Greetings and welcome to the Bright Horizons First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to your host, Elizabeth Boland, Chief Financial Officer. Thank you, you may begin.

Thanks, Kevin, and hello to everybody on the call today. With me on the call are Stephen Kramer, our Chief Executive Officer; and Dave Lissy, our Executive Chair. Before I turn it over to Stephen, let me cover off a few administrative matters. Today's call is being webcast, and the recording will be available under the Investor Relations section of our website brighthorizons.com. As a reminder to participants, any forward-looking statements that are made on this call, including those regarding future financial performance are subject to the Safe Harbor statement that's 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 they are described in detail in our 2018 Form 10-K. Any forward-looking statements speaks only as of the date on which it's 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. So Stephen will now takes us through the review and update of the business. Stephen?

Great. Thanks Elizabeth. And again thanks to all of you who have joined us this evening. As always on today's call, I'll review our financial and operating results for this past quarter and update you on our growth plans and outlook for 2019. Elizabeth will then follow up with a more detailed review of the numbers before we open it up for your questions. We are very pleased with the strong start to 2019. For the first quarter of this year we are reporting topline growth of 8% to $502 million and adjusted EPS of $0.81, an increase of 13%. In our full service center segment, we added six centers including our second backup center for Barclays and a lease/consortium center in Greenwich Village, New York. We expanded our backup care portfolio with recent client launches for ADP, Waste Management and L3 Technologies. We also added to our education advisory client base this past quarter, launching services for Aurora Health Care and Thermo Fisher. We also continue to be very excited about the cross-selling and cross-promotion opportunities within our existing client base. As we have shared on prior calls, less than a quarter of our clients currently purchase more than one of our services. Chick-fil-A became the latest example of our client moving from a single service, in this case full service childcare to a multi-service client with the launch of our backup care solutions earlier this year. We've also begun to realize the benefits of the investments we have been making in targeted marketing programs and technology to speed and improve the end-user experience. We continue to be really pleased with the progress of these initiatives, exemplified by the open rates of our personalized outreach journeys. The increased mix of reservations made on our mobile and web platform and…

Thank you, Stephen. Once again, recapping the headlines for the quarter. Overall, revenue was up 8.2% or $38 million in the quarter. The 6.5% growth in our full service center revenue or $26 million was driven by rate increases, enrollment gains, and contributions from newer centers and includes approximately 2% from acquisitions. Also foreign exchange rates created approximately 200 basis points of headwind to the full service growth for the quarter. So on a common currency basis, this segment expanded 8.5%. Our backup operations topped our previous estimates generating 18% topline growth in the quarter. In addition to new clients who launched service, revenue expanded on contributions from my family care in the UK and on strong utilization from existing clients which was aided by the timing of school vacation days. Ed advisory services grew 15% on new client launches in expanded use by the existing base. In Q1, gross profit increased $13.4 million to $127 million, which represents 25.3% of revenue. And adjusted operating income increased $63.3 million or 12.6% of revenue as Stephen said, up 60 basis points from Q1 of 2018. Breaking that down into our segments, for the full service segment, adjusted operating income expanded 40 basis points to 9.9% on the gains that we realized from enrollment growth in our mature and ramping centers and on contributions from new and acquired centers coupled with our usual tuition increases. Our backup operations generated operating income margins just over 27% in the quarter up from 25.8% in 2018 on the strong utilization levels and improving efficiency of service delivery. Turning to interest expense, it was $12 million in Q1 of 2019 and up slightly over 2018 on slightly higher average interest rates. Our current borrowing cost approximates 4% with $500 million of our term loans, which is…

[Operator Instructions] Our first question comes from the line of Manav Patnaik with Barclays. Please shoot your question.

Hey, this is Ryan on for Manav, just curious, would you take a step back and look at the full center market, we often get asked the question, how much more room is there to grow there. You guys are obviously a leading player. When you look out over the next couple of years, do you see more growth coming from cross-selling or is there still a lot of white space available in kind of the existing full center market?

Yes, that's a great question, Ryan. So we see opportunities in both, there we estimate about 14,000 work sites here in the U.S. that could benefit from an onsite childcare center, obviously we serve a small fraction of that today and so we continue to see with both individual organizations that don't work with us today as well as those who do, the opportunity to continue to expand that line of service. The additional nuance I would put on is, in addition to those who are current clients of other services, we also see clients who have a single center or two centers today also continuing to add to their footprint of centers in again larger locations within their employees. So we see it both in existing clients who are clients of centers, existing clients who work with us in other lines of service as well as new prospects to the Bright Horizons family.

Got it, thanks. And I guess, in some of these cross-selling initiatives that you've seen, is there a time that it typically takes from someone who signs up for a center to adopt some of the other services? And how has that changed over time? Are you seeing any acceleration in the time it takes for clients to adopt the second solution?

Sure. Well, I think that over the last couple of years, you've heard us talk more about our initiatives and focus around cross-selling. And so I think we are certainly beginning to see the fruits of some different dimensions, whether that be our salespeople now having the ability to sell into our existing accounts and partner with our relationship managers as well as different compensation available to our salespeople as well as account managers that we are seeing an increased velocity. And certainly a center decision is one that is very methodical and still has a relatively long sales cycle to it. On the other hand, I feel like our team is very well equipped to continue to introduce that service and extend into the center world for us.

Got it. Thank you.

Thanks Ryan.

Our next question comes from the line of Andrew Steinerman with JP Morgan. Please shoot with your question.

Hi Elizabeth, I just wanted to get a little more color on operating margins. What type of operating margins is implied in the second quarter guide that you just gave on revenue and EPS, and how do you see the cadence of operating margins in the second half of the year and what factors are driving that?

Yes. So as mentioned, we delivered 60 basis points against the first quarter. And if we look back to 2018, we had sort of an improving cadence to the operating margin as the year went along. I expect that as we look at the rest of this year, we'll be in the – since we're guiding this 50 to 100 for the full year, that will be in the range of how we are doing the first quarter maybe ticking up modestly as the year goes on. But no dramatic shift from quarter-to-quarter is how I'd frame it, so relatively same arena for Q2.

Okay. Thank you.

Yes.

Our next question comes from the line of Gary Bisbee with Bank of America. Please shoot your question.

Yes. Hey, good evening. Stephen, the comment that there's 14,000 work sites in the U.S. that could benefit from an onsite center, that big addressable market's been talked about for a long time, one thing that's curious is the number that the company has targeted small acquisitions and new openings or new customer centers is 40 to 50, it's been that way for a long time and the base of center is a lot larger. For such a big opportunity, why wouldn't there be an opportunity to increase the number that you add through the routine M&A and organic gains? Like it's been the same every year since the IPO, a few years obviously there's been more when there's been bigger M&A but is there some like gating factor to penetrating that market at a proportional rate to the growth that the company had over time?

Sure. So the way I would think about Gary is, there is the employer opportunity first and foremost that that we go after with our direct sales team. And the rate limiting step on that is getting an employer to yes. And there are a lot of considerations that HR and ultimately leadership at organizations think about whether that be their portfolio of benefits, whether it be the allocation of their space, the real estate that would be required, the capital that is required in order to make a center happen on their site. So I think that we are working diligently and have consistently worked diligently to introduce our concept of onsite childcare to as many employers as possible. The reality is that there has been a lot of similarity in terms of the number who we have been able to get to, yes in that segment. As it relates to the fragmented market that we obviously look at from an acquisition standpoint, the rate limiting step there is really the focus that we have on our employers in serving their employees. And so we're trying to be very selective from a quality perspective, from a strategic fit perspective and then from a financial fit perspective. And so I would sort of look at the two opportunities, sort of as coexisting but the different rate limiting steps in each is different. That said, we agree with you, there is a lot of opportunity out there and we continue to press hard to help employers see the benefit and realize the benefit of having an onsite center and at the same time looking very broadly at what M&A opportunities exist out there that fit our criteria.

Thanks. And then just follow up on that same them, does the much tighter labor market, does that help in the sales pitch or we hear from other parts of the HR world that there's pressure to be more efficient and use technology and actually bring down the cost base that HR is supporting. I don’t know if that is like an offsetting factor, but it just strikes me you should have more demand given how tight the labor market is and how impactful this offering can be?

Yes, we agree. The impact of the offering is absolutely clear and we certainly are in an environment where the work for talent is real, that said. On the onsite childcare center side, the decision that an employer is making is very long-term, right. This center is one that they will ultimately continue to persist with for many years through many different economic cycles and so what we see the decision makers and employers thinking about is the long-term fit of an onsite center for their particular culture, for their particular set of needs and their sets of requirements. And so, yes, broadly, our services benefit, from the work for talent that we currently find ourselves in. I would say of all of the services that we have, clearly the onsite center has the proposition whereby they need to think the longest – and the longest term about the investment that they're making.

Okay. Great. And then just one for Elizabeth, just given the rates have gone up and now appeared to be coming in a little bit or stabilizing. Any change in how you are thinking about comfort level with your leverage and its three to four times, is that still the right place we should think that you are targeting? Thank you.

Sure. I think the – probably the range we would quote is more like 2.5 times to3.5 times and ticking above that temporarily. If we had a transaction that requires some borrowing, which would of course come with its own cash flow and enable us to delever against that, but in terms of optimizing the flexibility and the debt and the pricing on it, we think that, that is a range that works best for us.

Great. Thank you.

Thanks.

Our next question comes from line of George Tong with Goldman Sachs. Please shoot with your question.

Hi, thanks. Good afternoon.

Hi, George.

Enrollment growth has been pretty persistent driver of overall revenue growth. Can you discuss how you expect enrollment trends to potentially change to reflect benefits from your recent technology investments that's helping you to drive utilization rates higher and also given where we are in the macro cycle?

Yes, I will only touch first on full service utilization, because I think that's – I want to make sure that we're distinguishing between the types of use across our three different service lines. In the full service centers we are able to realize enrollment gains year-over-year because of the long ramp cycle that it takes centers to get to full maturity. So what we categorize as new centers, the first 12 months, they're open and then they continue to ramp in year two and three and get to a mature operating level by their fourth year. And so in those centers we have enrollment gains that come from those ramping centers. And then to the extent that we can eke out a little bit of enrollment in the mature centers, that's the other element of efficiency that we can enjoy with both effective management in the center, but also by deploying more backup use to centers that are open to enable to take backup use, but ultimately having that overall portion of the 1% to 2% a year. The utilization that we are seeing some more specific impact, I think from the technology investments is more on our backup care services and in our Ed advising services where the technology forums more of the pipeline channel, if you will, not the pipeline, but it's part of the service delivery mechanism and therefore the more improved end-user experience and the speed to reserve the confirmation and then the experience with the employee can drive more utilization in that way. So I think that's more where we will see over time both the persistence of use, which is like in our full service centers retaining the use we have is step one, and then expanding the use to a broader population is step two. And we're pleased with both the, the early outcomes of the technology investments and our marketing efforts to increase awareness, increase registrations as well as the reservations because that ultimately is what will sustain over time.

Got it, that's helpful. And as it relates to the lease/consortium centers, can you provide an update on how much of a margin lift do you expect from maturing cohorts? And over what timeframe over the next several years you expect that tailwind to persist from a margin perspective?

Sure. So in general, in our full service segment, we would typically be looking to realize 20 to 25 basis points of margin expansion a year from sort of basic routine operations of maintaining cost discipline, against our price increases, retaining and growing enrollment modestly, opening new centers, so that's sort of the base business. On top of that, we would say for the next couple of years, this year and another two years call it as we ramp in more of these urban centric lease/consortium centers that we would have another, 15 to 25 basis points a year coming from that additional tailwind of those classes getting to maturity. So this year that's the sort of range that we would expect to have somewhere between 35 basis points and 50 basis points of margin expansion from the combination of base business in lease/consortium centers. And as you point out, George, in another two years, three years, we will be having enough mature classes that it will be more incidental, what the contribution is, but it's part of the overall growth strategy and just won't be additional tailwind is our view. But that's still a couple of years out.

Got it. Very helpful. Thank you.

Welcome.

Thanks.

Our next question comes from line of Jeff Meuler with Baird. Please shoot your question.

Yes, thank you. Just first, what was the closing date of the My Family Care acquisition because I thought it was announced before the last quarter, but it sounds like it wasn't in the prior guidance. Just what was the closing date?

It was early February, so it’s basically in for – so maybe it did crossover in terms of the timing of the earnings release, I think the…

Yes, I think the press announcement went out in coincidence with the last…

Earnings release, yes, it was in the first week of February.

Exactly.

Okay. But you have about a two-month contribution to the quarter from that. And I guess it seems like even if we back out the contribution, the four points to the full year, you're still guiding backup care to faster growth organically then it's had in a while. It just what do you see as the most impactful initiatives? Is it the tech initiatives? Is it the cross selling, is it something else going on in the market just, and is that type of growth sustainable?

Yes, thanks Jeff. So we agree and we are seeing modest uptick in the sort of base backup business. So certainly if you net out the uptick from the My Family Care acquisition, we do see some nice increase in terms of new client launches as well as our ability to use our technology and marketing platforms to drive additional registration and use. So we are seeing sort of those as the three key drivers in terms of new clients, the driving of registration and use as well as the My Family Care acquisition leading us to a place that is slightly higher than what we've seen historically.

Right. So that the previous – as you say the previous guidance would have been in the low double digits. So in the 10% to 12% range in our – I think the – with My Family Care you say we would be looking at more like 12% to 14% organic growth this year in My Family Care adding on to that. I think to the question of sustainability into future periods, of course this steps up the base, but we are and we will continue to relay to you are our outlook on what it looks like beyond 2019 as the use comes in for this year. But we are – I think the headline is that we feel good about the expanded opportunity. That's part of why we talk about cross selling and cross promotion within clients is the opportunity is to expand the utilization. And we're seeing some of the fruits of that from the efforts we've been talking about the last couple of years and think that it has good opportunity, but want to say more to come on specific guidance for future years in the coming quarters.

Okay. And then in the key urban markets where you're attacking the lease consortium opportunity, what are you seeing from the perspective of competitors adding centers, adding capacity in those markets? There are a lot of competitors simultaneously out of capacity or if not, what do you see as the barriers to them doing so?

Yes, so what we see is that we are seeing an occasional competitor, open up in those same markets. I'd say that the reason we don't see more velocity of competition in those markets is there is pretty strong barriers to entry, right? So the real estate costs are high, the capital build out requirements are high. The landlords in those markets tend to be more sophisticated and really do require the kind of credit worthiness that that we bring to the table. So I think if those things didn't exist, we would probably see more competition coming into those markets. But I think our reality is that we have certain things that others don't have. And then the second part of it, to answer your question is that we have an advantage in that we have clients that are also colocated in those markets. And so our ability to ramp more quickly and to place backup care additionally into those centers allows us to have what is a better ramp then what might be typical in that, and therefore losses that are on the front end less than other competitors might have to absorb. So I think taken together, we feel really good about our competitive position in those urban markets, despite the fact that there is a pretty significant imbalance between supply and demand.

Okay. And then just one last one. Did not save the best for last year. The ASC 842 lease accounting, is there any P&L impact including any movement between expense line items or is this just balance sheet accounting? Thanks.

Yes. Thanks for asking. We don't have any P&L impact, including either net earnings impact or classification on the income statement impact ultimately as the standard was promulgated some of those potential movements were removed. So what we do have is the balance sheet impact as you said, there's a component of the liability that is now in current liabilities as well as long term. And so there's a bit of change there and then there as a result of that, there's some movement on the cash flow statement between working capital line items. But other than that, no earnings impact that we are needing to report.

That's helpful. Thank you.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please shoot your question.

Thanks so much, Stephen, in your remarks, I think you mentioned a couple of times the fact that this be My Family Care deal was I think you called that an off-market deal? Maybe I'm reading too much into it. Is it getting tougher to find companies? Is there a lot more competition out there for acquisitions.

So I think that that varies by both geography as well as sort of the size and the strategic nature of the opportunity. I think the reason we keyed in on that being off market is that we are tending to see larger, more strategic opportunities tend to go through intermediaries. Again, I think we've seen that for a long time. And I think the reason we called that out in particular on My Family Care was because that would have naturally been one that would typically go to through an intermediary and because of our relationship and because of the understanding and friendship that existed between the two organizations, we’re able to do that directly with the owners rather than going through an intermediary. I'd say that as we look at sort of smaller networks and single sites, we have a long history and we will continue to do those in an off market type way. And it's really in the larger network opportunities that we're seeing continued persistence of intermediaries and auction types of scenarios. Now I think, we had commented a couple of years back when we made the Asquith acquisition that was large. It was strategic, it did go through intermediaries. But again, our relationship I think was really helpful to make sure that ultimately we ended up with that opportunity. So again, I wouldn't read anything more into it other than it's a core competency of Bright Horizons. We believe we're an acquirer of choice and it just was a good recognition through the My Family Care acquisition that that continues to be our status within the industry.

Okay. I appreciate the color on that. And Elizabeth, just a quick numbers question for you. Did you disclose the number of new centers that were open in the quarter?

Yes, we added six centers in the quarter.

Okay. Fantastic. Thanks so much.

Thank you.

Thank you.

Our next question comes online of Hamzah Mazari with Macquarie Group. Please shoot your question.

Hey, good evening. I think you may have touched on this a little bit, but was hoping for a little more color around where do you sort of view as a typical sales cycle, just in terms of low-to-high years, months, in terms of a new customer adding a center who doesn't have one and then clients subscribing to more than one service. And then also people that have a center adding another center. Is there an order of magnitude in terms of sales cycle, is there anything sort of that you can point to that some color? Thank you.

Sure. So our center sales cycle is clearly our longest. So that typically is a year plus in terms of educating the prospect or client about the value of having an onsite center. And then it will be a year plus in development. So the actual licensing construction and ultimately opening of a new center. So that tends to be a multiyear process from beginning to end. Whereas in our backup line of service or Ed advisory, we tend to have sales cycles that are more in the six months to 12 months from the time that we start to share and educate with that client to the time that they might decide to get to yes and or launch. And so that would be sort of the end. Now certainly there are clients that have come on board more quickly. And then there are others that have taken years and years. But I would say on average, I would think about a couple of years on the center side and then six months to a year plus on the backup and Ed advisory side.

Right. And then when you think of client attrition, I guess you guys call out your retention rate is – why do you lose clients? Is that just pricing? Or I know you had highlighted a Starbucks contract a while back but maybe that was just net new business, but any thoughts on attrition and customer retention?

Yes, so we have very, very high customer retention. So very high, 90%, 97%.

97%

Yes, 97% retention. In the cases where there is a client who doesn't work with us or the contract is lost. The most typical is on the center side, client M&A where they're consolidating their own workforces, they're sticking with childcare, but they may not have as many work sites and therefore they don't require a childcare centers at as many work sites. The other reason we might see closures is, we'll see closures in the wake of larger M&A deals where typically will know going in that in a larger portfolio of an organization that we acquire, that there'll be a tail in that portfolio that we'll want to ultimately prune. But on the client centric side, it's pretty unusual for us to lose a client across any of our services. And it's typically something that happens in the face of something very specific to that client.

Got you. And just a last question, I'll turn it over. And this may be too early, but any thoughts on impact on your business from the college admissions scandal? Is that just too small to matter in terms of being a positive for you or any thoughts around that? Thank you.

Thank you. Yes, so obviously our college advisory segment is relatively small to the total. On the other hand, what I would say is that given all of the press that there has been around the college admissions scandal. Certainly there is an increased recognition both among individuals but more importantly among employers as to the value of ethical college admissions advice, which obviously we have provided for many, many years now. And so the idea that employers have the ability to level the playing field and make it available to those of a wide variety of means and educational backgrounds that becomes really attractive. And then secondly, ensuring that employees that the employ have access to highly ethical services is also attractive. So again, the way we look at it is it’s certainly given a lot of publicity to the market. And ultimately the way we do it is very attractive to employers and directly to individuals.

Great. Thank you.

Excellent. So if there's no other questions, I just want to thank everyone again for joining our call and wishing everyone a great night.

Yes, we'll see on the road.

Take care.

Thank you.

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