May 4, 2016
Operator
Greetings and welcome to the Bright Horizons Family Solutions First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded.
I would now like to turn the conference over to your host, Dave Lissy, Chief Executive Officer for Bright Horizons Family Solutions. Thank you Mr.
Lissy, you may begin.
David H. Lissy
Thanks, Doug, and greetings to everybody on the call today from soggy Boston. Joining me on the call is Elizabeth Boland, our Chief Financial Officer, who as always will go through a few administrative matters before I come back and kick off the call.
Elizabeth?
Elizabeth J. Boland
Hi, everybody. Thanks for joining us today.
Our call is also being webcast for those of you who are interested in that and a recording of the call and our earnings release, which was issued today after the market closed are or will be available under the Investor Relations section of our website at brighthorizons.com. Some of the information we're providing today represents forward-looking statements including those regarding our current expectations for future performance, our business outlook, enrollment trends, our financial outlook for Q2 and for the full year 2016, for revenue growth, operating margins, overhead costs, growth and operating strategies, center openings and closures, capital spending, growth rates, borrowings, adjusted EBITDA, net income and EPS, as well as cash flow and share repurchases.
Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially. Factors that could cause actual results to differ include risks related to implementing our growth strategies, client demand, integrating acquisitions and our indebtedness as well as other risks and uncertainties that are described in the risk factors in our Form 10-K for 2015 and in our other SEC filings.
Any forward-looking statements speak only as of the date on which it's made and we undertake no obligation to update any of these forward-looking statements. The non-GAAP financial measures we discussed are detailed and reconciled to their GAAP counterparts in our press release and they also will be included in our Form 10-Q, which will be filed with the SEC and be available in the Investor Relations section of our website.
So, Dave, I'll turn it back over to you for the review and update on the business.
David H. Lissy
Thanks, Elizabeth, and hello, again to everybody who has joined us today on the call. As usual, I'll update you on our financial and operating results for this past quarter as well as our business outlook for the rest of the year.
Elizabeth will then follow with a more detailed review of the numbers and then we'll come back to you for Q&A after that. First, let me recap the headline numbers for our first quarter.
Revenue increased 10% to $385 million and adjusted EBITDA of $72 million was up 11% (sic) [10%] (02:58). Adjusted net income of $31 million was up 15% over last year's first quarter, which yielded adjusted earnings per share of $0.51, up 19% from last year.
This past quarter we had about 1% foreign exchange headwind so that on a common currency basis revenue growth would have been 11% and the growth in adjusted EBITDA and EPS would have also been slightly higher. Our top line grew $35 million this past quarter with solid contributions coming from each of our three business lines.
We added nine new centers including centers for new clients like Counselor Resources (03:34) as well as centers for existing clients that included Novartis, which added full-service care to the back-up and College Coach services we already provide to them and Cisco where we added their center in Bangalore, India, to the centers we already operate for them in California and London. In our back-up and ed advisory businesses, we recently launched services for new clients that included Lenovo, Yale University, State Farm Insurance, Gilead and Novo Nordisk just to name a few.
We're very pleased with the continued leverage at the operating income line, which expanded 50 basis points this past quarter. Our margin expansion reflects the combination of factors we've talked about on previous calls.
We continue to see positive enrollment trends in our mature class of P&L centers and price increases that average 3% to 4% across the system along with some modest overhead leverage. As we had anticipated and we experienced last quarter, the timing of the opening dates of new lease/consortium centers can be lumpy.
Since we had 10 opened in the past couple of months this quarter's margin expansion once again experienced some timing headwind from the early stage operating losses in these centers. Overall though our lease/consortium strategy is well on track to create significant value as the group of centers that opened over the past few years are doing well.
As the contributions from each maturing class that opened since 2013, offset the losses from the more recently opened centers, we expect to continue to see this short-term timing headwind diminish in the back half of 2016 thus producing some uplift in margin expansion for the full year. The performance and outlook for both our back-up and educational advising segments also remains very positive.
As we've talked about in the past, the timing of new client launches in these segments and the periodic investments that support the service delivery can sometimes cause some quarter-to-quarter variability, which you see in the results of these businesses in the first quarter. For back-up, our top line grew 9%.
Based on our current outlook, however, including the strength of our expected new client starts for the remainder of the year, we anticipate that we're on track for the yearly growth rates that we previewed last quarter in the low double-digits. On the margin side, we're rolling out our new operating system including mobile capability, which add some depreciation cost, which we factored into our plan for the full year.
Our ed advising business posted an outsized quarter growing 34% on the top line. For the full year, we believe they too are on track with the plan we discussed on our last call which should yield top line growth north of 20%.
These two segments are proving to be really good individual businesses each with compelling value propositions. The best part though is how they knit together with our centers to produce a powerful suite of solutions for employers that impact their workforce through key life stages and give us competitive advantage and thought leadership in the market.
Overall for 2016, we're pleased to be off to a strong start in line with our plan for the year. As we look ahead, we're well positioned to continue to execute on our growth and operating strategy and we remain on track to achieve the top line growth and the operating margin improvement that we previously discussed with you.
Our core business continues to progress nicely with enrollments steadily increasing in our mature base of centers and our newer class of lease/consortium centers ramping on or ahead of plan. The selling environment both for new clients and for cross-selling of existing clients continuous to be robust.
This is reflected in the quality of our early stage prospectus in our pipeline of centers under development and in our new client launches ready to come on line this year in our back-up and our education advising services. While we're seeing good progress on the new business front across most industries, the areas where we're currently experiencing the most positive activity include technology, biotech, healthcare and higher education.
Our international businesses are also off to a good start for the year as the UK and the Netherlands continue to deliver solid growth and contribution this past quarter. On the acquisition front, we see positive momentum in our pipeline of prospective high quality centers.
We've got a good mix of smaller networks and single center opportunities in active discussions both here in the U.S. and in Europe.
We completed one, three-center, deal in Q1 and based on what we see now, we expect to be able to continue to close deals consistent with the plan we laid out at the beginning of the year. Let me move for a second over to the balance sheet, as I've talked with you about before, our priorities for capital allocation are first the growth-oriented investments we're making in acquisitions and in new lease/consortium centers, so that's where we are focusing a lot of our time, attention and resources, and I remain pleased with the value creation from these investments.
Our second priority is to enhance shareholder value through our repurchase program, which we continued to execute on this past quarter through modest open market purchases. Before I turn it back to Elizabeth, let me confirm our outlook for 2016.
We continue to expect revenue growth in a range that approximates 8% to 10% over 2015 inclusive of an approximate 1% FX headwind. We expect to produce adjusted EBITDA in the range of $307 million to $310 million and full year 2016 earnings per share in the range of $2.17 to $2.21.
So, with that Elizabeth can review the numbers with you in more detail and I'll be back to talk with you during Q&A.
Elizabeth J. Boland
Thank you, Dave. So to get into a bit more detail on the results for the quarter, the $28.5 million increase in full-service center business revenue was driven by rate increases in the range of 3% to 4% that Dave mentioned, enrollment gains in our mature as well as ramping centers and the contributions from the 87 centers that we have added since Q1 of 2015.
As we've been reporting over the last year or so, we did see some impact from the stronger dollar in the quarter. Lower pound and euro FX rates in 2016 compared to 2015, dampened the revenue growth in the full-service segment by about $3.5 million, or just over 1%.
Therefore, as Dave said, on a common currency basis the full-service segment grew nearly 11% in the quarter. The impact of centers that we've closed, since the beginning of last year, also offset the top line growth in the full-service by about 1.5 percentage points.
The back-up division grew 9% and ed advisory services grew 34% in the quarter. On a quarter-to-quarter basis the growth rates can vary somewhat based on the timing of new client launches, service utilization levels as well as the comparable prior quarter.
In summary then our organic growth for the quarter was approximately 7.5% and acquisitions added a total of 5% including centers we acquired this quarter and the lapping effect from 2015 acquisitions. Gross profit increased $9.2 million to $96 million in the quarter and gross margin was 25%, 24.9% to be exact compared to 24.7% in 2015.
As we've discussed in prior quarters, our back-up and ed advisory services both generate gross margins that are more than double what we earn in the full-service business. Over time, top line growth in these segments contributes to margin expansion, although gross margin and operating income can vary from quarter-to-quarter based on the timing of investments that we continue to make in technology and the personnel that are necessary to support these growing businesses.
The timing of new business launches also contribute and the use mix contributes to quarter-to-quarter variability as well. On the full-service side, performance remained strong in our mature and ramping classes of centers.
The steady pace of year-over-year enrollment gains in the mature class that we've seen since 2011 is also continuing in 2016, and we realized over 1% increase in Q1 of 2016. Strong cost management alongside this enrollment growth plus the exit from underperforming locations contribute to the margin expansion.
As we've talked about on previous calls and Dave discussed, we are now realizing the contributions from the investments we made starting in late 2012 in our lease/consortium growth strategy. We've opened 50 of these centers over the past three years and expect to continue that pace of 15 centers to 20 centers per year in 2016.
As Dave mentioned, we've opened about 10 centers between this quarter and last quarter just as a near-term statistic. Although, we expect to incur roughly a similar level of losses from this group in 2016, as we incurred in the last two years, the headwind on gross margin is slightly higher in the first half of the year due to the timing of openings in late 2015 and early 2016.
Overhead in the quarter was $40 million compared to $37 million in 2015, essentially on plan for the quarter and reflective of ongoing investments in growth, operations, service delivery and technology. Interest expense was $10.7 million in the first quarter of 2016 and we ended the quarter with 3.2 times net debt-to-EBITDA compared to just under 3.5 turns at December 31 of 2015.
As previously announced, we had expanded our revolver capacity as well to $225 million in January. Our effective or structural tax rate of 35% in Q1 of 2016 is based on what we expect to be the applicable rate for our full projected year of 2016, and is roughly consistent with the structural rate from 2015.
We generated operating cash flow of $86 million in the quarter compared to $47 million in 2015 on improved working capital and after deducting maintenance CapEx our free cash flow totaled just over $80 million for the quarter. We repurchased approximately 400,000 shares of stock for $25 million in Q1 of 2016 and at March 31, we held $40 million in cash and had no borrowings outstanding under the revolver.
So, now to quantify our usual quarter end operating statistics. At March 31, we operated 936 centers with capacity of 107,400, which is an increase of 6% of capacity from a year ago.
As Dave previewed, our outlook for the full year 2016 anticipates revenue growth approximating 8% to 10% over 2015. The growth of the 8% to 10% breakdown is follows – organic growth approximates 8% to 10% including the 3% to 4% price increase, 1% to 3% overall from a growth in enrollment in our mature and our ramping centers, 1% to 2% from new organic full-service center additions, and 1% to 2% growth from our back-up and ed advisory services.
In addition, for the full year, acquisitions add approximately 2% to 3% in 2016 and that includes the lapping effect from the 2015 transactions, which diminishes as the year goes on. Offsetting these increases are the effects of center closings, which include both legacy, organic and acquired centers approximating 2% for the full year and projected reductions from foreign exchange rate differences of approximately 1%.
We are planning to add a total of 45 centers to 55 new centers including organic new and acquired centers, and our current outlook also contemplates closing 25 centers to 30 centers for the year. We expect that income from operations in 2016 will expand approximately 75 basis points to 100 basis points from the 12.5% adjusted income from ops that we reported for 2015 principally from gross margin expansion.
For the full year, we expect amortization to approximate $29 million, depreciation in the range of $57 million to $58 million, stock comp in the range of $11 million to $12 million and interest expense of about $42 million for the year assuming continued 4% to 4.5% borrowing rates on our term loans and no further borrowings under the revolver required based on expected cash flow generation. As I mentioned before, the structural tax rate is projected to be 35%.
The combination of top line growth and operating margin leverage drive adjusted EBITDA to a range of $307 million to $310 million for the full year 2016 and adjusted net income in the range of $133 million to $135 million. We also estimate that adjusted EPS will approximate $2.17 to $2.21 for 2016 on approximately 61.5 million weighted average shares.
Lastly for the full year, we project we will generate approximately $200 million to $220 million of cash flow from operations and approximately a $175 million of free cash flow, net of projected maintenance CapEx in the range of $35 million to $40 million. Based on the centers in development and slated to open in 2016 and early 2017, we also expect to invest $40 million or so in new center capital.
Looking specifically to Q2 2016, we expect our top line growth to continue to be in the range of 8% to 10% including the impact of foreign exchange. Our outlook for adjusted EBITDA approximates $81 million to $82 million and adjusted net income is in the range of $36 million to $37 million.
With approximately 61.5 million shares outstanding this translates to adjusted EPS in the range of $0.60 to $0.61 a share for the second quarter of 2016. So, with that we are ready to go to Q&A.
Operator
Thank you. Ladies and gentleman, at this time, we will be conducting a question-and-answer session.
Our first question comes from the line of Sara Gubins from Bank of America Merrill Lynch. Please proceed with your questions.
Sara Rebecca Gubins
Hi, thanks for taking my questions. I am wondering if you are seeing anything unusual on the wage front if you are seeing any incremental pressure on wages or if there are any changes in attrition at the centers?
David H. Lissy
Sara, as I think, I may have noted on prior calls what we are seeing is what we expected, which is in a time where the economy is more robust and there is more competition for labor. We do see a little more pressure on wages.
However, we anticipated this through our pricing strategy and it's nothing more than we anticipated. So, while we are seeing a more difficult recruiting environment, it's something that we've contemplated in our outlook for the year and feel good that our absolute wages are where they need to be to get us the talent that we need across the system.
So, we have this – on the flip side of that the competition for talent fuels the demand side of our business. So, it's very rare that we're in a really good time in our history where we would have a really good demand profile in that our employers are all looking forward – have the competition for talent so it fuels the demand for our services, it fuels the demand for enrollment and when these kinds of environments happen, we also have the flip side of a more challenging time on our side getting the talent that we need.
Sara Rebecca Gubins
Okay, got it thank you. And then just looking at the UK, in the event of Brexit how do you think that might impact operations in the UK both from a short-term perspective and a long-term perspective?
David H. Lissy
Yeah, we thought about that and of course we don't know where that is going to play out, but from our perspective in the UK we are regulated by the UK, there is no pan-European sort of regulation or really impact on how we operate. Our model is pretty straightforward.
We work with an employer. We get our revenue mostly from parents and also from employers and there is some government funding for child care that's funded through the UK model and the system, but it's uniquely in the UK.
We are regulated by the UK specifically in our world. I suppose that like every other company out there the big question is what will happen with the foreign exchange and the pound.
We have roughly 16% or 17% of our revenue comes from the UK. So, on a overall basis it wouldn't have an outsized impact on us if there are any sort of fluctuations in FX.
But from an operating perspective, we don't anticipate much to change.
Sara Rebecca Gubins
Okay, great. Thanks very much.
Elizabeth J. Boland
Thanks Sara.
Operator
Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.
Manav Patnaik
Yeah, good evening guys. So clearly, I mean, it sounds like businesses is as usual on the organic front and that's a good thing.
I feel like for the last several quarters, it sounded like there is a healthy M&A pipeline and you guys, correct me if I'm wrong but, are itching to close a couple of these deals but maybe we haven't seen that yet. Is that a fair characterization and maybe you can just help us understand like what's holding you back from doing these deals, which I think you want to do?
David H. Lissy
Well, Manav. I think, as I've said before I think the pipeline, there is a good level of activity going on both here in the U.S.
and in Europe. And, our bread and butter is always going to be the smaller deals that we do on a regular basis.
And I've actually been pleased that pretty consistently over time, we've been doing – we've been able to execute on these deals both here and in Europe pretty consistently so that our acquisition strategy isn't really lumpy. We have a good enough pipeline for us to sort of project forward and say if we can close smaller deals on a regular basis when the slightly larger ones come that will provide an addition to our strategy.
So, right now as I would look out, I'd say we're on track for where we thought we'd be for the year and that's largely a sum total of several smaller deals. And if something larger came along and it's time for that to happen, that would be additive and we look forward to that.
But I feel good that on a consistent basis, we will be able to close on really good value added transactions across the system.
Manav Patnaik
Got it and then probably not a – so as I guess firstly just on the, you mentioned a lot of the categories where you are seeing a lot of good activity. Can you help give some color on, I guess, the impact from not only just the energy side of things, but maybe on the finance side as well?
Clearly, a lot of those banks are going through a lot of layoffs, I don't know if you are seeing anything there?
David H. Lissy
Yeah, I think our financial service clients are still for the most part doing well. I mean, we're having good success in cross-selling.
Many of the larger financial service clients are legacy clients of ours so, they've had our services for some time and we're in the process of obviously trying to cross-sell some of our newer services, and we've got some traction there. And then we have a whole another set of financial service clients that we're seeing activity with, in the hedge fund area and other areas of this sector.
So, although it's not as much activity as we're seeing in some of the other industries that I talked about, it's still very much on the screen. Energy really has no change from the last time I commented on.
Energy represents a very, very small percentage of our clients. There had been some activity several years ago with some centers for some of the larger players in the field and we still have those centers, and they're still doing well.
But, as I said the last time on the call, I don't anticipate much in the form of new business in that sector in the near term. But, the good news is we're not exposed there with any kind of significant depth of clients that we work with.
Manav Patnaik
Okay and then just last one for me, I think, I heard you mention that you, I guess, opening another center in India through Cisco. Probably not much to read into that but maybe just some comments there and is that sort of a strategy we could see going with one of your multinational companies just opening a center here and then a different office location based on their needs?
David H. Lissy
Certainly I think, first in terms of our decision-making around future geography, one of the screens and one of the lenses that we look through is where our clients might have the desire for us to be or where there might be a market for employers to invest in our services, that's one of the screens we use. But I wouldn't say we'll just go anywhere for any client, because I think that would be a kind of haphazard strategy that would end up not, we'd look back and not be pleased with maybe the cost structure it would take to keep that up.
But from specifically related to India, since we had already operated a successful center and we're expanding that center for our client there. In Bangalore, when we contemplated the opportunity with Cisco, it was natural for us to continue to expand our footprint there and we are in discussions with other clients about India.
So, that – it probably won't be a fast growing area for us but we're certainly open particularly on the cost plus side, which is how we do those sites where we take very little if any risk. We're certainly open to expanding that footprint in Bangalore.
Manav Patnaik
All right, thanks a lot guys.
Elizabeth J. Boland
Thanks, Manav.
Operator
Our next question comes from the line of Gary Bisbee from RBC Capital Markets. Please proceed with your question.
Gary Bisbee
Hey, good afternoon.
David H. Lissy
Hey, Gary.
Elizabeth J. Boland
Hi.
Gary Bisbee
I guess, I just wanted to ask about the ed advisory businesses, so obviously that continues to do terrifically well. Can you review for us how the cost structure of that business works, so we can just think about scaling over the next few years?
I mean the margins were up exceptionally in what historically has been a weaker seasonal quarter for the business, I believe. And so, is there incremental investment that's needed or is this just that's it's more like a software model or something where you get very, very high incremental margins as you grow?
Thanks.
Elizabeth J. Boland
So the businesses is – cost structure is, as you might expect there is an element of the – we have a couple of hundred clients in that category, so we've got an account management team. It is a software service delivery for a number of the services and it's also a direct cost to counselors and advisors that we have.
We have some direct personnel cost and we have some ongoing software and technology cost to go into delivery. So, there is some step variable if you will investments that go there.
I think over time, we would – as we've described it, we would see this as a business that can get to and sustain sort of in the neighborhood of the operating margins you see for back-up care, so in the 30% range. We have, depending on – there is some variability that we see from quarter-to-quarter and with their delivery now based on some of the utilization of newer clients that come onboard and they're either in a ramp up mode or they're in more of a steady state mode, but overall despite what you see in variance from quarter-to-quarter, we would expect over time for it to ramp into a gradually from a 25%,28%, 30% sort of operating margin over time.
Gary Bisbee
Okay and just any other thoughts on sort of the growth curve of that over the next few years? How are you feeling about penetration, is it still low?
I think in the past you've talked about the hardest part is actually finding the person who has got the fingers on purse strings there, is that still the gating factor to growth?
David H. Lissy
Yeah, I think that largely, it's still a very much a missionary sell. Most of the market is still, organizations who are managing it themselves and without a lot of sophistication, without a lot of analytics and without a lot of knowledge.
So, it's as you said, as I've talked about before a lot of times even in large organizations it's – the budget for it is so decentralized, we try to (30:11) help educate the employer in terms of what the overall spend is and what the value we could add not only in terms of helping their employees, but in saving the money. And so, it's still very much a missionary sell, although, it's starting to get traction and I feel good that as Elizabeth said now we've got a sizable enough client list, it reminds me early on when we were trying to sell works like child care it's sort of word gets around within industries and you have a good enough reference base where it starts to help you and I think we're starting to feel that a little bit and hopefully it will continue to gain momentum as a result.
Gary Bisbee
Glad to hear it, thanks.
David H. Lissy
Yeah.
Operator
Our next question comes from the line of Trace Urdan from Credit Suisse. Pleas proceed with your question.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Thanks, good afternoon.
David H. Lissy
Hey, Trace. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) I wanted to kind of ask a similar question to the one Gary asked but with respect to the back-up centers.
I know, we talked about this last quarter as well. I know that there is a dynamic that exists between having sort of third-party centers that you are taking advantage of and then being able to put clients into your own centers.
But, is there something we can think about in terms of trying to anticipate how those margins are going to act going forward or we just kind of have to roll it.
David H. Lissy
I think Trace that, it's been, if you look at it the variability has been fairly modest. I think what we've tried to communicate is, that we do see the real growth in back-up the way we are going to deliver margin expansion if you will to the overall business is through top line growth.
And, we think the margins on back-up care are in the zone of where they'll be and we may over time we may eek out some efficiencies with technology, it may cost us a little bit in the short-term and gain efficiencies in the longer term in terms of having more stuff through mobile, more stuff online versus through a contact center in human service and so there are some things on the margin one way or another that can move the needle, but I think where you see back-up today from a margin perspective is where we would anticipate it in that zone for the foreseeable future, and that it's really a top line growth story that we continue to feel good about. It continues to grow nicely and continues to be the area that has expanded at least over the last five years, the most and I think still has a lot of runway left to it so – but on the margins side, I think we're pretty much in that zone.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay. It's just that nothing – your business is so incredibly stable and predictable that we all sort of make more out of the slight variations than maybe we should.
I want to ask another question, which is something that I got to ask and I don't know if there is any merit to it or not, but there have been these kind of stories in the popular press about how Millennials want to live in cities and they don't want to live in suburbs. You guys are obviously with the lease/consortium centers more those I think are more focused on kind of suburban office parks.
Have you seen any of that dynamic at all, is it just something that the popular press likes to write about or is that a real phenomenon and do you care one way or the other where Millennials want to live?
David H. Lissy
Well, I think that what we have seen and what's really driven our lease/consortium model. Actually our newer class of lease/consortium models are focused in the urban – more urban or what I'll call urban ring perimeters in areas say like Brooklyn, New York or Hoboken, New Jersey or places that our perimeter zones of San Francisco or Seattle that are redeveloping.
We're finding that a lot of – within our demographic that is young professional families, mom and dad working, mom and dad at least with an undergraduate degree often times with higher degrees, there is a desire to live in cities longer with young children than say what I did years ago when my kids were born, we made a very fast exit for the suburb. There is still some of that, but there is more of a desire to live closer in.
And, our lease/consortium model centers have been filling some of that demand. And part of the reason that the strategy has been successful is we've been able to fill them faster than our store classes (35:07) and they're in areas where either between client support or what tuitions can be, they're in our (35:16) strongest areas from our revenue perspective.
So, yeah, I think that strategy certainly has been or that trend has certainly been in part the fuel for what we're doing in the lease/consortium class these days. It's true to say that some of our legacy centers are more suburban, but they are suburbs of major cities.
So, they're still not to a place where we're susceptible to some of the sort of suburbs of places that have really suffered the most in the economy. They're still in relative good areas, but the newer trends definitely are fueling our newer classes of centers.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Great. Thank you.
David H. Lissy
Yep.
Operator
Our next question comes from the line of Brandon Dobell with William Blair. Please proceed with your question.
Brandon B. Dobell
Thanks good evening.
Elizabeth J. Boland
Hi Brandon.
Brandon B. Dobell
May be leveraging off of Trace's line of questioning, do you guys see any notable difference in either labor price pressures relative to the opportunity for pricing if you compare let's call it core urban with ex-urban locations, is there any difference in that gross margin dynamic?
David H. Lissy
Yeah, the difference in more urban locations if you just look at the lease/consortium model centers and you isolate that, part of the reason why those centers are so attractive to us from an investment point of view is that those are the areas Brandon where you are charging the most just the market is such that you're charging the most. And so it's not as if the actual margins (37:07) in some cases the margin percentage might be slightly higher but the actual dollars that they generate can be so significantly more than what the installed base would be in a more suburban location that it's an attractive proposition.
So that's in part why we've said that the newer class is, it's not just that it's they're not so much larger centers per se in the number of children we're serving, they're just larger in terms of what they produce from a revenue perspective and what they produce from a contribution perspective. And then the reason they can get to maybe slightly and (37:46) so with that said you can sometimes get a slightly better margin percentage, because the labor ratio of what you need to pay in those markets while it's greater than the more suburban markets it's not as great as the difference on the tuition side, so you get a little bit of arbitrage that way as well in those classes of centers.
I hope that answers you.
Brandon B. Dobell
Okay. Yeah, that makes sense.
Have you guys seen any change in educator or let's call it center level personnel turnover, and may be if there is a way to think about that and again core urban locations versus not or and different types of centers just trying to get a feel for how stable the employ base is, or if it's starting to churn more?
David H. Lissy
Yeah, now, we pretty much have – we see our turnover rates, which I think as you know are less than – have historically been less than half the industry average. We have done well in that area.
They tick up slightly when the economy gets tougher and they obviously tick down. So if they hover around 20%, they are up a little bit you know 2 percentage points in these times and they were down 2 percentage points when the economy was less robust.
But overall, our biggest challenge on recruiting is what I think I have alluded to in the past. We have had a long-term shrinkage of qualified talent in our industry over the course of the past 10 years to 20 years largely to do with just to attract the other industries becoming more attractive places for people to go and so fewer graduates with our degree that we would have traditionally have seen in early child education.
So, for the past say five years to seven years we've been doing a lot more in qualifying our own having people come to work for us at sort of Assistant Teacher or Associate Teacher levels and getting qualified and ultimately promoted with us. We qualified something north of 2,000 teachers over the past five years, since we have been started doing this ourselves across the U.S.
And, I still see that as our – one of the best investments we made and one of the best things that we are going to have to continue to hone going forward, because that's just a reality for our field.
Brandon B. Dobell
Got it. All right, thanks a lot.
Operator
Our next question comes from the line of Andrew Steinerman from JPMorgan. Please proceed with your question.
Andrew Charles Steinerman
Hi. I need to return to back-up care and understand the margins a little bit better.
Could you give us a sense within the back-up revenue, how much is filled in your centers yourself versus third party fulfillment, and if one is growing faster than the other, which one is the higher margin business?
David H. Lissy
Yeah, I will start and I will let Elizabeth sort of add color, Andrew. So when we look at back-up care as you know, we have essentially three areas – three ways back-up care can be used, one is our centers, one is third party centers and the other one is in-home care.
Andrew Charles Steinerman
Yeah.
David H. Lissy
So of the center – the centers represent about...
Elizabeth J. Boland
... the centers are about two-third and in-home is one-third.
David H. Lissy
Yeah. Centers are two-thirds in total and our centers are two-thirds of that two-third.
So about one-third of our center care overall is placed in in-home and other centers, others in Bright Horizons. And, of course, I desire not just from a profitability perspective but from an experience perspective and a belief in our own quality, is to try to place as much of that demand in Bright Horizon centers as possible.
Andrew Charles Steinerman
Sure.
David H. Lissy
So it is both we think better for better customer experience and that's what our surveys tell us. And also a more profitable experience for us, of course, when we're placing people with us versus paying somebody else for that day of care.
And I wouldn't – I think that over time and still today our usage in Bright Horizon centers continues to grow slightly faster than the usage...
Elizabeth J. Boland
... our network partners.
David H. Lissy
... than our network partners.
And those ratios that I said two-thirds of the two-thirds and the one-third of in-home care have been barely similar over the course of the past year or two. When you see some fluctuations in margin there, a lot of that can come down to we make some fixed cost investment say in technology or some of the service delivery, and the timing of client starts doesn't match revenue such that the margin in the quarter could fluctuate when we increase the amount that we pay ourselves for example like we did this year.
We allocate to our own centers, the full-service segment benefit slightly from that as a (43:10) detriment of the back-up segment. There are some things that are moving around a little, but as I said to the question that was asked before, I think we're in the zone margin-wise of where we're going to be from a back-up perspective.
There might be some quarterly fluctuation, but that, where we've been for the year is...
Elizabeth J. Boland
Steinerman, from a full year basis, I think last year's operating margin was around 31% and our sort of long-term objective here is to sustain around 30%-plus and that is where we expect we'll be this year.
Andrew Charles Steinerman
Okay, sounds good. Thank you.
David H. Lissy
Pleasure.
Operator
Our next question comes from the line of Jeff Silber from BMO Capital. Please proceed with your question.
Jeffrey Marc Silber
Thanks so much. I know there are some questions earlier about some specific verticals.
Can you just remind us what your exposure is to the major verticals by industry?
Elizabeth J. Boland
Sure can you – let me just call that up for a second do you have another question?
Jeffrey Marc Silber
I sure do, let me just ask that one and I know this one is a little bit early, but with elections season in full force, are there any major potential policies changes probably more at the state level than the federal, but are you seeing anything that could be proposed, that could be enacted next year? Thanks?
David H. Lissy
Yeah, thanks Jeff. No, as you suggest I think most and as I said in the past, most of what would sort of happen would happen at the state level we think.
And, we obviously pay a lot of attention to what's going on and there are states that have different variations of funding for preschool that has come about in some of those states in that process where the parent gets a voucher in addition to what the employer is paying and offset a little bit what they're paying and that's a model that exist in the UK as well. So but as we sort of survey the landscape there hasn't been, there is not – while there is a lot of rhetoric and a lot of activity around the subject we're not getting too much that we think would have much of a material effect on us.
And on the other front from a federal perspective the things that we would love to see happen in the future legislative environment would be and I've been saying this for a while, an expansion of the Dependent Care Assistance Plan, which has been at $5,000 pre-tax forever since the 1980s and we think should be inflation-adjusted that will be a positive in the sense that it would offset the cost, the portion parent pay for childcare and if that could ever happen, I don't hold out a lot of hope but if it would happen at some point that would benefit us along with some other tax code adjustments it could happen, but again not holding out a lot of hope at this stage.
Elizabeth J. Boland
So, going back to the question of industry verticals, so from an end market this is including revenue from all industry segments that we serve. The industrial sector is around 7%, the tech sector around 8%, professional services and other is 9%, government is 9%, education is 10%, consumer is 13%, financial services is 16% and healthcare and pharmaceuticals as a group is 28%.
Jeffrey Marc Silber
Okay. Fantastic, it's very helpful.
Thanks so much.
Elizabeth J. Boland
Sure.
David H. Lissy
Thanks Jeff.
Operator
Our next question comes from the line of Jeffrey Meuler from Baird. Please proceed with your question.
Nick J. Nikitas
Yeah, good afternoon. This is Nick Nikitas on for Jeff.
Just going back to the lease/consortium centers, can you guys talk about how you think about the potential market just over the next couple of years for the lease/consortium, I think it's been a similar trend of about 15 new centers over the past couple of years, can that continue as you look into 2017 and then maybe a couple of years beyond that?
David H. Lissy
Yeah. Nick, we do at least for the foreseeable future a continuation of 15 to 20 new locations across the system and have a pretty good view on that, have a good level of activity happening across the markets in which we're focused both here in U.S.
and London and in Amsterdam. So, I would say, for the next couple of years we foresee similar levels of activity.
Nick J. Nikitas
Okay, great. And I think Dave, I think, you mentioned that one of the existing clients I think was Novartis added full-service to back-up care and ed advisory pre-existing services.
Are you guys increasingly seeing that your ancillary services are driving new client relationships?
David H. Lissy
Yeah. I mean, I think as I said earlier, I think one of the nice parts about the new services is, we've been able to open the door to – we've been able to cross-sell our legacy center based clients, but we've also been able to open the door to new clients.
Centers take the longest. They require the most level of planning, of capital planning, of space availability and so, as I said that the sales cycle can really be lengthy whereas our newer services the sales cycle can be much more rapid.
And so, as a result the numbers of clients that we've been able to gain access to has been significant since the introduction of our newer services. So we are very active both and trying to still cross-sell our legacy clients, but also do the reverse and open the door with our new services and be sure they understand the full suite.
I think, we're very quickly approaching roughly 20% of our clients now have more than one of our services. So, it continues to grow and I expect that will continue to happen over time.
Nick J. Nikitas
Okay, great, thanks.
Elizabeth J. Boland
Thank you.
David H. Lissy
Yeah.
Operator
Our next question is a follow-up question from the line of Trace Urdan. Please proceed with your question.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Thanks. I'm going to apologize in advance if this is a remedial question, but I realize when Gary was asking this question that it felt like it was an assumption that EdAssist was the principal driver of the services business and I wondered if you could just speak to EdAssist versus College Coach.
Do they get packaged together always or they sold separately? And is one of them an obvious driver?
Is EdAssist the obvious driver in that equation or can you just give me a quick tutorial on that?
David H. Lissy
Yeah. Yeah.
So, when we talk about the ed advisory business we report it as a bundle between the two. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Right.
David H. Lissy
Often times those two services are sold together, sometimes College Coach would be sold by itself or packaged in with our other services, other times EdAssist would be sold by itself as well. So it really depends on the client situation, but from a reporting perspective, Trace they are bundled together.
I will tell you though that EdAssist is the faster growing of the two. It's much newer, College Coach has been around for a long time, so there is a installed base but EdAssist makes up the bulk of the growth in that segment.
Elizabeth J. Boland
EdAssist is about 2x. It's two-thirds of the overall segment, but as Dave said it will continue to be a bit more than that over time.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) And you described it before as, I forget the word, it was evangelical or something, but is there anything going on in that market itself that you think of as a driver or is it more just that there is sort of an existing base of companies that offer this benefit and you are looking to get them to get kind outsource it to you?
David H. Lissy
I think, there is – I mean, this thing about the tuition reimbursement area is, as I said in the past there is roughly $17 billion a year spent by companies in America to send their – to pay for school for their employees in one way, shape or form. And it's been a spend that's been largely unmanaged without a lot of analytics and without a lot of strategy, and not really coordinated that well with companies learning and development strategies and training strategies.
And so, we're trying to connect all the dots with this and we think there is a lot that can happen when those doubts are connected both in terms of strategy for the company, in terms of growth of their talent, but also you know in terms of savings and our ability to provide some level of discipline, help them understand where they are spending it, to go out and negotiate better rates for where they are spending their money. And so we are achieving that.
And then lastly, the other thing that's exciting is there has been lot of buzz around the idea that companies would also expand into repaying the college loans of their employees as a benefit. It's gotten some press recently and we actually have been on the forefront of that.
We have a few clients for whom we do that for and although it's there the only difference between the two is there is tax advantage for a company to provide tuition reimbursement for any one employee, the first could be $250 million (52:54) per year is tax advantage where in the loan repay world it's not and so if there ever a change to that, which is something that I forgot to mention in Jeff's question about legislative things if ever a change to that we think that market would unlock even more. And what that would do is just it expands that when we do both tuition reimbursement and loan repay for a client, it's just a larger revenue client for us than when we just do one of them.
So, it could expand the opportunity even more. So those are just some of the things I think that are happening on that front.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Is there anybody that you are aware of that's actively lobbying for a change like that?
David H. Lissy
I think there has been some reasonable activity on the Hill around it and I would say it's on the radar of some you know some congressmen and senators and we'll where it goes. Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Okay.
And, then last question Dave. There is sort of some conventional wisdom that a lot of companies like to offer that benefit, but they don't really want anybody to use it.
Do you find that there is an increase in the use of the tuition assistance benefit when you guys get involved?
David H. Lissy
I think that, that's a little bit of a misnomer. I actually think that, particularly today, where there is such a challenge for labor that, I think what companies find is that when people are using the tuition reimbursement much like when they're using their child care benefit, that it's sticky for them.
And so it's another hook, when there's competition for talent, it's another hook. It's a reason why someone may not leave your organization and I think that's happening.
The good news for us, Trace, is when we come and we engage with an employer, we can save them a fairly significant amount of money over time in their spend such that they can afford to have expansion in the benefit if they want just based on what we've been able to generate for them by better administering their policy so that people are using the benefit in the way that they intended and also by utilizing our network of education providers where we have essentially used the aggregate leverage that we have of helping with so much of the spend to get better rates from people who are providing adult education compared to the rack rates that many of our clients were paying before we showed up. So, I think there's a good value proposition in this world.
Trace Adair Urdan - Credit Suisse Securities (USA) LLC (Broker) Go it. Okay, thanks very much.
I appreciate it.
David H. Lissy
All right.
Elizabeth J. Boland
Thanks.
Operator
There are no further questions in queue. I would like to hand the call back over to management for closing comments.
David H. Lissy
Hey, Doug, thank you, and thanks everybody for joining us on our call. We appreciate it and we'll certainly be seeing many of you on the road in the coming months.
Have a good night.
Elizabeth J. Boland
Thanks, everybody.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.