Bright Horizons Family Solutions Inc (BFAM) 2014 Q1 法說會逐字稿

Greetings and welcome to the Bright Horizons Family Solutions first-quarter 2014 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.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to turn the conference over to your host, David Lissy, Chief Executive Officer. Mr. Lissy, you may begin.

Thanks, Stacy and hi to everybody on the call. Greetings from Boston, where we are eagerly waiting any sign of spring.

Joining me on the call today are, as usual, Elizabeth Boland, Chief Financial Officer. And before we kick off our formal remarks, let me let Elizabeth go through the Safe Harbor statements. Elizabeth?

Hi to everybody. As I hope you all saw, our earnings release went out today after the close of the market and it is on our website under the Investor Relations section of Bright Horizons. com. This call is being recorded and it is also being webcast, and a complete replay is available in either place. The phone replay number is 877-870-5176. For foreign International cultures it is a 58382 5517 web conference ID number 1358 0485. And as I mentioned, the webcast will be available at our website also under the Investor Relations section.

In accordance with Reg FD we use these calls, and other similar public forums, to provide the public and the investor community with timely information about our recent business operations and financial performance, along with our forward-looking statements regarding our current expectations for future performance. Forward-looking statements inherently involve risk and uncertainties that may cause actual operating and financial results to differ materially from those that we describe in our forward-looking statements in this call or other public forums.

These risks and uncertainties include our ability to successfully implement our growth strategies, including executing contracts for new clients, enrolling children in our childcare centers, and retaining client contracts and operating profitability in the US and abroad; secondly, our ability to identify complete and successfully integrate great acquisitions, and to realize the attendant operating synergies; third, the decisions around capital investment and employee benefits that employers are making; fourth, our ability to hire and retain qualified teachers, as well as other key employees and management; fifth, our substantial indebtedness and the terms of that 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, which is obviously available on the Investor Relations section of our website. Let me turn it back over to Dave for his update on the business.

Great, thanks, Elizabeth, and hi, everybody again on the call. We are pleased to be off to a strong start this year as we continue to execute on our long-term plan to grow our core center business while expanding our newer lines of services and growing our footprint outside the United States.

We just talked to you about six weeks ago when we reported last quarter's results, and at that point we give you a thorough overview of our outlook and of the business climate we are in. And really in such a short period not much has changed.

So, we are going to keep her comments relatively brief this time, focus on the quarter and our updated outlook for the rest of this year. I will kick things off and then Elizabeth will follow with a more detailed review of the numbers, and then we will go to your Q&A.

First, let me recap the headline numbers for you for the first quarter of this year. Revenue of $332 million was up 19% over the prior year, and adjusted EBITDA of $57 million was up 18%.

Adjusted net income of $23 million was up 46% over the first quarter of 2013, which yielded adjusted earnings per share of $0.34, up 36% from the $0.25 that we reported in last year's first quarter. Our revenue growth in Q1 reflected strong performance across our suite of product offerings. Full service revenues grew 18% over Q1 of last year, back-up revenues increased 13% and Ed advisory services grew $3 million, or 63%.

We added six new centers in the quarter. Highlights included our fourth center for Santeen; new centers were Chicos, down at their headquarters in Florida; and in the UK and London for the Royal Holloway University to name a few. Other new client additions during the quarter across our suite of other services included the J.M. Smucker Company, American University, the Vanguard group, Cone Health and Spirit Aerosystems just to name a few.

We continued our long-term track record of growing income from operations again this past quarter. As adjusted operating income of $35 million increased by $5 million or 18%, and the adjusted operating income as a percentage of revenue was steady at 10.5%.

With respect to gross margins we achieved strong sequential progress from the fourth quarter of 2013 of 90 basis points, toward our goal this year of achieving 20 to 40 basis points of gross margin improvement. This is a result of positive trends on enrollment and our mature class of P&L centers which are up more than 2% in the quarter over last year, price increases remaining slightly ahead of cost increases, strong performance in our Back-Up segment and the continued synergies from the acquisitions, including the closures of several underperforming centers we acquired.

As a reminder to you, part of our plan to achieve the synergies from the acquisitions last year included either fixing or closing the cohort of underperforming centers that we've identified when we did diligence on those deals. To be specific, this is anticipated to result in the closure of approximately 8 to 10 more centers in 2014 than our typical 2% to 3% expected level of annual closings in the normal course of our business.

These factors, which all create margin improvement, continue to be offset this quarter by the losses associated with the larger class of these Consortium centers reopened last year, and we continue to open this year. While we expect to continue to open a similar size class this year, we still have a negative headwind that will steadily decrease as these centers ramp up later this year and into next year.

On a fully ramped basis, to remind you, these centers generate the highest margins compared to our other operating models, and as we discussed before, we believe that this area has important strategic value and one that should be a strong value creator in 2015 and beyond.

We also continue to remain very focused on closely managing and leveraging down our overhead spending, while at the same time continuing to invest in our people and systems in order to maintain the high quality of our programs and our services as we grow. SG&A in the quarter was on track with our plan, excluding the cost associated with the follow-on offering which was completed at the end of March. As this year progresses we expect to fully realize the overhead synergies associated with the two relatively larger deals we completed last year and that, combined with continued growth and disciplined spending, should yield improvements in our overhead costs as a percentage of revenue as the year progresses.

Overall for 2014, we remain on track to achieve the operating margin improvement that we previously discussed with you just six weeks ago. Our business continues to feature strong cash-flow dynamics that include the continued generation of free cash flow as we naturally delever the Company through growth. After investing in the maintenance capital we need at our centers and in our infrastructure, our first priority remains to invest in the growth of the Company, either by finding acquisitions that meet our stringent criteria, or through investing in new lease Consortium model centers across the world.

As you know, last month our Board approved, and we announced a share repurchase plan. We see this as an additional lever to the growth investments that we will make in the coming years to maximize shareholder value as we go forward.

Now let me return to the remainder of this year. We expect to see revenue growth in a range that approximates 11% to 12% over 2013 levels. Our plan for the year now contemplates the addition of 45 to 50 new centers, including organic centers and some small tuck-in acquisitions. The new center growth will be achieved largely on the strength of our pipeline of centers currently under development and is as typical each year through transitions of management of centers that are either self managed by the employer or managed by one of our competitors. Additional revenue growth drivers will be the continued ramp-up of our centers that we opened prior to this year, as well as growth in the back up area and in educational advising.

Overall, we anticipate this growth will allow us to leverage gross margins 20 to 40 basis points in 2014, and adjusted operating income margin by 60 to 75 basis points, which will in turn drive adjusted EBITDA to a range of $241 million to $245 million. And adjusted net income to a range of $97 million to $99 million.

Thus our guidance for adjusted earnings per share for the full-year 2014 is a range of $1.43 to $1.46. So with that, let me hand it over to Elizabeth who will talk to you more detail about the numbers and I'll be back to you during Q&A. Elizabeth?

Thank you, Dave. So, as I mentioned earlier and we've done in previous conference calls, I will discuss our reported results as well as certain metrics that we think help isolate unusual or nonrecurring charges. Here is the release does include these tables that reconcile our US GAAP reported numbers to the additional metrics for adjusted EBITDA, operating income, net income and EPS. Specifically quantifying non recurring charges, such as the cost associated with the stock offerings and deal costs for acquisitions.

So again top line revenue growth was $52 million for the first quarter, with a full service center business increasing $45 million, back up increasing $4 million and Ed advisory increasing by $3 million. In addition to the new center growth rate increases in enrollment gains that Dave mentioned, favorable FX rates also contributed to the top-line growth.

Gross profit increased $11.4 million to $77 million in the quarter, and were 23.2% of revenue per to 23.5% in 2013. In addition to the factors that we reviewed earlier, our Back-Up division continues to be a strong contributor to our margin growth in the first quarter of 2014, as we generated 30% operating income growth on the 13% revenue expansion.

As we've talked about on prior calls, the quarterly margin trends in Back-Up can vary somewhat, based on the timing of new client launches, as well as seasonal trends in utilization which tend to be higher over the summer and school vacation periods than they are in the first quarter.

Adjusted overhead in the quarter was $35 million, compared to $30 million last year, remaining flat at 10.5% of revenue. We are close to completing the integration of Kids Unlimited and Children's Choice, so the overhead synergies have not totally been realized yet.

In addition stock compensation expense of $2.4 million in 2014 reflects the launch of our equity incentive program across the Company in the first quarter of 2014. Other than these two factors, we are realizing the expected leverage of the investments that we have made across all of our operating segments.

So in summary, adjusted net income of $22.7 million, which translates to adjusted EPS of $0.34 a share in the quarter, is up from $0.25 a share last year. We generated operating cash flow of $52 in the quarter, essentially even with 2013. After deducting maintenance CapEx of $5 million, our free cash flow in the quarter totaled $47 million, compared to $43 million last year.

Main drivers of this increase are just improved operating performance and consistent net working capital. In addition we did have a lower cash taxes in 2013 due to the refinancing of our debt that generated significant deductible cost. We ended the quarter with approximately $75 million in cash and no borrowings outstanding under our revolving credit facility.

Now to quantify our usual quarter end operating statistics, at March 31 we operated 881 centers, total capacity of 99,700 which is an increase of 13% from the 88,100 we had at March 31 of 2013. We operated approximately 75% of our contracts under profit-and-loss arrangements and 25% are under cost-plus contracts. And our average full service center capacity is 137 in the US and 76 in Europe.

Before I get into the Q2 and full-year 2014 guidance, I wanted to take a minute to refresh your memory, or introduced those of you who are newer to the story, to two factors that will affect the sequential quarterly performance this year. First, we will be lapping the Kids Unlimited acquisition in April and the Children's Choice acquisition in July, thereby affecting no relative revenue growth.

Second, as most of you know, we experience some seasonality over the summer months as older children age out of our full service centers and as we rebuild that enrollment over the fall, and as our Back-Up utilization peaks. Both of these factors impact the sequential operating performance for those segments.

As Dave previewed, our updated projection for the full-year 2014 anticipates revenue growth approximating 11% to 12% over 2013. Organic growth approximates 8% to 10%. This is comprised of price increases of 3% to 4%, growth in our enrollment of the mature and ramping centers of 1% to 3%, new organic full service center additions of 1% to 2%, and growth from our Back-Up and Ed advisory services up 1% to 2%.

In addition acquisitions will add approximately 4% to the revenue in 2014, including the lapping effect of acquisitions that were completed last year. Offsetting these increases are the effects of center closings, which do include both the legacy organic and acquired centers. This effect is approximately 2% decrement.

We expect an income from operations in 2014 will approximate 11% of revenue, expanding 60 to 75 basis points from the 10.4% adjusted income from operations that we reported for the full-year 2013. We are projecting amortization expense of approximately $30 million for the year, which includes $20 million related to our May of 2008 LBO. We are estimating depreciation to be approximately $44 million to $45 million.

I'm sorry, that's incorrect. We are expecting depreciation to approximate $52 million to $54 million.

We estimate stock compensation expense of $9 million and interest expense is projected to approximate $34 million for the year, assuming continued 4% borrowing rates on our term loan. And no borrowings under the revolver required based on our expected cash flow generation.

We estimate that the effective restructural tax rate will approximate 37% of our adjusted pretax income in 2014. Similar to that illustrated in our results for 2013 and consistent with projected GAAP reported effective tax rate for the full-year 2014. The combination of top line growth and margin leverage leads us to project a 15% to 17% increase to adjusted EBITDA, to a range of $241 million to $245 million for 2014. With adjusted net income for 2014 in the range of $97 million to $99 million, and $68 million estimated weighted average shares outstanding, we estimate that adjusted pro forma EPS therefore will range from $1.43 to $1.46 for the full year.

Lastly, for 2014, again, the full year we project will generate $160 million to $165 million of cash flow from operations, or $130 million to $140 million of free cash flow. Net of projected maintenance capital spending of $25 million to $30 million, consistent with the levels, essentially, that we generated in 2013. Based on centers in development and slated to open in 2014, we expect to invest approximately $40 million in new center capital consistent with 2013 levels.

On the acquisition front we plan to spend $20 million to $25 million on tuck-in acquisitions during 2014 versus the $130 million we spent this past year on the acquisition of Kids Unlimited and Children's Choice. We expect to fund all these investments from cash from operations and end the year with $90 million in cash on hand.

Looking specifically to the second quarter of 2014, our estimated revenue growth for Q2 approximates 10% to 11%. Our outlook for adjusted EBITDA is $64 million to $65 million. In using the 37% effective structural tax rate on the adjusted income before tax, we're projecting adjusted net income in the range of $27 million to $28 million, and EPS in the range of $0.40 to $0.41 a share for Q2 2014. With that Stacy, think we are ready for Q&A.

(Operator Instructions)

Sara Gubins, America Merrill Lynch.

Thank you. This is David Chu for Sara Gubins.

Just wanted to confirm. The 4,550 centers for 2014 -- that's a net number, correct?

That's a gross number, David.

That's a gross number?

We've always talked about that as a gross number.

Got it. So on a net basis, what are you thinking?

I think our typical run rate of closures is about 2% to 3% per year, which typically would yield 20 to 25 closings.

And I think this year we have the anomaly that I talked about earlier on the call, which is anywhere from 8 to 10 closings that we're likely to have, in addition to that with respect to closings from underperforming centers that we acquired in the two deals we did in the past year. So, closings could range between 30 and35.

Got it. And sorry if I missed this, but the organic revenue growth in the quarter?

The organic revenue growth in the quarter was about 8 percentage points. So of the 19% growth, we had just about 11%, $30 million or so, came from the kids in Children's Choice contributions.

Okay, thank you.

Lastly, in terms of improving capacity utilization, how much more runway do you think you have?

As we've talked about in the past, the place where we are most focused obviously is in the mature centers where we own the P&L. And in that subset of centers, that's the group when we talk about enrollment in the quarter being up just over 2%, that's what I'm referring to.

Overall, in terms of percentage of occupancy, we probably have 5% to 6% of runway left just to get us back to where we were before the downturn when we lost enrollment in our P&L class. Beyond that, there is probably another 5 to 6 points of potential room to get us to where we think full capacity would look like.

What is the full capacity rate?

Generally, centers would peak at average around 80% to 85% of capacity. And we consider that to be practical capacity.

Our target would be 78% to 80%, rather than a full practical capacity that we would be achieving.

Is that what your question is, David?

Yes, thank you very much.

Manav Patnaik, with Barclays. Please proceed.

Good evening.

Just to clarify on the guidance real quick, the $20 million to $25 million you characterized as acquisition spend, is that baked into the growth CapEx number?

The components of our capital spend are maintenance capital, which we're estimating $25 million to $30 million for maintenance capital; new center development, which is $40 million; and then acquisitions are separate from that.

Okay, got it. Just wanted to clarify that, thank you.

With respect to the share repurchases, I understand it gives you that little extra flexibility; and it is obviously a good thing.

I was wondering if you could talk about the timing around why announce it today? And then how should we think about in terms of your usage of that share repurchase?

To be clear, just to clarify, we didn't announce it today; we announced it a couple weeks ago.

But the reason for it, Manav, is as we look ahead and we anticipate continued growth and look at what we project to do over the long run, we want to be in a position to have as many levers at our disposal to maximize shareholder value.

And as I said earlier, the business -- and those of you at that been around for long time know this -- has really good cash flow dynamics. And we think we can, first and foremost, deploy that in the growth of the Company when we can find good acquisitions and when we can find good lease model locations to do.

But those things are always, A, a little bit lumpy in terms of when we can find the right ones to execute on; and, B, we may find ourselves at a place where, even taking advantage of everything that's on the table in both of those places at any given point in time, we still have the opportunity we think to add additional value through a buyback.

And we thought it was prudent, and our Board agrees, that we should be in that position. And as things play out, we will be in a position to be opportunistic, whether that's in the open market or as [Bing] continues to sell shares over time.

We want to be in a position to execute on that when and if the time comes. We think that's the best way to drive value.

Got it, and just one more related to the M&A topic. I know in the past you've characterized the M&A pipeline as being active; it's just a question of timing lumpy. Can you characterize it separated in terms of your existing markets and the scope of potentially getting into new markets that you are not in?

Every time I've commented historically on the acquisition pipeline I'm only referring to markets we are currently in. The pipeline still remains very active in the countries in which we operate in today.

Separate from that, we continue to engage in dialogue in a variety of countries around the world. With the idea that while it is unlikely that we will make a move to another country in the short term, it is more likely that over the long run, we will be operating in new countries. So we want to stay abreast.

We have some circled up around the world where we think the opportunity for us to add value might be the strongest. Either because we think there's potential for corporate sponsorship, or there is a financing program in place nationally that we think allows us to operate in a strong way and add value and deliver returns that are similar to what we do in other places around the world.

So we are active and we're in discussions. But I don't think that you should think that we will be talking about a new country in the short term. But certainly over the long term, it is a good possibility.

All right, thanks a lot.

Gary Bisbee, RBC Capital Markets.

Good afternoon.

I guess the first question --you committed to get exceptional growth but also small base, I guess in fairness from an educational advisory. And we know that business has really high gross margins.

I guess I just wanted to get some commentary as we think over the next couple years how the operating profitability of that business is likely to trend. And maybe the way that would be easiest to answer it is can you talk about what incremental investments in infrastructure and sales and whatnot?

And where are the investments you're making that continue to position this asset for growth, and over what time period might we see significantly better profitability?

Yes, I think as you rightly point out, we continue to be bullish on the opportunity for Ed Advising to continue to grow. It is clearly a big market.

We think the value proposition that we have is unique, and we think clients are responding positively to it. Both existing Bright Horizons clients that we're cross selling, and clients that are engaging with us for the first time in this newer service.

We obviously want to be sure that we feed it appropriately with respect to giving it the best chance to grow and take advantage of what we think is a pretty wide market opportunity.

We look at it, frankly, a little bit like our best internal analog is what happened with Back-up Care. And that business has become significant for us over the course of the past five to seven years and continues to grow nicely.

And in its early stages, it had similar dynamics to what we are seeing on the Ed Advisory services. That being, a strong gross margin and then diluted by an oversized, overhead spend in people and in systems and technology to make that all it can be. And then over once it reached a certain scale, it obviously began to contribute nicely on the operating line.

Our view is that this year Ed Advising will continue to be like it is now. It will continue to grow nicely, and it will continue to have strong gross margins.

But we're going to continue to make technology investments, additional sales people, some marketing investments, that will continue to force it not to contribute that much on the operating line. It may slightly do slightly better than break even, but nothing meaningful.

I would expect that beginning some point towards the middle to end of 2015 and beyond that it will take will turn and begin to contribute, maybe not its full potential, but certainly better than it is today. And with continued growth, we see the ability ultimately for this to be really our next Back-Up Care advantage in the way we look at it.

Great, thanks.

And just on to Back-Up Care, those margins there are terrific right now. How much upside could there be over time to that, or should we think of more as a top-line story in maintaining?

In Q1 in Back-Up, there is always a little seasonality that benefits us positively; and there is some seasonality in use. So you are going to see, as we've talked about before, some fluctuation both in revenue but also in the gross margin based on utilization as the year plays out. So it is probably safe to say we are at our peak of what during the year any quarter will were look like from a margin perspective.

Over the long run, we continue to believe that's more of a growth story at this point that is a margin leverage story. We are making good investments in that business, particularly in technology, in mobile applications, in broadening the suite of services that we offer under that umbrella.

We are really pleased with some of the things that we're going to introduce in the next year and have that in-and-out guidance for what we think the business is going to need to be fed to continue to grow. So I think the short story there, Gary, is more of a top-line growth story at this point.

Fair enough, and then just one last one. I hate to come back to this after half the call last time.

But one question I keep getting on this whole risk of universal Pre-K is you talked about the examples of a couple of states where there is a program you participate in those, and then for a lot of parents also do extra hours. And I think my sense was you charge a higher price such that your economics work out.

Here is the question. Do existing relationships with up employer sponsors, would they in any way preclude you from raising price for part of the week if there were markets that were to adopt something similar to what you've seen in a couple of your --

Actually, the effect on the employer sponsored centers is interesting because it kind of has the effect of really reducing the proportional contribution that the employer has to make when you bring another source of revenue in.

So most of the time, particularly in our cost-plus arrangements with clients, the client will see a net reduction to their proportional subsidy based on, in effect, another source of revenue coming from the state.

With respect to how we charge it up on community, to the degree we have a center that is a P&L center that has both corporate employees and also is open to the community, which happens in our P&L class or our lease/consortium class. There we would have full rein on pricing on the community-based usage within that center.

Great. Thanks a lot.

Timo Connor, William Blair.

Thank you.

Just trying to square the upside that you are seeing in organic growth and the healthy enrollment at mature centers with the changes to your thoughts on the net center count in 2014. Basically, it seems like the business is very healthy.

Just trying to figure out if there's going to be lumpiness from quarter to quarter, year to year in net center count. And then more steady, say, annually, how many centers do you think you will be adding in future years?

I think the order magnitude that we are talking about this year is what we see for the foreseeable future. I think there are going to be anomalies on the closing side. There have been in the past, and there certainly is this year.

I would just point out that the extra closings that we are talking about this year are going to be accretive and are really centers that were circled up as challenging whenever we do larger deals. By the way, this is not the first time that's happened. We've had that consistent as part of our plan over time.

I say that only because sometimes you can get lost in just looking at the actual net number. If we were to look at this margin that we are adding, or even the revenue, because most of the newer centers are a lot bigger than the centers we end up closing.

So, there's a lot more to the story than just the net gross number. But just broadly speaking, I think the number of adds this year will approximate what we think we can do in the next couple years, absent any larger acquisitions which will always push that number up. And those are not on our guidance for this year or any year.

A normalized basis of closings would be roughly 2% to 3% of centers in the normal course, absent any of these things that we'll tell you about on a periodic basis that might force that number up.

Okay.

And then from last year at this time to currently, the mature center enrollment growth has really accelerated. I guess if you had to point to a couple of things that are driving the upside there, what are they?

Well, I think it's a combination of a variety of factors. There is no question that I think we benefit from the fact that our centers that are in this class tend to be in geographic locations that do better than the general economy. And so not only are they benefiting now, but they benefited last year on a recovery basis a little faster than what some geographic areas have seen.

I also think on the sort of things that we can control, we've made a lot of deliberate improvements. We use the down economic time to continue to invest in our facilities, in our program, creating a variety of new curriculum pieces that have become a part of how we market those centers.

I think when you add that all up, a little bit more investment in digital marketing, a little more deliberate focus on marketing, doing more ourselves than maybe we had to do in the past. I think all of that has added up to continued momentum, and we expect that momentum to continue through the year.

Then I know that 78 to 80 is a target number for capacity utilization. But I'm assuming you have centers that are higher than that.

Is there any potential for upside to that, particularly later in the economic cycle?

Certainly we have centers, when you start to look at it, that have better capacity than that. But when you look at such a large group of centers over the course of time, and you consider the realities of when children age out and there's always fluctuating enrollment and natural cycles in any year. It is challenging to look at the system as being that much higher than that.

But certainly if all arrows are pointed in the right direction in any given year, that's possible. But we are not in a position to forecast that at this point.

Got it. Thank you.

Dan Dolev, Jefferies.

Thanks for taking my question.

Real quick question on M&A contribution. If I remember correctly, last time you said it was 5% this year. And if I heard correctly you said 4%. Can you maybe discuss what the difference was?

Sure. I think it ranges of where the growth is.

We've moved the overall revenue growth target slightly. And I think the base of where we are seeing the contribution from, the acquisitions and just timing of what we would see them, just puts it closer to the range of 4% or so. That's really all there is to that.

Got it. Okay. Thank you so much.

Thanks, Dan.

Jason Anderson, Stifel.

Good evening.

On that, would it be safe to say the dollar contribution of revenue from the closures would maybe be 1%? Would that be what moved that?

The closures aren't having anything to do with the acquisitions revenue growth. Sorry, I wasn't quite following--

I meant the closures that you talked about needing to close.

There's a small factor for that, but that wouldn't be a full percentage point. So I think it is just really timing of the others.

Would you be able to-- maybe you did, I'm sorry if I missed it -- quantify maybe the accretion from those 8 to 10 closures you are talking about?

We didn't quantify the accretion. But I think in general terms it is those centers would have been either losing order of magnitude, 50,000 to 100,000, or be break even. So there's accretion by virtue of not losing the cash and also because they are not contributing to revenue, with no margin contribution at all in terms of the pressure on margin growth.

Overall, I would have to take a look. But they were, as a class, losing money; and so there accretive as we go forward.

Great and then one more. The recent announcement you had about the special and exceptional needs partnership. How should we think about it?

Is there a contribution from that? Or does that just kind of roll up into a suite of products, product offering? Anything you can help us with there?

Yes, I will outline the strategy behind that. And then I will comment quickly on the way you should think about from that. ¶

So just to be clear about it, as we think about increasing the value proposition of what we bring to our clients, it is clear to us that there are many areas of struggle as working families continue to navigate the challenges of work and life. And we've responded to those solutions to the full suite of solutions that we now bring to bear.

We think it deepens our value proposition to any one client to continue to bring new ideas to the table. We recognize that we are not always going to be able to provide those ideas ourselves because our expertise may be slightly different from what's necessary to drive a solution in any given area.

One of the major things when we talk to our clients they bring up and have brought up over the years, is the disproportionate challenges that parents have when they are trying to navigate the issues related to children with exceptional and special needs. If you have to advocate for services, or anybody's ever been in that position to do so with the school system, it can become very cumbersome and cause a lot of loss of focus and loss of productivity.

We found a solution that a provider had developed, myEdGPS, and we are now the exclusive provider of that service in the employer channel. We've plugged into our suite of services, and we are sort of upselling it to our clients.

There will be some incremental revenue and incremental profit over the coming years from that. It's not going to be a big mover of the needle, to be frank. Although it will be deepen the value proposition that we have with our clients who continue to give us a strong position.

As other partners want to work with our clients, we want to deepen our position with the best and most high-quality suite of solutions available, which has been our history and will be our future.

The short story, Jason, is there's really nothing more to bake into this year financially. If it ever gets to a place where it becomes big enough for us to call it out from a financial point of view, we will let you know. But I wouldn't expect that in the next year or two.

Great, thanks a lot.

Jeff Silber, BMO.

Hi, this is Henry Chen calling in for Jeff. Thanks for taking my question.

Just wanted to dig in a little bit to the international component of your revenue growth, particularly in the UK and Netherlands. If you could provide a little commentary on that and how much of that is baked into the revenue guidance? Thanks.

Yes, so the UK overview and the Netherlands as well, both continue to operate right on plan with what we had hoped. They're each in a different phase of where they are in the revolution.

Obviously the UK's the country we went to first, besides US and Canada. And we have a long track record of both growing organically and through acquisition. And obviously, the biggest story in the past 12 months there has been the latest acquisition we did of kidsunlimited. That obviously will get lapped in April.

But that continues to contribute nicely. And they have a pipeline of their own, both of organic and acquisition potential that they are attempting to execute on, which gives us a good view that the UK has some good growth potential on its own going forward.

The Netherlands is a place we've been a lot shorter period of time.

I would describe where we are in the Netherlands is we took this past year to really solidify our position, strengthen our team, and really focus on the value proposition we are offering to parents. And we opened a few new centers ourselves organically focusing in major cities like Amsterdam, Rotterdam and The Hague.

I think what we've done now in the past couple months is we've really opened our focus to look at further consolidation of that market. And we want to be a participant in helping to consolidate that market.

We think there are some good targets for us, albeit not very large, but ones that add nice scale for us in that country itself. And then there's some good organic growth opportunity we think to open some new centers in the coming years.

The margins that are associated with the Netherlands and UK are also strong.

The UK, the long-term story there has been a little bit like I described when I was responding to the question around EdAssist. It took us a while to take what were good gross margins and get operating margins that looked a lot more like US. And we're getting a lot closer.

This last acquisition really went a long way to getting us there. And I think we are going to be very close to now having a business outside the United States that actually generates similar margin characteristics to the US.

And the Netherlands is already there. There are strong margins in that business, and that will be more of a top line growth story hopefully going forward.

That's how we look at those two countries. I don't know if that's the full answer you were looking for.

That's great. Do you have a target upside in terms of top-line growth that we could think towards?

I don't think we are talking about guidance of revenue broken out by area. Obviously we will report on our segments as we do in our releases. But I don't think we are talking about breaking down our overall guidance by country.

Okay. Thanks so much.

Trace Urdan, Wells Fargo Securities.

Thank you. Good afternoon.

I wanted to kind of riff off of Gary's question a little bit about gauging the growth of the Back-Up centers. And I'm interested if we go under the hood a little bit and understand, does the industry map for the Back-Up centers mirror the same industry map for the sponsored child care centers?

Is it something that you lead with or follow with as you think about attacking those markets? Does my question make sense?

Yes, and I will just add one thing that I think will hopefully bring additional clarity.

Broadly, I would say that the industry sectors tend to mirror themselves, mirror one another, with the exception of things like hospitals, which tend to skew more towards centers and not as much in the Back-Up area, although that's changing, I think, over time -- just when you look at our install base of clients.

But when you look at professional services, financial services, pharma, biotech, energy, technology -- those clients tend to be players in both areas. The reason for that, and this is what I wanted to add to your question, Trace, is that Back-Up and centers are extremely complementary of one another. Both in terms of what they mean as a value proposition to a client, but also what they mean in terms of our earnings.

And so by that I mean what really our Back-Up suite of services has allowed us to do over the past several years is to deal with touching more of our client employees' lives than we could when we only had the centers that touched a good number of people very deeply, but was not equitable across an entire workforce.

Now, it is more common, to answer your question, that we would be talking about both services together.

We'd be talking to a large multiservice company about centers at sites with enough critical mass where they might consider that. And then the Back-Up network in other places, where centers may not be viable but as a holistic solution to all of your needs in addition to the other services that we now offer.

Where it helps us from a financial point of view, of course, where the synergy comes in, is obviously we are unique in the sense that clients value the Bright Horizon network of centers -- extremely value it. They value the geography that we are in, the quality.

And we can then only be a Back-Up provider, but we are delivering a lot of the service in Bright Horizon centers -- not all of it, but a lot of it. And no other competitor will ever have the Bright Horizon center. So it creates both a financial win and also a bit of a competitive advantage.

That's really helpful, and just to make sure I understand.

Could you kind of imagine going in with the Back-Up centers as somehow an easier sale and then up selling to the full centers? And what you are suggesting is that's not really how it works? That you are calling on companies and attempting to persuade them to go for the whole bundle?

Yes, and I would add our educational advisory to that too. Our sales people are focused on selling the entire suite of solutions that we bring to bear.

And we now have some clients who have all of our services and some that have three out of four and some that have more than one. And so we had to play catch-up because when we started, we had hundreds of clients and only had one thing from us. So there's the cross selling we've been talking about.

But then there's when we go in fresh to a company that we haven't done business with before, we are presenting it as a suite of solutions.

Okay, fair enough.

And the other question I wanted to ask was during this last quarter, the market saw Nord Anglia come into the public markets, and a lot of investors got a view to their model. And in part includes a market that serves ex pats internationally. And I wanted to ask you about that.

Have you looked at the expat market specifically being sort of a high-end premium market where you have a third-party payer as being one that is a potential way to enter markets that you are not in internationally?

I would say that in part, part of the reason we are in India today is because the client that we are serving there was focused on both, serving their local population but also serving expats with a level of early education that's consistent with what they do in New York and London and other places we work for them.

I would also say that we are serving a lot of US expats in our employer-sponsored centers in the UK and vice versa here in the US --not expats, but people coming from other countries here.

I think when you look at our Ed Advising businesses and our College Coach business and other things like that, we are beginning to hear some discussion with our clients as we ask them other ways we can add value of how those services can apply to expats.

Because expats who are going to other countries are challenged to think about what they are doing for education. And those companies that are bringing employees here to the US are obviously thinking about the same thing.

And we have businesses in College Coach and in EdAssist that basically do that, although not specific focusing on ex-pats. So it will be a topical area for us that we'll continue to think about more over the next couple years.

Great. Thank you.

Jeff Volshteyn, JPMorgan.

Thank you for taking my question.

I wanted to ask about the third and fourth quarter. Is there anything about seasonality or any other factors that we should be aware of when we are modeling the second half of year?

Sure. I think as I was trying to express on the prepared remarks, Jeff, the first and second quarter of the year tend to be highest enrollment in the full-service business.

In the summertime, we start to see older children basically aging out of the preschool groups. Sometimes families withdraw children as they go on vacation, and then they re enroll in the fall, or we're rebuilding enrollment in aging younger children into the preschool room.

The third quarter you definitely see a pullback a bit on the full-service side.

And then in the Back-Up Care world we tend to have a much steadier revenue stream because of the nature of the client contracts that we have. And then the cost are more variable depending on the provision of care. So as the provision of care increases over the summertime, there's a bit of profitability compression over the summer because our utilization is higher than it is the other quarters.

And then in the fourth quarter for Back-Up Care, there tends to be some of the variability that we talked about last quarter that can happen from individual events. Like Hurricane Sandy generated a lot of need and interest in Back-Up Care. Otherwise, there can be clients that have higher utilization for the various events that happen in the fall and are also trying to use their basket of uses for the year.

So we tend to see a bit higher profitability -- all that boils down to a bit higher profitability on the margin side in the first and second quarter. Third quarter dips, and then we rebound a bit in the fourth quarter. And overhead tends to be steadier throughout the year.

That's very helpful.

Also on the foreign exchange, I think you said you had benefit in the first quarter from foreign exchange. What is included in your guidance?

What we benefited from in the first quarter was primarily the UK, where the pound exchange rate was about $1.65 compared to, I think it was $1.57 or so last year.

So in our guidance for the rest of year we are using ranges in the $1.60 to $1.65 range for the pound for the rest of year.

Great. Thank you very much.

(Operator Instructions)

Jeff Meuler, Baird.

Dave, I've got to say I was a little bit disappointed. You usually either make a reference to the weather or baseball. And being from Milwaukee, I was much preferring a baseball one this time.

Well, I think you guys took us down on opening day. I'm still hurting from the Brewers. (Overlapping/Multiple speakers).

I have to tell you that if we end the call soon, I'll get to the Bruins game on time.

All right, I'll try to be quick.

I guess just first a follow-up on the last question about how we should be thinking about seasonality and whatnot over the balance of the year.

Elizabeth, is it about accurate in terms of order of magnitude that going from Q2 to Q3, you are going to anniversary about an additional $10 million in M&A revenue?

It is a little bit higher than that because there's a week or so of kids, and then there's another week in the month of July or a couple weeks in July for Children's Choice. It is maybe closer to $15 million.

$15 million, okay, perfect.

Can you guys remind us the new lease/consortium centers, how long do they take to hit breakeven? And how long do they typically take to hit a scale margin?

Our typical installed base model would have looked like a breakeven point in the neighborhood of 18 to 24 months and hitting their mature operating levels once they get into year four.

Our new release models that we've been talking about on the last few quarters of call, I would say our experience there has been that we've been able to move that forward by, say, three months or so. The centers are larger and they have a lot of interest, particularly in the younger age groups.

So we are not seeing a breakeven point that's a lot faster, but we are seeing stronger year-one enrollment overall. So what it does is it sets the center up for quicker profitability as it gets past that, say, 18-month mark. That's the long-winded answer, I guess.

That's helpful.

Finally, you guys are obviously operating with a different balance sheet than when you were last public. So interesting to see the share repo authorization. Do you guys have a steady-state financial leverage target that investors should be thinking about?

I don't know that I would call it a fixed target at this point in time, Jeff. But what I would tell you is, obviously, one of the things that we learned a lot about when the Company was private was how the Company operates with debt because we never had any before.

So obviously, we think that where we are now in the range of 3 times to 3.5 times EBITDA, where we will be soon and continue to leverage down to, is comfortable for us, particularly at a cost of money around 4%.

So we think that it provides good efficiency and that we're going to grow over time and we are going to continue to leverage down naturally. Not necessarily by paying down the debt -- that may be something we decide to do. But right now. that doesn't appear to be the best way to add additional value.

So with the growth plans that we have where we expect to continue to grow earnings, we think that being ready to do repurchases when the time is right is a good way to add incremental value.

Okay, thank you. Enjoy the game.

Anj Singh, Credit Suisse.

Hi, thanks for taking my question.

Just real quick. I was hoping you can tell us where the number of new center openings was reduced. Was this on the organic or the acquisition end?

I think, Anj, obviously as the year progresses, we have more visibility on timing. There's always going to be some timing when we try to project stuff will get open in the fourth quarter or slip till 2015 at this point.

Most of the organic corporate stuff is baked, with the exception of the transitions of management, which close a little bit earlier. So whenever we are looking at the transitions of management, we are making a projection based on what in the pipe.

We still have good visibility and a strong pipe there. But we're looking at it going some of them will end up opening in Q4 and some of them will end up into the first quarter of 2015.

And then on the acquisition side, sort of a similar thing. Good visibility in our pipeline, good deal flow, but again, more weighted to the back end of the year and then ultimately trying to think about it at this point how much of it will get done by the end of the year versus what slips into Q1 of next year.

So really, it is probably a little bit of both, based on where we are now between organic. And of course we will have even more visibility on what we think that actual number will be when we talk to you the next time. And we will continue to update you.

Okay, thanks.

And then building on that, should we view the recent buyback as a sign that perhaps the acquisition pipeline is less full than it has been in the past?

No.

Okay. Then one other quick one.

I know last quarter you guys gave this number out. I'm not sure if I missed it, but how many clients are now utilizing your Ed Advisory services? And what's the percentage of them that are buying another Bright Horizon service?

I'm glad you asked that because I think we did give quite a bit of detail on that at the end of the year, Anj. And I think our protocol will be that we update all of you on that periodically, but not every quarter. So we look at that as more of an annual update. ¶

So suffice it to say, we have growth in both our Ed Advisory and Back-Up client list. And we continue to see cross sell across that group. So we've got a note to be sure we are updating everybody on that periodically, but there's just not that much change from quarter to quarter.

Got it. All right, thank you so much.

I'd like to turn the call over to David Lissy for closing comments.

Thanks, Stacy.

Thanks to everybody joined us on the call. We appreciate your continued interest in Bright Horizons and look forward to seeing many of you on the road and following up accordingly. Have a good night.

Have a good night, everyone.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.