Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q3 2023 Earnings Call Transcript
Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q3 2023 Earnings Call Transcript November 1, 2023
Bright Horizons Family Solutions Inc. beats earnings expectations. Reported EPS is $0.88, expectations were $0.8.
Operator: Good afternoon, ladies and gentlemen. And welcome to Bright Horizons Family Solutions’ Third Quarter of 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is my pleasure to introduce your host, Michael Flanagan, Vice President, Investor Relations for Bright Horizons Family Solutions. You may begin, sir.
Michael Flanagan: Thank you, Judith, and welcome to everyone on Bright Horizons third quarter earnings call. Before we begin, please note that today’s call is being webcast and a recording will be available under the Investor Relations section of our website brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook are subject to the Safe Harbor statements included in our earnings release. Forward-looking statements inherently involve risk and uncertainties that may cause actual operating and financial results to differ materially, and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release 2022, Form 10-K and other SEC filings.
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statements. We may also refer today to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available under the IR section of our website at investors.brighthorizons.com. Joining me on today’s call is Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our third quarter results, provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen.
Stephen Kramer: Thanks, Mike, and welcome to everyone who has joined the call this evening. I’m pleased with our performance in the third quarter. We delivered strong results with 20%- year-over-year revenue growth and 33% adjusted EPS growth. Full service revenue came in ahead of our expectations, with comparable high single-digit enrollment growth. And Back-Up Care delivered an exceptional quarter with used across all care types, well outpacing our expectations. Overall, as we approach the end of 2023, I'm proud of our performance and continued progress toward our near- and long-term objectives. So to get into some of the specifics. In our full service child care segment, revenue increased 17% in the third quarter to $445 million.
The typical seasonal enrollment dip over the summer months, primarily driven by older children, aging up and out into elementary school with slightly better than we expected, driving higher than projected year-over-year enrollment growth. The center cohorts we have discussed previously continued to demonstrate improved year-over-year performance. In Q3, our top-performing cohort defined as above 70% occupancy increased to 36% of our centers, which is an improvement from 25% in Q3 2022. In our bottom cohort of centers, those under 40% occupancy, represents 17% of centers as compared to 20% in the prior year period. To provide a bit more color on rolling trends, in centers that have been opened for more than one year, enrollment growth expanded to a high single-digit rate in Q3 with occupancy levels averaging 58% to 60% in the quarter.
In the US, year-over-year enrollment increased nearly 12% in these life centers with strong growth across both our client and lease models and notable ongoing momentum in our younger age groups with mid-teens growth in our infant and toddler classrooms. Outside the US, enrollment again increased at a low single-digit rate in Q3. And the UK remains our most challenging geography. Enrollment growth in the UK improved modestly in Q3 as compared to Q3 -- as compared to Q2, but as we discussed last quarter the macroeconomic backdrop's and a staffing environment continue to be a headwind to the cadence of our coverage in the pandemic. In the Netherlands and Australia, where occupancy averages more than 70%, enrollment increased sequentially over Q2 in line with our expectations.
On the staffing front, the US continued to see positive recruitment and retention trends. Staffing levels increased year-over-year, accommodating higher enrollment, underpinned by increased applicant flow and better retention rates. Outside the US, staffing trends continue to be more mixed. In the UK, labor continues to be a constraint to our enrollment and overall cost structure. As we discussed last quarter, we continue to execute on a variety of talent acquisition initiatives, and have undertaken actions to retain our existing staff, attract new qualified staff and reduce our reliance on costly agency staff. While I am optimistic that these initiatives will improve overall staffing levels and operating efficiency, these efforts will take time to drive a material change in labor costs and the profitability of our UK centers.
Let me now turn to backup care, which delivered another outstanding quarter. Revenue grew to $169 million. The 32% growth outpaced our expectations as we delivered a record level of use. Traditional network use was well above our guidance for the quarter with robust demand, notably from families who’s school children on summer vacation. The strong use growth experienced in July continued through August with our Bright Horizons centers and Steve & Kate's Camp showing the strongest growth across care types. September was another strong month of use, though the pace of growth moderated from the high concentration of use over the summer. Overall, I am delighted with the performance this quarter and the execution by our operations team to meet this surge in demand, ensuring client families will feed the care they needed to remain productive at work.
The growth and expansion of our backup services this year illustrates the broad opportunity we have within the Back-up Care segment as we leverage the investments we have been making in technology, marketing and product. Our Education Advisory business delivered revenue of $32 million, increasing 3% over the prior year. Notable new client launches in the quarter for EdAssist and College Coach included Fresenius Medical and Hubbell Incorporated. As I wrap up, I want to take this opportunity to recognize the incredible work of our centered teachers and staff teams. They have always been the key to our ability to deliver the highest quality education and care to families and clients. I am thrilled to share that we've just received the results of our Parent Impact Survey.
We again saw excellent NPS and customer satisfaction scores and heard overwhelmingly from currently enrolled families that the quality of our teachers and the impact they have on their child education sets Bright Horizons apart from our early education peers. Our business is fundamentally about people serving people. And this recognition is a great affirmation of the work we do every day. To in closing, I like the continued progress we are seeing across our business. Given our results year-to-date and our current outlook for Q4, we are narrowing our full year guidance to a revenue range of $2.375 billion to $2.4 billion, or 18% to 19% growth at an adjusted EPS range of $2.73 to $2.79. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more detail around our outlook.
Elizabeth Boland: Thank you, Stephen, and hello to everyone on the call. To recap the third quarter, overall revenue increased 20% to $646 million. Adjusted operating income of $67 million or 10% of revenue increased 46% over Q3 of 2022 and adjusted EBITDA of $101 million or 16% of revenue was up 26% over the prior year. Lastly, adjusted EPS of $0.88 a share grew 33% in the quarter. We added four new centers in Q3 and closed nine, ending the quarter with 1,063 centers. To break this down a bit further, full-service revenue increased $64 million to $445 million in Q3 or 17% over the prior year, ahead of our expectations of 14% to 16% driven by increased enrollment and pricing. Enrollment in our centers opened for more than one year, increased high single-digits across the portfolio.
Occupancy levels averaged in the range of 58% to 60% for Q3 ticking down sequentially as expected, given the typical enrollment seasonality over the summer months. As Stephen mentioned, US enrollment grew in the low double-digits, while international enrollment increased in the low single-digits over the prior year. Adjusted operating income of $7 million in the full-service segment increased $10 million in Q3. This year-over-year improvement was driven by higher enrollment, tuition increases and the improving operating leverage across our broader enrollment base. Partially offsetting the earnings growth was a $5 million reduction a support received from the ARPA government funding program over the prior year and the continued cost impact of inefficient labor and agency staffing in our UK business.
Turning to back-up care. Revenue grew 32% in the third quarter to $169 million, well ahead of our expectations for 12% to 15% growth and operating income was 31% of revenue, growing to $52 million. As Stephen detailed, use volume was higher than we anticipated, with strong use across care types, particularly in our school age summer programs. Lastly, our Educational Advising segment grew revenue by 3% to $32 million and delivered an operating margin of 26%. Interest expense increased modestly in the quarter to $11 million, excluding the $1.5 million per quarter in both 2022 and 2023 that is related to the deferred purchase price on our acquisition of Only About Children. The structural tax rate on adjusted net income increased to 28.5%, an increase of 180 basis points over Q3 of 2022.
Turning to the balance sheet and cash flow. Through September of this year, we have generated $161 million in cash from operations compared to $131 million last year. We've invested $92 million in fixed assets and acquisitions in 2023 and comparatively speaking in 2022, we had invested $251 million, including the acquisition of only about children on July 1 of 2022. We ended the third quarter of this year with $41 million of cash and a debt leverage ratio of 2.8 times net debt to EBITDA, down from the 3.25 times that that we started 2023. Moving on to our updated 2023 outlook. As Stephen outlined, we are raising the lower end of our range to the full year revenue guidance of $2.375 million to $2.4 million to reflect the revenue performance through the first nine months of the year.
In terms of segment revenue for the full year, we now expect full service to grow roughly 18% to 19%, Back-Up Care to grow approximately 20% to 22% and ed advisory to grow in the mid-single digits. On an adjusted EPS basis, we are narrowing our guidance range to $2.73 to $2.78 for the year. In terms of the remainder of 2023, this full year outlook assumes that Q4 overall revenue will be in the range of $575 million to $600 million, and adjusted EPS will be in the range of $0.72 to $0.77 for the quarter. Before I close, as we've done each quarter this year, I want to quantify three discrete items that are affecting our reported margins and earnings growth rates in 2023 that is ARPA funding, interest expense and the tax rate. In Q4, we expect those items to account for an approximate $0.25 headwind to year-over-year growth for Q4, with $13 million less in ARPA government funding at P&L centers, approximately 230 basis points higher tax rate and roughly $3 million more in interest expense.
Two notes here, the sequential step-up in interest expense to $14 million in Q4 of 2023 reflects the new quarterly run rate that we expect through 2024, as our interest rate caps step up this month. Also as a reminder, funding from the ARPA program at P&L centers, which effectively ended September 30, will be $33 million lower in 2024. So in closing, echoing Stephen's comments, we're pleased with the continued progress across the business this year and continue to be excited about the opportunities ahead. And so with that, Judith, we are open to questions and can go to Q&A.
Operator: Thank you very much, ma'am. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Andrew Steinerman of JPMorgan. Please go ahead.
Andrew Steinerman: Hey, it's Andrew. I just wanted to ask about the UK business, what gives you confidence that you'll be able to improve the UK business? And how important is it strategically to serve the UK and the US, let's say, together.
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