FORM 10-Q

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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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

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

As of August 1, 2013, the registrant had outstanding 35,843,784 shares of Common Stock, par value $0.01 per share.

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

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

The Advisory Board Company (individually and collectively with its subsidiaries, the “Company”) provides best practices research and analysis, business intelligence and software tools, and management and advisory services through discrete programs to hospitals, health systems, pharmaceutical and biotech companies, health care insurers, medical device companies, and colleges, universities, and other health care focused and educational institutions. Members of each renewable membership program are typically 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, web-based access to the program’s content database, and software tools.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as reported in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2013. The unaudited consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and a consolidated variable interest entity. The Company uses the equity method to account for equity investments in instances in which it owns common stock or similar interests and has the ability to exercise significant influence, but not control, over the investee. Investments in which the Company has little or no influence are accounted for using the cost method. All significant intercompany transactions and balances have been eliminated. Certain prior-period amounts have been reclassified to conform to the current-period presentation.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The consolidated balance sheet presented as of March 31, 2013 has been derived from the financial statements that have been audited by the Company’s independent registered public accounting firm. The consolidated results of operations for the three months ended June 30, 2013 may not be indicative of the results that may be expected for the Company’s fiscal year ending March 31, 2014, or any other period.

The accompanying March 31, 2013 consolidated balance sheet has been adjusted to correct immaterial errors in the previously reported amounts of membership fees receivable and deferred revenue. This correction resulted in a increase in membership fees receivable of $18.7 million, an increase in current deferred revenue of $11.8 million, and an increase in deferred revenue, net of current of $6.9 million.

Similar errors affecting membership fees receivable and deferred revenue were identified and corrected in the accompanying consolidated statement of cash flows for the three months ended June 30, 2012. Specifically, membership fees receivable was decreased by $32.0 million and deferred revenue was decreased by the same amount.

These corrections have no effect on the previously reported consolidated statements of income or stockholders’ equity for any period. The errors affected only balances within changes in working capital reported in cash flows from operating activities. Total cash flows from operating activities was unaffected by the corrections.

New pronouncements issued but not effective until after June 30, 2013 are not expected to have a material impact on the Company’s consolidated financial position, results of operations, or liquidity.

On October 1, 2012, the Company acquired for cash all of the issued and outstanding capital stock of ActiveStrategy, Inc. (“ActiveStrategy”), a Philadelphia-based performance improvement technology and consulting firm with innovative solutions for tracking and augmenting organizational effectiveness. This transaction enhances the Company’s existing performance improvement technology capabilities. The total purchase price, net of cash acquired, of $14.9 million consisted of an initial payment of $12.6 million of cash and an additional $2.3 million that has been placed into escrow and will be released by March 12, 2014 if specified indemnity conditions are satisfied. This indemnity escrow is not carried on the accompanying consolidated balance sheets.

The total purchase price was allocated to the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values as of October 1, 2012. The Company’s fair value of identifiable tangible and intangible assets was determined by using estimates and assumptions in combination with a valuation using an income approach from a market participant perspective. Of the total estimated purchase price, $1.5 million was allocated to net acquired tangible assets, which consist of accounts receivable of $1.3 million, deferred tax assets, net of $0.9 million, and other current assets of $0.3 million, netted by $1.0 million of acquired deferred revenue. Of the total estimated purchase price, $5.5 million was allocated to intangible assets, which consist of the value assigned to acquired technology related intangibles of $3.0 million, customer relationship and employee related intangibles of $1.0 million, and trademarks of $1.5 million. The acquired intangible assets have estimated lives ranging from four years to eleven years based on the cash flow estimates used to create the valuation models of each identifiable asset with a weighted average amortization period of 7.2 years. Approximately $7.9 million was allocated to goodwill, which represents synergistic benefits expected to be generated from scaling ActiveStrategy’s offerings across the Company’s large membership base. Goodwill is not deductible for tax purposes.

The financial results of ActiveStrategy are included in the Company’s consolidated financial statements from the date of acquisition. Pro forma financial information for this acquisition has not been presented because the effects were not material to the Company’s historical consolidated financial statements.

On November 15, 2012, the Company acquired for cash all of the issued and outstanding capital stock of 360Fresh, Inc. (“360Fresh”), a provider of clinical data analytics. The transaction enhances the Company’s existing suite of physician performance management solutions through the addition of unique technology that transforms the data from medical records into actionable insights to improve patient quality, reduce costs, and enhance productivity for health systems. The total purchase price, net of cash acquired, of $19.5 million consisted of an initial payment of $13.6 million of cash, the fair value of estimated additional contingent cash payments of $2.5 million, and an additional $3.4 million placed into escrow, which will be released by May 15, 2014 if specified indemnity conditions are satisfied. This indemnity escrow is not carried on the accompanying consolidated balance sheets. The contingent cash payments, which will not exceed $8.0 million and have no guaranteed minimum, will become due and payable to the former stockholders of 360Fresh if certain revenue targets are achieved over evaluation periods beginning at the acquisition date and extending through August 15, 2014. A $0.3 million upward adjustment was made to the fair value of the liabilities for such contingent cash payments during the three months ended June 30, 2013. This adjustment was recorded in cost of services on the accompanying consolidated statements of income and increased the liability to $2.8 million as of June 30, 2013. See Note 4, “Fair value measurements,” for additional information.

The total purchase price was allocated to the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values as of November 15, 2012. The Company’s fair value of identifiable tangible and intangible assets was determined by using estimates and assumptions in combination with a valuation using an income approach from a market participant perspective. Of the total estimated purchase price, $0.3 million was allocated to acquired accounts receivable and $4.1 million was allocated to assumed liabilities, which consist of $4.0 million of deferred tax liabilities and $0.1 million of acquired deferred revenue. Of the total estimated purchase price, $9.9 million was allocated to intangible assets, which consist of the value assigned to acquired technology related intangibles of $9.8 million and employee related intangibles of $0.1 million. The acquired technology and employee related intangibles have estimated lives ranging from four years to seven years based on the cash flow estimates used to create the valuation models of each identifiable asset with a weighted average amortization period of 7.0 years. Approximately $13.4 million was allocated to goodwill, which represents synergistic benefits expected to be generated from incorporating 360Fresh’s technology capabilities into the Company’s software programs and scaling their existing products across the Company’s large membership base. Goodwill is not deductible for tax purposes.

The financial results of 360Fresh are included in the Company’s consolidated financial statements from the date of acquisition. Pro forma financial information for this acquisition has not been presented because the effects were not material to the Company’s historical consolidated financial statements.

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision. The Company’s financial instruments consist primarily of cash, cash equivalents, marketable securities, and common stock warrants. In addition, contingent earn-out liabilities resulting from business combinations are recorded at fair value. The following methods and assumptions are used to estimate the fair value of each class of financial assets or liabilities that are valued on a recurring basis.

Cash and cash equivalents. This includes all cash and liquid investments with an original maturity of three months or less from the date acquired. The carrying amount approximates fair value because of the short maturity of these instruments. Cash equivalents consist of money market funds with original maturity dates of less than three months for which the fair value is based on quoted market prices. The Company’s cash and cash equivalents are held at major commercial banks.

Marketable securities. The Company’s marketable securities, consisting of U.S. government-sponsored enterprise obligations and various state tax-exempt notes and bonds, are classified as available-for-sale and are carried at fair market value based on quoted market prices.

Common stock warrants. The Company holds warrants to purchase common stock in an entity that provides technology tools and support services to health care providers, including the Company’s members, that are exercisable for up to 6,015,000 of the shares of the entity, as certain performance criteria are met. The common stock warrants meet the definition of a derivative and are carried at fair value in other non-current assets on the accompanying consolidated balance sheets. Gains or losses from changes in the fair value of the warrants are recognized in other income, net on the accompanying consolidated statements of income. See Note 10, “Other non-current assets,” for additional information. The fair value of these warrants is determined using a Black-Scholes-Merton model. Key inputs into this methodology are the estimate of the underlying value of the common shares of the entity that issued the warrants and the estimate of level of performance criteria that will be achieved. The entity that issued the warrants is privately held and the estimate of performance criteria to be met is specific to the Company. These inputs are unobservable and are considered key estimates made by the Company.

Contingent earn-out liabilities. This class of financial liabilities represents the Company’s estimated fair value of the contingent earn-out liabilities related to acquisitions based on probability assessments of certain performance achievements during the earn-out periods. Contingent earn-out liabilities are included in other long-term liabilities on the accompanying consolidated balance sheets. See Note 3, “Acquisitions,” for additional information.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The valuation can be determined using widely accepted valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). As a basis for applying a market-based approach in fair value measurements, GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no significant transfers between Level 1, Level 2, or Level 3 during the three months ended June 30, 2013 or 2012.

The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the necessary disclosures are as follows (in thousands):

The Company’s fair value estimate of the common stock warrants received in connection with its June 2009 investment was zero as of the investment date. Changes in the fair value of the common stock warrants subsequent to the investment date are recognized in earnings in the periods during which the estimated fair value changes. There was no change in the fair value of the common stock warrants during the three months ended June 30, 2013 or 2012.

The Company entered into an earn-out agreement in connection with its acquisition of Southwind on December 31, 2009. The additional contingent payments, which have no guaranteed maximum, become due and payable to the former owners of the Southwind business if certain milestones are met over the evaluation periods beginning at the acquisition date and extending through December 31, 2014. The fair value of the Southwind earn-out liability is impacted by changes in estimates regarding expected operating results, changes in the valuation of the Company’s stock price, and an applied discount rate, which was 14% as of June 30, 2013. The Company’s fair value estimate of the Southwind earn-out liability was $5.6 million as of the date of acquisition. On October 31, 2012, the Company transferred 112,408 shares of its common stock to the former owners of Southwind to satisfy the component of the contingent obligation payable in the Company’s common stock, which reduced the related earn-out liability by $5.4 million. As of June 30, 2013, $13.9 million had been earned and paid in cash and shares to the former owners of the Southwind business. As of June 30, 2013, based on current facts and circumstances, the estimated aggregate fair value of the remaining contingent obligation was $10.7 million, which will be paid at various intervals, if earned, over the evaluation periods which extend through December 31, 2014.

The Company entered into an earn-out agreement in connection with its acquisition of PivotHealth on August 1, 2011. The additional contingent cash payments, which have no guaranteed minimum or maximum, will become due and payable to the former owner of the PivotHealth business if certain revenue targets are achieved over evaluation periods beginning at the acquisition date and extending through December 31, 2014. The Company’s fair value estimate of the PivotHealth earn-out liability, which is payable in cash, was $2.9 million as of the date of acquisition. The estimated aggregate fair value of the contingent obligation for PivotHealth as of June 30, 2013 was $1.0 million. The fair value of the PivotHealth earn-out liability is impacted by changes in estimates regarding expected operating results and a discount rate, which was 14.5% as of June 30, 2013.

The Company’s fair value estimate of the 360Fresh earn-out liability, which is payable in cash, was $2.5 million as of the date of acquisition. The estimated aggregate fair value of the contingent obligation for 360Fresh as of June 30, 2013 was $2.8 million. The fair value of the 360Fresh earn-out liability is impacted by changes in estimates regarding expected operating results and a discount rate, which was 20.0% as of June 30, 2013. See Note 3, “Acquisitions,” for additional information regarding the 360Fresh acquisition and related earn-out liability.

Changes in the fair value of the contingent earn-out liabilities subsequent to the acquisition date, including changes arising from events that occurred after the acquisition date, such as changes in the Company’s estimate of performance achievements, discount rates, and stock price, are recognized in earnings in the periods during which the estimated fair value changes. The following table represents a reconciliation of the change in the contingent earn-out liabilities for the three months ended June 30, 2013 and 2012 (in thousands):

Certain assets and liabilities are not measured at fair value on an ongoing basis but instead are measured at fair value on a non-recurring basis, so that such assets and liabilities are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). During the three months ended June 30, 2013 and 2012, no fair value adjustments or material fair value measurements were required for non-financial assets or liabilities.

The aggregate value, amortized cost, gross unrealized gains, and gross unrealized losses on available-for-sale marketable securities are as follows (in thousands):

The following tables show the gross unrealized losses and fair value of the Company’s investments as of June 30, 2013 with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

There were no gross realized gains or losses on sales of available-for-sale investments during the three months ended June 30, 2013 or 2012. The weighted average maturity on all marketable securities held by the Company as of June 30, 2013 was approximately 6.7 years. Pre-tax net unrealized losses on the Company’s investments of $3.2 million as indicated above were caused by the increase in market interest rates compared to the average interest rate of the Company’s marketable securities portfolio. Of this amount, a gain of $0.1 million is related to investments that mature before June 30, 2014. The Company purchased certain of its investments at a premium or discount to their relative fair values. The Company does not intend to sell these investments and it is not more likely than not that it will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. There are fifteen tax exempt obligations of states and seven tax exempt obligations of U.S. government-sponsored enterprises with unrealized losses that have existed for less than one year. The Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2013. The Company has reflected the net unrealized gains and losses, net of tax, in accumulated other comprehensive income on the accompanying consolidated balance sheets. The Company uses the specific identification method to determine the cost of marketable securities that are sold.

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain of its membership programs, the Company provides software tools under hosting arrangements where the software application resides on the Company’s or its service providers’ hardware. The members do not take delivery of the software and only receive access to the software tools during the term of their membership agreement. Software development costs that are incurred in the preliminary project stage are expensed as incurred. During the development stage, direct consulting costs and payroll and payroll-related costs for employees that are directly associated with each project are capitalized and amortized over the estimated useful life of the software once placed into operation. Capitalized software is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred.

The acquired developed technology is classified as software within property and equipment because the developed software application resides on the Company’s or its service providers’ hardware. Amortization for acquired developed software is included in depreciation and amortization on the Company’s consolidated statements of income. Developed software obtained through acquisitions is amortized over its weighted average estimated useful life of approximately six years based on the cash flow estimate used to determine the value of the asset. The amount of acquired developed software amortization included in depreciation and amortization for the three months ended June 30, 2013 and 2012 was approximately $0.2 million and $0.2 million, respectively.

Furniture, fixtures, and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. There are no capitalized leases included in property and equipment for the periods presented. The amount of depreciation expense recognized on plant, property and equipment during the three months ended June 30, 2013 and 2012 was $2.4 million and $1.8 million, respectively.

Internally developed capitalized software is classified as software within property and equipment and has an estimated useful life of five years. As of June 30, 2013 and March 31, 2013, the carrying value of internally developed capitalized software was $32.4 million and $28.3 million, respectively. Amortization expense for internally developed capitalized software for the three months ended June 30, 2013 and 2012, recorded in depreciation and amortization on the accompanying consolidated statements of income, was approximately $1.9 million and $0.9 million, respectively. Property and equipment consists of the following (in thousands):

The Company evaluates its long-lived assets for impairment when changes in circumstances exist that suggests the carrying value of a long-lived asset may not be fully recoverable. If an indication of impairment exists, and the Company’s net book value of the related assets is not fully recoverable based upon an analysis of its estimated undiscounted future cash flows, the assets are written down to their estimated fair value. The Company did not recognize any material impairment losses on any of its long-lived assets during the three months ended June 30, 2013 or 2012.

Included in the Company’s goodwill and intangibles balances are goodwill and acquired intangibles and internally developed capitalized software for sale. Goodwill is not amortized as it has an estimated infinite life. Goodwill is reviewed for impairment at least annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company believes that no such impairment indicators existed during the three months ended June 30, 2013 or 2012. There was no impairment of goodwill recorded in the three months ended June 30, 2013 or 2012.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from six months to ten years. As of June 30, 2013, the weighted average remaining useful life of acquired intangibles was approximately 5.3 years. As of June 30, 2013, the weighted average remaining useful life of internally developed intangibles was approximately 3.9 years.

The gross and net carrying balances and accumulated amortization of intangibles are as follows (in thousands):

Amortization expense for intangible assets for the three months ended June 30, 2013 and 2012, recorded in depreciation and amortization on the accompanying consolidated statements of income, was approximately $1.8 million and $1.2 million, respectively. The following approximates the aggregate amortization expense to be recorded in depreciation and amortization on the consolidated statements of income for the remaining nine months of the fiscal year ending March 31, 2014 and for each of the following five fiscal years ending March 31, 2015 through 2018: $5.5 million, $7.1 million, $4.3 million, $3.8 million, and $3.4 million, respectively, and $4.6 million thereafter.

On August 31, 2011, the Company entered into an agreement with UPMC to establish Evolent Health, Inc. (“Evolent”) for the purpose of driving provider-led, value-driven care with innovative technology, integrated data and analytics, and services. The Company provided $10.0 million and other non-cash contributions to Evolent for an initial equity interest of 44% and has the right to appoint one person to Evolent’s board of directors. In addition, a member of the Company’s Board of Directors serves as the chief executive officer of Evolent. The Company exercises significant influence over Evolent, but does not control Evolent and is not the primary beneficiary of Evolent’s activities. The Company’s investment in Evolent is accounted for under the equity method of accounting, with the Company’s proportionate share of the income or loss recognized in the consolidated statements of income. As of June 30, 2013, the Company’s equity interest in Evolent was 31%. The decrease from the initial equity interest is due to the issuance of equity to Evolent employees pursuant to their equity incentive plan, as well as an additional equity investment from certain early customers in July 2012.

The Company’s proportionate share of the losses recognized by Evolent during the three months ended June 30, 2013 exceeded the Company’s investment balance. As a result, a portion of the Company’s proportionate losses was applied to the Company’s note receivable from Evolent at a rate consistent with the Company’s interest in Evolent’s outstanding debt, or 44% as of June 30, 2013. During the three months ended June 30, 2013, the Company recorded $1.9 million in losses against the Company’s investment in Evolent and $1.3 million in losses against the note receivable balance included in other non-current assets on the accompanying consolidated balance sheets. During the three months ended June 30, 2012, the Company’s proportionate share of the losses of Evolent was $2.1 million. Evolent is in the early stages of its business plan and, as a result, the Company expects Evolent to continue to incur losses and require additional funding in the future.

The following is a summary of the financial position of Evolent, as of the dates presented (in thousands):

The following is a summary of the operating results of Evolent for the periods presented (in thousands):

The Company holds an investment in Evolent accounted for under the equity method of accounting (see Note 8, “Investment in unconsolidated entity”). As of June 30, 2013, the Company holds a $10.0 million convertible term note from Evolent which bears interest at a rate of 8% per year, with such interest accruing on a daily basis and compounded annually. All outstanding principal and interest under the note will be due and payable by Evolent on or before July 7, 2014 unless the note is converted into equity securities of Evolent prior to such date. The carrying balance of the note receivable was decreased by $1.3 million during the three months ended June 30, 2013 to reflect the Company’s proportion of Evolent’s losses after the Company’s equity investment balance was reduced to zero (see Note 8, “Investment in unconsolidated entity”). The note receivable is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company believes that no such impairment indicators existed during the three months ended June 30, 2013.

In June 2009, the Company invested in the convertible preferred stock of a private company that provides technology tools and support services to health care providers, including the Company’s members. In addition, the Company entered into a licensing agreement with that company. As part of its investment, the Company received warrants to purchase up to 6,015,000 shares of the company’s common stock at an exercise price of $1.00 per share as certain performance criteria are met. The warrants are exercisable through June 19, 2019. The warrants contain a net settlement feature and therefore are considered to be a derivative financial instrument. The warrants are recorded at their fair value, which was $550,000 as of June 30, 2013 and March 31, 2013, and are included in other non-current assets on the accompanying consolidated balance sheets. The change in the fair value of the warrants is

recorded in other income, net on the accompanying consolidated statements of income. For additional information regarding the fair value of these warrants, see Note 4, “Fair value measurements.” The convertible preferred stock investment is recorded at cost, and the carrying amount of this investment as of June 30, 2013 of $5.0 million is included in other non-current assets on the accompanying consolidated balance sheets. The convertible preferred stock accrues dividends at an annual rate of 8% that are payable if and when declared by the investee’s board of directors. As of June 30, 2013, no dividends had been declared by the investee or recorded by the Company. This investment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of this asset may not be recoverable. The Company believes that no such impairment indicators existed during the three months ended June 30, 2013 or 2012.

On July 5, 2012, the Company entered into an agreement with an entity created for the sole purpose of providing consulting services for the Company on an exclusive basis. The Company’s relationship with the entity is governed by a services agreement and other documents that provide the entity’s owners the conditional right to require the Company to purchase their ownership interests (“Put Option”) at any time after certain conditions have been satisfied through December 31, 2014. As of June 30, 2013, these conditions had not been satisfied. These agreements also provide the Company a conditional right to require the entity’s owners to sell their ownership interests to the Company (“Call Option”) at any time between July 5, 2013 and December 31, 2014. The equity interest in this entity is classified as a redeemable noncontrolling interest, which is presented outside of permanent equity as the redemption is not solely within the Company’s control. The redeemable noncontrolling interest is recorded at its initial fair value of $0.1 million and has not been subsequently adjusted, as management’s current judgment is that it is not probable that the Put Option will become exercisable prior to its expiration due to uncertainty in the achievement of certain performance conditions specified in the agreement. If the Put Option were to become exercisable in the future, the estimated maximum total redemption amount of the redeemable noncontrolling interest under the Put Option would be approximately $7.5 million, which would be recorded as a reduction to net income available to common stockholders in the period when it is determined that exercise of the Put Option is probable.

The Company has determined that this entity meets the definition of a variable interest entity over which it has significant influence and, as a result, has consolidated the results of this entity into its consolidated financial statements. Noncontrolling interest represent the entity’s owners’ claims on consolidated investments where the Company owns less than a 100% interest. As of June 30, 2013, the Company has a 0% ownership interest in this entity. The Company records these interests at their initial fair value, adjusting the basis prospectively for the noncontrolling holders’ share of the respective consolidated investments’ results of operations and applicable changes in ownership.

In July 2012, the Company entered into a $150.0 million five-year senior secured revolving credit facility under a credit agreement with a syndicate of lenders. Under the revolving credit facility, up to $150.0 million principal amount of borrowings and other credit extensions may be outstanding at any time, subject to compliance with specified financial ratios and the satisfaction of other customary conditions to borrowing. The maximum principal amount available under the credit agreement may be increased by up to an additional $50.0 million in minimum increments of $10.0 million at the Company’s election upon the satisfaction of specified conditions. The credit agreement contains a sublimit for up to $5.0 million principal amount of swing line loans outstanding at any time and a sublimit for the issuance of up to $10.0 million of letters of credit outstanding at any time. The facility loans may be borrowed, repaid and reborrowed from time to time during the term of the facility and will mature and be payable in full on July 30, 2017. Consequently, the amount outstanding under the revolving credit facility at the end of a period may not be reflective of the total amounts outstanding during such period.

Amounts borrowed under the revolving credit facility generally will bear interest at an annual rate calculated, at the Company’s option, on the basis of either (a) an alternate base rate plus the applicable margin for alternate base rate loans under the credit agreement, which ranges from 0.75% to 1.50% based on the Company’s total leverage ratio, or (b) an adjusted LIBO rate plus the applicable margin for eurocurrency loans under the credit agreement, which ranges from 1.75% to 2.50% based on the Company’s total leverage ratio. The Company is required to pay a commitment fee on the unutilized portion of the facility at an annual rate of between 0.25% and 0.40% based on the Company’s total leverage ratio.

As of June 30, 2013, there were no amounts outstanding under the revolving credit facility and $150.0 million was available for borrowing.

The Company is required under the revolving credit facility to satisfy three financial ratios on a quarterly basis. The Company was in compliance with these financial covenants as of June 30, 2013.

On May 8, 2013, the Company’s Board of Directors authorized the Company to repurchase an additional $100 million of the Company’s common stock under its share repurchase program, bringing the total authorized repurchase amount under the program to $450 million since its inception. The Company repurchased 118,880 shares and 62,837 shares of its common stock at a total cost of approximately $6.2 million and $3.0 million in the three months ended June 30, 2013 and 2012, respectively, pursuant to its share repurchase program. The total amount of common stock purchased from inception under the program as of June 30, 2013 was 15,768,974 shares at a total cost of $347.1 million. All repurchases to date have been made in the open market and all repurchased shares have been retired as of June 30, 2013. No minimum number of shares subject to repurchase has been fixed and the share repurchase authorization has no expiration date. The Company has funded, and expects to continue to fund, its share repurchases with cash on hand, proceeds from the sale of marketable securities, and cash generated from operations. As of June 30, 2013, the remaining authorized repurchase amount was $102.9 million.

During the three months ended June 30, 2013, the Company retired 118,880 shares of its treasury stock. Upon retirement, these shares resumed the status of authorized but unissued stock. The treasury stock retirement resulted in reductions to common stock of $1,000, treasury stock of $6.2 million, and retained earnings of $6.2 million. A total of 15,768,974 shares of treasury stock have been retired to date. There was no effect on the total stockholders’ equity position as a result of the retirement.

The following table summarizes the changes in common stock options granted under the Company’s stock incentive plans during the three months ended June 30, 2013 and 2012:

The weighted average fair value of the options granted during the three months ended June 30, 2013 is estimated at $13.00 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 0.5%, an expected life of approximately four years, volatility of 33.20%, and dividend yield of 0% over the expected life of the option.

The following table summarizes the changes in restricted stock units (“RSUs”) granted under the Company’s stock incentive plans during the three months ended June 30, 2013 and 2012:

The Company recognized stock-based compensation expense in the following consolidated statements of income line items for stock options and RSUs, for the three months ended June 30, 2013 and 2012 (in thousands, except per share amounts):

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

As of June 30, 2013, $44.4 million of total unrecognized compensation cost related to outstanding options and non-vested RSUs was expected to be recognized over a weighted average period of 3.0 years.

The Company uses a more-likely-than-not recognition threshold based on the technical merits of the tax position taken 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 does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months. The Company classifies interest and penalties on any unrecognized tax benefits as a component of the provision for income taxes. No interest or penalties were recognized in the consolidated statements of income for the three months ended June 30, 2013 or 2012. The Company files income tax returns in U.S. federal and state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local tax examinations for filings in major tax jurisdictions before 2008.

Basic earnings per share is computed by dividing net income attributable to common stockholders by the number of weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders 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. Certain potential common share equivalents were not included in the computation because their effect was anti-dilutive. Fully diluted shares outstanding for the three months ended June 30, 2012 includes contingently issuable shares related to the component of the Southwind earn-out settled in stock. For additional information regarding these shares, see Note 4, “Fair value measurements.”

A reconciliation of basic to diluted weighted average common shares outstanding is as follows (in thousands):

In the three months ended June 30, 2013 and 2012, 0.7 million and 0.3 million shares, respectively, related to share-based compensation awards have been excluded from the calculation of the effect of dilutive outstanding stock-based awards shown above because their effect was anti-dilutive.

On July 8, 2013, the Company completed the acquisition for cash of a technology firm to supplement its existing physician referral programs and to provide new growth opportunities. The total purchase price consists of $11.5 million, a portion of which is reserved in escrow to secure indemnification and other obligations. The Company is in the process of finalizing the purchase price allocation and valuation of certain intangible assets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our 2013 Form 10-K discloses certain commitments and contractual obligations that existed as of March 31, 2013. Our December 2009 acquisition of Southwind Health Partners, L.L.C. and Southwind Navigator, LLC included a contingent obligation to make additional cash and/or common stock payments if certain milestones were met. As of June 30, 2013, based on current facts and circumstances, we have increased the estimated aggregate fair value of this contingent obligation to $24.6 million, which will be paid at various intervals, if earned, over evaluation periods beginning on the acquisition date and extending through December 31, 2014. As of June 30, 2013, $13.9 million has been earned and paid to the former owners.

Our August 2011 acquisition of PivotHealth included a contingent obligation to make additional cash payments if certain revenue targets were achieved over evaluation periods beginning at the acquisition date and extending through December 31, 2014. As of June 30, 2013, the estimated aggregate fair value of the contingent obligation for PivotHealth was $1.0 million.

Our November 2012 acquisition of 360Fresh included a contingent obligation to make additional cash payments if certain revenue targets were achieved over evaluation periods beginning at the acquisition date and extending through August 15, 2014. As of June 30, 2013, the estimated aggregate fair value of the contingent obligation for 360Fresh was $2.8 million.

As of June 30, 2013, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually limited purposes.

Interest rate 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. As of June 30, 2013, our marketable securities consisted of $136.2 million in tax-exempt notes and bonds issued by various states and $26.8 million in U.S. government-sponsored enterprise securities. The weighted average maturity on all our marketable securities as of June 30, 2013 was approximately 6.7 years. We perform periodic evaluations of the relative credit ratings related to our cash, cash equivalents, and marketable securities. Our 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. Because of the nature of our investments, we have not prepared quantitative disclosure for interest rate sensitivity in accordance with Item 305 of the SEC’s Regulation S-K, as we believe the effect of interest rate fluctuations would not be material.

Foreign currency risk. Our international operations, which account for approximately 4% of our revenue, subject us to risks related to currency exchange fluctuations. Prices for our services sold to members located outside the United States are sometimes denominated in local currencies (primarily British Pound Sterling). As a consequence, increases in the value of the U.S. dollar against local currencies in countries where we have members would result in a foreign exchange transaction loss recognized by us. We recorded foreign exchange transaction losses of $0.2 million during the three months ended June 30, 2013 and 2012, which are included in other income, net in our consolidated statements of income. A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on our financial position as of June 30, 2013.

Our Chief Executive Officer, or “CEO,” and Chief Financial Officer, or “CFO,” have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report as required by Rule 13a-15(b) or 15d-15(b) under the Exchange Act.

Our management, including our 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, our disclosure controls and procedures were effective.

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.

As discussed in this report, our actual results could differ materially from the results expressed or implied in our forward-looking statements. There have been no material changes in our risk factors from those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013. The risks described in our 2013 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

In January 2004, our board of directors authorized the repurchase by us from time to time of up to $50 million of our common stock. That authorization was increased in cumulative amount to $100 million in October 2004, to $150 million in February 2006, to $200 million in January 2007, to $250 million in July 2007, to $350 million in April 2008, and to $450 million in May 2013. All repurchases have been made in the open market pursuant to this publicly announced repurchase program. No minimum number of shares has been fixed, and the share repurchase authorization has no expiration date. A summary of the share repurchase activity for our first quarter of fiscal 2014 follows:

As of June 30, 2013, we had repurchased a total of 15,768,974 shares under our repurchase program since the program’s inception.



	10.21			Amended and Restated Employment Agreement, dated as of April 3, 2013, between the Company and Robert W. Musslewhite. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on April 8, 2013.

	10.23			Amended and Restated Employment Agreement, dated as of April 3, 2013, between the Company and David L. Felsenthal. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on April 8, 2013.

	10.24			Executive Nonqualified Excess Plan of The Advisory Board Company, effective May 1, 2013. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on April 8, 2013.

	31.1			Certification of the Chief Executive Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended.

	31.2			Certification of the Chief Financial Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended.

	32.1			Certifications pursuant to 18 U.S.C. Section 1350.

	101			XBRL (Extensible Business Reporting Language). The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2013 (unaudited) and March 31, 2012, (ii) Unaudited Consolidated Statements of Income for the Three Months Ended June 30, 2013 and 2012, (iii) Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2013 and 2012, (iv) Unaudited Consolidated Statements of Cash Flows for the Three months Ended June 30, 2013 and 2012, and (iv) Notes to Unaudited Consolidated Financial Statements.

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.


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

2445 M Street, NW, Washington, D.C.		20037
(Address of principal executive offices)		(Zip Code)


	Page No.
PART I. FINANCIAL INFORMATION		1

ITEM 1. Financial Statements		1
Consolidated Balance Sheets as of June 30, 2013 (unaudited) and March 31, 2013		1
Unaudited Consolidated Statements of Income for the Three Months Ended June 30, 2013 and 2012		2
Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2013 and 2012		3
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2013 and 2012		4
Notes to Unaudited Consolidated Financial Statements		5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		22
ITEM 4. Controls and Procedures		23

PART II. OTHER INFORMATION		23

ITEM 1A. Risk Factors		23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
ITEM 6. Exhibits		24
Signatures		25


	June 30, 2013			March 31, 2013
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	29,051		$	57,829
Marketable securities, current		11,130			16,611
Membership fees receivable, net		387,217			370,321
Prepaid expenses and other current assets		19,897			15,477
Deferred income taxes, current		10,944			7,664

Total current assets		458,239			467,902
Property and equipment, net		77,377			71,174
Intangible assets, net		31,497			32,381
Deferred incentive compensation and other charges		77,459			73,502
Deferred income taxes, net of current portion		3,316			3,888
Marketable securities, net of current portion		151,913			140,228
Goodwill		95,540			95,540
Investment in unconsolidated entity		—			1,907
Related party note receivable		8,696			4,358
Other non-current assets		5,550			5,550

Total assets	$	909,587		$	896,430

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred revenue, current	$	411,645		$	398,541
Accounts payable and accrued liabilities		68,911			75,089
Accrued incentive compensation		9,621			21,033

Total current liabilities		490,177			494,663
Deferred revenue, net of current portion		111,316			104,484
Other long-term liabilities		17,465			15,866

Total liabilities		618,958			615,013

Redeemable noncontrolling interest		100			100
The Advisory Board Company’s stockholders’ equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized, zero shares issued and outstanding		—			—
Common stock, par value $0.01; 135,000,000 shares authorized, 35,748,798 and 35,138,465 shares issued and outstanding as of June 30, 2013 and March 31, 2013, respectively		357			351
Additional paid-in capital		390,627			375,622
Accumulated deficit		(98,274	)		(95,809	)
Accumulated other comprehensive (loss) income		(2,073	)		1,261

Total stockholders’ equity controlling interest		290,637			281,425
Equity attributable to noncontrolling interest		(108	)		(108	)

Total stockholders’ equity		290,529			281,317

Total liabilities and stockholders’ equity	$	909,587		$	896,430


	Three Months Ended June 30,
	2013			2012
Revenue	$	123,216		$	104,142

Costs and expenses:
Cost of services, excluding depreciation and amortization		65,950			58,366
Member relations and marketing		22,188			19,120
General and administrative		17,986			13,479
Depreciation and amortization		6,354			4,086

Operating income		10,738			9,091
Other income, net		523			576

Income before provision for income taxes and equity in loss of unconsolidated entity		11,261			9,667
Provision for income taxes		(4,335	)		(3,702	)
Equity in loss of unconsolidated entity		(3,233	)		(2,124	)

Net income before allocation to noncontrolling interest		3,693			3,841
Net loss attributable to noncontrolling interest		—			—

Net income attributable to common stockholders	$	3,693		$	3,841


Earnings per share:
Net income attributable to common stockholders per share — basic	$	0.10		$	0.11
Net income attributable to common stockholders per share — diluted	$	0.10		$	0.11

Weighted average number of shares outstanding:
Basic		35,488			34,179
Diluted		36,618			36,054

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company


	Three Months Ended June 30,
	2013			2012
Net income attributable to common stockholders	$	3,693		$	3,841
Other comprehensive income:
Net unrealized (losses) gains on marketable securities, net of income taxes of (1,801) and 182 for the three months ended June 30, 2013 and 2012, respectively		(3,334	)		338

Comprehensive income	$	359		$	4,179


	Fair value as of June 30,		Fair value measurement as of June 30, 2013 using fair value hierarchy
	2013		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	29,051	$	29,051	$	—	$	—
Available-for-sale marketable securities (2)		163,043		163,043		—		—
Common stock warrants (3)		550		—		—		550
Financial liabilities
Contingent earn-out liabilities (4)		14,500		—		—		14,500


	Fair value as of March 31,		Fair value measurement as of March 31, 2013 using fair value hierarchy
	2013		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	57,829	$	57,829	$	—	$	—
Available-for-sale marketable securities (2)		156,839		156,839		—		—
Common stock warrants (3)		550		—		—		550
Financial liabilities
Contingent earn-out liabilities (4)		15,200		—		—		15,200


	As of June 30, 2013
	Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses
U.S. government-sponsored enterprises	$	26,864	$	27,844	$	—	$	979
Tax exempt obligations of states		136,179		138,392		1,481		3,695

	$	163,043	$	166,236	$	1,481	$	4,674


	As of March 31, 2013
	Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses
U.S. government-sponsored enterprises	$	25,430	$	25,347	$	83	$	—
Tax exempt obligations of states		131,409		129,550		2,715		856

	$	156,839	$	154,897	$	2,798	$	856


	As of June 30, 2013
	Fair market value		Amortized cost
Matures in less than 1 year	$	11,130	$	11,070
Matures after 1 year through 5 years		52,091		51,439
Matures after 5 years through 10 years		66,443		68,297
Matures after 10 years through 20 years		33,379		35,430

	$	163,043	$	166,236


	Less than 12 months				12 months or more				Total
	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
U.S. government-sponsored enterprises	$	26,864	$	979	$	—	$	—	$	26,864	$	979
Tax exempt obligations of states		59,222		2,830		14,636		865		73,858		3,695

	$	86,086	$	3,809	$	14,636	$	865	$	100,722	$	4,674


	As of
	June 30, 2013			March 31, 2013
Leasehold improvements	$	32,263		$	29,953
Furniture, fixtures, and equipment		37,520			36,502
Software		69,979			62,589

Property and equipment, gross		139,762			129,044
Accumulated depreciation and amortization		(62,385	)		(57,870	)

Property and equipment, net	$	77,377		$	71,174


			As of June 30, 2013							As of March 31, 2013
	Weighted average useful life		Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Intangibles
Internally developed intangible for sale:
Capitalized software		5.0	$	7,392	$	(1,240	)	$	6,152	$	6,438	$	(1,018	)	$	5,420
Acquired intangibles:
Developed software		4.9		19,250		(5,464	)		13,786		19,250		(4,659	)		14,591
Customer relationships		7.5		12,700		(5,212	)		7,488		12,700		(4,735	)		7,965
Trademarks		3.7		4,200		(2,258	)		1,942		4,200		(2,118	)		2,082
Non-compete agreements		4.3		1,400		(700	)		700		1,400		(633	)		767
Customer contracts		4.9		5,199		(3,770	)		1,429		5,199		(3,643	)		1,556

Total other intangibles			$	50,141	$	(18,644	)	$	31,497	$	49,187	$	(16,806	)	$	32,381


	As of
	June 30, 2013			March 31, 2013
Assets:
Current assets	$	14,982		$	9,842
Non-current assets		15,989			10,571

Total assets	$	30,971		$	20,413

Liabilities and Members’ Equity:
Current liabilities	$	18,409		$	11,716
Non-current liabilities		23,110			10,116

Total liabilities	$	41,519		$	21,832
Members’ equity		(10,548	)		(1,419	)

Total liabilities and members’ equity	$	30,971		$	20,413


	Three Months Ended June 30,
	2013					2012
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
Outstanding, April 1		2,692,353		$	21.06		3,812,228		$	17.04
Granted		418,440			47.87		347,760			43.83
Exercised		(507,844	)		15.16		(686,760	)		15.57
Forfeited		(31,116	)		29.36		(4,500	)		9.26
Cancellations		—			—		—			—

Outstanding, June 30		2,571,833		$	26.49		3,468,728		$	20.03

Exercisable, June 30		1,460,805		$	18.29


	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan
April 1 to April 30, 2013		—	$	—		—	$	109,091,888
May 1 to May 31, 2013		48,780	$	50.38		48,780	$	106,634,109
June 1 to June 30, 2013		70,100	$	52.79		70,100	$	102,933,721

Total		118,880	$	51.80		118,880


Exhibit Number		Description of Exhibit

	10.21	Amended and Restated Employment Agreement, dated as of April 3, 2013, between the Company and Robert W. Musslewhite. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on April 8, 2013.

	10.23	Amended and Restated Employment Agreement, dated as of April 3, 2013, between the Company and David L. Felsenthal. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on April 8, 2013.

	10.24	Executive Nonqualified Excess Plan of The Advisory Board Company, effective May 1, 2013. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on April 8, 2013.

	31.1	Certification of the Chief Executive Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended

	31.2	Certification of the Chief Financial Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as amended

	32.1	Certifications pursuant to 18 U.S.C. Section 1350

	101	XBRL (Extensible Business Reporting Language). The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2013 (unaudited) and March 31, 2012, (ii) Unaudited Consolidated Statements of Income for the Three Months Ended June 30, 2013 and 2012, (iii) Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2013 and 2012, (iv) Unaudited Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2013 and 2012, and (iv) Notes to Unaudited Consolidated Financial Statements.