Bright Horizons Family Solutions Inc (BFAM) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Bright Horizons Family Solutions third 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. David Lissy. Please go ahead, sir.

Thanks, Dustin, and hello to everybody who's joining us on the call today.

With me as usual is Elizabeth Boland, our Chief Financial Officer, and also as usual we'll begin today's call with Elizabeth going through our Safe Harbor statement. Elizabeth?

Hi, everyone. Our earnings release just went out over the wire after the close of the market today, and it's also available on our website at brighthorizons.com.

As just noted, this call is recorded and it's being webcast, and a complete replay can be available on either medium. If you want to use the phone replay, you can call (719) 457-0820 and use pincode 7597543, while the webcast will be available on our website under the Investor Relations section.

In accordance with regulation FD, we use these conference calls and other similar public forums to provide the public and the investing community with timely information about our business operations and financial performance along with our current expectations for the future. We adhere to restrictions on selective disclosure and limit our comments to items previously discussed in these forums. Certain non-GAAP financial measures may also be discussed during the call, and detailed disclosures relative to these measures are included in our press release as well as the Investor Relations section of our website.

The risks and uncertainties that may cause future operating results to vary from those we describe in our forward-looking statements made during this conference call include, one, our ability to execute contracts for new center or 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.

I'll turn it back over to Dave to kick off our comments.

Thanks, Elizabeth, and hello again to anybody who just joined us.

Let me begin today with a recap of our third quarter results and then discuss our operating and financial performance this past quarter and finish up with a look ahead at the rest of this year and into 2008. As usual, Elizabeth will follow me with a more detailed review of the quarter's numbers and our outlook for the remainder of the year next, and then I'll come back and join her for Q&A.

So first let me recap the numbers for the corner. Revenue for the third quarter of $190 million was up 10% over last year, while operating income rose to $17.8 million from $17.2 million in last year's third quarter. Net income of $10.2 million generated earnings per share of $0.38, versus $9.9 million and $0.37, respectively, in last year's third quarter.

We added 13 new centers in the quarter, 12 here in the U.S. and one in the U.K. Among the highlights were our 11th center for Citigroup and our second for Medtronic. In addition, we opened our first centers for American Eagle Outfitters, Trott & Trott and [Teradyne], as well as our first center in Alaska, for the Southcentral Foundation Healthcare System in Anchorage.

Following our addition last quarter of the Bridges Schools, we opened our second elementary school in Bellevue, Washington, Chestnut Hill Academy II, in September. Building on the strong demand at our very first school, Chestnut Hill Academy, this new school will allow us to serve more than 400 additional elementary school students when fully ramped up.

Lastly, during the quarter we closed four centers here in the U.S. and five smaller centers in the U.K., which leaves us on target with our previously discussed expectations to close approximately 12 centers outside of the UAW/Ford network this year.

Now let me address our operating performance in the quarter. First, for proper context, let me remind you that this quarter marked the first full quarter without the UAW/Ford child care centers and thus a reduction of approximately $7 million in revenue and approximately $1.1 million in operating contribution, or $0.025 a share. Despite the UAW/Ford loss, we continued to improve our operating contribution again this quarter, but we fell short of our prior forecast by just over $1 million.

Those of you who've followed us over the years know that one of the key ways we've improved our center margins over time is by achieving modest incremental enrollment gains in our class of centers where we have profit and loss responsibility. You also know that the third quarter is our most challenging time of the year to forecast, since enrollment dips as older preschoolers move on to elementary school and we rebuild enrollment through the fall.

Once again this quarter our seasonal enrollment trends followed historical patterns but were amplified in a select number of locations where enrollment fell short of our prior forecast. This issue was most profound in a group of roughly 35 of our community-based centers here in the U.S. and Europe.

To remind you and put this in proper context, we have profit and loss responsibility in approximately 65%, or 420, of our centers. Of that group, most are employer-sponsored, but roughly 100 of them rely on parent tuitions as their ongoing primary source of revenue. The majority of centers causing this issue are located in Colorado and Europe, with a collection of single-site outliers spread across various markets.

To be clear, in retrospect we overestimated the enrollment levels that these centers were able to maintain once you account for normal seasonality and in some cases were unable to adjust operating costs, principally staffing levels, in time to make up a portion of the earning (inaudible) that's caused by lower enrollment. We accept this as our own forecasting and execution issue at these centers and don't believe that this is related to any external macroeconomic issue, any client or industry weakness or any other trend affecting our overall business.

We've identified the issues that exist and have senior members of our operations team overseeing specific action plans. The fixes include enhanced marketing support, properly enrolling and pricing part-time care, reviewing staffing patterns and addressing general execution issues on a center-by-center basis.

It's important to note that with years of experience that are based on hundreds of centers, it's not the first time we've had to deal with these kinds of issues. The difference this quarter, though, is the magnitude of the issue and the weight it had on our ability to achieve our overall forecasted margin improvement level. The majority of the enrollment shortfall hit us in September, and as a result the fourth quarter results will reflect a continuation of this impact.

Our experience and track record give us confidence that we'll properly address these issues over time, and we expect our efforts to rebuild the performance in this select group will show improvement throughout 2008.

All this said, let me stress to you that the fundamentals of our business remain strong. We continue to have average pricing increase of 4 to 5% above our average personnel-related costs of 3 to 4%. In addition, across the rest of our business, including the vast majority of the base of cost-plus and P&L centers, and our new service lines, performance continues to be strong and in line with our overall expectations.

Let me now look ahead and touch on our outlook for the remainder of this year and 2008.

Our pipeline of centers under development remains solid, with more than 50 centers under development and scheduled to open throughout 2009. We continue to see favorable trends in the industry composition in the pipeline. Commitments for centers in the more cyclical industries, such as financial services and technology, have increased. The newer market in professional service firms has held steady, while at the same time commitments from healthcare and pharmaceuticals and government and education remain strong. The overall visibility on new center we have into 2008 and now into 2009 is encouraging, as is the activity we continue to see in our front-end sales prospects.

Year to date we've added 34 new centers, of which 30 have been organic and only four have been through acquisition. As I've mentioned on prior calls, the timing of our acquisitions can be lumpy, unlike the pipeline for organic growth, which builds more steadily over time. We're currently experiencing an uptick in our acquisition activity and have several deals in the stage of which we'd anticipate completion later this year or in the beginning of 2008. While we make it a practice not to comment on deal specifics, we're pleased with the overall quality of our acquisition prospects. As a result, we still expect that in the coming quarters and over time roughly a third of our growth will continue to come through the acquisition of high-quality centers and providers.

Our two newest service offerings, Back-Up Care Advantage and College Coach, also continue to perform well. We're very encouraged by the client interest in the BUCA program, and we're on course to generate approximately $6 million in revenue from this growing service in its first full year. College Coach also remains on track to grow 30% over the last fiscal year, with revenues of $7 million, and we've begun to see the early results of the cross-marketing of this service to our larger base of clients.

As these services ramp up, we're making the necessary overhead investments to ensure they have specific marketing resources and solid delivery platforms they need to realize their growth potential. As they grow and further leverage the investments we make, we expect them to continue to return operating margins significantly above those in our center-based business.

On the pricing side, we believe tuition increases we've seen this year of 4 to 5% will continue into 2008 and continue to be slightly ahead of our expected labor-related cost increases by approximately 1%. We continue to work very hard in a field plagued with annual turnover rates north of 70% to enhance our culture and our work environment, which helps us to create our long-term competitive advantage. It's our goal to be the employer of choice in our field, and we're very encouraged to see our annual turnover rate decline once again this year and approximate 20%.

In summary, while we accept our short-term results are below our prior projections, we remain confident that our business is well positioned for solid growth in financial performance. The work we're doing to improve performance in these centers is already in progress. We do expect that the third quarter effects in these centers will be amplified somewhat to account for their full quarter effect in Q4.

As said, we project our revenue in 2007 to be on pace with our previous guidance for approximately 11% full-year growth, which implies fourth quarter revenue of approximately $193 million to $195 million. We're also estimating earnings per share for the fourth quarter to be in the range of $0.42 to $0.44. This all takes into account the EPS effect, approximately $0.025, of the previously announced UAW/Ford center closures.

We're now in the midst of our annual budgeting process, so our initial outlook for 2008 at this stage is for revenue growth of approximately 10% over 2007 levels. We also expect to once again improve our operating margins in the range of 40 to 70 basis points over 2007 levels, all of which consider the remaining impact of the UAW-Ford contract.

With that, let me turn it over to Elizabeth so she can review the detail and the numbers with you, and I'll come back to you and talk on Q&A.

Elizabeth?

Thanks, Dave.

Since Dave went through all the top level results for the quarter, I won't repeat all that, so I will just get into the details underlying those results.

The sources of top line revenue growth remain consistent -- new center capacity and program additions, enrollment gains and rate increases. We added 13 centers in the quarter, bringing our total adds year to date to 34. Revenue also increased from the ongoing ramp-up of enrollment in the centers we opened in 2005 and 2006, as well as from newer services introduced in the last half of '06, specifically Back-Up Care Advantage and College Coach. Lastly, rate increases in the quarter continued to trend at 4 to 5% over '06 levels, and this was the primary source of increased revenue in the mature basis centers, which comprise approximately 80% of our revenue base.

Offsetting these increases were enrollment shortfalls in a number of our mature community-based centers, totaling just over $1 million, as well as the effect of the closed UAW/Ford centers, which, as Dave mentioned, generated approximately $7 million less revenue in Q3 '07 compared to Q3 '06.

Center gross margins increased $3 million, to $36.4 million, in the quarter, but were 19.2% compared to 19.3% in Q3 '06. The primary factors in improved gross margin contribution dollars include the execution in the majority of the core base business, contributions from centers acquired in transitions of management and the contributions from our higher-margin service lines, such as Back-Up Care and College Admissions Counseling.

In addition to the performance shortfalls Dave discussed in the group of centers, which were approximately $1.2 million below our expected contribution levels, the gross margin is also burdened by preopening and early stage operating losses from newer P&L centers we have opened, a total of 24 since the beginning of 2006. These losses approximate $1.2 million in the quarter, an increment of nearly $400,000 over 2006 levels. Overall for 2007, we expect to incur approximately $4.3 million in preopening and ramp-up losses for this class of centers opening in '06 and '07, an increase of $1.2 million over '06 levels.

SG&A as a percentage of revenue of 9.2% in the third quarter is up slightly from the 8.9% we reported last year. The modest leverage we are achieving in our overhead spending in the U.S. as well as in the U.K. has been offset by the incremental overhead associated with the absorption of the College Coach operations, as well as slight increases in equity expense over 2006.

Amortization expense totaled approximately $1.2 million in the third quarter of '07, compared to $850,000 in 2006, reflecting the effect of acquisitions made in the second half of last year. Net interest expense was $200,000, compared to $150,000 last year. We have reduced our borrowings outstanding under the line from $35 million in December '06 to just under $13 million at the end of September '07.

Our financial performance so far this year has driven a 15% increase in EBITDA, to $77 million for the year to date, while capital spending totaled $30 million through September 30. We ended the quarter with approximately $6 million in cash, and as you saw in the earnings release the weighted average shares outstanding were 26.9 million for the quarter, just under 27 million.

Now let me recap our usual operating stats. At September 30, we operated 639 centers, with total capacity of 71,000. We now operate approximately 65% of our contracts under profit and loss arrangements and 35% under cost-plus arrangements with the closure of the UAW/Ford cost-plus contracts program. For full-service centers, the average capacity per center now is 134 in the U.S. and remains at 59 in Europe.

To give a little more detail behind the guidance for the rest of '07, let me first isolate the impact of the Ford contract. First, for the full year '07, the closures will have the effect -- have had the effect of reducing revenue by approximately $16 million and operating income by approximately $2.2 million. This does translate to around $0.05 a share, split evenly between the third and fourth quarter. The further residual effect on the first two quarters of '08 is a reduction of approximately $18 million in revenue and approximately $2 million in operating income, or just under $0.05 a share in '08.

Our top line projection for '07 anticipates revenue growth approximating 11% for the full year over '06, or $775 million for the year. Considering the performance through September 30 and the variables that impact margin that we've discussed throughout the call, we are projecting to generate operating margins for the full year of approximately 10.25%. We expect amortization expense to be around $4.7 million for the year and to continue to have an effective tax rate of around 42%. Looking specifically to the fourth quarter of '07, we're estimating EPS in the range of $0.42 to $0.44 a share.

We are currently completing our annual budgeting process, and we will come back to you next quarter with more detailed guidance for 2008. In terms of our general outlook, the pipeline of new centers under development and the ramp of the newer class of centers will be key to our 2008 performance. We expect revenue growth to approximate 10% in '08, after considering this $18 million UAW/Ford contract effect. Considering the variables that impact margins, such as enrollment levels, labor management and personnel costs, contract mix, pricing power and the timing of new center openings, as well as the operating improvements we have implemented at the group of community-based centers which are performing below target, we believe that we will generate 40 to 70 basis points of operating margin improvement next year.

The combination of top line growth and the margin leverage leads us to project EPS in the range of $1.94 to $1.99 for 2008.

With that, Dustin, we are ready to go to Q&A.

Thank you.

(OPERATOR INSTRUCTIONS)

And we'll go first to Jack Sherck, with SunTrust.

Hi. Thank you very much. I just had a couple of questions about the centers that you've added and closed in the quarter. You mentioned that you added 13 centers, closed four in the U.S. and closed nine in the U.K., if I'm correct there.

I think it's nine in total, Jack.

I'm sorry. What?

It was nine in total.

Nine in total that you closed?

Yes.

Okay. And with those 13 that you added, what percentage of those were profit and loss versus cost-plus?

Let me just double-check that here. I have the year-to-date figure. Let me just calculate it for the quarter and I'll come back.

Okay. And then just on the 35 community-based centers that are coming in slightly below plan, what percentage of those were cost-plus versus profit and loss?

Those are all profit and loss, Jack. That really is the issue. The -- you know, as I said in the text of my opening, our ability to improve our operating margins year over year is in part made possible by improvement in the P&L base of centers' enrollment. So on the cost-plus side, while enrollment does fluctuate, it doesn't have any earnings impact to us, as you know, because we get a fixed management fee against the revenue. So the real key for us as it relates to looking at performance year over year is enrollment gains in the P&L class. And that's why we -- that's really the experience we've had. These 35 centers were really the ones that missed most against the forecast that we had had, and they really make up the group that we're focused on most specifically around rebuilding.

Right. And on those 35 centers, I take it one of the steps that you've taken to improve results there, have you opened it up to more clients or more businesses?

Yes, I mean, I think there lots of fixes, as I mentioned. These are centers that rely -- although they may have experienced some level of upfront capital contribution from clients, their ongoing operating ability depends on mostly parent tuitions in order to succeed. So the fixes may be to find additional employer sponsorship in certain cases. But the majority of the fixes tend to be either marketing supports, additional marketing supports, figuring out if we're actually pricing and enrolling part-time children in an appropriate way that's not impeding our ability to kind of maximize the tuitions we get on full-time enrollees, which can sometimes be a problem, being sure that the interplay between staffing and enrollment expectations is appropriate. So there are a number of steps that we take to put fixes in place. And the fixes are not the same in every center. It really is a center-by-center fix.

Okay, great. Thank you very much.

Let me just answer the question, too. We opened -- of the 13 centers we opened in the quarter, four were cost-plus and the rest were profit and loss contracts.

And we'll take our next question from Jeff Silber, with BMO Capital Markets.

Thanks so much. I just wanted to drill down a little bit into these 35 centers again. You mentioned Colorado and Europe specifically. Was there anything going on there? I mean, if I remember correctly you had made an acquisition in Colorado. Are those the centers we're talking about? And again any color specifically in Europe would be helpful. Thanks.

Yes, Jeff. The reason we call out Colorado and Europe is of the 35 they represent the majority of the numbers of centers in that class. And you are correct to say that Colorado really is -- there are -- there were two acquisitions we made in Colorado over the past two, two and a half years, and the majority of the issue stems from essentially centers in those groups. And so the fix there in one case is specific to some expectations we had that would -- on various changes that would occur through integration and what's actually turned out to be the case in reality. And so I think there is a whole specific plan in place with respect to those groups -- that grouping of centers. As I said earlier, it's different on a center-by-center basis. But the only commonality in Colorado happens to be some -- that they are -- they come from two acquisitions that we had done in the past.

You know, with respect to Europe, the centers are really pretty well dispersed around the U.K. and in Ireland, and, again, there's no real -- we don't think there's any pervasive trend that's driving this. We think it's kind of a center-by-center execution issue, rethinking of what's happening there and being sure that we're doing our best to both maximize enrollment and also to have a logical, as I said earlier, staffing plan against whatever the enrollment ultimately is going to be.

So some of the issue, while it's easy to point to enrollment, which is clearly, I think, the ultimate cause, I think one of the things that you know about us operationally is we're very focused on the interplay between staffing and revenue, and getting that right's important. So you can't always make it all up if you're down in enrollment, but there are things you can do to not take as big a hit, and in this group of centers there were a combination of both a shortfall of enrollment and not doing the best job we can at staffing.

Okay. That's fair enough. On the 13 centers that you opened in the quarter, were any of those acquired or were they all organic?

They were all organic.

So you had mentioned in terms of potential acquisitions coming forward, I know you're not going to talk about the specific companies, but maybe you can give us some general information. Is this in your core business? Is it some ancillary services? Anything you can tell us about where you think you'll be focused on will be helpful.

They're all center-based acquisitions, yes. That's, I guess, the best I can describe them. Yes, they're in our core business.

Okay. That's fair enough. And just a couple numbers questions. Staff-based comp in the quarter, if it's possible to break it out by line item.

It is possible. Let me just look that up and I'll fire it out in one of the next little breaks here.

All right. And I'll give you the next question. In terms of the share count that you're using for your guidance --

Yes.

-- if you could possibly give us that as well.

The share count is -- for the fourth quarter is just over 27 million in Q4, with a modest increase. I think that's about 50,000, 60,000 shares higher than the average this quarter.

And again for 2008 roughly the same?

2008 roughly up 200,000 shares.

Okay. And then final question and I'll let somebody else jump on, were there any share repurchases in the quarter? Maybe you can tell us about your philosophy regarding share buyback.

There were no share repurchases in the quarter, Jeff, and, as we've said before, we have an ongoing dialog with our board in that regard and have a plan -- a longer-term plan in place, and we continue to have those discussions with them and make decisions accordingly.

All right. Great. I'll let somebody else jump on. Thanks again.

Let me just answer that question on the equity comp. It is $1.2 million in the quarter in overhead, and it's another $100,000 or so in centers.

And we'll take our next question from Neil Macker, with Robert W. Baird.

Hi, guys. Quick question on the 35 centers. Is this a case of just misunderstanding what the actual demand in the area was, or is this a pricing problem in that you were too high above what the local area was really looking to pay?

Neil, we don't believe it to be a pricing problem. We believe it to be our own -- you know, I think we had -- in many of these centers we had reasonable momentum, not in all of them, but in many of them, when we look back into Q2, which is sort of our peak enrollment time frame. So in many cases we made forecasts based on some continued trends that we had seen back then that in the case of these centers proved to be untrue.

And we believe that the reasons why they were untrue were not related to -- necessarily to how we were priced in the market. It's hard to come to the conclusion that if you're okay a few months earlier that the issue just became so profound that it had effect shortly thereafter. And as you -- as I think we've said before, we are -- although we are priced on the high end of the market, we do diligence locally to be sure our pricing is not too far out of the market that we don't feel good about continuing to have the centers achieve whatever enrollment goals we have for them.

So we do believe it to be, as I said earlier, our own execution issues. In some cases not getting the forecast right in the rearview mirror appeared to be part of the problem, given what should have been issues that were discovered -- should have been discovered during the typical process of the day-to-day management. But in other cases it's just simply that the enrollment didn't happen, or we had more -- we didn't properly calculate the timing of when children were going to leave us and when the new enrollment that was going to come in was going to actually start. So there's a myriad of things we go through to analyze the issue. I think hopefully you recognize our track record in this regard has been really good and that our team is all over it, as you'd expect.

Right. No, I understand that. So just thinking about sort of lag effect here, you talked about the fourth quarter. Is this something where you really probably won't catch up with these enrollments until Q2 '08? Is that fair to say?

Yes, we're confident that we'll have -- we have or we will have the -- all the issues identified and that we'll make some forward progress in Q4. But I think what we were referring to was since most of the hit comes -- the majority of the hit, anyway, comes in the September month, the back end of Q3, the full -- we'll get more of a full quarter effect in Q4, and that's the reason it'll be somewhat amplified, and that we expect to see the progress that we'll begin to make in Q4 continue throughout the beginning of 2008 and really have an effect in 2008. And when we gave you our guidance for 2008 we tried to properly forecast in a disciplined way how that will play out into 2008. And we believe it'll take the full year of 2008 to fully recover but that we'll make continued forward progress through -- beginning in Q1 and throughout the rest of the year.

Okay, and then sort of switching topics but staying on price here, anecdotally we've talked to some of your clients in the past, and some of them have sort of pushed back on the idea of the price increases, sort of pricing yourself out of the market. Have you felt any pressure on that at all?

I will tell you, Neil, that the -- for probably the wide majority of the 20 years we've been around we've heard that same feedback. And I think that the level of quality, of course, that we aspire to, in order to pay people to keep that level of quality we've always had to price ourselves at the high end of the market. So we don't see any difference or feeling any difference in the feedback either we're getting from parents or clients now than we did this time last year or the year before. So I would have to say that -- I'd have to acknowledge that I think there are folks out there that believe we are high priced, but I don't think that would be any different feedback than we'd have gotten last year, three years ago, five years ago, on a relative basis.

Okay. That's great. And then, Elizabeth, real quick, just a clean-up on the centers number, the new centers that you opened, were they all in the U.S. or were there some in the U.K., too?

I think we opened one in the U.K. and 12 in the U.S.

Okay. That's great. Thanks, guys.

You're welcome.

Thanks, Neil.

We'll go next to Bob Craig, with Stifel Nicolaus.

Hi, guys.

Hi, Bob.

I'm glad you didn't make any comments on the Sox, by the way. I don't think we could take it here.

(Inaudible) in Cleveland.

Anyway, just to -- not to beat a dead horse here, just what was the amount of the enrollment shortfall, Dave, relative to your expectation?

I'll just take that.

Roughly.

It was roughly 225 or so enrollment, if you will, for the period we're talking about.

Okay. And I guess, you know, there's been a lot of discussion on this. You guys have been in business a long time. We know you guys to be superb operators. I'm just -- I'm just a little puzzled as to how this could happen. I know you shared some color on that, but any additional color in that regard would be helpful. I mean, it's just -- it was just very surprising that this sort of thing took place.

Well, I would tell you, Bob, we're not used to this kind of thing happening, either, and you can bet that we're all over it. I think that the issue -- it's not as if we haven't had slight variations to how we forecasted enrollment to happen in third quarters in the past, because it is a dicey time to be sitting in April or May and looking at -- or even June and looking at kind of what's going to happen and project it across the base of centers. So it's always been an area that's been more difficult than others for us to project.

That said, I think the delta hasn't been as wide in the past, and/or we've had other areas of the business make up for some of that with some outperformance in some other areas. And so I think what we had happen this time was a slightly larger delta than we've ever experienced before and for the most part the rest of the business is in line with expectations, and as a result the shortfall that we talked about.

So, you know, we're -- we, too, are not used to this thing happening, and of course it's our intent to not ever have it happening again. But we're going to be sure we're diligent about it and recognize that there is some continued issues that will play out in Q4 and into 2008, but we think we'll be able to turn it around as we -- as I said earlier into 2008.

In this situation I take it the disengagement was in line with your expectations. It was just the replacement that fell short.

A little of both. A little bit of not projecting the dip enough and then a little bit of the -- both the amount and the timing of the replacement.

Okay.

Because, remember, we have to get -- we have to both have the replacement and then, you know, we sometimes book later and earlier, so we can be booking for November starts now or December starts now, and it's getting that all right. We take a deposit, but it's getting that all right and then forecasting that appropriately.

Right. And I know over time, Dave, you guys have had a mix shift in your business more to situations where you guys take on more enrollment risk, and in some cases deal with multi-client situations. I mean, I know what you said at the front end, but does this in any way imply greater economic sensitivity of some of these community consortium or multi-client centers than what you've experienced with single-client centers in the past?

Yes, we've looked hard at that, and we don't believe that the centers that are involved here -- we think we have the issues, as I talked about before, identified, and really don't believe it's related to any kind of more pervasive economic issue or any industry or any specific client. And that's really affirmed by the fact that many of these centers exist in communities -- with the exception of Colorado, which is a specific issue that I talked before about -- many of these centers coexist with many of our other centers. And we have centers in similar (inaudible) areas to this that are doing well. So it's hard to point to the issue, when we analyze it, beyond the sort of acquisition integration issue we have a little bit of in Colorado, it's hard to point to these centers and say -- to say it's anything pervasive.

Okay. And last one and I'll turn it over, you mentioned, I think, that you haven't seen any change in activity at the front end of the sales cycle. It's still as robust as it has been.

That's right.

Okay, great. Thanks, guys.

Thanks, Bob.

(OPERATOR INSTRUCTIONS)

And we'll go next to Ryan Mahoney, with ThinkEquity.

Hi, thanks.

Hi, Ryan.

Hi, Ryan.

Hey. I was wondering if you could update us on your capacity expansion plans, if that's changed at all for 2007.

Do you mean centers that are expanding their own capacity? Is that what you mean?

I thought prior guidance was for total capacity to expand between 4 and 5% for 2007.

Oh, yes, that's still -- that's still basically on track. Yes.

Okay. And then are you providing any guidance at this point in time for 2008 capacity expansion?

We didn't explicitly provide that guidance. I think, again, with the lapping effects with the UAW/Ford, it would be somewhat in that range, probably closer to the 5% range once you take in the full year. Of course, that will be a little stronger, we would expect, in the second half.

Okay, thanks. And how about an update on the number of clients using Back-Up Care Advantage and College Coach?

Sure.

Yes, we've got roughly 100 clients that have signed up for Back-Up Care Advantage in its first year. Some of that is really -- some of that 100 is still keyed up to happen November 1, December 1, January 1. But the wide majority of it's already in -- already started at some point during the year. And as I said earlier, I think that was a natural extension of our services, because it not only allowed us to help employers in places where they have employees and we don't have centers deal with this issue. And that proved to be a real hot button.

With respect to College Coach, as I said on the last call, I think they've continued to add new clients. There have been a few clients that we've worked on that were former Bright Horizons clients that have converted and that as clients are making decisions for the first quarter of next year, which is a big sort of selling period right now, we have a lot in progress. So we're hopeful that the continued growth that we've experienced this year with College Coach will continue for the foreseeable future.

Great. Thanks.

Okay.

We'll go next to Jack Sherck, with SunTrust.

Thank you very much. You mentioned, I believe, that Back-Up Care Advantage, that that program would contribute about $6 million in revenue this year. Do you have any early thoughts in terms of contribution for '08?

Our view based on the growth that it's doing is that it would be somewhere around $9 million, probably 40 to 50% growth, based on the pace of where we're seeing this. If we took the current signed-up clients and what their annual run rate is, that gives us a really good leg up on hitting that target next year.

Great. Thank you very much.

Sure.

And we'll go next to Brandon Jones, private investor.

What kind of persistent changes do you have in place to reduce your staff overhead so that you can increase contribution margins to your individual centers?

We're always looking at being sure that we're making the wise investments in overhead that are appropriate both to support the centers that we have and also that we are properly positioned to continue to absorb the kind of growth that we've experienced. So I think we've been pretty diligent. If you look at overhead as a percentage of revenue, the reasons why that has not yet leveraged in the way it will in the future is that it's been taxed and burdened by a number of issues, including the absorption of some overhead from acquisitions that we've done in the past few years, Sarbanes-Oxley, which was added a few years ago, and then also the addition and the continued addition of equity expense, most of which we absorb at the overhead line. But when you back that out and you look at our real overhead growth, I think you would see that we've been really disciplined about not overspending in that regard.

Thank you. What kind of plans, in addition, do you have in place to increase your midyear enrollment?

Well, we enroll children at all times throughout the year, and the plans that we have in place include a continuation of everything we do from a parent marketing point of view. Many of our centers, as you know, as you probably know, are employer sponsored, so our client partners work with us to be sure that the employees of their organizations are well informed about opportunities to enroll. And then secondly, in the centers that rely on community-based enrollment, it's a whole series of kind of grassroots marketing efforts that go on locally to be sure that the word is out in the community about the center and that it's being properly marketed.

Thank you. Last question, you mentioned part time a couple times. How do you define your part-time children?

Well, you know, essentially five days a week eight to nine hours a day would be considered full time. Anything less than that is part time. And the -- what we need to do is be disciplined and understand that there is a demand for part-time enrollment that exists out there, and we accommodate that demand and always have. The key is being sure that you price your part-time care in a way that is logical. It can't just be a sort of even subset of the full-time care rate. It needs to be priced at a premium that acknowledges that it becomes more difficult for us to enroll full-time children once you take up space in the capacity that you have with part-time children.

So we want to accommodate the demand. It's out there. But we need to do it in a smart way. And so that may mean that depending on the full-time demand we have, which always should trump part-time, the part-time interest we have, that we're smart about how we integrate that part-time need into the center without impeding our growth to take the full-time enrollment. So it's a whole process that goes on. Our operating team is really good at it. And that's something we continue to be -- we focused on. We sometimes don't get it -- sometimes don't get it right on a center-by-center basis, and that was one of the issues that popped up on the subset of centers I talked about before, but we're confident that we know how to do it. We just need to get it done and make it happen consistently, center to center.

Great. Thank you.

And there appear to be no further questions at this time.

I'd like to turn things back to Mr. Lissy for any additional or closing comments.

Okay, Dustin. Thanks so much. We appreciate everybody's involvement in the call, and, as always, we'll be around to deal with follow-up on any questions anybody might have. Have a good night.

Thanks. Good night.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.