Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ABCO > SEC Filings for ABCO > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for ADVISORY BOARD CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ADVISORY BOARD CO


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context indicates otherwise, references in this report to the "Company," the "registrant," "we," "our," and "us" mean The Advisory Board Company and its subsidiaries.

Our fiscal year ends on March 31. Fiscal 2014 is our fiscal year ending on March 31, 2014.

This management's discussion and analysis of financial condition and results of operations includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act." Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "will," "believes," "anticipates," "plans," "expects," "seeks," "estimates," or "intends" and similar expressions. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the results, performance, or achievements expressed or implied by the forward-looking statements, including the factors discussed under "Item 1A. Risk Factors" in our annual report on Form 10-K for the fiscal year ended March 31, 2013, or the "2013 Form 10-K," filed with the Securities and Exchange Commission, or "SEC." We undertake no obligation to update any forward-looking statements, whether as a result of circumstances or events that arise after the date the statements are made, new information, or otherwise.

Executive Overview

We provide best practices research and analysis, business intelligence and software tools, and management and advisory services through discrete programs to approximately 4,100 organizations, including hospitals, health systems, pharmaceutical and biotech companies, health care insurers, medical device companies, colleges, universities, and other health care focused and educational institutions. Members of each program typically are charged a fixed annual fee and have access to an integrated set of services that may include best practice research studies, executive education seminars, customized research briefs, web-based access to the program's content database, and software tools.

Our four key areas of focus for fiscal 2014 are to continue to deliver world-class programs that drive significant returns for our members and ensure member loyalty through outstanding value delivery; to make select investments to capture the unique opportunities presented by current health care and education market conditions, through developing and launching new programs and acquiring products, services, and technologies that improve performance for our members; to further align our internal sales and account management functions to allow us to serve members more effectively and to develop deeper and more powerful commercial relationships across our portfolio; and to attract, cultivate, engage, and retain world-class talent across our organization. Success in all of these areas requires very strong execution across our business, and we have a heavy focus on setting each team up to manage against and attain high goals in each area of our operations.

Our membership business model allows us to create value for our members by providing proven solutions to common and complex problems as well as quality content on a broad set of relevant issues. Our growth has been driven by strong renewal rates, ongoing addition of new memberships in our existing programs, continued new program launches, acquisition activity, and continued annual price increases. We believe high renewal rates are a reflection of our members' recognition of the value they derive from participating in our programs. Our revenue grew 18.3% in the three months ended June 30, 2013 over the prior year period. Our contract value increased 15.6% to $475.8 million as of June 30, 2013 from $411.6 million as of June 30, 2012. We define contract value as the aggregate annualized revenue attributed to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement.

Our operating costs and expenses consist of cost of services, member relations and marketing, general and administrative expenses, and depreciation and amortization expenses. Cost of services includes the costs associated with the production and delivery of our products and services, consisting of compensation for research personnel, in-house faculty, software developers, and consultants; the organization and delivery of membership meetings, teleconferences, and other events; production of published materials; technology license fees; and costs of developing and supporting our web-based content and business intelligence and software tools. Member relations and marketing includes the costs of acquiring new members and the costs of account management, consisting of compensation, including sales incentives; travel and entertainment expenses; training of personnel; sales and marketing materials; and associated support services. General and administrative expenses include the costs of human resources and recruiting; finance and accounting; management information systems; facilities management; new program development; and other administrative functions. Depreciation and amortization expense includes the cost of depreciation of our property and equipment; amortization of costs associated with the development of software and tools that are offered as part of certain of our membership programs; and amortization of acquired developed technology. Included in our operating costs for each period presented are stock-based compensation expenses and expenses representing additional payroll taxes for compensation expense as a result of the taxable income employees recognized upon the exercise of common stock options and the vesting of restricted stock units.


Table of Contents

Critical Accounting Policies

Our accounting policies, which are in compliance with U.S. generally accepted accounting principles, or "GAAP," require us to apply methodologies, estimates, and judgments that have a significant impact on the results we report in our financial statements. In our 2013 Form 10-K, we have discussed those material accounting policies that we believe are critical and require the use of complex judgment in their application. There have been no material changes to our policies since our fiscal year ended March 31, 2013.

Non-GAAP Financial Presentation

This management's discussion and analysis presents supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These financial measures, which are considered "non-GAAP financial measures" under SEC rules, are referred to as adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share. See "Non-GAAP Financial Measures" below for definitions of such non-GAAP financial measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Results of Operations

The following table shows statements of income data expressed as a percentage of
revenue for the periods indicated:



                                                                Three Months Ended
                                                                     June 30,
                                                               2013             2012
Revenue                                                          100.0 %         100.0 %
Costs and expenses:
Cost of services, excluding depreciation and
amortization                                                      53.5 %          56.0 %
Member relations and marketing                                    18.0 %          18.4 %
General and administrative                                        14.6 %          12.9 %
Depreciation and amortization                                      5.2 %           4.0 %

Total costs and expenses                                          91.3 %          91.3 %

Operating income                                                   8.7 %           8.7 %
Other income, net                                                  0.4 %           0.6 %

Income before provision for income taxes and equity in
loss of unconsolidated entity                                      9.1 %           9.3 %
Provision for income taxes                                        (3.5 )%         (3.6 )%
Equity in loss of unconsolidated entity                           (2.6 )%         (2.0 )%

Net income before allocation to noncontrolling interest            3.0 %           3.7 %
Net loss attributable to noncontrolling interest                   0.0 %           0.0 %

Net income attributable to common stockholders                     3.0 %           3.7 %

Three months ended June 30, 2013 compared to the three months ended June 30, 2012

Net income attributable to common stockholders. Net income attributable to common stockholders was $3.7 million in the three months ended June 30, 2013 compared to $3.8 million in the three months ended June 30, 2012. The slight decrease in net income was primarily attributable to an increase in cost of services of $7.6 million incurred for new and growing programs, increases of $4.5 million in general and administrative expenses related to increases in investments in our information technology infrastructure to support our growing employee base and number of office locations, increases of $3.1 million in marketing and member relations costs attributable to the addition of new sales teams, an increase of $2.3 million in depreciation and amortization, and a $1.1 million increase in our proportionate share of the net loss of Evolent Health, or "Evolent." The effect of these factors was partially offset by an 18.3% increase in revenues and a $2.8 million decrease in fair value charges related to acquisition-related earn-out liabilities as compared to the prior year period.

Adjusted net income, non-GAAP earnings per diluted share, and adjusted EBITDA. Adjusted net income increased to $11.4 million in the three months ended June 30, 2013 from $11.1 million in the three months ended June 30, 2012, while adjusted EBITDA increased 11.2% to $22.5 million in the three months ended June 30, 2013 from $20.2 million in the three months ended June 30, 2012. The increases in adjusted net income and adjusted EBITDA were due to increased revenue, the effect of which was partially offset by the costs of new and growing programs, increased investment in our general and administrative infrastructure to support our growing employee base, and an increase in the number of new sales teams.


Table of Contents

Revenue. Total revenue increased 18.3% to $123.2 million in the three months ended June 30, 2013 from $104.1 million in the three months ended June 30, 2012, while contract value increased 15.6% to $475.8 million as of June 30, 2013 from $411.6 million as of June 30, 2012. The increases in revenue and contract value were primarily attributable to the introduction and expansion of new programs, including our fiscal 2013 acquisitions of ActiveStrategy, Inc. and 360Fresh, Inc., our cross-selling of existing programs to existing members, and, to a lesser degree, price increases. We offered 58 membership programs as of June 30, 2013 compared to 54 membership programs as of June 30, 2012.

Cost of services. Cost of services increased to $66.0 million in the three months ended June 30, 2013 from $58.4 million in the three months ended June 30, 2012. As a percentage of revenue, cost of services decreased to 53.5% for the three months ended June 30, 2013 from 56.0% for the three months ended June 30, 2012. The increase of $7.6 million in cost of services for the three months ended June 30, 2013 was primarily due to growth and expansion of our Crimson and Southwind programs, as well as our 2013 acquisitions of ActiveStrategy and 360Fresh. Cost of services also reflects increased costs associated with the delivery of program content and tools to our expanded membership base, including increased staffing, licensing fees, and other costs. These increases were partially offset by a difference in fair value charges of $2.8 million relating to our acquisition-related earn-out liabilities.

Member relations and marketing. Member relations and marketing expense increased 16.0% to $22.2 million in the three months ended June 30, 2013 from $19.1 million in the three months ended June 30, 2012. As a percentage of revenue, member relations and marketing expense decreased to 18.0% in the three months ended June 30, 2013 from 18.4% in the three months ended June 30, 2012. The increase in member relations and marketing expense was primarily attributable to an increase in sales staff and related travel and other associated costs, as well as to an increase in member relations personnel and related costs required to serve our expanding membership base.

General and administrative. General and administrative expense increased to $18.0 million in the three months ended June 30, 2013 from $13.5 million in the three months ended June 30, 2012. As a percentage of revenue, general and administrative expense increased to 14.6% in the three months ended June 30, 2013 from 12.9% in the three months ended June 30, 2012. The increase of $4.5 million in general and administrative costs for the three months ended June 30, 2013 was primarily attributable to increased information technology and infrastructure expense to support our growing employee base and number of office locations, and increased investments in our new product development and corporate development groups.

Depreciation and amortization. Depreciation expense increased to $6.4 million, or 5.2% of revenue, in the three months ended June 30, 2013, from $4.1 million, or 4.0% of revenue, in the three months ended June 30, 2012. The increase in depreciation and amortization was primarily due to increased amortization expense from developed capitalized internal-use software tools, the ActiveStrategy and 360Fresh acquisitions, and depreciation on our newly renovated Austin, Texas, San Francisco, California, and Nashville, Tennessee offices and on an expansion floor of our Washington, D.C. headquarters.

Other income, net. Other income, net was $0.5 million in the three months ended June 30, 2013, compared to $0.6 million in the three months ended June 30, 2012. Other income, net consists of interest income and foreign exchange transaction gains and losses. Interest income was $0.8 million in both the three months ended June 30, 2013 and 2012. We recognized foreign exchange transaction losses of $0.2 million during the three months ended June 30, 2013 and 2012 as a result of the effect of fluctuating currency rates on our receivable balances denominated in foreign currencies. During the three months ended June 30, 2013, we recognized $0.1 million in fees under our revolving credit facility.

Provision for income taxes. Our provision for income taxes was $4.3 million and $3.7 million in the three months ended June 30, 2013 and 2012, respectively. Our effective tax rate in the three months ended June 30, 2013 was 38.5% compared to 38.3% in the three months ended June 30, 2012.

Equity in loss of unconsolidated entity. Our proportionate share of the losses of Evolent during the three months ended June 30, 2013 and 2012 was $3.2 million and $2.1 million, respectively. Evolent was established in August 2011 and continues to operate as an early-stage business. As a result, we expect Evolent to incur losses and require additional funding in the future.


Table of Contents

Stock-based compensation expense. We recognized the following stock-based compensation expense in the consolidated statements of income line items for stock options and restricted stock units issued under our stock incentive plans for the three months ended June 30, 2013 and 2012 (in thousands, except per share amounts):

                                                         Three Months Ended
                                                              June 30,
                                                         2013           2012
      Stock-based compensation expense included in:
      Costs and expenses:
      Cost of services                                 $   1,405      $  1,004
      Member relations and marketing                         976           678
      General and administrative                           2,278         1,824
      Depreciation and amortization                           -             -

      Total costs and expenses                             4,659      $  3,506

      Operating income                                    (4,659 )    $ (3,506 )

      Net income attributable to common stockholders   $  (2,865 )    $ (2,163 )

      Impact on diluted earnings per share             $   (0.08 )    $  (0.06 )

There are no stock-based compensation costs capitalized as part of the cost of an asset.

As of June 30, 2013, $44.4 million of total unrecognized compensation cost related to stock-based compensation was expected to be recognized over a weighted average period of 3.0 years.

Non-GAAP Financial Measures

The tables below present information for the periods indicated about our adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share. We define "adjusted EBITDA" for the three months ended June 30, 2013 and 2012 as net income attributable to common stockholders before adjustment for the items set forth in the first table below. We define "adjusted net income" for the three months ended June 30, 2013 and 2012 as net income attributable to common stockholders excluding the net of tax effect of the items set forth in the second table below. We define "non-GAAP earnings per diluted share" for the three months ended June 30, 2013 and 2012 as earnings per diluted share excluding the net of tax effect of the items set forth in the third table below. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Presentation" in our 2013 Form 10-K for our reasons for including these financial measures in this report and for a description of material limitations with respect to the usefulness of such measures.

A reconciliation of adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share to the most directly comparable GAAP financial measures is provided below (in thousands, except per share data).

                                                                   Three Months Ended
                                                                        June 30,
                                                                 2013              2012
Net income attributable to common stockholders                 $   3,693         $  3,841
Equity in loss of unconsolidated entity                            3,233            2,124
Provision for income taxes                                         4,335            3,702
Other income, net                                                   (523 )           (576 )
Depreciation and amortization                                      6,354            4,086
Fair value adjustments to acquisition-related earn-out
liabilities                                                          700            3,500
Share-based compensation expense                                   4,659            3,506

Adjusted EBITDA                                                $  22,451         $ 20,183


Table of Contents
                                                                  Three Months Ended
                                                                       June 30,
                                                                  2013            2012
Net income attributable to common stockholders                 $    3,693       $  3,841
Equity in loss of unconsolidated entity                             3,233          2,124
Amortization of acquisition-related intangibles, net of
tax                                                                 1,136            790
Fair value adjustments to acquisition-related earn-out
liabilities, net of tax                                               431          2,160
Share-based compensation expense, net of tax                        2,865          2,163

Adjusted net income                                            $   11,358       $ 11,078


                                                                  Three Months Ended
                                                                       June 30,
                                                                  2013            2012
GAAP earnings per diluted share                                $     0.10       $   0.11
Equity in loss of unconsolidated entity                              0.09           0.06
Amortization of acquisition-related intangibles, net of
tax                                                                  0.03           0.02
Fair value adjustments to acquisition-related earn-out
liabilities, net of tax                                              0.01           0.06
Share-based compensation expense, net of tax                         0.08           0.06

Non-GAAP earnings per diluted share                            $     0.31       $   0.31

Liquidity and Capital Resources

Cash flows generated from operating activities represent our primary source of liquidity. We believe that existing cash, cash equivalents, marketable securities balances, and operating cash flows will be sufficient to support our expected operating and capital expenditures, as well as share repurchases, for at least the next 12 months. We had cash, cash equivalents, and marketable securities balances of $192.1 million as of June 30, 2013 and $214.7 million as of March 31, 2013. We expended $6.2 million and $3.0 million in cash to purchase shares of our common stock through our share repurchase program during the three months ended June 30, 2013 and 2012, respectively. We had no long-term indebtedness as of June 30, 2013 or March 31, 2013.

Cash flows from operating activities. The combination of revenue growth, profitable operations, and payment for memberships in advance of accrual revenue typically results in operating activities that generate cash flows in excess of net income on an annual basis. Cash flows from operating activities fluctuate from quarter to quarter based on the timing of new and renewal contracts as well as certain expenses, and the first quarter of our fiscal year typically provides the lowest quarterly cash flows from operations. Net cash flows used in operating activities were $3.6 million in the three months ended June 30, 2013, compared to net cash flows used in operating activities of $2.4 million in the three months ended June 30, 2012. The increase in net cash flows used in operating activities during the current period was primarily due to the payment of certain acquisition-related earn-out payments made during the three months ended June 30, 2013.

Cash flows from investing activities. Our cash management and investment strategy and capital expenditure programs affect investing cash flows. Net cash flows used in investing activities were $29.4 million and $35.1 million in the three months ended June 30, 2013 and 2012, respectively. Investing activities during the three months ended June 30, 2013 consisted of the net purchases of marketable securities of $12.0 million, capital expenditures of $11.7 million, and the purchase of $5.7 million in notes receivable from Evolent. Investing activities during the three months ended June 30, 2012 consisted primarily of capital expenditures of $8.5 million and the net purchases of marketable securities of $26.6 million.

Cash flows from financing activities. We had net cash flows provided by financing activities of $4.2 million and $11.8 million in the three months ended June 30, 2013 and 2012, respectively. Cash flows from financing activities during the three months ended June 30, 2013 primarily consisted of $8.3 million in additional tax benefits related to share-based compensation arrangements and $7.7 million of proceeds from the issuance of common stock upon the exercise of stock options, offset in part by $6.2 million of share repurchase activity and $5.8 million in shares withheld to satisfy the minimum employee tax withholding for certain vested restricted stock units. Financing activities during the three months ended June 30, 2012 primarily consisted of $10.7 million of proceeds from the issuance of common stock upon the exercise of stock options and $7.9 million in additional tax benefits related to share-based compensation arrangements, offset in part by $3.0 million of share repurchase activity and $3.8 million in shares withheld to satisfy the minimum employee tax withholding for certain vested restricted stock units. We repurchased 118,880 shares at a total cost of approximately $6.2 million and 62,837 shares at a total cost of approximately $3.0 million in the three months ended June 30, 2013 and 2012, respectively, pursuant to our share repurchase program.


Table of Contents

Revolving credit facility. In July 2012, we obtained a $150.0 million five-year senior secured revolving credit facility under a credit agreement with a syndicate of lenders that can be used to finance working capital needs and for general corporate purposes, including permitted acquisitions. The credit facility may be increased at our request by up to an additional $50.0 million in minimum increments of $10.0 million upon the satisfaction of specified conditions. The credit agreement contains a sublimit for up to $5.0 million principal amount of swing line loans outstanding at any time and a sublimit for the issuance of up to $10.0 million of letters of credit outstanding at any time. As of June 30, 2013, there were no amounts outstanding under the credit facility and $150.0 million was available for borrowing thereunder.

The facility loans may be borrowed, repaid, and reborrowed from time to time during the term of the facility and will mature and be payable in full on July 30, 2017. Borrowings on the credit facility, if any, will bear interest at an amount based on either (a) an alternate base rate plus the applicable margin for alternate base rate loans under the credit agreement, which ranges from 0.75% to 1.50% based on our total leverage ratio, or (b) an adjusted LIBO rate plus the applicable margin for eurocurrency loans under the credit agreement, which ranges from 1.75% to 2.50% based on our total leverage ratio. The facility contains customary affirmative and negative covenants. We are also required to maintain a maximum total leverage ratio of less than 3.5 to 1, a maximum senior secured leverage ratio of less than 2.5 to 1, and a minimum interest coverage ratio of greater than 3 to 1 for each of our fiscal quarters for the period of four consecutive fiscal quarters ending with the end of each such fiscal quarter. We were in compliance with each of these financial covenants as of June 30, 2013.

Contractual Obligations

Our 2013 Form 10-K discloses certain commitments and contractual obligations that existed as of March 31, 2013. Our December 2009 acquisition of Southwind . . .

  Add ABCO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ABCO - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.