The Advisory Board Company Reports Third Quarter Results

Third Quarter Financial Review

(In millions, except per share amounts)

  3Q-16

  3Q-15

  % Change a

Revenue             

$ 200.5

$ 200.5

(0.0)%

Net income

       37.5 b

0.7

   nm

Earnings per diluted share (EPS)

0.93

0.02

   nm

Adjusted EBITDA  (non-GAAP)

41.0

43.7

(6.2)%

Adjusted EPS (non-GAAP)

$ 0.28

$  0.33

(15.2)

Weighted average shares-diluted

40.5

42.8

(5.4)%

a)

nm – not meaningful

b)

Includes a $34.7 million gain from equity method investments from the sale of Evolent Health common stock in the period.

Nine-Month Financial Review

(In millions, except per share amounts)

First NineMonths 2016

First NineMonths 2015

  % Change

Revenue             

$  599.6

$  563.4

6.4%

Net income (loss)

55.4

(13.7)

    nm

Earnings (loss) per diluted share (EPS)

1.35

(0.33)

    nm

Adjusted revenue (non-GAAP)

599.6

      575.9 c

4.1%

Adjusted EBITDA (non-GAAP)

136.1

128.2

6.2

Adjusted EPS (non-GAAP)          

$   1.21

$  1.02

18.6

Weighted average shares-diluted

41.0

        42.4 d

(2.2)%

c)

Reflects the effect on revenue of fair value adjustments to acquired deferred revenue.

d)

For non-GAAP purposes, the Company has net income and, therefore, used adjusted diluted shares in its calculation of adjusted EPS.

(In millions, except per share amounts)

 CY-16

CY-15

  Y-Y %

Guidance

Actual

  Change

Revenue

 $ 817.0 - 819.0

$  780.8

        4.6 - 4.9%

Adjusted EBITDA (non-GAAP)

190.0 - 192.0

171.7

10.7 – 11.8

Adjusted EPS (non-GAAP)          

 $     1.83 - 1.86

$    1.51

21.2 – 23.2

Weighted average shares-diluted

41.0

42.4

(3.3)%

 THE ADVISORY BOARD COMPANY 

 UNAUDITED CONSOLIDATED STATEMENTS OF INCOME 

 AND OTHER OPERATING STATISTICS 

 (In thousands, except per share data) 

 Three Months Ended 

 Nine Months Ended 

 September 30, 

 September 30, 

2016

2015

 % Change 

2016

2015

 % Change 

 Statements of Income 

 Revenue (1) 

$    200,455

$    200,492

0.0%

$    599,572

$     563,397

6.4%

 Cost of services, excluding depreciation and amortization (2) (3) (4) 

104,215

101,362

2.8%

296,604

289,388

2.5%

 Member relations and marketing (2) (3) 

32,706

30,792

6.2%

97,819

90,893

7.6%

 General and administrative (2) (3) (5) 

32,227

30,678

5.0%

96,274

93,205

3.3%

 Depreciation and amortization (6) 

19,173

18,509

3.6%

57,857

54,282

6.6%

      Operating income 

12,134

19,151

-36.6%

51,018

35,629

43.2%

 Other expense 

      Interest expense 

(4,530)

(5,450)

-16.9%

(13,738)

(16,333)

-15.9%

      Other expense, net 

(1,516)

(1,150)

(2,380)

(2,280)

      Loss on financing activities 

-

-

-

(17,398)

 Total other expense, net 

(6,046)

(6,600)

(16,118)

(36,011)

      Income (loss) before provision for income taxes 

        and gain (loss) from equity method investments 

6,088

12,551

34,900

(382)

 Provision for income taxes 

3,279

8,590

13,812

11,684

 Gain (loss) from equity method investments 

34,729

(3,289)

34,284

(1,668)

      Net income (loss) 

$      37,538

$           672

$      55,372

 Net income (loss) per share 

 Basic 

$          0.94

$          0.02

$          1.36

$         (0.33)

 Diluted 

$          0.93

$          0.02

$          1.35

$         (0.33)

 Weighted average common shares outstanding 

 Basic 

40,102

42,320

40,651

41,900

 Diluted 

40,492

42,788

-5.4%

40,977

41,900

-2.2%

 Contract Value (at end of period)  

$    786,186

$    760,301

3.4%

 Percentages of Revenue 

 Cost of services, excluding depreciation and amortization (2) (3) (4) 

52.0%

50.6%

49.5%

51.4%

 Member relations and marketing (2) (3) 

16.3%

15.4%

16.3%

16.1%

 General and administrative (2) (3) (5) 

16.1%

15.3%

16.1%

16.5%

 Depreciation and amortization (6) 

9.6%

9.2%

9.6%

9.6%

 Operating income 

6.1%

9.6%

8.5%

6.3%

 Net income (loss) 

18.7%

0.3%

9.2%

-2.4%

(1)

 Amounts include effect on revenue of fair value adjustments to acquisition-related deferred revenue, as follows: 

 Revenue 

-

-

-

12,499

(2)

 Amounts include stock-based compensation, as follows: 

 Cost of services 

2,443

2,423

7,123

6,881

 Member relations and marketing 

1,342

1,306

3,843

3,907

 General and administrative 

4,182

3,365

11,948

11,342

-

(3)

 Amounts include Build to suit land rent, as follows: 

 Cost of services 

445

-

1,348

-

 Member relations and marketing 

329

-

984

-

 General and administrative 

157

-

469

-

(4)

 Amounts include fair value adjustments of acquisition-related earn-out liabilities, as follows: 

-

 Cost of services 

788

(1,057)

1,493

(2,140)

-

(5)

 Amounts include acquisition and transaction related costs, as follows: 

-

 General and administrative 

-

-

-

6,610

-

(6)

 Amounts include amortization of acquisition-related intangibles, as follows: 

-

 Depreciation and amortization 

7,026

7,740

21,425

23,320

 THE ADVISORY BOARD COMPANY 

 CONSOLIDATED BALANCE SHEETS 

 (In thousands) 

September 30,

December 31,

2016

2015

 (unaudited) 

 ASSETS 

 Current assets: 

 Cash and cash equivalents 

$               55,088

$               71,825

 Membership fees receivable, net 

621,904

605,444

 Prepaid expenses and other current assets 

20,262

22,543

 Total current assets 

697,254

699,812

 Property and equipment, net 

207,608

183,057

 Intangible assets, net 

260,039

274,721

 Deferred incentive compensation and other charges 

66,554

81,181

 Goodwill 

739,507

738,200

 Investments in unconsolidated entities 

-

706

 Other non-current assets 

-

1,800

 Total assets 

$          1,970,962

$          1,979,477

 LIABILITIES AND STOCKHOLDERS' EQUITY 

 Current liabilities: 

 Deferred revenue, current 

$             570,403

$             581,471

 Accounts payable and accrued liabilities 

77,193

74,879

 Accrued incentive compensation 

24,126

41,173

 Debt, current 

42,145

27,743

 Total current liabilities 

713,867

725,266

 Deferred revenue, net of current portion 

167,639

173,953

 Deferred income taxes, net of current portion 

81,811

93,893

 Debt, net of current portion 

486,880

522,086

 Financing obligation 

33,186

2,700

 Other long-term liabilities 

16,982

12,488

 Total liabilities 

1,500,365

1,530,386

 Stockholders' equity: 

 Common stock 

401

416

 Additional paid-in capital 

774,103

744,333

 Accumulated deficit 

(302,085)

(295,860)

 Accumulated other comprehensive income 

(1,822)

202

 Total stockholders' equity  

470,597

449,091

 Total liabilities and stockholders' equity 

$          1,970,962

$          1,979,477

 THE ADVISORY BOARD COMPANY 

 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 

 (In thousands) 

 Nine Months Ended September 30, 

2016

2015

 Cash flows from operating activities: 

 Net income (loss)  

$             55,372

$           (13,734)

 Adjustments to reconcile net income (loss) to net cash provided 

 by operating activities: 

 Depreciation and amortization 

57,857

54,282

 Loss on financing activities 

-

17,398

 Amortization of debt issuance costs 

1,017

983

 Deferred income taxes 

(9,776)

9,912

 Excess tax benefits from stock-based awards 

(3,925)

(2,804)

 Stock-based compensation expense 

22,914

22,130

 (Gain) loss on investment in common stock warrants 

-

(70)

 Loss on cost method investment 

1,800

-

 Equity in losses of equity method investments 

453

1,668

 Gain on partial sale of equity method investment 

(34,737)

-

 Changes in operating assets and liabilities (net of the effect of acquisition): 

 Membership fees receivable 

(16,460)

(35,774)

 Prepaid expenses and other current assets 

11,945

7,596

 Deferred incentive compensation and other charges 

14,495

2,977

 Other non-current assets 

-

(258)

 Deferred revenue 

(17,382)

58,469

 Accounts payable and accrued liabilities 

(9,898)

(5,595)

 Acquisition-related earn-out payments 

(1,432)

(2,198)

 Accrued incentive compensation 

(17,047)

(4,222)

 Other long-term liabilities 

1,263

(3,203)

 Net cash provided by operating activities 

56,459

107,557

 Cash flows from investing activities: 

 Purchases of property and equipment 

(34,808)

(39,498)

 Capitalized external-use software development costs 

(2,434)

(2,965)

 Cash paid for acquisitions, net of cash acquired 

(1,900)

(746,693)

 Cash paid for investment in equity method investment 

-

(3,006)

 Redemptions of marketable securities 

-

14,714

 Cash received from partial sale of equity method investment 

48,565

-

 Net cash provided by (used in) investing activities 

9,423

(777,448)

 Cash flows from financing activities: 

 Proceeds from debt, net 

17,000

1,280,292

 Pay down of debt 

(38,562)

(739,377)

 Debt issuance costs 

-

(2,568)

 Proceeds from issuance of common stock, net of selling costs 

-

148,786

 Proceeds from issuance of common stock from exercise of stock options 

3,337

3,262

 Withholding of shares to satisfy minimum employee tax withholding 

(3,473)

(6,058)

 Proceeds from issuance of stock under employee stock purchase plan 

370

389

 Acquisition-related earn-out payments 

(3,600)

(1,500)

 Excess tax benefits from stock-based awards 

3,925

2,804

 Purchases of treasury stock 

(61,616)

(33,000)

 Net cash (used in) provided by financing activities 

(82,619)

653,030

 Net decrease in cash and cash equivalents 

(16,737)

(16,861)

 Cash and cash equivalents, beginning of period 

71,825

72,936

 Cash and cash equivalents, end of period 

$             55,088

$             56,075

 THE ADVISORY BOARD COMPANY 

 FINANCIAL HIGHLIGHTS AND RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED) 

 (In thousands, except per share data) 

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

Revenue

$             200,455

$             200,492

$           599,572

$            563,397

Effect on revenue of fair value adjustments to acquisition-related deferred revenue

-

-

-

12,499

     Adjusted revenue

$             200,455

$             200,492

$           599,572

$            575,896

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

Net income (loss)

$               37,538

$                    672

$             55,372

$             (13,734)

Effect on revenue of fair value adjustments to acquisition-related deferred revenue

-

-

12,499

(Gain) loss from equity method investments

(34,729)

3,289

(34,284)

1,668

Provision for income taxes

3,279

8,590

13,812

11,684

Loss on financing activities

-

-

-

17,398

Interest expense

4,530

5,450

13,738

16,333

Other expense, net

1,516

1,150

2,380

2,280

Depreciation and amortization

19,173

18,509

57,857

54,282

Acquisition and similar transaction charges

-

-

-

6,610

Fair value adjustment to acquisition-related earn-out liabilities

788

(1,057)

1,493

(2,140)

Build-to-suit land rent

931

-

2,801

-

Vacation accrual adjustment

-

-

-

(850)

Stock-based compensation expense

7,967

7,094

22,914

22,130

     Adjusted EBITDA

$               40,993

$               43,697

$           136,083

$            128,160

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

Net income (loss)

$               37,538

$                    672

$             55,372

$             (13,734)

Effect on revenue of fair value adjustments to acquisition-related deferred revenue

-

-

-

12,499

(Gain) loss from equity method investments

(34,729)

3,289

(34,284)

1,668

Amortization of acquisition-related intangibles

7,026

7,740

21,425

23,320

Loss on financing activities

-

-

-

17,398

Acquisition and similar transaction charges

-

-

-

6,610

Fair value adjustment to acquisition-related earn-out liabilities

788

(1,057)

1,493

(2,140)

Gain on investment in common stock warrants

-

-

-

(70)

Loss on cost method investment

1,800

-

1,800

-

Build-to-suit land rent

931

-

2,801

-

Vacation accrual adjustment

-

-

-

(850)

Stock-based compensation expense

7,967

7,094

22,914

22,130

Income tax effects and adjustments

(9,980)

(3,494)

(21,743)

(23,148)

     Adjusted net income 

$               11,341

$               14,244

$             49,778

$              43,683

 THE ADVISORY BOARD COMPANY 

 FINANCIAL HIGHLIGHTS AND RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED) 

 (In thousands, except per share data) 

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

       Net income (loss) per share - diluted 

$                   0.93

$                   0.02

$                 1.35

$                 (0.33)

   Effect on revenue of fair value adjustments to acquisition-related deferred revenue

-

-

-

0.29

   (Gain) loss from equity method investments

(0.86)

0.08

(0.84)

0.04

   Amortization of acquisition-related intangibles

0.18

0.18

0.52

0.55

   Loss on financing activities

-

-

-

0.41

   Acquisition and similar transaction charges

-

-

-

0.16

   Fair value adjustment to acquisition-related earn-out liabilities

0.02

(0.03)

0.04

(0.05)

   Gain on investment in common stock warrants

-

-

-

-

   Loss on cost method investment

0.04

-

0.04

-

   Build-to-suit land rent

0.02

-

0.07

-

   Vacation accrual adjustment

-

-

-

(0.02)

   Stock-based compensation expense

0.20

0.16

0.56

0.53

   Income tax effects and adjustments

(0.25)

(0.08)

(0.53)

(0.55)

       Non-GAAP adjusted earnings per share

$                   0.28

$                   0.33

$                 1.21

$                  1.03

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

   Effective tax rate

53.9%

68.4%

39.6%

-3058.6%

   Effect on tax rate of Washington, D.C. tax law change including write-off of DC income tax credits

0%

0%

0%

3241%

   Effect on tax rate of loss on financing activities

0%

-9%

0%

-18%

   Effect on tax rate of equity method investment related FIN 48 liability

0%

0%

0%

0%

   Effect on tax rate of Royall acquisition costs and other tax items

0%

-14%

0%

-120%

       Adjusted effective tax rate

53.9%

45.9%

39.6%

44.4%

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

   Weighted average common shares outstanding - diluted

40,492

42,788

40,977

41,900

   Dilutive shares outstanding (1)

-

-

-

525

       Adjusted weighted average common shares outstanding - diluted

40,492

42,788

40,977

42,425

(1)   For non-GAAP purposes, the Company has net income and, therefore, used adjusted diluted shares in its calculation of non-GAAP adjusted EPS.

Non-GAAP Financial Presentation 

The non-GAAP financial reconciliation tables present supplemental measures of our performance which we have derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or "GAAP."  We refer to these financial measures, which are considered "non-GAAP financial measures" under SEC rules, as adjusted revenue, adjusted EBITDA, adjusted net income, non-GAAP earnings per diluted share, adjusted effective tax rate, and adjusted weighted average common shares outstanding-diluted.

Our management uses these non-GAAP financial measures, together with financial measures prepared in accordance with GAAP, to enhance understanding by investors of our core operating performance, as well as for internal forecasting purposes.  Our management believes that providing information about these non-GAAP financial measures facilitates an assessment by our investors of our fundamental operating trends and addresses concerns of investors that various financing, acquisition-related, non-cash and other effects included in GAAP measures may obscure such underlying trends.  We believe that, by highlighting such trends relating to our underlying performance, our non-GAAP presentation helps our investors to make meaningful period-to-period comparisons of our results. 

There are limitations to the use of our non-GAAP financial measures.  These non-GAAP financial measures may not be comparable to similarly titled measures of other companies.  Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Our non-GAAP financial measures exclude the items discussed below.  Because the excluded items have a material impact on our financial results, we use non-GAAP financial measures to supplement financial information presented in accordance with GAAP.  

Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are set forth below.  We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented.  The discussion below presents information about each of the non-GAAP financial measures and our reasons for excluding the enumerated items from our non-GAAP results.  In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.  Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.

Adjusted Net Income and Adjusted Earnings Per Share-Diluted

The Company presents adjusted net income and adjusted earnings per share-diluted to provide investors with a meaningful, consistent comparison of the Company's operating results and trends for the periods presented.  Our management believes that these measures are also useful to investors by allowing investors to evaluate the Company's operations using the same tools that management uses to evaluate the Company's past performance and prospects for future performance.  These two non-GAAP financial measures reflect adjustments based on the exclusion of the following items as well as adjustments for related income tax effects:• Effect on revenue of fair value adjustments to acquisition-related deferred revenue: The Company adjusts revenue to exclude the impact of acquisition-related deferred revenue fair value adjustments.  Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of the Company's operations.• Gain (loss) from equity method investments: The Company has excluded its proportional share of income (loss) and other gains recorded in connection with its equity method investments.  Our management believes that the exclusion of such amounts allows investors to better understand the Company's core operating results.

• Amortization of acquisition-related intangible assets:  Amortization of acquisition-related intangible assets consists of amortization of customer relationships, developed technology and trade names.  Amortization charges for acquired intangible assets are significantly affected by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period.  We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

• Loss on financing activities: The Company has excluded loss on financing activities, as this item represents a non-cash charge.  In addition, the amount and frequency of such charges are not consistent over time and are significantly affected by the timing and size of debt refinancing transactions.• Acquisition and similar transaction charges:  The Company has excluded certain acquisition-related charges resulting from acquisitions (including legal, accounting and due diligence costs) to allow more comparable comparisons of our financial results to our historical operations. Such charges generally are not relevant to assessing the long-term performance of the acquired assets, and are not a material consideration in management's evaluation of potential acquisitions. In addition, the frequency and amount of such charges vary significantly based on the size and timing of the acquisitions and the maturities of the businesses being acquired.  • Fair value adjustments to acquisition-related earn-out liabilities: The Company has excluded the impact of acquisition-related contingent consideration non-cash adjustments due to the inherent uncertainty and volatility associated with such amounts based on changes in assumptions with respect to fair value estimates.  The amount and frequency of such adjustments are not consistent across transactions and are significantly affected by the timing and size of our acquisitions, the future outlook of the acquired business, the estimated discount rate, and the nature of the transaction consideration.

• Stock-based compensation expense: Although stock-based compensation is a key incentive offered to our employees, we evaluate our operating results excluding such expense because the expense can vary significantly from period to period based on the Company's share price, as well as the timing, size and nature of equity awards granted. In addition, our management believes that the exclusion of this expense facilitates the ability of our investors to compare our operating results with those of other companies, many of which also exclude such expense in determining their non-GAAP financial measures.• Other corporate expenses: The Company has excluded certain other expenses that are the result of other, non-comparable events, primarily charges associated with the fair valuing of certain equity instruments. These events arise outside of the ordinary course of our continuing operations. We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

Adjusted EBITDA

Adjusted EBITDA reflects the adjustments to net income prepared on a GAAP basis, as discussed above, and, to the extent not already subject to such adjustments, excludes expenses related to interest, taxes, depreciation and amortization.  Companies exhibit significant variations with respect to capital structure and cost of capital (which affect relative interest expense) and differences in taxation and book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies.  By eliminating some of these variations and reflecting the other adjustments, discussed above, our management believes that this non-GAAP financial measure allows investors to evaluate more effectively our fundamental operating performance relative to that of other companies.

Adjusted Revenue

The Company adjusts revenue to exclude the impact of acquisition-related deferred revenue fair value adjustments.  Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of the Company's operations.

Adjusted Effective Tax Rate

Adjusted effective tax rate is the effective tax rate prepared on a GAAP basis adjusted for the impact of certain non-cash items included in the effective tax rate, including changes in statutory tax regulations and other items that are not indicative of our ongoing operations. We exclude these items because our management believes this non-GAAP financial measure will facilitate the comparison by investors of our annual effective tax rates over time. The adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, which excludes specified items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.

There are various limitations associated with the non-GAAP financial measures we use, including the following:• the non-GAAP financial measures generally do not reflect all depreciation and amortization, and although the assets being depreciated and amortized will in some cases have to be replaced in the future, the measures do not reflect any cash requirements for such replacements;• the non-GAAP financial measures do not reflect the expense of equity awards to employees; and • the non-GAAP financial measures do not reflect the effect of earnings or charges resulting from matters that our management considers not indicative of our ongoing operations, but which may recur from year to year.Because of their limitations, our non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, net income, earnings per diluted share, effective tax rate, and weighted average common shares outstanding-diluted prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.