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Decoding the Advisory Board’s Net Profit Margins in 2017

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ABCO’s 1Q17 margin performance

In 1Q17, the Advisory Board (ABCO) reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of ~$45 million, which was higher than its guidance of $37 million–$42 million. Its adjusted EBITDA, however, was ~$800,000 lower on a YoY (year-over-year) basis due to the higher revenues the company earned in 1Q16.

Based on historical quarterly revenue variations, ABCO expects 1Q17 to be its weakest sales quarter in 2017. It witnessed a robust sales improvement in April on a YoY basis.

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Drop in net profit margins

Wall Street analysts expect the Advisory Board to report a net income margin of ~5.8% in 2017, which would be a YoY fall of ~570 basis points.

By comparison, peers Automatic Data Processing (ADP), Fidelity National Information Services (FIS), and Fiserv (FISV) are expected to report net income margins of ~14.2%, 10.7%, and 17.0%, respectively, for 2017.

Growth drivers

The Advisory Board’s adjusted EBITDA benefitted from healthy contract value growth in 1Q17, driven mainly by robust sales in its education business. The company also witnessed increasing demand for its EMR (electronic medical record) optimization solutions, services to introduce cost efficiencies and revenue cycle consulting solutions, and planning 20-20 surveys.

ABCO’s client renewal rate across all of its businesses over the past 12 months comes in at ~92%. This was lower than the previous year’s 94%, and the slight drop was due to a declining renewal rate by international hospitals.

Notably, the Vanguard Russell 2000 ETF  (VTWO) has ~0.13% of its total portfolio holdings in ABCO.

In the next and final part of this series, we’ll discuss the Advisory Board’s growth prospects in healthcare.

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