or a nine?

It was three that opened in the First Quarter and there were another six or so that had started with pre-opening costs.

So is that incremental eight or nine or whatever that number is, those centers and we have an incremental incremental 350,000 of losses, can you divide the eight or nine into 350 and I'm just trying to sense how that comparison, it's really the delta that matters, sort of the rest of the year, not so much the absolute number in the statistic.

Right and the delta, to take just a delta quarter to quarter, it increases slightly the 350 will go up somewhat in Q2 and up further in Q3 and then it will reduce in Q4.

And then on into 08 is it going to stabilize at some point?

Yes. We would expect given the numbers that are open and what's in the pipeline and the visibility that we have that it would stabilize to probably modestly tic down in 08.

Great. Thank you.

Yes.

We'll take our next question from Mark Hughs with SunTrust Robinson Humphrey

Thank you very much.

Hi, Mark.

Good afternoon. Does the family enrichment business, you say it's coming off in Q2. Is that already gone or is that going to come off at the end of the quarter?

Yes. It's gone as of now-essentially the first of May.

Got you. And then how should capacity growth look taking into account the unit opening you've got on schedule versus the losses from UAW, you were up about 1.4% sequentially this quarter. How should we think about that over the next couple of quarters?

I haven't broken it out quarter to quarter Mark, but as you know, the Ford center is pretty large on average. They were over 230 capacity, so once you take that capacity out, we're looking at capacity adds next for the year in the range of 4-5%.

Right. Okay. And then how about labor costs, it seems like the macro statistics kicked up a little bit recently. How are you seeing it?

I think as I may have talked about earlier, we're looking at roughly 3-4% average salary increases this year, Mark, against the 4-5% average tuition increases and I would say that I think in part, we've been pretty disciplined about that consistently now for probably eight or nine years in passing through that level of salary increase or at least in that range which has helped our absolute wage kind of land in a pretty good place in most Markets. There's some exceptions where we're seeing competition or tighter labor Markets where that's not exactly true but on average, it's true, and so our biggest challenge in our field really as it relates to that is the ever shrinking pool of qualified talent, less graduates of four or two year schools with early childhood qualifications which as I think I talked about last time was a big motivation for us to develop our own Bright Horizons University and take the matter kind of into our own hands given we play the clock forward and we view that as one of our biggest opportunities or challenges we'll have to overcome going forward.

Got you and finally, the universal healthcare talk, seems like there's more of that. Anything we should think about near term as it affects your business?

I don't think so. I think we have been the leader in our field in providing much higher level of benefit package than what is typically found in early childhood education. It's one of the ways in which we distinguish ourselves based on the quality of our services which is directly related to the quality of the teachers in the classrooms and those who support them, so our goal has always been to be a leader in that regard, so but I don't, we haven't sort of foreshadowed any real impact as it relates to universal healthcare.

Okay, the opportunity for new business, new Management contacts, but doesn't sound like it so it's immaterial at this point.

Do you mean if the companies no longer had to spend as much on healthcare they might have more to spend on our services?

Well, that's a good idea too.

[LAUGHTER].

I was just thinking if states were looking for Managers for such programs that it could be an opportunity.

Oh, I see, I see. Yes, no, we haven't gone down that path yet.

Got you. Thank you.

We'll go next to Amy [Yunker] with Robert W. Baird.

Hi. Good afternoon.

Hi, Amy.

Just to follow-up on Howard's question about the multi- site customers, you said in presentation materials in the past that I think there's an opportunity given your single site clients for 3,000 potential sites from those existing clients and I guess, is that really the number we should be thinking about or what is kind of the criteria you look at there and if that is the number, why are are are we just seeing 50-55 sites per year? What's the hang up of the issue you think you need more salespeople because it seems like you operate pretty lean on the sales front.

Yes. Just to review the numbers and I think Amy you're right. When we look at sort of the universe and try to find our universe of opportunity, we look at our existing client base and those clients who have, those clients who have one site with us today have a total of 3,000 sites within their companies that have more than 500 employees in one location, so that's how we define them as a prospect for a center, and then within that base, within that as well, those clients who have more than one site with us so they at least have two, have 600 sites with more than 500 employees, and so that's what we view as kind of the universe of opportunity, in the same way that from a sales perspective, we've defined the salespeoples opportunity as there are 18,000 employers that have sites of more than 500 employees that we don't do business with today out there, and so that's kind of the wider universe. Do I suspect that we'll have that many sites? No. I do think that's sort of the opportunity that we put in front of ourselves to say when we're talking with clients, here are the candidates for sites, and we have both people that are focused on new business and existing business and as I said, in the past, I think it's a long sales cycle that takes time. Six years ago, we had virtually, I think we had half the number of sites, number of multi-site sites that we have today are clients that we have today. It's I think a long term opportunity that will continue to take advantage of.

I guess I'm just, it would seem as if existing clients would be more of a low hanging fruit, or an easier opportunity but given only 25% of your pipeline is with existing clients is, what do you think the challenges are there? Is it just that it takes time for them to get comfortable with what they have?

Yes, I do. I think it takes time and our history shows us that there are two types of clients. There are those that make decisions centrally for these kinds of services and where we can have a relationship at corporate, work on say a pilot site and then have it rollout based on corporate's blessing and financing, and then there are those clients for whom the decision is very decentralized where it's a good thing that we're doing business with them as a company which gets us in the door but the sites actually make decisions on their own or more importantly, they fund these kinds of programs on their own, and those are more complex and take more time to make happen.

But I would also say that one of the additional opportunities aside from centers which we still think is a long term important part of our growth as far as getting existing clients to do more centers, the new services we're adding, the Back-Up Care advantage and College Coach, Back-Up Care advantage of the 70 clients we've brought on, 60% of them have been existing clients who we already do business with broadening the relationship with us, maybe not yet with another center but with other services that make sensor allow us to touch more of their employees so in part, our desire to expand the suite of back up offerings and all add College Coach is that we're convinced that we have clients that want in addition to other centers more services that are valuable around work life integration and that's the key part of our strategy going forward.

Great that's helpful. And then lastly just Elizabeth, your expectations for CapEx for '07?

We're looking at a total of about 30 million, Amy. About 8 million of that is recurring CapEx and the rest is in new center development and improvement.

Great. Thank you.

Thanks, Amy.

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

Hi, guys. Thanks for taking my question. Following up on the previous caller's question, perhaps you can talk a little bit about the rational, the status of the sales force, what would be the argument against increasing resources in that area, particularly in light of how large the market opportunity is.

Well, I sense that there is an argument against increasing resources in the sales area and we've done that consistently over time. We now have a full team of people focused on the Back-up side and we have a full team of people focused on College Coach and we continue to add to our sales team that's focused on both new business within the center side as well as existing clients. So we have over 40 people in total on the sales team, here, in the UK, and Canada, and that number has grown over time, and I expect it going forward we'll continue to add resources to it. Where we see opportunity to do that.

Okay. And then I guess also in light of Amy's question, do you still think that the addressable market is defined by employers who or sites with 500 employees? Is that a reasonable cutoff or is there anything that's changing in the marketplace such that it would be more feasible for larger work sites with larger employee base?

Well, I think it's always been that the larger sites are better prospects than the smaller sites so somebody with 10,000 employees on one campus, you might argue is when we sort of raid our prospects on the sales side, we look at them a little differently than we look at a firm that might have only 500, and of course there's differences between employers who have 500 and have always had 500 and employers that have 500 today that we think will have 2000 in the next couple of years because of the growth trajectory so within that base, I think it is still reasonable to think of our universe of prospects as companies with more for centers as companies with more than 500 employees in one location, but again, not every prospect within that universe of 18,000 employers is created equal and our team of course is very strategic about being proactive within their territories in part based on size and in part based on industry and in part based on the situation that that employer, whether they are growing, moving to a new campus, whatever it might be.

Okay. And then given what's happening with the margin expansion or margin impact from the loss of the UAW contract, how should we think about the longer term margin opportunity? For the business?

I Think our view for the long run remains pretty consistent with what we have said in the past, and we still feel like going forward, we have good visibility on our ability to continue to increase price ahead of labor and other cost increases. We still feel good about our ability to achieve ramp up contributions despite increases in enrollment in our mature base and we still feel good about the ability to continue to grow the slightly higher margin services that we've added in the past year or two, and lastly, continue and hope next year begin to lever over head over time as a percentage of revenue in part because of a continued contribution from the UK and Ireland and in part because of just making that happen here in the U.S. So that the long term view of our ability to improve our operating margins in the range of 25-50 basis points per year would still be the way we would look at the business over the course of the next 3-5 years.

Okay and lastly, of the 40% or I guess the 30 or 40 clients that signed up for back up advantage that has not had a existing relationship with Bright Horizons, is there anything common to those employers? Are they smaller? Do they come from particular industries just so we can get a sense of what is changing about your customer base or how it's evolving?

they are as diverse as our client base at large so they are representative of virtually every industry. There's no real one sort of core of kinds of employers that are in that grouping, but what I would say is they do have a couple things in common. One, they had a strong desire to make a service available that could touch a large amount of their employees and so rather than site specific strategy, they were looking for an opportunity to provide Back-Up Care across their network of employees regardless of where they might live or work, and that's one important piece of what Back-up advantage has done for us is it's extended the breadth of our center based solutions to now include the ability to touch more people, and offer kind of an equitable solution. And then secondly it's it's allowed us to extend that solution to elder care which is a hot button for many employers so now instead of just touching the section, the segment of their workforce that has child care related issue s that causes work life friction, they can do the same for people of elder care giving responsibilities which is a segment of the workforce that's going to continue to grow over the next ten years so I think they have that in common but they don't have the same business in common.

That's very helpful. Thank you for taking my questions.

Sure. Thanks, Michael.

(OPERATOR INSTRUCTIONS) And once again if you do have a question, please press star one on your touch tone phone. We'll go next to Brandon Dobell with Credit Suisse.

Hi. Thanks. Wanted to focus on international for a second from a couple perspectives, and where are we in terms of the percentage of capacity or percentage of centers, the outlook there for capacity growth and then how you are getting that capacity growth. Is it same customer growth, how the salesforce is looking, those kind of questions and then in terms of foreign exchange, starting to see some impact there, wanted to see if that was an impact for you guys in the quarter as well.

Okay, Brandon, let me give you a bigger picture color on where I think we are outside the U.S. And let's hit on some of the numbers [Inaudible] the questions you asked.

Okay.

Roughly just to put it in numbers about 15% of our pipeline today is outside of the U.S, So that's really UK, Ireland, Canada, and so we're seeing momentum, continued consistent growth outside of the U.S. We've added another sales resource recently there and feel like that's in a good place as it relates to our growth. As you know, I think we're in a position, I'll take them one at a time, we're in a position in Ireland where we're growing, we're adding new centers and because we're continuing to add so many new centers and so many are on a relative basis and many of them are P & L centers that sort of is small enough now where the newer centers continue to depress that country's ability to contribute what we ultimately think they can over time once they are a little larger and more stable, more mature, and in the UK, we're starting to continue to see improvement in terms of throughout this year of their ability to contribute. There's still an overhead investment there that's outside for the current size of the business but we expect in the not too distant future for that to continue to improve and contribute to the overall pull. So that's sort of the bigger picture and I'll let Elizabeth a talk about the financial piece of that.

Yes. I think if I caught your question right, Brandon, one of the questions is on relative size of centers in Europe and we certainly are seeing a slightly higher overall new center profile in what's in the pipeline, the average center as I mentioned is about 58 and those that are in the pipeline are getting closer to 100 on average, so there's certainly an uptick in the average size similar to what we had seen five or ten years ago, and the growth there would be proportioned if we're looking at unit growth overall here, excluding the foreign effect if we had a 6-8% unit growth, we would hope to see that kind of the same level in Europe. With respect to foreign exchange, the pound has certainly strengthened against the dollar and so we saw some effect of that in the First Quarter versus last year. It was about I think$0.10 different foreign exchange rate, so from an order of magnitude standpoint that was probably three quarters of a million or a million in revenue in total.

Okay. Great. Thanks a lot.

Okay.

We'll go next to Jerry Herman with Stifel Nicolaus.

Thanks, good afternoon everybody hi guy. Question on the back up program if we can. Dave, can you give us a feel for the sort of typical size deal for Back-Up Care or I guess what I'm trying to get to is sort of the revenue contribution that may have this, I'm assuming it's pretty small but just some color if you would.

Sure, Jerry. You're right. It is small and hopefully will grow over time. I'll start by giving you sort of the as to directly answer answer your question, the average client would invest between, would invest an average of between 50-$75,000 per year. We have several that invest upwards of a couple 100,000 dollars per year depending on their desire for scope of the program, but that's about the average. We have some that invest as a first year slightly less. All total I think when you look at and talking mostly about either buying some portion of memberships into our consortium centers, but most specifically Back-Up Care Advantage we would expect that Back-Up Care Advantage by the end of the year will be on a run rate of about 5 millionish in annual revenue. So I think that gets to both of your questions.

Great. Appreciate that. And with regard to the Ford disengagement, Dave, does your assumptions and guidance include any sort of post-closing expense reimbursement to you guys?

We can't really comment on that, Jerry until that's finished so our assumptions today really include the entire loss of the program as it relates to it all happening as of June 30th, while the family centers happening now and the child care centers as of June 30th and we'll be in a better position to comment on post-closing responsibilities, reimbursement, any fees when we talk to you next time.

Okay, but what you've offered thus far assumes no such --

That's correct.

Great, thanks and I guess follow-up to that, any other sort of downsizing disengagement discussions going on?

As I said to you earlier, I think the joint program nature of the UAW Ford contract made it very unique in our world and it's not to say that we don't have any other employers who are contemplating downsize being in the over 700 clients that we serve but I think certainly nothing that's on our radar screen at this point that would have any big impact on us.

Great. Just one last one, Dave, if I can. Could you just talk about the acquisition environment? I know you've referenced your expectation on acquisitions but in light of some of the activity that's gone on, some of which we categorize as aggressive, maybe you could talk about the availability and valuations of anything you've looked at lately?

Well, I would say that there's certainly been acquisition activity here in the U.S. and in the UK as well, and other places around the world but those will be the two places we care most about, and there have been some aggressive activity out there. I would say that a majority of those situations we're not involved because the targets are companies that have been in our industry for a long time and kind of had the different operating model than what we've traditionally been about and so for the most part, we haven't been involved in many of the, I'll call them the more headline ones than you're probably aware of so we remain focused on a universe of opportunities that are relatively small in nature. They're not necessarily headline grabbing in terms of size, but they represent an opportunity to us to philosophically align with our levels of quality, to bring some talent into the Company potentially, to get us to transition a couple client contracts that we might be able to better leverage than a local operator might be able to do on their own, so I think that had we been playing on the larger playing field with some of the deals that have happened, I think it would be fair to say that that would be, we have maybe a different mind set than we do but it's sort of been not in our target universe.

Great. Thanks very much.

Yes.

We'll return to mark Hughs with SunTrust.

Thank you. What was the cash from operations in the quarter?

We haven't yet completed all the 10-Q disclosures, Mark, so we don't have all of that finalized yet.

Cash at the end of the period was 9 million I think I heard you say?

Yes.

Okay. Thank you.

Sure.

And there appear to be no further questions at this time. I'd like to turn things back to Mr. Lissy for additional or closing comments.

OK, thanks Dustin, and thank you to everybody on the call today. As always Elizabeth and I will be here with any further questions and during the course of between now and the next quarter, we'll look forward to seeing many of you on the road. Take care.

Goodnight.

Again that does conclude today's Conference Call. Thank you for your participation. You may disconnect at this time.