Bright Horizons Family Solutions Inc (BFAM) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bright Horizons Family Solutions second quarter earnings release conference. As a reminder, today's call is being recorded.

Now, for opening remarks, I'd like to turn the conference over to the Chief Executive Officer, Mr. David Lissy. Please go ahead.

Thanks, Dahlia. And hello to everybody who's joining us on the call today. Joining me, as usual, is Elizabeth Boland, our Chief Financial Officer. And we'll begin today's call with Elizabeth going through all the administrative matters. Elizabeth.

Hi, everyone. Our earnings release, as you know, went out over the wire after the close of the market today. And it's also available on our website at brighthorizons.com. As mentioned, this call is recorded and it's being webcast. And a complete replay will be available in either medium. Those wishing to access the phone replay can call (719) 457-0820 and use pincode 6368745, 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 also be discussed during the call. And detailed disclosures relative to these measures are included in our press release as well as the Investor Relations section of the website.

The risks and uncertainties that might cause future operating results to vary from what we describe in any of 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 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 tax and fiscal policies on employers considering worksite childcare, and lastly, the other risk factors which are set forth in our SEC filings, including our annual report on Form 10-K. So back to Dave.

Thanks, Elizabeth. And hello again to anybody who just joined us. Let me begin today with a recap of our second quarter results, then discuss our operating and financial performance over the past quarter. As usual, Elizabeth will follow me with a more detailed review of the numbers, including our outlook for the remainder of 2007 and then we'll open up the floor for questions.

So first, a recap of the numbers for the quarter. Revenue for the second quarter of $201 million was up 15% over last year, while operating income rose to $21.8 million from $18.7 million in last year's second quarter. Net income of $12.5 million generated earnings per share of $0.47, up 18% over 2006.

As we pass the midpoint of the year, we continue to see strong operating and financial performance and we're very pleased with our results year-to-date. Looking ahead, we have good visibility for the rest of 2007 and believe we're well positioned to meet our financial goals for this year and beyond.

I do want to note some of the unique items this past quarter that are attributable to our planned exit of the UAW Ford contract. This past quarter's revenue and cost of sales each include $4 million related to severance payments associated with the termination of the UAW Ford contract. As you may recall, under this cost-plus contract, we bear no exposure for closing costs. And due to the pass-through nature of these expenses, this had the effect of increasing revenue with no dollar impact at the gross margin line.

This also results in some variation in the associating percentages of revenue in the quarter such as gross margin and overhead. That said, we're pleased to see revenue growth pick up modestly again this quarter, even if you were to discount the revenue effect I just mentioned.

We added 12 new centers in the quarter, bringing our total number of additions so far this year to 21. New centers in this -- in the quarter included our third for Centene, this one in Montana, which is a new state for us, along with our second center for Blue Cross Blue Shield of Massachusetts, two new centers for the Department of Children, Schools and Families in the UK. And in the quarter we also added centers for the Baylor All Saints Medical Center in Texas, Suffolk College, and the Wellcome Trust in the UK.

We also welcomed a new school to our family, Bridges Montessori. Bridges is a high-quality elementary school that serves up to a capacity of 300 children with programming from preschool through 6th grade on a 3.5-acre campus in Stuart, Florida. With the addition of Bridges, we now operate a total of eight elementary schools.

We continue to look for opportunities to expand our reach in schools as we view this as a natural extension of our services. We're focused on areas where we see strong demand and can leverage our installed basic childcare centers as a source of enrollment, while at the same time providing the right financial profile to support our invested capital. As such, our growth in the schools area will continue at a measured and thoughtful pace.

Rounding out this quarter's center additions were new lease model consortium centers in the UK and Ireland. This quarter we closed two centers in addition to the previously announced and anticipated closings of the 26 childcare and family centers under the UAW Ford contract. We discussed our exit of this contract at length during our last two calls. And Elizabeth will once again review the impact of this on the remainder of 2007 and on 2008 in a couple of minutes.

Looking ahead, our pipeline of centers under development remained solid with more than 60 centers under development. This pipeline of committed centers is a good indicator of future growth and we continue to see favorable trends in the industry composition in the pipeline. (inaudible) centers in the more cyclical industries such as financial services and technology have increased. The newer marketing and professional service firms has held steady, while at the same time commitments from healthcare, pharmaceutical, and government and education remain strong.

The overall visibility we have through 2007 and into 2008 is encouraging. As is front-end sales activity as we're currently focused on gaining new commitments for centers that would open in 2008 and in 2009.

The mix of new centers this quarter included four acquired locations, three childcare centers, and the Bridges school. As you recall, there were no acquisitions in Q1. So year-to-date, four of our 21 new locations came to us via acquisition or roughly just under 20%. As you know, the timing of both new center openings and of acquisitions are never linear. However, we do expect that roughly a third of our growth over time will continue to come through the acquisition of high-quality centers and providers.

Our newest services, Back-Up Care Advantage, which is our integrated suite of back-up services, and College Coach, both continue to perform well. Although still relatively small, vis--vis, our main base of business, we continue to be very pleased with the current level of progress and remain enthusiastic about their potential to contribute significantly towards our future growth and profitability.

As we start our second year with the BUCA program, we're pleased with the level of client interest and are now projecting a total revenue from this program to exceed $5 million in 2007. College Coach remains on track to go approximately 35% over the last fiscal year and contributed approximately $7 million in revenue this year.

Finishing up my look at the revenue line, tuition increases averaging 4% to 5% continue to hold and we expect this will remain the case throughout 2007. In addition, enrollment continues to expand based primarily on the ramping of our newer centers, including a relatively large class of new lease consortium models that began opening last year along with continued modest increases in enrollment across our mature basis centers.

Let me turn now to the margin line. We again delivered strong performance with operating income expanding to almost 11% on gross margin improvement of 30 basis points with 20.4%, and modest overhead leverage to just over 9%. At the gross margin line, our ability to pace our price increase is modestly ahead of personnel cost increases along with the contributions of College Coach and our back-up programs and enrollment gains from ramping and mature centers, all contributed to this improvement.

As I'd noted before, the larger class of new P&L leaser consortium models coming on line continues to have a slight dampening effect at the margin line during their initial ramp-up period. But over time we expect these centers to become solid contributors to our long-term profitability.

Lastly, gross margin as a percent of revenue was dampened, as I mentioned before, by the severance payments related to Ford even though the gross margin dollars were not impacted at all. Despite the UAW Ford closures which are projected to reduce revenue by approximately $16 million in 2007 and operating income by $2.2 million, we still expect to see solid performance for the remainder of this year. More specifically, for Fiscal 2007, we expect revenue growth of approximately 11% for the full year, steady operating margin improvement in the range of 40 to 60 basis points and a resulting earnings per share in the range of $1.77 to $1.80 for the year.

Lastly, as you've heard me emphasize in the past, our consistent and strong results would not be possible without the passion and dedication of our educators and team members that have allowed us to grow while maintaining our focus on quality. In testament to this, we recently received the results of our annual parent satisfaction survey. This is an annual survey sent to all the families that we serve and tabulated by a third party. And with more than a 35% response rate, we received a 98% satisfaction rate for which we're both pleased and gratified.

Ours is an intensely human service and our sustainable competitive advantage is our people. We are very proud of team of professionals who deliver high quality care, education, and client service, to the children, families and clients that we serve around the world. Let me now turn it over to Elizabeth to get into a more detailed review of numbers with you and I will be back to talk along with her during Q&A. Elizabeth?

Thanks Dave. So, again, to just recap the headline results for the quarter, revenue of $201 million increased 15% over the second quarter of 2006 and operating income increased 17% to 10.8% from the 10.7% in the same period we reported last year while net income rose $1.7 million to $12.5 million. Earnings per share $0.47 is up 18% from the $0.40 we reported in 2006. As Dave mentioned, revenue and cost of sales both included approximately $4 million in severance payments for employees from at the UAW Ford Centers with no impact on gross margin dollars, due to the cost plus nature of the contract.

The sources of top line revenue growth remain consistent; - new center capacity and program additions, enrolment gains, and rate increases. We have added 21 centers in the first half of 2007 including 12 during the second quarter. Revenue also increased from the ongoing ramp up of enrolment in the centers we opened in 2005, in 2006, particularly the larger group of 36 centers added in the second half of 2006. Lastly, enrolment in our core base of mature centers continue to trend above prior year levels.

Offsetting these increases was a small effect from our cost plus group of centers particularly the UAW Ford Centers which generated approximately $1.5 million less revenue from operation in Q2 '07 than they generated in Q2 '06 as their operations wound down. Newer centers -- newer services, excuse me, including Back-Up Care Advantage and College Coach also delivered incremental revenue growth compared to last year and we continue to realize 4% to 5% annual tuition increases so far in 2007.

Center gross margins also continue to improve increasing to 20.4% for the quarter versus 20.1% in 2006. The primary factors in improved margin includes 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 in college admission counseling and solid enrolment across the core center base.

These gains at the gross margin line are offset in part by pre-opening and nearly stage operating losses from new P&L centers we have opened, a total of 19 since the beginning of 2006.

SG&A as a percentage of revenue of 9% in the second quarter is approximately even with Q2 '06. The modest leverage we have achieved in overhead spending in the U.S. as well as the U.K. has been offset by the incremental overhead associated with the absorption of the college coach operation and to a lesser extent increased equity expense over 2006 levels.

Amortization expense totaled approximately $1.1 million in approximately compared to 750,000 last year reflecting the effect of acquisitions made in the second half of 2006. Net interest expense was $200,000 for the quarter compared to interest income of $100,000 last year. With ongoing investments in the business for new centers and acquisition as well as regular stock repurchases, we have been a borrower under our working capital line of credit in recent quarters. We have reduced our borrowing to outstanding end of the line from $35 million in December '06 to just under $15 million at the end of June 2007.

Our strong financial performance so far this year has driven an 18% increase in EBITDA to $53 million for the year-to-date, while capital spending totaled $20 million through June. We ended the quarter with approximately $6 million in cash. The weighted average shares outstanding also decreased to 26.9 million for the quarter.

Now, let me recap our usual operational statistics. At June 30th, we operated 635 centers with 69,500 total capacity. We now operate approximately 65% of our contact under profit and loss arrangements, and 35% under cost plus contract.

With the closure of UAW Ford cost plus contract programs, the fault service center is the average capacity per center is now a 133 in the U.S. and remains at 58 in Europe.

In order to provide guidance for the rest of 2007, I will first isolate the impact of the UAW Ford contract now that the terms of the closure and employee severance arrangements have been completed. For the first full year -- I'm sorry, for the full year 2007, the closures will have the effect of reducing revenue by approximately $16 million and operating income by approximately $2.2 million. This translates to approximately $0.05 a share split relatively equally between the third quarter and the fourth quarter. The further residual effect in the first two quarters of 2008 is the reduction of approximately $18 million in revenue and approximately $2 million in operating income or just under $0.05 a share in 2008.

Now we'll look ahead to the rest of the 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 to 55 new centers this year. In addition to the UAW Ford Centers already discussed, we did close two centers in the second quarter and currently expect to have a relatively consistent number of routine closures to approximate 12 centers this year in total.

Our top line projection for 2007 anticipates growth approximating 11% over 2006 levels. Considering the variables in impact margin that we've discussed throughout the call, we are also projecting to generate 40 to 60 basis points of operating marginal improvement in 2007.

We expect overhead as a percentage of revenue to approximate 9.3% to 9.4% for the full year as we continue to absorb increments in overhead for College Coach and for equity expense as well as reflect the UAW Ford revenue loss. Based on current cash balances and expected cash flow for the remainder of '07 including projected capital spending of approximately $30 to $32 million for the full year, we would expect to see a gradual reduction in net interest expense in '07 as cash generated from operations absorbs the short-term borrowing. With amortization expense of approximately $4.7 million and effective tax rate of 42% and 27 million shares outstanding for the year, our projected EPS is in the range of $1.77 to $1.80 for 2007.

Looking specifically to the third quarter of '07, we are estimating EPS at $0.40 to $0.41 a share. With that, Dahlia, we're ready to go to Q&A.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment. Our first question comes from Jeff Silber with BMO Capital Markets.

Hello. Can you hear me?

Yes, yes we can. How are you?

Yes, we can.

Okay, I am doing fine. I apologize I am in transit right now. Can you give us a little bit more color on the acquisitions -- the Bridges acquisition and the three childcare centers? Any related financial impact would be helpful.

Well, they are they are pretty usual deals, Jeff. Bridges, as Dave mentioned, is a single-side acquisition. We did acquire the land and building there. So we'll see that was one of the factors and the capital spend in the quarters that we ended up talking on the property. We see it as a good investment, but otherwise the size of the school is a little bit larger than average; it almost 300 capacity. And so we see it as a good contributor at about double the size of a usual center. It is running a pre-school as well as an elementary age grouping and so it has its own built-in feeder system and a good installed base of enrollment. With respect to the acquisition in the U.K., three programs that are like the U.K. centers are all relatively smaller than the U.S. based, but these are a little larger than the average U.K. centers and they give us a good -- it is another tuck-in acquisition. It gives us a new geographic location and it is just sort of a typical ride up the middle acquisition.

And Jeff, we all follow suite with our typical financial metrics, given what historically we've been paying.

Okay, Dahlia, I think we may have lost him. So we'll go to the next question.

Hello. Can you hear me? Can you hear me now?

Yes.

We got you.

All right, sorry about that. I am just moving on to the pipeline. You talked about the strong visibility you have. Given the uncertainty we're seeing in the economy, are you seeing any of that within your clientele in terms of maybe companies potentially going down the road and then pulling back because of the uncertainty out there?

We continue to see, as I mentioned in my comments, good front end sales activity, good momentum, both in the areas of new center development on the back of suite of services any college goes. So I would say that the momentum continues to be strong from our point of view.

We'll move on and take another question, and let's move on to now Mark Hughes with SunTrust.

Mark?

One moment please. Mr. Hughes, please go ahead.

Okay, thank you. How many seats did you lose with the UAW closure?

It was about 1,600, Mark. As you might recall, the childcare centers have had about almost double the capacity, but the family centers which closed in April had no associated capacity like we think of for childcare. So although it was 26 programs that exited the center count, only 1,600 seats were lost in the total capacity.

Okay, the $16 million impact, does that include the $1.5 million that you have already incurred in the second quarter?

It does, yes.

Okay, and then with the 65% P&L, a little bit of a shift in that direction, refresh me on kind of average profitability, the business center model, the P&L versus cost plus. With that mixture, does that influence the way we should view the overall profitability for the -- or potential profitability?

Mark, let me take that. I think the real central reason for the shift is just the exit of the 26 cost plus contracts all at once.

Right.

And that's enough to move the needle. So as we look ahead, maybe another way to cut it is, when we look at our pipeline, we're not seeing any changes in the mix in the pipeline relative to cost plus and P&L as we've historically seen it. So I don't really -- I don't really think it is going to have much of an impact other than the exiting of that amount of cost plus programs.

Okay, and then just our observation, it would be swell if there is an acquisition out there that maybe would contribute $16 million this year or $18 million next year. Are there -- did those opportunities come along very often?

Well, I think as you've heard me say before, we were pretty diligent about looking for acquisitions and most of what we do is going to be like what we have done historically, mostly smaller acquisitions. So we feel like we've got a good active pipeline out there. Never can predict how the -- when they'll close and when they'll be added to the network, but the activity still can see I characterize it as still good and we'll see where it takes us.

Very well. Thank you.

Thanks Mark.

Okay.

Our next question now comes from Michael Lasser with Lehman Brothers.

Hi guys, nice job on the quarter.

Thanks Michael.

This may be splitting hairs, but you took the revenue guidance up from 10% to 11%, to $4 million in severance added. It seems about 50 bases points or so to the top line for the year. Are you a little more bullish on the top line than you where and if that's the case why choose routine of the bottom line guidance?

Well, Michael, I think that this time last year we talked to you all about our -- our forward look included a slight and steady climb on the top line. I continue to see modest improvement on the top line as we became more comfortable with the organic growth outlook that we had in the pipeline and we saw what openings were going to look like, and so we feel good that that will continue and that caused us to take a look at the year and say that we continue to -- we think we'll continue that trend. So I think that's really what you are seeing. I think we also have to remember that some of the growth that we're seeing which we're very comfortable with is in the area of the P&L models and the lease consortium models. So in many cases, these are client sponsored centers, but ones where we're taking the real estate risk and the sponsorships coming on the back end of that.

Those centers tend to incur more upfront losses than the standard mix. So I think we're being appropriately watchful of what that impact is going to be, particularly with the way you have to account for leases and often times, that's hitting our P&L before the centers are even open. So I think we need to be watchful of that and when we take into consideration what we see happening over the course of the rest of this year, we feel good about the 11% top line growth and feel comfortable in the $1.77 or $1.80 EPS.

Okay, and then the 50 new centers this year, that's 38 that are going to be close including UAW. So 12 or so in total and it -- so that would imply there's going to be 19 or so left for the next two quarters. Are they going to be -- first, is my math right and second is are those going to be weighted more towards the third quarter or the fourth quarter?

Well, I think, just to go back on the math a little bit, the -- we've opened 21 so far in the first two quarters. We expect to open 50 to 55 so we'll open the balance of the -- of that of what's left, the thirty plus or so centers in the second half of the year. I think there will be a slight weight towards the third quarter, but I think it will be fairly balanced between the third and fourth quarter.

Okay, kind of got to work on my math, I guess. The hybrid consortium and back-up model that you even talked about more recently, how is that still a significant portion of the pipeline or how are you thinking about that through the remainder of this year and into next?

Well, I think when you hear us talk about -- and I think this is important to keep clarifying, I think there has been a bit of a change in the way we think about what we traditionally call the lease or consortium model and that change really started to happen post the acquisition of Children First back in 2005. So many of the -- most, not all, of the consortium or lease models that we're opening today have elements of corporate sponsorship in them. They might be a hybrid model, meaning they have back-up and full service under one roof, or they could be just full service, but say half the space is sponsored by an employer. And we know that upfront before we take down the lease on the center and we -- and the other half of the space is we may be marketing to the community or to other employer. So I think it is safe to say that most of those models today have some level of that associated with it, either hybrid or some other level of support that we know it.

Again, there is still some of the traditional amenity office park kind of models that we have done historically, but I think what is really contributing to the up-tick in that class of centers has to do with the hybrid or some level of sponsorship in a lease or consortium model.

And so the lease model might be getting away from an office park and going in -- those are what you are referring to giving into more of a community type area, but with employee sponsorship in there?

Yes, I would say the more likely sight is what I will call a quasi commercial and residential area, so not truly residential, but a place that has employment generator surrounding it and also has a community that has a profile that can support the tuitions for a high-quality child care center.

And are you also using the Children First type model of filing memberships in those centers to launch them with more revenue from day one?

Yes, and again let me be clear about that. We're still looking very closely and have a couple in the pipeline where we are just looking at the traditional back-up model. So we're not getting away from that. What we see as the -- as a way to expand faster that model is to have some level of hybrid between full service care and Back-Up care. So instead of having to sell all of the memberships that we might have needed to sell to make a one consortium only or one back-up center work, we now have to sell -- we now have confidence that we can market both the full service spaces and less of the back-up spaces and end up with a return profile that gets us to the same place. So that's sort of -- that's what's changed I think over the past 2 years.

Okay, thank you for taking my question.

You're welcome.

Thanks, Michael.

Let's move on to Ryan Mahoney with ThinkEquity.

Hi, thanks. Good afternoon.

Hey, Ryan.

Hi, Ryan.

I was wondering if you could update us on your capacity expansion expectation through '07.

Sure. The -- considering the downgrade that Mark Hughes mentioned earlier -- asked about earlier with the UAW Ford centers coming out, our projection would be to add between 4 and 5% total capacity. So we ended last year just about $69,000, so it would be 4 to 5% on top of that.

If you were to factor out the UAW Ford effect it would be around 7% capacity addition and so topline growth is comprised of those capacity additions plus rate increases of 4 to 5% and then enrollment ramp in our existing base centers.

Okay, thanks. And then also I was hoping you could break out your pipeline mix between new and existing clients. I think you talked about that last quarter being about 25% new.

The number is pretty consistent, Ryan, with where we were last quarter. There hasn't been much change in that percentage. And I will tell you that of the -- the pipeline -- typical pipelines for us historically have at this stage been around 50% P&L, 50% management contracts. It's not ultimately what ends up being added but that's typically how the pipeline tends to look.

Some of the management contracts tend to sit in there for longer periods of time because they are larger centers, oftentimes part of campus developments and things like that. But of the 50% that are P&L, about half of those P&L models are employer-sponsored centers that are P&L and about half of them are lease consortium hybrid, back-up consortium type centers.

Okay. And then lastly if you could just talk about the stock comp and break it out between the line items.

Sure, just bear with me one second. I'll flip forward to that. There is about 350,000 to 400,000 or so, for the full year it will be at the gross margin line, center margin, and the remainder is in overhead. The -- of the total comp that we're expecting for the year is about -- well, actually let me just look this up. I'm just looking at a quarterly number, so if you have another question or if we go on to the next person I'll just look it up and put it out there in a second.

No, that's it, thanks a lot.

Okay.

(OPERATOR INSTRUCTIONS) And next with Robert Baird we have Amy Yunker.

Hi, good afternoon.

Hi, Amy.

I was hoping, David, you could just spend a minute to talk a little bit more about the elementary schools. I know you said you're going to be -- take a cautious approach. But can you talk about what kind of things you look for when you go into a particular market, what hurdles you have to meet in order to open -- or barriers to entry?

Yes, I think, Amy, our approach is we're taking -- and we've continued to take a look at markets where we believe a couple of things exist. One, we have a feeder system of centers that graduate preschoolers that make sense for us and make logical sense for us to take a look at extending our reach of services with parents. That's how we got into this originally in Seattle.

But it also has to be a market where we think the demand profile was strong and there is not already a saturated supply of private school options that are like our typical schools and are sort of priced in that range. And so we look at that in the market and try and look for both demand and also places where we think we can influence the supply a little bit through our centers.

And then of course the second criteria are markets where we already exist with schools, where we might have waitlists where we can add schools.

And then thirdly, another key thing for us is what does the builder buy, and I think we have a slight preference towards buying and expanding when we go into a new market. But once we are in a market the tendency is to build and expand off of what already exists there. So that -- to maybe kind of take all that and say where are we headed from here, I think you'll see us consistently add to the school network over the next few years.

I think some of it will come through us opening new schools in markets where we already have schools and then I think you'll see us enter a few new places that could be either through building or buying and our preference would be to buy but again it's a fairly limited field of for-profit elementary school operators out there. So I sort of am cautious to say it will for sure through buy because of course that has to be -- that has to work and has to be available, so we'll see where that takes us.

That's great. Thank you for the color, I appreciate it. I'm also wondering -- I'm sorry if I missed it if you said it, but how many clients do you have currently using both the College Coach and the Back-Up Care Advantage -- or not both, but one or the other?

There are 60, 65 or so clients in College Coach and over 90 clients in Back-Up Care Advantage.

And then finally, Elizabeth, do you have in front of you just a breakdown of the centers between North America and the UK and Ireland?

I do. At the end of June we have 116 centers in the UK and Ireland, and 519 in North America.

Great. Thanks, guys.

Sure.

Thank you, Amy.

And just to answer Ryan's question from before, the expense is projected for the year at $4.7 million of which about $400,000 is at the center level and the remainder is in overhead.

Our next question comes from Jerry Herman with Stifel Nicolaus.

Good afternoon, everybody. A couple of questions. Maybe just a different way to cut up revenues if we can -- I know you guys will probably give this in your Q, but can you identify the acquisition contribution either in percentage terms or dollars terms in the quarter?

We don't segregate that, Jerry, and there are four centers in the quarter and they'll -- their contribution will vary based on when they come in for the year, but it's not something we've typically segregated.

Okay. But the components of that will be Back-Up Childcare, College Coach and then those acquired centers?

I guess I was talking about the acquired centers in the quarter that we don't isolate revenue for individual centers. Is that -- was that --?

I was talking about all the acquisitions, all acquisition-related contribution.

Okay. Well, College Coach we acquired last year and its contribution this year, I think Dave did cite it, is expected to be around $7 million for the year, and it has a little bit of a backend waiting given the timing of how many students take on college counseling in their junior year prior to getting admitted to college.

But -- and it's in a growth mode, so there is that kind of quarter-to-quarter variability but we -- Back-Up Care Advantage we started up, so it's not an acquisition.

Right, okay. I guess maybe another way to ask that, Elizabeth, you've -- I mean, as you guys diversify, is there a way you can now measure non-center related revenue as a percentage of total? I mean, the predictability of the model, I guess, from our [selfish] vantage point is going down a bit, and I'm wondering if you can help us with that.

Well, in the 10-K we did segregate non-center-based revenue and College Coach certainly falls into that category. But maybe we are looking at the business a little bit differently than you are in terms of how it has similar operating metrics and we manage most of it similarly. But --

Yes, Jerry, I -- well, we don't see the predictability of the model going down, but that's, I guess, for us to discuss later. But the only non-center revenue that I guess you could classify in that category would be $7 million we would expect from the College Coach piece of the business and then also the -- of the Back-Up Care Advantage service, which we predict to be just north of $5 million this year.

But some of that revenue is actually -- a lot of that revenue actually is technically center-based and that as centers are providing a lot of the service, not all of the service under that program. So there is a good slice of that that's -- that we would consider to be center-based.

So of the total base of revenue we'll do this year, it's a fairly thin slice.

Okay. All right, that's fair. Questions about acquisitions, maybe you could talk a bit about the deal pipeline. I notice that Bridges involved some real estate purchases. I wonder if you are seeing that being a component of some of the deals that you've looked at, and I guess meaning that the capital requirements might be increased. Also if prices are being bid up in light of some of the aggressiveness of some of the other folks out there and multiples and deals, maybe even some framework on those you just accomplished.

Yes, I -- first on the real estate piece which is your first question, I don't think there is any change in our approach with that. We generally look at deals and most of the time we enter into a lease with a landlord. A lot of times the owner becomes our landlord, and many times the decision on whether or not to buy the real estate or enter into the lease comes down to economics and just doing the math and coming up with a -- if we can satisfy ourselves that there is return on capital, it's -- that makes sense. Under that scenario, vis-a-vis the other scenario then we'll be favorable.

But specifically in Florida there is an advantage from the tax perspective to owning the childcare center facility or the school in this case. So that -- I have to say in this case that was unique in that there was a favorable economic answer for us from a tax point of view to do that in this case.

So -- but in general with acquisitions, I think I said earlier, we still expect around a third of our growth to come over time through acquisitions both here and the UK, everywhere we operate. And I think our focus is not on -- there aren't many of the large operators that are -- fits for us in terms of logical fits. So our day-to-day focus is on small providers who tend to have a good, solid long-term reputation for quality, good, strong financial performance.

And we tend of do best where they really care about their legacy in terms of the buyer keeping up the level of quality in the community that they operate or being able to sell the client who sponsors them on the new operator and their ability to operate it at equal or better levels of quality. So that continues to remain our focus and from a multiple perspective we're still in the range that we historically have paid.

That's great. And then just one last question, Dave, if I can, and Elizabeth, your guidance for the full year implies sort of 8 to 11% growth in the third quarter but then up to 15 to 20% growth in the fourth quarter, and maybe just -- could you please shed some additional color on whether it's timing, seasonality, what have you that makes the fourth quarter relatively better.

Yes, and you're talking on the earnings side --?

Yes, yes, I'm sorry.

Yes, and you're touching on the primary driver that -- we have a few factors that do drive more contribution and more profitability out of the summer season. The core-based business of course experiences the enrollment turnover, if you will, the churn in preschoolers that we've talked about the last couple of years. That's the most evident at the childcare center level where the preschoolers go to the elementary schools and so we have to start rebuilding the preschool class. And we carry the teachers through that process and so we've always seen a bit of a dip in both enrollment and profitability in the third quarter for that.

Some other factors though come into play too with the ancillary lines of business. One is that for Back-Up care of course they have the highest relative levels of utilization over the summertime versus the rest of the year so we tend to have a somewhat higher-cost model in the summer and a somewhat lower-cost model throughout the rest of the year. So there is a little bit of upswing if you will in the fall from back-up care.

Schools are also closed over the summer, so we have the -- we have that enrollment just cut off and restarts in late August. And we also have with College Coach as I alluded to a bit before their revenue picks up in the fall semester but that's where the concentration of juniors who are getting counseling for the entry into college, high school juniors are going into their senior year, and so there is a bit of a concentration of services for College Coach in the fourth quarter as well.

So those are a couple of the main factors and I think that goes on top of what is our usual growth pattern, which involves opening centers -- we certainly don't hold out on openings in all the -- there is a tendency for centers to open in a little bit more concentrated way in the third quarter, so there is that contribution uplift as well.

That's great. That's good color, thanks guys.

Okay.

Thanks, Jerry.

Now, we'll take a follow-up from Jeff Silber.

Thanks. Just on the stock-based comp, can you possibly give us what it was for the second quarter and the breakout between the line items?

Sure. (technical difficulty) the second quarter was about $1.25 million and just under $100,000 or so goes to centers.

Thanks, and are there going to be any more severance payments with Ford in the third quarter or are they all taken care of in the second?

We're actually paying out (inaudible) in the third quarter, so we need to keep (inaudible) the high liability and high receivables from Ford related to that. But other than what we've accrued, the decisions that employees will make around COBRA opt out everything has been set (inaudible) so there is nothing further coming for that.

So it's more on the cash flow as opposed to the P&L?

Exactly.

Okay. And then what was cash flow from operations in the quarter?

We talked about EBITDA $53 million and we'll give all the details in the 10-Q when we file in (inaudible).

Okay, great, thanks again.

Okay.

Our next question is also a follow-up, and again, that's from SunTrust, Mark Hughes.

Thank you. The $1.5 million effect from UAW this quarter, what was the bottom-line impact of that?

Not much on the bottom line at all, Mark, because what it represented was the family centers closed in April so we had a little bit of lower contribution from them but de minimis said, put it in the category of $100,000 to $200,000 or so, nothing that measurable because they did shut down in April.

But it's mainly the childcare centers' enrollment starting to diminish as parents were making alternative decisions on where to place their children as whatever layoffs were happening in Ford. But because we operated those centers on a cost-plus arrangement, our management fee and what we earned at the center continued even though the enrollment was decreasing and the revenue was decreasing.

Right, okay. And then the elder care, did you mention 90 centers at the end of the quarter?

95, Mark.

95, I'm sorry. And that's up from 70 last quarter, right?

That's right.

And that was expected to be a $5 million contribution this year?

Yes, we said just over $5 for the year.

Can you say what that was last year?

It was almost -- it was de minimis because we started up the business in July and it was really just taking hold by the fourth quarter.

Yes.

But nothing in the second quarter last year.

Yes, okay. Thank you.

Okay.

Yes.

Our next question comes from Trace Urdan with Signal Hill.

Hey, good afternoon, guys.

Yes.

I wanted to -- you kind of poked at this and I don't know whether this is an answerable question on your part or not but I'm going to go ahead and ask anyway, does the 40 to 60 basis point improvement that you're anticipating this year in operating margins -- can you describe what impact the College Coach business has on that?

Well, College Coach was -- it was in the operations last year for 4 full months, so the lapping effect of that will diminish after -- halfway through the third quarter. So in the first half of the year College Coach is contributing 25 to 30 basis points probably of gross margin and at the operating margin level, it's modest but not that -- on only $7 million of revenue it's not moving the needle much at operating income.

Okay. That's -- I just didn't know if we knew what the margins for that business were. The other -- this is kind of a nitpicky question but I wondered if -- I didn't hear you tell us what the capacity was at Bridges?

300 capacity, Trace.

Okay, and that's sort of a -- it's a full-up school right now?

Yes.

Okay. And what -- where did that come from? Just a sort of case study on where these kinds of elementary school deals could come from. Was this sort of a -- was this a mom-and-pop start-up? What's the history on Bridges and how does it come to be for sale to you guys?

Well, I think from the viewpoint of the history it's an individual entrepreneur who had a passion for this and who cared a lot about quality and developing something that was unique in her area, and I think that she was also interested in trying to take that to the next level expand the footprint of what she had done.

And in our coming together I think we found the situation where she will stay with us and be relieved of some of the day-to-day, over time, responsibilities that she had in the school that she developed and help us to expand the footprint in an area of the country that we see as -- we already have another school in that relative area. So we do see that as a target market.

When you say expand the footprint, I mean, are you talking about opening up additional schools that are branded Bridges?

I guess I'd reserve the brand discussion because we have a school -- that's the JFK Charter School that's in partnership with -- it's partially funded through both charter funding and through our client there. And that's also a school that has a capacity of close to 500 children, and again, those aren't in the exact geography but essentially we're looking to connect those points and how we go about that I think we'll reserve comment on.

Okay. And then you've got effectively now two different models for this kind of business. Is there -- how are you thinking about that? Is there the possibility that you might go out and get into the sort of contract management business even as you are buying schools?

No, there is not -- that doesn't look like it's going to be an area we'll go down.

Okay, so those are sort of historic anomalies because of those circumstances but you're not actively trying to --

Yes.

-- recruit against that model?

To be clear, the JFK Charter School was opportunistic. We had a client partner for 10 years that we managed a childcare center for that really wanted to see this happen. And frankly without their support both in resources and in dollars the charter funding itself wouldn't have been attractive enough for us to make a school work. And so if we could find opportunities like that surely we would do them but we don't foresee that being a big growth area for us.

And in the Bridges situation did the school come to you or did you come to the school in terms of the deal coming off there?

We came to the school.

Okay, so you went out -- you identified that there was this opportunity and approached them and made that happen?

Well, I'll just say we have an active acquisition team that has identified opportunities for acquisitions that we think [our spec] might be fixing, and day to day, whether it's in the childcare area, the schools area, is actively pursuing relationships.

Okay, and that -- and then presumably with a non-competitive situation, is that fair?

I guess I would -- I'd just reserve comment on that as well.

Okay. All right, thank you.

I would imagine several of our competitors might be listening.

Well, fair enough.

And we have no further questions in our queue at this time, Mr. Lissy. I'll turn the conference back over to you.

Okay. Well, thanks everybody and hope everybody has a good night. As usual Elizabeth and I are here with any questions and if -- we're likely to see at some point out on the road.

Thanks. Have a good night.

That concludes today's conference call. Thank you for your participation and have a great day.