Bright Horizons Family Solutions, Inc. Stock

Greetings, welcome to the Bright Horizons Family Solutions Second Quarter 2026 Earnings Call. [Operator Instructions] 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. Please note, this conference is being recorded.

I will now turn the conference over to Michael Flanagan, Group Vice President, Strategic Finance at Bright Horizons Family Solutions. Thank you, Michael. You may begin.

Thanks, Veli, and welcome to Bright Horizons Family Solutions Inc. second 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 at 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 our 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 the GAAP counterparts in our earnings release, which is available on 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 Boland. Stephen will start by reviewing our results and I'll provide an update on the business, and Elizabeth will follow with more detailed review of the numbers before we open it up to your questions. So with that, let me turn the call over to Stephen.

Thanks, Mike, and thank you to everyone joining us this afternoon. I am pleased with our performance in the second quarter and through the first half of 2026. The Revenue expanded by 7% to $779 million with growth across both backup care and full service and adjusted EPS increased 20% to $1.28, both ahead of our expectations. Back-up care again led our growth while improving operating efficiency drove margin expansion in both segments. These results reinforce the strength and durability of our employer-sponsored model and the value of our differentiated portfolio of care and education solutions.

On our first quarter call, we introduced a new investor presentation highlighting our client-centric business model, our competitive advantages and the breadth of our long-term growth opportunities. Within back-up care, our largest segment by earnings contribution, we outlined 3 key growth drivers. Deepening penetration within our existing clients, expanding our ecosystem of care and education solutions and winning new logos. Let me update you on our progress on all 3 fronts.

Starting with deeper penetration. Back-up care revenue grew 19% to $194 million in the quarter, accelerating from 12% growth in the first quarter. Usage growth was strong across care types and was largely driven by more unique users as well as an uptick in frequency of use. Key to driving deeper penetration within our clients is the breadth and quality of our care network and our technology platform. We have made significant investments over the past several years to both enhance the booking process and expand access to care solutions. Today, families can confirm care in real time through our Instant Book capability and we now see the majority of our network care in backup secured this way. Combined with our broader service network, this creates a seamless on-demand experience that allows us to reliably connect families with trusted care across care types and geographies. Our ability to deliver quality care with this level of ease, reliability and scale drive deeper engagement and is a true competitive advantage.

Turning to the expansion of our ecosystem. Employer camps have become a natural extension of how we support clients to address their evolving workforce needs. This summer, we expanded our on-site Steve & Kate’s Camp for AT&T to its Atlanta campus, building on last year's successful pilot at its Dallas headquarters. We are also operating 5 camps for a leading multisite hospital system, 1 camp serving an energy company in Texas and a consortium camp serving 2 large banking employers in North Carolina. These camps demonstrate how we use our unique delivery capabilities and client relationships to develop additional ways to serve the increasing range of needs of employer clients and working parents.

Turning to our third backup growth lever, new and ramping clients. Utilization continues to build among recently launched clients. Some additions include a Fortune 500 global consumer company and a Fortune 500 global industrial company. These relationships demonstrate the broad relevance of our care solutions and provide an additional source of growth as they launch and mature. Overall, back-up care continues to deliver solid double-digit revenue growth, extending an impressive 15-year track record. This is a high-margin, capital-light business serving a large and underpenetrated market. With meaningful runway across each of our 3 growth avenues, we believe back-up care is well positioned to remain a durable driver of revenue and earnings growth.

Turning to full service. Revenue grew 3% to $557 million, in line with our expectations. Growth was driven by tuition increases and a favorable impact from foreign exchange, partially offset by continued enrollment headwinds in Australia and the impact of center closures as we continue to optimize the portfolio. We opened 7 centers in the quarter, including 5 for employer clients here in the U.S. Three centers were for a leading academic medical center that had self-operated their centers for more than 20 years before making the decision to have Bright Horizons assume the management of these programs with their ongoing financial support.

This illustrates the transition opportunity that continues to exist within employer-sponsored care, especially within health care and higher education institutions. A decision by an employer to self-operate is not necessarily permanent. When employers' needs and circumstances change, our market leadership expertise and operating scale make us the partner of choice for leading employers to transition the management of their centers. The other 2 employer-funded client centers opened in the quarter, our new worksite locations developed around these employer-specific needs exclusive to their employees and reflective of these clients' HR strategy and desire to meet employee needs. Together, these center openings illustrate the opportunity to grow our employer-sponsored center footprint through transitioning established programs to Bright Horizons management and partnering with employers on new centers for their employees.

Occupancy averaged in the high 60% range in the quarter. In fact, 70% excluding Australia, up sequentially and reflecting continued recovery across the broader portfolio. Enrollment in centers opened for more than 1 year increased approximately 1%, excluding the impact of enrollment contraction in Australia, which was roughly a 100 basis point headwind. The pressure in Australia remained broadly consistent with what we discussed in the first quarter, while the balance of the portfolio continued to progress.

Looking ahead, our focus is on building on the enrollment progress we have made, converting more inquiries into enrollments, translating higher occupancy into continued operating leverage and shaping the portfolio around centers and markets with the strongest long-term demand and strategic value to our clients. As we build on this progress, our commitment to delivering the highest quality care in a safe and nurturing environment remains foundational to everything we do. Over 40 years, we have built rigorous policies, training and oversight across our centers, and we continue to invest in the people, systems and practices that support consistent quality service delivery.

We also recognize that this work is never finished, and we continually learn, evaluate and strengthen our approach. That discipline and our commitment to transparency and improvement is fundamental to the trust families and employers place in Bright Horizons.

In Educational Advisory revenue of $28 million was consistent with the prior year as continued growth in College Coach was offset by lower participant engagement in EdAssist. Demand for College Coach's advisory and services is underpinned by the quality and experience of our college admissions and financial aid experts who provide highly personalized guidance to navigate the complex and high stakes college landscape. In EdAssist, our focus is on increasing engagement by strengthening the technology platform, expanding the relevance of our solutions and making it easier for working learners to take advantage of the education benefits available to them.

Tying all this together is one Bright Horizons. Our growth strategy to extend the reach and value of our service portfolio by engaging more employees and employers across the full spectrum of our solutions. At the employer level, that means building on the trust we have established through one service to expand relationships across our broader portfolio. Just as importantly, it means helping more eligible employees discover and engage with a range of care and education benefits available to them. By creating a more connected experience across our services, we can support more of their needs while delivering greater value to our employer clients.

We again saw the impact of this strategy during this past quarter. The academic medical center behind the 3 full service centers we transition, first started assisting College Coach client. Separately, a leading financial services company that has long utilized back-up care and a college coach to support employees and their families through the college planning process. Examples like these together with growing employee engagement across our services demonstrate the power of our employer-sponsored model and our ability to deepen relationships and penetration at both the employer and employee level.

In summary, we continue to demonstrate the strength and durability of our employer-sponsored model through the first half of 2026. As we look ahead to the remainder of the year, we are narrowing our full year revenue outlook to a range of $3.085 billion to $3.15 billion and raising adjusted EPS outlook to $5.05 to $5.15 per share.

With that, I'll turn the call over to Elizabeth to walk through the quarter in more detail and show more on our outlook.

Thank you, Stephen, and hello to everyone who's been able to join the call tonight. I'll begin with some overall financial highlights. Revenue for the second quarter grew 7% to $779 million, driven by continued top line growth in both our full service and backup segments. Adjusted operating income increased 15% to $99 million as adjusted operating margins expanded 95 basis points over the prior year quarter to 12.7%. Adjusted EBITDA increased 13% to $131 million, representing an adjusted EBITDA margin of 17%. And on the bottom line, adjusted EPS of $1.28 increased 20%.

Taking a closer look at each of our 3 business lines. Back-up revenue grew 19% in the quarter to $194 million, driven by the strong utilization Stephen talked about across care types. Adjusted operating income of $50 million grew 23% versus the prior year as the associated operating margin expanded 80 basis points to 26%. In full-service, revenue of $557 million grew 3% over the prior year quarter, driven primarily by tuition increases, growth in occupancy and a favorable impact from foreign exchange. These benefits were partially offset by an approximately 250 basis point headwind from center closures and, to a lesser extent, to enrollment declines in our Australia operations.

We ended the quarter with 988 centers Opening 7, as Stephen mentioned, while also closing 7 lease model centers. Enrollment in centers that are open for the last year was approximately flat in the second quarter after taking into account the roughly 100 basis points of headwind from the enrollment contraction in Australia. Occupancy increased sequentially from the first quarter and averaged in the high 60% range and was about 70%, excluding Australia.

With respect to the center cohorts we have discussed on prior calls, the overall mix continued to improve, driven by a significant reduction in our lowest occupied centers. Our top-performing cohort centers above 70% occupancy, represent 53% of these centers in the second quarter, roughly in line with what we reported in the second quarter of 2025. More notably, our bottom cohort that is centers below 40% occupied declined to 5% of these centers from 10% in the prior year, reflecting both the enrollment progress and the impact of closing underperforming centers.

Total full service adjusted operating income increased 10% to $44 million and represented an adjusted operating margin of 7.9% and an expansion of 50 basis points over the prior year. Tuition increases ahead of average wage growth across the portfolio and continued improvement in our U.K. operations drove the margin expansion. Excluding our challenged Australian operations, full-service adjusted operating margin would have expanded by more than 75 basis points over the prior year. Educational Advisory revenue of $28 million was consistent with the prior year quarter and adjusted operating margin was 16%.

Turning to a couple of other items on the P&L. Our net interest expense of $14 million increased $3 million over the prior year and was up $2 million sequentially due primarily to higher average borrowings as well as modestly higher average effective borrowing rates. The structural effective tax rate on adjusted net income was 28.75% in the second quarter, higher than in 2025 due primarily to losses in Australia that are not currently deductible.

Turning to the balance sheet and cash flow. We generated $95 million in cash from operations in the second quarter and made fixed asset investments of about $19 million. We also made share repurchases totaling approximately $250 million during the quarter. At quarter end, we had $164 million of cash and approximately $1.3 billion of gross debt. Our trailing net leverage ratio was 2.2x net debt to adjusted EBITDA at the end of the quarter reflecting that share repurchase activity over the last year.

Now moving on to our updated full year outlook. On the revenue side, as Stephen previewed, we are narrowing our reported revenue to a range of $3.085 billion to $3.115 billion and raising our adjusted EPS outlook to a range of $5.15 to -- $5.05 to $5.15.

Looking now at each segment for the full year. In full-service, we expect reported revenue to grow in the range of 2.5% to 3% on enrollment gains and tuition increases offset by approximately 200 basis points of headwind from net center closings and approximately 100 basis points of headwind from Australia. In back-up care, we have increased our expectations to 13% to 15% revenue growth for the full year, driven by the continued expansion of use. And in ed advisory, we expect to grow in the low single digits. We are now expecting $58 million to $60 million of interest expense for the year, an adjusted effective tax rate of 28.5% and a diluted share count of 51.5 million shares for the year.

Looking now to Q3, our outlook is for total revenue of $835 million to $845 million or growth of approximately 4% to 5%. We expect full service to grow reported revenue of 50 to 100 basis points, including an approximate 225 basis point headwind from net center holdings over the last year and 100 basis points of headwind from Australia. In back-up care, we expect revenue growth in the quarter of 12% to 14%, and again, Ed advisory to grow in the low single digits. In terms of earnings, we expect Q3 adjusted EPS to be in the range of $1.73 to $1.78 per share. So with that, we are ready to go to Q&A.

[Operator Instructions] Our first question is from Andrew Steinerman from JPMorgan.

Two quick questions, some of this like seasonal. -- with a strong backup growth in the quarter and into next quarter, could you just give us a sense how much summer camp usage is driving those results? Surely, it's broad usage, but I am interested in summer camp because you've had a lot of success there. And then also, I know it's early, and we're still in July. But as you think about the guide that you gave for the year, what are you assuming in terms of kind of back-to-school enrollment on the full service side.

Thank you for the question, Andrew. I'll start with the summer camp question. So first of all, we're obviously very pleased with the 19% in growth in the quarter. And that use was really across all care types, and it really was reflective of strong growth in both users and then a slight uptick in frequency. In terms of isolating summer camp in particular, obviously, in the summer months, that is the highest. But again, for the overall year, we generally see summer camp use in sort of the 25% to 30% of total use. So it is still just one of the components of our network use car types.

Yes. And then on the enrollment front, Andrew, so we had seen enrollment in the first half of the year, relatively stable as we had previewed at the beginning of the year with a little bit lighter growth in the second quarter that we would expect to see as we turn over in the fall here. We have a little bit of positive growth offset by the Australia headwind. So we're looking at a slightly positive ex Australia growth, sub 1%, but still positive with Australia putting us with another 100 basis points of headwind on top of that. But it's been an important cycle, of course.

We have had as we've stabilized enrollment in some of our larger or higher enrolled centers, they see more turnover in the older age groups as we come into the fall. So that backfill takes a bit of time. And we also have just have the natural comparison against a very strong year-over-year in our U.K. operations. So a couple of things that come into how we're growing Q2 versus Q3 and Q4, but we're still looking at something that's pretty close to our original guide for the full year.

Our next question is from Manav Patnaik with Barclays.

This is Roni Kennedy on for Manav. If I may, I'll start with a follow-up on backup. You highlighted both new logos and increasing utilization amongst recently launched clients or newer clients wrapping faster and what you've seen in the past? If so, what's driving that behavior? And then you also continue to discuss substantial penetration opportunities within existing. What gives you confidence that the employee participation rates can continue moving higher from here?

Yes. Thank you for the question. So I'll start with the second question. Since again, the vast majority of growth that we experience is within the existing client base. And so we are now into a multiyear demonstration of continuing to drive users and use. What I would say is that we continue to work with our client partners to provide increasing amounts of outreach, so that we can ultimately continue to garner more unique users. Because ultimately, that is the key determinant of continuing to see the kind of growth that we have been able to achieve.

Certainly, in the near term, we can look at reservation volumes and gain confidence, which is what gave us the ability to increase our guide but ultimately, it's really down to continuing to identify and secure new users and then a small uptick on frequency.

In terms of new and ramping clients, that is obviously a much smaller component of it given the fact that we have more than 1,000 clients to take advantage of our backup service. That said, they are important to the long term in this business. And I would say that the maturation process of these clients actually looks quite similar to what we've experienced. So it is not outsized compared to what it has been in the past, but rather just an important element.

And then the final component of your question was really around what the white space looks like. And I think as we articulated in the investor presentation, we see a lot of white space as it relates to the possibility of garnering new logos. And so I believe that, that will continue to be a component of our growth algorithm within backup care.

With the strong margin expansion and back-up to I guess, versus '255 last year. How much of that margin expansion was utilization versus mix? And how should we think about what our sustainable level of margins for back-up care?

We're still -- we believe the backup margins are sustainable. We're looking at -- we've been at 28% to 30% as our outlook for operating margins for back-up for a while. We would continue to expect to see that this year. So the third quarter even has -- with more volume even coming in the third quarter than the second quarter. the overall conversion of that is -- the margin conversion does come down to utilization against the portion of the back-up care cost of ports that are fixed. And so we would expect it to tick up in the third quarter from where we see the -- third and fourth quarter from where we see the first half of the year and be able to sustain that 28% to 30% given the strong the sentiment of both the mix of use and the volume conversion that we're able to have.

Our next question is from Jeff Meuler with Baird.

I know you've had greater than 70%, less than 40, 40 to 70 buckets for a while. But just on full service, can you just help us think through like what percentage you kind of characterize as like high margin, maybe near full occupancy not really growing? And then like what percentage are kind of like ramping well at this point? And then just of the lower utilization are those that are maybe not ramping or kind of in the assessment for closures bucket?

Yes. I appreciate the question because there was some nuance in there, Jeff. Broadly speaking, the group of centers that are operating above 70% are in that category of sustaining enrollment, not necessarily from quarter-to-quarter or at the time we're in right now. Those centers will be naturally cycling enrollment, particularly the older preschoolers who are graduating out to elementary school.

So there's -- that group is not necessarily growing much. It's sustaining enrollment, and we've been really pleased to see how much sustainability they have had through the last couple of years because that group has been steady. And between the overall aggregate price increases and the conversion of that to earnings in those centers, we're earning more even as the margin is getting back to our target of 10% or so. Those centers are really very much there.

The group in the middle, the 40% to 70% cohort, there certainly are some centers in that group that are running very well. They may be they may be anywhere from 60% to 70% occupied. They may be 55% to 65% occupied. They do very well at that level. And so they are also in that maybe not going to improve meaningfully from that level. But there are many -- that group is, call it, 45% or so of our overall mix. So there's still a good quarter of those centers to 35% of our -- 25% to 35% of the overall mix still have opportunity, but some are at steady state.

The sub-40% occupied group I would characterize, we're 5% this quarter, that's an optimized time period because as we do cycle enrollment, that will move around. But probably in that group where we have anywhere from 60 to 70 centers that might be candidates for deep consideration of whether they should close. We'd probably look at maybe 25 to 50 of those that we would have circled up as not likely to be viable over the long term and be candidates for closure beyond this year and maybe into '28.

So that's how I'd characterize the overall mix. I think the one additional consideration that I put out there is, of course, Australia has been underperforming and the deep dive that we are looking to do on that portfolio might increase that a little bit, but just trying to characterize the rest of the portfolio.

And help me with that deep dive just like how close are you or what -- like what actions have you taken? Or how close are you to taking more aggressive action in Australia?

Yes. So what I would say is, obviously, we shared in the last call, sort of the degradation that we saw in the enrollment. And so our focus at this point really is on aligning the staffing with the enrollment levels that we have and then obviously trying to improve enrollment from where we are. As Elizabeth just shared, the other action that we are looking at and circling up is around closures, right, to make sure that we're optimizing the portfolio for the future. And then ultimately, as we think about Australia, we're trying to think broadly about how to make sure that we can get that back on track in the way that we were able to accomplish in the U.K. And so that's our sort of immediate action. And then over the intermediate term, we obviously are looking at strategic options as it relates to how we think about that particular geography broadly.

Our next question is from Jeff Silber with BMO Capital Markets. .

I believe on your prior call, you gave us operating or adjusted operating margin guidance by segment. Can we just revisit that again?

Yes. So on operating margin, I think I just mentioned on -- from a backup care standpoint, we're looking at 28% to 30% for the year. On full service, we are -- overall, we expect to be flat for the year, flat-ish, and the Australia headwind there is, as we talked about last quarter and this quarter, it's expected to be 50 to 75 basis points. So we would be positive, certainly excluding that headwind. But at this point, we're looking to be relatively flattish in full-service. And then would be in the call 20% range.

Okay. Great. That's really helpful. And then a completely different question. A number of us cover some of the higher education companies, and I know it's a different business, but many of them have been talking about changes in the way that students are searching or finding schools that they want to attend moving from traditional search engines going to LLMs I'm just wondering, are you seeing that at all? And if so, are you changing your marketing strategy accordingly?

Sure. Happy to answer that. So clearly, your question is focused around the ed advisory aspect of what we do. And so when we think about the College Coach aspect, those are dependence of our clients' employees. They are traditional learners as opposed to adult learners. And so those traditional learners really are seeking out both information through AI and that type of support. But at the same time, these are very high stake decisions that they're making. And so therefore, the expertise that our counselors provide is still an incredibly valuable aspect of their search process. And so when we think about our advisory business, you'll note that on the College Coach side of the business, we continue to see participant growth, and that is really reflective of the fact that those employees and their dependents are highly interested in seeking expert advice from former college admissions and financial aid professionals.

Yes. I'm sorry. I was actually thinking about your full service center business. I don't know if that's impacted at all. .

Yes. I'm not sure that we've seen that kind of a shift, but happy to inquire more about that.

Our next question is from George Tong with Goldman Sachs.

Occupancy outside of Australia reached roughly 70% in the quarter. as occupancy rates continue to recover, where would you say you are in the margin expansion journey within full service? And how much operating leverage remains available before you reach a more normalized utilization level? .

So if I'm understanding your question right, it's the sort of opportunity to get back to a 10% EBIT margin, which is where we have historically operated. And our -- we certainly see a pathway to that, both with sustaining the enrollment and the performance in our top cohort enrolled group. But just maybe to walk through what we currently have in the headwind category of our business. So last year, we reported about 5.5% in full service. And as I mentioned, we would expect it to be relatively stable with that in 2026.

Looking at Australia in the round as a whole, that underperformance, the $20 million to $25 million, we expect to be losing in that geography is roughly 150 basis points of headwind and then we also have a group of centers as we have closed centers, and some of them we are working to completely exit the leases and the facility costs in them and that period of time to fully run off -- either run off the lease or to exit is another 50 basis points or so of headwinds. So just coming in, we are at about 7.5% without those 2 component pieces.

So you take the centers that are sub-70% occupied, and we have a group of them that on the earlier question, we expect will also be candidates for closure that are that are affecting the overall performance and then just gaining the enrollment in the middle cohort and getting that operating leverage. We certainly see a path to getting back to 10% and honestly, beyond that, but step one, it's getting back to 10% and then we'll be commenting later on that. It's been a, I think, a process, but we are very heartened by how the top performers continue to deliver and how we've been able to move centers out of the bottom cohort into the middle cohort.

Got it. That's very helpful. And then switching to back-up care. Growth accelerated in the quarter even against tougher comps. Can you discuss whether there were unusual tailwinds that you saw this quarter? Or is there a reason to believe that these growth rates are, in fact, sustainable?

Yes. So I think that there were no anomalies, if that's the question. So I think that really, the performance was down to continuing to increase the number of users. And as I said, a slight uptick in frequency. That said, Q3 is obviously the largest quarter. And so ultimately, we start to moderate a little bit as compared to the Q2 in Q3 in terms of what we called for in terms of guidance. And that really becomes just a very high peak within the overall year. But overall, to answer your question very directly, we continue to see an opportunity for us to get to sort of a 13% to 15% growth for the full year. and then continue to sustain double-digit growth for many years to come.

Our next question is from Toni Kaplan with Morgan Stanley.

I wanted to go back to the center closures topic, sort of been in net closures mode for a couple of years. Is there anything that when you go think about the go forward of your lease consortium strategy, like are there any changes that you're planning to make in terms of thinking about where to open new centers and things like that. I know it used to be more targeted towards urban areas because of the employer concentration. But is there anything sort of different that you're thinking about now?

Yes. Thank you for the question, Toni. So what I would say is in the near term, we continue to be focused on opening new centers in collaboration and in partnership with clients. So that's our first priority in the near term is to continue to either transition the management of centers for self-operated centers. And in addition to that, open new greenfield opportunities with clients' financial support. I would say, longer term, again, harkening back to this client centricity, our lease consortium models will really be driven by where our clients and their employees live and work and where we can garner support from our client partners in order to create additional sustainability for the model. So again, I would say, overall, very client-centric first and foremost in the near term with client centers. And then beyond that, thinking about lease consortiums that again, garner support through our client partners and their employees.

Yes. Got it. And then, Elizabeth, if you could help us for modeling purposes on what the FX was in the quarter for full service and if you have an updated expectation for FX for the full year, that would be great as well.

Yes, it's -- that's an important point, Toni, because it was a good guy, if you will, in the second quarter. The overall contribution in full service specifically, which is where -- most it was about 100 basis points of tailwind -- for the full year, it will also be relatively higher around 125 basis points. But in the second half, it's going to taper, we would expect it to taper significantly. So the swing between Q2 and Q3, part of the guide of 50 to 100 basis points in full service is reflective of a swing of 125 basis points from a plus 100 to negative 25 sort of as an impact on the overall growth rate.

[Operator Instructions] Our next question is from Josh Chan with UBS.

Maybe jumping off of the prior point about the moderation from -- in full service from Q2 to Q3. So recognizing is a part of that, but there's also a further moderation. So I'm wondering what of the main factors is causing that? Is it a greater impact in Australia -- any other dynamics affecting that?

Yes. So yes, so a little bit more of an effect from closures. So FX is the largest sort of sequential effect closures in terms of net gross or net closures because the openings are about the same, but the impact of net closures is another 75 basis points or so. So it was around 150 basis points we'd expect it to be 225 net center closings in Q3. And then the other factor, I mean, there's a little bit of mix that goes on, but the other factor to call out is on the overall enrollment, just a little bit. Australia is -- at the margins is probably a little bit of a factor, but also, we just tapered the enrollment growth a bit overall in the core enrollment, excluding Australia. So enrollment rather than being flat in the quarter, we'd expect it to be slightly down with -- including the effects of Australia of 100 basis points plus.

Okay. That makes a lot of sense. And then maybe on the repurchase. Obviously, you took advantage of the opportunity in Q2 again. And so could you talk to the willingness to buy back stock I guess, how do you balance that between leverage and opportunistic buybacks? How do you think about that from here?

Yes. I mean, the business generates a lot of cash, as you know, and we have leaned in pretty strong on the repurchase in the first half of the year. So total $250 million this quarter on top of in the first quarter. So we have been active and feel like that's been a good capital allocation against the modest additional revolver that we have used to affect that. At 2.2x net leverage, we've been much more levered than that in the past, as I say, replenishing cash generation in the business. And we feel comfortable certainly at these ratios and would be -- we want to be opportunistic as needed. The guidance doesn't contemplate further repurchases from now our steer on the overall share count is just reflective of similar to other times as what we've done to date.

Our next question is from Stephanie Moore with Jefferies.

Yes. Great. I wanted to touch a little bit about maybe price and volume contribution during the quarter. If you could break that out. Sorry, if I missed that, just a clarification there. And then if you could also talk through the expected occupancy improvement in full service in the back half of the year, I think there's a lot of moving pieces. So I just wanted to make sure I was level setting the expectations there.

Sure, so overall price -- our average price increase for the year has been about 4%. So that's consistent -- relatively consistent across all 4 quarters of the year and for the full year. Core enrollment, so excluding Australia, our enrollment in the quarter was up roughly 100 basis points. Australia was a headwind of around 100 basis points. So in terms of volume, that volume would be relatively flat. And then I mentioned that the net closures was around 150 basis points. FX was an addition to the overall reported revenue of 100 basis points and then a little bit of mix is the sort of the overall difference to the full service growth rate. And then I think I might have missed 1 additional question that you had, Stephanie.

No, I think you got it. I was mostly just trying to get a sense of just the occupancy trends in the back half of the year and environment trends .

Yes. Yes. So the second quarter, of course, is the high watermark in terms of the seasonality, cyclicality of our full-service enrollment business. We were high 60s in the quarter. We would expect that to be stepping down to mid-60s or so we'd be reporting a little bit of occupancy gain compared to last year, but at the margins still in the mid-60s plus -- and so that's where we'd expect to end the year. It steps down as we're cycling in the third quarter and then just as a modest increase to the fourth quarter.

Okay. Well, thanks, everyone, for joining the call and wishing everyone a good night.

Thanks, everyone.

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

Greetings, and welcome to the Bright Horizons Family Solutions First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Flanagan, Group Vice President, Strategic Finance. Please go ahead.

Thank you, Stacy, and welcome to Bright Horizon's first quarter earnings call. Before we begin, please note that today's call is being webcast and a recording will be available on 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 disclosed in detail in our earnings release, our 2025 Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which is made, and we undertake no obligation to update any forward-looking statements.

Today, we'll also refer to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release, which is available on the IR section of our website at investors.brighthorizons.com. Along with today's earnings release, we have posted an updated investor presentation to our website, which we will reference during today's call. And here joining me on the call is our Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland; Stephen will start by reviewing our results and provide an update on the business, and 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 good evening, everyone. 2026 is off to a positive start. Revenue grew 7% in the first quarter, in line with our expectations and earnings came in slightly ahead, reflecting continued execution across our business segments. In Q1, we delivered double-digit revenue growth backup, expanded operating margins in full service and made progress on transforming our Education Advisory business. Taken together, these results reflect the diversity and strength of our model and the enduring demand from work families and learners for the services that we provide, along with the employers who support them.

Before I get into the segment results for the quarter, I want to take a different approach tonight and start by addressing the thoughtful questions we have received from analysts and investors in recent quarters. Specifically, I want to take a few minutes to highlight how our strategy post-COVID is focused on delivering long-term growth and earnings performance, while increasing our impact on those we serve.

Bright Horizon's unique business model centers around partnering with employers to deliver high-quality solutions that support client employees across critical lines in career stages, while delivering a compelling ROI for our employer clients. Over time, we have expanded our education and our offerings and more recently, have sharpened our focus on the integration of our full suite of services for the benefit of our clients and their employees. To that end, we have taken steps to unify our go-to-market strategy, executed by a singular sales force and integrated account management team and underpinned by new resources and tools.

In parallel, we are developing a fully connected continuum of service delivered through both our owned assets and trusted partners. To make that work at scale, we are strengthening our foundational capabilities. Specifically, a common client employee credit model across our offerings and integrated CRM and consumer data platform and ultimately, a more consistent and seamless customer experience. As Mike mentioned, alongside tonight's earnings release, we have included an updated investor deck that outlines our client-centric business model, our compute advantages and illustrates the scope of the growth opportunity.

As one example, I use backup care, our largest segment by earnings contribution. Using Slides 12 through 15 in our new investor presentation, I will walk through the growth framework, penetration within existing clients, expansion of our care and education ecosystem and winning new logos.

Starting with penetration on Slide 12. User penetration is less than 5% across our client base, which highlights the significant opportunity ahead. The latent demand is substantial. More than 4 and 5 working U.S. adults have at least one care need that our back care offering addresses. Over the last several years, we have thoughtfully listened to clients and broadened our capabilities to include an even wider range of care types increasing relevance across employee populations. This in turn enables our employer partners to meet their strategic objectives of fewer vendors delivering broader and deeper value directly aligned with our approach.

We also break down penetration by industry and illustrate the dispersion within each sector on Slide 13. The takeaway clear penetration is low across all industries. And even within the same sector, there is wide variation, demonstrating that the opportunity is less about maturity and more about how the benefit is deployed within each client. To highlight one example, health care. The median client penetration is below 2%, which increases to more than 7% at the 95th percentile and exceeds 10% of among our most highly utilized health care clients.

Next, on Slide 14, we illustrate that a key driver of growing utilization is the breadth of our care network. We have built an ecosystem that sends traditional childcare centers, in home care providers, school age programs, academic tutoring, pet care and elder care through a mix of owned assets and a bidded network of partners. Expanding that network helps us to meet more employee needs, which support adoption and retention among both new and existing users.

Finally, turning to Slide 15. New logos are another meaningful growth channel in back-up. We estimate that 90-plus percent of the MB market remains unvended today and roughly half of the Fortune 500 did not have a back-up care solution in place. What positions us exceptionally well to capitalize on this opportunity, is our ability to deliver high-quality care across care types, geographies and employee needs with flexibility, scale and trust that are difficult to replicate. We believe this advantage becomes even more important as employer adoption continues to grow. I had a back-up care as the example because it reflects the broader playbook across Bright Horizons, drive deeper client and user adoption, expand the range of needs we can serve and deliver a more connected experience for families.

By way of a real-time example, we put this strategy into action this past week at our on the Horizon Summit. We hosted more than 100 clients, including HR and benefits leaders from Bank of America, Comcast and Cone Health to name a few. The discussion encompass the future of employer-sponsored education and care and moderate ways to deliver a unified experience for employees and their families. We received tremendous feedback from clients about the event and the innovations that we introduced.

We look forward to sharing more over time. And at this point, I would like to turn back to our first quarter segment results. In Back-Up Care, revenue increased 12.5% to $145 million in the quarter, and adjusted operating margins were 18%, both in line with our expectations. Growth was driven by continued expansion in unique users with solid use across all care types. And looking ahead to the summer months and peak utilization for school age programs, we are encouraged by continued user growth and the visibility of use through early reservations for the second and third quarters.

Turning to Full Service. Revenue grew 6% to $541 million, in line with our expectations. Growth was driven by a combination of tuition increases and a tailwind from foreign exchange, partially offset by center closures and continue to rationalize the portfolio. We opened 2 centers in the first quarter, one in the Netherlands and our third location for Toyota here in the United States. Occupancy averaged in the mid-60% range in Q1 improving sequentially from the fourth quarter and the prior year. Inlet growth in centers opened for the last year was modestly positive in the first quarter. This included approximately 100 basis points of headwind from our Australia operations, where we experienced an elevated enrollment decline in this group of 78 centers.

In contrast to our other geographies, our Australia portfolio occupancy has drifted over in the years following the pandemic. And this quarter, the enrollment contraction was much more significant than prior year's school year transition cycle. With the broader Australian ECE industry also experiencing meaningful weakness in 2026, we expect a more challenged enrollment picture and overall performance profile as we look to the rest of the year. More broadly, we remain encouraged by the sequential improvement in occupancy across our network of centers that continued recovery across our middle and lower cohorts and the improved operating margin we drove this quarter despite a headwind from Australia.

Our focus remains on expanding our enrollment with improved consumer experience and quality value, achieving improved operating leverage and operating efficiency and rationalizing the center portfolio where appropriate. As previewed on our call in February, we closed 24 centers this quarter as we continue to position our portfolio to serve employees of our client partners and working parents where they live and work.

Our Education Advisory business delivered revenue of $27 million in the quarter and increased 2% over the prior year. Notable new client launches in the quarter included NXP Semiconductors and Huntington Bank, and we continue to be focused on driving participant growth and use across our College Coach and Editis services. So to close, our Q1 results demonstrate solid demand and execution across the business. We remain encouraged by the progress we are making in our core operations while maintaining financial and operational discipline. As such, we are reaffirming our 2026 full year revenue guidance range of $3.075 billion to $3.125 billion and our adjusted EPS guidance range of $4.90 to $5.10 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.

Thanks, Stephen, and hello to everyone who's joined the call. I'll start with our financial highlights. Revenue in the first quarter was $712 million, representing 7% growth year-over-year and in line with our expectations. Adjusted operating income of $65 million increased 4% over the prior year quarter and represented 9.1% of revenue. Adjusted EBITDA of $96 million also grew 4% and came in at 13.4% of revenue.

Adjusted EPS of $0.82 a share rose 6% over the prior year quarter and finished slightly ahead of our guidance at $0.75 to $0.80. Taking a closer look at each of our 3 business lines. backup revenue grew 12.5% in the first quarter to $145 million, increased users and expanded use within existing clients continues to drive the majority of the growth. And Q1 marks the 16th consecutive quarter of double-digit top line growth.

Adjusted operating margins were 18% in the quarter, which we expect at this time of year when use is seasonally lower. As we move into the higher use quarters over the rest of the year, we gain operating leverage and we continue to expect to see margins achieve our full year target of 28% to 30%.

Turning to Full Service. Revenue of $541 million expanded 6% over the prior year quarter driven primarily by tuition increases, enrollment gains and a tailwind from foreign exchange, which were all partially offset by an approximately 250 basis point headwind from the impact of closed centers over the past year and, to a lesser extent, to enrollment declines in Australia.

During the quarter, we had net closures of 22, resulting in a center count at quarter end of 988 centers. As Stephen mentioned, enrollment in centers opened for the last year was modestly positive in the first quarter, although it would have increased roughly 100 basis points without the enrollment contraction we experienced in Australia. Occupancy averaged in the mid-60 range, increasing from both the fourth quarter of 2025 and the prior year period.

With respect to the center cohorts we've discussed on prior calls, we also continue to see improvement over the prior year. Our top-performing cohort that is 7 centers that are above 70% occupancy improved from 47% of these centers in the first quarter of 2025 to 48% in the first quarter of 2016. And more notably, our bottom cohort centers below 40% occupancy has now fallen below 10% of these centers improving from 13% in the prior year to 8% this quarter, reflecting both enrollment progress and the results that are focused on closing underperforming centers.

Adjusted operating income of $37 million in Full Service increased $4 million over the prior year and represented [indiscernible] of revenue, an expansion of 30 basis points. Tuition increases ahead of average costs and continued progress in our U.K. operations drove the margin expansion. That said, reported margin improvement was meaningfully constrained by the enrollment and operating challenges in Australia. Excluding this effect in Australia, margin expansion would have been more than 50 basis points over the prior year.

Given the current operating performance and outlook for the rest of the year, we expect Australia to remain a larger headwind to reported margin performance than we had originally expected. Our Educational Advising segment had revenue of $27 million, an increase of 2% from the prior year quarter and adjusted operating margins of 9%, which were broadly consistent with the prior year quarter. Interest expense rose to $12 million in Q1, up from $10 million in the prior year quarter due to higher average interest rates as well as higher average borrowings on elevated share repurchases in the quarter.

The structural effective tax rate on adjusted net income was also 27.5%, consistent with Q1 of 2025.

Turning to the cash flow statement. We generated $108 million in cash from operations and made net fixed asset investments of $20 million, resulting in free cash flow of $88 million. Over the last 12 months, free cash flow was $276 million, representing a 106% conversion relative to adjusted net income. As mentioned, in Q1, we opportunistically repurchased $225 million of stock, funding the buybacks with free cash flow and the incremental revolver borrowings. As of the end of the quarter, $577 million remains on the new repurchase authorization that we announced in March.

Lastly, we ended Q1 with $133 million of cash and a leverage ratio of 1.9x net debt to adjusted EBITDA.

Now moving on to our 2026 outlook. We are reaffirming our 2026 full year guidance for revenue in the range of $3.075 billion to $3.125 billion and adjusted EPS in the range of $4.90 to $5.10. Our guidance does not include the effects of any additional share repurchases on either interest expense or on the share count.

If we look at a segment level, in full service, we expect reported revenue to grow in the range of 2.5% to 3.5% on enrollment gains and tuition increases, offset by approximately 200 basis points of headwind from net center closings and approximately 100 basis points on reduced expected performance from our Australia operations. In Back-Up Care, we now expect reported revenue to increase 12% to 14%, driven by the continued expansion of use. And lastly, in an advisory, we expect to grow in the mid-single digits.

Lastly, on the full year guidance, we are now estimating full year interest expense of $50 million to $52 million and an adjusted effective tax rate of 28% to 28.5%, up approximately 100 basis points from our prior guide. As we look specifically to Q2, our outlook is for total top line growth in the range of 5.25% to 6.5%. Breaking that down by segments, would be full service reported revenue growth of 2.5% to 3.5%, backup growth of 15% to 17% and ed advisory in the low single digits. In terms of earnings for Q2, we are expecting adjusted EPS in the range of $1.17 to $1.22.

So with that, Stacy, we are ready to Q&A.

[Operator Instructions] Your first question comes from Jeff Meuler with Baird.

I think you raised the Back-Up Care annual revenue guidance, correct me if I'm wrong, but was that on the back or driven by the early Back-Up Care reservations for Q2 or Q3? Or what was it? And just how much visibility at this point do you have, I guess, in summer usage?

Sure. Thank you for the question, Jeff. So we certainly raised the guidance right. So the previous guidance was from 11% to 13% for the year. Now we're at 12% to 14% for the year. And it's really based on our conviction around the momentum that we have around active users as well as their use patterns as you rightly noted, we have a large swath of our clients that have extended windows for reservations going into the summer. And so we do have good visibility around those reservations. And based on our historical trends, we believe that it was prudent to increase the guidance.

Got it. And then just help us understand the fundamental issue in Australia if it's supply/demand or immigration or affordability and alternatives? Just what's the issue? And -- is there any reason to think it's cyclical versus kind of the front end of a more structural headwind?

Sure. So happy to talk a little bit about the Australia piece, which is -- look, I think that the first thing that is important to start is that we entered that market back in 2022 and we're attracted to the market given the third-party funding support that existed. And in the case of Australia, it was really around government. And at the time, we had the opportunity to acquire a high-quality leader in only about children. At the time, they enjoyed and we enjoyed high occupancy rates. And in fact, the sector in general, enjoyed high occupancy rates. And the challenge that we were looking to ameliorate at that time was really one around the workforce and labor, specially around quantity of labor as well as the costs.

We expected that, that would ameliorate over time. That hasn't ameliorated as well over time and the enrollment since 2022, has been on a slow degradation path over that time period. And what I would say, Jeff, is that different from other geographies, we saw pretty steady increases in supply in the post-COVID period, right? So in that market, there was an acceleration of supply that came into the market. And so certainly would highlight the fact that the saturation rates of child care got higher, especially in the key markets in which we operate. And so then we turn to Q1 and the enrollment degradation was sharper in Q1 than we would have expected. It's certainly a time of year in Australia where families typically transition to school and new enrollments backfill. But ultimately, we had a quite a typical lever dynamic, but we didn't see the level of new starters. And so hopefully, that encapsulates the challenges that we see, and we really do see them as different from other geographies in which we operate.

Next question, Andrew Steinerman with JPMorgan.

So you're keeping the guide for the year, but Australia was worse. Back-Up was bumped up. Is there any other part of your, let's call it, non-Australia business that's sort of performing better than expected, which overall as a portfolio, is keeping you in line with your targeted range? And if you could just mention how big Australia is?

Sure. So Yes. To answer the question, we had a pretty significant share repurchase cadence in Q1. And so that is adding a tailwind to the earnings results, although with the offset. We do have a bit higher interest expense because of the financing of it in the near term, but it will continue to be accretive over time. But this year, it would be contributing in the high single digits, call it, sort of 8% net of -- or $0.08, sorry, net of the interest expense that we incurred so that's a positive to the business that is also contributing.

I think the other factor besides Australia's performance besides the operating performance is that because the position in Australia is one of loss making. We have a nondeductibility of all those losses. So it has a more amplified effect in the year. So compared to our previous guidance it's close to $0.20 of an impact just from Australia between the operations and the tax impact.

And I mentioned -- I asked besides for backup being bumped up in the guided range. Is there anything else outside of Australia, that's coming in better than anticipated as you're now a quarter into the year?

Well, the share repurchase is adding, call it, $0.08 or so. .

Next question, Jeff Silber with BMO Capital Markets. .

You mentioned that backup care margins tend to be a little bit softer in the first quarter, but they were still down on a year-over-year basis. Is there something specific that happened this quarter relative to last year?

No, not really. It's somewhat mix dependent, Jeff. It is a relatively low use quarter. And so is dependent on the more days out and school vacation weak rather than the intensity of school aged care that we see over the summer. So depending on the center in home, no different care type mix of the different -- that different provider network. So it's just down to that mix.

Okay. If I could go over to a full service center. I know it's a bit early, but can we get any color on how sign-ups are for the fall enrollment period?

Yes, I think it's fair to say that we're seeing a sort of similar cadence to how we closed out last year. And so as we look through this year, we really do see that opportunity to enroll at a similar rate as we saw in the second half of last year. We have that in terms of completed tours, which for us is a really important indicator in terms of forward bookings. And so I feel good that that's the outlook that we have.

Next question, Toni Kaplan with Morgan Stanley.

You were expecting a bunch of closures in the beginning of the year, and we did see that in the numbers I guess, are you still expecting that 25 to 30 net to be the decrease in centers for the full year? And I guess when you're opening new centers, you're going to open a bunch, I guess, in the remaining part of the year. I guess, when is the best time to open new centers? Just trying to understand the seasonality there.

Yes. Well, and if we could control the timetable of the opening, Toni, you're right, we would certainly be opening probably grow in middle to being ready to be available in the fall season. So opening July, August, and so you can enroll for the fall is probably the optimal time. But it ends up being center construction cycles and governing more of that opening cadence. The next best time would be to be opening right before the new year turns were because that's often when families are enrolling.

We do think that we will be in that neighborhood of 25 to 30 net reduction, net contraction of centers for the full year, but despite the outsized first quarter because we do have some openings that we've already done this quarter, and we see in the pipeline to be open, they, of course, are governed by this timetable, but -- we have the closures pretty well circled up, and that's a quantity that we're looking at.

Yes. Got it. And then I guess when I think about backup and you did some nice slides there. You talked about the backup penetration being under 5%. I guess, what do you attribute that to? Because is it that employees just aren't aware of the programs? And like, I guess, what are the ways that you can sort of drive that higher?

Sure. So I think that the reality is the employee benefit space is noisy, right? So employers offer a lot and employees' ability to understand all that they have on us is challenged in that noisy environment. What I would say is that when we think about sort of standing out within that context. It's some of the actions that we had talked about in the prepared remarks, right? So the onus is really on our account management team that we have really repositioned against our client base to build deeper partnerships, create more opportunities for us to get awareness out within the client base and then to ultimately have our account management team partnering even more with our marketing apparatus to ensure that we are getting good communication and good messaging out so that people receive the information at times where they might naturally need to service. So a lot of what we've talked about in prior calls is around this idea of personalization and really trying to get messaging that is personalized to the individual that helps to highlight what needs they may have and then how we can help to solve against those needs.

Next question, George Tong with Goldman Sachs.

You're focused on a unified approach to client engagement and service adoption. Can you talk about whether there are additional steps with the sales force or sales process you still have to implement in order to fully realize this vision?

Sure. So I'll talk about some of the recent actions that we've taken that obviously are not sort of yet bearing fruit, but will start to have impact over the coming quarters and years. So the first thing we did most recently was really separate out our enterprise approach from our geographic approach. And so we now have individuals that are squarely focused on the largest and most complex sales opportunities, both new logos as well as within our existing client base.

And then we have another set of individuals that are focused on the best opportunities outside of enterprise within geographic territory. So the first is structural. The second is that we really have deployed new sales training and tools to allow them to be more effective against this unified message because, again, we used to have individuals that would be selling individual products. And now the expectation is that our singular unified sales team will be going out and talking about the full totality of the Bright Horizon sets of offerings and then tailoring the solution to the needs of individual clients. So I put that into sort of category 1. That is a new piece of it that we are now deploying into the market.

I would say the second is that as we think about how we are unifying and going after the opportunities, we're really doing that at a bigger level as well. And so really starting to think about those employers who today offer more than one service. How do we help employees to understand and value services that may be across what are the silos within Bright runs to really enable additional use patterns. And so I'll give you an example of that, a client that may offer college coach and also through its backup line of service offer tutoring and helping to cross-pollinate college coach users to leverage a tutoring offering and tutoring users to take advantage of the College Coach offering. And so that's sort of the multilevel example of how we're thinking about it, which is first at the enterprise level and then secondly, at the individual user level.

That's very helpful. And then on Back-Up Care, you mentioned -- you've seen 16 consecutive quarters of double-digit. Given that extended history of strong double-digit growth, are you ready to update your longer-term target for back-up care growth at this point? .

Yes. So I think that you will have just received the presentation, but I will draw your attention to Slide 28 where we do update the Back-Up Care building block within our growth algorithms and are really calling at this point for a longer-term growth algorithm of 11% to 13%. And which is an upgrade from what you will have seen historically. .

[Operator Instructions] Your next question comes from Josh Chan with UBS.

Steve, Elizabeth, I guess on the Back-Up Care penetration slide that you showed, I guess, what in your mind causes the difference in penetration? Obviously, the slide suggest that industry has some factor to it, but then is tenure? Is it geographic location, kind of what causes some of the [indiscernible] higher versus lower penetration?

Sure. So first, I'll talk about what the differences are between industries and then we can talk about within industry. between industry, part of the differential comes down to employee demographics, right? And so you'll see within financial services, where financial services and professional services, where we tend to have the strongest penetration. We're talking about demographics and a work style that really does work very well to when there is a breakdown in care arrangement that employee really eating and valuing, having a replacement care arrangement. And so therefore, we'll see higher utilization in those kinds of industries in a place like industrial, where perhaps these are manufacturing plants or other traditionally male-dominated kinds of industries, we've seen less take-up -- but I think the more interesting part of this chart, even between -- even more so than between industries is within industries.

And you see that there is quite a bit of disparity between those that are on the least penetrated to those that are on the most in companies and organizations that should have similar traits. And so we are really undertaking, first and foremost, studying our most highly utilized clients and our least utilized we are really through our changes on the account management side, working very diligently to try to work towards having our less penetrated clients look more like our more highly penetrated clients and continuing to extend the growth of those that are more highly penetrated understanding that on average, we still have a modest penetration. And so between the work we're doing on the analytical side and by aligning the account management function and marketing functions, we believe we have the ability to continue to show good progress on this.

That's really helpful color on the backup care. And then on the full service side, you did outline a 4.5% to 6.5% growth over the long term. I was just wondering what underpins that, including tuition and center openings, et cetera, in terms of the full-service drivers?

Yes. I mean, over time, those are the building blocks. It would be price increases and then enrollment in the earlier question about adding centers. So as we return to more of a cadence of at least neutral, hopefully, next year, neutral net openings to positive again, that ramping in the ramp-up of centers in their enrollment and then that just modest enrollment gains would be a contributor to that over time. So unit growth to some degree and then enrollment growth would be the other components in that besides a, call it, a 3% to 4% or so price increase and then the other pieces would be enrollments in new centers.

Next question, Faiza Alwy with Deutsche Bank.

I wanted to follow up just on the full-service margin side. So a couple of related questions. One was just, could you help us frame the impact from Australia to margin specifically? Apologies if I missed this, but I know you gave us the top line impact. But just curious if you still expect to see 25 to 50 basis points this year? And if there's any offsets to the impact from Australia? And related to that, just as part of the long-term building blocks, I see the 9% to 10%, I guess, I can call it target. So just curious when you expect to sort of get there?

Sure. I think I got the gist of the question. So if I didn't please circle back. But I think the question is around what are the full service margins considering this impact of Australia. And I think there's 2 ways that may be helpful to answer that. One is what is the impact with Australia and the results? And then what is the actual headwind just talking about Australia in totality. And so we had guided to the year to have 25 to 50 basis points of margin expansion. And given the headwind of this -- the revenue degradation, which is in the 100 basis point range of the enrollment is 100 basis points, it's, call it, $20 million or so. The margin degradation is even more than that.

And so we have an element of, call it, flat margin growth or so this year, but it would be 25 to 50 basis points without the effect of Australia. So that's the impact of it being included. If we think about Australia just standing alone, it has a full year revenue profile that's in the neighborhood of around $140 million of revenue. And with losses in the $20 million to $25 million range in total, it's about 150 basis points of overall headwind to the full-service business. So we talked about how much -- the question earlier came in about what is the impact on the guide? Are there puts and takes within the guide for Australia. And so we did have to absorb some of the underperformance this year. But again, just standing alone, Australia with the tax impact and that kind of a loss profile is close to $0.40 of overall headwind to the earnings performance.

Great. That's super helpful. And then I guess the second part of my question was just around the long-term building blocks, the 9% to 10%. I know we've been asking this question for some time really since COVID. So just curious how your views have evolved.

Yes. And so from the standpoint of -- if we just look at the base, we started this year, we ended last year, I should say, with 5.5% if we have 150 basis points of headwind from Australia and we are able to be gaining 25 to 50 basis points a year, we would, all things being equal, be at 7. We would be adding 25 to 50 bps a year as we continue to gain enrollment. We have also a number of the centers that we have closed, which we have talked about on prior calls that have some tail of operating costs as we work to completely exit those leases. Some of them have run dark costs that we are incurring.

So that's another, call it, 50 basis points or so that will taper out of the margin in the next couple of years. And so we are well on our way to that 9% to 10% with continued improvement, and we still have some centers to exit from the portfolio. So that combination along with operating leverage and efficiency from enrollment gains year-over-year, we think we are certainly within striking distance, and we see that in our best-performing centers. But some of these outliers are putting a pretty severe headwind on the reported margin at the moment.

Understood. And then just a quick follow-up. I'm curious if you're seeing any benefits even sort of as you're talking to clients from the 45F OBDA impact that increased the annual cap for tax credits. I know this had come up sort of last year, but just curious how your conversations have trended on this topic.

Sure. So look, I think that the quick answer on that is that 45F hasn't had much of an impact in terms of the conversations or in the adoption by our client base. And so I think that while it can be an interesting talking point in a way into new client conversations, I would say that it certainly, from our perspective, is not one that is moving the needle as it relates to ultimately getting clients over the line and/or seeing it much as something that's being adopted by our current clients.

Next question, Stephanie Moore with Jefferies.

I guess just maybe circling back to the back-up care. Can you talk a little bit about of your clients that use more than one service within the back-up care services, I think that would be helpful.

Sure. So I guess I'll take a step back and say that how back-up care used to be defined in the earliest days was around providing care in center and then ultimately got extended to in-home. And over time, right, we have extended that to include school age programs. We have extended that to include elder care. We've extended that into academic tutoring and pet care. And what I would say is that almost universally, our clients offer the in-center and in-home for both children and aging adults. I would say that we have very strong majority type take-up as it relates to academic tutoring. And then I would say that the lowest adopted of the offerings is pet care, although from a user perspective, that happens to be quite a popular part of the offering. And so again, part of it is what's being offered, which I shared a fair characterization and the other is how it is adopted by the end user. But that's how I would characterize it. All offer it in center in-home, adult and child most offer it for tutoring and then a, to a lesser extent, the pet care. .

Got it. That's really helpful. And maybe just -- I don't think anyone has asked so far in just the U.K. business. I think a lot of progress has been made on that front over the last year or so. So maybe how we should think about just the improvement in operating income and general performance there.

Yes. So I appreciate the reminder because certainly, the U.K. business has been on a journey, and we're very pleased to see both the sequential and the quarter-on-quarter progress, the year-over-year progress. And so -- as a reminder, last year, the U.K. had turned the corner and was positive from an operating performance, operating income contribution standpoint, still a headwind to the overall full service margins in the low single digits rather than the 5.5% overall that we were reporting.

And this year, we continue to see both between the enrollment gains and just the continued operating execution -- that has continued to improve. It's still -- it's making progress to the overall average still is a little bit of a headwind, but it's a big contributor in terms of the turnaround. It's just not the velocity of the improvement contributes to our overall leverage, but it's just at a little bit lower pace than it was in 2025.

Wonderful. Well, thank you all very much for joining us on the call and wishing you a great night. .

Thanks, everyone.

This concludes the teleconference. You may disconnect your lines at this time, and thank you for your participation.

Greetings, and welcome to the Bright Horizons Family Solutions Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Flanagan, Vice President of Investor Relations. Please go ahead.

Thanks, Paul, and welcome to Bright Horizons Fourth 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, 2024, Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which is made, and we undertake no obligation to update any forward-looking statements.

Today, we will also refer to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release. which is available under the Investor Relations section of our website at investors.brighthorizons.com. Joining me on today's call are 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.

With that, I let turn the call over to Stephen.

Thanks, Mike, and good evening to everyone on the call. I am pleased to report a strong finish to 2025, closing out a year of solid growth and continued progress across the business. In the fourth quarter, revenue increased 9% to $734 million and adjusted EPS increased 17% to $1.15 both ahead of our expectations. For the full year, we delivered revenue of $2.93 billion, up 9% over the prior year and adjusted EPS of $4.55 representing 31% growth year-over-year. These results exceeded the expectations shared at the beginning of the year and highlight the continued evolution of Bright Horizons into a diversified, integrated solutions provider of employer-sponsored education and care.

The improvements in our business mix throughout 2025, combined with our growing impact on families and employers, reinforce our confidence in the durability of our model and long-term opportunity for growth.

Let me now walk through the segments. First, back-up care again delivered strong growth and earnings contribution in Q4 as it is done over the course of 2025. In Q4, revenue increased 17% to $183 million. Driven by solid utilization across center-based, in-home and school age programs. Utilization during the quarter reflected a combination of unplanned CAGR when regular arrangements were disrupted along with more predictable care needs such as scheduled school breaks and holiday coverage.

For the full year, back-up care revenue grew 19% to $728 million and sustained strong operating margins. Our service reach spans more than 1,100 employer clients and millions of eligible employees globally. Importantly, our existing clients had double-digit growth in backup users even as their eligible populations remain relatively flat, meaning growth was driven by deeper penetration into the eligible population, underscoring the value of the benefit to an increasing number of working families. Looking forward, our focus remains on scaling the backup business by expanding unique users within existing clients, increasing frequency of use among those utilizing care and continuing to retain and add new employer clients.

This growth relies upon an unmatched delivery model that combines owned capacity across our full service centers and backup operations alongside a broad third-party provider network. We still well less than 10% penetration within existing clients we have a significant opportunity to further expand active user adoption and utilization through targeted marketing, expanded capacity across use types and our One Bright Horizons initiatives to increase awareness across our services. We remain confident that back-up care will continue to be a durable source of growth in earnings while also strengthening broader employer partnerships across Bright Horizon services.

Turning to full service. Revenue increased 6% in the fourth quarter to $515 million, with growth driven by a combination of tuition increases and enrollment growth tempered by our continued portfolio rationalization. We added 6 new centers this quarter, including 4 client centers, 3 of which were transitioned of management for Stormont Vail Health and Cone Health. These additions extend our leadership in employer-sponsored child care and reaffirm the critical role on-site care plays in supporting working families and their employers. Enrollment in centers opened for more than 1 year increased approximately 1% in the fourth quarter, and occupancy averaged in the mid-60% range, broadly consistent with seasonal patterns we typically see in the back half of the year.

Underlying enrollment dynamics remained similar to what we saw throughout 2025, with solid demand in many geographies, countered by more muted enrollment growth levels in some of our more challenged areas. We are pleased to see continued progress, particularly in our lower occupancy cohort, were centers operating below 40% occupancy declined from 16% to 12% of the portfolio in the fourth quarter year-on-year. Specifically in the U.K., our full-service business continued to make progress and delivered positive operating profit for the year, a significant milestone post pandemic and a meaningful turnaround from the $30 million of annual losses we absorbed just 2 years ago. This progress reflects higher occupancy, more consistent staffing and improved affordability for families aided by expanded government supports.

Looking ahead, our focus remains on serving families where they work and live, continuing to invest in the quality of our services and strengthening the long-term economics of our portfolio. We will continue to operate in locations that are important to our client partners, are strategic in delivering back-up care and in areas with strong supply-demand dynamics. At the same time, we'll continue to rationalize locations where these characteristics are not present. Turning to ed advisory. Revenue increased 10% to $36 million in the quarter. and for the full year grew 9% to $125 million, both ahead of our initial expectations. College Coach led the growth in margin performance as more families engage with our college counseling services, while EdAssist also continued to expand its participant base.

During the quarter, we added new employer clients to the portfolio, including launches with [indiscernible] Estee Lauders and Becton Dickinson, among others. Before I turn it over to Elizabeth, I want to take a moment to recognize an important milestone. 2026 marks the 40th anniversary of Bright Horizons. When our founders launched the company in 1986 they, believed employers could play a meaningful role in supporting working families. And then doing so, we benefit children, parents and employers alike. Over 4 decades, Bright Horizons has developed thoughtfully alongside changes in the workforce, employer priorities and the needs of working families. Central to that evolution has been the development of our back-up care business. and the expansion of our services to support families and employees across life and career stages, broadening our impact to a much wider population. That progression reflects our ability to listen to clients adapt to changing needs and invest in ways to maximize impact, all while remaining grounded in our mission to support children, families and employers.

We are proud of what this organization has built over 4 decades. Deeply grateful to our employees whose dedication make it possible and appreciative of our client partners and customers who place their trust in us. In closing, 2025 was a year of solid financial performance and meaningful progress across many dimensions of our business. We grew revenue 9%, expanded adjusted operating margins 200 basis points and delivered 30% earnings growth. We strengthened our balance sheet, repurchased $225 million of shares and position the company for long-term success. As we look ahead to 2026 we are optimistic about the opportunities in front of us and look to build on the momentum we saw in 2025. Elizabeth will walk through the guidance in more detail, but at a high level, we expect revenue to be in the range of $3.075 billion to $3.125 billion and adjusted EPS to be in the range of $4.90 to $5.10 per share.

With that, I will turn the call over to Elizabeth.

Thanks, Stephen, and hello to everyone who's joined the call tonight. I'll start with our financial highlights. Revenue in the fourth quarter was $734 million, representing 9% growth year-over-year and modestly ahead of our expectations. The quarter reflected solid execution across the business with continued strength in back-up care and steady performance in full service and ed advisory. Adjusted operating income rose 14% to $91 million, with operating margins up roughly 60 basis points over the prior year to 12.3%. Adjusted EBITDA increased 12% to $123 million representing an adjusted EBITDA margin of 17%. And lastly, adjusted EPS of $1.15 per share, ahead of our expectations, grew 17% over the prior year. .

Breaking this down into the segment results. back-up care revenue grew 17% in the fourth quarter to $183 million, driven by solid demand over the fall and holiday season. As Stephen mentioned, utilization continues to be driven by both predictable and planned needs as well as unexpected care disruptions. Operating margins remained strong in the quarter at 32% and in line with our expectations for the higher volume of care that we deliver in the second half of the year, while also reflecting our disciplined expense management and a favorable mix of utilization. Full service revenue of $515 million was up 6% in Q4, mainly on pricing increases, modest enrollment gains and an approximate 175 basis point tailwind from foreign exchange. Centers we have closed as part of our portfolio rationalization since Q4 of '24 partially offset these gains representing an approximate 200 basis point headwind.

Enrollment in our centers opened for more than 1 year increased approximately 1% and occupancy levels across our portfolio averaged in the mid-60s for Q4. In the specific center cohorts we have discussed on prior calls, we continued to show improvement over the prior year period. Our top-performing cohort centers above 70% occupied, improved from 39% of those centers in Q4 of '24 to 40% of centers in Q4 of '25. And as Stephen commented, our bottom cohort of centers those sub-40% occupied, improved from 16% in the prior year period to 12% of the total population this past quarter.

Adjusted operating income of $20 million in the full service segment increased roughly 45 basis points to 4%, up $3 million over the prior year higher enrollment and improved operating leverage, particularly in our U.S. and U.K. operations helped drive the growth in earnings, while higher benefits costs partially offset some of these advances. Lastly, our revenue in the educational advisory segment increased 10% over the prior year to $36 million with operating margins of 30%, consistent with Q4 '24. Net interest expense ticked up to $12 million in Q4 of '25, also consistent with the prior year quarter and totaled $45 million for the full year. Our non-GAAP effective tax rate was 26.4% in the quarter -- in the fourth quarter, bringing the effective rate for the full year to 27%.

Turning to the balance sheet and cash flow. For the full year 2025, we generated $351 million in cash from operations compared to $337 million in 2024. Capital investments totaled $91 million in the current year 2025 as compared to $95 million in the prior year. And with the continued cash build specifically free cash flow generated in Q4, we repurchased $225 million of stock in 2025, including roughly $120 million in the fourth quarter. We ended the year with $140 million of cash and a leverage ratio of roughly 1.7x net debt to adjusted EBITDA.

Moving on to our 2026 outlook. In terms of the top line, we currently expect 2026 revenue to be in the range of $3.075 billion to $3.125 billion or growth of 5% to 6.5%. Looking at this at a segment level, in full service, we expect reported revenue to grow in the range of 3.5% to 4.5% on enrollment gains and tuition increases offset by approximately 200 basis points in headwind from net center closings. In back-up care, we expect reported revenue to increase 11% to 13% and driven by the continued expansion of use. And in ed advisory, we expect to grow in the mid-single digits. In terms of earnings, we expect 2026 adjusted EBITDA, EPS, excuse me, to be in the range of $4.90 to $5.10 a share.

As we look specifically in Q1 '26, our outlook is for total top line growth in the range of 6% to 7.5%. The segment breakdown would be full service reported revenue growth of 5.5% to 6.5% back-up of 11% to 13% and ed advisory in the low to mid-single digits. In terms of earnings, we expect Q1 adjusted EPS to be in the range of $0.75 to $0.80 a share.

So with that, Paul, we are ready to go to Q&A.

[Operator Instructions] Our first question is from Jeff Meuler with Baird.

Can you help us with how you're thinking about the full-service margin outlook, including as you close these centers that are a 200 basis point revenue headwind on average, are they at a loss? Or just how should we factor in the different drivers of full-service margin outlook? .

Yes. Thanks, Jeff. So as we look at 2026, we had, obviously, good performance this year and are building off of where we ended 2025 into '26. We mentioned a couple of things on the prepared remarks, including about 100 basis points of enrollment gain in the year. That will contribute some continued performance in our U.K. business, which had a certainly a strong year in 2025, and that velocity will be -- continues to grow, but it will be expanding at a little bit lower pace than it was able to this year.

So we're looking overall at about 25 to 50 basis points of margin improvement in the full service business in '26. That captures some effect of these closures as you're highlighting, most of them are in a loss-making position, yes, because that's the reason for underperformance leading to a closure decision. There is some tail to those costs even as the center ceases operations if we're running dark and/or we're not able to fully exit the lease are paying off multiple years of lease expense in advance. So we are having some ongoing effect of that, but it does add modestly to the operating leverage as we are exiting these underperforming centers. But overall, full service 25 to 50 bps.

Got it. And then just given the headlines and new stories, can you just comment on health and safety protocols, any changes that you're making or considering? And then just how you think about any sort of like local market or licensing risks or a private public partnership for UPK opportunities that could be impacted from those issues. .

Sure. Thank you for the question, Jeff. As you'll know, and those who interact with know, our #1 priority continues to always be delivering high-quality care and education for families and ultimately for the clients that we serve. When we have any incident at a center. We take it incredibly seriously. What I would say is that enrolled families at other centers tend to focus on the experience that they are having at their individual center. And the relationships that we enjoy with our clients. We focus on transparency and also strong communication so that we can express to them exactly what has occurred. And then ultimately, the actions that we are taking to make ourselves even stronger going forward.

So overall, to be very direct with you, we continue to see strong retention of families in our centers. We continue to see stability in our client base. And so overall, while we take these incidentally seriously, from a business impact perspective, I would say, at this point, our view is that, that is not the case. You referenced the relationships that we may have with UPK, so for example, in New York City, in particular. And what I would say is that we enjoy contracts in the majority of our centers for UPK . We have received feedback from the regulator. Having visited almost all of our UPK centers in recent months that we continue to perform at a high level. There is never a guarantee that contracts will ultimately be renewed over time. On the other hand, we feel confident in our position at this point within the New York City market and our ability to continue to deliver for the large number of families that we do.

Our next question is from Manav Patnaik with Barclays.

Elizabeth, maybe just firstly on the guide, if you could help us with the assumption on pricing and enrollment growth in the full center business? And then also just if you want to just knock out the margins for the other two businesses in 1Q and the full year. .

Sure. So overall, we're looking at price increases, which would vary as I'm sure most on the call know we make individual localized decisions on this. But on average, the price increases for '26 are approximately 4% and we are looking at overall enrollment for the year plus 100 basis points give or take. So the two of those are the two primary components there. The price increase reflects what we see in the wage offsetting around 3% or so range against that 4% for wages. As it relates to the overall margin in the other businesses. So back up, we would be looking at our long-term average. Just to reiterate that, we would expect to be 25% to 30% operating margin over time. We certainly have been performing well against that, and we would look in '26, we would look to be seeing that in the upper half of that range. So call it, 27%, 28% to 30% for the year. So that's what we're seen in back-up care. And then in ed advisory business similar to this year overall in the low 20s .

Got it. And maybe just back to New York City, I guess, with the new mayor and the free child care proposal. I wanted to just get your take, if you've spoken to the administration, you're involved in there. Just some color on what your New York City exposure is? I know in the past with pre-K and those kinds of things, you benefit from wraparound care, but I'm not sure what these proposals look like.

Sure. So as I shared, we -- as the majority of the centers that we have in New York City proper, we participate in UPK and that is a good relationship with the city in terms of a good demonstration of the power of private public partnerships. It's an environment where the city funds at a level that supports quality and likewise, is an environment that is open to working with private providers like us. So New York City has been, in our opinion, a really good example of where UPK can work well both for the city, but also for Bright Horizons and the families that we serve.

The expectation going forward is there have been conversations about moving to younger age groups, so the twos, so 2k and there is an indication that it would likely look similar to the UPK program that's in place only for younger age groups. The expectation also is that they are going to be starting with a pilot that is focused on the neediest areas of the city and then potentially expand in the way they did previously to a much broader aspects of the city. In terms of the relationship, yes, I mean, I think we as one of the largest providers in New York City or UPK, we certainly have a good and ongoing relationship with the folks that manage those programs and continue to feel like we have a good sense of how this may unfold over time.

Our next question is from Andrew Steinerman with JPMorgan.

So Bright Horizons continues to have strong backup cap growth as employees at the corporate clients engage and use their additional use cases of their backup benefits. I was wondering how do the corporate clients feel about that kind of the increased spend that comes as employees realize and use their backup benefits more and do you see any tightening of backup benefits in terms of like use cases that are allowed by corporate clients? .

Sure. I'm happy to answer that, Andrew. So first, it's fair to say that we're very pleased with the 19% growth that we experienced this year. And that is in addition to the last several years of very strong growth. And as you all know, the majority of the revenue that we derived is directly from the employer support of these programs because there's really a limited co-pay that goes along with it at the employee level. But I think that we have done a really good job of articulating to employers the value in terms of productivity. That backup provides to their employees and then ultimately accrues to them as employers. And so I think that strong ROI has really held us in good stead as it relates to the continued investments that they're making. I would also observe that within the benefits portfolio that HR manages, backup is still a pretty modest line item, especially as it compares to some of the more traditional and larger benefits that they manage.

And so while the increases are significant for us and obviously for the progress that we have continued to make from any one employer's perspective, it's still a pretty modest line item despite the fact that on a percentage basis for them, it is growing more significantly. But again, I think our teams have done a really good job of ensuring that we are focused on -- and secondly, the feedback from employees around the backup benefit continues to be incredibly strong.

Our next question is from George Tong with Goldman Sachs.

You mentioned occupancy averaged mid-60s in 4Q. Based on your guide for this year, can you describe how you expect occupancy to unfold over the course of 2026 by quarter roughly? .

Yes. So the seasonal pattern would be pretty consistent where we see a lift in enrollment in the first half of the year, particularly in Q2 is where it would be peaking in the -- it was in the high 60s in 2025, so being picked up -- it would tick up a bit above that. And then in the second half, it would be back down into the mid-60s for the second half of the year, Q3 and ending the year similar to Q4 as Q3. So it's a lift in Q1 and Q2 and then similar to the pattern you saw this year.

Got it. So by 4Q this year, would you expect it to be better than mid-60s from 4Q last year? Or do you think you've reached the steady state and mid-60s as a reasonable year-end? .

Yes. It would be still in the mid-60s exiting '26 because with a growth rate of just 100 basis points in a year. We're we're making headway against that gradually, but it wouldn't be getting beyond the mid-60s by the end of the year. Still growth to come though. We are heartened by the continued interest, and we have the overall number of enrollment in the 100 basis point range is masks the improvement in the middle and lower cohorts, which are growing low to mid-single digits because they're more under enrolled than the top cohort, which is very well enrolled.

And in fact, can't really take any more enrollment and may see some cycling. So overall, we're pleased with the ongoing momentum, it's modest, and it's year-by-year, quarter-by-quarter, but we are seeing growth and think that, that will continue to allow us to move beyond the mid-60s over time. That won't happen, we wouldn't expect in '26, but certainly have the opportunity down the road.

Our next question is from Toni Kaplan with Morgan Stanley.

I was hoping you could start maybe giving additional color on the closures. Just wondering if there are any sort of commonalities on why the centers got up to a higher level of utilization and I'm sure there were a number of things that you tried. And so just wanted to understand the reason for that. But were there a number of leases that came up this year? Just trying to understand also like how to think about closures for maybe '27 as well.

Yes. Yes. So I think the common theme is probably the centers that have been circled up for closure. And in fact, we have closed already in '26 close to half of what we would expect to close for the year. we'd expect to be in the range of 45 to 50 or so closures this year overall, and we've closed more than 20 already in this quarter. And that the circling up of those has been a combination of the things that you mentioned, Toni, which is some were within a year or 2 or 3 of the end of their lease. And so the underperformance, the lagging enrollment and the overall economics of operating compared to covering the fixed cost was not sensible. And so we were able to in many cases, move the families and the staff to other nearby centers and to accommodate the needs of everyone in that way. And so that's obviously the best case scenario where we can rationalize portfolio and retain the enrollment and the staff as well.

Also, there certainly were some cases where the underperformance is so significant and there is no particular lease action, the lease is not coming up for still several more years, but we have elected to stop operations and do this either combine or just stop operations because the demand is not sufficient. The operations are quite -- the operating performance is quite low, and therefore, we are shutting down operations and may have some tail of costs that carries on for a couple of years if we are not able to sublease the space, we will certainly work to do that, but it's not the most amenable market for that. But I think it's just a decision point of persisting looking at the client relationships, is there client interest in full-time care? Is there a client interest in back-up care? Is there a landlord negotiation that can get us a more tolerable occupancy cost? Are there other -- and of course, the main ones, which are can we enlist more enrollment by more parent awareness and more marketing conversion, but that's all of those things go into a decision, which is a tough one to make.

Great. And then for my follow-up on back-up care, I guess, anecdotally, we're aware of at least one employer who added days during COVID and now is cutting back on days going back to sort of pre-COVID levels. And so I wanted to understand if that is just a one-off situation or if they're is sort of a larger trend of cutting back on days? And what I'm trying to get at is if you're seeing any changes in the drivers of growth in back-up care like going forward versus like recent years, are you seeing sort of more growth from new employers signing on as opposed to those adding days or any difference in usage, et cetera. I just wanted to understand directionally the back-up care drivers and if that is something that is changing.

So Toni, what I would say is now the drivers in 2026. And moving forward, we expect actually will look very similar to the last several years. So the vast, vast majority of the growth comes from the existing client base. Of course, we continue to add clients, but that is not a large source of growth given the maturation that is required of a new client, and it takes time for the benefits to become known and then ultimately used in a more mature way. So when we think about the drivers, number one, is continuing to increase the number of unique users. And so as I shared, we grew that at sort of mid-double-digit rate and so getting more penetration within our existing base is a really critical component.

I would say that to the question around program design and policy changes, it was not actually the norm for most of our employers to change their program parameters even during COVID. We had a select number that really had some outsized programs that have come back into more of our normalized program policy. But the reality is in the current operating environment, most of those who use do not use their full bank, whether it be an outsized bank or even a more traditional sized bank. So again, it's this combination of continuing to drive users continuing to drive their frequency of use, understanding that most do not use their full bank, and those become the two most important determinants of the continued growth algorithm.

[Operator Instructions] Our next question is from Josh Chan with UBS.

I guess, around your expectation to grow enrollment 100 basis points which is similar to kind of the exit rate in Q4. Have you seen kind of a solid or pretty stable fall enrollment season during Q4 to kind of inform you of that? Just I'm just wondering how the enrollment season kind of progressed.

Yes. It was -- I would say that we had a bit of a slowdown in the second half of the year. We were a little faster growth in 1H of '25, and then it tapered in the second half. So it was -- the momentum coming through the fall was and into the rest of the year was similar to what we had expected and stable going into next year. I'd say that the maybe the notable element as we're looking ahead is a little bit of an uptick in younger age group enrollment. The mix is it's not dramatically different, but it's an uptick in younger age interest. And so that's always a positive, of course, for just growing the younger children into the older age groups as they stay with us. So that's one of the elements of positive outlook that we are seeing.

And we talked last -- throughout 2025, it is last year, and we're talking about Q4, but some of the supports that we are seeing outside the U.S. has certainly helped to improve affordability to families in the countries that we operate, where government funding for child care is available to all families. It's means tested, but it's available to all families at some level, and that enables more families to afford care. So that has driven some good stability also in the enrollment outlook.

Okay. That makes sense. And then in terms of your center count, I guess, how many centers are you aiming to open next year? And at what point do you feel like you can get to kind of net neutral center count in the future? .

Yes. So in '26, we'd look to be opening plus/minus 20 or so. And I think I mentioned closing 45 to 50. So we would be in the net closure position as you say, in '26. It will go a long way, closing getting underperformers closed throughout the rest of this year. We'll go a long way toward addressing that bottom cohort. We mentioned there's 12% of centers in the bottom cohort about just under 90 of those or so are P&L centers that we control the bottom line. And even after the closures in the early part of this year, it's already ticked down meaningfully to -- in the neighborhood of 70. So we will be in a good position to have made progress through many of the centers, but I'd still say we would -- we'd probably be in another year beyond '26, '27 before we're meaningfully net positive. .

Our next question is from Stephanie Moore with Jefferies.

Hi, good afternoon. Thank you. I was hoping you could talk a little bit about what you're seeing from just an overall pricing standpoint, general appetite from parents and customers on tuition increases, how you view kind of pricing going forward now that inflation is kind of arguably a bit under control, labor is in a little bit better positioned. So I would just love to get your kind of updated view on general pricing trends.

Yes. I mean it's obviously the economy has been in many families have been quite stressed with the whole of inflation in general over the last many years. Child Care has, for many years, been a higher than inflation cost service, mainly because of the labor intensity that goes into it and the pandemic really added some fuel to that with significant increases to the labor cost as some significant wage steps were made early on in the pandemic. And then we continue to do increases, but they're much more market level increases over the last couple of years. So I think the parents are understanding that the cost of care is very much driven by personnel costs. We mentioned benefits costs on this call, in particular, because it is one of the important cost wage and benefits is an important element of the total rewards package for our teachers. It's one of the things that's attractive to them about our employee value proposition and why they work here, but it is a cost that we need to be continuing to bake into the overall cost structure and the tuition recovery over time.

So we feel like our algorithm will continue to hold. Parents understand where the increases are coming from and the I think that our measured approach to tuition increases that tries to balance the economics, covering costs in the center as well as attracting enrollment, retaining enrollment and bringing as economic value to families and to our client partners as we can will ultimately carry the day. So we're always looking for ways that we can be effective in making the cost of care affordable to families but transparent about the fact that it does increase with -- primarily with those personnel costs each year.

Absolutely. No, I think that's fair. And just as a follow-up, and I do apologize if I missed this, but wondering if you guys could give an update on getting back to 70% enrollment or what you view as an optimal enrollment level, just kind of update and time line there? .

Sure. So we're in the mid-60s right now across the portfolio and about half of our centers operate above 70%. And actually, they operate above 80% on average. And so I would say that our target would still be to aim for 70% many centers performed just fine below that, 60%, 70%, it doesn't -- it's not a magic number, but it is certainly one that we aspire to in terms of critical mass in the center of the right kind of mix of age groups that bring the operating efficiency that is natural in a childhood center where this labor intensity is as high as it is. And so our view at 100 basis points a year of enrollment gain, we will be making headway on that and getting closer to 70%.

But the other factor there is as we continue to rationalize the portfolio, and we have fewer centers that are operating sub 40%. We will naturally be drifting up, if you will. But it's really having the enrollment that's the most important factor. And it's -- the top group is doing well. It's doing great. They're sustaining enrollment above 80% even as the natural age up and cycling happens. So that is the most heartening part of it. It's that middle cohort of, call it, 40% of our centers that have the real opportunity to be adding 5, 10, 15 basis points of children -- 5, 10, 15 percentage points of enrollment to really get us closer to that 70% average.

Great. Well, thanks again for joining us on the call and wishing you all a good night. .

This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.

Greetings, and welcome to the Bright Horizons Family Solutions third quarter earnings release conference call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael Flanagan, Group Vice President of Strategic Finance. Thank you. You may begin.

Thank you, Shamali, 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, 2024 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 Investor Relations 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 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.

With that, let me turn the call over to Stephen.

Thanks, Mike, and welcome to everyone who has joined the call. We delivered another quarter of solid execution and performance with revenue increasing 12% to $803 million and adjusted EPS growing 41% to $1.57, both well ahead of our expectations. Demand persisted from both client employees and employers for our broad suite of education and care benefits, and our teams executed with discipline and focus. This quarter's performance positioned us to finish the year with strong momentum and confidence in our ability to deliver on our strategic objectives.

Let me start with backup care, which was a clear standout in the third quarter as it has been all year. Revenue increased 26% to $253 million with strong broad-based demand for all care types across our own supply and our partner network. The momentum we saw in early summer carried through the quarter, particularly in our programs catering to school-age children, supported by working parents significant needs during the school breaks. More employees use care, existing users leaned in further and more employers signed on to offer the benefit, notably new client MIT and Appian Corporation.

Our operations team executed exceptionally well, delivering record levels of care during this compressed high-intensity period. And our marketing and technology teams continue to progress our personalization efforts to attract and stimulate use among client employees.

Backup care continues to be an exciting growth engine, both financially and strategically and a core pillar of our long-term value creation. While today, it stands as our largest driver of revenue and profit growth, we believe we are still in the early innings of the opportunity. Our current reach spans more than 1,000 employers and millions and millions of eligible employees, but employer adoption and usage remains modest relative to its potential. Our strategy to close this gap is focused on expanding the number of unique users within our existing client base, increasing frequency of use among those who already value the service and continuing to grow our client roster.

As we look ahead, we will continue to invest to support the growth of backup care, expanding capacity, deepening personalization and reinforcing the value proposition for both employers and client employees. A critical differentiator in our model and our ability to deliver on this growth is the breadth and quality of our delivery network. Our full-service centers remain foundational in that effort, serving as a direct source of care and as an essential infrastructure that supports reliability, responsiveness, quality and scale across our global platform.

Now moving to our full-service centers. Revenue in full service increased 6% to $516 million, driven by a combination of enrollment growth, tuition increases and new center openings. We added 3 new centers this quarter, including 2 centers for a new higher ed client and a third location for Dartmouth-Hitchcock Medical Center. These openings not only reinforce our leadership in employer-sponsored child care, but also underscore the enduring importance of on-site care as a strategic workforce solution.

Enrollment in centers opened for more than 1 year increased at a low single-digit rate, while average occupancy ticked down to the mid-60s sequentially given the usual summer to fall seasonality. While the pace of enrollment growth has moderated over the course of the year, we continue to see the fastest growth in select centers operating below 40% occupancy. Centers in the 40% to 70% occupancy range also continued to show enrollment growth and margin improvements. And among our top-performing centers, those with occupancy above 70%, we continue to have strong profitability, while the natural cycling of last year's strong occupancy levels tempered our overall enrollment growth.

Outside the U.S., our U.K. Full Service business continues to regain ground. Enrollment growth has continued with increased demand among working families, a segment we are well positioned to serve and more favorable government support to families. Operationally, we are seeing the benefits of disciplined cost management, improved staffing and retention and an improved labor environment. The U.K. remains a strengthening component to our Full Service segment and is now on track to contribute modestly positive earnings in 2025. As we exit 2025 and plan for 2026, our focus in full service remains on delivering quality at scale, expanding occupancy and fulfilling increasing amounts of backup use. We are also ensuring our portfolio is aligned with long-term opportunities for growth and margin improvement.

Moving on to our Education Advisory segment. Revenue grew 10% this past quarter to $34 million, ahead of our expectations, led by the continued strength of College Coach, which contributed both top line growth and strong margins. In addition, EdAssist expanded its participant base as employees continue to explore education benefits to support their career development. We believe that our investments in this product offering and customer experience position us well to meet the evolving client upskilling needs and create value over time. We added new clients to the portfolio this quarter, including Sony Music and Premier Health Partners, expanding our reach and reinforcing the relevance of education and coaching benefits in today's landscape.

Before I turn it over to Elizabeth, I want to take a moment to reflect on one of the most meaningful traditions at Bright Horizons, our awards of excellence celebration. This year, we once again had the privilege of gathering in person to honor the extraordinary contributions of our employees. With more than 20,000 nominations from colleagues, families and clients, the awards and the events were powerful reminders of the deep impact our teams have on the lives of those we serve. Celebrating together with our Westminster, Colorado and Newton, Massachusetts teams was a true highlight, a chance to recognize the passion, care and commitment that define our culture. To all our employees, thank you for the work you do every day and for the difference you make in the lives of children, families, learners and employers around the world.

In closing, this terrific quarter reflects strong contributions across all of our service lines. As we look ahead, we remain focused on building a more integrated Bright Horizons, one that aligns our delivery model, technology and client partnerships to provide a more seamless experience for working families. Our broad portfolio is central to this effort and backup care stands out as a cornerstone of our One Bright Horizons strategy, serving as a strategic lever for strengthening client relationships, enhancing employee productivity and driving enterprise-wide value.

Given our results year-to-date and our current outlook for Q4, we are upgrading our full year earnings guidance. We now expect revenue to be approximately $2.925 billion, representing 9% growth, and we are increasing our adjusted EPS to a range of $4.48 to $4.53.

With that, I'll turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook.

Thanks, Stephen, and greetings to everyone on the call tonight. Let me start with our financial highlights. Revenue for the third quarter grew 12% to $803 million, driven by continued growth and disciplined execution across each of our segments. Adjusted operating income rose 39% to $124 million, with operating margins up roughly 300 basis points over the prior year to 15.5%. Adjusted EBITDA increased 29% to $156 million and represents an adjusted EBITDA margin of 19% in the quarter. Lastly, adjusted EPS of $1.57 came in well ahead of our expectations, supported by strong backup revenue performance and operating leverage.

Breaking this down a bit further into the segment results. As noted, back-up care revenue grew 26% in the third quarter to $253 million, driven by strong demand over the peak summer season. At this high watermark of utilization for the year, we also delivered significant operating leverage as adjusted operating income of $95 million increased $25 million over the prior year, and that translates to an operating margin of 38%.

Full Service revenue of $516 million was up 6% in Q3, mainly on pricing increases, modest enrollment gains and an approximate 125 basis point tailwind from foreign exchange. The centers that we have closed since Q3 of 2024 did partially offset these top line gains.

Enrollment in our centers opened for more than 1 year increased low single digits across the portfolio. As Stephen mentioned, occupancy levels across our portfolio opened for more than 1 year averaged in the mid-60s for Q3, improving over the prior year, but naturally stepping down sequentially from last quarter given typical summer seasonality.

In the specific center cohorts that we've previously discussed, we continue to show improvement over the prior year. Our top-performing cohort, that is centers above 70% occupied, improved from 42% of these centers in the third quarter of '24 to 44% in the third quarter of '25. The bottom cohort of centers, those under 40% occupied, improved modestly from 13% last year to 12% this past quarter.

Adjusted operating income of $20 million in the Full Service segment increased $8 million over the prior year and represented 4% of revenue in the quarter compared to 2.6% in the same 2024 period. This improved operating leverage was bolstered by higher enrollment to help drive that growth in earnings.

Lastly, Educational Advisory revenue, which increased 10% to $34 million, delivered operating margins of 26%, an improvement over the prior year with strong flow-through on the higher utilization of services.

Recurring interest expense was $10 million in Q3, down from $12 million in Q3 of 2024, largely due to lower interest rates and lower overall borrowings. The structural effective tax rate on adjusted net income was 27%.

Relative to the balance sheet through September of this year, we have generated $203 million in cash from operations, made fixed asset investments of $59 million and have repurchased $105 million of stock. We ended Q3 with $117 million of cash, and we've reduced our net leverage ratio of 1.7x net debt to adjusted EBITDA.

Now moving on to our updated 2025 outlook. We're updating our '25 guidance for both revenue and adjusted EPS to reflect the outperformance in Q3 as well as our expectations now for Q4. We now expect revenue to approximate [ $2.9 billion to $5 ] billion and adjusted EPS to be in the range of $4.48 to $4.53.

In terms of our updated full year outlook by segment, we expect Full Service revenue to grow roughly 6%, back-up care to grow roughly 18% and Ed Advisory growth to be in the high single digits for -- again, for the full year.

With this full year outlook translates to for Q4 is overall revenue in the range of $720 million to $730 million and adjusted EPS in a range of $1.07 to $1.12.

So with that, Shamali, we are ready to go to Q&A.

[Operator Instructions] Our first question comes from the line of Andrew Steinerman with JPMorgan.

So obviously, I wrote a report sizing out the backup care industry recently and your backup growth was just tremendous. I surely wanted to ask you about the sustainability of these type of growth rates. I remember that you like to refer to kind of low double-digit growth as the sustainable rate, but you're growing above that now and into the fourth quarter.

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 a 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.

Great. Thank you, Elizabeth. And Andrew, thank you for the note that you put out. It highlighted a really critical part of our business. And when we think about the long-term sustainability around the back-up care business, we were very encouraged this quarter, but candidly, for the whole year around our ability to continue to grow both the user base as well as the frequency of use. And look, at the end of the day, we're really focused around getting new users from among our client base, but also making sure that those who use return. And so when we think about the full scope of the opportunity, at this point, we have, call it, over 1,000 clients out of tens of thousands of potential clients. We have, call it, 10 million lives that we have the ability to impact. They're eligible for these services, of which we have less than 10% penetration. And so when we really think about the opportunity, we're really looking at it through that lens and believe that long term, this continues to be an important part of our growth algorithm.

Our next question comes from the line of George Tong with Goldman Sachs.

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%?

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.

Got it. That's helpful. And I guess following up on that, what would you think could be positive catalysts to drive a reacceleration in enrollment growth? Is it going to be external and market-driven? Or are there internal initiatives that you have that can help pick up that growth?

Yes. I mean, certainly, the opportunity through what we're controlling our own initiatives include a variety of the improvements to the customer experience, the ability to move from inquiry or just interest in a place to actual registration and enrollment. We have a number of both initiatives in terms of more effective marketing, more targeted outreach to our customers, connecting customers who are part of our employer base across our network of centers. So there are a number of initiatives in that way, but just smoothing the experience for a parent who is able to register and then and start using care when they need it.

But certainly, I think external factors are in play. There is, I think, an environment from an economic standpoint that is continues to be a bit unsettled with different pressures on the consumers and the return to office cadence continues to be moving faster in some areas than others. And so parent demand can be somewhat variable there. But we're pleased with our general placement of our portfolio in terms of being close to where working families are living and/or working and where employers are able to generate a concentrated amount of use, but we are also mindful of the pressures on the end consumer who does typically pay the lion's share for this service. So being affordable in the market, our value proposition very visible and available to parents to see those kinds of things are certainly in our control.

Our next question comes from the line of Jeff Meuler with Baird.

Just given those economic conditions that you just referenced, how are you planning tuition pricing, I guess, in calendar year 2026 for Full Service?

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%.

Okay. And then for back-up care, just with that big opportunity and also just with the demand we're seeing and the strong execution we're seeing in your results, I guess, how are those factors intersecting with the budgetary environment as clients do calendar year 2026 planning and budgeting for your service? Are they kind of leaning in like we've seen in the strong results this year? Or is there any sort of increased hesitancy for budgetary reasons?

Sure, Jeff. So we are through the lion's share of our renewal season at this point. And first, I would say that our clients were really pleased with the way this year has turned out for them and their employees. The feedback has been incredibly strong from their employee base, which is a real marker of the importance of the backup care service. I think we have done an increasingly positive job of articulating the ROI, especially as it relates to productivity related to our service. And so I think we're well set up going into 2026 for our clients to continue to be interested in investing. Contextually, backup care still represents a really small part of a benefits budget. And so when they think about some of the larger items like health care or even a 401(k), those are areas where, obviously, those are significant in terms of their investment. I think that for any individual client, while the kind of growth that we've experienced over the last several years is important for our business, I think it's very reasonably absorbed by our client base given that context and the importance of the service.

Our next question comes from the line of Manav Patnaik with Barclays.

My first question was just in the backup 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.

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 experienced 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 Steven Kates 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.

Okay. Got it. And Elizabeth, just you've given some good helpful color for the fourth quarter and some early look at '26. I was hoping you could just fill in the gaps on the margin front, like where do you think margins end up in '25? And then anything to keep in mind when we model out next year?

Yes. So we -- obviously, maybe ticking through the different segments. So full service this quarter had a nice step-up in margin, 140 basis points or so. We would expect to finish off the year in the 125 basis points or so range for the full year. And back-up care obviously had a very strong quarter this quarter. The volume of use helps that. And we would expect to be at the upper end of the range. We've given a range of 25% to 30% as our expected long-term sustainable target for the back-up care segment. And so with the performance in the third quarter and that kind of volume, we would expect to be at the higher end of that range, again, for the full year. And then the Ed Advising business in the 20% or so plus, low 20s as we've seen in the last couple of quarters.

Our next question comes from the line of Toni Kaplan with Morgan Stanley.

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 backup care strength, would that offset any impact from those?

So Tony, 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 harken 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.

Great. Maybe in your experience of companies where they do have reductions in force, do they typically change their benefit levels? I'm sure there's like a delay or anything like that, but have you ever seen Full Service clients switch to backup care? Or is that not really a thing because they've already normally built a center already?

Yes. So I think on the center side, as we've shared, I mean, that's a really long-term decision. And so I think clients generally, unless they get into an incredibly compromised position, generally will persist with their center. And so again, I think on the center side, we see really good retention rates on the basis that a client will understand that there'll be better and worse cycles and they'll continue to push through that. I would say on the backup side, from a program design standpoint, again, we don't typically see clients change their program design, for example, how many uses an individual employee can have access to because ultimately, when they do find themselves in situations where they are reducing their force, what that really means is they're expecting more from the employees that remain. And so given that backup is so aligned with being a productivity tool for employees who use it, employers generally understand that for those that remain, they need all the support that they can get as it relates to staying focused on their work.

[Operator Instructions] Our next question comes from the line of Josh Chan with UBS.

Stephen and Elizabeth, congrats on the good quarter. I guess on backup, 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?

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 Steven case 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.

Great. And I guess how does the backup strength, does it alleviate the need for you to raise enrollment quickly in full service as you think about maybe having some of that capacity to serve your strong backup demand? Does that change the way you're thinking about enrollment in full service?

Well, I'll say -- I'll start and then perhaps Elizabeth will play color. But I think if we take a step back on that question, which I think is an important one, as I shared in the prepared remarks, our center footprint is a critical component of our ability to fulfill backup cases. And so when we think about the value of that center footprint, we are increasingly seeing the amount of care that we can fulfill through our own network of Bright Horizon centers as an important sort of shared resource between backup and Full Service. So the implication of what you just said is true, which is the strategic value of our Full Service centers is not just about how quickly can we enroll, but it is also about how much demand can we fulfill on the backup side of our business in our own centers because clearly, when we think about the margin profile for the company, the margin profile for the company of fulfilling back-up care cases, obviously, is strong and therefore, is important to make sure we're able to deliver on.

Yes. And Josh, there's certainly some cases where we have been in a position where a center has not only pretty significant backup demand, but predictable enough backup demand that we can dedicate a room or 2 to specifically cover backup care and/or school aged care in the vacation weeks and other things like that. So there are good opportunities for us to utilize the full service footprint in the way that you described that goes to what Stephen is talking about from the strategic fulfillment side of the equation, but also just utilizing the capacity that exists. In our full service centers now, certainly, some are still under enrolled, but they have always had capacity since we don't operate full every day. And it's been both a helpful muscle that we've been able to develop over time. And as our systems of placement get more -- both speedier and more accurate from a time placement standpoint, we're able to fulfill more of that care.

Our next question comes from the line of Stephanie Moore with Jefferies.

This is Harold 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.

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.

Our next question comes from the line of Jeff Silber with BMO Capital Markets.

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?

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.

That's very helpful. And then just for the follow-up, I was wondering how we should be thinking about the net center openings for next year. Are you in a position now where you think you'll be a net closer of centers just looking at the, I think, the 12%, sub-40% utilization you called out? And how do you kind of think about that going into the next year?

Sure. So this year, we had -- I think we entered the year looking to be plus/minus close to net 0 on the openings versus closures. And given the cadence of where we have a number of centers that are in development that have pushed into the early part of next year. So our openings are trailing by a handful this year. And then we have also been opportunistic about some of the closures. So we expect that we will be net closing this year, probably closer to 5 to 10 centers. As we look ahead to next year, and so that would be closures in the neighborhood of 25 to 30 or so centers. So we would be looking to close, I would estimate at this point, we're still in the planning process for 2026, but a closure level in that same range. So we may not be net positive in 2026, but that is really down to the those centers that are in the sub -40% occupied, as you mentioned, there's probably 80 P&L centers in that cohort. There are a handful of client centers, but there's 80 that are in our sort of P&L responsibility. And of those, a portion of them are operating at a level where they're partially covering their rent, and they have some strategic opportunity with the client relationships that Stephen mentioned, some backup use. So not all of those would close, but they -- that's the group that would be the most likely candidates for closure.

Okay. Well, thank you very much. Really appreciate everyone joining today's call and wishing you all a good night and a happy Halloween.

Thanks, everybody.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.