Bright Horizons Family Solutions Inc. (BFAM) Earnings Call Transcript

Greetings, and welcome to the Bright Horizons Family Solutions Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to your host, Michael Flanagan, GVP, Strategic Finance and Investor Relations. Please go ahead.

Thanks, Carrie, and welcome to Bright Horizons Third Quarter Earnings Call. Before we begin, please note that today's call is being webcast, and a recording will be available under the Investor Relations section of our website, investors.brighthorizons.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 the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2025 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. Today, we also refer 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, investors.brighthorizons.com. Joining me on today's call is our Chief Executive Officer, Stephen Kramer, and our Chief Financial Officer, Elizabeth Boland. 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. Wth that, let me turn the call over to Stephen.

Thanks, Mike, and thank you to everyone joining us this evening. We delivered a solid third quarter with revenue growing 5% to $841 million and adjusted EPS growing 15% to $1.80. Across our portfolio of services, the third quarter is an important period and is illustrative of how we support working families at different stages of their lives. In backup care, it is our peak season for use. And in full service, it marks the start of a new school year when preschoolers move up to elementary school and many new families join our centers. Getting into details on the recent quarter, I will start with back-up care and then walk through full service, including how the fall enrollment season played out. In back-up care, revenue grew 13% to $286 million, in line with our expectations and on top of strong growth in the third quarter of each of the last 4 years. Growth was primarily driven by more employees using their benefit along with an uptick in use per user with the strongest demand in the care type serving families with school-age children on summer break, including camps and tutoring. Meeting that demand starts well before school lets out. Heading into the busy summer season, our teams expanded our vetted provider network across care types, adding many new and in many cases, exclusive partners in camp centers and in home care, adding capacity in our highest demand geographies and extending our reach into new markets where our client employees live and work. That preparation allowed us to deliver care where and when families needed it, resulting in a high fulfillment rate throughout the peak period of demand. At the same time, our marketing and technology teams continue to advance the personalization initiatives that build awareness and drive use, along with the booking experience that allows families to secure care quickly and easily. The breadth of our care options, the quality and scale of our network and the ease of booking through our platform are real competitive advantages, and they are why employers partner with Bright Horizons to provide this important benefit. As we have transitioned into the fall, we are mindful that many client employees are ahead of use within their annual use banks given their strong utilization year-to-date. We expect this to have a dampening effect on growth towards the end of the year, and we now anticipate 13% revenue growth for the full year. Looking over the long term, with penetration of our eligible employee base still below 5%, we see continued runway to extend participation and the breadth of use cases. Our focus is on broadening what the benefit can do for families and making it easier to use. A few examples include our new offering, CareAdvising, which supports families with complex neurodiversity and senior care needs, a conversational AI-supported consumer navigation experience and a more connected experience across our services through One Bright Horizons. Together, these and other initiatives support our long-term growth target of 11% to 13%. Turning to full service. Revenue grew 1.3% to $522 million. Tuition increases were partially offset by modestly lower enrollment, including continued contraction in Australia and by the impact of center closures as we continue to rationalize the portfolio. We added 2 centers in the quarter, including a transition for a leading academic health system client. Occupancy averaged in the mid-60% range in the third quarter, a seasonal step down from the second quarter. Excluding Australia, enrollment in centers opened more than 1 year declined roughly 50 basis points, while Australia's contraction was an additional roughly 100 basis point headwind to our overall enrollment. Last quarter, given the slowing pace of enrollment growth we had seen develop midyear across our markets, we tempered our enrollment growth outlook for the second half of the year. Retention of enrolled families has remained steady. That said, new family starts this fall have been softer than we anticipated with the biggest change from our enrollment expectations being in the U.K. In late June, the U.K. childcare regulator published a group-wide notice requiring us to strengthen safeguarding governance and oversight across our U.K. nurseries. The impact of this was limited over the seasonally quieter summer months, but we did not sufficiently anticipate the duration or full effect it would have on new families decisions in the fall enrollment season. In mid-September, the regulator issued an updated notice that recognized our progress, but nonetheless extended the review period. Because the fall enrollment season was only beginning late in the third quarter, we expect the larger impact on enrollment will be in the fourth quarter and until the notice is lifted. Our focus is and always has been on safeguarding and the safety and well-being of the children in our care. This underpins our ability to generate and convert more inquiries, retain families as their children move through our programs and partner with our employer clients to drive enrollment. We will also continue to optimize our portfolio, positioning our centers to serve employees of our client partners and working families where they live and work as well as continue to close underperforming centers. In Australia, the operating environment remains challenging. A combination of real estate developer-driven supply growth alongside softening demand has pushed the industry as well as our own occupancy to multiyear lows. Our results in Q3 were in line with our expectations, but we have not seen signs that conditions will improve in the near term. Following an updated assessment of the market's prospects, we recorded a noncash impairment this quarter, which Elizabeth will cover. We are actively reviewing strategic alternatives in this market. And while we would defer further comment until we have something definitive to share, we are moving with urgency. At the same time, we continue to support our Australian educators who remain focused on delivering high-quality care and education for the children and families we serve. In Educational Advisory, revenue was $33 million, with continued growth in College Coach, offset by lower participant use in E Asssist. Before I wrap up, I want to reflect on a particularly special moment for Bright Horizons. This fall, we came together to honor our 40th anniversary. It was incredibly meaningful to have our founders, former leaders and colleagues from across Bright Horizons together in one place, reflecting on how far we have come over 4 decades and the positive impact we have had on the lives of others. What began 40 years ago with a simple belief in supporting working families and employers has grown well beyond our first centers into a broad portfolio of education and care solutions. Over those 4 decades, we have navigated economic cycles, a global pandemic and the changing needs of families and employers and our ability to adapt while continuing to deliver for families and clients we serve has been an absolute constant. Through it all, the commitment to making a difference in the lives of children, families, learners and employers remains at the heart of who we are. I left incredibly proud of what this organization has built together and confident in our ability to capitalize on the opportunities ahead. In summary, this quarter showed continued strength in back-up care and our employer-sponsored model as well as opportunities for improvement. We are taking actions to strengthen safeguarding practices, rebuild enrollment in full service and address challenges in Australia while continuing to invest and benefit from the long-term growth and opportunity in back-up care. Notwithstanding our solid results through the third quarter, our revised outlook reflects the change in our expectations for the fourth quarter. As a result, we now expect revenue to be approximately $3.07 billion and adjusted EPS in the range of $4.98 to $5.03 per share. With that, I'll turn the call over to Elizabeth, who will walk through the quarter in more detail and share more on our outlook.

Thank you, Stephen, and hello to everyone who has joined our call tonight. I'll begin with some overall financial highlights. Revenue for the third quarter grew 5% to $841 million, driven by continued top line growth in both our back-up care and Full Service segments. Adjusted operating income increased 5% to $130 million and adjusted operating margin of 15.5% was consistent with the prior year quarter. Adjusted EBITDA increased 5% to $163 million, representing an adjusted EBITDA margin of 19.4%, also in line with last year. And on the bottom line, adjusted EPS of $1.80 increased 15%, reflecting both operating income growth and the leverage we have realized from our share repurchases over the past year. Taking a closer look at each of our 3 business lines. In Back-up Care, revenue grew 13% in the quarter to $286 million, driven by growth in users and led by our programs for school-aged children over the summer months, as Stephen had outlined. Adjusted operating income of $101 million represents an operating margin of 35%. As is typical, the third quarter is our seasonal high point for backup use and margins, and we continue to expect full year operating margins in the range of 28% to 30%, consistent with the outlook we provided earlier this year. In Full Service, revenue of $522 million grew 1.3% over the prior year quarter, driven primarily by tuition increases and offset by an approximately 200 basis point headwind from net center closures and an approximately 100 basis point headwind from enrollment declines in our Australia operations. We ended the quarter with 979 centers opening 2, as Stephen said, while closing 11 centers, 4 of which were in Australia. Breaking down the enrollment stats a bit further, enrollment in centers that were opened for the last year declined roughly 50 basis points in the third quarter, excluding the roughly 100 basis points of headwind from the enrollment contraction in Australia. Occupancy declined seasonally from the second quarter and averaged in the mid-60% range. With respect to the center cohorts we have discussed on prior calls, we continue to drive improvement at the lower end of the portfolio. Our top-performing cohort, centers above 70% occupancy, represented 42% of these centers in the third quarter. Our bottom cohort that is those with below 40% occupancy improved to 9% of these centers from 12% in the prior year, reflecting both enrollment progress in centers moving up the occupancy curve as well as the impact of exiting underperforming centers. Enrollment continued to grow in our middle and bottom cohorts, while the transition -- while the annual transition of preschoolers to kindergarten weighed on our top cohort, resulting in modest overall enrollment decrement in these centers, which still average more than 80% occupied. The total Full Service adjusted operating margins decreased 25 basis points to 3.7% in the quarter. Excluding Australia operating income, margins would have reflected an increase of 40 basis points over the prior year. Operating leverage from tuition increases ahead of wage growth and improved operational efficiency were offset by the lower enrollment. As Stephen previewed, following our annual assessment of goodwill and other intangible assets for potential impairment, including an updated review of the longer-term outlook for our Australian operations, we recorded a noncash goodwill impairment charge of $290 million and other intangible asset impairment charge of $4 million in the third quarter, all related to our international full-service reporting unit, where Australia is grouped. Turning to Educational Advising. Revenue of $33 million declined slightly from the prior year quarter, while adjusted operating margin was 29%. I'll cover off a couple of other items on the P&L. Our net interest expense on debt borrowings of $17 million increased $7 million over the prior year and was up $3 million sequentially due primarily to higher average balances outstanding and interest rates. The structural effective tax rate on adjusted net income was 28.25% in the third quarter, which is higher than 2025 due primarily to the losses in Australia that are not currently deductible for tax purposes. Relative to the balance sheet through September of this year, we've generated $208 million in cash from operations, have made net fixed asset investments of $69 million and have repurchased $560 million of stock. We ended Q3 with $119 million of cash and trailing net leverage of 2.4x net debt to adjusted EBITDA. Now moving on to our updated 2026 outlook. As Stephen previewed, we are revising our full year guidance, and we now expect revenue to approximate $3.07 billion and adjusted EPS to be in the range of $4.98 to $5.03 a share. Looking now at each segment for the full year. In Full Service, we expect reported revenue to grow approximately 2%, reflecting tuition increases, offset by lower enrollment, approximately 200 basis points of headwind from net center closings and approximately 100 basis points of headwind from Australia. In Back-up Care, we expect growth of approximately 13% for the full year. And in Ed Advisory, we expect revenue to be approximately flat with 2025. We are expecting $61 million to $62 million of interest expense for the full year and an adjusted effective tax rate of 28.25% with weighted average diluted shares of 51 million for the full year period. This full year outlook translates into Q4 overall revenue in the range of $730 million to $740 million and adjusted EPS in the range of $1.14 to $1.19 per share. So with that, Carrie, we are ready to go to Q&A.

[Operator Instructions] And our first question will come from Manav Patni with Barclays.

This is Ronan on for Manav. Can you cover with the U.K. and Australia facing the specific headwinds you covered, how did enrollment trend in the U.S. through the fall enrollment season? And what were the key drivers of what you saw, please?

Can you turn -- the question was what is enrollment?

S.rollment.

In the third quarter?

In the third quarter, yes.

Yes. So overall, as mentioned on the call, the enrollment in the third quarter, excluding Australia, was down about 50 basis points. And so the enrollment is -- that decrement is mostly coming from the U.S. So there's a bit of a decrement in the U.S., a bit higher than outside the U.S.

Got it. And then any specific drivers to call out on that, please?

I didn't hear what you said...

Drivers of U.S.

Yes. So the drivers of the decrement are mainly in new starters, and we have experienced pretty good retention on the family side, but we are -- on families who are in the programs that we have, but the fall enrollment cycle is one where we see preschoolers graduating out into elementary school and then we are in a rebuilding enrollment mode. So it's primarily on a pace of new starters that we are seeing a little bit of a shortfall to what we had expected.

And I think the only other thing I would add is that certainly, the cycling of the enrollment is really in that top cohort, right? And so when we think about the reality is those are still very well-occupied centers. On the other hand, that's the place also where the speed at which the children get backfilled does have an impact on the ultimate net enrollment growth.

Got it. And if I may ask a follow-up on the backup care fourth quarter use bank constraint. I think you had said many employees are ahead in their annual use banks and that this should dampen the back-up care growth towards year-end. How significant is that effect in 4Q? And should we view that as just primarily timing as I think inherently implied and that benefit limit issue rather than any moderation in underlying engagement or demand?

Yes. I mean it is primarily a timing issue given that many of the users of our back-up care services is one of the strengths of the program are repeat users. And so they're most familiar with the program. They are more inclined to be reserving ahead and using their days as the year is unfolding. Newer users to the program, as you might imagine, may be more spread out. So we see that as a timing matter overall, with the use growth at the pace that it is, the fact that we had such high growth in the second quarter and the third quarter is where we see that the difference versus Q4 is not indicative of anything given the growth in new users that we've seen throughout.

Our next question will come from George Tong with Goldman Sachs.

This is Alex Lakritz on for George Tong. You mentioned that the regulatory notice had a larger-than-anticipated impact on new family starts in the U.K. So once the notice is listed, how should we think about the pace of enrollment recovery and whether there's going to be any lag between inquiries and actual starts?

Yes. So look, I think that's really tough for us to know for sure. This is an action that the U.K. regulator took that is without precedent. So therefore, it's not something that we would know in terms of how quickly things will come back. What we do know is that we are working really diligently in the U.K. to ensure that we regain the confidence of the regulator in terms of our safeguarding efforts. Those actions started well ahead of the actual notice and continue to today and will continue as safeguarding is always our #1 priority. And so our expectation is that given that the market in general is strong and that this is really reflective of a challenge that is unique to Bright Horizons that we should see the pace of enrollment recovery come back following the lift of that notice.

Got it. And then in back-up care, with penetration still below 5% of eligible employees, could you talk a little bit about how utilization typically develops as the client relationship matures? And any trends you're seeing amongst your longest tenured clients?

Sure. So we have had a large number of clients for a large number of years. And so we have many that would fall into the category that you just described. And certainly, what you have seen over the last, call it, 4 years is very strong growth even among our "mature clients in terms of their duration as being clients. And so we continue to see opportunity given the low penetration that we have even within those clients that have been partners for a long time to continue to grow. And so we see that as a real positive in terms of both our track record and our forward outlook.

Some of what we see with this is that certainly, as a benefit is introduced, it has a little bit lower penetration in that initial year or 2 or 3 as it's getting more awareness within the company. And then the opportunity is greater. That's one factor on how we achieve better penetration. But our own tools for reaching employees have also improved over the last couple of years in terms of being able to -- a registered family can tell us more about themselves, and we can be marketing in real time for events that are relevant to their family situation. And so in that way, as we are with a client for longer, there's more opportunity for the employees who are working there to become aware of us and also for the client, even in their own circumstances that might be -- we've even seen with clients that are introducing a new care type that it opens it up to a new group of employees, but also it is something of a -- it's a productivity and retention tool for employees who are perhaps working in an environment where there have been some otherwise challenging business conditions for a client, and they find it highly valuable in that way.

Our next question will come from Andrew Steinerman with JPMorgan.

Yes. Historically, kind of center closings in a typical year, this kind of further back was 1% to 2%, and that was always kind of healthy pruning. As you look into '27, do you feel like the U.S. could get back to kind of, let's call it, a typical pruning year of centers after a bigger year this year? Like do you feel like by the end of this year, we might kind of rationalize the higher level of closings and move into a year that's kind of more typical? And I'm just talking about really kind of the U.S. here in terms of center closings.

Yes. So we do have an elevated level of closures this year, Andrew, and are still with 9% or so of our centers in that group that's sub 40% occupied, there's still a little bit of runway there as those centers come into focus to be able to be at the end or near the end of their lease life and to be exiting. So we still would expect to be in a net center closing position in the U.S. in '27, given the centers that are still in that group that we have on the radar to be -- to likely be exiting given the enrollment trends we're seeing now.

Moving next to Jeff Meuler with Baird.

I have a follow-up on the dampening effect of use bank utilization that you were talking to. And I understand the concept, but I don't understand the maybe surprise factor because I would think you had a pretty good sense going into Q3 of where those -- the utilization stood and Q3, at least revenue was in your guidance range. And I think you're steering the full year to the low end of the prior guidance range. So if you could help me like what's the surprise factor -- or why is there more of an impact on Q4?