Exhibit 99.1
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Contact: Robert P. Borchert VP Investor Relations 202.266.6240 IR@advisory.com |
THE ADVISORY BOARD COMPANY REPORTS SECOND QUARTER 2017 RESULTS
WASHINGTON, D.C. — (August 8, 2017) — The Advisory Board Company (NASDAQ: ABCO), a leading provider of research, technology, and consulting to health care organizations and educational institutions, today announced financial results for the second quarter and six-month period ended June 30, 2017.
Second Quarter Financial Review
| (In millions, except per share amounts) |
Q2-17 | Q2-16 | % Change | |||||||||
| Revenue |
$ | 200.3 | $ | 198.4 | 1.0 | % | ||||||
| Net income |
14.7 | 7.5 | 96.8 | |||||||||
| Earnings per diluted share (EPS) |
0.36 | 0.18 | 92.5 | |||||||||
| Adjusted Revenue (non-GAAP) a |
199.8 | 193.7 | 3.2 | |||||||||
| Adjusted EBITDA (non-GAAP) a |
44.3 | 47.2 | (6.2 | ) | ||||||||
| Adjusted EPS (non-GAAP) a |
$ | 0.37 | $ | 0.46 | (19.6 | )% | ||||||
| a) | Excludes contribution from exited programs and impact of restructuring and other charges for current and prior year periods. |
Revenue for the second quarter of 2017 was $200.3 million, compared to $198.4 million for the same quarter a year ago. The Company reported net income for the second quarter of 2017 of $14.7 million, or $0.36 per diluted share, compared to net income of $7.5 million, or $0.18 per diluted share, for the second quarter of 2016. The second quarter of 2017 included $14.9 million in restructuring and strategic alternative-related charges and a net gain of $17.7 million from the Company’s investment in Evolent Health, Inc.
Adjusted contract value, excluding exited programs from current and prior year periods, decreased 4.4% to $723.2 million as of June 30, 2017, compared to adjusted contract value of $756.6 million as of June 30, 2016.
Adjusted revenue for the second quarter of 2017 was $199.8 million, compared to adjusted revenue of $193.7 million for the same quarter a year ago. Adjusted EBITDA in the second quarter of 2017 was $44.3 million, compared to $47.2 million for the second quarter of 2016. Adjusted EPS was $0.37 for the second quarter of 2017, compared to $0.46 for the second quarter last year.
Six-Month Financial Review
| (In millions, except per share amounts) |
First Half-17 | First Half-16 | % Change | |||||||||
| Revenue |
$ | 394.8 | $ | 399.1 | (1.1 | )% | ||||||
| Net income |
34.4 | 17.8 | 92.9 | |||||||||
| Earnings per diluted share (EPS) |
0.83 | 0.43 | 92.8 | |||||||||
| Adjusted revenue (non-GAAP) b |
393.9 | 389.1 | 1.2 | |||||||||
| Adjusted EBITDA (non-GAAP) b |
89.3 | 93.1 | (4.1 | ) | ||||||||
| Adjusted EPS (non-GAAP) b |
$ | 0.84 | $ | 0.91 | (7.7 | )% | ||||||
| b) | Excludes contribution from exited programs and impact of restructuring and other charges for current and prior year periods. |
Revenue for the six-month period ended June 30, 2017 was $394.8 million, compared to $399.1 million for the same quarter a year ago. Net income was $34.4 million, or $0.83 per diluted share, for the six-month period ended June 30, 2017, compared to net income of $17.8 million, or $0.43 per diluted share, for the six-month period ended June 30, 2016. The six-month period ended June 30, 2017 included $26.1 million in restructuring and strategic alternative-related charges and a net gain of $39.3 million from the Company’s investment in Evolent Health, Inc.
Adjusted revenue for the six-month period ended June 30, 2017 was $393.9 million, compared to adjusted revenue of $389.1 million for the same period a year ago. Adjusted EBITDA in the first six-month period of 2017 was $89.3 million compared to $93.1 million for the six-month period ended June 30, 2016. Adjusted EPS was $0.84 for the six-month period ended June 30, 2017, compared to $0.91 for the six-month period last year.
Balance Sheet and Capital Resources
As of June 30, 2017, the Company had $144.0 million in cash and cash equivalents and $501.0 million in total debt. The Company’s leverage ratio at June 30, 2017 was approximately 2.7, compared to 2.9 as of June 30, 2016. Net of cash, the Company’s net leverage ratio was 1.9 at June 30, 2017, compared to 2.8 at June 30, 2016.
2017 Financial Guidance
The Company’s financial guidance for calendar year 2017 remained unchanged, as follows:
| ($ in millions, except per share amounts) |
CY-17 Guidance c | CY-16 Actual c | Y-Y Change | |||||||
| Adjusted Revenue (non-GAAP) |
$ | 780.0 - 840.0 | $ | 786.1 | (0.6) - 7.9% | |||||
| Adjusted EBITDA (non-GAAP) |
$ | 190.0 - 215.0 | $ | 185.0 | 2.7 - 16.2% | |||||
| Adjusted EBITDA margin (non-GAAP) |
24.4 - 25.6 | % | 23.5 | % | 90 - 210 bps | |||||
| Adjusted EPS (non-GAAP) |
$ | 1.80 - 2.10 | $ | 1.86 | (3.2) - 12.9% | |||||
| c) | Excludes contribution from exited programs and impact of restructuring and other charges for current and prior year periods. |
Conference Call Information
As previously announced, The Advisory Board Company will hold a conference call to discuss its financial and operating performance today, August 8, 2017, at 5:30 p.m. Eastern Time. The Company invites all interested parties to attend the conference call, including the lenders under the Company’s senior secured credit facilities. The call will be available via live webcast on the Company’s website at investors.advisoryboardcompany.com. The webcast and accompanying slide presentation will be archived on the Company’s website for at least 30 days.
To participate by telephone, please dial 888-336-7150 (or 412-902-4176 for international callers). Participants are advised to dial in at least five minutes prior to the call to register.
About The Advisory Board Company
The Advisory Board Company is a best practices firm that uses a combination of research, technology, and consulting to improve the performance of approximately 5,700 health care organizations and educational institutions. Headquartered in Washington, D.C., with offices worldwide, The Advisory Board Company forges and finds the best new ideas and proven practices from its network of thousands of leaders, then customizes and hardwires them into every level of member organizations, creating enduring value. For more information, visit www.advisoryboardcompany.com.
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Non-GAAP Financial Measures
This news release presents information about the Company’s historical adjusted revenue, adjusted EBITDA, adjusted net income, adjusted EPS, and adjusted effective tax rate, which are non-GAAP financial measures provided as a complement to the results provided in accordance with accounting principles generally accepted in the United States of America (“GAAP”). A reconciliation of each of the foregoing historical non-GAAP financial measures to the most directly comparable historical GAAP financial measures is provided in the accompanying tables found at the end of this release for each of the fiscal periods indicated.
No reconciliation of the Company’s adjusted revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted EPS guidance for calendar year 2017 to the most comparable GAAP financial measures is included in the tables found at the end of this release.
Caution Regarding Forward-Looking Statements
Statements in this news release that relate to future results and events are forward-looking statements and are based on the Company’s expectations as of the date of this news release. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “estimate,” “expect,” “guidance,” “intend,” “may,” “outlook,” “plan,” “potential,” “should,” “will,” “would,” or similar words or expressions. Forward-looking statements in this news release include the Company’s expectations regarding its performance and results for calendar 2017 with respect to adjusted revenue, adjusted EBITDA, adjusted EBITDA margin, adjusted EPS, and adjusted effective tax rate.
Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties, and other factors, including those relating to: factors that adversely affect the financial condition of the health care and education industries; federal and state law and regulations governing the health care and education industries and the Company’s members’ and subcontractors’ respective compliance with those applicable laws and regulations; effects of federal and state privacy and security laws and cyberattacks, actual or attempted breaches of security, unanticipated disclosures of information, and similar events; liability for failure to provide accurate information or for deficient submissions to third-party payors; compliance with federal and state laws governing healthcare fraud and abuse or reimbursement; the Company’s ability to attract new members, obtain renewals from existing members, and sell additional products and services; maintaining the Company’s reputation and expanding its name recognition; the Company’s ability to offer new and valuable products and services; effects of competition; the Company’s ability to maintain a highly-skilled workforce; unsuccessful design or implementation of software or delivery of the Company’s consulting, management and data-enabled services; delays in generating revenue; disruptions in service or operational failures at the Company’s data centers or at other service provider locations; ability to collect and maintain member and third-party data and to obtain proper permissions and waivers for use and disclosure of information received from members or on their behalf; maintenance of third-party providers and strategic alliances and entry into new alliances; ability to license, integrate, and access third-party technologies and data; potential liability claims; protection of the Company’s intellectual property; claims of infringement, misappropriation, or violation of proprietary rights of third parties; limitations associated with use of open source technology; estimates and assumptions used to prepare the Company’s consolidated financial statements and any changes made to those estimates; any significant increase in bad debt in excess of recorded estimates; the inability to integrate successfully the operations of future acquisitions into the Company’s business; business and financial risks associated with the pursuit of acquisition opportunities; any significant impairment of the Company’s goodwill; the Company’s ability to realize a return on its strategic investments; potential imposition of sales and use taxes on sales of the Company’s services; the Company’s ability to realize fully its deferred tax assets; the potential effects of changes in, or interpretations of, tax rules on the Company’s effective tax rates; inherent limitations in, and the potential impact of any failure to maintain, effective internal control and procedures over financial reporting; limitations caused by the Company’s level of debt, interest payment obligations, and covenants under its senior credit agreement; unanticipated risks and costs regarding interest rates and hedging instruments; effects of issuance of additional capital stock; and provisions in the Company’s charter and bylaws that could discourage takeover attempts.
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This list of risks, uncertainties, and other factors is not complete. The Company discusses some of these matters more fully, as well as certain risk factors that could affect the Company’s business, financial condition, results of operations, and prospects, in its filings with the Securities and Exchange Commission, including the Company’s annual report on Form 10-K for the year ended December 31, 2016, subsequent quarterly reports on Form 10-Q, and current reports on Form 8-K. These filings are available for review through the Securities and Exchange Commission’s website at www.sec.gov. Any or all forward-looking statements the Company makes may turn out to be wrong, and can be affected by inaccurate assumptions the Company might make or by known or unknown risks, uncertainties, and other factors, including those identified in this news release. Accordingly, you should not place undue reliance on the forward-looking statements made in this news release, which speak only as of its date. The Company does not undertake to update any of its forward-looking statements, whether as a result of circumstances or events that arise after the date they are made, new information, or otherwise.
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THE ADVISORY BOARD COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND OTHER OPERATING STATISTICS
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||
| 2017 | 2016 | % Change | 2017 | 2016 | % Change | |||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||
| Statements of Income |
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| Revenue (1) |
$ | 200,299 | $ | 198,382 | 1.0 | % | $ | 394,838 | $ | 399,117 | -1.1 | % | ||||||||||||
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| Cost of services, excluding depreciation and amortization (1) (2) (3) (4) (5) |
101,788 | 96,440 | 5.5 | % | 200,430 | 192,389 | 4.2 | % | ||||||||||||||||
| Member relations and marketing (2) (3) (4) |
33,241 | 32,718 | 1.6 | % | 66,096 | 65,113 | 1.5 | % | ||||||||||||||||
| General and administrative (1) (2) (3) (4) |
44,475 | 32,219 | 38.0 | % | 83,563 | 64,047 | 30.5 | % | ||||||||||||||||
| Depreciation and amortization (1) (6) |
21,645 | 18,917 | 14.4 | % | 43,979 | 38,684 | 13.7 | % | ||||||||||||||||
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| Operating (loss) income |
(850 | ) | 18,088 | 770 | 38,884 | |||||||||||||||||||
| Other expense |
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| Interest expense |
(4,730 | ) | (4,389 | ) | 7.8 | % | (9,230 | ) | (9,210 | ) | 0.2 | % | ||||||||||||
| Other (expense) income, net |
(90 | ) | (923 | ) | 143 | (862 | ) | |||||||||||||||||
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| Total other expense, net |
(4,820 | ) | (5,312 | ) | (9,087 | ) | (10,072 | ) | ||||||||||||||||
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| (Loss) income before benefit (provision) for income taxes and gain (loss) from equity method investments |
(5,670 | ) | 12,776 | (8,317 | ) | 28,812 | ||||||||||||||||||
| Benefit (provision) for income taxes |
2,681 | (4,870 | ) | 3,405 | (10,533 | ) | ||||||||||||||||||
| Gain (loss) from equity method investments |
17,736 | (411 | ) | 39,313 | (445 | ) | ||||||||||||||||||
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| Net income |
$ | 14,747 | $ | 7,495 | 96.8 | % | $ | 34,401 | $ | 17,834 | 92.9 | % | ||||||||||||
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| Net income per share |
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| Basic |
$ | 0.36 | $ | 0.19 | $ | 0.85 | $ | 0.44 | ||||||||||||||||
| Diluted |
$ | 0.36 | $ | 0.18 | 92.5 | % | $ | 0.83 | $ | 0.43 | 92.8 | % | ||||||||||||
| Weighted average common shares outstanding |
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| Basic |
40,586 | 40,365 | 40,421 | 40,928 | ||||||||||||||||||||
| Diluted |
41,460 | 40,570 | 2.2 | % | 41,252 | 41,222 | 0.1 | % | ||||||||||||||||
| Contract Value (at end of period, excluding exited programs) |
$ | 723,186 | $ | 756,607 | -4.4 | % | ||||||||||||||||||
| Percentages of Revenue |
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| Cost of services, excluding depreciation and amortization (1) (2) (3) (4) (5) |
50.8 | % | 48.6 | % | 50.8 | % | 48.2 | % | ||||||||||||||||
| Member relations and marketing (2) (3) (4) |
16.6 | % | 16.5 | % | 16.7 | % | 16.3 | % | ||||||||||||||||
| General and administrative (1) (2) (3) (4) |
22.2 | % | 16.2 | % | 21.2 | % | 16.0 | % | ||||||||||||||||
| Depreciation and amortization (1) (6) |
10.8 | % | 9.5 | % | 11.1 | % | 9.7 | % | ||||||||||||||||
| Operating income |
-0.4 | % | 9.1 | % | 0.2 | % | 9.7 | % | ||||||||||||||||
| Net income |
7.4 | % | 3.8 | % | 8.7 | % | 4.5 | % | ||||||||||||||||
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(1) Amounts include exited programs, as follows: |
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| Revenue |
485 | 4,711 | 967 | 9,989 | ||||||||||||||||||||
| Cost of services |
2,448 | 4,157 | 5,739 | 7,978 | ||||||||||||||||||||
| General and administrative |
— | — | 2 | — | ||||||||||||||||||||
| Depreciation and amortization |
1,872 | 506 | 3,110 | 975 | ||||||||||||||||||||
| (2) Amounts include restructuring and strategic alternative charges, as follows: |
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| Cost of services |
2,044 | — | 4,339 | — | ||||||||||||||||||||
| Member relations and marketing |
78 | — | 389 | — | ||||||||||||||||||||
| General and administrative |
12,793 | — | 21,400 | — | ||||||||||||||||||||
| (3) Amounts include stock-based compensation, as follows: |
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| Cost of services |
1,829 | 2,493 | 3,087 | 4,680 | ||||||||||||||||||||
| Member relations and marketing |
1,134 | 1,387 | 2,280 | 2,501 | ||||||||||||||||||||
| General and administrative |
2,651 | 4,085 | 5,958 | 7,766 | ||||||||||||||||||||
| (4) Amounts include build-to-suit land rent, as follows: |
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| Cost of services |
472 | 478 | 936 | 904 | ||||||||||||||||||||
| Member relations and marketing |
305 | 351 | 616 | 655 | ||||||||||||||||||||
| General and administrative |
154 | 165 | 310 | 312 | ||||||||||||||||||||
| (5) Amounts include fair value adjustments of acquisition-related earn-out liabilities, as follows: |
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| Cost of services |
52 | 1,775 | 452 | 705 | ||||||||||||||||||||
| (6) Amounts include amortization of acquisition-related intangibles, as follows: |
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| Depreciation and amortization |
6,593 | 6,975 | 13,400 | 14,013 | ||||||||||||||||||||
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THE ADVISORY BOARD COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ | 144,033 | $ | 91,151 | ||||
| Membership fees receivable, net |
574,442 | 605,517 | ||||||
| Prepaid expenses and other current assets |
22,251 | 18,965 | ||||||
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| Total current assets |
740,726 | 715,633 | ||||||
| Property and equipment, net |
155,020 | 171,281 | ||||||
| Construction in progress |
97,966 | 63,368 | ||||||
| Intangible assets, net |
244,907 | 255,053 | ||||||
| Deferred incentive compensation and other charges |
59,432 | 72,178 | ||||||
| Goodwill |
737,023 | 739,507 | ||||||
| Equity method investments |
10,180 | 19,858 | ||||||
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| Total assets |
$ | 2,045,254 | $ | 2,036,878 | ||||
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| LIABILITIES AND STOCKHOLDERS’ EQUITY |
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| Current liabilities: |
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| Deferred revenue, current |
$ | 545,275 | $ | 564,237 | ||||
| Accounts payable and accrued liabilities |
71,480 | 67,702 | ||||||
| Accrued incentive compensation |
18,469 | 25,521 | ||||||
| Debt, current |
63,764 | 49,347 | ||||||
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| Total current liabilities |
698,988 | 706,807 | ||||||
| Deferred revenue, net of current portion |
135,628 | 170,357 | ||||||
| Deferred income taxes |
88,310 | 89,013 | ||||||
| Debt, net of current portion |
437,251 | 472,739 | ||||||
| Financing obligation |
97,966 | 63,368 | ||||||
| Other long-term liabilities |
21,038 | 17,550 | ||||||
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| Total liabilities |
1,479,181 | 1,519,834 | ||||||
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| Stockholders’ equity: |
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| Common stock |
406 | 402 | ||||||
| Additional paid-in capital |
797,328 | 782,399 | ||||||
| Accumulated deficit |
(232,563 | ) | (266,218 | ) | ||||
| Accumulated other comprehensive income |
902 | 461 | ||||||
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| Total stockholders’ equity |
566,073 | 517,044 | ||||||
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| Total liabilities and stockholders’ equity |
$ | 2,045,254 | $ | 2,036,878 | ||||
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THE ADVISORY BOARD COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Six Months Ended June 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: |
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| Net income |
$ | 34,401 | $ | 17,834 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization |
43,979 | 38,684 | ||||||
| Amortization of debt issuance costs |
561 | 566 | ||||||
| Deferred income taxes |
4,794 | (881 | ) | |||||
| Excess tax benefit from stock-based awards |
(288 | ) | (633 | ) | ||||
| Stock-based compensation expense |
11,325 | 14,947 | ||||||
| Equity in losses of equity method investments |
2,999 | 445 | ||||||
| Gain on partial sale of equity method investment |
(42,312 | ) | — | |||||
| Changes in operating assets and liabilities (net of the effect of acquisition): |
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| Membership fees receivable |
31,074 | 4,948 | ||||||
| Prepaid expenses and other current assets |
(3,247 | ) | 7,370 | |||||
| Deferred incentive compensation and other charges |
13,290 | 11,408 | ||||||
| Deferred revenue |
(53,691 | ) | (35,056 | ) | ||||
| Accounts payable and accrued liabilities |
(20,089 | ) | (10,738 | ) | ||||
| Acquisition-related earn-out payments |
(196 | ) | (1,432 | ) | ||||
| Accrued incentive compensation |
(7,053 | ) | (24,408 | ) | ||||
| Other long-term liabilities |
2,388 | 27 | ||||||
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| Net cash provided by operating activities |
17,935 | 23,081 | ||||||
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| Cash flows from investing activities: |
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| Purchases of property and equipment |
(16,287 | ) | (19,877 | ) | ||||
| Capitalized external-use software development costs |
(1,285 | ) | (1,608 | ) | ||||
| Cash paid for acquisitions |
— | (1,900 | ) | |||||
| Cash received from partial sale of equity method investment |
71,871 | — | ||||||
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| Net cash provided by (used in) investing activities |
54,299 | (23,385 | ) | |||||
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| Cash flows from financing activities: |
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| Proceeds from debt |
— | 17,000 | ||||||
| Paydown of debt |
(21,562 | ) | (14,375 | ) | ||||
| Proceeds from issuance of common stock from exercise of stock options |
7,389 | 3,100 | ||||||
| Withholding of shares to satisfy minimum employee tax withholding |
(5,173 | ) | (3,432 | ) | ||||
| Proceeds from issuance of stock under employee stock purchase plan |
180 | 256 | ||||||
| Acquisition-related earn-out payments |
(186 | ) | (3,600 | ) | ||||
| Excess tax benefits from stock-based awards |
— | 633 | ||||||
| Purchases of treasury stock |
— | (53,616 | ) | |||||
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| Net cash used in financing activities |
(19,352 | ) | (54,034 | ) | ||||
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| Net increase (decrease) in cash and cash equivalents |
52,882 | (54,338 | ) | |||||
| Cash and cash equivalents, beginning of period |
91,151 | 71,825 | ||||||
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| Cash and cash equivalents, end of period |
$ | 144,033 | $ | 17,487 | ||||
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THE ADVISORY BOARD COMPANY
FINANCIAL HIGHLIGHTS AND RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue |
$ | 200,299 | $ | 198,382 | $ | 394,838 | $ | 399,117 | ||||||||
| Less: Revenue from exited programs |
485 | 4,711 | 967 | 9,989 | ||||||||||||
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| Adjusted revenue |
$ | 199,814 | $ | 193,671 | $ | 393,871 | $ | 389,128 | ||||||||
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| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income |
$ | 14,747 | $ | 7,495 | $ | 34,401 | $ | 17,834 | ||||||||
| (Gain) loss from equity method investments |
(17,736 | ) | 411 | (39,313 | ) | 445 | ||||||||||
| (Benefit) provision for income taxes |
(2,681 | ) | 4,870 | (3,405 | ) | 10,533 | ||||||||||
| Interest expense |
4,730 | 4,389 | 9,230 | 9,210 | ||||||||||||
| Other expense (income), net |
90 | 923 | (143 | ) | 862 | |||||||||||
| Depreciation and amortization |
21,645 | 18,917 | 43,979 | 38,684 | ||||||||||||
| Fair value adjustment to acquisition-related earn-out liabilities |
52 | 1,775 | 452 | 705 | ||||||||||||
| Build-to-suit land rent |
931 | 995 | 1,862 | 1,871 | ||||||||||||
| Stock-based compensation expense |
5,614 | 7,965 | 11,325 | 14,947 | ||||||||||||
| Loss (income) from exited programs |
3,835 | (48 | ) | 7,884 | (1,036 | ) | ||||||||||
| Depreciation and amortization from exited programs |
(1,872 | ) | (506 | ) | (3,110 | ) | (975 | ) | ||||||||
| Restructuring and strategic alternative charges |
14,915 | — | 26,128 | — | ||||||||||||
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| Adjusted EBITDA |
$ | 44,270 | $ | 47,186 | $ | 89,290 | $ | 93,080 | ||||||||
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8
THE ADVISORY BOARD COMPANY
FINANCIAL HIGHLIGHTS AND RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income |
$ | 14,747 | $ | 7,495 | $ | 34,401 | $ | 17,834 | ||||||||
| (Gain) loss from equity method investments |
(17,736 | ) | 411 | (39,313 | ) | 445 | ||||||||||
| Amortization of acquisition-related intangibles |
6,593 | 6,975 | 13,400 | 14,013 | ||||||||||||
| Fair value adjustment to acquisition-related earn-out liabilities |
52 | 1,775 | 452 | 705 | ||||||||||||
| Build-to-suit land rent |
931 | 995 | 1,862 | 1,871 | ||||||||||||
| Stock-based compensation expense |
5,614 | 7,965 | 11,325 | 14,947 | ||||||||||||
| Loss (income) from exited programs |
3,835 | (48 | ) | 7,884 | (1,036 | ) | ||||||||||
| Restructuring and strategic alternative charges |
14,915 | — | 26,128 | — | ||||||||||||
| Income tax effects and adjustments |
(13,634 | ) | (6,732 | ) | (21,596 | ) | (11,331 | ) | ||||||||
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| Adjusted net income |
$ | 15,317 | $ | 18,836 | $ | 34,543 | $ | 37,448 | ||||||||
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| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income per share - diluted |
$ | 0.36 | $ | 0.18 | $ | 0.83 | $ | 0.43 | ||||||||
| (Gain) loss from equity method investments |
(0.43 | ) | 0.01 | (0.95 | ) | 0.01 | ||||||||||
| Amortization of acquisition-related intangibles |
0.16 | 0.17 | 0.32 | 0.34 | ||||||||||||
| Fair value adjustment to acquisition-related earn-out liabilities |
— | 0.04 | 0.01 | 0.02 | ||||||||||||
| Build-to-suit land rent |
0.02 | 0.03 | 0.05 | 0.05 | ||||||||||||
| Stock-based compensation expense |
0.14 | 0.20 | 0.28 | 0.36 | ||||||||||||
| Loss (income) from exited programs |
0.09 | — | 0.19 | (0.03 | ) | |||||||||||
| Restructuring and strategic alternative charges |
0.36 | — | 0.63 | — | ||||||||||||
| Income tax effects and adjustments |
(0.33 | ) | (0.17 | ) | (0.52 | ) | (0.27 | ) | ||||||||
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| Non-GAAP adjusted earnings per share |
$ | 0.37 | $ | 0.46 | $ | 0.84 | $ | 0.91 | ||||||||
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| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Effective tax rate |
47.3 | % | 38.1 | % | 40.9 | % | 36.6 | % | ||||||||
| Effects of rate change on investments in Evolent Health, Inc. and Evolent Health LLC |
-4.6 | % | 0.0 | % | -3.1 | % | 0.0 | % | ||||||||
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| Adjusted effective tax rate |
42.7 | % | 38.1 | % | 37.8 | % | 36.6 | % | ||||||||
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9
Non-GAAP Financial Presentation
The non-GAAP financial reconciliation tables present supplemental measures of the Company’s performance which have been derived from its consolidated financial information but which are not presented in the Company’s consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or “GAAP.” The Company refers to these financial measures, which are considered “non-GAAP financial measures” under SEC rules as adjusted revenue, adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share.
The Company’s management team uses these non-GAAP financial measures, together with financial measures prepared in accordance with GAAP, to enhance understanding by investors of core operating performance, as well as for internal forecasting purposes. Management believes that providing information about these non-GAAP financial measures facilitates an assessment by investors of the Company’s fundamental operating trends and addresses concerns of investors that various non-cash and other effects included in GAAP measures may obscure such underlying trends. The Company believes that, by highlighting such trends relating to underlying performance, its non-GAAP presentation helps investors to make meaningful period-to-period comparisons of the Company’s results.
There are limitations to the Company’s use of non-GAAP financial measures. These non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including industry peer companies, may calculate non-GAAP financial measures differently than the Company does, limiting the usefulness of those measures for comparative purposes.
The Company’s non-GAAP financial measures exclude the items discussed below. Because the excluded items have a material impact on its financial results, the Company uses 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. The Company encourages investors and other interested parties 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 the Company’s reasons for excluding the enumerated items from its non-GAAP results. In future fiscal periods, the Company 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 the Company’s non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.
The Company has not reconciled forward-looking non-GAAP measures to forward-looking GAAP measures presented in this press release because the Company is unable to predict, without unreasonable effort, GAAP measures of (i) revenue and loss (income) from exited programs, (ii) fair value adjustments to acquisition-related earn-out liabilities, (iii) restructuring activities, and (iv) gains (losses) from the Company’s equity method investments. These items, which could materially affect the computation of such forward-looking GAAP measures, are inherently uncertain and depend on various factors, many of which are outside the Company’s control.
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. 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:
| • | 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. 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 the Company’s acquisitions, and these charges may vary in amount from period to period. The Company excludes these charges to facilitate a more meaningful evaluation of its current operating performance and comparisons to its past operating performance. |
| • | 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 the Company’s acquisitions, the future outlook of the acquired business, the estimated discount rate, and the nature of the transaction consideration. |
| • | Build-to-suit land rent: The Company entered into a 16-year lease for its new corporate headquarters in December 2015, which is currently being constructed in Washington, D.C. The lease has an anticipated start date of mid-2019. The Company has concluded that it is the deemed owner of the building (for accounting purposes only) during the construction period and that the lease qualifies for build-to-suit accounting. The Company recognizes expense on a portion of future lease payments that are estimated to represent the underlying land lease. The Company excludes these costs for purposes of calculating non-GAAP measures because the Company believes these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the Company’s current operating performance or comparisons to the Company’s operating performance in other periods. |
| • | Stock-based compensation expense: Although stock-based compensation is a key incentive offered to its employees, the Company evaluates its 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, management believes that the exclusion of this expense facilitates the ability of investors to compare the Company’s operating results with those of other companies, many of which also exclude such expense in determining their non-GAAP financial measures. |
| • | Restructuring and strategic alternative charges: The Company has excluded costs associated with its previously announced restructuring plan and its work on strategic alternatives. These costs of its restructuring and strategic alternatives plan are primarily related to employee |
10
| termination costs and lease exit costs, as well as legal, consulting, and financial advisory fees. The Company excludes these restructuring and strategic alternative costs for purposes of calculating non-GAAP measures because the Company believes that these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the Company’s current operating performance or comparisons to the Company’s operating performance in other periods. |
| • | Income (loss) from exited programs: The Company has excluded income (loss) from programs it has exited or intends to exit in connection with its restructuring and strategic alternatives plan. The excluded items encompass revenue and costs, including salary and benefits. The Company believes that the exclusion of such amounts allows investors to better understand the Company’s core continuing operations. |
| • | 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 the Company’s continuing operations. The Company excludes these charges to facilitate a more meaningful evaluation of current operating performance and comparisons to past operating performance. |
Adjusted Revenue
The Company adjusts revenue to exclude the impact of exited programs. 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 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, amortization, gain or loss from exited programs, and restructuring-related charges. 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, management believes that this non-GAAP financial measure allows investors to evaluate more effectively the Company’s fundamental operating performance relative to that of other companies.
Adjusted Effective Tax Rate
Adjusted effective tax rate is the effective tax rate prepared on a GAAP basis adjusted to exclude the effects of a rate change on the Company’s investments in Evolent Health, Inc. and Evolent Health LLC during the three and six months ended June 30, 2017. The Company excludes these items because its management believes this non-GAAP financial measure will facilitate the comparison by investors of the Company’s 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, by the adjusted income before the provision for income taxes.
There are various limitations associated with the non-GAAP financial measures the Company uses, including:
| • | 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 management considers not indicative of the Company’s ongoing operations, but which may recur from year to year. |
Because of their limitations, the Company’s 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, or earnings per diluted share prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.
11