Bright Horizons Family Solutions Inc. (BFAM) Q4 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Bright Horizons Family Solutions Fourth Quarter 2017 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] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, David Lissy, Executive, Chairman, Bright Horizons Family Solutions.

Thanks, Omar. And hello to everybody on the call today. Joining me today on the call are Stephen Kramer, our CEO; and Elizabeth Boland, our CFO. And Elizabeth with start as usual by going through a few administrative matters before I kick off the call. Elizabeth?

Hi, everybody. And thanks for joining us today. For reference as just stated, this call is being recorded and webcast, and the earnings release that we issued after the market close today, as well as the recording of the call are /or will be available under the Investor Relations section of our website at 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 2018, and our expectations for revenue growth, operating margins, acquisitions, and contributions from lease/consortium centers, integration costs, business segment contributions, our growth plans, center openings and closures, capital investments, interest expense, foreign currency rates, tax reforms, effective tax rates, adjusted net income and 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 are described in the risk factors of our Form 10-K and 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 financial measures we discuss are detailed and reconciled to their GAAP counterparts in our press release, and will also be included in our Form 10-K when filed with the SEC, and available in the Investor Relations section of our website. So I'll turn it back over to Dave and Stephen for review and update on the business.

Thanks Elizabeth. And hi everybody, again who is on our call today. I am going to start by reviewing our financial and operating results for this past quarter and year. Stephen will follow me with an update on our growth plans and outlook for 2018. And Elizabeth will follow him with a more detailed review of the numbers before we open it up to your questions. We are pleased to continue our strong performance in the fourth quarter of 2017 and to end in a good position as we began this year. Revenue increased 10.4% to $440 million. Adjusted EBITDA increased $6 million to $82 million. And adjusted earnings per share increased 30% to $0.73 per share. For the full year in 2017, revenue of $1.7 billion represented growth of 11%. And adjusted earnings per share of $2.69 increased 25% over 2016. Our top line growth of $41 million in Q4 included solid contributions from each of there lines of business. And we finished 2017, having achieved our targeted growth levels in each segment as well. Our Full Service Center revenue expanded 10%. And we added seven centers in the fourth quarter including one for our new client Oregon State University and our fourth center for Goldman Sachs, this one in Salt Lake City. Back-up revenue increased 11% and Ed Advisory grew 22% in the quarter. Recent new client launches for these two segments include the Yale New Haven Health System, Colorado School of Mine, Exelon and the US Agency for International Development to name a few. We also continue to deliver strong and consistent operating results, even as we make investments to support our continued growth, the quality of our service delivery and efficiency. Operating margins of 12.2% for the quarter, which excludes transaction costs related to our debt amendment, are in line with our plan. As a reminder, when we talked to you this time last year, we previewed the three primary areas that would impact our margins in 2017, offsetting other underlying operating leverage in the year. First, the Q4 of 2016, Asquith acquisition which contributed roughly $90 million of revenue in 2017 at margins that are consistent with the rest of our UK full service centers, but lower than our total U.S. business. In addition, we incurred approximately $2.5 million of integration type costs that served as a headwind in 2017, but won't recur this year. The second component relates to the short-term effects on our margin from our newer lease/consortium centers that we previously talked about. We've opened 71 of these centers over the last five years as part of our long-term growth strategy. In 2017, these centers as a group generated roughly $120 million of revenue, but the associated margin contribution was still modest. As each successive class reaches a mature operating level, like the first two cohorts have now done, the contributions from the matured centers will outweigh the startup and ramping losses of our newer classes. Thereby, naturally diminishing the headwind we've been experiencing. As we discussed on prior calls, we are therefore beginning to unlock the value creation that exists in this group of centers. The third element relates to our investments in technology and people to enhance our customers' user experience, build utilization levels of our services within our client's workforces, and over time to deliver more efficient and automated support services. Stephen will talk about that a little more in a couple minutes during his part. On the balance sheet side of things, with our strong operating cash flow and debt capacity, we remained well positioned to take advantage of any strategic opportunities that may arise. As we previously outlined, our first priority remains growth-oriented investments in acquisitions and new lease consortium centers. The second priority is to enhance shareholder value through our share repurchase program, which we've continued to execute in 2017, with both open-market purchases as well as participating in a block trade in both May and November. On the credit front this past year, we've also reduced our exposure to rising interest rates by repricing our term loans and executing interest rates swaps on about half of our floating rate debt this past October. This past January, as you know, we successfully completed our executive leadership transition process with Stephen Kramer assuming the CEO role. I couldn't be more confident in Stephen's leadership and his ability to continue to drive our mission and strategy in the years ahead. I also look forward to my new role as Executive Chair and the many exciting opportunities are continue to exist for Bright Horizons down the road. I am so pleased and proud of our team and the results they have delivered in 2017. And I believe we are well positioned to continue that momentum going forward. So speaking of going forward, let me turn it over to Stephen to talk more about our outlook going forward. Stephen?

Great. Thanks Dave. And good to be speaking with all of you today. I am eager to update all of you on our growth strategy and priorities on the progress with the technology investments we've been making. And on our 2018 outlook. As Dave outlined, we finished 2017 with good momentum across all aspects of our business. Our growth strategy continues to prioritize both organic and acquisition growth. On the organic growth front, our sales pipeline remains strong with interest from both new clients and existing clients, who are looking to add services for their employees. We continue to focus and gain traction on the cross selling opportunities with our existing client base, which now exceeds 1,100 employer partners. More than 230 of these clients now purchase more than one service with us; nearly double the number from just five years ago. And the opportunity remains robust to expand this further. Healthcare, higher Ed and technology continued to be the most active in these three sectors for us. The effective tax reform both for employers and for working families while not game changer for us, our on the margin positive factors. The labor market remained extremely tight which helps our selling value proposition for our suite of services; while at the same time challenges us on the recruitment and retention of our workforce. Over the last several years we've worked to stay ahead of the curve with wages and benefits, particularly in urban areas where this challenge is greatest. Our plan for 2018 also contemplates ongoing focus and investment and continuing to enhance our culture as a competitive advantage. Our strategy to develop new lease consortium centers in key urban market addresses the demand for high quality, full service, and early education in these specific densely populated geographies. Places where employers sometimes don't have sufficient space to develop their own centers. These locations also support our back-up business by expanding our capacity to deliver back-up care at our centers. We continue to expect to see our back-up and Ed advisory segments grow faster than our core full service business in 2018. These segments contribute to our ability to drive margin expansion over time by capitalizing on the synergy between our services, expanding our market opportunity and allowing us to provide services to more of our clients' workforces. This enhances the value proposition we offer to employers and their employees across key life stages. On the acquisition front, most of you know that acquisitions have always been a key element of our growth strategy. And we expect that to continue in 2018 and beyond. After an outsized year in 2016 due to Asquith, we had a more typical year of tuck-in acquisitions in 2017. Adding a total of 14 centers globally. And our 2018 plan considers a similar number. We continue to pursue opportunities that range in scale and have a good mix of smaller network and single center opportunities and active discussions, both here in the US and in Europe. As Dave previewed, I also want to provide you with an update on investments we've been making in people and technology. To recap the more significant investments, in 2017 we completed the implementation of new core operating systems in our back-up and ed advisory areas, which in both cases provide us with stronger foundation on which to deliver better and more streamline user experience, including enhanced online and mobile capability. Future enhancements to these systems include more on demand service delivery including expanded mobile capabilities. On a parallel track, we've continued with our investment and implementation of expanded digital marketing capabilities. These investments are personalized in communication with our users, and over time are expected to drive increased utilization within the workforces of the employer client with who we serve. On the center side, our parent user app, My Bright Day, enables real time direct communication between our teachers, administrators and parents and families. It has received rave reviews across our center network and positions us well for expanded functionality. As part of our plan for 2018, we'll continue to make investments to ensure that these key systems deliver the value expect and provide us with the platform that we need to grow and enhance our leadership position in the market. In sum, we believe that we are well positioned to continue the positive momentum that we've experienced over many years. As we look at our plans for 2018, we are anticipating revenue growth to be in the range of 8% to 10%, and we do expect to regain operating margin leverage in the range of 50 to 100 basis points this year. With slightly higher interest rates and a slightly lower effective tax rate for next year, which Elizabeth will discuss in more detail, we expect this to translate into adjusted EPS growth for 2018 in the mid to high teens or $3.12 to $3.16 per share. With that Elizabeth can review the numbers in more detail. And we'll back with you during Q&A.

Thank you, Stephen. So again, to recap, overall revenue was up $41 million or 10.4% in the quarter. The organic growth approximates 7.5%, with 5.25% coming from full service and 2.25% coming from back-up and Ed advisory. Acquisitions added a further 4.5% growth in the quarter. And center closures offset top line growth by about 3%, while the pound and the euro strengthened against the dollar, adding just over 1% to the top line growth in the quarter. Gross profit increased to $108 million or 24.6% of revenue. And adjusted operating income increased to $54 million or 12.2% of revenue. On a segment basis, the back-up division expanded $6 million on the top line, and ed advisory was up $3 million, or 22%, from a combination of new client launches and expanded utilization by our existing clients. Revenue growth and margins can vary from quarter-to-quarter in both of these segments based on the timing of new client launches, the service utilization levels and the investments that we are making in the growth and service delivery. That said since the operating margins in both back-up and ed advisory are 2x to 3x what we earned in our full service centers, we continue to see their revenue growth and sustained operating performance contributing to margin expansion over time. Turning to full service. The $32 million increase in center revenue was driven by rate increases, enrollment gains and contributions from new centers. Operating margins, again, excluding the Q4 transaction cost were 8.8% in Q4, 2017, roughly consistent with 2016 levels with a few offsetting factors. The gains we've realized from an enrollment growth in our matured and ramping centers, disciplined pricing strategies and cost management and contributions from new and acquired centers are partially offset by the margin effects of the recently opened classes of lease consortium centers that are still in their ramp up stage. Overall, Q4 2017 overhead was $46 million compared to $42 million in 2016. Again excluding the transaction costs for the debt and secondary offerings that we had in acquisitions in 2016, this is essentially consistent with 2016 levels as a percentage of revenue. Interest expense $11.8 million in the quarter, it was roughly consistent too with last year as lower interest rates from two repricing during 2017 offset the incremental borrowings. As Dave mentioned, we at the end of October we also entered into a four year interest rates swap on $500 million of our floating rate term loan B debt to hedge our exposure to rising interest rates. The 2017 structural tax rate on adjusted net income came in at 24% for the year. And a slightly higher tax benefits from stock option exercises in the quarter than we had initiated estimated. This rate does not include any effects of tax reform due to the one time nature of the provisions under the reform that affect us. We generated operating cash flow of $236 million in 2017, compared to $213 million last year. The increase relates to improved core performance and working capital. But it was lower than our previous estimate primarily due to the additional $11 million liability for the transition tax on foreign earnings that we recorded in Q4, 2017 in conjunction with tax reform. After deducting maintenance CapEx, free cash flow totaled $200 million for 2017. Again as Dave outlined, we deployed our cash flow into center investments and acquisition. We also repurchased total of 2 million shares in 2017 both through open market purchases and the block trades in May and November. We ended 2017 at roughly 3.5x of net debt to EBITDA and expect that to tick down towards 3x by the end of 2018. Lastly, at 12/31/2017, we operated 1,038 centers with the capacity to serve 116,000 children. So now to add to the guidance headlines that Stephen previewed. Our outlook for 2018 anticipates revenue growth approximate in 8% to 10% over 2017. That includes low double digit revenue growth in our back-up division, 10% to 12% for the year. And top line growth in our Ed advisory services in the 15% to 20% range for the year. In our full service segment, we are planning to add a total of approximately 45 to 50 new centers in 2018 including organic, new and acquired centers. And our outlook also contemplates closing approximately 25 centers. A more typical run rate than we saw in 2017. On the operating side for 2018 in the full service, we expect to continue to gain approximately 1% to 2% from enrollment in our ramping and matured centers. And we project price increases averaging 3.5% to 4% across the P&L center network, while maintaining 1% spread between price and our cost increases. We, therefore anticipate that we'll regain the operating leverage that Stephen mentioned in the range of 50 to 100 basis points as a factors mitigating margin expansion in 2017 diminish over the course of the year. On some other key measure for the full year of 2018, we estimate amortization of $32 million, depreciation in the range of $17 million and stock compensation of around $15 million. Based on our outstanding borrowings and estimates of additional interest rate increases in 2018, we are projecting interest expense in the range of $48 million to $50 million. Now, let me touch on the expected structural tax rate for 2018 and the potential effects on Bright Horizons of Tax Reform. The headline is that while positive, the net effect will be modest for us in 2018 given the comparison to the structural tax rate for 2017, which benefited from the new rules regarding tax benefits on equity transactions. We estimate that the effective tax rate will approximate 23% in 2018, compared to 24% in 2017. Specifically, the reduction in the US federal tax rate will be partially offset by one, incremental taxes on foreign earnings and two, higher net effective state income tax rate. Most significantly the estimated impact of the tax benefits of stock option exercises is expected to be substantially lower in 2018, due to both the lower applicable tax rates and the projections of activity for eligible exercises. We estimate that we'll generate approximately $260 million to $270 million of cash flow from ops yielding around $220 million to $230 million of free cash flow after $45 million or so of estimated maintenance CapEx. Investments in our new center capital for centers opening in 2018 and in early 2019 are projected to total $45 million to $50 million in 2018. So the combination of all these factors lead to our projection that we'll generate adjusted net income in the range of $184 million to $187 million, and adjusted EPS in the range of $3.12 to $3.16 on projected weighted average shares of 59 million to 59.5 million. Looking specifically to Q1 of 18, we're projecting 8% to 9% top line growth, adjusted net income in the range of $41 million to $42 million and adjusted EPS in the range of $0.70 to $0.71 a share. So with that Omar, we are ready to go to Q&A.

[Operator Instructions] Our first question is from Manav Patnaik, Barclays. Please proceed with your question.

Yes, thank you. Good evening, guys. My first question was I think in your comments you talked about exploring all the other opportunities or something along those lines. Was that basically referring to M&A to enter a new country or is there anything more to that as well?

We couldn't hear you on the beginning Manav. Would you addressing that to me, Dave or Stephen. But I think -- and I'll answer the question. And that's, we continue, as we've said in the past to look at opportunities that exist around the world for Bright Horizons to expand and add value. And the criteria that the lens that we look through for that opportunity remains countries where we think there is the potential for a funding source that is in addition to what parents pay. So either the potential for an employer market like we have in the US, or financial support that comes from a government source that is sustainable. And so there are a number of countries around the world that fit those basic criteria. And we continue to meet new teams around the world that have the potential for -- possibility for us. There's nothing on our near-term horizon. But down the line if it is a possibility for future expansion.

Got it. And then just one other one for me is how do you evaluate the returns -- like how should we think about how that --

A return on --

-- What we see that numbers and so forth.

So did you say, how do we measure the returns on our tech investments, Manav?

Yes, correct. The technology spend that you talked about.

Yes, sure Manav. Good evening. So when we think about the tech investments that we're making, as I shared they sort of come in two flavors, right. One flavor is around employee experience and the other is around more personalized marketing and outreach to employee end users. And so as we think about the ROI, it is really about the funds that we invest into these different systems, and into these different opportunities and then clearly the outcome that we're looking for is to drive higher satisfaction scores of employees that use our services. And ultimately in addition to that we are looking to drive additional use from our employer clients to their employees enhance use.

Our next question is from Andrew Steinerman, JPMorgan. Please proceed with your question.

Hi, David. You intrigued me by reminding me of unlocking value within the lease consortium centers. What do you think kind of target operating margins could be on the portfolio of lease consortium centers? And how long will take to get the target recognizing? You'll continue to grow along the way.

Yes, I'll start, Andrew, and I'll let Steve and Elizabeth add to it. So I think as we've talked about before our focus on the lease consortium models just looking at them in terms of how we -- the criteria that we use to make a decision on where to go. And what I would say to make sense put us at the high range of our center margins. We look to, if we're going to invest our capital in the site, those are the centers that drive within our center portfolio. The high end of the margin range that we would typically target in the 20% to 25% gross margin range. And so of course, that's the goal, and that's where we're headed to with the portfolio. As you know, it takes several years to ramp up to get there. And then we continue to open new centers that somewhat diluted. So we think that the portfolio as a whole has a lot of value there to be unlocked over time. And we're getting there. We'll see in 2018, like we talked about, we'll start to get value from there because we're now to a place where we have some of our older cohorts that are contributing fully. And the newer cohorts aren't diminishing as much and so therefore, it's going -- start to be delivered more value and in part helps us get some of the margin expansion back overall that we're looking for. But it will be a few years out before we recognize the full value of kind of what sits in that portfolio because we've only been added for going on five years now.

And a few years for the gross margin targets or few years for your ultimate operating margin targets.

Yes, I mean, I think I'll just jump in here, I think the gross margin Andrew, as we've talked about, we expect to see a bit of beginning to turn the tide in 2018. So it's not going to be instantaneous because of what Dave just described in each of the cohorts contributing. But if we talk about 20 to 25 basis points a year, maybe coming from this group that over time you have 10 years of classes of these centers and you've got revenue in the range of $2 million to $2.5 million per center. That's where you can start to see that the gross margins will improve. The operating margins pretty -- we have pretty predictable overhead across our full-service business, it's in the zip code of 8% to 10%. So the margin for full service will contribute to overall leverage even though our operating margins right now are above that level.

Our next question comes from Gary Bisbee, RBC Capital Markets. Please proceed with your question.

Hey, good evening. So, it looks to me like you without the ASU benefit being larger you've missed the guidance for the fourth quarter on earnings. Although, it's always a little tough for this tax stuff, but I guess I wanted to ask, just what maybe if anything from your perspective came in different than you expected? It looks like the gross margin did begin anything going on there. And I guess just how you think you did relative to what you expected three months ago.

Yes, no, I think our view is different than that Gary. We had good growth across all three of the segments and margin performance varies a little bit as we've talked about in the back-up and Ed advising quarter-to-quarter. So that can be slightly unpredictable, but overall we feel like we came in, we did come in the range of the guidance we've given before there was around a $0.04 tax benefit arising from different tax rate then 25 is what we had expected for the year and came in at 24 for the year. So not seen that as a missed at all, we were within our range.

Okay, all right. Fair enough. And I guess sticking on the tax theme, appreciate the color. Can you tell us how if ASU had not been -- if that rule had not been changed in 2017, like outside of that moving up and down? How much is your tax rate structurally declining because of Tax Reform and I guess what would -- how much in 23%, I think you said for this year, how much is the ASU benefit is left. So if that were to go to zero, how much higher would the rate go? Thanks.

Yes. So it's a good way to look at it. If talking about is sort of is a base rate in 2017 excluding the noise of the tax reform that we did record because there where -- we had to revalue our deferred taxes. We had this transition tax to record. And we also had a benefit from our Ireland centers that we had closed and exited Ireland. So leaving that aside our base rate is about 36% in 2017. And that was what forms the basis of our structural rate this year that less the ASU effect as you say got us to the 20% in 2017. In 2018, the rate would be between 27% and 28% as a base rate is our estimate. That's a blend of the federal rate. Our foreign operations, of course, which have rates that are closer to the US federal rate but even the Netherlands is a bit higher. And then the net effective state income taxes, which is gone up because they are net state rate has the lower tax deductibility. So 27% to 28% compared to 36. That's the headline and then what we're forecasting this year on the ASU is, it's in the footnotes of the press release, but we're estimating maybe $10 million to $12 million of a credit for that.

Okay got, so like two thirds of the benefit in terms of the percent sort of, you're not expecting to recur. And I understand it's a lower benefit at a lower tax rate like you said earlier. Okay. All right. That's very helpful. Thank you. And then two other quick ones from me. Can you give us the rate of your interest rate swap? What's the fixed rate that you're swapping for?

Yes, so the rate is it blends to or it's 3.9% we swapped 1.9 and we are at L plus 200. So it's essentially fixed at 3.9 for that tranche.

Got you, okay and then just last one, when we look at the cash flow how in CapEx, in particular how much of the investment in these technology initiatives was capital versus the operating investment, and is that basically through now or should we think that I guess from both the operating and capital level that the investments. How much of that continues? Or is the growth of it? Or is it essentially as you said earlier in the year? This was the growth year now those investments stay but grow in line with revenues at the right way to look at it. Thank you.

Yes, I think broadly speaking, that's right. The investments that we've started to -- we've made and we will continue to make investments, but not an accelerated rate of them. So the most of the effect that we've been talking about with the margin headwind has to do with actual P&L, its personnel and support and some depreciation, but the depreciation obviously continues. So there is a cash flow expenditure that capital, that's on top of what you're seeing in the P&L, our view, I think this year is it there may be some modest increases to what we saw this year, but we're not calling it out as we don't see it as something that's really that notable. But we're going to continue to focus on and this is an area value.

Our next question comes from David Chu, Bank of America Corporation. Please proceed with your question.

Great. Thank you. So can you provide a bridge to arrive at 2018 margin outlook? So just wanted to get a gauge of the impact lease consortium Asquith and the tech investment?

So, not sure that I can quite bridge it that way. I think that what we would expect to see in the 50 to 100 basis points would be, as I mentioned before, maybe 20 to 25 bps coming from the lease consortium centers in more of a contributory mode. The Asquith headwind would be between the -- that was in that was partially overhead and partially margin, so the Asquith headwind is probably 10 to 20 bps that is out and then the rest of the performance of the business would be the components 25 bps coming from back-up and ed advising and another 25 midpoint on full service, so call it, those are the general components, but not so much bridge from the headwind this year, but more like what we think contributes.

Got you. So is Asquith a headwind or a tailwind when you say like maybe 10 to 20 basis point?

So the reason we -- well, Asquith was a headwind in 2017, just because of it's a mix, there is a piece of it was overhead and now it's in the full service base. And so it won't be more contributory because it's in the full service base where we get a tailwind is not having the repeated $2.5 million or so of overhead synergies. So that's why I'm saying 10 and 15 bps is that overhead spend that goes away.

Okay and then just in terms of timing of new centers for 2018, should we just assume at this point it's pretty even over the course of the year, or should be back-half loaded?

At this point, we've got the visibility of the pipeline, it's just variable. The timing of when centers open can vary from this but it reasonably ratable over the course of the year. I don't know that there's anything particularly back-end weighted.

Okay, great. And just lastly just a number of new centers open includes for the 4th quarter?

So we, added 7, opened and we closed 6.

Our next question comes from Hamzah Mazari, Macquarie. Please proceed with your question.

Hi, this Kayvon Rahbar filling in for Hamzah. My question is about market share in the US and internationally. Can you give any color on if that's growing or staying the same?

Yes, I think when we think about market share. We really think about it in the employer segment specifically here in the United States. And obviously it varies by service line, but if you look at the entire market, we start with the frame that it is an incredibly fragmented market. In the employer space, we have 6x the number of centers as our next largest competitor. And then we enjoyed that type of competitive position in fact even greater market share leverage over our competitors in the other two market segments in which we compete. And then when we look at the UK and the Netherlands, again, we are in pretty much the full service segment in those two markets, highly fragmented and we represent, again one of the largest players in the UK, we represent sort of Top 5 in the Netherlands, but that still represents a very small percentage of the overall market for child care in those markets.

[Operator Instructions] Our next question is from Jeff Meuler, Baird. Please proceed with your question.

Yes. Thank you. So I think I was missing something because you started talking about the investments in people on tech. I thought you are going to lead us to a path say that you're not going to get margin expansion in 2018. But then you're going to give us, you're going to deliver on the 50 to 100 basis points. So I guess trying to figure out what I'm missing? Are you starting to see a pickup in turnover of your employees, or you just explaining why you get more of a normal margin expansion year sort of an out sized one and in 2018? Just I guess the primary question is about -- the first one on the employee turnover trend but if there's anything else that you're trying to signal.

Hi, Jeff. It's Stephen. So as it relates to our employee turnover. I assume that's what you're asking about. I think we are, we're seeing that be pretty static at this point. And again that comes down to the fact that we have and continue to invest very much in being an employer of choice, we spent a lot of time and effort on the culture that we have here at Bright Horizons. So despite a tightening labor market, what we really wanted to sort of highlight for folks that we have been very thoughtful and continue to be very thoughtful about ensuring that we are really maintaining that status. And so we don't expect an increase in our employee turnover rate. And then as it relates to the tech investments, really what we're trying to share was that we continue to see nice progress as it relates to making good strides in those areas. We don't anticipate an uptick from the spend level that we have been that over the last year. And so therefore it will not look like a margin headwind in the way that it has, because it is sort of baked into the run rate and we'll continue to sustain at approximately that rate.

Okay. That's helpful. And then I guess a multi part on just this viral season and impact I guess I was starting at the back-up care business, but if there's something you're seeing on the full service side, I'd be interested there as well. So the first question would be are you seeing an uptick in usage of back-up care because of a busy viral season? And then the second question is just, if there is spike in usage, given that you're selling I think a certain number of seats in many instances to employers to use over the course of the year for their employee base. Do you just have the incremental expense that you have, if there is a spike or is there also incremental I guess revenue associated with any spikes and usage? Thank you.

Sure. So why don't I start with the second part of your question comes because it sort frames the first part. So we have two different contract types within our back-up care service. So we have those employers that contract for a specific number of uses and within that, the net and as employees use those uses obviously that are the bank that they draw down upon. And then if the employer in the aggregate over uses then we'll upgrade them to a new use level that allows them to continue to enjoy the service. We have a second type of contract type, which is really focused on pay per use, and those tend to be our largest clients. And really what happens in those scenarios is that the employer pays for the number of uses that an employee that they cover will use. And so if you think about those two contract types in both instances use actually is a positive feature. Going to your second question around flu and other issues that have been prevalent this winter. Our base of uses across all of our employers is significant enough at this point, where small numbers of employees and/or their children that may be impacted relative to the total user base, and use cases that people use back-up for wouldn't necessarily show in the same way. For example, that a hurricane might or a snowstorm might because again the number of people impacted is just much greater. So we haven't detected any discernible number of increases, based on the flu as you indicated. And I think part of that is just that the number of uses within our total book of business at this point is so significant that it just wouldn't show up.

Our next question comes from Jeff Silber, BMO Capital Markets. Please proceed with your question.

Hey guys, its Henry Chien calling for Jeff. Just had a question demand trends. I was wondering if you could comment a little bit about if you're seeing change in the types of demand you're seeing whether it is from corporations or in terms of enrollment. Just thinking in terms of the context of employment growth picking up, wages picking up and sentiment from corporations picking up or is this more something that maybe we need to wait for more of a demographic shift of more people having babies to start seeing an impact on your top line.

Yes. So here what I would say, I would say that certainly we are in a positive selling environment from the perspective in employers. Employers are really looking for ways to differentiate themselves and what is a very tight labor market. And so in terms of the reception that we're receiving at the employer level to our services. We continue to see a robust sales pipeline, which is very positive. What I would say on the demand side at the user level is, again we have, as you know over the last number of years come back from a time where there was a real economic downturn and therefore, we did see a drop in enrollment and I think we have nicely climb back to the appropriate water line on that. And so therefore, the demand that exists at the individual consumer level has certainly come back to a nice level that puts us at a comfortable place. So I think overall the employment picture is obviously positive for the types of services that we deliver Gary.

Got it. Okay, and just wanted to follow up on the use of your free cash flow. And I know you mentioned M&A is likely to be focused on the smaller tuck-in type of networks, but more broadly beyond M&A. Could you share just your thoughts on where you intent to deploy your free cash flow.

Yes, as I commented earlier, I think our strategy remains focused first and foremost on as you mentioned M&A and also on the lease consortium model roll out. We still believe that there are plenty -- there is plenty of opportunity within the markets that we've defined for new lease consortium models. And also while we're not counting on any larger acquisitions, because they're lumpy, over the course of year - time that it's likely as we have in the past that will come across and things that makes sense. But as we commented on earlier, our plan for 2018 contemplates based on what we can see now, which is continuation of what we delivered in 2017. Other than that, we will remain focused on our buyback strategy as another as a sort of third priority as it relates to the deployment of capital and so that's where we find ourselves.

Thanks, Henry and thanks everybody. On behalf of Stephen, Elizabeth and I, we thank you for participating on the call tonight, and I'm sure for many of you will be talking to you down the line. Have a good night.

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