2025 Q3 Earnings Call: Contradictions Emerge on Enrollment, Subsidies, and Occupancy Trends

Date of Call: November 12, 2025

Financials Results

• Revenue: $677,000,000, up ~1.0% YOY (CFO noted +80 bps YOY)
• EPS: Adjusted EPS $0.13, up from $0.05 a year ago
• Operating Margin: Income from operations $26,000,000 (vs $54,000,000 prior year)

Guidance:

• Full-year 2025 revenue expected $2,720M–$2,740M.
• Full-year Adjusted EBITDA expected $290M–$295M; adjusted EPS $0.64–$0.67.
• Full-year occupancy expected ~200 bps lower than 2024; week-to-week enrollment growth expected to continue into year-end.
• Tuition ~+2% contribution to 2025 revenue; pricing expected to be higher in 2026 (finalizing rates).
• B2B (Champions + employer) ~+1% contribution; tuck-ins ~+1%; NCOs <1% in 2025, accelerating in 2026.
• Free cash flow $88M–$94M; CapEx $131M–$133M; net debt/adj. EBITDA ~2.5x.

Business Commentary:

• Revenue and Enrollment Trends:
• KinderCare's revenue was $677 million in Q3 2025, up nearly 1% from the previous year, with same center revenue at $617 million.

• Same center occupancy was 67%, down 160 basis points from the prior year, primarily due to a softer back-to-school enrollment season and reduced subsidy enrollments in certain states.

• Economic Conditions and Consumer Behavior:

• Inflation remains elevated, causing families to be more cautious in decision-making, which is reflected in a decline in consumer confidence.

• These economic conditions affected enrollment decisions, with families delaying or reconsidering childcare options.

• Tuition and Subsidy Dynamics:

• Tuition increased by 2% for Q3, lower than anticipated due to a higher subsidy mix and fewer expected increases in subsidy rates.

• Some states like Indiana introduced measures such as waitlists and reduced reimbursement rates, impacting subsidy enrollments.

• Operational Initiatives and Growth Levers:

• KinderCare focused on operational improvements such as evolving leadership talent and applying digital tools to enhance enrollment and occupancy.
• The Champions before and after school program, as well as KinderCare for Employers, demonstrated solid growth, contributing to revenue increases.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Management described near-term enrollment softness and state subsidy headwinds (e.g., Indiana down ~1,000 subsidy students) but reiterated long-term confidence in demand, bipartisan funding support, and operational levers (Opportunity Region, digital tools) to restore growth; updated 2025 guide reflects caution while emphasizing cash generation and continued M&A and NCO activity.

Q&A:

• Question from Yehuda Salterman (Morgan Stanley): Heading into 2026, what are your directional expectations for enrollment — better or worse than current levels?
  Response: Management expects inquiries remain healthy and over the long term enrollments should revert to historical growth; they are monitoring late‑2025 data to assess short‑term impacts.

• Question from Yehuda Salterman (Morgan Stanley): You said the government shutdown had no direct material impact but increased uncertainty — was that factored into the guide and to which assumptions?
  Response: Few families were directly impacted; the guide incorporates caution around state budget uncertainty driven by the shutdown, which could affect subsidy timing and rates.

• Question from Andrew Steinerman (JPMorgan): When do you expect to return to your medium‑term growth algorithm?
  Response: Management expects a return to the long‑term algorithm in 2027, with B2B, NCOs and tuck‑ins on track to support 2026 progress.

• Question from Andrew Steinerman (JPMorgan): You said pricing increases will be higher in 2026 — can you comment on that?
  Response: They expect private‑pay tuition increases in 2026 to exceed the ~2% seen in 2025, but final 2026 rates are being finalized pending state subsidy clarity.

• Question from Ronan Kennedy (Barclays): Can you expand on the 'softer starting point' for back‑to‑school and how much lower enrollment is due to macro vs subsidy vs conversion issues?
  Response: Q3 began with lower enrollments than desired; multiple drivers contributed — macro consumer caution, subsidy reductions (notably Indiana down ~1,000 full‑time subsidy children), and local conversion opportunities — all material factors.

• Question from Ronan Kennedy (Barclays): Can you provide occupancy trends by quintile through Q3 and into Q4?
  Response: Top three quintiles saw slight declines, the lowest‑occupancy quintile (Opportunity Region) has shown improvement via diagnostic/digital remediation; management expects to apply those learnings broadly.

• Question from Jeff Meuler (Baird): How do you reconcile optimism about returning to ALGO with structural industry factors (birth rates, supply, pricing) that could be secular headwinds?
  Response: Management monitors inquiries per center, workforce/demographic metrics and bipartisan policy support; they believe sustained inquiry flow plus operational improvements and diagnostic tools support a return to prior growth.

• Question from Jeff Meuler (Baird): At what point would you take more proactive cost‑out measures given revenue pressure and EBITDA deleveraging?
  Response: They continuously evaluate efficiencies (G&A, labor productivity, digital automation) and will act as needed, with labor optimization a primary focus, but no single trigger announced.

• Question from Jeff Silber (BMO Capital Markets): Are you considering more aggressive center closures as part of cost control?
  Response: The company regularly reviews centers and will close when ROI and lease timing justify it, but they won't hesitate to close underperforming centers while retaining those with turnaround potential.

• Question from Jeff Silber (BMO Capital Markets): Would you pause tuck‑ins/acquisitions and focus on deleveraging instead?
  Response: The Board supports continued selective investment in NCOs and tuck‑ins given attractive low‑single‑digit EBITDA multiples and capital efficiency; they will continue acquisitions while managing leverage.

• Question from George Tong (Goldman Sachs): Can you estimate how much of enrollment headwinds are macro vs local idiosyncratic?
  Response: Hard to quantify precisely; absent a few state subsidy slowdowns they'd be closer to flat enrollment — subsidy actions are a meaningful short‑term headwind, while other impacts are local and macro‑driven.

• Question from George Tong (Goldman Sachs): From center diagnostics in Opportunity Region, what local factors most frequently block enrollment growth and have they changed?
  Response: Diagnostics reveal controllable local factors (conversion process, director/district execution, family engagement); adoption of tools has driven strong turnarounds in low‑occupancy centers and remains the focus.

• Question from Josh Shen (UBS): What enrollment decline is baked into Q4 guidance — is it around a 4% decline?
  Response: Q4 is expected to be slightly below Q3, but not a dramatic drop like 4%; they see a mild decline heading into the holidays and will use holiday trends as an inflection point for spring.

• Question from Josh Shen (UBS): Why does EBITDA guidance decline materially relative to modest revenue change?
  Response: EBITDA pressure reflects two drivers: lower occupancy (reducing leverage) and subsidy rate reductions in certain states (which largely flow through to the bottom line), compressing margins.

• Question from Faiza Ali (Deutsche Bank): How much did subsidy changes impact the quarter/year and when will states resolve these issues?
  Response: Most states have completed budget decisions; a handful caused near‑term pressure (Indiana notably), while some states (e.g., Texas, Arizona) have since committed additional funding; resolution timing varies by state but many actions are known for 2026 planning.

• Question from Faiza Ali (Deutsche Bank): On pricing and wage inflation — what wage assumptions and why do you expect higher pricing in 2026?
  Response: Wage planning is near‑complete (cited ~5.6% as a reference); management expects to maintain a 50–100 bps spread between wages and tuition and believes center‑by‑center dynamics support higher tuition in 2026 while preserving that spread.

Contradiction Point 1

Enrollment Challenges and Rebound Expectations

It involves the company's expectations and strategies regarding enrollment challenges and the anticipated rebound, which are crucial for understanding the business outlook and investor expectations.

What are your expectations for 2026 enrollment? Will it be higher or lower than current levels? - Yehuda Salterman (Morgan Stanley)

2025Q3: We still feel very good about the level of inquiries at the local level... As confidence returns for consumers, we believe we will return to our historical growth algorithm. - Paul Thompson(CEO)

Can you discuss the enrollment trends and the reasons for the slowdown? Is the slowdown affecting many markets, and is it a sudden change? - Toni Michele Kaplan (Morgan Stanley)

2025Q2: Enrollment challenges were more pronounced in June due to slower new student enrollment... We saw a slight decline in enrollment in these centers, but the bottom quintile showed improvement. - Paul Thompson(CEO)

Contradiction Point 2

Impact of Subsidies on Enrollment

It highlights the company's assessment of the impact of subsidies on enrollment, which is a key factor in financial performance and strategic planning.

What are your expectations for enrollment in 2026? Will it improve or decline compared to current levels? - Yehuda Salterman (Morgan Stanley)

2025Q3: We continue to see improved performance from our center directors... We believe we will return to our historical growth algorithm. - Paul Thompson(CEO)

Has private enrollment declined compared to the subsidized cohort? - Unidentified Analyst (JPMorgan)

2025Q2: Subsidy enrollment growth has slowed but remains positive... Subsidy enrollment is influenced by state budget decisions and tuition rate adjustments, while private pay enrollment has been stable. - Paul Thompson(CEO)

Contradiction Point 3

Occupancy Trends and Strategic Response

It involves the company's approach to occupancy trends and strategic responses, which are crucial for understanding business operations and growth prospects.

How have occupancy trends by quintile evolved this quarter and into Q4? - Ronan Kennedy (Barclays)

2025Q3: Occupancy trends are consistent with previous discussions, showing a slight decline in top quintiles and improvement in the fifth quintile. - Paul Thompson

Have occupancy and enrollment visibility changed, and how do initiatives like the opportunity region impact performance? - John Ronan Kennedy (Barclays)

2025Q2: Occupancy is challenging, but we've adjusted our guidance. The opportunity region is showing early positive results, focusing on center-level improvements and leveraging digital tools for enhanced performance. - Anthony Amandi(CFO)

Contradiction Point 4

Enrollment and Occupancy Trends

It pertains to the company's expectations and perceptions regarding enrollment and occupancy trends, which are critical for revenue projections and investor confidence.

What are your expectations for 2026 enrollment compared to current levels? - Yehuda Salterman(Morgan Stanley)

2025Q3: We still feel very good about the level of inquiries at the local level. We continue to see improved performance from our center directors. As confidence returns for consumers, we believe we will return to our historical growth algorithm. - Paul Thompson(CEO)

What are parents doing as an alternative to enrolling in the centers starting earlier, especially during the summer before August or September enrollment? - Toni Kaplan(Morgan Stanley)

2025Q1: We are seeing more inquiries and tours at summer times, indicating a delay in enrollment decision-making, especially for younger age groups. - Paul Thompson(CEO)

Contradiction Point 5

Impact of Economic Factors

It involves the company's assessment of the impact of economic factors on its operations, which is crucial for strategic planning and investor expectations.

Are enrollment declines primarily due to economic versus local factors? - George Tong(Goldman Sachs)

2025Q3: Subsidy reductions in certain states significantly impact enrollments. Macroeconomic factors also influence consumer decision-making. - Paul Thompson(CEO)

What are parents doing instead of enrolling their kids in centers, starting earlier? What are they doing over the summer if enrolling in August or September? - Toni Kaplan(Morgan Stanley)

2025Q1: We are seeing more inquiries and tours at summer times, indicating a delay in enrollment decision-making, especially for younger age groups. - Paul Thompson(CEO)