Earnings Call Transcript - BFAM Q3 2021

Operator, Operator

Greetings. Welcome to the Bright Horizons Family Solutions Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I’ll now turn the conference over to your host, Michael Flanagan, Director of Investor Relations. You may begin.

Michael Flanagan, Director of Investor Relations

Thanks, John, and hello to everyone on the call. With me here are Stephen Kramer, our Chief Executive Officer; and Elizabeth Boland, our Chief Financial Officer. 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. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business and financial performance, including the impact of COVID-19 on our operations, are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2020 Form 10-K and other SEC filings. Any forward-looking statements speak only as of the date on which it is made, and we undertake no obligation to update any forward-looking statements. We also refer today to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available under the IR section of our website. Stephen will now take us through the review and update on the business.

Stephen Kramer, Chief Executive Officer

Thanks Mike. Hello to everyone on the call, and thank you for joining us this evening. I hope that you and your families are remaining healthy and safe. I’ll start tonight with a review of our third quarter and provide an update on our current operations. Elizabeth will then provide a more detailed review of the numbers before we open it up for your questions. First, let me recap the headline numbers for the third quarter. Revenue increased 36% to $460 million, with adjusted operating income of $46 million and adjusted EPS of $0.64, up from the operating and earnings losses we reported this time last year. As we continue to build back the top line to pre-COVID levels and beyond, I’m really pleased with our recovery in earnings, as reflected in the delivery of 10% operating margin and 17% adjusted EBITDA. Overall, as we approach the end of 2021, I remain encouraged with the progress and trajectory of our recovery from the significant impact of COVID on our business. Our global team has responded exceptionally well and has navigated a very fluid environment this year with resilience, perseverance and compassion. I’m very optimistic about our market position and ability to realize the many growth opportunities that lie ahead across our businesses. Let me start with our full service segment. Revenue grew 52% in Q3, reflecting continued enrollment recovery and the ramping of recently reopened centers. We ended the quarter with 949 centers or 94% of our 1,011 centers open. From a new center perspective, we launched 19 centers, including a seventh center for Centene, a second center for Stanford University and six centers for the Mass General Brigham Health System, which had previously been self-operated. Through the late summer and early fall, we continued to reopen a number of our temporarily closed centers, with 23 reopening in the third quarter and a further eight reopening in October. That said, the Delta variant proved to be yet another disruptor to our recovery and previous expectations, with some clients further delaying the full reopening of offices and on-site centers. Importantly, it was just that: a delay. Nearly all of the 54 remaining temporarily closed centers are now slated to reopen later this year or early 2022. In our open centers, we continue to see enrollment rebuild. Occupancy levels in Q3 were consistent with Q2, which is better than historical seasonality, but lower than what we had expected when we talked to you on our Q2 call. The Delta variant peak in the late summer and early fall temporarily slowed the enrollment recovery as it coincided with the period that is typically a busy start window for new families. Some parents across the country chose to push out their start dates and several of our more affected geographies were those hardest hit by the Delta variant. That said, the underlying demand indicators for high-quality child care remain solid, and recent enrollment trends continue to show steady progress. With the Delta wave subsiding and work plans solidifying for 2022, there has been an uptick in families requesting to start care early in the new year. Therefore, I continue to be encouraged by the demand picture, despite some near-term timing shifts. As we discussed last quarter, one of the challenges in meeting this growing demand is the fact that the labor environment broadly and in our sector remains challenging. Although staffing challenges are not new to the childcare industry, the pandemic has created unique difficulties and has exacerbated the supply conditions we have worked hard for decades to manage. In the face of this environment, enrollment in a minority of centers has been constrained by our ability to staff the high-quality educators needed to serve all the families who requested care. Our teams are aggressively focused on solving the labor pressures. We have taken a number of steps to further differentiate our employee value proposition, increasing compensation and tailoring benefits programs as well as investing in talent acquisition and sourcing. We are already seeing results from these efforts, particularly with new applicant trends, which have already reached pre-COVID levels. This indicates we are well positioned to capture an even greater share of the early educator talent pool. We are fortunate that in the near-term, we have government program support targeted for the childcare industry to ease some of the inflationary labor pressures. Over time, our consistent pricing strategy positions us to regain our historical center economics as those support programs inevitably wane. So as I look ahead, I am confident that these investments in our teachers and center leaders, along with Bright Horizons’ 20-year track record, our recognition as one of Fortune Magazine’s Great Places to Work and our industry-leading role as the Employer of Choice, will ensure that we attract the early educators we need to continue to grow for many years to come. Let me now turn to back-up care, which is well positioned to capture a growing client opportunity as we head into 2022 and beyond. In the quarter, revenue of $99 million increased 7% over a strong 2020 quarter. For context, Q3 revenue is up 24% over 2019, in line with our historical and long-term annual growth rate of 10% to 12%. We continue to lead this market by a wide margin, extended further this quarter with new client launches for AstraZeneca, Unilever, Unum and Yahoo. While the Delta wave certainly influenced many parents' short-term decisions around care provisions, traditional uses were still up sharply over the prior year, and we remain encouraged by the broadening of use types and users with strong uptake of virtual tutoring and school age care through Steve & Kate’s Camps. While those indicators are clearly positive, the staffing constraints impacting our full-service business have also been a challenge in the back-up care arena. As a result, we have seen greater demand in certain geographies and peak periods than we have been able to accommodate in centers or within home providers. We are working to expand our in-center availability as well as our network of third-party providers, particularly in-home caregivers, and we are making further investments in care and technology initiatives to ensure we can deliver the service our growing base of parents and clients need. Turning to our education advisory business, which delivered revenue growth of 10%. We launched a number of new clients in the quarter, including AT&T, Maxum, Northwestern Mutual and Samsung Electronics and continue to see healthy participation and activity levels, particularly within College Coach as the demand for support during the college admissions process remains very robust. The tight labor market also continues to drive demand for our workforce education programs as employers look for streamlined and cost-effective solutions to upskill and reskill their existing workforces. Across all of our businesses, I’m encouraged by the depth of conversations we are having with many prospective and current clients about the additional avenues in which they can attract and support their employees through our service offerings. As we have discussed before, the pandemic has highlighted the essential nature of our services and the increasing importance childcare has in the nation’s economy. The widespread staffing challenges affecting so many industries and the reduction in availability of child care have spawned new opportunities in full service, back-up care and advisory. We are seeing employers across industries reevaluate their employee value proposition, compensation levels and benefit offerings and look at deploying creative solutions to ease their acute labor challenges. These solutions are not only part of their recruitment and retention strategy, but also a newly evolving element of attracting their workforce back to the office and keeping them engaged on site. Overall, as we have broadened our service offering and strengthened our market position over the last year, we are very well-positioned to capture a growing client opportunity as we head into 2022 and beyond. In addition to the client opportunity, the Build Back Better plan, as proposed by the Biden administration, is another source of potential third-party support for early childhood education. The proposed plan highlights the role high-quality early education has in the development of children as well as the benefits to the economy and society as a whole. Bright Horizons believes this is a great need for our nation and has the potential to help the many children and families who have not historically been able to access affordable, high-quality care and education. Before I hand the call over to Elizabeth, I want to take this time to acknowledge every member of the Bright Horizons family. Over the last couple of months, we held more than 100 virtual employee recognition events where we celebrated team and individual achievements. I’m incredibly proud of our team’s grit and dedication to deliver the highest quality education and care to our families, despite the challenges endemic in our industry and still across much of the economy. While this year’s celebrations were virtual, they were no less special. My heartfelt appreciation goes out to all of our more than 25,000 employees who work tirelessly each day bringing passion and the expertise that allows us to collectively impact the lives of those we have the privilege to serve. Elizabeth?

Elizabeth Boland, Chief Financial Officer

Great. Thank you, Stephen, and hi, everybody. I’ll recap the headlines for Q3 and then provide some thoughts on the fourth quarter. For the third quarter, overall revenue increased 36% to $460 million, adjusted operating income was $46 million or 10% of revenue and adjusted EBITDA increased 163% to $79 million or 17% of revenue. We ended September with 949 out of 1,011 centers opened. In the third quarter, we added 19 new centers, and we reopened 23 centers that had been temporarily closed. We also permanently closed 14 centers. Full service revenue increased $114 million in Q3 or 52%, within our expected increase of 50% to 60% year-on-year. Our occupancy levels averaged between 50% and 60%, which is comparable to Q2 levels as the Delta wave tempered the pace of recovery we saw in the second quarter and early summer period. Adjusted operating income for the full service segment improved $67 million over 2020 to positive $10 million. This represents a 59% flow-through on the revenue growth. The outperformance versus our expectation of approximately 45% flow-through relates to improving efficiency with enrollment and lower-than-expected labor costs due to staffing constraints as well as the contributions from continued support from government programs targeted for the childcare industry. As Stephen mentioned, Back-up care grew 7% to $99 million. We continue to expand our client roster with another solid quarter of new client launches. And while revenue was short of our expectations with the Delta wave impacting care requests and staffing challenges constraining care supply, we did see traditional in-center and in-home back-up users and uses grow sequentially and over the prior year significantly as they continue to progress toward pre-COVID levels. Revenue from reimbursed care, while lower than the first half of the year and significantly lower than the third quarter of 2020, did help to contribute to the relatively higher 32% operating margin in the third quarter of 2021. Our Educational Advising segment reported revenue of $27 million, growing 10% on contributions from new client launches and expanded use of our workforce education, college admissions advising and our Sittercity services. Interest expense of $9.2 million in Q3 of 2021 was roughly equivalent to the prior year and the structural tax rate on adjusted net income was 22%, compared to 12% in 2020. This is primarily due to a proportionately lower tax benefit from equity activity under ASU 2016-09. On capital allocation, our strategy continues to be first to invest in the growth of our business, both organic and inorganic and in our service delivery and product innovation. After these growth investments, we’ve also allocated capital to our share repurchase program under our existing authorization. Through September of this year, we generated $185 million in cash from operations and invested $60 million on new centers and acquisitions as well as just over $100 million in share repurchases. We ended the quarter at 2.5 times net debt-to-EBITDA, with $412 million of cash and no borrowings outstanding on our $400 million revolver. As has been the case since the onset of the pandemic last year, we are not providing full earnings guidance, because the cadence of the recovery remains difficult to predict. However, I will share some qualitative color on how we see Q4 unfolding. We expect enrollment levels to gradually build in Q4 as COVID cases and Delta variant impacts appear to be subsiding, and more families are reengaging with traditional care arrangements. We also anticipate reopening approximately 10 centers or so in November and December, adding to the eight that we opened in October and end the year with over 95% of our centers open. As the Delta wave timing disrupted our enrollment recovery cadence, we now expect utilization to fully recover to pre-COVID levels in 2022, with moderately higher sequential occupancy levels in Q4 of this year. In terms of full service revenue, we are expecting growth of approximately 25% to 30% over Q4 of 2020, with incremental operating income flow-through approximating 40% as centers continue to reopen and re-ramp and we work to regain our historical cost efficiency. As noted, we remain very optimistic about Back-up care’s growth runway, including the opportunity for new client additions, broader penetration within client populations and greater use by existing families. Again, with the Delta wave subsiding and reimbursed care moderating compared to Q3, we would expect to see traditional care continue to grow significantly over the prior year and expect Back-up care revenue to grow approximately 12% to 15% in Q4, with operating margins in the range of 35% to 40%. Finally, we expect our Ed Advisory business to continue to deliver similar results in Q4 as we saw in the third quarter with revenue growth of approximately 10% and operating margins widening to about 15% to 25%. So John, with that, we are ready to go to Q&A.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Andrew Steinerman with JP Morgan. You may proceed with your question.

Andrew Steinerman, Analyst, JP Morgan

Hi, Elizabeth. I think I heard you say full service utilization getting back to pre-COVID levels by 2022. If I heard you right, that’s what you said. Do you have a sense when within 2022 you’ll get back to those utilization levels? And I just want to make sure we benchmark it. I think when you say pre-COVID utilization rate, you’re referring to the 70% to 80% range.

Elizabeth Boland, Chief Financial Officer

Andrew, yes, when we’re talking pre-COVID, we’re referencing the 2019 time frame since COVID started in early 2020. That’s the general benchmark. You’re correct that the range of enrollment in our mature centers at that point was 70% to 80%. That would be the target we’re aiming to get back to. In terms of when in 2022, given the visibility we have now with the disruption in the fall enrollment, I’d say it’s more likely the second half rather than the first half. We are building through Q4 modestly and there is another enrollment cycle in January that will provide additional clarity, but with what we see today, we expect the recovery more in the second half of 2022.

Andrew Steinerman, Analyst, JP Morgan

Got it. Thank you.

Operator, Operator

Our next question comes from the line of Hamzah Mazari with Jefferies. You may proceed with your question.

Hamzah Mazari, Analyst, Jefferies

Good afternoon. Thank you. My question is primarily around labor constraints. You mentioned not being able to fulfill some demand because of labor constraints. Could you give a little more color as to how pervasive that is through your system? I know you mentioned certain geographies. It looks like your Q3 revenue was maybe $20 million or so shy of consensus, but I’m not sure how that compared to your internal budget. So I'm trying to get a sense of how much demand you are losing out on because of labor constraints. And then is this demand going to go away, or will you be able to capture it and it’s just a timing issue?

Elizabeth Boland, Chief Financial Officer

So it’s a view on where we were constrained. We would estimate that we probably have been 2 to 4 percentage points lower in utilization than we would otherwise have seen because of staffing limitations, meaning either not opening a room or not being able to take additional enrollment. So it’s meaningful and because the fall cycle is a heavier enrollment cycle, the combination of that with labor shortages impacted results. It’s not too dissimilar on the back-up side, where being able to service back-up care also faced constraints.

Hamzah Mazari, Analyst, Jefferies

Got it. And just my follow-up is largely around stimulus: what’s in the system and when does it roll off? Also, anything around universal pre-K you’re hearing and your view on how that might impact your business?

Elizabeth Boland, Chief Financial Officer

I’ll talk about the government stimulus and what we’ve been able to realize. It’s helpful in defraying some of the embedded incremental costs that are in our system. Whether it’s higher labor hours per child due to more intensive ratios, incremental testing, hygiene and other measures, these funds help offset those costs. We estimate somewhere between $15 million and $25 million annually that we’re able to realize toward those costs. So it’s helpful, but it’s not transformative.

Stephen Kramer, Chief Executive Officer

And Hamzah, in terms of universal pre-K and other legislation being discussed, we’re encouraged that early childhood education is receiving attention at the national level. We operate in geographies where government leans in, such as the U.K. and the Netherlands, and in pockets in the U.S. In terms of where this stands, it’s still under discussion and details are not yet fully defined. We’re hopeful that the funds being discussed will flow through states to make child care more affordable and expand universal pre-K. Our only reservation is whether the amount being discussed will be sufficient to accomplish the ambition outlined. So we’re enthusiastic, but cautious about the quantum of funding.

Hamzah Mazari, Analyst, Jefferies

Thank you.

Elizabeth Boland, Chief Financial Officer

Thank you.

Stephen Kramer, Chief Executive Officer

Thanks.

Operator, Operator

Our next question comes from the line of Manav Patnaik with Barclays. You may proceed with your question.

Manav Patnaik, Analyst, Barclays

Hi. My first question is just about the 14 centers you permanently closed this quarter. Can you remind us what the year-to-date or COVID-to-date number is? And how much of that is due to offices deciding not to have centers anymore? Just trying to understand the level of disruption.

Stephen Kramer, Chief Executive Officer

Yes. Fourteen in the quarter, and we closed 33 year-to-date.

Elizabeth Boland, Chief Financial Officer

Yes. Last year, we closed a total of 88. So we are over 100 centers closed through the COVID cycle. In terms of the drivers, the mix is split between our lease model centers and our client centers. One notable point is that we have seen a more normalized level of closures in our U.K. business this year. They did not close many centers immediately after COVID because of strong structural workforce support and efforts to reopen. As we reopened centers there, some have proven not to be economic over the long run based on utilization and demand profile, so they are featuring more in closures this year than last year. That’s a bit of color on the closures.

Manav Patnaik, Analyst, Barclays

Okay, got it. I was also hoping you could help distinguish performance between your lease consortium centers and client centers. With the Delta variant and office delays, is the retail lease consortium side ramping faster?

Elizabeth Boland, Chief Financial Officer

There’s not a really discernible difference. Client centers do tend to have a bit more enrollment than lease consortium centers when they are opening or re-ramping, typically a couple of percentage points different, but it’s not a meaningful change. We’re not seeing a material difference because of client sponsorship versus lease compared to our history.

Manav Patnaik, Analyst, Barclays

Okay. Thank you.

Operator, Operator

Our next question comes from the line of George Tong with Goldman Sachs. You may proceed with your question.

George Tong, Analyst, Goldman Sachs

Thanks. You launched 19 new centers this quarter. Given the long sales cycles for new center launches, have you seen any disruption in demand for new center openings that might impact the number of new openings one or two years from now?

Stephen Kramer, Chief Executive Officer

No. The quarter's openings give us confidence in the level of interest and the speed of decisions. Our pipeline for new centers, specifically client centers, continues to be robust, with opportunities for new builds and transitions for organizations that self-operate today. The quarter’s results and openings, as well as our outlook, give us confidence in a continued cadence of conversations and significant interest in on-site centers.

George Tong, Analyst, Goldman Sachs

You planned to end the year with over 95% of your centers open. When would you expect to have 100% of your centers fully open?

Elizabeth Boland, Chief Financial Officer

For the vast majority of the centers that remain temporarily closed, there are probably fewer than five with dates after the first half of next year. So the reopening is mainly between Q4 and the first half of 2022.

George Tong, Analyst, Goldman Sachs

Got it. Thank you.

Operator, Operator

Our next question comes from the line of Gary Bisbee with Bank of America. You may proceed with your question.

Gary Bisbee, Analyst, Bank of America

Good afternoon. I want to go back to the labor pressures. Thanks for sizing that earlier. Can you help us understand how you’re dealing with this? One of the crown jewels of your model has been the ability to price in excess of labor. Is there any risk to that? Are you having to raise wages meaningfully? And is there anything on the horizon that you think can really help the situation, like more women returning to the workforce as schools and day care reopen? How are you thinking about managing this dynamic on the cost side?

Elizabeth Boland, Chief Financial Officer

I’ll take the first part. Our view is that the underlying economics of our model remain intact, although we might see relatively higher wage pressure in the near term that may take a cycle or two of tuition increases to balance price and cost while getting enrollment back. Historically, we’ve seen wage increases of around 2% to 4% in higher markets, and we’re seeing average wage inflation in the sector of around 3% to 5%. There are more meaningful structural changes in certain key markets with higher cost of living or tighter labor supply. We are putting real investment behind wages and benefits and with the price increases we expect for the early part of next year, we should be able to recoup a good measure of that. We plan meaningful tuition increases this cycle and the next cycle to get back to historical differentials over time. The environment is fluid, but we believe we can continue to price as we historically have against the underlying cost structure.

Stephen Kramer, Chief Executive Officer

I would add that an important element of our model is being an employer of choice. We are focused on being an employer of choice within our sector. We are investing in wages and benefits and highlighting career progression opportunities such as fully paid CDAs and the Horizons Future degree program that allow individuals to join and build a career caring for and educating young children. These investments will take a couple of cycles from a cost perspective, but they are the right actions to attract early childhood educators into the market.

Elizabeth Boland, Chief Financial Officer

I’ll also note that some of this support is coming through government direct subsidies that help defray costs. That support helps in the intervening time while those programs are in place.

Gary Bisbee, Analyst, Bank of America

Are those subsidies expected to run through the end of next year or beyond? Do you have a sense of timing?

Elizabeth Boland, Chief Financial Officer

It varies state by state and isn’t always clear how quickly states will fund. We expect the bulk of the spending will be under ARPA and the Consolidated Appropriations Act with funding into 2022 and some into 2023, but we’re not counting on it going beyond that.

Gary Bisbee, Analyst, Bank of America

Okay. That’s helpful. One more follow-up: there’s debate about whether your network is the best setup in a hybrid work environment. Are you considering more community-based centers instead of on-site centers? If so, would you accelerate the openings of lease consortiums compared to pre-pandemic pace, or do you think your current network mix is optimal for the near term?

Stephen Kramer, Chief Executive Officer

We like the positioning of our network. Our first priority is working with employers to support employees directly, often via employer-sponsored on-site centers, which remain attractive. We continue to partner on the lease consortium side to find locations attractive to employer partners. Those lease consortium models are approved based on the community’s ability to sustain the economics and the attractiveness to employer partners. Overall, we continue to see the mix look similar to what it has been, and we feel good about the locations as they exist today.

Gary Bisbee, Analyst, Bank of America

Thank you.

Operator, Operator

Our next question comes from the line of Jeff Silber with BMO Capital Markets. You may proceed with your question.

Jeff Silber, Analyst, BMO Capital Markets

Thanks. Can you talk about the competitive environment? Many smaller players ran into trouble last year and some didn’t reopen, while some larger players have increased scale. How have dynamics changed over the past year or so?

Stephen Kramer, Chief Executive Officer

Research suggests about 10% of center capacity has been permanently closed, so there has been a contraction in market size. We continue to focus on growth and expect additional consolidation opportunities in the industry over time. There have been fewer near-term consolidations than we might have expected, partly because of directed government programs supporting child care. Over time, we expect consolidation to continue and believe we are well positioned to be one of the consolidators. From a competitive standpoint, we still have a market share advantage. Some large retail competitors have fewer centers than our employer-sponsored base and tend to focus more on retail than employer on-site centers. Our focus remains on the employer-sponsored piece where we continue to lead by a wide margin.

Jeff Silber, Analyst, BMO Capital Markets

A follow-up on wage inflation and passing through costs: you said it may take a cycle or two. Can you clarify the pricing cadence? When do you typically raise prices and how long to recoup costs?

Elizabeth Boland, Chief Financial Officer

We typically raise prices once a year, and given COVID disruption we calibrated to a January cycle. New families join at the prevailing rate and then move to the next annual cycle in January. When we say a cycle or two, we mean a year or two to recoup those costs as we monitor wage inflation and set increases for January and then evaluate how it plays out through the following year to set rates for the next cycle.

Jeff Silber, Analyst, BMO Capital Markets

Got it. That’s really helpful. Thanks so much.

Operator, Operator

Our next question comes from the line of Jeff Mueller with Baird. You may proceed with your question.

Jeff Mueller, Analyst, Robert W. Baird & Co.

Thanks for taking the question. In terms of back-up care, which fulfillment channel was staffing constrained? Did you pivot delivery to other channels or partners? I ask because the year-over-year growth in Q4 guidance sounds good. Is the issue resolved or ongoing, or is the year-over-year trend more about seasonal contribution from Steve & Kate’s or easier comps?

Stephen Kramer, Chief Executive Officer

We saw staffing challenges in centers and more so in in-home care because there’s less leverage there—one caregiver to one child. The in-home side felt more pressure in certain markets on peak days. We are expanding our network of in-home agencies, investing in our own in-home caregiver network and putting more investment into CNS and other initiatives to address these challenges.

Jeff Mueller, Analyst, Robert W. Baird & Co.

The Q4 Back-up care margin guidance of 35% to 40% looks quite strong. Is that driven by less in-home delivery, unused capacity catch-up, mix shift, or something else?

Elizabeth Boland, Chief Financial Officer

Q4 is on the higher end of where we typically see margins. There is some sequential uplift in Q4 relative to the rest of the year, and it reflects a mix shift back toward more traditional use and center delivery as reimbursed care moderates versus Q3. Essentially, it reflects the flow-through we would expect as we rebuild toward a more traditional mix of care consumption.

Jeff Mueller, Analyst, Robert W. Baird & Co.

How is Back-up care sales planning with clients looking for 2022? You had a lot of client sign-ups through the pandemic; is there upsell momentum and what do you see for 2022 sales?

Stephen Kramer, Chief Executive Officer

We continue to see a robust pipeline going into 2022 despite the increase in interest and sales during COVID. Employers make decisions at different cadences, and we continue to have productive conversations, cross-sell opportunities with other product lines, and attract new clients to Bright Horizons. We feel good about the pipeline and expect to close a number of new back-up care clients in 2022.

Jeff Mueller, Analyst, Robert W. Baird & Co.

Okay, thank you.

Operator, Operator

Our next question comes from the line of Toni Kaplan with Morgan Stanley. You may proceed with your question.

Toni Kaplan, Analyst, Morgan Stanley

Thanks. You mentioned occupancy levels being flat sequentially and a slower ramp for utilization versus previous commentary. This seemed like a change versus last quarter when commentary was more positive around reopening post-Labor Day. If you had to parse out drivers of the change, you mentioned Delta and labor—are those the bulk of what changed?

Elizabeth Boland, Chief Financial Officer

Those are the two primary drivers. The Delta variant impacted behavior and created elevated anxiety around exposure for children, prompting some parents to pause enrollment during a period when many would otherwise have been signing up. That coincided with employers making different decisions about work arrangements. The staffing challenges then compounded the issue because while demand returned, we sometimes couldn’t service all of it. Despite this, we have momentum in demand and interest levels in many areas where parents are enrolling.

Toni Kaplan, Analyst, Morgan Stanley

A follow-up on hybrid work: have you considered offering employers access to any of your community centers instead of an on-site center? Employers could still offer a subsidy. Would that detract from on-site demand, and is this being discussed?

Stephen Kramer, Chief Executive Officer

We’ve evaluated that and had conversations with employer clients and surveyed parents. What we’re finding is that while families may have hybrid work schedules, they want consistency of care for their children. Families tend to choose a single center—either an on-site center or a convenient center near home or work—because consistency provides highest quality: same teachers and consistent classmates. Also, the vast majority of our inquiries and enrollments are for full-time care, which was true pre-COVID and remains true today. So parents overwhelmingly choose a single center for consistency.

Toni Kaplan, Analyst, Morgan Stanley

Got it. Thank you.

Stephen Kramer, Chief Executive Officer

Excellent. Well, thank you very much. We appreciate everyone who joined the call. I hope everyone has a great night.

Elizabeth Boland, Chief Financial Officer

Thanks, everyone. Good to talk with you.