Bright Horizons Family Solutions Inc.

Greetings and welcome to Bright Horizons Family Solutions fourth quarter 2020 earnings release conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host and Senior Director of Investor Relations, Michael Flanagan.

Thanks, Omar. And I loaded everyone on the call today. With me are Stephen Kramer, Chief Executive Officer, and Elizabeth Boland, Chief Financial Officer. I'll turn the call over to Stephen after covering a few administrative matters. Today's call is being webcast and recording will be available under the investor relations section of our website, brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business and financial performance, including the impact of COVID-19 on our operations, are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2019 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement. We also refer to data with 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. Stephen will now take us through the review and update on the business.

Thanks, Mike. Hello to everyone on the call, and thank you for joining us this evening. I hope that you and your families are healthy and keeping safe. I'll start our call tonight with a recap of our fourth quarter results, and then we'll outline the progress we made in 2020 against our strategic priorities, which position us well to build on this performance in 2021 and further our recovery from the COVID-19 pandemic. Elizabeth will follow. with a more detailed review of the numbers before we open it up for your questions. I'm pleased with the way we finished 2020. For the fourth quarter, we delivered revenue of $377 million and adjusted EPS of $0.36 per share. In our full-service segment, we continued to make progress in re-ramping our centers and in resuming operations at temporarily closed centers, nine of which reopened this past quarter. In addition to this, we launched two new centers, including a client-sponsored center for SAS. Importantly, occupancy levels at open centers modestly improved throughout Q4, in spite of increased community spread of COVID around the holidays. Our backup care business finished the year strong, with increasing in-center and in-home use, as well as some continued self-sourced reimbursed care use, as parents accessed our backup care alternatives to help manage remote work and hybrid school schedules. We had another great quarter of new client adoptions with Danaher, McDonald's, Nordstrom, and Okta among the many additions. Collectively, our growth in 2020 propelled us past the 1,000 backup client milestone. We also continued to add to our education advisory client base, launching service for AbbVie, GitHub, and MD Anderson this past quarter. While 2020 presented unprecedented challenges, I couldn't be more proud of the Bright Horizons family's response. Our global teams quickly adapted to the changing needs of clients, families, and children, while at the same time remain focused on the four strategic priorities that underpin our work and that we carry forward into 2021. First, preserve a strong culture and a great workplace at Bright Horizons. Second, deliver highest quality education and care services. Third, extend our impact through strategic growth, and fourth, connect across functions, service lines, and geographies. As you have heard me say many times before, our culture and people are our core strength, and this year we saw their very best. Our staff immediately rose to the challenge created by COVID-19, providing safe and nurturing environments for families and children, while also ensuring tens of thousands of families could get the much-needed support through backup care. At the same time, we as an organization worked tirelessly to support our employees whose lives and families were upended throughout the year as a result of the pandemic. This included healthcare and expanded education benefits for furloughed employees, enhanced pay for teachers on the front lines, and the introduction of telehealth and school-age learning supports. As we start 2021, we continue to focus on our people and our culture. In particular, we are redoubling our efforts to ensure a healthy, safe, and supportive working environment. Within this context, we recently announced an education and appreciation program to encourage and incentivize our center staff to get vaccinated. Second, we have always been focused on high quality standards at our Bright Horizons centers and across all of our services. Quality for us encompasses many aspects, including well-trained and qualified teachers, research-based curriculum, and vigilant health and safety. In the early days of the pandemic, we quickly pivoted and adapted our service delivery to meet the difficult and involving environment. We instituted industry-leading COVID-19 protocols that set the standard for others, created an online platform for children to stay connected with classmates and teachers, as well as curriculum to progress child development in a disrupted learning setting. Having now reopened more than 650 centers and re-enrolled tens of thousands of families, we have heard over and over again how important our actions and our health and safety efforts were key to families' decisions to enroll at Bright Horizons. In 2021, we'll continue to evolve our policies and practices to respond to the changing and hopefully improving health environment. We never waver from delivering healthy, safe, and high quality experiences for children and families. This is what our clients expect and has always been core to our mission. Third, while COVID-19 has presented many challenges, it has also provided strategic growth opportunities. the pandemic has fundamentally increased the awareness of our service offerings and allowed us to deepen and expand our client relationships. As an example, we now serve more than 1,000 employers with backup care, and the large majority of those new backup clients added in 2020 are first-timers with Bright Horizons. We also had great success in cross-selling services, growing our multi-service client portfolio by 20% in 2020, to more than 360 employers. We're seen as a valuable partner to support business continuity, return to work, and other strategic business objectives of leading employers. At the same time, employees' expectations of their employer for added supports is more pronounced than ever before. Moving into 2021, we will capitalize on this momentum and continue to extend our client reach, grow our enrollment and use, while expanding our services and capabilities to accommodate a more dynamic workplace environment. Center-based childcare remains a critical area of investment for employers looking at ways to support their employees irrespective of work location, especially as they contemplate their worksite reopening strategy. Our suite of services, client relationships, and technology capabilities position us well to extend our impact. Finally, we continue to invest in technology and digital marketing to unify our services for clients and end users. One recent example is the successful launch of My Bright Horizons, a new portal for end users that showcases all of the services available through their employer's program with Bright Horizons. And it personalizes the experience to their unique life stage. We also streamlined the booking process for backup reservations in 2020, speeding the care confirmation process. In 2021, our clients and their employees will continue to feel the benefits of more personalized outreach and a more seamless user experience. Our ambition continues to be to serve our clients and their employees in an increasingly friction-free manner and to increase the awareness utility, and use of the Bright Horizons suite. Before I wrap up, I want to comment on our commitment to diversity, equity, and inclusion. Embedded in our culture, DE&I has always been a core business priority and one that is inextricably tied to Bright Horizons' long-term success. We have worked since our founding to make it a real and lasting difference in the lives we touch through the work we do and those we employ. Last June, we took steps to reinforce and expand several of our diversity, equity, and inclusion goals to ensure that we continue to be a welcoming and inclusive place for all. In addition, we are in the unique position of educating the next generation. And with that responsibility comes the opportunity to make a difference by modeling for children and families an environment that is open, curious, and genuinely interested in what is different. We are also having conversations with clients on how our services support their DE&I objectives, particularly in workforce education. I also recently signed the CEO Action Pledge, which aligns Bright Horizons with more than 1,500 like-minded organizations whose CEOs have demonstrated a commitment to diversity, equity, and inclusion. So in closing, I want to thank every member of the Bright Horizons family for their incredible efforts throughout 2020 as we navigated the near-term environment while remaining focused on our long-term priorities and objectives. As I look back on 2020, I believe it will prove to be a foundational year for Bright Horizons. While it certainly had its financial and operating challenges, it has provided us the opportunity to demonstrate to all of our stakeholders the resiliency of our business model the critical nature of our services, and the discipline we have fostered for more than three decades. As we enter 2021, we start a new chapter, poised to capitalize on our strong position and the significant opportunities that lie ahead. We believe the depth of our client relationships, reputation for quality, ability to adapt and innovate, and most importantly, our talented and committed workforce will drive our success in 2021 and beyond.

Thank you, Steven. I will now recap again briefly the quarter results and then provide some thoughts on 2021. So for the fourth quarter, overall revenue contracted 28% to $377 million. Operating income totaled $18 million, or 5% of revenue. and adjusted EBITDA was 53 million, or 14% of revenue. We opened two new centers and reopened nine centers in the quarter, ending the year with 910 centers open. While we continue to re-enroll families and are encouraged by the stability and sequential improvement of enrollment, at 40 to 50%, average occupancy was still well below the pre-COVID periods in Q4. In addition, we have approximately 100 centers that have not yet reopened. As a result, full-service center revenue contracted $153 million in Q4 of 2020, or roughly 37%, comparing favorably to our expected range of 35% to 45%. Adjusted operating income for the full-service segment contracted $65 million over 2019, to a loss of $29 million. This represents a 43% flow-through on the revenue reduction, also ahead of our expectations of a 50% to 60% flow-through on progressing enrollment and solid cost management, as well as continued support from our client partners and government programs targeted for the childcare industry. Demand for our backup services was ahead of our expectations in the fourth quarter, with top-line growth of 4% to $85 million and with 39 million of operating income. As we ended 2020, traditional in-center and in-home backup use continued to show encouraging trends, with use rebounding off the lows from early in the pandemic and growing sequentially through the back half of 2020. While reimbursed care use peaked in Q2, several clients have continued to make this care option available to support their employees' childcare needs. and that drove higher than expected use through the end of the year. Our educational advising segment also reported solid growth in the quarter, with revenue up 6 million, or 25%, on contributions from new client launches and expanded use of our workforce education and college admissions advising services. As in the initial stages of the pandemic, we've been able to limit the adverse impact of the revenue contraction on operating income in Q4, in part due to the support we receive from our client partners in our variable cost structure, but also due to various provisions of the CARES Act and other government programs in the UK and the Netherlands that represent direct financial supports for the childcare industry. We've been disciplined about cost management, prioritizing spending and investments, and we will continue to be measured about the remaining center reopenings so that we are aligning demand for care with the locations that we are operating. Interest expense of 9 million in Q4 of 2020 was down 2 million over 2019 on lower interest rates and average borrowings. The structural tax rate on adjusted net income was 12% for the full year 2020, which resulted in a 3% effective rate for Q4 of 2020. This is down from 21% for the full year 2019 on reduced taxable income and a proportionately higher effect from the tax benefit on equity transactions. Turning to the balance sheet and cash flow, for the year 2020 we generated $210 million in cash from operations and made capital investments of $73 million compared to $105 million in 2019. We had $385 million in cash as of 12-31 of 2020, and have no borrowings outstanding on our $400 million revolver. We ended the year with 1,014 childcare centers in our portfolio. As mentioned, we launched two new centers in the quarter, and we also permanently closed an additional 14 centers. Like the slate of closures we announced last quarter, these were typically smaller, below average performing centers which have been particularly impacted by the current conditions and had more limited visibility on a timeline for recovery. As discussed on previous calls, we will continue to evaluate our portfolio of centers to identify which locations we may consolidate, not reopen, or otherwise divest as a result of COVID-19. As has been the case since early 2020, we're not providing detailed annual or quarterly revenue or earnings guidance as the ongoing business disruption associated with the pandemic remains difficult to predict. However, I can share some qualitative color on how we see 2021 unfolding. With 910 centers open, or about 90% of our portfolio, our focus remains on enrolling families and ramping our centers back to pre-COVID levels. We remain encouraged by enrollment trends as utilization improves sequentially throughout Q4, despite the increased community spread and the intermittent reinstatement of restrictions in certain geographies. We continue to believe that we will fully recover our enrollments over time, but based on the current conditions, including the cadence of vaccination and general COVID-19 uncertainty, we expect that it will take likely until late 2021 before utilization fully recovers. In the near term, and given the onset of COVID-19 in mid-March of 2020, the first quarter of 2021 will continue to show contracted revenue of approximately 30 to 35% in our full service segment, with related decremental flow through of approximately 40%. As we look out over the balance of 2021, again in the full service segment, we expect that revenue growth to resume and to generate positive operating income in the second half of 2021. Backup care has clearly been a bright spot over the last year, providing valuable client service opportunities while also contributing to the resilience of our overall business performance. As discussed, we experienced outsized growth in this segment in 2020, in large part due to the significant use of self-sourced reimbursed care. Although we have seen some continued use of reimbursed care, we expect this will decrease significantly in 2021 compared to 2020 levels. And as a reminder, it was particularly concentrated in Q2 of 2020. In the near term, we expect back-up care revenue growth in the range of 10% to 12% for Q1. But given that outsized comparison in the second quarter, We expect revenue to trail 2020 levels in the first half, so combining Q1 and Q2 overall would contract by approximately 20% to 25%. With a return to growth in the second half as utilization of traditional in-center and in-home care progress toward pre-COVID levels. Finally, we expect our advisory business to continue to deliver similar results in 2021 as we saw in 2020. or approximately mid-teens revenue growth. So to conclude, although the operating environment continues to be dynamic and fluid, the performance of our business demonstrates the strength of our durable employer-centric model. We navigated a challenging 2020 by relying on our dedicated employees, by leveraging our experienced management team and balance sheet, and taking a disciplined and thoughtful approach to cost management and capital allocation. I'm encouraged by the recent trends, the resilience of our business, and like Stephen, I'm optimistic about our outlook as we move into 2021 and beyond. So with that, Omar, we are ready to go to Q&A.

All right. Thank you. Now, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So one moment, please, while we poll for questions. And our first question is from George Tong with Goldman Sachs. Please state your questions.

Hi. Thanks. Good afternoon. You indicated that occupancy levels in your full-service business modestly improved sequentially in 4Q despite increased COVID. It's trending in the 40% to 50% range. Can you elaborate on those occupancy trends, including how performance has evolved since the start of the year?

Well, I think the headline is that the performance on utilization, George, has been measured and improving modestly month to month. So that has continued into the January, February timeframe. I think as we have looked at this, that's why we feel encouraged by the sort of sustaining and the slight improvement month by month. That's why we talked last quarter about utilization being on average, it ranged from 20 to 60%, but averaging somewhere around 35 to 40 so it has improved on that but at a at a you know very measured pace as i say but it is continuing into the early part of this year and that's what what gives us the comfort to um you know sort of look at the levels that we we talked about in terms of performance in the early part of the year got it very helpful and then just as a follow-up you noted that performance in the first quarter exceeded your prior expectations

Can you talk about what the sources of upside were in your full-service business, what drove the outperformance versus your initial expectations, and if those same factors would represent tailwinds in future quarters?

So I think you said first quarter, but I believe you mean the outperformance in the fourth quarter.

That's right, fourth quarter, yes.

So I didn't know if it was like trying to lead the witness and talking about Q1. Right. So with respect to the fourth quarter performance in full service, so, you know, as I mentioned, enrollment was improving, and so it held, and, you know, in some cases was slightly better. And, of course, we're looking at enrollment across centers that are reopening and how that's going to trend. So it was on the better end, I'd say, slightly than we had expected. I think good cost management, we've also been trying to be cautious about you know, how this is the enrollment will play with the, as we're bringing families back and we have incremental labor hours as a result of changes in the way that we are accepting, you know, drop off and pick up. And so there's some additional staff to cover. those kinds of things, as well as the way that the ratios fall in the rooms. There's some incremental labor and some incremental PPE. Again, not anything that's so outsized. We're just trying to plan for that well, and we did a good job managing the costs. And then I think the other aspect of this is that we have been able to participate, as I mentioned in the prepared remarks, in some of the programs that have been put in place to support businesses and particularly the childcare industry. So there were some of the state block grants and related that we were able to access that also contributed. So to the point of whether what's continuing going forward, I think many of the supports for, say, for example, in the UK had quite a robust government support program that essentially wound down by the end of the year. So that program is largely behind us. Some of the other CARES Act provisions are largely completed, and there are new proposals on the table with the Biden administration, some of which we may be able to benefit from, but some of that is to be determined. So I would say that the opportunity for us to continue to perform, we're basing it on our sort of foundational you know, build enrollment, get families back in the center, and that's where we're trying to, you know, deliver on the operating performance rather than on some of those, the government programs, which can be a little bit less dependable. So I think that's the headline is good fundamental performance supported by perhaps a few things that were more one-off.

Very helpful. Thank you.

Welcome.

Thanks, George.

And our next question is from Manav Patnaik with Barclays.

Thank you. Good evening. I was hoping, you know, the 100 centers that are still closed, I'm presuming, you know, most of those are just the corporate locations. And I was just wondering if you could give us some color, what you're hearing from those corporates. You know, have any of them, you know, just decided to maybe cancel the employees, like some of the tech companies just won't come back? I was just hoping you could give us What's the discussion like there?

Yeah, it's a great question, Manav. So you're right to say that the majority of the 100 centers that are yet to reopen are associated with our employer-client partners. What I would say is that the conversations are ongoing, and we continue to expect that as they contemplate reopening their worksites, that as part of that reopening strategy, they are either going to open prior at the same time as or in some small number of cases just subsequent to the reopening of their work sites. So we're not hearing from many of our clients that reopening is not in the offing. And so our expectation is that throughout the first half of 2021, we'll continue to see reopenings of these temporarily closed centers.

And, you know, most of the kind of new logos or wins you called out in your script sounded like more backup care, but in the full service, like, are you losing some customers? I can understand why nobody wants to sign up right now, but just has the retention been similar?

Well, we have certainly some of the centers that we closed over the course of the last few quarters, Manav, have been closed. Some clients, I'd say the concentration, if we were looking at those, would have been in some government agencies, actually, some smaller centers that were in the, let's say, the D.C. area with some smaller government agency locations that just are in a situation where there isn't a pathway to those employees coming back and they're isolated from any other use. Also, a few smaller... locations that were for smaller colleges. So there have been a little bit of a theme like that, but not as much, you know, in terms of a change of heart from what we see, client interest, actually, you know, to your point of clients not signing up for new Um, we, we did, you know, we, we did open one, um, new center for a client in the fourth quarter. We continue, um, to have centers in development with clients and continue to have conversations for this as an option. So those conversations are slower, um, but they have not stopped. And I'd say that some of the center calling that you're seeing is, um, maybe some of these centers that were, uh, more of a, um, a decision from a client who just came to the conclusion that this was the time that they couldn't continue with it. So there is a little bit of attrition there, but nothing major.

Okay, and if I could just squeeze one quick one. What was the acquisition contribution, I guess, from Scissor City?

It's a couple million in revenue. Okay.

All right, thank you very much.

You're welcome.

Thanks, Manav.

And our next question is from Stephanie Yeat with JP Morgan.

Hi, Elizabeth. It's Andrew and Stephanie. My question has to do with your comment that you still expect to be back to normal full-service utilization by the end of this calendar year, and I know that means into the high 70s. What has to happen in the fall for that to happen?

Well, I think that it's actually a little bit of a different cycle, Andrew, in that typically the fall would be a new enrollment cycle. I think that we're expecting a little bit more of a maybe linear progression over the course of the year as parents continue to gradually come back even over the summer and that we're not seeing that same cycle. So what would have to happen, I think, for the fall is that we see modest building and as vaccinations are more widely distributed and are more widely consumed and parents continue to return to centers and group care over the course of the spring and the summer, I think that would be the foundation that we would be looking for to achieve that kind of fall enrollment cycle. I think, too, the whole school cadence and the way that schools have been in a hybrid situation and or fully remote. You know, it's obviously all over the map. So I think a more consistent school cycle would also be helpful to parents in terms of their planning. But I don't know, Stephen, if you had other thoughts about what would deliver that fall enrollment.

Yeah, no, I think that's exactly right. I think it's going to come down to continued confidence in returning to group care. I think that one of the other elements that's worthy of note is that in the majority of the states, our child care teachers are being prioritized earlier in the cycle for vaccination. And I think that that will continue to propel parents' confidence in our centers and ultimately continued persistence of seeing child care centers as places that don't perpetuate spread of COVID-19 would also be an important marker. So again, I totally agree with Elizabeth, and I think the addition of vaccination and non-spread within child care centers are sort of helpful attributes as well. Perfect. Thank you.

Thank you.

And our next question is from Tony Kaplan with Morgan Stanley.

Thanks very much. I noticed the fact that margins were notably strong again. You mentioned the high margin self-sourced care continues to decline.

So I just wanted to hear the... Tony? Oh, well, maybe we can circle back. Yeah. Absolutely.

Absolutely. Next question is from Hamza Mazzari with Jefferies. Great question.

Hi, this is Mario Cordolacci filling in for Hamza. Could you comment on your current client base in backup? I know you disclosed the 1K. Just wondering how much room there is for penetration or even, I guess, cross-selling with your existing full service clients. And then with that 1,000 clients in backup, I mean, could you speak to the size of your pipeline there? relative to that 1,000 client figure?

Yes, well, I'll sort of take a step back on that question and really, you know, characterize what we see as the opportunity. So certainly 1,000 employer clients is a very, very small relative to the overall number a set of clients that are addressable for this service. Remembering that this service, unlike our full-service child care center service, is a national network solution, so it doesn't require a concentration of employees in any one location. So what we find is for employers that have greater than 500 or 1,000 employees total, we have the ability to serve them with a really robust benefit. I'd say the second thing worthy of note is in our overall client base, Only 25% of our clients buy more than one service. So in lots of different directions, including purchasing backup and investing in backup, we have the ability to cross-sell. And backup is one of the areas that we continue to focus on for those clients who buy either ed advisory or full-service child care. And then the final piece that I would say is that our pipeline continues to be robust. despite the fact that we had tremendous growth in 2020 in terms of the number of clients, we can see strong momentum of prospective clients that are really interested in solving the challenges associated with both the child care disruptions that are created now and also going into the future, as well as the elder care component to that service. So we see really positive momentum and continued, you know, new sales in 2021. Got it. Thank you.

And then on margin within backup, maybe could you help us understand some of the puts and takes of what to expect in 21 versus 20, just from like you're expecting less reimbursement and more in-center and in-home care. Could you maybe help us out with understanding some of the puts and takes of margin in 21 relative to some of those dynamics?

Yeah, so in general, our backup business, as you say, is primarily, it is a service delivery where care is provided either in center or at home. And we target a return on that in the range of 25 to 30% operating income. And so I think broadly speaking, that's where we would expect our backup business to be able to perform in 2021. That's coming from the mix of use being, you know, in line with pistol mix and us being able to deliver that along with some continued reimbursed care. But that aspect of... of the use mix has distorted the margins in 2020 because it is, it's a pass through and it is recognized, the revenue is recognized on a net basis. And so it has the effect of pushing the margin level higher than would normative and what we would expect in the future. So Q2 will be a complete outlier as we compare against that. But in general, we would expect our backup margins to be able to be in the 25 to 30% range given the

um the overall service delivery and cost structure and what have you great thank you thank you and our next question is from gary bisbee with bank of america securities yeah thanks let me follow up on that on that last one so you know if there is some tale of self-reimbursed care continuing into q1 at some of your clients and the jumping off point for margin on backup, you know, it's 46% in the quarter you just reported. I can't imagine it's going right to 25 to 30 in the short term. And so I guess, is it right to think it could persist much higher than historical, at least for another quarter or two? And I guess then, Let me just push back a little at going back to 25 to 30. I mean, you've had significant growth in the client base. There should be some scalability. You've talked a lot about using technology to reduce friction. I assume that's on your part in addition to the client. So wouldn't it be reasonable, given how well this business has done, given that the TAM probably is benefiting from the pandemic, that you might be more profitable or just not have line of sight to that yet? Thank you.

Yeah, no, I mean, I think it's a fair question, Gary, and the opportunity there is multiple. One is being able to obviously access more utilization within any given client arrangement, so more employees who who are able to access the care and who do. Therefore, the mix there can be beneficial because we are then leveraging that overhead across that broader penetration. There is an opportunity, I think, for us to continue to gain efficiency here. I think we're certainly focused on rebuilding the traditional enrollment and having the access to that available. and ensuring that those who want to use the care can use it. And so in that way, the historical model has been premised on a mix of in-center and in-home use. And you're right to say that there will be a sloping back, if you will, to that level. We certainly are conscious, though, that clients who have an arrangement with us want their employees to use it. And so we want to be sure that we're driving that cost side of the equation, if you will, in order to make sure that that persists. So, long-winded way of saying, you know, I think there's opportunity for us to perform better than that range. We have made some investments. We will continue to make investments. And, you know, to the extent that the client sign-up stays as strong as it is, there's certainly some upside opportunity.

And then I'll ask you a question. similar to one I asked a quarter ago, when we think about backup, you know, there's obviously several levers to sort of TAM expansion or long-term growth potential. It's how many customers, it's how many, I guess, how many workers do they have, but how many of the workers, you know, are using the service. And I guess within that, what type of the service they're using. As you think to your comments you've given on the growth for this year, you know, are you assuming that sort of usage within a client or penetration of the potential people at clients that could use it goes to historical levels? Or do you think there's some benefit, you know, from the awareness that, Stephen, that you called out earlier in the call here that could lead that number to be higher? And it's probably hard to know how much, but, you know, is that included with this year's Or is there potential that it could really outperform if now that people understand this service is there, even if it's in the historical delivery models, that you could see real lasting lift, not just from clients, but more people at the existing base using the service?

Yeah, I mean, I think it's a great call out, right? So, you know, When we think about the levers within backup, right, there is certainly the new client growth, which we experienced nice new client growth in 2020. We have an expectation that we're going to continue to experience nice new client growth in 2021. And then another lever, of course, is the number of registered users that ultimately turn into actual users. And so in 2020... And you take, you know, obviously a place like Bank of America where many more people understood our service was available and therefore, you know, the potential now that they are registered users to use coming into 2021 is greater. And we have seen some in Q4 convert in that manner from some self-sourced care individuals to individuals who then use more traditional care. So overall, I think your premise is a good one. We continue to try to make for a more seamless experience. We try to do more personalized outreach. So certainly in our calculus is driving use within a client as well as driving new clients So overall, that's, you know, partially baked into the plan. If we're able to outperform that, we certainly strive to. But again, I think we've embedded some sense that that will occur in 2021.

And then just one, if I could sneak one more in about the center-based business, you know, and as we think about work from home, my sense is an awful lot of community-based competitors and others are open and have opened the doors and, you know, Do you have a sense how many of your users that are in corporates that are closed or still not having a lot of people back in the office have transitioned their kids to other centers? And if there's a risk that that could impact the, you know, the re-enrollment or the increase in utilization. And I guess the second part of that, you know, historically there's always this transition where kids age out and you bring in a new class. How does that look this fall? Does the pandemic impact how you go about attracting that new class? If people aren't in the office, does that impact the normal cadence of how you do that? Thank you.

So let me address the first piece. The first piece is really very much on our mind. We've been staying in very close contact with those who have previously been enrolled that are not currently enrolled. And what we're finding is a few things, right? So there are three things that those individuals have done. Either there's a small proportion of them that have found a different model of care, right? So they may have an in-home caregiver if they're working from home, and therefore, you know, they've chosen a different modality of care. There are those who have chosen a community-based provider that is convenient for them. And then the third, which we've been very focused on, is trying to ensure that if we have a community-based program, a community welcoming program, that we welcome those individuals to our community program. But again, remember, the vast majority of our employer programs centers at this point are now open. And so there's a real incentive, we find, for individuals who have enjoyed the center experience at their worksite to continue to divert back to those worksites. And so they're either going back and working hybrid model at work or fully at work, and therefore the most convenient option for them is the on-site work site center. The second is that the vast majority of our customers we find live within 10 miles of their center, and that includes both work site and community welcoming parents. And so it may be that they're continuing to work from home, but because the vast majority of our employer-based centers are open, they may still choose to drive their child to the center and then go home for work on some days. So I do think we're looking very specifically at what those patterns are, are staying in really close contact with those who have either not chosen to go back to their employer center and or one of our community-facing centers and are looking to make sure that we maximize those to come back to the Bright Horizons family if they've chosen to go elsewhere in the interim.

Thank you. I appreciate all that, Tyler.

And our next question is from Tony Kaplan with Morgan Stanley.

Thank you. I wanted to ask about M&A. This year was a relatively limited year for you, which makes sense just given everything happening with COVID. Just curious if we could see that tick up in the near term or if we should assume that your current focus is really on your internal strategy and just waiting to see, you know, the recovery, you know, before looking for new acquisitions.

Yeah, so on the acquisition front, we continue to be actively out in the market talking to high-quality providers and owners. And that's both in the three geographies in which we currently operate, the U.S., the U.K., and the Netherlands. But we're also continuing, as you would expect, to look in geographies that today we don't operate. And so we believe that through 2021 – the possibility for high-quality acquisition opportunities will continue to present themselves and will continue to uncover those. So, you know, we are absolutely committed to continuing with that leg of our growth strategy and believe that there should be opportunities within 2021 for us to come together with high-quality providers.

That's great. And then just looking at full-service margins, You'd been guiding to about 50% to 60% conversion for 4Q, but you came in a lot better than that. Is that better expense control or lower startup costs, or was there something else? And how should we think about the conversion margin and full service in 2021? Thanks.

Yeah, so Q4 had a bit better conversion. Some of it was good cost management. I think also we had continued support from clients in centers that were in a ramp-up mode that we hadn't been necessarily counting on, but it continued to come. And then we also were able to access some of the CARES Act state block grants that had an impact in the quarter. As we look ahead, what we said in the call, in the prepared remarks is, you know, it's going to be, the first quarter is going to look, you know, we expect somewhat similar to Q4, and then we have a revenue contraction in the 30-35% range with a flow-through in the neighborhood of 40%. We are still in a, you know, enrollment building mode. We have step variable costs and all that coming through, so haven't really reached a the sweet spot of pure operating leverage, but we would expect as the year goes on, as we lap Q2 and the contraction of all the centers closing, revenue growth will resume by Q2 and continue over the course of the year, and that we would be getting to a positive operating income performance by the second half or in the second half. So it's a bit of a tale of two cities as we get to the lapping stage and then continue to rebuild the enrollment. Great. Very helpful.

Thank you. Thanks.

Thank you.

And as a quick reminder, if you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for further questions. And our next question is from Jeff Silber with BMO Capital Markets.

Thanks so much for squeezing me in. Just a follow-up from a couple of the prior questions. We're talking about post-pandemic, and I know nobody really knows what's going to happen, but we're seeing a lot of surveys where a lot more employees are planning on working remotely, either part-time or kind of on a hybrid schedule or whatever. You mentioned having some affiliations with some community-based programs. I'm curious in the areas where you have holes, are you looking to acquire or maybe take over leases of some of the centers that might have closed up?

Yeah, so we certainly are continuing to think, as we always have, holistically about our portfolio. We believe that we're very well positioned, obviously, with a combination of employer centers, so at the worksite, alongside of our lease consortiums that are in the communities typically where our employer clients have employees living and working. So ultimately feel well-positioned. On the other hand, we continue to look for new lease consortium centers. We continue to look at acquisition opportunities that will round out our portfolio so that we continue to be increasingly well-prepared as employees make choices about where they're going to live, where they're going to work, and ultimately where the employer is looking to support their child care needs.

Okay, that's helpful. And forgive me, I came on late, so if you talked about this, you can just skip over it. But one of the proposals in the stimulus plan is an increase in the tax credit, and I'm just curious, historically, either when the tax credit, the child care tax credit was started or when it made change, does that have an impact on parents? I mean, obviously it will help them financially, but do you find that really has an impact between kind of a go and no-go decision whether to use external child care? Thanks.

Yeah, it's a great question. First of all, it's fair to say that we've always believed in our employer model because the government level of support, aside from the support that they provide to the most disadvantaged families, has never really stimulated demand for our childcare centers. On the other hand, we're cautiously optimistic that the Biden plan has a bit more teeth than what we've seen in the past. Granted, it is still a proposal, so it's still going to get its edges rounded out. So we're not sort of counting on what that might do. But where we see the opportunity, if there is to be an opportunity, is that the level of support is potentially going to increase. And the other interesting facet of this is that it could – be provided on a monthly basis. So those two factors on the margin could tip someone who is evaluating either a lower cost option or a different modality of care to potentially find that Bright Horizons is part of their consideration set. So that's really how we're thinking about it. But again, early days in the proposal. And so we'll see ultimately what comes to pass. All right.

That's really helpful, Collin. Thanks so much.

Thank you.

And our next question is from Jeff Mueller with Beard.

Yeah, thank you. Good afternoon. What have you been doing for full-service pricing and employee wages and benefits, I guess, in the fall or into the new calendar year?

So we have – it's been an interesting year for that. We have continued through the pandemic. We actually continued – access to our employee benefits for employees who were active and those who were furloughed. Sorry, did I misunderstand the question?

So I thought the question was focused on tuition and wage increases. Exactly, exactly.

I'm sorry, like I had a complete audio recording error there in my head. Sorry, Jeff. So as it relates to the tuition and labor relationship, 2020, I think, was a disrupted year. So we certainly had some geographies where we were in a mode where we were both open, we had centers that were operating, and we had unusual pay structures as we had premium pay and sort of hazard pay for frontline workers. So we've looked at a reset for this, and similar with tuitions, which were disrupted during the year. So we have I think resumed a view looking at the overall, you know, structure of a center's operations, looking ahead to 2021 and have sort of calibrated the tuitions alongside what we see as the labor cost structure. So I would, I guess I'd characterize it as 2020 was a bit of a disrupted year. We did, we had some wage increases, but it wasn't across the board. We had some tuition increases, but they weren't always across the board either. And so there's not a uniform answer to that, but we are looking at a, you know, a similar business model structure in 2021, what we have established for, you know, the tuition-labor relationship has resumed there. And so I think that's how I'd try to frame it for you.

Okay. And then a follow-up, I think I gave you the last question, but... So from a new enrollment perspective, I'm guessing a lot of your enrollments, correct me if I'm wrong, were prior children coming back to your centers. But how has new enrollment been, and how is the current mix of the infants and newborns to age up with you?

No, I mean, it's actually – I don't know, Mike, if you have a stat there that can – can go behind this, but I think actually we have had good returning enrollment from families who were with us, but we have had new enrollment as well. So it's a meaningful portion of the enrollment that has come back to centers as they have reopened. And I think in general, the enrollments are happening across all age groups, but they are slightly tipped toward older children where parents, in terms of their comfort level, have I'd say been slightly more comfortable with the preschool four or five-year-olds than a new infant. But we do have, you know, we have good infant enrollment. It's just if we were balancing out what's the relativity across the age groups, it's a bit more in the older age groups than younger.

Okay. And then last one, I just want to make sure I'm understanding the accounting. So you recognize the block grant support from the state and federal government as revenue, if you could just clarify or confirm that. And can you give us a rough sizing of how much that was in the quarter?

Yeah, so essentially those grants are in support of expenses, and so they do not represent revenue. They represent cost. And so in the quarter, it was south of $10 million for those that were that were recognized. I think that what we would characterize, though, too, with this and similar to the UK support, much of this was directed toward incremental spending that was occurring, whether it was for labor or PPE, as opposed to, you know, certainly businesses are incurring things like rent, but incremental costs that would not have otherwise perhaps been in the mix. So, Just put that out there as a part of the equation here is that some of it is in and out as opposed to just incremental.

That's really helpful.

Thank you.

You're welcome.

Thank you. All right. Well, thanks again for joining us on the call, and I hope everyone has a good evening and stays safe and healthy.

Talk to you all soon. Thanks very much.