KinderCare Learning Companies, Inc. (KLC)·Q3 2025 Earnings Summary

Executive Summary

• Q3 2025 revenue rose 0.8% year over year to $676.8 million; diluted EPS was $0.04 while adjusted EPS increased to $0.13, reflecting lower interest expense and non-GAAP addbacks, but GAAP profitability was pressured by reduced COVID-related reimbursements and higher wage rates .
• Management cut FY2025 guidance: revenue to $2.72–$2.74 billion (from $2.75–$2.80 billion in Q2 and $2.75–$2.85 billion in Q1), adjusted EBITDA to $290–$295 million (from $310–$320 million and $310–$325 million), and adjusted EPS to $0.64–$0.67 (from $0.77–$0.82 and $0.75–$0.85) .
• Same-center occupancy averaged 67% in Q3 (seasonally low quarter), down 160 bps y/y; management highlighted Champions’ strength (11% revenue growth to ~$50 million) and continued employer on-site occupancy >70%, while subsidy rate reductions in several states weighed on tuition contribution and enrollment .
• Stock reaction catalysts: guidance cut, visibility that occupancy recovery will take longer, and state-level subsidy dynamics; operational initiatives and COO appointment aim to improve center execution and enrollment conversion over time .

What Went Well and What Went Wrong

What Went Well

• Champions (before/after-school) revenue grew 11% y/y to ~$50 million, with 120 net new sites added over the last 12 months; management cited “meaningful growth in average enrollments in established sites” .
• Employer on-site centers maintained >70% occupancy and grew with three new centers opened in Q3; signed 20 new employer tuition-benefit contracts covering ~317,000 employees across 17 states .
• Non-GAAP profitability resilience: adjusted EPS rose to $0.13 from $0.05 y/y; interest expense fell to $24.1 million from $39.5 million on post-IPO deleveraging and repricing actions .

Management quotes:

• “We delivered revenue growth led by strong performance in Champions and sustained engagement from employers who value the breadth and flexibility of our childcare solutions.” — CEO Paul Thompson .
• “Our adjusted EBITDA margin for the quarter came in just under 10%…we will remain focused on disciplined cost management and operational efficiency.” — CFO Tony Amandi .

What Went Wrong

• GAAP operating margin compressed: income from operations fell to $26.3 million (3.9% margin) from $54.4 million (8.1%) y/y, driven by higher cost of services and SG&A (tech investments, public-company costs) and reduced government assistance as COVID-19 stimulus concluded .
• Same-center occupancy averaged 67%, at the low end of expectations due to slower enrollments through back-to-school; tuition contribution was only ~2% vs plan, reflecting a higher subsidy mix and rate reductions in certain states (e.g., Indiana) .
• FY2025 guidance lowered across revenue, adjusted EBITDA, and adjusted EPS given slower occupancy recovery and downstream uncertainties tied to a government shutdown’s impacts on state budgets and subsidy reimbursement trajectories .

Financial Results

Headline KPIs vs prior quarter and prior year

Year-over-year drivers

Segment/KPI snapshot

Note: Adjusted EBITDA margin for Q3 2025 was “just under 10%” per management commentary .

Balance sheet and cash flow (selected)

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Strategic focus: “Disciplined execution and continued operational progress through the back-to-school season…strong performance in Champions and sustained engagement from employers” — CEO Paul Thompson .
• Macro and subsidy: “We believe the enrollment challenges reflect the current economic environment are not permanent…states have implemented wait lists and reducing reimbursement rates; Indiana ~13,000 fewer children receiving subsidy…our enrollments declined by ~1,000” — CEO Paul Thompson .
• Operational execution: “Our digital tools continue to make it easier for families to move through the enrollment process…one center lifted occupancy from 48% to 95% within eight months” — CEO Paul Thompson .
• Financial discipline: “Adjusted EBITDA margin…just under 10%…we will remain focused on disciplined cost management and operational efficiency” — CFO Tony Amandi .
• Medium-term path: “Overall, we will get back to the algorithm in 2027…feel good about tuition [in 2026]” — CEO Paul Thompson .

Q&A Highlights

• Occupancy recovery timing: Management expects return to medium-term growth algorithm in 2027; 2026 tuition contribution expected to be higher than 2025 .
• Subsidy impact quantification: Indiana ~1,000 fewer full-time subsidy enrollments since start of year; some states (TX, AZ) announced incremental funding (aggregate ~$50–$100M over two years) to raise rates and add seats .
• Tuition vs wages: Company intends to maintain a 50–100 bps spread between tuition and wage increases in 2026; tuition planning underway and center-level pricing considers engagement, occupancy, competition, and demographics .
• Cost actions and closures: Ongoing evaluation of center portfolio; willing to close centers when ROI supports it and leases allow; continue funding NCOs and tuck-ins given low multiples and strategic value .
• Margin dynamics: EBITDA guidance reduction largely driven by pricing/subsidy rate effects (flow-through) and occupancy leverage (gross margin and SG&A) .

Estimates Context

• Wall Street consensus via S&P Global was unavailable at the time of this analysis; we could not quantify revenue or EPS beats/misses versus Street for Q3 2025 or upcoming quarters (S&P Global data access error) [GetEstimates error].
• Management indicated revenue came in slightly below internal expectations due to slower enrollments, providing directional context for expectations vs actuals .

Key Takeaways for Investors

• The narrative shifted from “near-term enrollment delay” to a longer recovery path: management now targets a return to the medium-term algorithm in 2027; FY2025 occupancy expected ~200 bps below 2024 .
• Subsidy rate and authorization dynamics are a central swing factor: pressure in certain states (e.g., Indiana) weighed on tuition and occupancy, but other states are expanding support; watch state budget actions and rate trajectories .
• Champions and employer on-site remained robust growth engines and partial offsets, with recurring B2B revenue and continued site expansion; these levers support diversified growth in a cautious consumer backdrop .
• Non-GAAP performance and balance sheet strength provide flexibility: adjusted EPS improved y/y; interest expense declined materially; net debt/Adjusted EBITDA at 2.5x; FCF guided to $88–$94M .
• Near-term stock drivers: guidance cut, occupancy trend through holiday inflection and into spring, visibility on state subsidy rates, and 2026 tuition actions; COO appointment aligns execution to drive center-level conversion .
• Medium-term thesis: scale, subsidy engagement capabilities, and digital tools to improve conversion in lower-occupancy centers; expect tuition contribution to normalize higher in 2026 with continued B2B and tuck-in momentum .
• Risk watchlist: macro consumer confidence, wage inflation relative to tuition, regulatory/legal environment, and occupancy leverage on margins (especially pricing-related effects that flow through EBITDA) .