Greetings, and welcome to Bright Horizons Family Solutions Fourth Quarter 2020 Earnings Release Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host and Senior Director of Investor Relations, Michael Flanagan.

Thanks, Operator, and hello to everyone on the call today. With me are Stephen Kramer, Chief Executive Officer; and Elizabeth Boland, Chief Financial Officer. I'll turn the call over to Stephen after covering a few administrative matters.

Thanks, Mike. Hello to everyone on the call, and thank you for joining us this evening. I hope that you and your families are healthy and safe. I'll start our call tonight with a recap of our fourth quarter results and then outline the progress we made in 2020 against our strategic priorities, which position us well to build on this performance in 2021 and further our recovery from the COVID-19 pandemic. Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions. I'm pleased with the way we finished 2020. For the fourth quarter, we delivered revenue of $377 million and adjusted EPS of $0.36 per share. In our full-service segment, we continue to make progress in re-ramping our centers and in resuming operations at temporarily closed centers, 9 of which reopened this past quarter. In addition to this, we launched 2 new centers, including a client-sponsored center for SaaS. Importantly, occupancy levels at open centers modestly improved throughout Q4, in spite of increased community spread of COVID around the holidays. Our backup care business finished the year strong with increases in center and in-home use as well as continued self-source reimbursed care use, as parents accessed our backup care alternatives to help manage remote work and hybrid school schedules. We had another great quarter of new client adoptions with Danaher, McDonald's, Nordstrom, and Okta, among many other additions. Collectively, our growth in 2020 propelled us past the 1,000 backup client milestone.

Thank you, Stephen. I will now provide a brief summary of the quarterly results and share some insights regarding 2021. In the fourth quarter, total revenue decreased by 28% to $377 million. Operating income reached $18 million, which is 5% of revenue. Adjusted EBITDA was $53 million, equivalent to 14% of revenue. We opened two new centers and reopened nine centers during the quarter, concluding the year with 910 centers in operation. While we are actively re-enrolling families and are heartened by the stability and gradual improvement in enrollment, the average occupancy rate of 40% to 50% remains significantly lower than pre-COVID levels in Q4. Additionally, around 100 centers have yet to reopen. Consequently, full-service center revenue decreased by $153 million in Q4 of 2020, approximately 37%, which is better than our anticipated range of 35% to 40% to 45%. Adjusted operating income for the full-service segment fell by $65 million compared to 2019, resulting in a loss of $29 million. This indicates a 43% flow-through on the revenue decline, also outperforming our expectations of a 50% to 60% flow-through due to advancing enrollment, effective cost management, and ongoing support from our client partners and government programs aimed at the childcare sector.

And our first question is from George Tong with Goldman Sachs.

You indicated that occupancy levels in your full-service business modestly improved sequentially in Q4 despite increased COVID. It's trending in the 40% to 50% range. Can you elaborate on those occupancy trends, including how performance has evolved since the start of the year?

Well, I think the headline is that the performance on utilization, George, has been measured and improved modestly month-to-month. That has continued into the January, February timeframe. I think as we have looked at this, that's why we feel encouraged by the sort of sustaining and slight improvement month by month. That's why we talked last quarter about utilization being, on average, it ranged from 20% to 60%, but averaging somewhere around 35% to 40%. So it has improved on that, but at a very measured pace. As I say, it is continuing into the early part of this year, and that's what gives us the comfort to look at the levels that we talked about in terms of performance in the early part of the year.

Got it. Very helpful. And then just as a follow-up, you noted that performance in the first quarter exceeded your prior expectations. Can you talk about what the sources of upside were in your full-service business, what drove the outperformance versus your initial expectations? And if those same factors would represent tailwinds in future quarters?

So I think you said first quarter, but I believe you mean the outperformance in the fourth quarter.

That's it. Fourth quarter, yes.

I wasn't sure if we were transitioning to discuss Q1. Regarding our fourth quarter performance in full service, enrollment showed improvement and was occasionally slightly better than we anticipated. We're monitoring enrollment across the centers that are reopening and the trends associated with that. Overall, I'd describe the results as slightly better than expected. Our cost management has been effective, and we remain cautious about how enrollment will develop as we welcome families back and adjust labor hours for drop-off and pick-up changes. There are some additional staffing and PPE costs, but they're manageable, and we've done well in controlling expenses. Additionally, we've participated in programs aimed at supporting businesses, particularly in childcare, which included accessing some state block grants. Looking ahead, the extensive government support programs in the U.K. have mostly concluded. Some other provisions from the Cares Act are largely finished as well, although new proposals from the Biden Administration may offer potential benefits, albeit uncertain at this point. Our focus for continued performance is on our foundational strategies and bringing families back into the centers, rather than relying on government programs that may not be reliable. In summary, we are seeing strong fundamental performance supplemented by a few one-off contributions.

And our next question is from Manav Patnaik with Barclays.

I was hoping the 100 centers that are still closed. I'm presuming most of those are just corporate locations. And I was just wondering if you could give us some color, what you're hearing from those corporates? Have any of them just decided to maybe cancel the employees like some of the tech companies just won't come back? I was just hoping you could give us what's the discussion like there.

Yes. It's a great question, Manav. So you're right to say that the majority of the 100 centers that are yet to reopen are associated with our employer client partners. What I would say is that the conversations are ongoing, and we continue to expect that as they contemplate reopening their worksites, as part of that reopening strategy, they are either going to open prior, at the same time as, or in some small number of cases, just subsequent to the reopening of their work sites. We are not hearing from many of our clients that reopening is not on the table. So our expectation is that throughout the first half of 2021, we'll continue to see reopenings of these temporarily closed centers.

It seems that most of the new wins you mentioned are primarily in backup care. In terms of full service, are you experiencing any customer losses? I can understand why there might be hesitation to sign up right now, but how has retention been?

We have certainly seen that some of the centers that we closed over the course of the last few quarters have been some clients. I'd say that concentration, if we were looking at those, would have been in some government agencies, actually, some smaller centers that were in the D.C. area with some smaller government clients that are in a situation where there isn't a pathway to those employees coming back, and they’re isolated from any other usage. Also, a few smaller locations were for some smaller colleges. So there has been a little bit of a theme like that, but not as much in terms of a change of heart from what we see, client interest. Clients not signing up for new clients happened, but we did open one new center for a client in the fourth quarter. We continue to have centers in development with clients and continue conversations for this as an option. So those discussions are slower, but they have not stopped. Some of the center culling that you're seeing might be a decision from a client who just came to the conclusion that this was the time they couldn't continue with it. So there is a little bit of attrition there, but nothing major.

Okay. And if I could just squeeze one quick one, what was the acquisition contribution, I guess, from CDC?

It's a couple of million in revenue.

And our next question is from Stephanie Yee with JPMorgan.

It's Andrew in for Stephanie. My question has to do with your comment that you still expect to be back to normal full-service utilization by the end of this calendar year. I know that means into the high 70s. What has to happen in the fall for that to happen?

Well, I think it's actually a little bit of a different cycle, Andrew, and that typically, the fall would be a new enrollment cycle. I think we're expecting a more linear progression over the course of the year as parents continue to gradually come back, even over the summer, and that we're not seeing that same cycle. For the fall, I think that we see modest building as vaccinations are more widely distributed and consumed, and parents continue to return to centers and group care over the spring and summer. I think that would form the foundation we would need to achieve that fall enrollment cycle. Two, this whole school cadence and the way that schools have been in a hybrid situation and/or fully remote, is obviously all over the map. A more consistent school cycle would also be helpful to parents in terms of their planning. I don't know, Stephen, if you had other thoughts about what would deliver that fall enrollment?

Yes. No, I think that's exactly right. It's going to come down to continued confidence in returning to group care. One other notable element is that in the majority of the states, all childcare teachers are being prioritized earlier in the vaccination cycle. That will also continue to enhance parent confidence in our centers. Additionally, it’s important to see that childcare centers do not perpetuate COVID-19 spread. Those would be important markers. So again, I completely agree with Elizabeth, and the addition of vaccinations and no spread within childcare centers are key attributes.

And our next question is from Toni Kaplan with Morgan Stanley.

Toni, maybe we can circle back on this next question?

Next question is from Hamzah Mazari with Jefferies.

This is Mario Cortellacci filling in for Hamzah. Could you comment on your current client base and backup? I know you disclosed that you reached 1,000. Just wondering how much room there is for penetration or even cross-selling with your existing full-service clients. And with that 1,000 clients in backup, could you speak to the size of your pipeline relative to that 1,000 client figure?

Yes. I'll take a step back on that question and really characterize what we see as the opportunity. Certainly, 1,000 employer clients is very small relative to the overall set of clients that are addressable for this service. Remember that this service, unlike our full-service childcare center service, is a national network solution. It doesn't require a concentration of employees in any one location. For employers with more than 500 or 1,000 employees in total, we can provide them with a really robust benefit. Secondly, it’s worth noting that within our overall client base, only 25% of our clients buy more than one service. There are many directions we can go, including purchasing backup and investing in backup. We have the ability to cross-sell, and backup is one area we continue to focus on for those clients who also buy either advisory or full-service childcare. Finally, our pipeline remains robust even after tremendous growth in 2020 in terms of the number of clients. We expect strong momentum from prospective clients interested in addressing both current childcare disruptions and future elder care needs as well. We see positive momentum and continued new sales in 2021.

Got it. Regarding margins within backup, could you help us understand some of the puts and takes of what to expect in '21 versus '20? You're expecting less reimbursement and more in-center and in-home care. Could you help us understand some of the dynamics impacting margin in '21 relative to those changes?

Yes. In general, our backup business, as you say, is a service delivery where care is provided either in center or in-home. We target a return on that in the range of 25% to 30% operating income. I would say broadly speaking, this is where we expect our backup business to perform in 2021. That expectation is based on the mix of use being in line with historic mix, alongside some continued reimbursed care. However, that aspect of the use mix distorted margins in 2020 because it was a pass-through, recognized on a net basis. This caused margins to appear higher than normative, which is not what we would expect in the future. Q2 will be an outlier as we compare against the prior year. But generally, we would expect backup margins to remain in the 25% to 30% range, given the overall service delivery and cost structure.

And our next question is from Gary Bisbee with Bank of America Securities.

Let me follow-up on that last one. If there is some tail of self-reimbursed care continuing into Q1 at some of your clients and the starting point for margin on backup is 46% in the quarter you just reported, is it right to think it could persist much higher than historical levels for another quarter or two? Also, let me push back a little on the 25% to 30%. You’ve had significant growth in the client base. There should be some scalability. You’ve talked a lot about using technology to reduce friction, which I assume benefits you and clients. Wouldn't it be reasonable to expect more profitability given how well this business has performed and how the total addressable market may be benefiting from the pandemic?

Yes. I mean, it’s a fair question, Gary. The opportunity is multifold. One is accessing more utilization within any client arrangement — more employees utilizing the care. The mix can be beneficial because we then leverage overhead across a broader penetration. There’s potential for us to gain efficiency here. We certainly aim to rebuild traditional enrollment, ensuring that those who want to use the care can do so. Historical models were based on a mix of in-center and in-home usage. You’re correct that it will slope back to that level. We are also conscious that clients want their employees to use the service. Thus, we aim to manage the cost side of the equation to ensure that usage persists. Long story short, there's a chance for us to perform better than that range. We’ve made some investments and will continue to do so. If client sign-ups remain as robust as they currently are, there's certainly upside opportunity.

When we think about backup, there are several levers impacting total addressable market expansion or long-term growth potential. It’s about how many customers they have, how many workers they have, how many are using the service, and what type of service they're accessing. Are you considering historical levels of usage within a client when projecting growth for this year? Have you built in awareness that clients may have increased now that they understand the service is available? Is that part of your projections, or could it outperform?

Yes. It’s a great point. When thinking about backup levers, we experienced nice client growth in 2020 and expect to see more new clients in 2021. Another key lever is the number of registered users who turn into actual users. In 2020, in places like Bank of America, many more employees became aware of our service. Therefore, their potential as registered users to utilize services now carries over to 2021. We have seen some conversions in Q4, where self-sourced care individuals switched to more traditional care. Overall, your insight is good. We're working to make the experience more seamless and conducting personalized outreach. Driving usage with clients and onboarding new clients are our ongoing priorities. While we’ve included some expectations for 2021, we strive for performance beyond that.

A last question. As we think about the center-based business, many community-based competitors have opened. Do you have a sense of how many of your users, especially corporate users, have transitioned to other centers? Is there a risk this could impact re-enrollment or utilization increases? Also, historically, there’s a transition where children age out, and you bring in a new class. How does that look this fall? Does the pandemic impact how you attract the new class, and if people aren't back in the office, does that affect how you usually do recruitment?

Yes. The first aspect is very much in our consideration. We've been staying in close contact with those previously enrolled that are not currently enrolled. We're finding a few things: first, a small proportion have opted for a different care model; second, some may have chosen community-based providers that are convenient; and lastly, we’ve ensured a welcoming program to encourage returnees to our community centers. Most importantly, the majority of our employer centers are now open, so we see an incentive for those who enjoyed the on-site experience at their workplaces to return. They might still opt to drop their children at centers before returning home for work. Furthermore, most of our clients reside within a 10-mile radius of their centers, which facilitates this. We’re closely scrutinizing patterns and ensuring we reconnect with those who have not yet returned to either our employer or community-facing centers.

And our next question is from Toni Kaplan with Morgan Stanley.

I wanted to ask about M&A. This year was relatively limited for you, which makes sense given everything happening with COVID. Are we likely to see that increase in the near term? Or should we assume that your current focus is really on your internal strategy and waiting for recovery before considering new acquisitions?

On the acquisition front, we continue to actively engage with high-quality providers and owners. This spans the three geographies we currently operate — the U.S., the U.K., and the Netherlands. We also look at opportunities in geographies where we do not currently operate. We believe throughout 2021, the possibility for high-quality acquisition opportunities will continue to present themselves. Thus, we are committed to advancing that leg of our growth strategy and recognize opportunities throughout 2021 to form partnerships with high-quality providers.

That sounds great. Looking at full-service margins, you've been guiding about a 50% to 60% conversion for Q4, yet you exceeded that. Was that due to better cost control, lower start-up costs, or something else? How should we view the full-service conversion margin throughout 2021?

Yes. Q4 indeed saw a better conversion. Some of it stemmed from solid cost management. We also received continued support from clients and centers in ramp-up modes that exceeded our expectations. Additionally, we accessed some Cares Act state block grants that positively impacted the quarter. Looking ahead, we expect Q1 to resemble Q4 somewhat, with a revenue contraction in the 30% to 35% range and a flow-through in the neighborhood of 40%. We're still in enrollment building mode, encountering variable costs. Therefore, we haven't fully reached the operating leverage sweet spot. However, we predict to achieve positive operating income performance by the second half of the year. It's a tale of two cities as we progress toward the lapping stage and continue rebuilding enrollment.

And our next question is from Jeff Silber with BMO Capital Markets.

Just a follow-up on a couple of prior questions regarding post-pandemic trends. Many surveys show that a large number of employees plan to work remotely, part-time or on hybrid schedules. You mentioned partnerships with community-based programs. Are you considering acquiring or taking over leases of centers that might have closed?

Yes. We continue to think holistically about our portfolio. We're very well-positioned with a combination of employer centers at the work site alongside our lease consortiums in the communities where our employer clients have employees living and working. We feel we are well prepared, and we remain open to new lease/consortium centers while also looking for acquisition opportunities that can enhance our portfolio as employees make choices about where they work and live.

That's helpful. One of the proposals in the stimulus plan is an increase in the child care tax credit. When the tax credit is modified, do you find that impacts parents' decisions on whether to use external childcare?

It’s a great question. We've traditionally felt that our employer model has not relied heavily on government support at levels aside from assistance provided to the most disadvantaged families. However, we are cautiously optimistic that the Biden plan could prove more impactful than previous proposals. However, we are not counting on it just yet. If the new tax support materializes and is offered monthly, these factors could influence those evaluating lower-cost options or alternative modalities, potentially including Bright Horizons as a consideration. But it's still in early stages.

And our next question is from Jeff Meuler with Baird.

What have you been doing regarding full-service pricing and employee wages and benefits in the fall or into the new calendar year?

It’s been an interesting year for that. Throughout the pandemic, we continued access to our employee benefits for those active and furloughed staff. Sorry, did I misunderstand the question?

I interpreted the inquiry as focusing on tuition and wage increases.

Exactly. I apologize, I just had an audio misunderstanding there. Regarding tuition and labor relationships, 2020 was disruptive. We had premium and hazard pay for frontline workers. It prompted us to reset our approach. We conducted a review and calibrated tuition alongside the labor cost structure. I’d say 2020 was indeed atypical, resulting in some wage increases but not uniformly. Similarly, tuitional adjustments were not consistent across the board. We're reassessing the business model in 2021 to align with labor costs, and that structure has resumed.

Regarding new enrollment, a lot of your enrollments were likely prior children returning. How has new enrollment been? What is the current mix of infants and newborns aging up with you?

Actually, we have had good returning enrollment from families who were with us. But we also have had new enrollment. It’s a meaningful portion of the enrollment that has come back as centers have reopened. Generally, enrollments are across all age groups but slightly tipped toward older children. Parents are more comfortable with preschool aged 4 to 5 years than new infants. However, we still maintain solid infant enrollment. It just trends heavier in the older age group.

One last question regarding the accounting for the block grant support from the state and federal government. Did you recognize that as revenue, and can you roughly size how much that was in the quarter?

The grants essentially support expenses, meaning they do not represent revenue but serve as a cost reduction. It was below $10 million for those recognized in the quarter. Additionally, much of this was directed toward incremental spending on labor or PPE that wouldn’t have otherwise been factored in — certainly, businesses incur costs like rent, but also incremental costs that represent these grants.

All right. Well, thanks again for joining us on the call. I hope everyone has a good evening and stays safe and healthy.

Talk to you all soon. Thank you very much.