Bright Horizons Family Solutions (BFAM) Q4 2016 Results - Earnings Call Transcript

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Bright Horizons Family Solutions, Inc. (NYSE:BFAM) Q4 2016 Earnings Call February 9, 2017 5:00 PM ET

Executives

David H. Lissy - Bright Horizons Family Solutions, Inc.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Analysts

Manav Patnaik - Barclays Capital, Inc.

Trace Adair Urdan - Credit Suisse Securities (NYSE:USA) LLC

Andrew Charles Steinerman - JPMorgan Securities LLC

Gary Bisbee - RBC Capital Markets LLC

David J. Chu - Bank of America Merrill Lynch

Jeffrey Marc Silber - BMO Capital Markets (United States)

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Operator

Greetings, and welcome to the Bright Horizons Family Solutions Fourth Quarter 2016 Earnings Release Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, David Lissy, Chief Executive Officer for Bright Horizons Family Solutions. Thank you, Mr. Lissy. You may begin.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Thanks, Ben, and greetings to everybody from Boston where we have official blizzard conditions, but everybody is unfazed as they still bask in the afterglow of our big win this past weekend. Joining me on the call is Elizabeth Boland, our Chief Financial Officer, as usual, and she'll go through a few administrative matters before I kick off the call. Elizabeth?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Thank you, Dave. Hi, everyone. Thanks for joining us today. The call is also being webcast, as usual, and a recording of the call and our release, which was issued after the market closed today, are or they will be available under the Investor Relations section of our website, brighthorizons.com.

Some of the information we're providing today represents forward-looking statements, including those regarding our growth and operating strategy and our financial outlook for 2017 as well as our expectations for revenue growth, for operating margins, contributions from acquisitions, our credit facility, business segments, foreign currency rates, tax rates, center openings and closures, capital spending, adjusted net income and earnings per share and cash flow and share repurchases.

Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially. Factors that could cause our actual results to differ include risks related to implementing our growth strategies, client demand, the integration of acquisitions, currency fluctuations and our indebtedness, as well as the other risks and uncertainties that are described in the Risk Factors set forth in our Form 10-K. Any forward-looking statement speaks only as of the date on which it's made, and we undertake no obligation to update any forward-looking statements.

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

So let me turn it back over to Dave for the review and update on the business.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Thanks, Elizabeth, and hello, again, to everybody on the call. As usual, I'm going to update you on our financial and operating results for the past year. My prepared comments will be a little bit longer as I provide – as we head into the New Year and I give you an outlook for 2017. Elizabeth will then follow with a more detailed review of the numbers before we open it up to your questions.

To recap the headline numbers for this past quarter, revenue increased over 7% to $400 million, which yielded adjusted EBITDA of $76 million and adjusted earnings per share of $0.56, up 19% from last year.

As we discussed with you in our last call, we've experienced some FX headwind related to our UK operations of approximately 3% in the second half of 2016. Therefore, on a common currency basis revenue growth approximated 10% in Q4, and the growth in adjusted earnings per share would have also been proportionally higher, north of 20%.

For the full-year 2016, revenue of $1.6 billion, represented growth of 8% or 10% on a common currency basis. Adjusted earnings per share of $2.16 increased 17% over 2015, and on a common currency basis would have been up about 19%.

Solid contributions from each of our three lines of business drove our top line growth of $19 million and 70 basis points of gross margin expansion in the fourth quarter. This quarter, we added 99 centers with highlights that include two for the University of Southern California and the 88 centers that we acquired from the Asquith acquisition, which I'll talk about in more detail in a minute.

Our back-up and educational advising segments also continued to expand their respective client bases and breadth of services. We're now serving more than 750 clients in back-up and 275 clients in ed advising, including new client launches this past quarter for Dell, formally Quest Software; BASF Corporation; and the University of Utah Health Sciences.

As we've discussed on prior calls, the timing of when new clients launch their service with us can contribute some variability in our quarter-to-quarter growth rates. We witnessed this earlier in the year and we're pleased to complete 2016 with just over 10% top line growth in our back-up division and 20% top line growth in our educational advising segment.

On the margin side, we continue to deliver strong and consistent results. The operating margins for these two segments are higher than what we realized on our full-service segment. Even as we continue to make important investments to enhance the user experience and to create longer-term operating efficiencies.

We also opened a total of 15 new lease/consortium centers in 2016 with five opening in the fourth quarter. We've now opened 60 of these centers since the beginning of 2013 as part of our long-term growth strategy and we continue to be on track to create significant value over time from this area.

Now that the centers that opened in 2013 and 2014 are further along their operating maturity curve, as we had expected their contributions offset the cash losses we incur in the newer classes of centers that are still in their early stages of ramp-up.

That said, when you take this group as a whole, this group of 60 centers now generates a meaningful amount of our full-service revenue that comes to us as a whole, with modest margin contribution. So that continues to result in a headwind to full-service margin expansion.

As we've discussed on prior calls, we expect that this headwind will naturally diminish, as the more recent classes continue to ramp unlocking the significant value creation that exist in this cohort of centers.

On the acquisition front, we had an active year that included single-site and multi-site deals both here and in Europe. Most significantly, this past November, we completed the acquisition of Asquith Day Nurseries & Pre-Schools, which was the third largest center provider in the UK.

With this addition, we're now the largest provider of child care and early education in the UK with more than 300 centers. Consistent with our targeted strategy, the Asquith centers are located predominantly in the southeast of England, including the Greater London area and are a nice complementary addition to our existing UK network.

We also expect to add a handful of new centers to our network from the Asquith growth pipeline that we inherited as part of the deal. It's an exciting strategic addition, and we've long respected this group for their commitment to quality as recognized by their impressive track record with Ofsted, the regulating agency in the UK, and by their talented team of people.

Since we completed the transaction on November 10, our respective teams have been working closely on the integration strategy and process, which we expect will continue through mid to late-2017, although it's well underway at this stage. We expect that the group will add approximately £65 million in additional revenue in 2017.

Given the near-term effects of the integration and our incremental financing, as well as their class of newly ramping centers that we absorbed, we're expecting relatively limited net contribution from Asquith in 2017 and to realize the full value as we end this year and head into 2018.

Beyond this transaction in line with the plan we laid out at the beginning of the year, we also continued with our plan to add tuck-in acquisitions both here in the U.S. and abroad as well as to pursue strategic transactions such as College Nannies and Tutors earlier this year.

As you've seen play out this past year, our acquisition strategy continues to be to pursue opportunities that range in scale. Our pipeline remains strong and we have a good mix of smaller networks and single center opportunities in active discussions both here in the U.S. and in Europe.

So, as we kick-off 2017, we do so with good momentum across all aspects of our business. Our growth strategy continues to be focused on organic as well as acquisition growth and leveraging the breadth of our existing client base to cross-sell our additional value-add services. Our sales pipeline in each of our services remains strong with broad interest across a number of industries and with both new clients and cross-sell opportunities.

All of this puts us in a solid position to achieve our organic growth plan in 2017. We now serve over 1,100 clients and almost 20% of them purchase more than one of our services. The investments we've made and continue to make in the people and systems needed to deliver our suite of services in a high-quality manner remains at the core of enabling our ability to continue our strong track record of results.

Our 2017 plan continues our focus on investing in technology and systems that we believe will enhance our customer service and bring us longer-term operating efficiencies. In our center business, our plan continues to include investing in our teachers and center leaders, both from a compensation and benefit standpoint as well as in further training and professional development.

Our strategy to develop new lease/consortium centers in key markets addresses the demand for high-quality full-service early education in these specific geographic locations and also supports our expanding back-up business by adding to our ability to deliver back-up care at our own centers. It also helps us to deal with the trend that we've seen emerging as more employers continue to locate employees in dense urban environments that doesn't allow them the space to develop their own individual centers.

Once again, we expect our back-up and educational advisory segments also to grow faster than our core business in 2017. These segments contribute to our ability to drive margin expansion by capitalizing on the synergy between our services expanding our market opportunity and allowing us to touch more of our clients' workforce, thus deepening the value proposition we offer to employers and their working families across key life stages.

Lastly, I want to review our capital allocation and credit strategy. As we previewed for you on our last call, we amended our credit agreement in November, taking advantage of favorable credit market conditions to extend our term loan out seven years, and lock in favorable terms and rates.

We also borrowed an additional $150 million under our term loan to fund the Asquith acquisition and use that revolver for the remainder of the purchase price. That said, given the cash we generate, our revolver, and access to additional capacity when we need it, we still remain in a good position to take advantage of any strategic opportunities that continue to present themselves.

Our first priority remains growth investments and acquisitions, adding new lease/consortium centers which you've seen us do this past quarter and year. The second priority is to enhance shareholder value through our share repurchase program, which we've also continued to execute on this past year. I would expect that will continue in 2017 with these same priorities in mind.

So before I turn it over to Elizabeth, let me update you on our outlook for 2017. We're targeting revenue growth in the range of 10% to 12%, offset in part by some continued FX headwind from the pound compared to 2016 that approximates 2%, mostly in the first half of the year.

When we factor in the impact of timing, related to the new lease/consortium centers and our expectations for the Asquith integration and the FX headwind, we expect adjusted earnings per share growth of 17% to 20% over 2016 or a range of $2.52 per share to $2.58 per share.

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

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Thank you, Dave. So just getting into a bit more detail on the quarter's results. The $19 million increase in full-service center business revenue was driven by rate increases that we've talked about in the 3% to 4% range on average, enrollment gains in our mature and ramping centers, and the contributions from new centers, most significantly the 88 Asquith centers acquired in mid-November as Dave talked about. Those centers added about $11 million to the top line in Q4.

The FX impact that we've discussed is most significant in the full-service segment. In Q4, we had approximately 3.5% headwind on the full-service growth rate. As lower pound FX rates in 2016 compared to 2015, dampened the revenue growth by over $11 million in the quarter. On a common currency basis, the full-service segment therefore grew 9.5% in Q4, approximately 5.25% organic and 4.25% from acquisitions.

The back-up division expanded over $6 million on the top-line, or 13.6%, and ed advisory services was up almost $2 million, or 15%, in the quarter.

As Dave mentioned, these growth rates can vary somewhat quarter-to-quarter based on the timing of new client launches and service utilization levels as well as the comparable prior quarter's performance. But for the full year, we did generate just over 10% revenue growth in back-up and 20% in ed advisory in line with our expectations.

In Q4, gross profit increased $9 million to $99 million, or 24.9% of revenue. Adjusted operating income, excluding the transaction-type costs for our refinancing and the acquisitions, increased $4 million to $49 million, or 12.3%, of revenue.

So starting off with our smaller segments, we reported over 29% operating margin in back-up and 24% for ed advisory in Q4 2016. Given the nature of the services that we deliver in these segments, the cost structure for both back-up and ed advisory is less labor intensive than we experienced in the full-service child care segment. And so these two business lines both continue to generate gross and operating margins that are well above what we earned in the full-service business.

Gross profit and operating income can also vary from quarter-to-quarter tracking the revenue growth trends, but also reflecting our investments to drive the expansion and evolution of these businesses. We expect the bulk of these segments will continue to contribute margin expansion over time through top-line growth and sustaining the operating margin performance.

In the full-service segment, operating margins expanded 50 basis points in Q4, on enrollment growth in our mature and ramping centers, consistent pricing discipline and cost management and contributions from new and acquired centers. Offsetting these gains are the margin effects of the classes of lease/consortium centers that have recently opened that are still in the ramp-up stage of their growth and are, therefore, not yet contributing as fully mature centers.

Turning to other costs in our results, overhead in the quarter was $42 million compared to $38 million in 2016, excluding the nearly $2 million of transaction costs related to the debt financing in Asquith acquisition. In addition to the spending to support growth, operations, service delivery and technology, we also absorbed the overhead support team from Asquith in Q4.

In the near-term and during the integration of this business, we expect overhead to push up modestly. But ultimately, we expect to realize solid overhead synergy from the combination of our support teams. More broadly, although the Asquith centers generate gross margins that are consistent with our overall full-service portfolio, the Asquith group as a whole had only modest contribution to operating income in the quarter due to integration spending and the effects of amortization expense. After factoring in the financing costs of the transaction, the group did not contribute to the bottom line in 2016.

Interest expense was $11.4 million in Q4, up slightly from last quarter. We borrowed an additional $200 million as Dave mentioned to finance the Asquith acquisition, $150 million of which is on our term loan, in connection with the amendment of our credit agreement and $50 million was borrowed under the revolver. In connection with this refinancing, we also recorded a one-time charge of $11 million for the extinguishment of our prior credit facility.

We ended the quarter with 3.6 times net debt to EBITDA compared to just under 3.5 turns at the end of last year. The structural tax rate for adjusted net income was 34% for the full-year 2016 consistent with the overall effective rate that we've recorded under U.S. GAAP and it reflects the favorable effects of lower statutory income tax rates in our foreign jurisdictions.

In the year, we generated operating cash flow of $211 million compared to $170 million in 2015 on improved performance and working capital. After deducting maintenance CapEx, our free cash flow totaled about $175 million for the year.

Dave mentioned our capital allocation strategy and under the share repurchase program in 2016, we repurchased a total of 1.7 million shares for $113 million via both open market purchases and one block trade in May of 2016. At the end of 2016, we operated 1,035 centers with a capacity to serve 115,000 children.

So looking ahead, as Dave previewed, our outlook for 2017 anticipates revenue growth of 10% to 12% over 2016 and that includes revenue gains in our back-up division in the low double-digits range, 10% to 12% for the year and growth in our ed advisory services in the 15% to 20% range for the full-year. The foreign exchange headwind is projected to approximate 2% for the first half of the year based on current pound and euro rates with a diminishing effect after that as we lap the reduced rates by Q4.

In our full-service segment, we're planning to add a total of approximately 50 new centers in 2017, including organic new and acquired centers. And our outlook also contemplates closing approximately 25 centers consistent with the level of closures we had in 2016.

On the operating side for 2017, in the mature full-service business, we expect to continue to gain approximately 1% enrollment in our mature base of centers, building on the steady gains we've made over the last several years. And we project price increases averaging 3.5% to 4% across the network, while maintaining a 1% spread between price and our center cost increases.

We continue to feel good about our long-term operating margin growth target of 50 basis points to 100 basis points, but we do have a few near-term mitigating effects that we expect to impact operating margins for 2017.

First, there's the addition of the Asquith group of centers, which add a relatively significant amount of revenue, but will not be at their steady-state operating levels until 2018, due to both the incremental overhead and the integration spending, as well as the impacts of their own newer and ramping centers. Second, there's the near-term drag on margins from the most recently opened lease/consortium centers and the class that we will open in 2017. And lastly, we're projecting an increase in our overhead spending to support our growth.

We continue to see the value of investing in technology and software solutions to expand our sales and marketing efforts to improve the user experience and to drive efficiency through more automated solutions. We expect these overhead related investments to strengthen our market position and service capability over time, but there will be an investment period in 2017. Considering these various factors, we expect to see operating income margins broadly consistent with 2016 levels in the range of 12.5% to 13% of revenue.

On some other key measures for the full-year 2017, and including acquisitions that we completed this past year, we're estimating amortization expense of $32 million to $33 million, depreciation of $70 million to $75 million and stock compensation expense of $13 million to $14 million. Based on our outstanding borrowings, including the revolver balance in the first half of 2017, we're projecting interest expense of $43 million to $44 million.

The effective tax rate is estimated to approximate 30% to 32% in 2017 from the effective lower statutory tax rates in our foreign operations, which we expect to contribute at higher levels in 2017, and from the impact of the change in accounting for tax benefits of stock option exercises, which is effective January 1. Specifically related to this change, our weighted average shares also will be increasing by approximately 700,000 shares.

We estimate that we will generate approximately $200 million of free cash flow with $225 million to $250 million of cash flow from operations and $40 million to $45 million of estimated maintenance CapEx. We also expect to invest around $50 million in new center capital for centers that we will open in 2017 and in early 2018.

The combination of all these factors lead to our projection that we will generate adjusted EPS growth in the range of 17% to 20% in 2017 or a range of $2.52 to $2.58 a share on projected 61 million to 61.5 million weighted average shares. This translates to an estimated range of adjusted net income of $154 million to $158 million.

Looking specifically to Q1 of 2017, we're projecting 9% to 10% top-line growth, which incorporates the effects of continued FX headwind of approximately 2%. Our outlook for adjusted net income is in the range of $33 million to $34 million. And for adjusted EPS in the range of $0.55 to $0.56 a share, on 61 million weighted average shares for the quarter.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. The first question comes from Manav Patnaik of Barclays. Please go ahead.

Manav Patnaik - Barclays Capital, Inc.

Thank you, good evening.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Hi, Manav.

Manav Patnaik - Barclays Capital, Inc.

Maybe first just to clarify on the guidance, so I think 10% to 12% would be reported revenue growth that you're guiding to, 2% FX hit, so that means constant currency is 12% to 14% and then what is the organic number embedded in that?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

So, it's 2% for the first half of the year, Manav, so it won't be 2% for the full-year, so it's probably more like 11% to 13% or so would be the full-year effect just to clarify the top-line.

Manav Patnaik - Barclays Capital, Inc.

Okay.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

So, what is the organic element of that? We mentioned that Asquith would be contributing an incremental £65 million. So, that's the primary driver there, but let me pull that up for you. If you have another question, I'll try to...

Manav Patnaik - Barclays Capital, Inc.

Yeah. Sure. The other question maybe for Dave is, the strength of this revenue growth has been about 5% organic for two quarters in a row now. Maybe just some color there on, is that just financing like how should we expect it to get back to what it's historically been faster growth rate, so how should we think about that?

David H. Lissy - Bright Horizons Family Solutions, Inc.

You know, I think as I commented earlier I think we have in our plan to open approximately 50 new centers in 2017 and have a pipeline that suggest that there's some visibility beyond that in good trends. So, I think that our center strategy as you know Manav, has changed from in addition to just going after single employer sponsored centers to also focusing on the lease/consortium centers. So I think that remains the same as we head into 2017. But all I can say on it now is what I see in the pipeline which is good momentum.

Manav Patnaik - Barclays Capital, Inc.

Okay. And I guess...

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

So the growth – let me just answer the earlier question on the acquisitions growth; it's about half and half of the overall guidance that would be acquisitions versus organic.

Manav Patnaik - Barclays Capital, Inc.

So at the midpoint roughly 6.6 (27:35), right?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yup.

Manav Patnaik - Barclays Capital, Inc.

Yup, okay. And then just on the margin front as well, is there any way to help us quantify I guess you cited three buckets why you expect that margin would be the Asquith integration, the lease/consortium and then the tech investment any way to bucket that in terms of the impact from each?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yeah, I mean, the elements of that are probably best quantified as it's – Asquith is in the neighborhood of probably 40 basis points to 50 basis points of a headwind as we get through the integration period and get their centers to a steady-state level. The overhead investment is probably similar, a similar range in that 40 basis points to 50 basis points of effect and the lease/consortium centers is the smaller effect of that in the 10 basis points to 20 basis points.

Manav Patnaik - Barclays Capital, Inc.

Okay. And then just the last question just tied to these, are these all sort of investments that will occur over 2017 and, therefore, probably don't repeat in 2018? Is that how we should think about it?

David H. Lissy - Bright Horizons Family Solutions, Inc.

Well, I think, Asquith will naturally leverage itself, as we talked about earlier, and we'll begin to see that contributing in the back half of 2017 and then fully realize its value obviously in 2018. We do think that the overhead investments we're making mostly relate to areas of technology investments, mainly in our back-up and ed assist but also in our center business.

And we're sort of in that time period where we started doing that this year, in 2016. Some of that is just a carryover effect of what we did in 2016 and just some continued investment in 2017. But as you probably hear from lots of companies, we sort of find ourselves in the phase where we're investing and not yet realizing the synergies that we expect to come from that or the leverage we expect to get from, on those investments or those systems that will happen in the future.

Best example that I could give you on that would be, you think about the way in which our back-up care service works and all the investments that we're making in mobile and in sort of the user experience should create a more efficient process compared to what is a fairly human-intensive delivery of coordinating or scheduling that care today.

Manav Patnaik - Barclays Capital, Inc.

Okay. Thanks, guys.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yes.

Operator

The next question comes from Trace Urdan of Credit Suisse. Please go ahead.

Trace Adair Urdan - Credit Suisse Securities (USA) LLC

Thanks. I'd like to continue with that line for one more second, Dave. When you talk about technology investments, I think, CapEx and amortization. But it sounds like you're actually thinking that there are sort of operating expenses attached to these investments, too. Can you just give us a little bit more color on what that overhead looks like? Is it bodies to supervise new projects or what are we talking about?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Well, I'll jump in here and Dave can certainly weigh in too. A number of the solutions are – they are people, their development time, and there are a lot of software solutions that are Software-as-a-Service. And so to the extent that the entire technology world is shifting a bit from servers to the cloud and to subscription-type services, we're participating in that as well.

And so there are many of those that are, they're driving through the sales and marketing effort and they're also driving into the actual operations of the centers. And so what I would say and adding on to what Dave said to Manav's question is, there are probably parts of these investments that are one time, but I think what we've learned and experienced over the years is, is that these investments make for a better overall experience for parents and families and all of the folks that are using our services and there are always new developments that are coming along, so we see it as an important investment to both stay ahead of and to continue to invest in proactively.

Trace Adair Urdan - Credit Suisse Securities (USA) LLC

Okay. Again, I'm just trying to grasp...

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

You're trying to figure out there.

Trace Adair Urdan - Credit Suisse Securities (USA) LLC

Yeah. I'm just trying to figure what they are. So that kind of suggests that you're buying some sort of off-the-shelf SaaS solutions for some of the things you're describing. I was sort of picturing proprietary apps that you're building. So can you talk about what your – is these products that are in the market...

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

It can be both. Yeah, it can be. There are some capital expenditures here that will be hitting as you say depreciation or amortization, but there are also a number of people supporting the efforts and so it's a combination of some capital costs that has a relatively shorter lifespan of leasehold improvements in some other capital assets for one thing, but it's also a number of people and thought leaders to get there.

Trace Adair Urdan - Credit Suisse Securities (USA) LLC

And are these investments – sorry, last question on this. But are these investments that are going to sort of necessary in order to maintain your kind of current status in the market? You're sort of fulfilling expectations that consumers have about being able to access your services in a more automated fashion or are you actually anticipating that there could be some improvements in efficiency that would yield returns for these investments down the road?

David H. Lissy - Bright Horizons Family Solutions, Inc.

I think, it's both, Trace. And so what we're talking about are making the user experience more efficient. We're talking about everything from when you – like I gave the example before in the back-up care area. Today, it's very intensive from the standpoint of most care is scheduled through a contact center, it's human intensive to the degree that moves more and more online via mobile than that has an operating efficiency associated with it. And also gives the customers what they want, which is the ability to do it in a more expedient way, and a way that's in sync with the way the world is going. So that's one example. There are examples of like that across ed advising business within centers, so it's really a little bit of both.

Trace Adair Urdan - Credit Suisse Securities (USA) LLC

Okay. That's really helpful, Dave. Thank you. And then, last question for me. There is all this kind of drama coming out of Washington, the stock market seems to like things so far. Are you sensing any kind of a difference in tone among your customers or prospective customers in terms of whether they're feeling more bullish, less bullish, more likely to make decisions, less likely to make decisions? Does it seem to be impacting your pipeline in any material way?

David H. Lissy - Bright Horizons Family Solutions, Inc.

I think, as I commented earlier, I think, we feel good as we head into 2017 at the pipeline across all three of the services that we deliver is in good shape, and the momentum feels good. I think it's a little early to be able to attribute it, a month into specifically what's going on in Washington.

But I think I expect that the feeling that companies have about the outlook is good. And the clients I've spoken to feel better about sort of the future and hopefully that translates into wanting to make more investments in people and our kinds of services.

So, I think, in particular sectors like financial services, which has been an area that we have a lot of concentration in, but hasn't been the most robust from a new sales perspective in the past couple of years, I'm hopeful that things like some of the discussions that are going on with respect to that industry and deregulation may create a little more bullishness in that sector, and I think that will be good for us. But it's still too early I think for me to be able to point to it specifically, other than to say that we feel good about the way the pipeline looks.

Trace Adair Urdan - Credit Suisse Securities (USA) LLC

Okay. Great. Thank you.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Thanks, Trace.

Operator

The next question comes from Andrew Steinerman of JPMorgan. Please go ahead.

Andrew Charles Steinerman - JPMorgan Securities LLC

Hi. Dave, could you give us a sense where we are in terms of penetration of full-service corporate child care in America? I know you say, we keep opening up centers at a rapid rate, but just give us a sense of like, kind of, what inning of the penetration story we're in? And is this lease/consortium center helping you penetrate more customers?

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yeah. I think, I'll answer the last question and then I'll answer your first question, Andrew. I think we started out with the lease/consortium strategy really for two particular reasons. One was that obviously we saw a trend with more of our types of customers and more of our clients locating employees in and around major urban centers and a lack of supply there, and obviously our ability to fulfill that was a driver.

And then, secondly, those are the same markets where we have a big concentration of back-up care needs, so these new centers really cover up both of those drivers. I think what we've learned over the past year, two years in doing this and then talking to clients is, one of the factors that challenges employers as it relates to their desire to do their own work site center, is if they concentrate more and more people in urban and dense urban environments, they just don't have – it's not feasible. There's not enough space to do their own center. And so there is – so I think that what we're doing on the lease/consortium centers is really, we're benefiting from that. Although on the other side of it, it's obviously within those same geographies we would expect to see less single sponsored centers.

On the other side of that, we still see single sponsored centers opening in our traditional more suburban campus environments. To answer your question directly and maybe to broaden a little bit, when I look at our three lines of business I look at the sort of center world of what we're doing in the employer sponsored world, I would say we're probably in the fifth or sixth inning of our development in that space. And I compare that to back-up where we're probably in the third inning, maybe bottom of the third inning going into the fourth inning. And ed advising, where we're still kind of in the first inning. So, I think that's how I would look at the three aspects of what exists in terms of where we are in each of the developments of those services.

Andrew Charles Steinerman - JPMorgan Securities LLC

Thank you. Appreciate it.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yeah.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Thanks, Andrew.

Operator

The next question comes from Gary Bisbee of RBC Capital Markets. Please go ahead.

Gary Bisbee - RBC Capital Markets LLC

Hey, good afternoon.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Hi, Gary.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Hi Gary.

Gary Bisbee - RBC Capital Markets LLC

I guess going back to just all the questions about the technology and other investments, what's the timing to see those efficiency gains that you referenced in the future? Obviously, it's not this year but should we think that that's several years out? Or is that the kind of thing that some of these investments you could have fairly quick return on if it's the need for less labor, or whatever?

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yes, I mean, I think, Gary, first I would just say, we're pointing all this out as we head into the year. We had also told you last year, we were also investing in the same way and this is a continuation of what we have talked about before and I would just put it in perspective. It's relatively modest in the scheme of things, but important to call out as it relates to our strategy and where we see things in the future.

I would expect that as we head into – that would come out of 2017 and head into 2018 and start to see some of the positive effects and essentially see some of those investments get leverage. Not all of them, but some of them. Much like I expect the – as I said earlier, the Asquith headwind to sort of a bait in the second half of 2017 and into 2018, I would expect a similar timeline for some of what we're doing because again some of this was started last year, and it is just a carryover effect in the first half that we're experiencing from investments we've made mid-way through 2016.

Gary Bisbee - RBC Capital Markets LLC

Okay. And then just a question on the margins, I think that covers the full-service centers for sure, but the other two businesses, back-up I know you've been – you begun to depreciate this year some IT systems investments, and so that was weighing on the margins. Is it safe to say that that is largely behind us and we'd see some more normal behavior, or are there other investments you're making there? And I guess ed advisory similar question, but just obviously very high margins, but down a lot in the last few quarters? What's the cadence going forward or what are the factors impacting how that will look the next couple of quarters? Thank you.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yeah, so some of this investment we're talking about would be affecting those segments as well, Gary. But broadly speaking, back-up delivered around 29%, I think margins for the full-year. And as you say there was a bit of a new weight on the cost structure there with our operating system.

We would expect to be able to sustain – broadly speaking, sustain margins in and around that level in back-up with the ongoing depreciation cost, of course, and just continued investment that we're doing there. But keeping in that and I'm talking about being in the similar range of 28% to 29%, 30%, ed advisory is just a little bit more immature business, where we delivered 24% I think for the full-year on the operating line.

Over time, I think we're probably seeing some lumpiness there, but probably three years, four years away from being steady at 30%, but we think we can get to operating margins of 30%. How it plays out this year? I would posit that we've got good revenue growth. But probably we'll still be around that mid-20%s in terms of operating margin, because of just where we are with the evolution and development of what needs to go into service delivery now.

Gary Bisbee - RBC Capital Markets LLC

Okay. And then I guess just one bigger picture question. So, we're – what I guess four years now since the IPO. One of the challenges of how successfully and rapidly we've grown the business is you're penetrating more and more the opportunity every year. When you think about the next five years, is there any reason that the long-term growth targets that you occasionally referenced since the IPO would not be sustainable as we think over the next few years or is it reasonable to think there's some deceleration in that just as you scale the business and it gets harder and harder to grow or the 2017 guidance looks right in line with how you've talked about it, another really strong year. Is that give confidence as that can be sustainable over time? Thank you.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yes, I think we still feel as we've commented in the prepared remarks, good about our longer-term targets. We still feel there's good opportunity in everything that we are doing and look forward and I can point to each segment that we operate in and feel like based on what I know now and see now it feels like there's good visibility for the next several years to continue to execute on the same plan that we've been talking about since we went public.

And then on the bottom line, I feel like the – again, there's always these short-term effects when you sort of do an acquisition like we did with Asquith or you make periodic investments, but ultimately 50 basis points to 100 basis points of operating margin expansion we think longer-term – is the longer-term target and we still think is doable. We think there not a growth opportunity in the segments and I sort of outlined in Andrew's question of what's the right space it's left there and the cross-selling it's left there.

But also I think we have considerable value that remains to be unlocked in the lease/consortium centers which is probably the biggest bucket of value creation opportunity that needs to be unlocked and levered some of the things that I talked about earlier and then it still feel like there's a lot to go there. So long-winded answer to, I think we still feel good about the longer-term targets that we've been talking about over the past several years.

Gary Bisbee - RBC Capital Markets LLC

And then just one last quick one on that last point Dave you said, considerable value to be unlocked from a lease/consortium. My sense is, we are getting close to the point where that was going to start deliver. You've got a couple of years of those that are now profitable, the drag is diminishing. When is that tipping point if there is such a thing or should we just think that it goes from the bigger drag to a smaller drag to a positive in a positive growth in the next couple years or is there some point you would call out?

David H. Lissy - Bright Horizons Family Solutions, Inc.

I think maybe just to put it in context, right? So, the good news is that we've been able to offset the cash losses that we – where we see in the newer centers with the two-years of centers that are now mature, so that's a good news. But when you think about it that still leaves us with a considerable amount of revenue from 60 centers that nets to zero contribution.

So until we get to another year or two, I think as we head into the back half of this year, and into 2018, and more of those next year classes start to mature, then it starts to move into positive contribution territory. And the value – in terms of margin growth – and then gets – and then value continues to get unlocked over the next – over a couple of years, not all at once, because we continue to open new classes of centers that offset that. So I think maybe we were confusing sort of the offset of losses getting to sort of net zero on that with sort of how the value truly gets unlocked once we start to see – once we see that group positively contributing.

Gary Bisbee - RBC Capital Markets LLC

Yeah, okay. That's helpful. I appreciate it. Thanks and stay warm and dry in the snow.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yeah. Thanks. You too.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

You too, thanks.

Operator

Next question comes from David Chu of Bank of America. Please go ahead.

David J. Chu - Bank of America Merrill Lynch

Hi, thank you. So at this point, do you expect the new centers to be evenly distributed throughout the year or more heavily weighted let's say to the back half or for 2017?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yeah, I mean relatively speaking on sort of the near-term horizon that we have, I'd say they may be 40/60, first-half/back-half, David.

David J. Chu - Bank of America Merrill Lynch

Okay. And then just in terms of Asquith, so what are the economics like? I mean, in terms of revenue-margin profile, do they largely compare with your other UK centers?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

They do. I mean, they're in and around the London Southeast area. So overall, revenue contribution annualized in the £73 million, £75 million range and margins in the 15% to 20% range, which is consistent with our UK business. So they do perform well there. We just have – they do have, as I mentioned, they've been new center providers. They have acquired some businesses over time. And they'll ramp those up and that will help get the margin more to that 20% range or may be north of that over time. But that's their general profile.

David J. Chu - Bank of America Merrill Lynch

Okay. And then just lastly if I can, I know we're getting close in terms of the mature centers hitting the prior peak levels. But do you think we could possibly see it exceed that this time around?

David H. Lissy - Bright Horizons Family Solutions, Inc.

Well, David, I guess the best way I can answer that is, if you go back to what happened with our mature base prior to the economic downturn in 2008, we were achieving 25 basis points to 50 basis points of growth in the mature base during that point in time. So I think, we're still even projecting about a percentage point of enrollment growth in the mature base, the P&L base, and that's still ahead of what I would call normal. So I would hope that we would get to a place where once we got back in the next two years or so, 2.5 years or so, that we would – it would still be able to eke out that – in and around that 25 basis points to 50 basis points per year of straight enrollment growth, not price, price is in addition to that, but just an enrollment.

David J. Chu - Bank of America Merrill Lynch

Okay. That's very helpful. Thank you very much.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yeah.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Thanks.

Operator

The next question comes from Jeff Silber of BMO. Please go ahead.

Jeffrey Marc Silber - BMO Capital Markets (United States)

Thanks so much. I want to go back to the post-election euphoria, but focusing more on space and maybe some large municipalities. Were there any major changes in policy either universal child care, anything else that could impact your business that came on?

David H. Lissy - Bright Horizons Family Solutions, Inc.

Jeff, as I think we've commented in the past, we've lived in environments where there have been varied forms of universal pre-K and other legislation that exists, whether it be in cities, states, cities or states. And I would say that nothing has subsequently affected our world or what we do. I would say that and I said this before that I'm hopeful, because I think that more investment is a good thing. I think that in a world where municipalities or states see it in their interest to provide funds to either support quality or to allow people to be consumers of quality and help them with affordability, I think that can help our centers, anything that can defray the cost of what parents have to pay, the portion that parents have to pay, and also really the portion that employers have to pay in their model is a good thing.

And we have some states where we have this working. We have states like Georgia and several others where we participate as a provider in the state plan and all that does is act as a third leg to the stool between what the employer pays and what the parent pays. And so I remain – we're advocates for more. It's hard to know what the fiscal realities of states will actually produce in terms of the level of funding that will come out. But certainly, I would be hopeful that more could happen in the future.

Jeffrey Marc Silber - BMO Capital Markets (United States)

Okay. Great. And forgive me, I might have missed it, but did you disclose the number of new centers that you opened and the ones that you closed? I think you mentioned the 88 centers acquired. But just to get to the 1,035 centers at the end the year, I just wanted to go back into it. Thanks.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yeah, so we added a total of 99 centers in the quarter and we closed four centers. So for the full-year, a total of 128 centers added and 25 centers closed.

Jeffrey Marc Silber - BMO Capital Markets (United States)

Okay. Thank you so much.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yup.

Operator

The next question comes from Jeff Meuler of Baird. Please go ahead.

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Yeah. Thank you. Can you remind us of the lease/consortium center margin target at maturity?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yes, so we are – those centers have an average, Jeff, $2 million to $2.5 million of revenue and the targeted gross margin is – we target 25%, we tend to model 20% to 25% gross margins there.

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Okay. And then I guess what are you seeing in some of the urban areas where you have a concentration in terms of other high-quality providers adding capacity or opening new centers?

David H. Lissy - Bright Horizons Family Solutions, Inc.

Yeah, I think, Jeff, depending on the state or the city we're talking about, there is varied competition. Mostly as we've talked to you about before, most of our competition tends to come from local providers who really do a good quality job on a very local basis, one center, two centers in a geography. And we see here and there those kinds of providers popping up. Occasionally, there's franchise groups that are opening centers in some of our markets and we see them continuing as competitors, but I would say it's not a different environment than what we've seen or what I'm seeing now then I would've answered that question last year.

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Okay. And then I just want to make sure I heard a comment that you made correctly. I think you said expanding the breadth of services in back-up care. Is there some new flavor to the offering in the back-up care business?

David H. Lissy - Bright Horizons Family Solutions, Inc.

I think I was referring to – when I said that, I think I was referring to trying to get sell more of our services to our existing clients. So, as I commented earlier about 20% of our clients purchase more than one of our services, so I talked about expanding the breadth of our services in an individual client.

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Okay. And then Elizabeth, can you just help us isolate the EPS impact from two things, the acquisition and the stock comp accounting just so we can better compare it to the last round of guidance?

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

The acquisition meaning Asquith? Are you talking about 2017?

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Yes.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Yeah. So on an adjusted net income basis, so on that basis, which is what we've historically been describing, the Asquith acquisition adds a little bit on the bottom line sort of in neighborhood of a couple of cents, not as significant in 2017 for the reasons that we talked about. The stock comp is actually quite a – it varies depending on what level of exercises occur. So from estimated standpoint, it's in the neighborhood of $10 million or so.

Jeff P. Meuler - Robert W. Baird & Co., Inc.

Okay. Thanks and thanks for getting payback on the Falcons for me.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Any time, Jeff.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

You're welcome. Okay...

Operator

There are no – go ahead.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

No, I think I was going to say, I think that's it then.

Operator

Okay. Thank you. This concludes today's – go ahead, sir.

David H. Lissy - Bright Horizons Family Solutions, Inc.

No, Go ahead, Ben.

Operator

I'll hand it back to management for any closing remarks.

David H. Lissy - Bright Horizons Family Solutions, Inc.

Okay. Well, thanks Ben, and thank you all. I know many of you are in markets where it's – the weather is equally as bad as we have in Boston. So, we appreciate you being with us and we look forward to talking with you all soon.

Elizabeth J. Boland - Bright Horizons Family Solutions, Inc.

Safe home. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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