Bright Horizons Family Solutions Inc (BFAM) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Bright Horizons third-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference (Operator Instructions). It is now my pleasure to introduce your host David Lissy, Chief Executive Officer of Bright Horizons. Thank you, Mr. Lissy, you may now begin.

Thanks, Shay, and hello to everybody on the call. And should I say with great respect to my friends and colleagues from St. Louis, greetings from where we are still euphoric up here in Red Sox nation. Joining me on the call today is Elizabeth Boland, fellow Red Sox fan and Chief Financial Officer. And before we kick off our formal remarks, I'll let Elizabeth go through a few administrative matters. Elizabeth?

Thank you. Hi, everybody. Our earnings release went out just after 4 PM today and is available on our website under the investor relations section at BrightHorizons.com. As always, this call is recorded and is being webcast, and a complete replay can be available either by call or on webcast. The phone replay number is 877-870-5176. If you're an international caller, it's 858384 5517, and the conference ID is 10000747. The webcast is 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 recent business operations and financial performance along with forward-looking statements regarding our current expectations for the future. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially from those described in our forward-looking statements and are made during the call. These risks and uncertainties include our ability to successfully implement our growth strategies including executing contracts for new client commitments, enrolling children in our centers, retaining client contracts, and operating profitably in the US and abroad.

Secondly, our ability to identify, complete, and successfully integrate acquisitions and to realize the attendance operating synergies. Third, our decisions around capital investment and employee benefits that employers are making. Fourth, our ability to hire and retain qualified teachers and other key employees and management, next to our substantial indebtedness in the terms of such indebtedness. And lastly, the other risk factors that are set forth in our SEC filings.

We also discuss certain non-GAAP financial measures on these calls, and detailed disclosures and reconciliations relative to these measures are included in our press release as well as the investor relations section on our website.

So Dave, back to you for the detailed review.

Thanks, Elizabeth. And hello again to everybody on our call today. As usual, I'll start things off and Elizabeth will follow with more detailed review of the numbers and our outlook before we then open it back up for questions later on.

First, let me recap the quarter's headline numbers for you. Revenue of $309 million was up 15% over the prior year, and adjusted EBITDA of $15 million was up 13%. Adjusted net income more than doubled to $18 million, which yielded adjusted earnings per share of $0.28, up from $0.16 in last year's third quarter.

For the nine months through September 2013, revenue was up 13% to $900 million, and adjusted net income doubled to $57 million, and adjusted earnings per share of $0.87 compares to $0.54 for the same 2012 period.

During this past quarter, we added 12 new centers in addition to the 49 Children's choices centers that we acquired here in the US back in July. These centers include three sites for Anova healthcare in Virginia; our second center for the University of Chicago; new centers for Biogen Idec Care in Boston and Weill Cornell Medical College on the Upper East Side of Manhattan.

Our Back-up and Educational Advisory services also grew in line with our plan once again this quarter; and some new client highlights in that area including Memorial Hermann Healthcare System, 21st Century Fox, and Liberty Mutual. In addition, we continue to be very optimistic about the cross-selling opportunity that exists for us to expand our relationships with existing and new clients through these valuable service channels. Recent cross-selling examples include Sony Electronics, Shell Oil, and T. Rowe Price.

The strategy behind the development and expansion of our service offerings is simply this -- to provide clients and families with a broad range of high-quality services that individually or in tandem with one another specifically address the diverse challenges that cause friction when working families aim to be productive at work and at home. This past quarter, we were very pleased with the affirmation of the importance of our work and the success of our strategy when the 2013 Working Mother 100 Best list of companies was released. 80 of the 100 honored companies are Bright Horizons' clients, including for the second year in a row all 10 of the top 10. These employer clients recognize that one key to their success is a culture that fosters their employees' overall well-being and engagement; and that to achieve this, they need programs and services that cultivate a healthy integration between work and life and provide opportunities for employees to grow professionally and remain engaged in their work.

Let me turn back to our financial performance this quarter. Gross profit was up over $8 million in the quarter to $69 million, while the margin percentage of 22.2% was broadly in line with last year's margin. The positive effects on the margin in this past quarter included tuition rate increases that averaged 3% to 4% and were paced modestly ahead of our cost increases and our full-service segment.

Second, enrollment growth in our mature centers as well as the ramp-up in enrollment in our newer class of centers. Third, new centers we added last year in 2012 and again this year in 2013. And lastly, continued strong growth in our back-up business.

As we had expected, these gains in the quarter were offset somewhat by a few things related to timing as compared to last year's third quarter. First, the impact of the losses from the larger class of lease/consortium centers that we've opened in the past year in relation to a smaller class of such centers in 2012. As you might remember, we lose money in these centers on the first 18 to 24 months of operation as they're ramping up enrollment. As a result, margins are depressed somewhat in the near term. However, these centers are ramping consistent with our historic experience, and thus we expect the operating contribution to continue to expand as these class of centers become fully mature.

Second, we added 113 centers to the acquisitions of kidsunlimited and Children's Choice. And, as previously discussed, we've incurred center training and redundancy costs during the integration, which have modestly affected the margin in the quarter. In addition, each of these acquisitions came with classes of centers that were new, and thus in ramp-up mode, which depresses the ultimate margin targets that both groups will achieve over the near term.

Now let me update you on the overall integrations of Children's Choice and the kidsunlimited centers. We're pleased with the progress we've made to date in knitting together both our operations and back-office teams and systems, and we remain on pace to realize the synergies we'd estimated at the time those deals closed. Clients have responded positively to the transition. And over the long-term, we believe that we have an opportunity to drive more growth through cross-selling our services, which are broader than either legacy organization had the ability to offer.

As a reminder, we do have some incremental one-time cost in our overhead for 2013 for this period of integration, which we expect to run into the beginning of next year until we complete the back-office and system integrations by the middle of 2014. Lastly, as discussed last time, each of these larger groups came to us with a handful of underperforming centers; and in our typical discipline around these type of situations, we expect to either improve the performance in the near term or ultimately exit these locations, either of which will also improve margins over time.

I also want to update you on our view for the remainder of this year and discuss our broad targets for 2014. We continue to expect to add a total of 145 to 150 new centers in 2013, including both organic new centers and the acquisitions we've already discussed. We continue to have good visibility in our organic new center additions due to the strength of our pipeline of centers currently under development. The mix of centers in the pipeline is also representative in geography, industry verticals, and operating model to our existing base. We continue to see good representation within the higher education, technology, healthcare, and energy sectors with both new clients and new centers for existing clients in our pipeline.

I'm also encouraged about the prospects for continued growth in our Back-up Dependent Care services and our Educational Advisory businesses, both of which are generating strong revenue growth in excess of our core full-service segment and are contributing to our margin expansion once again this year.

On the pricing side consistent with our historical performance, we're realizing our targeted 3% to 4% tuition increases on average once again this year, which will outpace our cost increases by approximately 1%. We also expect and continue to realize the positive trend in enrollment growth in our mature class of P&L centers that have been steadily regaining enrollment for the past three years, which also contributes to gross margin expansion.

For this year, we are raising our outlook for revenue growth for 2013 to 13% to 14% over 2012 levels. Overall, we anticipate this growth will allow us to drive adjusted EBITDA to a range of $208 million to $210 million and adjusted net income to $77 million to $79 million, which is double what we achieved last year. That's our guidance for adjusted earnings per share for the full year of 2013 is $1.18 to $1.20.

As we look ahead to 2014 and beyond, our business is well positioned to continue to benefit from the positive trends and operating execution that have contributed to our strong performance this year. While we're not yet providing specific guidance for next year, based on how we are trending at this point, we're targeting revenue growth in 2014 to be in the range of 11% to 12%, and we expect to continue to drive strong earnings growth that should result in adjusted EBITDA growth in the mid-to high teens and, in turn, adjusted earnings per share growth north of 20% for 2014.

With that, I'll hand it over to Elizabeth for a more detailed review of the numbers, and I'll be back here to talk more during the Q&A. Elizabeth?

Thanks, Dave. So as we've done on previous conference calls, I'm going to discuss our reported results as well as the certain metrics that we think help isolate unusual and nonrecurring charges. So as I said before, the earnings release includes tables that reconcile our US GAAP reported numbers to these additional metrics for adjusted EBITDA, operating income, net income, and EPS. Specifically, quantifying various one-time charges we've recorded in Q1 of 2013 upon completion of our IPO as well as deal costs in connection with the acquisition of kidsunlimited and Children's Choice, as well as costs associated with a secondary offering that we completed in the second quarter of this year.

Top line revenue growth of $41 million in Q3 was 15% with the full-service center business increasing $33 million, Back-up increasing $6 million, and ed advisory adding $2 million. Revenue in our full-service segment increased through the rate increases that Dave mentioned, averaging 3% to 4%, enrollment gains of approximately 1% in our mature class of P&L centers, and from new organic and acquired centers. Gross profit increased $8 million to $68.5 million in the quarter, with the full-service segment adding $5 million of that growth. Gross margin for the quarter of 22.2% compares to 22.4% in 2012. As Dave mentioned, there are a couple of factors that are affecting the full-service margins, resulting in a slight decrease year over year.

First, as we talked about earlier this year, we do have a larger class of lease/consortium centers that have opened this year compared to 2012. These centers generate losses during the ramp-up period, and we incurred approximately $1.5 million more in such ramp-up losses in the third quarter of 2013 than we did in 2012. In addition, the kidsunlimited centers and Children's Choice centers have operated at gross margins ranging from 15% to 20%, and both of them came to us with this class of newer centers that are ramping and thus are depressing the ultimate margin capability of the group. The incremental $26 million of revenue, therefore, from these two larger groups is contributing gross profit at a rate slightly below the overall full-service margin rate, which averages approximately 20%.

Excluding the one-time costs in SG&A that are related to transaction costs for Children's Choice, which totaled $1.75 million this quarter. Overhead in Q3 of 2013 was $31.3 million and increased to 10.1% of revenue from 9.9% last year. The primary driver of this increase is redundant or duplicative costs that we are incurring during the integration of the acquisitions. These costs approximate $1 million this quarter, which added 30 basis points to the overhead rate.

Subsequent to the debt refinancing we completed in January of 2013, we've also reduced our interest expense to just over $9 million in the third quarter of 2013, compared to $21.4 million last year. Amortization expenses of $7.7 million increased $600,000 over last year in connection with the acquisitions we've discussed.

In summary, adjusted net income of $18.4 million translates to adjusted EPS of $0.28 a share in the quarter, up from $0.16 a share last year. We've generated operating cash flow of $121 million year to date, compared to $93 million last year. After deducting maintenance CapEx of $25 million, our free cash flow through September totaled $96 million, compared to $65 million in 2012. The main drivers of this increase are the improved operating performance we've been describing as well as consistent net working capital. We ended the quarter with approximately $35 million in cash and $21 million outstanding under our revolver.

Now I'll recap a few operating statistics. At September 30, we operated 880 centers with total capacity of just over 99,000, an increase of 13% since the same month-end last year. We operate approximately 75% of our contracts under profit-and-loss arrangements and 25% under cost-plus contracts, and our average full-service center capacity is 137 in the US and 77 in Europe.

As Dave previewed, our updated top line projection for the full-year 2013 anticipates revenue growth of 13% to 14% over 2012 levels, inclusive of Children's Choice from July 22 and kidsunlimited from April 10, just to recap the dates of those transactions.

The components of this top line growth are as follows. Organic growth approximating 8%, which includes the estimated 3% to 4% price increase, 1% to 2% average growth in enrollment in our mature and ramping centers, 1% to 2% from new organic full-service center additions, and 1% to 2% growth from our Back-up and ed advisory services.

In addition, acquisitions add approximately 8% to revenue in 2013, including the lapping effect of the Casterbridge deal we completed last year. Offsetting these increases by approximately 2% to 3% are the variations in our cost-plus revenue as well as the impact from center closings, which include both legacy organic, and acquired centers.

We expect that adjusted income from operations in 2013 will be approximately 10 to 20 basis points higher than the 10.5% we reported in 2012. The gross margin improvement for the year is offset by increased overhead, including incremental nonrecurring costs during the integration period for both kidsunlimited and Children's Choice as well as higher amortization expense. We are now projecting amortization expense to approximate $30 million for the full year, and that includes $20 million related to our May of 2008 LBO. And we're expecting depreciation expense to approximate $43 million to $44 million.

Stock comp is expected to be $11 million, and interest expense is projected to approximate $41 million for the full year. We've borrowed under our revolver, as I mentioned, to complete the acquisition of Children's Choice, and we expect to have outstanding borrowings under the line of credit averaging $10 million to $20 million for the remainder of this year, gradually paying it down toward year-end.

We estimate that the effective or structural tax rate will continue to approximate 37% of our adjusted pretax income in 2013, and that rate is similar to what we illustrated in our results for 2012. The combination of top line growth and margin leverage leads us to project adjusted EBITDA of $208 million to $210 million for 2013, which is an increase of 15% to 16% over the $181 million we reported in 2012, and adjusted net income for 2013 in the range of $77 million to $79 million.

With respect to share count, we currently have $66.8 million of fully diluted shares outstanding and project that to rise approximately 200,000 shares in Q4. For the full year, therefore, weighted average shares will approximate 66 million shares. Based on these share counts, we estimate adjusted pro forma EPS will range from $1.18 to $1.20 for the full-year 2013.

Lastly, for the full year, we project we'll generate approximately $150 million of cash flow from operations, or $120 million of free cash flow net of our projected maintenance capital spending of $30 million -- approximately $30 million. This compares to $107 million of cash flow from operations, $66 million of free cash flow, and $41 million of maintenance CapEx in 2012.

Based on the centers in development and slated to open in 2013 and early 2014, we expect to invest approximately $40 million in new center capital this year compared to $29 million last year. As a reminder to those of you who are newer to our story, our third-quarter is the time of year when we experience some seasonal fluctuations in enrollment in our full-service centers and higher utilization of our back-up services, both of which result in modest dips of our operating performance relative to the first half of the year. Therefore, our results for the third quarter illustrates this normal decline, with the fourth-quarter projections reflecting the usual pickup in enrollment in the fall.

With that background, I'm looking specifically to the fourth quarter of 2013. Therefore, we are estimating revenue growth of 14% to 16% in Q4, adjusted EBITDA of $53 million to $55 million, adjusted net income in the range of $20 million to $21 million, and EPS approximating $0.30 to $0.32 a share.

And with that, Shane, we are ready to go to Q&A.

(Operator Instructions) Sara Gubins, BofA Merrill Lynch.

Sara Gubins. Can you give us an update of margin expectations for 2014? This may be high-level.

I think at this point, we are going to -- for 2014, our view is pretty much what I talked about before, that we're looking at the top line growth in the 11% to 12% and the adjusted EBITDA and adjusted net income in the levels that I talked about earlier. But we'll continue to be more specific with overall guidance the next time we talk.

Okay. And so this larger class of lease/consortium, does that impact 2014 as well?

Well, I think it -- the issue in 2000 -- the way we think about this going forward is it really is the delta between the larger class this year and what we did last year that Elizabeth talked about in the third quarter. That was about $1.5 million difference in losses year over year. Because we still view the lease/consortium models as a strong growth engine, we are planning for a similar class in 2014. So the numbers that I -- or the higher level numbers that I talked about and previewed for 2014 anticipate a class that looks like the class this year in size.

So the expectation is that as we play out, that Delta, when you're comping against a similar class, it won't be as great as the impact that it was this year when you are trying to comp it year over year. Does that make sense?

Yes, yes, that's very helpful. Sorry, Elizabeth, were you going to say something?

I was just going to say but I think the point is that the investment in the lease-model class does play out, as Dave was alluding to, over time. So the class that we're opening this year will continue to ramp up next year and a new class will come in so that you have -- you do have in 2014, some drag on the margins for that class next year. It's just that the lapping effect is what we wouldn't see.

Sure, sure. And one last question. So both Back-up Care and ed advisory saw a nice pickup in growth this quarter year over year. Is there anything particular to note here? And do you think this is like a good run rate heading into 2014?

Yes, I think as we've talked about in the past, there's always a little bit of quarterly movement based on the timing of new sales and upgrades of existing clients or cross-selling or whatever it may be. But we feel good about the performance in both of those segments, and we feel like they'll play and are trending well into 2014 and will play a similar role in terms of their contribution to the overall whole as they did this past year.

Okay. Thank you.

Thanks, David.

(inaudible), Credit Suisse.

Thanks for taking my question. So first off, I was wondering if you could comment a little bit on your international segment, and if the stability in recovery headlines that we're seeing is in line with what you are seeing in your business?

Yes, obviously we feel good about what's going on in Europe. Each country is little bit of a different story. I mean, longer-term, we are pleased just to read some of the macroeconomic projections that exist in the UK, for example. Although, I would say that those remain sort of projections and the environment there, we're not projecting as we go into 2014 for some wild change that's going to affect our business. The business is trending well, and we're expecting sort of a continuation of that. And obviously the integration of kidsunlimited provides us with specific opportunity over there.

I hope that in time we'll be able to report some pickup based on just a better macro environment. But we see the headlines in the news, but I'm not sure that the operating reality is yet caught up with it. So it's not a negative, it just means that we're sort of planning for a continuation of what we experienced this year.

Okay, got it. Another macro-level question, did the government shutdown have any tangible impact on your business?

No is the short answer. We had a few centers that were affected that we closed for short period of time or affected in some way. As you know, parents pay a month in advance for tuition tuition, so we were successful in relocating virtually every child that wanted to be relocated to a nearby center that was open. So, we -- while there was some minimal effects, nothing material that hurt the business.

Okay, thank you. And one last one for me. Regarding the pick-up in your ancillary services businesses, could you comment on whether that's coming from cross-selling opportunities or are they new clients? Any color you could give around that would be helpful.

Yes, I'll talk broadly around that. I can't really be as specific to say this is specifically the breakdown in the quarter because I don't have that breakdown. But I will say, broadly speaking, that within the back-up world of business, the growth comes pretty equally from new clients starting out with the service for the first time as it does from either up-selling are cross-selling existing clients that we have relationships with both here and in the UK. Whereas on the educational advising services, it's probably somewhere in the neighborhood of about two-thirds new clients that are new to Bright Horizons and about a third of clients that we're cross-selling that service into that had a previous relationship with Bright Horizons. And, again, that's broad, that's not specific to Q3; that's just generally what we're seeing.

Okay, that's super helpful. That's all for me, thank you.

Dan Dolev, Jefferies.

Thanks for taking my question. You mentioned organic growth, if I believe correct, is going to be about 8% for the year. Can you maybe walk us through the quarterly organic growth numbers from Q1 to Q3? And then how that's sort of building up to the 8%. Thanks.

I think that having covered off with the year will look like and we talk about what acquisitions have been, Dan, I think the math is there. The headline -- I think that having had a few questions about this, you know, from folks over the last few months, the thing that we're trying to help people understand that the organic growth is coming to us from the full-service business as well as from the ancillary services. They are contributing -- the latter piece there is contributing 1% to 2% in the year. And then the full-service business continues to deliver with its own organic new centers as well as rate increases and enrollment. So that performance this quarter is taxed, as is the whole year, by some center closings which are a decrement of between 2 and 3 percentage points overall. And so, from that, I think you can get the difference in the overall 14% top line growth and the acquisitions of $26 million.

Yes, okay. I mean I was calculating my numbers --- I was calculating organic growth if I look at the M&A every quarter. I was calculating organic growth year to date of about 6%. That's why wanted to get some more color on this.

Yes, I think Dan, maybe the additional color to add to that would be the way we think about this is it's, in some ways, unfair to simply report an organic net number and an acquisition gross number in the sense that if you take all the closings and net them against just the organic side of the business, we don't look at that as a sort of fair way to look at it because those closings are representative of centers that we acquired that we pruned in addition to other centers that we might close for a variety of reasons. So -- and it's instead of trying to track as really specific is that, we just look at sort of the gross organic growth, the gross acquisition growth, and then deduct the 2%. So really when you add the [8%] to the [8%], you get to [16%], and deduct [2%] and you are at [14%]. That's kind of the formula the way we think the business here. And we just wanted to relay that to you.

Okay, thank you. Appreciate it.

Manav Patnaik, Barclays.

Hi, this is actually Greg calling in for Manav. I was wondering if I could get some of your thoughts on the competitive landscape in the UK nursery market. Whether you expect to see increased competition following the Busy Bees acquisition?

Yes, look, Busy Bees was an organization that we have competed against for enrollment principally. They have not been a big player in the employer-sponsored space. We just acquired our principal competitor in that space in kidsunlimited. There are a few other players in the employer-sponsored space in the UK, but Busy Bee is largely much like there -- the company that that company owned in the US, KinderCare, was basically a retail child care organization. So we competed for enrollment with them principally in sites that we might have nearby their sites.

Busy Bees was really a rollup of a variety of different organizations that existed in the UK over the years and we were familiar with, many of whom we looked at and obviously they're not part of our organization. But they are bought by a financial buyer, and I guess there is -- it's question mark in terms of what the future will hold there, but I would say that we don't look at that and say that's -- we don't anticipate much difference, if you will, particularly as we go into 2014. We'll keep watching that, but I think, you know, we feel good about the positioning that we have both in the employer market in the UK and also in where we've chosen to either site ourselves or we've acquired lease/consortium centers with a major focus in the southern part of England in and around London where we think the economics best support the level of quality and the kind of margins that we would expect. So we feel good about our competitive position in the UK; that's an organization that's been around and we've competed against for a long time, and we like our position going forward.

Okay, that makes sense. And then on the 3% to 4% price increases. Do you expect the cost plus 1% approximation to be kind of what you are able to do over the long term, and is there any potential to flex that higher? And that's it for me.

Yes, our view at least for this year and as we trend into 2012 is that we think the historic range that we've averaged really over the course of the past 10 years or so will continue to play forward. And that would look like, in our estimation at this point, what we're experiencing now, which is 3% to 4% pricing increases against 2%, 3% overall cost increases in the full-service center segment. And that's our expectation. There's always -- within individual centers, there's some fluctuation in that. There's some bandwidth for that. But the average across the business, we expect to continue to play off in that range.

Okay. Thank you.

Timo Connor, William Blair.

Thank you very much. I'll follow up on the UK market. It looks like the government voucher market as well as is generally funding for child care there. Appears to be relatively attractive. Have you seen an impact in any of the recent changes in funding, either the broad market or specifically the employer market?

Yes, I think, Timo, that the market -- the changes have been sort of well baked into our business. We like the operating environment there because there are essentially two levels of incentives. There's some incentive for employers to invest in centers; not necessarily their own centers, but make some investment in lease/consortium centers because it's a tax advantage program for that to happen through payroll deducting and a number of things that go on, without getting into detail. So we like that from the employer perspective. We also like that the government voucher system effectively pays for some portion of the overall tuition costs regardless of salary level and allows the employer to use that voucher at the center -- that employee to use that voucher the center of their choice.

And so, in effect, what we have in the UK is the environment that, frankly, we would love in any country that we would operate in, which is the employer paying for some portion of it, the government paying for some portion of it. Thus, the amount the parent has to pay being less than what exists, for example, here in America where it's either the employer or the employee, there's no government -- with the exception of very low-income families, there's no real government piece of that pie, if you will.

So we like the environment with respect to how the overall cost of what we're doing is subsidized by either the employer or the government in the UK. And, you know, obviously we -- more of our focus in the UK has been on the lease/consortium model than in the cost plus or the single-employer model as compared to the US, and it's really because of that incentive structure that I just talked about there where it's not as -- there's not as much of an incentive for an individual employer to do their own center. Not that to say there aren't some and there will be more, but just not as much a market opportunity for that model as there is the US. So -- and the same is true broadly in the Netherlands as well.

Okay and is that mix shift one of the reasons that the -- your cost plus exposure seems to be trending down a little bit? And is that kind of more of a one-time impact as a result of taking on kidsunlimited?

Yes, it really is taking on kidsunlimited, and even Children's Choice had a smaller percentage of cost plus then P&L. So when you absorb that many centers at once, between Children's Choice and kidsunlimited, it was a very small portion that was cost plus. If I contrast that for second with our pipeline of centers, our employer-sponsored centers that we're working on, there's no material change in the US to our sort of historic mix. It's really just the impact of absorbing all those acquisitions at once.

Okay, and then as you get up to scale in the UK and it sounds like that is progressing. Is there a potential that margins could be potentially higher in the UK as opposed to the US given the mix there?

Well, I think that the -- our goal really is -- I think the margins in the UK will -- there's still a little bit of room, I think, to grow over the time. I'm not -- we are not sort of forecasting any sort of wild GAAP between what the ultimate margins can be in the UK or the US. I think the work that we've done in the UK that's really been extremely important that improves the long-term health of the business over there has to do with two really key factors. One is improving the size of the units, the centers over there. Because the problem we faced years ago with when we first went there was it takes as much overhead, really, to make -- to operate the business if your centers are 50 in capacity and produce a certain level of pounds in revenue as it does if they were twice the size of that.

So it's a lot more -- it's much more an efficient business to manage when you can have the units producing more revenue and more margin against an overhead structure that you need to make the business work there. So I think we've done a lot of good work in pruning, over the years, some of our smaller sites and a lot of our newer sites; both those that we've acquired and those we've opened ourselves have been larger.

And then overall, our scale there with these acquisitions has allowed us to lever down overall overhead as a percentage of revenue. And those two factors are really important as it relates to the operating margins that we're achieving now and expect to continue to leverage a little further once we synergize the kidsunlimited acquisition. So that's more how we view the short-term view on the UK.

Thank you, appreciate the color.

Jeff Volshteyn, JPMorgan.

Thank you for taking my question. I wanted to ask about 2014 revenue guidance. First of all, does that include -- does that only include existing operations or some base level of future acquisitions?

So broadly speaking, and again we're not going to get into the specifics other than for 2014 at this point other than what we've already said. But broadly speaking, when we looked at it, our view includes the carry-forward effect, as you would imagine, of what's occurred already in 2013. Not only from the lapping or the carryover of acquisitions, but also the ramp-up of our class of centers that we've opened and what's in the pipeline that we expect to open that we know of as of now, which will continue hopefully to grow. And so those things inform it.

We have not included in that forecast an acquisition -- outsized acquisition like we have continued -- like we've achieved two of in this year. So our normal bogey for acquisitions would be somewhere in the neighborhood of 10 to 15 single center kinds of -- or small groups of acquisitions that we would tuck in either in the US or the UK or the Netherlands. And in our broad projection, we would include that type of placeholder in our view because the pipeline that we're working on suggests that's a reasonable few to have at this point, Jeff. But there's no forecast for any larger acquisition because those tend to be lumpy unless predictable.

Excellent, this is very helpful. If I could ask on the centers in the third quarter, out of the 50 net new centers sequentially, can you help us think through how many are new and how many closed in the quarter?

Yes, so we added the 49 from Children's Choice and another 12 through organic additions, and we closed a total of 11 centers.

Great. And the last question for me. Any color around Affordable Care Act and possible changes in the way that your employees will see benefits in 2014, 2015, and going forward?

Overall, the Affordable Care Act, Jeff, had minimal effect on us. And that's mostly because -- well, we like everybody else, had to incur the changes, things like dependents going to 26 and things like that. But our base -- even our sort of baseline plan, we offer a variety of different health plans that people can buy up to. But our sort of, if you will, the plan that costs the employees the least and has the most sort of co-pays associated with it already complies mostly with what the minimum levels in ACA were and required of employers.

So we don't view a major -- really, much cost differential related specific to ACA, and we are not thinking about that in terms of having a meaningful effect either this year or next year. We'll continue, as every employer needs to -- as this plays out, we'll continue to evaluate what the right options are for us in sync with what's going on in the overall market. We're not forecasting, for example, going through exchanges any time in the near future. But like any organization who's got a significant line item in their healthcare, we'll continue to stay focused on how it is that we deliver the best possible benefit to our employees at a cost that we feel like is appropriate. So that's sort of how we think about it.

Great. Thank you so much.

Brian Zimmerman, Goldman Sachs.

Now that you had a few months to work through the integration of kidsunlimited and Children's Choice, have there been any surprises either on the positive or negative side? And then you mentioned some of the underperforming assets, I think, in Children's Choice. How much time do you usually give those assets before you decide to either close the center or get them up to the Company average?

So it really is a -- I'll go backwards and answer the last part of your question first. So, it really -- every one of them is unique. Every one of them -- some have -- come with client relationships, others less of a client relationship where it's a lease kind of situation. So it's hard to paint them with a brush, but I would say broadly speaking in the first year of their existence with us, by the end of that, we can generally reach a conclusion as to whether or not this is fixable and thus something we should continue to invest in or something that we ought to exit. And that -- the only caveat I would put on that is gates that might be relevant with respect to leases ending and/or contracts expiring, which obviously play heavily into how we looked at it and diligence and play heavily into how we'll ultimately choose or not choose to operate going forward. So that's broadly how it would look.

With respect to the acquisitions and how we're going, I think that the sort of differences -- we tend to do what we like to think of as a really thorough job at diligence and doing all the work we can possibly do before you're absolutely inside. I would say that now that we are inside, you always make some assumptions with respect to who does what on the overhead level and where things will go. I would say it's safe to say that while we're going to reach our overhead synergy targets in both cases, the pro forma for how we thought we would get there, when we drew it up before we got inside might look a little bit different than how it actually works. But I think, in the end, we'll get to the same target. I think, you know, there are some surprises in both cases with some aspects of the curriculum and/or systems that were positive, more positive than we even anticipated. There's always some negative things with respect to how things were done versus how we thought they would be done and us having to maybe support things a little differently than what we thought.

But moving away from that, I would say that in both cases, you know, we're tracking in line with where we hoped to be at this time. And granted, I will say -- I would caveat all that with it's early, and it's fair to say that we'll have even more to say about each one when we talk to you the next time.

Okay, that's helpful. And then obviously the acquisitions you've had are affecting margins bit. Have you attempted to quantify this drag? In other words, what would your margins be -- look like on a same-center basis or ex-the larger acquisitions?

What would it look like if they were at our level or if we had not done them?

So I guess I'm trying to get a sense better sense of during the integration costs, you have a lot of one-time costs. But then also, there are some overhead costs that are realized when you acquire a business. Trying to see what would be more of a steady-state margin if you were to take out those acquisitions.

Let me to see if I can take a look at that, Brian, and come back with something on this call.

Okay, sure. And then just a final question, can you give us a bit more detail on your investments in technology? What type of investments were those, and how should we be thinking about additional costs going forward?

Yes, so we -- I would say that we had anticipated, both this year and in 2014, continued investments in systems. And the key systems for us relate mostly to three or four different things. One is, the system that we used to provide service delivery within our Back-up business. The second one is the same-service delivery system within the ed assist business that we operate. Thirdly, we -- several years ago, and we're in the final stages of continuing to implement the improvements in our center operating systems on the full-service side both here and in the UK, that's not a new -- some of these aren't new projects, they're just discontinued sort of version 2, version 3, or finalizing implementation of them. And then lastly, this past year, we implemented a new HRIS system, which ultimately improves our ability to get analytics on the labor side. So those four things, generally speaking, have been the investments. But when we talk about, obviously, the guidance for the rest of this year and the broad-level guidance that we've given for -- or targets that we've given for 2014, it contemplates the investments we're making in these [things].

Okay. Thanks a lot guys.

Thank you.

Gary Bisbee, RBC Capital Markets.

A couple of questions. First of all, Dave, you mentioned the opportunity with the acquisition to drive back up and may be Ed advisory through those and maybe cross-selling because they didn't have the same level. I realize the scale of those relative to your Company are enormous, but is that a material opportunity? And I guess I wanted to ask you, particularly for Back-up from two angles. Number one, the ability to sell their clients. Number two, is the economics, if you're able to send existing Back-up contracts into some of their facilities -- is that economics a lot better for you than third-party if you didn't have the school in that region?

Yes, I mean, clearly, if we -- when we can drive Back-up business into Bright Horizons centers, that's both, we think, and a really good quality answer for the user and also has -- we have better economics in that situation.

We enjoy really good relationships with other centers where we're not and expect to continue to have those relationships going forward. But when we add groups like this and we had a key area where either the only choice maybe has been in-home care, which is more expensive, or another provider. We can give them a Bright Horizons offering; that will provide, on the margin, better economics to us.

You know, with respect to their clients, both in the case of the UK and the US, I think it's really fair to say that neither legacy organization had the ability to offer the kind of Back-up suite of solutions that we offer or the educational advisory services that we offer. So there's some pretty -- at least in the US, there's some very big and really good employers that they had relationships with that we're meeting through this new partnership and that we hope will play out over the long run; and more opportunity for us to sell them the kind of things that we have that neither of those legacy organizations had.

And then just following up on that, over the last few years you've obviously bulked up big corporate accounts sales force, and yet you're only -- or you talked about only being 15% of customers use more than one service. How do you -- can you give us an update on just in general how that's going? How do you grade your performance in going after that opportunity? And how quickly do you think you can (multiple speakers) --

Yes, and we'll update at appropriate increments how that 15% continues to change over time. We're not going to do that every quarter, but at some point we'll give an update. But broadly, as I said earlier, Gary, in the Back-up segment, roughly half of our business is coming from clients who don't -- we had never enjoyed any relationship with before they signed up for that service, and about half is coming from two facets of what I think of cross-selling.

One is cross-selling literally meaning they had another relationship with us either on the center side of the educational system side and we sold them Back-up for the first time. Or we've up-sold them in the sense that they only offered Back-up to some portion of their workforce and now they're going to roll it out nationally or internationally. And so we are increasing the revenue per client even though they may have offered some level of Back-up with us in the past. So those two things account for about half the growth, roughly speaking, over of time of Back-up.

So -- and obviously, every time we add a new client, every time we do that and cross-sell, it's going to tick up a 15% number, as it will in the cases when we do that on the ed assist side, which are about one third of the time each -- a new client joins the ed assist side, they -- we've enjoyed a relationship with them elsewhere. So that number will continue to tick up. When it becomes a meaningful milestone, we'll report on it, but we continue to make good progress.

Okay, and then just one last one. With -- I realize it's real small numbers, and maybe that's just the answer, but with the ed advisory business, I think fourth quarter of last year was like a 35% year-over-year growth rate. Then it dipped into the teens, low 20%s, almost 40% this quarter. I think of this business having relatively stable contracts. I guess two things -- what causes that volatility in the growth rate, number one; number two, what should we think about in the next couple of quarters?

I think the -- some of it is timing with respect to converting on sales contracts and working out partnerships. So I think that -- as I said earlier, we think that business is -- has long-term potential to look a lot like what back-up has become to us over the years. The piece of the business that's growing is really in its third year of real maturity in terms of growth. And it got started a little before that, but it was a sort of slow start, and then we sort of reconfigured it in a way that it looks today. So it's early days.

The market opportunity there is substantial. It's the one place where there's an existing spend going on of about $16 billion in tuition reimbursement. And we think we've got a value-added service there, and it really helps the adult learner make better choices and the client be more efficient with their spending and a really strong value proposition.

So it's us against the idea right now. Feels like to me like when I started 16 years ago trying to sell the concept of employer-sponsored child care. It's very early days; it's missionary selling, but it's got good potential once it catches on.

Great, thanks for all the color.

Thanks.

Jerry Herman, Stifel.

Thanks. Good evening, everybody. Just two quick questions; I know it's getting late. The first is with regard to seasonality. I know the fall is little bit more important from a what's called new-enrollment perspective. Was there any variance relative to your expectations in the fall? Did it come in in line with what you guys were expecting?

Yes, I think that we have been pleased with the sort of continued progress, as we mentioned the year-over-year gains in our mature class. As you say, the fall is the time when we have the older preschoolers going off to go to elementary school and that kind of churn. And so as we continue to see September and October's enrollment come in and still be comping favorably north of 1% over last year, we feel really good about those trends.

Great. And then I just wanted to flip around sort of the pricing question, Dave, with regard to any signs whatsoever of wage inflation at this juncture?

You know obviously, Jerry, these things are geographically sensitive. And every center -- as I said earlier, there's some bandwidth to both the tuition increases and the wage increases in terms of where it gets to the average. But I guess I would say that we feel like the plan that we have in place on both the tuition side and on the wage side is trending well.

I think we've talked about this on past calls. I think the strategy that we had to continue to increase wages and increase price during the tougher times has landed our absolute wage in a much better place than had we done what most of the market did during those times, which were not increase either and thus now we're having -- they are having to play catch-up.

So our sort of smooth strategy of continued improvement, I think, continues to allow us to have a smoother landing and thus puts us in a place to be able to look out toward next year and think that we're going to be in a good place.

That's great. Dave, it's been about a month since I've seen you. There's a rumor that you've grown a beard in honor of the Red Sox (laughter)?

Yes, I'm about to shave it, Jerry, so I'll send you a picture.

Thanks (laughter).

(Operator Instructions) Jeff Meuler, Robert W Baird.

Thanks for sneaking me in. And as a Brewers fan that's been caused a lot of pain by the Cardinals in recent years, congratulations to you guys.

Jeff, we appreciate it. Thanks.

Elizabeth, if I recall correctly, Children's Choice had a business that was similar to the back-up care that is getting slotted into there for reporting purposes. I don't recall how sizable that was, but can you just give us any indication in terms of the contribution this quarter from Children's Choice to the back-up care reporting line?

Yes, I think it's fair to say that there was a very small portion of their business more aspirational then operational. So they just had a couple of clients, and it's not meaningful at all in the quarter.

Okay. And then did you say there was a contribution from the two sizable acquisitions of $26 million in revenue this quarter?

Yes, they made about $26 million in revenue in the quarter end, yes.

Okay. And then I guess it sounds like there's some de minimis amount in back-up care, but if I would apply that full $26 million to full-service, I get organic revenue growth of about 3%. Is that right? And it sounds like that's below kind of what I would think about the organic growth being if I think about the individual pieces between price and organic growth at mature and organic growth in terms of enrollment growth at ramping centers. If you could just help us bridge that.

Yes, I think it's related to the couple of factors. The closings that we talked about, which is another around 2.5% in the quarter; and then the other factor, which without calling out every minor change, but we were affected a bit buy foreign exchange this quarter to the tune of about $1 million as well. So, I think the -- again, the netting off of all the growth against the organic without disaggregating the closures will give you that kind of a net answer. But that is how the math works; it's just we would look at it as more like 6% less the effect of the cost-plus contract and a bit of foreign exchange.

Okay. And then, Dave, I understand that it can be lumpy, so you don't bake it into the guidance in terms of the larger acquisitions, but how's the pipeline there?

From an acquisition standpoint?

Yes, yes.

No, I think the acquisition pipeline remains similar to what I commented the last time we spoke, which is there are sort of two pieces of the pipeline. There's conversations that go on on a regular basis with our team on the ground in Europe and also in the US with the smaller sort of 10-or-under center operators. And that's a good pipeline; it remains strong. We think there's, as I said earlier, a continued conversion there into 2014; looks feasible.

With respect to larger things, those are, as you say, very lumpy. And we continue to have obviously opportunities there in all the countries we operate in. Nothing obviously that we have our view on in terms of baking into our view for 2014 at this point. But conversations continue to go on, and I would say the pipeline continues to be in the same good place that it's been since we talked to you the last time.

Okay, thank you both. Thanks.

Trace Urdan, Wells Fargo Securities.

Just one really quick one and kind of a follow-up to Jeff's question regarding the Affordable Care Act. So it's very clear you guys are at a scale and have plans that meet all the requirements. My guess is that maybe some of the smaller operators out there do not. And I'm wondering whether the coming employer mandate may in fact be a catalyst to increase M&A activity and whether there's a possibility that we'll see some sort of opportunistic pickup in that in 2014.

Trace, it's an interesting point and certainly one we've thought about, both from an M&A perspective and just a general competitive standpoint. I think that there are many providers in our field that either don't have healthcare plans of any substance or that have plans that are just -- just would never comply with ACA. And thus, the cost creep -- potential cost creep that they'll experience has got to manifest itself in terms of their need to increase tuitions greater than where they're at, if they're going to absorb that or else it's going to depress their margin. So from a price-competitiveness standpoint, before they even talk about M&A, we think that bodes well for us going forward. None of that we can see today in the market, but -- and I don't know when we'll actually see that manifest itself, but we feel good about the what the prospects of that will mean to us from a competitive standpoint.

How that will manifest itself into M&A will also be interesting to watch. On one level, you might suggest that in fact that would be the case, but you also have to remember that some of the same criteria -- particularly on the smaller deals, the criteria that we are looking for -- again, trying to look for accretive deals that operate at our level of quality at prices that are around that price point -- are going to be need to be able to absorb the benefits like ours in order to work for us, ultimately. So while it may motivate some people, it still needs to be the kind of situation that we would have ultimately acquired or else we're going to end up getting it at a lower margin than we need to. We're going to be the ones having to increase price and suffer the enrollment loss associated with that.

So we're going to have to be careful to be sure that it's still -- we still have the same sort of criteria that we have on the M&A front. But surely, I think, from a pure market competitive viewpoint, I think it bodes well for how our price competes.

Got it, thank you.

Thanks, Trace.

Thank you. At this time, we have no further questions. I would like to turn the call back over to Mr. Lissy for closing comments.

Thanks, Shea. We've run over time. I appreciate everybody's questions and certainly everybody's attention over the past hour and 10 minutes or so, and we look forward to seeing you on the road. Have a good night.

Thanks everybody.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.