Bright Horizons Family Solutions Inc.

Greetings and welcome to the Bright Horizons Family Solutions first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. 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. It is now my pleasure to introduce your host, Michael Flanagan, Vice President, Investor Relations. Please go ahead.

Thank you, Stephanie. Sorry, thank you, Stacey. Welcome to Bright Rises' first quarter earnings call. Before we begin, please note that today's call is being webcast and recording will be available underneath the investor relations section of our website, brightrisens.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance, and outlook, are subject to safe harbor statements included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2023 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 statements. We also refer today to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release. which is available under the IR section of our website at investors.brighthorizons.com. Joining me on today's call is our Chief Executive Officer, Stephen Kramer, and our Chief Financial Officer, Elizabeth Bolin. Stephen will start by reviewing our results and will provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen.

Thanks, Mike, and welcome to everyone who has joined the call. We are really pleased with the solid start to 2024 and our performance in the first quarter. Revenue increased double digits year over year and earnings outperformed our expectations. With occupancy in our full service segment ticking up to greater than 60% globally and backup use continuing its solid year over year growth trend, we are tracking to deliver on our 2024 guidance. So, to get into some of the specifics. Revenue in the quarter increased 12% to $623 million, with adjusted net income of $30 million and adjusted EPS of $0.51 per share. In our full-service child care segment, revenue increased 12% in the first quarter to $484 million. We launched six centers in the quarter, including client center transitions for Aflac and Rockefeller University. Enrollment in centers that have been open for more than one year increased at a mid-single-digit rate in Q1, and occupancy averaged more than 60%. The U.S. continues to see the strongest performance, with high single-digit enrollment growth driven by double-digit growth in our younger age groups and mid-single-digit growth in the preschool age group. The U.K. led our growth outside the U.S., while our centers in the Netherlands and Australia have had more limited expansion in enrollment, given they sustained higher than average occupancy levels over the last couple of years. Occupancy in the UK stepped up sequentially on mid-single digit enrollment growth. Although the operating environment continues to be challenging, I am encouraged by the recent progress we have made to improve the efficiency of our center operations, specifically by retaining and hiring more Bright Horizons employee teachers and reducing our reliance on agency staff. While the UK remains a headwind to our overall full-service profitability, I am encouraged by the trends and the fundamentals and expect to see continued performance gains. Let me now turn to Backup Care, which delivered another strong quarter, growing revenue 16% to $115 million on solid utilization. We also continue to expand our client base with Q1 launches for Lincoln National, NXP Semiconductors, and United Therapeutics, to name a few. Traditional network use remains strong, with the largest growth in our Bright Horizons owned and controlled supply. While Q1 is a seasonally lower use period for backup care, the number of employees utilizing their care benefit was solid in Q1 and serves as a positive indicator as we look ahead to the higher use summer months. With this expanding participation by eligible client employees, combined with our broader portfolio of use types, we continue to track to our 2024 growth goals. Our education advisory business delivered revenue of $24 million in the quarter, flat over the prior year. Notable new client launches in the quarter included Danaher, IPG Photonics, and WR Graze. As we discussed last quarter, we expect participant levels and use to be relatively stable in this segment this year. We are making strategic investments in the team, product suite, and marketing to transform both the service offering and the service experience. Ed Advisory is a youth-driven business, and I believe the investments we are making today will ultimately drive greater client adoption and client-employee participation in 2025 and beyond. Before I wrap up, I want to share the results of our annual Modern Family Index that we are releasing next week. For the last decade, we have explored the sentiments of working parents as they balance work and their family responsibilities. What we have seen change over the last decade is working parents' new confidence in advocating for family supports, as well as their increasing expectations of their employers. For 70% of employees, employer benefits that support a work-life balance are non-negotiable. Child care in particular was at the top of parents' wish list, trumping even remote work and increase flexibility. This new view of the relationship between employers and employees is vital for the health of families and employers, and it is a clear warning signal for employers who do not invest in family supports. We are very proud to be the partner of choice for so many leading employers who are already ahead of the curve. In closing, I'm pleased with the strong start to 2024. We executed well in the quarter and the results set a solid foundation for us to accomplish the goals we set for 2024. I believe we are well positioned to continue the positive momentum and operating discipline in Q1. As such, we are reaffirming our 2024 full year guidance, specifically revenue growth of approximately 10% to 2.6 to 2.7 billion and adjusted EPS in the range of $3 to $3.20 per share. With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook.

Thank you, Stephen, and hello to everyone who's joining the call today. To recap the first quarter, overall revenue increased 12% to $623 million. Adjusted operating income of $40 million, or 6% of revenue. increased 9% over Q1 of 23, while adjusted EBITDA of $75 million, or 12% of revenue, increased 7% over the prior year. We ended the quarter with 1,044 centers, adding six new and closing 11 centers in the first quarter. To break this down a bit further, full service revenue of $484 million was up 12% in Q1. At the high end of our expectations, on increased enrollment and tuition pricing. Enrollment in our centers open for more than one year increased mid-single digits across the portfolio. As Stephen mentioned, occupancy levels averaged over 60% for Q1, stepping up sequentially given normal enrollment seasonality and the growth we saw. U.S. enrollment was up high single digits, and international enrollment increased in the low single digits over the prior year. In the center cohorts we've discussed previously, we continue to show improvement over the prior year period. In Q1, our top performing cohort, defined as above 70% occupancy, improved from 35% of our centers in Q1 of 23 to 44% of our centers in Q1 of 24. In our bottom cohort of centers, those under 40% occupancy now represents 14% of centers as compared to the high teens in the prior year period. Adjusted operating income of 21 million in the full service segment increased 11 million over the prior year. Higher enrollment, tuition increases, and improved operating leverage more than offset the 15 million reduction in support received from the ARPA government funding program in Q1 of 2023. As Stephen discussed, While the US full-service business continues to be a headwind to our overall segment profitability, we are seeing good progress in reducing the losses with improved staffing, continued enrollment gains, and the ongoing center portfolio rationalization. Turning to backup care, revenue grew 16% in the first quarter to $115 million, a touch ahead of the high end of our expectations with adjusted operating income of $16 million, or 14% of revenue. Adjusted operating margins in the quarter were affected by the closeout of the Stephen Cates Camps earn-out, which resulted in a one-time $2.3 million charge in the quarter, and by the timing of quarterly overhead spending allocations. Our estimates of overhead support costs for the backup segment for the full year is unchanged but the phasing of these costs is reflected more radically as the spending occurs, resulting in a relatively higher overhead allocation in the first half of the year as compared to the prior year, with the second half expected to see a relatively lower allocation as compared to 2023. Lastly, educational advising segment reported $24 million of revenue and delivered operating margin of 10%. The operating margins contracted over the prior year driven in large part by the investments we are making in the team and the product suite. Interest expense increased $2.5 million to $14 million in Q1, excluding the $1.5 million per quarter in 2023 of deferred purchase price interest accretion that we've previously discussed. The structural effective tax rate on adjusted net income was 28.3% roughly consistent with Q1 of 23. Turning to balance sheet and cash flow, we generated $116 million in cash from operations in the first quarter, compared to $67 million in Q1 of 23. We made fixed asset investments of $19 million, consistent with the prior year period, and in early January, paid the remaining $106.5 million due for the Oak acquisition that had been deferred for 18 months. We ended the quarter with $64 million in cash and reduced our leverage ratio to 2.5 times net debt to adjusted EBITDA. Now, moving on to our 24 outlook. As previewed, we are maintaining our 2024 full-year guidance for revenue in the range of $2.6 to $2.7 billion and adjusted EPS in the range of $3 to $3.20 a share. At a segment level, we expect full service to grow roughly 8 to 12 percent, backup care to grow 10 to 12 percent, and ed advisory to grow in the low single digits. As we outlined last quarter, there are two discrete items affecting our reported margins and earnings growth rates in 2024. Specifically, we expect those items to account for an approximately 52 to 55 cent headwind to growth for the full year. reflecting the lapping of approximately $34 million of ARPA funding for P&L centers that we received in 2023, and an estimated increase of $8 to $10 million in interest expense for the year. As we look specifically to Q2, our outlook is for total top-line growth in the range of 9% to 11%, with full service of 9% to 11%, backup of 10% to 12%, and then advisory in the low to single digits. In terms of earnings, we expect Q2 adjusted EPS to be in the range of 70 to 75 cents a share. Regarding the discrete items I mentioned above, we expect a $9 million headwind from the ARPA support we have received in Q2 of 23, as well as approximately 2 to 3 million more in interest expense than last year. So with that, we are ready to go to Q&A.

Thank you. We will now be conducting a question and answer session. If you would 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 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Andrew Steinerman with JP Morgan. Please go ahead.

Hi. I was really encouraged by the margin in full service, and I just wanted to kind of make sure that there wasn't anything that was kind of one-offish about it, that it was sustainable and should improve from here.

Yeah, thanks, Andrew. We are encouraged as well by that, the performance in the quarter, both in the U.S. and a bit better in the UK than we had expected this early in the year. We had previewed that we expected the UK to be improving in 24 against 23, and that would have been, you know, it's ramping in during the year, so there was a bit better performance from the UK. It's recurring in that we see that being sustained improvement as we go along, but I think that what you're seeing is solid performance there. One thing I would call out is as we are radibly distributing the overhead, as I mentioned in backup, there's a little bit of a headwind to backup. There's a slight benefit to the full service segment, but a fairly small portion of that gain. Same overall expense for the year, but the first quarter benefited by something half a percent or so.

Okay. Thank you.

Next question, George Tong with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. You mentioned that your occupancy rates are now over 60%. Can you provide your latest views on how you expect occupancy to play out over the course of the year, taking into account seasonality trends and where you hope to end the year by?

Yeah, so as alluded maybe in your question, George, the first half of the year is the stronger portion of the year for full-service enrollment. So we would expect to see some gain on that in the second quarter, improving enrollment in Q2, and then tapering some with the seasonality in Q3 and into Q4. So likely expected for the year being in the 60% to 65% range, but ending the year close to where we are at this stage. So tapering, growing a bit in Q2 and then tapering back similar level to where we see the first quarter.

Got it. That's helpful. And then in the UK business, you mentioned it's still seeing some headwinds. Can you talk about some of the latest initiatives you've undertaken to try to improve performance there and what the timing would look like for when enrollments and occupancy in the UK can improve?

Sure, so as Elizabeth just alluded to, we're obviously pleased with the progress that we are making. Certainly, 2023 was a particularly challenging year in the UK, and we put a number of actions in place that we said were going to take time to start to season in. Examples of that were recruiting efforts that really focused on enlarging our apprenticeship program, ensuring that we had a seamless candidate experience and really trying to move that to something that was a bit quicker and a bit more seamless for the candidate. And then finally doing some international recruiting. And I think that what we saw in the first quarter is some of those actions really starting to benefit our ability to attract and retain the staff that we have and needed. and then certainly starting to reduce the reliance that we had to a certain extent in our agency staff. So we continue those efforts. And then at the same time, what we're finding is the macro environment there, especially on the labor side, is starting to ease a little bit. And so I think it's the combination of those two things that give us confidence that we're going to continue to see good improvement through 2024 and into 2025.

Got it. Very helpful. Thank you.

Thank you.

Next question, Josh Chan with UBS. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Could you just talk about the conversations you have with kind of prospective customers, whether the tone has shifted on that front and Also, whether your center openings and closing targets for the year has shifted much. Thank you.

Sure. So I think the conversations with our perspective and current clients continue to be positive, specifically on the center side of our business. As we've shared the last few quarters, there has certainly been an elevated level of interest, specifically in centers. And the reality is that along with that has been certainly an elongated sales process. So while we've seen elevated interest, certainly employer clients are being even more deliberative about coming to a decision. I'd say a bright point in that, and we certainly saw this in the first quarter, is that some of that elevated interest is in the form of transitions of management. So for centers that are currently today self-operated, we are seeing, again, interest in examining the possibility of outsourcing centers that exist today, are self-managed, often in healthcare and higher ed, and at least considering the outsourcing. So I would say overall, positive, but on the other hand, certainly deliberative as it relates to timing. And we see that certainly in our current client base as well, which is You know, our current clients are really pleased with the services that we're delivering for them and believe that we will continue to see the kind of retention rates that we have enjoyed historically.

Thank you for the color.

Next question, Manav Finay with Barclays. Please go ahead.

Thank you. Good evening. First question, just on maybe a similar thing on the backup side, can you just talk about the you know, underlying conversations, help, maybe pipeline, and maybe just remind us of just the seasonality through the course of the year in terms of, you know, the backup usage typically?

Sure. So first, I'll make the natural observation, which is we were really pleased with the performance of the first quarter. It was a touch above the high end of our estimate, so that's a really positive way to start the year. As you alluded to, Manav, it is the smallest quarter in terms of use and revenue. And so certainly the comps in the second half of this year are stronger and off of a larger base. And so, again, I think that it is prudent for us to stick with our guidance that we had in place. What I would say in terms of, you know, the existing client base and the pipelines, I think our existing client base continues to be strong and very committed to the services that we are delivering for their working parents. And then on the pipeline side, we continue to see good interest among a large cross-section of industries and employer size.

Okay, and then maybe just the same thing on the margin side, Elizabeth, maybe. So that earn-out payment, that was just, one time for the year, I guess, or do you, will you see that repeat? Just, I know you said you basically, it sounded like you said you pulled forward the expenses, but just wanted to get some comfort on, you know, whether.

Yeah, the settlement of the ERNA was a one-time payment. So that's, that's all there is on that. It was a, a settlement of the deal that we had made on Stephen Cates in the early phases of COVID. It was a 2021 deal. deal and we wanted to have alignment with the business performing and so structured the acquisition with an earn out and so came to a place where it was appropriate to settle that. So that's behind us and so won't affect the margins going forward. What we would expect to see more aligned to the say 20% range in operating margin and stepping up from where we would have otherwise barring that we would have seen Q1 in the mid to higher teens range stepping up a bit in Q2 as the use begins to pick up toward the summer, and then margins well over the 30% level in Q3 with the growth of the use and then this radical alignment of overhead for the year. So that's where you'll see the backup margins just up more. aligned to what you've seen in the past and still looking at, you know, margins for the year that are aligned with where we, you know, what we reported in 23.

Got it. Thank you. Thank you.

Next question. Jeff Mueller with Baird. Please go ahead.

Yeah. Thank you. I'm sorry. I know you just gave some of this, but can you just be any more specific quantification by quarter on the overhead alignment or allocation changes and kind of the quarterly impacts for each of the segments?

So, essentially, the view is overhead is a fairly – we incur it on a pretty ratable basis throughout the year. It's not a perfect 25% per quarter, but it's closer to that than than a revenue basis where we have the kind of seasonality that we do now with backup much more amplified in Q3 and even partially into Q2 compared to particularly Q1. So the effect is most outsized in Q1. It's 300 basis points or so effect in Q1 where it's a couple hundred basis points. in the second quarter likely, and then it reverses in the back half of the year. So that's the same, again, same amount overall for the year. It's just allocated differently to the quarters in the same amount, obviously quarter that we're reporting actuals.

Okay. And then just how big is the self-managed center market? And of that, What is the, I guess, serviceable addressable market for you, meaning roughly what percentage of that market would you view as a potentially good fit for Bright Horizons that you'd be interested in managing them if you had the opportunity?

Sure. So what we have identified, and we focus on sort of an addressable market where the size of the center, the quality of the center, and the employer themselves you know, would be appropriate for us is, you know, I would say low thousands, but is of significance. And typically these programs have been in existence for, you know, quite a number of years. And so that's why I really highlight the fact that these are very deliberative in terms of decisions because in many cases these centers have been operated by, you know, call it the higher end institution or the healthcare institution for, you know, as much as 10, 20, even 30 years. On the other hand, I think that what we certainly saw in terms of transitions, you know, pre-COVID, in COVID, and what we project going forward is an opportunity that certainly we are focused on, given the fact that, you know, like operators in general, it has been a difficult operating environment for a number of years. And so I think that there is more open-mindedness among employers where their core business is not running a childcare center for their employees, it makes sense for them to at least examine the possibility of working with experts like ourselves.

Got it.

And then I hear you that the younger cohorts are growing at a higher rate from an enrollment perspective than the older cohorts. But as it stands today, just how... How much is your mix kind of shifted towards the older cohorts versus what it was kind of pre-COVID, just as we think through kind of the age-out dynamic later this year?

So we're actually slightly overweight in the younger age groups at the moment. By slightly, I mean a couple hundred basis points weighted toward the infant-toddler two group versus the older age group.

Oh, okay. Awesome. Thank you.

Once again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Tony Kaplan with Morgan Stanley. Please go ahead.

Thanks so much. I remember last year in, I believe it was second and third quarter, you benefited from the Stephen Cates camps. And I know this wasn't a 23 deal, but could you just remind us, did you ramp up the marketing there and what the reason was for that huge ramp in 23. And I'm only asking from the perspective of it seems like the comp is a little bit tough. And I know you had guided earlier to being back to sort of more of a normal growth range and back up for next quarter. But just wanted to make sure I remembered the dynamics of what went on in second and third quarter of last year with regard to the camps.

Yeah, so I can, let me start, Tony, and maybe if Stephen adds some color, I'll just double check some of my specific statistics here. But Stephen Cates brought in a, they had been a partner of ours prior to the acquisition, and they provide camp programs typically in the summer, and then for us in addition in break times and throughout summer. various off days or particular pop-up arrangements where we can deploy a school-age type program for older children, kindergarten through younger to middle school. So it opened up an opportunity to serve more children, and with the expansion of the capacity for that kind of a use case and a provider expansion from both having them with us opening more camps than they had operated and then being able to provide that in other venues besides just in the summer camp time frame, we've been able to expand that school age type programming in a broader way as an additional use case. So we did see with the, it's concentrated in the summer, but with those programs coming into their second to third year after the acquisition maturity, if you will, there was an opportunity to serve more families that way. We also last year had more use from other care types as well. We had introduced pet care in the latter part of 2022. And so that was also seeing good uptake from a number of our clients who introduced it as a new use type that opened the door to many new users who may not have ever used backup care before. It's also an intermittent use case. And then also academic tutoring continued to be an opportunity for parents who had school-agers to access both virtual and we also introduced in-person tutoring. So there were a number of incremental use cases that were available last year in maybe a more robust fashion that drove some of the backup use, but as you say, we were stacking, by the back half of this year, we're stacking pretty robust two-year growth rates in backup, which we We know each year we're replenishing the backup use. We've got a lot of happy users who return, but it's something we're cognizant of in terms of making sure that we've got the network, the provider, the use cases, et cetera, to deliver on the kind of growth we're talking about.

Yep, makes sense. And then just wanted to ask about the M&A pipeline. Are you starting to see any more willingness from small providers to sell given that ARPA is, you know, behind us now? You know, any just commentary on how the pipeline looks and your appetite for M&A? Thanks.

Sure. Thanks, Toni. So I think that we are still early in that curve. You know, ARPA ended September of 2023. We have always sort of forecasted that this would be sort of a 12 to 24 months from the end of ARPA before owners started really making either decisions or different decisions than they otherwise would have made. I would say in terms of being really specific about the acquisition pipeline, I would say that we continue to cultivate those relationships. We continue to look at some smaller opportunities. especially where we are looking to densify near high-performing centers. And so, overall, it's definitely a part of the growth algorithm, although, again, at this point, we continue to be very focused on continuing to enroll within our existing centers and moving ahead on that front.

Super. Thanks.

Next question, Jeff Silber with BMO Capital Markets. Please go ahead.

Thanks so much. You talked a little bit about what you're doing from a labor perspective in the UK. I'm just curious if you can address what's going on in the US in terms of labor supply availability and wage inflation.

Yeah, so I would start by saying we're really pleased with the retention rates that we are achieving here in the US. So again, in the depths of COVID, that was a real challenge in terms of our ability to retain and therefore the need to attract more new staff to Brighter Islands. So we still continue at a level that is stronger than what we enjoyed even in 2019. So for me, any conversation around talent starts with retention and feel really good about where we are from that perspective. In terms of the labor market, there are still pockets of sort of heat pockets in the country where It is still challenging to recruit the full complement of staff that we would like to have. On the other hand, broadly, we feel good about the progress that we continue to make here in the U.S. And then in terms of wage rates, I think that we feel really differently than we felt, again, in the depths of COVID when we needed to accelerate wages in a more significant way. It feels like we are now in a place where we are paying really competitively, and therefore, at this point, expect that wage increases will be much more in line with what we had seen previously, as opposed to significant stepped-up basis that we incurred in the depths of COVID.

Okay, that's helpful.

There was an earlier question about center closures, and forgive me if I missed the answer, but I think the question was about your goal for center closures this year. I think you had previously said it would be the same as last year. Is that still the same? And are they skewed to any specific geography? And if they're more in the U.S., is there any specific region? Thanks.

Yeah, so we would still expect to be in the range of what we closed in 2023. We closed 49 centers last year, so still in that range. You know, some disproportionate skew to the UK could be, you know, the UK is not 40% of our overall business, but they certainly could be 40, 45% of those closures. But there are still some underperformers in the US that we are looking at addressing in the same way that we've talked about rationalizing the portfolio in the UK. So those are the two geographies where we're, you know, seeing... seeing the more outsized closures. And there's no particular – we closed 11 this quarter, so there's a cadence that we're following against overall performance when the leases are up, what we can exit, and the timing of all that for parents.

Okay. That's really helpful. Thanks so much.

Thanks, Jeff.

Excellent. All right. Well, thank you all very much for your time. We appreciate it and look forward to seeing you soon.

Thanks, everyone. Have a good night.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation. you music music Thank you. Thank you. Bye. Music Music Greetings and welcome to the Bright Horizons Family Solutions first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. 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. It is now my pleasure to introduce your host, Michael Flanagan, Vice President, Investor Relations. Please go ahead.

Thank you, Stephanie. Sorry, thank you, Stacy. Welcome to Bright Rise's first quarter earnings call. Before we begin, please note that today's call is being webcast and recording will be available underneath the investor relations section of our website, brightrisons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance, and outlook, are subject to safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2023 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 statements. We also refer today to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release. which is available under the IR section of our website at investors.brightrisons.com. Joining me on today's call is our Chief Executive Officer, Stephen Kramer, and our Chief Financial Officer, Elizabeth Bolin. Stephen will start by reviewing our results and will provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, let me turn the call over to Stephen.

Thanks, Mike, and welcome to everyone who has joined the call. We are really pleased with the solid start to 2024 and our performance in the first quarter. Revenue increased double digits year over year and earnings outperformed our expectations. With occupancy in our full service segment ticking up to greater than 60% globally and backup use continuing its solid year over year growth trend, we are tracking to deliver on our 2024 guidance. So, to get into some of the specifics. Revenue in the quarter increased 12% to $623 million, with adjusted net income of $30 million and adjusted EPS of $0.51 per share. In our full-service child care segment, revenue increased 12% in the first quarter to $484 million. We launched six centers in the quarter, including client-centered transitions for Aflac and Rockefeller University. Enrollment in centers that have been open for more than one year increased at a mid-single-digit rate in Q1, and occupancy averaged more than 60%. The U.S. continues to see the strongest performance, with high single-digit enrollment growth driven by double-digit growth in our younger age groups and mid-single-digit growth in the preschool age group. The U.K. led our growth outside the U.S., while our centers in the Netherlands and Australia have had more limited expansion in enrollment, given they sustained higher than average occupancy levels over the last couple of years. Occupancy in the UK stepped up sequentially on mid-single digit enrollment growth. Although the operating environment continues to be challenging, I am encouraged by the recent progress we have made to improve the efficiency of our center operations, specifically by retaining and hiring more Bright Horizons employee teachers and reducing our reliance on agency staff. While the UK remains a headwind to our overall full-service profitability, I am encouraged by the trends and the fundamentals and expect to see continued performance gains. Let me now turn to Backup Care, which delivered another strong quarter, growing revenue 16% to $115 million on solid utilization. We also continue to expand our client base with Q1 launches for Lincoln National, NXP Semiconductors, and United Therapeutics, to name a few. Traditional network use remains strong, with the largest growth in our Bright Horizons owned and controlled supply. While Q1 is a seasonally lower use period for backup care, the number of employees utilizing their care benefit was solid in Q1 and serves as a positive indicator as we look ahead to the higher use summer months. With this expanding participation by eligible client employees, combined with our broader portfolio of use sites, we continue to track to our 2024 growth goals. Our education advisory business delivered revenue of $24 million in the quarter, flat over the prior year. Notable new client launches in the quarter included Danaher, IPG Photonics, and WR Graze. As we discussed last quarter, we expect participant levels and use to be relatively stable in this segment this year. We are making strategic investments in the team, product suite, and marketing to transform both the service offering and the service experience. Ed Advisory is a youth-driven business, and I believe the investments we are making today will ultimately drive greater client adoption and client-employee participation in 2025 and beyond. Before I wrap up, I want to share the results of our annual Modern Family Index that we are releasing next week. For the last decade, we have explored the sentiments of working parents as they balance work and their family responsibilities. What we have seen change over the last decade is working parents' new confidence in advocating for family supports, as well as their increasing expectations of their employers. For 70% of employees, employer benefits that support a work-life balance are non-negotiable. Childcare in particular was at the top of parents' wish list, trumping even remote work and increase flexibility. This new view of the relationship between employers and employees is vital for the health of families and employers, and it is a clear warning signal for employers who do not invest in family supports. We are very proud to be the partner of choice for so many leading employers who are already ahead of the curve. In closing, I'm pleased with the strong start to 2024. We executed well in the quarter and the results set a solid foundation for us to accomplish the goals we set for 2024. I believe we are well positioned to continue the positive momentum and operating discipline in Q1. As such, we are reaffirming our 2024 full year guidance, specifically revenue growth of approximately 10% to 2.6 to 2.7 billion and adjusted EPS in the range of $3 to $3.20 per share. With that, I'll turn the call over to Elizabeth, who'll dive into the quarterly numbers and share more details around our outlook.

Thank you, Stephen, and hello to everyone who's trying to call today. To recap the first quarter, overall revenue increased 12% to $623 million. Adjusted operating income of $40 million, or 6% of revenue. increased 9% over Q1 of 23, while adjusted EBITDA of $75 million, or 12% of revenue, increased 7% over the prior year. We ended the quarter with 1,044 centers, adding six new and closing 11 centers in the first quarter. To break this down a bit further, full service revenue of $484 million was up 12% in Q1, at the high end of our expectations, on increased enrollment and tuition pricing. Enrollment in our centers open for more than one year increased mid-single digits across the portfolio. As Stephen mentioned, occupancy levels averaged over 60% for Q1, stepping up sequentially given normal enrollment seasonality and the growth we saw. U.S. enrollment was up high single digits, and international enrollment increased in the low single digits over the prior year. In the center cohorts we've discussed previously, we continue to show improvement over the prior year period. In Q1, our top performing cohort, defined as above 70% occupancy, improved from 35% of our centers in Q1 of 23 to 44% of our centers in Q1 of 24. In our bottom cohort of centers, those under 40% occupancy now represents 14% of centers as compared to the high teens in the prior year period. Adjusted operating income of 21 million in the full service segment increased 11 million over the prior year. Higher enrollment, tuition increases, and improved operating leverage more than offset the 15 million reduction in support received from the ARPA government funding program in Q1 of 2023. As Stephen discussed, While the U.S. full-service business continues to be a headwind to our overall segment profitability, we are seeing good progress in reducing the losses with improved staffing, continued enrollment gains, and the ongoing center portfolio rationalization. Turning to backup care, revenue grew 16% in the first quarter to $115 million, a touch ahead of the high end of our expectations with adjusted operating income of $16 million, or 14% of revenue. Adjusted operating margins in the quarter were affected by the closeout of the Stephen Cates Camps earn-out, which resulted in a one-time $2.3 million charge in the quarter, and by the timing of quarterly overhead spending allocations. Our estimates of overhead support costs for the backup segment for the full year is unchanged but the phasing of these costs is reflected more radically as the spending occurs, resulting in a relatively higher overhead allocation in the first half of the year as compared to the prior year, with the second half expected to see a relatively lower allocation as compared to 2023. Lastly, educational advising segment reported $24 million of revenue and delivered operating margin of 10%. The operating margins contracted over the prior year driven in large part by the investments we are making in the team and the product suite. Interest expense increased $2.5 million to $14 million in Q1, excluding the $1.5 million per quarter in 2023 of deferred purchase price interest accretion that we've previously discussed. The structural effective tax rate on adjusted net income was 28.3% roughly consistent with Q1 of 23. Turning to balance sheet and cash flow, we generated $116 million in cash from operations in the first quarter, compared to $67 million in Q1 of 23. We made fixed asset investments of $19 million, consistent with the prior year period, and in early January, paid the remaining $106.5 million due for the Oak acquisition that had been deferred for 18 months. We ended the quarter with $64 million in cash and reduced our leverage ratio to 2.5 times net debt to adjusted EBITDA. Now, moving on to our 24 outlook. As previewed, we are maintaining our 2024 full-year guidance for revenue in the range of $2.6 to $2.7 billion and adjusted EPS in the range of $3 to $3.20 a share. At a segment level, we expect full service to grow roughly 8 to 12 percent, backup care to grow 10 to 12 percent, and ed advisory to grow in the low single digits. As we outlined last quarter, there are two discrete items affecting our reported margins and earnings growth rates in 2024. Specifically, we expect those items to account for an approximately 52 to 55 cent headwind to growth for the full year. reflecting the lapping of approximately $34 million of ARPA funding for P&L centers that we received in 2023, and an estimated increase of $8 million to $10 million in interest expense for the year. As we look specifically at Q2, our outlook is for total top-line growth in the range of 9% to 11%, with full service of 9% to 11%, backup of 10% to 12%, and then advisory in the low single digits. In terms of earnings, we expect Q2 adjusted EPS to be in the range of 70 to 75 cents a share. Regarding the discrete items I mentioned above, we expect a $9 million headwind from the ARPA support we have received in Q2 of 23, as well as approximately 2 to 3 million more in interest expense than last year. So with that, we are ready to go to Q&A.

Thank you. We will now be conducting a question and answer session. If you would 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 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Andrew Steinerman with JP Morgan. Please go ahead.

Hi. I was really encouraged by the margin in full service, and I just wanted to kind of make sure that there wasn't anything that was kind of one-offish about it, that it was sustainable and should improve from here.

Yeah, thanks, Andrew. We are encouraged as well by that, the performance in the quarter, both in the U.S. and a bit better in the UK than we had expected this early in the year. We had previewed that we expected the UK to be improving in 24 against 23, and that would have been, you know, it's ramping in during the year, so there was a bit better performance from the UK. It's recurring in that we see that being sustained improvement as we go along, but I think that what you're seeing is solid performance there. One thing I would call out is as we are radibly distributing the overhead, as I mentioned in backup, there's a little bit of a headwind to backup. There's a slight benefit to the full service segment, but a fairly small portion of that gain. Same overall expense for the year, but the first quarter benefited by something half a percent or so.

Okay. Thank you.

Next question, George Tong with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. You mentioned that your occupancy rates are now over 60%. Can you provide your latest views on how you expect occupancy to play out over the course of the year, taking into account seasonality trends and where you hope to end the year by?

Yeah, so as alluded maybe in your question, George, the first half of the year is the stronger portion of the year for full-service enrollment. So we would expect to see some gain on that in the second quarter, improving enrollment in Q2, and then tapering some with the seasonality in Q3 and into Q4. So likely expected for the year being in the 60% to 65% range, but ending the year close to where we are at this stage. So tapering, growing a bit in Q2 and then tapering back similar level to where we see the first quarter.

Got it. That's helpful. And then in the UK business, you mentioned it's still seeing some headwinds. Can you talk about some of the latest initiatives you've undertaken to try to improve performance there and what the timing would look like for when enrollments and occupancy in the UK can improve?

Sure, so as Elizabeth just alluded to, we're obviously pleased with the progress that we are making. Certainly, 2023 was a particularly challenging year in the UK, and we put a number of actions in place that we said were going to take time to start to season in. Examples of that were recruiting efforts that really focused on enlarging our apprenticeship program, ensuring that we had a seamless candidate experience and really trying to move that to something that was a bit quicker and a bit more seamless for the candidate. And then finally doing some international recruiting. And I think that what we saw in the first quarter is some of those actions really starting to benefit our ability to attract and retain the staff that we have and needed. and then certainly starting to reduce the reliance that we had to a certain extent in our agency staff. So we continue those efforts. And then at the same time, what we're finding is the macro environment there, especially on the labor side, is starting to ease a little bit. And so I think it's the combination of those two things that give us confidence that we're going to continue to see good improvement through 2024 and into 2025.

Got it. Very helpful. Thank you.

Thank you.

Next question, Josh Chan with UBS. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Could you just talk about the conversations you have with kind of prospective customers, whether the tone has shifted on that front and Also, whether your center openings and closing targets for the year has shifted much. Thank you.

Sure. So I think the conversations with our perspective and current clients continue to be positive, specifically on the center side of our business. As we've shared the last few quarters, there has certainly been an elevated level of interest, specifically in centers. And the reality is that along with that has been certainly an elongated sales process. So while we've seen elevated interest, certainly employer clients are being even more deliberative about coming to a decision. I'd say a bright point in that, and we certainly saw this in the first quarter, is that some of that elevated interest is in the form of transitions of management. So for centers that are currently today self-operated, we are seeing, again, interest in examining the possibility of outsourcing centers that exist today, are self-managed, often in healthcare and higher ed, and at least considering the outsourcing. So I would say overall, positive, but on the other hand, certainly deliberative as it relates to timing. And we see that certainly in our current client base as well, which is you know, our current clients are really pleased with the services that we're delivering for them and believe that we will continue to see the kind of retention rates that we have enjoyed historically.

Thank you for the color.

Next question, Manav Finay with Barclays. Please go ahead.

Thank you. Good evening. First question, just on maybe a similar thing on the backup side, can you just talk about the you know, underlying conversations, help, maybe pipeline, and maybe just remind us of just the seasonality through the course of the year in terms of, you know, the backup usage typically?

Sure. So first, I'll make the natural observation, which is we were really pleased with the performance of the first quarter. It was a touch above the high end of our estimate, so that's a really positive way to start the year. As you alluded to, Manav, it is the smallest quarter in terms of use and revenue. And so certainly the comps in the second half of this year are stronger and off of a larger base. And so, again, I think that it is prudent for us to stick with our guidance that we had in place. What I would say in terms of the existing client base and the pipelines, I think our existing client base continues to be strong and very committed to the services that we are delivering for their working parents. And then on the pipeline side, we continue to see good interest among a large cross-section of industries and employer size.

Okay, and then maybe just the same thing on the margin side, Elizabeth, maybe. So that earn-out payment, that was just, one time for the year, I guess, or do you, will you see that repeat? Just, I know you said you basically, it sounded like you said you pulled forward the expenses, but just wanted to get some comfort on, you know, whether for the.

Yeah, the settlement of the earn out was a one-time payment. So that's, um, that's all there is on that. Uh, it was a, a settlement of, uh, the deal that we had made on Stephen case in the early phases of COVID. It was a 2021, uh, deal and we wanted to have alignment with the business performing and so structured the acquisition with an earn out and so came to a place where it was appropriate to settle that. So that's behind us and so won't affect the margins going forward. What we would expect to see more aligned to the say 20% range in operating margin and stepping up from where we would have otherwise barring that we would have seen Q1 in the mid to higher teens range stepping up a bit in Q2 as the use begins to pick up toward the summer, and then margins well over the 30% level in Q3 with the growth of the use and then this radical alignment of overhead for the year. So that's where you'll see the backup margins just up more. aligned to what you've seen in the past and still looking at, you know, margins for the year that are aligned with where we, you know, where we reported in 23.

Got it. Thank you. Thank you.

Next question. Jeff Mueller with Baird. Please go ahead.

Yeah. Thank you. I'm sorry. I know you just gave some of this, but can you just be any more specific quantification by quarter on the overhead alignment or allocation changes and kind of the quarterly impacts for each of the segments?

So, essentially, the view is overhead is a fairly – we incur it on a pretty radical basis throughout the year. It's not a perfect 25% per quarter, but it's closer to that than than a revenue basis where we have the kind of seasonality that we do now with backup much more amplified in Q3 and even partially into Q2 compared to particularly Q1. So the effect is most outsized in Q1. It's 300 basis points or so effect in Q1 where it's a couple hundred basis points. in the second quarter likely, and then it reverses in the back half of the year. So that's the same, again, same amount overall for the year. It's just allocated differently to the quarters and the same amount, obviously quarter that we're reporting actuals.

Okay.

And then just how big is the self managed center market? And of that, What is the, I guess, serviceable addressable market for you, meaning roughly what percentage of that market would you view as a potentially good fit for Bright Horizons that you'd be interested in managing them if you had the opportunity?

Sure. So what we have identified, and we focus on sort of an addressable market where the size of the center, the quality of the center, and the employer themselves you know, would be appropriate for us is, you know, I would say low thousands, but is of significance. And typically these programs have been in existence for, you know, quite a number of years. And so that's why I really highlighted the fact that these are very deliberative in terms of decisions because in many cases these centers have been operated by, you know, call it the higher end institution or the healthcare institution for you know, as much as 10, 20, even 30 years. On the other hand, I think that what we certainly saw in terms of transitions, you know, pre-COVID, in COVID, and what we project going forward is an opportunity that certainly we are focused on, given the fact that, you know, like operators in general, it has been a difficult operating environment for a number of years. And so I think that there is more open-mindedness among employers where their core business is not running a childcare center for their employees, it makes sense for them to at least examine the possibility of working with experts like ourselves.

Got it.

And then I hear you that the younger cohorts are growing at a higher rate from an enrollment perspective than the older cohorts. But as it stands today, just how... how much is your mix kind of shifted towards the older cohorts versus what it was kind of pre-COVID, just as we think through kind of the age-out dynamic later this year?

So we're actually slightly overweight in the younger age groups at the moment. By that, by slightly, I mean a couple hundred basis points weighted toward the infant-toddler two group versus the older age group.

Oh, okay. Awesome. Thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Next question comes from Tony Kaplan with Morgan Stanley. Please go ahead.

Thanks so much. I remember last year in, I believe it was the second and third quarter, you benefited from the Stephen Cates camps. And I know this wasn't a 23 deal, but could you just remind us, did you ramp up the marketing there and what the reason was for that? huge ramp in 23, and I'm only asking from the perspective of it seems like the comp is a little bit tough, and I know you had guided earlier to being back to sort of more of a normal growth range and back up for next quarter, but just wanted to make sure I remembered the dynamics of what went on in second and third quarter of last year with regard to the camps.

Let me start, Tony, and maybe if Steven adds some color, I'll just double check some of my specific statistics here. Steven Cates brought in a, they have been a partner of ours prior to the acquisition and they provide camp programs typically in the summer and then for us in addition in break times and throughout various off days or particular pop-up arrangements where we can deploy a school-age type program for older children, kindergarten through younger to middle school. So it opened up an opportunity to serve more children, and with the expansion of the capacity for that kind of a use case and a provider expansion from both having them with us opening more camps than they had operated and then being able to provide that in other venues besides just in the summer camp time frame, we've been able to expand that school age type programming in a broader way as an additional use case. So we did see with the, it's concentrated in the summer, but with those programs coming into their second to third year after the acquisition maturity, if you will, there was an opportunity to serve more families that way. We also last year had more use from other care types as well. We had introduced pet care in the latter part of 2022. And so that was also seeing good uptake from a number of our clients who introduced it as a new use type that opened the door to many new users who may not have ever used backup care before. It's also an intermittent use case. And then also academic tutoring continued to be an opportunity for parents who had school-agers to access both virtual and we also introduced in-person tutoring. So there were a number of incremental use cases that were available last year in maybe a more robust fashion that drove some of the backup use, but as you say, we were stacking, by the back half of this year, we're stacking pretty robust two-year growth rates in backup, which we We know each year we're replenishing the backup use. We've got a lot of happy users who return, but it's something we're cognizant of in terms of making sure that we've got the network, the provider, the use cases, et cetera, to deliver on the kind of growth we're talking about.

Yep, makes sense. And then just wanted to ask about the M&A pipeline. Are you starting to see any more willingness from small providers to sell given that ARPA is behind us now? Any just commentary on how the pipeline looks and your appetite for M&A? Thanks.

Sure. Thanks, Toni. So I think that we are still early in that curve. ARPA ended September of 2023. We have always sort of forecasted that this would be sort of a 12 to 24 months from the end of ARPA before owners started really making either decisions or different decisions than they otherwise would have made. I would say in terms of being really specific about the acquisition pipeline, I would say that we continue to cultivate those relationships. We continue to look at some smaller opportunities. especially where we are looking to densify near high-performing centers. And so, overall, it's definitely a part of the growth algorithm, although, again, at this point, we continue to be very focused on continuing to enroll within our existing centers and moving ahead on that front.

Super. Thanks.

Next question, Jeff Silber with BMO Capital Markets. Please go ahead.

Thanks so much. You talked a little bit about what you're doing from a labor perspective in the UK. I'm just curious if you can address what's going on in the US in terms of labor supply availability and wage inflation.

Yeah, so I would start by saying we're really pleased with the retention rates that we are achieving here in the US. So again, in the depths of COVID, that was a real challenge in terms of our ability to retain and therefore the need to attract more new staff to Brighter Islands. So we still continue at a level that is stronger than what we enjoyed even in 2019. So for me, any conversation around talent starts with retention and feel really good about where we are from that perspective. In terms of the labor market, there are still pockets of sort of heat pockets in the country where It is still challenging to recruit the full complement of staff that we would like to have. On the other hand, broadly, we feel good about the progress that we continue to make here in the U.S. And then in terms of wage rates, I think that we feel really differently than we felt, again, in the depths of COVID when we needed to accelerate wages in a more significant way. It feels like we are now in a place where we are paying really competitively, and therefore, at this point, expect that wage increases will be much more in line with what we had seen previously, as opposed to significant stepped-up basis that we incurred in the depths of COVID.

Okay, that's helpful.

There was an earlier question about center closures, and forgive me if I missed the answer, but I think the question was about your goal for center closures this year. I think you had previously said it would be the same as last year. Is that still the same? And are they skewed to any specific geography? And if they're more in the U.S., is there any specific region? Thanks.

Yeah, so we would still expect to be in the range of what we closed in 2023. We closed 49 centers last year, so still in that range. You know, some disproportionate skew to the UK could be, you know, the UK is not 40% of our overall business, but they certainly could be 40, 45% of those closures. But there are still some underperformers in the US that we are looking at addressing in the same way that we've talked about rationalizing the portfolio in the UK. So those are the two geographies where we're, you know, seeing... seeing the more outsized closures. And there's no particular – we closed 11 this quarter, so there's a cadence that we're following against overall performance when the leases are up, what we can exit, and the timing of all that for parents.

Okay. That's really helpful. Thanks so much.

Thanks, Jeff.

Excellent. All right. Well, thank you all very much for your time. We appreciate it and look forward to seeing you soon. Thanks, everyone.

Have a good night.

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