Bright Horizons Family Solutions Inc (BFAM) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Bright Horizons Family Solutions first-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to the conference over to your host, Dave Lissy, Chief Executive Officer for Bright Horizons Family Solutions. Thank you, Mr. Lissy, you may begin.

Thanks, Doug, and greetings to everybody on the call today, from soggy Boston. Joining me on the call is Elizabeth Boland, our Chief Financial Officer, who, as always, will go through a few administrative matters before I come back and kick off the call.

Elizabeth?

Hi, everybody. Thanks for joining us today. Our call is also being webcast, for those of you who are interested in that. And a recording of the call, and our earnings release, which was issued today after the market closed, are or will be available under the Investor Relations section of our website at brighthorizons.com.

Some of the information we are providing today represents forward-looking statements, including those regarding our current expectations for future performance, our business outlook, enrollment trends, our financial outlook for Q2 and for the full-year 2016 for revenue growth, operating margins, overhead costs, growth and operating strategies, center openings and closures, capital spending, growth rates, borrowings, adjusted EBITDA, net income and EPS, as well as cash flow and share repurchases.

Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially. Factors that could cause actual results to differ include the risks related to implementing our growth strategies, client demand, integrating acquisitions, and our indebtedness, as well as other risks and uncertainties that are described in the risk factors in our Form 10-K for 2015 and in our other SEC filings.

Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any of these forward-looking statements.

The non-GAAP financial measures we discuss are detailed and reconciled to their GAAP counterparts in our press release. And they also will be included in our Form 10-Q, which will be filed with the SEC and be available in the Investor Relations section of our website.

So, Dave, I'll turn it back over to you for the review and update on the business.

Thanks, Elizabeth, and hello again to everybody who has joined us today on the call. As usual, I will update you on our financial and operating results for this past quarter, as well as our business outlook for the rest of the year. Elizabeth will then follow with a more detailed review of the numbers, and then we will come back to you for Q&A after that.

First let me recap the headline numbers for our first quarter. Revenue increased 10% to $385 million, and adjusted EBITDA of $72 million was up 11%. Adjusted net income of $31 million was up 15% over last year's first quarter which yielded adjusted earnings per share of $0.51, up 19% from last year. This past quarter, we had about a 1% foreign exchange headwind, so that on a common currency basis revenue growth would've been 11%, and the growth in adjusted EBITDA and EPS would have also been slightly higher.

Our top line grew $35 million this past quarter, with solid contributions coming from each of our three business lines. We added nine new centers, including centers for new clients, like Concho Resources; as well as centers for existing clients that included Novartis, which added full-service care to the back-up and College Coach services we already provide to them; and Cisco, where we added their center in Bangalore, India, to the centers we already operate for them in California and London.

In our back-up and ed advisory businesses, we recently launched services for new clients that included Lenovo, Yale University, State Farm Insurance, Gilead, and Novo Nordisk, just to name a few.

We are very pleased with the continued leverage at the operating income line, which expanded 50 basis points this past quarter. Our margin expansion reflects the combination of factors we've talked about on previous calls. We continue to see positive enrollment trends in our mature class of P&L centers, and price increases that average 3% to 4% across the system, along with some modest overhead leverage.

As we had anticipated, and we experienced last quarter, the timing of the opening dates of new lease/consortium centers can be lumpy. Since we had 10 open in the past couple of months, this quarter's margin expansion once again experienced some timing headwind from the early-stage operating losses in these centers. Overall, though, our new lease/consortium strategy is well on track to create significant value, as the group of centers that opened over the past few years are doing well.

As the contributions from each maturing class that opened since 2013 offset the losses from the more recently opened centers, we expect to continue to see the short-term timing headwind diminish in the back half of 2016; thus producing some uplift in margin expansion for the full year.

The performance and outlook for both our back-up and educational advising segments also remains very positive. As we've talked about in the past, the timing of new client launches in these segments, and the periodic investments that support the service delivery, can sometimes cause some quarter-to-quarter variability which is seen in the results of these businesses in the first quarter.

For back-up, our top line grew 9%. Based on our current outlook, however, including the strength of our expected new client starts for the remainder of the year, we anticipate that we are on track for the yearly growth rates that we previewed last quarter in the low double-digits.

On the margin side, we are rolling out our new operating system, including mobile capability which adds some depreciation costs which we've factored into our plan for the full year.

Our advising business posted an outsized quarter, growing 34% on the top line. For the full year, we believe they, too, are on track with the plan we discussed on our last call, which should yield top-line growth north of 20%.

These two segments are proving to be really good individual businesses, each with compelling value propositions. The best part, though, is how they knit together with our centers to produce a powerful suite of solutions for employers that impact their workforce through key life stages, and give us competitive advantage and thought leadership in the market.

Overall for 2016, we are pleased to be off to a strong start, in line with our plan for the year. As we look ahead, we are well positioned to continue to execute on our growth and operating strategy. And we remain on track to achieve the top-line growth and the operating margin improvement that we've previously discussed with you.

Our core business continues to progress nicely, with enrollment steadily increasing on our mature basis centers, and our newer class of lease/consortium centers ramping on or ahead of plan. The selling environment, both for new clients and for cross-selling of existing clients, continues to be robust. This is reflected in the quality of our early-stage prospect base and our pipeline of centers under development, and in our new client launches ready to come online this year in our back-up and our education advising services.

While we are seeing good progress on the new business front across most industries, the areas where we are currently experiencing the most positive activity include to technology, biotech, healthcare, and higher education. Our international businesses are also off to a good start for the year, as the UK and the Netherlands continued to deliver solid growth and contribution this past quarter.

On the acquisition front, we see positive momentum in our pipeline of prospective high-quality centers. We've got a good mix of smaller networks and single center opportunities in active discussions both here in the US and in Europe. We completed one 3-center deal in Q1. And based on what we see now, we expect to be able to continue to close deals consistent with the plan we laid out at the beginning of the year.

Let me move for a second over to the balance sheet. As I've talked with you about before, our priorities for capital allocation are first the growth-oriented investments we are making in acquisitions and in new lease/consortium centers. So that's where we are focusing a lot of our time, attention, and resources. And I remain pleased with the value creation from these investments.

Our second priority is to enhance shareholder value through our repurchase program, which we continue to execute on this past quarter through modest open-market purchases.

Before I turn it back to Elizabeth, let me confirm our outlook for 2016. We continue to expect revenue growth in a range that approximates 8% to 10% over 2015, inclusive of an approximate 1% FX headwind. We expect to produce adjusted EBITDA in the range of $307 million to $310 million, and full-year 2016 earnings per share in the range of $2.17 to $2.21.

So with that, Elizabeth can review the numbers with you in more detail, and I'll be back to talk with you during Q&A.

Thank you, Dave. So to get into a bit more detail on the results for the quarter, the $28.5 million increase in full-service center business revenue was driven by rate increases in the range of 3% to 4%, as Dave mentioned; enrollment gains in our mature, as well as ramping centers; and the contributions from the 87 centers that we have added since Q1 of 2015.

As we've been reporting over the last year or so, we did see some impact from the stronger dollar in the quarter. Lower pound and euro FX rates in 2016 compared to 2015 dampened the revenue growth in the full-service segment by about $3.5 million, or just over 1%. Therefore, as Dave said, on a common currency basis, the full-service segment grew nearly 11% in the quarter.

The impact of centers that we've closed since the beginning of last year also offset the top-line growth in full-service by about 1.5 percentage points.

The back-up division grew 9%, and net advisory services grew 34% in the quarter. On a quarter-to-quarter basis, the growth rates can vary somewhat, based on the timing of new client launches, service utilization levels, as well as the comparable prior quarter.

In summary, then, our organic growth for the quarter was approximately 7.5%. And acquisitions added a total of 5%, including centers we acquired this quarter, and the lapping effect from 2015 acquisitions.

Gross profit increased $9.2 million to $96 million in the quarter, and gross margin was 25% -- 24.9%, to be exact -- compared to 24.7% in 2015. As we've discussed in prior quarters, our back-up and net advisory services both generate gross margins that are more than double what we earn in the full-service business.

Over time, top-line growth in these segments contributes to margin expansion; although gross margin and operating income can vary from quarter to quarter, based on the timing of investment that we continue to make in technology and the personnel that are necessary to support these growing businesses. The timing of new business launches also contribute, and the use mix contributes to quarter-to-quarter variability as well.

On the full-service side, performance remained strong in our mature and ramping classes of centers. The steady pace of year-over-year enrollment gains in the mature class that we have seen since 2011 is also continuing in 2016, and we realized over 1% increase in Q1 of 2016. Strong cost management alongside this enrollment growth, plus the exit from underperforming locations, contribute to the margin expansion.

As we've talked about on previous calls, and Dave discussed, we are now realizing the contributions from the investments we made starting in late 2012 in our lease/consortium growth strategy. We've opened 50 of these centers over the past three years, and expect to continue that pace of 15 to 20 per year in 2016. As Dave mentioned, we've opened about 10 in the last -- between this quarter and last quarter -- just as a near-term statistic.

Although we expect to incur roughly a similar level of losses from this group in 2016 as we incurred in the last two years, the headwind on gross margin is slightly higher in the first half of the year due to the timing of openings in late 2015 and early 2016.

Overhead in the quarter was $40 million compared to $37 million in 2015, essentially on plan for the quarter, and reflective of ongoing investments in growth, operations, service delivery, and technology.

Interest expense was $10.7 million in the first quarter of 2016. And we ended the quarter with 3.2 times net debt to EBITDA compared to just under 3.5 turns at 12/31 of 2015.

As previously announced, we have expanded our revolver capacity as well to $225 million in January.

Our effective or structural tax rate of 35% in Q1 of 2016 is based on what we expect to be the applicable rate for our full projected year of 2016, and is roughly consistent with the structural rate from 2015.

We generated operating cash flow of $86 million in the quarter compared to $47 million in 2015 on improved working capital. And after deducting maintenance CapEx, our free cash flow totaled just over $80 million for the quarter.

We repurchased approximately 400,000 shares of stock for $25 million in Q1 of 2016. And at March 31, we held $40 million in cash and had no borrowings (technical difficulty) outstanding end of the revolver.

So now to quantify our usual quarter-end operating statistics: at March 31, we operated 936 centers with capacity of 107,400, which is an increase of 6% of capacity from a year ago.

As Dave previewed, our outlook for the full year 2016 anticipates revenue growth approximating 8% to 10% over 2015. The growth of the 8% to 10% breaks down as follows: organic growth approximates 8% to 10%, including the 3% to 4% price increase; 1% to 3% overall from a growth and enrollment in our mature and our ramping centers; 1% to 2% from new organic full-service center additions; and 1% to 2% growth from our back-up and net advisory services.

In addition, for the full year, acquisitions add approximately 2% to 3% in 2016. And that includes the lapping effect from the 2015 transactions, which diminishes as the year goes on.

Offsetting these increases are the effects of center closings, which include both legacy organic and acquired centers, approximating 2% for the full year; and projected reductions from foreign exchange rate differences of approximately 1%.

We are planning to add a total of 45 to 55 new centers, including organic new and acquired centers, and our current outlook also contemplates closing 25 to 30 centers for the year.

We expect that income from operations in 2016 will expand approximately 75 to 100 basis points from the 12.5% adjusted income from ops that we reported for 2015, principally from gross margin expansion. For the full year, we expect amortization to approximate $29 million; depreciation in the range of $57 million to $58 million; stock comp in the range of $11 million to $12 million; and interest expense of about $42 million for the year; assuming continued 4% to 4.5% borrowing rates on our term loans, and no further borrowings under the revolver required, based on expected cash flow generation. As I mentioned before, the structural tax rate is projected to be 35%.

The combination of top-line growth and operating margin leverage drive adjusted EBITDA to a range of $307 million to $310 million for the full-year 2016, and adjusted net income in the range of $133 million to $135 million. We also estimate that adjusted EPS will approximate $2.17 to $2.21 for 2016 on approximately 61.5 million weighted average shares.

Lastly, for the full year, we project we will generate approximately $200 million to $220 million of cash flow from operations; and approximately $175 million of free cash flow, net of projected maintenance CapEx, in the range of $35 million to $40 million.

Based on the centers in development and slated to open in 2016 and early 2017, we also expect to invest $40 million or so in new center capital.

Looking specifically at Q2 2016, we expect our top-line growth to continue to be in the range of 8% to 10%, including the impact of foreign exchange. Our outlook for adjusted EBITDA approximates $81 million to $82 million. And adjusted net income is in the range of $36 million to $37 million.

We have approximately 61.5 million shares outstanding. This translates to adjusted EPS in the range $0.60 to $0.61 a share for the second quarter of 2016.

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

(Operator Instructions). Sara Gubins, Bank of America Merrill Lynch.

I'm wondering if you are seeing anything unusual on the wage front -- if you are seeing any incremental pressure on wages, or if there are any changes in attrition at the centers.

Sarah, we -- as I think I may have noted on prior calls -- what we're seeing is what we expected, which is in a time where the economy is more robust and there is more competition for labor, we do see a little more pressure on wages. However, we anticipated this through our pricing strategy, and it is nothing more than we anticipated.

So while we are seeing a more difficult recruiting environment, it's something that we've contemplated in our outlook for the year; and feel good that our absolute wages are where they need to be to get us the talent that we need across the system.

So we have this -- on the flip side of that, the competition for talent fuels the demand side of our business. So it's very rare that we are in a really good time in our history where we would have a really good demand profile, in that our employers are all looking for -- have competition for talent so it fuels the demand for our services; it fuels the demand for enrollment. And when those -- these kinds of environments happen, we also have the flip side of a more challenging time, on our side, getting the talent that we need.

Okay. Got it. Thank you. And then just looking at the UK, in the event of Brexit, how do you think that might impact operations in the UK, both from a short-term perspective and a long-term perspective?

We've thought about that and, of course, don't know where that is going to play out. But from our perspective, in the UK we are regulated by the UK -- there's no pan-European sort of regulation, or really impact on how we operate. Our model is pretty straightforward. We work with an employer -- we get our revenue mostly from parents and also from employers. There is some government funding for child care that's funded through the UK model in the system. But it's uniquely in the UK. We are regulated by the UK specifically in our world.

I suppose that like every other company out there, the big question is, what will happen with the foreign exchange and the pound? We have roughly 16% or 17% of our revenue comes from the UK. So on an overall basis, it wouldn't have an outsized impact on us if there were any sort of fluctuations in FX. But from an operating perspective, we don't anticipate much to change.

Okay. Great. Thanks very much.

Manav Patnaik, Barclays.

So clearly it sounds like business is as usual on the organic front, and that's a good thing. I feel like for the last several quarters, it sounded like there's a healthy M&A pipeline. And you guys -- correct me if I'm wrong -- but are itching to close a couple of these deals, but maybe we haven't seen that yet. Is that a fair characterization? Maybe you can just help us understand like what's holding you back from doing these deals which I think you want to do.

Well, Manav, I think -- as I've said before -- I think the pipeline -- there is a good level of activity going on, both here in the US and in Europe. And our bread and butter is always going to be these smaller deals that we do on a regular basis. And I've actually been pleased that pretty consistently over time, we've been able to execute on these deals, both here and in Europe pretty consistently so that our acquisition strategy isn't really lumpy.

We have a good enough pipeline for us to sort of project forward and say, if we can close smaller deals on a regular basis when the slightly larger ones come, that will provide in addition to our strategy.

So right now, as I would look out, I would say we are on track for where we thought we'd be for the year. And that's largely a sum total of several smaller deals. And if something larger came along, and it's time for that to happen, that would the additive and we'd look forward to that.

But I feel good that, on a consistent basis, we'll be able to close on really good value-added transactions across the system.

Got it. And then probably not a -- so I guess firstly just on the -- you mentioned a lot of the categories where you have seen a lot of good activity. Can you help give some color on the impact from not only just the energy side of things, but maybe on the finance side as well? Clearly a lot of those banks that are going through a lot of layoffs -- I don't know if you are seeing anything there.

I think -- our financial service clients are still, for the most part, doing well. I mean we are having good success in cross-selling. Many of the larger advanced service clients are legacy clients of ours, so they've had our services for some time. And we are in the process of obviously trying to cross-sell some of our newer services, and we've got some traction there. And then we have a whole other set of financial service clients that we are sort of seeing activity within the hedge fund area, and other areas of the sector.

So although it's not as much activity as we are seeing in some of the other industries that I talked about, it is still very much on the screen. Energy -- really is no change from the last time I commented on it. Energy represents a very, very small percentage of our clients. There had been some activities several years ago with some centers for some of the larger players in the field. And we still have those centers, and they are still doing well.

But as I said the last time on the call, I don't anticipate much in the form of new business in that sector in the near-term. But the good news is, we're not exposed there with any kind of significant depth of clients that we work with.

Okay. And then just the last one for me. I Think I heard you mention that you are I guess opening another center in India through Cisco -- probably not much to read into that, but maybe just some comments there. And is that sort of a strategy we could see with -- going with one of your multinational companies is opening a center here, and then different office locations based on their needs?

Certainly, I think, first, in terms of our decision-making around future geography, one of the screens and one of the lenses that we look through is where our clients might have the desire for us to be, and where there might be a market for employers to invest in our services. That's one of the screens we use.

But I wouldn't say we will just go anywhere for any client, because I think that would be kind of a haphazard strategy that would end up not -- we would look back and not be pleased with maybe the cost structure it would take to keep that up.

But -- from specifically related to India, since we had already operated a successful center, and were expanding that center for our client there in Bangalore, when we contemplated the opportunity with Cisco, it was natural for us to continue to expand our footprint there. And we are in discussions with other clients about India. So it probably won't be a fast-growing area for us. But we're certainly open, particularly on the cost-plus side, which is how we do those sites, where we take very little, if any, risk. We are certainly open to expanding that footprint in Bangalore.

All right. Thanks a lot, guys.

Gary Bisbee, RBC Capital Markets.

I guess I just wanted to ask about the advisory businesses. So obviously that continues to do terrifically well. Can you review for us how the cost structure of that business works, so we can just think about scaling over the next few years? The margins were up exceptionally in what historically has been a weaker seasonal quarter for the business, I believe. And so is there incremental investment that's needed? Or is this just that it is more like a software model or something, where you've got to very, very high incremental margins as you grow? Thanks.

So the business is -- the cost structure is, as you might expect, there is an element of the -- we have a couple hundred clients in that category. So we've got an account management team. It is a software service delivery for a number of the services, and it's also a direct cost through counselors, advisors that we have. We have some direct personnel costs. And we have some ongoing software and technology costs that go into delivering this.

So there's some step variable, if you will, investments that go there. I think, over time, we would, as we've described it, we would see this as a business that can get to and sustain sort of in the neighborhood of the operating margins you see for back-up care, so in the 30% range.

We have, depending on some -- there is some variability that we see from quarter to quarter in what they are delivering now, based on some of the utilization of newer clients that come on board, and they are either in a ramp-up mode or they are in more of a steady-state mode.

But, overall, despite what you see in variance from quarter to quarter, we would expect over time for it to ramp into gradually from a 25%, 28%, 30% sort of operating margin over time.

Okay. And any -- just any other thoughts on sort of the growth curve of that over the next few years? How are you feeling about penetration? Is it still low? I think in the past you've talked about the hardest part is actually finding the person who's got their fingers on the purse strings there. Is that still the gating factor to growth?

I think that largely it is still very much a missionary sell. Most of the market is still organizations who are managing it themselves and without a lot of sophistication, without a lot of analytics and without a lot of knowledge. So it's as you said -- and as I've talked about before, a lot of times even in large organizations, the budget for it is so decentralized, you are trying to help educate the employer in terms of what the overall spend is and what the value we could add -- not only in terms of helping their employees but in saving money.

And so it's still very much a missionary sell, although it's starting to get traction. And feel good that, as Elizabeth said, now we've got a sizable enough client list -- it reminds me, early on, when we were trying to sell worksite childcare -- sort of word gets around within industries. And you have a good enough reference base where it starts to help you. And I think we are starting to feel that a little bit, and hopefully it will continue to gain momentum as a result.

Glad to hear it. Thanks.

Trace Urdan, Credit Suisse.

I wanted to kind of ask a similar question to the one Gary asked, but with respect to the back-up centers. I know -- and we talked about this last quarter, as well -- I know that there's a dynamic that exists between having sort of third-party centers that you are taking advantage of, and then being able to put clients into your own centers. But is there something we can think about in terms of trying to anticipate how those margins are going to act, going forward, or are we just to have to roll with it?

I think, Trace, that it has been -- if you look at it, the variability has been fairly modest. I think what we've tried to communicate is that we do see that the real growth in back-up -- the way we are going to deliver margin expansion, if you will, for the overall business is through top-line growth. And we think the margins on back-up care are in the zone of where they will be. And we may -- over time, we may eke out some efficiencies with technology. It may cost us a little bit in the short-term, and gain efficiencies in the longer-term in terms of having more stuff through mobile, more stuff online, versus through a contact center and human service.

So there's some things on the margin, one way or another, that can move the needle. But I think where you see back-up today from a margin perspective is where we would anticipate it in that zone for the foreseeable future; and that it's really a top-line growth story that we continue to feel good about. It continues to grow nicely. It continues to be the area that has expanded, at least over the last five years, the most, and I think still has a lot of runway left to it. But on the margin side, I think we are pretty much in that zone.

Okay. It's just that nothing -- your business is so incredibly stable and predictable that we all sort of make more out of the slight variations than maybe we should.

I wanted to ask another question, which is something I got asked and I don't know if there's any merit to it or not. But there's been all this -- there's been these kind of stories in the popular press about how Millennials want to live in cities and they don't want to live in suburbs. You guys are obviously with the lease/consortium centers more -- those, I think, are more focused on kind of suburban office parks.

Have you seen any of that dynamic at all? Is this just something that the popular press likes to write about, or is it a real phenomenon? And do you care, one way or the other, where Millennials want to live?

I think that what we have seen, and what's really driven our lease/consortium model -- actually, our newer class of lease/consortium models are focused in the more urban or what I'll call urban ring perimeters in areas, take -- say, like Brooklyn, New York, or Hoboken, New Jersey, or places that are perimeter zones of -- San Francisco or Seattle that are redeveloping. We're finding that a lot of within our demographic that is young professional families -- mom and dad working, mom and dad at least with an undergraduate degree, often times with higher degrees -- that there is a desire to live in cities longer with young children than, say, what I did years ago when my kids were born and we made the very fast exit for the suburb.

There is still some of that, but there's more of a desire to live closer in. And our lease/consortium model centers have been filling some of that demand. And part of the reason that they are -- that the strategy has been successful is we've been able to fill them faster than our store classes. And they are in areas where -- either between client support or what tuitions can be -- they are in our strongest areas from our revenue perspective.

So, yes, I think that strategy certainly has been -- or that trend has certainly been, in part, the fuel for what we're doing in the lease/consortium class these days. It's true to say that some of our legacy centers are more suburban. But they are suburbs of major cities, so they are still not to a place where we are susceptible to some of the sort of suburbs of places that have really suffered the most in the economy. They are still in relative good areas, but the newer trends definitely are fueling our newer classes of centers.

Great. Thank you.

Brandon Dobell, William Blair.

Maybe leveraging off of Trace's line of questioning, do you guys see any notable difference in either labor price pressures relative to the opportunity for pricing, if you compare -- let's call it core urban, with X urban locations? Is there any difference that gross margin dynamic?

The difference in more urban locations, if you just look at the lease/consortium model centers and you isolate that, part of the reason why those centers are so attractive to us, from an investment point of view, is that those are the areas, Brandon, where you are charging the most. Just the market is such that you are charging the most. And so it's not as if the actual margins -- in some cases, the margin percentage might be slightly higher. But the actual dollars that they generate can be so significantly more than what the installed base would be in a more suburban location that it's an attractive proposition.

So that's, in part, why we've said that the newer class is -- it's not just that it is -- they are not so much larger centers, per se, in the number of children we are serving; they are just larger in terms of what they produce from a revenue perspective and what they reduce from a contribution perspective.

And then the reason they can get maybe slightly -- so with that said, you can sometimes get a slightly better margin percentage. Because the labor ratio of what you need to pay in those markets, while it is greater than the more suburban markets, it's not as great as the difference on the tuition side. So you get a little bit of arbitrage that way, as well, in those classes of centers.

Okay.

I hope that answers your --.

Yes, that makes sense. Have you guys seen any change in educator or, let's call it, center level personnel turnover? Maybe if there's another way to think about that in core urban locations versus not, or in different types of centers. Just trying to get a feel for how stable the employee base is, or if it's starting to churn more.

We pretty much have -- we see our turnover rates, which I think as you know, are less than -- have historically been less than half the industry average. We have done well in that area. They pick up slightly when the economy gets tougher, and they obviously pick down. So if they hover around 20%, they are up a little bit -- a couple of percentage points in these times. And they were down a couple of percentage points when the economy was less robust.

But, overall, our biggest challenge on recruiting is what I think I've alluded to in the past -- we have had a long-term shrinkage of qualified talent in our industry over the course of the past 10 to 20 years, largely to do with just the other industries becoming more attractive places for people to go; and, so, fewer graduates with our degree that we would have traditionally seen an early childhood education.

So for the past, say, five to seven years we have been doing a lot more in qualifying our own, having people come to work for us at sort of assistant teacher or associate teacher levels, and getting qualified and ultimately promoted with us. We've qualified something north of 2,000 teachers over the past five years since we even started doing this ourselves across the US. And I still see that as one of the best investments we've made, and one of the things that we are going to have to continue to own going forward, because that's just a reality for our field.

Got it. All right. Thanks a lot.

Andrew Steinerman, JPMorgan.

I need to return to back-up care and understand the margins a little bit better. Could you give us a sense, within the back-up revenue, how much is filled in your centers yourself versus third-party fulfillment? And if one is growing faster than the other, which one is the higher-margin business?

I'll start, and I'll that Elizabeth sort of add color, Andrew. So when we look at back-up care, as you know, we have essentially three areas that people -- three ways back-up care can be used. One is our centers; one is third-party centers; and the other is in-home care. So of the center, the centers represent about --

The centers are about two-thirds, and in-home is one third.

Two-thirds, yes. Centers are two-thirds in total, and our centers are two-thirds of that two-thirds. So about one-third of our center care overall is placed in other centers, other than Bright Horizons. Of course, our desire, not just from a profitability perspective but from an experience perspective, and a belief in our own quality, is to try to place as much of the demand in Bright Horizons centers as possible.

So it is both, we think better for -- a better customer experience, and that's what our surveys tell us -- and also a more profitable experience for us, of course, when we are placing people with us versus paying somebody else for that day of care. And I think that over time, and still today, our usage in Bright Horizons centers continues to grow slightly faster than the usage at --

Of our network partners.

-- than our network partners. And those ratios that I said -- two-thirds of the two-thirds, and the one-third of in-home care -- have been fairly similar over the course of the past year or two.

When you see some fluctuations in margin, there -- a lot of that can come down to we make some fixed cost investment say in technology or some of the service delivery. And the timing of client starts doesn't match the revenue such that the margin in the quarter could fluctuate when we increase the amount that we pay ourselves. For example, like we did this year, we allocated to our own centers. Full-service segment benefits slightly from that to the detriment of the back-up segment.

There's some things that move it around a little bit. But as I said to the question that was asked before, I think we are in the zone, margin-wise, of where we are going to be, from a back-up perspective. There might be some quarterly fluctuation, but where we've been for the years is --.

From a full-year basis, I think last year's operating margin was around 31%. And our sort of long-term objective here is to sustain around 30%-plus, and that's where we expect we'll be this year.

Okay. Sounds good. Thank you.

Jeff Silber, BMO Capital.

I know there were some questions earlier about some specific verticals. Can you just remind us what your exposure is to the major verticals by industry?

Sure. Let me just call that up for a second. Do you have another question?

I sure do -- let me just ask about one. And I know this one is a little bit early. But with election season in full force, are there any major potential policy changes -- probably more at the state level than the federal -- but are you seeing anything that could be proposed that could be enacted next year? Thanks.

Thanks, Jeff. No; as you suggest, I think most -- and as I've said in the past -- most of what would sort of happen would happen at the state level, we think. And we obviously pay a lot of attention to what's going on. And there are states that have different variations of funding for preschool that has come about in some of those states in that process where the parent gets a voucher in addition to what the employer is paying, and it offsets a little bit what they are paying. And that's a model that exists in the UK as well.

But as we sort of survey the landscape, there hasn't been -- while there's a lot of rhetoric and a lot of activity around the subject, we are not seeing too much that we think would have much of a material effect on us.

And on the other front, from a federal perspective, the things that we would love to see happen in the future legislative environment would be -- and I've been saying this for a while -- an expansion of the Dependent Care Assistance plan which has been at $5,000 pre-tax forever, since the 1980s, and we think should be inflation-adjusted. That would be a positive in the sense that it would offset the cost, the portion the parents pay for childcare.

And if that could ever happen -- I don't hold out a lot of hope -- but if that would happen at some point, that would benefit us, along with some other tax code adjustments that could happen. But, again, not holding out a lot of hope at this stage.

So going back to the question of industry verticals. So from an end market -- this is including revenue from all industry segments that we serve -- the industrial sector is around 7%; the tech sector, around 8%. Professional services and other is 9%. Government is 9%. Education is 10%. Consumer is 13%. Financial services is 16%. And healthcare and pharmaceuticals, as a group, is 28%.

Okay. Fantastic. That's very helpful. Thanks so much.

(Operator Instructions). Jeff Meuler, Baird.

This Nick Nikitas is on for Jeff. Just going back to the lease/consortium centers, can you guys talk about how you think about the potential market just over the next couple of years for the lease/consortium? I mean it's been a similar trend of about 15 new centers over the past couple of years. Can that continue as you look into 2017, and then a couple of years beyond that?

Yes, Nick. We do see, at least for the foreseeable future, a continuation of 16 to 20 new locations across the system, and have a pretty good view on that; have a good level of activity happening across the markets in which we are focused, both here in the US, in London, and in Amsterdam. So I would say for the next couple of years, we foresee similar levels of activity.

Okay. Great. And then I think, Dave, you mentioned that one of the existing clients -- I think it was Novartis -- added full-service to back-up care and advisory pre-existing services. Are you guys increasingly seeing that your ancillary services are driving new client relationships?

Yes. I think as I said earlier, I think one of the nice parts about the new services is we've been able to open the door to -- we've been able to cross-sell our legacy center-based clients, but we've also been open -- able to open the door to new clients. Centers take the longest. They require the most level of planning, of capital planning, of space availability.

And so, as I said, the sales cycle can really be lengthy; whereas our newer services, the sales cycle can be much more rapid. And so as result, the numbers of clients that we've been able to gain access to has been significant since the introduction of our newer services. So we are very active both in trying to still cross-sell our legacy clients, but also do the reverse and open the door with our new services and be sure they understand the full suite.

I think we are very quickly approaching roughly 20% of our clients now have more than one of our services. So it continues to grow, and I expect that will continue to happen over time.

Okay. Great. Thanks.

Trace Urdan, Credit Suisse.

Thanks. I'm going to apologize in advance if this is a remedial question. But I realized when Gary was asking his question that it felt like there was an assumption that EdAssist was the principal driver of the services business. And I wondered if you could just speak to EdAssist versus College Coach. Do they get packaged together always? Are they sold separately, and is one of them an obvious driver? Is EdAssist the obvious driver in that equation, or can you just give me a quick tutorial on that?

So when we talk about the ed advising business, we report it as a bundle between the two. Oftentimes, those two services are sold together. Sometimes College Coach we'll be sold by itself or packaged in with our other services. Other times, EdAssist would be sold by itself as well.

So it really depends on the client situation. But from a reporting perspective, Trace, they are bundled together. I will tell you, though, that EdAssist is the faster-growing of the two. It's much newer. College Coach has been around for a long time, so there's an installed base. But EdAssist makes up the bulk of the growth in that segment.

So EdAssist is about 2X -- it's two-thirds of the overall segment. But as Dave said, it will continue to be a bit more than that over time.

And you described it before as -- I forget the word -- it was evangelical or something. But is there anything going on in that market itself that you think of as a driver? Or is it more that there is just sort of an existing base of companies that offer this benefit, and you are looking to get them to kind of outsource it to you?

I think there's -- the thing about the tuition reimbursement area is, as I've said in the past, there's roughly $17 billion a year spent by companies in America to send their -- to pay for school for their employees in one way, shape, or form. And it's been a spend that's been largely unmanaged, without a lot of analytics, and without a lot of strategy, and not really coordinated that well with companies' learning and development strategies and training strategies.

So we're trying to connect all the dots with this. And we think there's a lot that can happen when those dots are connected, both in terms of strategy for the Company in terms of growth of their talent; but also in terms of savings in our ability to provide some level of discipline, and help them understand where they are spending it, to go out and negotiate better rates for where they are spending their money. And so we are achieving that.

And then, lastly, the other thing that's exciting is there's been a lot of buzz around the idea that companies would also expand into repaying the college loans of their employees as the benefit. It's gotten some press recently, and we actually have been on the forefront of that. We have a few clients for whom we do that for. And although today the only difference between the two is there is a tax advantage for a company to provide tuition reimbursement for any one employee, the first $5,250 per year is tax-advantaged; where in the loan repay world, it is not.

So if there were ever a change to that -- which is something that I forgot to mention in Jeff's question about legislative things -- if there is ever a change to that, we think that market would unlock even more. What that would do is just expands the -- when we do both tuition reimbursement and loan repay for a client, it's just a larger-revenue client for us than what we just do one of them. So it could expand the opportunity even more. So those are just some of the things that I think are happening on that front.

Is there anybody that you are aware of that is actively lobbying for a change like that?

I think there's been some reasonable activity on the Hill around it. And I would say, it's on the radar of some congressmen and senators. And we'll see where it goes.

Okay. And then last question, Dave, there's sort of some conventional wisdom that a lot of companies like to offer that benefit, but they don't really want anybody to use it. Do you find that there is an increase in the use of the tuition assistance benefit, when you guys get involved?

I think that that's a little bit of a misnomer. I actually think that -- particularly today, where there is such a challenge for labor -- that I think what companies find is that when people are using their tuition reimbursement, much like when they are using their childcare benefit, that it's sticky for them. So it's another hook -- when there's competition for talent, it's another hook. It's a reason why someone may not leave your organization. And I think that's happening.

The good news for us, Trace, is when we come and we engage with an employer, we can save them a fairly significant amount of money over time in their spend, and we can -- such that they can afford to have expansion in the benefit if they want, just based on what we've been able to generate for them by better administering their policies so the people that are using the benefit in the way that they intended. And also by driving -- by utilizing our network of education providers where we have essentially used the aggregate leverage that we have of helping with so much of the spend to get better rates from people who are providing adult education, compared to the rack rates that many of our clients were paying before we showed up. So I think there's a good value proposition in this world.

Got it. Okay. Thanks very much. I appreciate it.

There are no further questions in the queue.

I'd like to hand the call over to management for closing comments.

Doug, thank you. And thanks, everybody, for joining us on our call. We appreciate it. And we'll certainly be seeing many of you on the road in the coming months. Have a good night.

Thanks, everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.