Q4 2020 Bright Horizons Family Solutions Inc Earnings Call
[music].
Greetings and welcome to the bright Horizons family solutions fourth quarter 2020 earnings release Conference call. At this time all participants are in a listen only mode of 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 of this conference is being recorded.
I would now like to turn the conference over to your host senior director of Investor Relations Michael Flanagan.
Thanks Omar.
The one on the call today.
With me are Stephen Kramer, Chief Executive Officer, and Elizabeth Boland, Chief Financial Officer.
Turn the call over Stephen after covering a few administrative matters.
Today's call is being webcast and a recording will be available under the Investor Relations section of our website bright horizons Dot 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.
We're looking statements inherently bought risks and uncertainties of may cause actual operating and financial results to differ materially and of described in detail in our 2019 form 10-K, and other SEC filings.
Any forward looking statements speaks only as of the date on which is made and we undertake no obligation to update any forward looking statements.
We also further data of 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.
David will now take us through the review and update on the business.
Thanks, Mike and 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 will 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 am pleased with the way we finished 2020 for the fourth quarter, we delivered revenue of $377 million and adjusted EPS of <unk> 36 per share.
And our full service segment, we continued to make progress in re ramping our centers and in resuming operations had temporarily closed centers nine of which we opened this past quarter.
In addition of this we launched two new centers, including a client sponsored center for SaaS.
Importantly occupancy levels at open centers modestly improved throughout Q4 in spite of increased community spread of COVID-19 around the holidays.
Our back up care business finished the year strong with increasing in center and in home use as well as some continued self source reimburse 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 oak debt among the many additions.
Collectively our growth in 2020 propelled us past the thousand 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 families response.
Our global teams quickly adapted to the changing needs of clients families and children. While at the same time remained focus 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've heard me say many times before our culture and people are a 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 to backup care.
At the same time, we as an organization worked tirelessly to support our employees, whose lives and families were up ended throughout the year as a result of the pandemic the.
This included health care, and the expanded education benefits for furloughed employees and.
The 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.
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.
The 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.
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 will 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 1000 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 returned 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 'twenty and 'twenty, one 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 child care remains of critical areas 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 of new portal for end users that showcases all of the services available through their employers 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 of 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 and 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 DNI has always been of 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 to 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 of 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 and 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 day and I objectives, particularly in workforce education.
I also recently sign the CEO action pledge, which aligns bright horizons with more than 1500 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 of foundational year for bright horizons.
While it certainly had its financial and operating challenges. It is provide 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 from 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 and I will now recap again briefly the quarter of 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 five percentage of revenue and adjusted EBITDA was 53 million of 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, we're still well below the pre COVID-19 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%.
I'm hearing favorably to our expected range of 35% to 40% 45 per cent.
Adjusted net operating income for the full service segment contracted 65 million over 2019, two of loss of $29 million.
This represents a 43% flow through on the revenue reduction also ahead of our expectation of of 50% to 60% flow through on.
On progressing enrollment and solid cost management as well as continued support from our client partners and government programs targeted for the child care 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 of 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 child care 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 in 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 received from our client partners and our variable cost structure, but also due to various provisions of the cares Act and other government programs in the U K and the Netherlands.
And that represent direct financial support for the child care industry.
We've been disciplined about cost management, prioritizing spending and investments and we will continue to be measured about the remaining set of reopening. 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 of 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 1014 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.
And that's been the case since early 2020, we're not providing detailed annual or quarterly revenue of our 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-19 levels.
We remain encouraged by the enrollment trends as utilization improved sequentially throughout Q4, despite the increased community spread in the intermittent reinstatement of restrictions in certain geographies.
We continue to believe that we will fully recover our enrollments over time the 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 of 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 source reimburse care.
Although we have seen some continued use of reimburse 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 backup care revenue growth in the range of 10% to 12% for Q1, but given that outside of the comparison in the second quarter. We expect revenue to trail of 2020 levels in the in the first half so combining Q1 and Q2 overall would contract by approximately 20 to 25.
5% with a return to growth in the second half as utilization of traditional in center and in home care progress toward pre COVID-19 levels.
Finally, we expect our Ed 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 and the resilience of our business and likes David Im optimistic about our outlook as we move into 2021 and beyond.
So with that Omar we are ready to go to Q&A.
Alright, thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one of 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 from 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.
Okay.
And the our first question is from George Tong with Goldman Sachs. Please state your question.
Hi, Thanks, good afternoon.
Indicated the occupancy levels in your full service business modestly improve sequentially in <unk>. Despite the increased COVID-19. It's in the training and the 40 to 50 per cent range can you elaborate on those occupancy trends, including how performance has evolved since the start of the year.
Oh, well I think the headline is that the the performance on utilization, Georgia has been measured and improving modestly on a month to month. So that has continued into the January February timeframe.
I think as we have looked at this we that's why we feel encouraged by the sort of sustaining and the slightly slight improvement month by month.
Why yeah, we talked last quarter about utilization being.
On average it range from 20% to 60%, but averaging somewhere around 35% to 40. So it has improved on that but at a.
Very measured pace as I say, but it is continuing into the early part of this year and that's what gives us the comfort to.
Sort of look at the levels that we talked about in terms of performance in the early part of the year.
Got it very helpful. And then just because of the follow up you noted that the 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 tailwind in future quarters.
So I think you said first quarter, but I believe you mean, the outperformance in the fourth quarter. So that's right yes.
So I didn't know if there is like trying to lead the witness.
So the right.
So with respect to the fourth quarter performance and full service.
I mentioned enrollment was was improving and so it held and in some cases with was slightly better and of course, we're looking at enrollment across centers that are reopening and how that's going to transfer all of us on the better end I'd say slightly than we had expected.
Think good cost management, we've also been trying to be.
I'm cautious about.
How this is the enrollment will play with the.
We're bringing families back in we have incremental labor hours as a result of changes in the.
The way that we are excepting drop off and pick up and so.
There are some additional staff to cover those kinds of things as well as the way that the ratios fall in the rooms are some incremental labor and some incremental PPE not again not anything thats. So outside of the we're just trying to plan for that well and we.
Did a good job managing the cost and then I think the other aspect of this is the we have been able to participate as as I mentioned in the prepared remarks and in some of the program set.
Have been put in place to support businesses in particular of of childcare industry. So there were some some of the state block grants and related that we were able to access that also contributed.
The point of whether what's continuing going forward I think many of the support.
For let's say for example in the U K had quite a robust.
The 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 May we may be able to benefit from but that is some of that is to be determined. So I would say that the opportunity for us to to continue to perform more basing it on our sort of found.
<unk> Bill.
Built enrollment get families back in the center and that's that's what we're trying to deliver on the operating performance rather than on.
Some of those that the government programs, which can be a little bit less dependable. So.
The headline is good fundamental performance supported by perhaps a few things that were more one off.
Very helpful. Thank you.
Thanks George.
And our next question is from Manav Patnaik with Barclays.
Thank you good evening.
I was hoping you know the hundreds of centers that are still closed.
I'm presuming you know most of the goals is just the corporate locations and I was just wondering if you could give us the color what you're hearing from those cooperates.
Any of them and they just decided to maybe cancels the the employees like some of the tech companies just won't come back I was just hoping you the list.
What's the discussion like debt.
Yeah.
Question Manav, so youre right to say that the majority of the 100 centers that are yet to reopen are associated with the 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 work sites.
That is part of that reopening strategy. They are either going to open prior at the same time as we're in some small number of cases, just subsequent to the reopening of their work sites. So we're not hearing.
You know from many of our clients debt reopening is not in the offing and so our expectation is that throughout the first half of 2021, we'll continue to see reopening of these temporarily closed centers.
And most of the kind of new logos of wins, you called out of the niche group trended like we're more backup care, but in the full service like a U.
Are you are you, losing some kind of stores I can understand why nobody wants to sign up right now, but just have you.
Has the retention being similar.
Well, we have certainly some of the centers that we closed.
Over the course of the last few quarters Manav have been some some clients I'd say the concentration if we were looking at those would've been.
In some government agencies actually some smaller centers that were.
Now 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.
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 in terms of.
A change of heart from what we see client interest actually to your point of clients not signing up for new.
We did we did open one new center for a client in the fourth quarter, we continue.
To have centers in development with clients and continue to have conversations for this as an option. So those conversations are slower, but they have not stopped and I'd say that some of the center culling that youre seeing is maybe some of the centers that were more of a.
<unk>.
A decision from a client who just came to the conclusion that this was the time that they couldnt 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 like any accurate the what was the acquisition contribution I guess from finished the.
It's just it's a couple of million in revenue okay.
Alright, Thank you very much.
Welcome. Thanks Manav.
And our next question is from Stephanie eat with J P. Morgan.
Hi, Elizabeth it's the it's.
It's Andrew and Stephanie.
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 but moving to the out of seven days of what has to happen in the fall for that to.
The happen.
Well I think that it's actually a little bit of of different cycle.
Andrew in the 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 we're not seeing that same cycle. So what would have to happen.
I think for the fall is that we we see modest building.
As vaccinations are more widely distributed than our mark more widely consumed and parents.
We continue to return to centers in group care over the course of the spring and the summer I think that would be the the foundation that we would be looking forward to to achieve that kind of a fall enrollment cycle I think to the whole school.
Cadence and the way that schools have been in a hybrid.
Situation <unk> fully remote.
Do you see 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 the out other thoughts about what we deliver that fall enrollment, yes, no I think that's exactly right I think it's going to come down to continued confidence in returning to grew care I think debt.
One of the other elements that's worthy of note is that in the majority of the states.
Our childcare teachers are being prioritized earlier in the cycle for vaccination and I think that that will continue to propel parents confidence in our in our centers and ultimately continued persistence of seeing childcare 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 in and non spread within childcare centers or are sort of helpful attributes as well.
Perfect. Thank you.
Thank you.
And our next question is from Toni Kaplan with Morgan Stanley.
Thanks very much.
The bad debt of trying to answer a notable of China again, you mentioned the high <unk>.
Based on the size of course continues.
<unk> continues to decline.
Finally the.
Tony.
Maybe we can maybe circle back yet.
The next.
Most of the apps.
Some of it.
Our next question is from Hamzah, the Missouri with Jefferies.
Sure.
Hi, This is Mario court of law <unk> filling in for Hamzah.
And just could you comment on your on your current client base and backup of I know you disclosed the the one K I was wondering how much room there is for penetration of our <unk>.
Even I guess cross selling with your existing.
Full service clients and then with that 100000.
Clients in back up I mean could you could you speak of the size of your of your pipeline relative to that 1000.
Figure.
Yes, well I'll sort of take a step back on that question really.
Characterize what we see as the opportunity.
So certainly of 1000 employer clients is a very very small.
Very small relative to the overall set of clients that are addressable for the service.
Remembering that this service. Unlike our full service Childcare 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 of 1000 employees total.
We have the ability to serve them with the a really robust benefit I would say the second thing worthy of note is in our overall client base of only 25% of our clients.
By more than one service so in lots of different directions, including purchasing back up 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 childcare and then the final piece that I.
I'd 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 we see strong momentum of prospective clients that are really interested in solving the challenges associated with both the childcare.
There are 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 a continued.
The new sales in 2021.
Got it. Thank you and then on margin within backup.
And then maybe could you help us understand some of the puts and takes some of.
What to expect in 'twenty, one versus 'twenty just from you.
You're expecting less.
Less.
Reimbursement in more in center and home care can you maybe help us out with understanding some of the puts and takes of margin in 'twenty, one relative to some of those dynamics.
Yes, so in general our backup business.
As you say is primarily.
It is a service delivery, whereas caris provided either in center of your home.
And we target of return on.
On that in the range of 25% to 30% operating income and so I.
Broadly speaking, that's where we would expect.
Our bad debt business to be able to perform in 2021 that that's true that's coming from.
The the mix of us being.
In line with cash.
The next day, and us being able to flow.
Flavor that along along with some continued reimbursed care, but that aspect of it.
Of the use mix has distorted the margins in 2020, because it is the pass through and it is recognized the revenue is recognized on the net basis and so it has the effect of pushing the margin level higher than.
Norm It is and what we would expect in the future. So Q2 will be of complete outlier as we compare against that but in general we would expect our backup margins to be to be able to be end of the 25% to 30% range given the.
The overall service delivery and cost structure and what have you.
Great. Thank you.
Well thank you.
Yeah.
And our next question is from Gary Bisbee with Bank of America Securities.
Yeah. Thanks, let me follow up on the on that last one so if there is some tail of self reimburse care continuing into Q1.
Some of your clients and.
The jumping off point for margin.
On back up 46% in the quarter, you just reported I cant imagine its going to 25 to 30 in the short term and so I guess.
Is it right to think it could 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 the 25 to 30, I mean, you've had significant growth in the client base there should be some scale ability you've talked a lot about using technology to reduce friction I assume that's on your your part in addition to the client so wouldn't it be reasonable given how well this <unk>.
Business has gone given the the Tam probably benefiting from the pandemic that you might be more profitable or just not have line of line of sight to that yet. Thank you.
Yeah, No I mean, I think of it.
It's a fair question, Gary and the.
The opportunity there is what is multiple of one is being able to obviously access more utilization.
Within any given client arrangements of more employees, who were able to access the Karen who do and therefore.
That's the mix there.
Can be beneficial because we are then leveraging that overhead across that that broader penetration. So there is an opportunity at the for us to continue to gain efficiency here I think we are certainly focused on rebuilding the traditional enrollment and having the access to that available.
And the ensuring that those who want to use the care can use it and so.
In that way the the historical model has been premised on the mix of in center of in home use and.
Youre right to say that there will be a sloping back if you will to that level.
We certainly are conscious, though the clients who have an arrangement with us want their employees to use it and so we want to be sure that were driving that.
Of that cost side of the equation. If you will in order to make sure that that persists. So.
Long winded way of saying I think theres opportunity for us to perform better than that range. We have made some investments we will continue to make investments and to the extent that.
That does the.
The client sign up stays as strong as it is.
Certainly some upside opportunity.
And then I'll ask you a question.
Similar to what I asked the quarter ago, when we think about backup there's obviously several levers to sort of Tam expansion of long term growth potential its how many customers how many I guess, how many workers do they have but how many of the workers are you.
Using the service.
And I guess within that what what type of the service, they're using as you think to your comments you've given on on the growth for this year are you assuming that sort of usage within our client or penetration of the potential people at clients that could use it goes to historical levels or do you think there is some.
N of fit.
From the awareness that debt.
Stephen that you called out earlier in the call here that could be that number to be higher and it's probably hard to know how much but it is.
Is that included with this year.
Or is there potential that it could really outperform if now that people understand the services there even if it's in the historical delivery models that debt.
The real last lasting lift not just from clients, but more people at the existing base using the service.
Yes, I mean, I think it's of great call out right. So.
When we think about the 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 turned in.
To.
Actual users and so in 2020.
And you take obviously a place like bank of America, where many more people understood. Our service was available and therefore.
The potential now that they are registered users to use coming into 2021 is greater and we have we have seen some in Q4.
Convert in that manner from some self sourced care.
Individuals' two individuals who then use more traditional care. So overall I think your premises of 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 us within a client as well as driving new clients. So over.
All of that's partially baked into the plan. If we are able to outperform that we certainly strive to but again I think we've embedded some.
<unk> debt that will occur in 2021.
Just wondering if I could sneak one more in about the center based business.
And as we think about work from home.
My sense is an awful lot of community base.
<unk> and others are open.
Open the doors.
Do you have a sense how many of your users that are in corporates that are closed are still not having a lot of people back in the office of transition their kids to other centers.
And if theres, a risk that that could impact.
The the re enrollment or the increase in utilization and I guess, the second part of that historically Theres always this transition where kids age out and you're bringing in a new class.
How does that look this fall does the pandemic impact how you go about attracting new that new class of.
And if people aren't in the office does that impact the normal cadence of how you do that thank you.
Yeah. 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.
Those who have previously been enrolled that are not currently enrolled.
And what we're finding as of 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, they've chosen a different modality of care there are those who.
<unk> 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 centers. At this point are now open and so there is a real.
So.
Incentive we find for individuals who have enjoyed.
The center experience at their Worksite.
You continue to divert back to those work sites and so they are either going back and working hybrid model at work are fully at work and therefore, the most convenient option for them is the onsite work site center. The second is that the vast majority of our customers. We find live within 10 miles of their <unk>.
Center and that includes both Worksite and community welcoming parents and so it may be that they are continuing to work from home, but because of 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 of what that what those patterns are are staying in really close contact with those who have either not chosen to go back to their employer Center <unk> one of our communities face.
<unk> 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 in the interim.
I appreciate all of that color.
Yeah.
And our next question is from Toni Kaplan with Morgan Stanley.
Thank you.
I wanted to ask about M&A. This year was a relatively limited here for you of 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 the recovery.
Before looking for new acquisitions.
Yes, 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 use of 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.
Debt through 2021, the possibility for high quality acquisition opportunities.
We will continue to present themselves and we'll continue to uncover those.
So we 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 <unk>, but you came in a lot better than that and is that better expense control or lower startup costs or was there something else and how should we think about the conversion margin of.
<unk> service in 2021.
Yes so.
So Q4 had had a bit better conversion some of it was good cost management.
I think also we had continued support from <unk>.
From clients in centers that we're in a ramp up mode.
That we haven't been necessarily counting on but it continued to come and then we also were able to access some of the cares Act.
<unk> block grants debt.
That had an impact in the quarter.
To the as we look ahead.
Well, what we said in the call.
In the prepared remarks is it's going to be the first quarter is going to look we expect somewhat similar to Q4 and then we have.
A revenue contraction in the 30% 35% range with.
The flow through in the neighborhood of 40%.
We are still in a enrollment building mode. We are step variable costs and all of that coming through so haven't really reached the.
The sweet spot of of pure operating leverage, but we would expect as the year goes on as we lap Q2, and the contraction of the all the centers closing revenue growth will resume.
By Q2 and continue over the course of the year and net.
We would be getting too.
Our positive operating income performance by the second half or in the second half so.
It's a.
It's a bit of a tale of two two cities as we get to the lapping stage and then continue to rebuild the Iran.
Great very helpful. Thank you.
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 of Q.
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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 of the prior questions.
If 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 or planning on working remotely either part time or kind of a hybrid schedule or whatever.
You mentioned, having some affiliations with some community based programs I'm curious the in the areas where you have holes are you looking to acquire or maybe takeover leases of some of the centers that might have closed up.
Yes, we certainly are continuing to think as we always have holistically about our portfolio.
We believe that we're very well positioned.
Obviously with the combination of employer centers. So at the work site 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 theyre going to live where theyre 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've talked about the sneak in just skip over it but.
One of the proposals and the stimulus plan is an increase from the tax credit and I'm just curious historically either when the tax credit the child care tax credits, which started or when it may change does that have an impact.
On parents or.
Well, 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 trials here. Thanks.
Sure.
Yes, it's a great question I mean first of all of its 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 child care centers on the other hand.
Cautiously optimistic that the Biden plan has a bit more teeth and 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 there.
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 of lower cost option or a different modality of care to potentially find the bright horizons as 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 what comes to pass.
Alright, Thats really helpful color. Thanks, so much.
Thank you.
And our next question is from Jeff Mueller with Baird.
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 until the new calendar year.
So we have it's been.
An interesting year for that we have continued through this the pandemic we actually continued.
Access to our employee benefits for employees, who were active and those who are furloughed.
Sorry, I misunderstand. The question. So I thought the question was focused on tuition and wage increases.
Exactly exactly.
Sorry, I like they had a complete.
Complete audio recording era, there in my head sorry, Jeff.
So as it relates to to the tuition and labor relationship 2020, I think was a disruptive year.
So we we.
Certainly had some.
Geographies, where we were in a mode, where we were open we had centers that were operating in we had unusual pay structures as we had premium pay and sort of hazard pay for frontline workers until 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.
The structure of our centers operations looking ahead to 2021 and has sort of calibrated the tuitions and alongside what we see as the the.
The labor cost structure, so I would I guess I would characterize it as 2020 was a bit of of 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.
A similar.
Business model structure in 2021, what we have established for the tuition labor relationship has resumed.
There and so I think thats hard I try to frame it for you.
Okay.
Then a follow up I think I can vary plus question, but.
So from a new enrollment perspective, I'm guessing a lot of your enrollments correct me, if I'm wrong word price.
Your children coming back to your centers, but how has new enrollment been and how is the current mix of the incidence of newborns to age up with you.
No I mean its actually.
Mike do you have a staff there they.
You 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 enrolment as well. So it's a meaningful portion of the enrollment debt has come back to centers as they have reopened and I think in general the the enrollments are happening across all age groups, but they are.
Our Ah slightly tipped toward older children, where parents in terms of their comfort level has been.
Been slightly more comfortable with the the preschool four of five year olds.
And our new insight, but we do have.
We have good in pet enrollment, it's just if we were of balancing out and what's the relativity of across the age groups, that's a bit more in the older age groups and 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 up how much of that was on the quarter.
Okay.
So the the essentially those 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 the what we what we would characterize though too with with this and similar to the U K support.
Much of this was directed toward incremental spending.
That was occurring whether it was for labor or PPE as opposed to.
Certainly the 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 or is it some of it is in and out as opposed to just incremental.
That's really helpful. Thank you.
Welcome. Thank you.
Alright, well, thanks again for joining us on the call and I hope everyone has a good evening and stay safe and healthy.
Talk to you all soon thanks very much.
Okay.
Okay.