Bright Horizons Family Solutions Inc. Q3 FY2025 earnings call

• Back-up care was a standout with 26% revenue growth, driven by strong demand across care types, including school-age programs, and new clients like MIT and Appian. Focus on expanding users and frequency within existing client base.
• Full service revenue up 6% due to pricing, modest enrollment gains, and FX tailwind. U.K. full service business regaining ground with enrollment growth and cost management. Focus on quality at scale and portfolio alignment.
• Education advisory revenue up 10% led by College Coach and EdAssist, with new clients like Sony Music and Premier Health Partners. Emphasis on meeting client upskilling needs.
• Mention of awards of excellence celebration honoring employees' contributions.

Back-up care: Revenue increased 26% to $253 million, accounting for 31.5% of total revenue ($803 million). Full service: Revenue grew 6% to $516 million, making up 64.2% of total revenue. Education advisory: Revenue rose 10% to $34 million, representing 4.2% of total revenue.

• Upgraded full-year revenue to approximately $2.925 billion (9% growth) and adjusted EPS to $4.48 to $4.53.
• Back-up care expected to grow ~18% in 2025, full service ~6%, education advisory high single digits.
• Q4 revenue expected in range of $720 million to $730 million, adjusted EPS in range of $1.07 to $1.12.

• Economic uncertainties impacting parent demand for back-up care.
• Variable return to office cadence affecting demand for back-up care.
• Pressure on end consumers who pay for services, affecting affordability of back-up care.

Q: So obviously, I wrote a report sizing out the back-up care industry recently and your back-up growth was just tremendous. I surely wanted to ask you about the sustainability of these type of growth rates.

A: Yes. So thanks, Andrew. We're just looking at each other, who goes first. So thanks for the question. Well, as noted, we're looking at now, given the performance in the third quarter, which was certainly very substantial and outsized to our own expectations. We're looking at about 18% growth for this year. And that reflects, obviously, the growth over our prior year. And continuing that going forward, we would -- still it's early days. We're not going to be providing detailed guidance yet for 2026. But as we look ahead, certainly, that low double digits ticking up a bit probably from that to maybe 11% to 13% would be where we would be looking for next year, but it is a model that does have a tremendous amount of opportunity, as Stephen alluded to in terms of the piece parts of how we can grow that. And maybe I'll turn it over to him to talk a bit more about that.

Q: You mentioned enrollments increased in the low single-digit range. Can you clarify what low single digits means and if your full year enrollment growth outlook is still 2%?

A: Yes. So we had -- as we talked about last quarter, George, we had probably about 2% growth last quarter and are looking at something closer to 1%, 1% plus this quarter. So low single digits being a little bit of a taper from where we saw last quarter, and that's the pace at which we would expect to exit the year similar to that 1%, 1% plus.

Q: Just given those economic conditions that you just referenced, how are you planning tuition pricing, I guess, in calendar year 2026 for full service?

A: Yes. On balance, Jeff, we're looking at around a 4% average that would be at the higher end of our historic range. But in this kind of an environment, it's a bit of a middle-of-the-road pricing strategy. We have, as you know, a variable implementation of that. So that's an average, but we do make individual localized decisions that take into account market factors, other choices or competitors that may be in an environment. And in the centers that we have that still remain under-enrolled, we may take a more aggressive pricing approach. And in those that have higher demand, we may price higher. And by aggressive, I mean we may go lower than that average and then we may price higher than average where the demand is higher. But the average is looking to be in the neighborhood of 4%.

Q: My first question was just in the back-up performance this quarter, where did you see the outperformance versus kind of the expectations of the guide that you had given? And maybe I don't know if that correlates with the context on, Stephen, you said it's very early innings in back-up care. Like is that new logos, upsell, a combination of both? I was just hoping for some color there.

A: Sure. Happy to. So I think we mentioned a couple of new logos. But in any given year, the reality is that the vast, vast majority of the growth that we experience is from the existing user base and existing client base. And so what we really saw was our ability to grow new users and continue to get existing users to come back and reuse was an important component of the outperformance. Clearly, in this quarter, we saw good use across the different use types, but school-age programs were an important component of the quarter. And what's nice about school-age programs, in particular, is our ability to flex up and down given ratios, given flexibility of space and the numbers of new opportunities through Steve & Kate's as well as through our extended network. And so all those things taken together really allowed for our outperformance. Manav, if you'll remember from the last quarter call, we highlighted that we saw some strong indications of early reservations. And I think what ended up happening was that got compounded with working families who came much more closer to the date of needed care and ultimately drove what we saw this quarter.

Q: At least 3 of your representative clients have announced headcount reductions in the thousands in the past 6 months, 2 of which in September and October. Should we expect to see any impact from that? Or because of your multiyear contracts and maybe back-up care strength, would that offset any impact from those?

A: So Toni, I think the question you just asked was related to layoffs at some of our clients and the impact that, that might have on their investment. What I would say is I would hearken back to what I shared about the low penetration that we have within the existing eligible base of employees within our client employees, right? So at a sort of sub 10% penetration, we categorically have a lot of room even with some reductions in force. And so yes, we have multiyear contracts. But ultimately, what is going to drive the day in terms of where we see continued investment is going to be in our ability to continue to get new users and to get existing users to repeat their use. And so given the small penetration that we have, our expectation is that with our efforts, we should continue to see good progress going forward even in those accounts that are having reductions in force.

Q: Stephen and Elizabeth, congrats on the good quarter. I guess on back-up, as you think about going into next year, how are you planning to resource the business, I guess? And if you were faced with kind of surprisingly high demand again, how do you or what do you do to kind of fill capacity in that scenario?

A: Yes. I mean look, we go through an extensive planning cycle, and we look at our expected demand client by client, and then we also look at it geography by geography. And so we have a really comprehensive team that focuses on the BI behind the business and then a provider relations team that really tries to map what expected demand is against the provider network that we have. And so what I would say is that we have fairly sophisticated tools to make sure that we don't get caught out with extra demand that can't be fulfilled. And because both in our own centers as well as in our own Steve & Kate's Camps in home care delivery as well as all of our extended partners, we are leveraging sort of excess capacity on any given day. We have a really good track record of being able to fulfill a high percentage of the care requests that ultimately are required. And so I appreciate the question. I think it's an important one, and we spend a lot of time making sure that we invest behind the capacity to make sure that it is available for our clients and their employees because that is such an important metric to those who we serve.

Q: This is Harold Antor on for Stephanie Moore. Just real quick on the U.K. I know you guys are seeing some improvements there. So I just wanted to get any more color. What percentage of the centers are there? What percent of revenue is it running? And I think you wanted to break even this year. I guess how has it been running year-to-date compared to your projections? And then I guess, what would you be saying -- what would you be thinking the contribution to '26 would be? Just anything around that would be very helpful.

A: Yes. Thanks for the question. And certainly, the team have been very hard at work in the U.K. to bring that well-positioned portfolio back to its prior operating capability. And the performance this year has been both steady. It's been steady for several quarters now, but it has been steady and improving enough that we are comfortable with the visibility of being more on the positive side than just breakeven side for the U.K. And as we look ahead to 2026, the performance for the U.K. has been a contributor to the improvement in the margin in full service this year. It still is a headwind, probably 50 basis points or so headwind. And as it continues to improve and contribute to next year, that will -- it still is trailing where we are in the U.S. business as an example. So it still is a bit of a tailwind but it will contribute to our momentum as well next year. Full service overall, I think that the point about enrollment, we talked about tuition rate increases, et cetera. Overall, we would continue to expect to see some margin expansion next year, maybe not at the pace that we're seeing this year, more like 50 to 100 basis points of margin expansion, but the U.K. would be a component of that.

Q: This is Ryan on for Jeff. Just had a quick follow-up question on the pricing for next year. Just based on the data we track on child care service wages, they've been growing around 4%. I'm not sure if you're seeing anything differently. So wondering how you see the wage inflation dynamic evolving? And then what is your confidence level in just being able to price over that? I know it's a little bit different by market, but just in relation to the 4% pricing you said on average for next year?

A: Yes. We have -- I appreciate the context of some general market factors. We tend to be paying at certainly the median to higher on wages. And so we feel like we will be able to sustain that. We have typically targeted a 100-basis point spread between average tuition increases and average wages. And we would, at this point, expect to be able to sustain that given where we see our labor cohort. So I think confidence -- we do feel confident that we can price ahead of wage, balancing out, as mentioned before, some of the conditions where we may be a bit more aggressive on price in order to continue to drive demand and enrollment in the centers that are more underperforming.