Earnings Call Transcript
BRIGHT HORIZONS FAMILY SOLUTIONS INC. (BFAM)
Earnings Call Transcript - BFAM Q4 2025
Michael Flanagan, Vice President of Investor Relations
Thanks, Paul, and welcome to Bright Horizons Fourth Quarter Earnings Call. Before we begin, please note that today's call is being webcast and a recording will be available under the Investor Relations section of our website, investors.brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook, 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 should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2024, Form 10-K, and 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 forward-looking statements. Today, we will also refer to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available under the Investor Relations section of our website at investors.brighthorizons.com. Joining me on today's call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our results and will provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, I will turn the call over to Stephen.
Stephen Kramer, CEO
Thanks, Mike, and good evening to everyone on the call. I am pleased to report a strong finish to 2025, closing out a year of solid growth and continued progress across the business. In the fourth quarter, revenue increased 9% to $734 million, and adjusted EPS increased 17% to $1.15, both ahead of our expectations. For the full year, we delivered revenue of $2.93 billion, up 9% over the prior year and adjusted EPS of $4.55, representing 31% growth year-over-year. These results exceeded the expectations shared at the beginning of the year and highlight the continued evolution of Bright Horizons into a diversified, integrated solutions provider of employer-sponsored education and care. The improvements in our business mix throughout 2025, combined with our growing impact on families and employers, reinforce our confidence in the durability of our model and long-term opportunity for growth. Let me now walk through the segments. First, back-up care again delivered strong growth and earnings contribution in Q4 as it has done over the course of 2025. In Q4, revenue increased 17% to $183 million, driven by solid utilization across center-based, in-home, and school-age programs. Utilization during the quarter reflected a combination of unplanned care when regular arrangements were disrupted along with more predictable care needs such as scheduled school breaks and holiday coverage. For the full year, back-up care revenue grew 19% to $728 million and sustained strong operating margins. Our service reach spans more than 1,100 employer clients and millions of eligible employees globally. Importantly, our existing clients had double-digit growth in backup users, even as their eligible populations remained relatively flat, meaning growth was driven by deeper penetration into the eligible population, underscoring the value of the benefit to an increasing number of working families. Looking forward, our focus remains on scaling the backup business by expanding unique users within existing clients, increasing frequency of use among those utilizing care, and continuing to retain and add new employer clients. This growth relies upon an unmatched delivery model that combines owned capacity across our full service centers and backup operations alongside a broad third-party provider network. We still well less than 10% penetration within existing clients, so we have a significant opportunity to further expand active user adoption and utilization through targeted marketing, expanded capacity across use types, and our One Bright Horizons initiatives to increase awareness of our services. We remain confident that back-up care will continue to be a durable source of growth in earnings while also strengthening broader employer partnerships across Bright Horizons services. Turning to full service, revenue increased 6% in the fourth quarter to $515 million, with growth driven by a combination of tuition increases and enrollment growth tempered by our continued portfolio rationalization. We added 6 new centers this quarter, including 4 client centers, 3 of which were transitioned through management for Stormont Vail Health and Cone Health. These additions extend our leadership in employer-sponsored child care and reaffirm the critical role on-site care plays in supporting working families and their employers. Enrollment in centers opened for more than 1 year increased approximately 1% in the fourth quarter, and occupancy averaged in the mid-60% range, broadly consistent with seasonal patterns we typically see in the back half of the year. Underlying enrollment dynamics remained similar to what we saw throughout 2025, with solid demand in many geographies countered by more muted enrollment growth levels in some of our more challenged areas. We are pleased to see continued progress, particularly in our lower occupancy cohort, where centers operating below 40% occupancy declined from 16% to 12% of the portfolio in the fourth quarter year-on-year. Specifically in the UK, our full-service business continued to make progress and delivered positive operating profit for the year, a significant milestone post-pandemic and a meaningful turnaround from the $30 million of annual losses we absorbed just 2 years ago. This progress reflects higher occupancy, more consistent staffing, and improved affordability for families aided by expanded government support. Looking ahead, our focus remains on serving families where they work and live, continuing to invest in the quality of our services and strengthening the long-term economics of our portfolio. We will continue to operate in locations that are important to our client partners, are strategic in delivering back-up care, and in areas with strong supply-demand dynamics. At the same time, we'll continue to rationalize locations where these characteristics are not present. Turning to ed advisory, revenue increased 10% to $36 million in the quarter, and for the full year grew 9% to $125 million, both ahead of our initial expectations. College Coach led the growth in margin performance as more families engage with our college counseling services, while EdAssist also continued to expand its participant base. During the quarter, we added new employer clients to the portfolio, including launches with Estee Lauder and Becton Dickinson, among others. Before I turn it over to Elizabeth, I want to take a moment to recognize an important milestone. 2026 marks the 40th anniversary of Bright Horizons. When our founders launched the company in 1986, they believed employers could play a meaningful role in supporting working families. In doing so, we benefit children, parents, and employers alike. Over 4 decades, Bright Horizons has developed thoughtfully alongside changes in the workforce, employer priorities, and the needs of working families. Central to that evolution has been the development of our back-up care business and the expansion of our services to support families and employees across life and career stages, broadening our impact to a much wider population. That progression reflects our ability to listen to clients, adapt to changing needs, and invest in ways to maximize impact, all while remaining grounded in our mission to support children, families, and employers. We are proud of what this organization has built over 4 decades. We are deeply grateful to our employees whose dedication makes it possible and appreciative of our client partners and customers who place their trust in us. In closing, 2025 was a year of solid financial performance and meaningful progress across many dimensions of our business. We grew revenue 9%, expanded adjusted operating margins by 200 basis points, and delivered 30% earnings growth. We strengthened our balance sheet, repurchased $225 million of shares, and positioned the company for long-term success. As we look ahead to 2026, we are optimistic about the opportunities in front of us and look to build on the momentum we saw in 2025. Elizabeth will walk through the guidance in more detail, but at a high level, we expect revenue to be in the range of $3.075 billion to $3.125 billion and adjusted EPS to be in the range of $4.90 to $5.10 per share. With that, I will turn the call over to Elizabeth.
Elizabeth Boland, CFO
Thanks, Stephen, and hello to everyone who's joined the call tonight. I'll start with our financial highlights. Revenue in the fourth quarter was $734 million, representing 9% growth year-over-year and modestly ahead of our expectations. The quarter reflected solid execution across the business with continued strength in back-up care and steady performance in full-service and educational advisory. Adjusted operating income rose 14% to $91 million, with operating margins up roughly 60 basis points over the prior year to 12.3%. Adjusted EBITDA increased 12% to $123 million, representing an adjusted EBITDA margin of 17%. Lastly, adjusted EPS of $1.15 per share, ahead of our expectations, grew 17% over the prior year. Breaking this down into the segment results, back-up care revenue grew 17% in the fourth quarter to $183 million, driven by solid demand over the fall and holiday season. Utilization continues to be driven by both predictable and planned needs as well as unexpected care disruptions. Operating margins remained strong in the quarter at 32% in line with our expectations for the higher volume of care that we deliver in the second half of the year while also reflecting our disciplined expense management and a favorable mix of utilization. Full-service revenue of $515 million was up 6% in Q4, mainly due to pricing increases, modest enrollment gains, and an approximate 175 basis point tailwind from foreign exchange. Centers we have closed as part of our portfolio rationalization since Q4 of '24 partially offset these gains, representing an approximate 200 basis point headwind. Enrollment in our open centers for more than 1 year increased approximately 1%, and occupancy levels across our portfolio averaged in the mid-60s for Q4. In the specific center cohorts we have discussed previously, we continued to show improvement over the prior year period. Our top-performing cohort of centers above 70% occupancy improved from 39% of those centers in Q4 of '24 to 40% in Q4 of '25. Similarly, our bottom cohort of centers occupying less than 40% improved from 16% in the prior year period to 12% this past quarter. Adjusted operating income of $20 million in the full-service segment increased by roughly 45 basis points to 4%, up $3 million over the prior year. Higher enrollment and improved operating leverage, particularly in our U.S. and U.K. operations, helped drive the growth in earnings, while higher benefits costs partially offset some of these advances. Lastly, our revenue in the educational advisory segment increased 10% over the prior year to $36 million with operating margins of 30%, consistent with Q4 '24. Net interest expense ticked up to $12 million in Q4 of '25, also consistent with the prior year quarter and totaled $45 million for the full year. Our non-GAAP effective tax rate was 26.4% in the fourth quarter, bringing the effective rate for the full year to 27%. Turning to the balance sheet and cash flow. For the full year 2025, we generated $351 million in cash from operations compared to $337 million in 2024. Capital investments totaled $91 million in 2025 compared to $95 million in the prior year. With the continued cash build specifically free cash flow generated in Q4, we repurchased $225 million of stock in 2025, including roughly $120 million in the fourth quarter. We ended the year with $140 million of cash and a leverage ratio of roughly 1.7 times net debt to adjusted EBITDA. Moving on to our 2026 outlook, we currently expect 2026 revenue to be in the range of $3.075 billion to $3.125 billion, or growth of 5% to 6.5%. In full-service, we expect reported revenue to grow in the range of 3.5% to 4.5% on enrollment gains and tuition increases offset by approximately 200 basis points in headwind from net center closings. In back-up care, we expect reported revenue to increase 11% to 13%, driven by continued expansion of use. In educational advisory, we expect to grow in the mid-single digits. For 2026 adjusted EPS, we expect to be in the range of $4.90 to $5.10 a share. Looking specifically at Q1 '26, our outlook is for total top line growth in the range of 6% to 7.5%. The segment breakdown would be full service reported revenue growth of 5.5% to 6.5%, back-up care of 11% to 13%, and educational advisory in the low to mid-single digits. For Q1, we expect adjusted EPS to be in the range of $0.75 to $0.80 a share. With that, Paul, we are ready to go to Q&A.
Jeffrey Meuler, Analyst
Can you help us with how you're thinking about the full-service margin outlook, including as you close these centers that are a 200 basis point revenue headwind on average, are they at a loss? Or just how should we factor in the different drivers of full-service margin outlook?
Elizabeth Boland, CFO
Yes. Thanks, Jeff. So as we look at 2026, we had, obviously, good performance this year and are building off of where we ended 2025 into '26. We mentioned a couple of things on the prepared remarks, including about 100 basis points of enrollment gain in the year. That will contribute some continued performance in our U.K. business, which had a certainly strong year in 2025, and that velocity will continue to grow, but it will be expanding at a little bit lower pace than it was able to this year. So we're looking overall at about 25 to 50 basis points of margin improvement in the full service business in '26. That captures some effect of these closures as you're highlighting; most of them are in a loss-making position, yes, because that's the reason for underperformance leading to a closure decision. There is some tail to those costs even as the center ceases operations if we're running dark and/or we're not able to fully exit the lease or paying off multiple years of lease expense in advance. So we are having some ongoing effect of that, but it does add modestly to the operating leverage as we are exiting these underperforming centers. But overall, full service 25 to 50 bps.
Jeffrey Meuler, Analyst
Got it. And then just given the headlines and news stories, can you just comment on health and safety protocols, any changes that you're making or considering? And then just how you think about any sort of local market or licensing risks or a private-public partnership for UPK opportunities that could be impacted from those issues?
Stephen Kramer, CEO
Sure. Thank you for the question, Jeff. As you'll know, and those who interact with us know, our number one priority continues to always be delivering high-quality care and education for families and ultimately for the clients that we serve. When we have any incident at a center, we take it incredibly seriously. What I would say is that enrolled families at other centers tend to focus on the experience that they are having at their individual center. And the relationships that we enjoy with our clients. We focus on transparency and also strong communication so that we can express to them exactly what has occurred. And then ultimately, the actions that we are taking to make ourselves even stronger going forward. So overall, to be very direct with you, we continue to see strong retention of families in our centers. We continue to see stability in our client base. And so overall, while we take these incidents seriously, from a business impact perspective, I would say that, at this point, our view is that, that is not the case. You referenced the relationships that we may have with UPK, so for example, in New York City, in particular. And what I would say is that we enjoy contracts in the majority of our centers for UPK. We have received feedback from the regulator, having visited almost all of our UPK centers in recent months, that we continue to perform at a high level. There is never a guarantee that contracts will ultimately be renewed over time. On the other hand, we feel confident in our position at this point within the New York City market and our ability to continue to deliver for the large number of families that we do.
Manav Patnaik, Analyst
Elizabeth, maybe just firstly on the guide, if you could help us with the assumption on pricing and enrollment growth in the full center business? And then also just if you want to just knock out the margins for the other two businesses in Q1 and the full year.
Elizabeth Boland, CFO
Sure. So overall, we're looking at price increases, which would vary as I'm sure most on the call know we make individual localized decisions on this. But on average, the price increases for '26 are approximately 4%, and we are looking at overall enrollment for the year plus 100 basis points, give or take. So the two of those are the two primary components there. The price increase reflects what we see in the wage offsetting around 3% or so range against that 4% for wages. As it relates to the overall margin in the other businesses, for back-up, we would be looking at our long-term average. Just to reiterate that, we would expect to be 25% to 30% operating margin over time. We certainly have been performing well against that, and we would look in '26, we would be looking to see that in the upper half of that range. So call it, 27%, 28% to 30% for the year. So that's what we're seeing in back-up care. And then in ed advisory business similar to this year, overall in the low 20s.
Manav Patnaik, Analyst
Got it. And maybe just back to New York City, I guess, with the new mayor and the free child care proposal. I wanted to just get your take if you've spoken to the administration, you're involved in there. Just some color on what your New York City exposure is? I know in the past with pre-K and those kinds of things, you benefit from wraparound care, but I'm not sure what these proposals look like.
Stephen Kramer, CEO
Sure. As I mentioned, most of our centers in New York City are involved with UPK, which demonstrates a strong relationship with the city through successful public-private partnerships. The city's funding supports high-quality programs and is open to collaboration with private providers like us. New York City serves as a prime example of how UPK can benefit both the city and Bright Horizons, along with the families we assist. Going forward, discussions have been held about extending these programs to younger age groups, specifically for two-year-olds, potentially mirroring the existing UPK framework but tailored for these younger children. It is expected that a pilot program will initially target the city's most underserved areas before gradually expanding, similar to previous initiatives. Regarding our relationship with the city, as one of the largest UPK providers in New York, we maintain a strong and ongoing connection with those who oversee these programs, and we feel confident about how this will progress over time.
Andrew Steinerman, Analyst
So Bright Horizons continues to have strong backup cap growth as employees at the corporate clients engage and use their additional use cases of their backup benefits. I was wondering how do the corporate clients feel about that kind of increased spend that comes as employees realize and use their backup benefits more, and do you see any tightening of backup benefits in terms of like use cases that are allowed by corporate clients?
Stephen Kramer, CEO
Sure. I'm happy to answer that, Andrew. So first, it's fair to say that we're very pleased with the 19% growth that we experienced this year. And that is in addition to the last several years of very strong growth. And as you all know, the majority of the revenue that we derive is directly from the employer's support of these programs because there's really a limited co-pay that goes along with it at the employee level. But I think that we have done a really good job of articulating to employers the value in terms of productivity that backup provides to their employees and then ultimately accrues to them as employers. And so I think that strong ROI has really held us in good stead as it relates to the continued investments that they're making. I would also observe that within the benefits portfolio that HR manages, backup is still a pretty modest line item, especially as it compares to some of the more traditional and larger benefits that they manage. And so while the increases are significant for us and obviously for the progress that we have continued to make from any one employer's perspective, it's still a pretty modest line item despite the fact that on a percentage basis for them, it is growing more significantly. But again, I think our teams have done a really good job of ensuring that we are focused on the value proposition.
Keen Fai Tong, Analyst
You mentioned occupancy averaged mid-60s in 4Q. Based on your guide for this year, can you describe how you expect occupancy to unfold over the course of 2026 by quarter, roughly?
Elizabeth Boland, CFO
Yes. The seasonal pattern should remain consistent, showing an increase in enrollment during the first half of the year, especially in the second quarter, which peaked in the high 60s in 2025. We expect it to rise slightly above that and then decrease to the mid-60s in the second half of the year, similar to the trends observed in the third quarter and fourth quarter. There will be an increase in the first and second quarters, following a pattern like what we saw this year.
Keen Fai Tong, Analyst
Got it. So by 4Q this year, would you expect it to be better than mid-60s from 4Q last year? Or do you think you've reached the steady state and mid-60s is a reasonable year-end?
Elizabeth Boland, CFO
Yes. It would still be in the mid-60s exiting '26 because with a growth rate of just 100 basis points in a year, we're making headway against that gradually, but it wouldn't be getting beyond the mid-60s by the end of the year. Still growth to come, though. We are heartened by the continued interest, and we have the overall number of enrollment in the 100 basis point range masks the improvement in the middle and lower cohorts, which are growing low to mid-single digits because they're more under enrolled than the top cohort, which is very well enrolled. And in fact, can't really take any more enrollment and may see some cycling. So overall, we're pleased with the ongoing momentum; it's modest, and it's year-by-year, quarter-by-quarter, but we are seeing growth and think that will continue to allow us to move beyond the mid-60s over time. That won't happen, we wouldn't expect in '26, but certainly have the opportunity down the road.
Toni Kaplan, Analyst
I was hoping you could start maybe giving additional color on the closures. Just wondering if there are any sort of commonalities on why the centers got up to a higher level of utilization and I'm sure there were a number of things that you tried. And so just wanted to understand the reason for that. But were there a number of leases that came up this year? Just trying to understand also how to think about closures for maybe '27 as well.
Elizabeth Boland, CFO
Yes, the main theme here relates to the centers that we have identified for closure. We have already closed nearly half of the centers we anticipated closing this year, with the total expected closures ranging from 45 to 50. More than 20 of these closures have occurred in this quarter alone. The decision to close centers has been influenced by several factors, including some centers being within one to three years of the end of their lease, underperformance, falling enrollment, and the overall economics of operations that do not justify the fixed costs. In many cases, we have successfully transitioned families and staff to nearby centers, which allowed us to rationalize our portfolio while retaining enrollment and staff. There are also situations where the underperformance is so significant that we chose to cease operations, even if the lease has several more years to run. In these cases, we may consider combining centers or completely halting operations due to insufficient demand. While we aim to sublease the space to mitigate ongoing costs, the current market conditions do not favor this approach. Ultimately, our decision-making process considers client relationships, interest in full-time and backup care, negotiations for better occupancy costs, and strategies to increase enrollment through enhanced parent awareness and effective marketing. Each of these factors contributes to a challenging decision-making process.
Toni Kaplan, Analyst
Great. And then for my follow-up on backup care, I guess, anecdotally, we're aware of at least one employer who added days during COVID and now is cutting back on days, going back to sort of pre-COVID levels. And so I wanted to understand if that is just a one-off situation or if there's a larger trend of cutting back on days? And what I'm trying to get at is if you're seeing any changes in the drivers of growth in backup care like going forward versus recent years, are you seeing sort of more growth from new employers signing on as opposed to those adding days, or any difference in usage, etc. I just wanted to understand directionally the backup care drivers and if that is something that is changing.
Stephen Kramer, CEO
So Toni, what I would say is the drivers in 2026. And moving forward, we expect actually will look very similar to the last several years. So the vast, vast majority of the growth comes from the existing client base. Of course, we continue to add clients, but that is not a large source of growth given the maturation that is required of a new client, and it takes time for the benefits to become known and then ultimately used in a more mature way. So when we think about the drivers, number one is continuing to increase the number of unique users. And so, as I shared, we grew that at a mid-double-digit rate and so getting more penetration within our existing base is a really critical component. I would say that to the question around program design and policy changes, it was not actually the norm for most of our employers to change their program parameters even during COVID. We had a select number that really had some outsized programs that have come back into more of our normalized program policy. But the reality is in the current operating environment, most of those who use do not use their full bank, whether it be an outsized bank or even a more traditional sized bank. So again, it's this combination of continuing to drive users, continuing to drive their frequency of use, understanding that most do not use their full bank, and those become the two most important determinants of the continued growth algorithm.
Joshua Chan, Analyst
I guess, around your expectation to grow enrollment 100 basis points which is similar to the kind of the exit rate in Q4. Have you seen kind of a solid or pretty stable fall enrollment season during Q4 to kind of inform you of that? Just I'm just wondering how the enrollment season kind of progressed.
Elizabeth Boland, CFO
Yes. I would say we experienced a slight slowdown in the second half of the year. We had faster growth in the first half of '25, which tapered off in the latter half. The momentum we saw in the fall and into the rest of the year aligned with our expectations and remained stable as we move into next year. One positive aspect to note as we look ahead is a slight increase in enrollment among younger age groups. While the overall mix hasn't changed drastically, there is increased interest from younger ages, which is a positive sign for transitioning these children into older age groups as they stay with us. This is one of the encouraging elements for our outlook. Throughout 2025, as we discussed last year and specifically in Q4, certain supports we’ve seen outside the U.S. have helped improve affordability for families in the countries where we operate. Government funding for childcare is available to all families at some level, which has enabled more families to access care. This has also contributed to a stable enrollment outlook. In 2026, we anticipate opening approximately 20 centers while closing around 45 to 50, resulting in a net closure position. Closing underperforming centers throughout this year will significantly help us address the lowest-performing cohort. We noted that 12% of centers fall into this bottom cohort, which consists of nearly 90 P&L centers that we manage. After the closures in the early part of this year, that number has already decreased meaningfully to around 70. Therefore, we will be in a favorable position to have made progress with many centers, but I would estimate that it will likely take until 2027 before we are significantly net positive.
Stephanie Moore, Analyst
Hi, good afternoon. Thank you. I was hoping you could talk a little bit about what you're seeing from just an overall pricing standpoint, general appetite from parents and customers on tuition increases, how you view kind of pricing going forward now that inflation is kind of arguably a bit under control, labor is in a little bit better positioned. So I would just love to get your kind of updated view on general pricing trends.
Elizabeth Boland, CFO
Yes. I mean, it's obviously the economy has been in many families have been quite stressed with the whole of inflation in general over the last many years. Child Care has, for many years, been a higher-than-inflation cost service, mainly because of the labor intensity that goes into it, and the pandemic really added some fuel to that with significant increases to the labor cost as some significant wage steps were made early on in the pandemic. And then we continue to do increases, but they're much more market level increases over the last couple of years. So I think the parents are understanding that the cost of care is very much driven by personnel costs. We mentioned benefits costs on this call, in particular, because it is one of the important cost wage and benefits is an important element of the total rewards package for our teachers. It's one of the things that's attractive to them about our employee value proposition and why they work here, but it is a cost that we need to be continuing to bake into the overall cost structure and the tuition recovery over time. So we feel like our algorithm will continue to hold. Parents understand where the increases are coming from, and I think that our measured approach to tuition increases that tries to balance the economics, covering costs in the center as well as attracting enrollment, retaining enrollment, and bringing as economic value to families and to our client partners as we can will ultimately carry the day. So we're always looking for ways that we can be effective in making the cost of care affordable to families but transparent about the fact that it does increase with primarily those personnel costs each year. We are currently in the mid-60s across our portfolio, with about half of our centers operating above 70% and averaging over 80%. Our target remains at 70%, though many centers function adequately at 60% to 70%. This target is important for achieving a critical mass with the right mix of age groups, which enhances operational efficiency in our centers due to the high labor intensity involved. We anticipate making progress towards 70% with an annual enrollment increase of 100 basis points. Additionally, as we streamline our portfolio and reduce the number of centers operating below 40%, we will naturally improve our overall performance. Enrollment remains the key factor, and our top-performing centers are maintaining enrollment above 80% despite age changes. The middle group of approximately 40% of our centers has significant potential to increase enrollment by 5 to 15 percentage points, helping us move closer to our 70% average goal.
Stephen Kramer, CEO
Great. Well, thanks again for joining us on the call, and wishing you all a good night.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.