Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q1 2024 Earnings Call Transcript

Bright Horizons Family Solutions Inc. (NYSE:BFAM) Q1 2024 Earnings Call Transcript May 4, 2024

Bright Horizons Family Solutions Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Bright Horizons Family Solutions First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Flanagan, Vice President, Investor Relations. Please go ahead.

Michael Flanagan: Thank you, Stephanie. Sorry, thank you, Stacy. Welcome to Bright Horizon's first quarter earnings call. Before we begin, please note that today's call is being webcast and 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 statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described and detailed in our earnings release, 2023 Form 10-K and other SEC filings.

Any forward-looking statement 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 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.brighthorizon.com. Joining me on today's call is our Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our results and we'll 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. We are really pleased with the solid start to 2024 and our performance in the first quarter. Revenue increased double-digits year-over-year, and earnings outperformed our expectations. With occupancy in our full service segment ticking up to greater than 60% globally and back-up use continuing its solid year-over-year growth trends we are tracking to deliver on our 2024 guidance. So to get into some of the specifics. Revenue in the quarter increased 12% to $623 million with adjusted net income of $30 million and adjusted EPS of $0.51 per share. In our full service child care segment, revenue increased 12% in the first quarter to $484 million. We launched six centers in the quarter, including client center transitions for Aflac and Rockefeller University.

Enrollment in centers that have been opened for more than one year increased at a mid single-digit rate in Q1 and occupancy averaged more than 60%. The U.S. continues to see the strongest performance with high single-digit enrollment growth driven by double-digit growth in our younger age groups and mid single-digit growth in the preschool age group. The UK led our growth outside the U.S. While our centers in the Netherlands and Australia have had more limited expansion in enrollment, given they sustained higher-than-average occupancy levels over the last couple of years. Occupancy in the UK stepped up sequentially on mid single-digit enrollment growth. Although the operating environment continues to be challenging, I'm encouraged by the recent progress we have made to improve the efficiency of our center operations, specifically by retaining and hiring more Bright Horizons employee teachers and reducing our reliance on agency staff.

While the UK remains a headwind to our overall full service profitability, I’m encouraged by the trends and the fundamentals and expect to see continued performance gains. Let me now turn to back-up care which delivered another strong quarter, growing revenue 16% to $115 million on solid utilization. We also continue to expand our client base with Q1 launches for Lincoln National, NXP Semiconductors and United Therapeutics to name a few. Traditional network use remains strong with the largest growth in our Bright Horizons owned and controlled supply. While Q1 is a seasonally lower use period for back-up care, the number of employees utilizing their care benefit was solid in Q1 and serves as a positive indicator as we look ahead to the higher use summer months.

With this expanding participation by eligible client employees, combined with our broader portfolio of use sites, we continue to track to our 2024 growth goals. Our Education Advisory business delivered revenue of $24 million in the quarter, flat over the prior year. Notable new client launches in the quarter included Danaher, IPG Photonics and W. R. Grace. As we discussed last quarter, we expect participant levels and used to be relatively stable in this segment this year. We are making strategic investments in the team, product suite and marketing to transform both the service offering and the service experience. Ed advisory is a use-driven business, and I believe the investments we are making today will ultimately drive greater client adoption and client employee participation in 2025 and beyond.

Before I wrap up, I want to share the results of our annual Modern Family Index that we are releasing next week. For the last decade, we have explored the sentiments of working parents as they balance work and their family responsibilities. What we have seen change over the last decade is working parent's new confidence in advocating for family supports as well as their increasing expectations of their employers. For 70% of employees, employer benefits would support a work-life balance are nonnegotiable. Childcare in particular was at the top of parents wish list trumping even remote work and increase flexibility. This new view of the relationship between employers and employees is vital for the health of families and employers and it is a clear warning signal for employers who do not invest in family supports.

We are very proud to be the partner of choice for so many leading employers who are already ahead of the curve. In closing, I'm pleased with the strong start to 2024. We executed well in the quarter, and the results set a solid foundation for us to accomplish the goals we set for 2024. I believe we are well positioned to continue the positive momentum and operating discipline in Q1. As such, we are reaffirming our 2024 full year guidance. Specifically, revenue growth of approximately 10% to $2.6 billion to $2.7 billion and adjusted EPS in the range of $3 to $3.20 per share. With that, I'll turn the call over to Elizabeth who will dive into the quarterly numbers and share more details around our outlook.

Elizabeth Boland: Thank you, Stephen, and hello to everyone who's joining the call today. To recap the first quarter, overall revenue increased 12% to $623 million, adjusted operating income of $40 million or 6% of revenue increased 9% over Q1 of 2023, while adjusted EBITDA of $75 million or 12% of revenue increased 7% over the prior year. We ended the quarter with 1,044 centers, adding six new and closing 11 centers in the first quarter. To break this down a bit further, Full Service revenue of $484 million was up 12% in Q1 at the high end of our expectations on increased enrollment and tuition pricing. Enrollment in our centers opened for more than one year, increased mid single-digits across the portfolio. As Stephen mentioned, occupancy levels averaged over 60% from Q1 stepping up sequentially given the normal enrollment seasonality and the growth we saw.

U.S. enrollment was up high single-digits and international enrollment increased in the low single-digits over the prior year. In the center cohorts we've discussed previously, we continued to show improvement over the prior year period. In Q1, our top-performing cohort, defined as above 70% occupancy improved from 35% of our centers in Q1 of 2023 to 44% of our centers in Q1 of 2024. In our bottom cohort of centers those under 40% occupancy now represents 14% of centers as compared to the high teens in the prior year period. Adjusted operating income of $21 million in the Full Service segment increased $11 million over the prior year. Higher enrollment tuition increases and improved operating leverage more than offset the $15 million reduction in support received from the ARPA government funding program in Q1 of 2023.

As Stephen discussed, while the U.S. Full Service business continues to be a headwind to our overall segment profitability, we are seeing good progress in reducing the losses with improved staffing, continued enrollment gains and the ongoing center portfolio rationalization. Turning to back-up care. Revenue grew 16% in the first quarter to $115 million, a touch ahead of the high end of our expectations with adjusted operating income of $16 million or 14% of revenue. Adjusted operating margins in the quarter were affected by the closeout of the Steve & Kate's Camp earnout, which resulted in a onetime $2.3 million charge in the quarter and by the timing of quarterly overhead spending allocations. Our estimates of overhead support costs for the back-up segment for the full year is unchanged, but the phasing of these costs is reflected more ratably as the spending occurs, resulting in a relatively higher overhead allocation in the first half of the year as compared to the prior year, with the second half expected to see a relatively lower allocation as compared to 2023.

Lastly, Educational Advising segment reported $24 million of revenue and delivered operating margin of 10%. The operating margins contracted over the prior year, driven in large part by the investments we are making in the team and the product suite. Interest expense increased $2.5 million to $14 million in Q1, excluding the $1.5 million per quarter in 2023 of deferred purchase price interest accretion that we've previously discussed. The structural effective tax rate on adjusted net income was 28.3%, roughly consistent with Q1 of 2023. Turning to the balance sheet and cash flow. We generated $116 million in cash from operations in the first quarter compared to $67 million in Q1 of 2023. We made success in investments of $19 million, consistent with the prior year period.

And in early January, paid the remaining $106.5 million due for the Oak acquisition that had been deferred for 18 months. We ended the quarter with $64 million in cash and reduced our leverage ratio to 2.5x net debt to adjusted EBITDA. Now moving on to our 2024 outlook. As preview, we are maintaining our 2024 full year guidance for revenue in the range of $2.6 billion to $2.7 billion and adjusted EPS in the range of $3 to $3.20 a share. At a segment level, we expect full service to grow roughly 8% to 12%, back-up care to grow 10% to 12% and ed advisory to grow in the low single digits. As we outlined last quarter, there are two discrete items affecting our reported margins and earnings growth rates in 2024. Specifically, we expect those items to account for an approximately $0.52 to $0.55 headwind to growth for the full year reflecting lapping of approximately $34 million of ARPA funding for P&L centers that we received in 2023 and an estimated increase of $8 million to $10 million in interest expense for the year.

As we look specifically to Q2, our outlook is for total top line growth in the range of 9% to 11% with full service of 9% to 11%, back-up of 10% to 12% and in ed advisory in the low single digits. In terms of earnings, we expect Q2 adjusted EPS to be in the range of $0.70 to $0.75 a share. Regarding the discrete items I mentioned above, we expect a $9 million headwind from the ARPA support we have received in Q2 of 2023 as well as approximately $2 million to $3 million more in interest expense than last year. So with that, we are ready to go to Q&A.

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