Bright Horizons Family Solutions Inc. Q1 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the Bright Horizons Family Solutions First Quarter 2021 Earnings Release Conference Call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Flanagan, Senior Director of Investor Relations. Please go ahead, sir.

Thanks, Holly, and hello to everyone on the call. With me here is our CEO, Stephen Kramer; and our CFO, Elizabeth Boland. I'll turn the call over to Stephen after covering a few administrative matters. Today's call is being webcast and a recording will be available under the Investor Relations section of our website, brighthorizons.com.

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 keeping safe. I'll start tonight with a recap of our first quarter results and provide an update on our current operations. Elizabeth will follow with a more detailed review of the numbers before we open it up for your questions. I'm pleased with our solid start to the year and pace of the continuing recovery in our business. For the first quarter, we delivered revenue of $391 million and adjusted EPS of $0.23 per share. In our full-service segment, we added seven centers, including new client centers for Regeneron, Horizon Therapeutics, the University of Maryland and Memorial Sloan Kettering as well as an organic center in the Netherlands and two centers acquired on the West Coast. We also made good progress in re-ramping center enrollments with the positive enrollment trends we saw in Q4 continuing through the first quarter. Our backup and Ed Advisory segments expanded their client bases and breadth of services, delivering revenue growth in the quarter of 3% and 16%, respectively, with recent new client launches for General Motors, ConocoPhillips, Dollar Tree, Freddie Mac and Shopify. Overall, as we approach the midpoint of the year, I remain encouraged by the consistent pace and trajectory of our recovery in 2021. We ended the quarter with 1,015 centers, roughly 900 of which are open. In the U.S., we reopened six temporarily closed centers in addition to the new centers added in the quarter. Occupancy levels in the open centers continued to improve month-over-month in the first quarter, tracking nicely to our expectations as families return to our centers. Importantly, several of our more heavily concentrated markets, which were also later to reopen, made up solid ground this quarter. Reducing infection rates coupled with expanding vaccine coverage and a relaxation of COVID restrictions have contributed to the increasing occupancy and the pace of recovery in all regions.

Thank you, Stephen. Appreciate that and hello to everybody on the call. Thanks for joining us today. Let me again recap the quarter results and provide some thoughts on the rest of 2021. For the first quarter, overall revenue contracted 23% to $391 million. Adjusted operating income totaled $14 million or 4% of revenue, and adjusted EBITDA was $46 million or 12% of revenue. We ended March with 902 out of 1,015 centers open with seven new centers added in the quarter and six centers permanently closed. We also have 113 centers that are temporarily closed, including the reclosures related to the short-term lockdowns in the U.K.

Our first question today will come from Andrew Steinerman with JP Morgan.

Stephen, I definitely heard your comments about the American Families Plan, which I really know is still just a proposal at this point. And I surely quote your point that the details past the fact sheet that the White House put out really are not available. But my question to you is, from what we know now, is the industry's experience in Georgia with Universal Pre-K a fair analogy to the way that this might move forward? In other words, the industry adjusts and can serve in this type of role profitably?

Yes. A great question, Andrew. And again, I'll underscore the part that says that there is still very limited detail as it relates to this plan. On the other hand, obviously, we have and will continue to spend a lot of time making sure that we understand and prepare for any possible inclusion of Bright Horizons in the work of serving. What I would say first and foremost, though, is what is really great about the American Families Plan is it highlights what we have been certainly trying to highlight for employers for the last 35 years, which is the importance of families having access to high-quality affordable care. And the idea that in the absence of that, parents and working parents end up dropping out of the workforce, especially women. And certainly, as it relates to the long-term benefits of child care, I think the American Families Plan does a great job of outlining how it leads to increased wages, improved health, reduced crime, et cetera. I would say that when we look at the plan as described and again with limited detail, obviously, there is an allocation of funding for free universal preschool for three- and four-year-olds. I think that it is also fairly clear that there is going to be a prioritization of high-need areas. And so when you reference Georgia as an example of a state that has leaned into this, I would say that that is a pretty good distinction between how Georgia has approached it and how, on the national stage, they may be contemplating it. And certainly, while $200 billion seems like a breathtaking amount, when you think about that over 10 years and you think about the number of children who are low- and middle-income families, you realize that the ability for this plan to truly provide for all children seems quite limited. So when you think about the Georgia plan or you think about the work that we do, for example, in the U.K., where they have 30 hours of free child care subsidized by the government, where providers like Bright Horizons deliver on that care in a way that is profitable and does work economically and for families, certainly, that is a possibility. But again, I think as we look at the plan, we recognize that there is some pretty specific language around focusing on the most hard-pressed working families for those families that are earning 1.5x their state median income or less. So I do think that at least some of the basic tenets do look to be different from what we experienced in the U.K. or even as you referenced in Georgia.

I understand how you answered that. And that is helpful. Can I just try one more clarification, same point? So the proposal really is only about three- and four-year-olds. And I know, obviously, that the most typical entry point and the bigger population for full-service care at Bright Horizons is infants and toddlers. Would you be willing to give us a sense of your mix of enrollments for three- and four-year-olds for full service?

Yes. So Andrew, I think as you may know, the general mix in the center is about 40% or so infant and toddler and 60% in the three- to five-year-olds, and it can vary if you're running a kindergarten classroom. Many employers have maybe closer to a 50-50 mix. But in general, it's about 40-60, and we tend to have demand in the infant and toddler ages because there is more limited supply in the market for those spaces. So that's the capacity; the enrollment may be skewed to more like 50-50 in general.

Next, we'll hear from Manav Patnaik with Barclays.

Stephen, I know you've been doing all these parent surveys and employee surveys. And I guess I was just hoping you give us a little bit more of the latest thoughts in terms of what you are hearing in terms of on-site care, if you feel like you need to pivot a little bit into more lease/consortium or retail centers. Just curious what the latest thoughts there are?

Yes. Thanks for the question, Manav. I think what we're hearing, and I'll start with employer sentiment first. What we're hearing from employers is a steady shift towards an expectation that employees will come back to the office. So I think you most recently heard this week from Goldman Sachs and JPMorgan Chase and others that their expectation is that their employees will be coming back to their office locations. And so I think that some of the earlier rhetoric that was out was this idea that offices were dead, and people are not going to be returning to the offices. But I think that has shifted quite a bit. And I think we're starting to see our clients and the broader employer populations looking to get their employees back to the office in the June through the end of the year time frame. So from an employer perspective, I think there is a growing desire and interest to get employees back to the work site. I think that from their perspective, they are increasingly seeing their child care center as a real attraction tool to have working parents come back and that support be something that is important as a consideration to having them come back to the office. I would say from an employee's perspective, I think they are recognizing that while flexible work arrangements may be more available than they were pre-pandemic, they are not going to be either as pervasive or as liberal as they may have once thought. And so the surveys that we continue to do hear more and more about near-office solutions being an important component of their care arrangements. It's not to say that we aren't thinking broadly about what footprint we need, both near the office and in communities. But suffice it to say, we feel really good about where the locations are of our centers, and we'll continue to build out in areas that we need additional capacity. But again, feel good about where our locations are vis-à-vis where we think the demand is going to be.

Okay. Got it. That's super helpful. And then just these new services, virtual tutoring, camps, et cetera, I think that makes sense. Is this all because of the Sittercity acquisition? And I guess you just hired the Care.com co-founder to run that business. I'm just curious what kind of changes we should expect. Is there any kind of mass scaling plans going on here? Just curious.

Yes. I think, first and foremost, we're trying to be responsive to the needs that employees have and that their employers want to support. So through our client advisory board interaction as well as through the interactions we have with employees and just our knowledge of the environment for school and support, we are very quickly mobilizing additional care types. We recognize, for example, this summer that a lot of families' traditional camp arrangements have been disrupted. So the strategic acquisition of Steve & Kate's as well as additional partnerships with other camp providers we think are going to position us well vis-à-vis the disruptions that families are going to face in that area. In addition, on the virtual tutoring side, that was really a recognition and an outcry from employees who recognize that through both remote learning earlier in the year and hybrid learning, academic progress for many children has been stunted. They want to make sure that their children are well prepared going into next fall and beyond. Employers have been very cooperative and, in fact, leaning into the idea of supporting this area for their employees. Sittercity, obviously, again, a strategic acquisition that we made, was really timely but really long-term in nature as well, which is to say, we believe that as we continue to address more and more of the care needs of families, we become that destination for all care needs. Likewise, as we think about our employer clients, they continue to be more and more interested in supporting their employees in a broader way. And yes, we're very excited about the hire that we made for the CEO of Sittercity. She was one of the co-founders of Care.com. She has a terrific background in this area. But again, she represents one of many talented individuals that is attracted to Bright Horizons to lead our different areas of the business.

And our next question will come from George Tong with Goldman Sachs.

You mentioned that utilization rates for your full-service centers are now 45% to 55% and tracking towards pre-COVID levels. I was wondering if you could provide some additional context and perspectives around that. So how the utilization rates performed over the course of the quarter? And then how you expect them to evolve over the course of the year? And just confirm that by year-end, you would expect utilization rates to return to pre-COVID levels?

Sure. So I think as we tried to infer in the comments, the performance has been really quite steady in terms of the recovery of the enrollment. Where you may look back in our history and see some more seasonality, we are expecting to continue to build on where we are growing enrollment now through the summer, where it would often be a time of churn as older children go into elementary school and you're backfilling younger age groups. But because we are in more of a rebuild mode, we would expect to see that enrollment continue to progress as we're seeing both the penetration of vaccine distribution continue to move along and people begin to reorient toward their dynamic work arrangements, and their summer plans are a little bit different even this year than they have been in the past. So to say we are confirming we expect to be back to near the pre-COVID levels by the end of the year, I would say it's our expectation and the path that we're on, and that's what we're aiming for with all of our efforts toward not only welcoming back parents who have been in the center before, but welcoming new families and introducing them to the Bright Horizons curriculum and the terrific experience that their children can have. It is something that we are focused on in the centers. One other thing, Keen, is that not only are centers open now, but we've learned a lot through that process. As we continue to reopen centers that have been temporarily closed, we will be working on getting those ramped up. Some of those, if they're opening in the last half of the year or in the fall and on, those obviously won't be back to pre-COVID levels by the end of the year.

Got it. That's very helpful. And I know you mentioned that your surveys and conversations with employers suggest that the return to office movement is pacing favorably. In the scenario, I guess, that work-from-home does become more permanent or structural in nature, could you talk about maybe the strategies that you have to bolster or shore up utilization rates in case people return to the office fewer days of the week post-COVID than pre-COVID? In other words, how can you adapt if the reality ends up being different in terms of work-from-home than before?

It's a great question, thank you. We have been preparing for that possibility. A few things. First, it's important to remember that in our on-site centers, we generally had waitlists because we typically do not build centers with our clients that can support the full workforce and demand that is expected within that location. Our expectation is that even in a scenario where people come back less than full-time to the office and therefore want to use the center less than full-time, we will have the ability to serve more families in those locations as opposed to running at occupancy rates that are lower than what we had seen previously. Second, we've been working hard to create a seamless experience across multiple centers for working families. So having the option of an on-site center and then utilizing one of our community-facing centers that is typically closer to home is something that we're working hard on. That is a combination of how we structure the experience for the parents so that they really feel like it's a seamless experience between two centers as opposed to unique experiences in one center for part of the week and another different experience in a second part of the week. We're working hard in both ways: to make sure that we're able to serve more families in the on-site locations and to create that seamless experience across multiple centers for the same family, utilizing both our on-site as well as our community-facing centers.

Our next question will come from Hamzah Mazari with Jefferies.

My first question is on the backup business. It's pretty clear margins will ramp back down as your mix normalizes. But could you give maybe investors comfort that this backup business from a revenue perspective, not margins, has not peaked? And what we mean by that is just sort of walk us through the dynamics of new client wins, clients adding more days, maybe some of those days are sticky, maybe they're not, maybe they cut days post-COVID. Just help us understand from a revenue base perspective what gets you comfortable the business hasn't peaked and let's leave margins aside, obviously.

So I think from a revenue growth perspective, a few things. One is we have added a number of new clients to the overall business. We think about the long-term opportunity first and foremost based on the continuation of new clients being added into the client base and the strong retention that we have associated with our existing clients. So the client base itself continues to go from strength to strength. The second is, as we continue to add different use cases to the total portfolio of how an employee can utilize the service, we believe that will both attract new users to the service as well as increase the average number of uses that a particular employee will use. Finally, we're seeing good support for employers to keep the use banks at least at the level they have been historically, and in some cases grow the use bank, recognizing that as more use cases are introduced, in certain circumstances employees may need access to more days rather than the standard or fewer. Taken together, we feel really good about where the backup business is and where it's headed. We need to continue to see the environment stabilize from a health perspective so that there is continued confidence in using our traditional care arrangements. In this past quarter, we saw an increased use of reimbursed care, which comes at a lower revenue value per use and is reflected in the revenue growth that we experienced. But again, I think it's not anything that we would expect to be the long-term pattern.

If I can add one other thing to that, Hamzah: the variety of services and the ability to serve children of different ages means we can touch different parents in an employer who may otherwise not have been a backup user candidate. That offers us the opportunity to go deeper with the client on breadth of users, age of children, types of care, and that's another way that we can gain additional penetration.

That's great. The other question, just coming back to universal Pre-K — and thanks for all the detail — but just to simplify and dumb it down: are you not impacted, even though you have a bunch of three- and four-year-olds because you expect there to be an income threshold in your customer base as high wage earners? And oh by the way, there's not enough capacity in the system to take on five million more kids. So you view this as net neutral or maybe even a positive to you if you can get involved in creating capacity for the system. Is that fair just in simple terms?

Yes. First, again, limited detail, so we don't want to get over our skis in terms of opining on what might be. But I think what you've outlined is a fair characterization from what we know, which is if there are income limits to lower- and middle-income families, we know that those who we serve tend to be higher income and therefore likely would be outside of the scope of the program. I would say in addition to that, in our experience, for working parents, dual-income working parents who need full day, full year care, Universal Pre-K generally does not fit as a service to the needs that they have.

Incomplete solution.

It's incomplete, whereas what we provide to three- and four-year-olds is full day, full year, which really does map with their traditional care needs. And then the final piece is that in the event where income is not a factor and where the government provides rates that are sustainable, then we, of course, would be a participant in providing the preschool education and believe that we would be a provider of choice for families. Where some of the costs were offset by the government, families would have the ability to step into a high-quality solution offered through Bright Horizons.

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

If I could start off with one on backup. Can you just tell us in the quarter, how much was the number of days of usage up year-over-year? I understand you have a mix issue that makes the revenue growth look weak, but the margin's strong. But what's the underlying volume growth trending at?

You're a little bit faint here, Gary, but I think your question was what is the underlying use metrics for the first quarter. So we haven't ever quantified exactly what our backup use is. The feature of the traditional in-center and in-home network partners has not yet recovered to last year's level. The substitution for that has been more reimbursed care, but it comes at a fraction of the revenue. From the standpoint of overall use, we certainly are seeing a trend toward higher use levels based on the volume of clients, but we haven't quantified it.

What I'm trying to get at is what's the business growing outside of this mix? Is there any way to frame that? I asked it on the third quarter call if you thought there was a case that the addressable market for the business could grow on the other side of the pandemic because more parents potentially within an employer have used the service and had a good experience. You've talked about having had strong client growth. Is it safe to say the trajectory now versus 2019 is faster than the trajectory in the couple of years prior to the pandemic?

Yes. That is a way that we are thinking about it as well. If we look back to that time frame and how the growth compares, the noise in there is that many clients have a basket of use in total in their arrangement and individual employees have certain limits to what they can use. To the extent they are utilizing reimbursed care, until you're at the limit of those baskets, it can be disordered to just look at that one figure. But I think from the velocity of the number of clients, the number of eligible employees they have, and the opportunity for penetration at the levels we are seeing — employees using care at those levels applied to the number of clients that we have, getting the marketing effort out to that population and having newer clients begin to season into the mix and existing clients expand and return to the level of traditional care — that's where we see the underlying growth opportunity. That's why when we look to the back half of the year, we talk about the growth at the levels that we see. We're coming off a noisy number of quarters, so take the point that if we look back a couple of years, is the growth coming off that? It is. But we're not quite there yet either because of the pause or reluctance of parents to fully reembrace traditional center care, and that's where we feel confident that we can be a real solution for them over time.

Great. And then just one on the full-service center business. When we talk to people who run more retail or community chains, our sense is utilization is near 90% in some cases pre-pandemic. I understand the center mix at corporates tends to be a lot lower. But how are you thinking about the risk that parents move their kids to a local center and might not bring them back to your center? I asked you this last quarter, but do you have any updated information, survey data, what you're seeing as you reopen, just to support that you'll get a lot of them back? And maybe as part two of that, how many of the centers in the U.S. today are community-facing versus purely corporate?

Our data is not suggestive of the risk you described. The market data and checks we've made are suggestive that community-facing centers across the country, especially in the markets in which we operate, are very much in line with where we are. Some publications may be talking about staffed rooms as opposed to available capacity within a center, and those numbers can be misleading. I have a great degree of confidence that where we are running and where the market is running is quite commensurate. We've done very well attracting our previously enrolled families back to the center, and that has tracked consistently over time as our centers have reopened. We enjoy a market position where working parents truly appreciate the value of a Bright Horizons experience for their child, whether at the work site or in one of our lease/consortium models. We don't have concern that families are leaking to other providers; our previously enrolled families have stayed with us, and we are garnering more than our fair share of new families coming and joining child care arrangements.

In the U.S., about two-thirds of our centers are community-facing. They can welcome enrollment from the community in one form or another. In our European operations, basically all of the centers do. There are some employer-sponsored centers, but even they are welcoming to community members.

Our next question will come from Jeff Silber with BMO Capital Markets.

Sorry to go back to government funding. But we did have, I guess, a plan that has passed, that was the American Rescue Plan where the child care tax credit was expanded. I'm just curious, did you see any benefit from that? And historically, when tax credits like this are expanded or contracted, how does that impact your business?

You're referring to the tax credit to families where they will be getting funding monthly toward their child care that they can use toward child care costs. I would say it's difficult to see a material bump yet. I don't know that the funding has had enough of a trickle-down effect. Families are juggling a variety of supports; some of the stimulus payments certainly have come in as well. I think a parent who may be getting $300 a month in a child care credit that they previously did not have would be able to buy more time in a center and/or buy up in quality of a center type of care that they would seek, and so over time we could see a benefit from that. It's a little too soon to attribute changes to that versus the other variables in enrollment.

Okay. Fair enough. And then going back to the American Families Plan: there was a provision about establishing, I think, a $15 minimum wage for childcare staff. I know you've historically said that you pay typically above market rates. Can you give us an indication roughly what the average wages are? I know they'll differ by geography. And if we do see this enforced, how would that impact your business?

As you said, salaries vary across the country and local economies. Nationally, we would be above $15 in many places, but it depends on local areas. There are some areas where we're a couple dollars below that in average because that's what the market is, and other areas where we're well above it. The challenge with any national minimum wage is wage compression at all levels; it can cause a cascade of effects beyond bringing people to a minimum wage. Our hallmark has been to be an employer of choice. Stephen cited this in the prepared remarks about being on Fortune's 100 Best list. We have always prided ourselves on being a great place to work, paying a professional wage and offering professional benefits for our teachers who are critical educators in children's lives. We will continue to do that and work to partner with employers to make child care accessible. We will continue to be a leader and think that we can adapt as we have in places like Seattle or New York to these kinds of regulatory changes. The U.K. and the Netherlands also have living wage and minimum wage thresholds that we've been able to adapt to over time.

Our next question will come from Toni Kaplan with Morgan Stanley.

Wanted to ask about the roughly little over 100 centers that are closed. Are those employer-based centers where their offices haven't reopened? Or are those centers where you're evaluating whether you should open them generally because of some other issue?

Toni, it's generally the former. These are primarily client centers. There's a handful that are our decision community-facing where we either have consolidated the enrollment just to be efficient and are looking for continued momentum to reopen those locations. But the vast majority are our client locations where the employers are looking at their worksite reopening and/or at what time they want to begin to bring people back on to the campus for more than a skeleton crew.

I would add that a lot of them are tied to locations where physically the location is closed and therefore the opportunity to reopen the child care center independently from the building or campus is not possible. The majority of our centers at this point are open, and that is not to say that all of those worksites are reopened. Many were able to open because they had a different entrance and could open separately and uniquely from the actual office. Totally agree with Elizabeth: the majority of the closed centers are employer-sponsored, and for the most part, we have a good sightline through the remainder of the year to get those reopened.

That's great. And wanted to hear about the pipeline of future employers. Is converting the pipeline going as quickly as it normally is or because of COVID and unclear work-from-home arrangements is there a little bit of a longer lead time to opening centers? And then also, is there anything different about the pipeline overall versus a typical pipeline in general, like whether it's skewed to certain size or industry or any other factor I might be missing?

We were really pleased to open the four new client centers in the quarter. I'm hopeful that is a strong indication that the reduction in velocity on making decisions that we saw in 2020 is back for 2021. We feel good about the pipeline and the interest employers are demonstrating toward on-site and near-site child care centers and other supports they can provide to employees. We feel good about our ability to continue to engage employers on the topic and ultimately open new centers and transition other centers from self-operated opportunities. Overall, feeling good about where we are in the pipeline for both centers as well as backup and our Ed Advisory services. Excellent. Thank you very much, and thanks for everyone for joining the call this evening. Appreciate all the great questions and look forward to continuing the great operations that we have here at Bright Horizons. Thank you.

Thank you. And again, that concludes today's call. Thank you for your participation. You may now disconnect.