ABCO The Advisory Board Company (MM)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): February 11, 2015

 

 

The Advisory Board Company

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		000-33283		52-1468699
(State or other jurisdiction of incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)

 

2445 M Street, NW, Washington, District of Columbia		20037
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 202-266-5600

Not Applicable

Former name or former address, if changed since last report

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

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Item 2.02. Results of Operations and Financial Condition.

On February 11, 2015, The Advisory Board Company (“we” or the “Company”) issued a news release announcing its financial results for the quarter and nine month transition period ended December 31, 2014. A copy of the Company’s news release is furnished as Exhibit 99.1 to this report.

Introduction of “Adjusted Revenue” as Non-GAAP Financial Measure. In the news release, the Company presents a new financial measure, “adjusted revenue,” which, for the reasons indicated below, has not been prepared in accordance with generally accepted accounting principles (“GAAP”). The references to adjusted revenue for fiscal year 2015 used in the news release refer to revenue before the effect of the fair value adjustment to the acquired deferred revenue of Royall Acquisition Co. in accordance with purchase accounting rules.

Under applicable business combination accounting rules, the Company is required to account for the fair value of deferred revenue that it assumed in connection with its acquisition of Royall Acquisition Co. (“Royall”) in January 2015. The fair value of deferred revenue is required to be calculated based upon the estimated cost of retaining a third-party to provide services under Royall’s contracts, rather than upon the contracted amount under those contracts. Because the fair value is less than the contracted amount, the Company’s GAAP revenue for the one year period subsequent to the acquisition will not reflect the full amount of revenue that would otherwise have been recorded by Royall had it remained an independent company. The adjusted revenue measure that the Company presents in the news release is intended to reflect the full amount that Royall would have recognized as revenue, absent the fair value adjustment.

Our management believes that the use of adjusted revenue will allow for more complete comparisons to the financial results of historical operations and the financial results of peer companies. Adjusting GAAP revenue in the manner described above is useful to management and investors in measuring the ongoing performance of the business, and enhances the ability to understand the company’s operating performance, in the ordinary, ongoing and customary course of our operations. Management expects to use adjusted revenue for internal budgeting and other managerial purposes in part because the measure will enable management to better evaluate projected and historical operating results while isolating the effect of purchase accounting on those results. Our adjusted revenue measure may be calculated differently from similarly titled measures reported by other companies due to differences in accounting policies and items excluded or included in the adjustments, which limits its usefulness as a comparative measure. Adjusted revenue should be considered by our investors only in addition to revenue as presented in accordance with GAAP.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

The following document is herewith furnished as an exhibit to this report.

 

99.1		News release of The Advisory Board Company dated February 11, 2015.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

				The Advisory Board Company
February 11, 2015				By:		/s/ Michael T. Kirshbaum
						Name:		Michael T. Kirshbaum
						Title:		Chief Financial Officer and Treasurer

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Exhibit Index

 

Exhibit No.		Description
99.1		News release of The Advisory Board Company dated February 11, 2015.

Exhibit 99.1

 

 

 

Contact:		Michael Kirshbaum		The Advisory Board Company
		Chief Financial Officer		2445 M Street, N.W.
		c/o Cameron Moss		Washington, D.C. 20037
		202.266.7538		www.advisory.com
		MossC@Advisory.com

THE ADVISORY BOARD COMPANY REPORTS RESULTS FOR

QUARTER AND NINE MONTH PERIOD ENDED DECEMBER 31, 2014

Company Reports Quarterly Revenue of $150 Million and Contract Value of $602 Million;

Announces Launch of Two New Programs; Announces Guidance

WASHINGTON, D.C. — (February 11, 2015) — The Advisory Board Company (NASDAQ: ABCO), a global technology, research, and services company providing the leading cloud-based comprehensive performance platform for the health care and higher education industries, today announced financial results for the quarter and nine month period ended December 31, 2014, highlighted by 15% growth in contract value and quarterly revenue.

Robert Musslewhite, Chairman and Chief Executive Officer of The Advisory Board Company, commented, “Overall, 2014 was another successful year for The Advisory Board Company, continuing our track record of incredible value delivered to our members, transformational impact on the industries we serve, mid-teens growth, and strong margin performance. In addition, our acquisition of Royall & Company, which became effective on January 9, was a key addition to the firm, expanding our impact and membership while maintaining all key attributes of our successful business model. Our subscription based model and high renewal rates typically provide reliable forward insight into future performance, and I am pleased to have visibility into another strong year for calendar 2015, with expectations for revenue growth of 14-17% and significant margin expansion.”

Mr. Musslewhite continued, “I am pleased to announce today two new product launches. First, on the health care side, we launched the Purchased Services Management Program. Purchased outsourced functions such as food, transcription, clinical engineering, and facilities maintenance comprise 40% or more of the average hospital’s expenses but are often poorly managed, with unscrutinized long-term contracts. Further, when contracts are re-negotiated or bid out, hospitals often lack the data and skills to negotiate not only the contract price but also the various other terms and conditions that ultimately determine the value of the service. The Purchased Services Management Program is a templatized service offering which leverages know-how and proven practices to develop strategies for effectively negotiating purchased services contracts. Through our deep category knowledge and significant experience negotiating and executing service contracts, the program delivers contract savings and elevated performance standards. With pilot projects that have yielded multi-million dollar ROI, the Purchased Services Management Program has had a strong kick-off, and we are excited about its potential.”

Mr. Musslewhite concluded, “I am also pleased to announce today our latest launch into the higher education industry, the Enrollment Management Forum, a renewable research program focused on the critical strategic issues surrounding enrollment at colleges and universities today. With best practice research, peer networking, and benchmarking tools, the Enrollment Management Forum addresses such topics as elevating net revenue management, maximizing student yield, meeting the student success imperative, and building a high-performance, data-driven enrollment function. A

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strong complement to the capabilities we gained through the Royall & Company acquisition, the Enrollment Management Forum is off to a great start, and we are confident that it will provide outstanding value to members, both as a stand-alone program and through its synergies with the capabilities Royall & Company brings to the company.”

Revenue for the quarter increased 15% to $150.2 million, from $131.0 million for the quarter ended December 31, 2013. Contract value increased 15% to $601.8 million as of December 31, 2014, up from $522.5 million as of December 31, 2013. For the quarter ended December 31, 2014, net loss attributable to common stockholders was $5.0 million, or $0.14 per diluted share, compared to net income attributable to common stockholders of $3.8 million, or $0.10 per diluted share, for the quarter ended December 31, 2013. For the quarter ended December 31, 2014, adjusted EBITDA was $22.6 million, up from $21.4 million for the quarter ended December 31, 2013. Adjusted net income for the quarter ended December 31, 2014 was $9.5 million, or $0.26 per diluted share, which was unchanged from the quarter ended December 31, 2013. Adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share are all non-GAAP financial measures.

For the nine month period ended December 31, 2014, revenue increased 14% to $436.2 million, from $382.6 million for the nine months ended December 31, 2013. Net loss attributable to common stockholders was $1.7 million, or $0.05 per diluted share, for the nine month period ended December 31, 2014, compared to net income attributable to common stockholders of $16.5 million, or $0.45 per diluted share, for the nine months ended December 31, 2013. For the nine month period ended December 31, 2014, adjusted EBITDA was $72.0 million, up from $66.2 million for the nine months ended December 31, 2013. Adjusted net income for the nine month period ended December 31, 2014 was $36.4 million, or $1.00 per diluted share, compared to $32.3 million, or $0.88 per diluted share, for the nine months ended December 31, 2013.

Outlook for Calendar Year 2015

The Company is providing financial guidance for calendar year 2015. For calendar year 2015, the Company expects adjusted revenue to be in a range of approximately $780 million to $800 million, adjusted EBITDA to be in a range of approximately $170 million to $180 million, and non-GAAP earnings per diluted share to be in a range of approximately $1.22 to $1.35. For calendar year 2015, the Company expects stock-based compensation expense to be approximately $32.5 million, debt expense to be approximately $27.0 million, amortization from acquisition-related intangible assets to be approximately $31 million, and amortization from non-acquisition related assets to be approximately $47 million. For calendar year 2015, the Company expects capital expenditures to be in a range of approximately $60 million to $65 million and an effective tax rate in a range of approximately 45% to 47%.

Non-GAAP Financial Measures

This press release and the accompanying tables present information about the Company’s adjusted EBITDA, adjusted net income, and non-GAAP earnings per diluted share, 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”). The term “adjusted EBITDA” for the three and nine months ended December 31, 2014 and 2013 refers to net income attributable to common stockholders before adjustment for the items set forth in the first table. The term “adjusted net income” for the three and nine months ended December 31, 2014 and 2013 refers to net income attributable to common stockholders excluding the net of tax effect of the items set forth in the second table below. The term “non-GAAP earnings per diluted share” for the three and nine months ended December 31, 2014 and 2013 refers to earnings per diluted share excluding the net of tax effect of the items set forth in the third table below. The term adjusted revenue for fiscal year 2015 refers to revenue before the effect of the fair value adjustment to the acquired deferred revenue of Royall & Company in accordance with purchase accounting.

A reconciliation of the foregoing historical non-GAAP financial measures to the most directly comparable historical GAAP financial measures is provided below for each of the periods indicated. It is not practicable to provide a reconciliation of forecasted adjusted EBITDA or non-GAAP earnings per diluted share to the most directly comparable GAAP financial measures because certain items required for the forecast of such GAAP financial measures, including fair value adjustments to acquisition-related earn-out liabilities, equity in loss of unconsolidated entity, and gains and losses on investment in common stock warrants, cannot reasonably be estimated or predicted at this time.

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		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2014				2013				2014				2013
Net (loss) income attributable to common stockholders		$	(4,990	)		$	3,771			$	(1,677	)		$	16,465
Equity in loss of unconsolidated entities			3,193				1,413				6,540				3,320
Accretion of non-controlling interest to redemption value			(637	)			—				6,253				—
Provision for income taxes			(869	)			3,170				3,774				12,311
Other expense (income), net			1,186				(360	)			1,327				(1,974	)
Depreciation and amortization			11,237				8,712				29,994				21,952
Write-off of capitalized software			2,086				—				2,086				—
Acquisition and similar transaction charges			5,264				—				5,532				573
Fair value adjustments to acquisition-related earn-out liabilities			(100	)			—				(600	)			(250	)
Vacation accrual adjustment			—				—				850				—
Stock-based compensation expense			6,249				4,728				17,965				13,794
Adjusted EBITDA		$	22,619			$	21,434			$	72,044			$	66,191

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2014				2013				2014				2013
Net (loss) income attributable to common stockholders		$	(4,990	)		$	3,771			$	(1,677	)		$	16,465
Equity in loss of unconsolidated entities			3,193				1,413				6,540				3,320
Accretion of non-controlling interest to redemption value			(637	)			—				6,253				—
Amortization of acquisition-related intangibles, net of tax			1,984				1,424				5,697				3,790
Write-off of capitalized software, net of tax			1,537				—				1,537				—
Acquisition and similar transaction charges, net of tax			3,880				—				4,042				352
Fair value adjustments to acquisition-related earn-out liabilities, net of tax			(74	)			—				(501	)			(154	)
Loss on investment in common stock warrants, net of tax			—				—				108				—
Vacation accrual adjustment, net of tax			—				—				777				—
Stock-based compensation expense, net of tax			4,605				2,908				13,599				8,484
Adjusted net income		$	9,498			$	9,516			$	36,375			$	32,257
		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2014				2013				2014				2013
Net (loss) income attributable to common shareholders per share - Diluted		$	(0.14	)		$	0.10			$	(0.05	)		$	0.45
Equity in loss of unconsolidated entities			0.09				0.04				0.18				0.09
Accretion of non-controlling interest to redemption value			(0.02	)			—				0.18				—
Amortization of acquisition-related intangibles, net of tax			0.06				0.04				0.16				0.10
Write-off of capitalized software, net of tax			0.04				—				0.04				—
Acquisition and similar transaction charges, net of tax			0.11				—				0.11				0.01
Fair value adjustments to acquisition-related earn-out liabilities, net of tax			(0.01	)			—				(0.01	)			—
Loss on investment in common stock warrants, net of tax			—				—				—				—
Vacation accrual adjustment, net of tax			—				—				0.02				—
Stock-based compensation expense, net of tax			0.13				0.08				0.37				0.23
Non-GAAP earnings per diluted share		$	0.26			$	0.26			$	1.00			$	0.88

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Web and Conference Call Information

As previously announced, the Company will hold a conference call to discuss its third quarter performance this evening, February 11, 2015, at 5:30 p.m. Eastern Time. The conference call will be available via live webcast on the Company’s website at www.advisory.com/IR. To participate by telephone, the dial-in number is 888.336.7150. Participants are advised to dial in at least five minutes prior to the call to register. The webcast will be archived for seven days from 8:00 p.m. Eastern Time on Wednesday, February 11, 2015, until 11:00 p.m. Eastern Time on Wednesday, February 18, 2015.

About The Advisory Board Company

The Advisory Board Company is a global technology, research, and services firm partnering with 5,000 organizations and more than 230,000 leaders across health care and higher education. Through its innovative membership model, the Company collaborates with executives and their teams to elevate performance and solve their most pressing challenges. The Company provides strategic guidance, actionable insights, web-based software solutions, and comprehensive implementation and management services. For more information, visit the firm’s website, www.advisory.com.

Forward-Looking Statements

This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, including the Company’s expectations regarding its revenue, adjusted EBITDA, non-GAAP earnings per diluted share, stock-based compensation expense, debt expense, amortization from acquisition-related intangible assets, amortization from non-acquisition related intangible assets and effective tax rate for calendar year 2015 are based on information available to the Company as of February 11, 2015, the date of this news release, as well as the Company’s current projections, forecasts, and assumptions, and are subject to risks and uncertainties. You are hereby cautioned that these statements may be affected by certain factors, including those set forth below. Consequently, actual operations and results may differ materially from the results discussed or implied in the forward-looking statements, and reported results should not be considered as an indication of future performance. Factors that could cause actual results to differ materially from those indicated or implied by the forward-looking statements include, among others, changes in the financial condition of the health care industry, our dependence on renewal of membership-based services, the need to attract new business and retain current members and qualified personnel, new product development, competition, risks associated with the Company’s software tools and management and advisory services, risks relating to privacy, information security, and other laws and standards related to the health care and education industries, maintaining our third-party provider relationships and strategic alliances, our ability to license technology from third parties, impairment of goodwill, our level of indebtedness, various factors related to income and other taxes, and any failure to recognize the anticipated benefits of our acquisition of Royall Acquisition Co., as well as other risks and uncertainties described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 and in our subsequent filings with the Securities and Exchange Commission, which are available for review at the Securities and Exchange Commission’s website at www.sec.gov. Additional information will also be set forth in the Company’s Report on Form 10-KT for the transition period ended December 31, 2014 to be filed with the Securities and Exchange Commission.

Accordingly, readers are cautioned not to place undue reliance on the forward-looking statements made in this news release, which speak only as of the date of this news release. 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								Selected				Nine Months Ended								Selected
		December 31,								Growth				December 31,								Growth
		2014				2013				Rates				2014				2013				Rates
Statements of Income
Revenue		$	150,188			$	131,038				14.6	%		$	436,228			$	382,595				14.0	%
Cost of services, excluding depreciation and amortization (1) (2)			81,807				69,521								230,103				205,328
Member relations and marketing (1)			27,803				25,500								81,171				69,886
General and administrative (1) (3) (4)			29,372				19,430								76,657				55,426
Depreciation and amortization (5)			11,237				8,712								29,994				21,952
Write-off of capitalized software			2,086				—								2,086				—
Operating income			(2,117	)			7,875								16,217				30,003
Other (expense) income, net (6)			(1,186	)			360								(1,327	)			1,974
(Loss) income before provision for income taxes and equity in loss of unconsolidated entities			(3,303	)			8,235								14,890				31,977
Provision for income taxes			869				(3,170	)							(3,774	)			(12,311	)
Equity in loss of unconsolidated entities			(3,193	)			(1,413	)							(6,540	)			(3,320	)
Net (loss) income before allocation to noncontrolling interest			(5,627	)			3,652								4,576				16,346
Net loss and accretion to redemption value attributable to noncontrolling interest (7)			637				119								(6,253	)			119
Net (loss) income attributable to common stockholders		$	(4,990	)		$	3,771							$	(1,677	)		$	16,465
Net (loss) income attributable to common stockholders per share
Basic		$	(0.14	)		$	0.10							$	(0.05	)		$	0.46
Diluted		$	(0.14	)		$	0.10							$	(0.05	)		$	0.45
Weighted average common shares outstanding
Basic			36,037				36,063								36,213				35,812
Diluted			36,037				37,112								36,213				36,876
Contract Value (at end of period)		$	601,842			$	522,532				15.2	%
Percentages of Revenue
Cost of services, excluding depreciation and amortization (1) (2)			54.5	%			53.1	%							52.7	%			53.7	%
Member relations and marketing (1)			18.5	%			19.5	%							18.6	%			18.3	%
General and administrative (1) (3) (4)			19.6	%			14.8	%							17.6	%			14.5	%
Depreciation and amortization (5)			7.5	%			6.6	%							6.9	%			5.7	%
Operating income			-1.4	%			6.0	%							3.7	%			7.8	%
Net income attributable to common stockholders			-3.3	%			2.9	%							-0.4	%			4.3	%
(1)    Amounts include stock-based compensation, as follows:
Cost of services			1,972				1,456								5,977				4,145
Member relations and marketing			1,126				944								3,348				2,845
General and administrative			3,151				2,328								8,640				6,804
(2)    Amounts include fair value adjustments of acquisition-related earn-out liabilities, as follows:
Cost of services			(100	)			—								(600	)			(250	)
(3)    Amounts include acquisition and transaction related costs, as follows:
General and administrative			5,264				—								5,532				573
(4)    Amounts include Vacation accrual adjustment in fiscal year as follows:
General and administrative			—				—								850				—
(5)    Amounts include amortization of acquisition-related intangibles, as follows:
Depreciation and amortization			2,692				2,315								7,566				6,163
(6)    Amounts include loss on investment in common stock warrants, as follows:
Other income, net			—				—								180				—
(7)    Amount represents non-cash charge to accrete redeemable non-controlling interest to redemption value
			637				119								(6,253	)			119

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THE ADVISORY BOARD COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		December 31,				March 31,
		2014				2014
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	72,936			$	23,129
Marketable securities, current			14,714				2,452
Membership fees receivable, net			539,061				447,897
Prepaid expenses and other current assets			19,786				27,212
Deferred income taxes, current			14,936				5,511
Total current assets			661,433				506,201
Property and equipment, net			135,107				102,457
Intangible assets, net			38,973				33,755
Deferred incentive compensation and other charges			89,010				86,147
Marketable securities, net of current portion			—				161,944
Goodwill			186,895				129,424
Investments in and advances to unconsolidated entities			9,316				15,857
Other non-current assets			5,370				5,550
Total assets		$	1,126,104			$	1,041,335
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred revenue, current		$	501,785			$	459,827
Accounts payable and accrued liabilities			80,787				77,815
Accrued incentive compensation			32,073				28,471
Total current liabilities			614,645				566,113
Deferred revenue, net of current portion			167,014				127,532
Deferred income taxes, net of current portion			9,300				1,556
Other long-term liabilities			14,233				8,975
Total liabilities			805,192				704,176
Redeemable noncontrolling interest			—				100
The Advisory Board Company’s stockholders’ equity:
Common stock			361				363
Additional paid-in capital			443,367				429,932
Accumulated deficit			(122,898	)			(91,468	)
Accumulated other comprehensive (loss) income			82				(1,541	)
Total stockholders’ equity controlling interest			320,912				337,286
Equity attributable to noncontrolling interest			—				(227	)
Total stockholders’ equity			320,912				337,059
Total liabilities and stockholders’ equity		$	1,126,104			$	1,041,335

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THE ADVISORY BOARD COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine Months Ended December 31,
		2014				2013
Cash flows from operating activities:
Net income before allocation to noncontrolling interest		$	4,576			$	16,346
Adjustments to reconcile net income before allocation to noncontrolling interest to net cash provided by operating activities:
Depreciation and amortization			29,994				21,952
Write-off of capitalized software			2,086				—
Deferred income taxes			(1,071	)			(585	)
Excess tax benefits from stock-based awards			(1,815	)			(16,583	)
Stock-based compensation expense			17,964				13,794
Amortization of marketable securities premiums			1,331				2,020
Loss on investment in common stock warrants			180				—
Equity in loss of unconsolidated entities			6,540				3,320
Changes in operating assets and liabilities:
Membership fees receivable			(82,689	)			(79,697	)
Prepaid expenses and other current assets			9,827				16,264
Deferred incentive compensation and other charges			(2,863	)			(11,548	)
Deferred revenue			78,160				101,861
Accounts payable and accrued liabilities			5,311				3,921
Acquisition-related earn-out payments			(3,348	)			(2,212	)
Accrued incentive compensation			3,602				3,877
Other long-term liabilities			(2,886	)			855
Net cash flows provided by operating activities			64,899				73,585
Cash flows from investing activities:
Purchases of property and equipment			(48,134	)			(35,692	)
Capitalized external use software development costs			(3,826	)			(3,722	)
Investments in and loans to unconsolidated entities			—				(15,641	)
Cash paid for acquisitions, net of cash acquired			(77,468	)			(46,036	)
Redemptions of marketable securities			151,420				48,676
Purchases of marketable securities			—				(38,762	)
Net cash flows provided by (used in) investing activities			21,992				(91,177	)
Cash flows from financing activities:
Proceeds from issuance of stock from exercise of stock options			4,294				17,478
Withholding of shares to satisfy minimum employee tax withholding			(7,611	)			(5,796	)
Proceeds from issuance of stock under employee stock purchase plan			432				374
Excess tax benefits from stock-based awards			1,815				16,583
Purchases of treasury stock			(36,014	)			(16,159	)
Net cash flows (used in) provided by financing activities			(37,084	)			12,480
Net increase (decrease) in cash and cash equivalents			49,807				(5,112	)
Cash and cash equivalents, beginning of period			23,129				57,829
Cash and cash equivalents, end of period		$	72,936			$	52,717