Bright Horizons Family Solutions' (BFAM) CEO Stephen Kramer on Q3 2021 Results - Earnings Call Transcript

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Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q3 2021 Earnings Conference Call November 2, 2021 5:00 PM ET

Company Participants

Michael Flanagan – Director-Investor Relations

Stephen Kramer – Chief Executive Officer

Elizabeth Boland – Chief Financial Officer

Conference Call Participants

Andrew Steinerman – JP Morgan

Hamzah Mazari – Jefferies

Manav Patnaik – Barclays

George Tong – Goldman Sachs

Gary Bisbee – Bank of America

Jeff Silber – BMO Capital Markets

Jeff Mueller – Baird

Toni Kaplan - Morgan Stanley

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. [Operator Instructions] Plesase 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

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 speaks only as of the date on which is made, and we undertake no obligation to update any forward-looking statements. We also refer today 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

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 6 centers for the Mass General Brigham Health System, which had previously been self-operated.

Through the late summer, early fall, we continue 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 Delta variant.

That said, the underlying demand indicators for high-quality child care remains 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. And 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, our 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, as one of Fortune Magazine’s Great Places to Work and our industry-leading role as the Employer of Choice to 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 2020 strong 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 parent 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 business, 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 what 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

Great. Thank you, Stephen, and hi, everybody, who’s able to join us to this evening. Thanks for being here. I’ll also 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 have 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 in relation to 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 the COVID cases and Delta variant impact 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 8 that we opened in October and end the year with over 95% of our centers open.

As the Delta wave fall 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.

Question-and-Answer Session

Operator

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

Andrew Steinerman

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 kind of make sure we benchmark it. I think when you say pre-COVID utilization rate, you’re kind of talking about the 70% to 80% range.

Elizabeth Boland

Andrew, yes, when we’re talking pre-COVID, we’re essentially referencing the 2019 time frame since COVID started in early 2020. So that’s the general benchmark. You’re correct that the range of enrollment in our mature centers at that point was 70% to 80%. So it – that would be the target that we’re getting back. That’s what we’re aiming to get back to.

In terms of when in 2022, given the visibility that we have now with the disruption in the fall enrollment here, we have – I’d say, it’s not necessarily the first half of the year would be more building through the fourth quarter modestly. We have another enrollment cycle that comes in January. And so that is one we need to have a bit more concretely in our sites. But I think with that in mind, we see it more in the second half than the first half.

Andrew Steinerman

Got it. Thank you.

Operator

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

Hamzah Mazari

Good afternoon. Thank you. My question is primarily around labor constraints. So you mentioned not being able to fulfill kind of the demand that you’re seeing out there because of labor constraints. Could you just give a little more color as to how pervasive is that 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 was relative to your internal budget. So just trying to get a sense of how much demand are you 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 timing?

Elizabeth Boland

So it’s a, I think, a view on what we are constrained by, Hamzah, we would estimate that we probably have 2 to 4 percentage points or so of our – what we would otherwise have seen for utilization that we were not able to fulfill due to staffing having to either not open a room or not be able to take additional enrollment because of that. So it’s meaningful and had – because of the fall cycle, A, it was – it’s a heavy enrollment cycle – heavier enrollment cycle anyway, but the combination of that with the labor shortage and unavailability did impact it that way. Not too dissimilar on the back-up side, even being able to service back-up care as well.

Hamzah Mazari

Got it. And just my follow-up question is largely around just from a stimulus perspective sort of what’s in your system? And when does it kind of roll off? And as part of that, just anything around universal pre-K that you’re hearing and your view on how that may impact your business?

Elizabeth Boland

Yes. So maybe I’ll talk about the government stimulus and what we’ve been able to realize. It’s helpful. I think, as Stephen framed it, it is helpful toward defraying some of the embedded incremental costs that are in our system, whether it’s from additional notwithstanding the labor constraints we have, we still do have higher level of labor hours per child, because of more intensive ratio and staffing and just getting back to more normalcy with parents being able to drop off children and some incremental testing for COVID testing, kits hygiene, some of those things.

So there is a bit more intensive cost structure that is defrayed by these government stimulus funds. But we’re talking about somewhere between $15 million and $25 million probably annually, but we’re able to realize on that we’re able to put towards those – to that cost to frame it. So it’s helpful, but it’s not transformative.

Stephen Kramer

Yes. And Hamzah, in terms of the UPK and the other legislation that is currently being discussed by the Biden administration, look, first, we’re very encouraged and believe that it’s a great thing for early childhood education to be in the spotlight, the way it is at the national level, something that we obviously have believed in for our entire existence. And certainly, we operate in geographies, where government leans in such places as the UK and the Netherlands. And then there are pockets here in the U.S. where that has been the case as well.

In terms of where that is, obviously, that is still in discussion. And the details are not as detailed as we would like to see. On the other hand, we are encouraged and are hopeful that the money that the government is looking to put against us, ultimately, find its way through the states to make child care affordable for families and make universal pre-K available to families. We still are hesitant in terms of the quantum that is being discussed being enough to actually accomplish the ambition that the government has. So I would say that’s the only offset to our enthusiasm around this program is simply whether or not, ultimately, the ambition that they discuss is congruent with the amount of investment that they’re ultimately talking about.

Hamzah Mazari

Thank you.

Elizabeth Boland

Thank you.

Stephen Kramer

Thanks.

Operator

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

Manav Patnaik

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

Elizabeth Boland

Yes. So it’s – sorry…

Stephen Kramer

Yes. 14 in the quarter, and we closed 33…

Elizabeth Boland

Year-to-date.

Stephen Kramer

Year-to-date.

Elizabeth Boland

Yes. And last year, we closed a total of 88. And so we are over 100 through the COVID cycle, if you will. And in terms of the percentages that are – I think the percentages are more about where is the demand profile as opposed to campuses. I think you said campus is closing. There are – it’s a split between our lease model centers and our client centers. But I would note one thing that’s a little bit – one notable thing about the closures this year is that we have seen a more normalized, if you will, level of closures in our UK business. They did not close hardly any centers immediately after COVID, there were very strong structural support for the workforce, they really worked hard to get centers.

The whole economy was working hard to get everything reopened. And so we did reopen a number of centers there that have proven to be not economic over the long run in terms of the utilization and the demand profile. And so they do feature a little bit more this year than the UK group did last year. So I think that’s just one piece of color commentary, Manav.

Manav Patnaik

Okay, got it. And I was also hoping you could help us just distinguish the performance between your lease consortium centers in the U.S. perhaps? And then, obviously, I understand the delta variant and the office location delays. I guess, just trying to get a flavor of whether at least on the retail side, the more lease consortium side things are ramping up faster.

Elizabeth Boland

Yes. It’s actually – there’s not a really discernible difference there. The client centers, I think like they always do when they’re opening or re-ramping, they tend to have a bit more enrollment than the lease consortium centers. And we’ve seen, it’s a couple of percentage points different. It’s not a meaningful change, but not seeing it different because of a client sponsorship versus lease compared to our history.

Manav Patnaik

Okay. Thank you.

Elizabeth Boland

Thank you.

Stephen Kramer

Thanks, Manav.

Operator

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

George Tong

All right. Thanks. Good afternoon. 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

No. I think, look the quarter openings, I think actually give us quite a bit of confidence in terms of the level of interest and the speed of which these decisions continue to be made. So overall, I think our pipeline for new centers, specifically client centers continues to be robust, and those come in, in terms of new builds as well as in terms of transition opportunities for those who today self-operate. And so certainly, I think the quarter’s results and openings as well as, as we look out into the future, we feel good about continued cadence of conversation and discussion as well as significant interest in the on-site centers.

George Tong

Got it. Very helpful. You planned to end the year with over 95% of your centers open. When would you expect to have 100% or all of your centers fully opened?

Elizabeth Boland

Yes. So we have this – George, for the vast majority of the centers that remain temporarily closed. There’s probably fewer than five that have dates after the first half of next year. So it’s mainly between Q4 and then the first half of 2022.

George Tong

Got it. Thank you.

Elizabeth Boland

Thank you.

Stephen Kramer

Thank you.

Operator

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

Gary Bisbee

Good afternoon. So I want to go back to the labor pressures for a minute. Thanks for sizing that. That’s helpful. Can you maybe size or help us understand a little better how you’re dealing with this? Obviously, one of the crown jewels of your model has always been the ability to price in excess of labor. Is there any risk to that? And are you having to raise wages meaningfully? And then the second part of the question is just is there anything on the horizon that you think can really help the situation? Now that schools are back and in many cases, day care is back, I think there’s an expectation that there will be more women returning to the workforce. And is that likely to give you help? Or just how are you thinking about managing this dynamic on the cost side? Thank you.

Elizabeth Boland

Yes. Well, I can take the first part of the question, Gary. I think that our view is that the underlying economics of our model are intact, although as we’ve said the last couple of calls that there might be relatively higher wage pressure in the near-term that may take a cycle or two of tuition increases as we balance out price and cost to the parents with getting enrollment back and being attractive in that way. So we are certainly at the high end of our wage – our historical wage pattern. You’ve heard us talk about 2% to 3% or in a higher market 3% to 4% wage increases and we’re certainly seeing that on average 3%, 4% or 5% as an average wage inflation in our sector.

With that, some structural, more meaningful structural changes in some of our key markets where cost of living is even particularly higher or there are other constraints on the labor force. So we’re putting real money behind this are able to with our price increases that we’re expecting for the early part of next year, able to recoup a good measure of that. But we, again, want to balance it out and expect that we will have more meaningful tuition increases this cycle and the next cycle in order to get that back into its usual 1% differentials over time.

We do think that that’s intact. I think that’s the fundamental question that you’re asking that we will be able to continue to price in the way that we have against the underlying cost structure, but it is a fluid market.

Stephen Kramer

And Gary, I guess, I would just add. Look, a really important element of our model in addition to what you just described is being an employer of choice. And so we continue to make sure that we are focused on being an employer of choice within our sector. We are absolutely making investments in wages. We’re making investments in benefits. We are also highlighting opportunities for career progression that are made possible by things like our fully paid for CDA or fully paid for Horizons future degree program that allow individuals to join us and ultimately build a career doing really important work of caring for an educating young children.

And so again, as Elizabeth said, we think it will take a couple of cycles from a cost perspective. But we believe it’s absolutely the right thing to do, and we believe it is going to continue to position us well to attract early childhood educators into the market.

Elizabeth Boland

And just to add to that, we did mention that we do have some of this support coming through government direct subsidies that helps to – it’s pointed towards many of these very initiatives. So that also, I think, helps to support that in this intervening time while those programs are in place.

Gary Bisbee

And are those going through the end of next year? Or it’s not clear to me which programs you’re – are you in some of the ones that go through 2024? Or what – do you have a sense when it ends?

Elizabeth Boland

Well, I think that it does vary state by state, and it is – it’s not always clear how quickly the states are going to fund. We are expecting that there will be probably the bulk of the spending will be under ARPA. The Consolidated Appropriations Act has had some funding into 2022 ARPA going through 2022 and some into 2023, but we’re not – I think we’re not counting on it going beyond that.

Gary Bisbee

Okay. That’s helpful. And then just one follow-up. There’s been this debate that around is your network sort of the best setup network in a work – flexible work environment. How have your – I don’t think I’ve asked you about it in more than six months. How are you thinking about that? Is there a need, over time, do you think at this point to have more of your network be community based? And if so, when we get back to some level of normal, would you expect to accelerate from the pre-pandemic pace the openings of lease consortiums? Or do you think the network is still relatively optimal as you’ve got it set up today for a period, whether that’s 12 or 18 months from now when we’re in sort of a new normal?

Stephen Kramer

Yes. So, we really like the positioning that we have and the network that we have. As always, our first priority is continuing to work with employers to support their employees directly. And that comes in the form of employer-sponsored sites. They are on-site at their work locations, which, as we’ve shared, continues to be an attractive model from both our perspective, but equally importantly from the employer’s perspective. And so we’re continuing to see good demand in that regard. In addition to that, we are continuing to partner as we always have on the lease consortium side to find locations that are attractive to our employer partners where they can invest alongside of us.

And ultimately, those lease consortium models get approved on the basis that the community around them can sustain and provide the economics that we’re looking for. But at the same time, we know that we’re citing in locations that are attractive to our employer partners. And so ultimately, we continue to see the mix look very similar to what the mix has been, and we continue to evolve with our client partners as it relates to where we are citing locations going forward, but feel really good about the locations as they exist today moving into the future.

Gary Bisbee

Thank you.

Operator

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

Jeff Silber

Thanks so much. I was wondering if you can talk about the competitive environment. I know a lot of the smaller players ran into trouble last year, some of them didn’t reopen. But we’re seeing some of the larger players get larger. I know they do more of the retail side than the worksite, but some of them also have sizable worksite components. Can you just talk about the dynamics, what’s changed over the past year or so?

Stephen Kramer

Yes. I think, look, the research suggests that about 10% of the center of capacity has been permanently closed. So, I think it’s safe to say that there has been a contraction in the overall size of the market. I think it is also true to say that, again, we continue to be focused on our growth profile as do others in our sector and ultimately believe that there will be additional consolidation opportunities within our industry. I think there have been fewer in the sort of near term than we may have expected, and it comes back to the fact that there has been very directed government programs to support child care. And so I think that during this intervening difficult period, some providers have been able to sustain on the basis of some of that additional government support.

That said, over time, we do believe that there will be consolidation. We do believe that we are well positioned to ultimately be one of the key consolidators as we have historically been. From a competitive standpoint, I think that we still have a market share advantage over any of our competitors. And so to the extent that, for example, one of the large retail competitors has somewhere less than 100 centers, that still is a small base compared to our employer-sponsored focus. And ultimately, I think they continue to see opportunity on the retail side and less so on the employer side. And as we’ve stated time and time again, our focus really continues to be on that employer-sponsored piece, where we think we continue to lead by a fairly wide margin.

Jeff Silber

Okay. That’s helpful. And I just wanted to follow up from a comment you mentioned earlier to the question about wage inflation and passing that through. I think Elizabeth you said it was going to take a cycle or two. Can you just clarify what you meant, when do you typically raise prices? Can it be done if – I get a new customer coming in, can be done fairly immediately? Just talk about that dynamic, that would be great.

Elizabeth Boland

Yes. So, we typically raise prices once a year. And given the COVID disruption, we actually have calibrated to a January cycle. So that’s when we’re looking at our next increase. And so it’s not to say that we couldn’t do a midyear increase if there were some exogen circumstance or change in what was going on. But we typically do it just at that time. So, new families who are joining on the rate whenever they do, if they come in July, they pay that rate until the next cycle in January or when their child just up.

Jeff Silber

Got it. So when you set a cycle or two, you mean like a year or two to recoup those costs?

Elizabeth Boland

Yes, exactly. We have – the environment we’re in now, we’ve been monitoring it. There is – 2020 was obviously a non-typical year. This year, we have seen the wage inflation coming in or coming on stronger in the last several months. And so we can now, with that information, calibrate the increases for January and then be able to – how is it actually playing out through next year to set the rates for 2023.

Jeff Silber

Okay. That’s really helpful. Thanks so much.

Elizabeth Boland

Welcome.

Operator

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

Jeff Mueller

Yes. Thanks for taking the question. In terms of back-up care, what fulfillment channel was staffing constrained? And did you pivot the delivery to other channels or other partners? I ask because the year-over-year growth in Q4 sounds like it’s good. So not sure if the issue has been resolved or if it’s ongoing or if the year-over-year trend is more about the seasonal contribution from Steve & Kate’s or the easier comp or something like that?

Stephen Kramer

Yes. So Jeff, thank you for the question. What I would say is that we did have staffing challenges in centers and in-home, more pronounced on the in-home side because, obviously, there is much less leverage, right? It’s one caregiver to one child in that format. And so certainly, on the in-home side, we felt more pressure in certain markets on certain peak days. That said, as we mentioned earlier, we are taking significant action to try to ameliorate some of those staffing challenges.

But nonetheless, I would say it was more on the in-home side. We are expanding our network of in-home agencies. We’re definitely putting more investment into CNS and those home caregivers that we employ directly and so ultimately feel like we are going to overcome those challenges in that way.

Jeff Mueller

Okay. And then the Q4 Back-up care margin sounds quite good. Is that less in-home delivery? Is that unused capacity that you get some like catch-up for? Just what’s driving that to 35% to 40%?

Elizabeth Boland

Yes, it’s on – obviously, on the higher end of where we would typically see longer-term margins there, Jeff. It is down to – Q4 just sequentially have some relative uplift to the rest of the year. So there’s a bit of that playing in. But it is as we come back to a more normalized level of actual traditional use center paying those third-party providers and what that mix is. It’s just our, what the – essentially what the flow through would be in this environment while we’re still rebuilding to a more traditional use consumption against the revenue.

Jeff Mueller

Okay. And then just last, how is Back-up care sales planning with clients looking for 2022. There’s – you had a lot of clients sign up through the pandemic, and I think there’s been some hope that there’s been upsell at some point. Just are you seeing that? Or what are you seeing for 2022 Back-up care sales?

Stephen Kramer

Yes. So I think that, what this quarter demonstrated and what we continue to see in the pipeline is that despite the increase that we saw through COVID in terms of interest and sales in our backup line of business, we continue to see a robust pipeline going into 2022. Employers make decisions at different rates and a different cadence. And so we continue to have really productive conversations. We continue to work on our cross-selling against those who today buy Ed advisory or our centers. And at the same time, we continue to attract through our back-up line of service, a number of new clients to the Bright Horizons family. So I would say, Jeff, very specifically going into 2022, we feel good about our pipeline, and we can continue to feel good that we’re going to be closing a number of new Back-up clients.

Jeff Mueller

Okay, thank you.

Stephen Kramer

Thank you.

Operator

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

Toni Kaplan

Thanks so much. You mentioned the occupancy levels being flattish sequentially and you talked about a slower ramp for utilization versus previously. And this seemed like a bit of a change versus last quarter on the call, you talked about sort of sounded very positive around reopening post Labor Day, maybe plus 30 or 60 days. So if you had to sort of parse out the drivers of the change, you’ve talked about the Delta variant and the labor impacting sort of the staffing levels, are there other factors that you would call out beyond those? Or were those really the bulk of what’s somewhat changed here?

Elizabeth Boland

Yes. I think the, those are the two primary drivers, Toni. The Delta variant having an impact on sort of the general apparent behavior. The Delta variant, in particular, having some higher elevated level of anxiety around its effect on children or the exposure for children that I think brought a level of response from parents that was different than some of the previous variants or the that we had seen. And all of that came at the time when many would have otherwise been signing up to enroll and that employers were making different decisions about work arrangements. And so the disruption to routine and what people were planning for, it had a variety of effects, but we’ve sort of all put it into the rubric of the Delta variant in that timing.

The staffing challenges then added to that and have become – they’ve been coming but as enrollment has come back and there is more demand. We do feel very good – notwithstanding what I just said about parents, we do feel good about all the parts who, a have come back, they have expressed interest, they’re enrolling. So there is good momentum there in many respects with the demand side and the interest level, but not being able to service all of it is just sort of an ironic sort of additive to an environment where we’re also seeing parents pause.

Toni Kaplan

Yes. That makes sense. And I wanted to ask a follow-up on hybrid. So just curious about your thoughts on offering employers the option of going to any of your community centers instead of like assuming that they do have an on-site center. So just sort of opening up that flexibility, I imagine the employer could still maybe offer a subsidy like they do for the on-site centers. And obviously, that would maybe detract from some demand for the on-site. So maybe that’s why they don’t do it. But just is that a possibility at all? Is that being sort of thrown out there to employers? Just how should we think about that?

Stephen Kramer

Yes. So we certainly evaluated that and had conversations with our employer clients about the network of centers that we have that could serve their employees more broadly. And at the same time, we’ve done a lot of survey work with parents directly. And what I would say is the outcome of both the conversations the survey work and also just the actions that parents have taken is suggestive that while families and working parents may decide to work a hybrid schedule, they want consistency of care for their children.

And so ultimately, what we’re finding is whether a family chooses their on-site center or in those cases where an on-site center is not available, and they’re choosing a center close to home or close to work, they are choosing a single center. The other thing that’s really interesting about both our inquiries and enrollment profile is the vast majority of our enrollment and inquiries are for full-time care. And so that’s very consistent with what we saw at pre-COVID. And that continues to persist because, again, I think the overriding factor for families is that consistency of care for their child.

They know that, that’s the highest quality experience to have a single set of teachers, consistency of classmates. And so that is the prevailing decision that they’re making irrespective of what they’re deciding to do with their own work accommodations.

Toni Kaplan

Got it. Thank you.

Stephen Kramer

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

Elizabeth Boland

Thanks, everyone. Good to talk with you.

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