Greetings and welcome to the Bright Horizons Family Solutions Third Quarter 2017 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Lissy, Chief Executive Officer. Thank you. Mr. Lissy, you may begin.

Thanks, Bob, and greetings from Boston, and hello to everybody on the call today. Joining me on the call today are Stephen Kramer, our President; and Elizabeth Boland, our Chief Financial Officer. And as usual we'll begin with Elizabeth going through a few administrative matters before I kick off the call. Elizabeth?

Thanks, Dave, and hi everyone. Thanks for joining us on the call today. For reference, this call is being webcast, and the earnings release that we issued after the market close today as well as a recording of today's call are, or will be, available under the Investor Relations section of our website, brighthorizons.com. Some of the information we're providing today includes forward-looking statements such as those regarding our operating strategy and financial outlook for the rest of 2017 and 2018, as well as expectations for revenue growth, operating margins, acquisitions, and contributions from lease/consortium centers, integration costs, business segment contributions, growth plans, center openings and closures, capital investments, interest expense, foreign currency rates, tax rates, adjusted net income, EPS and cash flow. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially. These risks and uncertainties include those described in the risk factors of our Form 10-K as well as our other SEC filings. 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 detailed and reconciled to their GAAP counterparts in our press release and will also be included in our Form 10-Q when filed with the SEC, and will be available in the Investor Relations section of our website. So Dave, back to you, with the review and update on the business.

So thanks, Elizabeth, and hello, again to everybody on the call. As usual, I'll update you on our financial and operating results for this past quarter and I'll provide you with an updated outlook for 2017. Elizabeth will then follow with a more detailed review of the numbers before Stephen, Elizabeth and I open it up for your questions. We were pleased to continue our strong performance in the third quarter of 2017. Revenue increased 13% to $433 million. Adjusted EBITDA increased $7 million to $77 million, and adjusted earnings per share of $0.62 increased 27% from last year. Our top-line growth of $49 million included solid contributions from each of our three lines of business. We added 10 new centers to our network this quarter, including new centers for PepsiCo, Salesforce, Sheetz (03:06), Weill Cornell Medical Center and West Virginia University Hospital. Back-up revenue increased 13% and ed advisory grew 37% in the quarter from new clients, expanded utilization and rate increases. Recent new client launches for these two segments include the Bank of New York Mellon, EntIT Software (03:28), Piedmont Healthcare and DaVita. As we move ahead to the end of the year, we continue to be on track to achieve our 2017 targeted growth levels in each of our lines of business. We also continue to deliver strong and consistent results in our core operations, even as we make investments to support continued growth and efficiency and to expand the business in strategic ways. Operating margins of 11.2% for the quarter, which excludes certain transaction costs, and I'll talk about more in a minute, are in line with our previously discussed expectations for the year. As a reminder, there are three primary areas that are impacting margins this year, offsetting other underlying operating leverage in 2017. First,…

Thanks again, Dave. So again, to recap, overall revenue was up 13% or $49 million in the quarter. The organic growth approximates 7.5%, with 5% coming from full service and 2.5% coming from our back-up and ed advisory services. Acquisitions, most significantly the Asquith centers, added a further 7% growth in the quarter. And center closures offset top-line growth by 2%. Gross profit increased $12 million to $103 million or 23.8% of revenue, which is consistent with 2016 levels. And adjusted operating income increased to $49 million or 11.2% of revenue. On a segment basis, the back-up division expanded over $7 million on the top-line, which translates to 13% growth, and ed advisory services was up over $3 million, or 27%. All of this from a combination of new client launches and expanded utilization by our existing client base. The $39 million increase in full service center revenue was driven by rate increases, enrollment gains and contributions from new centers. We didn't have any meaningful FX effect in results in the third quarter. At the operating margin level, we generated operating margin income of 26% in back-up and 29% in ed advisory this past quarter. For these two smaller segments, revenue growth and margins can vary a bit from quarter-to-quarter based on the timing of our new client launches as well as the service utilization levels and the investments that we're making in the growth and service delivery, including the technology and marketing investments that Dave discussed earlier. Operating margins are on track with our plan for 2017, and since these operating margins in these two segments are two times to three times what we earn in our full service centers, we continue to see their revenue growth and operating performance contributing to margin expansion over time. Turning to full…

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. Our first question comes from the line of Andrew Steinerman with JPMorgan. Please proceed with your question.

I hope it's okay to ask about 2018, even though you said not detailed guidance yet. When you talk about 8% to 10% revenue growth, could you give us some sense of the organic revenue growth piece to that?

Yes. So, Andrew, that would include a typical component of 1% to 2% coming from acquisition contributions because this has been a pretty typical year this year, and we would expect a typical year next year. So the organic growth would be 6% to 7% – 6% to 8%, I guess on top of that – sorry, 7% to 8%.

And is that post-closings or pre-closings?

Well, with 8% to 10% total, that would be post-closings.

Okay. Thank you.

Thank you. Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Please proceed with your question.

Hey, guys. Good afternoon.

Hey, Gary.

So first question, I guess, one might argue given that Asquith goes from a drag to getting the synergies and some of the other things you've called out, that you might actually have margin expansion, potentially above the long-term trend that you've called out historically. And yet, you're sort of calling for getting back to that. I realize it's early and this isn't official guidance yet. But are there any major puts and takes that we should think about when we try to frame that early read on margins for next year?

Well, as you said, Gary, it's early, and we're trying to give you a range of what we see now. And we think – it's early to sort of call the quarterly flow of the pick-up that we'll receive or the value that we'll receive from the lease models as they ramp-up. And as you know, that's not as smooth as – quarters can move around a little bit on that which affects the full year. I think the most important part is, from my perspective, is we expect to regain margin leverage that's consistent with what we experienced – had experienced prior to this year, given the things that we have called out which had produced the sort of lack of it this year, which were the investments we've made and the Asquith acquisition. So where we'll fall within that or what the ultimate opportunities are, we'll be able to have more clarity when we talk to you as time plays out and certainly by the time our next call happens. So I think the important part is, I think that based on what we're seeing, we do expect to return to where we – in the range of where we've been.

Okay. And then on the technology investments, it sounds like you've made good progress year-to-date and certainly understand the potential to all of those. But what's a reasonable timeline to think about the efficiency follow-through from the investments? There is probably a lag after you get the stuff up and running and people getting comfortable with it and starting to use it. But should we think that this is something that starts to play out next year? Or is this really longer-dated benefit?

Yeah. Yeah, I mean – I think we're – it's a little too early to call as it relates to next year. I'll let Stephen offer some color since he oversees a lot of that. But from just big picture, without being able to call how much of it will be sort of later next year versus 2019 and kind of the exact timing of all that, the two major sort of value creation areas that we expect to gain from technology, one is, as you point out, which is efficiency, that is obviously more automated service delivery, less human interaction with call center, things like that – that will drive just better efficiency in the service which is positive. But also probably the bigger lever is the improvement of the use of our services within the workforces of the clients that we serve. And obviously achieving that, given that things like back-up and ed advisory, there is a direct correlation between the use of those services and revenue that we gain. Those are there the two sort of headlines, but I'll let Stephen give you a little more color on it.

Thanks, Dave. So I think the way we're thinking about it, first and foremost, is we're really trying to really enhance the customer or end-user experience as a first priority with a secondary priority obviously being ultimately driving efficiency. So when we think about the idea of really achieving more self-service, more on-demand, more real-time access to our services for our end users, that really becomes our first priority. And then as Dave said, the other piece of this is really personalizing our outreach so that end users really do meet us and we meet them when their need actually is occurring. And so first and foremost, I think the priority for us and ultimately from your perspective, you should be contemplating – is really enhancing that user experience, trying to drive additional use; that ultimately will translate into growth. And then secondarily, the additional side benefit of that will be efficiency on the back-end as it relates to things like contact center and other direct intervention that we normally would have to do.

So let me use as an example here. My firm has a relationship with you guys on back-up. I go through the open enrollment pamphlet, it's towards the back of it, like half a page or something. Is the thought process that you get the app and all of that listed in that kind of thing or that you find a way to market to me, as an employee of a company you have a relationship with, such that I – I guess I'm trying to figure out how the one gets to the other. How do you get me on the app so that I could then become a user? Or is it just people that have already used it are going to find it a lot better so they will use it more? Is that more how you're thinking about it?

Yes. So your example's a great one. So it's actually both. So the first is that we are trying to increase the number of end users who participate with our programs. And the way we're going to do that is through engagement tools. Obviously, we need to go through their employer, but ultimately trying to drive engagement through communities, discussions and other resources that employees will have access to. And the idea is that employers will be more interested in marketing when there is something that employees will get aside from just access to our service. Then when we move to the actual user and someone who has registered, raised their hand once, our goal really is to keep an ongoing relationship with them and continue through personalized journeys to anticipate their needs, and ultimately help them to understand how our service will meet them at their needs. So, for example, you may have used our back-up care service for Martin Luther King Day in 2017. And so as we lead up to Martin Luther King Day in 2018, we would let you know that Martin Luther King Day is coming up, last year you utilized our service, we want to make sure that you remember us again this year. Or we know that snow is coming to the Midwest, and therefore, we will hit all of the end users who have raised their hand and send them a personalized message about that weather so that they think about us in that point of need.

Got you. And then just one last quick one, Elizabeth, can you give us just the terms of interest rate swap? What are you trading for what? Or have you put out a filing with that? Maybe I missed it.

No, I don't think we've put out a filing about it. Essentially, we have fixed just over 4% cost of money on $500 million tender, for four years.

Okay. Great. Thank you.

Yeah.

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Yeah, thank you, good evening guys.

Hey, Manav.

My first question is just on the decision to leave Ireland. I mean I know you said the employers there today at least weren't, I guess, looking to sign up on the full-time centers. But it sounds like with Brexit and so forth, there is a lot more who are trying to get in there. So I guess, was that a premature decision maybe? I was just trying to understand, using the case study in Ireland as an example of maybe how you might enter another country in Europe?

Yes. Manav, just to provide you a little more color, we've been there for quite some time, and I think that just going back to our – the sort of focus, as I've talked about before, what from – as we look around the world at different countries, what is it about a country that would make it attractive for us to operate. And what we really would look for is either one or two sustainable sort of funding mechanisms. One is whether or not there is an incentive or a realistic expectation that employers will participate in the way they do in the U.S. and to a lesser degree, in the UK. Or there's a sustainable funding mechanism that supports quality and affordability, much like what happens in the Netherlands. And if we don't have either, we're essentially operating in an environment where it's great retail. When we entered Ireland, there was a tax scheme put in place that incented developers that made our entry into Ireland really very capital-light because it incented real estate developers to put in money to build child care centers in the developments, and we would operate. And I think what we – so initially, we thought we would be able to operate with that as a driver and that employers might jump on and support it beyond that. What we found in time is, unfortunately, we weren't able to prove enough enrollment at the price point that it took to operate without employer investment. And we weren't able to get employer investment. So I think what we had to do was say – we stopped probably eight years ago, we haven't added a center there. And we just managed the small group of centers that we've had. And the couple that we had were fine but after a while, it's just a small group of centers and no growth prospects. We believe there's lots of other places we can invest our time and energy. We found a little provider who wanted to take them over and we created an exit that made sense for us. So I don't – we wouldn't have done that if we believed that there was a lot of good future growth opportunity there. There was nothing that suggested that. And in fact, really most providers that we've gotten to know there have not fared well. And so – at scale, and so there is a few local smaller ones, but at scale. So there are other markets around the world that we're currently operating in, and that maybe someday we'll operate in that we could get much more excited about dedicating our time and energy to.

Got it. And then on the margin expansion of 50 to 100 basis points, I guess, to next year, can you break out the components that drive that? And I'm guessing it probably is the lease/consortium going from a drag of 10 to 20 basis points to maybe a positive, but what are the other components that you are assuming in that number?

Well, we would probably be looking at 20 to 25 basis points coming from the continued growth of our back-up and ed advising businesses that are able to sustain their margins and contribute at a level that's higher than full service. As you say, the lease/consortium centers beginning to contribute as we convert from being a headwind to a slight tailwind. And then I think the execution of – the same components of the rest of execution in the full service business of continuing to open new centers and ramp centers and contribution from tuck-in type acquisitions. So the pricing to cost discipline we would expect to be able to continue to sustain and it's those components that would be – full service maybe contributing a bit more than the back-up and ed advising would be able to, but that's the rough headline.

Got it. Thanks a lot. guys.

Sure, thanks, Manav.

Thank you. Our next question comes from the line of David Chu with Bank of America. Please proceed with your question.

Hi. Thanks a lot. Just wanted to ask if fall enrollment trends met your expectation, and if there is anything you need to call out relative to the past few fall seasons?

No, I think – David, it's a good question. But you know based on what we see now, we're pleased with the way it trended. I think we're continuing sort of the natural trajectory of rebuilding enrollment like we do in the fall. And we hit our peak at the end of the first quarter, beginning of the second quarter or so. And normally in full service enrollment – but I like what we're seeing in terms of the trends. And it's fairly even, it's not like we have a few areas that are over-contributing and everybody else is not. I mean, on a relative basis, it's across the board. So we're pleased with what we see.

Okay, great. And is there any reason why we shouldn't expect a comparable, like 10% to 12% growth for back-up here, 15% to 20% for ed advisory for 2018, just from a high level?

No. That's in the ballpark of what we would be continuing to see in terms of the growth contributions from them.

Okay. Great. Thank you very much.

Thanks.

Thank you. Our next question comes from the line of Jeff Meuler with Baird. Please proceed with your question. Jeff P. Meuler - Robert W. Baird & Co., Inc.: Yes. Thank you. In terms of the really good performance on the ancillary services, I know you called out that it's both increased usage and cross-selling. On the cross-selling piece in particular, are you doing anything differently to get the success? I know that's long been a big opportunity for you. So, I guess, first, are you having increased success with the cross-selling? And if so, are you doing anything differently to get it?

So I'll answer that in two ways. The first is, yes, we are having increased success cross-selling. And the reason I think is we have changed both structurally and incentive programs to align ourselves with better cross-selling. So to be really specific about it, we now have our sales teams pointed directly at our existing client base in addition to going after prospective clients, so ones that would be new to the family. Whereas, historically, our account managers had the expectation that they would grow their current relationships and ultimately cross-sell. But instead, we have recognized that within our environment, a partnership between people who have relationship skills and relationship orientation, with people who are more of the cultivators on the sales side, makes for a stronger and more energized effort. And then the second is that we have moved to a model where we really are providing the incentive directly to those individuals that are on the sales team to go after those existing accounts. Jeff P. Meuler - Robert W. Baird & Co., Inc.: And the sales team – just what services do they all sell? Do they have the full toolbox of services for the entire sales force, or...?

Yes. So first, when we think about anyone who is going in to sell within our employer prospective client base, the expectation is that regardless of what their core selling proposition is, they go with the full suite of services that we offer. We do have a dedicated team that is going after our ed advisory opportunity that is distinct from those who are going after our dependent care services, specifically child care centers as well as back-up care services. Jeff P. Meuler - Robert W. Baird & Co., Inc.: Okay. Thanks, Stephen, and thanks for the reminder, snow's coming to the Midwest. And then on the comment on the tax rate for 2018 being higher, I just – what's the underlying drivers that lower assumption in terms of the stock comp benefit? Or why is it higher in 2018, and if you can quantify it at all?

Yes, so our estimate, Jeff, would be that it would be maybe 2 to 3 percentage points higher than this year. And the reason for that is that the stock compensation effect, which is a fixed number, if you will, it's not fixed in that we can estimate it. We can ballpark what it may be based on equity that's outstanding and exercisable, but it's dependent on people exercising. And then it's a credit to the tax expense. And proportionately, it will be less of an effect as the rest of our tax expense increases, the rest of our pre-tax income increases. And so it has a less beneficial effect over time, as we're a growing company. So that's why we're estimating a 2 to 3 percentage points increase in the tax rate. Jeff P. Meuler - Robert W. Baird & Co., Inc.: Okay. Thank you.

Thank you. Our next question comes from the line of Anj Singh with Credit Suisse. Please proceed with your question. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC: Hi. Thanks for taking my questions. I had a question on the Asquith center closures. Is the amount of closures you're mentioning there incremental to what you had anticipated when you made the deal or not really? And then maybe asked another way, would you be able to give us a sense of what the percentage of Asquith center closures looks like versus other sizeable deals you've done in the past?

Anj, the real issue isn't that they're any different. I think when we did diligence in Asquith, not unlike when we do diligence on most larger groups, we always circle up some centers that are not performing that hadn't been performing for the previous provider. We think our first hope and our first goal is try to do what can to obviously help them to get better. Some are – they're all different in terms of what the ability is to continue to operate versus when the timing is that you can possibly get out given leases or given contracts, whatever it may be. So they're not all created equal. What we don't know when we do diligence and what we don't know until we get into it is kind of the timing of it. So it's not like the numbers of centers changed at all, it's just that we have the ability to have some of them be affected slightly sooner than we thought. And we're taking advantage of that opportunity. But it's not – I mean, I don't have the exact numbers as it relates to how many ultimately will close in front of me versus how that compares to previous groups, but I can tell you ballpark that it's about the same percentage of centers. It seems to always be the case that there is a grouping of centers in each deal where that's a – where what I'm talking about exists. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC: Okay, got it. That's super helpful. And then for a follow-up – sort of changing gears, could you give us an update for what your utilization levels looks like? I know you've been closing the gap towards the 78%, 88%, 80% target of level. I just wanted to get on an update there in light of the strong performance that you guys have been putting up? Thank you.

Yeah, I mean, broadly speaking, we're pretty close to back to that high-water mark in our mature P&L centers. There's a little bit of room to go there, but overall in that high 70s range for our core enrollment. So the growth that we're seeing now is slightly what we would typically see, I should say, in a mature center environment we would have a little bit of room to grow enrollment, be more efficient with it. And we have a little room to go there, maybe another 0.5% or so over time, but we've – the slow climb back to sort of steady state is where we would say we are at this point. And now it's a matter of sustaining enrollment, continuing to eke out a little bit of efficiency and growth there and open new centers. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC: Okay. Thank you so much.

Thanks.

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Hey. Thanks. It's Henry Chien calling for Jeff.

Hi, Henry.

Hey, guys. Just a quick one, this quarter, how many centers did you open and close (41:46)?

Yeah. So as Dave mentioned in his remarks, we opened 10, we added 10 new centers, and we closed a total of 20. So, a net decrease of 10.

Okay, got it. Thank you. And I was just curious on the organic growth and your strategy for 2018. Just curious if you can share some more color on how you're thinking about expansion for next year, whether you're planning to accelerate or pick up the rate of new centers and any change in the type of markets that you are looking to open in? Thanks.

Yeah, I mean, I think broadly speaking, I think what you can expect from us in 2018 is similar to what you have seen from us in the past. I mean, numbers of new centers will continue to grow. And I think both on the lease/consortium centers and also on the employer side, we'll see good consistent growth in 2018, contribution from new centers, both here in the UK and also in the Netherlands. And I think you'll continue, again, broadly, to see the back-up division grow in the range that we've been talking about, in 10- to 12-ish range, and then ed advising growing in the neighborhood of high teens to 20% range for next year. And then as we always do, we have a pipeline of acquisitions that we cultivate, and it's always hard to predict the timing there. So acquisitions will be lumpy. In our base forecast, we consider a small number of tuck-in acquisitions based on the pipeline that we already have, and then there is always the potential for upside if we could get things done sooner than what the base plan calls for and that would add to it. And then in terms of new markets, we continue to be active in looking but there's nothing that we can report to you today to say that you should expect anything in terms of a new country. Although in the longer term, that remains something of interest for us.

Got it, okay. That's helpful. And just shifting to the – specifically the back-up dependent care services. Is there any reason that margins – or could margins expand in this business with this incremental growth? Or is there anything that may hold it back for next year?

We really see the back-up business as one of more of a growth story than a margin leverage story. We've been talking a fair amount about some of the investments that we're making in the technology and marketing space. I think those would be important to sustain going forward. It has a lower fixed cost component than full service, so it already comes with a higher margin going in. And so while, of course, we will strive to continue to operate more efficiently year-over-year what we look at is a pretty stable margin that we can stay in the range of 25% to 30% operating margin range. And so it's less about leveraging that over time, a little bit of eking out perhaps but that's really what we see there as sustaining those margins, not trying to leverage – or we'll try to leverage them but not counting on leverage in that arena.

Got it, okay. Thanks so much.

Thank you. There are no further questions at this time.

Okay, Bob, thank you. And thanks for everybody for joining us today for the call. As usual, Elizabeth and Stephen and I will see on the road in the coming months and talk to you thereafter. Have a good night.

Thank you.

Thank you.

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