Advisory Board 10Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-33283

THE ADVISORY BOARD COMPANY

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		52-1468699 (I.R.S. Employer Identification Number)

2445 M Street, NW
Washington, D.C. 20037
(202) 266-5600
(Address and phone number of principal executive offices)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of August 6, 2007, we had outstanding 18,064,953 shares of Common Stock, par value $0.01 per share.

THE ADVISORY BOARD COMPANY
INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets at June 30, 2007 (unaudited) and March 31, 2007	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2007 and 2006	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2007 and 2006	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	14
ITEM 4.	Controls and Procedures	14

PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	15
ITEM 2.	Changes in Securities and Use of Proceeds	15
ITEM 3.	Defaults Upon Senior Securities	15
ITEM 4.	Submission of Matters to a Vote of Security Holders	15
ITEM 5.	Other Information	15
ITEM 6.	Exhibits	15

Signatures		16

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

THE ADVISORY BOARD COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


	June 30, 2007			March 31, 2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	14,885		$	13,195
Marketable securities		12,728			12,718
Membership fees receivable, net		67,629			57,671
Prepaid expenses and other current assets		5,855			3,123
Deferred income taxes, net		20,173			21,673

Total current assets		121,270			108,380


Property and equipment, net		18,034			17,421
Intangible assets, net		1,043			1,011
Goodwill		5,426			5,426
Deferred incentive compensation and other charges		16,403			13,857
Deferred income taxes, net of current portion		7,399			6,629
Marketable securities		120,818			133,450

Total assets	$	290,393		$	286,174


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred revenue	$	119,724		$	116,994
Accounts payable and accrued liabilities		21,346			18,721
Accrued incentive compensation		5,582			10,608

Total current liabilities		146,652			146,323

Other long-term liabilities		1,571			1,387

Total liabilities		148,223			147,710


Stockholders’ equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized, zero shares issued and outstanding		—			—
Common stock, par value $0.01; 90,000,000 shares authorized, 21,075,020 and 20,825,938 shares issued as of June 30, 2007 and March 31, 2007, respectively, and 18,194,939 and 18,227,726 shares outstanding as of June 30, 2007 and March 31, 2007 respectively		211			208
Additional paid-in capital		192,994			181,380
Retained earnings		88,043			80,962
Accumulated elements of other comprehensive losses		(1,804	)		(1,156	)
Treasury stock, at cost 2,880,081 and 2,598,212 shares at June 30, 2007 and March 31, 2007, respectively		(137,274	)		(122,930	)

Total stockholders’ equity		142,170			138,464

Total liabilities and stockholders’ equity	$	290,393		$	286,174

The accompanying notes are an integral part of these condensed consolidated balance sheets.

THE ADVISORY BOARD COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)


	Three Months Ended
	June 30,
	2007			2006
Revenues	$	51,104		$	44,205

Costs and expenses:
Cost of services (1)		24,288			20,915
Member relations and marketing (1)		10,612			9,442
General and administrative (1)		6,353			5,365
Depreciation		767			370


Income from operations		9,084			8,113
Interest income		1,537			1,718


Income before provision for income taxes		10,621			9,831
Provision for income taxes		(3,540	)		(3,332	)


Net income	$	7,081		$	6,499


Earnings per share:
Net income per share — basic	$	0.39		$	0.34
Net income per share — diluted	$	0.38		$	0.33
Weighted average number of shares outstanding
Basic		18,110			18,939
Diluted		18,795			19,755


(1)		The following table summarizes the share-based compensation recognized and included in the condensed consolidated statements of income above (see note 3).


Cost of services	$	1,146	$	1,053
Member relations and marketing		707		683
General and administrative		1,556		1,382

	$	3,409	$	3,118

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE ADVISORY BOARD COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Three Months Ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	7,081		$	6,499
Adjustments to reconcile net income to net cash flows provided by operating activities —
Depreciation		767			370
Amortization of intangible assets		57			45
Deferred income taxes and use of net operating loss		3,018			2,976
Excess tax benefits from share-based compensation		(2,008	)		(2,392	)
Share-based compensation expense		3,409			3,116
Amortization of marketable securities premiums		194			286
Changes in operating assets and liabilities:
Membership fees receivable		(9,958	)		(9,782	)
Prepaid expenses and other current assets		(710	)		(47	)
Deferred incentive compensation and other charges		(2,546	)		(1,189	)
Deferred revenues		2,730			2,678
Accounts payable and accrued liabilities		2,625			(1,285	)
Accrued incentive compensation		(5,026	)		(2,596	)
Other long-term liabilities		184			374

Net cash used in operating activities		(183	)		(947	)


Cash flows from investing activities:
Purchases of property and equipment		(1,380	)		(2,300	)
Capitalized external use software development costs		(89	)		(118	)
Redemptions of marketable securities		13,500			3,000
Purchases of marketable securities		(2,000	)		(8,000	)

Net cash provided by (used in) investing activities		10,031			(7,418	)


Cash flows from financing activities:
Issuance of common stock from exercise of stock options		4,063			1,618
Issuance of common stock under employee stock purchase plan		115			102
Excess tax benefits from share-based payments		2,008			2,392
Purchases of treasury stock		(14,344	)		(8,500	)

Net cash used in financing activities		(8,158	)		(4,388	)


Net increase (decrease) in cash and cash equivalents		1,690			(12,753	)
Cash and cash equivalents, beginning of period		13,195			21,678


Cash and cash equivalents, end of period	$	14,885		$	8,925

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	464		$	150

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE ADVISORY BOARD COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business description and basis of presentation

The Advisory Board Company (the Company) provides best practices research, analysis, executive education, and decision support tools across the health care industry focusing on business strategy, operations and general management issues. Best practices research identifies, analyzes and describes specific management initiatives, processes and strategies that have been determined to produce the best results in solving common business problems or challenges. The Company provides members with its best practices research and analysis through discrete annual programs. Each program typically charges a fixed annual fee and provides members with services which may include best practices research reports, executive education, on-line analytical tools, and other supporting research services. Memberships in each of our best practices research programs are renewable at the end of their membership contracts, which are generally 12 months in length. Programs providing best practices installation support help participants accelerate the adoption of best practices profiled in the Company’s research studies, and therefore are not individually renewable.

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as reported on the Company’s Form 10-K for the year ended March 31, 2007, filed with the SEC on May 30, 2007. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all significant intercompany transactions.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The condensed consolidated balance sheet presented as of March 31, 2007, has been derived from the financial statements that have been audited by the Company’s independent registered public accountant. The consolidated results of operations for the three months ended June 30, 2007, may not be indicative of the results that may be expected for the fiscal year ending March 31, 2008, or any other period within the Company’s fiscal year 2008.

Note 2. Critical accounting policies and new accounting pronouncement

Revenue recognition

Revenues from renewable research memberships and best practices installation support memberships are recognized over the term of the related subscription agreement, which is generally 12 months. Fees are generally billable when a letter of agreement is signed by the member, and program agreement fees receivable and related deferred revenue are recorded upon the commencement of the agreement or collection of fees if earlier. Certain fees are billed on an installment basis. Members whose membership agreements are subject to the service guarantee may request a refund of their fees, which is provided on a pro rata basis relative to the length of the service period. As of June 30, 2007 and March 31, 2007, approximately $2.9 million and $2.6 million, respectively, of deferred revenues were to be recognized beyond the following 12 months.

For new programs that incorporate more robust decision support tools, all program revenue is deferred until the tool is generally available for release to our membership, and then recognized ratably over the remainder of the contract term of each agreement. In addition, one of our programs includes software tools together with implementation services, technical support and related membership services. Revenue for these arrangements is recorded pursuant to the American Institute of Certified Public Accountants’ Statement of Position 97-2,Software Revenue Recognition, as amended. We recognize revenue under these arrangements when persuasive evidence of an arrangement exists, delivery of the software and performance of the services has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. We separate the fair value of the technical support and related membership services from the total value of the contract based on vendor specific objective evidence of fair value. The fees related to the software license and implementation services are bundled and recognized as the implementation services are performed. Fees associated with the technical support and related membership services are recorded as revenue ratably over the term of the agreement, beginning when all other elements have been delivered.

Washington, D.C. income tax incentives

In February 2006, the Company received notification from the Office of Tax and Revenue of the District of Columbia that the Company had been accepted effective as of January 1, 2004 as a Qualified High Technology Company (QHTC). As a QHTC, the Company’s Washington, D.C. statutory income tax rate is 0.0% through December 2008 and 6.0% thereafter, versus 9.975% prior to the qualification. The Company is also eligible for certain Washington, D.C. income tax credits and other benefits.

New accounting pronouncement

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the recognition threshold and measurement of a tax position taken on a tax return. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. Effective April 1, 2007, the Company adopted the provisions of FIN 48. See Note 6 for further detail regarding the adoption of this interpretation for which the impact of adoption was not material.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). This Statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. The Company will be required to adopt FAS 157 as of April 1, 2008. The Company is currently evaluating the impact of FAS 157 and has not yet determined the effect the adoption of FAS 157 will have on the Company’s financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (''FAS 159’’). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company will be required to adopt FAS 159 as of April 1, 2008. The Company is currently evaluating the impact of FAS 159 and has not yet determined the effect the adoption of FAS 159 will have on the Company’s financial position or results of operations.

Note 3. Share-based compensation

Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(FAS 123(R)), using the modified prospective transition method, and therefore, has not restated results for prior periods. Under this transition method, share-based compensation expense for the first quarter includes compensation expense for all share-based compensation awards granted prior to, but not vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(FAS 123). Share-based compensation expense for all share-based compensation awards granted on or after April 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). The Company previously recorded share-based compensation expense in accordance with the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (APB No. 25), which allowed the Company to record share-based compensation expense based on the intrinsic value of the share-based award at the date of grant.

FAS 123(R) requires forfeitures to be estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under FAS 123, as amended by Statement of Financial Accounting Standards No. 148Accounting for Stock-Based Compensation-Transition and Disclosure(FAS 148) for the periods prior to April 1, 2006, the Company accounted for forfeitures as they occurred. When estimating forfeitures, the Company considers voluntary termination behaviors as well as trends of actual options forfeited. The Company records share-based compensation expense on a straight-line basis over the vesting period.

Under the Company’s principal share-based compensation plans, the Company has granted certain employees options to purchase common stock and has also granted certain employees restricted stock units. Options are rights to purchase the common stock of the Company at the fair market value on the date of grant. Restricted stock units are share-based compensation arrangements of a number of shares of the Company’s common stock that may be settled, at the Company’s election, in cash or in shares of the Company’s common stock. Restricted stock unit holders do not have voting rights until the restrictions lapse.

During the three months ended June 30, 2007, the Company recognized share-based compensation expense, related to stock options and restricted stock units, of $3.4 million, or $0.12 per diluted share. During the three months ended June 30, 2006, the Company recognized shared-based compensation expense, related to stock options and restricted stock units, of $3.1 million, or $0.10 per diluted share.

As of June 30, 2007, $25.9 million of total unrecognized compensation cost related to share-based compensation is expected to be recognized over a weighted-average period of 1.9 years.

Equity incentive plans

The Company issues awards under the 2005 Stock Incentive Plan (the 2005 Plan), and the 2006 Stock Incentive Plan (the 2006 Plan). The 2005 Plan and the 2006 Plan (collectively, the Plans), provide for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units and incentive bonuses. Grants may consist of treasury shares or newly issued shares. Options are typically granted as non-qualified stock options but the Plans permit the grants of options that qualify as “incentive stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option or other equity-based award is equal to the closing price of the Company’s common stock on the date of grant. The maximum contractual term of equity awards granted under the 2005 Plan is 7 years and under the 2006 Plan is 5 years. As of June 30, 2007, a total of 1.7 million shares were available for issuance under the Plans.

For the three months ended June 30, 2007 and 2006, the Company granted a total of 5,000 and 3,000 stock options with a weighted average exercise price of $54.39 and $48.09, respectively.

For the three months ended June 30, 2007, the Company granted a total of 3,200 restricted stock units at a weighted average fair value of $51.77. No restricted stock units were granted during the three months ended June 30, 2006.

Valuation assumptions

The Company calculates the fair value of each award on the date of grant using the Black-Scholes valuation model for options to purchase common stock. The following assumptions were used to value grants of options to purchase common stock for each respective period:


	Three Months Ended
	June 30,
	2007			2006
Risk-free interest rate		4.5	%		5.1	%
Dividend yield		0.0	%		0.0	%
Expected life of option (in years)		3.5			5.0
Expected volatility		27.7	%		26.5	%

Weighted-average fair value of share-based compensation awards granted	$	14.77		$	16.251

Options granted under the 2005 Plan may not have a term exceeding seven years, and options granted under the 2006 Plan may not have a term exceeding five years. The average term of all options granted in the three months ended June 30, 2007 and 2006 were five and seven years, respectively. The valuation of restricted stock units is determined using the fair market value on the date of grant.

Employee stock purchase plan

The Company sponsors an employee stock purchase plan (ESPP) for all eligible employees. Under the ESPP, employees authorize payroll deductions from 1% to 15% of their eligible compensation to purchase shares of the Company’s common stock. A total of 842,000 shares of the Company’s common stock are authorized under the ESPP. Under the ESPP, shares of the Company’s common stock may be purchased at the end of each fiscal quarter at 85% of the closing price of the Company’s common stock on the last day of the three month purchase period. During the three months ended June 30, 2007 the Company issued 2,435 shares under the ESPP at an average price of $47.23 per share. During the three months ended June 30, 2006 the Company issued 2,485 shares under the ESPP at an average price of $40.88 per share.

Note 4. Earnings per share

Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the number of weighted average common shares increased by the dilutive effects of potential common shares outstanding during the period. The number of potential common shares outstanding is determined in accordance with the treasury stock method, using the Company’s prevailing tax rates. A reconciliation of basic to diluted weighted average common shares outstanding is as follows (in thousands):


	Three Months Ended
	June 30,
	2007		2006
Basic weighted average common shares outstanding		18,110		18,939
Dilutive impact of stock options		582		816
Dilutive impact of restricted stock units		103		—

Diluted weighted average common shares outstanding		18,795		19,755

Note 5. Comprehensive income

Comprehensive income is defined as net income plus the net-of-tax impact of foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income was $6.4 million and $5.9 million for the three months ended June 30, 2007 and 2006, respectively. The accumulated elements of other comprehensive income, net of tax, included within stockholders’ equity on the condensed consolidated balance sheets are comprised solely of the net change in unrealized (losses) gains on available-for-sale marketable securities. Unrealized losses, net of tax, on available-for-sale marketable securities amounted to $648,000 and $600,000 for the three months ended June 30, 2007 and 2006, respectively.

Note 6. Income taxes

FIN 48 prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position. If a tax position does not meet the more-likely-than-not initial recognition threshold, no benefit is recorded in the financial statements. The Company adopted FIN 48 on April 1, 2007 and there was no effect of applying the provisions of this interpretation. The Company classifies interest and penalties accrued on any unrecognized tax benefits as a component of the provision for income taxes. The total amount of interest and penalties recognized in the condensed consolidated statement of income for the three months ended June 30, 2007 and the condensed consolidated balance sheet at June 30, 2007 was not material. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly increase within the next 12 months. The Company files income tax returns in U.S. federal, state, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local tax examinations in major tax jurisdictions before 2002.

Note 7. Stockholders’ equity

The Company’s Board of Directors has authorized a cumulative share repurchase of up to $200 million of the Company’s common stock of which $29.6 is available for repurchase under the authorization at June 30, 2007. Repurchases will be made from time to time in open market and privately negotiated transactions subject to market conditions. No minimum number of shares has been fixed. The Company has funded, and expects to continue to fund, its share repurchases with cash on hand and cash generated from operations.

As of June 30, 2007 and March 31, 2007, the Company had repurchased 3,880,081 and 3,598,212 shares of the Company’s common stock, respectively, at a total cost of $170.4 million and $156.1 million, respectively. Of these repurchased shares, 1,000,000 have been retired.

Note 8. Supplemental cash flow disclosures

The Company utilized tax benefits from the exercise of stock options that principally offset the current tax provision that was recorded in the accompanying condensed consolidated statements of income. During the three months ended June 30, 2007 and 2006, the Company recognized approximately $2.0 million and $2.4 million, respectively, in stockholders’ equity for tax deductions associated with the exercise of non-qualified common stock options and disqualifying dispositions of incentive stock options.

Note 9. Collaboration agreement

On February 6, 2007, the Company entered into a three-year agreement with The Corporate Executive Board Company to collaborate on four initiatives specific to each company’s traditional demonstrated best practice research memberships (the Collaboration Agreement). Under the Collaboration Agreement, two initiatives relate to content-sharing, providing the Company with the opportunity to license The Corporate Executive Board Company’s General Counsel Roundtable materials and The Corporate Executive Board Company with the opportunity to license the Company’s health care industry research. The third part of the collaboration covers potential product development in traditional demonstrated best practices research memberships. The fourth part focuses on ways to enhance service to the companies’ existing members of their demonstrated best practice research programs. The collaboration does not include the payment of fees other than license fees payable upon implementation of content sharing programs. Each collaboration initiative covered by the agreement includes a renewal option for at least one additional two-year term. To facilitate the open sharing of information required for the collaboration, the agreement also includes a non-compete provision in each company’s traditional best practice research memberships. The term of the non-compete provision will be at least four years and may extend depending on the renewals of the collaboration initiatives covered by the agreement.

Note 10. Subsequent events

On July 31, 2007, the Company’s Board of Directors authorized an increase in its share repurchase of up to an additional $50 million of the Company’s common stock, bringing the total amount authorized to be spent under the program to $250 million.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, the effects of future regulation and the effects of future competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions. Forward-looking statements involve risks, uncertainties and assumptions. You should not put undue reliance on any forward-looking statements.

You should understand that many important factors could cause our results to differ materially from those expressed in forward-looking statements. These factors include, but are not limited to the following.

	•		our dependence on the health care industry,

	•		our reliance on key personnel and our ability to attract and retain qualified personnel,

	•		our dependence on renewals in our membership-based business model,

	•		our management of growth,

	•		our inability to know in advance if new products will be successful,

	•		the impact on our financial results associated with some of our newer programs that are more dependent upon technology,

	•		our ability to implement and provide continuous and uninterrupted performance of our hardware, network, and applications, including those we have acquired or which may be provided by third parties,

	•		competition, including the potential expiration of our collaboration agreement with The Corporate Executive Board Company in 2011,

	•		cost containment pressures on health care providers,

	•		economic and other conditions in the markets in which we operate, including industry consolidation,

	•		government regulations,

	•		our potential exposure to loss of revenue resulting from our unconditional service guarantee,

	•		our potential inability to protect our intellectual property rights,

	•		our potential exposure to litigation related to the content of our products,

	•		variability of quarterly operating results,

	•		possible volatility in our stock price,

	•		various factors that could affect our effective tax rates or our ability to use our existing deferred tax assets,

	•		whether the District of Columbia withdraws our status as a Qualified High-Technology Company, and

	•		the effect of the amount, type and timing of future share-based compensation arrangements.

These and other factors are discussed more fully in our 2007 annual report on Form 10-K that we filed with the Securities and Exchange Commission on May 30, 2007. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

We provide best practices research, decision-support tools and analysis across the health care industry. Best practices research identifies, analyzes and describes specific management initiatives, processes and strategies that have been determined to produce the best results in solving common business problems or challenges. Members of each program typically are charged a fixed annual fee and have access to an integrated set of services that may include best practices research studies, executive education seminars, customized research briefs, decision support tools and web-based access to the program’s content database. We currently offer 34 programs.

Our membership business model allows us to focus on a broad set of issues relevant to health care organizations, while promoting frequent use of our programs and services by our members. This facilitates growth through cross-sell opportunities to existing members and the development of new programs. Our revenues grew 15.6% in the first three months of fiscal 2008 over the first three months of fiscal 2007. We also increased our contract value by 16.7% at June 30, 2007 over June 30, 2006. We define contract value as the aggregate annualized revenue attributed to all membership agreements in effect at a given point in time, without regard to the initial term or remaining duration of any such agreement.

Memberships in 26 of our programs are renewable at the end of their membership contract term, which is typically one year. Our other eight best practices programs provide installation support. These program memberships help participants accelerate the adoption of best practices profiled in our research studies, and are therefore not individually renewable.

Costs associated with a new program initially increase more rapidly than revenues following introduction of the program because revenues associated with the new program are recognized ratably over the membership year while costs are generally expensed as incurred. Because we offer a standardized set of services, however, our program cost structure is relatively fixed and the incremental cost to serve an additional member is low.

Our operating costs and expenses consist of cost of services, member relations and marketing, general and administrative expenses, and depreciation expenses. Cost of services represents the costs associated with the production and delivery of our products and services. Member relations and marketing expenses include the costs of acquiring new members and renewing existing members. 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. Included in our operating costs for each year presented are equity-related 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 share-based compensation expense related to our adoption of FAS 123(R). Depreciation expense includes the cost of depreciation of our property and equipment.

Critical Accounting Policies

We have identified certain policies as critical to our business operations and the understanding of our results of operations. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. However, certain of our accounting policies are particularly important to the presentation of our financial position and results of operations and may require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, our observance of trends in the industry, information provided by our members and information available from other outside sources, as appropriate .

Revenue recognition

Washington, D.C. income tax incentives

Share-based compensation

We account for share-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(FAS 123(R)) using the modified prospective transition method. Under the fair value recognition provisions of FAS 123(R), share-based compensation cost is measured at the grant date of the share-based awards based on their fair values, and is recognized as an expense in the consolidated statement of income over the vesting periods of the awards. In accordance with the modified prospective transition method, compensation cost recognized by us beginning April 1, 2006 included: (a) compensation cost for all share-based payments granted on or after April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of FAS 123(R), and (b) compensation cost for all share-based payments granted prior to, but that were unvested as of, April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123. Results for prior periods have not been restated.

Under the provisions of FAS 123(R), we calculate the grant date fair value of share-based awards using the Black-Scholes valuation model. Determining the fair value of share-based awards is judgmental in nature and involves the use of significant estimates and assumptions, including the term of the share-based awards, risk-free interest rates over the vesting period, expected dividend rates, the price volatility of the Company’s shares and forfeiture rates of the awards. Prior to adopting FAS 123(R), we recognized forfeitures only as they occurred. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.

As mandated by FAS 123(R), we also report the benefits of tax deductions in excess of recognized compensation expense as a financing cash inflow in the condensed consolidated statement of cash flows. Prior to the adoption of FAS 123(R), we reported these tax benefits as an operating cash flow. Results for prior periods have not been restated.

Results of operations

The following table shows statement of operations data expressed as a percentage of revenues for the periods indicated.


	Three Months Ended
	June 30,
	2007			2006
Revenues		100.0	%		100.0	%
Costs and expenses:
Cost of services		47.5			47.3
Member relations and marketing		20.8			21.4
General and administrative		12.4			12.1
Depreciation		1.5			0.8

Income from operations		17.8			18.4
Interest income		3.0			3.9

Income before provision for income taxes		20.8			22.3
Provision for income taxes		6.9			7.6

Net income		13.9	%		14.7	%

Three months ended June 30, 2007 and 2006

Revenues.Total revenues increased 15.6% to $51.1 million for the three months ended June 30, 2007, from $44.2 million for the three months ended June 30, 2006. Our contract value increased 16.7% to $210.6 million at June 30, 2007 from $180.5 million at June 30, 2006. Revenue growth was attributed to the introduction and expansion of four new programs across the past twelve months, and cross-selling existing programs to existing members. To a lesser degree, sales to new member organizations and price increases also contributed to our revenue growth.

Cost of services.Cost of services increased 16.1% to $24.3 million or 47.5% of revenues for the three months ended June 30, 2007, from $20.9 million or 47.3% of revenues for the three months ended June 30, 2006. Beginning April 1, 2006, we adopted FAS 123(R) which addresses the accounting for share-based compensation. Included within cost of services expense for the three months ended June 30, 2007 and 2006 is approximately of $1.1 million of share-based compensation expense calculated in accordance with FAS 123(R). In addition, cost of services increased because of the following:

	•		Additional personnel and related costs associated with the delivery of content and tools to our expanded membership base including new programs,

	•		increased investment in on-line tools and applications used in certain of our best practice research programs which require more upfront resources before launch, and

	•		variable licensing fees associated with two of our research programs.

Because cost of services as a percentage of revenues may fluctuate from quarter to quarter, the cost of services as a percentage of revenues for the three months ended June 30, 2007 may not be indicative of future quarterly or annual results.

Member relations and marketing.Member relations and marketing costs increased 12.4% to $10.6 million, or 20.8% of revenues for the three months ended June 30, 2007, from $9.4 million, or 21.4% of revenues for the three months ended June 30, 2006. Included within member relations and marketing expense during the three months ended June 30, 2007 and 2006 is approximately $0.7 million of share-based compensation expense calculated in accordance with FAS 123(R). Other factors contributing to the increase in member relations and marketing expense include the following:

	•		An increase in sales staff and related costs associated with the introduction of new memberships, and

	•		an increase in member relations personnel and related costs to serve the larger membership base.

General and administrative.General and administrative expenses increased 18.4% to $6.4 million, or 12.4% of revenues for the three months ended June 30, 2007, from $5.4 million, or 12.1% of revenues for the three months ended June 30, 2006. Included within General and administrative expense during the three months ended June 30, 2007 and 2006 is approximately of $1.6 million and $1.4 million of share-based compensation expense calculated in accordance with FAS 123(R), respectively. In addition, general and administrative expense for the three months ended June 30, 2007 include increased investment in new program development.

Depreciation.Depreciation expense increased to $767,000 for the three months ended June 30, 2007, from $370,000 for the three months ended June 30, 2006. The increase in depreciation is related to two factors. First, the capital expenditures made in connection with the buildout of our headquarters facility during fiscal year 2007, and second, capitalized software costs related to some of our newer membership programs that include web-based tools.

Provision for income taxes.We recorded a provision for income taxes of $3.5 million and $3.3 million in the three months ended June 30, 2007 and 2006, respectively. Our effective tax rate decreased to 33.3% for the three months ended June 30, 2007 compared to 33.9% in the three months ended June 30, 2006 due primarily to a reduction in non-deductible share-based compensation expense.

Liquidity and capital resources

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 generating net positive cash flows on an annual basis. Cash flow from operations fluctuates from quarter to quarter based on the timing of certain expenses. During the three months ended June 30, 2007, we used $183,000 in cash from operating activities, compared to cash flows used in operating activities of $947,000 for the three months ended June 30, 2006. As of June 30, 2007, we had approximately $148.4 million in cash and cash equivalents and marketable securities. We believe these funds, together with net annual positive cash flows from operations, will satisfy working capital, financing, and capital expenditure requirements for the next twelve months.

Cash flows from investing activities.We had cash provided from investing activities of $10.0 million during the three months ended June 30, 2007, consisting of net redemption of marketable securities of $11.5 million, offset by capital expenditures of $1.4 million related primarily to costs capitalized for the development of software. During the three months ended June 30, 2006, we used $7.4 million of cash, consisting of net purchases of marketable securities of $5.0 million, and capital expenditures of $2.3 million, consisting primarily of $1.3 million of costs capitalized for the development of software and $500,000 of costs related to the expansion of our headquarters facility.

Cash flows from financing activities.During the three months ended June 30, 2007 and 2006, we spent $14.3 million and $8.5 million, respectively, for the purchase of treasury stock. In addition, we generated $2.0 million and $2.4 million of excess tax benefits representing the amount used to reduce the Company’s tax liability incurred during the three months ended June 30, 2007 and 2006, respectively. Prior to adoption of FAS 123(R) these benefits were included in cash flow from operations. We also received $4.1 million and $1.6 million in connection with the issuance of common stock from the exercise of stock options each of the three months ended June 30, 2007 and 2006, respectively.

In November 2006, we entered into a $20 million revolving credit facility with a commercial bank that can be used for working capital, share repurchases or other general corporate purposes. Borrowings on the credit facility, if any, will be collateralized by certain of our marketable securities and will bear interest at an amount based on the published LIBOR rate. We are also required to maintain an interest coverage ratio for each of our fiscal years of not less than three to one. The credit facility renews automatically each year until 2011, and can be increased at the request of the Company by up to an additional $10 million per year up to $50 million in the aggregate. There have been no borrowings under the credit facility.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate risk primarily through our portfolio of cash, cash equivalents and marketable securities, which is designed for safety of principal and liquidity. Cash and cash equivalents include investments in highly liquid U.S. Treasury obligations with maturities of less than three months. At June 30, 2007, our marketable securities consist of $7.2 million in tax-exempt notes and bonds issued by the District of Columbia, $33.3 million in tax-exempt notes and bonds issued by other states, and $93.0 million in U.S. government agency securities. The average maturity on all our marketable securities as of June 30, 2007 was approximately 3.7 years. We perform periodic evaluations of the relative credit ratings related to the cash, cash equivalents and marketable securities. This portfolio is subject to inherent interest rate risk as investments mature and are reinvested at current market interest rates. We currently do not use derivative financial instruments to adjust our portfolio risk or income profile. Due to the nature of our investments we have not prepared quantitative disclosure for interest rate sensitivity in accordance with Item 305 of Regulation S-K as we believe the effect of interest rate fluctuations would not be material.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures: The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report based on the evaluation of these controls and procedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act. The Company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Based on their evaluation, such officers have concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this quarterly report, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors.

In addition to the other information contained in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for fiscal year ended March 31, 2007, and the following risk factors in evaluating us and our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

Our Board of Directors has authorized the repurchase of up to $200 million of our common stock in the open market and in privately negotiated transactions subject to market conditions. No minimum number of shares has been fixed.


								Approximate
					Total			Dollar Value
					Number of			of Shares
			Average		Shares			That May
	Total		Price		Purchased			Yet Be
	Number of		Paid		as Part of a Publicly		��	Purchased
	Shares		Per		Announced			Under The
	Purchased		Share		Plan			Plan
April 1, 2007 to April 30, 2007		197,589	$	50.61		3,795,801		$	33,944,406
May 1, 2007 to May 31, 2007		46,300	$	50.62		3,842,101		$	31,600,700
June 1, 2007 to June 30, 2007		37,980	$	52.65		3,880,081		$	29,600,978

Total		281,869	$	50.89

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5. Other Information.

Not applicable

Item 6. Exhibits.

(a) Exhibits:

The exhibits required by this Item are listed in the Exhibit Index immediately following the signature page to this report of Form 10-Q.

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 thereunto duly authorized in Washington, D.C. on August 9, 2007.


	THE ADVISORY BOARD COMPANY
	By:	/s/ Michael T. Kirshbaum
		Michael T. Kirshbaum
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Exhibit Index


*3.1		Certificate of Incorporation
*3.2		Bylaws
*4.1		Form of Common Stock Certificate
31.1		Certification of Frank J. Williams Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Michael T. Kirshbaum Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Frank J. Williams and Michael T. Kirshbaum Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Incorporated by reference to the registrant’s statement on Form S-1, declared effective by the Securities and Exchange Commission on November 9, 2001.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Advisory Board Inactive 10-Q2007 Q2 Quarterly report

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