10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission file number: 000-33283

THE ADVISORY BOARD COMPANY

(Exact name of registrant as specified in its charter)

Delaware	52-1468699
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2445 M Street, N.W., Washington, D.C. 20037

(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.01	The NASDAQ Stock Market LLC
	(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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.

Large accelerated filer	þ	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if smaller reporting company)	Smaller reporting company	¨

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

Based upon the closing price of the registrant’s common stock as reported on the NASDAQ Global Select Market on June 30, 2016, the aggregate market value of the common stock held by non-affiliates of the registrant was $1,424,955,877.

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on February 28, 2017 was 40,235,820.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain portions of the registrant’s definitive proxy statement for the 2017 annual meeting of stockholders to be filed with the Commission no later than 120 days after the end of the fiscal period covered by this report.

THE ADVISORY BOARD COMPANY

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Mine Safety Disclosures	27
	PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 8.	Financial Statements and Supplementary Data	51
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	97
Item 9A.	Controls and Procedures	97
Item 9B.	Other Information	97
	PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	99
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100
Item 13.	Certain Relationships and Related Transactions, and Director Independence	100
Item 14.	Principal Accountant Fees and Services	100
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	101
Item 16.	Form 10-K Summary	106
Signatures		106
Index to Exhibits		107

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EXPLANATORY NOTE REGARDING THIS ANNUAL REPORT

In November 2014, we elected to change our fiscal year from the period beginning on April 1 and ending on March 31 to the period beginning on January 1 and ending on December 31. We refer in this report to our 2016 fiscal year that began on January 1, 2016 and ended on December 31, 2016 as fiscal year 2016, to our 2015 fiscal year that began on January 1, 2015 and ended on December 31, 2015 as fiscal year 2015, and to the nine-month fiscal period that began on April 1, 2014 and ended on December 31, 2014 as the 2014 transition period.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, or PSLRA. These statements are intended to take advantage of the “safe harbor” provisions of the PSLRA. The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek,” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings, and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in this report under “Part I - Item 1A - Risk Factors.” Any forward-looking statement speaks only as of the date of this report, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date of this report.

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PART I

We have derived some of the information contained in this report concerning the markets and industry in which we operate and the customers we serve from publicly available information and from industry sources. Although we believe that this publicly available information and the information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.

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

Item 1. Business.

Overview

We are a leading provider of insight-driven performance improvement solutions to the rapidly changing health care and education industries. Through our subscription-based membership programs, software, data-enabled services, and consulting capabilities, we leverage our intellectual capital to help our clients, which we refer to as our members, solve their most critical business problems. As of the date of this report, we served approximately 5,600 members.

We provide members with best-practice industry research, and insights that they need to thrive in a dynamic market. We then help to guide and support our members in the implementation of these best practices through proprietary, high-value technology, services, and consulting capabilities. All of our programs are rooted in best practices and extend across four key areas:

• Best practices research. Our best practices research and insight programs provide the foundation for all of our other programs. These programs are focused on understanding industry dynamics, identifying best-demonstrated management practices, critically evaluating widely-followed but ineffective practices, and analyzing emerging trends within the health care and education industries. We communicate and teach best practices across our broad network through independent forums for each key leadership constituency.

• Technology. Our cloud-based software applications allow members to combine insights derived from our best practices research with their own operational and financial data and third-party and proprietary data to benchmark performance; identify and assess revenue, cost, quality, and performance improvement opportunities; and implement identified best practices.

• Data-enabled services. We draw on our extensive data assets, distinctive technology platforms, proven processes, and deep expertise gained over years of experience to apply best practices and enablement services to directly produce results for our members.

• Consulting services. Our consulting services programs assist our members’ own efforts to set strategic direction, address key operational challenges, and improve their performance. We deploy our experts to work side-by-side with members implementing best practice solutions and driving change in their organizations.

Corporate Information

We were incorporated in Maryland in 1979 and reincorporated in Delaware in 2001. The mailing address of our principal executive offices is 2445 M Street, N.W., Washington, D.C., 20037, and our telephone number is (202) 266-5600.

We maintain a corporate Internet website at www.advisoryboardcompany.com.We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish the reports with the Securities and Exchange Commission, or SEC. The contents of our website are not a part of this annual report on Form 10-K.

Our Markets

Across our more than 35-year history, we have focused on providing insight-driven, differentiated, scalable, and renewable solutions to the rapidly transforming health care and education industries. Within the health care market, we primarily serve U.S. hospitals and health systems, and also sell programs to international hospitals, independent medical groups, post-acute care facilities, pharmaceutical, biotechnology, and medical device companies, as well as to health care insurers and other service providers. The Centers for Medicare and Medicaid Services estimated that spending in the United States for health care services was expected to be approximately $3.4 trillion in 2016, or approximately 18.1% of the country’s Gross Domestic Product (GDP), and was expected to grow to over $5.5 trillion, or 19.9% of GDP, by 2025.

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Within the education market, we serve a range of public and private colleges, universities, and K-12 schools. The U.S. Department of Education estimates education institutions to be a $1.2 trillion market involving the participation of more than 85.7 million students and more than 136,000 institutions, including both degree-granting and other education organizations.

Both health care and education organizations rely on external service providers to help them develop strategies, consolidate and analyze data, improve operations and processes, and train staff in order to remain competitive in a dynamic industry environment. We believe that certain characteristics of the health care and education industries make them especially suited for our business model of standardized delivery of services and software rooted in shared best practices:

• Undergoing transformation: Both the health care and education industries are undergoing tremendous change. Health care providers are facing an aging population, increasing cost and margin pressures, new regulations related to the Affordable Care Act and now the potential amendment or repeal of certain components of the Affordable Care Act, and movement from fee-for-service to value-based reimbursement. Colleges and universities are confronting a slower growing student population, shrinking state budgets, rising cost concerns, heightened attention to value and outcomes, and a movement towards performance-based funding. During these times of significant change, health care and education institutions are in greater need of, and are actively seeking, best practices to address their mounting challenges.

• Common and complex industry-wide issues: Health care and education organizations of all types and sizes face many of the same complex strategic, operational, and management issues. Institutions are working to increase revenue, reduce costs, improve productivity and performance, manage innovation, reengineer business processes, and comply with new government regulations. Because the delivery of health care and education services is based on complex, interrelated processes, there is widespread interest in, and broad applicability of, standardized programs that address the major challenges facing the industries.

• Fragmented target industries: We believe that our target market consists of over 15,000 health care organizations and over 5,000 education institutions. Many of these organizations deliver services primarily on a local or regional basis. As a result of this fragmentation, best practices that are pioneered in local or regional markets are rarely widely known throughout the industry.

• Willingness to share best practices: We believe that health care and education organizations display a relatively high propensity to share best practices. Many health systems and universities are non-profit organizations or compete in a limited geographic market and do not consider organizations outside their market to be their competitors. In addition, the health care and education industries have a charter above commerce in serving their communities and their end customers, and have a long tradition of disseminating information as part of ongoing research and education activities.

• Need for data and analytics: Health care data resides in numerous source systems both within and dispersed across a variety of organizations, including hospitals, physician practices, and government and commercial payers. Education data similarly is derived from a broad range of sources, which encompass students, parents, employers, high schools, colleges and universities, and other non-traditional education institutions. To achieve higher-quality outcomes and control costs, organizations within these markets exhibit a strong and continuing need for data and the systematic analysis of data to help them understand their current performance and identify opportunities for improvement.

• Value orientation: A membership model that provides access to best practice insight, software applications, and value-added services on a syndicated basis appeals to many value-focused health care and education organizations that may be reluctant to make discretionary investments in an exclusive, higher-priced, customized engagement or tailored software solution to address their critical issues.

Our Strengths

We are a mission-driven organization with core values, a service ethic, and a results-oriented approach dedicated to helping health care and education institutions solve their most pressing problems. Our competitive strengths include the following:

• Market leader in rapidly changing markets. We are a market leader in both the health care and education markets, serving executives at more than 3,000 U.S. hospitals and health systems since 1986 and over 1,100 U.S. colleges and universities since 2007. The ongoing transformation of these industries is presenting new challenges and creating demand for new programs and services. We believe our reputation and success to date have positioned us as a premier source and partner for identifying, evaluating, communicating, and providing solutions that respond to evolving market needs.

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• A superior value proposition to members. Members use our programs to improve the effectiveness of their organizations by increasing productivity, reducing operating costs, and enhancing revenue. We believe that our program costs generally represent a small percentage of the potential benefit members can achieve through successful application of the best practices research, software, and consulting that they receive. In fact, we generated over $2.0 billion in documented value for our members. In addition, our fixed-fee pricing for research and software promotes frequent use of our programs by our members, which we believe increases both the value members receive and their loyalty to our programs.

• Extensive membership base and longstanding member relationships. Our membership includes some of the largest and most prestigious health care and education institutions in the United States, including all 20 of the 2016-2017 U.S. News and World Report honor roll hospitals and 91 of the U.S. News and World Report’s top 100 national universities for 2017. Our programs reach more than 10,000 chief executive and chief operating officers, and over 300,000 other senior executives, operational and clinical leaders, department heads, and product-line managers. Our membership-based model, in which members participate in our research on an annual basis, gives us privileged access to our members’ business practices, proprietary data, and strategic plans, enabling us not only to identify and share emerging best practices but also to develop first-in-class and best-in-class new programs and services to meet our members’ changing needs.

• Broad, insight-driven offerings. We provide a distinctively broad and deep set of best practices research, technology programs, data-enabled services, and consulting services, allowing us to assist our members in a variety of ways depending on their specific needs and problem areas. Our health care programs address key areas where hospitals and health systems require comprehensive and continuous support to address perennial challenges, including: driving health system growth, reducing care variation, and optimizing the revenue cycle. Our education programs focus on topics that include enrollment management, student success, academic programming, faculty productivity, and advancement. Our technology programs and data-enabled services differ from those of most of our competitors in that they are rooted in best practices, aggregate and standardize data from disparate source systems, and are part of a complementary platform of offerings.

• Highly recurring, visible, and scalable business model. We derive the majority of our revenue from multi-year memberships across our distinct programs. Our member renewal rate for our research and software programs has equaled or exceeded 90% for each of the twelve-month fiscal periods in the five year period ended December 31, 2016, which we believe reflects our members’ recognition of the value they derive from participating in our programs. In addition, we can identify over 80% of our expected annual revenues at the beginning of the fiscal year based on our deferred revenue balance and historical program renewal trends. Our economic model, which features a standardized set of services and a largely fixed-cost structure, enables us to add new members to our programs at a low incremental cost of delivery, thereby disproportionately increasing operating profit for our members.

• Consistent financial performance and strong cash flows. Since becoming a public company in 2001, we have increased our number of members, contract value per member, total contract value, and revenue nearly every year, including during economic downturns. Since March 31, 2012, our number of members has grown from 3,726 to 5,633, while our contract value per member has expanded from approximately $107,000 to approximately $140,000. The combination of revenue growth, profitable operations, and payment for memberships in advance of accrual revenue typically results in our cash flows from operations exceeding our net income and often approximating our adjusted EBITDA.

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Growth Strategy

We believe we are well positioned to capitalize on the favorable characteristics in our target markets and deploy our competitive strengths to continue growing our business. As part of our growth strategy, we plan to:

• Add new health care and education members. We believe there are over 15,000 potential members in the health care market and over 5,000 potential members in the education market. Although we currently have an established membership base in these markets, we actively seek to continue adding new members. In addition, we believe that our business model and existing membership base represent significant assets that we can use to attract additional non-provider health care members and international health care and education members. We currently serve approximately 400 non-U.S. health care organizations through programs that rely on research and analysis primarily derived from our work with U.S. health care organizations. In addition, we are seeking to expand our work with independent medical groups, pharmaceutical, biotechnology, medical device, and health insurance companies, as well as with other organizations with an interest in U.S. hospital and health system operations, performance, and data.

• Expand relationships with and create additional value for existing members. We have developed broad and deep relationships with approximately 4,400 members and over 200,000 executives across our health care programs, and approximately 1,100 members and over 80,000 executives across our education programs. As members recognize benefits from one program, they may seek out or become strong candidates for other programs and services. In addition, our steady interaction with members through research, sales, program development and delivery, and account management provides us with insight into which of our programs would be most suitable for them. Since 2011, we have increased contract value per member by 47%, from approximately $95,000 to approximately $140,000 as of December 31, 2016, by selling additional programs to existing members and adding new members. The average contract value is approximately $124,000 per health care member and approximately $193,000 per education member. This average contract value continues to remain a small portion of many institutions’ total expenditures on professional services per year.

• Continue innovating through member-driven product development. As our markets rapidly evolve, we seek to expand our portfolio of programs and services through development of new programs and successful execution and integration of acquisitions and strategic partnerships. Each year, we pursue a rigorous research process involving extensive member feedback, in which we build a large pipeline of potential new program concepts and existing program extensions and innovations. We then concentrate our efforts on areas of greatest interest to our members. Our research and development process benefits from insight derived through our research programs and the involvement of industry thought leaders from progressive and well-known organizations that act as advisors, as well as from information we gather from hundreds of member interviews. We currently plan to continue introducing new programs and existing program extensions and innovations through a mixture of internal development activities, partnerships, and acquisitions.

• Use differentiated data and expertise to provide comprehensive solutions to members. As the health care and education industries continue their transformation, our members are increasingly looking to consolidate and replace their individual vendors and products with strategic partners, integrated technology platforms, and comprehensive solutions. We believe many of our members will consider us particularly well suited to respond to this demand based on our unique research and best-practice insights, differentiated data acquisition and standardization capabilities, compiled data sets across thousands of physicians, patients, and students, and reputation for deep industry expertise and a strategic approach to solving issues.

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Our Offerings

We are a best practices firm that uses a combination of research, technology, and consulting to improve the performance of health care and education organizations around the world. We forge and find the best new ideas and proven practices from across our vast network of leaders. Then we customize and hardwire them into every level of our member organizations, creating enduring value. Through our membership model, we collaborate with executives and their teams to find and implement the best solutions to their toughest challenges. Our research programs offer proven, actionable insights inspired by the industry’s most progressive organizations. Our technology programs offer analytics platforms that surface opportunities, hardwire best practices, and accelerate progress. Our data-enabled services leverage our expertise to deliver value on behalf of our members. Our consulting services offer seasoned experts for strategic, customized support.

Health Care

Our health care offerings are presented to the marketplace collectively as Advisory Board (www.advisory.com). We launched our first health care research program in 1986, and have built our market leadership position by providing best practice research and insight to health care leaders. We expanded into the delivery of distinct consulting capabilities in 2001, and serviced 400 organizations throughout 2016 with our staff of experts. In 2004, we launched our first technology program and serve 3,000 hospitals today. Through our research, we cover all areas of health care performance, providing best practice insights to the industry’s most pressing issues. Through our technology and consulting we solve specific business problems by applying best practices to create deep analytics, technology, and service solutions that enable the action members need to take.

Best Practices Research Programs

Best practice insight is the core of our business. Through our membership model, we offer our member organizations a direct line to the industry’s most-needed insights and best-practice ideas to help address their most important problems and find and implement the best solutions to their toughest challenges. We have deep relationships with senior-most leaders and an understanding of the key industry topics that will keep them up at night, and we dive into the root causes of key issues and find practices that have been demonstrated to have an impact.

Each of our best practices research programs is targeted at a specific member executive and addresses the executive’s specific strategic challenges, operational issues, and management concerns. Each program includes published studies, executive education, proprietary databases and online services, access to experts, and executive briefings, among other services, as we continue to enhance the programs with innovative features. For each best practices research program, we typically publish two to four best practices research studies annually. We design each study to present the conclusions and supporting best practices in a graphical format, enabling the intended audience to assimilate quickly the 100 to 250 pages of research content. Consistent application of our research methodology and extensive staff member training across all programs enable us to maintain a high level of research quality in the programs.

In addition to our research studies, we deliver an executive education curriculum based on our proprietary research to member institutions nationwide through four channels: general membership meetings; presentations conducted on-site at member organizations; on-call access to experts; and frequent teleconferences. In all four settings, we use interactive discussions to provide a deeper understanding and facilitate practical application of the best practices we have identified. In the year ended December 31, 2016, we delivered executive education services to more than 150,000 executive and managerial participants through more than 130 member meetings, over 2,300 on-site seminars, and approximately 250 webconferences. These interactions serve as an important building block for our relationships with members, allowing us the opportunity to gather input about our research agendas and services, generate leads for cross-selling additional programs to existing members, and identify ideas for potential new programs.

Across our research programs, we also offer a variety of online databases, content, tools, and calculators to increase the utility of our research, facilitate analysis of an organization’s current performance, and assist the adoption of best practices at member institutions. Each research program has a dedicated section on our password-protected member website, accessible only to members of the program, which includes such items as best practices, executive modules, online data, audit toolkits, and market forecasting instruments. Through the website, members of each program may search and access program-specific content, which includes the ability to access an electronic library of past and current research studies, review executive education modules, view meeting schedules, and communicate with our staff and other members. A few examples of our 18 research programs include:

• Health Care Advisory Board: Through the Advisory Board's flagship research program, we provide CEOs and their executive teams strategic guidance, tools, and implementation support needed to win market share, protect margins, and drive population health return on investment.

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• Clinical Roundtables: We provide tools and benchmarks, best practices from health system peers, and expert insight to help our members strategically address specific service-line challenges in areas such as cardiovascular and oncology, as well as physician practices alignment and performance improvement.

• Nursing Executive Center: We arm nurse executives with market insights and guidance to help set strategy, and provide support with the best practices and tools to help them achieve their top goals.

• Post-Acute Care Collaborative: We provide best practice research and supporting tools to help our members navigate delivery system and payment reform challenges while helping to strengthen their acute and post-acute relationships and care quality.

We typically charge a separate annual membership fee for each program that is fixed for the duration of the membership agreement and entitles participating members to access all of a program’s membership services. Most programs are sold as recurring, multi-year contracts. Institutions may access our services within a program only if they are members of that program.

Technology Programs

We offer technology analytics programs anchored by cloud-based software applications that surface performance improvement opportunities to accelerate progress. These applications are regularly updated with member-specific data as well as third-party and proprietary data, and provide all member institutions with access to specific performance improvement metrics. The software applications pull data from disparate legacy information systems through standardized data extracts and, with analytics and proprietary metrics informed by our best practices research and insights, transform hard-to-access legacy data into performance reports and benchmarks offering actionable insight for managers and executives.

The technology programs are renewable and address perennial problems in areas in which we have developed significant knowledge through our research programs. Our programs are cloud-based, allowing members to derive value with minimal upfront investment costs. Cloud-based software allows continual access via the Internet and can quickly be updated, delivering new program content and functionality to all members with minimal disruption. The programs are built to be flexible and easy to use, offering members ad hoc querying, performance alerts, drill-down analysis, and comparative benchmarking.

Through the combination of our research and access to the technology programs, members gain insight into areas of opportunity for operational or financial improvement, receive best practices toolkits to capture the improvement, and directly use our resources to inform front-line decisions on an hourly, daily, and weekly basis. Our programs allow members to transform their data into information they can use to enhance performance, enabling them to quantify areas of opportunity and identify value captured through use of our programs, and allow members to benchmark themselves against each other and learn how other members captured value from our software applications and consulting services.

We offer 19 technology programs and enhanced solutions, a few of which include:

• Planning 20/20 is a recently redesigned planning solution that integrates Crimson Market Advantage with several key research assets, enhanced analytics, and business development guidance to support hospital strategic planners’ need to meet new and evolving industry demands across the continuum of care.

• Crimson Continuum of Care helps hospitals achieve physician alignment, identify outliers in care delivery, and measure and sustain outcomes from unwarranted care variation reduction initiatives in order to advance quality goals and secure cost savings.

• Integrated Revenue Cycle Management Platform spans the revenue lifecycle from patient access to mid-cycle to business office and contract/payer management, delivering workflow, analytics, and data-enabled automation that enables health systems to dramatically improve revenue capture, eliminate re-work, and  optimize reimbursement.

Consulting Services

Through our consulting services, we provide on-the-ground support for major performance improvement initiatives, as well as best practice professional management of key areas of the hospital or medical group. We assist in three primary ways: expert counsel, including business planning and strategy development; dedicated support, including interim senior management to oversee a specific change management process for a defined period; and long-term management, involving a seasoned group of senior executives working on-site for an extended period to provide hands-on, practical advice and execution against financial and operational goals.

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Our consulting engagements deliver meaningful insights and results in areas such as strategy, electronic medical record (EMR) optimization, revenue cycle optimization, clinical quality and care redesign, physician practice management, operational capacity and workforce efficiency, supply cost savings, and development of accountable care organizations and clinically integrated networks. Our members benefit from outcome-focused consultants experienced in change management, access to best practice performance criteria, industry standard and proprietary benchmarks, implementation-oriented recommendations, and an objective third-party perspective.

Focus Areas

Our technology and consulting programs cover our members’ most important problem areas, and are organized into three areas of focus:

• Driving Health System Growth: Driving the acquisition and retention of patients by assembling the network needed to effectively bring care in the right setting

• Reducing Care Variation: Improving care quality and reducing cost by eliminating unwarranted care variation

• Optimizing the Revenue Cycle: Ensuring members’ financial viability by improving the efficiency and effectiveness of revenue management

In each area we have multiple technology solutions and industry experts focused on delivering significant value to our health care members. In 2016, we were able to document over $2 billion in incremental savings, efficiency, and revenue capture for our members through their work with us. In addition, we have, and continue to innovate and develop, enterprise capabilities that integrate across all areas of our members operations.

Education

Our education offerings were launched in 2007 and are presented to the marketplace collectively as EAB (www.eab.com). In fiscal year 2016, we worked with more than 1,100 college and university members, conducted approximately 5,000 research interviews, maintained more than 450 million course records in our student success analytic models, and engaged in more than 1.2 billion student interactions.

As in our health care business, our education offerings are all based on best practice. They are delivered through three types of renewable subscription programs: research, technology, and data-enabled services.

Research Programs

We offer more than a dozen research programs aimed at helping today's education leaders solve their most pressing issues and biggest problems. We identify best practices to address education’s top challenges with research forums dedicated to all key leaders of the academy, including provosts, chief business officers, chief information officers, chief research officers, vice presidents of enrollment management, vice presidents of student affairs, deans of continuing and online education, and many other key academic and administrative leaders. Across our research programs, we complete 50 major research initiatives each year. These best practices are disseminated to our membership through 100-250 page graphically-oriented publications, online publications and tools on our password protected member websites, and executive education presentations. In the year ended December 31, 2016, we delivered executive education services to more than 15,000 executive and managerial participants through more than 90 member meetings, over 390 on-site seminars, and over 100 webconferences.

Our research programs provide us deep access to our member colleges and universities, strong relationships with their leaders, and an unparalleled view of the key problems they face. This set of insights not only fuels our best practice work through our research programs but also provides a continuous source for new business ideas, which we have continually capitalized on throughout our decade of serving education institutions. These best practice insights have seeded not only additional research programs but also programs where we hardwire them through technology and data-enabled services.

Technology Programs

Currently, our technology programs are primarily focused in the area of student success. With disappointing graduation rates and student retention an increasing problem on college campuses, colleges and universities are spending an estimated $3.2 billion on student success. In 2009, we published a study in our research program for vice presidents of academic affairs that identified sixteen best practices for student retention and timely graduation. Out of that work, we have developed a membership that combines analytics, interaction, and workflow technology to help our members support, retain, and graduate more students. With more than 450 million course records in the platform and over 3.6 million daily logins, our student success technology is used to improve student advising and increase student success by identifying and positively influencing choices by at-risk and off-path students.

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In addition, we also partner with university academic and business leaders to leverage department-specific benchmarks in enrollment, capacity, outcomes, and costs to help make smart decisions and investments to improve academic efficiency and grow program revenues.

Data-enabled services

Currently, our data-enabled services are primarily focused in the area of enrollment management. With slowing demographic trends and declines in public funding, colleges and universities are spending an estimated $4.1 billion on enrollment management. Through data-driven solutions, we support colleges and universities in targeting qualified prospective students; building relationships with prospective students during the search, application, and yield process; and optimizing financial aid resources. Our differentiated capabilities are bolstered by our more than 1.2 billion student interactions, contact with virtually all U.S. college-bound students, and proprietary methodologies and marketing campaign testing.

Our Membership

As of the date of this report, our membership consisted of approximately 5,600 members, composed primarily of hospitals and health systems and colleges and universities, as well as selected other health care and education institutions.

We seek to involve the country’s most progressive health care and education organizations in our membership. The participation of these members provides us with a window into the latest challenges confronting the industries we serve and the most innovative best practices that we can share broadly throughout our membership. As of December 31, 2016, we served all 20 of the honor roll hospitals listed in the 2016-2017 U.S. News and World Report ranking, all of the Becker Hospital Review largest 15 health systems in the United States, 30 of the world’s largest pharmaceutical and medical device companies, and 91 of the U.S. News and World Report top 100 national universities for 2017.

Our programs serve a range of constituencies, including both the most senior executives and the broader management team. As of the date of this report, our programs reached over 10,000 chief executive and chief operating officers and over 200,000 other senior executives, clinical leaders, department heads, and product-line managers. No one member accounted for more than 1.5% of our revenue in fiscal year 2016, fiscal year 2015, or the 2014 transition period. We generated approximately 2%, 2%, and 4% of our revenue from members outside the United States in fiscal year 2016, fiscal year 2015, and the 2014 transition period, respectively.

Pricing and Contracts

We typically charge a separate fixed annual membership fee for each of our programs that covers all of the services in the program. Annual fees vary by program based on the target executive constituency and the specific combination of services we provide to participating members. The annual fees paid by members within the same program also vary based on the size of the member institution and the total number of program memberships the member purchases. Membership fees also may be lower for the initial members of new programs. Annual fees for software programs are higher than annual fees for research and insights programs. On average, we increase membership fees 2% to 3% per year, and, in some of our programs, charge our members for certain direct billable expenses, such as travel expenses. Most of our memberships are multi-year agreements. Fees for our programs are generally payable in advance.

Sales and Marketing

We maintain new business development teams that are responsible for selling new memberships and member services teams that are responsible for servicing and renewing existing memberships. New business development representatives typically focus on selling specific programs through face-to-face meetings with senior executives at current and prospective member institutions. Member services representatives assume a relationship management role and perform most of their responsibilities over the telephone. New business development teams and member services teams are compensated with base salaries and variable, goal-based incentives. For many of our members, we assign an executive advisor to ensure that the member is receiving value from the programs in which it currently participates, to identify new programs that could assist the member with key challenges that it faces, and to coordinate the activities of the new business development and member services teams with the goal of serving the member and expanding the overall member relationship.

Intellectual Property

We offer our members a range of products to which we claim intellectual property rights, including research content, online services, databases, electronic tools, cloud-based applications, performance metrics, and software products. We own and control a variety of trade secrets, confidential information, trademarks, trade names, copyrights, and other intellectual property rights that, in the aggregate, are of material importance to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and license other companies to use certain technology and other intellectual property that we control. We consider our trademarks, service marks, databases, software, and other intellectual

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property to be proprietary, and rely on a combination of copyright, trademark, trade secret, non-disclosure, and contractual safeguards to protect our intellectual property rights. We have been granted federal registration for some of our trademarks and service marks.

Competition

We are not aware of any other organization that offers services to health care or education organizations across as broad a range of best practices, technology and data-enabled services, and consulting services as those offered by our company. We compete in some discrete programs and for discretionary expenditures against health care-focused, education-focused, and multi-industry firms. These include consulting and strategy firms; market research, data, benchmarking, and forecasting providers; technology vendors and services firms; health care information technology firms; technology advisory firms; outsourcing firms; and specialized providers of educational and training services. Other organizations, such as state and national trade associations, group purchasing organizations, non-profit think-tanks, and database companies, also may offer research, consulting, tools, and education services to health care and education organizations.

We believe that the principal competitive factors in our market include quality and timeliness of research and analysis; applicability and efficacy of recommendations; strength and depth of relationships with member senior executives; reliability and effectiveness of software applications; distinctiveness of dashboards and user interfaces; depth and quality of the customer network; ability to meet the changing needs of current and prospective members; measurable returns on customer investment; and service and affordability. We believe we compete favorably with respect to each of these factors.

Our collaboration agreement with CEB, a global business membership and research organization, to enhance our services to members and explore new product development opportunities expired in February 2017. The collaboration agreement includes a limited non-competition provision that survives the expiration until February 2018 in accordance with its terms.

Legal Proceedings

From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.

Employees

As of December 31, 2016, we employed approximately 3,800 professionals, approximately 2,000 of whom are based in our headquarters in Washington, D.C. None of our employees are represented by a collective bargaining arrangement.

Government Regulation

The health care and education industries are highly regulated and subject to changing political, legislative, regulatory, and other influences. Existing and new federal and state laws and regulations affecting the health care and education industries could create unexpected liabilities for us, could cause us or our members to incur additional costs and could restrict our or our members’ operations. Many of the laws are complex and their application to us, our members, or the specific services and relationships we have with our members are not always clear.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010, collectively referred to as the Affordable Care Act, was signed into law with the stated goal of expanding access to affordable health insurance, controlling health care costs, and improving health care quality.

Based on public statements made by President Trump and members of Congress, it is possible that legislation may be enacted that would materially affect the Affordable Care Act and its implementation, including legislation that would repeal, replace, amend, or defund the law. We cannot predict the impact a repeal or substantial revision of the Affordable Care Act may have on our business or the business of our members.

Our failure to anticipate accurately the application of the laws and regulations affecting the health care and education industries, or our other failure to comply, could create liability for us, result in adverse publicity, and otherwise negatively affect our business. See the “Risk Factors” section of this report for more information about the impact of government regulation on our company.

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Executive Officers

The following table sets forth as of the date of this report the names, ages, and positions of the persons who serve as our executive officers.

Executive Officers	Age	Position
Robert W. Musslewhite	47	Chief Executive Officer and Chairman
David L. Felsenthal	46	President and Director
Michael T. Kirshbaum	40	Chief Financial Officer and Treasurer
Evan R. Farber	44	Chief Legal Officer and Corporate Secretary
Cormac F. Miller	43	Chief Product Officer
Richard A. Schwartz	51	Chief Operating Officer, Health Care
Mary D. Van Hoose	52	Chief Talent Officer

Our executive officers are appointed by, and serve at the pleasure of, our board of directors.

Robert W. Musslewhite has served as our Chief Executive Officer since September 2008. Mr. Musslewhite joined us in 2003, initially serving in executive roles in strategic planning and new product development. In 2007, Mr. Musslewhite was named Executive Vice President and general manager in charge of software-based programs, and he became CEO the following year. Before joining us, Mr. Musslewhite was an Associate Principal in the Washington, D.C., Amsterdam, and Dallas offices of McKinsey & Company, an international consulting firm, where he served a range of clients across the consumer products industry and other industries and was a co-leader of McKinsey’s Pricing Center. Mr. Musslewhite received an A.B. degree in Economics from Princeton University and a J.D. from Harvard Law School.

David L. Felsenthal became our President in September 2008. Mr. Felsenthal first joined us in 1992. He served as Chief Financial Officer, Secretary, and Treasurer from April 2001 through February 2006 before his service as an Executive Vice President beginning in February 2006 and as Chief Operating Officer from January 2007 to September 2008. From 1997 to 1999, Mr. Felsenthal worked as Director of Business Development and Special Assistant to the CEO/CFO of Vivra Specialty Partners, a private health care services and technology firm. From 1992 through 1995, Mr. Felsenthal held various positions with us in research and new product development. Mr. Felsenthal received an A.B. degree from Princeton University and an M.B.A. from Stanford University.

Michael T. Kirshbaum became our Chief Financial Officer in February 2006 and Treasurer in March 2007. Mr. Kirshbaum joined us in 1998, and before his current role held a variety of positions in the finance group, most recently serving as Senior Director of Finance. In that role, Mr. Kirshbaum was responsible for most of our finance operations, including our overall financial strategy and budgeting process, as well as a number of other accounting functions. Mr. Kirshbaum currently serves on the board of Evolent Health, Inc., a value-based care company. Mr. Kirshbaum received a B.S. degree in Economics from Duke University.

Evan R. Farber became our Chief Legal Officer in September 2015. Mr. Farber joined us in October 2007 as General Counsel and also has served as Corporate Secretary since November 2007. Before joining us, Mr. Farber was a partner at Hogan & Hartson L.L.P. (now Hogan Lovells US LLP), an international law firm, where he practiced corporate, securities, transactional, and commercial law. Mr. Farber received a B.A. degree from Binghamton University, State University of New York, and a J.D. from The George Washington University Law School.

Cormac F. Miller was named Chief Product Officer in January 2016. Mr. Miller served as our Executive Vice President from August 2011 through January 2016, with responsibility for corporate strategy and new product development, and as our Executive Director, Strategic Planning and New Product Development from January 2007 through August 2011. Mr. Miller joined us in 1996 and held various management positions within our research programs, including Executive Director, Research from October 2005 to December 2006, and Managing Director from October 2002 through October 2005. Mr. Miller received a B.S. degree from the University of Wisconsin-Madison.

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Richard A. Schwartz became our Chief Operating Officer, Health Care in January 2016. He previously served as President, Performance Technologies and Consulting since March 2014 and as Executive Vice President from February 2006 to February 2014, responsible for strategic planning and general management of our physician-oriented programs. Mr. Schwartz joined us in 1992 and held various management positions within our research programs, including Executive Director, Research from June 1996 to March 2000 and General Manager, Research from 2001 to 2006. Mr. Schwartz received a B.A. degree from Stanford University and an M.B.A. from Duke University.

Mary D. Van Hoose has served as Chief Talent Officer since 2009. In this role Ms. Van Hoose oversees recruiting, retention, engagement, and development of our staff worldwide, and works closely with the executive team on a broad range of issues that include organizational planning, goal setting, leadership development, and firm communication. Ms. Van Hoose joined us in 1991 and initially served as a research analyst focusing on certain clinical best practices for hospitals and health care providers. From 2000 to 2009, Ms. Van Hoose served as our Executive Director of Career Management. Ms. Van Hoose received a B.A. degree from the University of Virginia.

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Item 1A. Risk Factors.

We describe below what we believe are currently the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that could adversely affect our business, financial condition, results of operations, and prospects.

Risks Related to the Health Care and Education Industries

Because most of our members are in the health care industry, factors that adversely affect the financial condition of the health care industry could have a negative impact on us.

We historically have derived most of our revenue from members in the health care industry. As a result, our business, financial condition, and results of operations could be adversely affected by conditions affecting the health care industry generally and hospitals and health systems in particular. Our ability to grow will depend on the economic environment of the health care industry as well as our ability to increase the number and the breadth of the services that we sell to our members. There are many factors that could affect the purchasing practices, operations, and, ultimately, the operating funds of health care organizations, such as reimbursement policies for health care expenses, consolidation in the health care industry, and regulation, litigation, and general economic conditions. Because of current macro-economic conditions, many health care delivery organizations continue to experience deteriorating cash flow, access to credit, and budgets. It is unclear what long-term effects general economic conditions will have on the health care industry and in turn on us.

The health care industry is highly regulated and subject to changing political, legislative, regulatory, and other influences. Existing and new federal and state laws and regulations affecting the health care industry could create unexpected liabilities for us, could cause us or our members to incur additional costs, and could restrict our or our members’ operations. Many health care laws are complex and their application to us, our members, or the specific services and relationships we have with our members is not always clear. In addition, federal and state legislatures periodically have considered programs to reform or amend the U.S. health care system at both the federal and state level, and we expect that additional federal and state health care reform measures will be adopted in the future. In March 2010, the Affordable Care Act was signed into law with the goal of expanding access to affordable health insurance, controlling health care costs, and improving health care quality. Based on public statements made by President Trump and members of Congress, it is possible that legislation may be enacted that would materially affect the Affordable Care Act and its implementation, including legislation that would repeal, replace, amend, or defund the law. We cannot predict the impact that a repeal or substantial revision of the Affordable Care Act could have on our business or the business of our members.

Because of the significant implementation issues arising under these laws and because regulations for implementing these laws are being released on an ongoing basis, it is unclear what long-term effects such issues they will have on the health care industry and in turn on our business, financial condition, and results of operations. Among other effects, we could be required to make unplanned modifications of our products and services or could suffer delays or cancellations of orders or reductions in demand for our products and services as a result of changes in regulations affecting the health care industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, changes to the Health Insurance Portability and Accountability Act of 1995, and the regulations that have been issued under it, which we refer to collectively as HIPAA, and other federal or state privacy laws, laws relating to the tax-exempt status of many of our members, or restrictions on permissible discounts and other financial arrangements. Our failure to anticipate accurately the application of these laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity, and negatively affect our business.

Federal and state regulations governing our members in the education industry may negatively affect our members’ businesses, marketing practices, and budgets, any or all of which could have a material adverse effect on our ability to generate revenue.

We expect to derive an increasing amount of revenue from post-secondary educational institutions. Such educational institutions are subject to extensive federal and state regulation, including the Higher Education Act, Department of Education regulations, and individual state higher education regulations. The regulations govern many aspects of the operations of our higher education members, including marketing and recruiting activities, as well as their eligibility to participate in Title IV federal student financial aid programs, which is the principal source of funding for many of our members. There recently have been significant changes to these regulations, and a high level of regulatory activity and heightened legislative scrutiny is expected to continue. Changes in, new interpretations of, or noncompliance with applicable laws, regulations, standards, or policies applicable to our members could have a material adverse effect on their accreditation, authorization to operate in various states, or receipt of funds under Title IV programs, any of which, in turn, may harm our ability to generate revenue from these members and negatively affect our financial results.

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Privacy and security laws may increase the costs of operation and expose us to civil and criminal sanctions.

The privacy and security of personally identifiable information, also known as personal data, is a major issue in our industries. We must comply with extensive requirements regarding the use, disclosure, retention, and security of personal data, including patient health care information. Failure by us to comply with any of the applicable laws, regulations, and standards regarding privacy, identity theft prevention and detection, breach notification, and data security may subject us to actual or threatened proceedings, actions, and public statements against us by government entities, private parties, consumer advocacy groups, or others, including civil monetary penalties and, in some circumstances, criminal penalties or contractual liability under our agreements with our members. In addition, any such failure may harm our reputation and adversely affect our ability to retain existing members and attract new members.

Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about data security breaches suffered by well-known companies and institutions and the activities of various government agencies and lawsuits filed in response to these breaches. Concerns about our practices with regard to the collection, use, disclosure, or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business. In addition, we may incur significant costs in monitoring and complying with the multitude of evolving laws and regulations relating to privacy and security, the scope of which is changing and subject to differing interpretations.

The Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act (or the HITECH Act, which was enacted as part of the American Recovery and Reinvestment Act of 2009), and the implementing regulations issued under these statutes contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. These restrictions and requirements are set forth in the Privacy Rule and Security Rule portions of HIPAA. The HIPAA Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is authorized by the individual or is specifically required or permitted under the Privacy Rule, and requires covered entities to provide individuals with certain rights with respect to their protected health information. The Privacy Rule imposes a complex system of requirements on covered entities for complying with these basic standards. Under the HIPAA Security Rule, covered entities must establish administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of electronic protected health information maintained or transmitted by them or by others on their behalf.

The HIPAA Privacy and Security Rules historically have applied directly to covered entities, such as our members who are health care providers that engage in HIPAA-defined standard electronic transactions or health plans. Because some of our members disclose protected health information to us so that we may use that information to provide certain services to them, we are a “business associate” of those members. To provide members with services that involve the use or disclosure of protected health information, the HIPAA Privacy and Security Rules require us to enter into business associate agreements with our members. Such agreements must, among other matters, provide adequate written assurances:

• as to how we will use and disclose the protected health information;

• that we will implement reasonable administrative, physical, and technical safeguards to protect such information from misuse;

• that we will enter into similar agreements with our agents and subcontractors that have access to the information;

• that we will report security incidents and other inappropriate uses or disclosures of the information; and

• that we will assist the covered entity with certain of its duties under the Privacy Rule.

On January 25, 2013, the United States Department of Health and Human Services, Office for Civil Rights, published a final rule modifying the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules, referred to as the Final HIPAA Omnibus Rule, that implemented many of the provisions of the HITECH Act. The Final HIPAA Omnibus Rule applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities. We must directly comply with certain aspects of the Privacy and Security Rules, and are also subject to enforcement for a violation of HIPAA. The Final HIPAA Omnibus Rule also imposes mandatory federal requirements for both covered entities and business associates regarding notification of breaches of unsecured protected health information.

Any failure or perception of failure of our products or services to meet HIPAA and related regulatory requirements could expose us to risks of investigation, notification, litigation, penalty, or enforcement, could adversely affect demand for our products and services, and force us to expend significant capital and other resources to modify our products or services to address the privacy and security requirements of our members and HIPAA.

In addition to our obligations under HIPAA, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in

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this area, including privacy safeguards, security standards, and data security breach notification requirements. We may be required to comply with these state laws, if they are more stringent than HIPAA requirements and therefore not preempted by the federal requirements.

We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business, products, services, or the associated costs of compliance.

Federal or state governmental authorities may impose additional data security standards or additional privacy or other restrictions on the collection, use, transmission, and other disclosures of health information that would limit, forbid, or regulate the use or transmission of health information pertaining to U.S. patients outside of the United States. Such legislation, if adopted, could render operations outside of the United States impracticable or substantially more expensive. In addition, although most of our business is conducted in the United States, some of our businesses and operations are international in nature and consequently are subject to regulation in the jurisdictions in which we conduct those operations. We may be obligated to comply with these regulatory regimes, which include, among other matters, privacy and data protection regulations (including requirements for cross-border data transfers) that vary from jurisdiction to jurisdiction.

Our higher education industry members are required to comply with The Family Educational Rights and Privacy Act, or FERPA, and if we violate obligations relating to such members’ FERPA compliance, our reputation and business could suffer.

FERPA generally prohibits an institution of higher education from disclosing personally identifiable information from a student’s education records without the student’s consent. Our members disclose to us certain information that originates from or constitutes a student education record under FERPA and must make such disclosures to us in compliance with FERPA. As an entity that provides services to institutions, we are indirectly subject to FERPA and may not transfer or otherwise disclose any personally identifiable information from a student record to another party other than in a manner permitted under the statute. Any violation of us by FERPA could result in a material breach of contract with one or more of our members and could harm our reputation. Further, if we disclose student information in violation of FERPA, the Department of Education could require one or more members to suspend our access to student information for an extended period.

If we or our subcontractors or agents cause a violation of the Higher Education Act and corresponding regulations established by the Department of Education as they relate to the ban on incentive compensation, we could be liable to our members for substantial fines, sanctions, or other liabilities.

Many of our higher education members are subject to the ban on incentive compensation established under the Higher Education Act and corresponding regulations established by the Department of Education. Such institutions are prohibited from providing any incentive payments based directly or indirectly on success in securing enrollments or financial aid to any persons or “entities” engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance. Such entities would include us to the extent that we are engaged in any student recruiting or admission activities, or in making decisions regarding financial aid, for a member. Moreover, the ban on incentive compensation extends to incentive payments, based directly or indirectly on success in securing enrollments or financial aid, to the employees of such entities if the employees are involved with or responsible for admissions, recruiting, or financial aid activities. If we or our subcontractors or agents act in a manner that causes a violation of the incentive compensation rule, we could be liable to our members for substantial fines, sanctions, or other liabilities, including liabilities related to “whistleblower” claims under the federal False Claims Act. Any such claims, even if without merit, could require us to incur significant costs to defend the claims, distract management’s attention from our operations, and damage our reputation.

If we or our subcontractors or agents act in a manner that causes a violation of the Department of Education’s misrepresentation rule, or similar federal and state regulatory requirements, we could face fines, sanctions, and other liabilities.

Many of our higher education members are subject to other regulations promulgated by the Department of Education that affect our student recruitment activities, including the misrepresentation rule. The misrepresentation rule is broad in scope and may apply to certain statements our employees, subcontractors, or agents may make on behalf of or at the direction of a higher education member about the nature of a member’s program, a member’s financial charges, or the employability of graduates of a member’s program. A violation of this rule, or other federal or state regulations applicable to our activities, based on statements or conduct by us or by an employee, subcontractor, or agent performing services for members could negatively affect our reputation, result in the termination of member contracts, require us to pay the fees associated with indemnifying a member from private claims or government investigations, or require us to pay substantial fines, sanctions, or other liabilities.

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If our products or services fail to provide accurate information, or if our content or any other element of our products or services is associated with incorrect, inaccurate, or faulty coding, billing, or claims submissions to Medicare or any other third-party payor, we could be liable for damages to customers or the government.

Our products and content were developed based on the laws, regulations, and third-party payor rules in existence at the time such software and content was developed. Members could assert claims against us or the government, or qui tam relators on behalf of the government could assert claims against us under the federal False Claims Act or similar state laws, if we interpret those laws, regulations, or rules incorrectly; the laws, regulations, or rules materially change at any point after the software and content was developed; we fail to provide up-to-date, accurate information; or our products or services are otherwise associated with incorrect, inaccurate, or faulty coding, billing, or claims submissions by our members. The assertion of such claims and ensuing litigation, regardless of the resolution, could result in substantial costs to us, divert management’s attention from operations, damage our reputation, and decrease market acceptance of our services. Although we attempt to limit by contract our liability to customers for damages, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable or otherwise protect us from liability for damages. We cannot limit liability the government could seek to impose on us under the False Claims Act.

If we fail to comply with federal and state laws governing health care fraud and abuse or reimbursement, we may be subject to civil and criminal penalties or loss of eligibility to participate in government health care programs.

A number of federal and state laws, including physician self-referral laws, anti-kickback restrictions, and laws prohibiting the submission of false or fraudulent claims, apply to health care providers, physicians, and others that make, offer, seek, or receive referrals or payments for products or services that may be paid for through any federal or state health care program and, in some instances, private programs. These laws are complex and change rapidly and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities recently have increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other health care reimbursement laws and rules. From time to time, participants in the health care industry receive inquiries or subpoenas to produce documents in connection with government investigations. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted from operations by these efforts.

These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Errors created by our proprietary applications or that relate to claims or cost report information or services that relate to relationships between our members and other health care providers, including physicians, may be determined or alleged to be in violation of these laws and regulations. Any failure of our proprietary applications or services, including consulting and management services, to comply with these laws and regulations could result in substantial civil or criminal liability and could, among other impacts, adversely affect demand for our services, invalidate all or portions of some of our contracts with our members, require us to change or terminate some portions of our business, cause us to be disqualified from serving customers doing business with government payors, and give our members the right to terminate our contracts with them.

We could become subject to regulation by the Food and Drug Administration if functionality in one or more of the software applications we offer causes the software to be considered a medical device.

The overall framework of the laws and regulations administered by the Food and Drug Administration, or FDA, applies to all products that meet the definition of a “medical device.” To the extent that functionality in one or more of the software products we currently or may in the future offer causes the software to be considered a medical device under existing FDA regulations or policies or under regulations and policies now under active consideration by the FDA, we, as a provider of application functionality, could be required, depending on the functionality, to:

• register our company and list products with the FDA;

• notify the FDA and demonstrate substantial equivalence to other products on the market before marketing our functionality;

• obtain FDA approval by demonstrating the safety and effectiveness of the regulated products prior to marketing; and

• comply with various FDA regulations, including the agency’s quality system regulation, medical device reporting regulations, corrections and removal reporting regulations, and post-market surveillance regulations.

The FDA can impose extensive requirements governing pre- and post-market conditions, such as service investigation and conditions relating to approval, labeling, and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes. Any application of FDA regulations to our business could adversely affect our financial results by increasing our operating costs, slowing our time to market for regulated software products, and making it uneconomical to offer some software products.

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Risks Related to Our Operations

Our revenue and results of operations may suffer if we are unable to attract new members, obtain renewals from existing members, or sell additional products and services.

We derive most of our revenue from annual memberships for our programs, products, and services. Our growth therefore depends on our ability to attract prospects to their first membership, achieve and sustain high renewal rates on existing memberships, and sell additional products and services to existing members. This depends on our ability to understand and anticipate market and pricing trends and members’ needs, the continuity of our principal contacts at a member organization, our members’ budgetary environment, and our ability to deliver consistent, reliable, high-quality, and timely products and services that are more attractive than those of our competition. Failure to achieve new member additions, to deliver acceptable member renewal rate levels, or to cross-sell additional memberships and services to existing members at the level we forecast could materially and adversely affect our operating results.

If we are unable to maintain our reputation and expand our name recognition, we may have difficulty attracting new business and retaining current members.

Our professional reputation is an important factor in attracting and retaining our members and in building relationships with the progressive health care and education organizations that supply many of the best practices we feature in our research. We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining members. Promotion and enhancement of our reputation will depend largely on our success in continuing to provide effective solutions. Our brand name and reputation will suffer, and our ability to attract new members or retain existing members could be adversely affected, if members do not perceive our solutions to be effective or of high quality or if there are inaccuracies or defects in our solutions.

If we are not able to offer new and valuable products and services, our business may suffer.

Our success depends on our ability to identify and develop new products and services that serve specific constituencies, to anticipate changing market trends, and to adapt our research, software applications, and analysis to meet the changing needs of our members. We may not be able to provide helpful and timely research and analysis of developments and trends in a manner that meets market needs. Any such failure could cause some of our existing products and services to become obsolete, particularly in the health care industry, where needs continue to evolve rapidly with the introduction of new technology and the obsolescence of old technology, changing payment systems and regulatory requirements, shifting strategies and market positions of major industry participants, and changing objectives and expectations of health care consumers. This environment of rapid and continuous change presents significant challenges to our ability to provide our members with timely research, software applications, and consulting and management services for issues and topics of importance. As a result, we must continue to invest resources in development of new programs and services in order to enhance our existing products and services and introduce new high-quality products and services that will appeal to members and potential members.

Many of our member relationships are non-exclusive or terminable after a specified term. If our new or modified product and service innovations are not responsive to user preferences or emerging industry standards or regulatory changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing members, be unable to obtain new members, or incur impairment of capitalized software development assets.

Because many of our programs offer a standardized set of services that allows us to spread our largely fixed program cost structure across our membership base of participating organizations, we may lose money on or terminate a program if we are unable to attract or retain a sufficient number of members in that program to cover our costs. Terminating a program could adversely affect our business by causing dissatisfaction among members of the terminated program and by impairing our reputation with current and potential members.

Competition may adversely affect our business.

Any failure by us adequately to identify, understand, or address competitive pressures could have a material adverse effect on our business. We compete in discrete programs and for discretionary dollars against health care-focused, education-focused, and multi-industry firms. These include traditional consulting firms; market research, data, benchmarking and forecasting providers; technology vendors and services firms; health care and education information technology firms; technology advisory firms; and specialized providers of educational and training services. Other entities, such as state and national trade associations, group purchasing organizations, non-profit think-tanks, and database companies, also may offer research, consulting, data-enabled services, and education services to health care and education organizations that are competitive with our programs.

We compete on the basis of several factors, including breadth, depth, and quality of product and service offerings, ability to deliver clinical, financial, and operational performance improvement through the use of products and services, quality and

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reliability of services, ease of use and convenience, brand recognition, and the ability to integrate services with existing technology. Some of our competitors are more established, benefit from greater name recognition, have larger member bases, and have substantially greater financial, technical, and marketing resources. Other of our competitors have proprietary technology that differentiates their product and service offerings from ours. As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands, products, and services, and make more attractive offers to our members.

We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other factors, competition within the industry, consolidation of health care industry participants, practices of managed care organizations, government action affecting reimbursement, government action affecting access to student loans, and financial stress experienced by our members. If our pricing experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected.

We cannot be certain that we will be able to retain our current members or expand our member base in this competitive environment. If we do not retain current members or expand our member base, our business, financial condition, and results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of consolidation in both the health care information technology and health care industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively and could harm our business, financial condition, and results of operations.

Our prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees.

Our future success depends upon our ability to hire, train, motivate, manage, and retain a significant number of highly skilled employees, particularly research analysts, technical experts, and sales and marketing staff. We have experienced, and expect to continue to experience, competition for professional personnel from management consulting firms and other producers of research, technology, and analysis services. Hiring, training, motivating, managing, and retaining employees with the skills we need is time consuming and expensive. Any failure by us to address our staffing needs in an effective manner could hinder our ability to continue to provide high-quality products and services, implement software applications, complete existing member engagements, or attract new members.

Unsuccessful design or implementation of our software may harm our future financial results.

Software development and implementation can take long periods of time and require significant capital investments. If our software applications are less effective, cost-efficient, or attractive to our members than they anticipate or do not function as expected or designed, we may not recover the development costs, and our competitive position, operations, or financial results could be adversely affected. In addition, any defects in our software applications or other intellectual property could result in additional development costs, the diversion of technical and other resources from our other development efforts, significant cost to resolve the defect, loss of members, harm to our reputation, risk of nonpayment, loss of revenue, and exposure to liability claims. We also rely on technology and implementation support provided by others in some of our programs that offer software applications. Our business could be harmed by defects in this technology or by the failure of third parties to provide timely and accurate services.

Some of our products and services are complex and require significant work to implement. If the member implementation process is not executed successfully or if execution is delayed, our relationships with some of our members may be adversely impacted, and our results of operations may be negatively affected. In addition, cancellation of any of our products and services after implementation has begun may involve loss to us of time, effort, and resources invested in the canceled implementation as well as lost opportunity for acquiring other members over the same period.

We may experience significant delays in generating, or an inability to generate, revenue if potential members take a long time to evaluate our products and services.

A key element of our strategy is to market our products and services directly to health care providers, such as health systems and acute care hospitals, and education institutions, such as colleges and research universities, to increase the number of our products and services utilized by existing members. If we are unable to sell additional products and services to existing hospital, health system, and education members, or enter into and maintain favorable relationships with other health care providers or education organizations, our ability to increase our revenue could be materially adversely affected. We do not control many of the factors that will influence the decisions of these organizations regarding the purchase of our products and services. The evaluation process sometimes can be lengthy and involve significant technical evaluation and commitment of personnel by these organizations. The use of our products and services also may be delayed due to reluctance to change or modify existing procedures.

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Unsuccessful delivery of our consulting and management services may harm our future financial success.

We provide strategic and operational support to our member institutions to help them achieve key clinical quality and financial performance goals, as well as to accelerate the implementation of best practices profiled in our research studies and to perform some services that they otherwise may perform themselves. If we do not deliver our services in an appropriate or timely manner, our relationships with some of our members and our results of operations may be negatively affected. To maintain our annual revenue and contract value from our consulting and management services, we will have to sell new consulting and management engagements each year as we complete other consulting and management engagements. We may not be successful in selling consulting and management engagements in the future as a result of a lack of continued market acceptance of our offerings or other factors. We also are subject to litigation for any failure to provide our services appropriately or in a timely manner.

We could sustain a material loss of business, substantial legal liability, and significant harm to our reputation as a result of an actual or attempted breach of security, unauthorized disclosure of information, denial of service attack, or the perception that personal or other sensitive or confidential information in our possession is not secure.

We receive, collect, process, and use a large amount of data and information from our employees and from or on behalf of our members and prospective members and other third parties in the course of our operations, including personally identifiable, protected health, and other sensitive and confidential information. This data and information are often accessed by us and our members through transmissions over public and private networks, including the Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our information technology systems. We have implemented security measures, technical controls, and contractual precautions designed to identify, detect, and prevent unauthorized access, alteration, use, or disclosure of our and our clients' and employees' data. These measures, however, may not provide absolute security. Beyond external criminal activity, systems that access or control access to our services and databases may be compromised as a result of human error, fraud, or malice on the part of employees or third parties, or may result from accidental technological failure. Because the techniques used to obtain unauthorized access, disable service, or sabotage systems change frequently, may originate from less regulated and remote areas around the world, and generally are not recognized until launched against us, we may be unable to address proactively these techniques or to implement adequate preventative measures.

If someone is able to circumvent or breach our security systems, they could misappropriate information or cause interruptions to our operations. Successful or attempted security breaches also could damage our reputation and expose us to a risk of monetary loss, litigation, fines, and sanctions. We also face risks associated with security breaches affecting third parties that conduct business with us or our members and others who interact with our data. Although we maintain insurance against loss for certain security and privacy breaches, we may not carry appropriate insurance or maintain sufficient coverage to compensate for all potential liability.

The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after an incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential members that may impede our critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our members or other third parties could expose us, our members, or other third parties affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business. In addition, we rely in certain limited capacities on third-party data management providers whose possible security problems and security vulnerabilities may have similar effects on us.

Our business could be harmed by disruptions in service or operational failures at our data centers or at other service provider locations related to the storage, transmission, and presentation of member data.

Our data centers and service provider locations store and transmit critical member data that is essential to our business. While these locations are chosen for their stability, failover capabilities, and system controls, we do not directly control the continued or uninterrupted availability of every location. Interruptions in service or damage to locations may be caused by natural disasters, power loss, Internet or network failures, operator error, security breaches, computer viruses, denial-of-service attacks, or similar events, and could result in service interruptions, delays in access, or the destruction of data. Disaster recovery, data backups, and business continuity planning address many of these possible service interruptions, but the varied types and severity of the interruptions that could occur may render our safeguards inadequate. These service interruption events could impair our ability to deliver services or products or cause us to miss specified service levels in our agreements with our members, which could negatively affect our ability to retain existing members and attract new members.

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We may be liable to our members and may lose members if we are unable to collect and maintain member data or if we lose member data.

Because of the large amount of data that we collect and manage from our members and other third parties and the increasing use of technology in our programs, hardware failures or errors in our processes or systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our members regard as significant. Further, our ability to collect and report data may be interrupted or limited by a number of factors, including the failure of our network, software systems, or software applications, or the terms of our members’ contracts with their third-party suppliers. Computer viruses may harm our systems, causing us to lose data, and the transmission of computer viruses could expose us to litigation. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to capture, store, supply, utilize, and report information, our reputation could be harmed and we could lose existing members and experience difficulties in attracting new members.

Failure by our members to obtain proper permissions and waivers for use and disclosure of the information we receive from them or on their behalf may result in claims against us or may limit or prevent our use of data, which could harm our business.

We require our members to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of the information that we receive, and we require contractual assurances from our members that they have done so and will do so. If our members do not obtain necessary permissions and waivers, our use and disclosure of information that we receive from them or on their behalf may be limited or prohibited by state or federal privacy laws or other laws. Any such failure to obtain proper permissions and waivers could impair our functions, processes, and databases that reflect, contain, or are based on such data and may prevent our use of such data. In addition, such a failure could interfere with or prevent creation or use of rules and analyses or limit other data-driven activities that benefit us. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of our lack of a valid notice, permission, or waiver. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.

Our sources of data might restrict our use of or refuse to license us such data, which could adversely affect our ability to provide certain products or services.

A portion of the data that we use is purchased, licensed, or otherwise obtained from third parties, including from our members, government entities, and public records. We believe that we currently have the rights necessary to use the data that are incorporated into our products and services, although our licenses for information may not allow us to use that information for all potential or contemplated applications and products. These third parties could seek to withdraw their data from us for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data, or if judicial or regulatory interpretations are issued restricting use of the data, and they also could fail to adhere to our data quality standards, causing us to incur additional expense to utilize the data appropriately. If a substantial number of data providers withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and services to our members could be materially adversely impacted, and would have a material adverse effect on our business, financial condition, and results of operations.

If we are unable to maintain our third-party providers or strategic alliances, or enter into new alliances, we may be unable to expand our current business.

Our business strategy includes entering into strategic alliances and affiliations with leading service providers. If existing alliances are terminated or we are unable to enter into alliances with such providers, we may be unable to maintain or increase our market presence. We work closely with our strategic partners either to expand our penetration in certain areas or to expand our market capabilities. We may not achieve our objectives through these alliances. Many of these companies have multiple relationships and they may not regard us as significant to their business. Moreover, these companies, in certain circumstances, may pursue relationships with our competitors or develop or acquire products and services that compete with our products and services.

Our business could be harmed if we are no longer able to license, integrate, or access third-party technologies and data.

We depend upon licenses from third-party vendors for some of the technology and data used in our software applications, for some of the technology platforms upon which these applications operate. We also use third-party software to maintain and enhance content generation and delivery, and to support our technology infrastructure. These technologies might not continue to be available to us on commercially reasonable terms, or at all. Most of these licenses can be renewed only by mutual agreement and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period. Our inability to obtain any of these licenses could delay our ability to provide services until alternative technology can be identified, licensed, and integrated, which may harm our financial condition and results of operations. Some of our third-party licenses are

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non-exclusive, and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us.

Our use of third-party technologies exposes us to increased risks, including risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology, and the generation of revenue from licensed technology sufficient to offset associated procurement and maintenance costs. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions to operate as effectively without this technology.

In addition, we need to access a member’s information technology systems, some of which are provided to our members by third parties, in order to extract some of the member’s data for certain of our software applications or otherwise to provide some of our consulting and management services to the member. Some of those third parties may limit, condition, or otherwise deny us access to those systems for any reason, including if there is a competitive reason to do so. Our inability to obtain timely access to a member’s system on reasonable terms may increase the cost to deliver such services to our members and may adversely affect our ability to serve or retain existing members, gain new members, or continue to provide certain services.

Potential liability claims may adversely affect our business.

Our services, which may include recommendations and advice to organizations regarding complex business and operational processes, regulatory and compliance issues, and labor practices, may give rise to liability claims by our members or by third parties who bring claims against our members. Health care and education organizations often are the subject of regulatory scrutiny and litigation, and we also may become the subject of such litigation based on our advice and services. Any such litigation, whether or not resulting in a judgment against us, may adversely affect our reputation and could have a material adverse effect on our financial condition and results of operations. We may not have adequate insurance coverage for claims against us.

If the protection of our intellectual property is inadequate, our competitors may gain access to our intellectual property and we may lose our competitive advantage.

Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of internal controls, contractual arrangements, and legal protections to protect our proprietary rights in our products and services. The steps we have taken to protect our intellectual property rights may not be adequate to deter misappropriation of our rights and may not enable us to detect unauthorized uses and take timely and effective steps to enforce our rights. Our financial condition and results of operations could be negatively affected if we lose our competitive advantage because others are able to use our intellectual property. If unauthorized uses of our proprietary products and services were to occur, we may be required to engage in costly and time-consuming litigation to enforce our rights, and we might not prevail in any such litigation. If others were able to use our intellectual property, our ability to charge our fees for our products and services could be adversely affected. In addition, we may be subject to infringement claims as we become more well-known to non-operating entities, sometimes referred to as patent trolls, or to competitors, that assert patents against other entities.

If we are alleged to infringe, misappropriate, or violate the proprietary rights of third parties, we could incur unanticipated expense and be prevented from providing our products and services.

We could be subject to intellectual property infringement, misappropriation, or other intellectual property violation claims to the extent that our research content and applications’ functionality may overlap with competitive products, and third parties may claim that we do not own or have rights to use all intellectual property rights used in the conduct of our business. We cannot assure you that infringement, misappropriation, or claims alleging intellectual property violations will not be asserted against us. Also, we cannot assure you that any such claims will be unsuccessful. We could incur substantial costs and diversion of management resources defending any such claims. Further, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. Licenses for any intellectual property of third parties that might be required for our products or services may not be available on commercially reasonable terms, or at all. Such claims also might require us to indemnify of our members at significant expense.

A number of our contracts with our members contain indemnity provisions in which we indemnify such members against certain losses that may arise from third-party claims that are brought in connection with the use of our products.

Our exposure to risks associated with the use of intellectual property may be increased as a result of our acquisitions of technology, as we have limited information about the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.

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Our use of open source technology could adversely affect our ability to commercialize our software applications and subject us to possible litigation.

The products or technologies acquired, licensed, or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future. Such open source software generally is licensed by its authors or other third parties under various public domain or other open source licenses. Some open source software licenses require users who distribute open source software as part of their software to disclose publicly all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. There is little or no legal precedent governing the interpretation of many of the terms of these licenses and therefore the potential impact of such terms on our business is unknown and may result in unanticipated conditions or restrictions on our ability to market our software applications.

If an author or other party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations. If our defenses were not successful, we could be subject to significant damages, be enjoined from the distribution of our products that contained the open source software, and be required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, we could be required under some open source licenses to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours.

We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our operating results.

In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. In addition, as discussed in Note 2 to our consolidated financial statements for the year ended December 31, 2016 included in this report, we make certain estimates, including decisions related to provisions for uncollectible revenue, income taxes, and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. If any of these estimates and assumptions should change or prove to have been incorrect, our reported operating results could be materially adversely affected.

Any significant increase in bad debt in excess of recorded estimates would have a negative impact on our business, financial condition, and results of operations.

Our operations may incur unexpected losses from unforeseen exposures to member credit risk. We initially evaluate the collectability of our accounts receivable based on a number of factors, including a specific member’s ability to meet its financial obligations to us, the length of time the receivables are past due, and historical collections experience. Based on these assessments, we record a reserve for specific account balances as well as a general reserve based on our historical experience for bad debt to reduce the related receivables to the amount we expect to collect from members. If circumstances related to specific members change as a result of economic conditions or otherwise, such as a limited ability to meet financial obligations due to bankruptcy, or if conditions deteriorate to the extent that our past collection experience is no longer relevant, the amount of accounts receivable that we are able to collect may be less than our previous estimates as we experience bad debt in excess of reserves previously recorded.

We are continuing to integrate the operations of Royall and other acquisitions into our business, and we may be unable to do so in the manner expected.

Our ability to achieve the anticipated benefits of our acquisition of Royall Acquisition Co., or Royall, and other acquisitions continue to be subject to a number of uncertainties. The integration of Royall’s operations, which is continuing in 2017, could result in brand confusion, reduced employee morale and engagement, the disruption of our businesses, processes, and systems, inconsistencies in standards, controls, procedures, practices, and policies, and a significant burden on our management and internal resources, any of which could adversely affect our ability to achieve the anticipated the benefits of the acquisition as and when expected, or at all. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenue and efficiencies from the Royall and other, smaller acquisitions and could adversely affect our operating results and future growth.

We may pursue other acquisition opportunities, which could subject us to considerable business and financial risk.

We evaluate potential acquisitions of complementary businesses on an ongoing basis and may from time to time pursue acquisition opportunities. We may not be successful in identifying acquisition opportunities, assessing the value, strengths, and weaknesses of these opportunities, or completing acquisitions on acceptable terms. Future acquisitions may result in dilution to

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our earnings, including as a result of dilutive issuances of equity securities we may pay as acquisition consideration. Acquisitions may expose us to particular business and financial risks, including risks that we may:

• suffer the diversion of financial and management resources from existing operations;

• incur indebtedness and assume additional liabilities, known and unknown, including liabilities relating to the use of intellectual property we acquire;

• incur significant additional capital expenditures, transaction expenses, operating expenses, and non-recurring acquisition-related and integration charges;

• experience an adverse impact on our earnings from the amortization or impairment of acquired goodwill and other intangible assets;

• fail to integrate successfully the operations and personnel of the acquired businesses;

• enter new markets or market new products with which we are not entirely familiar; and

• fail to retain key personnel of, vendors to, and clients of the acquired businesses.

If we are unable to manage the risks associated with acquisitions, or if we experience unforeseen expenses, difficulties, complications, or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, we may fail to achieve expected cost savings, revenue opportunities, and other expected benefits of our acquisition strategy and may be required to focus resources on integrating the acquired operations rather than on our primary product and service offerings.

Goodwill impairment charges may adversely affect our operating results.

Goodwill represents the excess purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. We have a substantial amount of goodwill on our balance sheet generated in connection with our acquisitions and business growth strategy. As of December 31, 2016, our goodwill of approximately $739.5 million represented approximately 36.3% of our total assets as of that date. We test the goodwill balances allocated to our reporting units for impairment on an annual basis and if events occur or circumstances change that indicate that the fair value of one or more of our reporting units may be below its carrying amount. A decline in the quoted market price of our stock could denote a triggering event indicating that goodwill may be impaired. When testing goodwill for impairment, we determine fair value using both an income and market approach. The income approach is based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital, or WACC. The market approach is based on revenue and earnings multiple data of peer companies. Because market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the fair value of the reporting units, including estimating revenue growth rates, operating margins, terminal growth rates, and discount rates. We also perform a reconciliation between our market capitalization and our estimate of the aggregate fair value of the reporting units, including consideration of a control premium. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in the estimates and assumptions described above.

In connection with our annual goodwill assessment on October 1, 2015, management reduced its cash flow projections for Royall due in part to first year performance being below the expectations we had set as of the acquisition date. Based on the results of the impairment test, we recorded an impairment charge of 15.3% of Royall’s goodwill. For information about this $99.1 million impairment charge, see Note 7, “Goodwill and intangibles,” to our consolidated financial statements included in this report.

Continued lower than expected revenue growth, a trend of weaker than anticipated financial performance, including the pace and extent of operating margin, a decline in our share price from current levels for a sustained period of time, or an increase in the market-based WACC, among other factors, could significantly impact our impairment analysis and may result in further goodwill impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Policies - Goodwill and Other Intangible Assets.”

We may invest in companies for strategic reasons and may not realize a return on our investments.

From time to time, we may make investments in companies to further their strategic objectives and support our key business initiatives. Such investments could include equity or debt instruments in private companies, many of which may be not be marketable at the time of our initial investment. These companies may range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The success of these companies may depend on product development, market acceptance, operational efficiency, and other key business factors. The companies in which we invest may fail because they may not be able to secure additional funding, obtain

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favorable investment terms for future financings, or take advantage of liquidity events such as public offerings, mergers, and private sales. If any of these private companies fails, we could lose all or part of our investment in that company. If we determine that impairment indicators exist and that there are other-than-temporary declines in the fair value of the investments, we may be required to write down the investments to their fair value and recognize the related write-down as an investment loss.

If our members who operate as not-for profit entities lose their tax-exempt status, those members would suffer significant adverse tax consequences which, in turn, could adversely affect their ability to purchase products or services from us.

State tax authorities have challenged the tax-exempt status of hospitals and other health care facilities claiming such status on the basis that they are operating as charitable or religious organizations. The outcome of these cases has been mixed, with some facilities retaining their tax-exempt status and others being denied the ability to continue operating as not-for profit, tax-exempt entities under state law. In addition, many states have removed sales tax exemptions previously available to not-for-profit entities, and both the Internal Revenue Service and the U.S. Congress are investigating the practices of non-for profit hospitals. Those facilities denied tax exemptions could be subject to the imposition of tax penalties and assessments that could have a material adverse impact on their cash flow, financial strength, and, in some cases, continuing viability. If the tax-exempt status of any member is revoked or compromised by new legislation or interpretation of existing legislation, that member’s financial health could be adversely affected, which could have a negative impact on our sales to the member.

If we are required to collect sales and use taxes on the programs we sell in various jurisdictions, we may be subject to liability for past sales and incur additional related costs and expenses and may experience a decrease in our future sales.

We may lose sales or incur significant expenses if states are successful in imposing state sales and use taxes on our services. A successful assertion by one or more states that we should collect sales or other taxes on the sale of our services could result in substantial tax liabilities for past sales, decrease our ability to compete with software vendors not subject to sales and use taxes, and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe that our services are subject to sales and use taxes in a particular state, may approach state tax authorities to determine how to comply with their rules and regulations. We may become subject to sales and use taxes and related interest and penalties for past sales in states where we believe no compliance is necessary. If we are required to collect and pay back taxes and the associated interest and penalties, and if our members fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on our future services will effectively increase the cost of such services to our members and may adversely affect our ability to retain existing clients or to gain new members in the states in which such taxes are imposed.

We may not be able to fully realize our deferred tax assets.

For tax purposes, we have deferred income tax assets consisting primarily of state income tax credit and net operating loss carryforwards. As of December 31, 2016, our deferred income tax assets totaled approximately $52.5 million, which constituted approximately 2.6% of our total assets as of that date. If our future taxable income is less than we believe it will be, we may not be able to fully realize our deferred tax assets. In estimating future tax consequences, we do not consider the effect of future changes in existing tax laws or rates in the determination and evaluation of deferred tax assets and liabilities until the new tax laws or rates are enacted. We have established our deferred income tax assets and liabilities using currently enacted tax laws and rates. We will recognize an adjustment to income for the impact of new tax laws or rates on the existing deferred tax assets and liabilities when and if new tax laws or rates are enacted that have an impact on our deferred income taxes.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

We are subject to income and other taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating our provision for income taxes. We also are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation, or the effects of a change in tax policy in the United States or in any of the international jurisdictions where we do business, could have a material effect on our operating results in the period or periods for which that determination is made.

Our growing operations in India expose us to risks that could have an adverse effect on our costs of operations.

As of December 31, 2016, we employed approximately 370 employees in India through our Indian subsidiary, ABCO Advisory Services India Private Ltd., which expects to continue adding personnel. While there are cost advantages to operating in India, significant growth in the technology sector in India has increased competition to attract and retain skilled employees and has led to a commensurate increase in compensation expense. In the future, we may not be able to hire and retain such

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personnel at compensation levels consistent with our existing compensation and salary structure in India. In addition, our reliance on a workforce in India exposes us to disruptions in the business, political, and economic environment in that region. Maintenance of a stable political environment is important to our operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. Our operations in India require us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. Our Indian operations also may subject us to trade restrictions, reduced or inadequate protection for intellectual property rights, and security breaches. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.

As a result of the inherent limitations in our internal control over financial reporting, misstatements due to error or fraud may occur and not be detected.

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file with or submit to the SEC under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to management and recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls.

Risks Related to Our Indebtedness

Our level of debt and interest payment obligations may limit our growth and operational flexibility.

As of December 31, 2016, we had approximately $524.7 million in aggregate outstanding indebtedness, consisting of $424.7 million in borrowings under our senior secured term loan facility and $100 million in borrowings under our senior secured revolving credit facility. As of the same date, we could incur up to an additional $80.9 million of indebtedness outstanding at any time under our senior secured revolving credit facility. This substantial level of indebtedness may have important consequences. For example, it may:

• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;

• limit our ability to obtain additional financing to expand our business or alleviate liquidity constraints, as a result of financial and other restrictive covenants in our indebtedness;

• limit our ability to pursue our acquisition strategy;

• increase our vulnerability to general adverse economic and industry conditions;

• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

• place us at a competitive disadvantage relative to companies that have less indebtedness.

Covenants under our senior secured credit agreement may restrict our future operations.

Our senior secured credit agreement imposes operating and financial restrictions that limit our discretion on certain business matters, which could make it more difficult for us to expand, finance our operations, and engage in other business activities that may be in our interest. These restrictions include a requirement that we comply on a quarterly basis with financial covenants. Our debt covenants limit our ability and the ability of our subsidiaries to:

• incur indebtedness;

• create liens on assets;

• pay cash dividends;

• repurchase shares of our common stock or make other restricted payments;

• make investments in or loans to other parties;

• sell assets;

• engage in mergers and acquisitions;

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• enter into transactions with affiliates;

• enter into sale and leaseback transactions; and

• engage in businesses other than businesses of the type we conduct currently.

We may incur indebtedness in addition to the foregoing indebtedness. Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.

We are subject to interest rate risk that could cause us to incur unanticipated costs.

Borrowings under our senior secured credit agreement are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed would remain the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. We have entered into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility for a notional amount of $262.3 million as of December 31, 2016. However, we may not maintain interest rate swaps with respect to all of our variable-rate indebtedness and any swaps we enter into may not fully mitigate our interest rate risk. Additionally, hedging transactions involve additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions, and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense.

In the event that we need to refinance all or a portion of our outstanding debt before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing debt or refinance our existing debt at all. If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, the interest expense relating to the refinanced debt would increase.

Hedging instruments often are not guaranteed by an exchange or its clearing house and involve risks and costs.

Hedging instruments involve risk since they are often not guaranteed by an exchange or a clearing house. The enforceability of agreements underlying derivative transactions may depend on compliance with applicable regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with which we enter into a hedging transaction would most likely result in a default, which would result in the loss of unrealized gains and force us to cover our resale commitments, if any, at the then current market price. Although we generally seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until its expiration, which could result in losses.

Risks Related to Our Common Stock

Any failure by us to maintain effective internal control over financial reporting may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on the effectiveness of our internal control over financial reporting and to include a report by our independent auditors attesting to such effectiveness. Any failure by us to maintain effective internal control over financial reporting could adversely affect our ability to report accurately our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent auditors determine that we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remediate any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, also could restrict our future access to the capital markets. As discussed in this report under “Controls and Procedures,” our management has concluded that we have a material weakness in our internal control over financial reporting related to our tax process.

Our issuance of additional capital stock in connection with financings, acquisitions, investments, our stock incentive plans, or otherwise could adversely affect the market price of our common stock.

Our charter authorizes us to issue up to 135,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations and our debt covenants, we may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investment, our stock incentive plans, or otherwise. We may issue additional shares of common stock at a discount from the market price of our common stock on the

25

issue date. Any issuance of stock could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.

Provisions in our charter and bylaws could discourage takeover attempts we oppose even if our stockholders might benefit from a change in control of our company.

Provisions in our charter and bylaws may make it difficult and expensive for a third party to pursue a takeover attempt we oppose even if a change in control of our company would be beneficial to the interests of our stockholders. These provisions also could make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you support. The charter and bylaw provisions:

• provide that the number of directors that will constitute the entire board of directors will be determined by a resolution of a majority of the board of directors;

• provide that any vacancy on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors then in office;

• provide that a special meeting of stockholders may be called only by a majority of the directors then in office, by the chairman of the board of directors, or by any holder or holders of at least 40% of the outstanding shares of capital stock then entitled to vote on any matter for which the special meeting is being called;

• prohibit stockholders from taking action by written consent in lieu of a meeting with respect to any actions that are required or permitted to be taken by stockholders at any annual or special meeting of stockholders;

• provide authority for our board of directors without stockholder approval to provide for the issuance of up to 5,000,000 shares of preferred stock, in one or more classes or series, with terms and conditions, and having rights, privileges and preferences, to be determined by the board of directors; and

• establish advance notice procedures for stockholders to make nominations of candidates for election as directors or to present any other business for consideration at any annual or special stockholder meeting.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our headquarters is located in approximately 340,000 square feet of office space in Washington, D.C. The facilities accommodate research, delivery, marketing and sales, software development, information technology, administration, and operations personnel. We occupy our headquarters facilities under an operating lease that expires in May 2019. The lease contains provisions for rental escalation and requires us to pay our portion of our executory costs such as taxes, insurance, and operating expenses.

In December 2015, we entered into a new lease to move our headquarters to a building that is being constructed in Washington, D.C. We expect to occupy the building for 16 years, starting no later than May 1, 2019. Payments to the landlord under our new lease agreement will not begin until May 2019.

As of December 31, 2016, we also leased office space under operating leases in Birmingham, Alabama; San Francisco, California; Chicago, Illinois; Bloomington, Minnesota; Plymouth Meeting, Pennsylvania; Nashville, Tennessee; Austin, Texas; Houston, Texas; Richmond, Virginia; and London, England. We also lease office space in Chennai, India through our Indian subsidiary, ABCO Advisory Services India Private Ltd. For information about our leases, see Note 14, “Commitments and contingencies,” to our consolidated financial statements included elsewhere in this report. We believe that our facilities are adequate for our current needs and that additional facilities will be available for lease on a commercially reasonable basis to accommodate our anticipated growth.

Item 3. Legal Proceedings.

From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.

Item 4. Mine Safety Disclosures.

None.

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PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the Global Select Market of The NASDAQ Stock Market LLC and is traded under the NASDAQ symbol “ABCO.” The following table sets forth, for our last two fiscal years, the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market.

	High		Low
Year Ended December 31, 2016:
First quarter	$	49.17	$	18.87
Second quarter	$	36.45	$	28.99
Third quarter	$	48.86	$	34.48
Fourth quarter	$	44.85	$	24.85
Year Ended December 31, 2015:
First quarter	$	56.49	$	43.00
Second quarter	$	54.94	$	46.67
Third quarter	$	60.38	$	43.59
Fourth quarter	$	54.84	$	40.70

As of February 28, 2017, there were nine holders of record of our common stock and 40,235,820 shares of common stock outstanding. The number of record holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker, bank, or other nominee, but does include each such broker, bank, or other nominee as one record holder.

We have not declared or paid any cash dividends on our common stock since we became a public company in 2001. We do not currently anticipate declaring or paying any cash dividends. The timing and amount of future cash dividends, if any, is periodically evaluated by our board of directors and would depend on, among other factors, our earnings, financial condition, cash requirements, and restrictions on dividend payments under our senior secured credit facilities.

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The Advisory Board Company Stock Comparable Performance Graph

The graph below compares the cumulative total stockholder return on our common stock during the period from March 31, 2012 through December 31, 2016, with the cumulative total return on the S&P 500 Index, the Russell 2000 Index, and the NASDAQ Composite Index for the same period. The comparison assumes that $100 was invested on March 31, 2012 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

	The Advisory Board Company		S&P 500 Index		Russell 2000 Index		NASDAQ Composite Index
March 31, 2012	$	100	$	100	$	100	$	100
March 31, 2013	$	119	$	114	$	116	$	107
March 31, 2014	$	145	$	139	$	145	$	139
December 31, 2014	$	111	$	155	$	151	$	159
December 31, 2015	$	112	$	157	$	144	$	170
December 31, 2016	$	75	$	176	$	175	$	185

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Item 6. Selected Financial Data.

The following table presents our selected financial data. The table should be read in conjunction with our consolidated financial statements, the notes to the consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report. In November 2014, we elected to change our fiscal year from the period beginning on April 1 and ending on March 31 to the period beginning on January 1 and ending on December 31.

	Year Ended December 31,						Nine Months Ended December 31,			Year Ended March 31,
	2016			2015			2014			2014			2013
(In thousands except per share amounts)
Statements of Operations Data:
Revenue	$	803,424		$	768,348		$	434,002		$	519,429		$	450,286
Costs and expenses:
Cost of services, excluding depreciation and amortization	392,956			392,676			230,769			271,923			237,605
Member relations and marketing	130,028			120,958			81,244			96,298			85,264
General and administrative	126,634			128,669			75,483			74,169			62,185
Depreciation and amortization	77,268			73,134			30,317			31,084			20,108
Impairment of capitalized software	—			8,166			2,086			—			—
Goodwill impairment	—			99,145			—			—			—
Total costs and expenses	726,886			822,748			419,899			473,474			405,162
Operating income (loss)	76,538			(54,400		)	14,103			45,955			45,124
Other (expense) income:
Interest expense	(18,137		)	(21,121		)	—			—			—
Other (expense) income, net	(2,789		)	(6,499		)	(1,327		)	2,706			2,604
Loss on financing activities	—			(17,398		)	—			—			—
Total other (expense) income, net	(20,926		)	(45,018		)	(1,327		)	2,706			2,604
Income (loss) before provision for income taxes and gains (losses) from equity method investments	55,612			(99,418		)	12,776			48,661			47,728
Provision for income taxes	(11,040		)	(15,200		)	(3,530		)	(18,737		)	(17,899		)
Gains (losses) from equity method investments	46,666			(4,396		)	(6,540		)	(6,051		)	(6,756		)
Net income (loss) before allocation to noncontrolling interest	91,238			(119,014		)	2,706			23,873			23,073
Net (loss) income and accretion to redemption value attributable to noncontrolling interest	—			—			(6,253		)	119			108
Net income (loss) attributable to common stockholders	$	91,238		$	(119,014	)	$	(3,547	)	$	23,992		$	23,181
Earnings per share:
Net income (loss) attributable to common stockholders per share – basic	$	2.25		$	(2.84	)	$	(0.10	)	$	0.67		$	0.67
Net income (loss) attributable to common stockholders per share – diluted	$	2.23		$	(2.84	)	$	(0.10	)	$	0.65		$	0.64
Weighted average number of shares outstanding:
Basic	40,528			41,888			36,213			35,909			34,723
Diluted	40,871			41,888			36,213			36,959			36,306

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	Year Ended December 31,						Nine Months Ended December 31,			Year Ended March 31,
	2016			2015			2014			2014			2013
(In thousands)
Stock-based compensation expense included in Statement of Operations:
Costs and expenses:
Cost of services	$	9,231		$	9,211		$	5,977		$	5,527		$	3,975
Member relations and marketing	5,028			5,176			3,348			3,688			2,643
General and administrative	15,176			14,706			8,640			9,002			7,295
Total costs and expenses	29,435			29,093			17,965			18,217			13,913
Operating income	(29,435		)	(29,093		)	(17,965		)	(18,217		)	(13,913		)

	December 31,							March 31,
	2016		2015			2014		2014			2013
(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	91,151	$	71,825		$	72,936	$	23,129		$	57,829
Marketable securities	—		—			14,714		164,396			156,839
Working capital (deficit)	8,826		(25,454		)	46,635		(61,038		)	(26,720		)
Total assets	2,036,878		1,979,477			1,125,643		1,042,064			898,849
Deferred revenue	734,594		755,424			672,743		589,077			503,576
Total stockholders’ equity	517,044		449,091			317,810		336,665			283,185

	December 31,						March 31,
	2016		2015		2014		2014		2013
(unaudited)
Other Operating Data:
Contract value (in thousands) (1)	$	781,368	$	762,595	$	601,842	$	541,903	$	466,329

—————————————

(1) Represents the aggregate annualized revenue attributable to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The following management’s discussion and analysis should be read in conjunction with our audited consolidated financial statements included in this report.

In November 2014, we elected to change our fiscal year end from March 31 to December 31. We refer to the nine-month transition period that began on April 1, 2014 and ended December 31, 2014 as the 2014 transition period. We believe that a reader’s understanding of our results of operations will be enhanced by review of a comparison between our audited results for the fiscal year ended December 31, 2015, referred to as fiscal year 2015, and our unaudited results for the calendar year ended December 31, 2014, referred to as calendar year 2014. Accordingly we present our discussion and analysis under “Results of Operations” below based on comparisons of the results for such periods, as well as based on a comparison of the results of fiscal year 2015 to the results for our fiscal year ended December 31, 2016, referred to as fiscal year 2016.

Overview of Our Operations

We are a leading provider of insight-driven performance improvement software and solutions to the rapidly changing health care and education industries. Through our subscription-based membership programs and consulting capabilities, we leverage our intellectual capital to help our clients, which we refer to as our members, solve their most critical business problems. As of the date of this report, we served approximately 5,600 members.

Our membership business model allows us to create value for our members by providing proven solutions to common and complex problems as well as high-quality content and innovative software on a broad set of relevant issues. Our growth has been driven by strong renewal rates, expansion of our relationships with existing members, new program launches, acquisition activity, the addition of new members, and annual price increases. Our member institution renewal rate has equaled or exceeded 90% in each of the twelve-month fiscal periods in the three-year period ended December 31, 2016. We believe high renewal rates reflect of our members’ recognition of the value they derive from participating in our programs.

Our revenue grew 4.6% in fiscal year 2016 over fiscal year 2015 and 34.4% in fiscal year 2015 over calendar year 2014. Our contract value increased 2.5% from December 31, 2015 to $781.4 million as of December 31, 2016 and 26.7% from December 31, 2014 to $762.6 million as of December 31, 2015. We define contract value as the aggregate annualized revenue attributable to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement. In each of our programs, we generally invoice and collect fees in advance of accrual revenue recognition.

On January 3, 2017, we approved a restructuring plan as part of our ongoing efforts to better align our resources and health care business strategy to meet member needs and market demand as well as to improve efficiency and future growth. In connection with such restructuring plan, we will reduce our workforce as a part of a broader effort to more closely align operating expenses with our long-term strategic initiatives and current macroeconomic business conditions. The reduction-in-force will affect approximately 220 employees and is expected to be completed during fiscal year 2017. We expect to recognize approximately $7 to $9 million of pre-tax restructuring charges in fiscal year 2017 in connection with this reduction-in-force, consisting of severance and other employee termination benefits.

We expect revenue and rate of revenue growth to be stable year-over-year in fiscal year 2017 due to the exiting of certain products and services which do not fully align with our long-term strategy, the absence of acquisition activity in fiscal year 2016 after our acquisition of Royall in fiscal year 2015, and slower sales in the quarter ended December 31, 2016 offset by expansion of our relationships with existing members, the addition of new members, and annual price increases.

Our operating costs and expenses consist of cost of services, member relations and marketing expense, general and administrative expenses, depreciation and amortization expense, impairment of capitalized software, and goodwill impairment.

• Cost of services includes the costs associated with the production and delivery of our products and services, consisting of compensation for research, creative, data, and analysis personnel, consultants, software developers, and in-house faculty; costs of the organization and delivery of membership meetings, teleconferences, and other events; production and distribution of published materials; technology license fees; costs of developing and supporting our cloud-based content and software; and fair value adjustments to acquisition-related earn-out liabilities.

• Member relations and marketing expense includes the costs of acquiring new members and the costs of account management, and consists of compensation (including sales incentives), travel and entertainment expenses, and costs for training of personnel, sales and marketing materials, and associated support services.

• General and administrative expense includes the costs of human resources and recruiting; finance and accounting; legal support; management information systems; real estate and facilities management; corporate development; new program development; and other administrative functions.

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• 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 intangibles.

• Impairment of capitalized software includes the impairment charge taken to write down acquired technology and internally developed capitalized software balances to their fair value.

• Goodwill impairment includes the impairment charge taken to write down goodwill to its estimated fair value.

Our operating costs for each period include stock-based compensation expenses and expenses representing additional payroll taxes for compensation expense as a result of the taxable income employees recognize upon their exercise of common stock options and the vesting of restricted stock units issued under our stock incentive plans.

The inclusion of the results of acquired businesses affect the comparability of our results of operations for the periods addressed in this management’s discussion and analysis.

Non-GAAP Financial Presentation

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 accounting principles generally accepted in the United States of America, or “GAAP.” These financial measures, which are considered “non-GAAP financial measures” under SEC rules, are referred to as adjusted revenue, adjusted EBITDA, adjusted net income, non-GAAP earnings per diluted share, adjusted effective tax rate, and adjusted weighted average common shares outstanding - diluted. See “Non-GAAP Financial Measures” below for information about our use of these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of such measures, and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

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Results of Operations

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

	Year Ended December 31, (1)						Nine Months Ended December 31,
	2016		2015		2014		2014
					(Unaudited)
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of services, excluding depreciation and amortization	48.9		51.1		52.0		53.2
Member relations and marketing	16.2		15.7		18.8		18.7
General and administrative	15.8		16.7		16.5		17.4
Depreciation and amortization	9.6		9.5		6.8		7.0
Impairment of capitalized software	—		1.1		0.4		0.5
Goodwill impairment	—		12.9		—		—
Total costs and expenses	90.5		107.0		94.5		96.8
Operating income (loss)	9.5		(7.1	)	5.5		3.2
Interest expense	(2.3	)	(2.7	)	—		—
Other (expense) income, net	(0.3	)	(0.8	)	(0.1	)	(0.3	)
Loss on financing activities	—		(2.3	)	—		—
Total other (expense) income, net	(2.6	)	(5.9	)	(0.1	)	(0.3	)
Income (loss) before provision for income taxes and gains (losses) from equity method investments	6.9		(12.9	)	5.4		2.9
Provision for income taxes	(1.4	)	(2.0	)	(1.8	)	(0.8	)
Gains (losses) from equity method investments	5.8		(0.6	)	(1.6	)	(1.5	)
Net income (loss) before allocation to noncontrolling interest	11.3		(15.5	)	1.9		0.6
Net loss and accretion to redemption value attributable to noncontrolling interest	—		—		(1.1	)	(1.4	)
Net income (loss) attributable to common stockholders	11.3	%	(15.5	)%	0.8	%	(0.8	)%

(1) Shows the audited results for our fiscal year ended December 31, 2016 and 2015, the unaudited results for the calendar year ended December 31, 2014, and the audited results for the nine-month transition period that began on April 1, 2014 and ended on December 31, 2014.

Years ended 2016, 2015, and 2014

Net income (loss) attributable to common stockholders. Net income attributable to common stockholders was $91.2 million in fiscal year 2016 compared to net loss attributable to common stockholders of $119.0 million in fiscal year 2015. Our net income in fiscal year 2016 reflected an increase in revenue of $35.1 million, a $29.7 million post-tax gain on the sale of a portion of our shares in Evolent Inc., an $18.2 million post-tax dilution gain due to Evolent's acquisition activity, and a $3.0 million decrease in interest expense. The net loss in the prior year period was primarily attributable to a $99.1 million goodwill impairment, $21.1 million in interest expense related to new indebtedness, a $17.4 million loss on financing activities, and a discrete tax item of $10.8 million related to a write-off of accumulated Washington, D.C. tax credits as a result of changes in District of Columbia tax laws effective January 1, 2015. We did not incur comparable expenses in the current period.

Net loss attributable to common stockholders in fiscal 2015 also included an $8.2 million impairment of capitalized software, $6.6 million in acquisition-related costs, a $3.2 million impairment of a cost method investment, and increases in operating expenses, which were principally related to our acquisition of Royall. The effects of these items were partially offset by a $196.5 million increase in revenue over the revenue generated in calendar year 2014 and a non-cash accretion of $6.3 million in calendar year 2014 associated with the change in the redemption value of our redeemable noncontrolling interest in a private entity.

Revenue. Total revenue increased 4.6% to $803.4 million in fiscal year 2016 from $768.3 million in fiscal year 2015, while contract value increased 2.5% to $781.4 million as of December 31, 2016 from $762.6 million as of December 31, 2015.

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The increases in revenue and contract value were primarily attributable to membership growthin our Royall enrollment services, education research programs, student success software program, and EMR optimization services offering.

Total revenue increased 34.4% to $768.3 million in fiscal year 2015 from $571.8 million in calendar year 2014, while contract value increased 26.7% to $762.6 million as of December 31, 2015 from $601.8 million as of December 31, 2014. The increases in revenue and contract value were primarily attributable to our acquisition of Royall, strong performance in our consulting and management offerings, including the addition of EMR optimization services through acquisitions and continued growth in our software and research programs.

Cost of services. Cost of services increased to $393.0 million for fiscal year 2016 from $392.7 million for fiscal year 2015. As a percentage of revenue, cost of services was 48.9% and 51.1% for fiscal years 2016 and 2015, respectively. The decrease in cost of services as a percentage of revenue for the fiscal year 2016 was primarily attributable to the benefit of more revenue across our fixed cost platform and lower average employee bonuses. Cost of services included fair value adjustments to our acquisition-related earn-out liabilities, which resulted in decreases in such liabilities of $1.3 million and $1.7 million in fiscal years 2016 and 2015, respectively.

Cost of services increased to $392.7 million for fiscal year 2015 from $297.4 million for calendar year 2014. The increase in cost of services was primarily due to an increase of $46.6 million relating to our acquisition of Royall and increases of $13.8 million relating to the continued growth and expansion of our Crimson programs, as well as to our recent acquisitions of Clinovations and ThoughtWright, LLA d/b/a Grades First, or GradesFirst. Cost of services in the fiscal year 2015 also reflected increased costs associated with the delivery of program content and tools to our expanded membership base, including increased staffing, licensing fees, and other costs. As a percentage of revenue, cost of services was 51.1% for fiscal year 2015 and 52.0% for calendar year 2014. Cost of services included fair value adjustments to our acquisition-related earn-out liabilities, which resulted in decreases in such liabilities of $1.7 million in fiscal year 2015 and $4.7 million in calendar year 2014.

Member relations and marketing expense. Member relations and marketing expense increased 7.5% to $130.0 million in fiscal year 2016 from $121.0 million in fiscal year 2015. As a percentage of revenue, member relations and marketing expense in fiscal years 2016 and 2015 was 16.2% and 15.7%, respectively. The increases in member relations and marketing expense were primarily attributable to increases 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.

Member relations and marketing expense increased 12.4% to $121.0 million in fiscal year 2015 from $107.7 million in calendar year 2014. As a percentage of revenue, member relations and marketing expense was 15.7% in fiscal year 2015 and 18.8% in calendar year 2014. The increase in member relations and marketing expense was primarily attributable to an increase in sales staff and other associated costs, as well as to an increase in member relations personnel and related costs required to serve our expanding membership base. The decrease in member relations and marketing expense as a percentage of revenue resulted from our acquisition of Royall as the Royall business historically spends less on marketing relative to revenue, as well as increased efficiency of our sales teams.

General and administrative expense. General and administrative expense decreased to $126.6 million in fiscal year 2016 from $128.7 million in fiscal year 2015. As a percentage of revenue, general and administrative expense decreased to 15.8% in fiscal year 2016 from 16.7% in fiscal year 2015. The decrease of $2.0 million in general and administrative expense was primarily attributable to $6.6 million in acquisition costs related to our acquisition of Royall in fiscal year 2015, $4.0 million relating to an all-employee event during 2015 with no comparable expense in fiscal year 2016, and lower average employee bonuses. This decrease was offset in part by increased investment in administrative functions and office space to support our growing organization.

General and administrative expense increased to $128.7 million in fiscal year 2015 from $94.2 million in calendar year 2014. As a percentage of revenue, general and administrative expense increased to 16.7% in fiscal year 2015 from 16.5% in calendar year 2014. The increase of $34.4 million in general and administrative expense was primarily attributable to increases of $4.6 million in costs related to investments in our human resources, finance, and information technology infrastructure to support our growing employee base and number of office locations, as well as an increase of $5.0 million in our new product and corporate development groups. For fiscal year 2015, we also recognized a total of $6.6 million in acquisition costs related to our acquisition of Royall, $4.0 million relating to an all-employee event, and $3.2 million in costs relating to signing our new headquarters lease.

Depreciation and amortization. Depreciation expense increased to $77.3 million, or 9.6% of revenue in fiscal year 2016, from $73.1 million, or 9.5% of revenue in fiscal year 2015. The increase in depreciation and amortization expense in the current period was primarily attributable to increased amortization expense from developed capitalized internal-use software and depreciation of improvements made to our Washington, D.C. headquarters.

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Depreciation expense increased to $73.1 million, or 9.5% of revenue in fiscal year 2015, from $39.1 million, or 6.8% of revenue in calendar year 2014. The increase in depreciation and amortization expense in the current period was primarily attributable to increased amortization expense of $23.4 million from acquired intangibles relating to our acquisitions of Royall, GradesFirst, and Clinovations, as well as, developed capitalized internal use software, and depreciation of improvements made to new expansion floors in our Washington, D.C. headquarters.

Impairment of capitalized software. During fiscal year 2015, we concluded that certain internally developed and acquired technology assets would no longer be utilized in our services, and as a result, we recognized a $8.2 million impairment charge on the remaining unamortized costs. During the calendar year 2014, we concluded that certain internally developed capitalized software for sale assets were not fully recoverable, and as a result recognized a $2.1 million impairment on the remaining unamortized costs.

Goodwill impairment. We performed our annual goodwill impairment assessment on October 1, 2015 and, in connection with the preparation of our audited financial statements for fiscal year 2015, concluded that the Royall reporting unit was impaired by $99.1 million. See Note 7, “Goodwill and intangibles,” to our consolidated financial statements included in this report for information about this impairment change. There was no comparable activity in the other periods.

Interest expense. Interest expense decreased to $18.1 million in fiscal year 2016 from $21.1 million in fiscal year 2015. The decrease in interest expense was due to lower average debt balances following our retirement of $150 million of indebtedness and a related refinancing that occurred during the fiscal year 2015 in addition to continued principal payments.

Interest expense of $21.1 million was recognized during fiscal year 2015 on indebtedness incurred to fund the Royall acquisition on January 9, 2015. Subsequently in fiscal 2015, $150 million of such an acquisition indebtedness was retired and the balance of such indebtedness was refinanced. There was no comparable activity in calendar year 2014.

Other (expense) income, net. Other (expense) income, net consists of gains and losses on investments in preferred stock and common stock warrants, interest income, and foreign currency gains and losses. Other expense, net for fiscal year 2016 was $2.8 million and consisted of foreign exchange losses of $1.4 million. In addition, we incurred a $1.8 million impairment loss on a cost method investment and a $0.4 million gain on our interest rate swap during fiscal year 2016. The foreign currency gains and losses reflected the effect of fluctuating currency rates on our receivable balances denominated in foreign currencies.

For fiscal year 2015, other income, net consisted of gains and losses on investments in preferred stock and common stock warrants, interest income, and foreign currency gains and losses. Other expense, net for fiscal year 2015 was $6.5 million and consisted of a loss of $3.6 million on a cost method investment, and a foreign exchange rate loss of $2.9 million. Other expense, net for calendar year 2014 was $0.6 million and consisted of interest income of $1.1 million, offset by a foreign exchange rate loss of $1.7 million. As of December 31, 2015, we no longer owned marketable securities, except for our ownership interest in Evolent Health, Inc., which is accounted for under the equity method.

Loss on financing activities. A loss on financing activities of $17.4 million was recognized in connection with the refinancing of acquisition indebtedness during fiscal year 2015. There was no comparable activity in fiscal year 2016 or 2014.

Provision for income taxes. Our provision for income taxes was $11.0 million and $15.2 million for calendar years 2016 and 2015, respectively. Our effective tax rate for fiscal year 2016 was 19.9% compared to (15.3)% for fiscal year 2015.

Our provision for income taxes for the fiscal year 2015 was $15.2 million compared to $10.5 million for the calendar year 2014. Our effective tax rate of (15.3)% for the fiscal year 2015 decreased from our effective tax rate of 34.0% for the calendar year 2014. The tax expense for fiscal year 2015 included a $10.8 million impact related to a write-off of accumulated Washington, D.C. income tax credits as a result of changes in District of Columbia tax laws effective January 1, 2015.

Gains (losses) from equity method investments. Our proportionate share of gains and losses in our investments in the Evolent entities, net of tax during fiscal years 2016, 2015, and calendar year 2014 were $46.7 million, $4.4 million, and $6.5 million, respectively. The primary drivers for the gains in fiscal year 2016 was the sale of a portion of our ownership interest in Evolent Inc. and dilution gains recognized as a result of Evolent's acquisition activity. Total cash received from the partial sale was $48.6 million and resulted in the recognition of a post-tax gain of $29.7 million in fiscal year 2016. Total post-tax dilution gains recognized as the result of Evolent's acquisition activity was $18.2 million.

Net loss and accretion to redemption value of noncontrolling interest. In July 2012, we entered into an agreement with an entity created for the sole purpose of providing consulting services for us on an exclusive basis. We determined that this entity met the definition of a variable interest entity over which we have significant influence and, as a result, have consolidated the results of this entity into our consolidated financial statements. During calendar year 2014, we determined that the conditions to satisfy the put option discussed further in Note 9, "Noncontrolling interest," of our consolidated financial statements included in this report were probable of achievement and at such time recorded an accretion charge to the estimated redemption amount of our redeemable noncontrolling interest of $6.3 million.

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Stock-based compensation expense. We recognized the following stock-based compensation expense in the consolidated statements of operations line items for stock options and restricted stock units issued under our stock incentive plans for fiscal years 2016 and 2015, and calendar year 2014 (in thousands):

	Year Ended						Year Ended
	December 31,						December 31,
	2016			2015			2014
Stock-based compensation expense included in:							(unaudited)
Costs and expenses:
Cost of services	$	9,231		$	9,211		$	7,358
Member relations and marketing	5,028			5,176			4,190
General and administrative	15,176			14,706			10,839
Depreciation and amortization	—			—			—
Total costs and expenses	29,435			29,093			22,387
Operating income	(29,435		)	(29,093		)	(22,387		)

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

Stock-based compensation expense by award type for calendar years 2016, 2015, and 2014 was as follows (in thousands):

	Year Ended				Year Ended
	December 31,				December 31,
	2016		2015		2014
Stock-based compensation expense by award type:					(unaudited)
Stock options	$	13,270	$	10,908	$	6,585
Restricted stock units	16,165		18,185		15,802
Total stock-based compensation	$	29,435	$	29,093	$	22,387

As of December 31, 2016, $49.0 million of total unrecognized compensation cost related to stock-based awards is expected to be recognized over a weighted average period of 2.4 years.

Liquidity and Capital Resources

Cash flows generated from operating activities represent our primary source of liquidity. We believe that existing cash and cash equivalents and operating cash flows will be sufficient to support our expected operating and capital expenditures, as well as our debt service obligations, during at least the next 12 months. We had cash and cash equivalents of $91.2 million as of December 31, 2016 and cash and cash equivalents balances of $71.8 million as of December 31, 2015. We expended $61.6 million in fiscal year 2016 and $53.0 million in fiscal year 2015 in cash to purchase shares of our common stock through our share repurchase program. We expended $1.9 million in fiscal year 2016 and $746.7 million in fiscal year 2015 in cash for acquisitions.

Cash Flows

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 attributable to common stockholders on an annual basis. Net cash flows provided by operating activities were $112.6 million for fiscal year 2016, compared to $161.9 million for fiscal year 2015. The decrease was primarily attributable to the change in taxes paid from a net refund of $4.7 million in fiscal year 2015 to net tax payments of $25.9 million in fiscal year 2016, as well as to a slower rate of cash collection and the timing of payments of accounts payable. Operating cash flow was further reduced by income tax payments primarily attributed to the sale of a portion of our ownership interest in Evolent Inc. The cash proceeds from the sale are included in our cash flows from investing activities.

Net cash flows provided by operating activities were $161.9 million for fiscal year 2015 and consisted primarily of net loss offset by non-cash impairment charges of $110.9 million, non-cash depreciation and amortization expense, stock-based compensation expense, and loss on financing activities. The changes in membership fees receivable and deferred revenue which increased operating cash flows reflect the fact that we invoice and collect in advance of services performed.

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Net cash flows provided by operating activities were $64.6 million for the transition period and consisted primarily of net income plus non-cash depreciation and amortization expense, stock-based compensation expense, and deferred revenue, offset in part by changes in membership fees receivable.

Cash flows from investing activities. Our cash management, investment and acquisition strategy, and capital expenditure programs affect investing cash flows. Cash used in investing activities for fiscal year 2016 was $1.9 million, consisting primarily of $48.6 million of cash received from the sale of a portion of our ownership interest in Evolent Inc., offset by capital expenditures of $48.5 million, and expenditures of $1.9 million for our acquisition.

Cash used in investing activities for fiscal year 2015 was $791.7 million, consisting primarily of expenditures of $746.7 million for our acquisitions, capital expenditures of $56.7 million, and a contribution of $3.0 million to Evolent LLC. The effect of these factors was offset in part by redemptions of $14.7 million of marketable securities.

During the transition period, investing activities provided $29.9 million in cash, which primarily consisted of net redemptions of $151.4 million of marketable securities, partially offset by expenditures of $70.2 million for our acquisitions of Healthpost, GradesFirst, and Clinovations and by capital expenditures of $51.4 million.

Cash flows from financing activities. In fiscal year 2016, we had net cash flows used in financing activities of $91.4 million consisting of proceeds of $17.0 million from the issuance of debt, proceeds of $4.8 million from the issuance of common stock, and excess tax benefits of $1.3 million resulting from the exercise of employee options. The effect of those items was partially offset by the repurchase of 1,951,258 shares of our common stock for approximately $61.6 million, the pay-down of debt of $45.8 million, $3.6 million in acquisition-related earn-out payments, and our use of $3.5 million to satisfy minimum employee tax withholding for vested restricted stock units.

In fiscal year 2015, we had net cash flows used in financing activities of $628.6 million consisting of proceeds of $1,840.7 million from the issuance of debt, proceeds of $154.0 million from the issuance of common stock, and excess tax benefits of $4.9 million resulting from the exercise of employee options. The effect of those items was partially offset by the pay-down of debt of $1,307.2 million, the repurchase of 1,069,357 shares of our common stock for approximately $53.0 million, our use of $6.1 million to satisfy minimum employee tax withholding for vested restricted stock units, $3.3 million to pay debt issuance costs, and $1.5 million to make acquisition-related earn-out payments.

In the transition period, we had net cash flows used in financing activities of $44.6 million, consisting of our repurchase of 731,559 shares of our common stock for approximately $36.0 million, our use of $7.6 million to satisfy minimum employee tax withholding for vested restricted stock units, and a $6.1 million payment for the acquisition of a noncontrolling interest. The effect of those items was partially offset by our receipt of $4.3 million from the exercise of stock options, $0.4 million in excess tax benefits resulting from the exercise of employee options, and $0.4 million from the issuance of common stock under our employee stock purchase plan.

Senior secured credit facilities

On February 6, 2015, we obtained $675 million of senior secured credit facilities, referred to as the Credit Facilities, under a credit agreement with a syndicate of lenders. The Credit Facilities were amended on October 30, 2015.

The amended Credit Facilities consist of (a) a five-year senior secured term loan facility in the principal amount of $475 million, or Term Facility, and (b) a five-year senior secured revolving credit facility, or Revolving Facility, under which up to $200 million principal amount of borrowings and other credit extensions may be outstanding at any time.

The Advisory Board Company is the borrower under the Credit Facilities. The obligations of The Advisory Board Company under the Credit Facilities are guaranteed by its domestic subsidiaries, subject to certain exceptions, and the obligations of The Advisory Board Company and the subsidiary guarantors under the Credit Facilities are secured by a first-priority security interest in substantially all of the assets of The Advisory Board Company and such domestic subsidiaries.

Term Facility 

As of December 31, 2016, $424.7 million was outstanding under the Term Facility. We are able to elect, subject to pro forma compliance with the financial covenants and other customary conditions, to solicit the lenders under the Credit Facilities or other prospective lenders to add one or more incremental term loan facilities to the Credit Facilities or to increase commitments under the Revolving Facility in an aggregate amount of no more than (a) $150 million plus (b) the amount of voluntary prepayments of borrowings under the Credit Facilities not funded with the incurrence of other long-term indebtedness. Any such voluntary prepayments of loans under the Revolving Facility must be accompanied by permanent reductions of commitments under the Revolving Facility.

To the extent not previously paid, the Term Facility will mature, and all term loans outstanding under the facility will become due and payable, on February 6, 2020. The term loans are repayable in quarterly installments, which commenced with

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the quarter ended June 30, 2015, equal to a specified percentage of the aggregate principal amount drawn on the facility closing date, as follows: (a) 1.25% for each of the first eight full fiscal quarters following the facility closing date; (b) 2.5% for each of the ninth through twelfth full fiscal quarters following the facility closing date; and (c) 3.75% for each of the thirteenth through nineteenth full fiscal quarters following the facility closing date. We also are required to make principal prepayments under the Term Facility from the net proceeds of specified types of asset sales, casualty events, and incurrences of debt. We may voluntarily prepay outstanding term loans without premium or penalty.

Amounts drawn under the Term Facility generally bear interest, payable monthly, at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus an initial margin of 1.25% or (b) the applicable London interbank offered rate, or LIBOR, plus an initial margin of 2.25%, subject in each case to margin reductions based on our total leverage ratio from time to time. The interest rate on the alternate base rate loans will fluctuate as the base rate fluctuates, while the interest rate on the LIBOR loans will be adjusted at the end of each applicable interest period. Interest on alternate base rate loans will be payable monthly in arrears, while interest on LIBOR loans will be payable at the end of each applicable interest period, except that, in the case of any interest period longer than three months, interest will be payable at the end of each three-month period.

Revolving Facility 

As of December 31, 2016, $100 million of borrowings were outstanding under the Revolving Facility. Up to a maximum of $200 million of amounts (including letters of credit) may be outstanding at any time under the facility. The Revolving Facility will mature, and all revolving loans outstanding under the facility will become due and payable, on February 6, 2020. The facility loans may be borrowed, repaid and reborrowed from time to time during the term of the facility. We may use the proceeds of borrowings under the Revolving Facility, when drawn, to finance working capital needs and for general corporate purposes, including permitted acquisitions.

Amounts drawn under the Revolving Facility generally bear interest, payable quarterly, at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus an initial margin of 1.25% or (b) the applicable London interbank offered rate plus an initial margin of 2.25%, subject in each case to margin reductions based on our total leverage ratio from time to time.

We are obligated to pay a commitment fee at an initial annual rate of 0.30%, subject to reduction based on our total leverage ratio from time to time, accruing on the average daily amount of available commitments under the Revolving Facility.

The Credit Facilities contain customary negative covenants restricting certain actions that may be taken by us and our subsidiaries. Subject to specified exceptions, these covenants limit our ability and the ability of our subsidiaries to incur indebtedness, create liens on our assets, pay cash dividends, repurchase our common stock and make other restricted payments, make investments in or loans to other parties, sell assets, engage in mergers and acquisitions, enter into transactions with affiliates, enter into sale and leaseback transactions, and change our businesses. The Credit Facilities also contain customary affirmative covenants, including, among others, covenants requiring compliance with laws, maintenance of corporate existence, licenses, properties, and insurance, payment of taxes and performance of other material obligations, and delivery of financial and other information to the lenders. We are required to maintain compliance with financial covenants consisting of (a) a maximum total leverage ratio and (b) a minimum interest coverage ratio, each measured as of the last day of our fiscal quarter, for a period consisting of our most recently completed four fiscal quarters. We were in compliance with these financial covenants as of December 31, 2016.

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2016. These obligations relate to our debt, leases for our headquarters and other offices, and a non-cancelable agreement for the purchase of data. These are more fully described in Note 14, “Commitments and contingencies,” to our consolidated financial statements included in this report.

	Payment due by period (in thousands)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt	$	522,086	$	49,347	$	156,540	$	316,199	$	—
Build-to-suit lease obligation	$	446,133	$	—	$	16,515	$	50,407	$	379,211
Non-cancelable operating leases	$	62,053	$	17,421	$	27,398	$	11,621	$	5,613
Purchase obligation	$	2,375	$	1,375	$	1,000	$	—	$	—
Interest payments on debt obligations	$	37,247	$	14,086	$	22,448	$	713	$	—

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In addition to the contractual obligations above, as of December 31, 2016 we have payments of up to $1.2 million contingently payable through December 31, 2017 related to business acquisitions. For additional detail, see Note 4, “Fair value measurements,” to our consolidated financial statements included in this report.

Share Repurchase Program

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. This authorization subsequently 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, to $450 million in May 2013, and to the current level of $550 million in November 2015. We intend to fund any future share repurchases with cash on hand and with cash generated from operations. No minimum number of shares for repurchase has been fixed, and the share repurchase authorization has no expiration date. All repurchases have been made in the open market pursuant to this publicly announced repurchase program. As of December 31, 2016, the remaining authorized repurchase amount was $36.5 million. Our ability to repurchase common stock is restricted by the covenants in our senior secured credit facilities.

Exercise of Stock Options and Purchases Under Our Employee Stock Purchase Plan

Options granted to participants under our stock-based incentive compensation plans that were exercised to acquire shares generated cash of approximately $4.3 million for fiscal year 2016, $4.7 million for fiscal year 2015, and $4.3 million for the 2014 transition period from payment of option exercise prices.

Cash flows of approximately $0.5 million for fiscal year 2016, $0.5 million for fiscal year 2015, and $0.4 million for the 2014 transition period were provided by discounted stock purchases by participants under our employee stock purchase plan.

Off-Balance Sheet Arrangements

As of December 31, 2016, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition or results of operations.

Summary of Critical Accounting Policies

We have identified the following policies as critical to our business operations and the understanding of our results of operations. This listing is not a comprehensive identification of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Certain of our accounting policies are particularly important to the presentation of our financial condition and results of operations and may require the application of significant judgment by our management. 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 observation of trends in the industry, information provided by our members, and information available from other outside sources, as appropriate. For a more detailed discussion on the application of these and other accounting policies, see Note 2, “Summary of significant accounting policies,” to our consolidated financial statements included in this report. Our critical accounting policies are discussed below.

Revenue Recognition

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned, and (4) collectibility is reasonably assured. Fees are generally billable when a letter of agreement is signed by the member. Fees receivable during the subsequent twelve-month period and related deferred revenue are recorded on the balance sheet upon the commencement of the membership and are subsequently updated at the end of each reporting period. In many of our higher priced membership program agreements with terms that are greater than one year, fees may be billed on an installment basis. In certain multi-year arrangements, the member has the ability to cancel the arrangement within a defined notice period without penalty.

Our membership programs generally include more than one deliverable. Deliverables are determined based upon the availability and delivery method of the services and may include: best practices research; executive education curricula; cloud-based content, databases, and calculators; performance or benchmarking reports; diagnostic tools; interactive advisory support; and technology. Access to such deliverables is generally available on an unlimited basis over the membership period. When an agreement contains multiple deliverables, we review the deliverables to determine if they qualify as separate units of accounting. In order for deliverables in a multiple-deliverable arrangement to be treated as separate units of accounting, the deliverables must have standalone value upon delivery, and delivery or performance of undelivered items in an arrangement with a general right of return must be probable. If we determine that there are separate units of accounting, arrangement

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consideration at the inception of the membership period is allocated to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. Because of the unique nature of our products, neither vendor specific objective evidence nor third-party evidence is available. Therefore, we utilize best estimate of selling price to allocate arrangement consideration in multiple- deliverable arrangements. Best estimate of selling price is an estimate and, as such, could change over time.

In general, the deliverables in membership programs do not qualify as separate units of accounting. These deliverables are consistently available throughout the membership period, and, as a result, the consideration is recognized ratably over the membership period. When a service offering includes a combination of unlimited and limited service offerings, revenue is recognized over the appropriate service period, either ratably, if the service is consistently available, or, if the service is not consistently available, upon the earlier of the delivery of the service or the completion of the membership period, provided that all other criteria for recognition have been met.

Certain membership programs incorporate hosted software. In many of these agreements, members are charged set-up fees in addition to subscription fees for access to the hosted cloud-based software and related membership services. Both set-up fees and subscription fees are recognized ratably over the term of the membership agreement, which is generally three years, and is consistent with the pattern of the delivery of services under these arrangements. Upon launch of a new program that incorporates software, all program revenue is deferred until the program is generally available for release to our membership, and then recognized ratably over the remainder of the contract term of each agreement.

Certain arrangements include performance-based fees that are contingent upon the member realizing a benefit over a defined period. These performance-based fees are included in the arrangement consideration and recognized when the related services are provided to the member and we are reasonably assured that the amounts due are collectible. We have not recognized any revenue that is at risk due to future performance contingencies.

We also perform professional services sold under separate agreements that include consulting and management services. These agreements are either fixed fee or time-and-materials arrangements. For fixed fee arrangements, we recognize professional services revenues using the proportional performance method based on effort expended. We recognize professional services revenues for time-and-materials arrangements as services are rendered based on contractual rates.

For arrangements in which a customer purchases multiple membership programs or purchases a membership program together with consulting and management services, each program and professional services arrangement is generally considered a separate unit of accounting, and arrangement consideration is allocated based on our best estimate of selling price. We develop our best estimate of selling price by considering pricing practices, margin, competition, and geographies in which we offer our products and services.

Although we believe that our approach to estimates and judgments with respect to revenue recognition is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material.

Allowance for Uncollectible Revenue

Our ability to collect outstanding receivables from our members has an effect on our operating performance and cash flows. We maintain an allowance for uncollectible revenue as a reduction of revenue based on our ongoing monitoring of members’ credit and the aging of receivables. To determine the allowance for uncollectible revenue, we examine our collections history, the age of accounts receivable in question, any specific member collection issues that have been identified, general market conditions, and current economic trends.

Basis of Presentation and Consolidation

We may enter into various agreements with unrelated third parties to provide, directly or indirectly, services to our members or prospective members. We must determine for each of these business arrangements, which could include an investment by us in the third party, whether to consolidate the third party or account for our investment under the equity or cost basis of accounting. We determine whether to consolidate certain entities based on our rights and obligations under the agreements, applying the applicable accounting guidance. For investment interests that we do not consolidate, we evaluate the guidance to determine the accounting framework to apply. The application of the rules in evaluating the accounting treatment for each agreement is complex and requires substantial management judgment. Therefore, we believe the decision to choose an appropriate accounting framework is a critical accounting estimate. We evaluate our accounting for investments on a regular basis, including when a significant change in the design of an entity occurs.

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Property and Equipment

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal use software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain membership programs, we provide technology under a hosting arrangement where the software application resides on our or our service providers’ hardware. The members do not take delivery of the software and only receive access to the software during the term of their membership agreement.

Software development costs that are incurred in the preliminary project stage for internal use software 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 it is placed into operation. Capitalized software is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and upgrades and enhancements to existing systems that result in added functionality are capitalized, while maintenance and repairs are charged to expense as incurred.

Acquired developed software represents the fair value of software acquired through a business combination that resides on our or our service providers’ hardware and is made available to members through the memberships. Amortization for acquired developed software is included in the depreciation and amortization line item of our consolidated statements of operations. Acquired developed software is amortized over its weighted average estimated useful life of eight years based on the cash flow estimate used to determine the value of the intangible asset at its acquisition.

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.

Construction Costs for a Build-to-Suit Lease

In December 2015, we entered into a build-to-suit lease agreement for a new corporate headquarters in Washington, D.C., which is currently being constructed. For accounting purposes only, we are the deemed owner of the building during the construction period. Accordingly, we estimate the construction-in-progress asset and the corresponding construction financing obligation on at least a quarterly basis. Estimates for the total cost of the construction and percentage of completion are based on project plans and progress reports. We anticipate that construction will be completed in mid-2019.

Business Combinations

Accounting for acquisitions requires our management to estimate the fair value of the assets and liabilities acquired, which involves a number of judgments, assumptions, and estimates that could materially affect the timing or amounts recognized in our financial statements. The items involving the most significant assumptions, estimates, and judgments include those requiring determination of the fair value of the following:

• acquired technologies and other intangible assets, including valuation methodology, estimations of future cash flows, and discount rates, as well as the estimated useful life of assets;

• the acquired company’s trademark, as well as assumptions about the period of time the acquired trademark will continue to be used;

• deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances, which are initially estimated as of the acquisition date;

• property and equipment, pre-existing liabilities, deferred revenue, and contingent consideration, as each may be applicable; and

• goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

We allocate goodwill and intangible assets to the reporting unit based on the reporting unit that is expected to benefit from the business combination. Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Increases or decreases in the fair value of contingent consideration obligations resulting from changes in the estimates of earn-out results can materially impact the financial statements. As of December 31, 2016, we had a liability of $1.2 million for

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contingent consideration related to acquisitions. See Note 4, “Fair value measurements,” to our consolidated financial statements included in this report for further detail.

Goodwill and Other Intangible Assets

The excess cost of an acquisition over the fair value of the net assets acquired is recorded as goodwill. The primary factors that generate goodwill are the value of synergies between us and our acquired entities and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. Our goodwill and other intangible assets with indefinite lives are not amortized, but rather tested for impairment on an annual basis on October 1, or more frequently if events or changes in circumstances indicate potential impairment.

When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.

We estimate the fair value of our reporting units using both an income and a market approach. The income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital determined separately for each reporting unit. The determination of fair value using the income approach involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, terminal growth rates, and discount rates. The market approach is based on revenue and earnings multiple data of peer companies. See Note 7, “Goodwill and intangibles,” to our consolidated financial statements included in this report for further detail, including information about our recognition of a goodwill impairment charge of $99.1 million during fiscal year 2015.

Other intangible assets consist of capitalized software for sale and acquired intangibles. We capitalize consulting costs and payroll and payroll-related costs for employees directly related to building a software product for sale once technological feasibility is established. We determine that technological feasibility is established by the completion of a detailed program design or, in its absence, completion of a working model. Once the software product is ready for general availability, we cease capitalizing costs and begins amortizing the intangible asset on a straight-line basis over its estimated useful life. The weighted average estimated useful life of capitalized software is five years. Other intangible assets include those assets that arise from business combinations and that consist of developed technology both for internal use and external sale, non-competition covenants, trademarks, contracts, and customer relationships that are amortized, on a straight-line basis, over two years to seventeen years. Finite-lived intangible assets are required to be amortized over their useful lives and are evaluated for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Recovery of Long-lived Assets (Excluding Goodwill)

We record our long-lived assets, such as property and equipment, at cost. We review the carrying value of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be fully recoverable. The test for recoverability is made using an estimate of the undiscounted expected future cash flows and, if required, the impairment loss, if any, is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable. We consider expected cash flows and estimated future operating results, trends, and other available information in assessing whether the carrying value of assets is impaired. If we determine that an asset’s carrying value is impaired, we will record a reduction in the carrying value of the identified asset and charge the impairment as an operating expense in the period in which the determination is made. Although we believe that the carrying values of our long-lived assets are appropriately stated, changes in our business strategy or market conditions or significant technological developments could significantly affect these judgments and require adjustments to recorded asset balances.

Deferred Incentive Compensation and Other Charges

Incentive compensation to our employees related to the negotiation of new and renewal memberships, license fees to third-party vendors for tools, data, and software incorporated in specific memberships that include software, and other direct

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and incremental costs associated with specific memberships are deferred and amortized over the term of the related memberships.

Income Taxes

Deferred income taxes are determined using the asset and liability method. Under this method, temporary differences arise as a result of the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in our management's opinion, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and tax rates on the date of the enactment of the change.

Our tax positions are subject to income tax audits by federal, state, local, and foreign tax authorities. A tax benefit from an uncertain position may be recognized in the financial statements only if it is more likely than not that the position is sustainable, based on its technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time.

Stock-based Compensation

We measure and recognize stock-based compensation cost based on the estimated fair values of the stock-based awards on the grant date. Stock-based compensation costs are recognized as an expense in the consolidated statements of operations over the vesting periods of the awards. We calculate the grant date estimated fair value of all stock options, with the exception of the stock options issued with market-based conditions, using a Black-Scholes valuation model. The fair value of stock options issued with both performance-based and market-based conditions is calculated on the date of grant using a Monte Carlo model.

Determining the estimated fair value of stock-based awards is subjective in nature and involves the use of estimates and assumptions, including the term of the stock-based awards, risk-free interest rates over the vesting period, expected dividend rates, the price volatility of our shares, forfeiture rates of the awards, and the impact of market conditions. The probability of achieving performance conditions and the estimated time to achieve such performance conditions are significant estimates in determining when and in what amount to recognize stock-based awards with performance conditions. Such estimates are made based on the historical achievement of similar conditions and our estimated operating plan. As these factors change, the estimates of probability and estimated time to achieve performance conditions are updated. Forfeitures are estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate is based on historical experience. Our fair value estimates are based on assumptions we believe are reasonable but that are inherently uncertain. The fair value of all restricted stock units, with the exception of the restricted stock units issued with market-based conditions, is determined as the fair market value of the underlying shares on the date of grant. The fair value of restricted stock units issued with both performance-based and market-based conditions is calculated on the date of grant using a Monte Carlo model. To the extent we change the terms of our employee stock-based compensation programs, experience market volatility in the pricing of our common stock that increases the implied volatility calculation, or refine different assumptions in future periods such as the probability or timing of achieving performance conditions and forfeiture rates that differ from our current estimates, among other potential factors, the stock-based compensation expense that we record in future periods and the tax benefits that we realize may differ significantly from the expense and the tax benefits we have recorded in previous reporting periods.

Recent Accounting Pronouncements

See Note 2, “Summary of significant accounting policies,” to our consolidated financial statements included elsewhere in this report for a description of recent accounting pronouncements, including the expected dates of adoption.

Non-GAAP Financial Measures

The tables below present supplemental measures of our performance which we have derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We refer to these financial measures, which are considered “non-GAAP financial measures” under SEC rules, as adjusted revenue, adjusted EBITDA, adjusted net income, non-GAAP earnings per diluted share, adjusted effective tax rate, and adjusted weighted average common shares outstanding-diluted.

Our management uses these non-GAAP financial measures, together with financial measures prepared in accordance with GAAP, to enhance understanding by investors of our core operating performance, as well as for internal forecasting purposes. Our management believes that providing information about these non-GAAP financial measures facilitates an assessment by our investors of our fundamental operating trends and addresses concerns of investors that various financing, acquisition-

44

related, non-cash, and other effects included in GAAP measures may obscure such underlying trends. We believe that, by highlighting such trends relating to our underlying performance, our non-GAAP presentation helps our investors to make meaningful period-to-period comparisons of our results.

There are limitations to the use of our non-GAAP financial measures. These non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Our non-GAAP financial measures exclude the items discussed below. Because the excluded items have a material impact on our financial results, we use non-GAAP financial measures to supplement financial information presented in accordance with GAAP.

Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are set forth below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. The discussion below presents information about each of the non-GAAP financial measures and our reasons for excluding the enumerated items from our non-GAAP results. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.

Adjusted Revenue

We adjust revenue to exclude the impact of acquisition-related deferred revenue fair value adjustments. Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of our operations.

Adjusted Net Income and Non-GAAP Earnings Per Diluted Share

We present adjusted net income and non-GAAP earnings per diluted share to provide investors with a meaningful, consistent comparison of our operating results and trends for the periods presented. Our management believes that these measures are also useful to investors by allowing investors to evaluate our operations using the same tools that management uses to evaluate our past performance and prospects for future performance. These two non-GAAP financial measures reflect adjustments based on the exclusion of the following items as well as adjustments for related income tax effects:

• Effect on revenue of fair value adjustments to acquisition-related deferred revenue: We adjust revenue to exclude the impact of acquisition-related deferred revenue fair value adjustments. Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of our operations.

• Accretion of noncontrolling interest to redemption value:  We have excluded a charge resulting from management’s determination during 2014 that it was probable that a put option owned by a variable interest entity would become exercisable prior to its expiration. The charge represents an increase in the carrying value to estimated redemption value. We do not expect this type of transaction to recur.

• Goodwill impairment:We have excluded the impact of impairments of goodwill resulting from acquisitions, as such non-cash amounts are inconsistent in amount and frequency and are significantly affected by the timing and size of acquisitions.

• Impairments of capitalized software: We have has excluded the impact of impairments of finite-lived software assets, as such non-cash amounts are inconsistent in amount and frequency and are significantly affected by the timing and extent of our software development efforts. Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of our operations.

• Gain (loss) from equity method investments: We have excluded our proportionate share of income (loss) and other gains recorded in connection with our equity method investments. Our management believes that the exclusion of such amounts allows investors to better understand our core operating results.

• Amortization of acquisition-related intangible assets: Amortization of acquisition-related intangible assets consists of amortization of customer relationships, developed technology, and trade names. Amortization charges for acquired intangible assets are significantly affected by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges to

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facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

• Loss on financing activities: We have excluded loss on financing activities, as this item represents a non-cash charge. In addition, the amount and frequency of such charges are not consistent over time and are significantly affected by the timing and size of debt refinancing transactions.

• Acquisition and similar transaction charges: We have excluded certain acquisition-related charges resulting from acquisitions (including legal, accounting, and due diligence costs) to allow more comparable comparisons of our financial results to our historical operations. Such charges generally are not relevant to assessing the long-term performance of the acquired assets, and are not a material consideration in management’s evaluation of potential acquisitions. In addition, the frequency and amount of such charges vary significantly based on the size and timing of the acquisitions and the maturities of the businesses being acquired. 

• Fair value adjustments to acquisition-related earn-out liabilities: We have excluded the impact of acquisition-related contingent consideration non-cash adjustments due to the inherent uncertainty and volatility associated with such amounts based on changes in assumptions with respect to fair value estimates. The amount and frequency of such adjustments are not consistent across transactions and are significantly affected by the timing and size of our acquisitions, the future outlook of the acquired business, the estimated discount rate, and the nature of the transaction consideration.

• Stock-based compensation expense: Although stock-based compensation is a key incentive offered to our employees, we evaluate our operating results excluding such expense because the expense can vary significantly from period to period based on our share price, as well as the timing, size, and nature of equity awards granted. In addition, our management believes that the exclusion of this expense facilitates the ability of our investors to compare our operating results with those of other companies, many of which also exclude such expense in determining their non-GAAP financial measures.

• Other corporate expenses: We have excluded certain other expenses that are the result of other, non-comparable events, primarily charges associated with the fair valuing of certain equity instruments. These events arise outside of the ordinary course of our continuing operations. We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

• Income tax effects and adjustments: During the twelve months ended December 31, 2015, we adjusted for the impact of certain discrete items included in the effective tax rate, including items unrelated to the current year, changes in statutory tax rates, or other items that are not indicative of our ongoing operations. We exclude these items because management believes it will facilitate the comparison of the annual effective tax rate over time. The adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, which excludes discrete items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.

Adjusted EBITDA

Adjusted EBITDA reflects the adjustments to net income prepared on a GAAP basis, as discussed above, and, to the extent not already subject to such adjustments, excludes expenses related to interest, taxes, depreciation and amortization. Companies exhibit significant variations with respect to capital structure and cost of capital (which affects relative interest expense) and differences in taxation and book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. By eliminating some of these variations and reflecting the other adjustments, discussed above, our management believes that this non-GAAP financial measure allows investors to evaluate more effectively our fundamental operating performance relative to that of other companies.

Adjusted Effective Tax Rate

Adjusted effective tax rate is the effective tax rate prepared on a GAAP basis adjusted for the impact of certain non-cash items included in the effective tax rate, including changes in statutory tax regulations and other items that are not indicative of our ongoing operations. We exclude these items because our management believes this non-GAAP financial measure will facilitate the comparison by investors of our annual effective tax rates over time. The adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, which excludes specified items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.

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There are various limitations associated with the non-GAAP financial measures we use, including the following:

• the non-GAAP financial measures generally do not reflect all depreciation and amortization, and although the assets being depreciated and amortized will in some cases have to be replaced in the future, the measures do not reflect any cash requirements for such replacements;

• the non-GAAP financial measures do not reflect the expense of equity awards to employees; and

• the non-GAAP financial measures do not reflect the effect of earnings or charges resulting from matters that our management considers not indicative of our ongoing operations, but which may recur from year to year.

Because of their limitations, our non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, net income, earnings per diluted share, effective tax rate, and weighted average common shares outstanding-diluted prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.

Adjusted net income and adjusted EBITDA. We expect adjusted EBITDA growth in excess of revenue growth and adjusted EBITDA margin expansion in fiscal year 2017 due to scale and efficiency from revenue growth relative to a fixed cost base for existing programs, our restructuring plan, and absence of significant additional acquisition activity in fiscal year 2016. Adjusted net income increased 39.3% to $89.4 million for fiscal year 2016 from $64.2 million for fiscal year 2015, while adjusted EBITDA increased 9.6% to $188.3 million for fiscal year 2016 from $171.7 million for fiscal year 2015. The increases in adjusted net income and adjusted EBITDA were attributable to continued growth in our Royall enrollment services, education research programs, student success software program, and EMR optimization services offering. This revenue growth was partially offset by higher marketing and member relations costs.

Adjusted net income increased to $64.2 million for fiscal year 2015 from $47.3 million for calendar year 2014, while adjusted EBITDA increased 80% to $171.7 million for calendar year 2015 from $95.7 million for calendar year 2014. The increases in adjusted EBITDA and adjusted net income for calendar year 2015 were attributable to our increased revenue and our acquisition of Royall, the effects of which were partially offset by increased investment in our general and administrative infrastructure to support our growing employee base, higher marketing and member relations costs attributable to an increase in the number of new sales teams, and the costs of new and growing programs.

	Year Ended December 31,						Nine Months Ended December 31,
	2016		2015		2014		2014
Revenue	$	803,424	$	768,348	$	571,805	$	434,002
Effect on revenue of fair value adjustments to acquisition-related deferred revenue	—		12,499		—		—
Adjusted revenue	$	803,424	$	780,847	$	571,805	$	434,002

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	Year Ended December 31,									Nine Months Ended December 31,
	2016			2015			2014			2014
Net income (loss) attributable to common stockholders	$	91,238		$	(119,014	)	$	4,790		$	(3,547	)
Effect on revenue of fair value adjustments to acquisition-related deferred revenue	—			12,499			—			—
(Gains) losses from equity method investments	(46,666		)	4,396			9,271			6,540
Accretion of noncontrolling interest to redemption value	—			—			6,253			6,253
Provision for income taxes	11,040			15,200			10,463			3,530
Interest expense	18,137			21,121			—			—
Other expense (income), net	2,789			6,499			595			1,327
Loss on financing activities	—			17,398			—			—
Depreciation and amortization	77,268			73,134			39,101			30,317
Impairment of capitalized software	—			8,166			2,086			2,086
Goodwill impairment	—			99,145			—			—
Acquisition and similar transaction charges	—			6,610			4,592			4,592
Build-to-suit land rent	3,733			—			—			—
Fair value adjustments to acquisition-related earn-out liabilities	1,292			(1,665		)	(4,700		)	(600		)
Vacation accrual adjustment	—			(850		)	850			850
Stock-based compensation expense	29,435			29,093			22,388			17,965
Adjusted EBITDA	$	188,266		$	171,732		$	95,689		$	69,313

	Year Ended December 31,									Nine Months Ended December 31,
	2016			2015			2014			2014
Net income (loss) attributable to common stockholders	$	91,238		$	(119,014	)	$	4,790		$	(3,547	)
Effect on revenue of fair value adjustments to acquisition-related deferred revenue	—			12,499			—			—
(Gains) losses from equity method investments	(46,666		)	4,396			9,271			6,540
Accretion of noncontrolling interest to redemption value	—			—			6,253			6,253
Impairment of capitalized software	—			8,166			1,502			1,502
Goodwill impairment	—			99,145			—			—
Amortization of acquisition-related intangibles	28,408			31,033			9,893			7,566
Loss on financing activities	—			17,398			—			—
Acquisition and similar transaction charges	—			6,610			4,592			4,592
Fair value adjustments to acquisition-related earn-out liabilities	1,292			(1,665		)	(4,700		)	(600		)
Loss on investment in common stock warrants	—			370			180			180
Impairment of cost method investment	1,800			3,200			—			—
Build-to-suit land rent	3,733			—			—			—
Vacation accrual adjustment	—			(850		)	850			850
Stock-based compensation expense	29,435			29,093			22,388			17,965
Income tax effects and adjustments	(19,835		)	(26,180		)	(7,722		)	(6,704		)
Adjusted net income	$	89,405		$	64,201		$	47,297		$	34,597

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	Year Ended December 31,									Nine Months Ended December 31,
	2016			2015			2014			2014
Net income (loss) attributable to common shareholders per share - diluted	$	2.23		$	(2.84	)	$	0.13		$	(0.10	)
Effect of adjusted weighted average common shares outstanding - diluted on earnings (loss) per share	—			0.02			—			0.01
Effect on revenue of fair value adjustments to acquisition-related deferred revenue	—			0.30			—			—
(Gains) losses from equity method investments	(1.14		)	0.10			0.25			0.18
Accretion of noncontrolling interest to redemption value	—			—			0.17			0.17
Impairment of capitalized software	—			0.19			0.04			0.04
Goodwill impairment	—			2.34			—			—
Amortization of acquisition-related intangibles	0.70			0.73			0.27			0.20
Loss on financing activities	—			0.41			—			—
Acquisition and similar transaction charges	—			0.16			0.12			0.12
Fair value adjustments to acquisition-related earn-out liabilities	0.03			(0.04		)	(0.13		)	(0.02		)
Loss on investment in common stock warrants	—			0.01			0.01			—
Impairment of cost method investment	0.04			0.08			—			—
Build-to-suit land rent	0.09			—			—			—
Vacation accrual adjustment	—			(0.02		)	0.02			0.02
Stock-based compensation expense	0.72			0.69			0.61			0.49
Income tax effects and adjustments	(0.48		)	(0.62		)	(0.21		)	(0.18		)
Non-GAAP earnings per diluted share	$	2.19		$	1.51		$	1.28		$	0.93

	Year Ended December 31,						Nine Months Ended December 31,
	2016		2015		2014		2014
Effective tax rate	19.9	%	(15.3	)%	34.0	%	27.6	%
Effect on tax rate of Washington, D.C. tax law change including write-off of DC income tax credits	—	%	18.0	%	—	%	—	%
Effect on tax rate of loss on financing activities	—	%	(13.0	)%	—	%	—	%
Effect on tax rate of asset impairment	—	%	52.1	%	—	%	—	%
Effect on tax rate of unconsolidated equity method investment related FIN 48 liability	—	%	—	%	(5.6	)%	—	%
Effect on tax rate of Royall acquisition costs and other acquisition-related tax items	—	%	(2.6	)%	—	%	—	%
Adjusted effective tax rate	19.9	%	39.2	%	28.4	%	27.6	%

	Year Ended December 31,			Nine Months Ended December 31,
	2016	2015	2014	2014
Weighted average common shares outstanding - diluted	40,871	41,888	36,877	36,213
Dilutive shares outstanding	—	516	—	555
Adjusted weighted average common shares outstanding - diluted	40,871	42,404	36,877	36,768

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. As of December 31, 2016, we had $424.7 million of outstanding borrowings under our senior secured term loan facility and $100.0 million of outstanding borrowings under our revolving credit facility. Amounts drawn under each facility generally bear interest, payable quarterly, at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus an initial margin of 1.25% or (b) the applicable London interbank offered rate, plus an initial margin of 2.25%, subject in each case to margin reductions based on our total leverage ratio from time to time. Accordingly, we are exposed to fluctuations in interest rates on the variable-rate borrowings under our senior secured term loan facility and revolving credit facility. A hypothetical 10% increase in LIBOR would increase our annual cash interest expense on our variable-rate debt by approximately $0.4 million.

During fiscal year 2016, we utilized an interest rate swap to manage exposure to interest rates on a portion of the variable rate of our indebtedness. Our interest rate swap is with major financial institutions and is not used for speculative or trading purposes. We have designated our interest rate swap as a cash flow hedge, and changes in the fair value of the interest rate swap are recognized in other comprehensive (loss) income. Hedge ineffectiveness associated with the interest rate swap is reported in interest expense. We recorded the interest rate swap at fair value, which amounted to an asset of $1.0 million as of December 31, 2016.

Foreign Currency Risk. Our international operations, which accounted for approximately 2.4% of our consolidated total revenue for the fiscal year 2016, 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 the British Pound Sterling). As a consequence, increases in the U.S. dollar against local currencies in countries where we have members would result in a foreign exchange loss recognized by us. We recorded a foreign currency exchange rate loss of $1.4 million for fiscal year 2016, $2.9 million for fiscal year 2015, and $1.7 million for the 2014 transition period. These amounts are included in other income, net in our consolidated statements of operations. A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on our financial position as of December 31, 2016.

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Item 8. Financial Statements and Supplementary Data.

Report of Management’s Assessment of Internal Control Over Financial Reporting

Management is responsible for the preparation and integrity of our consolidated financial statements appearing in our Annual Report on Form 10-K. Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s estimates and judgments.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance as to the reliable preparation and presentation of our consolidated financial statements in accordance with generally accepted accounting principles, as well as to safeguard assets from unauthorized use or disposition.

Our control environment is the foundation for our system of internal control over financial reporting and is reflected in our Code of Ethics for Employees, Code of Business Conduct and Ethics for Members of the Board of Directors and Code of Ethics for Finance Team Members. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.

The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with members of management and the independent registered public accounting firm to review and discuss internal control over financial reporting and accounting and financial reporting matters. The independent registered public accounting firm reports to the Audit Committee.

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in Internal Control-Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. In its evaluation, management identified control deficiencies in its tax process that constituted a material weakness as such deficiencies potentially would not prevent or detect and correct a material misstatement of the Company’s consolidated financial statements. As a result, management has concluded that our internal control over financial reporting was not effective as of December 31, 2016.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Ernst & Young LLP, an independent registered public accounting firm which has issued a report on our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting, which is included herein and which expresses an adverse opinion thereon.

/s/ Robert W. Musslewhite

Robert W. Musslewhite

Chief Executive Officer and Director

March 15, 2017

/s/ Michael T. Kirshbaum

Michael T. Kirshbaum

Chief Financial Officer and Treasurer

March 15, 2017

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Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Stockholders of

The Advisory Board Company and subsidiaries

We have audited The Advisory Board Company and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Advisory Board Company and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weaknesses in internal controls related to the Company’s tax process. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Advisory Board Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended December 31, 2016 and 2015, and the nine months ended December 31, 2014. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated March 15, 2017 which expressed an unqualified opinion on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, The Advisory Board Company and subsidiaries have not maintained effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

/s/ Ernst & Young LLP

McLean, Virginia

March 15, 2017

52

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

The Board of Directors and Stockholders of

The Advisory Board Company and subsidiaries

We have audited the accompanying consolidated balance sheets of The Advisory Board Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended December 31, 2016 and 2015, and the nine months ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the consolidated financial statements of Evolent Health, Inc. or Evolent Health LLC, entities in which the Company has a 7.9% and 7.7% interest, respectively, as of December 31, 2016. In the consolidated financial statements, the Company’s investment in Evolent Health, Inc. is stated at $10.3 million and $0 as of December 31, 2016 and 2015, respectively, the Company’s investment in Evolent Health LLC is stated at $9.6 million and $0.7 million as of December 31, 2016 and 2015, respectively, the Company’s equity in the net loss of Evolent Health, Inc. is stated at $4.3 million and $3.0 million for the years ended December 31, 2016 and 2015, respectively, and the Company’s equity in the net loss of Evolent Health LLC is stated at $6.1 million and $8.6 million for the years ended December 31, 2016 and 2015, respectively, and $6.5 million for the nine months ended December 31, 2014. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Evolent Health, Inc. and Evolent Health LLC, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Advisory Board Company and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years ended December 31, 2016 and 2015, and the nine months ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Advisory Board Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 15, 2017, expressed an adverse opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

March 15, 2017

53

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Evolent Health, Inc.

In our opinion, the consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders’ equity (deficit) and redeemable preferred stock and of cash flows (not presented herein) present fairly, in all material respects, the financial position of Evolent Health, Inc. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1, the Company accounted for its investment in its subsidiary as an equity method investment from January 1, 2014 through June 3, 2015. Subsequent to June 3, 2015, in connection with the reorganization described in Note 1, the Company consolidated the results of its subsidiary.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 2, 2017

54

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Evolent Health LLC

In our opinion, the accompanying consolidated statements of operations, of changes in members’ equity and redeemable preferred units and of cash flows, for the period from January 1, 2015 to June 3, 2015 and for the year ended December 31, 2014 present fairly, in all material respects, the results of operations and cash flows of Evolent Health LLC (Predecessor) for the period from January 1, 2015 to June 3, 2015 and for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

February 29, 2016

55

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Evolent Health LLC

In our opinion, the accompanying consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, of changes in members’ equity and redeemable preferred units and of cash flows for the year ended December 31, 2016 and for the period from June 4, 2015 to December 31, 2015 present fairly, in all material respects, the financial position of Evolent Health LLC and its subsidiaries (Successor) as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the year ended December 31, 2016 and for the period from June 4, 2015 to December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 2, 2017

56

THE ADVISORY BOARD COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	December 31,
	2016			2015
ASSETS
Current assets:
Cash and cash equivalents	$	91,151		$	71,825
Membership fees receivable, net	605,517			605,444
Prepaid expenses and other current assets	18,965			22,543
Total current assets	715,633			699,812
Construction in progress	63,368			2,700
Property and equipment, net	171,281			180,357
Intangible assets, net	255,053			274,721
Deferred incentive compensation and other charges	72,178			81,181
Goodwill	739,507			738,200
Investments in and advances to unconsolidated entities	19,858			706
Other non-current assets	—			1,800
Total assets	$	2,036,878		$	1,979,477
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred revenue, current	$	564,237		$	581,471
Accounts payable and accrued liabilities	67,702			74,879
Accrued incentive compensation	25,521			41,173
Debt, current	49,347			27,743
Total current liabilities	706,807			725,266
Deferred revenue, net of current portion	170,357			173,953
Deferred income taxes	89,013			93,893
Debt, net of current portion	472,739			522,086
Financing obligation	63,368			2,700
Other long-term liabilities	17,550			12,488
Total liabilities	1,519,834			1,530,386
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, 40,192,980 and 41,572,523 shares issued and outstanding as of December 31, 2016 and 2015, respectively	402			416
Additional paid-in capital	782,399			744,333
Accumulated deficit	(266,218		)	(295,860		)
Accumulated other comprehensive income	461			202
Total stockholders’ equity	517,044			449,091
Total liabilities and stockholders’ equity	$	2,036,878		$	1,979,477

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

57

THE ADVISORY BOARD COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Revenue	$	803,424		$	768,348		$	434,002
Costs and expenses:
Cost of services, excluding depreciation and amortization	392,956			392,676			230,769
Member relations and marketing	130,028			120,958			81,244
General and administrative	126,634			128,669			75,483
Depreciation and amortization	77,268			73,134			30,317
Impairment of capitalized software	—			8,166			2,086
Goodwill impairment	—			99,145			—
Operating income (loss)	76,538			(54,400		)	14,103
Other (expense) income
Interest expense	(18,137		)	(21,121		)	—
Other (expense) income, net	(2,789		)	(6,499		)	(1,327		)
Loss on financing activities	—			(17,398		)	—
Total other (expense) income, net	(20,926		)	(45,018		)	(1,327		)
Income (loss) before provision for income taxes and gains (losses) from equity method investments	55,612			(99,418		)	12,776
Provision for income taxes	(11,040		)	(15,200		)	(3,530		)
Gains (losses) from equity method investments	46,666			(4,396		)	(6,540		)
Net income (loss) before allocation to noncontrolling interest	91,238			(119,014		)	2,706
Net loss and accretion to redemption value attributable to noncontrolling interest	—			—			(6,253		)
Net income (loss) attributable to common stockholders	$	91,238		$	(119,014	)	$	(3,547	)
Net income (loss) attributable to common stockholders per share — basic	2.25			(2.84		)	(0.10		)
Net income (loss) attributable to common stockholders per share — diluted	2.23			(2.84		)	(0.10		)
Weighted average number of shares outstanding:
Basic	40,528			41,888			36,213
Diluted	40,871			41,888			36,213

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

58

THE ADVISORY BOARD COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Year Ended December 31,		Year Ended December 31,			Nine Months Ended December 31,
	2016		2015			2014
Net income (loss) attributable to common stockholders	$	91,238	$	(119,014	)	$	(3,547	)
Other comprehensive income:
Net unrealized (losses) gains on marketable securities, net of tax	—		(81		)	1,623
Net unrealized gain on cash flow hedges, net of taxes	259		201			—
Comprehensive income (loss)	$	91,497	$	(118,894	)	$	(1,924	)

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

59

THE ADVISORY BOARD COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

												Accumulated Other Comprehensive Income (Loss)
	Common Shares					Additional Paid-in Capital			Retained Earnings						Treasury Stock			Noncontrolling Interest
	Stock		Amount																		Total
Balance as of March 31, 2014	36,321,825		$	363		$	428,628		$	(90,557	)	$	(1,541	)	$	—		$	(227	)	$	336,666
Proceeds from exercise of stock options	233,999		3			4,294			—			—			—			—			4,297
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding	254,248		3			(7,611		)	—			—			—			—			(7,608		)
Excess tax benefits from stock-based awards	—		—			392			—			—			—			—			392
Proceeds from issuance of common stock under employee stock purchase plan	9,241		—			432			—			—			—			—			432
Stock-based compensation expense	—		—			17,964			—			—			—			—			17,964
Retirement of treasury stock	—		(8		)	—			(36,006		)	—			36,014			—			—
Purchases of treasury stock	(731,559	)	—			—			—			—			(36,014		)	—			(36,014		)
Net activity related to noncontrolling interests	—		—			3,378			—			—			—			227			3,605
Change in net unrealized gains (losses) on available-for-sale marketable securities, net of income taxes of ($1,147)	—		—			—			—			1,623			—			—			1,623
Net income	—		—			(6,253		)	2,706			—			—						(3,547		)
Balance as of December 31, 2014	36,087,754		$	361		$	441,224		$	(123,857	)	$	82		$	—		$	—		$	317,810
Proceeds from exercise of stock options	218,109		3			4,744			—			—			—			—			4,747
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding	247,157		2			(6,060		)	—			—			—			—			(6,058		)
Excess tax benefits from stock-based awards	—		—			4,855			—			—			—			—			4,855
Proceeds from issuance of common stock under employee stock purchase plan	10,496		—			505			—			—			—			—			505
Stock-based compensation expense	—		—			29,092			—			—			—			—			29,092
Retirement of treasury stock	—		(11		)	—			(52,989		)	—			53,000			—			—
Purchases of treasury stock	(1,069,357	)	—			—			—			—			(53,000		)	—			(53,000		)
Issuance of common stock to purchase Royall	2,428,364		24			121,224			—			—			—			—			121,248
Common stock offering	3,650,000		37			148,749			—			—			—			—			148,786
Change in net unrealized gains (losses) on cash flow hedge, net of income taxes of $354												201									201
Change in net unrealized gains (losses) on available-for-sale marketable securities, net of income taxes of $(143)	—		—			—			—			(81		)	—			—			(81		)
Net loss	—		—			—			(119,014		)	—			—			—			(119,014		)
Balance as of December 31, 2015	41,572,523		$	416		$	744,333		$	(295,860	)	$	202		$	—		$	—		$	449,091
Proceeds from exercise of stock options	284,843		3			4,341			—			—			—			—			4,344
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding	210,562		2			(3,516		)	—			—			—			—			(3,514		)
Excess tax benefits from stock-based awards and other	—		—			4,628			—			—			—			—			4,628
Proceeds from issuance of common stock under employee stock purchase plan	14,041		—			476			—			—			—			—			476
Stock-based compensation expense	—		—			29,435			—			—			—			—			29,435
Retirement of treasury stock	—		(20		)	—			(61,596		)	—			61,616			—			—
Purchases of treasury stock	(1,951,258	)	—			—			—			—			(61,616		)	—			(61,616		)
Issuance of common stock for contingent earnout	62,269		1			2,702															2,703
Change in net unrealized gains (losses) on cash flow hedge, net of income taxes of $83	—		—			—			—			259			—			—			259
Net income	—		—			—			91,238			—			—			—			91,238
Balance as of December 31, 2016	40,192,980		$	402		$	782,399		$	(266,218	)	$	461		$	—		$	—		$	517,044

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

60

THE ADVISORY BOARD COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Cash flows from operating activities:
Net income (loss) before allocation to noncontrolling interest	$	91,238		$	(119,014	)	$	2,706
Adjustments to reconcile net income before allocation to noncontrolling interest to net cash provided by operating activities:
Depreciation and amortization	77,268			73,134			30,317
Impairment of capitalized software	—			8,166			2,086
Goodwill impairment	—			99,145			—
Loss on financing activities	—			17,398			—
Amortization of debt issuance costs	940			1,270			—
Deferred income taxes	(6,807		)	6,670			(2,383		)
Excess tax benefits from stock-based awards	(1,285		)	(4,855		)	(392		)
Stock-based compensation expense	29,435			29,093			17,964
Amortization of marketable securities premiums	—			—			1,274
Loss on investment in common stock warrants	—			370			180
Impairment of cost method investment	1,800			3,200			—
(Gains) losses from equity method investments	(16,987		)	4,396			6,540
Gain on partial sale of equity method investment, net of taxes	(29,679		)	—			—
Changes in operating assets and liabilities:
Membership fees receivable	(73		)	(37,144		)	(82,689		)
Prepaid expenses and other current assets	(10,500		)	13,276			4,936
Deferred incentive compensation and other charges	9,915			5,937			102
Other non-current assets	—			(258		)	—
Deferred revenue	(20,830		)	64,381			80,386
Accounts payable and accrued liabilities	380			(6,678		)	5,107
Acquisition-related earn-out payments	(1,432		)	(2,531		)	(3,348		)
Accrued incentive compensation	(15,652		)	9,100			3,602
Other long-term liabilities	4,828			(3,122		)	(1,815		)
Net cash provided by operating activities	112,559			161,934			64,573
Cash flows from investing activities:
Purchases of property and equipment	(45,392		)	(52,941		)	(47,535		)
Capitalized external use software development costs	(3,131		)	(3,749		)	(3,826		)
Cash paid for acquisition, net of cash acquired	(1,900		)	(746,693		)	(70,208		)
Investments in and advances to unconsolidated entities	—			(3,006		)	—
Redemptions of marketable securities	—			14,714			151,420
Cash received from partial sale of equity method investment	48,565			—			—
Net cash (used in) provided by investing activities	(1,858		)	(791,675		)	29,851
Cash flows from financing activities:
Payment for acquisition of noncontrolling interest	—			—			(6,110		)
Proceeds from debt, net	17,000			1,840,734			—
Pay down of debt	(45,750		)	(1,307,188		)	—
Debt issuance costs	—			(3,251		)	—
Equity offering	—			148,786			—
Proceeds from issuance of common stock from exercise of stock options	4,344			4,747			4,294
Withholding of shares to satisfy minimum employee tax withholding for vested restricted stock units	(3,514		)	(6,058		)	(7,611		)
Proceeds from issuance of common stock under employee stock purchase plan	476			505			432
Excess tax benefits from stock-based awards	1,285			4,855			392
Acquisition-related earn-out payments	(3,600		)	(1,500		)	—
Purchases of treasury stock	(61,616		)	(53,000		)	(36,014		)
Net cash (used in) provided by financing activities	(91,375		)	628,630			(44,617		)
Net increase (decrease) in cash and cash equivalents	19,326			(1,111		)	49,807
Cash and cash equivalents, beginning of period	71,825			72,936			23,129
Cash and cash equivalents, end of period	$	91,151		$	71,825		$	72,936

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

61

THE ADVISORY BOARD COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business description

The Advisory Board Company (individually and collectively with its subsidiaries, the “Company”) provides best practices research and insight, technology, data-enabled services, and consulting services, through discrete programs to hospitals, health systems, independent medical groups, pharmaceutical and biotechnology companies, health care insurers, medical device companies, and colleges, universities, and other health care-focused organizations and educational institutions. Members of each subscription-based membership program are typically charged a separate fixed annual fee and have access to an integrated set of services that may include best practices research studies, executive education, proprietary content databases and online tools, daily online executive briefings, original executive inquiry services, cloud-based software applications, data-enabled services, and consulting and management services.

Note 2. Summary of significant accounting policies

Basis of presentation and consolidation

The 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 securities deemed to be in-substance common stock and has the ability to exercise significant influence, but not control, over the investee and for all investments in partnerships or limited liability companies where the investee maintains separate capital accounts for each investor. Investments in which the Company holds securities that are not in-substance common stock, or holds common stock or in-substance common stock but has little or no influence over the investee are accounted for using the cost method. All significant intercompany transactions and balances have been eliminated.

Fiscal year

The Company changed its fiscal year to the calendar twelve months ending December 31, effective beginning with the period ended on December 31, 2014. As a result, the fiscal transition period was shortened from twelve months to a nine-month transition period ended on December 31, 2014. In these consolidated statements, including the notes thereto, the financial results ended December 31, 2014 are for a nine-month period. Audited results for the twelve months ended December 31, 2016 and 2015 are both for twelve-month periods.

Use of estimates in preparation of consolidated financial statements

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates, judgments, and assumptions. For cases where the Company is required to make certain estimates, judgments, and assumptions, the Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available to the Company at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s financial statements will be affected. The Company’s estimates, judgments, and assumptions may include: estimates of bad debt reserves; estimates to establish employee bonus and commission accruals; estimates of the fair value of contingent earn-out liabilities; estimates of the useful lives of acquired or internally developed intangible assets; estimates of the fair value of goodwill and intangibles and evaluation of impairment; determination of when investment impairments are other-than-temporary; estimates of the recoverability of deferred tax assets; and estimates of the potential for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.

Correction of prior period errors

In connection with the preparation of the 2016 consolidated financial statements, the Company recorded corrections of certain out-of-period, immaterial misstatements that occurred in prior years. These corrections resulted in an increase to the provision for income taxes of $2.6 million primarily related to recording reserves for tax positions taken in prior periods offset by correcting an overstatement of deferred tax assets related to stock based compensation. These corrections also resulted in a decrease to income tax expense of $5.1 million included in gains (losses) from equity method related to recording a deferred tax asset for the outside basis difference in the Company's investment in Evolent, Inc. In addition, the Company recorded a balance sheet adjustment to increase deferred tax assets and additional paid-in capital by $3.4 million at December 31, 2016.

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Cash equivalents and marketable securities

Marketable securities with original maturities of three months or less at purchase are considered cash equivalents. Investments with original maturities of more than three months are classified as marketable securities. Marketable securities, are classified as available-for-sale, and carried at fair value based on quoted market prices. The net unrealized gains and losses on available-for-sale marketable securities are excluded from net income attributable to common stockholders and are included within accumulated other comprehensive income, net of tax. The specific identification method is used to compute the realized gains and losses on the sale of marketable securities. The Company did not hold any marketable securities as of December 31, 2016 or 2015.

Allowance for uncollectible revenue

The Company’s ability to collect outstanding receivables from its members has an effect on the Company’s operating performance and cash flows. The Company records an allowance for uncollectible revenue as a reduction of revenue based on its ongoing monitoring of members’ credit and the aging of receivables. To determine the allowance for uncollectible revenue, the Company examines its collections history, the age of accounts receivable in question, any specific member collection issues that have been identified, general market conditions, and current economic trends. Membership fees receivable balances are not collateralized.

Property and equipment

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal use software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain membership programs, the Company provides software applications under a hosting arrangement where the software application resides on the Company’s or its service providers’ hardware. The members do not take delivery of the software and receive access to the software only during the term of their membership agreement.

Software development costs that are incurred in the preliminary project stage for internal use software 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 it is placed into operation. Internally developed capitalized software is classified as software within property and equipment and is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and upgrades and enhancements to existing systems that result in additional functionality are capitalized, while maintenance and repairs are charged to expense as incurred. Amortization expense for internally developed capitalized software for the years ended December 31, 2016 and 2015, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $22.3 million and $18.9 million, respectively. Amortization expense for internally developed capitalized software for the nine months ended December 31, 2014, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $10.1 million.

Acquired developed software represents the fair value of software acquired through a business combination that resides on the Company’s or its service providers’ hardware and is made available to members though the memberships. Amortization for acquired developed software is included in depreciation and amortization on the consolidated statements of operations. Acquired developed software is amortized over a weighted average estimated useful life of eight yearsbased on the cash flow estimate used to determine the value of the intangible asset at its acquisition. The amount of acquired developed software amortization included in depreciation and amortization for the years ended December 31,2016 and 2015 was approximately $8.8 million and $9.4 million, respectively. The amount of acquired developed software amortization included in depreciation and amortization for the nine months ended December 31, 2014 was approximately $2.0 million.

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 capital leases included in property and equipment. The amount of depreciation expense recognized on furniture, fixtures, and equipment for the years ended December 31, 2016 and 2015 was approximately $22.2 million and $20.4 million, respectively. The amount of depreciation expense recognized on furniture, fixtures, and equipment for the nine months ended December 31, 2014 was approximately $10.9 million.

The Company establishes assets and liabilities (financing obligations) for the estimated construction costs incurred under build-to-suit lease arrangements where the Company is considered the owner for accounting purposes only, to the extent the Company is involved in the design or construction of the asset or takes construction risk prior to commencement of a lease. The Company recognizes expense on a portion of future lease payments that are estimated to represent the underlying land lease. The Company records an asset for the amount of the total project costs in construction in progress and the related financing obligation, representative of the project costs incurred by the developer, in financing obligations on the consolidated balance

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sheet. Upon completion of the construction of facilities under build-to-suit leases, the Company evaluates whether these arrangements meet the criteria for sale-leaseback accounting treatment. If the lease does not meet sale-leaseback criteria, the Company will treat the build-to-suit as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation, (2) imputed interest expense, and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the building’s estimated useful life. At the conclusion of the lease term, the net book values of the asset and financing obligation would be derecognized.

Business combinations

The Company records acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration are recognized at their fair value on the acquisition date. All subsequent changes to the acquired assets or assumed liabilities of the acquired company at the acquisition date that occur both within the measurement period and as a result of facts and circumstances that existed at the acquisition date are recognized as an adjustment to goodwill. Any acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. Acquisition-related costs are recorded as expenses in the consolidated financial statements. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Goodwill and other intangible assets

The excess cost of an acquisition over the fair value of the net assets acquired is recorded as goodwill. The primary factors that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. The Company’s goodwill and other intangible assets with indefinite lives are not amortized, but rather are tested for impairment on an annual basis on October 1, or more frequently if events or changes in circumstances indicate potential impairment.

When testing goodwill for impairment, the Company has the option first to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, the Company is then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company estimates the fair value of its reporting units using both an income and market approach. The income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. The determination of fair value using the income approach involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, terminal growth rates, and discount rates. The market approach is based on revenue and earnings multiple data of peer companies. See Note 7, “Goodwill and intangibles,” for further detail, including the recognition of goodwill impairment charges of $99.1 million during the year ended December 31, 2015.

Other intangible assets consist of capitalized software for sale and acquired intangibles. The Company capitalizes consulting costs and payroll and payroll-related costs for employees directly related to building a software product for sale once technological feasibility is established. The Company determines that technological feasibility is established by the completion of a detailed program design or, in its absence, completion of a working model. Once the software product is ready for general availability, the Company ceases capitalizing costs and begins amortizing the intangible asset on a straight-line basis over its estimated useful life. The weighted average estimated useful life of capitalized software for sale is five years. Other intangible assets include those assets that arise from business combinations and that consist of developed technology both for internal use and external sale, non-competition covenants, trademarks, contracts, and customer relationships that are amortized, on a straight-line basis, over two years to seventeen years. Finite-lived intangible assets are required to be amortized over their useful lives and are evaluated for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

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Recovery of long-lived assets (excluding goodwill)

The Company records long-lived assets, such as property and equipment, at cost. The carrying value of long-lived assets is reviewed for possible impairment whenever events or changes in circumstances suggest the carrying value of a long-lived asset may not be fully recoverable. The test for recoverability is made using an estimate of the undiscounted expected future cash flows and, if required, the impairment loss is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable. The Company considers expected cash flows and estimated future operating results, trends, and other available information in assessing whether the carrying value of assets is impaired. If it is determined that an asset’s carrying value is impaired, a write-down of the carrying value of the identified asset will be recorded as an operating expense on the consolidated statements of operations in the period in which the determination is made.

Fair value of financial instruments

The Company’s short-term financial instruments include cash and cash equivalents, membership fees receivable, accrued expenses, and accounts payable. The carrying value of these financial instruments as of December 31, 2016 and 2015 approximates their fair value due to their short-term nature.

Derivative instruments

The Company holds warrants to purchase common stock in an entity that meet the definition of a derivative. Derivative instruments are carried at fair value on the consolidated balance sheets. Gains or losses from changes in the fair value of the warrants are recognized on the consolidated statements of operations in the period in which they occur.

The Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of discounting the future variable cash payments, or receipts, over the life of the agreements. The Company has designated the interest rate swap as a cash flow hedge of the variability of interest payments under its senior secured term loan facility due to changes in the benchmark interest rate. If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations for the applicable period. 

Revenue recognition

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned, and (4) collectibility is reasonably assured. Fees are generally billable when a letter of agreement is signed by the member. Fees receivable during the subsequent twelve-month period and related deferred revenue are recorded on the balance sheet upon the commencement of the membership and are subsequently updated at the end of each reporting period. In many of the Company’s higher priced programs and membership agreements with terms that are greater than one year, fees may be billed on an installment basis. In certain multi-year arrangements, the member has the ability to cancel the arrangement within a defined notice period without penalty.

The Company’s membership programs generally include more than one deliverable. Deliverables are determined based upon the availability and delivery method of the services and may include the following: best practices research; executive education curricula; cloud-based content, databases, and calculators; performance or benchmarking reports; diagnostic tools; interactive advisory support; and software. Access to such deliverables is generally available on an unlimited basis over the membership period. When an agreement contains multiple deliverables, the Company reviews the deliverables to determine if they qualify as separate units of accounting. In order for deliverables in a multiple-deliverable arrangement to be treated as separate units of accounting, the deliverables must have standalone value upon delivery, and delivery or performance of undelivered items in an arrangement with a general right of return must be probable. If the Company determines that there are separate units of accounting, arrangement consideration at the inception of the membership period is allocated to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. Because of the unique nature of the Company’s products, neither vendor specific objective evidence nor third-party evidence is available. Therefore, the Company utilizes best estimate of selling price to allocate arrangement consideration in multiple-deliverable arrangements.

In general, the deliverables in membership programs do not qualify as separate units of accounting. These deliverables are consistently available throughout the membership period, and, as a result, the consideration is recognized ratably over the membership period. When a service offering includes a combination of unlimited and limited service offerings, revenue is recognized over the appropriate service period, either ratably, if the service is consistently available, or, if the service is not consistently available, upon the earlier of the delivery of the service or the completion of the membership period, provided that all other criteria for recognition have been met.

Certain membership programs incorporate hosted software. In many of these agreements, members are charged set-up fees in addition to subscription fees for access to the hosted cloud-based software and related membership services. Both set-up

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fees and subscription fees are recognized ratably over the term of the membership agreement, which is generally three years, and is consistent with the pattern of the delivery of services under these arrangements. Upon launch of a new program that incorporates software, all program revenue is deferred until the program is generally available for release to the Company’s membership, and then recognized ratably over the remainder of the contract term of each agreement.

Certain arrangements include performance-based fees that are contingent upon the member realizing a benefit over a defined period. These performance-based fees are included in the arrangement consideration and recognized when the related services are provided to the member and the Company is reasonably assured that the amounts due are collectible. The Company has not recognized any revenue that is at risk due to future performance contingencies.

The Company also performs professional services sold under separate agreements that include consulting and management services. These agreements are either fixed fee or time-and-materials arrangements. For fixed fee arrangements, the Company recognizes professional services revenues using the proportional performance method based on effort expended. The Company recognizes professional services revenues for time-and-materials arrangements as services are rendered based on contractual rates.

For arrangements in which a customer purchases multiple membership programs or purchases a membership program together with consulting and management services, each program and professional services arrangement is generally considered a separate unit of accounting, and arrangement consideration is allocated based on the Company’s best estimate of selling price. The Company develops its best estimate of selling price by considering pricing practices, margin, competition, and geographies in which the Company offers its products and services.

Deferred incentive compensation and other charges

Incentive compensation to employees related to the negotiation of new and renewal memberships, license fees to third-party vendors for tools, data, and software incorporated in specific memberships that include software, and other direct and incremental costs associated with specific memberships are deferred and amortized over the term of the related memberships.

Operating leases

The Company recognizes rent expense under operating leases on a straight-line basis over the non-cancelable term of the lease, including free-rent periods. Lease incentives relating to allowances provided by landlords are amortized over the term of the lease as a reduction of rent expense. The Company recognizes sublease income on a straight-line basis over the term of the sublease, including free rent periods and escalations, as a reduction of rent expense. Costs associated with acquiring a subtenant, including broker commissions and tenant allowances, are amortized over the sublease term as a reduction of sublease income.

Stock-based compensation

The Company has several stock-based compensation plans which are described more fully in Note 12, “Stock-based compensation.” These plans provide for the granting of stock options and restricted stock units (“RSUs”) to employees, non-employee members of the Company’s Board of Directors and any other service providers who have been retained to provide consulting, advisory, or other services to the Company. Stock-based compensation cost is measured at the grant date of the stock-based awards based on their fair values, and is recognized as an expense in the consolidated statements of operations over the vesting periods of the awards. The fair value of RSUs, with the exception of RSUs issued with both performance and market-based conditions, is determined as the fair market value of the underlying shares on the date of grant. The fair value of RSUs issued with market-based conditions is calculated on the date of grant using a Monte Carlo option-pricing model. The Company calculates the fair value of all stock option awards, with the exception of the stock options issued with market-based conditions, on the date of grant using the Black-Scholes model. The fair value of stock options issued with market-based conditions is calculated on the date of grant using a Monte Carlo option-pricing model. Forfeitures are estimated based on historical experience at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are inherently uncertain.

For awards with performance conditions, the probability of achieving performance conditions and estimated time to achieve such performance conditions are measured at each reporting period and are used to determine when and in what amount to recognize stock-based awards with performance conditions.

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Other (expense) income, net

Other expense, net for the year ended December 31, 2016 includes foreign exchange losses of $1.4 million, as a result of the effect of fluctuating currency rates on the Company's receivable balances denominated in foreign currencies, and a $1.8 million loss on the Company's investment in preferred stock and common stock warrants of a private company that were determined to be other than temporary. The Company paid $4.3 million to the private company, a related party, under its reseller agreement which is included in cost of services on the consolidated statement of operations for the year ended December 31, 2016.

Other expense, net for the year ended December 31, 2015 includes a $3.6 million loss on the Company's investment in preferred stock and common stock warrants of a private company that were determined to be other than temporary and a foreign exchange rate loss of $2.9 million. Other income, net for the nine months ended December 31, 2014 includes $1.1 million of interest income earned from the Company’s marketable securities, a $1.7 million loss on foreign exchange rates, $0.5 million in credit facility fees, $0.1 million realized loss on sale of marketable securities, and a $0.2 million loss on the Company's investment in common stock warrants. The Company paid $4.2 million to the private company, a related party, under its reseller agreement which is included in cost of services on the consolidated statement of operations for the year ended December 31, 2015.

Income taxes

Deferred income taxes are determined using the asset and liability method. Under this method, temporary differences arise as a result of the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and tax rates on the date of the enactment of the change.

Construction in progress

In December 2015, the Company entered into a lease for its new corporate headquarters, which is currently being constructed in Washington D.C. The lease has an anticipated start date of mid-2019 with a 16-year initial term and $446.1 million of lease payments. The Company has concluded that it is the deemed owner of the building (for accounting purposes only) during the construction period and that the lease qualifies for build-to-suit accounting. Accordingly, the Company has recorded a construction-in-progress asset, net of $63.4 million and $2.7 million for which there is a corresponding construction financing obligation of $63.4 million and $2.7 million recorded in the consolidated balance sheet as of December 31, 2016 and 2015, respectively. The Company will continue to increase the construction-in-progress asset and corresponding long-term liability as additional building costs are incurred by the landlord during the construction period. Upon completion of the construction, the Company will evaluate whether or not this arrangement meets the criteria for sale-leaseback accounting treatment.

Concentrations of risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of membership fees receivable, cash and cash equivalents, and marketable securities. The credit risk with respect to membership fees receivable is generally diversified due to the large number of entities constituting the Company’s membership base, and the Company establishes allowances for potential credit losses. No one member accounted for more than 1.5% of revenue for any period presented. The Company maintains cash and cash equivalents and, in prior periods, marketable securities with financial institutions, which may at times exceed federally insured limits.

In the years ended December 31, 2016, 2015, and the nine months ended December 31, 2014 , the Company generated approximately 2.4%, 2.4% and 3.9% of revenue, respectively, from members outside the United States. The Company’s international operations subject the Company to risks related to currency exchange fluctuations. Prices for the Company’s services sold to members located outside the United States are sometimes denominated in local currencies. Increases or decreases in the value of the U.S. dollar against local currencies in countries where the Company has members may result in a foreign exchange gain or loss recognized by the Company. Such foreign exchange gains or losses are included in other (expenses) income, net in the consolidated statements of operations.

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Earnings per share

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 (“diluted EPS”) 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.

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

	Year Ended December 31,	Year Ended December 31,	Nine Months Ended December 31,
	2016	2015	2014
Basic weighted average common shares outstanding	40,528	41,888	36,213
Effect of dilutive outstanding stock-based awards	343	—	—
Diluted weighted average common shares outstanding	40,871	41,888	36,213

In the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, 1.6 million shares, 2.7 million shares, and 2.6 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.

Recent accounting pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all recent ASUs. ASUs not identified below were assessed and determined to be not applicable or are expected to have an immaterial impact on the Company’s consolidated financial position and results of operations.

Recently adopted

In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented as a direct deduction from the carrying amount of that debt liability and only impacts financial position presentation. In August 2015, the FASB issued guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The guidance codified the SEC staff's view on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements consistent with prior practice as an asset. The Company adopted these standards retrospectively on January 1, 2016. The impact the adoption had on the Company's consolidated financial position as of December 31, 2015 is disclosed below (in thousands). The adoption had no effect on the Company's results of operations for any period.

	As reported		Adjustments			As adjusted
Prepaid expenses and other current assets	$	22,651	$	(108	)	$	22,543
Deferred incentive compensation and other charges	81,462		(281		)	81,181
Total assets	1,979,866		(389		)	1,979,477
Debt, current	27,851		(108		)	27,743
Debt, net of current portion	522,367		(281		)	522,086
Total liabilities	1,530,775		(389		)	1,530,386
Total liabilities and stockholders’ equity	1,979,866		(389		)	1,979,477

In June 2014, the FASB issued accounting guidance related to share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In February 2015, the FASB issued guidance on amendments to the consolidation analysis. The new guidance requires management to reevaluate all legal entities under a revised consolidation model that will (1) modify the evaluation of whether

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limited partnership and similar legal entities are variable interest entities (“VIEs”), (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 under the Investment Company Act of 1940 for registered money market funds. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In September 2015, the FASB issued new guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should either be presented separately on the face of the income statement or disclosed in the notes to the financial statements. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. It requires an assessment for a period of one year after the date on which the financial statements are issued. Further, based on certain conditions and circumstances, additional disclosures may be required. This ASU is effective beginning with the first annual period ending after December 15, 2016, and for all annual and interim periods thereafter. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

Recently issued

In May 2014, the FASB issued accounting guidance related to revenue recognition. The new standard supersedes most of the existing revenue recognition guidance under GAAP, and requires revenue to be recognized when goods or services are transferred to a customer in an amount that reflects the consideration a company expects to receive. The new standard may require more judgment and estimates relating to the recognition of revenue, which could result in additional disclosures to the financial statements. The original effective date of the new standard was for annual and interim reporting periods beginning after December 15, 2016. In July 2015, the FASB decided to defer by one year the effective date of this new revenue recognition standard. As a result, the new standard will be effective for annual and interim reporting periods beginning after December 15, 2017, with an option that permits companies to adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The Company will adopt the standard using the modified retrospective approach on January 1, 2018.

While we are continuing to assess all potential impacts of the new standard, we currently believe the new standard will impact the Company's accounting for deferred costs and arrangements that include variable consideration. The Company is currently evaluating the effect that the standard will have on its remaining revenue. The Company continues to update its assessment of the impact of the standard and related updates to the consolidated financial statements, and will note material impacts when known.

In January 2016, the FASB issued accounting guidance related to the recognition and measurement of financial assets and liabilities. The guidance requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under this ASU, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance for classifying and measuring investments in debt securities and loans is not affected. The guidance eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted for only certain portions of the ASU. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued accounting guidance relating to leases. The guidance requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The new guidance also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The guidance is effective for annual reporting and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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In March 2016, the FASB issued accounting guidance relating to stock compensation. The guidance simplifies various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to impact net income, earnings per share, and the statement of cash flows. The guidance is effective for annual reporting and interim periods beginning after December 15, 2016, with early adoption permitted. The Company will adopt the standard January 1, 2017 and is currently evaluating the impact of the new guidance on its consolidated financial statements.

In August 2016, the FASB issued accounting guidance relating to the statement of cash flows. The guidance clarifies how certain cash receipts and cash payments are presented in the statement of cash flows. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued accounting guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued accounting guidance simplifying the test of goodwill impairment. The guidance eliminates Step 2 of the goodwill impairment test, which calculates the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., Step 1). The guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued accounting guidance related to gains and losses from the derecognition of nonfinancial assets: clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

Note 3. Acquisitions

Increasing service to members through the introduction and expansion of new programs is a key component of the Company's growth strategy. From time to time the Company supplements its organic new program development efforts with acquisitions that allow it to introduce new programs and services to its members, or that complement and enhance the value of existing programs through the addition of new capabilities.

2016 Acquisitions

There were no material acquisitions for the year ended December 31, 2016.

2015 Acquisitions

On January 9, 2015, the Company completed the acquisition of all of the issued and outstanding capital stock of Royall Acquisition Co. (together with its subsidiaries, “Royall”) from Royall Holdings, LLC (the “Seller”). Royall is a higher education market leader in strategic, data-driven student engagement and enrollment management solutions.

Total consideration consisted of the following (in thousands):

Net cash paid (1)	$	744,193
Fair value of equity issued	121,224
Total	$	865,417

(1) Net of cash acquired of $7,065 and a working capital adjustment payment of $1,278.

On January 9, 2015, in connection with the completion of the acquisition of Royall, the Company entered into credit facilities with various lenders. See Note 10, "Debt," for further details regarding these credit facilities.

The fair value of equity issued was approximately $121.2 million based on 2,428,364 shares of the Company's common stock valued at $49.92 per share, which was the closing price on January 9, 2015 as reported on the NASDAQ Global Select Market. The 2,428,364 shares issued to the Seller was the minimum number of shares that could have been issued under the pricing collar set forth in the purchase agreement, since the volume-weighted average trading price of the Company’s common

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stock on the NASDAQ Global Select Market for the 15 consecutive trading days ended on (and including) January 7, 2015 was higher than the pricing collar ceiling price of $41.18.

The purchase price allocation resulting from the acquisition of Royall is set forth below (in thousands):

	As of January 9, 2015
Consideration paid for the acquisition	$	865,417
Allocated to:
Membership fees receivable, net	29,239
Prepaid expenses and other current assets	8,237
Property and equipment	44,209
Intangible assets, net	262,000
Deferred revenue, current	(18,300		)
Accounts payable and accrued liabilities	(5,621		)
Deferred income taxes, net of current portion	(102,599		)
Fair value of net assets acquired	$	217,165
Allocation to goodwill	$	648,252

The goodwill is primarily attributable to the assembled workforce of Royall and synergies and economies of scale expected from combining the operations of the Company and Royall. Of the goodwill recognized, $61.4 million is deductible for tax purposes.

Acquisition-related costs of $9.9 million were incurred and included in general and administrative costs in the Company’s consolidated statements of operations. Of this amount, $3.3 million was recognized in the transition period ended December 31, 2014, and $6.6 million was recognized in the year ended December 31, 2015.

The year ended December 31, 2015 includes the operations of Royall for the period from January 9, 2015 through December 31, 2015. The condensed consolidated statements of operations for the year ended December 31, 2015 includes $102.8 million of revenues and $88.6 million of net loss (inclusive of a $99.1 million goodwill impairment charge), respectively, attributed to Royall. In addition, the Company recorded adjustments to the Royall purchase price allocation resulting in an increase to deferred tax assets and a reduction of goodwill of approximately $1 million during the year ended December 31, 2016. The impairment and related adjustment are described in Note 7, “Goodwill and intangibles.”

The following table presents the Company’s pro forma consolidated revenues and net income (loss) attributable to common stockholders for the year ended December 31, 2015 and the nine months ended December 31, 2014. The unaudited pro forma results include the historical statements of operations information of the Company and of Royall, giving effect to the acquisition of Royall and related financing as if they had occurred on April 1, 2014. As described below under “Transition Period Acquisitions,” the Company consummated certain other acquisitions during the year ended December 31, 2015 and the nine months ended December 31, 2014, but has not included the impact of these acquisitions in these pro forma results as their effect would not have been material.

The unaudited pro forma financial information presented below does not reflect the effect of any actual or anticipated synergies expected to result from the acquisition of Royall. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been recognized had the acquisition of Royall and the related financing been effected on the assumed date.

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The unaudited pro forma results are set forth below (in thousands):

	Unaudited Pro Forma Results
	Year Ended December 31,			Nine Months Ended December 31,
	2015			2014
Revenue	$	783,640		$	502,319
Net income (loss) attributable to common stockholders	(90,705		)	(29,962		)

For the year ended December 31, 2015 and the nine months ended December 31, 2014, the pro forma results, prepared in accordance with GAAP, include the following pro forma adjustments related to the acquisition of Royall:

(i) an increase in non-recurring transaction expenses of $9.9 million in the nine months ended December 31, 2014 to reflect the assumption that the Royall acquisition occurred on April 1, 2014;

(ii) the elimination of $6.6 million of acquisition costs recorded in the year ended December 31, 2015 as these are now presented in the nine months ended December 31, 2014;

(iii) an increase in amortization expense related to the fair value of the identifiable intangible assets of $0.4 million in the year ended December 31, 2015 and $11.6 million in the nine months ended December 31, 2014;

(iv) a reduction in revenue of $12.5 million in the nine months ended December 31, 2014, representing the purchase accounting fair value effect to revenue the Company would have recognized during the year ended December 31, 2014 had the acquisition of Royall occurred on April 1, 2014 and an increase in revenue of $12.5 million in the year ended December 31, 2015, representing the purchase accounting fair value effect to revenue that was recognized in the year ended December 31, 2015;

(v) an increase in revenue of $2.8 million and an increase in expense of $1.7 million for the year ended December 31, 2015 for Royall's activity from January 1, 2015 to the January 9, 2015 acquisition date;

(vi) the elimination and replacement of the historical Royall interest expense with the interest expense from the Company's senior secured term credit facility totaling $19.9 million in the year ended December 31, 2015 and $13.6 million in the nine months ended December 31, 2014;

(vii) an increase in compensation expense related to the inducement equity awards issued to certain Royall employees totaling $0.1 million in the year ended December 31, 2015 and $4.4 million in the nine months ended December 31, 2014;

(viii) an increase in non-recurring loss on financing activities expenses of $17.4 million in the nine months ended December 31, 2014 to reflect the assumption that the Royall acquisition and related financings occurred during the nine months ended December 31, 2014; and

(ix) the elimination of $17.4 million of loss on financing activities recorded in the year ended December 31, 2015 as this is now presented in the corresponding period of 2014.

There were no other material acquisitions for the year ended December 31, 2015.

Transition Period Acquisitions

During the nine months ended December 31, 2014, the Company completed three acquisitions qualifying as business combinations in exchange for aggregate net cash consideration of $71.3 million. The total purchase price has been allocated to identifiable assets acquired and liabilities assumed, including $16.6 million to intangible assets with a weighted average amortization period of 8.3 years and $57.5 million to goodwill, of which $33.9 million is tax deductible. The completed acquisitions in the nine months ended December 31, 2014, both individually and in the aggregate, were not material to the Company's consolidated results of operations.

Note 4. Fair value measurements

Financial assets and liabilities

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, interest rate swaps, and, in prior periods, marketable securities. In addition, contingent earn-out liabilities

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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 class of financial liabilities 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 also consist of money market funds with fair values based on quoted market prices. The Company’s cash and cash equivalents are held at major commercial banks.

Interest rate swaps. The Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of discounting the future variable cash payments, or receipts, over the life of the agreements. The variable interest rates used in the calculation of receipts are based on observable market interest rate curves.

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 expected to be paid out within the next twelve months are included in accrued liabilities on the consolidated balance sheets. Contingent earn-out liabilities expected to be paid out after the next twelve months are included in other long-term liabilities on the consolidated balance sheets.

Measurements

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) and the income approach (present value of future income or cash flow). 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 three levels are:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3—Unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies.

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 year ended December 31, 2016 or December 31, 2015.

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):

	Fair value as of		Fair value measurement as of December 31, 2016 using fair value hierarchy
	December 31, 2016		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	91,151	$	91,151	$	—	$	—
Interest rate swaps (2)	1,044		—		1,044		—
Financial liabilities
Contingent earn-out liabilities (3)	1,164		—		—		1,164

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	Fair value as of		Fair value measurement as of December 31, 2015 using fair value hierarchy
	December 31, 2015		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	71,825	$	71,825	$	—	$	—
Interest rate swaps (2)	419		—		419		—
Financial liabilities
Contingent earn-out liabilities (3)	7,250		—		—		7,250

—————————————

(1) Fair value is based on quoted market prices.

(2) Fair value is determined using market standard models with observable inputs.

(3) This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and general macro-economic environment and industry trends.

Contingent earn-out liabilities

The Company’s fair value estimate of the earn-out liability related to the Company's acquisition of Southwind Health Partners, L.L.C. and Southwind Navigator, LLC (together, “Southwind”) in December 2009 was $5.6 million. The fair value of the Southwind earn-out liability was impacted by changes in the Company’s stock price and by changes in estimates regarding expected operating results through the end of the evaluation period, which was December 31, 2014. As of December 31, 2016, $21.4 million had been earned and paid in cash and shares of Company common stock to the former owners of the Southwind business, which includes the final payment of $1.0 million that was paid during the year ended December 31, 2016 in satisfaction of its remaining obligation.

The Company’s fair value estimate of the earn-out liability related to the Company’s acquisition of 360Fresh, Inc. (“360Fresh”) in November 2012 was $2.5 million. The Company paid $1.5 million in January 2015 in satisfaction of its remaining obligation.

The Company's fair value estimate of the earn-out liability related to the Company's acquisition of Clinovations, LLC (“Clinovations”) in November 2014 was $4.5 million. The fair value of the Clinovations earn-out liability will be impacted by changes in estimates regarding expected operating results through the evaluation period, which ends on December 31, 2017  with payments extending through April 2018. In September 2016, 62,269 shares of Company common stock were issued to pay a portion of the earn-out liability. The maximum payout of the earn-out is $9.5 million, while the minimum is zero. Based on Clinovations' operating results, the remaining contingent obligation for Clinovations as of December 31, 2016 was $0.6 million. The fair value of the Clinovations earn-out liability will be impacted by changes in estimates of discount rates for each evaluation period, which vary from 6.7% to 7.5%, and the volatility of the Company stock, which was 25% as of December 31, 2016.

The Company's fair value estimate of the earn-out liability related to the Company's acquisition of ThoughtWright, LLC d/b/a GradesFirst (“GradesFirst”) in December 2014 was $3.6 million. The fair value of the GradesFirst earn-out liability was impacted by changes in estimates regarding expected operating results through the evaluation period, which ended on December 31, 2015. The maximum earn-out potential of $4.0 million was earned during the evaluation period and paid as of December 31, 2016 in satisfaction of the Company’s remaining obligation.

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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 year ended December 31, 2016 and the year ended December 31, 2015 (in thousands):

	Year Ended
	December 31, 2016			December 31, 2015
Beginning balance	$	7,250		$	12,946
Fair value change in Southwind contingent earn-out liability (1)	—			261
Fair value change in GradesFirst contingent earn-out liability (1)	—			400
Fair value change in Clinovations contingent earn-out liability (1)	1,103			(2,326		)
Fair value change in other contingent earn-out liabilities (1)	546
Southwind earn-out payment	(1,032		)	(2,531		)
360 Fresh earn-out payment	—			(1,500		)
Clinovations earn-out payment	(2,703		)	—
Grade First earn-out payment	(4,000		)	—
Ending balance	$	1,164		$	7,250

—————————————

(1) Amounts were recognized in cost of services on the consolidated statements of operations.

Financial instruments not recorded at fair value on a recurring basis

Equity method investments. The Company's equity method investments represent the Company's ownership interest in Evolent Health, Inc. and its subsidiary, Evolent Health LLC. The fair value of the Company's ownership interest in Evolent Health, Inc. and its subsidiary was $138.2 million as of December 31, 2016 based on the closing price of the common stock of Evolent Health, Inc. as reported on the New York Stock Exchange prior to any discount. For further information, see Note 8, "Equity method investments." The fair value of the Company's equity method investments is measured quarterly for disclosure purposes. The Company's equity method investments are recorded at fair value only if an impairment charge is recognized.

Senior secured term loan. The Company estimates that the fair value of its senior secured term loan was $527.3 million as of December 31, 2016. The fair value was determined based on discounting the future expected variable cash payments over the life of the loan. The variable interest rates used in the calculation are based on observable market interest rates. The senior secured term loan would be classified as Level 2 within the fair value hierarchy if it were measured at fair value.

Non-recurring fair value measurements

During the years ended December 31, 2016 and 2015, the Company determined that its cost method investment in convertible preferred stock and common stock warrants of a private company would not be recoverable and recorded impairment expense of $1.8 million and $3.2 million, respectively. The fair values estimated in connection with this impairment is considered a Level 3 fair value measure due to the significance of unobservable inputs to the valuation. 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. The carrying value of the Company’s investment was $0.0 million and $1.8 million as of December 31, 2016 and 2015, respectively, which is included in other non-current assets on the consolidated balance sheet. 

As of December 31, 2016, no dividends had been declared by the investee or recorded by the Company.

Non-financial assets and liabilities

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).

During the year ended December 31, 2016, no fair value adjustments or material fair value measurements were required for non-financial assets or liabilities. During the year ended December 31, 2015 and the nine months ended December 31, 2014, the Company’s capitalized software for sale assets were measured and recorded at fair value due to circumstances that indicated that the carrying values of the assets were not fully recoverable. As a result, the Company recognized an impairment of approximately $8.2 million and $2.1 million in the fiscal periods ending December 31, 2015 and 2014, respectively, within the consolidated statements of operations. The Company utilized the discounted cash flow method to determine the fair value of the capitalized software assets. Cash flows were determined based on the Company’s estimates of future operating results

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and discounted using an internal rate of return consistent with that used by the Company to evaluate cash flows of other assets of a similar nature. Due to the significant unobservable inputs inherent in discounted cash flow methodologies, this method is classified as Level 3 in the fair value hierarchy.

During the year ended December 31, 2015, the Company determined that there was evidence of impairment on its goodwill. See Note 7, “Goodwill and intangibles,” for further detail on the recognition of goodwill impairment charges. The fair values estimated in connection with this impairment are considered a Level 3 fair value measure due to the significance of unobservable inputs to the valuation.

Note 5. Membership fees receivable

Membership fees receivable consist of the following (in thousands):

	As of December 31,
	2016			2015
Billed fees receivable	$	149,117		$	138,100
Unbilled fees receivable	462,780			473,053
Membership fees receivable, gross	611,897			611,153
Allowance for uncollectible revenue	(6,380		)	(5,709		)
Membership fees receivable, net	$	605,517		$	605,444

Included in membership fees receivable are billed and unbilled receivables. Billed fees receivable represent invoiced membership fees. Unbilled fees receivable represent fees due to be billed within the next twelve months to members, a portion of which relates to revenue to be recognized in excess of a year and is included in long term deferred revenue. The Company generates long term deferred revenue due to the majority of its invoicing being done in advance.

Note 6. Property and equipment

Property and equipment consists of the following (in thousands):

	As of December 31,
	2016			2015
Leasehold improvements	$	69,465		$	63,608
Furniture, fixtures and equipment	70,362			62,790
Software	231,952			202,384
Property and equipment, gross	371,779			328,782
Accumulated depreciation and amortization	(200,498		)	(148,425		)
Property and equipment, net	$	171,281		$	180,357

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. During the year ended December 31, 2015, the Company recognized an impairment loss of $2.7 million related to certain internally developed software that is no longer in use. The Company did not recognize any material impairment losses on any of its property and equipment during the year ended December 31, 2016 or the nine months ended December 31, 2014.

As of December 31, 2016 and 2015, the carrying value of internally developed capitalized software was $75.2 million and $73.2 million, respectively.

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Note 7. Goodwill and intangibles

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 indefinite life. Goodwill is reviewed for impairment at least annually as of October 1, the first date of the fourth quarter of the Company's fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment. The Company has one operating segment, which is consistent with the way management runs the business and allocates resources. The operating segment is then divided into two reporting units largely as a result of the Royall acquisition and continued integration efforts. The two reporting units are Royall and the remaining Advisory Board business ("Core ABC"). Goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination.

The determination of fair value of the reporting units used to perform the first step of the impairment test requires judgment and involves significant estimates and assumptions about the expected future cash flows and the impact of market conditions on those assumptions. Due to the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact the Company’s assumptions as to future revenue growth rates, future operating margins, market-based WACC, and other factors that may result in changes in the estimates of the Company’s reporting units’ fair value. Although management believes the assumptions used in testing the Company’s reporting units’ goodwill for impairment are reasonable, it is possible that market and economic conditions could change from those expected. A decline in revenue or revenue and earnings multiple data of peer companies, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Company’s financial condition and results of operations.

The Company performed the annual goodwill impairment test at October 1, 2016. The fair value of both the Royall and Core ABC reporting units exceeded carrying value, resulting in no indicated impairment for the two reporting units. There were no indicators of impairment identified between October 1 and December 31, 2016. Accordingly, there was no impairment of goodwill recorded during the year ended December 31, 2016.

The Royall reporting unit had goodwill of $648.3 million as of October 1, 2015. The estimated fair value of the reporting unit did not exceed its carrying value and, therefore, step two of the goodwill impairment was performed. The decrease in fair value of the reporting unit from the acquisition was attributable to reduced projected cash flow growth rates due in part to lower than expected first year performance and lower market derived multiples between the January 9, 2015 acquisition date and the October 1, 2015 goodwill impairment assessment date. As the Company completed its calendar year 2016 forecast in the three months ended December 31, 2015, it revised its outlook for the Royall business, reducing cash flow forecasts over the projection period. The projections incorporated the effect of current market conditions, including revenue growth, customer attrition, operating margins, capital expenditures, and working capital dynamics. The market-based WACC used in the income approach for Royall was 11%. The terminal growth rate used in the discounted cash flow model was 3.5%.

As the Royall reporting unit failed the step one test, the Company performed the step two test. In connection with the step two test, the Company estimated the fair value of identifiable intangible assets and deferred revenue using methodologies consistent with those used in the original Royall purchase price allocation. Key assumptions were updated to reflect the current outlook for the Royall business as well as market conditions. The result of the step two analysis resulted in a goodwill impairment of $99.1 million.

The Company believed that no such impairment indicators existed during the nine months ended December 31, 2014. There was no impairment of goodwill recorded during the nine months ended December 31, 2014.

Changes in the carrying amount of goodwill are as follows (in thousands):

	As of December 31,
	2016			2015
Beginning of period	$	738,200		$	186,895
Goodwill acquired	2,258			650,289
Goodwill impairment	—			(99,145		)
Purchase accounting adjustment (1)	(951		)	161
Ending balance	$	739,507		$	738,200

(1) The 12/31/2016 adjustment represents an adjustment to the purchase price allocation resulting in an increase to deferred tax assets and a reduction of goodwill.

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Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from two years to seventeen years. As of December 31, 2016, the weighted average remaining useful life of acquired intangibles was approximately 13.3 years. As of December 31, 2016, the weighted average remaining useful life of internally developed intangibles was approximately 3.4 years.

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

		As of December 31, 2016							As of December 31, 2015
	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	$	20,034	$	(9,998	)	$	10,036	$	16,902	$	(6,796	)	$	10,106
Acquired intangibles:
Developed software	5.2	9,450		(8,575		)	875		9,450		(8,075		)	1,375
Customer relationships	16.2	277,710		(42,978		)	234,732		277,710		(25,769		)	251,941
Trademarks	8.6	14,900		(5,923		)	8,977		14,900		(4,490		)	10,410
Non-compete agreements	3.8	1,400		(1,400		)	—		1,400		(1,379		)	21
Customer contracts	4.7	6,449		(6,016		)	433		6,449		(5,581		)	868
Total other intangibles		$	329,943	$	(74,890	)	$	255,053	$	326,811	$	(52,090	)	$	274,721

During the year ended December 31, 2015 and the nine months ended December 31, 2014, the Company concluded that certain acquired developed technology assets would no longer be in use. As a result, the Company recognized a $5.4 million and $2.1 million impairment, respectively, on the remaining unamortized costs.

Amortization expense for intangible assets for the year ended December 31, 2016, 2015, and the nine months ended December 31, 2014, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $22.8 million, $24.4 million, and $7.3 million, respectively. The following approximates the aggregate amortization expense to be recorded in depreciation and amortization on the consolidated statements of operations for each of the following five fiscal years ending December 31, 2017 through 2021: $22.5 million, $21.6 million, $19.9 million, $18.7 million, and $17.7 million, respectively, and $154.7 million thereafter. 

Note 8. Equity method investments

As of December 31, 2016, the Company held a 7.7% equity interest in Evolent Health LLC (“Evolent LLC”) and a 7.9% equity ownership interest in Evolent Health, Inc. (“Evolent Inc.”), which had no material operations outside of its 77.4% ownership interest in Evolent LLC. These investments are accounted for under the equity method, with the Company’s proportionate share of the investees’ losses recognized in the consolidated statements of operations. The Company has the right to designate two individuals to Evolent Inc.'s board of directors, who were the Company’s Chief Financial Officer and an unaffiliated designee of the Company as of December 31, 2016.

During the year ended December 31, 2016, the Company sold a portion of its interest in Evolent Inc. Total cash received from the transaction was $48.6 million and resulted in the recognition of an after tax gain of $29.7 million. During the year ended December 31, 2016, the Company recognized in the consolidated statements of operations its proportionate share of the losses of Evolent Inc. of $4.3 million. The Company’s share of the losses of Evolent Inc. that was applied to the carrying value of its investment in Evolent Inc. during the year ended December 31, 2015 was $3.0 million. The carrying balance of the Company’s investment in Evolent Inc. was $10.3 million and $0 as of December 31, 2016 and 2015. The Company had no unrecorded losses related to its investment in Evolent Inc. as of December 31, 2016.

The Company recognized in the consolidated statements of operations its proportionate share of the losses of Evolent LLC of $6.1 million, $8.6 million, and $6.3 million in the years ended December 31, 2016, 2015, and the nine months ended December 31, 2014, respectively. The carrying balance of the Company’s investment in Evolent LLC was $9.6 million and $0.7 million as of December 31, 2016 and 2015, respectively. The Company had no unrecorded losses related to its investment in Evolent LLC as of December 31, 2016 or 2015.

In connection with the reorganization and initial public offering of Evolent Inc. in June 2015, the "Transaction," the Company carried over its basis in its investment resulting in a significant difference between its basis and its proportionate share in the equity of Evolent Inc. As of December 31, 2016, the basis difference totaled $43.8 million and will decrease over time through amortization and upon any sale or dilutive transactions. Evolent Inc. gained control of Evolent LLC in the

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Transaction and applied purchase and push down accounting. The Company has excluded the effects of this in its determination of the equity in Evolent LLC losses, thereby reducing its share of losses from Evolent LLC for the affected periods.

Because of Evolent LLC's treatment as a partnership for federal income tax purposes, the losses of Evolent LLC pass through to the Company and the other members. The Company's proportionate share of the losses of Evolent LLC is recorded net of the estimated tax benefit the Company believes will be realized from the equity in loss of equity method investments on the consolidated statements of operations.

Historically, the Company had provided a full valuation allowance against the deferred tax asset resulting from these benefits. During the nine months ended December 31, 2014, the Company did not recognize a tax benefit associated with equity method losses as there was a full valuation allowance recorded.

During the year ended December 31, 2015, the Company determined that it was more likely than not able to realize the deferred tax assets associated with its investment in Evolent LLC as a result of the reorganization related to Evolent Inc.'s initial public offering; accordingly, a tax benefit of $6.7 million was recorded to release the valuation allowance previously recorded. An additional tax benefit of $0.5 million was recorded in the year ended December 31, 2015 for tax benefits associated with current year losses received from Evolent LLC. For the year ended December 31, 2015, the income tax benefit from gains (losses) from equity method investments was $7.2 million, representing an effective tax rate of 62.2%.

The provision for income taxes from gains (losses) from equity method investments for the year ended December 31, 2016 was $21.2 million, representing an effective tax rate of 31.3%. Tax expense of $18.9 million was recorded for the tax effect of the current period gain on sale of shares in Evolent, Inc. and $7.4 million of expense associated with current year dilution gains and the allocated share of losses from Evolent LLC and Evolent, Inc. The effective tax rate applied to the dilution gains, gain on partial sales, and the allocated share of losses is 38.8%. Additional tax benefit of $5.1 million was recorded for the tax effects of current year losses received from Evolent LLC and prior period adjustments.

The gains (losses) from equity method investments on the consolidated statement of operations consisted of the following (in thousands):

	Year ended December 31,			Year ended December 31,			Nine Months Ended  December 31,
	2016			2015			2014
Allocated share of losses	$	(10,366	)	$	(11,616	)	$	(6,540	)
Gain on partial sale of investment	48,565			—			—
Dilution gains	29,704			—			—
Tax (expense) benefits	(21,237		)	7,220			—
Gains (losses) from equity method investments	$	46,666		$	(4,396	)	$	(6,540	)

In connection with the Transaction, the Company and certain investors in Evolent LLC entered into a tax receivables agreement with Evolent Inc. Under the terms of that agreement, Evolent Inc. will make cash payments to the Company and certain investors in amounts equal to 85% of Evolent Inc.'s actual tax benefit realized from various tax attributes related to activity before the initial public offering. Interest will be included on the tax savings at the applicable London interbank offered rate plus 100 basis points. The tax receivables agreement will generally apply to Evolent Inc.'s taxable years up to and including the 15th anniversary date of the Transaction. As of December 31, 2016, the Company has not received any payments pursuant to the terms of the tax receivables agreement. As the amount the Company will receive related to the tax receivables agreement is unknown, the Company will recognize payments, if any, associated with this agreement when received.

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The following is a summary of the consolidated financial position of Evolent, Inc. as of the date presented:

	As of December 31,
	2016		2015
Assets:
Current assets	$	264,966	$	184,463
Non-current assets	934,873		831,051
Total assets	$	1,199,839	$	1,015,514
Liabilities and shareholders' equity:
Current liabilities	$	131,941	$	59,506
Non-current liabilities	155,784		21,429
Total liabilities	287,725		80,935
Total shareholders’ equity attributable to Evolent Health, Inc.	702,526		649,341
Non-controlling interests	209,588		285,238
Total liabilities and shareholders’ equity	$	1,199,839	$	1,015,514

The following is a summary of the consolidated operating results of Evolent, Inc. for the periods presented:

	Year Ended December 31,
	2016			2015
Revenue	$	254,188		$	96,878
Cost of revenue (exclusive of depreciation and amortization)	155,177			57,398
Gross profit	99,011			39,480
(Loss) income before income taxes and non-controlling interests	(237,533		)	343,289
Net (loss) income	(226,778		)	319,814
Net (loss) income attributable to Evolent Health, Inc.	(159,742		)	332,494

Evolent LLC is in the early stages of its business plan and, as a result, the Company expects both Evolent Inc. and Evolent LLC to continue to incur losses. The Company’s investments are evaluated for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. As of December 31, 2016, the Company believes that no impairment charge is necessary. For additional information on the fair value of the Company’s investment in the Evolent entities, see Note 4, “Fair value measurements.”

Note 9. Noncontrolling interest

In July 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 was governed by a services agreement and other documents, as amended, that provided the entity’s owners the conditional right to require the Company to purchase their ownership interests (“Put Option”), for a price based on a formula set forth in the agreement, at any time after certain conditions were satisfied through June 30, 2015. These agreements also provided the Company a conditional right to require the entity’s owners to sell their ownership interests to the Company (“Call Option”) over the same period. The Company determined that this entity met the definition of a variable interest entity over which it had significant influence and, as a result, consolidated the results of this entity into its consolidated financial statements. The noncontrolling interest represents the entity’s owners’ claims on consolidated investments where the Company owns less than a 100% interest. Losses attributable to noncontrolling interest were $0 for the years ended December 31, 2016 and 2015, respectively, and $0.2 million for the nine months ended December 31, 2014.

On December 5, 2014, the conditions required for the entity's owners to exercise the Put Option were satisfied and the entity's owners exercised the Put Option. The Company paid $6 million to acquire 100% of the ownership interests. The purchase price of $6.1 million is recorded as a reduction to net income attributable to common stockholders on the accompanying consolidated statements of operations. Prior to the exercise of the Put Option, the Company had a 0% interest in this entity. In conjunction with the exercise of the Put Option, the Company recorded a deferred tax asset of $3.4 millionrelated

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to basis differences. As a result of the exercise of the Put Option, there was no noncontrolling interest for the year ended December 31, 2016 or 2015. As of December 31, 2016, the deferred tax asset had a balance of $2.9 million.

Note 10. Debt

Senior secured credit facilities obtained in January 2015

On January 9, 2015, in connection with the completion of the acquisition of Royall, the Company entered into a credit agreement with various lenders. Under the terms of the January 9, 2015 credit agreement, lenders provided the Company with $775 million of senior secured credit facilities for application to the acquisition of Royall and the Company’s corporate needs after the closing of the Royall acquisition. The credit facilities consisted of a term loan facility in the principal amount of $725 million, maturing on January 9, 2022, and a revolving credit facility under which up to $50 million principal amount of borrowings and other credit extensions could be outstanding at any time, maturing on January 9, 2020.

Amounts drawn under the term facility generally bore interest, payable quarterly, at an annual rate calculated, at the Company’s option, on the basis of either (a) an alternate base rate plus an initial margin of 3.00% or (b) the applicable London interbank offered rate (subject to a 1.00% floor) plus an initial margin of 4.00%, subject in each case to margin reductions based on the Company's total leverage ratio from time to time. The annual interest rate for the term loan facility as of January 9, 2015 was 5.00%. The revolving facility was undrawn at the facility closing date. All $725 million of term loans available under the term loan facility were drawn at the closing of the acquisition to pay the majority of the cash purchase price for the Royall capital stock. Total original issue discount of $21.8 million and deferred financing fees of $2.8 million were recorded related to this credit agreement. The Company recognized a loss of $0.2 million on the modification of the July 2012 revolving credit facility. This loss was recorded in loss on financing activities within the consolidated statements of operations.

Equity offering in January 2015

On January 21, 2015, the Company closed on a registered public offering of its common stock. The Company used the net proceeds from the offering plus available cash to repay approximately $149.9 million principal amount of loans outstanding under its $725 million senior secured term loan facility. This payment resulted in a loss on financing activities of $4.5 million related to original issue discount and $0.3 million related to deferred financing fees. The total $4.8 million loss was recognized in loss on financing activities within the consolidated statement of operations.

Senior secured credit facilities obtained in February 2015

On February 6, 2015, the Company entered into a new credit agreement with various lenders. The new credit agreement consists of a five-year senior secured term loan facility in the original principal amount of $575 million and a five-year senior secured revolving credit facility under which up to $100 million principal amount of borrowings and other credit extensions may be outstanding at any time. The proceeds of the term loan were used to repay and retire all loans outstanding under the term loan facility obtained on January 9, 2015. The revolving credit facility was not drawn down on February 6, 2015. Amounts drawn under the term loan and revolving credit facilities bore interest, payable quarterly, at an annual rate calculated, at the Company’s option, on the basis of either (a) an alternate base rate plus an initial margin of 1.75% or (b) the applicable London interbank offered rate plus an initial margin of 2.75%, subject in each case to margin reductions based on the Company’s total leverage ratio from time to time. At the time of issuance, the stated annual interest rate on the borrowing was 3.01%. Amounts due under the new credit agreement are secured by substantially all of the Company's tangible and intangible assets.

The lenders under the new credit agreement included the lenders from the January 9, 2015 agreement as well as new lenders. For those lenders to this agreement that also participated in the January 9, 2015 agreement, the Company concluded that the new credit agreement represented a modification of the debt. As a modification, the original issue discount and deferred financing fees associated with the original borrowings carried forward to the new borrowings. Any fees paid to or received from these lenders were recorded as an adjustment to the original issue discount. Any fees paid to third parties were recorded as expense. The Company received a net refund of $2.4 million from the original lenders under the January 9, 2015 agreement, which was treated as a reduction to the original issue discount and deferred financing fees. Further, because the level of participation in the borrowings by the lenders under the original credit agreement was significantly less under the new agreement than under the original agreement, the Company recognized a debt modification expense of $17.4 million related to a portion of the original issue discount and deferred financing fees from the old agreement. This $17.4 million expense was recorded as a loss on financing activities within the consolidated statement of operations.

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Amendment to the senior secured credit facilities

On October 30, 2015, the Company amended its senior secured credit facilities. Prior to the amendment, the outstanding principal amount of the senior secured term loan was approximately $560.6 million and no amounts were outstanding under the revolving credit facility. Pursuant to this amendment, the amount available for borrowing under the revolving credit facility was increased from $100.0 million to $200.0 million. On October 30, 2015, the Company borrowed $100.0 million under the revolving credit facility and used all of the proceeds to repay a portion of the outstanding principal amount of the senior secured term loan. Upon consummation of this prepayment transaction, $460.6 million in aggregate principal amount remained outstanding under the senior secured term loan. In addition, the Company lowered the initial margin on the alternate base rate from 1.75% to 1.25% and on the London interbank offered rate from 2.75% to 2.25%. The Company recognized no loss on financing activities related to this amendment. As of December 31, 2016, based on the Company's leverage ratio, the interest rate margin was 2.00% and the stated annual interest rate on the senior secured term loan was 2.77%.

As of December 31, 2016 and 2015, there was $100.0 million outstanding under the revolving credit facility and $80.9 million and $98.6 million, respectively, was available for borrowing. As of December 31, 2016 and 2015, $19.1 million and $1.4 million, respectively, of standby letters of credit had been issued and were outstanding under the revolving credit facility. As of December 31, 2016 and 2015, the stated annual interest rate on the amounts drawn on the revolving credit facility were 2.77% and 2.68%, respectively. The Company is obligated to pay a commitment fee at an annual rate of 0.3% subject to reduction based on the Company’s total leverage ratio from time to time, accruing on the average daily amount of available commitments under the revolving credit facility.

In June 2016 the Company drew down $17.0 million of borrowings under its revolving credit facility, which was repaid as of December 31, 2016.

Long-term debt is summarized as follows (in thousands): 

	As of December 31, 2016
2.77%term facility due fiscal 2020 ($424,687 face value less unamortized discount of $2,601)	$	422,086
Revolving credit facility	100,000
Less: Amounts due in next twelve months ($50,312 face value less unamortized discount of $965)	(49,347		)
Total	$	472,739

The credit agreement contains customary representations and warranties, events of default and financial and other covenants, including covenants that require the Company to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The Company's compliance with the two financial covenants is measured as of the end of each fiscal quarter. The Company was in compliance with these financial covenants as of December 31, 2016 and 2015.

Long-term debt maturing in each of the next five fiscal years, excluding the discount, is as follows (in thousands):

Year Ending December 31,
2017	$	50,312
2018	79,062
2019	86,250
2020	309,063
Total	$	524,687

Interest expense for the years ended December 31, 2016 and 2015 was $18.1 million and $21.1 million, respectively, inclusive of $1.4 million and $1.3 million, respectively, of amortization of debt issuance costs and $2.2 million and $2.0 million, respectively, of payments related to the interest rate swaps described below.

Swap agreements

Through its senior secured term loan and revolving facilities, the Company is exposed to interest rate risk. In April 2015, to minimize the impact of changes in interest rates on its interest payments, in April 2015, the Company entered into three interest rate swap agreements with financial institutions to swap a portion of its variable-rate interest payments for fixed-rate interest payments. The interest rate swap derivative financial instruments are recorded on the consolidated balance sheet at fair value, which is based on observable market-based expectations of future interest rates.

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At hedge inception, the Company entered into interest rate swap arrangements with notional amounts totaling $287.5 million. The swap was structured to have a declining notional amount which matches the amortization schedule of the term loan. As of December 31, 2016 and 2015, the principal amount hedged was $262.3 million and $276.8 million, respectively. Consistent with the terms of the Company's senior secured term loan facility, the interest rate swap agreements mature in February 2020 and have periodic interest settlements. Under the agreements, the Company is entitled to receive a floating rate based on the one-month London interbank offered rate and obligated to pay an average fixed rate of 1.282% on the outstanding notional amount. The Company has designated the interest rate swap as a cash flow hedge of the variability of interest payments under its senior secured term loan facility due to changes in the LIBOR benchmark interest rate. The difference between cash paid and received is recorded within interest expense on the consolidated statements of operations.

As of December 31, 2016 and 2015, the fair value of the interest rate swaps was an asset of $1.0 million and $0.4 million, respectively, and was recorded in the Company's consolidated balance sheets within other non-current assets. For the year ended December 31, 2016 and 2015, the change in fair value of the swaps, net of tax, of $0.3 million and $0.2 million, respectively, were reported as a component of accumulated other comprehensive income. The Company does not expect any amount included in accumulated other comprehensive income to be reclassified into earnings during the next 12 months. For the years ended December 31, 2016 and 2015, there was $0.4 million and $0.0, respectively, of hedge ineffectiveness, recorded within the consolidated statements of operations. Changes in fair value are reclassified from accumulated other comprehensive income into earnings in the same period in which the hedged item affects earnings.

If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations for the applicable period. 

Note 11. Stockholders’ equity

In November 2015, the Company’s board of directors authorized an increase in its cumulative share repurchase program to $550 million of the Company’s common stock. The Company repurchased 1,951,258 shares, 1,069,357 shares, and 731,559 shares of its common stock at a total cost of approximately $61.6 million, $53.0 million, and $36.0 million, in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, respectively, pursuant to its share repurchase program. The total amount of common stock purchased from inception under the program as of December 31, 2016 was 19,778,800 shares at a total cost of $513.5 million. All repurchases to date have been made in the open market and shares have been retired as of December 31, 2016. No minimum number of shares subject to repurchase has been fixed and the share repurchase authorization has no expiration date. The Company has funded its share repurchases with cash on hand, proceeds from the sale of marketable securities, and cash generated from operations. As of December 31, 2016, the remaining authorized repurchase amount was $36.5 million.

During the year ended December 31, 2016, the Company retired 1,951,258 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 $19,513, treasury stock of $61.6 million, and retained earnings of $61.6 million. During the year ended December 31, 2015, the Company retired 1,069,357 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 $10,700, treasury stock of $53.0 million, and retained earnings of $53.0 million. A total of 19,778,800 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. During the nine months ended December 31, 2014, the Company retired 731,559 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 $7,300, treasury stock of $36.0 million, and retained earnings of $36.0 million. A total of 17,827,542 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.

Equity offering

On January 21, 2015, the Company closed the registered public offering of 3,650,000 shares of common stock by the Company and, pursuant to registration rights granted by the Company to the Seller in connection with the acquisition of Royall, the public offering of 1,755,000 shares of common stock held by the Seller that were issued to the Seller as the equity component of the acquisition consideration. The shares in the registered public offering were sold at a price to the public of $43.00 per share, less an underwriting discount of $1.935 per share, for a net per share purchase price of $41.065. The Company also incurred selling costs of $1.1 million directly related to this equity offering. The net proceeds received by the Company were approximately $148.8 million after deducting the underwriting discount and selling costs. As of December 31, 2016, the Seller held no shares of the common stock issued to it as acquisition consideration.

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Note 12. Stock-based compensation

Equity incentive plans

The Company issues awards, including stock options and RSUs, under the Company’s 2009 Stock Incentive Plan (the “2009 Plan”). On June 9, 2015, the Company's stockholders approved an amendment to the 2009 Plan that increased the number of shares of common stock authorized for issuance under the plan by 3,800,000 shares. As of December 31, 2016, there were 1,862,891 shares available for issuance under the 2009 Plan. On September 5, 2013, the Company's stockholders also approved an amendment to the 2009 Plan that increased the maximum term for stock option and freestanding stock appreciation rights awards granted under the plan from five years to seven years.

The 2009 Plan is administered by the Compensation Committee of the Company’s board of directors, which has the authority to determine which officers, directors, employees, and other service providers are awarded options or share awards pursuant to the 2009 Plan and to determine the terms of the awards. Grants may consist of treasury shares or newly issued shares. Options are rights to purchase common stock of the Company at the fair market value on the date of grant. 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 Company generally awards non-qualified options, but the 2009 Plan permits the issuance of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. Holders of options do not participate in dividends, if any, until after the exercise of the award. RSUs are equity settled stock-based compensation arrangements of a number of shares of the Company’s common stock. RSU holders do not participate in dividends, if any, nor do they have voting rights until the restrictions lapse.

On January 9, 2015, in conjunction with the Royall acquisition, the Company created The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees to enable the Company to award options and restricted stock units to persons employed by Royall as an inducement to employees entering into and continuing employment with the Company or its current or future subsidiaries upon consummation of the Royall acquisition. Under the terms of this plan, the aggregate number of shares issuable pursuant to all awards may not exceed 1,906,666. The awards consisted of performance-based stock options to purchase an aggregate of 1,751,000 shares of common stock and performance-based RSUs for an aggregate of 145,867 shares of common stock. Both the performance-based stock options and performance-based RSUs are also subject to service conditions.

Stock options granted under the inducement plan have an exercise price equal to $49.92, which was the closing price of the Company’s common stock on January 9, 2015 as reported on the NASDAQ Global Select Market. The stock options have a seven-year term and are eligible to vest, if performance-based vesting criteria are satisfied, in installments commencing in January 2017 and ending in January 2020. The RSUs were valued at $49.92 and are also eligible to vest in installments commencing in January 2017 and ending in January 2020, subject to satisfaction of performance-based vesting criteria. The vesting criteria in both cases are based on performance of the Royall programs and services. The aggregate grant date fair value of the performance-based stock options, assuming all performance targets are met, is estimated to be approximately $26.8 million. The aggregate grant date fair value of the performance-based RSUs, assuming all performance targets are met, is estimated at approximately $7.3 million. As of December 31, 2016, the Company expects that Royall will achieve 70% to 99% of the performance targets, which would result in vesting of 50% of the performance-based stock options and 50% of the RSUs eligible to vest, subject to forfeitures. The option and RSU awards are reflected in the following tables.

The actual stock-based compensation expense the Company will recognize is dependent upon, but not limited to, Royall satisfying the applicable performance conditions and continued employment of award recipients at the time performance conditions are met. The actual amount the Company will recognize may increase or decrease based on Royall's actual results and the employment status of the award recipients at the time performance conditions are met.

On June 23, 2014, the Compensation Committee of the board of directors approved a long-term incentive plan pursuant to which nonqualified stock options and RSUs would be granted under the 2009 Plan to certain executive officers of the Company. During the year ended December 31, 2014, 970,937 nonqualified stock options and 104,026 RSUs were granted to certain executive officers of the Company. The awards are subject to both performance-based and market-based conditions and will vest based upon the achievement of specified levels of both sustained contract value and sustained stock price during the performance period, which could extend to March 31, 2019. The vesting of the RSUs is also subject to a one-year service condition, which requires the recipient to remain employed with the Company for at least one year following the date on which the applicable performance and market conditions are achieved. The Company utilized the longer of the explicit, implicit, or derived service periods for the requisite service period, which includes the current estimate of the time to achieve the performance and market conditions and is four years for the stock options and six years for the RSUs, inclusive of the one-year service condition. The options and RSUs are included in the tables below.

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Stock option activity. During the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014, the Company granted 1,345,000, 2,102,916, and 1,144,973, stock options, respectively, with a weighted average exercise price of $28.44, $50.45, and $52.28, respectively.

During the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014, participants exercised 303,490, 218,109, and 233,999 options for a total intrinsic value of $4.7 million, $6.6 million, and $7.3 million, respectively. Intrinsic value is calculated as the number of shares exercised times the Company’s stock price at exercise less the exercise price of the option.

The following table summarizes the changes in common stock options during the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014 for all of the Company's stock incentive plans.

	Number of Performance-Based Options		Weighted Average Exercise Price			Number of Service-Based Options		Weighted Average Exercise Price
Outstanding as of March 31, 2014	20,000		$	29.58		1,810,323		$	32.86
Granted	974,605		51.40			170,368		57.31
Exercised	—		—			(233,999	)	18.36
Forfeited	—		—			—		—
Outstanding, as of December 31, 2014	994,605		$	50.96		1,746,692		$	37.19
Granted	1,774,820		$	49.90		328,096		$	53.42
Exercised	—		—			(218,109	)	21.76
Forfeited	(756,100	)	49.92			(13,569	)	60.27
Outstanding, as of December 31, 2015	2,013,325		$	50.42		1,843,110		$	41.73
Granted	319,900		$	28.20		1,025,100		$	28.52
Exercised	—		—			(303,490	)	16.05
Forfeited	(215,370	)	49.92			(39,542	)	52.68
Outstanding, as of December 31, 2016	2,117,855		$	47.11	(1)	2,525,178		$	39.28	(3)
Exercisable, as of December 31, 2016	26,872		$	34.91	(2)	1,021,192		$	43.29	(4)

—————————————

(1) The weighted average remaining contractual term for all performance-based options outstanding at December 31, 2016 is approximately five years and the aggregate intrinsic value is $1.7 million.

(2) The weighted average remaining contractual term for all performance-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $0.1 million.

(3) The weighted average remaining contractual term for all service-based options outstanding at December 31, 2016 is approximately four years and the aggregate intrinsic value is $7.4 million.

(4) The weighted average remaining contractual term for all service-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $2.5 million.

The aggregate intrinsic value shown in the footnotes of the table above is the sum of the amounts by which the quoted market price of the Company’s common stock on the NASDAQ Global Select Market exceeded the exercise price of the options as of December 31, 2016, for those options for which the quoted market price was in excess of the exercise price. This amount changes over time based on changes in the fair market value of the Company’s common stock. During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, 341,024, 387,748, and 411,259 options, respectively, vested with fair values of $0.1 million, $5.0 million, and $4.2 million, respectively.

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The following table summarizes the exercise prices and contractual lives of all options outstanding under the Company's stock incentive plans as of December 31, 2016:

	Options Outstanding
Range of Exercise Prices	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life - Years
$ 0.00 – $ 9.99	—	$	—	0.0
10.00 – 19.99	70,500	16.58		0.3
20.00 – 29.99	1,469,478	27.83		5.6
30.00 – 39.99	46,432	35.18		6.4
40.00 – 49.99	1,495,769	48.14		3.4
50.00 – 59.99	1,476,482	52.57		4.6
60.00 – 69.99	84,372	66.90		4.2
$ 0.00 – $ 69.99	4,643,033	$	42.85	4.5

Restricted stock unit activity. During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, the Company granted 534,205, 568,511, and 336,113 RSUs, respectively, the majority of which vest in four equal annual installments on the anniversary of the grant date. The valuation of RSUs is determined as the fair market value of the underlying shares on the date of grant. The weighted average grant date fair value of RSUs granted without market conditions for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 was $31.07, $51.94, and $42.92, respectively. There were no RSUs granted with market conditions during the year ended December 31, 2016. The weighted average fair value of RSUs granted with market conditions during the year ended December 31, 2015 is estimated at $15.49 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.6%; an expected life of approximately 5 years; volatility of 31.3%; and dividend yield of 0.0% over the expected life of the RSUs. The weighted average fair value of RSUs granted with market conditions during the nine months ended December 31, 2014 is estimated at $15.75 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.7%; an expected life of approximately 5 years; volatility of 30.0%; and dividend yield of 0.0% over the expected life of the RSUs.

During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, participants vested in 318,877, 362,654, and 387,377 RSUs, respectively, for a total intrinsic value of $10.5 million, $19.0 million, and $22.0 million, respectively. Intrinsic value is calculated as the number of shares vested times the Company’s closing stock price on the NASDAQ Global Select Market at the vesting date. Of the RSUs vested in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, 108,315, 115,497, and 133,129 shares, respectively, were withheld to satisfy minimum employee tax withholding.

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The following table summarizes the changes in RSUs during the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 for all of the stock incentive plans described above.

	Number of Performance-Based RSUs		Weighted Average Grant Date Fair Value		Number of RSUs		Weighted Average Grant Date Fair Value
Non-vested, March 31, 2014	42,880		$	47.87	1,067,582		$	41.81
Granted	152,957		28.43		183,156		55.02
Forfeited	(8,540	)	51.15		(4,076	)	48.83
Vested	—		—		(387,377	)	32.27
Non-vested, December 31, 2014	187,297		$	31.85	859,285		$	48.89
Granted	191,740		$	49.87	376,771		$	52.99
Forfeited	(78,005	)	48.16		(33,789	)	55.74
Vested	—		—		(362,654	)	43.43
Non-vested, December 31, 2015	301,032		$	39.10	839,613		$	52.82
Granted	23,580		$	32.28	510,625		$	31.01
Forfeited	(66,139	)	51.15		(64,170	)	47.18
Vested	(893	)	50.41		(317,984	)	51.48
Non-vested, December 31, 2016	257,580		$	35.34	968,084		$	42.13

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. Under the ESPP, shares of the Company’s common stock may be purchased at the end of each fiscal quarter at 95% of the closing price of the Company’s common stock. A total of 1,684,000 shares of the Company’s common stock are authorized under the ESPP. As of December 31, 2016, a total of 1,453,429 shares were available for issuance under the ESPP. During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, the Company issued 14,041, 10,496, and 9,241 shares, respectively, under the ESPP at an average price of $34.00, $48.11, and $46.64 per share, respectively. The compensation expense related to the ESPP recorded in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 was not material to the consolidated financial statements.

Valuation assumptions and equity based award activity

As discussed in Note 2, “Summary of significant accounting policies,” determining the estimated fair value of stock-based awards is judgmental in nature and involves the use of significant estimates and assumptions, including the term of the stock-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.

Stock option valuation

The Company calculates the fair value of all stock option awards, with the exception of the stock options issued with market-based conditions, on the date of grant using the Black-Scholes model. Those stock option awards that have market-based conditions are valued using a Monte Carlo model. The expected term for the Company's stock options is determined through analysis of historical data on employee exercises, vesting periods of awards, and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury bonds issued with life terms similar to the expected life of the grant. Volatility is calculated based on historical volatility of the daily closing price of the Company’s common stock continuously compounded with a look-back period similar to the terms of the expected life of the grant. The Company has not declared or paid any cash dividends on its common stock since the closing of its initial public offering and does not currently anticipate declaring or paying any cash dividends. The timing and amount of future cash dividends, if any, is periodically evaluated by the Company’s board of directors and would depend upon, among other factors, the Company’s earnings, financial condition, cash requirements, and contractual restrictions.

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The following average key assumptions were used in the valuation of all stock options granted in each respective period:

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Stock option grants:
Risk-free interest rate	.95% – 1.64%		1.18% – 1.67%		1.53% – 1.75%
Expected lives in years	5.04 – 5.54		4.00 – 5.45		5.00 – 5.47
Expected volatility	36.4% – 38.4%		31.2% – 33.0%		29.8% – 30.9%
Dividend yield	—	%	—	%	—	%
Weighted average exercise price of options granted	28.44		50.45		52.28
Weighted average grant date fair value of options granted	10.00		15.49		14.49
Number of options granted	1,345,000		2,102,916		1,144,973

Valuation for restricted stock units

RSUs without market conditions are valued at the grant date closing price of the Company’s common stock as reported on the NASDAQ Global Select Market. Those RSU awards that have market-based conditions are valued using a Monte Carlo model. The expected term for those RSUs is based on the vesting periods of the awards. The risk-free interest rate is based on U.S. Treasury bonds issued with life terms similar to the expected life of the grant. Volatility is calculated based on historical volatility of the daily closing price of the Company’s common stock continuously compounded with a look-back period similar to the terms of the expected life of the grant. The dividend yield assumption is based on the fact that the Company has not declared or paid any cash dividends on its common stock since the closing of its initial public offering and does not currently anticipate declaring or paying any cash dividends. The timing and amount of future cash dividends, if any, is periodically evaluated by the Company’s board of directors and would depend upon, among other factors, the Company’s earnings, financial condition, cash requirements, and contractual restrictions.

Valuation for employee stock purchase rights

The value of employee stock purchase rights for shares of stock purchased under the ESPP is determined as the fair market value of the underlying shares on the date of purchase as determined by the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market, less the purchase price, which is 95% of the closing price of the Company’s common stock. The ESPP enrollment begins on the first day of the quarter. Stock purchases occur on the last day of the quarter, with only eligible employee payroll deductions for the period used to calculate the shares purchased. There is no estimate of grant date fair value or estimated forfeitures, since actual compensation expense was recorded in the period on the purchase date. The fair value of employee stock purchase rights is equivalent to a 5% discount of the purchase date closing price.

Forfeitures

Forfeitures are estimated based on historical experience at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense is recognized on a straight-line basis, net of an estimated forfeiture rate, for only those shares expected to vest over the requisite service period of the award, which is generally the option vesting term, and can range from six months to six years. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. The Company analyzes forfeiture rates using six separate groups; one group for members of the Company’s board of directors, three separate groups of executives based on seniority, and two groups for general employees. Two of these groups, the Royall executive group and the Royall general employee group, were created in the year ended December 31, 2015 in order to apply separate forfeiture rates to the Royall inducement plan awards. The Company uses an annualized forfeiture rate of 9.35% for the Royall executive team and 3.3% for the Royall general employees. During the year ended December 31, 2016, the Company also increased its estimated annualized forfeiture rate for one of its general employee groups from 4.6% to 5.5%. Annualized forfeiture rates for the remaining groups are 0%, 0.4%, and 1.0% for members of the Company's board of directors, and two groups of executives, respectively.

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Compensation expense

The Company recognized stock-based compensation expense in the following consolidated statements of operations line items for stock options and RSUs and for shares issued under the Company’s ESPP, for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 (in thousands, except per share amounts):

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Stock-based compensation expense included in:
Costs and expenses:
Cost of services	$	9,231		$	9,211		$	5,977
Member relations and marketing	5,028			5,176			3,348
General and administrative	15,176			14,706			8,640
Total costs and expenses	29,435			29,093			17,965
Operating income	$	(29,435	)	$	(29,093	)	$	(17,965	)

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

Stock-based compensation expense by award type is shown below (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Stock-based compensation expense by award type:
Stock options	$	13,270	$	10,908	$	5,431
Restricted stock units	16,165		18,185		12,534
Total stock-based compensation	$	29,435	$	29,093	$	17,965

As of December 31, 2016, $49.0 million of total unrecognized compensation cost related to stock-based awards was expected to be recognized over a weighted average period of 2.4 years.

Tax benefits

The benefits of tax deductions in excess of recognized book compensation expense are reported as a financing cash inflow with a corresponding operating cash outflow in the consolidated statements of cash flows. Approximately $1.3 million, $4.9 million, and $0.4 million of tax benefits associated with the exercise of employee stock options and RSUs were recorded as cash from financing activities in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, respectively. 

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Note 13. Income taxes

The provision for income taxes, excluding the tax effect of equity method gains (losses), consists of the following (in thousands):

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Current tax expense
Federal	$	13,527		$	6,225		$	3,613
State and local	3,694			1,781			1,680
Foreign	626			524			620
Total current tax expense	$	17,847		$	8,530		$	5,913
Deferred tax (benefit) expense
Federal	$	(7,279	)	$	(6,376	)	$	(297	)
State and local	472			13,046			(2,086		)
Foreign	—			—			—
Total deferred tax (benefit) expense	$	(6,807	)	$	6,670		$	(2,383	)
Provision for income taxes	$	11,040		$	15,200		$	3,530

The components of Income before provision for income taxes were as follows (in thousands):

	Year Ended December 31,		Year Ended December 31,			Nine Months Ended December 31,
	2016		2015			2014
U.S. sources	$	53,433	$	(101,386	)	$	10,445
Non-U.S. sources	2,179		1,968			2,331
Total	$	55,612	$	(99,418	)	$	12,776

The provision for income taxes differs from the amount of income taxes determined by applying the applicable income tax statutory rates to income before provision for income taxes as follows:

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Section 162(m) compensation	0.5	%	(0.8	)%	11.7	%
State income tax, net of U.S. federal income tax benefit	4.6	%	3.5	%	7.4	%
Washington, D.C. QHTC income tax credits and D.C. law changes	—	%	(13.4	)%	(9.8	)%
Uncertain tax position	(0.3	)%	0.7	%	5.4	%
Federal R&D credit (net of associated UTP)	(22.7	)%	1.8	%	(25.7	)%
Return to provision adjustment	1.2	%	(0.4	)%	3.2	%
Goodwill impairment	—	%	(38.3	)%	—	%
Meals and entertainment	2.7	%	(1.5	)%	5.5	%
Stock-based compensation	(2.8	)%	—	%	—	%
Other permanent differences, net	1.7	%	(1.9	)%	(5.1	)%
Effective tax rate	19.9	%	(15.3	)%	27.6	%

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Deferred income taxes are provided for temporary differences between the tax bases of assets and liabilities and their reported amounts on the consolidated financial statements. The tax effect of these temporary differences is presented below (in thousands):

	As of December 31,
	2016			2015
Deferred income tax assets (liabilities):
Federal R&D credits	$	6,107		$	420
Deferred compensation accrued for financial reporting purposes	7,139			13,284
Stock-based compensation	21,384			15,724
Acquired net operating loss carryforwards	2,794			5,421
Reserve for uncollectible revenue	2,508			2,119
Basis difference on investment in unconsolidated entities	962			7,208
Debt issuance costs	2,066			2,801
Deferred rent	3,248			1,466
Depreciation	1,057			—
Tax credit carryforwards	1,094			332
Unrealized foreign exchange loss	667			—
Outside basis difference on cost method investment	1,967			—
Other	1,490			835
Total deferred tax assets	52,483			49,610
Valuation allowance	—			(49		)
Total deferred tax assets, net of valuation allowance	52,483			49,561
Capitalized software development costs	(33,599		)	(31,042		)
Deferred incentive compensation and other deferred charges	(11,211		)	(11,940		)
Acquired intangibles and goodwill; and acquisition related costs	(94,947		)	(97,278		)
Depreciation	—			(3,031		)
Other	(1,739		)	(163		)
Total deferred tax liabilities	(141,496		)	(143,454		)
Net deferred income tax (liabilities) assets	$	(89,013	)	$	(93,893	)

The Company has $2.8 million, tax effected, of U.S. federal and state net operating loss carryforwards available at December 31, 2016, some of which are a result of recent acquisitions. These carryforwards will be used to offset future income but maybe limited by the change in ownership rules in Section 382 of the Internal Revenue Code. These net operating loss carryforwards will expire between 2021 and 2035. The Company anticipates it will be able to use all of its acquired net operating loss carryforwards. In estimating future tax consequences, the Company generally considers all expected future events in the determination and evaluation of deferred tax assets and liabilities. The Company believes that its estimated future ordinary taxable income will be sufficient for the full realization of its deferred income tax assets. The effect of future changes in existing laws or rates is not considered in the determination and evaluation of deferred tax assets and liabilities until the new tax laws or rates are enacted.

Deferred U.S. income taxes have not been provided for the portion of the difference between book and tax basis in non-U.S. subsidiaries, which is essentially permanent in duration. Determination of the amount of these taxes is not practicable.

During the year ended December 31, 2016, the Company claimed $4.6 million in federal research and development credits and $14.1 million of additional benefit for the 2012, 2013, 2014, and 2015 tax years. For the year ended December 31, 2015, the Company claimed $1.8 million in federal research and development credits on its originally filed U.S. federal income tax return.

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Uncertain Tax Positions

The following table summarizes the activity related to the Company's reserve for unrecognized tax positions (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Balance at beginning of the period	$	1,385	$	828	$	—
Additions based on tax positions related to the current periods	1,126		281		497
Additions for tax positions of prior periods	4,905		—		331
Positions assumed in acquisition	—		276		—
Balance at end of the period	$	7,416	$	1,385	$	828

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 twelve months. The Company classifies interest and penalties on any unrecognized tax benefits as a component of the provision for income taxes. The amount accrued for interest and penalties for the twelve months ended December 31, 2016 and 2015, respectively was $0.1 million and $0.3 million, respectively. No interest or penalties were recognized in the consolidated statements of operations for the nine months ended December 31, 2014. The Company files income tax returns in U.S. federal and state and foreign jurisdictions. During 2016, the Company underwent a U.S. federal tax audit for tax years ended December 31, 2011 and December 31, 2013 and completed with no change. With limited exceptions, tax years 2014 and forward remain open.

If the Company was able to recognize the uncertain tax positions of $7.4 million, the entire balance would affect the Company’s effective tax rate. A deferred tax liability has not been recognized because the Company indefinitely reinvests its local country earnings from foreign operations.

Note 14. Commitments and contingencies

Operating leases

The Company leases its headquarters space under an operating lease that expires in May 2019. Leasehold improvements related to leases are depreciated over the shorter of the term of the lease or useful life and totaled approximately $33.3 million, net, and $37.0 million, net, as of December 31, 2016 and 2015, respectively. The terms of the lease contain provisions for rental escalation, and the Company is required to pay its portion of executory costs such as taxes, insurance, and operating expenses. The Company also entered into a build-to-suit lease arrangement for a new corporate headquarters in December 2015. See Note 6, “Property and equipment,” for further information regarding this arrangement.

The Company also leases office space under operating leases in Birmingham, Alabama; San Francisco, California; Chicago, Illinois; Bloomington, Minnesota; Plymouth Meeting, Pennsylvania; Nashville, Tennessee; Austin, Texas; Houston, Texas; Richmond, Virginia; and London, England. The Company also leases office space in Chennai, India through its Indian subsidiary, ABCO Advisory Services India Private Ltd. The lease expiration dates are July 2018 for the Alabama lease, July 2017 for the California lease, June 2022 for the Illinois lease, July 2020 for the Minnesota lease, September 2019 for the Pennsylvania lease, April 2020 for the Tennessee leases, March 2021 for the Texas leases, March 2022 for the Virginia leases, April 2020 for the England lease, and June 2022 for the India lease.

The Company recognized rental and executory expenses of $23.7 million, $23.1 million, and $13.2 million, in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, respectively, related to these leases. The Company subleases office space in Nashville, Tennessee.

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The following table details the future minimum lease payments under the Company’s current leases (in thousands):

Year Ending December 31,	Operating leases		Build-to-suit lease obligation		Total lease obligations
2017	$	17,421	$	—	$	17,421
2018	16,255		—		16,255
2019	11,143		16,515		27,658
2020	6,741		25,018		31,759
2021	4,880		25,389		30,269
Thereafter	5,613		379,211		384,824
Total	$	62,053	$	446,133	$	508,186

Purchase obligation

The Company has entered into a non-cancelable agreement for the purchase of data. As of December 31, 2016, the Company’s minimum obligation in connection with this agreement extends through May 2019. The minimum purchases expected to be made under this agreement for each of the following two fiscal years ending December 31, 2017 and December 31, 2018 are $1.4 million and $1.0 million, respectively.

Benefit plan

The Company sponsors a defined contribution 401(k) plan (the “401(k) Plan”) for all employees who have reached the age of 21. The Company provides discretionary matching contributions in the range of 0% to 100%, which percentage is determined by the Company after the end of the applicable plan year, of an employee’s contribution up to a maximum of 4% of base salary. The Company's contributions to the 401(k) Plan during the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, were approximately $5.9 million, $4.9 million, and $0.0 million, respectively.

Litigation

From time to time, the Company is engaged in certain legal disputes arising in the ordinary course of business, such as employment-related claims. When the likelihood of a loss contingency becomes at least reasonably possible with respect to any of these disputes, or, as applicable in the future, if there is at least a reasonable possibility that a loss exceeding amounts already recognized may have been incurred, the Company will revise its disclosures in accordance with the relevant authoritative guidance and will accrue a liability for loss contingencies when the Company believes that it is both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated. The Company will review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent that new information is obtained, and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, the Company will record changes in its accrued liabilities in the period in which such determination is made. As of December 31, 2016, the Company was not a party to, and its property was not subject to, any material legal proceedings.

Other

As of December 31, 2016, the Company had outstanding letters of credit totaling $19.1 million to provide security deposits for certain office space leases. The letters of credit expire annually but will automatically extend for another annual term from their expiration dates unless the Company terminates them. To date, no amounts have been drawn on the letters of credit.

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Note 15. Segment and geographic areas

Operating segments are defined as components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Under this definition, the Company has one operating segment as of December 31, 2016. Over the past few years, the Company has completed several acquisitions. These acquisitions have allowed the Company to expand its existing offerings and enhance membership services. The Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.

Substantially all of the Company’s identifiable assets are located in the United States. The following table sets forth revenue information for each geographic area for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
United States	$	784,447	$	749,880	$	417,194
Other countries	18,977		18,468		16,808
Total revenue	$	803,424	$	768,348	$	434,002

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Note 16. Quarterly financial data (unaudited)

Unaudited summarized financial data by quarter for the years ended December 31, 2016 and 2015 are as follows (in thousands, except per share amounts).

	Fiscal 2015 Quarter Ended
	March 31,			June 30,		September 30,		December 31,
Revenue	$	179,322		$	183,583	$	200,492	$	204,951
Operating Income	4,158			12,320		19,151		(90,029		)
(Loss) income from continuing operations before provision for income taxes and and gains (losses) in equity method investments	(19,971		)	7,038		12,551		(99,036		)
Net (loss) income attributable to common stockholders	(22,072		)	7,666		672		(105,280		)
Earnings per share:
Net (loss) income attributable to common stockholders per share — basic	$	(0.54	)	$	0.18	$	0.02	$	(2.52	)
Net (loss) income attributable to common stockholders per share — diluted	$	(0.54	)	$	0.18	$	0.02	$	(2.52	)
	Fiscal 2016 Quarter Ended
	March 31,			June 30,		September 30, (1)		December 31,
Revenue	$	200,735		$	198,382	$	200,455	$	203,852
Operating Income	20,796			18,088		12,134		25,520
Income from continuing operations before provision for income taxes and gains (losses) in equity method investments	16,036			12,776		6,088		20,712
Net income attributable to common stockholders	10,339			7,495		37,538		35,866
Earnings per share:
Net income attributable to common stockholders per share — basic	$	0.25		$	0.19	$	0.94	$	0.89
Net income attributable to common stockholders per share — diluted	$	0.25		$	0.18	$	0.93	$	0.88

(1) In connection with the preparation of the unaudited consolidated financial statements, the Company recorded corrections of certain out-of-period, immaterial misstatements that occurred in prior periods. These corrections resulted in an increase to the provision for income taxes of $4.2 million for the three months ended September 30, 2016 primarily related to recording reserves for tax positions taken in prior periods. These corrections also resulted in a decrease to income tax expense of $5.1 million included in gains (losses) from equity method investments for the three months ended September 30, 2016 related to recording a deferred tax asset for the outside basis difference in the Company's investment in Evolent, Inc. The impact of these out-of-period corrections on net income for the three ended September 30, 2016 was not significant. 

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Note 17. Supplemental cash flow

A summary of supplemental cash flow information for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 is presented below (in thousands):

	Year Ended   December 31,					Nine Months Ended December 31,
	2016		2015			2014
Cash paid (received) for:
Income taxes	$	25,919	$	(4,695	)	$	32
Interest	$	14,090	$	17,646		$	—
Non-cash activities:
Clinovations earn-out liability share-based payment	$	2,703	$	—		$	—
Increase in estimated cost of construction of a building under a build-to-suit lease	$	60,667	$	2,700		$	—

Note 18.Subsequent events

On January 3, 2017, the Company approved a restructuring plan which will result in a reduction-in-force of approximately 220 employees and is expected to be completed during fiscal year 2017. The Company expects to recognize approximately $7 to $9 million of pre-tax restructuring charges in fiscal year 2017 in connection with this reduction-in-force, consisting of severance and other employee termination benefits.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of disclosure controls and procedures

Our Chief Executive Officer, or “CEO,” and Chief Financial Officer, or “CFO,” have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of December 31, 2016. 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 upon our evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of December 31, 2016.

Changes in internal control over financial reporting

As previously disclosed under “Item 9A-Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015, we concluded that our disclosure controls and procedures were not effective as of December 31, 2015 due to two material weaknesses in our internal control over financial reporting described below. During the second quarter of 2016, we identified a material weakness related to the internal controls over the income tax process which was disclosed in our Quarterly Report on Form 10-Q for our quarter ended June 30, 2016. The Company has taken actions to remediate the material weaknesses related to our internal control over financial reporting, as follows:

1. With respect to the material weakness in the revenue recognition controls, we have made control improvements, including a process for a contemporaneous review of contracts and the dedication of additional subject matter expert staff, and are planning an upgraded software solution to properly account for complex contract terms, including customer cancellation provisions and contingent fee arrangements. We have concluded that this material weakness was remediated as of December 31, 2016.

2. With respect to the material weakness in the business combination controls, we have made improvements to the design of the related controls, including standardized review procedures over third-party valuations and related projections. In addition, we have added resources to our accounting and financial reporting functions to facilitate the timely execution of the process improvements. However, as the Company did not complete another material acquisition in 2016, neither we nor our external auditors tested the operating effectiveness of these newly designed controls.

3. With respect to the material weakness in the tax controls, although we have made control improvements, we have concluded that the material weakness has not been remediated as of December 31, 2016. Specifically, we have concluded that the internal controls over the tax accounts have not been designed or do not operate at a sufficient level of precision to prevent or detect and correct a material misstatement. The Company identified errors in current and prior periods in the tax accounts that resulted from control deficiencies in the tax process. These errors were not material to the affected financial statements. However, the Company concluded that these control deficiencies in aggregate represent a material weakness as there is a reasonable possibility the controls as currently operating would not prevent or detect and correct a material misstatement. The Company is evaluating these control deficiencies and plans to add resources with additional experience and technical capability to provide effective oversight of our tax function.

Successful remediation of the material weakness described above requires review and evidence of the effectiveness of the related internal control processes as part of our periodic assessments of our internal control over financial reporting. As we continue to evaluate and work to enhance our internal control over financial reporting, we may determine that additional measures should be taken to address the material weakness described above or other control deficiencies, or that we should modify the remediation plan.

Except as noted in the preceding paragraphs, there has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

Bylaw Amendment

On March 13, 2017, the Board of Directors of the Company approved an amendment to the Company’s Amended and Restated Bylaws (as amended, the “Bylaws”) effective as of that date (the “Bylaw Amendment”). The Bylaw Amendment

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added a new Article IX, Forum for Adjudication of Certain Disputes, which provides that, unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (a) derivative actions, (b) actions for breach of fiduciary duties owed by directors, officers, stockholders, employees, or agents of the Company, (c) actions arising under any provision of the General Corporation Law of Delaware, the Company’s Certificate of Incorporation, or the Company’s Bylaws, and (d) actions governed by the internal affairs doctrine. Any person or entity holding, purchasing, or otherwise acquiring any interest in shares of capital stock of the Company is deemed to have notice of and consented to the provisions of the Bylaw Amendment.

The foregoing description of the Bylaw Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaw Amendment, a copy of which is attached as Exhibit 3.2.1 to this Annual Report on Form 10-K and is incorporated herein by reference. The Amended and Restated Bylaws containing the Bylaw Amendment is filed as Exhibit 3.2.2 to this Annual Report on Form 10-K.

Senior Management Severance and Change of Control Plan

On March 10, 2017, the Compensation Committee of the Board of Directors of the Company adopted The Advisory Board Company Senior Management Severance and Change of Control Plan (the “Plan”). Each of the Company's named executive officers, other than Robert Musslewhite and David Felsenthal, and certain other officers are eligible to participate in the Plan.

Participation in the Plan is conditioned upon the execution of an agreement not to compete with the Company or solicit the Company's members or employees for one year following termination of employment, and not to use or disclose the Company’s confidential information at any time following termination of employment. The agreement not to compete under the Plan supersedes the prior non-competition agreements with the participants, which provided that the Company could restrict the ability of a participant to compete with the Company following a termination without cause for up to two years in exchange for salary continuation payments equal to up to 125% of the participant’s base salary per year.

The Plan provides that where a participant’s employment is terminated outside of the context of a “change of control,” either by the Company without “cause” or by the participant for “good reason” (each as defined in the Plan), the participant will be entitled to receive:

• A lump sum cash payment equal to the sum of the participant’s base salary plus the greater of the participant’s annual bonuses earned in each of the two years prior to termination;

• Accelerated vesting of time-based equity awards that would have vested within one year of termination; and

• Continued health and medical coverage for up to one year.

In the event that a participant’s employment is terminated within six months prior to, or within twelve months following, a change of control, either by the Company without cause or by the participant for good reason, the participant will be entitled to receive:

• A lump sum cash payment equal to one and a half times the sum of the participant’s base salary plus the greater of the participant’s annual bonuses earned in each of the two years prior to termination;

• Accelerated vesting of time-based equity awards, and continued vesting of performance-based equity awards based on the actual level of performance; and

• Continued health and medical coverage for up to one year.

The provision of payments and benefits described above is conditioned upon the participant’s execution of a release of claims. The Plan provides that if a participant receives any amount, whether under the Plan or otherwise, that is subject to the excise tax imposed pursuant to Section 4999 of the Internal Revenue Code, the amount of the payments to be made to the participant will be reduced to the extent necessary to avoid imposition of the excise tax, but only if the net amount of the reduced payments exceeds the net amount that the participant would receive following imposition of the excise tax and all income and related taxes.

The foregoing description of the Plan does not purport to be complete and is qualified in the entirety by reference to the full text of the Plan, which is filed as Exhibit 10.38 to this Annual Report on Form 10-K and is incorporated herein by reference.

98

PART III

Item 10. Directors, Executive Officers, and Corporate Governance.

See “Executive Officers” in Part I, Item 1 of this Annual Report on Form 10-K for information about our executive officers, which is incorporated by reference in this Item 10. Other information required by this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders, referred to as the “ 2017 proxy statement,” which we will file with the SEC on or before 120 days after our fiscal year ended December 31, 2016, and which appears in the 2017 proxy statement, including under the captions “Proposal No. 1—Election of Directors,” “Board Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

We have adopted a code of ethics for our senior financial officers that applies to all of our senior financial officers, including our chief executive officer, chief financial officer, chief accounting officer, controller, and any person performing similar functions. The code of ethics for our senior financial officers is available to the public in the “The Firm—Investor Relations—Governance” section of our website at www.advisory.com. Any person may request a copy of the code of ethics for our senior financial officers, without charge, by writing to us at The Advisory Board Company, 2445 M Street, N.W., Washington, D.C. 20037, Attention: Corporate Secretary. We intend to satisfy the SEC’s disclosure requirements regarding amendments to, or waivers of, the code of ethics for our senior financial officers by posting such information on our website indicated above.

Board of Directors

The following lists the members of our board of directors and the principal occupation of each director as of the date of this report.

Robert W. Musslewhite	David L. Felsenthal
Chairman	President,
Chief Executive Officer,	The Advisory Board Company
The Advisory Board Company
Sanju K. Bansal	Peter J. Grua
Founder and Chief Executive Officer,	Partner, HLM Venture Partners
Hunch Analytics, LLC
Nancy Killefer	Kelt Kindick
Director Emeritus,	Advisory Partner,
McKinsey & Company	Bain & Company, Inc.
Mark R. Neaman	Leon D. Shapiro
President and Chief Executive Officer,	Director,
NorthShore University HealthSystem	Vistage International, Inc.
LeAnne M. Zumwalt
Group Vice President,
DaVita HealthCare Partners Inc.

99

Item 11. Executive Compensation.

Information required by this Item 11 is incorporated herein by reference to the 2017 proxy statement, including the information in the 2017 proxy statement appearing under the captions “Board Corporate Governance Matters,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” and “Executive Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information required by this Item 12 is incorporated herein by reference to the 2017 proxy statement, including the information in the 2017 proxy statement appearing under the captions “Security Ownership” and “Proposal 3 - Approval of 2009 Incentive Plan Amendment - Equity Compensation Plan Information.”

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required by this Item 13 is incorporated herein by reference to the 2017 proxy statement, including the information in the 2017 proxy statement appearing under the caption “Board Corporate Governance Matters.”

Item 14. Principal Accountant Fees and Services.

Information required by this Item 14 is incorporated herein by reference to the 2017 proxy statement, including the information in the 2017 proxy statement appearing under the caption “Proposal No. 2—Ratification of the Selection of Ernst & Young LLP as Independent Registered Public Accounting Firm for the Fiscal Year Ending December 31, 2017.”

100

Part IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report:

(1) The following financial statements of the registrant and report of independent registered public accounting firm are included in Item 8 hereof:

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015

Consolidated Statements of Operations for the year ended December 31, 2016, the year ended December 31, 2015, and the nine-month period ended December 31, 2014

Consolidated Statements of Comprehensive (Loss) Income for the year ended December 31, 2016, the year ended December 31, 2015, and the nine-month period ended December 31, 2014

Consolidated Statements of Changes in Stockholders’ Equity for the year ended December 31, 2016, the year ended December 31, 2015, and the nine-month period ended December 31, 2014

Consolidated Statements of Cash Flows for the year ended December 31, 2016, the year ended December 31, 2015, the nine-month period ended December 31, 2014

Notes to Consolidated Financial Statements.

(2) Except as provided below, all financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission either have been included in the Financial Statements or are not required under the related instructions, or are not applicable and therefore have been omitted.

Schedule II—Valuation and Qualifying Accounts

(3) In accordance with Rule 3-09 of Regulation S-X, the audited financial statements of Evolent Health LLC, an equity investee, are filed as an exhibit to this annual report on Form 10-K. The Company's consolidated statements of operations included in Item 8 reflect the Company's proportionate share of Evolent Health LLC's operations for the periods shown.

(4) The Company files herewith or incorporates by reference herein the exhibits identified below. The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K under Commission File No. 000-33283.

101

Exhibit Number	Description of Exhibit
3.1	Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2012.
3.2.1	Amendment to Amended and Restated Bylaws of the Company adopted March 13, 2017. Filed herewith.
3.2.2	Amended and Restated Bylaws of the Company as in effect on March 13, 2017. Filed herewith.
4.1	Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1/A (Commission File No. 333-68146) filed with the Commission on October 29, 2001
10.1*	Form of Indemnity Agreement between the Company and certain officers, directors and employees. Incorporated by reference to Exhibit 10.33 of the Company’s Registration Statement on Form S-1/A (Commission File No. 333-68146) filed with the Commission on October 29, 2001.
10.2*	Form of Indemnification Agreement between the Company and certain officers, directors and employees. Incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
10.3*	Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.34 of the Company’s Registration Statement on Form S-1/A (Commission File No. 333-68146) filed with the Commission on October 29, 2001.
10.4*	The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 17, 2005.
10.5*	Form of Standard Terms and Conditions for Restricted Stock Units pursuant to The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
10.6*	Form of Restricted Stock Unit Award Agreement pursuant to The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.40 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
10.7*	The Advisory Board Company 2006 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 17, 2006.
10.8*	Form of Restricted Stock Award Agreement pursuant to The Advisory Board Company 2005 and 2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.
10.9*	Form of Award Agreement for Non-qualified Stock Options pursuant to The Advisory Board Company 2005 and 2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for quarter ended September 30, 2008.
10.10*	The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan. Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company filed with the Commission on July 26, 2013.
10.11*	Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on September 16, 2009.
10.12*	Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on September 16, 2009.
10.13*	Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on September 16, 2009.
10.14*	2014 Form of Award Agreement for Non-Qualified Stock Options for certain employees pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.
10.15*	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.
10.16*	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.

102

Exhibit Number	Description of Exhibit
10.17*	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.
10.18	Agreement of Lease, dated October 20, 2003, between the Company and 2445 M Street Property LLC. Incorporated by reference to Exhibit 10.37 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
10.19	Collaboration Agreement, dated as of February 6, 2007, between The Corporate Executive Board Company and the Company (the “Collaboration Agreement”). Incorporated by reference to Exhibit 10.42 of the Company’s Annual Report on Form 10-K filed for the fiscal year ended March 31, 2007. On May 27, 2008, the Commission granted confidential treatment with respect to certain portions of the Collaboration Agreement.
10.20	Letter agreement, dated February 4, 2010, between the Company and The Corporate Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2009.
10.21	Letter agreement, dated November 7, 2011, between the Company and The Corporate Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007. Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.
10.22	Letter agreement, dated February 5, 2014, between the Company and The Corporate Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007. Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2013.
10.23	Registration Rights and Governance Agreement, dated as of January 9, 2015, among the Company and Royall Holdings, LLC. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on January 12, 2015.
10.24	The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees. Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (Commission File No. 333-201982) filed with the Commission on February 9, 2015.
10.25	Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees. Incorporated by reference to Exhibit 10.40 of the Company’s Transition Report on Form 10-K for the period ended December 31, 2014.
10.26	Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees. Incorporated by reference to Exhibit 10.41 of the Company’s Transition Report on Form 10-K for the period ended December 31, 2014.
10.27	Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 10, 2015.
10.28	Pledge and Security Agreement, entered into as of February 6, 2015, among the Company and the Subsidiaries of the Company party thereto, as Grantors, and JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on February 10, 2015.
10.29	Guaranty made as of February 6, 2015 by the Subsidiaries of the Company party thereto in favor of JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on February 10, 2015.
10.30	Amendment No. 1, dated as of March 31, 2015, to Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.
10.31	Amendment No. 2, dated as of October 30, 2015, to that certain Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Commission on November 5, 2015.

103

Exhibit Number	Description of Exhibit
10.32	Amendment No. 3, dated as of January 15, 2016, to Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
10.33*	The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.34*	2015 Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.35*	2015 Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.36*	2015 Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.37*	Director compensation plans. Incorporated by reference to “Board Corporate Governance Matters - Board of Directors Compensation” in the Company’s Definitive Proxy Statement on Schedule 14A for the 2015 Annual Meeting of Stockholders, filed on April 28, 2015 (Commission File No. 000-33283).
10.38*	The Advisory Board Company Senior Management Severance and Change of Control Plan. Filed herewith.
12.1	Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
21.1	Subsidiaries of the Registrant. Filed herewith.
23.1	Consent of Independent Registered Public Accounting Firm with respect to the consolidated financial statements of the Company. Filed herewith.
23.2	Consent of Independent Auditor with respect to the financial statements of Evolent Health, Inc. Filed herewith.
23.3	Consent of Independent Auditor with respect to the financial statements of Evolent Health LLC (Predecessor). Filed herewith.
23.4	Consent of Independent Auditor with respect to the financial statements of Evolent Health LLC (Successor). Filed herewith.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. Filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. Filed herewith.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Filed herewith.
99.1	Audited financial statements as of December 31, 2016 and 2015, and for the three years ended December 31, 2016, of Evolent Health LLC. Filed herewith.
101	XBRL (Extensible Business Reporting Language). The following financial statements from the Company’s Annual Report on Form 10-K for the period ended December 31, 2015, formatted in XBRL: (i) Consolidated Balance Sheets (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

* Management contracts or compensation plans or arrangements in which directors or executive officers participate.

104

THE ADVISORY BOARD COMPANY

SCHEDULE II—Valuation and Qualifying Accounts

(In thousands)

	Balance at Beginning of Year		Additions Charged to Revenue		Additions Charged to Other Accounts		Deductions From Reserve		Balance at End of Year
Nine months ended December 31, 2014 Allowance for uncollectible revenue	$	6,850	$	8,938	$	—	$	8,258	$	7,530
Year ended December 31, 2015 Allowance for uncollectible revenue	$	7,530	$	4,893	$	310	$	7,024	$	5,709
Year ended December 31, 2016 Allowance for uncollectible revenue	$	5,709	$	5,577	$	—	$	4,906	$	6,380

105

Item 16. Form 10-K Summary.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	The Advisory Board Company
March 15, 2017	/s/ Robert W. Musslewhite
	Robert W. Musslewhite,
	Chief Executive Officer and Chairman

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated on the dates indicated.

Signature	Title	Date
/s/ Robert W. Musslewhite	Chief Executive Officer and Chairman	March 15, 2017
Robert W. Musslewhite	(Principal Executive Officer)
/s/ Michael T. Kirshbaum	Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)	March 15, 2017
Michael T. Kirshbaum
/s/ Sanju K. Bansal	Director	March 15, 2017
Sanju K. Bansal
/s/ David L. Felsenthal	Director	March 15, 2017
David L. Felsenthal
/s/ Peter J. Grua	Director	March 15, 2017
Peter J. Grua
/s/ Nancy Killefer	Director	March 15, 2017
Nancy Killefer
/s/ Kelt Kindick	Lead Director	March 15, 2017
Kelt Kindick
/s/ Mark R. Neaman	Director	March 15, 2017
Mark R. Neaman
/s/ Leon D. Shapiro	Director	March 15, 2017
Leon D. Shapiro
/s/ LeAnne M. Zumwalt	Director	March 15, 2017
LeAnne M. Zumwalt

106

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
3.1	Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2012.
3.2.1	Amendment to Amended and Restated Bylaws of the Company adopted March 13, 2017. Filed herewith.
3.2.2	Amended and Restated Bylaws of the Company as in effect on March 13, 2017. Filed herewith.
4.1	Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1/A (Commission File No. 333-68146) filed with the Commission on October 29, 2001
10.1*	Form of Indemnity Agreement between the Company and certain officers, directors and employees. Incorporated by reference to Exhibit 10.33 of the Company’s Registration Statement on Form S-1/A (Commission File No. 333-68146) filed with the Commission on October 29, 2001.
10.2*	Form of Indemnification Agreement between the Company and certain officers, directors and employees. Incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
10.3*	Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.34 of the Company’s Registration Statement on Form S-1/A (Commission File No. 333-68146) filed with the Commission on October 29, 2001.
10.4*	The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 17, 2005.
10.5*	Form of Standard Terms and Conditions for Restricted Stock Units pursuant to The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
10.6*	Form of Restricted Stock Unit Award Agreement pursuant to The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.40 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
10.7*	The Advisory Board Company 2006 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 17, 2006.
10.8*	Form of Restricted Stock Award Agreement pursuant to The Advisory Board Company 2005 and 2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.
10.9*	Form of Award Agreement for Non-qualified Stock Options pursuant to The Advisory Board Company 2005 and 2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for quarter ended September 30, 2008.
10.10*	The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan. Incorporated by reference to Appendix A to the Definitive Proxy Statement of the Company filed with the Commission on July 26, 2013.
10.11*	Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on September 16, 2009.
10.12*	Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on September 16, 2009.
10.13*	Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on September 16, 2009.
10.14*	2014 Form of Award Agreement for Non-Qualified Stock Options for certain employees pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.
10.15*	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.

107

Exhibit Number	Description of Exhibit
10.16*	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.
10.17*	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.
10.18	Agreement of Lease, dated October 20, 2003, between the Company and 2445 M Street Property LLC. Incorporated by reference to Exhibit 10.37 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
10.19	Collaboration Agreement, dated as of February 6, 2007, between The Corporate Executive Board Company and the Company (the “Collaboration Agreement”). Incorporated by reference to Exhibit 10.42 of the Company’s Annual Report on Form 10-K filed for the fiscal year ended March 31, 2007. On May 27, 2008, the Commission granted confidential treatment with respect to certain portions of the Collaboration Agreement.
10.20	Letter agreement, dated February 4, 2010, between the Company and The Corporate Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007. Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2009.
10.21	Letter agreement, dated November 7, 2011, between the Company and The Corporate Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007. Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.
10.22	Letter agreement, dated February 5, 2014, between the Company and The Corporate Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007. Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2013.
10.23	Registration Rights and Governance Agreement, dated as of January 9, 2015, among the Company and Royall Holdings, LLC. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on January 12, 2015.
10.24	The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees. Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (Commission File No. 333-201982) filed with the Commission on February 9, 2015.
10.25	Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees. Incorporated by reference to Exhibit 10.40 of the Company’s Transition Report on Form 10-K for the period ended December 31, 2014.
10.26	Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees. Incorporated by reference to Exhibit 10.41 of the Company’s Transition Report on Form 10-K for the period ended December 31, 2014.
10.27	Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 10, 2015.
10.28	Pledge and Security Agreement, entered into as of February 6, 2015, among the Company and the Subsidiaries of the Company party thereto, as Grantors, and JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on February 10, 2015.
10.29	Guaranty made as of February 6, 2015 by the Subsidiaries of the Company party thereto in favor of JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on February 10, 2015.
10.30	Amendment No. 1, dated as of March 31, 2015, to Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.
10.31	Amendment No. 3, dated as of January 15, 2016, to Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

108

Exhibit Number	Description of Exhibit
10.32	Amendment No. 3, dated as of January 15, 2016, to that certain Credit Agreement, dated as of February 6, 2015, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto. Incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2015.
10.33*	The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.34*	2015 Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.35*	2015 Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.36*	2015 Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K filed with the Commission on June 15, 2015.
10.37*	Director compensation plans. Incorporated by reference to “Board Corporate Governance Matters - Board of Directors Compensation” in the Company’s Definitive Proxy Statement on Schedule 14A for the 2015 Annual Meeting of Stockholders, filed on April 28, 2015 (Commission File No. 000-33283).
10.38*	The Advisory Board Company Senior Management Severance and Change of Control Plan. Filed herewith.
12.1	Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
21.1	Subsidiaries of the Registrant. Filed herewith.
23.1	Consent of Independent Registered Public Accounting Firm with respect to the consolidated financial statements of the Company. Filed herewith.
23.2	Consent of Independent Auditor with respect to the financial statements of Evolent Health, Inc. Filed herewith.
23.3	Consent of Independent Auditor with respect to the financial statements of Evolent Health LLC (Predecessor). Filed herewith.
23.4	Consent of Independent Auditor with respect to the financial statements of Evolent Health LLC (Successor). Filed herewith.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. Filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. Filed herewith.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Filed herewith.
99.1	Audited financial statements as of December 31, 2016 and 2015, and for the three years ended December 31, 2016, of Evolent Health LLC. Filed herewith.
101	XBRL (Extensible Business Reporting Language). The following financial statements from the Company’s Annual Report on Form 10-K for the period ended December 31, 2016, formatted in XBRL: (i) Consolidated Balance Sheets (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

* Management contracts or compensation plans or arrangements in which directors or executive officers participate.

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EX-3.2.1

Exhibit 3.2.1

Bylaw Amendment Adopted Effective March 13, 2017

ARTICLE IX

FORUM FOR ADJUDICATION OF CERTAIN DISPUTES

Unless the Corporation consents in writing to the selection of an alternative forum (an “Alternative Forum Consent”), the Court of Chancery of the State of Delaware shall be, to the fullest extent permitted by law, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder, employeeor agent of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation or any director, officer, stockholder, employee or agent of the Corporation arising out of or relating to any provision of the Delaware General Corporation Law or the Corporation’s Certificate of Incorporation or these Bylaws, or (iv) any action asserting a claim against the Corporation or any director, officer, stockholder, employeeor agent of the Corporation governed by the internal affairs doctrine of the State of Delaware; provided, however, that, in the event that the Court of Chancery of the State of Delaware lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another court of the State of Delaware, or if no court of the State of Delaware has jurisdiction, the federal district court for the District of Delaware, in each such case, unless the Court of Chancery (or such other state or federal court located within the State of Delaware, as applicable) has dismissed a prior action by the same plaintiff asserting the same claims because such court lacked personal jurisdiction over an indispensable party named as a defendant therein. Failure to enforce the foregoing provisions would cause the Corporation irreparable harm and the Corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provision, including, without limitation, an anti-suit injunction to enforce Article IX and to preclude suit in any other forum. Any person or entity holding, purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and to consent to (i) the personal jurisdiction of the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another court of the State of Delaware, or if no court of the State of Delaware has jurisdiction, the federal district court for the District of Delaware) in any proceeding brought to enjoin, or otherwise enforce this Article IX with respect to, any action by that person or entity that is inconsistent with the exclusive jurisdiction provided for in this Article IX (an “Inconsistent Action”) and (ii) having service of process made upon such person or entity in any such proceeding by service upon such person’s or entity’s counsel in such Inconsistent Action as agent for such person or entity.

EX-3.2.2

Exhibit 3.2.2

AMENDED AND RESTATED BYLAWS

OF

THE ADVISORY BOARD COMPANY

(a Delaware corporation)

Effective March 13, 2017

ARTICLE I
OFFICES

The Corporation may have offices within and without the State of Delaware as the Board of Directors may from time to time determine.

ARTICLE II
STOCKHOLDERS

1.    Stock Certificates; Uncertificated Shares.

(a)    The shares of capital stock of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of capital stock of the Corporation shall be uncertificated shares. Any or all of the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.

(b)    Restrictions; Legends and Notice. Whenever the Corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the Corporation shall issue any shares of its stock as partly paid stock, the certificates, if any, representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the Delaware General Corporation Law. Within a reasonable time after the issuance or transfer of any uncertificated shares, the Corporation shall send to the registered owner thereof any written notice prescribed by the Delaware General Corporation Law.

(c)    Lost, Stolen or Destroyed Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

2.    Fractional Share Interests. The Corporation may, but shall not be required to, issue fractions of a share.

3.    Stock Transfers; Registered Stockholders. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of

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the Corporation shall be made only on the stock ledger of the Corporation by the registered holder thereof or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates representing such shares of stock properly endorsed and the payment of all taxes due thereon. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

4.    Record Date for Stockholders.

(a)    Notice and Voting. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b)    Calling Special Meetings. Any stockholder of record seeking to have the stockholders call a special meeting of stockholders shall deliver to the Secretary of the Corporation a notice and request to fix a record date for purposes of determining stockholders entitled to request such meeting in writing, and the Board of Directors shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date, which record date shall be fixed in accordance with these Bylaws and the Delaware General Corporation Law; provided that, if no record date is set by the Board within ten days of the date on which such notice and request is delivered to the Secretary, the record date for determining stockholders entitled to request such special meeting shall be deemed to be the first date on which such notice and request to fix a record date for purposes of determining stockholders entitled to request such meeting was delivered to the Secretary of the Corporation.

(c)    Dividends and Other Rights. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

5.    Meaning of Certain Terms. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat, as the case may be, the term “share” or “shares” or “share of stock” or “shares of stock” or “stockholder” or “stockholders” refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the Corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the Certificate of Incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the Delaware General Corporation Law confers such rights notwithstanding that the Certificate of Incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the Certificate of Incorporation, except as any provision of law may otherwise require.

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6.    Stockholder Meetings.

(a)    Place of Meetings. Meetings of the stockholders shall be held at such place, if any, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

(b)    Annual Meetings. If required by law, an annual meeting of stockholders for the election of directors and the transaction of any other proper business as may come before the meeting shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Except as otherwise provided by law, notice of the annual meeting, stating the place, if any, date and hour of the meeting, shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting.

(c)    Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, special meetings of stockholders, for any purpose or purposes, shall be called by the Secretary (i) at the direction of either (x) the Chairman of the Board of Directors or (y) a majority of directors of the Board of Directors by a resolution of the Board of Directors, or (ii) at the request of the holder or holders of at least forty percent of the capital stock of the Corporation issued and outstanding as of the record date determined in accordance with Section 4(b) of this Article II (the “Requisite Percent”) who are entitled to vote on any matter for which the special meeting is being called and who deliver to the Secretary a Special Meeting Request (as defined below) satisfying the requirements of Section 7(a) of this Article II.

(d)    Stockholder List. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting or (ii) during ordinary business hours at the principal place of business of the Corporation. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof; and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the Corporation, or to vote at any meeting of stockholders.

(e)    Nominations and Stockholder Business.

(i)    To be properly brought before an annual meeting, nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders at an annual meeting of stockholders must be either (x) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (y) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (z) otherwise brought before the annual meeting by any stockholder of the Corporation who is a stockholder of record on the record date determined in accordance with Section 4(a) of this Article II, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 6(e).

(ii)    For nominations or other business to be properly brought before an annual meeting by a stockholder under this Section 6(e), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and any proposed business must be a proper subject for stockholder action. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than ninety days nor more than one hundred twenty days prior to the first anniversary of the date of the prior year’s annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than sixty days after such date, then notice by the stockholder to be timely must be delivered not earlier than the one hundred twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to

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the annual meeting or the tenth day following the day on which the date of the meeting is publicly announced. Such stockholder’s notice must set forth (x) as to each person whom the stockholder proposes to nominate for election or reelection as a director (1) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and (2) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director; (y) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend the bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (z) as to the stockholder giving the notice and the beneficial owners, if any, on whose behalf the nomination or proposal is made (I) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, (II) the class and the number of shares of stock of the Corporation which are owned (beneficially or of record) by such stockholder and such beneficial owner, (III) a description of all arrangements or understandings between such stockholder and such beneficial owner and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder and of such beneficial owner in such business, and (IV) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (1) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (2) otherwise to solicit proxies from stockholders in support of such proposal or nomination.

(iii)    Notwithstanding anything in this Section 6(e) to the contrary, if the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement specifying the size of the increased Board of Directors made by the Corporation at least ninety days prior to the date of the first anniversary of the prior year’s annual meeting of stockholders, then a stockholder’s notice required by this Section 6(e) will also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation.

(iv)    Only such business may be conducted at a special meeting of stockholders as has been brought before the meeting pursuant to the Corporation’s notice of meeting. Business proposals and nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (x) by or at the direction of the Board of Directors or (y) by any stockholder of the Corporation who is a stockholder of record at the time of giving the notice required by this Section 6(e) (or, in the case of a holder or holders at whose direction the special meeting is called, at the time of giving the notice required by Section 7(a) of this Article II) in accordance with this Section 6(e) or Section 7(a), as applicable, who is entitled to vote at the meeting and who gives timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice delivered pursuant to this Section 6(e)(iv) shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the one hundred twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. With respect to any notice of nomination submitted by a stockholder, such stockholder’s notice must set forth the information described in clauses (x) and (z) of the third sentence of Section 6(e)(ii) of this Article II and, with respect to notice of any business proposal

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submitted by a stockholder, such stockholder’s notice must set forth the information described in clauses (y) and (z) of the third sentence of Section 6(e)(ii) of this Article II.

(v)    Only those persons who are nominated in accordance with the procedures set forth in this Section 6(e) or Section 7 of this Article II will be eligible for election as directors at any meeting of stockholders. Only business brought before the meeting in accordance with the procedures set forth in this Section 6(e) or Section 7 of this Article II, as applicable, may be conducted at a meeting of stockholders.

(vi)     For purposes of this Section 6(e), “public announcement” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act.

(vii)    Notwithstanding the foregoing provisions of this Section 6(e), a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 6(e). Nothing in this Section 6(e) shall be deemed to affect any rights of (1) stockholders to request inclusion of proposals or nominations in the Corporation’s proxy statement pursuant to applicable rules and regulations promulgated under the Exchange Act or (2) the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation of the Corporation.

(f)    Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, at all meetings of the stockholders, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting.

(g)    Voting; Proxies. Except as otherwise expressly required by law or provided in the Certificate of Incorporation, each share of capital stock of the Corporation shall entitle the holder thereof to one vote. Except as provided in the next paragraph of this Section 6(g) with respect to the election of directors, any action shall be authorized by a majority of the votes cast except where the Delaware General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the Certificate of Incorporation and these Bylaws. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a new proxy bearing a later date. In the election of directors, and for any other action, voting need not be by ballot.

Except as otherwise provided by these Bylaws, each director shall be elected by the vote of the majority of the votes cast with respect to that director’s election at any meeting for the election of directors at which a quorum is present, provided that if, as of the tenth (10th) day preceding the date the Corporation first mails its notice of meeting for such meeting to the stockholders of the Corporation, the number of nominees exceeds the number of directors to be elected (a “Contested Election”), the directors shall be elected by the vote of a plurality of the votes cast. For purposes of this paragraph, a majority of votes cast shall mean that the number of votes cast “for” a director’s election exceeds the number of votes cast “against” that director’s election (with “abstentions” and “broker nonvotes” not counted as a vote cast either “for” or “against” that director’s election). In order for any incumbent director to become a nominee of the Board of Directors for further service on the Board of Directors,

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such person must submit an irrevocable resignation, contingent on (i) that person not receiving a majority of the votes cast in an election that is not a Contested Election, and (ii) acceptance of that resignation by the Board of Directors in accordance with the policies and procedures adopted by the Board of Directors for such purpose. In the event an incumbent director fails to receive a majority of the votes cast in an election that is not a Contested Election, the Governance Committee, or such other committee designated by the Board of Directors pursuant to these Bylaws, shall make a recommendation to the Board of Directors as to whether to accept or reject the resignation of such incumbent director, or whether other action should be taken. The Board of Directors shall act on the resignation, taking into account the committee’s recommendation, and publicly disclose (by a press release and filing an appropriate disclosure with the Securities and Exchange Commission) its decision regarding the resignation and, if such resignation is rejected, the rationale behind the decision within ninety (90) days following certification of the election results. The committee in making its recommendation and the Board of Directors in making its decision each may consider any factors and other information that they consider appropriate and relevant. Any nominee who tenders his or her resignation pursuant to this Section 6(g) will not participate in the deliberations of the committee or the Board of Directors regarding whether to accept the resignation.

(h)    Conduct of Meetings. All meetings of stockholders shall be presided over by the Chairman of the Board of Directors, or in his absence, by the Chief Executive Officer, or in his absence, by the President, if any, or in his absence, by a Vice President, or in the absence of the foregoing persons, by a chairman designated by the Board of Directors, or in the absence of such designation, by a chairman chosen at the meeting. The Secretary of the Corporation shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of the meeting shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman of the meeting, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The chairman of the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and if such chairman should so determine, such chairman shall so declare to the meeting, and any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

(i)    Inspectors of Election; Opening and Closing the Polls. Prior to any meeting of stockholders, the Board of Directors, the Chairman of the Board, the Chief Executive Officer or any other officer designated by the Board of Directors shall appoint one or more inspectors, who shall have the powers and duties set forth in Section 231 of the Delaware General Corporation Law as currently in effect or as the same may hereafter be amended or replaced, which inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at such meeting and make a written report thereof and may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspectors shall have the duties prescribed by law. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting.

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7.    Stockholder Requested Special Meetings.

(a)    In order for a special meeting of stockholders to be called pursuant to clause (ii) of Section 6(c) of this Article II (a “Stockholder Requested Special Meeting”), one or more notices requesting a special meeting of stockholders (such notice, the “Special Meeting Request”) must be signed by a holder or holders of the Requisite Percent (or their duly authorized agents) and must be delivered to the Secretary. The Special Meeting Request(s) shall be delivered to the Secretary at the principal executive offices of the Corporation by registered mail, return receipt requested. Each Special Meeting Request shall (i) set forth a statement of the specific purpose(s) of the meeting and the matters proposed to be acted on at such meeting, (ii) bear the date of signature of each stockholder (or duly authorized agent thereof) signing the Special Meeting Request, (iii) set forth (A) the name and address, as they appear in the Corporation’s stock ledger, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed), (B) the class, if applicable, and the number of shares of capital stock of the Corporation that are owned of record and beneficially by each such stockholder and (C) include documentary evidence of such stockholder’s record and beneficial ownership of such stock, (iv) set forth all information relating to each such stockholder that must be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, and (v) contain the information described in the third sentence of Section 6(e)(ii) of this Article II. Any requesting stockholder may revoke his, her or its request for a special meeting at any time by written revocation delivered to the Secretary at the principal executive offices of the Corporation.

(b)    Except as provided in the next sentence, any special meeting shall be held at such date and time as may be fixed by the Board of Directors in accordance with these Bylaws and the Delaware General Corporation Law. In the case of a Stockholder Requested Special Meeting, such meeting shall be held at such date and time as may be fixed by the Board of Directors in accordance with applicable law (the “Meeting Date”); provided, however, that the record date for such meeting shall be fixed in accordance with Section 4(a) of this Article II and applicable law, and if the Board of Directors fails to designate a Meeting Date within ten (10) days after the record date established in accordance with Section 4(b) of this Article II, then such Meeting Date shall be the 30th day after such record date (or, if that day shall not be a business day, then on the next business day); provided, further, however, that the date of any Stockholder Requested Special Meeting shall be not more than forty-five days after such record date; and provided, further, that in the event that the Board of Directors fails to designate a time and place for a Stockholder Requested Special Meeting, then such meeting shall be held at the Corporation’s principal executive offices at 9 A.M. local time. In fixing a date and time for any Stockholder Requested Special Meeting, the Board of Directors may consider such factors as it deems relevant within the good faith exercise of business judgment, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for a meeting and any plan of the Board of Directors to call an annual meeting or a special meeting.

(c)    Business transacted at any Stockholder Requested Special Meeting shall be limited to the purpose stated in the Special Meeting Request(s); provided, however, that notwithstanding anything to the contrary set forth herein, the Board of Directors shall not be prohibited from submitting additional matters to the stockholders at any Stockholder Requested Special Meeting.

ARTICLE III
DIRECTORS

1.    Election of Directors. Except as provided in the Certificate of Incorporation, Section 2 of this Article III or applicable law, directors shall be elected at annual meetings of stockholders, and each director so elected shall hold office until the succeeding annual meeting and until his successor is duly elected and qualified, or until his earlier resignation or removal. Any director may resign at any time upon notice to the Corporation. Such resignation shall take effect at the time specified therein or, if the time be not specified, upon the delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Directors need not be stockholders of the Corporation. The number of directors of the Corporation shall be determined by resolution of a majority of the Board of Directors of the Corporation.

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2.    Vacancies. Vacancies on the Board of Directors shall be filled in accordance with the provisions of the Corporation’s Certificate of Incorporation.

3.    Duties and Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

4.    Meetings.

(a)    Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors shall be called by the Secretary (i) at the direction of (x) the Chairman of the Board of Directors or (y) the Chief Executive Officer, if the Chief Executive Officer is a member of the Board of Directors, or (ii) at the written request of a majority of the entire Board of Directors. Notice of a meeting of the Board of Directors, stating the place, date and hour of the meeting, shall be given to each director either by mail not less than forty-eight hours before the date of such meeting or by telephone or other means of electronic transmission not less than twenty-four hours before the date of such meeting.

(b)    Quorum and Action. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all of the members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmissions, setting forth the action so taken, are filed with the minutes of proceedings of the Board of Directors or committee.

5.    Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or of any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 5 shall constitute presence in person at such meeting.

6.    Committees. The Board of Directors shall adopt resolutions establishing an audit committee and a compensation committee. In addition, the Board of Directors may designate one or more additional committees. Each committee shall consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors as requested or required.

7.    Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum and/or an amount of shares of the Corporation’s stock (or options or other rights to purchase or obtain shares of the Corporation’s stock) for attendance at each meeting of the Board of Directors and/or as compensation for service as director. No such payment shall preclude any director from

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serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

ARTICLE IV
OFFICERS

1.    General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board (who must be a director), a Chief Executive Officer, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a President and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation.

2.    Election. The Board of Directors at its first meeting held after each annual meeting of stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by or at the direction of the Board of Directors and/or the Compensation Committee thereof.

3.    Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chief Executive Officer or such other authorized officer of the Corporation, and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.

4.    Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these Bylaws or by the Board of Directors.

5.    Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors and the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these Bylaws, the Board of Directors or the Chief Executive Officer. In the absence or disability of the Chairman of the Board of Directors, the Chief Executive Officer shall preside at all meetings of the stockholders and, if a member of the Board of Directors, of the Board of Directors. The Chief Executive Officer shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these Bylaws or by the Board of Directors.

6.    President. The President, who may be the same person as the Chief Executive Officer, shall have such powers and duties as generally pertain to the office of President and as the Board of Directors may from time to time prescribe, subject generally to the direction of the Board of Directors and the Executive Committee, if any. If the Chief Executive Officer and the President are not the same individual, at the request of the Chief Executive

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Officer or in his absence, or in the event of his inability or refusal to act, the President shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. If there be no President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the Chief Executive Officer, or in the event of the inability or refusal of the Chief Executive Officer to act, shall perform the duties of the Chief Executive Officer, and when so acting, such officer shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer.

7.    Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board may from time to time prescribe.

8.    Secretary. The Secretary shall, unless otherwise directed by the Board of Directors, attend all meetings of the Board of Directors and all meetings of stockholders, and shall record (or arrange for the recordation of) all the proceedings at each meeting of the Board of Directors and stockholders in a book or books to be kept for that purpose; the Secretary shall also perform like duties, when required, for the committees of the Board of Directors. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or Chief Executive Officer, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the Chief Executive Officer may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.

9.    Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation.

10.    Assistant Secretaries. Except as may be otherwise provided in these Bylaws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.

11.    Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer.

12.    Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

13.    Outside or Private Employment. No officer or employee shall have any outside or private employment or affiliation with any firm or organization incompatible with his concurrent employment by the

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Corporation, nor shall he accept or perform any outside or private employment which the Chief Executive Officer of the Corporation determines will interfere with the efficient performance of his official duties.

ARTICLE V
NOTICES

1.    Notices. Whenever notice is required by law, the Certificate of Incorporation or these Bylaws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice may also be given personally or by electronic transmission in accordance with Section 232 of the Delaware General Corporation Law. Notice shall be deemed to have been given to all stockholders of record who share an address if notice is given in accordance with the “householding” rules set forth in Rule 14a-3(e) under the Exchange Act, and Section 233 of the General Corporation Law.

2.    Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these Bylaws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

ARTICLE VI
GENERAL PROVISIONS

1.    Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, and applicable law may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.

2.    Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

3.    Fiscal Year. The fiscal year of the Corporation shall be fixed, and shall be subject to change, by the Board of Directors.

4.    Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the word “Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE VII
AMENDMENTS

Subject to the provisions of the Certificate of Incorporation, as such may be amended from time to time, and the provisions of the Delaware General Corporation Law, these Bylaws may be altered, amended, changed, added to or repealed in whole or in part, or new Bylaws may be adopted, by the stockholders or the Board of

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Directors. All such amendments must be approved by either the holders of a majority of the outstanding capital stock of the Corporation entitled to vote thereon or by a majority of the entire Board of Directors.

ARTICLE VIII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS

1.    Power to Indemnify in Actions, Suits or Proceedings other than those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Notwithstanding the preceding sentence, except as otherwise provided in Section 4 of this Article VIII, the Corporation shall be required to indemnify a current or former director or officer in connection with any action, suit or proceeding (or part thereof) commenced by such director or officer only if the commencement of such action, suit or proceeding (or part thereof) by such director or officer was authorized in the specific case by the Board of Directors.

2.    Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Notwithstanding the preceding sentence, except otherwise provided in Section 4 of this Article VIII, the Corporation shall be required to indemnify a current or former director or officer in connection with any action, suit or proceeding (or part thereof) commenced by such director or officer only if the commencement of such action, suit or proceeding (or part thereof) by such director or officer was authorized in the specific case by the Board of Directors.

3.    Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made with respect to a person who is an officer or director at the time of such determination (a) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (b) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (c) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits

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or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case.

4.    Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the applicable standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 4 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

5.    Expenses Payable in Advance. Expenses incurred by a director or officer in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Corporation, upon the determination by the Board of Directors, in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VIII.

6.    Non-exclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, these Bylaws or any agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the Delaware General Corporation Law, or otherwise.

7.    Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VIII.

8.    Certain Definitions. For purposes of this Article VIII, references to the “Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan,

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its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article VIII.

9.    Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by the Corporation pursuant to this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

10.    Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 4 of this Article VIII), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

11.    Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.

12.    Severability. If this Article VIII or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each person as provided above as to the expenses (including attorney’s fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including a grand jury proceeding and an action by the Corporation, to the full extent permitted by any applicable portion of this Bylaw that shall not have been invalidated or by any other applicable law.

ARTICLE IX

FORUM FOR ADJUDICATION OF CERTAIN DISPUTES

Unless the Corporation consents in writing to the selection of an alternative forum (an “Alternative Forum Consent”), the Court of Chancery of the State of Delaware shall be, to the fullest extent permitted by law, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation or any director, officer, stockholder, employee or agent of the Corporation arising out of or relating to any provision of the Delaware General Corporation Law or the Corporation’s Certificate of Incorporation or these Bylaws, or (iv) any action asserting a claim against the Corporation or any director, officer, stockholder, employee or agent of the Corporation governed by the internal affairs doctrine of the State of Delaware; provided, however, that, in the event that the Court of Chancery of the State of Delaware lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another court of the State of Delaware, or if no court of the State of Delaware has jurisdiction, the federal district court for the District of Delaware, in each such case, unless the Court of Chancery (or such other state or federal court located within the State of Delaware, as applicable) has dismissed a prior action by the same plaintiff asserting the same claims because such court lacked personal jurisdiction over an indispensable party named as a defendant therein. Failure to enforce the foregoing provisions would cause the Corporation irreparable harm and the Corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provision, including, without limitation, an anti-suit injunction to enforce Article IX and to preclude suit in any other forum. Any person or entity holding, purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and to consent to (i) the personal jurisdiction of the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another court of the State of Delaware, or if no court of the State of Delaware has jurisdiction, the federal district court for the District of Delaware) in any proceeding brought to enjoin, or otherwise enforce this Article IX with respect to, any action by

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that person or entity that is inconsistent with the exclusive jurisdiction provided for in this Article IX (an “Inconsistent Action”) and (ii) having service of process made upon such person or entity in any such proceeding by service upon such person’s or entity’s counsel in such Inconsistent Action as agent for such person or entity

* * *

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EX-10.38

Exhibit 10.38

The Advisory Board CompanySenior Management Severance and Change of Control Plan

ARTICLE I

PURPOSE

This Senior Management Severance and Change of Control Plan has been established by the Company on March 10, 2017 (the “Effective Date”) to provide Participants with the opportunity to receive certain severance protections. The Plan, as set forth herein, is primarily intended to help retain qualified executives, maintain a stable work environment and provide economic security to eligible executives in the event of certain qualifying terminations of employment. Capitalized terms used but not otherwise defined herein have the meanings set forth in ARTICLE II.

The Plan is not intended to be included in the definitions of “employee pension benefit plan” or “pension plan” set forth under Section 3(2) of ERISA. The Plan is intended to meet the descriptive requirements of a plan constituting a “severance pay plan” within the meaning of regulations published by the Secretary of Labor at Title 29, Code of Federal Regulations, Section 2510.3-2(b). Notwithstanding the forgoing, if and to the extent that the Plan is deemed to be an “employee pension benefit plan” or “pension plan” as set forth under Section 3(2) of ERISA, then the Plan is intended, for all purposes under ERISA, to constitute a plan which is unfunded and maintained by the Company primarily for the purposes of providing deferred compensation for a select group of management or highly compensated employees.

ARTICLE II

DEFINITIONS

“Accrued Compensation” means: (i) Base Salary accrued by the Participant through, but not paid to the Participant as of, the Qualifying Termination Date; (ii) any annual incentive bonus earned by the Participant for a prior year but not paid to the Participant as of the Qualifying Termination Date and (iii) any vested employee benefits to which the Participant is entitled as of the Qualifying Termination Date under any employee benefit plan of the Company.

“Administrator” means the Compensation Committee or its delegate.

“Annual Bonus” means the greater of the (i) annual incentive bonus actually earned by the Participant for the fiscal year immediately preceding the year of the Participant’s Qualifying Termination Date (the “Prior Fiscal Year”), or (ii) annual incentive bonus actually earned by the Participant for the fiscal year immediately preceding the Prior Fiscal Year.

“Base Salary” means the Participant’s annual base salary as in effect immediately prior to the Qualifying Termination Date or, if higher, as in effect immediately prior to the occurrence of an event or circumstance constituting Good Reason.

“Benefit Continuation” has the meaning set forth in Section 3.01(c).

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“Benefit Continuation Period” means the period commencing on the Qualifying Termination Date and ending on the earlier to occur of: (i) the end of the twelve (12)-month period following the Qualifying Termination Date; (ii) the date on which the Participant becomes eligible to receive substantially similar coverage from another employer; and (iii) the date the Participant is no longer eligible to receive COBRA continuation coverage.

“Board” means the Board of Directors of the Company.

“Cause” has the meaning set forth in the Participant’s employment or other agreement with the Company, if any; provided, that if the Participant is not a party to any such employment or other agreement or such employment or other agreement does not contain a definition of “cause,” then Cause shall mean:

(a)any willful act or willful omission (other than as a result of a Total and Permanent Disablement (as defined in the Amended and Restated 2009 Stock Incentive Plan or a successor plan)) that results in a material detriment to the Company;

(b)    Participant’s conviction of, or plea of nolo contendere to, a felony (other than a traffic infraction);

(c)    the commission by the Participant of a material act of fraud, theft or dishonesty against the Company;

provided, however, that if an event described in clause (a) of the definition of Cause is reasonably capable of being cured, the Company shall deliver a written demand to the Participant which specifically identifies the conduct that may provide grounds for Cause within thirty (30) calendar days of the Company’s actual knowledge of such act or omission, and the Participant shall have thirty (30) days after such demand to cure such conduct. For purposes hereof, no act or omission shall be deemed “willful” if it was done with a good faith belief that it was in the best interests of the Company.

“Change of Control” means the occurrence of one of the following:

(a)    the “acquisition” by a “person” or “group” (as those terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules promulgated thereunder), other than by Permitted Holders, of beneficial ownership (as defined in Exchange Act Rule 13d-3) directly or indirectly, of any securities of the Company or any successor of the Company immediately after which such person or group owns securities representing 50% or more of the combined voting power of the Company or any successor of the Company;

(b)    the consummation of a merger, consolidation or reorganization involving the Company, unless either (A) the stockholders of the Company immediately before such merger, consolidation or reorganization own, directly or indirectly immediately following such merger, consolidation or reorganization, at least 60% of the combined voting power of the company(ies) resulting from such merger, consolidation or reorganization in substantially the same proportion as their ownership immediately before such merger, consolidation or reorganization, or (B) the stockholders of the Company immediately after such merger, consolidation or reorganization include Permitted Holders;

(c)    the transfer of 50% or more of the assets of the Company or a transfer of assets that during the current or either of the prior two fiscal years accounted for more than 50% of the Company’s revenues or income, unless the person to which such transfer is made is either (A) a Subsidiary of the Company, (B) wholly owned by all of the stockholders of the Company, or (C) wholly owned by Permitted Holders; or

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(d)    the complete liquidation or dissolution of the Company.

“Change of Control Severance Amount” has the meaning set forth in Section 3.01(b).

“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

“Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.

“Company” means The Advisory Board Company, a Delaware corporation, and, except as the context otherwise requires, its affiliates and wholly-owned subsidiaries and any successor by merger, acquisition, consolidation or otherwise that assumes the obligations of the Company under the Plan.

“Compensation Committee” means the Compensation Committee of the Board of Directors of the Company.

“Covered Period” means the period of time beginning on the first occurrence of a Change of Control and lasting through the one-year anniversary of the occurrence of the Change of Control; provided, that the Covered Period shall also include the six (6)-month period immediately prior to the occurrence of the Change of Control where (i) a Participant’s Qualifying Termination occurs during such period at the request of a third party in anticipation of the Change of Control and (ii) the transaction constituting a Change of Control is consummated.

“Effective Date” has the meaning set forth in ARTICLE I.

“Eligible Employee” means any full-time employee of the Company; provided, that the term “Eligible Employee” shall exclude the Chief Executive Officer and President of the Company.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Exchange Act” means the Securities and Exchange Act of 1934, as amended.

“Excise Tax” means any excise tax imposed under Section 4999 of the Code.

“Good Reason” has the meaning set forth in the Participant’s employment or other agreement with the Company, if any; provided, that if the Participant is not a party to any such employment or other agreement or such employment or other agreement does not contain a definition of “good reason,” then Good Reason shall mean, in each case without the Participant’s written consent:

(a)    a material reduction in the Participant’s Base Salary or Target Annual Bonus, in each case other than a general reduction in Base Salary or Target Annual Bonus that occurs prior to or following the Covered Period and that affects all similarly situated employees in substantially the same proportions;

(b)    during the Covered Period, a relocation of the Participant’s principal place of employment by more than fifty (50) miles;

(c)    the Company’s failure to obtain an agreement from any successor to the Company to assume and agree to perform the obligations under the Plan in the same manner and to the same extent that the Company would be required to perform, except where such assumption occurs by operation of law;

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provided, however, that for any of the foregoing to constitute Good Reason, the Participant must provide written notification of such event or condition constituting Good Reason within ninety (90) days after the Participant knows of the occurrence of any such event or condition, and the Company shall have sixty (60) days from the date of receipt of such written notice to effect a cure of the event or condition constituting Good Reason, and, upon cure thereof by the Company, such event or condition shall no longer constitute Good Reason.

“Non-Change of Control Severance Amount” has the meaning set forth in Section 3.01(a).

“Other Severance” has the meaning set forth in Section 3.02.

“Participant” means each Eligible Employee who (i) is designated by the Administrator on or after the date hereof as a Participant, (ii) has executed the Restrictive Covenant Agreement, (iii) and is so designated on Exhibit A.

“Permitted Holder” means: (i) the Company; (ii) any subsidiary of the Company; (iii) any employee benefit plan of the Company; and (iv) any group which includes or any person who is wholly or partially owned by a majority of the individuals who immediately prior to a Change of Control are executive officers (as defined in Exchange Act Rule 3b-7) of the Company or any successor of the Company; provided that immediately prior to and for six (6) months following such Change of Control such executive officers of the Company are beneficial owners (as defined in Exchange Act Rule 16a-1(a)(2)) of the common stock of the Company or any successor to the Company; and provided further that such executive officers’ employment is not terminated by the Company or any successor of the Company (other than as a result of death or Total and Permanent Disablement (each as defined in the Amended and Restated 2009 Stock Incentive Plan, or any successor thereto) during the six (6) months following such Change of Control. If, as a result of a transaction, a Change of Control would have been deemed to have occurred but for the fact that the requirements of this clause (iv) had been satisfied at the time of such transaction and the requirements of this clause (iv) cease to be satisfied on a date within six (6) months of such transaction, a Change of Control shall be deemed to have occurred on such date.

“Plan” means The Advisory Board Company Senior Management Severance and Change of Control Plan, as may be amended and/or restated from time to time.

“Qualifying Termination” means the termination of a Participant’s employment either by the Company without Cause or by Participant for Good Reason.

“Qualifying Termination Date” means the date on which a Participant incurs a Qualifying Termination.

“Release Agreement” means the Release and Separation Agreement substantially in the form attached hereto as Exhibit B.

“Restrictive Covenant Agreement” means the Restrictive Covenant Agreement substantially in the form attached hereto as Exhibit C.

“Severance” has the meaning set forth in Section 3.01(a).

“Target Annual Bonus” means the Participant’s target annual incentive bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which the Qualifying Termination Date occurs or, if higher, immediately prior to the fiscal year in which occurs the first event or circumstance constituting Good Reason; provided, that if the Participant is not eligible to receive a specified target

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annual incentive bonus following a Change of Control, then Target Annual Bonus shall mean such target annual incentive bonus in effect as of immediately prior to the date of the Change of Control.

“Total Payments” has the meaning set forth in Section 5.01.

ARTICLE III

SEVERANCE

Section 3.01Severance Following Qualifying Termination.

(a)    Non-Change of Control Severance Amount.If a Participant incurs a Qualifying Termination prior to or after the Covered Period, and subject to the execution and nonrevocation of a Release Agreement, the Company shall provide each Participant with an amount equal to the sum of the Participant’s (A) Base Salary and (B) Annual Bonus (the “Non-Change of Control Severance Amount”). Subject to Section 8.13, the Non-Change of Control Severance Amount shall be paid in substantially equal installments over the one-year period following the Qualifying Termination Date, payable in accordance with the Company’s normal payroll practices, and shall commence on the first regularly scheduled payroll date that occurs immediately following the sixty-first (61st) day following the Qualifying Termination Date (such date, the “Payment Commencement Date”). Notwithstanding the foregoing, the portion of the severance amount provided under this Section 3.01 that is payable on the Payment Commencement Date shall include a lump-sum amount equal to the portion of the severance amount that would have been payable commencing on the Qualifying Termination Date and ending on the Payment Commencement Date.

(b)    Change of Control Severance Amount. If a Participant incurs a Qualifying Termination during the Covered Period, and subject to the execution and nonrevocation of a Release Agreement, the Company shall provide each Participant with an amount equal to one and one-half (1.5) times the sum of the Participant’s (A) Base Salary and (B) Annual Bonus (the “Change of Control Severance Amount”). Subject Section 8.13, Change of Control Severance Amount shall be paid in a lump-sum on the sixty-first (61st) day following the Qualifying Termination Date.

(c)    Benefits Continuation. During the Participant’s Benefit Continuation Period, the Participant properly and timely makes an election under COBRA, continued participation for the Participant and his or her eligible dependents in the Company’s group health, medical, dental, vision and life insurance programs or policies in which the Participant and his or her eligible dependents was eligible to participate as of the Qualifying Termination date on the same basis as active employees (“Benefit Continuation”); provided, that the Company’s payment of such COBRA premiums shall be taxable as wages to the Participant. Benefit Continuation shall be provided concurrently with any health care benefit required under COBRA and shall become secondary to any Medicare coverage for which the Participant becomes eligible to receive.

(d)    Accrued Compensation. The Company shall pay the Accrued Compensation to each Participant who incurs a Qualifying Termination in a lump-sum payment as soon as practicable, but in any event before the earlier to occur of (y) the payment date required by applicable law and (z) thirty (30) days immediately following the Qualifying Termination Date.

Section 3.02Other Severance Payments. In the event that the Company is obligated by law or contract to pay a Participant other severance pay, a termination indemnity, notice pay, or the like, or if the Company is obligated by law to provide advance notice of separation (“Other Severance”), then the amount of the

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Non-Change of Control Severance Amount otherwise payable to such Participant shall be reduced by the amount of any such Other Severance actually paid to the Participant (but not below zero).

Section 3.03Coordination of Benefits. Notwithstanding anything set forth herein to the contrary, to the extent that any severance payable under a plan or agreement covering a Participant as of the date such Participant becomes eligible to participate in this Plan constitutes deferred compensation under Section 409A of the Code, then to the extent required to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, the portion of the benefits payable hereunder equal to such other amount shall instead be provided in the form set forth in such other plan or agreement. Further, to the extent, if any, that provisions of this Plan affect the time or form of payment of any amount which constitutes deferred compensation under Section 409A of the Code, then to the extent required to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, if a Change of Control does not constitute a change in control event within the meaning of Section 409A of the Code, the time and form (but not the amount) of payment shall be the time and form that would have been applicable in absence of a Change of Control.

ARTICLE IV

EQUITY AWARDS

Section 4.01Equity Awards.

(a)    Non-Change of Control. In the event that a Participant incurs a Qualifying Termination prior to or after the Covered Period, then, subject to subject to the execution and nonrevocation of a Release Agreement, each-then outstanding equity award that would have vested based on continued employment through the first (1st) anniversary of the Qualifying Termination Date had the Participant continued employment through such date shall vest and become exercisable, as applicable and, except as provided below or in Section 4.01(c), any payment in respect of such awards, if applicable, shall be made in a lump sum on the sixty-first (61st) day following the Qualifying Termination Date; provided, that each then-outstanding equity award that vests at least in part based on the achievement of performance metrics shall vest or be forfeited in accordance with the terms of the applicable Company equity plan and award agreement. Each stock option that vests and becomes exercisable in accordance with this Section 4.01(a) shall expire on the earlier to occur of the ninetieth (90th) day following the Qualifying Termination Date or the expiration of such stock option. For the avoidance of doubt, each then-outstanding equity award that does not vest in accordance with the first sentence of this Section 4.01(a) shall be forfeited as of the Qualifying Termination Date.

(b)    Change of Control. In the event that a Participant incurs a Qualifying Termination during the Covered Period, then, subject to the execution and nonrevocation of a Release Agreement, as of the date immediately preceding the Qualifying Termination Date, each then-outstanding and unvested equity award shall vest and become exercisable, as applicable, and, except as provided in Section 4.01(c), any payment in respect of such awards, if applicable, shall be made in a lump sum on the sixty-first (61st) day following the Qualifying Termination Date; provided, each then-outstanding equity award that vests at least in part based on the achievement of performance metrics shall remain outstanding following the Qualifying Termination Date and shall vest or be forfeited in accordance with the terms of the applicable award agreement based on the actual level of performance.

(c)    Settlement of Awards. Notwithstanding anything in this Section 4.01 to the contrary, if all or a portion of an Company equity award subject to accelerated vesting under the terms of this Section 4.01 constitutes deferred compensation under Section 409A of the Code, then to the extent required to avoid

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accelerated taxation and/or tax penalties under Section 409A of the Code, such awards shall vest at the time(s) provided in this Section 4.01, but settlement, distribution or payment, as the case may be, shall be made on the earliest possible date that would not subject such awards to taxation and/or tax penalties under Section 409A of the Code.

ARTICLE V

SECTION 280G

Section 5.01Treatment of Payments.Notwithstanding any other provision of the Plan to the contrary, in the event that any payment or benefit received or to be received by the Participant (including any payment or benefit received in connection with a Change of Control or the termination of the Participant’s employment, whether pursuant to the terms of the Plan or any other plan, arrangement or agreement) (all such payments and benefits, including the severance benefits payable hereunder, being hereinafter referred to as the “Total Payments”) would be subject (in whole or part), to the Excise Tax, then, after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement, the severance benefits payable hereunder shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Participant would be subject in respect of such unreduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions attributable to such unreduced Total Payments).

Section 5.02Ordering of Reduction. In the case of a reduction in the Total Payments pursuant to Section 5.01, the Total Payments shall be reduced in the following order: (i) payments that are payable in cash the full amount of which are treated as parachute payments under Treasury Regulation Section 1.280G-1, Q&A 24(a) shall be reduced (if necessary, to zero), with amounts that are payable last reduced first; (ii) payments and benefits due in respect of any equity the full amount of which are treated as parachute payments under Treasury Regulation Section 1.280G-1, Q&A 24(a), with the highest values reduced first (as such values are determined under Treasury Regulation Section 1.280G-1, Q&A 24) shall next be reduced; (iii) payments that are payable in cash that are valued at less than full value under Treasury Regulation Section 1.280G-1, Q&A 24, with amounts that are payable last reduced first, shall next be reduced; (iv) payments and benefits due in respect of any equity valued at less than full value under Treasury Regulation Section 1.280G-1, Q&A 24, with the highest values reduced first (as such values are determined under Treasury Regulation Section 1.280G-1, Q&A 24) shall next be reduced; and (v) all other non-cash benefits not otherwise described in clauses (ii) or (iv) shall be next reduced pro-rata.

Section 5.03Additional Payments. If the Participant receives reduced payments and benefits by reason of this ARTICLE V and it is established pursuant to a determination of a court of competent jurisdiction which is not subject to review or as to which the time to appeal has expired, or pursuant to an Internal Revenue Service proceeding, that the Participant could have received a greater amount without resulting in any Excise Tax, then the Company shall thereafter pay the Participant the aggregate additional amount which could have been paid without resulting in any Excise Tax as soon as reasonably practicable.

ARTICLE VI

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CLAIMS PROCEDURES

Section 6.01Initial Claims. A Participant who believes he or she is entitled to a payment under the Plan that has not been received may submit a written claim for benefits to the Plan within one hundred and twenty (120) days after the Participant’s Qualifying Termination Date. Claims should be addressed and sent to:

The Advisory Board Company

2445 M St., NW

Washington, DC 20037

Attention: Corporate Secretary

If the Participant’s claim is denied, in whole or in part, the Participant shall be furnished with written notice of the denial within ninety (90) days after the Administrator’s receipt of the Participant’s written claim, unless special circumstances require an extension of time for processing the claim, in which case a period not to exceed one hundred and eighty (180) days shall apply. If such an extension of time is required, written notice of the extension shall be furnished to the Participant before the termination of the initial ninety (90)-day period and shall describe the special circumstances requiring the extension, and the date on which a decision is expected to be rendered. If written notice of denial of the claim for benefits is not furnished within the specified time, the claim shall be deemed to be denied. The Participant shall then be permitted to appeal the denial in accordance with Section 6.02 below. Written notice of the denial of the Participant’s claim shall contain the following information:

(a)    the specific reason or reasons for the denial of the Participant’s claim;

(b)    references to the specific Plan provisions on which the denial of the Participant’s claim was based;

(c)    a description of any additional information or material required by the Administrator to reconsider the Participant’s claim (to the extent applicable) and an explanation of why such material or information is necessary; and

(d)    a description of the Plan’s review procedures and time limits applicable to such procedures, including a statement of the Participant’s right to bring a civil action under Section 502(a) of ERISA following a benefit claim denial on review.

Section 6.02Appeal of Denied Claims. If the Participant’s claim is denied (or deemed denied) and he or she wishes to submit a request for a review of the denied claim, the Participant or his or her authorized representative must follow the procedures described below:

(a)    Upon receipt of the denied claim, the Participant (or his or her authorized representative) may file a request for review of the claim in writing with the Administrator. This request for review must be filed no later than sixty (60) days after the Participant has received written notification of the denial (or no later than sixty (60) days after the claim is deemed denied).

(b)    The Participant has the right to submit in writing to the Administrator any comments, documents, records or other information relating to his or her claim for benefits.

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(c)    The Participant has the right to be provided with, upon request and free of charge, reasonable access to and copies of all pertinent documents, records and other information that is relevant to his or her claim for benefits.

(d)    A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the Participant feels are pertinent.

(e)    The review of the denied claim shall take into account all comments, documents, records and other information that the Participant submitted relating to his or her claim, without regard to whether such information was submitted or considered in the initial denial of his or her claim.

(f)    The Administrator may require the Participant to submit additional facts, documents or other material as he or she may find necessary or appropriate in making his or her review.

Section 6.03Administrator’s Response to Appeal. The Administrator shall provide the Participant with written notice of its decision within sixty (60) days after the Administrator’s receipt of the Participant’s written claim for review. There may be special circumstances which require an extension of this sixty (60)-day period. In any such case, the Administrator shall notify the Participant in writing within the sixty (60)-day period and the final decision shall be made no later than one hundred and twenty (120) days after the Administrator’s receipt of the Participant’s written claim for review. This notice of extension shall describe the special circumstances necessitating the additional time and the date by which the Administrator is to render his or her decision on review. The Administrator’s decision on the Participant’s claim for review shall take into account all comments, documents, records and other information submitted by the applicant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination, shall be communicated to the Participant in writing and shall clearly state:

(a)    the specific reason or reasons for the denial of the Participant’s claim;

(b)    reference to the specific Plan provisions on which the denial of the Participant’s claim is based;

(c)    a statement that the Participant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, the Plan and all documents, records and other information relevant to his or her claim for benefits; and

(d)    a statement describing the Participant’s right to bring an action under Section 502(a) of ERISA.

Section 6.04Exhaustion of Administrative Remedies. The exhaustion of these claims procedures is mandatory for resolving every claim and dispute arising under the Plan. As to such claims and disputes:

(a)    no claimant shall be permitted to commence any legal action to recover benefits or to enforce or clarify rights under the Plan under Section 502 or Section 510 of ERISA or under any other provision of law, whether or not statutory, until these claims procedures have been exhausted in their entirety; and

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(b)    in any such legal action, all explicit and implicit determinations by the Administrator (including, but not limited to, determinations as to whether the claim, or a request for a review of a denied claim, was timely filed) shall be afforded the maximum deference permitted by law.

Section 6.05Arbitration. Subject to Section 6.04, any dispute, controversy or claim arising out of or related to the Plan shall be submitted to and decided by binding arbitration. Arbitration shall be administered exclusively by an arbitration organization of the Company’s choice and shall be conducted consistent with the rules, regulations and requirements thereof as well as any requirements imposed by state law. Any arbitral award determination shall be final and binding.

ARTICLE VII

ADMINISTRATION, AMENDMENT AND TERMINATION

Section 7.01Administration. The Administrator has the exclusive right, power and authority, in its sole and absolute discretion, to administer and interpret the Plan. The Administrator has all powers reasonably necessary to carry out its responsibilities under the Plan including (but not limited to) the sole and absolute discretionary authority to:

(a)    administer the Plan according to its terms and to interpret Plan policies and procedures;

(b)    resolve and clarify inconsistencies, ambiguities and omissions in the Plan and among and between the Plan and other related documents;

(c)    take all actions and make all decisions regarding questions of eligibility and entitlement to benefits, and benefit amounts;

(d)    make, amend, interpret, and enforce all appropriate rules and regulations for the administration of the Plan;

(e)    process and approve or deny all claims for benefits; and

(f)    decide or resolve any and all questions, including benefit entitlement determinations and interpretations of the Plan, as may arise in connection with the Plan.

The decision of the Administrator on any disputes arising under the Plan, including (but not limited to) questions of construction, interpretation and administration shall be final, conclusive and binding on all persons having an interest in or under the Plan. The Administrator may delegate any of its duties hereunder to such person or persons from time to time as it may designate. Any such delegation shall be in writing.

Section 7.02Amendment and Termination. The Plan may be amended or terminated by the Compensation Committee or the Board of Directors of the Company at any time; provided, however, that unless replaced with severance benefits that are more favorable to the Participant or unless an amendment would otherwise increase benefits, the Plan may not be amended or terminated during the twelve (12) months immediately following a Change of Control.

ARTICLE VIII

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GENERAL PROVISIONS

Section 8.01At-Will Employment. The Plan does not alter the status of each Participant as an at-will employee of the Company. Nothing contained herein shall be deemed to give any Participant the right to remain employed by the Company or to interfere with the rights of the Company to terminate the employment of any Participant at any time, with or without Cause.

Section 8.02Effect on Other Plans, Agreements and Benefits.

(a)    Each Participant who incurs a Qualifying Termination shall remain entitled to any benefits to which he or she would otherwise be entitled under the terms and conditions of the Company’s tax-qualified retirement plans and non-qualified deferred compensation plans and nothing contained in the Plan is intended to waive or relinquish the Participant’s vested rights in such benefits.

(b)    Any severance benefits payable to a Participant under the Plan shall not be counted as compensation for purposes of determining benefits under any other benefit policies or plans of the Company, except to the extent expressly provided therein.

Section 8.03Mitigation. Except as provided in Section 3.01(c), the amount of any payment or benefit provided for in this Plan shall not be reduced by any compensation earned by the Participant as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Participant to the Company, or otherwise.

Section 8.04Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan. If any provision of the Plan is held by a court of competent jurisdiction to be illegal, invalid, void or unenforceable, such provision shall be deemed modified, amended and narrowed to the extent necessary to render such provision legal, valid and enforceable, and the other remaining provisions of the Plan shall not be affected but shall remain in full force and effect.

Section 8.05Headings and Subheadings. Headings and subheadings contained in the Plan are intended solely for convenience and no provision of the Plan is to be construed by reference to the heading or subheading of any section or paragraph.

Section 8.06Unfunded Obligations. The amounts to be paid to Participants under the Plan are unfunded obligations of the Company. The Company is not required to segregate any monies or other assets from its general funds with respect to these obligations. Participants shall not have any preference or security interest in any assets of the Company other than as a general unsecured creditor.

Section 8.07Successors. The Plan shall be binding upon any successor to the Company, its assets, its businesses or its interest (whether as a result of the occurrence of a Change of Control or otherwise), in the same manner and to the same extent that the Company would be obligated under the Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by the Plan, the Company shall require any successor to the Company to expressly assume the Plan in writing and honor the obligations of the Company hereunder, in the same manner and to the same extent that the Company would be required to perform if no succession had taken place. All payments and benefits that become due to a Participant under the Plan shall inure to the benefit of his or her heirs, assigns, designees or legal representatives.

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Section 8.08Transfer and Assignment. Neither a Participant nor any other person shall have any right to sell, assign, transfer, pledge, anticipate or otherwise encumber, transfer, hypothecate or convey any amounts payable under the Plan prior to the date that such amounts are paid, except that, in the case of a Participant’s death, such amounts shall be paid to the Participant’s beneficiaries.

Section 8.09Waiver. Any party’s failure to enforce any provision or provisions of the Plan shall not in any way be construed as a waiver of any such provision or provisions, nor prevent any party from thereafter enforcing each and every other provision of the Plan.

Section 8.10Governing Law. To the extent not pre-empted by federal law, the Plan shall be construed in accordance with and governed by the laws of the State of Delaware without regard to conflicts of law principles. Subject to Section 6.05, any action or proceeding to enforce the provisions of the Plan shall be brought only in a state or federal court located in the State of Delaware, New Castle County, and each party consents to the venue and jurisdiction of such court.

Section 8.11Clawback. Any amounts payable under the Plan are subject to any policy (whether in existence as of the Effective Date or later adopted) established by the Company providing for clawback or recovery of amounts that were paid to the Participant. The Company shall make any determination for clawback or recovery in its sole discretion and in accordance with any applicable law or regulation.

Section 8.12Withholding. The Company shall have the right to withhold from any amount payable hereunder any Federal, state and local taxes in order for the Company to satisfy any withholding tax obligation it may have under any applicable law or regulation.

Section 8.13Section 409A. The intent of the parties is that payments and benefits under this Plan be exempt from, or comply with, Section 409A of the Code, and accordingly, to the maximum extent permitted, this Plan shall be interpreted and administered to be in accordance therewith. Notwithstanding anything contained herein to the contrary, the Participant shall not be considered to have terminated employment with the Company for purposes of any payments under this Plan which are subject to Section 409A of the Code until the Participant would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A of the Code. Each amount to be paid or benefit to be provided under this Plan shall be construed as a separate identified payment for purposes of Section 409A of the Code, and any payments described in this Plan that are due within the “short term deferral period” as defined in Section 409A of the Code shall not be treated as deferred compensation unless applicable law requires otherwise. Without limiting the foregoing and notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Plan during the six (6)-month period immediately following a Participant’s separation from service shall instead be paid on the first business day after the date that is six (6) months following the Participant’s separation from service (or, if earlier, death). To the extent required to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts reimbursable to the Participant under this Plan shall be paid to the Participant on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in-kind benefits provided) during any one year may not effect amounts reimbursable or provided in any subsequent year. The Company makes no representation that any or all of the payments described in this Plan shall be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to any such payment. The Participant shall be solely responsible for the payment of any taxes and penalties incurred under Section 409A.

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EX-12.1

Exhibit 12.1

Computation of ratio of earnings to fixed charges (a)

(dollars in thousands)

	Year Ended December 31, 2016		Year Ended December 31, 2015			Nine Months Ended December 31, 2014		Year Ended March 31, 2014		Year Ended March 31, 2013		Year Ended March 31, 2012
Pre-tax income from continuing operations before adjustment for income or loss from equity investees	$	55,612	$	(99,418	)	$	12,776	$	48,661	$	47,728	$	39,406
Fixed charges	24,418		26,537			4,378		4,833		3,582		2,650
Total earnings available for fixed charges	$	80,030	$	(72,881	)	$	17,154	$	53,494	$	51,310	$	42,056
Fixed charges:
Interest component of rental payments	$	6,281	$	5,416		$	3,920	$	4,254	$	3,214	$	2,650
Interest expense	18,137		21,121			458		579		368		—
Total fixed charges	24,418		26,537			4,378		4,833		3,582		2,650
Ratio of earnings to fixed charges	3.28x		*			3.92x		11.06x		14.32x		15.87x

*Earnings for the year ended December 31, 2015 were inadequate to cover fixed charges by $46,344.

(a) The Advisory Board Company had no preferred equity securities outstanding and did not pay preferred dividends in any of the periods presented. Consequently, The Advisory Board Company’s ratio of earnings to combined fixed charges and preferred stock dividends for each of such periods is identical to The Advisory Board Company’s ratio of earnings to fixed charges as indicated above.

The Advisory Board Company computes its ratio of earnings to fixed charges by dividing pre-tax income (loss) from continuing operations, before adjustment for income or loss from equity investees, plus fixed charges and less capitalized interest, by fixed charges. Fixed charges consist of interest expense, including interest expense from amortized premiums, discounts and capitalized expenses related to indebtedness, and the estimated portion of rental expense deemed by The Advisory Board Company to be representative of the interest factor of rental payments under operating leases, which The Advisory Board Company estimates to be one-third of such payments.

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

The following is a list of subsidiaries of The Advisory Board Company.

Name	Jurisdiction of Organization
Advancement Services, Inc.	Virginia
ABCO International Holdings, LLC	Delaware
ABCO Advisory Services India Private Limited	India
Royall Acquisition Company	Delaware
Royall & Company	Virginia
Royall & Company Holding, Inc.	Delaware
The Advisory Board (Chile) SpA	Chile

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement Number 333-84422 on Form S-8 pertaining to The Advisory Board Company 1997 Stock-Based Incentive Compensation Plan, The Advisory Board Company 2001 Stock-Based Incentive Compensation Plan, The Advisory Board Company Directors’ Stock Plan, The Advisory Board Company Employee Stock Purchase Plan,

(2) Registration Statement Number 333-140757 on Form S-8 pertaining to The Advisory Board Company 2005 Stock Incentive Plan, The Advisory Board Company 2006 Stock Incentive Plan,

(3) Registration Statement Number 333-162032 on Form S-8 pertaining to The Advisory Board Company 2009 Stock Incentive Plan,

(4) Registration Statement Number 333-177006 on Form S-8 pertaining to The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan,

(5) Registration Statement Number 333-192270 on Form S-8 pertaining to The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan,

(6) Registration Statement Number 333-201608 on Form S-3 of The Advisory Board Company,

(7) Registration Statement Number 333-201982 on Form S-8 pertaining to The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees, and

(8) Registration Statement Number 333-204989 on Form S-8 pertaining to the The Advisory Board Company Amended and Restated 2009 Stock Incentive Plan;

of our reports dated March 15, 2017, with respect to the consolidated financial statements and schedule of The Advisory Board Company and subsidiaries and the effectiveness of internal control over financial reporting of The Advisory Board Company and subsidiaries, included in this Annual Report (Form 10-K) of The Advisory Board Company for the year ended December 31, 2016.

/s/ Ernst & Young LLP

McLean, VA

March 15, 2017

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8  (Nos. 333-204989, 333-201982, 333-192270, 333-177006, 333-162032, 333-140757, 333-84422) and Form S-3 (Nos. 333-201608) of The Advisory Board Company of our reportdated March 2, 2017 relating to the financial statements of Evolent Health, Inc., which appears in this Annual Report on Form 10‑K.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 15, 2017

EX-23.3

Exhibit 23.3

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8  (Nos. 333-204989, 333-201982, 333-192270, 333-177006, 333-162032, 333-140757, 333-84422) and Form S-3 (Nos. 333-201608) of The Advisory Board Company of our reportdated February 29, 2016 relating to the financial statements of Evolent Health LLC (Predecessor), which appears in this Annual Report on Form 10‑K.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 15, 2017

EX-23.4

Exhibit 23.4

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8  (Nos. 333-204989, 333-201982, 333-192270, 333-177006, 333-162032, 333-140757, 333-84422) and Form S-3 (Nos. 333-201608) of The Advisory Board Company of our reportdated March 2, 2017 relating to the financial statements of Evolent Health LLC (Successor), which appears in this Annual Report on Form 10‑K.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 15, 2017

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert W. Musslewhite, certify that:

1. I have reviewed this annual report on Form 10-K of The Advisory Board Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2017	/s/ Robert W. Musslewhite
	Robert W. Musslewhite
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael T. Kirshbaum, certify that:

1. I have reviewed this annual report on Form 10-K of The Advisory Board Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2017	/s/ Michael T. Kirshbaum
	Michael T. Kirshbaum
	Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

THE ADVISORY BOARD COMPANY

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in his capacity as an officer of The Advisory Board Company (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Annual Report on Form 10-K of the Company for the period ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert W. Musslewhite

Robert W. Musslewhite

Chief Executive Officer

March 15, 2017

/s/ Michael T. Kirshbaum

Michael T. Kirshbaum

Chief Financial Officer and Treasurer

March 15, 2017

EX-99.1

Evolent Health LLC

Consolidated Financial Statements

As of December 31, 2016 and 2015, and for the year ended December 31, 2016 and for the period from June 4, 2015 to December 31, 2015 (Successor Company) and for the period from January 1, 2015 to June 3, 2015 and for the year ended December 31, 2014 (Predecessor Company)

Evolent Health LLC

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Consolidated Statements of Changes in Members’ Equity and Redeemable Preferred Units	6
Notes to Consolidated Financial Statements	7

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Evolent Health LLC

In our opinion, the accompanying consolidated statements of operations, of changes in members’ equity and redeemable preferred units and of cash flows, for the period from January 1, 2015 to June 3, 2015 and for the year ended December 31, 2014 present fairly, in all material respects, the results of operations and cash flows of Evolent Health LLC (Predecessor) for the period from January 1, 2015 to June 3, 2015 and for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

February 29, 2016

1

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Evolent Health LLC

In our opinion, the accompanying consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, of changes in members’ equity and redeemable preferred units and of cash flows for the year ended December 31, 2016 and for the period from June 4, 2015 to December 31, 2015 present fairly, in all material respects, the financial position of Evolent Health LLC and its subsidiaries (Successor) as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the year ended December 31, 2016 and for the period from June 4, 2015 to December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 2, 2017

2

EVOLENT HEALTH LLC

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	Successor
	As of December 31,
	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	23,313	$	145,726
Restricted cash and restricted investments	34,416		4,703
Accounts receivable, net (amounts related to affiliates: 2016 - $8,258; 2015 - $10,185)	40,635		20,381
Prepaid expenses and other current assets (amounts related to affiliates: 2016 - $4,507; 2015 - $1,220)	11,011		4,208
Investments, at amortized cost	44,341		9,445
Total current assets	153,716		184,463
Restricted cash and restricted investments	6,000		1,582
Investments, at amortized cost	—		44,618
Investments in and advances to affiliate	2,159		—
Property and equipment, net	31,179		12,796
Prepaid expenses and other non-current assets	10,043		—
Intangible assets, net	258,923		163,152
Goodwill	613,253		608,903
Total assets	$	1,075,273	$	1,015,514
LIABILITIES AND MEMBERS’ EQUITY
Liabilities
Current liabilities:
Accounts payable (amounts related to affiliates: 2016 - $13,480; 2015 - $13,311)	$	43,892	$	16,699
Accrued liabilities (amounts related to affiliates: 2016 - $3,211; 2015 - $828)	29,160		6,047
Accrued compensation and employee benefits	38,394		21,925
Deferred revenue	20,481		14,835
Total current liabilities	131,927		59,506
Long-term debt, net of discount	9,160		—
Other long-term liabilities	14,655		111
Total liabilities	155,742		59,617
Commitments and Contingencies (See Note 9)
Members' Equity
Class A common units - Unlimited units authorized as of December 31, 2016 and 2015;
52,586,899 and 41,491,498 units issued and outstanding as of December 31, 2016 and 2015, respectively	709,943		670,659
Class B common units - 100,000,000 units authorized as of December 31, 2016 and 2015;
15,346,981 and 17,524,596 units issued and outstanding as of December 31, 2016 and 2015, respectively	209,588		285,238
Total members' equity	919,531		955,897
Total liabilities and members' equity	$	1,075,273	$	1,015,514

See accompanying Notes to Consolidated Financial Statements

3

EVOLENT HEALTH LLC

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

	Successor						Predecessor
	For the year ended			For the period			For the period			For the year ended
	December 31,			June 4, 2015 -			January 1, 2015			December 31,
	2016			December 31, 2015			- June 3, 2015			2014
Revenue
Transformation (1)	$	38,320		$	19,906		$	15,755		$	36,289
Platform and operations (1)	215,868			76,972			46,059			64,599
Total revenue	254,188			96,878			61,814			100,888
Expenses
Cost of revenue (exclusive of depreciation and amortization
expenses presented separately below) (1)	155,177			57,398			44,839			73,122
Selling, general and administrative expenses (1)	160,692			75,286			58,457			76,521
Depreciation and amortization expenses	17,224			7,166			2,637			3,694
Goodwill impairment	160,600			—			—			—
(Gain) loss on change in fair value of contingent consideration	(2,086		)	—			—			—
Total operating expenses	491,607			139,850			105,933			153,337
Operating income (loss)	(237,419		)	(42,972		)	(44,119		)	(52,449		)
Interest income (expense), net	723			293			38			195
Other income (expense), net	4			—			2			(9		)
Income (loss) from affiliate	(841		)	—			—			—
Net income (loss)	$	(237,533	)	$	(42,679	)	$	(44,079	)	$	(52,263	)

(1) Amounts related to affiliates included above are as follows (see Note 15):
Revenue
Transformation	$	482	$	940	$	828	$	8,930
Platform and operations	34,267		23,642		22,275		28,847
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses)	22,207		14,050		10,812		14,488
Selling, general and administrative expenses	2,027		1,542		1,701		227

See accompanying Notes to Consolidated Financial Statements

4

EVOLENT HEALTH LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Successor						Predecessor
	For the year ended			For the period			For the period			For the year ended
	December 31,			June 4, 2015 -			January 1, 2015 -			December 31,
	2016			December 31, 2015			June 3, 2015			2014
Cash Flows from Operating Activities
Net income (loss)	$	(237,533	)	$	(42,679	)	$	(44,079	)	$	(52,263	)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Gain on change in fair value of contingent liability	(2,086		)	—			—			—
Loss from lease abandonment	6,456			—			—			—
(Income) loss from affiliate	841			—			—			—
Depreciation and amortization expenses	17,224			7,166			2,637			3,694
Goodwill impairment	160,600			—			—			—
Stock-based compensation expense	18,604			14,730			21,738			11,091
Acceleration of unvested equity awards for Valence employees	3,897
Other	802			157			(79		)	48
Changes in assets and liabilities, net of acquisitions:
Accounts receivables, net	(11,044		)	11,756			(22,660		)	1,043
Prepaid expenses and other current assets	(9,968		)	(2,036		)	(103		)	(405		)
Other non-current assets	—			—			—			1,751
Accounts payable	(6,371		)	2,764			5,999			5,547
Accrued liabilities	16,197			(3,788		)	7,494			392
Accrued compensation and employee benefits	6,664			11,402			(4,936		)	7,468
Deferred revenue	1,200			(17,998		)	14,490			6,882
Other current liabilities	—			(56		)	(395		)	217
Other long-term liabilities	(153		)	114			—			2,414
Net cash provided by (used in) operating activities	(34,670		)	(18,468		)	(19,894		)	(12,121		)
Cash Flows from Investing Activities
Cash paid for parent company contribution of assets	(82,560		)	—			—			—
Purchases of investments	—			(54,234		)	8,240			(56,169		)
Investments in and advances to affiliates	(3,000		)	—			—			—
Maturities and sales of investments	9,379			4,000			14,350			32,000
Purchases of property and equipment	(15,526		)	(6,515		)	(4,337		)	(11,034		)
Change in restricted cash and restricted investments	(6,090		)	—			—			(3,576		)
Net cash provided by (used in) investing activities	(97,797		)	(56,749		)	18,253			(38,779		)
Cash Flows from Financing Activities
Proceeds from sale of Class A units to parent	—			209,087			—			47
Proceeds from issuance of Class A units to parent upon
exercise of stock options	1,259			152			—			—
Proceeds from issuance of Series B-1 preferred units, net	—			—			—			961
Proceeds from issuance of 2021 Mirror Notes, net of issuance costs	9,160			—			—			—
Payments of deferred offering costs	—			(1,361		)	(428		)	(1,365		)
Purchase of Series A preferred units	—			—			—			(1,500		)
Taxes withheld for vesting of restricted stock units	(365		)	—			—			—
Net cash provided by (used in) financing activities	10,054			207,878			(428		)	(1,857		)
Net increase (decrease) in cash and cash equivalents	(122,413		)	132,661			(2,069		)	(52,757		)
Cash and cash equivalents as of beginning-of-period	145,726			13,065			15,134			67,891
Cash and cash equivalents as of end-of-period	$	23,313		$	145,726		$	13,065		$	15,134
Supplemental Disclosure of Non-cash Investing and Financing Activity
Non-cash transfer of deferred offering costs to members’ equity	$	—		$	3,154		$	—		$	—
Non-cash issuance of Class A common units	177,805			—			—			—
Non-cash transfer from prepaid expenses to deferred offering costs	—						300
Accrued deferred offering costs	—			—			1,361			196
Non-cash Valence tax withholdings	1,148
Non-cash deferred financing costs payable	1,036
Non-cash contribution of common stock to Evolent Health LLC
prior to the Offering Reorganization	—			—			21,810			—
Accrued property and equipment purchases	446			—			—			96
Non-cash issuance of series B-1 preferred units	—			—			—			593
Non-cash settlement of accounts payable through issuance of
Class A common units	—			—			—			279
Effects of the Secondary Offering
Decrease in Class B common units as a result of the Secondary Exchange	28,220			—			—			—

See accompanying Notes to Consolidated Financial Statements

5

EVOLENT HEALTH LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY AND REDEEMABLE PREFERRED UNITS

(in thousands)

	Redeemable Preferred Units									Total
									Redeemable				Series A				Series B				Class A					Class B non-voting					Total
	Series B				Series B-1				Preferred				Preferred Units				Preferred Units				Common Units					Common Units					Members’
Predecessor	Units	Amount			Units	Amount				Units			Units		Amount		Units	Amount			Units		Amount			Units		Amount			Interests
Balance as of December 31, 2013	14,368	$	38,251		—	$	—			$	38,251		15,600		$	—	11,676	$	31,044		3,824		$	—		—		$	—		$	31,044
Stock-based compensation expense	—	—			—	—				—			—		—		—	—			—		11,091			—		—			11,091
Repurchase of preferred units	—	(828		)	—	—				(828		)	(300	)	—		—	(672		)	—		—			—		—			(672		)
Issuance of Series B-1 preferred
units, net of expenses	—	—			360	1,554				1,554			—		—		—	—			—		—			—		—			—
Forfeiture of restricted stock	—	—			—	—				—			—		—		—	—			(48	)	—			—		—			—
Issuance of common units
to Evolent Health Holdings Inc.	—	—			—	—				—			—		—		—	—			12		47			—		—			47
Non-cash issuance of common units
to Evolent Health Holdings Inc.	—	—			—	—				—			—		—		—	—			260		279			—		—			279
Net income (loss)		(21,689		)		(1,554		)		(23,243		)	—		—		—	(17,603		)	—		(11,417		)	—		—			(29,020		)
Balance as of December 31, 2014	14,368	15,734			360	—				15,734			15,300		—		11,676	12,769			4,048		—			—		—			12,769
Stock-based compensation expense	—	—			—	—				—			—		—		—	—			—		21,810			—		—			21,810
Net income (loss)	—	(12,293		)	—	—				(12,293		)	—		—		—	(9,976		)	—		(21,810		)	—		—			(31,786		)
Balance as of June 3, 2015	14,368	3,441			360	—				3,441			15,300		—		11,676	2,793			4,048		—			—		—			2,793
Successor
Opening members’ equity as a result
of the Offering Reorganization	—	—			—	—				—			—		—		—	—			28,227		479,843			17,525		297,918			777,761
Issuance of Class A common units
to Evolent Health, Inc.	—	—			—	—				—			—		—		—	—			13,225		205,933			—		—			205,933
Stock-based compensation expense	—	—			—	—				—			—		—		—	—			—		14,730			—		—			14,730
Issuance of common units to Evolent
Health, Inc. for equity exercise	—	—			—	—				—			—		—		—	—			39		152			—		—			152
Net income (loss) subsequent to the
Offering Reorganization	—	—			—	—				—			—		—		—	—			—		(29,999		)	—		(12,680		)	(42,679		)
Balance as of December 31, 2015	—	—			—	—				—			—		—		—	—			41,491		670,659			17,525		285,238			955,897
Cumulative-effect adjustment from
adoption of new accounting principle	—	—			—	—				—			—		—		—	—			—		139			—		(139		)	—
Stock-based compensation expense	—	—			—	—				—			—		—		—	—			—		16,147			—		—			16,147
Acceleration of unvested equity awards
for Valence Health employees	—	—			—	—				—			—		—		—	—			162		3,897			—		—			3,897
Issuance of common units to Evolent
Health, Inc. for equity exercise	—	—			—	—				—			—		—		—	—			221		1,259			—		—			1,259
Issuance of common units to Evolent
Health, Inc. for vesting of equity awards	—	—			—	—				—			—		—		—	—			84		2,193			—		—			2,193
Exchange of Class B common units	—	—			—	—				—			—		—		—	—			2,178		28,220			(2,178	)	(28,220		)	—
Issuance of common units to Evolent
Health Inc. for business combinations	—	—			—	—				—			—		—		—	—			8,451		177,667			—		—			177,667
Change in membership interest as a result
of business combinations	—	—			—	—				—			—		—		—	—			—		(19,745		)	—		19,745			—
Net income (loss)	—	—			—	—				—			—		—		—	—			—		(170,493		)	—		(67,036		)	(237,529		)
Balance as of December 31, 2016	—	$	—		—	$	—			$	—		—		$	—	—	$	—		52,587		$	709,943		15,347		$	209,588		$	919,531

See accompanying Notes to Consolidated Financial Statements

6

EVOLENT HEALTH LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Evolent Health LLC (“Evolent” or the “Company” which also may be referred to as “we,” “our” or “us”) is a managed services firm that supports leading health systems and physician organizations in their migration toward value-based care and population health management. The Company’s services include providing our customers, who we refer to as partners, with a population management platform, integrated data and analytics capabilities, pharmacy benefit management (“PBM”) services and comprehensive health plan administration services. Together these services enable health systems to manage patient health in a more cost-effective manner. The Company’s contracts are structured as a combination of advisory fees, monthly member service fees, percentage of plan premiums and shared medical savings arrangements. The Company’s headquarters is located in Arlington, Virginia.

The Company was originally organized as a “C” corporation in August 2011 (as Evolent Health, Inc.) and was capitalized through contributions of cash and intangible assets in exchange for preferred stock. At the time of the formation, the founding investors, The Advisory Board Company (“The Advisory Board”) and University of Pittsburgh Medical Center (“UPMC”), each contributed $10.0 million in cash to the Company. In addition, UPMC contributed a $3.0 million software license for use and resale by Evolent Health, Inc. as part of its service offerings. Each party also contributed various other items, such as a business plan, and entered into various agreements with Evolent Health, Inc., such as reseller agreements. Each of these other contributions were determined to have no material value at the date of contribution and the agreements reflected terms consistent with a marketplace participant.

On September 23, 2013, the Company undertook a reorganization (the “Series B Reorganization”) in which Evolent Health Holdings, Inc. (“Evolent Health Holdings”) was formed and the existing company (our predecessor, the former Evolent Health, Inc., or “Evolent, Inc.”) converted into a limited liability company. Following the conversion of Evolent, Inc. into a limited liability company, the Company completed the issuance of $100.0 million of series B preferred units to new and existing investors. Certain rights and preferences related to the series B preferred units were set forth in the Company’s operating agreement and a master investors’ rights agreement (“MIRA”) among the investors.

Initial Public Offering of Evolent Health, Inc. and Offering Reorganization

On June 4, 2015, Evolent Health LLC and our parent, Evolent Health Holdings, undertook a reorganization (the “Offering Reorganization”) in connection with the initial public offering (“IPO”) of Evolent Health, Inc. These transactions are discussed in detail in Note 4. In connection with the Offering Reorganization, the Company amended and restated its operating agreement to, among other things, establish two classes of equity (voting Class A common units and non-voting Class B common units).

Subsequent to the Offering Reorganization and IPO, the pre-Offering Reorganization members of the Company (other than Evolent Health, Inc.) held 100% of our Class B common units and Evolent Health, Inc. holds 100% of our Class A common units. The Company’s Class B common units can be exchanged (together with a corresponding number of shares of Evolent Health, Inc.’s Class B common stock) for one share of Evolent Health, Inc.’s Class A common stock. Subsequent to the Offering Reorganization, IPO of Evolent Health, Inc., secondary offering (as described below) and transactions completed in 2016 (as described in Note 4), as of December 31, 2016, Evolent Health, Inc. owned 77.4% of Evolent Health LLC, holds 100% of the voting rights in the Company, is the sole managing member of the Company and, therefore, controls the operations of the Company. Evolent Health, Inc. consolidates the results of the Company subsequent to the date of the Offering Reorganization.

Secondary Offering

In September 2016, Evolent Health, Inc. completed a secondary offering of 8.6 million shares of its Class A common stock at a public offering price of $22.50 per share. The shares sold in the offering were sold by certain affiliates of TPG Global, LLC (“TPG”), The Advisory Board, UPMC, Ptolemy Capital, LLC (together, the “Investor Stockholders”) and certain management selling stockholders (together with the Investor Stockholders, the “Selling Stockholders”). Evolent Health, Inc. did not receive any proceeds from the sale of the shares.

The shares sold in the offering consisted of 6.4 million existing shares of Evolent Health, Inc.’s Class A common stock owned and held by the Selling Stockholders and 2.2 million newly-issued shares of Evolent Health, Inc.’s Class A common stock received by certain Investor Stockholders pursuant to the exercise of an existing exchange right.

The newly-issued shares of Evolent Health, Inc.’s Class A common stock were issued to certain Investor Stockholders in exchange (the “Exchange”) for an equal number of shares of Evolent Health, Inc.’s Class B common stock (which were subsequently canceled) and an equal number of Evolent Health LLC’s Class B common units (“Class B units”). Class B units received by Evolent Health, Inc. from relevant Investor Stockholders were simultaneously exchanged for an equivalent number of Class A units of Evolent Health LLC, and Evolent Health LLC canceled the Class B units it received in the Exchange.

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As a result of the Exchange and the Company’s cancellation of the Class B units, Evolent Health Inc.’s economic interest in the Company increased from 71.0% to 74.6% immediately following the Exchange. Evolent Health, Inc.’s economic interest in the Company will increase if further exchanges occur.

Since its inception, the Company has incurred losses from operations. As of December 31, 2016, the Company had cash and cash equivalents of $23.3 million. In addition, the Company received proceeds of approximately $110.2 million in connection with the 2021 Mirror Notes (as defined below) during the first quarter of 2017. The Company believes it has sufficient liquidity for the next twelve months as of the date the financial statements were available to be issued.

2. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principle

Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”). Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized below.

As discussed in Note 4, amounts for the period January 1, 2015, through June 3, 2015, and for the year ended December 31, 2014, presented in our consolidated financial statements and notes to consolidated financial statements represent the historical operations of the Company prior to the Offering Reorganization and the application of pushdown accounting related to the Offering Reorganization. The amounts as of December 31, 2016 and 2015, and for the year ended December 31, 2016, and for the period from June 4, 2015, through December 31, 2015, include the effects of pushdown accounting and have been separated by a black line in our consolidated financial statements to highlight the lack of comparability between the periods.

Summary of Significant Accounting Policies

Accounting Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. In the accompanying consolidated financial statements, estimates are used for, but not limited to, the valuation of assets, liabilities, consideration related to business combinations and step acquisitions, revenue recognition including discounts and credits, estimated selling prices for deliverables in multiple element arrangements, contingent payments, allowance for doubtful accounts, depreciable lives of assets, impairment of long lived assets (including equity method investments), stock-based compensation, contingent liabilities, valuation of intangible assets (including goodwill) and the useful lives of intangible assets.

Principles of Consolidation

The consolidated financial statements include the accounts of Evolent Health LLC and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.

Comprehensive Income

No elements of comprehensive income were present for any periods presented.

Application of Pushdown Accounting

Pushdown accounting means establishing a new basis for the assets and liabilities of an acquired company based on a “pushdown” of the acquirer’s stepped-up basis to the acquired company in connection with a change-in-control event. We elected to apply pushdown accounting in the reporting period in which the Offering Reorganization change-in-control event occurred, specifically the second quarter of 2015. The decision to apply pushdown accounting is irrevocable. Our election of pushdown accounting required us to record the new basis of accounting established by our acquirer, Evolent Health, Inc., for the individual assets and liabilities of our Company. Goodwill was calculated and recognized by us consistent with business combination accounting as further described in Note 4, resulting in the pushdown of $608.9 million in goodwill.

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Fair Value Measurement

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. Our Consolidated Balance Sheets include various financial instruments (primarily cash not held in money-market funds, restricted cash, accounts receivable, accounts payable, accrued expenses, deferred revenue and other liabilities) that are carried at cost and that approximate fair value.

See Note 14 for further discussion regarding fair value measurement.

Cash and Cash Equivalents

We consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company holds materially all of our cash in bank deposits with FDIC participating banks, at cost, which approximates fair value. Cash and cash equivalents held in money market funds are carried at fair value, which approximates cost.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments are carried at cost and include cash and investments used to collateralize various contractual obligations (in thousands) as follows:

	As of December 31,
	2016		2015
Collateral for letters of credit
for facility leases (1)	$	4,852	$	3,710
Collateral with financial institutions (2)	4,950		—
Pharmacy benefit management
and claims processing services (3)	30,555		2,479
Other	59		96
Total restricted cash
and restricted investments	40,416		6,285
Non-current restricted investments (2)	4,950		—
Non-current restricted cash (1)	1,050		1,582
Total non-current restricted cash
and restricted investments	6,000		1,582
Current restricted cash
and restricted investments	$	34,416	$	4,703

⁽¹⁾ Represents restricted cash of approximately $4.9 million related to collateral for letters of credit required in conjunction with lease agreements. See Note 9 for further discussion of our lease commitments.

⁽²⁾ Represents collateral for letters of credit held with financial institutions for risk-sharing arrangements. The collateral amount is invested in restricted certificates of deposit with original maturities in excess of 12 months. The restricted investments are classified as held-to-maturity and stated at cost. Fair value of the certificates of deposit is determined using Level 2 inputs and approximates cost as of December 31, 2016. See Note 9 for further discussion of our risk-sharing arrangements.

⁽³⁾ Represents cash held on behalf of clients to process PBM and other claims. Approximately $27.0 million of the amount in this category is related to a new client relationship established during 2016.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded when amounts are contractually billable under our customer contracts and are recorded at the invoiced amount and do not bear interest. The Company’s contracts typically include installment payments that do not necessarily correlate to the pattern of revenue recognition. In assessing the valuation of the allowance for doubtful accounts, management reviews the collectability of accounts receivable on an individual account basis. The allowance is adjusted periodically based on management’s determination of collectability, and any accounts that are determined to be uncollectible are written off against the allowance. The Company did not record an allowance for doubtful accounts in 2016 or 2015, as all amounts were determined to be collectible.

Due to the timing of invoicing, the Company had recorded unbilled receivables of $1.8 million and $0.1 million as of December 31, 2016 and 2015, respectively. Unbilled receivables are considered short-term and generally invoiced subsequent to the month the services are

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provided. While terms vary by contract, payment for services is typically contractually linked to the provision of specified services, with the timing of invoicing occurring in advance or subsequent to the services period. 

Property and Equipment, Net

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. The following summarizes the estimated useful lives by asset classification:

Computer hardware	3 years
Furniture and equipment	3 years
Internal-use software development costs	7 years
Leasehold improvements	Shorter of useful life or remaining lease term

When an item is sold or retired, the cost and related accumulated depreciation or amortization is eliminated and the resulting gain or loss, if any, is recorded in our Consolidated Statements of Operations.

We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset group is not recoverable and exceeds fair value. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset group exceeds its fair value.

Software Development Costs

The Company capitalizes the cost of developing internal-use software, consisting primarily of personnel and related expenses (including stock-based compensation and employee taxes and benefits) for employees and third parties who devote time to their respective projects. Internal-use software costs are capitalized during the application development stage – when the research stage is complete and management has committed to a project to develop software that will be used for its intended purpose and any costs incurred during subsequent efforts to significantly upgrade and enhance the functionality of the software are also capitalized. Capitalized software costs are included in property and equipment, net on our Consolidated Balance Sheets. Amortization of internal-use software costs are recorded on a straight-line basis over their estimated useful life and begin once the project is substantially complete and the software is ready for its intended purpose.

Research and Development Costs

Research and development costs consist primarily of personnel and related expenses (including stock-based compensation) for employees engaged in research and development activities as well as third party fees. All such costs are expensed as incurred. We focus our research and development efforts on activities that support our technology infrastructure, clinical program development, data analytics and network development capabilities. Research and development costs are recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and were $11.1 million, $3.6 million, $5.8 million and $4.0 million for the year ended December 31, 2016, for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively.

Goodwill

Goodwill results from (i) recognizing the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired, (ii) the application of push-down accounting, and (iii) the application of intercompany contribution of assets from our parent. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at our single reporting unit level, which is consistent with the way management evaluates our business. Acquisitions to date have been complementary to the Company’s core business, and therefore goodwill is assigned to our single reporting unit to reflect the synergies arising from each business combination.

We perform a two-step test in our evaluation of the carrying value of goodwill, if qualitative factors determine it is necessary to complete the two-step goodwill impairment test. In Step 1 of the evaluation, the fair value is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable, and Step 2 is not required. If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist, and Step 2 is required. In Step 2, the implied fair value of goodwill is determined. The fair value as determined in Step 1 is assigned to all of its net assets (recognized and unrecognized) as if the entity was acquired in a business combination as of the date of the impairment test. If the

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implied fair value of goodwill is lower than its carrying amount, goodwill is impaired and written down to its fair value; and a charge is reported in impairment of goodwill on our Consolidated Statements of Operations. See Note 7 for additional discussion regarding the goodwill impairment tests conducted during 2016 and 2015.

Intangible Assets, Net

As noted above, on June 4, 2015, the Company completed the Offering Reorganization, following which Evolent Health, Inc. was required to remeasure our assets and liabilities at fair value, which resulted in the recording of certain intangible assets. The Company was contributed by its parent and acquired additional intangible assets in conjunction with strategic transactions made during2016. Information regarding the determination and allocation of the fair value of the acquired assets and liabilities are further described within Note4.

Identified intangible assets are recorded at their estimated fair values at the date of acquisition or contribution and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. The following summarizes the estimated useful lives by asset classification:

Corporate trade name	20 years
Customer relationships	15-25 years
Technology	5-7 years

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group exceed the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value. See Note 7 for additional discussion regarding our intangible assets.

Long-term Debt

As discussed in Note 8, Evolent Health, Inc. issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”) in a private placement in December 2016. Subsequent to the issuance of the 2021 Notes, Evolent Health, Inc. entered into a mirror agreement with Evolent Health LLC and committed to loan the proceeds to the Company under the same terms as the 2021 Notes (the “2021 Mirror Notes”). As of December 31, 2016, the Company had received $10.0 million from Evolent Health, Inc. in connection with the 2021 Mirror Notes.

The 2021 Mirror Notes are carried at cost, net of deferred financing costs. The deferred financing costs will be amortized to non-cash interest expense using the straight line method over the contractual term of the 2021 Mirror Notes, since this method was not materially different from the effective interest rate method. Cash interest payments are due semi-annually in arrears - on June 1 and December 1 each year, starting on June 1, 2017. We will accrue interest expense monthly based on the annual coupon rate of 2.00%. The 2021 Mirror Notes have embedded conversion options and contingent interest provisions.

Leases

The Company leases all of its office space and enters into various other operating lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement to determine whether the lease is an operating or capital lease. The operating lease agreements may contain tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, the Company records a deferred rent asset or liability on our Consolidated Balance Sheets equal to the difference between the rent expense and future minimum lease payments due. The rent expense related to these items is recognized on a straight-line basis in the Consolidated Statements of Operations over the terms of the leases. In addition, the Company has entered into sublease agreements for some of its leased office space. Total rental income attributable to the subleases is offset against rent expense recorded in the Consolidated Statements of Operations over the terms of the leases. As of December 31, 2016 and 2015, the Company had not entered into any capital leases.

The Company is subject to non-cancellable leases for offices or portions of offices for which use might cease, resulting in a lease abandonment. When a lease abandonment is determined to have occurred, the present value of the future lease payments, net of estimated sublease payments, along with any unamortized tenant improvement costs, are recognized as lease abandonment expense in the Company’s Consolidated Statements of Operations with a corresponding liability in the Company’s Consolidated Balance Sheets. See Note 9 for discussion of the lease abandonment.

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Impairment of Equity Method Investments

The Company considers potential impairment triggers for its equity method investments, and the equity method investments will be written down to fair value if there is evidence of a loss in value which is other-than-temporary. The Company may estimate the fair value of its equity method investments by considering recent investee equity transactions, discounted cash flow analyses, and recent operating results. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether other-than-temporary impairment has occurred. The estimation of fair value and whether other-than-temporary impairment has occurred requires the application of significant judgment and future results may vary from current assumptions. There was no such impairment for the year ended December 31, 2016. The Company had no equity method investments in 2015 or 2014.

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of providing the requisite services or other instances where the revenue recognition criteria have not been met. Amounts deferred that are not anticipated to be recognized as revenue within a year of the balance sheet date are reported as long-term deferred liabilities.

Revenue Recognition

Revenue from the Company’s services is recognized when there is persuasive evidence of an arrangement, performance or delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.

At times, the Company enters into contracts that contain multiple deliverables and we evaluate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (i) if the delivered item has value to the customer on a standalone basis, and (ii) if the contract includes a general right of return relative to the delivered item, and delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor. Revenue is then allocated to the units of accounting based on an estimate of each unit’s relative selling price.

Revenue Recognition - Transformation

Transformation contracts consist of strategic assessments, or blueprint contracts, and implementation contracts. Based on the strategic assessment generated in a blueprint contract, a customer may decide to move forward with a population health or health plan strategy; in these cases, the customer enters into an implementation contract in which the Company provides services related to the launch of this strategy. 

The Company recognizes revenue associated with transformation contracts based on a proportionate performance method, where revenue is recognized each period in proportion to the amount of the contract completed during that period. Contract completion is measured using output measures as best estimated by labor hours incurred compared to the total estimated labor hours necessary to complete our performance obligations contained in the contract. 

Revenue Recognition - Platform and Operations

After the transformation phase, the Company often enters into a multi-year service contract with its customers where various population health, health plan operations, third-party health plan and PBM services are provided on an ongoing basis to the members of the customers’ plans typically in exchange for a monthly service fee, per member per month (“PMPM”) fee or a percentage of plan premiums.  Revenue from these contracts is recognized in the month in which the services are delivered.  In certain arrangements, there is a contingent portion of our service fee including meeting service level targets, sharing in rebates, shared medical savings arrangements based on financial performance and other performance measures. The Company continuously monitors its compliance with these arrangements and recognizes revenue when the amount is estimable and there is evidence to support meeting the criteria.

Credits and Discounts

We also provide credits and discounts to our customers often based on achieving certain volume commitments or other criteria. Credits are assessed to determine whether they reflect significant and incremental discounts. If the discounts are significant, the Company allocates them between the contract deliverables or future purchases as appropriate. If the future credit expires unused, it is recognized as revenue at that time.

Stock-based Compensation

Evolent Health, Inc. sponsors a stock-based incentive plan that provides for the issuance of stock-based awards to employees and non-employee directors of Evolent Health, Inc. or its consolidated subsidiaries, including Evolent Health LLC. For each equity award granted by Evolent Health, Inc., the Company is contractually required to issue a corresponding amount and class of membership

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equity to Evolent Health, Inc. in accordance with the Company’s Third Amended and Restated Operating Agreement. The stock-based awards generally vest over a four year period and expire ten years from the date of grant.

We expense the fair value of stock-based awards included in our incentive compensation plans. Fair value of stock options is determined using a Black-Scholes options valuation methodology. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, on a straight-line basis and is recognized as an increase to members’ equity. Stock-based compensation expense is reflected in “Cost of revenue” and “Selling, general and administrative expenses” in our Consolidated Statements of Operations. Additionally we capitalize personnel expenses attributable to the development of internal-use software, which include stock-based compensation costs. We adopted ASU 2016-09 during 2016, which allows us to recognize share-based award forfeitures as they occur rather than applying an estimated forfeiture rate. See “Change in Accounting Principal” below for further discussion of the adoption of ASU 2016-09.

Subsequent to the Series B Reorganization in 2013, stock-based awards were granted in the stock of the Company’s equity-method investor to employees of Evolent Health LLC. As such, we were required to use a “non-employee” model for recognizing stock-based compensation, which required the awards to be marked-to-market through net income at the end of each reporting period until vesting occurred. Subsequent to the Offering Reorganization described in Note 4, the results of Evolent Health LLC are consolidated by Evolent Health, Inc.; therefore, compensation costs are recognized using an “employee” model. Under the “employee” model, we no longer mark the awards to market at the end of each reporting period.

Income Taxes

On September 23, 2013, the Company underwent a legal entity and tax restructuring pursuant to which the Company’s federal and state income tax status and classification changed from a “C” corporation, subject to federal and state income taxes, to a partnership whereby the Company’s members (and not the Company itself) are responsible for reporting income or loss based on such member’s respective share of the Company’s income and expenses as reported for tax purposes. As a result of this restructuring, the Company is no longer subject to income tax.

Operating Segments

Operating segments are defined as components of a business that earn revenue and incur expenses for which discrete financial information is available that is evaluated, on a regular basis, by the chief operating decision maker (“CODM”) to decide how to allocate resources and assess performance. The Company’s CODM, the Chief Executive Officer, allocates resources at a consolidated level and therefore the Company views its operations and manages its business as one operating segment. All of the Company’s revenue is generated in the United States and all assets are located in the United States.

Change in Accounting Principle

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company elected to early adopt ASU 2016-09 effective January 1, 2016. There was no material impact to member equity on January 1, 2016.

3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards by requiring an assessment for a period of one year after the date that the financial statements are issued. Further, based on certain conditions and circumstances, additional disclosures may be required. This standard is effective beginning with the first annual period ending after December 15, 2016, and for all annual and interim periods thereafter. The Company adopted ASU 2014-15 during 2016. The adoption did not have a material impact on the Company’s financial statements as management has not identified any conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern for one year after the date the consolidated financial statements were available to be issued.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The purpose of the update was to simplify the presentation of debt issuance costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company

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adopted ASU 2015-03 during 2016. As a result of the adoption, we recorded the $125.0 million private placement of the 2021 Mirror Notes as a long-term liability, net of deferred offering costs of $4.8 million. The deferred offering costs will be amortized into the principal note balance over the term of the 2021 Mirror Notes. Refer to Note 8 for further discussion of the 2021 Mirror Notes.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted for any interim or annual period. The Company elected to early adopt this ASU during 2016, as described in Note 2 above.

Future Adoption of New Accounting Standards

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other - Simplifying the Test for Goodwill Impairment. The purpose of the ASU is to simplify the subsequent measurement of goodwill. The ASU eliminates Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We anticipate this ASU may have a material impact on our consolidated financial statements if a future goodwill impairment test does not pass the Step 1 evaluation. We intend to early adopt the requirements of this standard for our annual and/or interim goodwill impairment tests for our fiscal year beginning January 1, 2017.

In January 2017, the FASB issued ASU 2017-01, Business Combinations - Clarifying the Definition of a Business. The purpose of the ASU is to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU provides a screen to determine when an integrated set of assets and activities is not a business. The ASU also provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. We intend to adopt the requirements of this standard effective January 1, 2018, and are currently evaluating the impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. The purpose of the ASU is to reduce diversity in practice regarding the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in the ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. We intend to adopt the requirements of this standard effective January 1, 2018, and are currently evaluating the impact of the adoption on our Consolidated Statements of Cash Flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This ASU provides updated guidance on eight specific cash flow issues to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We intend to adopt the requirements of this standard effective January 1, 2018, and are currently evaluating the impact of the adoption on our Consolidated Statements of Cash Flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. With respect to assets measured at amortized cost, such as held-to-maturity assets, the update requires presentation of the amortized cost net of a credit loss allowance. The update eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses as opposed to the previous standard, when an entity only considered past events and current conditions. With respect to available for sale debt securities, the update requires that credit losses be presented as an allowance rather than as a write-down. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We intend to adopt the requirements of this standard effective January 1, 2020 and are currently evaluating the impact of the adoption on our financial condition and results of operations.

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In February 2016, the FASB issued ASU 2016-02, Leases, in order to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases.This update introduces a new standard on accounting for leases, including a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. We intend to adopt the requirements of this standard effective January 1, 2019, and are currently evaluating the impact of the adoption on our financial condition and results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, in order to clarify the principles of recognizing revenue. This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation. By completing all five steps of the process, the core principles of revenue recognition will be achieved. In March 2016, the FASB issued an update to the new revenue standard (ASU 2014-09) in the form of ASU 2016-08, which amended the principal-versus-agent implementation guidance and illustrations in the new revenue guidance. The update clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued another update to the new revenue standard in the form of ASU 2016-10, which amended the guidance on identifying performance obligations and the implementation guidance on licensing. These ASUs were followed by two further updates issued during May 2016, including ASU 2016-11, which rescinds certain SEC guidance, such as the adoption of ASUs 2014-09 and 2014-16, including accounting for consideration given by a vendor to a customer, and ASU 2016-12, which is intended to clarify the objective of the collectability criterion while identifying the contract(s) with a customer. The new revenue standard (including updates) will be effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. We intend to adopt the requirements of this standard effective January 1, 2018, and while we are evaluating the impact to our financial condition and results of operations, we expect the adoption of this ASU to require the inclusion of additional disclosures surrounding the nature and timing of our revenue. In our efforts to adopt this ASU, we have formulated an implementation team and begun the evaluation process. We have evaluated a number of our contracts and at this point there is no clear indication regarding overall impact to our consolidated financial statements. We intend to complete the process during 2017, and until we have a clear indication of the impact of the adoption of the new standard we will not finalize our implementation method.

We have evaluated all other issued and unadopted ASUs and believe the adoption of these standards will not have a material impact on our results of operations, financial position, or cash flows.

4. Transactions

Aldera

On November 1, 2016, Evolent Health, Inc. completed the acquisition of Aldera Holdings, Inc. (“Aldera”) and acquired 100% of the voting equity interests. Aldera is the primary software provider for the Valence Health (as defined below) third party administration (“TPA”) platform. The acquisition provides control over a key vendor for Valence Health’s TPA services. The merger consideration, net of certain closing and post-closing adjustments, was $34.3 million based on the closing price of Evolent Health, Inc.’s Class A common stock on the New York Stock Exchange on November 1, 2016, and consisted of approximately 0.5 million shares of Evolent Health Inc.’s Class A common stock, $17.5 million in cash and $7.0 million related to the settlement of a prepaid software license.

Prior to the acquisition of Aldera, Evolent Health, Inc. entered into a perpetual license agreement for development rights and use of Aldera proprietary software for $7.0 million. Upon closing the acquisition of Aldera, it was concluded that the $7.0 million prepaid asset recorded by Evolent Health, Inc. and the deferred revenue balance recorded by Aldera for the perpetual software license should be assessed as a prepayment for a software license that was effectively settled upon acquisition and is eliminated in the post-combination consolidated financial statements. No gain or loss was recognized on settlement as management determined the $7.0 million license fee to be priced at fair value and the license agreement did not include a settlement provision. Evolent Health, Inc. increased the consideration transferred for the acquisition of Aldera by $7.0 million for the effective settlement of the prepaid software license at the recorded amount, bringing the total consideration paid for the acquisition to $34.3 million.

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Evolent Health, Inc. accounted for the transaction as a business combination using purchase accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of November 1, 2016, as follows (in thousands):

Purchase consideration:
Fair value of Class A common stock issued	$	9,864
Cash for settlement of software license	7,000
Cash	17,481
Total consideration	$	34,345
Tangible assets acquired:
Receivables	$	624
Prepaid expenses and other current assets	272
Property and equipment	1,065
Other non-current assets	9
Identifiable intangible assets acquired:
Customer relationships	7,000
Technology	2,500
Liabilities assumed:
Accounts payable	429
Accrued liabilities	1,204
Accrued compensation and employee benefits	605
Deferred revenue	44
Goodwill	25,157
Net assets acquired	$	34,345

The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts deemed receivable by management. Identifiable intangible assets associated with technology and customer relationships will be amortized on a straight-line basis over their preliminary estimated useful lives of 5 and 15 years, respectively. The technology is related to source code for licensed software used to support the third party administration platform offered to Aldera’s clients. The fair value of the intangible assets was primarily determined using the income approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to the acquired assembled workforce and expected cost and revenue synergies. Goodwill is considered an indefinite lived asset.

The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information. Any necessary adjustments will be finalized within one year from the date of acquisition.

Subsequent to the acquisition, Aldera was reorganized pursuant to Delaware law into a single-member limited liability company, to which Evolent Health Inc. contributed the assets and liabilities described in the table above. In connection with the transaction, the Company loaned $24.5 million in cash and issued 0.5 million Class A common units to Evolent Health, Inc., which then contributed its membership interest in the single-member limited liability company to Evolent Health LLC, which extinguished the loan receivable from Evolent Health, Inc. As a result, the Company owns the operating assets and liabilities of Aldera, as described in the table above, and our consolidated financial statements as of and for the year ended December 31, 2016, include the financial results of Aldera from November 1, 2016. The Consolidated Statements of Operations include $1.2 million of revenues and $1.8 million of net loss attributable to Aldera for the year ended December 31, 2016. The Company incurred approximately $0.2 million in transaction costs related to the Aldera transaction, which were recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations for the year ended December 31, 2016. The transaction was a taxable business combination for Evolent Health, Inc. and the amount of goodwill determined for tax purposes is deductible upon the beginning of the amortization period for tax purposes; however, since the Company is a pass-through entity for income tax purposes, such deduction will be taken directly by Evolent Health, Inc.

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Valence Health

On October 3, 2016, Evolent Health, Inc. completed its acquisition of Valence Health, Inc., excluding Cicerone Health Solutions, Inc. (“Valence Health”) and acquired 100% of the voting equity interests. Valence Health, based in Chicago, Illinois, was founded in 1996 and provides value-based administration, population health and advisory services. In its 20 year history, Valence Health has developed particular expertise in the Medicaid and pediatric markets. The addition of Valence Health is expected to strengthen the Company’s operational capabilities and provide increased scale and client diversification.

The merger consideration, net of certain closing and post-closing adjustments, was $217.0 million based on the closing price of Evolent Health, Inc.’s Class A common stock on the New York Stock Exchange on October 3, 2016, and consisted of 7.0 million shares of Evolent Health, Inc.’s Class A common stock and $54.8 million in cash. The final number of shares to be issued is still subject to adjustment, pending a concluded net working capital settlement.

Evolent Health, Inc. accounted for the transaction as a business combination using purchase accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of October 3, 2016, as follows (in thousands):

Purchase consideration:
Fair value of Class A common stock issued	$	159,614
Fair value of contingent consideration	2,620
Cash	54,799
Total consideration	$	217,033
Tangible assets acquired:
Restricted cash	$	1,829
Accounts Receivable	8,587
Prepaid expenses and other current assets	3,465
Property and equipment	6,241
Other non-current assets	313
Favorable leases assumed (net of unfavorable leases)	4,323
Identifiable intangible assets acquired:
Customer relationships	69,000
Technology	18,000
Liabilities assumed:
Accounts payable	5,703
Accrued liabilities	3,865
Accrued compensation and employee benefits	9,200
Deferred revenue	2,022
Other long-term liabilities	2,328
Net deferred tax liabilities	13,316
Goodwill	141,709
Net assets acquired	$	217,033

The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts due under contracts of $9.1 million, of which $0.5 million is expected to be uncollectible. Identifiable intangible assets associated with customer relationships and technology will be amortized on a straight-line basis over their preliminary estimated useful lives of 20 and 5 years, respectively. The customer relationships are primarily attributable to long-term existing contracts with current customers. The technology is an existing platform Valence Health uses to provide services to customers. The fair value of the intangible assets was primarily determined using the income approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to the acquired assembled workforce and expected cost and revenue synergies. Goodwill is considered an indefinite lived asset.

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The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information. Any necessary adjustments will be finalized within one year from the date of acquisition.

In connection with the acquisition, Evolent Health, Inc. formed a Delaware single-member limited liability company, which merged with Valence Health, and was the surviving entity. Evolent Health, Inc. contributed the assets and liabilities described in the table above to the single-member limited liability company. Also in connection with the transaction, the Company loaned $54.8 million in cash and issued 7.0 million Class A common units to Evolent Health, Inc., which then contributed its ownership interest in the single-member limited liability company to Evolent Health LLC, thus extinguishing the loan receivable from Evolent Health, Inc. As a result, the Company owns the operating assets and liabilities of Valence Health, as described in the table above, and our consolidated financial statements as of and for the year ended December 31, 2016, include the financial results of Valence Health from October 3, 2016. The Consolidated Statements of Operations include $24.1 million of revenues and $18.1 million of net loss attributable to Valence Health for the year ended December 31, 2016.

The merger was structured as a tax-free reorganization and therefore Evolent Health, Inc. received carryover basis in the assets and liabilities acquired; accordingly, Evolent Health, Inc. recognized net deferred tax liabilities associated with the merger with a preliminary estimated fair value of $13.3 million. This created additional goodwill for Evolent Health, Inc., but as the Company is a pass-through entity for income tax purposes the goodwill did not flow through with the rest of the acquired net assets. Evolent Health, Inc. cannot deduct the purchased goodwill for tax purposes.

The transaction also included an earn-out of up to $12.4 million, fair valued at $2.6 million as of October 3, 2016, payable by January 30, 2017, in Evolent Health, Inc. Class A common stock, tied to new business activity contracted on or before December 31, 2016. The fair value was determined by assigning probabilities to potential business activity in the pipeline as of the acquisition date. As of December 31, 2016, Valence Health did not contract sufficient business to be eligible for payment of the earn-out consideration. As a result, the Company recorded a gain of $2.6 million in accordance with the release of the contingent liability for the year ended December 31, 2016, which is recorded within “(Gain) loss on change in value of contingent consideration” on our Consolidated Statements of Operations. The Company incurred approximately $2.7 million of transaction costs related to the Valence Health transaction for the year ended December 31, 2016. Approximately $2.6 million of the transaction costs are recorded within “Selling, general and administrative expenses” and less than $0.1 million are recorded within “Cost of revenue” on our Consolidated Statements of Operations.

In addition, our results for the year ended December 31, 2016, include approximately $3.9 million in stock compensation expense related to the acceleration of unvested Valence Health equity awards that vested upon the close of the Valence Health transaction. The expense is related to Valence Health employees that remained with the Company following the close of the transaction.

Our results from operations also include a lease abandonment expense of approximately $6.5 million in conjunction with a rental space acquired as part of the Valence Health transaction. Immediately following the transaction, the Company made a decision to abandon and sublet its rented space at 540 W. Madison Street, Suite 1400, Chicago, Illinois (the “14th Floor Space”). The 14th Floor Space was completely vacated and is not being used in any manner by Evolent following the date of the transaction. Accordingly, the Company believes it effectively ceased using the 14th Floor Space on October 3, 2016. As of October 3, 2016, the total gross value of remaining lease payments was $20.8 million and the gross value of reasonably estimable sublease rentals was $13.5 million. The Company applied a discount rate of 5%, based on its estimated incremental unsecured borrowing rate, resulting in an estimated net present value of the abandonment loss of approximately $6.5 million, the long-term portion of which is recorded within “Other long-term liabilities” and the short-term portion of which is recorded within “Accrued liabilities” on our Consolidated Balance Sheet as of December 31, 2016. The abandonment loss is recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations for the year ended December 31, 2016.

Concurrent with Evolent Health, Inc.’s acquisition of Valence Health on October 3, 2016, Valence Health signed a Master Service Agreement (the “MSA”), as well as a Transition Service Agreement (the “TSA”) with Cicerone Health, the surviving Valence Health, Inc. state insurance cooperative business (“CHS”). The MSA and the TSA are at market rates and, therefore, there is no allocation of purchase price to these arrangements. The terms of, as well as the performance obligations under, the MSA and TSA were contributed down to the Company.

The terms of the MSA stipulate that the Company will provide service information technology, system configuration and medical management services to CHS’s state insurance cooperative clients until December 31, 2018. Based on management’s analysis, the terms of the MSA are at fair market value.

Under the terms of the TSA, the Company will provide back office information technology support to CHS and CHS will provide back office finance and human resources support to Evolent until December 31, 2017. Employees of both entities will have mutual employee health care claims administration through a self-funded plan. Based on management’s analysis, the terms of the TSA are at fair market value.

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Passport

On February 1, 2016, the Company and Evolent Health, Inc. entered into a strategic alliance with University Health Care d/b/a Passport Health Plan (“Passport”), a nonprofit community-based and provider-sponsored health plan administering Kentucky Medicaid and federal Medicare Advantage benefits to approximately 0.3 million Kentucky Medicaid and Medicare Advantage beneficiaries. Prior to the transaction, the Company issued 1.1 million Class A common units to Evolent Health, Inc. in exchange for a corresponding number of Class A common shares. The Company used the 1.1 million Class A common shares to acquire capabilities and assets from Passport to enable us to build out a Medicaid Center of Excellence based in Louisville, Kentucky. Additional equity consideration of up to $10.0 million may be earned by Passport should we obtain new third party Medicaid businesses in future periods. This transaction also includes a 10-year arrangement under which we will provide various health plan management and managed care services to Passport. The Company incurred approximately $0.2 million in transaction costs related to the Passport acquisition for the year ended December 31, 2016. The transaction costs are recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations. The Company has accounted for the transactions with Passport as a business combination using purchase accounting.

The fair value of the total consideration transferred in connection with the close of the transaction was $18.2 million, of which the Evolent Health, Inc. Class A common stock was valued at $10.5 million and the contingent equity consideration was initially valued at $7.8 million. The fair value of the shares issued was determined based on the closing price of Evolent Health, Inc.’s Class A common stock on the NYSE as of February 1, 2016, and the quantity of shares issued was determined under a pricing collar set forth in the purchase agreement. The contingent consideration of $8.3 million is a mark-to-market liability recorded within “Other long-term liabilities” on our Consolidated Balance Sheets as of December 31, 2016. We recorded a re-measurement loss of approximately $0.5 million based on a change in the discount rate as of December 31, 2016. The fair value of the contingent equity consideration was estimated based on the real options approach, a form of the income approach, which estimated the probability of the Company achieving future revenues under the agreement. Key assumptions include the discount rate and the probability-adjusted recurring revenue forecast. A further discussion of the fair value measurement of the contingent consideration is provided in Note 14.

The purchase price was allocated to the assets acquired based on their estimated fair values as of February 1, 2016, as follows (in thousands):

Purchase Consideration
Fair value of Class A common stock issued	$	10,450
Fair value of contingent consideration	7,750
Total consideration	$	18,200
Tangible assets acquired
Prepaid asset	$	6,900
Goodwill	11,300
Net assets acquired	$	18,200

The prepaid asset is related to an acquired facility license agreement as the Company was provided with leased facilities which house the acquired Passport employees at no future cost to the Company. The fair value of the acquired facility license agreement was determined by comparing the current market value of similar lease spaces to the facilities occupied by the acquired Passport personnel to obtain a market value of the occupied space, with the present value of the determined market value of the occupied space classified as the acquired facility license agreement prepaid asset. The goodwill is attributable partially to the acquired assembled workforce. The transaction was a taxable business combination for the Company and the amount of goodwill determined for tax purposes is deductible upon the beginning of the amortization period for tax purposes; however, since the Company is a pass-through entity for income tax purposes, such deduction will be taken directly by Evolent Health, Inc.

Results for the year ended December 31, 2016, include revenues and related expenses from our services agreement with Passport and amortization of the acquired intangibles for the period February 1, 2016, through December 31, 2016. The Consolidated Statements of Operations include $49.8 million of revenues and $6.4 million of net loss attributable to Passport for the year ended December 31, 2016.

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The Offering Reorganization

On June 4, 2015, Evolent Health LLC and our parent, Evolent Health Holdings, undertook a reorganization, or the Offering Reorganization, in connection with the IPO of Evolent Health, Inc. In connection with the Offering Reorganization, the Company amended and restated its operating agreement to, among other things, establish two classes of equity (voting Class A common units and non-voting Class B common units). As part of the Offering Reorganization:

• Evolent Health Holdings amended and restated its certificate of incorporation to, among other things, authorize two classes of common stock, Class A common stock and Class B common stock;

• Evolent Health Holdings merged with and into a newly incorporated entity, Evolent Health, Inc., and the surviving corporation of the merger was Evolent Health, Inc.;

• An affiliate of TPG (which includes TPG Global, LLC and its affiliates including one or both of TPG Growth II BDH, LP and TPG Eagle Holdings, L.P.), a pre-Offering Reorganization member of Evolent Health LLC, merged with and into Evolent Health, Inc. and the surviving corporation of the merger was Evolent Health, Inc.;

• Each of the then-existing stockholders of Evolent Health Holdings received four shares of Evolent Heath, Inc.’s Class A common stock and the right to certain payments under a Tax Receivables Agreement (the “TRA”) in exchange for each share of Class A common stock held in Evolent Health Holdings;

• TPG received 2.1 million shares of Class A common stock of Evolent Health, Inc. at $17.00 per share, together with the right to certain payments under the TRA, in exchange for 100% of the equity that it held in its affiliate that was merged with Evolent Health, Inc., and Evolent Health LLC issued an identical number of Class A common units to Evolent Health, Inc.;

• Evolent Health, Inc. issued shares of Class B common stock to certain entities which were members of Evolent Health LLC prior to the Offering Reorganization, together with the right to certain payments under a tax receivables agreement, and Evolent Health LLC issued an identical number of Class B common units to the holders of the Class B common stock of Evolent Health, Inc.; and

• The Company’s MIRA was terminated, and our pre-Offering Reorganization members who were party thereto entered into a stockholders’ agreement with Evolent Health, Inc.

Subsequent to the Offering Reorganization, the pre-Offering Reorganization members of the Company (other than Evolent Health, Inc.) hold 100% of our Class B common units and Evolent Health, Inc. holds 100% of our Class A voting common units. The Company’s Class B common units can be exchanged (together with a corresponding number of shares of Evolent Health, Inc.’s Class B common stock) for one share of Evolent Health, Inc.’s Class A common stock.

Evolent Health, Inc.’s Step Acquisition of the Company

As a result of the Offering Reorganization, Evolent Health, Inc. obtained voting control over the Company and therefore consolidated the Company. Evolent Health, Inc. accounted for obtaining control of the Company as a step acquisition and, accordingly, recognized the fair value of the Company’s assets acquired, liabilities assumed, non-controlling interests recognized and the remeasurement gain recorded on the previously held equity interests. As the acquisition was the result of the Offering Reorganization and not the purchase of additional interests in the Company, there were no assets acquired or liabilities assumed, and there was no purchase price paid as a part of the transaction. Evolent Health, Inc.’s allocation of the value of the transaction (in thousands) is included below:

Goodwill	$	608,903
Intangible assets	169,000
Cash and restricted cash	21,930
Other assets	49,239
Remeasurement gain on previously held equity interest	(414,133		)
Liabilities and deferred revenue	(71,299		)
Non-controlling interests	(332,793		)
Carrying value of previously held equity interest	(30,847		)
Purchase price	$	—

Evolent Health, Inc.’s estimated fair value of the Company was determined using a business enterprise valuation approach that discounted the Company’s projected cash flows based on an estimate of its weighted average cost of capital. The Company’s fair value was estimated to be $777.8 million. In addition, Evolent Health, Inc. determined the fair value of the Company’s tangible and identifiable intangible assets, deferred revenue and other liabilities, based on various income and market approaches, including the relief from royalty method for trade name and technologies, and the discounted cash flow method for customer relationships, both of which use Level 3 inputs (see Note 14 for discussion of fair value and use of Level 3 inputs). Evolent Health, Inc. is amortizing the acquired identifiable intangible assets over their estimated useful lives (see Note 2 for discussion of useful lives for intangible assets). The Offering Reorganization was structured as a tax-free exchange and, therefore, did not result in tax deductible goodwill for Evolent Health, Inc.

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Subsequent to the Offering Reorganization, the IPO and the secondary offering described below, as of December 31, 2016, Evolent Health, Inc. owned 77.4% of the economic interests and 100% of the voting rights in the Company. Evolent Health, Inc.’s operations will continue to be conducted through the Company and subsequent to the Offering Reorganization, the financial results of the Company are consolidated in the financial statements of Evolent Health, Inc. Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in the Company and its only business is to act as sole managing member of the Company.

Evolent Health LLC Governance

Evolent Health, Inc. serves as our sole managing member. As such, it controls the Company’s business and affairs and is responsible for the management of our business.

Coordination of Evolent Health, Inc. and Evolent Health LLC

Evolent Health, Inc. must, at all times, maintain a one-to-one ratio between the number of outstanding shares of its Class A common stock and the number of outstanding Class A common units of the Company.

Issuances of Common Units

The Company may only issue Class A common units to Evolent Health, Inc., as our sole managing member. Class B common units may be issued only to certain persons or entities. Such issuances of Class B common units shall be made in exchange for cash or other consideration. Class B common units may not be transferred as Class B common units except to certain permitted transferees and in accordance with the restrictions on transfer set forth in the third amended and restated operating agreement of the Company. Any such transfer must be accompanied by the transfer of an equal number of shares of Class B common stock of Evolent Health, Inc.

We entered into an exchange agreement with Evolent Health, Inc., The Advisory Board, TPG and another investor. Pursuant to and subject to the terms of the exchange agreement and the third amended and restated operating agreement of the Company, holders of our Class B common units, at any time and from time to time, may exchange one or more Class B common units, together with an equal number of shares of Evolent Health, Inc.’s Class B common stock, for shares of Evolent Health, Inc.’s Class A common stock on a one-for-one basis. The amount of Evolent Health, Inc.’s Class A common stock issued or conveyed will be subject to equitable adjustments for stock splits, stock dividends and reclassifications. As holders exchange their Class B common units and Class B common stock for Class A common stock, Evolent Health, Inc.’s interest in us will increase.

Pro forma financial information (unaudited)

The unaudited pro forma Consolidated Statements of Operations presented below gives effect to (1) the Aldera transaction as if it had occurred on January 1, 2015, (2) the Valence Health transaction as if it had occurred on January 1, 2015, (3) the Passport transaction as if it had occurred on January 1, 2015, and (4) pushdown accounting as if it had occurred on January 1, 2014. The following amounts include adjustments to:

• Remove transaction costs related to the Aldera, Valence and Passport transactions of $0.2 million, $2.7 million and $0.3 million, respectively, recorded during 2016 and reclassify said amounts to 2015;

• Remove one-time items, such as the gain on the release of our contingent liability related to Valence Health of $2.6 million, stock based compensation of $3.9 million related to the acceleration of Valence Health’s unvested equity awards and the lease abandonment charge related to the 14th Floor Space of $6.5 million, recorded during 2016 and reclassify said amounts to 2015;

• Record amortization expenses related to intangible assets beginning January 1, 2015, for intangibles related to Valence Health and Aldera;

• Record revenue and expenses related to the MSA and TSA in 2016 and 2015;

• Record amortization expenses related to intangible assets beginning January 1, 2014, for intangibles related to the Offering Reorganization;

• Record rent expense related to Passport prepaid lease beginning January 1, 2015;

• Remove transaction costs of $4.3 million related to the Offering Reorganization and the IPO in 2015 and reclassify said amounts to 2014; and

• Record amortization expenses related to intangible assets beginning January 1, 2014.

This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had pushdown accounting taken place on January 1, 2014. The pro forma adjustments were based on available information and assumptions that the Company believes are reasonable to reflect the impact of pushdown accounting on the Company’s historical financial information on a pro forma basis (in thousands).

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	For the Years Ended
	December 31,
	2016			2015			2014
Revenue	$	361,944		$	311,639		$	95,888
Net income (loss)	(228,941		)	(99,803		)	(68,856		)

2016 Secondary Offering

In September 2016, Evolent Health, Inc. completed a secondary offering of 8.6 million shares of its Class A common stock at a public offering price of $22.50 per share. The shares were sold by the Selling Stockholders. Evolent Health, Inc. did not receive any proceeds from the sale of the shares.

The shares sold in the offering consisted of 6.4 million existing shares of Evolent Health, Inc.’s Class A common stock owned and held by the Selling Stockholders and 2.2 million newly-issued shares of Evolent Health, Inc.’s Class A common stock received by certain Investor Stockholders pursuant to the exercise of an existing exchange right.

The newly-issued shares of Evolent Health, Inc.’s Class A common stock were issued to certain Investor Stockholders in exchange for an equal number of shares of Evolent Health, Inc.’s Class B common stock (which were subsequently canceled) and an equal number of Evolent Health LLC’s Class B common units. Class B units received by Evolent Health, Inc. from relevant Investor Stockholders were simultaneously exchanged for an equivalent number of Class A units of Evolent Health LLC, and Evolent Health LLC canceled the Class B units it received in the Exchange.

As a result of the Exchange and Evolent Health LLC’s cancellation of the Class B units, Evolent Health, Inc.’s economic interest in Evolent Health LLC increased from 71.0% to 74.6% immediately following the Exchange. Evolent Health, Inc.’s economic interest in Evolent Health LLC will increase if further exchanges occur.

Asset Acquisition

Vestica Healthcare, LLC

On March 1, 2016, the Company entered into an Asset Purchase Agreement with Vestica Healthcare, LLC (“Vestica”). As part of the transaction, the Company paid $7.5 million to acquire certain assets from Vestica to further align our interests with one of our existing partners. Vestica can earn an additional $4.0 million in consideration, which is being held in escrow, based on certain future events. This transaction also includes an arrangement under which Vestica will continue to perform certain services on our behalf related to the acquired assets.

We accounted for the transaction as an asset acquisition where the assets acquired were measured based on the amount of cash paid to Vestica as well as transaction costs incurred as the fair value of the assets given was more readily determinable than the fair value of the assets received. We classified and designated identifiable assets acquired and we assessed and determined the useful lives of the acquired intangible assets subject to amortization. As a result, we recorded a $7.5 million customer relationship intangible asset with a useful life of thirteen years. The transaction was a taxable asset purchase. However, since the Company is a pass-through entity for income tax purposes, such deduction will be taken directly by Evolent Health, Inc.

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5. Investments

Our investments are classified as held-to-maturity as we have both the intent and ability to hold the investments until their individual maturities. The amortized cost, gross unrealized gains and losses, and fair value of our investments as measured using Level 2 inputs (in thousands) were as follows:

	As of December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Costs		Gains		Losses		Value
U.S. Treasury bills	$	28,119	$	116	$	27	$	28,208
Corporate bonds	16,222		81		8		16,295
Total investments	$	44,341	$	197	$	35	$	44,503
	As of December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Costs		Gains		Losses		Value
U.S. Treasury bills	$	28,306	$	115	$	181	$	28,240
Corporate bonds	25,757		110		80		25,787
Total investments	$	54,063	$	225	$	261	$	54,027

The amortized cost and fair value of our investments by contractual maturities (in thousands) were as follows:

	As of December 31, 2016				As of December 31, 2015
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	44,341	$	44,503	$	9,445	$	9,451
Due after one year through five years	—		—		44,618		44,576
Total	$	44,341	$	44,503	$	54,063	$	54,027

The following table summarizes our held-to-maturity securities in an unrealized loss position as of the periods noted below. These securities are aggregated by major security type and length of time that the individual securities have been in a continuous unrealized loss position (in thousands, except number of securities):

	As of December 31, 2016					As of December 31, 2015
	Number of	Fair		Unrealized		Number of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses
Unrealized loss for less than twelve months:
U.S. Treasury bills	1	$	4,002	$	1	7	$	28,240	$	181
Corporate Bonds	—	—		—		14	21,674		80
Total	1	$	4,002	$	1	21	$	49,914	$	261

We did not hold any securities in a continuous unrealized loss position for twelve months or longer as of December 31, 2016 or 2015, respectively.

When a held-to-maturity investment is in an unrealized loss position, we assess whether or not we expect to recover the entire cost basis of security, based on our best estimate of the present value of cash flows expected to be collected from the debt security. Factors considered in our analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness and forecasted performance of the investee. In cases where the estimated present value of future cash flows is less than our cost basis, we recognize an other than temporary impairment and write the investment down to its fair value. The new cost basis would not be changed for subsequent recoveries in fair value. While some of the securities held in the investment portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not significant for the

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years ended December 31, 2016 or 2015. The Company does not intend, nor does the Company believe that it is likely, that the Company will be required to sell these securities before the recovery of the cost basis.

6. Property and Equipment, Net

The following summarizes our property and equipment (in thousands):

	As of
	December 31,
	2016			2015
Computer hardware	$	4,474		$	232
Furniture and equipment	2,448			1,604
Internal-use software development costs	21,385			6,363
Leasehold improvements	8,108			5,830
Total property and equipment	36,415			14,029
Accumulated depreciation and amortization expenses	(5,236		)	(1,233		)
Total property and equipment, net	$	31,179		$	12,796

The Company capitalized $15.0 million, $4.4 million, $6.4 million, and $7.7 million of these internal-use software development costs for the year ended December 31, 2016, for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively. The net book value of capitalized internal-use software development costs was $19.9 million and $6.3 million as of December 31, 2016 and 2015, respectively.

Depreciation expense related to property and equipment was $2.6 million, $2.1 million, $1.2 million and $2.7 million for the year ended December 31, 2016, for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively, of which amortization expense related to capitalized internal-use software development costs was $1.4 million, $1.2 million, less than $0.1 million and $1.0 million for the year ended December 31, 2016, for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively.

7. Goodwill and Intangible Assets, Net

Goodwill

Goodwill has an estimated indefinite life and is not amortized; rather it is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

In interim periods between annual goodwill reviews, we also evaluate qualitative factors that could cause us to believe our estimated fair value of our single reporting unit may be lower than the carrying value and trigger a Step 1 test including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance including an analysis of our current and projected cash flows, revenue and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in strategy, partners, or litigation.

As a result of the Offering Reorganization described in Note 4, we revalued our Consolidated Balance Sheets to the market value of Evolent Health, Inc.’s IPO share price of $17.00 and recorded $608.9 million in goodwill on our Consolidated Balance Sheets.

Subsequent to our 2015 annual impairment testing in the fourth quarter of 2015, Evolent Health, Inc.’s common stock price declined significantly, reaching a historic low in the first quarter of 2016. During the three months ended March 31, 2016, Evolent Health, Inc.’s common stock traded between $8.48 and $12.32, or an average common stock price of $10.33 compared to an average common stock price of $19.51 and $14.73 during the three month periods ended September 30, 2015, and December 31, 2015, respectively. A sustained decline in Evolent Health, Inc.’s common stock price and the resulting impact on Evolent Health, Inc.’s market capitalization is one of several qualitative factors we consider each quarter when evaluating whether events or changes in circumstances indicate it is more likely than not that a potential goodwill impairment exists. Evolent Health, Inc.’s Class A common stock price is an indicator of impairment for Evolent Health LLC because Evolent Health Inc. is a holding company whose only asset is Evolent Health LLC; therefore Evolent Health, Inc.’s market capitalization is reflective of Evolent Health LLC’s value. We concluded that the further decline in Evolent Health, Inc.’s common stock price observed during the first quarter of 2016 did represent a sustained decline and that triggering events occurred during the period requiring an interim goodwill impairment test as of March 31, 2016. As such, we performed a Step 1 impairment test of our goodwill as of March 31, 2016.

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Step 1 Results

To determine the implied fair value for our single reporting unit, we used both a market multiple valuation approach (“market approach”) and a discounted cash flow valuation approach (“income approach”).  In determining the estimated fair value, we considered the level of Evolent Health, Inc.’s Class A common stock price and assumptions that we believed market participants would make in valuing our reporting unit, including a control premium, as well as discounted cash flow calculations of management’s estimates of future financial performance and management’s long-term plans.  This analysis also required us to make judgments about revenues, expenses, fixed asset and working capital requirements, the timing of exchanges of our Class B common shares, capital market assumptions and discount rates.

In our March 31, 2016, Step 1 test, our most sensitive assumption for purposes of the market approach was our estimate of the control premium, and the most sensitive assumption related to the income approach, other than our cash flows, was the discount rate. As of March 31, 2016, our single reporting unit failed the Step 1 analysis as we determined that its implied fair value was less than its carrying value based on the weighting of the fair values determined under both the market and income approaches. As fair value was less than carrying value, we performed a Step 2 test to determine the implied fair value of our goodwill.

Step 2 Results

In our March 31, 2016, Step 2 test, the fair value of all assets and liabilities were estimated, including our tangible assets (corporate trade name, customer relationships and technology), for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of goodwill was then compared to the carrying amount of goodwill resulting in an impairment charge of $160.6 million on our Consolidated Statements of Operations.

The impairment was driven primarily by the sustained decline in Evolent Health, Inc.’s share price as our estimates of our future cash flows and the control premium have remained consistent, combined with an increase in the discount rate period over period. As noted above, our determination of fair value used a weighting of the fair values determined under both the market and income approaches, with the market approach driving the significant reduction in overall firm value and related impairment of goodwill.

On October 31, 2016, we performed our annual impairment test in accordance with our policy as stated above. Our qualitative assessment did not identify sufficient indicators of impairment to require a Step 1 evaluation.

The following table summarizes the changes in the carrying amount of goodwill (in thousands):

	For the Years Ended
	December 31,
	2016			2015
Balance as of beginning-of-year	$	608,903		$	—
Goodwill Acquired (1)	164,950			608,903
Goodwill Impairment (current and cumulative)	(160,600		)	—
Balance as of end-of-year	$	613,253		$	608,903

⁽¹⁾ Represents goodwill acquired as a result of the Offering Reorganization for the year ended December 31, 2015, and as a result of the Passport, Valence Health and Aldera transactions for the year ended December 31, 2016, as discussed further in Note 4.

Intangible Assets, Net

As part of the Offering Reorganization described in Note 4, intangible assets of $169.0 million were recorded on our Consolidated Balance Sheets. We recorded additional intangible assets of $108.3 million related to the Passport, Valence Health and Aldera transactions in 2016, as discussed further in Note 4.

Prior to the Offering Reorganization, we amortized an intangible asset related to a software license contributed by UPMC for use and resale as part of our service offerings which was valued at $3.0 million and a five year useful life.

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Details of our intangible assets (in thousands), including their weighted-average remaining useful lives (in years), are presented below:

	As of December 31, 2016
	Weighted-
	Average	Gross					Net
	Remaining	Carrying		Accumulated			Carrying
	Useful Life	Amount		Amortization			Value
Corporate trade name	18.4	$	19,000		$	1,505	$	17,495
Customer relationships	21.5	203,500			9,018		194,482
Technology	5.2	50,500			7,753		42,747
Below market lease, net	9.4	4,323			124		4,199
Total		$	277,323		$	18,400	$	258,923

	As of December 31, 2015
	Weighted-
	Average	Gross					Net
	Remaining	Carrying		Accumulated			Carrying
	Useful Life	Amount		Amortization			Value
Corporate trade name	19.4	$	19,000		$	554	$	18,446
Customer relationships	24.4	120,000			2,797		117,203
Technology	6.4	30,000			2,497		27,503
Total		$	169,000		$	5,848	$	163,152

Amortization expense related to intangible assets was $12.5 million, $0.5 million, $5.8 million and $0.9 million for the year ended December 31, 2016, for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively.

Future estimated amortization of intangible assets (in thousands) as of December 31, 2016, is as follows:

2017	$	19,027
2018	18,971
2019	19,065
2020	19,052
2021	18,086
Thereafter	164,722
Total	$	258,923

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. As discussed above, during the first quarter of 2016, our single reporting unit failed the Step 1 test for goodwill impairment, thus triggering an impairment analysis of the carrying value our intangible asset group.  In conjunction with the impairment testing of the carrying value of our goodwill, we performed an analysis to determine whether the carrying amount of our intangible asset group was recoverable.  We performed a Step 1 test, which required management to compare the total undiscounted future cash flows of the intangible asset group to the current carrying amount.  The total undiscounted cash flows included only the future cash flows that are directly associated with and that were expected to arise as a result of the use and eventual disposal of the asset group.  Based on our Step 1 test, we concluded the carrying amount of our long-lived assets were recoverable given the pre-tax, undiscounted cash flows exceed the carrying value of the asset group.

8. Long-term Debt

In December 2016, Evolent Health, Inc. issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2021 in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. The 2021 Notes were issued at par for net proceeds of $120.2 million. Evolent Health, Inc. incurred $4.8 million of debt issuance costs in connection with the 2021 Notes, which are being amortized to non-cash interest expense using the straight line method over the contractual term of the 2021 Notes, since this method was not materially different from the effective interest method. The closing of the Private Placement of the 2021 Notes occurred on December 5, 2016.

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Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017, at a rate equal to 2.00% per annum. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased or converted in accordance with their terms prior to such date. In addition, holders of the 2021 Notes may require the Company to repurchase their 2021 Notes upon the occurrence of a fundamental change at a price equal to 100.00% of the principal amount of the 2021 Notes being repurchased, plus any accrued and unpaid interest. Upon maturity, and at the option of the holders of the 2021 Notes, the principal amount of the notes may be settled via shares of Evolent Health Inc.’s Class A common stock.

The 2021 Notes are convertible into shares of Evolent Health, Inc.’s Class A common stock, based on an initial conversion rate of 41.6082 shares of Class A common stock per $1,000 principal amount of the 2021 Notes, which is equivalent to an initial conversion price of approximately $24.03 per share of Evolent Health, Inc.’s Class A common stock. In the aggregate, the 2021 Notes are initially convertible into 5.2 million shares of Evolent Health Inc.’s Class A common stock (excluding any shares issuable by Evolent Inc. upon a conversion in connection with a make-whole provision upon a fundamental change under the Indenture).

The 2021 Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, Evolent Health, Inc. will deliver for each $1,000 principal amount of notes converted a number of shares of Class A common stock equal to the applicable conversion rate (together with a cash payment in lieu of delivering any fractional share) on the third business day following the relevant conversion rate. Pursuant to the operating agreement between the Company and Evolent Health, Inc., we will issue a corresponding amount of Class A common units to Evolent Health, Inc. for every share of Evolent Health, Inc. Class A common stock issued in connection with conversion or maturity of the 2021 Notes.

2021 Mirror Notes

Immediately following the issuance of the 2021 Notes and pursuant to a mirror agreement, Evolent Health, Inc. committed to loan the proceeds, net of deferred offering costs, to Evolent Health LLC under identical terms as described above. Evolent Health LLC intends to use the net proceeds for working capital and other general corporate purposes. As of December 31, 2016, the Company has received proceeds of $10.0 million and recorded the amount within “Long-term debt” on its Consolidated Balance Sheets, net of discount. The Company received the remainder of the proceeds during the first quarter of 2017. Interest expense related to the loan was immaterial for the year ended December 31, 2016. The Company did not have any indebtedness for the years ended December 31, 2015 and 2014.

2021 Mirror Notes Carrying Value

The estimated fair value of the 2021 Mirror Notes is $9.2 million, which approximates cost as of December 31, 2016. Fair value approximates cost as there were no significant movements in interest rates between the issuance date and December 31, 2016. The 2021 Mirror Notes also have embedded conversion options and contingent interest provisions.

The following table summarizes the carrying value of the long-term debt (in thousands) as of December 31, 2016:

Carrying value	$	9,160
Unamortized discount	840
Principal amount	$	10,000
Remaining amortization period (years)	4.9

9. Commitments and Contingencies

UPMC Reseller Agreement

The Company and UPMC are parties to a reseller, services and non-competition agreement, dated August 31, 2011, which was amended and restated by the parties on June 27, 2013 (as amended through the date hereof, the “UPMC Reseller Agreement”). Under the terms of the UPMC Reseller Agreement, UPMC has appointed the Company as a non-exclusive reseller of certain services, subject to certain conditions and limitations specified in the UPMC Reseller Agreement. In consideration for the Company’s obligations under the UPMC Reseller Agreement and subject to certain conditions described therein, UPMC has agreed not to sell certain products and services directly to the Company’s customers and top prospects.

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The Advisory Board Company Reseller Agreement

The Company and The Advisory Board are parties to a services, reseller, and non-competition agreement, dated August 31, 2011, which was amended and restated by the parties on June 27, 2013, and May 1, 2015 (as so amended, “The Advisory Board Company Reseller Agreement”). Under the terms of The Advisory Board Company Reseller Agreement, The Advisory Board provides certain services to the Company on an as-requested basis.  In addition, The Advisory Board has a right of first offer to provide certain specified services during the term of the Agreement and has the right to collect certain fees for specified referrals. Pursuant to the Advisory Board Company Reseller Agreement, the Company entered into a services agreement with The Advisory Board in October 2016 whereby The Advisory Board will provide certain services to the Company in conjunction with risk adjustment services provided to one of our customers.

Contingencies

Litigation Matters

We are engaged from time to time in certain legal disputes arising in the ordinary course of business, including employment claims. When the likelihood of a loss contingency becomes probable and the amount of the loss can be reasonably estimated, we accrue a liability for the loss contingency. In connection with the Valence Health transaction, the Company acquired certain in-process litigation. However, the Company is fully indemnified by the Valence Health sellers and therefore has no potential exposure. We continue to review accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and our views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. The Company is not aware of any legal proceedings or claims as of December 31, 2016 and 2015, that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.

Commitments

Lease Commitments

The Company has entered into lease agreements for its office locations in Arlington, Virginia, Chicago, Illinois, Lisle, Illinois, and San Francisco, California. In addition, certain leases acquired as part of the Valence Health transaction included existing sublease agreements for office locations in Chicago, Illinois. Total rental expense, net of sublease income, on operating leases was $5.9 million, $1.2 million, $2.3 million and $3.3 million for the year ended December 31, 2016, for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively.

In connection with various lease agreements, the Company is required to maintain $4.9 million in letters of credit. As of December 31, 2016, the Company held $4.9 million in restricted cash and restricted investments as collateral for the letters of credit.

Arlington, Virginia Office Lease

During 2013, the Company entered into a facility lease in Arlington, Virginia. Total future minimum lease commitments over 4 years are $13.8 million as of December 31, 2016. The future minimum lease payments associated with the Arlington, Virginia lease are included in the table below. In conjunction with this lease, the Company is required to maintain a letter of credit in the amount of $1.6 million. The collateral for the letter of credit is currently recorded as restricted cash.

Lisle, Illinois Office Lease

On November 1, 2016, the Company assumed a facility lease in Lisle, Illinois as part of the Aldera transaction. Total future minimum lease commitments over 8.5 years are approximately $4.0 million as of December 31, 2016. The future minimum lease payments associated with the Lisle, Illinois lease are included in the table below. In conjunction with this lease, the Company is required to maintain a letter of credit in the amount of $0.5 million. The collateral for the letter of credit is currently recorded as restricted cash.

Chicago, Illinois Office Lease

On October 3, 2016, the Company assumed a facility lease in Chicago, Illinois as part of the Valence Health transaction. This lease includes three floors. One of the floors is occupied by the Company, one is subleased to a tenant, and one was abandoned. Total future minimum lease commitments over 11 years are approximately $30.2 million as of December 31, 2016. The future minimum lease payments associated with the Chicago, Illinois lease are included in the table below. In conjunction with this lease, the Company is required to maintain a letter of credit in the amount of $1.5 million. The collateral for the letter of credit is currently recorded as restricted cash.

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In connection with the Chicago, Illinois lease, the Company acquired a sublease tenant for one of the floors (“13^th Floor Sublease”). Total future sublease income over 11 years is approximately $10.1 million as of December 31, 2016. The future minimum sublease income attributable to the 13^th Floor Sublease is included in the table below.

Also in connection with the Chicago, Illinois lease agreement, the Company made a decision to abandon and sublet one of the floors in its rented space. The space was acquired as part of the Valence Health acquisition and has a remaining lease term of 11 years as of December 31, 2016. The 14^th Floor Space has been completely vacated and is not being used in any manner by Evolent following the date of the merger. Accordingly, the Company believes it effectively ceased using the 14^th Floor Space on October 3, 2016. As of October 3, 2016, the total gross value of remaining lease payments was $20.8 million and the gross value of reasonably estimable sublease rentals was $13.5 million. The gross estimated sublease value was determined with a real estate broker and reflects an appropriate market risk premium. Accordingly, the discount rate used in the present value calculation takes into account only the time value of money. The Company applied a discount rate of 5%, based on its estimated incremental unsecured borrowing rate, resulting in an estimated net present value of the abandonment loss of approximately $6.5 million, the long-term portion of which is recorded within “Other long-term liabilities” and the short-term portion of which is recorded within “Accrued liabilities” on our Consolidated Balance Sheets. The unsecured borrowing rate is based on the Company’s convertible debt rate of 2% with a premium added to reflect an unsecured borrowing rate. The abandonment loss is recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations.

The following table presents a roll forward of the lease abandonment liability for the year ended December 31, 2016:

Accrual at December 31, 2015	$	—
Abandonment expense	6,460
Abandonment amortization	(360		)
Accrual at December 31, 2016	$	6,100

Future minimum rental commitments (in thousands) as of December 31, 2016, were as follows (including the gross lease payments related to the 14^th Floor Space):

2017	$	8,883
2018	8,694
2019	7,014
2020	6,964
2021	2,851
Thereafter	22,379
Total	$	56,785

Future minimum sublease payments receivable (in thousands) as of December 31, 2016, were as follows:

2017	$	1,754
2018	1,501
2019	815
2020	809
2021	556
Thereafter	6,551
Total	$	11,986

Purchase Obligations

Our contractual obligations related to vendor contracts (in thousands) as of December 31, 2016, were as follows:

	Less						More
	Than		1 to 3		3 to 5		Than
	1 Year		Years		Years		5 Years		Total
Purchase obligations related
to vendor contracts	$	2,276	$	393	$	—	$	—	$	2,669

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Indemnifications

The Company’s customer agreements generally include a provision by which the Company agrees to defend its partners against third party claims (a) for death, bodily injury, or damage to personal property caused by Company negligence or willful misconduct, (b) by former or current Company employees arising from such managed service agreements, (c) for intellectual property infringement under specified conditions and (d) for Company violation of applicable laws, and to indemnify them against any damages and costs awarded in connection with such claims. To date, the Company has not incurred any material costs as a result of such indemnities and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

Guarantees

As part of our strategy to support certain of our partners in the Next Generation Accountable Care Program (“Next Gen”), we entered into upside and downside risk sharing arrangements. Our downside risk-sharing arrangements are limited to our fees and are executed through our wholly-owned captive insurance company. To satisfy the capital requirements of our insurance entity as well as state insurance regulators, Evolent entered into letters of credit of $5.0 million to secure potential losses related to insurance services. This amount is in excess of our actuarial assessment of loss.

Credit and Concentration Risk

The Company is subject to significant concentrations of credit risk related to cash and cash equivalents, investments and accounts receivable. As of December 31, 2016, materially all of our $23.3 million of cash and cash equivalents are held in bank deposits with FDIC participating banks. While the Company maintains its cash and cash equivalents and investments with financial institutions with high credit ratings, it often maintains these deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses on cash and cash equivalents or investments to date.

The following table summarizes those partners who represented at least 10% of our revenue for the periods presented:

	Successor				Predecessor
	For the year ended		For the period		For the period		For the year ended
	December 31,		June 4, 2015 -		January 1, 2015		December 31,
	2016		December 31, 2015		- June 3, 2015		2014
Customer A	19.6	%	*		*		*
Customer B	14.5	%	15.6	%	18.7	%	25.0	%
Customer C	12.7	%	11.2	%	10.2	%	*
Customer D	*		19.6	%	15.7	%	16.0	%
Customer E	*		14.1	%	18.7	%	21.0	%
Customer F	*		11.8	%	12.3	%	14.0	%

* Represents less than 10.0% of the respective balance

The following table summarizes those partners who represented at least 10% of our trade accounts receivable for the periods presented:

	As of December 31,
	2016		2015
Customer B	*		12.9	%
Customer D	*		23.2	%
Customer F	*		28.1	%
Customer G	*		11.4	%
Customer H	14.3	%	*

* Represents less than 10.0% of the respective balance

At times our contracts may be amended to change the nature and price of the services and/or the time period over which they are provided. For example, in 2015, we signed two amendments to our agreement with Piedmont WellStar Health Plan, noted as customer D above, that reduced our expected revenue under that contract in 2016. In connection with the amendments, the customer also sold its 2.2% ownership interest in us to certain of our pre-IPO investors, consisting of TPG, The Advisory Board and UPMC.

30

During the fourth quarter of 2015, we agreed to amend the terms of our contract with WakeMed Health and Hospitals, noted as customer E above, and changed our fee structure from a PMPM-based fee to a combination of a fixed-fee and a performance-based fee. The performance-based portion of our fee was tied to Wake Med’s participation in the Next Generation ACO Program. In 2016 Wake Med determined not to participate in the calendar year 2016 program; therefore the portion of our fee and the corresponding expenses related to the performance-based arrangement were eliminated from our agreement.

10. Stock-based Compensation

2011 and 2015 Equity Incentive Plans

Evolent Health, Inc. sponsors a stock-based incentive plan for employees and non-employee directors of Evolent Health, Inc. and its consolidated subsidiaries, which includes Evolent Health LLC. The plan provides for the issuance of stock options, performance-based stock options, restricted stock and restricted stock units (“RSUs”), under the Evolent Health Holdings, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the 2015 Evolent Health, Inc. Omnibus Incentive Compensation Plan (the “2015 Plan”). Evolent Health, Inc. assumed the 2011 Plan in connection with the merger of Evolent Health Holdings, Inc. with and into Evolent Health, Inc. The 2011 Plan allows for the grant of an array of equity-based and cash incentive awards to Evolent Health Inc.’s directors, employees and other service providers. The 2011 Plan was amended on September 23, 2013, to increase the number of shares authorized to 9.1 million shares of Evolent Health Inc.’s common stock. As of December 31, 2016 and 2015, 4.9 million and 5.1 million stock options, respectively, and 3.8 million shares of restricted stock have been issued, net of forfeitures, under the 2011 Plan.

On May 1, 2015, the Board of Directors approved and authorized the 2015 Plan which provides for the issuance of up to 6.0 million shares of the Company’s Class A common stock to employees and non-employee directors of the Company and its consolidated subsidiaries. As of December 31, 2016 and 2015, 1.7 million and 0.7 million stock options and 0.7 million and 0.3 million RSUs have been issued, net of forfeitures, under the 2015 Plan.

We follow an employee model for our stock-based compensation as awards are granted in the stock of our parent, Evolent Health, Inc., to employees of its consolidated subsidiary, Evolent Health LLC, after the Offering Reorganization. During the period subsequent to the Series B Reorganization and prior to the Offering Reorganization, stock-based awards were granted in the stock of our equity-method investor, Evolent Health Holdings, to employees of the Company. As the stock-based awards were granted in the stock of a non-consolidated entity, we followed a “non-employee” model for recording stock-based compensation which required the awards to be marked-to-market through net income at the end of each reporting period until vesting occurred. See below for details on how Evolent Health, Inc. and Evolent Health LLC determined the value of Evolent Health, Inc. common stock for purposes of stock-based compensation prior to the Offering Reorganization.

Under the Company’s Third Amended and Restated Operating Agreement, the Company is required to issue an identical amount of common units to Evolent Health, Inc. in exchange for its underlying stock. As a result, the Company records a capital contribution from Evolent Health, Inc. each time a stock award is granted.

31

Stock-based Compensation Expense

Total compensation expense by award type and line item in our consolidated financial statements were as follows (in thousands):

	Successor				Predecessor
	For the year ended		For the period		For the period		For the year ended
	December 31,		June 4, 2015 -		January 1, 2015		December 31,
	2016		December 31, 2015		- June 3, 2015		2014
Award Type
Stock options	$	15,647	$	8,913	$	12,829	$	3,125
Performance-based stock options	374		—		—		—
Restricted stock	—		4,875		8,909		7,966
RSUs	2,583		942		—		—
Acceleration of unvested equity awards	3,897		—		—		—
Total	$	22,501	$	14,730	$	21,738	$	11,091
Line Item
Cost of revenue	$	2,670	$	1,144	$	1,374	$	758
Selling, general and
administrative expenses	19,831		13,586		20,364		10,333
Total	$	22,501	$	14,730	$	21,738	$	11,091

We recorded $3.9 million in stock-based compensation expense during 2016 for the acceleration of Valence Health’s unvested equity awards that vested upon the close of the Valence Health transaction. We recorded $4.9 million in stock-based compensation in the period June 4, 2015, through December 31, 2015, for the acceleration of our unvested restricted shares which vested immediately after the Offering Reorganization and prior to the IPO.

No stock-based compensation in the totals above was capitalized as software development costs for the year ended December 31, 2016. Less than $0.1 million of stock-based compensation included in the totals above was capitalized as software development costs for the period January 1, 2015, through June 3, 2015, for the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014.

Total unrecognized compensation expense (in thousands) and expected weighted-average period (in years) by award type for all of our stock-based incentive plans were as follows:

	As of
	December 31, 2016
			Weighted-
			Average
	Expense		Period
Stock options	$	23,168	1.46
Performance-based stock options	1,415		3.17
RSUs	6,336		2.47
Total	$	30,919

Stock Options

Other than the performance based stock options described below, options awarded under the incentive compensation plans are generally subject to a four-year graded service vesting period where 25% of the award vests after each year of service and have a maximum term of 10 years. Information with respect to our options is presented in the following disclosures.

The option price assumptions used for our stock option awards were as follows:

32

	For the Years Ended December 31,
	2016			2015			2014
Weighted-average fair value
per option granted	$	4.69		$	10.41		$	7.48
Assumptions:
Expected term (in years)	6.25			6.25			6.25
Expected volatility	45		%	45		%	35		%
Risk-free interest rate	1.3 - 1.5%			1.4 - 1.8%			1.8 - 2.0%
Dividend yield	—		%	—		%	—		%

The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend rate is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the historical volatility of a peer group of public companies similar to Evolent Health, Inc. over the most recent period commensurate with the estimated expected term of the awards due to the limited history of Evolent Health, Inc.’s stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based on the midpoint convention.

Information with respect to our stock options, including weighted-average remaining contractual term (in years) and aggregate intrinsic value (in thousands) was as follows:

					Weighted-
			Weighted-		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding as of December 31, 2015	5,689,928		$	6.03	8.63	$	34,589
Granted	905,241		10.42
Exercised	(220,722	)	5.70
Forfeited	(369,102	)	10.32
Outstanding as of December 31, 2016	6,005,345		$	6.44	7.83	$	50,193
Vested and expected to vest
after December 31, 2016	6,005,345		$	6.44	7.83	$	50,193
Exercisable at December 31, 2016	2,629,035		$	6.78	7.62	$	26,944

The total fair value of options vested during the year ended December 31, 2016, the period January 1, 2015, through June 3, 2015, the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, was $12.4 million, $1.2 million, $10.0 million and $2.3 million, respectively. The total intrinsic value of options exercised during the year ended December 31, 2016, the period January 1, 2015, through June 3, 2015, the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, was $3.8 million, zero, $0.5 million and less than $0.1 million, respectively. We issue new shares to satisfy option exercises.

Performance-based stock option awards

In March 2016, Evolent Health, Inc. granted approximately 0.3 million performance-based options to certain employees to create incentives for continued long-term success and to more closely align executive pay with Evolent Health, Inc.’s stockholders’ interests. Each of the grants is subject to market-based vesting, as follows:

• one-third of the shares subject to the option award will vest in the event that the average closing price of Evolent Health, Inc.’s Class A common stock on the NYSE is at least $13.35 per share for a consecutive ninety day period;

• one-third of the shares subject to the option award will vest in the event that the average closing price of Evolent Health, Inc.’s Class A common stock on the NYSE is at least $16.43 per share for a consecutive ninety day period; and

• one-third of the shares subject to the option award will vest in the event that the average closing price of Evolent Health, Inc.’s Class A common stock on the NYSE is at least $19.51 per share for a consecutive ninety day period.

In addition, the percentage of options per tranche that has satisfied the market-based performance hurdle is also subject to a service completion schedule. The aggregate percentage of options eligible to vest is based upon each of the service completions dates below:

33

• 50% of the shares subject to the option award will vest on March 1, 2019, and

• 50% of the shares subject to the option award will vest on March 1, 2020.

We measured the fair value of the performance-based stock options using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 1.83%, volatility of 65%, expected term of ten years and dividend yield of 0%. These inputs resulted in a weighted-average fair value per option granted of $6.68. During 2016 all of the average stock price milestones were achieved and therefore the awards are now only subject to the service completion obligations.

Information with respect to our performance-based stock options (aggregate intrinsic value shown in thousands, weighted-average remaining contractual term shown in years) was as follows:

				Weighted-
		Weighted-		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value
Outstanding as of December 31, 2015	—	$	—	—	$	—
Granted	267,770	10.27
Outstanding as of December 31, 2016	267,770	$	10.27	9.17	$	1,213
Vested and expected to vest
after December 31, 2016	267,770	$	10.27	9.17	$	1,213

Restricted stock

Restricted stock awarded under the incentive compensation plans are generally subject to a graded service vesting period where 25% of the award vests after one year of service and the remaining award vests quarterly thereafter. Restricted stock awards are issued to the participants for no consideration. There were no restricted stock awards granted or forfeited during the years ended December 31, 2016 or 2015. There were no restricted stock awards outstanding as of December 31, 2016 or 2015.

Restricted Stock Units

Other than RSUs granted to Evolent Health Inc.’s non-employee directors which have a one year vesting period, RSUs awarded under the incentive compensation plans are generally subject to a four-year graded service vesting period where 25% of the award vests after each year of service and are issued to the participants for no consideration. Information with respect to our RSUs is presented below:

			Weighted-
			Average
			Grant-Date
	Shares		Fair Value
Outstanding as of December 31, 2015	333,354		$	16.84
Granted	473,944		11.60
Forfeited	(81,324	)	15.19
Vested	(107,693	)	16.68
Outstanding as of December 31, 2016	618,281		$	13.07

The total fair value of RSUs vested during the year ended December 31, 2016, was $1.8 million. There were no RSU vests for the years ended December 31, 2015 or 2014.

11. Income Taxes

After the Series B Reorganization, the Company is no longer a taxable entity as it was converted from a corporation to a partnership for U.S. federal income tax purposes, and as such is not a taxable entity and incurs no U.S. federal income tax liability. Instead, its net taxable income is generally allocated to its members pro rata subsequent to the Offering Reorganization, or subject to the members’ rights and preferences prior to the Offering Reorganization according to the number of common units each member owns. As a result

34

of the Series B Reorganization, the Company ceased the recognition of all federal and state deferred tax assets and liabilities as of September 23, 2013.

12. Employee Benefit Plans

We sponsor a tax-qualified 401(k) retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. We make matching contributions to the plan in accordance with the plan documents and various limitations under Section 401(a) of the Internal Revenue Code of 1986, as amended. We contributed$4.3 million, $1.4 million, $2.4 million and $2.3 million to the plan for the year ended December 31, 2016, the period January 1, 2015, through June 3, 2015, the period June 4, 2015, through December 31, 2015, and for the year ended December 31, 2014, respectively.

13. Investments In and Advances to Affiliates

Georgia Physicians for Accountable Care LLC

During the second quarter of 2016, the Company acquired 21,429 Class B units of GPAC for $3.0 million in cash. The investment represented a 27% economic interest and a 28% voting interest in GPAC at the date of the transaction. The Company has determined it has significant influence but that it does not have control over GPAC. Accordingly, the investment is accounted for under the equity method of accounting and the Company will be allocated its proportional share of GPAC’s profits and losses for each reporting period. For the year ended December 31, 2016, Evolent Health, Inc.’s proportional share of the losses of GPAC was $0.8 million. As of December 31, 2016, the Company owned a 26% economic interest and a 28% voting interest in GPAC.

Concurrently, the Company signed a long-term services agreement with GPAC to provide certain management, operational and support services to help GPAC manage elements of its service offerings. Revenue related to the long-term services agreement for the year ended December 31, 2016, was $0.2 million.

14. Fair Value Measurement

GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) assuming an orderly transaction in the most advantageous market at the measurement date. GAAP also establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

• Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date;

• Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date and the fair value can be determined through the use of models or other valuation methodologies; and

• Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the particular asset or liability being measured.

Recurring Fair Value Measurements

In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):

	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	1,128	$	—	$	—	$	1,128
Liabilities
Contingent consideration (2)	$	—	$	—	$	8,300	$	8,300

35

	As of December 31, 2015
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	122,328	$	—	$	—	$	122,328

⁽¹⁾ Represents the cash and cash equivalents that were held in a money market fund as of December 31, 2016 and 2015, as presented in the tables above.

⁽²⁾ Represents the contingent earn-out consideration related to the Passport acquisition as described further in Note 4.

The Company recognizes any transfers between levels within the hierarchy as of the beginning of the reporting period. There were no transfers between fair value levels for the years ended December 31, 2016 and 2015, respectively.

In the absence of observable market prices, the fair value is based on the best information available and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks.

As discussed in Note 4, the strategic alliance with Passport includes a provision for additional equity consideration contingent upon the Company obtaining new third party Medicaid business in future periods. The significant unobservable inputs used in the fair value measurement of the Passport contingent consideration are the five-year risk-adjusted recurring revenue compound annual growth rate (“CAGR”) and the applicable discount rate. A significant increase in the assumed five-year risk-adjusted recurring revenue CAGR projection or decrease in discount rate in isolation would result in a significantly higher fair value of the contingent consideration.

The changes in our contingent consideration, measured at fair value, for which the Company uses Level 3 inputs to determine fair value are as follows for the year ended December 31, 2016 (in thousands):

Balance as of beginning of year	$	—
Additions	10,386
Settlements	—
Realized and unrealized (gains) losses, net	(2,086		)
Balance as of end of year	$	8,300

The table above includes contingent consideration related to both the Passport and Valence Health transactions. As discussed in Note 4, there was contingent consideration related to the Valence Health transaction, tied to Valence Health contracting new business activity on or before December 31, 2016. The Company determined the fair value of the contingent consideration was approximately $2.6 million as of the acquisition date. Valence Health did not contract sufficient business activity to be eligible for any contingent consideration as of December 31, 2016. Accordingly, the Company recorded a $2.6 million realized gain associated with the release of the liability. There is no contingent consideration obligation related to the Valence Health transaction as of December 31, 2016. The realized gain was offset by a $0.5 million realized loss associated with an increase in fair value of Passport’s contingent consideration, which was initially recorded at $7.8 million. As a result, the Company recorded a net realized gain of 2.1 million in fair value of contingent consideration for the year ended December 31, 2016.

The Company did not have any assets or liabilities with Level 3 inputs for the year ended December 31, 2015.

The following table summarizes the fair value (in thousands), valuation techniques and significant unobservable inputs of our Level 3 fair value measurements as of December 31, 2016:

	Fair		Valuation	Significant	Assumption or
	Value		Technique	Unobservable Inputs	Input Ranges
Contingent consideration (1)	$	8,300	Real options approach	Risk-adjusted recurring revenue CAGR	97.0	%	(2)
				Discount rate/time value	2.5% - 4.5%

⁽¹⁾ Related to additional Passport earn-out consideration as described further in Note 4.

⁽²⁾ The risk-adjusted recurring revenue CAGR is calculated over the five year period 2017-2021. Given that there was no recurring revenue in 2016, the calculation of the 2017 growth rate is based on a theoretical 2016 recurring revenue of $1.0 million, resulting in a higher growth rate. The risk-adjusted recurring revenue CAGR over the period 2018-2021 is 50.8%.

The Company did not hold any assets or liabilities with Level 3 inputs as of December 31, 2015.

36

Nonrecurring Fair Value Measurements

In addition to the assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. This includes goodwill, intangible assets, property, plant and equipment, held-to-maturity investments and equity method investments. While not carried at fair value on a recurring basis, these items are continually monitored for indicators of impairment that would indicate current carrying value is greater than fair value. In those situations, the assets are considered impaired and written down to current fair value. Refer to Notes 4, 5, 6 and 7 for further discussion of assets measured at fair value on a nonrecurring basis.

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents (those not held in a money market fund), restricted cash, receivables, prepaid expenses, accrued liabilities, accrued compensation and deferred rent approximate their fair values because of the relatively short-term maturities of these items and financial instruments.

The estimated fair value of the 2021 Mirror Notes is $10.0 million, which approximates cost as of December 31, 2016. Fair value approximates cost as there were no significant movements in interest rates between the issuance date and December 31, 2016. See Note 8 for further discussion of the 2021 Mirror Notes.

15. Related Parties

As discussed in Note 13, the Company owned a 26% economic interest in GPAC as of December 31, 2016, and is considered to have significant influence. As a result, the Company accounts for the investment under the equity method of accounting and is allocated its proportional share of GPAC’s profits and losses for each reporting period. In addition, the Company signed a long-term services agreement with GPAC to provide certain management, operational and support services to help GPAC manage elements of its service offerings.

The Company also works closely with both of its founding investors, The Advisory Board and UPMC. The relationship with The Advisory Board is centered on providing certain specified services and making valuable connections with CEOs of health systems that could become partners. The Company’s relationship with UPMC is a subcontractor relationship where UPMC has agreed to execute certain tasks (primarily TPA services) relating to certain customer commitments. We also conduct business with a company in which UPMC holds a significant equity interest.

Additionally, prior to the Offering Reorganization, Evolent Health, Inc. issued shares of common and preferred stock to certain of our partners while concurrently entering into revenue contracts with those partners. The Company issued an identical number of Class A common units to Evolent Health, Inc. as a result of the stock issuances. Those customers are considered related parties and the balances and/or transactions with them are reported on our consolidated financial statements.

The Company also works closely with its parent entity, Evolent Health, Inc. The Company acts as the operating company for Evolent Health Inc., which is the holding company. In addition, the Company entered into various transaction with Evolent Health Inc. during 2016, including a mirror note agreement (as discussed further in Note 8) and contributions of purchased assets (as discussed further in Note 4). Evolent Health, Inc. is considered a related party and the balances and/or transaction with them are reported on our consolidated financial statements.

37

XML

Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2016	Feb. 28, 2017	Jun. 30, 2016
Document Document And Entity Information [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	FY
Trading Symbol	ABCO
Entity Registrant Name	ADVISORY BOARD CO
Entity Central Index Key	0001157377
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		40,235,820
Entity Public Float			$ 1,424,955,877

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 91,151	$ 71,825
Membership fees receivable, net	605,517	605,444
Prepaid expenses and other current assets	18,965	22,543
Total current assets	715,633	699,812
Construction in progress	63,368	2,700
Property and equipment, net	171,281	180,357
Intangible assets, net	255,053	274,721
Deferred incentive compensation and other charges	72,178	81,181
Goodwill	739,507	738,200
Investments in and advances to unconsolidated entities	19,858	706
Other non-current assets	0	1,800
Total assets	2,036,878	1,979,477
Current liabilities:
Deferred revenue, current	564,237	581,471
Accounts payable and accrued liabilities	67,702	74,879
Accrued incentive compensation	25,521	41,173
Debt, current	49,347	27,743
Total current liabilities	706,807	725,266
Deferred revenue, net of current portion	170,357	173,953
Deferred income taxes	89,013	93,893
Debt, net of current portion	472,739	522,086
Financing obligation	63,368	2,700
Other long-term liabilities	17,550	12,488
Total liabilities	1,519,834	1,530,386
Stockholders’ equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized, zero shares issued and outstanding	0	0
Common stock, par value $0.01; 135,000,000 shares authorized, 40,192,980 and 41,572,523 shares issued and outstanding as of December 31, 2016 and 2015, respectively	402	416
Additional paid-in capital	782,399	744,333
Accumulated deficit	(266,218)	(295,860)
Accumulated other comprehensive income	461	202
Total stockholders’ equity	517,044	449,091
Total liabilities and stockholders’ equity	$ 2,036,878	$ 1,979,477

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Dec. 31, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Preferred stock, par value (dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	135,000,000	135,000,000
Common stock, shares issued (in shares)	40,192,980	41,572,523
Common stock, shares outstanding (in shares)	40,192,980	41,572,523

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Income Statement [Abstract]
Revenue	$ 434,002,000	$ 803,424,000	$ 768,348,000
Costs and expenses:
Cost of services, excluding depreciation and amortization	230,769,000	392,956,000	392,676,000
Member relations and marketing	81,244,000	130,028,000	120,958,000
General and administrative	75,483,000	126,634,000	128,669,000
Depreciation and amortization	30,317,000	77,268,000	73,134,000
Impairment of capitalized software	2,086,000	0	8,166,000
Goodwill impairment	0	0	99,145,000
Operating income (loss)	14,103,000	76,538,000	(54,400,000)
Interest expense	0	(18,137,000)	(21,121,000)
Other (expense) income, net	(1,327,000)	(2,789,000)	(6,499,000)
Loss on financing activities	0	0	(17,398,000)
Total other (expense) income, net	(1,327,000)	(20,926,000)	(45,018,000)
Income (loss) before provision for income taxes and gains (losses) from equity method investments	12,776,000	55,612,000	(99,418,000)
Provision for income taxes	(3,530,000)	(11,040,000)	(15,200,000)
Gains (losses) from equity method investments	(6,540,000)	46,666,000	(4,396,000)
Net income (loss) before allocation to noncontrolling interest	2,706,000	91,238,000	(119,014,000)
Net loss and accretion to redemption value attributable to noncontrolling interest	(6,253,000)	0	0
Net income (loss) attributable to common stockholders	$ (3,547,000)	$ 91,238,000	$ (119,014,000)
Earnings per share:
Net (loss) income attributable to common stockholders per share — basic (dollars per share)	$ (0.10)	$ 2.25	$ (2.84)
Net (loss) income attributable to common stockholders per share — diluted (dollars per share)	$ (0.10)	$ 2.23	$ (2.84)
Weighted average number of shares outstanding:
Basic (shares)	36,213	40,528	41,888
Diluted (shares)	36,213	40,871	41,888

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
Net income (loss) attributable to common stockholders	$ (3,547)	$ 91,238	$ (119,014)
Other comprehensive income:
Net unrealized (losses) gains on marketable securities, net of tax	1,623	0	(81)
Net unrealized gain on cash flow hedges, net of taxes	0	259	201
Comprehensive income (loss)	$ (1,924)	$ 91,497	$ (118,894)

XML

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Elements of Other Comprehensive Income (Loss)	Treasury Stock	Noncontrolling Interest
Beginning balance at Mar. 31, 2014	$ 336,666	$ 363	$ 428,628	$ (90,557)	$ (1,541)	$ 0	$ (227)
Beginning balance (in shares) at Mar. 31, 2014		36,321,825
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Proceeds from exercise of stock options	$ 4,297	$ 3	4,294
Proceeds from exercise of stock options (in shares)	233,999	233,999
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding	$ (7,608)	$ 3	(7,611)
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding (in shares)		254,248
Excess tax benefits from stock-based awards	392		392
Proceeds from issuance of common stock under employee stock purchase plan	$ 432		432
Proceeds from issuance of common stock under employee stock purchase plan (in shares)	9,241	9,241
Stock-based compensation expense	$ 17,964		17,964
Retirement of treasury stock	0	$ (8)		(36,006)		36,014
Purchases of treasury stock	(36,014)					(36,014)
Purchase of treasury stock (in shares)		(731,559)
Net activity related to noncontrolling interests	3,605		3,378				227
Change in net unrealized gains (losses) on available-for-sale marketable securities, net of income taxes of ($1,760 twelve months March 31, 2014, and $1,147 nine months December 31, 2014)	1,623				1,623
Net Income (Loss)	(3,547)		(6,253)	2,706
Ending balance at Dec. 31, 2014	317,810	$ 361	441,224	(123,857)	82	0	0
Ending balance (in shares) at Dec. 31, 2014		36,087,754
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Proceeds from exercise of stock options	$ 4,747	$ 3	4,744
Proceeds from exercise of stock options (in shares)	218,109	218,109
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding	$ (6,058)	$ 2	(6,060)
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding (in shares)		247,157
Excess tax benefits from stock-based awards	4,855	$ 0	4,855
Proceeds from issuance of common stock under employee stock purchase plan	$ 505		505
Proceeds from issuance of common stock under employee stock purchase plan (in shares)	10,496	10,496
Stock-based compensation expense	$ 29,092		29,092
Retirement of treasury stock	0	$ (11)		(52,989)		53,000
Purchases of treasury stock	(53,000)					(53,000)
Purchase of treasury stock (in shares)		(1,069,357)
Issuance of common stock to purchase Royall	121,248	$ 24	121,224
Issuance of common stock to purchase Royall (in shares)		2,428,364
Common stock offering	148,786	$ 37	148,749
Common stock offering (in shares)		3,650,000
Change in net unrealized gains (losses) on available-for-sale marketable securities, net of income taxes of ($1,760 twelve months March 31, 2014, and $1,147 nine months December 31, 2014)	(81)				(81)
Change in net unrealized gains (losses) on cash flow hedge, net of income taxes of $83	201				201
Net Income (Loss)	(119,014)			(119,014)
Ending balance at Dec. 31, 2015	449,091	$ 416	744,333	(295,860)	202	0	0
Ending balance (in shares) at Dec. 31, 2015		41,572,523
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Proceeds from exercise of stock options	$ 4,344	$ 3	4,341
Proceeds from exercise of stock options (in shares)	303,490	284,843
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding	$ (3,514)	$ 2	(3,516)
Vesting of restricted stock units, net of shares withheld to satisfy minimum employee tax withholding (in shares)		210,562
Excess tax benefits from stock-based awards	4,628		4,628
Proceeds from issuance of common stock under employee stock purchase plan	$ 476		476
Proceeds from issuance of common stock under employee stock purchase plan (in shares)	14,041	14,041
Stock-based compensation expense	$ 29,435		29,435
Retirement of treasury stock	0	$ (20)		(61,596)		61,616
Purchases of treasury stock	(61,616)					(61,616)
Purchase of treasury stock (in shares)		(1,951,258)
Issuance of common stock for contingent earnout	2,703	$ 1	2,702
Release of Contingent Earnout shares (in shares)		62,269
Change in net unrealized gains (losses) on available-for-sale marketable securities, net of income taxes of ($1,760 twelve months March 31, 2014, and $1,147 nine months December 31, 2014)	0
Change in net unrealized gains (losses) on cash flow hedge, net of income taxes of $83	259				259
Net Income (Loss)	91,238			91,238
Ending balance at Dec. 31, 2016	$ 517,044	$ 402	$ 782,399	$ (266,218)	$ 461	$ 0	$ 0
Ending balance (in shares) at Dec. 31, 2016		40,192,980

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - USD ($) $ in Thousands	12 Months Ended		21 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Statement of Stockholders' Equity [Abstract]
Change in net unrealized gains (losses), tax		$ (143)	$ (1,147)
Change in net unrealized gains (losses) on cash flow hedge, tax	$ 83	$ 354

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Cash flows from operating activities:
Net income (loss) before allocation to noncontrolling interest	$ 2,706,000	$ 91,238,000	$ (119,014,000)
Adjustments to reconcile net income before allocation to noncontrolling interest to net cash provided by operating activities:
Depreciation and amortization	30,317,000	77,268,000	73,134,000
Impairment of capitalized software	2,086,000	0	8,166,000
Goodwill impairment	0	0	99,145,000
Loss on financing activities	0	0	17,398,000
Amortization of debt issuance costs	0	940,000	1,270,000
Deferred income taxes	(2,383,000)	(6,807,000)	6,670,000
Excess tax benefits from stock-based awards	(392,000)	(1,285,000)	(4,855,000)
Stock-based compensation expense	17,964,000	29,435,000	29,093,000
Amortization of marketable securities premiums	1,274,000	0	0
Loss on investment in common stock warrants	180,000	0	370,000
Impairment of cost method investment	0	1,800,000	3,200,000
(Gains) losses from equity method investments	6,540,000	(16,987,000)	4,396,000
Gain on partial sale of equity method investment, net of taxes	0	(29,679,000)	0
Changes in operating assets and liabilities:
Membership fees receivable	(82,689,000)	(73,000)	(37,144,000)
Prepaid expenses and other current assets	4,936,000	(10,500,000)	13,276,000
Deferred incentive compensation and other charges	102,000	9,915,000	5,937,000
Other non-current assets	0	0	(258,000)
Deferred revenue	80,386,000	(20,830,000)	64,381,000
Accounts payable and accrued liabilities	5,107,000	380,000	(6,678,000)
Acquisition-related earn-out payments	(3,348,000)	(1,432,000)	(2,531,000)
Accrued incentive compensation	3,602,000	(15,652,000)	9,100,000
Other long-term liabilities	(1,815,000)	4,828,000	(3,122,000)
Net cash provided by operating activities	64,573,000	112,559,000	161,934,000
Cash flows from investing activities:
Purchases of property and equipment	(47,535,000)	(45,392,000)	(52,941,000)
Capitalized external use software development costs	(3,826,000)	(3,131,000)	(3,749,000)
Cash paid for acquisition, net of cash acquired	(70,208,000)	(1,900,000)	(746,693,000)
Investments in and advances to unconsolidated entities	0	0	(3,006,000)
Redemptions of marketable securities	151,420,000	0	14,714,000
Cash received from partial sale of equity method investment	0	48,565,000	0
Net cash (used in) provided by investing activities	29,851,000	(1,858,000)	(791,675,000)
Cash flows from financing activities:
Payment for acquisition of noncontrolling interest	(6,110,000)	0	0
Proceeds from debt, net	0	17,000,000	1,840,734,000
Pay down of debt	0	(45,750,000)	(1,307,188,000)
Debt issuance costs	0	0	(3,251,000)
Equity offering	0	0	148,786,000
Proceeds from issuance of common stock from exercise of stock options	4,294,000	4,344,000	4,747,000
Withholding of shares to satisfy minimum employee tax withholding for vested restricted stock units	(7,611,000)	(3,514,000)	(6,058,000)
Proceeds from issuance of common stock under employee stock purchase plan	432,000	476,000	505,000
Excess tax benefits from stock-based awards	392,000	1,285,000	4,855,000
Acquisition-related earn-out payments	0	(3,600,000)	(1,500,000)
Purchases of treasury stock	(36,014,000)	(61,616,000)	(53,000,000)
Net cash (used in) provided by financing activities	(44,617,000)	(91,375,000)	628,630,000
Net increase (decrease) in cash and cash equivalents	49,807,000	19,326,000	(1,111,000)
Cash and cash equivalents, beginning of period	23,129,000	71,825,000	72,936,000
Cash and cash equivalents, end of period	$ 72,936,000	$ 91,151,000	$ 71,825,000

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Business Description

12 Months Ended

Dec. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Business Description

Business description

The Advisory Board Company (individually and collectively with its subsidiaries, the “Company”) provides best practices research and insight, technology, data-enabled services, and consulting services, through discrete programs to hospitals, health systems, independent medical groups, pharmaceutical and biotechnology companies, health care insurers, medical device companies, and colleges, universities, and other health care-focused organizations and educational institutions. Members of each subscription-based membership program are typically charged a separate fixed annual fee and have access to an integrated set of services that may include best practices research studies, executive education, proprietary content databases and online tools, daily online executive briefings, original executive inquiry services, cloud-based software applications, data-enabled services, and consulting and management services.

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Summary of significant accounting policies

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Summary of significant accounting policies

Summary of significant accounting policies

Basis of presentation and consolidation

The 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 securities deemed to be in-substance common stock and has the ability to exercise significant influence, but not control, over the investee and for all investments in partnerships or limited liability companies where the investee maintains separate capital accounts for each investor. Investments in which the Company holds securities that are not in-substance common stock, or holds common stock or in-substance common stock but has little or no influence over the investee are accounted for using the cost method. All significant intercompany transactions and balances have been eliminated.

Fiscal year

The Company changed its fiscal year to the calendar twelve months ending December 31, effective beginning with the period ended on December 31, 2014. As a result, the fiscal transition period was shortened from twelve months to a nine-month transition period ended on December 31, 2014. In these consolidated statements, including the notes thereto, the financial results ended December 31, 2014 are for a nine-month period. Audited results for the twelve months ended December 31, 2016 and 2015 are both for twelve-month periods.

Use of estimates in preparation of consolidated financial statements

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates, judgments, and assumptions. For cases where the Company is required to make certain estimates, judgments, and assumptions, the Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available to the Company at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s financial statements will be affected. The Company’s estimates, judgments, and assumptions may include: estimates of bad debt reserves; estimates to establish employee bonus and commission accruals; estimates of the fair value of contingent earn-out liabilities; estimates of the useful lives of acquired or internally developed intangible assets; estimates of the fair value of goodwill and intangibles and evaluation of impairment; determination of when investment impairments are other-than-temporary; estimates of the recoverability of deferred tax assets; and estimates of the potential for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.

Correction of prior period errors

In connection with the preparation of the 2016 consolidated financial statements, the Company recorded corrections of certain out-of-period, immaterial misstatements that occurred in prior years. These corrections resulted in an increase to the provision for income taxes of $2.6 million primarily related to recording reserves for tax positions taken in prior periods offset by correcting an overstatement of deferred tax assets related to stock based compensation. These corrections also resulted in a decrease to income tax expense of $5.1 million included in gains (losses) from equity method related to recording a deferred tax asset for the outside basis difference in the Company's investment in Evolent, Inc. In addition, the Company recorded a balance sheet adjustment to increase deferred tax assets and additional paid-in capital by $3.4 million at December 31, 2016.

Cash equivalents and marketable securities

Marketable securities with original maturities of three months or less at purchase are considered cash equivalents. Investments with original maturities of more than three months are classified as marketable securities. Marketable securities, are classified as available-for-sale, and carried at fair value based on quoted market prices. The net unrealized gains and losses on available-for-sale marketable securities are excluded from net income attributable to common stockholders and are included within accumulated other comprehensive income, net of tax. The specific identification method is used to compute the realized gains and losses on the sale of marketable securities. The Company did not hold any marketable securities as of December 31, 2016 or 2015.

Allowance for uncollectible revenue

The Company’s ability to collect outstanding receivables from its members has an effect on the Company’s operating performance and cash flows. The Company records an allowance for uncollectible revenue as a reduction of revenue based on its ongoing monitoring of members’ credit and the aging of receivables. To determine the allowance for uncollectible revenue, the Company examines its collections history, the age of accounts receivable in question, any specific member collection issues that have been identified, general market conditions, and current economic trends. Membership fees receivable balances are not collateralized.

Property and equipment

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal use software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain membership programs, the Company provides software applications under a hosting arrangement where the software application resides on the Company’s or its service providers’ hardware. The members do not take delivery of the software and receive access to the software only during the term of their membership agreement.

Software development costs that are incurred in the preliminary project stage for internal use software 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 it is placed into operation. Internally developed capitalized software is classified as software within property and equipment and is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and upgrades and enhancements to existing systems that result in additional functionality are capitalized, while maintenance and repairs are charged to expense as incurred. Amortization expense for internally developed capitalized software for the years ended December 31, 2016 and 2015, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $22.3 million and $18.9 million, respectively. Amortization expense for internally developed capitalized software for the nine months ended December 31, 2014, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $10.1 million.

Acquired developed software represents the fair value of software acquired through a business combination that resides on the Company’s or its service providers’ hardware and is made available to members though the memberships. Amortization for acquired developed software is included in depreciation and amortization on the consolidated statements of operations. Acquired developed software is amortized over a weighted average estimated useful life of eight yearsbased on the cash flow estimate used to determine the value of the intangible asset at its acquisition. The amount of acquired developed software amortization included in depreciation and amortization for the years ended December 31,2016 and 2015 was approximately $8.8 million and $9.4 million, respectively. The amount of acquired developed software amortization included in depreciation and amortization for the nine months ended December 31, 2014 was approximately $2.0 million.

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 capital leases included in property and equipment. The amount of depreciation expense recognized on furniture, fixtures, and equipment for the years ended December 31, 2016 and 2015 was approximately $22.2 million and $20.4 million, respectively. The amount of depreciation expense recognized on furniture, fixtures, and equipment for the nine months ended December 31, 2014 was approximately $10.9 million.

The Company establishes assets and liabilities (financing obligations) for the estimated construction costs incurred under build-to-suit lease arrangements where the Company is considered the owner for accounting purposes only, to the extent the Company is involved in the design or construction of the asset or takes construction risk prior to commencement of a lease. The Company recognizes expense on a portion of future lease payments that are estimated to represent the underlying land lease. The Company records an asset for the amount of the total project costs in construction in progress and the related financing obligation, representative of the project costs incurred by the developer, in financing obligations on the consolidated balance sheet. Upon completion of the construction of facilities under build-to-suit leases, the Company evaluates whether these arrangements meet the criteria for sale-leaseback accounting treatment. If the lease does not meet sale-leaseback criteria, the Company will treat the build-to-suit as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation, (2) imputed interest expense, and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the building’s estimated useful life. At the conclusion of the lease term, the net book values of the asset and financing obligation would be derecognized.

Business combinations

The Company records acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration are recognized at their fair value on the acquisition date. All subsequent changes to the acquired assets or assumed liabilities of the acquired company at the acquisition date that occur both within the measurement period and as a result of facts and circumstances that existed at the acquisition date are recognized as an adjustment to goodwill. Any acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. Acquisition-related costs are recorded as expenses in the consolidated financial statements. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Goodwill and other intangible assets

The excess cost of an acquisition over the fair value of the net assets acquired is recorded as goodwill. The primary factors that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. The Company’s goodwill and other intangible assets with indefinite lives are not amortized, but rather are tested for impairment on an annual basis on October 1, or more frequently if events or changes in circumstances indicate potential impairment.

When testing goodwill for impairment, the Company has the option first to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, the Company is then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company estimates the fair value of its reporting units using both an income and market approach. The income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. The determination of fair value using the income approach involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, terminal growth rates, and discount rates. The market approach is based on revenue and earnings multiple data of peer companies. See Note 7, “Goodwill and intangibles,” for further detail, including the recognition of goodwill impairment charges of $99.1 million during the year ended December 31, 2015.

Other intangible assets consist of capitalized software for sale and acquired intangibles. The Company capitalizes consulting costs and payroll and payroll-related costs for employees directly related to building a software product for sale once technological feasibility is established. The Company determines that technological feasibility is established by the completion of a detailed program design or, in its absence, completion of a working model. Once the software product is ready for general availability, the Company ceases capitalizing costs and begins amortizing the intangible asset on a straight-line basis over its estimated useful life. The weighted average estimated useful life of capitalized software for sale is five years. Other intangible assets include those assets that arise from business combinations and that consist of developed technology both for internal use and external sale, non-competition covenants, trademarks, contracts, and customer relationships that are amortized, on a straight-line basis, over two years to seventeen years. Finite-lived intangible assets are required to be amortized over their useful lives and are evaluated for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Recovery of long-lived assets (excluding goodwill)

The Company records long-lived assets, such as property and equipment, at cost. The carrying value of long-lived assets is reviewed for possible impairment whenever events or changes in circumstances suggest the carrying value of a long-lived asset may not be fully recoverable. The test for recoverability is made using an estimate of the undiscounted expected future cash flows and, if required, the impairment loss is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable. The Company considers expected cash flows and estimated future operating results, trends, and other available information in assessing whether the carrying value of assets is impaired. If it is determined that an asset’s carrying value is impaired, a write-down of the carrying value of the identified asset will be recorded as an operating expense on the consolidated statements of operations in the period in which the determination is made.

Fair value of financial instruments

The Company’s short-term financial instruments include cash and cash equivalents, membership fees receivable, accrued expenses, and accounts payable. The carrying value of these financial instruments as of December 31, 2016 and 2015 approximates their fair value due to their short-term nature.

Derivative instruments

The Company holds warrants to purchase common stock in an entity that meet the definition of a derivative. Derivative instruments are carried at fair value on the consolidated balance sheets. Gains or losses from changes in the fair value of the warrants are recognized on the consolidated statements of operations in the period in which they occur.

The Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of discounting the future variable cash payments, or receipts, over the life of the agreements. The Company has designated the interest rate swap as a cash flow hedge of the variability of interest payments under its senior secured term loan facility due to changes in the benchmark interest rate. If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations for the applicable period. 

Revenue recognition

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned, and (4) collectibility is reasonably assured. Fees are generally billable when a letter of agreement is signed by the member. Fees receivable during the subsequent twelve-month period and related deferred revenue are recorded on the balance sheet upon the commencement of the membership and are subsequently updated at the end of each reporting period. In many of the Company’s higher priced programs and membership agreements with terms that are greater than one year, fees may be billed on an installment basis. In certain multi-year arrangements, the member has the ability to cancel the arrangement within a defined notice period without penalty.

The Company’s membership programs generally include more than one deliverable. Deliverables are determined based upon the availability and delivery method of the services and may include the following: best practices research; executive education curricula; cloud-based content, databases, and calculators; performance or benchmarking reports; diagnostic tools; interactive advisory support; and software. Access to such deliverables is generally available on an unlimited basis over the membership period. When an agreement contains multiple deliverables, the Company reviews the deliverables to determine if they qualify as separate units of accounting. In order for deliverables in a multiple-deliverable arrangement to be treated as separate units of accounting, the deliverables must have standalone value upon delivery, and delivery or performance of undelivered items in an arrangement with a general right of return must be probable. If the Company determines that there are separate units of accounting, arrangement consideration at the inception of the membership period is allocated to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. Because of the unique nature of the Company’s products, neither vendor specific objective evidence nor third-party evidence is available. Therefore, the Company utilizes best estimate of selling price to allocate arrangement consideration in multiple-deliverable arrangements.

In general, the deliverables in membership programs do not qualify as separate units of accounting. These deliverables are consistently available throughout the membership period, and, as a result, the consideration is recognized ratably over the membership period. When a service offering includes a combination of unlimited and limited service offerings, revenue is recognized over the appropriate service period, either ratably, if the service is consistently available, or, if the service is not consistently available, upon the earlier of the delivery of the service or the completion of the membership period, provided that all other criteria for recognition have been met.

Certain membership programs incorporate hosted software. In many of these agreements, members are charged set-up fees in addition to subscription fees for access to the hosted cloud-based software and related membership services. Both set-up fees and subscription fees are recognized ratably over the term of the membership agreement, which is generally three years, and is consistent with the pattern of the delivery of services under these arrangements. Upon launch of a new program that incorporates software, all program revenue is deferred until the program is generally available for release to the Company’s membership, and then recognized ratably over the remainder of the contract term of each agreement.

Certain arrangements include performance-based fees that are contingent upon the member realizing a benefit over a defined period. These performance-based fees are included in the arrangement consideration and recognized when the related services are provided to the member and the Company is reasonably assured that the amounts due are collectible. The Company has not recognized any revenue that is at risk due to future performance contingencies.

The Company also performs professional services sold under separate agreements that include consulting and management services. These agreements are either fixed fee or time-and-materials arrangements. For fixed fee arrangements, the Company recognizes professional services revenues using the proportional performance method based on effort expended. The Company recognizes professional services revenues for time-and-materials arrangements as services are rendered based on contractual rates.

For arrangements in which a customer purchases multiple membership programs or purchases a membership program together with consulting and management services, each program and professional services arrangement is generally considered a separate unit of accounting, and arrangement consideration is allocated based on the Company’s best estimate of selling price. The Company develops its best estimate of selling price by considering pricing practices, margin, competition, and geographies in which the Company offers its products and services.

Deferred incentive compensation and other charges

Incentive compensation to employees related to the negotiation of new and renewal memberships, license fees to third-party vendors for tools, data, and software incorporated in specific memberships that include software, and other direct and incremental costs associated with specific memberships are deferred and amortized over the term of the related memberships.

Operating leases

The Company recognizes rent expense under operating leases on a straight-line basis over the non-cancelable term of the lease, including free-rent periods. Lease incentives relating to allowances provided by landlords are amortized over the term of the lease as a reduction of rent expense. The Company recognizes sublease income on a straight-line basis over the term of the sublease, including free rent periods and escalations, as a reduction of rent expense. Costs associated with acquiring a subtenant, including broker commissions and tenant allowances, are amortized over the sublease term as a reduction of sublease income.

Stock-based compensation

The Company has several stock-based compensation plans which are described more fully in Note 12, “Stock-based compensation.” These plans provide for the granting of stock options and restricted stock units (“RSUs”) to employees, non-employee members of the Company’s Board of Directors and any other service providers who have been retained to provide consulting, advisory, or other services to the Company. Stock-based compensation cost is measured at the grant date of the stock-based awards based on their fair values, and is recognized as an expense in the consolidated statements of operations over the vesting periods of the awards. The fair value of RSUs, with the exception of RSUs issued with both performance and market-based conditions, is determined as the fair market value of the underlying shares on the date of grant. The fair value of RSUs issued with market-based conditions is calculated on the date of grant using a Monte Carlo option-pricing model. The Company calculates the fair value of all stock option awards, with the exception of the stock options issued with market-based conditions, on the date of grant using the Black-Scholes model. The fair value of stock options issued with market-based conditions is calculated on the date of grant using a Monte Carlo option-pricing model. Forfeitures are estimated based on historical experience at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are inherently uncertain.

For awards with performance conditions, the probability of achieving performance conditions and estimated time to achieve such performance conditions are measured at each reporting period and are used to determine when and in what amount to recognize stock-based awards with performance conditions.

Other (expense) income, net

Other expense, net for the year ended December 31, 2016 includes foreign exchange losses of $1.4 million, as a result of the effect of fluctuating currency rates on the Company's receivable balances denominated in foreign currencies, and a $1.8 million loss on the Company's investment in preferred stock and common stock warrants of a private company that were determined to be other than temporary. The Company paid $4.3 million to the private company, a related party, under its reseller agreement which is included in cost of services on the consolidated statement of operations for the year ended December 31, 2016.

Other expense, net for the year ended December 31, 2015 includes a $3.6 million loss on the Company's investment in preferred stock and common stock warrants of a private company that were determined to be other than temporary and a foreign exchange rate loss of $2.9 million. Other income, net for the nine months ended December 31, 2014 includes $1.1 million of interest income earned from the Company’s marketable securities, a $1.7 million loss on foreign exchange rates, $0.5 million in credit facility fees, $0.1 million realized loss on sale of marketable securities, and a $0.2 million loss on the Company's investment in common stock warrants. The Company paid $4.2 million to the private company, a related party, under its reseller agreement which is included in cost of services on the consolidated statement of operations for the year ended December 31, 2015.

Income taxes

Deferred income taxes are determined using the asset and liability method. Under this method, temporary differences arise as a result of the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and tax rates on the date of the enactment of the change.

Construction in progress

In December 2015, the Company entered into a lease for its new corporate headquarters, which is currently being constructed in Washington D.C. The lease has an anticipated start date of mid-2019 with a 16-year initial term and $446.1 million of lease payments. The Company has concluded that it is the deemed owner of the building (for accounting purposes only) during the construction period and that the lease qualifies for build-to-suit accounting. Accordingly, the Company has recorded a construction-in-progress asset, net of $63.4 million and $2.7 million for which there is a corresponding construction financing obligation of $63.4 million and $2.7 million recorded in the consolidated balance sheet as of December 31, 2016 and 2015, respectively. The Company will continue to increase the construction-in-progress asset and corresponding long-term liability as additional building costs are incurred by the landlord during the construction period. Upon completion of the construction, the Company will evaluate whether or not this arrangement meets the criteria for sale-leaseback accounting treatment.

Concentrations of risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of membership fees receivable, cash and cash equivalents, and marketable securities. The credit risk with respect to membership fees receivable is generally diversified due to the large number of entities constituting the Company’s membership base, and the Company establishes allowances for potential credit losses. No one member accounted for more than 1.5% of revenue for any period presented. The Company maintains cash and cash equivalents and, in prior periods, marketable securities with financial institutions, which may at times exceed federally insured limits.

In the years ended December 31, 2016, 2015, and the nine months ended December 31, 2014 , the Company generated approximately 2.4%, 2.4% and 3.9% of revenue, respectively, from members outside the United States. The Company’s international operations subject the Company to risks related to currency exchange fluctuations. Prices for the Company’s services sold to members located outside the United States are sometimes denominated in local currencies. Increases or decreases in the value of the U.S. dollar against local currencies in countries where the Company has members may result in a foreign exchange gain or loss recognized by the Company. Such foreign exchange gains or losses are included in other (expenses) income, net in the consolidated statements of operations.

Earnings per share

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 (“diluted EPS”) 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.

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

	Year Ended December 31,	Year Ended December 31,	Nine Months Ended December 31,
	2016	2015	2014
Basic weighted average common shares outstanding	40,528	41,888	36,213
Effect of dilutive outstanding stock-based awards	343	—	—
Diluted weighted average common shares outstanding	40,871	41,888	36,213

In the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, 1.6 million shares, 2.7 million shares, and 2.6 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.

Recent accounting pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all recent ASUs. ASUs not identified below were assessed and determined to be not applicable or are expected to have an immaterial impact on the Company’s consolidated financial position and results of operations.

Recently adopted

In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented as a direct deduction from the carrying amount of that debt liability and only impacts financial position presentation. In August 2015, the FASB issued guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The guidance codified the SEC staff's view on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements consistent with prior practice as an asset. The Company adopted these standards retrospectively on January 1, 2016. The impact the adoption had on the Company's consolidated financial position as of December 31, 2015 is disclosed below (in thousands). The adoption had no effect on the Company's results of operations for any period.

	As reported		Adjustments			As adjusted
Prepaid expenses and other current assets	$	22,651	$	(108	)	$	22,543
Deferred incentive compensation and other charges	81,462		(281		)	81,181
Total assets	1,979,866		(389		)	1,979,477
Debt, current	27,851		(108		)	27,743
Debt, net of current portion	522,367		(281		)	522,086
Total liabilities	1,530,775		(389		)	1,530,386
Total liabilities and stockholders’ equity	1,979,866		(389		)	1,979,477

In June 2014, the FASB issued accounting guidance related to share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In February 2015, the FASB issued guidance on amendments to the consolidation analysis. The new guidance requires management to reevaluate all legal entities under a revised consolidation model that will (1) modify the evaluation of whether limited partnership and similar legal entities are variable interest entities (“VIEs”), (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 under the Investment Company Act of 1940 for registered money market funds. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In September 2015, the FASB issued new guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should either be presented separately on the face of the income statement or disclosed in the notes to the financial statements. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. It requires an assessment for a period of one year after the date on which the financial statements are issued. Further, based on certain conditions and circumstances, additional disclosures may be required. This ASU is effective beginning with the first annual period ending after December 15, 2016, and for all annual and interim periods thereafter. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

Recently issued

In May 2014, the FASB issued accounting guidance related to revenue recognition. The new standard supersedes most of the existing revenue recognition guidance under GAAP, and requires revenue to be recognized when goods or services are transferred to a customer in an amount that reflects the consideration a company expects to receive. The new standard may require more judgment and estimates relating to the recognition of revenue, which could result in additional disclosures to the financial statements. The original effective date of the new standard was for annual and interim reporting periods beginning after December 15, 2016. In July 2015, the FASB decided to defer by one year the effective date of this new revenue recognition standard. As a result, the new standard will be effective for annual and interim reporting periods beginning after December 15, 2017, with an option that permits companies to adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The Company will adopt the standard using the modified retrospective approach on January 1, 2018.

While we are continuing to assess all potential impacts of the new standard, we currently believe the new standard will impact the Company's accounting for deferred costs and arrangements that include variable consideration. The Company is currently evaluating the effect that the standard will have on its remaining revenue. The Company continues to update its assessment of the impact of the standard and related updates to the consolidated financial statements, and will note material impacts when known.

In January 2016, the FASB issued accounting guidance related to the recognition and measurement of financial assets and liabilities. The guidance requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under this ASU, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance for classifying and measuring investments in debt securities and loans is not affected. The guidance eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted for only certain portions of the ASU. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued accounting guidance relating to leases. The guidance requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The new guidance also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The guidance is effective for annual reporting and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In March 2016, the FASB issued accounting guidance relating to stock compensation. The guidance simplifies various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to impact net income, earnings per share, and the statement of cash flows. The guidance is effective for annual reporting and interim periods beginning after December 15, 2016, with early adoption permitted. The Company will adopt the standard January 1, 2017 and is currently evaluating the impact of the new guidance on its consolidated financial statements.

In August 2016, the FASB issued accounting guidance relating to the statement of cash flows. The guidance clarifies how certain cash receipts and cash payments are presented in the statement of cash flows. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued accounting guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued accounting guidance simplifying the test of goodwill impairment. The guidance eliminates Step 2 of the goodwill impairment test, which calculates the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., Step 1). The guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued accounting guidance related to gains and losses from the derecognition of nonfinancial assets: clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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Acquisitions

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Acquisitions

Acquisitions

Increasing service to members through the introduction and expansion of new programs is a key component of the Company's growth strategy. From time to time the Company supplements its organic new program development efforts with acquisitions that allow it to introduce new programs and services to its members, or that complement and enhance the value of existing programs through the addition of new capabilities.

2016 Acquisitions

There were no material acquisitions for the year ended December 31, 2016.

2015 Acquisitions

On January 9, 2015, the Company completed the acquisition of all of the issued and outstanding capital stock of Royall Acquisition Co. (together with its subsidiaries, “Royall”) from Royall Holdings, LLC (the “Seller”). Royall is a higher education market leader in strategic, data-driven student engagement and enrollment management solutions.

Total consideration consisted of the following (in thousands):

Net cash paid (1)	$	744,193
Fair value of equity issued	121,224
Total	$	865,417

(1) Net of cash acquired of $7,065 and a working capital adjustment payment of $1,278.

On January 9, 2015, in connection with the completion of the acquisition of Royall, the Company entered into credit facilities with various lenders. See Note 10, "Debt," for further details regarding these credit facilities.

The fair value of equity issued was approximately $121.2 million based on 2,428,364 shares of the Company's common stock valued at $49.92 per share, which was the closing price on January 9, 2015 as reported on the NASDAQ Global Select Market. The 2,428,364 shares issued to the Seller was the minimum number of shares that could have been issued under the pricing collar set forth in the purchase agreement, since the volume-weighted average trading price of the Company’s common stock on the NASDAQ Global Select Market for the 15 consecutive trading days ended on (and including) January 7, 2015 was higher than the pricing collar ceiling price of $41.18.

The purchase price allocation resulting from the acquisition of Royall is set forth below (in thousands):

	As of January 9, 2015
Consideration paid for the acquisition	$	865,417
Allocated to:
Membership fees receivable, net	29,239
Prepaid expenses and other current assets	8,237
Property and equipment	44,209
Intangible assets, net	262,000
Deferred revenue, current	(18,300		)
Accounts payable and accrued liabilities	(5,621		)
Deferred income taxes, net of current portion	(102,599		)
Fair value of net assets acquired	$	217,165
Allocation to goodwill	$	648,252

The goodwill is primarily attributable to the assembled workforce of Royall and synergies and economies of scale expected from combining the operations of the Company and Royall. Of the goodwill recognized, $61.4 million is deductible for tax purposes.

Acquisition-related costs of $9.9 million were incurred and included in general and administrative costs in the Company’s consolidated statements of operations. Of this amount, $3.3 million was recognized in the transition period ended December 31, 2014, and $6.6 million was recognized in the year ended December 31, 2015.

The year ended December 31, 2015 includes the operations of Royall for the period from January 9, 2015 through December 31, 2015. The condensed consolidated statements of operations for the year ended December 31, 2015 includes $102.8 million of revenues and $88.6 million of net loss (inclusive of a $99.1 million goodwill impairment charge), respectively, attributed to Royall. In addition, the Company recorded adjustments to the Royall purchase price allocation resulting in an increase to deferred tax assets and a reduction of goodwill of approximately $1 million during the year ended December 31, 2016. The impairment and related adjustment are described in Note 7, “Goodwill and intangibles.”

The following table presents the Company’s pro forma consolidated revenues and net income (loss) attributable to common stockholders for the year ended December 31, 2015 and the nine months ended December 31, 2014. The unaudited pro forma results include the historical statements of operations information of the Company and of Royall, giving effect to the acquisition of Royall and related financing as if they had occurred on April 1, 2014. As described below under “Transition Period Acquisitions,” the Company consummated certain other acquisitions during the year ended December 31, 2015 and the nine months ended December 31, 2014, but has not included the impact of these acquisitions in these pro forma results as their effect would not have been material.

The unaudited pro forma financial information presented below does not reflect the effect of any actual or anticipated synergies expected to result from the acquisition of Royall. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been recognized had the acquisition of Royall and the related financing been effected on the assumed date.

The unaudited pro forma results are set forth below (in thousands):

	Unaudited Pro Forma Results
	Year Ended December 31,			Nine Months Ended December 31,
	2015			2014
Revenue	$	783,640		$	502,319
Net income (loss) attributable to common stockholders	(90,705		)	(29,962		)

For the year ended December 31, 2015 and the nine months ended December 31, 2014, the pro forma results, prepared in accordance with GAAP, include the following pro forma adjustments related to the acquisition of Royall:

(i) an increase in non-recurring transaction expenses of $9.9 million in the nine months ended December 31, 2014 to reflect the assumption that the Royall acquisition occurred on April 1, 2014;

(ii) the elimination of $6.6 million of acquisition costs recorded in the year ended December 31, 2015 as these are now presented in the nine months ended December 31, 2014;

(iii) an increase in amortization expense related to the fair value of the identifiable intangible assets of $0.4 million in the year ended December 31, 2015 and $11.6 million in the nine months ended December 31, 2014;

(iv) a reduction in revenue of $12.5 million in the nine months ended December 31, 2014, representing the purchase accounting fair value effect to revenue the Company would have recognized during the year ended December 31, 2014 had the acquisition of Royall occurred on April 1, 2014 and an increase in revenue of $12.5 million in the year ended December 31, 2015, representing the purchase accounting fair value effect to revenue that was recognized in the year ended December 31, 2015;

(v) an increase in revenue of $2.8 million and an increase in expense of $1.7 million for the year ended December 31, 2015 for Royall's activity from January 1, 2015 to the January 9, 2015 acquisition date;

(vi) the elimination and replacement of the historical Royall interest expense with the interest expense from the Company's senior secured term credit facility totaling $19.9 million in the year ended December 31, 2015 and $13.6 million in the nine months ended December 31, 2014;

(vii) an increase in compensation expense related to the inducement equity awards issued to certain Royall employees totaling $0.1 million in the year ended December 31, 2015 and $4.4 million in the nine months ended December 31, 2014;

(viii) an increase in non-recurring loss on financing activities expenses of $17.4 million in the nine months ended December 31, 2014 to reflect the assumption that the Royall acquisition and related financings occurred during the nine months ended December 31, 2014; and

(ix) the elimination of $17.4 million of loss on financing activities recorded in the year ended December 31, 2015 as this is now presented in the corresponding period of 2014.

There were no other material acquisitions for the year ended December 31, 2015.

Transition Period Acquisitions

During the nine months ended December 31, 2014, the Company completed three acquisitions qualifying as business combinations in exchange for aggregate net cash consideration of $71.3 million. The total purchase price has been allocated to identifiable assets acquired and liabilities assumed, including $16.6 million to intangible assets with a weighted average amortization period of 8.3 years and $57.5 million to goodwill, of which $33.9 million is tax deductible. The completed acquisitions in the nine months ended December 31, 2014, both individually and in the aggregate, were not material to the Company's consolidated results of operations.

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Fair value measurements

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair value measurements

Fair value measurements

Financial assets and liabilities

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, interest rate swaps, and, in prior periods, marketable securities. 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 class of financial liabilities 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 also consist of money market funds with fair values based on quoted market prices. The Company’s cash and cash equivalents are held at major commercial banks.

Interest rate swaps. The Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of discounting the future variable cash payments, or receipts, over the life of the agreements. The variable interest rates used in the calculation of receipts are based on observable market interest rate curves.

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 expected to be paid out within the next twelve months are included in accrued liabilities on the consolidated balance sheets. Contingent earn-out liabilities expected to be paid out after the next twelve months are included in other long-term liabilities on the consolidated balance sheets.

Measurements

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) and the income approach (present value of future income or cash flow). 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 three levels are:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3—Unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies.

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 year ended December 31, 2016 or December 31, 2015.

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):

	Fair value as of		Fair value measurement as of December 31, 2016 using fair value hierarchy
	December 31, 2016		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	91,151	$	91,151	$	—	$	—
Interest rate swaps (2)	1,044		—		1,044		—
Financial liabilities
Contingent earn-out liabilities (3)	1,164		—		—		1,164

	Fair value as of		Fair value measurement as of December 31, 2015 using fair value hierarchy
	December 31, 2015		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	71,825	$	71,825	$	—	$	—
Interest rate swaps (2)	419		—		419		—
Financial liabilities
Contingent earn-out liabilities (3)	7,250		—		—		7,250

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(1) Fair value is based on quoted market prices.

(2) Fair value is determined using market standard models with observable inputs.

(3) This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and general macro-economic environment and industry trends.

Contingent earn-out liabilities

The Company’s fair value estimate of the earn-out liability related to the Company's acquisition of Southwind Health Partners, L.L.C. and Southwind Navigator, LLC (together, “Southwind”) in December 2009 was $5.6 million. The fair value of the Southwind earn-out liability was impacted by changes in the Company’s stock price and by changes in estimates regarding expected operating results through the end of the evaluation period, which was December 31, 2014. As of December 31, 2016, $21.4 million had been earned and paid in cash and shares of Company common stock to the former owners of the Southwind business, which includes the final payment of $1.0 million that was paid during the year ended December 31, 2016 in satisfaction of its remaining obligation.

The Company’s fair value estimate of the earn-out liability related to the Company’s acquisition of 360Fresh, Inc. (“360Fresh”) in November 2012 was $2.5 million. The Company paid $1.5 million in January 2015 in satisfaction of its remaining obligation.

The Company's fair value estimate of the earn-out liability related to the Company's acquisition of Clinovations, LLC (“Clinovations”) in November 2014 was $4.5 million. The fair value of the Clinovations earn-out liability will be impacted by changes in estimates regarding expected operating results through the evaluation period, which ends on December 31, 2017  with payments extending through April 2018. In September 2016, 62,269 shares of Company common stock were issued to pay a portion of the earn-out liability. The maximum payout of the earn-out is $9.5 million, while the minimum is zero. Based on Clinovations' operating results, the remaining contingent obligation for Clinovations as of December 31, 2016 was $0.6 million. The fair value of the Clinovations earn-out liability will be impacted by changes in estimates of discount rates for each evaluation period, which vary from 6.7% to 7.5%, and the volatility of the Company stock, which was 25% as of December 31, 2016.

The Company's fair value estimate of the earn-out liability related to the Company's acquisition of ThoughtWright, LLC d/b/a GradesFirst (“GradesFirst”) in December 2014 was $3.6 million. The fair value of the GradesFirst earn-out liability was impacted by changes in estimates regarding expected operating results through the evaluation period, which ended on December 31, 2015. The maximum earn-out potential of $4.0 million was earned during the evaluation period and paid as of December 31, 2016 in satisfaction of the Company’s remaining obligation.

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 year ended December 31, 2016 and the year ended December 31, 2015 (in thousands):

	Year Ended
	December 31, 2016			December 31, 2015
Beginning balance	$	7,250		$	12,946
Fair value change in Southwind contingent earn-out liability (1)	—			261
Fair value change in GradesFirst contingent earn-out liability (1)	—			400
Fair value change in Clinovations contingent earn-out liability (1)	1,103			(2,326		)
Fair value change in other contingent earn-out liabilities (1)	546
Southwind earn-out payment	(1,032		)	(2,531		)
360 Fresh earn-out payment	—			(1,500		)
Clinovations earn-out payment	(2,703		)	—
Grade First earn-out payment	(4,000		)	—
Ending balance	$	1,164		$	7,250

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(1) Amounts were recognized in cost of services on the consolidated statements of operations.

Financial instruments not recorded at fair value on a recurring basis

Equity method investments. The Company's equity method investments represent the Company's ownership interest in Evolent Health, Inc. and its subsidiary, Evolent Health LLC. The fair value of the Company's ownership interest in Evolent Health, Inc. and its subsidiary was $138.2 million as of December 31, 2016 based on the closing price of the common stock of Evolent Health, Inc. as reported on the New York Stock Exchange prior to any discount. For further information, see Note 8, "Equity method investments." The fair value of the Company's equity method investments is measured quarterly for disclosure purposes. The Company's equity method investments are recorded at fair value only if an impairment charge is recognized.

Senior secured term loan. The Company estimates that the fair value of its senior secured term loan was $527.3 million as of December 31, 2016. The fair value was determined based on discounting the future expected variable cash payments over the life of the loan. The variable interest rates used in the calculation are based on observable market interest rates. The senior secured term loan would be classified as Level 2 within the fair value hierarchy if it were measured at fair value.

Non-recurring fair value measurements

During the years ended December 31, 2016 and 2015, the Company determined that its cost method investment in convertible preferred stock and common stock warrants of a private company would not be recoverable and recorded impairment expense of $1.8 million and $3.2 million, respectively. The fair values estimated in connection with this impairment is considered a Level 3 fair value measure due to the significance of unobservable inputs to the valuation. 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. The carrying value of the Company’s investment was $0.0 million and $1.8 million as of December 31, 2016 and 2015, respectively, which is included in other non-current assets on the consolidated balance sheet. 

As of December 31, 2016, no dividends had been declared by the investee or recorded by the Company.

Non-financial assets and liabilities

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).

During the year ended December 31, 2016, no fair value adjustments or material fair value measurements were required for non-financial assets or liabilities. During the year ended December 31, 2015 and the nine months ended December 31, 2014, the Company’s capitalized software for sale assets were measured and recorded at fair value due to circumstances that indicated that the carrying values of the assets were not fully recoverable. As a result, the Company recognized an impairment of approximately $8.2 million and $2.1 million in the fiscal periods ending December 31, 2015 and 2014, respectively, within the consolidated statements of operations. The Company utilized the discounted cash flow method to determine the fair value of the capitalized software assets. Cash flows were determined based on the Company’s estimates of future operating results and discounted using an internal rate of return consistent with that used by the Company to evaluate cash flows of other assets of a similar nature. Due to the significant unobservable inputs inherent in discounted cash flow methodologies, this method is classified as Level 3 in the fair value hierarchy.

During the year ended December 31, 2015, the Company determined that there was evidence of impairment on its goodwill. See Note 7, “Goodwill and intangibles,” for further detail on the recognition of goodwill impairment charges. The fair values estimated in connection with this impairment are considered a Level 3 fair value measure due to the significance of unobservable inputs to the valuation.

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Membership fees receivable

12 Months Ended

Dec. 31, 2016

Receivables [Abstract]

Membership fees receivable

Membership fees receivable

Membership fees receivable consist of the following (in thousands):

	As of December 31,
	2016			2015
Billed fees receivable	$	149,117		$	138,100
Unbilled fees receivable	462,780			473,053
Membership fees receivable, gross	611,897			611,153
Allowance for uncollectible revenue	(6,380		)	(5,709		)
Membership fees receivable, net	$	605,517		$	605,444

Included in membership fees receivable are billed and unbilled receivables. Billed fees receivable represent invoiced membership fees. Unbilled fees receivable represent fees due to be billed within the next twelve months to members, a portion of which relates to revenue to be recognized in excess of a year and is included in long term deferred revenue. The Company generates long term deferred revenue due to the majority of its invoicing being done in advance.

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Property and equipment

12 Months Ended

Dec. 31, 2016

Property, Plant and Equipment [Abstract]

Property and equipment

Property and equipment

Property and equipment consists of the following (in thousands):

	As of December 31,
	2016			2015
Leasehold improvements	$	69,465		$	63,608
Furniture, fixtures and equipment	70,362			62,790
Software	231,952			202,384
Property and equipment, gross	371,779			328,782
Accumulated depreciation and amortization	(200,498		)	(148,425		)
Property and equipment, net	$	171,281		$	180,357

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. During the year ended December 31, 2015, the Company recognized an impairment loss of $2.7 million related to certain internally developed software that is no longer in use. The Company did not recognize any material impairment losses on any of its property and equipment during the year ended December 31, 2016 or the nine months ended December 31, 2014.

As of December 31, 2016 and 2015, the carrying value of internally developed capitalized software was $75.2 million and $73.2 million, respectively.

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Goodwill and intangibles

12 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and intangibles

Goodwill and intangibles

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 indefinite life. Goodwill is reviewed for impairment at least annually as of October 1, the first date of the fourth quarter of the Company's fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment. The Company has one operating segment, which is consistent with the way management runs the business and allocates resources. The operating segment is then divided into two reporting units largely as a result of the Royall acquisition and continued integration efforts. The two reporting units are Royall and the remaining Advisory Board business ("Core ABC"). Goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination.

The determination of fair value of the reporting units used to perform the first step of the impairment test requires judgment and involves significant estimates and assumptions about the expected future cash flows and the impact of market conditions on those assumptions. Due to the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact the Company’s assumptions as to future revenue growth rates, future operating margins, market-based WACC, and other factors that may result in changes in the estimates of the Company’s reporting units’ fair value. Although management believes the assumptions used in testing the Company’s reporting units’ goodwill for impairment are reasonable, it is possible that market and economic conditions could change from those expected. A decline in revenue or revenue and earnings multiple data of peer companies, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Company’s financial condition and results of operations.

The Company performed the annual goodwill impairment test at October 1, 2016. The fair value of both the Royall and Core ABC reporting units exceeded carrying value, resulting in no indicated impairment for the two reporting units. There were no indicators of impairment identified between October 1 and December 31, 2016. Accordingly, there was no impairment of goodwill recorded during the year ended December 31, 2016.

The Royall reporting unit had goodwill of $648.3 million as of October 1, 2015. The estimated fair value of the reporting unit did not exceed its carrying value and, therefore, step two of the goodwill impairment was performed. The decrease in fair value of the reporting unit from the acquisition was attributable to reduced projected cash flow growth rates due in part to lower than expected first year performance and lower market derived multiples between the January 9, 2015 acquisition date and the October 1, 2015 goodwill impairment assessment date. As the Company completed its calendar year 2016 forecast in the three months ended December 31, 2015, it revised its outlook for the Royall business, reducing cash flow forecasts over the projection period. The projections incorporated the effect of current market conditions, including revenue growth, customer attrition, operating margins, capital expenditures, and working capital dynamics. The market-based WACC used in the income approach for Royall was 11%. The terminal growth rate used in the discounted cash flow model was 3.5%.

As the Royall reporting unit failed the step one test, the Company performed the step two test. In connection with the step two test, the Company estimated the fair value of identifiable intangible assets and deferred revenue using methodologies consistent with those used in the original Royall purchase price allocation. Key assumptions were updated to reflect the current outlook for the Royall business as well as market conditions. The result of the step two analysis resulted in a goodwill impairment of $99.1 million.

The Company believed that no such impairment indicators existed during the nine months ended December 31, 2014. There was no impairment of goodwill recorded during the nine months ended December 31, 2014.

Changes in the carrying amount of goodwill are as follows (in thousands):

	As of December 31,
	2016			2015
Beginning of period	$	738,200		$	186,895
Goodwill acquired	2,258			650,289
Goodwill impairment	—			(99,145		)
Purchase accounting adjustment (1)	(951		)	161
Ending balance	$	739,507		$	738,200

(1) The 12/31/2016 adjustment represents an adjustment to the purchase price allocation resulting in an increase to deferred tax assets and a reduction of goodwill.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from two years to seventeen years. As of December 31, 2016, the weighted average remaining useful life of acquired intangibles was approximately 13.3 years. As of December 31, 2016, the weighted average remaining useful life of internally developed intangibles was approximately 3.4 years.

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

		As of December 31, 2016							As of December 31, 2015
	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	$	20,034	$	(9,998	)	$	10,036	$	16,902	$	(6,796	)	$	10,106
Acquired intangibles:
Developed software	5.2	9,450		(8,575		)	875		9,450		(8,075		)	1,375
Customer relationships	16.2	277,710		(42,978		)	234,732		277,710		(25,769		)	251,941
Trademarks	8.6	14,900		(5,923		)	8,977		14,900		(4,490		)	10,410
Non-compete agreements	3.8	1,400		(1,400		)	—		1,400		(1,379		)	21
Customer contracts	4.7	6,449		(6,016		)	433		6,449		(5,581		)	868
Total other intangibles		$	329,943	$	(74,890	)	$	255,053	$	326,811	$	(52,090	)	$	274,721

During the year ended December 31, 2015 and the nine months ended December 31, 2014, the Company concluded that certain acquired developed technology assets would no longer be in use. As a result, the Company recognized a $5.4 million and $2.1 million impairment, respectively, on the remaining unamortized costs.

Amortization expense for intangible assets for the year ended December 31, 2016, 2015, and the nine months ended December 31, 2014, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $22.8 million, $24.4 million, and $7.3 million, respectively. The following approximates the aggregate amortization expense to be recorded in depreciation and amortization on the consolidated statements of operations for each of the following five fiscal years ending December 31, 2017 through 2021: $22.5 million, $21.6 million, $19.9 million, $18.7 million, and $17.7 million, respectively, and $154.7 million thereafter.

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Equity method investments

12 Months Ended

Dec. 31, 2016

Equity Method Investments and Joint Ventures [Abstract]

Equity method investments

Equity method investments

As of December 31, 2016, the Company held a 7.7% equity interest in Evolent Health LLC (“Evolent LLC”) and a 7.9% equity ownership interest in Evolent Health, Inc. (“Evolent Inc.”), which had no material operations outside of its 77.4% ownership interest in Evolent LLC. These investments are accounted for under the equity method, with the Company’s proportionate share of the investees’ losses recognized in the consolidated statements of operations. The Company has the right to designate two individuals to Evolent Inc.'s board of directors, who were the Company’s Chief Financial Officer and an unaffiliated designee of the Company as of December 31, 2016.

During the year ended December 31, 2016, the Company sold a portion of its interest in Evolent Inc. Total cash received from the transaction was $48.6 million and resulted in the recognition of an after tax gain of $29.7 million. During the year ended December 31, 2016, the Company recognized in the consolidated statements of operations its proportionate share of the losses of Evolent Inc. of $4.3 million. The Company’s share of the losses of Evolent Inc. that was applied to the carrying value of its investment in Evolent Inc. during the year ended December 31, 2015 was $3.0 million. The carrying balance of the Company’s investment in Evolent Inc. was $10.3 million and $0 as of December 31, 2016 and 2015. The Company had no unrecorded losses related to its investment in Evolent Inc. as of December 31, 2016.

The Company recognized in the consolidated statements of operations its proportionate share of the losses of Evolent LLC of $6.1 million, $8.6 million, and $6.3 million in the years ended December 31, 2016, 2015, and the nine months ended December 31, 2014, respectively. The carrying balance of the Company’s investment in Evolent LLC was $9.6 million and $0.7 million as of December 31, 2016 and 2015, respectively. The Company had no unrecorded losses related to its investment in Evolent LLC as of December 31, 2016 or 2015.

In connection with the reorganization and initial public offering of Evolent Inc. in June 2015, the "Transaction," the Company carried over its basis in its investment resulting in a significant difference between its basis and its proportionate share in the equity of Evolent Inc. As of December 31, 2016, the basis difference totaled $43.8 million and will decrease over time through amortization and upon any sale or dilutive transactions. Evolent Inc. gained control of Evolent LLC in the Transaction and applied purchase and push down accounting. The Company has excluded the effects of this in its determination of the equity in Evolent LLC losses, thereby reducing its share of losses from Evolent LLC for the affected periods.

Because of Evolent LLC's treatment as a partnership for federal income tax purposes, the losses of Evolent LLC pass through to the Company and the other members. The Company's proportionate share of the losses of Evolent LLC is recorded net of the estimated tax benefit the Company believes will be realized from the equity in loss of equity method investments on the consolidated statements of operations.

Historically, the Company had provided a full valuation allowance against the deferred tax asset resulting from these benefits. During the nine months ended December 31, 2014, the Company did not recognize a tax benefit associated with equity method losses as there was a full valuation allowance recorded.

During the year ended December 31, 2015, the Company determined that it was more likely than not able to realize the deferred tax assets associated with its investment in Evolent LLC as a result of the reorganization related to Evolent Inc.'s initial public offering; accordingly, a tax benefit of $6.7 million was recorded to release the valuation allowance previously recorded. An additional tax benefit of $0.5 million was recorded in the year ended December 31, 2015 for tax benefits associated with current year losses received from Evolent LLC. For the year ended December 31, 2015, the income tax benefit from gains (losses) from equity method investments was $7.2 million, representing an effective tax rate of 62.2%.

The provision for income taxes from gains (losses) from equity method investments for the year ended December 31, 2016 was $21.2 million, representing an effective tax rate of 31.3%. Tax expense of $18.9 million was recorded for the tax effect of the current period gain on sale of shares in Evolent, Inc. and $7.4 million of expense associated with current year dilution gains and the allocated share of losses from Evolent LLC and Evolent, Inc. The effective tax rate applied to the dilution gains, gain on partial sales, and the allocated share of losses is 38.8%. Additional tax benefit of $5.1 million was recorded for the tax effects of current year losses received from Evolent LLC and prior period adjustments.

The gains (losses) from equity method investments on the consolidated statement of operations consisted of the following (in thousands):

	Year ended December 31,			Year ended December 31,			Nine Months Ended  December 31,
	2016			2015			2014
Allocated share of losses	$	(10,366	)	$	(11,616	)	$	(6,540	)
Gain on partial sale of investment	48,565			—			—
Dilution gains	29,704			—			—
Tax (expense) benefits	(21,237		)	7,220			—
Gains (losses) from equity method investments	$	46,666		$	(4,396	)	$	(6,540	)

In connection with the Transaction, the Company and certain investors in Evolent LLC entered into a tax receivables agreement with Evolent Inc. Under the terms of that agreement, Evolent Inc. will make cash payments to the Company and certain investors in amounts equal to 85% of Evolent Inc.'s actual tax benefit realized from various tax attributes related to activity before the initial public offering. Interest will be included on the tax savings at the applicable London interbank offered rate plus 100 basis points. The tax receivables agreement will generally apply to Evolent Inc.'s taxable years up to and including the 15th anniversary date of the Transaction. As of December 31, 2016, the Company has not received any payments pursuant to the terms of the tax receivables agreement. As the amount the Company will receive related to the tax receivables agreement is unknown, the Company will recognize payments, if any, associated with this agreement when received.

The following is a summary of the consolidated financial position of Evolent, Inc. as of the date presented:

	As of December 31,
	2016		2015
Assets:
Current assets	$	264,966	$	184,463
Non-current assets	934,873		831,051
Total assets	$	1,199,839	$	1,015,514
Liabilities and shareholders' equity:
Current liabilities	$	131,941	$	59,506
Non-current liabilities	155,784		21,429
Total liabilities	287,725		80,935
Total shareholders’ equity attributable to Evolent Health, Inc.	702,526		649,341
Non-controlling interests	209,588		285,238
Total liabilities and shareholders’ equity	$	1,199,839	$	1,015,514

The following is a summary of the consolidated operating results of Evolent, Inc. for the periods presented:

	Year Ended December 31,
	2016			2015
Revenue	$	254,188		$	96,878
Cost of revenue (exclusive of depreciation and amortization)	155,177			57,398
Gross profit	99,011			39,480
(Loss) income before income taxes and non-controlling interests	(237,533		)	343,289
Net (loss) income	(226,778		)	319,814
Net (loss) income attributable to Evolent Health, Inc.	(159,742		)	332,494

Evolent LLC is in the early stages of its business plan and, as a result, the Company expects both Evolent Inc. and Evolent LLC to continue to incur losses. The Company’s investments are evaluated for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. As of December 31, 2016, the Company believes that no impairment charge is necessary. For additional information on the fair value of the Company’s investment in the Evolent entities, see Note 4, “Fair value measurements.”

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Noncontrolling interest

12 Months Ended

Dec. 31, 2016

Noncontrolling Interest [Abstract]

Noncontrolling interest

Noncontrolling interest

In July 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 was governed by a services agreement and other documents, as amended, that provided the entity’s owners the conditional right to require the Company to purchase their ownership interests (“Put Option”), for a price based on a formula set forth in the agreement, at any time after certain conditions were satisfied through June 30, 2015. These agreements also provided the Company a conditional right to require the entity’s owners to sell their ownership interests to the Company (“Call Option”) over the same period. The Company determined that this entity met the definition of a variable interest entity over which it had significant influence and, as a result, consolidated the results of this entity into its consolidated financial statements. The noncontrolling interest represents the entity’s owners’ claims on consolidated investments where the Company owns less than a 100% interest. Losses attributable to noncontrolling interest were $0 for the years ended December 31, 2016 and 2015, respectively, and $0.2 million for the nine months ended December 31, 2014.

On December 5, 2014, the conditions required for the entity's owners to exercise the Put Option were satisfied and the entity's owners exercised the Put Option. The Company paid $6 million to acquire 100% of the ownership interests. The purchase price of $6.1 million is recorded as a reduction to net income attributable to common stockholders on the accompanying consolidated statements of operations. Prior to the exercise of the Put Option, the Company had a 0% interest in this entity. In conjunction with the exercise of the Put Option, the Company recorded a deferred tax asset of $3.4 millionrelated to basis differences. As a result of the exercise of the Put Option, there was no noncontrolling interest for the year ended December 31, 2016 or 2015. As of December 31, 2016, the deferred tax asset had a balance of $2.9 million.

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Debt

12 Months Ended

Dec. 31, 2016

Debt Disclosure [Abstract]

Debt

Debt

Senior secured credit facilities obtained in January 2015

On January 9, 2015, in connection with the completion of the acquisition of Royall, the Company entered into a credit agreement with various lenders. Under the terms of the January 9, 2015 credit agreement, lenders provided the Company with $775 million of senior secured credit facilities for application to the acquisition of Royall and the Company’s corporate needs after the closing of the Royall acquisition. The credit facilities consisted of a term loan facility in the principal amount of $725 million, maturing on January 9, 2022, and a revolving credit facility under which up to $50 million principal amount of borrowings and other credit extensions could be outstanding at any time, maturing on January 9, 2020.

Amounts drawn under the term facility generally bore interest, payable quarterly, at an annual rate calculated, at the Company’s option, on the basis of either (a) an alternate base rate plus an initial margin of 3.00% or (b) the applicable London interbank offered rate (subject to a 1.00% floor) plus an initial margin of 4.00%, subject in each case to margin reductions based on the Company's total leverage ratio from time to time. The annual interest rate for the term loan facility as of January 9, 2015 was 5.00%. The revolving facility was undrawn at the facility closing date. All $725 million of term loans available under the term loan facility were drawn at the closing of the acquisition to pay the majority of the cash purchase price for the Royall capital stock. Total original issue discount of $21.8 million and deferred financing fees of $2.8 million were recorded related to this credit agreement. The Company recognized a loss of $0.2 million on the modification of the July 2012 revolving credit facility. This loss was recorded in loss on financing activities within the consolidated statements of operations.

Equity offering in January 2015

On January 21, 2015, the Company closed on a registered public offering of its common stock. The Company used the net proceeds from the offering plus available cash to repay approximately $149.9 million principal amount of loans outstanding under its $725 million senior secured term loan facility. This payment resulted in a loss on financing activities of $4.5 million related to original issue discount and $0.3 million related to deferred financing fees. The total $4.8 million loss was recognized in loss on financing activities within the consolidated statement of operations.

Senior secured credit facilities obtained in February 2015

On February 6, 2015, the Company entered into a new credit agreement with various lenders. The new credit agreement consists of a five-year senior secured term loan facility in the original principal amount of $575 million and a five-year senior secured revolving credit facility under which up to $100 million principal amount of borrowings and other credit extensions may be outstanding at any time. The proceeds of the term loan were used to repay and retire all loans outstanding under the term loan facility obtained on January 9, 2015. The revolving credit facility was not drawn down on February 6, 2015. Amounts drawn under the term loan and revolving credit facilities bore interest, payable quarterly, at an annual rate calculated, at the Company’s option, on the basis of either (a) an alternate base rate plus an initial margin of 1.75% or (b) the applicable London interbank offered rate plus an initial margin of 2.75%, subject in each case to margin reductions based on the Company’s total leverage ratio from time to time. At the time of issuance, the stated annual interest rate on the borrowing was 3.01%. Amounts due under the new credit agreement are secured by substantially all of the Company's tangible and intangible assets.

The lenders under the new credit agreement included the lenders from the January 9, 2015 agreement as well as new lenders. For those lenders to this agreement that also participated in the January 9, 2015 agreement, the Company concluded that the new credit agreement represented a modification of the debt. As a modification, the original issue discount and deferred financing fees associated with the original borrowings carried forward to the new borrowings. Any fees paid to or received from these lenders were recorded as an adjustment to the original issue discount. Any fees paid to third parties were recorded as expense. The Company received a net refund of $2.4 million from the original lenders under the January 9, 2015 agreement, which was treated as a reduction to the original issue discount and deferred financing fees. Further, because the level of participation in the borrowings by the lenders under the original credit agreement was significantly less under the new agreement than under the original agreement, the Company recognized a debt modification expense of $17.4 million related to a portion of the original issue discount and deferred financing fees from the old agreement. This $17.4 million expense was recorded as a loss on financing activities within the consolidated statement of operations.

Amendment to the senior secured credit facilities

On October 30, 2015, the Company amended its senior secured credit facilities. Prior to the amendment, the outstanding principal amount of the senior secured term loan was approximately $560.6 million and no amounts were outstanding under the revolving credit facility. Pursuant to this amendment, the amount available for borrowing under the revolving credit facility was increased from $100.0 million to $200.0 million. On October 30, 2015, the Company borrowed $100.0 million under the revolving credit facility and used all of the proceeds to repay a portion of the outstanding principal amount of the senior secured term loan. Upon consummation of this prepayment transaction, $460.6 million in aggregate principal amount remained outstanding under the senior secured term loan. In addition, the Company lowered the initial margin on the alternate base rate from 1.75% to 1.25% and on the London interbank offered rate from 2.75% to 2.25%. The Company recognized no loss on financing activities related to this amendment. As of December 31, 2016, based on the Company's leverage ratio, the interest rate margin was 2.00% and the stated annual interest rate on the senior secured term loan was 2.77%.

As of December 31, 2016 and 2015, there was $100.0 million outstanding under the revolving credit facility and $80.9 million and $98.6 million, respectively, was available for borrowing. As of December 31, 2016 and 2015, $19.1 million and $1.4 million, respectively, of standby letters of credit had been issued and were outstanding under the revolving credit facility. As of December 31, 2016 and 2015, the stated annual interest rate on the amounts drawn on the revolving credit facility were 2.77% and 2.68%, respectively. The Company is obligated to pay a commitment fee at an annual rate of 0.3% subject to reduction based on the Company’s total leverage ratio from time to time, accruing on the average daily amount of available commitments under the revolving credit facility.

In June 2016 the Company drew down $17.0 million of borrowings under its revolving credit facility, which was repaid as of December 31, 2016.

Long-term debt is summarized as follows (in thousands): 

	As of December 31, 2016
2.77%term facility due fiscal 2020 ($424,687 face value less unamortized discount of $2,601)	$	422,086
Revolving credit facility	100,000
Less: Amounts due in next twelve months ($50,312 face value less unamortized discount of $965)	(49,347		)
Total	$	472,739

The credit agreement contains customary representations and warranties, events of default and financial and other covenants, including covenants that require the Company to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The Company's compliance with the two financial covenants is measured as of the end of each fiscal quarter. The Company was in compliance with these financial covenants as of December 31, 2016 and 2015.

Long-term debt maturing in each of the next five fiscal years, excluding the discount, is as follows (in thousands):

Year Ending December 31,
2017	$	50,312
2018	79,062
2019	86,250
2020	309,063
Total	$	524,687

Interest expense for the years ended December 31, 2016 and 2015 was $18.1 million and $21.1 million, respectively, inclusive of $1.4 million and $1.3 million, respectively, of amortization of debt issuance costs and $2.2 million and $2.0 million, respectively, of payments related to the interest rate swaps described below.

Swap agreements

Through its senior secured term loan and revolving facilities, the Company is exposed to interest rate risk. In April 2015, to minimize the impact of changes in interest rates on its interest payments, in April 2015, the Company entered into three interest rate swap agreements with financial institutions to swap a portion of its variable-rate interest payments for fixed-rate interest payments. The interest rate swap derivative financial instruments are recorded on the consolidated balance sheet at fair value, which is based on observable market-based expectations of future interest rates.

At hedge inception, the Company entered into interest rate swap arrangements with notional amounts totaling $287.5 million. The swap was structured to have a declining notional amount which matches the amortization schedule of the term loan. As of December 31, 2016 and 2015, the principal amount hedged was $262.3 million and $276.8 million, respectively. Consistent with the terms of the Company's senior secured term loan facility, the interest rate swap agreements mature in February 2020 and have periodic interest settlements. Under the agreements, the Company is entitled to receive a floating rate based on the one-month London interbank offered rate and obligated to pay an average fixed rate of 1.282% on the outstanding notional amount. The Company has designated the interest rate swap as a cash flow hedge of the variability of interest payments under its senior secured term loan facility due to changes in the LIBOR benchmark interest rate. The difference between cash paid and received is recorded within interest expense on the consolidated statements of operations.

As of December 31, 2016 and 2015, the fair value of the interest rate swaps was an asset of $1.0 million and $0.4 million, respectively, and was recorded in the Company's consolidated balance sheets within other non-current assets. For the year ended December 31, 2016 and 2015, the change in fair value of the swaps, net of tax, of $0.3 million and $0.2 million, respectively, were reported as a component of accumulated other comprehensive income. The Company does not expect any amount included in accumulated other comprehensive income to be reclassified into earnings during the next 12 months. For the years ended December 31, 2016 and 2015, there was $0.4 million and $0.0, respectively, of hedge ineffectiveness, recorded within the consolidated statements of operations. Changes in fair value are reclassified from accumulated other comprehensive income into earnings in the same period in which the hedged item affects earnings.

If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations for the applicable period. 

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Stockholders' equity

12 Months Ended

Dec. 31, 2016

Equity [Abstract]

Stockholders' equity

Stockholders’ equity

In November 2015, the Company’s board of directors authorized an increase in its cumulative share repurchase program to $550 million of the Company’s common stock. The Company repurchased 1,951,258 shares, 1,069,357 shares, and 731,559 shares of its common stock at a total cost of approximately $61.6 million, $53.0 million, and $36.0 million, in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, respectively, pursuant to its share repurchase program. The total amount of common stock purchased from inception under the program as of December 31, 2016 was 19,778,800 shares at a total cost of $513.5 million. All repurchases to date have been made in the open market and shares have been retired as of December 31, 2016. No minimum number of shares subject to repurchase has been fixed and the share repurchase authorization has no expiration date. The Company has funded its share repurchases with cash on hand, proceeds from the sale of marketable securities, and cash generated from operations. As of December 31, 2016, the remaining authorized repurchase amount was $36.5 million.

During the year ended December 31, 2016, the Company retired 1,951,258 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 $19,513, treasury stock of $61.6 million, and retained earnings of $61.6 million. During the year ended December 31, 2015, the Company retired 1,069,357 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 $10,700, treasury stock of $53.0 million, and retained earnings of $53.0 million. A total of 19,778,800 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. During the nine months ended December 31, 2014, the Company retired 731,559 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 $7,300, treasury stock of $36.0 million, and retained earnings of $36.0 million. A total of 17,827,542 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.

Equity offering

On January 21, 2015, the Company closed the registered public offering of 3,650,000 shares of common stock by the Company and, pursuant to registration rights granted by the Company to the Seller in connection with the acquisition of Royall, the public offering of 1,755,000 shares of common stock held by the Seller that were issued to the Seller as the equity component of the acquisition consideration. The shares in the registered public offering were sold at a price to the public of $43.00 per share, less an underwriting discount of $1.935 per share, for a net per share purchase price of $41.065. The Company also incurred selling costs of $1.1 million directly related to this equity offering. The net proceeds received by the Company were approximately $148.8 million after deducting the underwriting discount and selling costs. As of December 31, 2016, the Seller held no shares of the common stock issued to it as acquisition consideration.

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Stock-based compensation

12 Months Ended

Dec. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-based compensation

Stock-based compensation

Equity incentive plans

The Company issues awards, including stock options and RSUs, under the Company’s 2009 Stock Incentive Plan (the “2009 Plan”). On June 9, 2015, the Company's stockholders approved an amendment to the 2009 Plan that increased the number of shares of common stock authorized for issuance under the plan by 3,800,000 shares. As of December 31, 2016, there were 1,862,891 shares available for issuance under the 2009 Plan. On September 5, 2013, the Company's stockholders also approved an amendment to the 2009 Plan that increased the maximum term for stock option and freestanding stock appreciation rights awards granted under the plan from five years to seven years.

The 2009 Plan is administered by the Compensation Committee of the Company’s board of directors, which has the authority to determine which officers, directors, employees, and other service providers are awarded options or share awards pursuant to the 2009 Plan and to determine the terms of the awards. Grants may consist of treasury shares or newly issued shares. Options are rights to purchase common stock of the Company at the fair market value on the date of grant. 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 Company generally awards non-qualified options, but the 2009 Plan permits the issuance of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. Holders of options do not participate in dividends, if any, until after the exercise of the award. RSUs are equity settled stock-based compensation arrangements of a number of shares of the Company’s common stock. RSU holders do not participate in dividends, if any, nor do they have voting rights until the restrictions lapse.

On January 9, 2015, in conjunction with the Royall acquisition, the Company created The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees to enable the Company to award options and restricted stock units to persons employed by Royall as an inducement to employees entering into and continuing employment with the Company or its current or future subsidiaries upon consummation of the Royall acquisition. Under the terms of this plan, the aggregate number of shares issuable pursuant to all awards may not exceed 1,906,666. The awards consisted of performance-based stock options to purchase an aggregate of 1,751,000 shares of common stock and performance-based RSUs for an aggregate of 145,867 shares of common stock. Both the performance-based stock options and performance-based RSUs are also subject to service conditions.

Stock options granted under the inducement plan have an exercise price equal to $49.92, which was the closing price of the Company’s common stock on January 9, 2015 as reported on the NASDAQ Global Select Market. The stock options have a seven-year term and are eligible to vest, if performance-based vesting criteria are satisfied, in installments commencing in January 2017 and ending in January 2020. The RSUs were valued at $49.92 and are also eligible to vest in installments commencing in January 2017 and ending in January 2020, subject to satisfaction of performance-based vesting criteria. The vesting criteria in both cases are based on performance of the Royall programs and services. The aggregate grant date fair value of the performance-based stock options, assuming all performance targets are met, is estimated to be approximately $26.8 million. The aggregate grant date fair value of the performance-based RSUs, assuming all performance targets are met, is estimated at approximately $7.3 million. As of December 31, 2016, the Company expects that Royall will achieve 70% to 99% of the performance targets, which would result in vesting of 50% of the performance-based stock options and 50% of the RSUs eligible to vest, subject to forfeitures. The option and RSU awards are reflected in the following tables.

The actual stock-based compensation expense the Company will recognize is dependent upon, but not limited to, Royall satisfying the applicable performance conditions and continued employment of award recipients at the time performance conditions are met. The actual amount the Company will recognize may increase or decrease based on Royall's actual results and the employment status of the award recipients at the time performance conditions are met.

On June 23, 2014, the Compensation Committee of the board of directors approved a long-term incentive plan pursuant to which nonqualified stock options and RSUs would be granted under the 2009 Plan to certain executive officers of the Company. During the year ended December 31, 2014, 970,937 nonqualified stock options and 104,026 RSUs were granted to certain executive officers of the Company. The awards are subject to both performance-based and market-based conditions and will vest based upon the achievement of specified levels of both sustained contract value and sustained stock price during the performance period, which could extend to March 31, 2019. The vesting of the RSUs is also subject to a one-year service condition, which requires the recipient to remain employed with the Company for at least one year following the date on which the applicable performance and market conditions are achieved. The Company utilized the longer of the explicit, implicit, or derived service periods for the requisite service period, which includes the current estimate of the time to achieve the performance and market conditions and is four years for the stock options and six years for the RSUs, inclusive of the one-year service condition. The options and RSUs are included in the tables below.

Stock option activity. During the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014, the Company granted 1,345,000, 2,102,916, and 1,144,973, stock options, respectively, with a weighted average exercise price of $28.44, $50.45, and $52.28, respectively.

During the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014, participants exercised 303,490, 218,109, and 233,999 options for a total intrinsic value of $4.7 million, $6.6 million, and $7.3 million, respectively. Intrinsic value is calculated as the number of shares exercised times the Company’s stock price at exercise less the exercise price of the option.

The following table summarizes the changes in common stock options during the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014 for all of the Company's stock incentive plans.

	Number of Performance-Based Options		Weighted Average Exercise Price			Number of Service-Based Options		Weighted Average Exercise Price
Outstanding as of March 31, 2014	20,000		$	29.58		1,810,323		$	32.86
Granted	974,605		51.40			170,368		57.31
Exercised	—		—			(233,999	)	18.36
Forfeited	—		—			—		—
Outstanding, as of December 31, 2014	994,605		$	50.96		1,746,692		$	37.19
Granted	1,774,820		$	49.90		328,096		$	53.42
Exercised	—		—			(218,109	)	21.76
Forfeited	(756,100	)	49.92			(13,569	)	60.27
Outstanding, as of December 31, 2015	2,013,325		$	50.42		1,843,110		$	41.73
Granted	319,900		$	28.20		1,025,100		$	28.52
Exercised	—		—			(303,490	)	16.05
Forfeited	(215,370	)	49.92			(39,542	)	52.68
Outstanding, as of December 31, 2016	2,117,855		$	47.11	(1)	2,525,178		$	39.28	(3)
Exercisable, as of December 31, 2016	26,872		$	34.91	(2)	1,021,192		$	43.29	(4)

—————————————

(1) The weighted average remaining contractual term for all performance-based options outstanding at December 31, 2016 is approximately five years and the aggregate intrinsic value is $1.7 million.

(2) The weighted average remaining contractual term for all performance-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $0.1 million.

(3) The weighted average remaining contractual term for all service-based options outstanding at December 31, 2016 is approximately four years and the aggregate intrinsic value is $7.4 million.

(4) The weighted average remaining contractual term for all service-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $2.5 million.

The aggregate intrinsic value shown in the footnotes of the table above is the sum of the amounts by which the quoted market price of the Company’s common stock on the NASDAQ Global Select Market exceeded the exercise price of the options as of December 31, 2016, for those options for which the quoted market price was in excess of the exercise price. This amount changes over time based on changes in the fair market value of the Company’s common stock. During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, 341,024, 387,748, and 411,259 options, respectively, vested with fair values of $0.1 million, $5.0 million, and $4.2 million, respectively.

The following table summarizes the exercise prices and contractual lives of all options outstanding under the Company's stock incentive plans as of December 31, 2016:

	Options Outstanding
Range of Exercise Prices	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life - Years
$ 0.00 – $ 9.99	—	$	—	0.0
10.00 – 19.99	70,500	16.58		0.3
20.00 – 29.99	1,469,478	27.83		5.6
30.00 – 39.99	46,432	35.18		6.4
40.00 – 49.99	1,495,769	48.14		3.4
50.00 – 59.99	1,476,482	52.57		4.6
60.00 – 69.99	84,372	66.90		4.2
$ 0.00 – $ 69.99	4,643,033	$	42.85	4.5

Restricted stock unit activity. During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, the Company granted 534,205, 568,511, and 336,113 RSUs, respectively, the majority of which vest in four equal annual installments on the anniversary of the grant date. The valuation of RSUs is determined as the fair market value of the underlying shares on the date of grant. The weighted average grant date fair value of RSUs granted without market conditions for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 was $31.07, $51.94, and $42.92, respectively. There were no RSUs granted with market conditions during the year ended December 31, 2016. The weighted average fair value of RSUs granted with market conditions during the year ended December 31, 2015 is estimated at $15.49 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.6%; an expected life of approximately 5 years; volatility of 31.3%; and dividend yield of 0.0% over the expected life of the RSUs. The weighted average fair value of RSUs granted with market conditions during the nine months ended December 31, 2014 is estimated at $15.75 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.7%; an expected life of approximately 5 years; volatility of 30.0%; and dividend yield of 0.0% over the expected life of the RSUs.

During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, participants vested in 318,877, 362,654, and 387,377 RSUs, respectively, for a total intrinsic value of $10.5 million, $19.0 million, and $22.0 million, respectively. Intrinsic value is calculated as the number of shares vested times the Company’s closing stock price on the NASDAQ Global Select Market at the vesting date. Of the RSUs vested in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, 108,315, 115,497, and 133,129 shares, respectively, were withheld to satisfy minimum employee tax withholding.

The following table summarizes the changes in RSUs during the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 for all of the stock incentive plans described above.

	Number of Performance-Based RSUs		Weighted Average Grant Date Fair Value		Number of RSUs		Weighted Average Grant Date Fair Value
Non-vested, March 31, 2014	42,880		$	47.87	1,067,582		$	41.81
Granted	152,957		28.43		183,156		55.02
Forfeited	(8,540	)	51.15		(4,076	)	48.83
Vested	—		—		(387,377	)	32.27
Non-vested, December 31, 2014	187,297		$	31.85	859,285		$	48.89
Granted	191,740		$	49.87	376,771		$	52.99
Forfeited	(78,005	)	48.16		(33,789	)	55.74
Vested	—		—		(362,654	)	43.43
Non-vested, December 31, 2015	301,032		$	39.10	839,613		$	52.82
Granted	23,580		$	32.28	510,625		$	31.01
Forfeited	(66,139	)	51.15		(64,170	)	47.18
Vested	(893	)	50.41		(317,984	)	51.48
Non-vested, December 31, 2016	257,580		$	35.34	968,084		$	42.13

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. Under the ESPP, shares of the Company’s common stock may be purchased at the end of each fiscal quarter at 95% of the closing price of the Company’s common stock. A total of 1,684,000 shares of the Company’s common stock are authorized under the ESPP. As of December 31, 2016, a total of 1,453,429 shares were available for issuance under the ESPP. During the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, the Company issued 14,041, 10,496, and 9,241 shares, respectively, under the ESPP at an average price of $34.00, $48.11, and $46.64 per share, respectively. The compensation expense related to the ESPP recorded in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 was not material to the consolidated financial statements.

Valuation assumptions and equity based award activity

As discussed in Note 2, “Summary of significant accounting policies,” determining the estimated fair value of stock-based awards is judgmental in nature and involves the use of significant estimates and assumptions, including the term of the stock-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.

Stock option valuation

The Company calculates the fair value of all stock option awards, with the exception of the stock options issued with market-based conditions, on the date of grant using the Black-Scholes model. Those stock option awards that have market-based conditions are valued using a Monte Carlo model. The expected term for the Company's stock options is determined through analysis of historical data on employee exercises, vesting periods of awards, and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury bonds issued with life terms similar to the expected life of the grant. Volatility is calculated based on historical volatility of the daily closing price of the Company’s common stock continuously compounded with a look-back period similar to the terms of the expected life of the grant. The Company has not declared or paid any cash dividends on its common stock since the closing of its initial public offering and does not currently anticipate declaring or paying any cash dividends. The timing and amount of future cash dividends, if any, is periodically evaluated by the Company’s board of directors and would depend upon, among other factors, the Company’s earnings, financial condition, cash requirements, and contractual restrictions.

The following average key assumptions were used in the valuation of all stock options granted in each respective period:

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Stock option grants:
Risk-free interest rate	.95% – 1.64%		1.18% – 1.67%		1.53% – 1.75%
Expected lives in years	5.04 – 5.54		4.00 – 5.45		5.00 – 5.47
Expected volatility	36.4% – 38.4%		31.2% – 33.0%		29.8% – 30.9%
Dividend yield	—	%	—	%	—	%
Weighted average exercise price of options granted	28.44		50.45		52.28
Weighted average grant date fair value of options granted	10.00		15.49		14.49
Number of options granted	1,345,000		2,102,916		1,144,973

Valuation for restricted stock units

RSUs without market conditions are valued at the grant date closing price of the Company’s common stock as reported on the NASDAQ Global Select Market. Those RSU awards that have market-based conditions are valued using a Monte Carlo model. The expected term for those RSUs is based on the vesting periods of the awards. The risk-free interest rate is based on U.S. Treasury bonds issued with life terms similar to the expected life of the grant. Volatility is calculated based on historical volatility of the daily closing price of the Company’s common stock continuously compounded with a look-back period similar to the terms of the expected life of the grant. The dividend yield assumption is based on the fact that the Company has not declared or paid any cash dividends on its common stock since the closing of its initial public offering and does not currently anticipate declaring or paying any cash dividends. The timing and amount of future cash dividends, if any, is periodically evaluated by the Company’s board of directors and would depend upon, among other factors, the Company’s earnings, financial condition, cash requirements, and contractual restrictions.

Valuation for employee stock purchase rights

The value of employee stock purchase rights for shares of stock purchased under the ESPP is determined as the fair market value of the underlying shares on the date of purchase as determined by the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market, less the purchase price, which is 95% of the closing price of the Company’s common stock. The ESPP enrollment begins on the first day of the quarter. Stock purchases occur on the last day of the quarter, with only eligible employee payroll deductions for the period used to calculate the shares purchased. There is no estimate of grant date fair value or estimated forfeitures, since actual compensation expense was recorded in the period on the purchase date. The fair value of employee stock purchase rights is equivalent to a 5% discount of the purchase date closing price.

Forfeitures

Forfeitures are estimated based on historical experience at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense is recognized on a straight-line basis, net of an estimated forfeiture rate, for only those shares expected to vest over the requisite service period of the award, which is generally the option vesting term, and can range from six months to six years. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. The Company analyzes forfeiture rates using six separate groups; one group for members of the Company’s board of directors, three separate groups of executives based on seniority, and two groups for general employees. Two of these groups, the Royall executive group and the Royall general employee group, were created in the year ended December 31, 2015 in order to apply separate forfeiture rates to the Royall inducement plan awards. The Company uses an annualized forfeiture rate of 9.35% for the Royall executive team and 3.3% for the Royall general employees. During the year ended December 31, 2016, the Company also increased its estimated annualized forfeiture rate for one of its general employee groups from 4.6% to 5.5%. Annualized forfeiture rates for the remaining groups are 0%, 0.4%, and 1.0% for members of the Company's board of directors, and two groups of executives, respectively.

Compensation expense

The Company recognized stock-based compensation expense in the following consolidated statements of operations line items for stock options and RSUs and for shares issued under the Company’s ESPP, for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 (in thousands, except per share amounts):

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Stock-based compensation expense included in:
Costs and expenses:
Cost of services	$	9,231		$	9,211		$	5,977
Member relations and marketing	5,028			5,176			3,348
General and administrative	15,176			14,706			8,640
Total costs and expenses	29,435			29,093			17,965
Operating income	$	(29,435	)	$	(29,093	)	$	(17,965	)

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

Stock-based compensation expense by award type is shown below (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Stock-based compensation expense by award type:
Stock options	$	13,270	$	10,908	$	5,431
Restricted stock units	16,165		18,185		12,534
Total stock-based compensation	$	29,435	$	29,093	$	17,965

As of December 31, 2016, $49.0 million of total unrecognized compensation cost related to stock-based awards was expected to be recognized over a weighted average period of 2.4 years.

Tax benefits

The benefits of tax deductions in excess of recognized book compensation expense are reported as a financing cash inflow with a corresponding operating cash outflow in the consolidated statements of cash flows. Approximately $1.3 million, $4.9 million, and $0.4 million of tax benefits associated with the exercise of employee stock options and RSUs were recorded as cash from financing activities in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, respectively.

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Income taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

The provision for income taxes, excluding the tax effect of equity method gains (losses), consists of the following (in thousands):

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Current tax expense
Federal	$	13,527		$	6,225		$	3,613
State and local	3,694			1,781			1,680
Foreign	626			524			620
Total current tax expense	$	17,847		$	8,530		$	5,913
Deferred tax (benefit) expense
Federal	$	(7,279	)	$	(6,376	)	$	(297	)
State and local	472			13,046			(2,086		)
Foreign	—			—			—
Total deferred tax (benefit) expense	$	(6,807	)	$	6,670		$	(2,383	)
Provision for income taxes	$	11,040		$	15,200		$	3,530

The components of Income before provision for income taxes were as follows (in thousands):

	Year Ended December 31,		Year Ended December 31,			Nine Months Ended December 31,
	2016		2015			2014
U.S. sources	$	53,433	$	(101,386	)	$	10,445
Non-U.S. sources	2,179		1,968			2,331
Total	$	55,612	$	(99,418	)	$	12,776

The provision for income taxes differs from the amount of income taxes determined by applying the applicable income tax statutory rates to income before provision for income taxes as follows:

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Section 162(m) compensation	0.5	%	(0.8	)%	11.7	%
State income tax, net of U.S. federal income tax benefit	4.6	%	3.5	%	7.4	%
Washington, D.C. QHTC income tax credits and D.C. law changes	—	%	(13.4	)%	(9.8	)%
Uncertain tax position	(0.3	)%	0.7	%	5.4	%
Federal R&D credit (net of associated UTP)	(22.7	)%	1.8	%	(25.7	)%
Return to provision adjustment	1.2	%	(0.4	)%	3.2	%
Goodwill impairment	—	%	(38.3	)%	—	%
Meals and entertainment	2.7	%	(1.5	)%	5.5	%
Stock-based compensation	(2.8	)%	—	%	—	%
Other permanent differences, net	1.7	%	(1.9	)%	(5.1	)%
Effective tax rate	19.9	%	(15.3	)%	27.6	%

Deferred income taxes are provided for temporary differences between the tax bases of assets and liabilities and their reported amounts on the consolidated financial statements. The tax effect of these temporary differences is presented below (in thousands):

	As of December 31,
	2016			2015
Deferred income tax assets (liabilities):
Federal R&D credits	$	6,107		$	420
Deferred compensation accrued for financial reporting purposes	7,139			13,284
Stock-based compensation	21,384			15,724
Acquired net operating loss carryforwards	2,794			5,421
Reserve for uncollectible revenue	2,508			2,119
Basis difference on investment in unconsolidated entities	962			7,208
Debt issuance costs	2,066			2,801
Deferred rent	3,248			1,466
Depreciation	1,057			—
Tax credit carryforwards	1,094			332
Unrealized foreign exchange loss	667			—
Outside basis difference on cost method investment	1,967			—
Other	1,490			835
Total deferred tax assets	52,483			49,610
Valuation allowance	—			(49		)
Total deferred tax assets, net of valuation allowance	52,483			49,561
Capitalized software development costs	(33,599		)	(31,042		)
Deferred incentive compensation and other deferred charges	(11,211		)	(11,940		)
Acquired intangibles and goodwill; and acquisition related costs	(94,947		)	(97,278		)
Depreciation	—			(3,031		)
Other	(1,739		)	(163		)
Total deferred tax liabilities	(141,496		)	(143,454		)
Net deferred income tax (liabilities) assets	$	(89,013	)	$	(93,893	)

The Company has $2.8 million, tax effected, of U.S. federal and state net operating loss carryforwards available at December 31, 2016, some of which are a result of recent acquisitions. These carryforwards will be used to offset future income but maybe limited by the change in ownership rules in Section 382 of the Internal Revenue Code. These net operating loss carryforwards will expire between 2021 and 2035. The Company anticipates it will be able to use all of its acquired net operating loss carryforwards. In estimating future tax consequences, the Company generally considers all expected future events in the determination and evaluation of deferred tax assets and liabilities. The Company believes that its estimated future ordinary taxable income will be sufficient for the full realization of its deferred income tax assets. The effect of future changes in existing laws or rates is not considered in the determination and evaluation of deferred tax assets and liabilities until the new tax laws or rates are enacted.

Deferred U.S. income taxes have not been provided for the portion of the difference between book and tax basis in non-U.S. subsidiaries, which is essentially permanent in duration. Determination of the amount of these taxes is not practicable.

During the year ended December 31, 2016, the Company claimed $4.6 million in federal research and development credits and $14.1 million of additional benefit for the 2012, 2013, 2014, and 2015 tax years. For the year ended December 31, 2015, the Company claimed $1.8 million in federal research and development credits on its originally filed U.S. federal income tax return.

Uncertain Tax Positions

The following table summarizes the activity related to the Company's reserve for unrecognized tax positions (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Balance at beginning of the period	$	1,385	$	828	$	—
Additions based on tax positions related to the current periods	1,126		281		497
Additions for tax positions of prior periods	4,905		—		331
Positions assumed in acquisition	—		276		—
Balance at end of the period	$	7,416	$	1,385	$	828

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 twelve months. The Company classifies interest and penalties on any unrecognized tax benefits as a component of the provision for income taxes. The amount accrued for interest and penalties for the twelve months ended December 31, 2016 and 2015, respectively was $0.1 million and $0.3 million, respectively. No interest or penalties were recognized in the consolidated statements of operations for the nine months ended December 31, 2014. The Company files income tax returns in U.S. federal and state and foreign jurisdictions. During 2016, the Company underwent a U.S. federal tax audit for tax years ended December 31, 2011 and December 31, 2013 and completed with no change. With limited exceptions, tax years 2014 and forward remain open.

If the Company was able to recognize the uncertain tax positions of $7.4 million, the entire balance would affect the Company’s effective tax rate. A deferred tax liability has not been recognized because the Company indefinitely reinvests its local country earnings from foreign operations.

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Commitments and contingencies

12 Months Ended

Dec. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and contingencies

Commitments and contingencies

Operating leases

The Company leases its headquarters space under an operating lease that expires in May 2019. Leasehold improvements related to leases are depreciated over the shorter of the term of the lease or useful life and totaled approximately $33.3 million, net, and $37.0 million, net, as of December 31, 2016 and 2015, respectively. The terms of the lease contain provisions for rental escalation, and the Company is required to pay its portion of executory costs such as taxes, insurance, and operating expenses. The Company also entered into a build-to-suit lease arrangement for a new corporate headquarters in December 2015. See Note 6, “Property and equipment,” for further information regarding this arrangement.

The Company also leases office space under operating leases in Birmingham, Alabama; San Francisco, California; Chicago, Illinois; Bloomington, Minnesota; Plymouth Meeting, Pennsylvania; Nashville, Tennessee; Austin, Texas; Houston, Texas; Richmond, Virginia; and London, England. The Company also leases office space in Chennai, India through its Indian subsidiary, ABCO Advisory Services India Private Ltd. The lease expiration dates are July 2018 for the Alabama lease, July 2017 for the California lease, June 2022 for the Illinois lease, July 2020 for the Minnesota lease, September 2019 for the Pennsylvania lease, April 2020 for the Tennessee leases, March 2021 for the Texas leases, March 2022 for the Virginia leases, April 2020 for the England lease, and June 2022 for the India lease.

The Company recognized rental and executory expenses of $23.7 million, $23.1 million, and $13.2 million, in the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, respectively, related to these leases. The Company subleases office space in Nashville, Tennessee.

The following table details the future minimum lease payments under the Company’s current leases (in thousands):

Year Ending December 31,	Operating leases		Build-to-suit lease obligation		Total lease obligations
2017	$	17,421	$	—	$	17,421
2018	16,255		—		16,255
2019	11,143		16,515		27,658
2020	6,741		25,018		31,759
2021	4,880		25,389		30,269
Thereafter	5,613		379,211		384,824
Total	$	62,053	$	446,133	$	508,186

Purchase obligation

The Company has entered into a non-cancelable agreement for the purchase of data. As of December 31, 2016, the Company’s minimum obligation in connection with this agreement extends through May 2019. The minimum purchases expected to be made under this agreement for each of the following two fiscal years ending December 31, 2017 and December 31, 2018 are $1.4 million and $1.0 million, respectively.

Benefit plan

The Company sponsors a defined contribution 401(k) plan (the “401(k) Plan”) for all employees who have reached the age of 21. The Company provides discretionary matching contributions in the range of 0% to 100%, which percentage is determined by the Company after the end of the applicable plan year, of an employee’s contribution up to a maximum of 4% of base salary. The Company's contributions to the 401(k) Plan during the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014, were approximately $5.9 million, $4.9 million, and $0.0 million, respectively.

Litigation

From time to time, the Company is engaged in certain legal disputes arising in the ordinary course of business, such as employment-related claims. When the likelihood of a loss contingency becomes at least reasonably possible with respect to any of these disputes, or, as applicable in the future, if there is at least a reasonable possibility that a loss exceeding amounts already recognized may have been incurred, the Company will revise its disclosures in accordance with the relevant authoritative guidance and will accrue a liability for loss contingencies when the Company believes that it is both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated. The Company will review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent that new information is obtained, and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, the Company will record changes in its accrued liabilities in the period in which such determination is made. As of December 31, 2016, the Company was not a party to, and its property was not subject to, any material legal proceedings.

Other

As of December 31, 2016, the Company had outstanding letters of credit totaling $19.1 million to provide security deposits for certain office space leases. The letters of credit expire annually but will automatically extend for another annual term from their expiration dates unless the Company terminates them. To date, no amounts have been drawn on the letters of credit.

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Segments and geographic areas

12 Months Ended

Dec. 31, 2016

Segment Reporting [Abstract]

Segments and geographic areas

Segment and geographic areas

Operating segments are defined as components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. Under this definition, the Company has one operating segment as of December 31, 2016. Over the past few years, the Company has completed several acquisitions. These acquisitions have allowed the Company to expand its existing offerings and enhance membership services. The Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.

Substantially all of the Company’s identifiable assets are located in the United States. The following table sets forth revenue information for each geographic area for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
United States	$	784,447	$	749,880	$	417,194
Other countries	18,977		18,468		16,808
Total revenue	$	803,424	$	768,348	$	434,002

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Quarterly financial data (unaudited)

12 Months Ended

Dec. 31, 2016

Quarterly Financial Information Disclosure [Abstract]

Quarterly financial data (unaudited)

Quarterly financial data (unaudited)

Unaudited summarized financial data by quarter for the years ended December 31, 2016 and 2015 are as follows (in thousands, except per share amounts).

	Fiscal 2015 Quarter Ended
	March 31,			June 30,		September 30,		December 31,
Revenue	$	179,322		$	183,583	$	200,492	$	204,951
Operating Income	4,158			12,320		19,151		(90,029		)
(Loss) income from continuing operations before provision for income taxes and and gains (losses) in equity method investments	(19,971		)	7,038		12,551		(99,036		)
Net (loss) income attributable to common stockholders	(22,072		)	7,666		672		(105,280		)
Earnings per share:
Net (loss) income attributable to common stockholders per share — basic	$	(0.54	)	$	0.18	$	0.02	$	(2.52	)
Net (loss) income attributable to common stockholders per share — diluted	$	(0.54	)	$	0.18	$	0.02	$	(2.52	)
	Fiscal 2016 Quarter Ended
	March 31,			June 30,		September 30, (1)		December 31,
Revenue	$	200,735		$	198,382	$	200,455	$	203,852
Operating Income	20,796			18,088		12,134		25,520
Income from continuing operations before provision for income taxes and gains (losses) in equity method investments	16,036			12,776		6,088		20,712
Net income attributable to common stockholders	10,339			7,495		37,538		35,866
Earnings per share:
Net income attributable to common stockholders per share — basic	$	0.25		$	0.19	$	0.94	$	0.89
Net income attributable to common stockholders per share — diluted	$	0.25		$	0.18	$	0.93	$	0.88

(1) In connection with the preparation of the unaudited consolidated financial statements, the Company recorded corrections of certain out-of-period, immaterial misstatements that occurred in prior periods. These corrections resulted in an increase to the provision for income taxes of $4.2 million for the three months ended September 30, 2016 primarily related to recording reserves for tax positions taken in prior periods. These corrections also resulted in a decrease to income tax expense of $5.1 million included in gains (losses) from equity method investments for the three months ended September 30, 2016 related to recording a deferred tax asset for the outside basis difference in the Company's investment in Evolent, Inc. The impact of these out-of-period corrections on net income for the three ended September 30, 2016 was not significant.

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Supplemental cash flow

12 Months Ended

Dec. 31, 2016

Supplemental Cash Flow Elements [Abstract]

Supplemental cash flow

Supplemental cash flow

A summary of supplemental cash flow information for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 is presented below (in thousands):

	Year Ended   December 31,					Nine Months Ended December 31,
	2016		2015			2014
Cash paid (received) for:
Income taxes	$	25,919	$	(4,695	)	$	32
Interest	$	14,090	$	17,646		$	—
Non-cash activities:
Clinovations earn-out liability share-based payment	$	2,703	$	—		$	—
Increase in estimated cost of construction of a building under a build-to-suit lease	$	60,667	$	2,700		$	—

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Subsequent Events

12 Months Ended

Dec. 31, 2016

Subsequent Events [Abstract]

Subsequent Events

Subsequent events

On January 3, 2017, the Company approved a restructuring plan which will result in a reduction-in-force of approximately 220 employees and is expected to be completed during fiscal year 2017. The Company expects to recognize approximately $7 to $9 million of pre-tax restructuring charges in fiscal year 2017 in connection with this reduction-in-force, consisting of severance and other employee termination benefits.

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Schedule II - Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2016

Valuation and Qualifying Accounts [Abstract]

Schedule II - Valuation and Qualifying Accounts

THE ADVISORY BOARD COMPANY

SCHEDULE II—Valuation and Qualifying Accounts

(In thousands)

	Balance at Beginning of Year		Additions Charged to Revenue		Additions Charged to Other Accounts		Deductions From Reserve		Balance at End of Year
Nine months ended December 31, 2014 Allowance for uncollectible revenue	$	6,850	$	8,938	$	—	$	8,258	$	7,530
Year ended December 31, 2015 Allowance for uncollectible revenue	$	7,530	$	4,893	$	310	$	7,024	$	5,709
Year ended December 31, 2016 Allowance for uncollectible revenue	$	5,709	$	5,577	$	—	$	4,906	$	6,380

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Summary of significant accounting policies (Policies)

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Basis of presentation and consolidation

Basis of presentation and consolidation

The 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 securities deemed to be in-substance common stock and has the ability to exercise significant influence, but not control, over the investee and for all investments in partnerships or limited liability companies where the investee maintains separate capital accounts for each investor. Investments in which the Company holds securities that are not in-substance common stock, or holds common stock or in-substance common stock but has little or no influence over the investee are accounted for using the cost method. All significant intercompany transactions and balances have been eliminated.

Fiscal year

Fiscal year

The Company changed its fiscal year to the calendar twelve months ending December 31, effective beginning with the period ended on December 31, 2014. As a result, the fiscal transition period was shortened from twelve months to a nine-month transition period ended on December 31, 2014. In these consolidated statements, including the notes thereto, the financial results ended December 31, 2014 are for a nine-month period. Audited results for the twelve months ended December 31, 2016 and 2015 are both for twelve-month periods.

Use of estimates in preparation of consolidated financial statements

Use of estimates in preparation of consolidated financial statements

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates, judgments, and assumptions. For cases where the Company is required to make certain estimates, judgments, and assumptions, the Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available to the Company at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s financial statements will be affected. The Company’s estimates, judgments, and assumptions may include: estimates of bad debt reserves; estimates to establish employee bonus and commission accruals; estimates of the fair value of contingent earn-out liabilities; estimates of the useful lives of acquired or internally developed intangible assets; estimates of the fair value of goodwill and intangibles and evaluation of impairment; determination of when investment impairments are other-than-temporary; estimates of the recoverability of deferred tax assets; and estimates of the potential for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.

Cash equivalents and marketable securities

Cash equivalents and marketable securities

Marketable securities with original maturities of three months or less at purchase are considered cash equivalents. Investments with original maturities of more than three months are classified as marketable securities. Marketable securities, are classified as available-for-sale, and carried at fair value based on quoted market prices. The net unrealized gains and losses on available-for-sale marketable securities are excluded from net income attributable to common stockholders and are included within accumulated other comprehensive income, net of tax. The specific identification method is used to compute the realized gains and losses on the sale of marketable securities.

Allowance for uncollectible revenue

Allowance for uncollectible revenue

The Company’s ability to collect outstanding receivables from its members has an effect on the Company’s operating performance and cash flows. The Company records an allowance for uncollectible revenue as a reduction of revenue based on its ongoing monitoring of members’ credit and the aging of receivables. To determine the allowance for uncollectible revenue, the Company examines its collections history, the age of accounts receivable in question, any specific member collection issues that have been identified, general market conditions, and current economic trends. Membership fees receivable balances are not collateralized.

Property and equipment

Property and equipment

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal use software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain membership programs, the Company provides software applications under a hosting arrangement where the software application resides on the Company’s or its service providers’ hardware. The members do not take delivery of the software and receive access to the software only during the term of their membership agreement.

Software development costs that are incurred in the preliminary project stage for internal use software 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 it is placed into operation. Internally developed capitalized software is classified as software within property and equipment and is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and upgrades and enhancements to existing systems that result in additional functionality are capitalized, while maintenance and repairs are charged to expense as incurred. Amortization expense for internally developed capitalized software for the years ended December 31, 2016 and 2015, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $22.3 million and $18.9 million, respectively. Amortization expense for internally developed capitalized software for the nine months ended December 31, 2014, recorded in depreciation and amortization on the consolidated statements of operations, was approximately $10.1 million.

Acquired developed software represents the fair value of software acquired through a business combination that resides on the Company’s or its service providers’ hardware and is made available to members though the memberships. Amortization for acquired developed software is included in depreciation and amortization on the consolidated statements of operations. Acquired developed software is amortized over a weighted average estimated useful life of eight yearsbased on the cash flow estimate used to determine the value of the intangible asset at its acquisition. The amount of acquired developed software amortization included in depreciation and amortization for the years ended December 31,2016 and 2015 was approximately $8.8 million and $9.4 million, respectively. The amount of acquired developed software amortization included in depreciation and amortization for the nine months ended December 31, 2014 was approximately $2.0 million.

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 capital leases included in property and equipment. The amount of depreciation expense recognized on furniture, fixtures, and equipment for the years ended December 31, 2016 and 2015 was approximately $22.2 million and $20.4 million, respectively. The amount of depreciation expense recognized on furniture, fixtures, and equipment for the nine months ended December 31, 2014 was approximately $10.9 million.

The Company establishes assets and liabilities (financing obligations) for the estimated construction costs incurred under build-to-suit lease arrangements where the Company is considered the owner for accounting purposes only, to the extent the Company is involved in the design or construction of the asset or takes construction risk prior to commencement of a lease. The Company recognizes expense on a portion of future lease payments that are estimated to represent the underlying land lease. The Company records an asset for the amount of the total project costs in construction in progress and the related financing obligation, representative of the project costs incurred by the developer, in financing obligations on the consolidated balance sheet. Upon completion of the construction of facilities under build-to-suit leases, the Company evaluates whether these arrangements meet the criteria for sale-leaseback accounting treatment. If the lease does not meet sale-leaseback criteria, the Company will treat the build-to-suit as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation, (2) imputed interest expense, and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the building’s estimated useful life. At the conclusion of the lease term, the net book values of the asset and financing obligation would be derecognized.

Business combinations

Business combinations

The Company records acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration are recognized at their fair value on the acquisition date. All subsequent changes to the acquired assets or assumed liabilities of the acquired company at the acquisition date that occur both within the measurement period and as a result of facts and circumstances that existed at the acquisition date are recognized as an adjustment to goodwill. Any acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. Acquisition-related costs are recorded as expenses in the consolidated financial statements. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Goodwill and other intangible assets

Goodwill and other intangible assets

The excess cost of an acquisition over the fair value of the net assets acquired is recorded as goodwill. The primary factors that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. The Company’s goodwill and other intangible assets with indefinite lives are not amortized, but rather are tested for impairment on an annual basis on October 1, or more frequently if events or changes in circumstances indicate potential impairment.

When testing goodwill for impairment, the Company has the option first to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, the Company is then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company estimates the fair value of its reporting units using both an income and market approach. The income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. The determination of fair value using the income approach involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, terminal growth rates, and discount rates. The market approach is based on revenue and earnings multiple data of peer companies. See Note 7, “Goodwill and intangibles,” for further detail, including the recognition of goodwill impairment charges of $99.1 million during the year ended December 31, 2015.

Other intangible assets consist of capitalized software for sale and acquired intangibles. The Company capitalizes consulting costs and payroll and payroll-related costs for employees directly related to building a software product for sale once technological feasibility is established. The Company determines that technological feasibility is established by the completion of a detailed program design or, in its absence, completion of a working model. Once the software product is ready for general availability, the Company ceases capitalizing costs and begins amortizing the intangible asset on a straight-line basis over its estimated useful life. The weighted average estimated useful life of capitalized software for sale is five years. Other intangible assets include those assets that arise from business combinations and that consist of developed technology both for internal use and external sale, non-competition covenants, trademarks, contracts, and customer relationships that are amortized, on a straight-line basis, over two years to seventeen years. Finite-lived intangible assets are required to be amortized over their useful lives and are evaluated for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Recovery of long-lived assets (excluding goodwill)

Recovery of long-lived assets (excluding goodwill)

The Company records long-lived assets, such as property and equipment, at cost. The carrying value of long-lived assets is reviewed for possible impairment whenever events or changes in circumstances suggest the carrying value of a long-lived asset may not be fully recoverable. The test for recoverability is made using an estimate of the undiscounted expected future cash flows and, if required, the impairment loss is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable. The Company considers expected cash flows and estimated future operating results, trends, and other available information in assessing whether the carrying value of assets is impaired. If it is determined that an asset’s carrying value is impaired, a write-down of the carrying value of the identified asset will be recorded as an operating expense on the consolidated statements of operations in the period in which the determination is made.

Fair value of financial instruments

Fair value of financial instruments

The Company’s short-term financial instruments include cash and cash equivalents, membership fees receivable, accrued expenses, and accounts payable. The carrying value of these financial instruments as of December 31, 2016 and 2015 approximates their fair value due to their short-term nature.

Derivative instruments

Derivative instruments

The Company holds warrants to purchase common stock in an entity that meet the definition of a derivative. Derivative instruments are carried at fair value on the consolidated balance sheets. Gains or losses from changes in the fair value of the warrants are recognized on the consolidated statements of operations in the period in which they occur.

The Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of discounting the future variable cash payments, or receipts, over the life of the agreements. The Company has designated the interest rate swap as a cash flow hedge of the variability of interest payments under its senior secured term loan facility due to changes in the benchmark interest rate. If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations for the applicable period. 

Revenue recognition

Revenue recognition

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned, and (4) collectibility is reasonably assured. Fees are generally billable when a letter of agreement is signed by the member. Fees receivable during the subsequent twelve-month period and related deferred revenue are recorded on the balance sheet upon the commencement of the membership and are subsequently updated at the end of each reporting period. In many of the Company’s higher priced programs and membership agreements with terms that are greater than one year, fees may be billed on an installment basis. In certain multi-year arrangements, the member has the ability to cancel the arrangement within a defined notice period without penalty.

The Company’s membership programs generally include more than one deliverable. Deliverables are determined based upon the availability and delivery method of the services and may include the following: best practices research; executive education curricula; cloud-based content, databases, and calculators; performance or benchmarking reports; diagnostic tools; interactive advisory support; and software. Access to such deliverables is generally available on an unlimited basis over the membership period. When an agreement contains multiple deliverables, the Company reviews the deliverables to determine if they qualify as separate units of accounting. In order for deliverables in a multiple-deliverable arrangement to be treated as separate units of accounting, the deliverables must have standalone value upon delivery, and delivery or performance of undelivered items in an arrangement with a general right of return must be probable. If the Company determines that there are separate units of accounting, arrangement consideration at the inception of the membership period is allocated to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. Because of the unique nature of the Company’s products, neither vendor specific objective evidence nor third-party evidence is available. Therefore, the Company utilizes best estimate of selling price to allocate arrangement consideration in multiple-deliverable arrangements.

In general, the deliverables in membership programs do not qualify as separate units of accounting. These deliverables are consistently available throughout the membership period, and, as a result, the consideration is recognized ratably over the membership period. When a service offering includes a combination of unlimited and limited service offerings, revenue is recognized over the appropriate service period, either ratably, if the service is consistently available, or, if the service is not consistently available, upon the earlier of the delivery of the service or the completion of the membership period, provided that all other criteria for recognition have been met.

Certain membership programs incorporate hosted software. In many of these agreements, members are charged set-up fees in addition to subscription fees for access to the hosted cloud-based software and related membership services. Both set-up fees and subscription fees are recognized ratably over the term of the membership agreement, which is generally three years, and is consistent with the pattern of the delivery of services under these arrangements. Upon launch of a new program that incorporates software, all program revenue is deferred until the program is generally available for release to the Company’s membership, and then recognized ratably over the remainder of the contract term of each agreement.

Certain arrangements include performance-based fees that are contingent upon the member realizing a benefit over a defined period. These performance-based fees are included in the arrangement consideration and recognized when the related services are provided to the member and the Company is reasonably assured that the amounts due are collectible. The Company has not recognized any revenue that is at risk due to future performance contingencies.

The Company also performs professional services sold under separate agreements that include consulting and management services. These agreements are either fixed fee or time-and-materials arrangements. For fixed fee arrangements, the Company recognizes professional services revenues using the proportional performance method based on effort expended. The Company recognizes professional services revenues for time-and-materials arrangements as services are rendered based on contractual rates.

For arrangements in which a customer purchases multiple membership programs or purchases a membership program together with consulting and management services, each program and professional services arrangement is generally considered a separate unit of accounting, and arrangement consideration is allocated based on the Company’s best estimate of selling price. The Company develops its best estimate of selling price by considering pricing practices, margin, competition, and geographies in which the Company offers its products and services.

Deferred incentive compensation and other charges

Deferred incentive compensation and other charges

Incentive compensation to employees related to the negotiation of new and renewal memberships, license fees to third-party vendors for tools, data, and software incorporated in specific memberships that include software, and other direct and incremental costs associated with specific memberships are deferred and amortized over the term of the related memberships.

Operating leases

Operating leases

The Company recognizes rent expense under operating leases on a straight-line basis over the non-cancelable term of the lease, including free-rent periods. Lease incentives relating to allowances provided by landlords are amortized over the term of the lease as a reduction of rent expense. The Company recognizes sublease income on a straight-line basis over the term of the sublease, including free rent periods and escalations, as a reduction of rent expense. Costs associated with acquiring a subtenant, including broker commissions and tenant allowances, are amortized over the sublease term as a reduction of sublease income.

Stock-based compensation

Stock-based compensation

The Company has several stock-based compensation plans which are described more fully in Note 12, “Stock-based compensation.” These plans provide for the granting of stock options and restricted stock units (“RSUs”) to employees, non-employee members of the Company’s Board of Directors and any other service providers who have been retained to provide consulting, advisory, or other services to the Company. Stock-based compensation cost is measured at the grant date of the stock-based awards based on their fair values, and is recognized as an expense in the consolidated statements of operations over the vesting periods of the awards. The fair value of RSUs, with the exception of RSUs issued with both performance and market-based conditions, is determined as the fair market value of the underlying shares on the date of grant. The fair value of RSUs issued with market-based conditions is calculated on the date of grant using a Monte Carlo option-pricing model. The Company calculates the fair value of all stock option awards, with the exception of the stock options issued with market-based conditions, on the date of grant using the Black-Scholes model. The fair value of stock options issued with market-based conditions is calculated on the date of grant using a Monte Carlo option-pricing model. Forfeitures are estimated based on historical experience at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are inherently uncertain.

For awards with performance conditions, the probability of achieving performance conditions and estimated time to achieve such performance conditions are measured at each reporting period and are used to determine when and in what amount to recognize stock-based awards with performance conditions.

Other (expense) income, net

Other (expense) income, net

Other expense, net for the year ended December 31, 2016 includes foreign exchange losses of $1.4 million, as a result of the effect of fluctuating currency rates on the Company's receivable balances denominated in foreign currencies, and a $1.8 million loss on the Company's investment in preferred stock and common stock warrants of a private company that were determined to be other than temporary. The Company paid $4.3 million to the private company, a related party, under its reseller agreement which is included in cost of services on the consolidated statement of operations for the year ended December 31, 2016.

Other expense, net for the year ended December 31, 2015 includes a $3.6 million loss on the Company's investment in preferred stock and common stock warrants of a private company that were determined to be other than temporary and a foreign exchange rate loss of $2.9 million. Other income, net for the nine months ended December 31, 2014 includes $1.1 million of interest income earned from the Company’s marketable securities, a $1.7 million loss on foreign exchange rates, $0.5 million in credit facility fees, $0.1 million realized loss on sale of marketable securities, and a $0.2 million loss on the Company's investment in common stock warrants. The Company paid $4.2 million to the private company, a related party, under its reseller agreement which is included in cost of services on the consolidated statement of operations for the year ended December 31, 2015.

Income taxes

Income taxes

Deferred income taxes are determined using the asset and liability method. Under this method, temporary differences arise as a result of the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and tax rates on the date of the enactment of the change

Concentrations of risk

Concentrations of risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of membership fees receivable, cash and cash equivalents, and marketable securities. The credit risk with respect to membership fees receivable is generally diversified due to the large number of entities constituting the Company’s membership base, and the Company establishes allowances for potential credit losses. No one member accounted for more than 1.5% of revenue for any period presented. The Company maintains cash and cash equivalents and, in prior periods, marketable securities with financial institutions, which may at times exceed federally insured limits.

In the years ended December 31, 2016, 2015, and the nine months ended December 31, 2014 , the Company generated approximately 2.4%, 2.4% and 3.9% of revenue, respectively, from members outside the United States. The Company’s international operations subject the Company to risks related to currency exchange fluctuations. Prices for the Company’s services sold to members located outside the United States are sometimes denominated in local currencies. Increases or decreases in the value of the U.S. dollar against local currencies in countries where the Company has members may result in a foreign exchange gain or loss recognized by the Company. Such foreign exchange gains or losses are included in other (expenses) income, net in the consolidated statements of operations.

Earnings per share

Earnings per share

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 (“diluted EPS”) 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.

Recent accounting pronouncements

Recent accounting pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all recent ASUs. ASUs not identified below were assessed and determined to be not applicable or are expected to have an immaterial impact on the Company’s consolidated financial position and results of operations.

Recently adopted

In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented as a direct deduction from the carrying amount of that debt liability and only impacts financial position presentation. In August 2015, the FASB issued guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The guidance codified the SEC staff's view on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements consistent with prior practice as an asset. The Company adopted these standards retrospectively on January 1, 2016. The impact the adoption had on the Company's consolidated financial position as of December 31, 2015 is disclosed below (in thousands). The adoption had no effect on the Company's results of operations for any period.

	As reported		Adjustments			As adjusted
Prepaid expenses and other current assets	$	22,651	$	(108	)	$	22,543
Deferred incentive compensation and other charges	81,462		(281		)	81,181
Total assets	1,979,866		(389		)	1,979,477
Debt, current	27,851		(108		)	27,743
Debt, net of current portion	522,367		(281		)	522,086
Total liabilities	1,530,775		(389		)	1,530,386
Total liabilities and stockholders’ equity	1,979,866		(389		)	1,979,477

In June 2014, the FASB issued accounting guidance related to share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In February 2015, the FASB issued guidance on amendments to the consolidation analysis. The new guidance requires management to reevaluate all legal entities under a revised consolidation model that will (1) modify the evaluation of whether limited partnership and similar legal entities are variable interest entities (“VIEs”), (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 under the Investment Company Act of 1940 for registered money market funds. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In September 2015, the FASB issued new guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should either be presented separately on the face of the income statement or disclosed in the notes to the financial statements. The Company adopted this guidance on January 1, 2016. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. It requires an assessment for a period of one year after the date on which the financial statements are issued. Further, based on certain conditions and circumstances, additional disclosures may be required. This ASU is effective beginning with the first annual period ending after December 15, 2016, and for all annual and interim periods thereafter. The adoption did not have a material effect on the Company's consolidated financial position or results of operations.

Recently issued

In May 2014, the FASB issued accounting guidance related to revenue recognition. The new standard supersedes most of the existing revenue recognition guidance under GAAP, and requires revenue to be recognized when goods or services are transferred to a customer in an amount that reflects the consideration a company expects to receive. The new standard may require more judgment and estimates relating to the recognition of revenue, which could result in additional disclosures to the financial statements. The original effective date of the new standard was for annual and interim reporting periods beginning after December 15, 2016. In July 2015, the FASB decided to defer by one year the effective date of this new revenue recognition standard. As a result, the new standard will be effective for annual and interim reporting periods beginning after December 15, 2017, with an option that permits companies to adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The Company will adopt the standard using the modified retrospective approach on January 1, 2018.

While we are continuing to assess all potential impacts of the new standard, we currently believe the new standard will impact the Company's accounting for deferred costs and arrangements that include variable consideration. The Company is currently evaluating the effect that the standard will have on its remaining revenue. The Company continues to update its assessment of the impact of the standard and related updates to the consolidated financial statements, and will note material impacts when known.

In January 2016, the FASB issued accounting guidance related to the recognition and measurement of financial assets and liabilities. The guidance requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under this ASU, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance for classifying and measuring investments in debt securities and loans is not affected. The guidance eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted for only certain portions of the ASU. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued accounting guidance relating to leases. The guidance requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The new guidance also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The guidance is effective for annual reporting and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In March 2016, the FASB issued accounting guidance relating to stock compensation. The guidance simplifies various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to impact net income, earnings per share, and the statement of cash flows. The guidance is effective for annual reporting and interim periods beginning after December 15, 2016, with early adoption permitted. The Company will adopt the standard January 1, 2017 and is currently evaluating the impact of the new guidance on its consolidated financial statements.

In August 2016, the FASB issued accounting guidance relating to the statement of cash flows. The guidance clarifies how certain cash receipts and cash payments are presented in the statement of cash flows. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued accounting guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued accounting guidance simplifying the test of goodwill impairment. The guidance eliminates Step 2 of the goodwill impairment test, which calculates the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., Step 1). The guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued accounting guidance related to gains and losses from the derecognition of nonfinancial assets: clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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Summary of significant accounting policies (Tables)

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Reconciliation of Basic to Diluted Weighted Average Common Shares Outstanding

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

	Year Ended December 31,	Year Ended December 31,	Nine Months Ended December 31,
	2016	2015	2014
Basic weighted average common shares outstanding	40,528	41,888	36,213
Effect of dilutive outstanding stock-based awards	343	—	—
Diluted weighted average common shares outstanding	40,871	41,888	36,213

Schedule of New Accounting Pronouncements and Changes in Accounting Principles

	As reported		Adjustments			As adjusted
Prepaid expenses and other current assets	$	22,651	$	(108	)	$	22,543
Deferred incentive compensation and other charges	81,462		(281		)	81,181
Total assets	1,979,866		(389		)	1,979,477
Debt, current	27,851		(108		)	27,743
Debt, net of current portion	522,367		(281		)	522,086
Total liabilities	1,530,775		(389		)	1,530,386
Total liabilities and stockholders’ equity	1,979,866		(389		)	1,979,477

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Acquisitions (Tables)

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Schedule of Business Acquisitions, by Acquisition

Total consideration consisted of the following (in thousands):

Net cash paid (1)	$	744,193
Fair value of equity issued	121,224
Total	$	865,417

(1) Net of cash acquired of $7,065 and a working capital adjustment payment of $1,278.

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

The purchase price allocation resulting from the acquisition of Royall is set forth below (in thousands):

	As of January 9, 2015
Consideration paid for the acquisition	$	865,417
Allocated to:
Membership fees receivable, net	29,239
Prepaid expenses and other current assets	8,237
Property and equipment	44,209
Intangible assets, net	262,000
Deferred revenue, current	(18,300		)
Accounts payable and accrued liabilities	(5,621		)
Deferred income taxes, net of current portion	(102,599		)
Fair value of net assets acquired	$	217,165
Allocation to goodwill	$	648,252

Business Acquisition, Pro Forma Information

The unaudited pro forma results are set forth below (in thousands):

	Unaudited Pro Forma Results
	Year Ended December 31,			Nine Months Ended December 31,
	2015			2014
Revenue	$	783,640		$	502,319
Net income (loss) attributable to common stockholders	(90,705		)	(29,962		)

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Fair value measurements (Tables)

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements of Financial Assets and Liabilities on Recurring Basis

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):

	Fair value as of		Fair value measurement as of December 31, 2016 using fair value hierarchy
	December 31, 2016		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	91,151	$	91,151	$	—	$	—
Interest rate swaps (2)	1,044		—		1,044		—
Financial liabilities
Contingent earn-out liabilities (3)	1,164		—		—		1,164

	Fair value as of		Fair value measurement as of December 31, 2015 using fair value hierarchy
	December 31, 2015		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents (1)	$	71,825	$	71,825	$	—	$	—
Interest rate swaps (2)	419		—		419		—
Financial liabilities
Contingent earn-out liabilities (3)	7,250		—		—		7,250

—————————————

(1) Fair value is based on quoted market prices.

(2) Fair value is determined using market standard models with observable inputs.

(3) This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and general macro-economic environment and industry trends.

Reconciliation of Change in Contingent Earn-out Liabilities

The following table represents a reconciliation of the change in the contingent earn-out liabilities for the year ended December 31, 2016 and the year ended December 31, 2015 (in thousands):

	Year Ended
	December 31, 2016			December 31, 2015
Beginning balance	$	7,250		$	12,946
Fair value change in Southwind contingent earn-out liability (1)	—			261
Fair value change in GradesFirst contingent earn-out liability (1)	—			400
Fair value change in Clinovations contingent earn-out liability (1)	1,103			(2,326		)
Fair value change in other contingent earn-out liabilities (1)	546
Southwind earn-out payment	(1,032		)	(2,531		)
360 Fresh earn-out payment	—			(1,500		)
Clinovations earn-out payment	(2,703		)	—
Grade First earn-out payment	(4,000		)	—
Ending balance	$	1,164		$	7,250

—————————————

(1) Amounts were recognized in cost of services on the consolidated statements of operations.

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Membership fees receivable (Tables)

12 Months Ended

Dec. 31, 2016

Receivables [Abstract]

Membership Fees Receivable

Membership fees receivable consist of the following (in thousands):

	As of December 31,
	2016			2015
Billed fees receivable	$	149,117		$	138,100
Unbilled fees receivable	462,780			473,053
Membership fees receivable, gross	611,897			611,153
Allowance for uncollectible revenue	(6,380		)	(5,709		)
Membership fees receivable, net	$	605,517		$	605,444

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Property and equipment (Tables)

12 Months Ended

Dec. 31, 2016

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment consists of the following (in thousands):

	As of December 31,
	2016			2015
Leasehold improvements	$	69,465		$	63,608
Furniture, fixtures and equipment	70,362			62,790
Software	231,952			202,384
Property and equipment, gross	371,779			328,782
Accumulated depreciation and amortization	(200,498		)	(148,425		)
Property and equipment, net	$	171,281		$	180,357

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Goodwill and intangibles (Tables)

12 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Changes in Carrying Amount of Goodwill

Changes in the carrying amount of goodwill are as follows (in thousands):

	As of December 31,
	2016			2015
Beginning of period	$	738,200		$	186,895
Goodwill acquired	2,258			650,289
Goodwill impairment	—			(99,145		)
Purchase accounting adjustment (1)	(951		)	161
Ending balance	$	739,507		$	738,200

(1) The 12/31/2016 adjustment represents an adjustment to the purchase price allocation resulting in an increase to deferred tax assets and a reduction of goodwill.

Gross and Net Carrying Balances and Accumulated Amortization of Intangibles

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

		As of December 31, 2016							As of December 31, 2015
	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	$	20,034	$	(9,998	)	$	10,036	$	16,902	$	(6,796	)	$	10,106
Acquired intangibles:
Developed software	5.2	9,450		(8,575		)	875		9,450		(8,075		)	1,375
Customer relationships	16.2	277,710		(42,978		)	234,732		277,710		(25,769		)	251,941
Trademarks	8.6	14,900		(5,923		)	8,977		14,900		(4,490		)	10,410
Non-compete agreements	3.8	1,400		(1,400		)	—		1,400		(1,379		)	21
Customer contracts	4.7	6,449		(6,016		)	433		6,449		(5,581		)	868
Total other intangibles		$	329,943	$	(74,890	)	$	255,053	$	326,811	$	(52,090	)	$	274,721

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Equity method investments (Tables)

12 Months Ended

Dec. 31, 2016

Equity Method Investments and Joint Ventures [Abstract]

Equity Method Investments

The gains (losses) from equity method investments on the consolidated statement of operations consisted of the following (in thousands):

	Year ended December 31,			Year ended December 31,			Nine Months Ended  December 31,
	2016			2015			2014
Allocated share of losses	$	(10,366	)	$	(11,616	)	$	(6,540	)
Gain on partial sale of investment	48,565			—			—
Dilution gains	29,704			—			—
Tax (expense) benefits	(21,237		)	7,220			—
Gains (losses) from equity method investments	$	46,666		$	(4,396	)	$	(6,540	)

Summary of Financial Position

The following is a summary of the consolidated financial position of Evolent, Inc. as of the date presented:

	As of December 31,
	2016		2015
Assets:
Current assets	$	264,966	$	184,463
Non-current assets	934,873		831,051
Total assets	$	1,199,839	$	1,015,514
Liabilities and shareholders' equity:
Current liabilities	$	131,941	$	59,506
Non-current liabilities	155,784		21,429
Total liabilities	287,725		80,935
Total shareholders’ equity attributable to Evolent Health, Inc.	702,526		649,341
Non-controlling interests	209,588		285,238
Total liabilities and shareholders’ equity	$	1,199,839	$	1,015,514

Summary of Operating Results

The following is a summary of the consolidated operating results of Evolent, Inc. for the periods presented:

	Year Ended December 31,
	2016			2015
Revenue	$	254,188		$	96,878
Cost of revenue (exclusive of depreciation and amortization)	155,177			57,398
Gross profit	99,011			39,480
(Loss) income before income taxes and non-controlling interests	(237,533		)	343,289
Net (loss) income	(226,778		)	319,814
Net (loss) income attributable to Evolent Health, Inc.	(159,742		)	332,494

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Debt (Tables)

12 Months Ended

Dec. 31, 2016

Debt Disclosure [Abstract]

Schedule of Long-term Debt Instruments

Long-term debt is summarized as follows (in thousands): 

	As of December 31, 2016
2.77%term facility due fiscal 2020 ($424,687 face value less unamortized discount of $2,601)	$	422,086
Revolving credit facility	100,000
Less: Amounts due in next twelve months ($50,312 face value less unamortized discount of $965)	(49,347		)
Total	$	472,739

Schedule of Maturities of Long-term Debt

Long-term debt maturing in each of the next five fiscal years, excluding the discount, is as follows (in thousands):

Year Ending December 31,
2017	$	50,312
2018	79,062
2019	86,250
2020	309,063
Total	$	524,687

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Stock-based compensation (Tables)

12 Months Ended

Dec. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of Changes in Common Stock Options

The following table summarizes the changes in common stock options during the year ended December 31, 2016, the year ended December 31 2015, and the nine months ended December 31, 2014 for all of the Company's stock incentive plans.

	Number of Performance-Based Options		Weighted Average Exercise Price			Number of Service-Based Options		Weighted Average Exercise Price
Outstanding as of March 31, 2014	20,000		$	29.58		1,810,323		$	32.86
Granted	974,605		51.40			170,368		57.31
Exercised	—		—			(233,999	)	18.36
Forfeited	—		—			—		—
Outstanding, as of December 31, 2014	994,605		$	50.96		1,746,692		$	37.19
Granted	1,774,820		$	49.90		328,096		$	53.42
Exercised	—		—			(218,109	)	21.76
Forfeited	(756,100	)	49.92			(13,569	)	60.27
Outstanding, as of December 31, 2015	2,013,325		$	50.42		1,843,110		$	41.73
Granted	319,900		$	28.20		1,025,100		$	28.52
Exercised	—		—			(303,490	)	16.05
Forfeited	(215,370	)	49.92			(39,542	)	52.68
Outstanding, as of December 31, 2016	2,117,855		$	47.11	(1)	2,525,178		$	39.28	(3)
Exercisable, as of December 31, 2016	26,872		$	34.91	(2)	1,021,192		$	43.29	(4)

—————————————

(1) The weighted average remaining contractual term for all performance-based options outstanding at December 31, 2016 is approximately five years and the aggregate intrinsic value is $1.7 million.

(2) The weighted average remaining contractual term for all performance-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $0.1 million.

(3) The weighted average remaining contractual term for all service-based options outstanding at December 31, 2016 is approximately four years and the aggregate intrinsic value is $7.4 million.

(4) The weighted average remaining contractual term for all service-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $2.5 million.

Summary of Exercise Prices and Contractual Lives of Options Outstanding under Stock Incentive Plans

The following table summarizes the exercise prices and contractual lives of all options outstanding under the Company's stock incentive plans as of December 31, 2016:

	Options Outstanding
Range of Exercise Prices	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life - Years
$ 0.00 – $ 9.99	—	$	—	0.0
10.00 – 19.99	70,500	16.58		0.3
20.00 – 29.99	1,469,478	27.83		5.6
30.00 – 39.99	46,432	35.18		6.4
40.00 – 49.99	1,495,769	48.14		3.4
50.00 – 59.99	1,476,482	52.57		4.6
60.00 – 69.99	84,372	66.90		4.2
$ 0.00 – $ 69.99	4,643,033	$	42.85	4.5

Summary of Changes in RSUs

The following table summarizes the changes in RSUs during the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 for all of the stock incentive plans described above.

	Number of Performance-Based RSUs		Weighted Average Grant Date Fair Value		Number of RSUs		Weighted Average Grant Date Fair Value
Non-vested, March 31, 2014	42,880		$	47.87	1,067,582		$	41.81
Granted	152,957		28.43		183,156		55.02
Forfeited	(8,540	)	51.15		(4,076	)	48.83
Vested	—		—		(387,377	)	32.27
Non-vested, December 31, 2014	187,297		$	31.85	859,285		$	48.89
Granted	191,740		$	49.87	376,771		$	52.99
Forfeited	(78,005	)	48.16		(33,789	)	55.74
Vested	—		—		(362,654	)	43.43
Non-vested, December 31, 2015	301,032		$	39.10	839,613		$	52.82
Granted	23,580		$	32.28	510,625		$	31.01
Forfeited	(66,139	)	51.15		(64,170	)	47.18
Vested	(893	)	50.41		(317,984	)	51.48
Non-vested, December 31, 2016	257,580		$	35.34	968,084		$	42.13

Valuation of Stock Options

The following average key assumptions were used in the valuation of all stock options granted in each respective period:

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Stock option grants:
Risk-free interest rate	.95% – 1.64%		1.18% – 1.67%		1.53% – 1.75%
Expected lives in years	5.04 – 5.54		4.00 – 5.45		5.00 – 5.47
Expected volatility	36.4% – 38.4%		31.2% – 33.0%		29.8% – 30.9%
Dividend yield	—	%	—	%	—	%
Weighted average exercise price of options granted	28.44		50.45		52.28
Weighted average grant date fair value of options granted	10.00		15.49		14.49
Number of options granted	1,345,000		2,102,916		1,144,973

Summary of Stock-based Compensation Expense

The Company recognized stock-based compensation expense in the following consolidated statements of operations line items for stock options and RSUs and for shares issued under the Company’s ESPP, for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 (in thousands, except per share amounts):

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Stock-based compensation expense included in:
Costs and expenses:
Cost of services	$	9,231		$	9,211		$	5,977
Member relations and marketing	5,028			5,176			3,348
General and administrative	15,176			14,706			8,640
Total costs and expenses	29,435			29,093			17,965
Operating income	$	(29,435	)	$	(29,093	)	$	(17,965	)

Summary of Stock-based Compensation Expense by Award

Stock-based compensation expense by award type is shown below (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Stock-based compensation expense by award type:
Stock options	$	13,270	$	10,908	$	5,431
Restricted stock units	16,165		18,185		12,534
Total stock-based compensation	$	29,435	$	29,093	$	17,965

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Income taxes (Tables)

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Summary of Provision for Income Taxes

The provision for income taxes, excluding the tax effect of equity method gains (losses), consists of the following (in thousands):

	Year Ended December 31,			Year Ended December 31,			Nine Months Ended December 31,
	2016			2015			2014
Current tax expense
Federal	$	13,527		$	6,225		$	3,613
State and local	3,694			1,781			1,680
Foreign	626			524			620
Total current tax expense	$	17,847		$	8,530		$	5,913
Deferred tax (benefit) expense
Federal	$	(7,279	)	$	(6,376	)	$	(297	)
State and local	472			13,046			(2,086		)
Foreign	—			—			—
Total deferred tax (benefit) expense	$	(6,807	)	$	6,670		$	(2,383	)
Provision for income taxes	$	11,040		$	15,200		$	3,530

Schedule of Income before Income Tax, Domestic and Foreign

The components of Income before provision for income taxes were as follows (in thousands):

	Year Ended December 31,		Year Ended December 31,			Nine Months Ended December 31,
	2016		2015			2014
U.S. sources	$	53,433	$	(101,386	)	$	10,445
Non-U.S. sources	2,179		1,968			2,331
Total	$	55,612	$	(99,418	)	$	12,776

Statutory Rates to Income before Provision for Income Taxes

The provision for income taxes differs from the amount of income taxes determined by applying the applicable income tax statutory rates to income before provision for income taxes as follows:

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Section 162(m) compensation	0.5	%	(0.8	)%	11.7	%
State income tax, net of U.S. federal income tax benefit	4.6	%	3.5	%	7.4	%
Washington, D.C. QHTC income tax credits and D.C. law changes	—	%	(13.4	)%	(9.8	)%
Uncertain tax position	(0.3	)%	0.7	%	5.4	%
Federal R&D credit (net of associated UTP)	(22.7	)%	1.8	%	(25.7	)%
Return to provision adjustment	1.2	%	(0.4	)%	3.2	%
Goodwill impairment	—	%	(38.3	)%	—	%
Meals and entertainment	2.7	%	(1.5	)%	5.5	%
Stock-based compensation	(2.8	)%	—	%	—	%
Other permanent differences, net	1.7	%	(1.9	)%	(5.1	)%
Effective tax rate	19.9	%	(15.3	)%	27.6	%

Tax Effect of Differences between Tax Bases of Assets and Liabilities

The tax effect of these temporary differences is presented below (in thousands):

	As of December 31,
	2016			2015
Deferred income tax assets (liabilities):
Federal R&D credits	$	6,107		$	420
Deferred compensation accrued for financial reporting purposes	7,139			13,284
Stock-based compensation	21,384			15,724
Acquired net operating loss carryforwards	2,794			5,421
Reserve for uncollectible revenue	2,508			2,119
Basis difference on investment in unconsolidated entities	962			7,208
Debt issuance costs	2,066			2,801
Deferred rent	3,248			1,466
Depreciation	1,057			—
Tax credit carryforwards	1,094			332
Unrealized foreign exchange loss	667			—
Outside basis difference on cost method investment	1,967			—
Other	1,490			835
Total deferred tax assets	52,483			49,610
Valuation allowance	—			(49		)
Total deferred tax assets, net of valuation allowance	52,483			49,561
Capitalized software development costs	(33,599		)	(31,042		)
Deferred incentive compensation and other deferred charges	(11,211		)	(11,940		)
Acquired intangibles and goodwill; and acquisition related costs	(94,947		)	(97,278		)
Depreciation	—			(3,031		)
Other	(1,739		)	(163		)
Total deferred tax liabilities	(141,496		)	(143,454		)
Net deferred income tax (liabilities) assets	$	(89,013	)	$	(93,893	)

Schedule of Unrecognized Tax Benefits Roll Forward

The following table summarizes the activity related to the Company's reserve for unrecognized tax positions (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
Balance at beginning of the period	$	1,385	$	828	$	—
Additions based on tax positions related to the current periods	1,126		281		497
Additions for tax positions of prior periods	4,905		—		331
Positions assumed in acquisition	—		276		—
Balance at end of the period	$	7,416	$	1,385	$	828

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Commitments and contingencies (Tables)

12 Months Ended

Dec. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Future Minimum Lease Payments

The following table details the future minimum lease payments under the Company’s current leases (in thousands):

Year Ending December 31,	Operating leases		Build-to-suit lease obligation		Total lease obligations
2017	$	17,421	$	—	$	17,421
2018	16,255		—		16,255
2019	11,143		16,515		27,658
2020	6,741		25,018		31,759
2021	4,880		25,389		30,269
Thereafter	5,613		379,211		384,824
Total	$	62,053	$	446,133	$	508,186

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Segments and geographic areas (Tables)

12 Months Ended

Dec. 31, 2016

Segment Reporting [Abstract]

Revenue Information

The following table sets forth revenue information for each geographic area for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 (in thousands):

	Year Ended December 31,		Year Ended December 31,		Nine Months Ended December 31,
	2016		2015		2014
United States	$	784,447	$	749,880	$	417,194
Other countries	18,977		18,468		16,808
Total revenue	$	803,424	$	768,348	$	434,002

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Quarterly financial data (unaudited) (Tables)

12 Months Ended

Dec. 31, 2016

Quarterly Financial Information Disclosure [Abstract]

Summarized Financial Data

Unaudited summarized financial data by quarter for the years ended December 31, 2016 and 2015 are as follows (in thousands, except per share amounts).

	Fiscal 2015 Quarter Ended
	March 31,			June 30,		September 30,		December 31,
Revenue	$	179,322		$	183,583	$	200,492	$	204,951
Operating Income	4,158			12,320		19,151		(90,029		)
(Loss) income from continuing operations before provision for income taxes and and gains (losses) in equity method investments	(19,971		)	7,038		12,551		(99,036		)
Net (loss) income attributable to common stockholders	(22,072		)	7,666		672		(105,280		)
Earnings per share:
Net (loss) income attributable to common stockholders per share — basic	$	(0.54	)	$	0.18	$	0.02	$	(2.52	)
Net (loss) income attributable to common stockholders per share — diluted	$	(0.54	)	$	0.18	$	0.02	$	(2.52	)
	Fiscal 2016 Quarter Ended
	March 31,			June 30,		September 30, (1)		December 31,
Revenue	$	200,735		$	198,382	$	200,455	$	203,852
Operating Income	20,796			18,088		12,134		25,520
Income from continuing operations before provision for income taxes and gains (losses) in equity method investments	16,036			12,776		6,088		20,712
Net income attributable to common stockholders	10,339			7,495		37,538		35,866
Earnings per share:
Net income attributable to common stockholders per share — basic	$	0.25		$	0.19	$	0.94	$	0.89
Net income attributable to common stockholders per share — diluted	$	0.25		$	0.18	$	0.93	$	0.88

(1) In connection with the preparation of the unaudited consolidated financial statements, the Company recorded corrections of certain out-of-period, immaterial misstatements that occurred in prior periods. These corrections resulted in an increase to the provision for income taxes of $4.2 million for the three months ended September 30, 2016 primarily related to recording reserves for tax positions taken in prior periods. These corrections also resulted in a decrease to income tax expense of $5.1 million included in gains (losses) from equity method investments for the three months ended September 30, 2016 related to recording a deferred tax asset for the outside basis difference in the Company's investment in Evolent, Inc. The impact of these out-of-period corrections on net income for the three ended September 30, 2016 was not significant. 

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Supplemental cash flow (Tables)

12 Months Ended

Dec. 31, 2016

Supplemental Cash Flow Elements [Abstract]

Schedule of Cash Flow, Supplemental Disclosures

A summary of supplemental cash flow information for the year ended December 31, 2016, the year ended December 31, 2015, and the nine months ended December 31, 2014 is presented below (in thousands):

	Year Ended   December 31,					Nine Months Ended December 31,
	2016		2015			2014
Cash paid (received) for:
Income taxes	$	25,919	$	(4,695	)	$	32
Interest	$	14,090	$	17,646		$	—
Non-cash activities:
Clinovations earn-out liability share-based payment	$	2,703	$	—		$	—
Increase in estimated cost of construction of a building under a build-to-suit lease	$	60,667	$	2,700		$	—

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Summary of significant accounting policies - Additional Information (Detail) - USD ($)	1 Months Ended	9 Months Ended	12 Months Ended
	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Significant Accounting Policies [Line Items]
Tax expense (benefit)		$ 3,530,000	$ 11,040,000	$ 15,200,000
Increase in additional paid-in capital	$ 744,333,000		782,399,000	744,333,000
Amortization expense for intangible assets		7,300,000	22,800,000	24,400,000
Depreciation and amortization		10,900,000	22,200,000	20,400,000
Capital leases included in PP&E			0
Goodwill impairment		0	$ 0	99,145,000
Estimated useful lives of intangible assets (years)			3 years 5 months
Membership program agreement term			3 years
Gain (loss) on foreign exchange rate		(1,700,000)	$ 1,400,000	(2,900,000)
Impairment expense			1,800,000	3,200,000
Cost of services paid		230,769,000	392,956,000	392,676,000
Gain (loss) on investment in common stock warrants		(200,000)		(3,600,000)
Investment income, interest		1,100,000
Collateral fees		500,000
Marketable securities, realized gain (loss)		$ (100,000)
Construction in progress	2,700,000		63,368,000	2,700,000
Financing obligation	$ 2,700,000		$ 63,368,000	$ 2,700,000
Percentage of revenue generated from foreign country		3.90%	2.40%	2.40%
Minimum
Significant Accounting Policies [Line Items]
Estimated useful lives of intangible assets (years)			2 years
Maximum
Significant Accounting Policies [Line Items]
Estimated useful lives of intangible assets (years)			17 years
Software development
Significant Accounting Policies [Line Items]
Estimated useful lives of property and equipment (years)			5 years
Amortization expense for intangible assets		$ 10,100,000	$ 22,300,000	$ 18,900,000
Software and Software Development Costs
Significant Accounting Policies [Line Items]
Estimated useful lives of property and equipment (years)			8 years
Depreciation and amortization		$ 2,000,000	$ 8,800,000	9,400,000
Furniture, fixtures and equipment | Minimum
Significant Accounting Policies [Line Items]
Estimated useful lives of property and equipment (years)			3 years
Furniture, fixtures and equipment | Maximum
Significant Accounting Policies [Line Items]
Estimated useful lives of property and equipment (years)			7 years
Software, Intangible Asset
Significant Accounting Policies [Line Items]
Estimated useful lives of intangible assets (years)			5 years
Credit Concentration Risk | Revenue
Significant Accounting Policies [Line Items]
Concentration risk percentage			1.50%
Build-to-suit lease obligation
Significant Accounting Policies [Line Items]
Operating lease term of contract (years)	16 years
Rent expense	$ 446,100,000
Construction in progress	2,700,000		$ 63,400,000	2,700,000
Financing obligation	$ 2,700,000		63,400,000	2,700,000
Affiliated Entity
Significant Accounting Policies [Line Items]
Cost of services paid			4,300,000	$ 4,200,000
Adjustments
Significant Accounting Policies [Line Items]
Tax expense (benefit)			2,600,000
Increase in deferred tax assets			3,400,000
Increase in additional paid-in capital			3,400,000
Adjustments | Evolent Health Inc
Significant Accounting Policies [Line Items]
Tax expense (benefit)			$ 5,100,000

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Summary of significant accounting policies - Reconciliation of Basic to Diluted Weighted Average Common Shares Outstanding (Detail) - shares shares in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Accounting Policies [Abstract]
Basic weighted average common shares outstanding	36,213	40,528	41,888
Effect of dilutive outstanding stock-based awards	0	343	0
Diluted weighted average common shares outstanding	36,213	40,871	41,888
Stock Compensation Plan
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Share based compensation awards excluded from calculation of earnings per share	2,600	1,600	2,700

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Summary of significant accounting policies - Schedule of Recently Adopted Accounting Standards (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Prepaid expenses and other current assets	$ 18,965	$ 22,543
Deferred incentive compensation and other charges	72,178	81,181
Total assets	2,036,878	1,979,477
Debt, current	49,347	27,743
Debt, net of current portion	472,739	522,086
Total liabilities	1,519,834	1,530,386
Total liabilities and stockholders’ equity	2,036,878	1,979,477
Accounting Standards Update 2015-15
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Prepaid expenses and other current assets	22,543
Deferred incentive compensation and other charges	81,181
Total assets	1,979,477
Debt, current	27,743
Debt, net of current portion	522,086
Total liabilities	1,530,386
Total liabilities and stockholders’ equity	1,979,477
As reported | Accounting Standards Update 2015-15
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Prepaid expenses and other current assets		22,651
Deferred incentive compensation and other charges		81,462
Total assets		1,979,866
Debt, current		27,851
Debt, net of current portion		522,367
Total liabilities		1,530,775
Total liabilities and stockholders’ equity		$ 1,979,866
Adjustments | Accounting Standards Update 2015-15
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Prepaid expenses and other current assets	(108)
Deferred incentive compensation and other charges	(281)
Total assets	(389)
Debt, current	(108)
Debt, net of current portion	(281)
Total liabilities	(389)
Total liabilities and stockholders’ equity	$ (389)

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Acquisitions - Additional Information (Details) - USD ($)			9 Months Ended		12 Months Ended
	Jan. 21, 2015	Jan. 09, 2015	Sep. 30, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Business Acquisition [Line Items]
Share price (dollars per share)		$ 49.92
Goodwill impairment				$ 0	$ 0	$ 99,145,000
Depreciation and amortization				30,317,000	77,268,000	73,134,000
Interest expense				0	18,137,000	21,121,000
Stock-based compensation				17,965,000	29,435,000	29,093,000
Loss on financing activities				0	0	(17,398,000)
Royall Acquisition Co.
Business Acquisition [Line Items]
Fair value of equity issued		$ 121,224,000
Business acquisition, equity interest issued, number of shares (in shares)	1,755,000	2,428,364
Share price (dollars per share)		$ 49.92
Trading period (days)		15 days
Common stock, pricing collar ceiling (dollars per share)		$ 41.18
Goodwill tax deductible		$ 61,400,000
Transaction costs		$ 9,900,000
Acquisition-related costs				3,300,000		6,600,000
Revenue of acquiree since acquisition date, actual						102,800,000
Earnings (loss) of acquiree since acquisition date, actual						(88,600,000)
Goodwill impairment						99,100,000
Adjustment deferred tax asset					$ 1,000,000
Revenue			$ 783,640,000	502,319,000		2,800,000
Pro forma operating expenses						1,700,000
Non-recurring Transaction Expense | Royall Acquisition Co.
Business Acquisition [Line Items]
Non-recurring transaction expense				9,900,000
Acquisition-related Costs | Royall Acquisition Co.
Business Acquisition [Line Items]
Acquisition-related costs						(6,600,000)
Amortization Expense | Royall Acquisition Co.
Business Acquisition [Line Items]
Depreciation and amortization				11,600,000		400,000
Revenue Expense | Royall Acquisition Co.
Business Acquisition [Line Items]
Reduction in revenue				12,500,000
Increase in revenue						12,500,000
Interest Expense Elimination | Royall Acquisition Co.
Business Acquisition [Line Items]
Interest expense				13,600,000		19,900,000
Compensation Expense | Royall Acquisition Co.
Business Acquisition [Line Items]
Stock-based compensation				4,400,000		100,000
Non-recurring Loss | Royall Acquisition Co.
Business Acquisition [Line Items]
Loss on financing activities				$ (17,400,000)		$ (17,400,000)

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Acquisitions - Consideration (Details) - USD ($) $ in Thousands			9 Months Ended	12 Months Ended
		Jan. 09, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Business Acquisition [Line Items]
Net cash paid			$ 70,208	$ 1,900	$ 746,693
Royall Acquisition Co.
Business Acquisition [Line Items]
Net cash paid	[1]	$ 744,193
Fair value of equity issued		121,224
Total		865,417
Cash acquired from acquisition		7,065
Working capital adjustment		$ 1,278

[1] Net of cash acquired of $7,065 and a working capital adjustment payment of $1,278.

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Acquisitions - Recognized Identifiable Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands	Jan. 09, 2015	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Business Acquisition [Line Items]
Allocation to goodwill		$ 739,507	$ 738,200	$ 186,895
Royall Acquisition Co.
Business Acquisition [Line Items]
Consideration paid for the acquisition	$ 865,417
Membership fees receivable, net	29,239
Prepaid expenses and other current assets	8,237
Property and equipment	44,209
Intangible assets, net	262,000
Deferred revenue, current	(18,300)
Accounts payable and accrued liabilities	(5,621)
Deferred income taxes, net of current portion	(102,599)
Fair value of net assets acquired	217,165
Allocation to goodwill	$ 648,252

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Acquisitions - Pro Forma Information (Details) - Royall Acquisition Co. - USD ($) $ in Thousands	9 Months Ended		12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014	Dec. 31, 2015
Business Acquisition [Line Items]
Revenue	$ 783,640	$ 502,319	$ 2,800
Net income (loss) attributable to common stockholders	$ (90,705)	$ (29,962)

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Acquisitions - Transition Period Acquisitions (Details) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($) acquisition
Business Acquisition [Line Items]
Purchase price	$ 70,208	$ 1,900	$ 746,693
Weighted average useful life (years)		13 years 3 months
Goodwill	$ 186,895	$ 739,507	$ 738,200
Transition Period Acquisitions
Business Acquisition [Line Items]
Number of businesses acquired | acquisition			3
Purchase price			$ 71,300
Intangible assets			$ 16,600
Weighted average useful life (years)			8 years 3 months 18 days
Goodwill			$ 57,500
Goodwill tax deductible			$ 33,900

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Fair value measurements - Additional Information (Detail) - USD ($)	1 Months Ended		9 Months Ended	12 Months Ended
	Sep. 30, 2016	Jan. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015	Nov. 30, 2014	Nov. 30, 2012	Dec. 31, 2009
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Acquisition-related earn-out payments			$ 0	$ 3,600,000	$ 1,500,000
Impairment expense				$ 1,800,000	3,200,000
Dividend rate, percentage				8.00%
Dividends per share, declared (in dollars per share)				$ 0
Impairment of capitalized software			2,086,000	$ 0	8,166,000
Southwind
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent earn-out liabilities								$ 5,600,000
Consideration transferred				21,400,000
Contingent consideration paid				1,000,000
360 Fresh
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent earn-out liabilities							$ 2,500,000
Acquisition-related earn-out payments		$ 1,500,000
Clinovations LLC
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent earn-out liabilities				600,000		$ 4,500,000
Business acquisition, equity interest issued, number of shares (in shares)	62,269
Maximum payout of earn-out						9,500,000
Minimum payment of the earn-out						$ 0
GradesFirst
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent earn-out liabilities			$ 3,600,000
Maximum payout of earn-out				$ 4,000,000
Contingent Earn Out Liability | Clinovations LLC
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Expected volatility rate (percent)				25.00%
Contingent Earn Out Liability | Minimum | Clinovations LLC
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value estimate discount rate (percent)				6.70%
Contingent Earn Out Liability | Maximum | Clinovations LLC
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value estimate discount rate (percent)				7.50%
Evolent LLC
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Equity method investments, fair value disclosure				$ 138,200,000
Reported Value Measurement
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt instrument, fair value disclosure				527,300,000
Other Noncurrent Assets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments				$ 0	$ 1,800,000

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Fair value measurements - Fair Value Measurements of Financial Assets and Liabilities on Recurring Basis (Detail) - Recurring - USD ($) $ in Thousands		Dec. 31, 2016	Dec. 31, 2015
Financial assets
Cash and cash equivalents	[1]	$ 91,151	$ 71,825
Financial liabilities
Contingent earn-out liabilities		1,164	7,250	[2]
Level 1
Financial assets
Cash and cash equivalents	[1]	91,151	71,825
Financial liabilities
Contingent earn-out liabilities		0	0	[2]
Level 2
Financial assets
Cash and cash equivalents	[1]	0	0
Financial liabilities
Contingent earn-out liabilities		0	0	[2]
Level 3
Financial assets
Cash and cash equivalents	[1]	0	0
Financial liabilities
Contingent earn-out liabilities		1,164	7,250	[2]
Interest Rate Swap
Financial assets
Financial assets	[3]	1,044	419
Interest Rate Swap | Level 1
Financial assets
Financial assets	[3]	0	0
Interest Rate Swap | Level 2
Financial assets
Financial assets	[3]	1,044	419
Interest Rate Swap | Level 3
Financial assets
Financial assets	[3]	$ 0	$ 0

[1] Fair value is based on quoted market prices.

[2] This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and general macro-economic environment and industry trends.

[3] Fair value is determined using market standard models with observable inputs.

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Fair value measurements - Reconciliation of Change in Contingent Earn-out Liabilities (Detail) - Contingent Earn Out Liability - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Beginning balance		$ 7,250	$ 12,946
Ending balance		1,164	7,250
Southwind
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjustments made to the fair value of contingent liability	[1]	0	261
Earn out payments		(1,032)	(2,531)
GradesFirst
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjustments made to the fair value of contingent liability	[1]	0	400
Earn out payments		(4,000)	0
Clinovations LLC
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjustments made to the fair value of contingent liability	[1]	1,103	(2,326)
Earn out payments		(2,703)	0
Other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Adjustments made to the fair value of contingent liability	[1]	546
360 Fresh
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Earn out payments		$ 0	$ (1,500)

[1] Amounts were recognized in cost of services on the consolidated statements of operations.

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Membership fees receivable - Membership Fees Receivable (Detail) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Accounts, Notes, Loans and Financing Receivable [Line Items]
Membership fees receivable, gross	$ 611,897	$ 611,153
Allowance for uncollectible revenue	(6,380)	(5,709)
Membership fees receivable, net	605,517	605,444
Billed fees receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Membership fees receivable, gross	149,117	138,100
Unbilled fees receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Membership fees receivable, gross	$ 462,780	$ 473,053

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Membership fees receivable - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2016
Receivables [Abstract]
Unbilled fees expected to be billed	12 months

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Property and equipment - Schedule of Property and Equipment (Detail) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Property, Plant and Equipment [Abstract]
Leasehold improvements	$ 69,465	$ 63,608
Furniture, fixtures and equipment	70,362	62,790
Software	231,952	202,384
Property and equipment, gross	371,779	328,782
Accumulated depreciation and amortization	(200,498)	(148,425)
Property and equipment, net	$ 171,281	$ 180,357

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Property and equipment - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2015	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Property and equipment, net	$ 180,357	$ 171,281
Internally Developed Software
Property, Plant and Equipment [Line Items]
Impairment of long-lived assets held-for-use	2,700
Property and equipment, net	$ 73,200	$ 75,200

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Goodwill and intangibles - Additional Information (Detail)		9 Months Ended	12 Months Ended
	Oct. 01, 2015 USD ($)	Dec. 31, 2014 USD ($)	Dec. 31, 2016 USD ($) reporting_unit Segment	Dec. 31, 2015 USD ($)
Goodwill And Intangible Assets [Line Items]
Number of operating segments | Segment			1
Number of reporting units | reporting_unit			2
Goodwill		$ 186,895,000	$ 739,507,000	$ 738,200,000
Impairment of goodwill		0	$ 0	99,145,000
Estimated useful lives of intangible assets (years)			3 years 5 months
Weighted average useful life (years)			13 years 3 months
Impairment of intangible assets		2,086,000	$ 0	8,166,000
Amortization expense for intangible assets		7,300,000	22,800,000	24,400,000
Future amortization expense to be recorded in 2017			22,500,000
Future amortization expense to be recorded in 2018			21,600,000
Future amortization expense to be recorded in 2019			19,900,000
Future amortization expense to be recorded in 2020			18,700,000
Future amortization expense to be recorded in 2021			17,700,000
Future amortization expense to be recorded thereafter			$ 154,700,000
Minimum
Goodwill And Intangible Assets [Line Items]
Estimated useful lives of intangible assets (years)			2 years
Maximum
Goodwill And Intangible Assets [Line Items]
Estimated useful lives of intangible assets (years)			17 years
Capitalized software
Goodwill And Intangible Assets [Line Items]
Estimated useful lives of intangible assets (years)			5 years
Impairment of intangible assets		$ 2,100,000		$ 5,400,000
Royall
Goodwill And Intangible Assets [Line Items]
Goodwill	$ 648,300,000
Weighted average cost of capital (percent)	11.00%
Terminal growth rate (percent)	3.50%
Impairment of goodwill	$ 99,100,000

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Goodwill and intangibles - Changes in Carrying Amount of Goodwill (Detail) - USD ($)	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Goodwill [Roll Forward]
Beginning of period		$ 738,200,000	$ 186,895,000
Goodwill acquired		2,258,000	650,289,000
Goodwill impairment	$ 0	0	(99,145,000)
Purchase accounting adjustment		(951,000)	161,000
Ending balance	$ 186,895,000	$ 739,507,000	$ 738,200,000

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Goodwill and intangibles - Gross and Net Carrying Balances and Accumulated Amortization of Intangibles (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	3 years 5 months
Gross carrying amount	$ 329,943	$ 326,811
Accumulated amortization	(74,890)	(52,090)
Net carrying amount	$ 255,053	274,721
Capitalized software
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	5 years
Gross carrying amount	$ 20,034	16,902
Accumulated amortization	(9,998)	(6,796)
Net carrying amount	$ 10,036	10,106
Developed software
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	5 years 2 months
Gross carrying amount	$ 9,450	9,450
Accumulated amortization	(8,575)	(8,075)
Net carrying amount	$ 875	1,375
Customer relationships
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	16 years 2 months 6 days
Gross carrying amount	$ 277,710	277,710
Accumulated amortization	(42,978)	(25,769)
Net carrying amount	$ 234,732	251,941
Trademarks
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	8 years 7 months 12 days
Gross carrying amount	$ 14,900	14,900
Accumulated amortization	(5,923)	(4,490)
Net carrying amount	$ 8,977	10,410
Non-compete agreements
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	3 years 9 months 18 days
Gross carrying amount	$ 1,400	1,400
Accumulated amortization	(1,400)	(1,379)
Net carrying amount	$ 0	21
Customer Contracts
Finite-Lived Intangible Assets [Line Items]
Weighted average useful life (years)	4 years 8 months 12 days
Gross carrying amount	$ 6,449	6,449
Accumulated amortization	(6,016)	(5,581)
Net carrying amount	$ 433	$ 868

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Equity method investments - Narrative (Details)	9 Months Ended	12 Months Ended
	Dec. 31, 2014 USD ($)	Dec. 31, 2016 USD ($) people	Dec. 31, 2015 USD ($)	Mar. 31, 2014 USD ($)
Schedule of Equity Method Investments [Line Items]
Cash received from partial sale of equity method investment	$ 0	$ 48,565,000	$ 0
Gain on partial sale of equity method investment, net of taxes	0	29,679,000	0
Gains (losses) from equity method investments	(6,540,000)	46,666,000	(4,396,000)
Investments in and advances to unconsolidated entities		19,858,000	706,000
Tax expense (benefit)	$ 3,530,000	$ 11,040,000	$ 15,200,000
Effective Income Tax Rate Reconciliation, Percent	27.60%	19.90%	(15.30%)
Tax receivable percentage		85.00%
Tax receivable agreement period (up to) (in years)		15 years
Evolent LLC
Schedule of Equity Method Investments [Line Items]
Equity interest (percent)		7.70%
Gains (losses) from equity method investments	$ (6,300,000)	$ (6,100,000)	$ (8,600,000)
Investments in and advances to unconsolidated entities		9,600,000	700,000
Valuation Allowance			6,700,000
Tax expense (benefit)		(5,100,000)	(500,000)
Other than temporary impairments loss, investments		$ 0
Evolent Health Inc
Schedule of Equity Method Investments [Line Items]
Equity interest (percent)		7.90%
Equity method investments, number of individuals designated to board of directors by company | people		2
Cash received from partial sale of equity method investment		$ 48,600,000
Gain on partial sale of equity method investment, net of taxes		29,700,000
Gains (losses) from equity method investments		(4,300,000)	(3,000,000)
Investments in and advances to unconsolidated entities		10,300,000	0
Equity method investment, discrepancy between company basis and carrying value		43,800,000
Gain (loss) on sale, tax portion		18,900,000
Evolent Inc and Evolent LLC
Schedule of Equity Method Investments [Line Items]
Gain on partial sale of equity method investment, net of taxes		48,565,000	0	$ 0
Gains (losses) from equity method investments		46,666,000	(4,396,000)	(6,540,000)
Income (loss) from equity method investments, tax expense (benefit)		$ 21,237,000	$ (7,220,000)	$ 0
Income (Loss) from Equity Method Investments, Tax Expense (Benefit), Percentage		31.30%	62.20%
Gain (loss) on sale, tax portion		$ 7,400,000
Effective Income Tax Rate Reconciliation, Percent		38.80%
Evolent LLC
Schedule of Equity Method Investments [Line Items]
Equity interest (percent)		77.40%

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Equity method investments - Equity in Loss of Consolidated Entities (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015	Mar. 31, 2014
Schedule of Equity Method Investments [Line Items]
Gain on partial sale of investment	$ 0	$ 29,679	$ 0
Gains (losses) from equity method investments	$ (6,540)	46,666	(4,396)
Evolent Inc and Evolent LLC
Schedule of Equity Method Investments [Line Items]
Allocated share of losses		(10,366)	(11,616)	$ (6,540)
Gain on partial sale of investment		48,565	0	0
Dilution gains		29,704	0	0
Tax (expense) benefits		(21,237)	7,220	0
Gains (losses) from equity method investments		$ 46,666	$ (4,396)	$ (6,540)

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Equity method investments - Summary of Financial Position of Evolent (Detail) - Evolent Health Inc - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Assets:
Current assets	$ 264,966	$ 184,463
Non-current assets	934,873	831,051
Total assets	1,199,839	1,015,514
Liabilities, redeemable preferred units and members’/shareholders' equity:
Current liabilities	131,941	59,506
Non-current liabilities	155,784	21,429
Total liabilities	287,725	80,935
Total shareholders' equity/members’ equity	702,526	649,341
Non-controlling interests	209,588	285,238
Total liabilities and shareholders'/members’ equity	$ 1,199,839	$ 1,015,514

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Equity method investments - Summary of Operating Results of Evolent (Detail) - Evolent Health Inc - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Equity Method Investment, Summarized Financial Information, Income Statement [Abstract]
Revenue	$ 254,188	$ 96,878
Cost of revenue (exclusive of depreciation and amortization)	155,177	57,398
Gross profit	99,011	39,480
(Loss) income before income taxes and non-controlling interests	(237,533)	343,289
Net (loss) income	(226,778)	319,814
Net income (loss)	$ (159,742)	$ 332,494

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Noncontrolling interest - Additional Information (Detail) - USD ($)		9 Months Ended	12 Months Ended
	Dec. 05, 2014	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015	Dec. 04, 2014
Noncontrolling Interest [Abstract]
Net loss attributable to noncontrolling interest		$ 200,000	$ 0	$ 0
Payment for acquisition of noncontrolling interest	$ (6,000,000)	$ (6,110,000)	0	$ 0
Ownership interest (percent)	100.00%				0.00%
Noncontrolling interest, change in redemption value	$ 6,100,000
Deferred tax assets related to tax basis	$ 3,400,000		$ 2,900,000

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Debt - Additional Information (Detail)						1 Months Ended	9 Months Ended	12 Months Ended
	Oct. 30, 2015 USD ($)	Oct. 29, 2015 USD ($)	Feb. 06, 2015 USD ($)	Jan. 21, 2015 USD ($)	Jan. 09, 2015 USD ($)	Jun. 30, 2016 USD ($)	Dec. 31, 2014 USD ($)	Dec. 31, 2016 USD ($) covenant	Dec. 31, 2015 USD ($)	Apr. 30, 2015 USD ($) swap_agreement
Line of Credit Facility [Line Items]
Loss on financing activities							$ 0	$ 0	$ 17,398,000
Debt instrument, number of financial covenants | covenant								2
Interest expense							$ 0	$ 18,137,000	21,121,000
Amortization of debt issuance costs, excluding ineffectiveness of swap								1,400,000	1,300,000
Interest expense, interest rate swaps								2,200,000	2,000,000
Credit Facility $150 Million | Line of Credit
Line of Credit Facility [Line Items]
Loss on financing activities					$ 200,000
January 2015 Term Loan Facility | Term Loan Facility
Line of Credit Facility [Line Items]
Amount of revolving credit facility					725,000,000
Loss on financing activities				$ 4,800,000
Extinguishment of debt amount				149,900,000
Gains (losses) on extinguishment of debt, before write off of deferred debt issuance cost				(4,500,000)
Write off of deferred debt issuance cost				$ 300,000
February 2015 Senior Secured Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Amount of revolving credit facility			$ 575,000,000
Debt instrument term (years)			5 years
Stated interest rate percentage			3.01%
February 2015 Senior Secured Revolving Credit Facility | Revolving Credit Facility
Line of Credit Facility [Line Items]
Amount of revolving credit facility			$ 100,000,000
Debt instrument term (years)			5 years
October 2015 Senior Secured Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Original issue discount								$ 2,601,000
Stated interest rate percentage								2.77%
Amounts outstanding on line of credit	$ 460,600,000	$ 560,600,000
October 2015 Senior Secured Revolving Credit Facility | Revolving Credit Facility
Line of Credit Facility [Line Items]
Amount of revolving credit facility	200,000,000	$ 100,000,000
Stated interest rate percentage								2.77%
Amounts outstanding on line of credit	0							$ 100,000,000	100,000,000
Proceeds from long-term lines of credit	$ 100,000,000
Amounts available for borrowing								80,900,000	98,600,000
October 2015 Senior Secured Revolving Credit Facility | Line of Credit
Line of Credit Facility [Line Items]
Proceeds from long-term lines of credit						$ 17,000,000
October 2015 Senior Secured Revolving Credit Facility | Standby Letters of Credit
Line of Credit Facility [Line Items]
Amount of revolving credit facility								$ 19,100,000.0	$ 1,400,000.0
Stated interest rate percentage								2.77%	2.68%
Commitment fee (percentage)								0.30%
Royall Acquisition Co. | January 2015 Term Loan and Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Amount of revolving credit facility					775,000,000
Royall Acquisition Co. | January 2015 Term Loan Facility | Term Loan Facility
Line of Credit Facility [Line Items]
Amount of revolving credit facility					725,000,000
Original issue discount					21,800,000
Deferred financing fees					$ 2,800,000
Royall Acquisition Co. | January 2015 Term Loan Facility | Line of Credit
Line of Credit Facility [Line Items]
Debt instrument, effective interest rate (percent)					5.00%
Royall Acquisition Co. | January 2015 Revolving Credit Facility | Revolving Credit Facility
Line of Credit Facility [Line Items]
Amount of revolving credit facility					$ 50,000,000
Loss on financing activities					17,400,000
Debt instrument, unamortized discount, adjustment amount due to refund from original creditors					$ 2,400,000
Base Rate | February 2015 Senior Secured Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Basis spread on variable rate (percent)			1.75%
Base Rate | October 2015 Senior Secured Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Basis spread on variable rate (percent)	1.25%	1.75%
Base Rate | Royall Acquisition Co. | January 2015 Term Loan Facility | Line of Credit
Line of Credit Facility [Line Items]
Basis spread on variable rate (percent)					3.00%
LIBOR | February 2015 Senior Secured Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Basis spread on variable rate (percent)			2.75%
LIBOR | October 2015 Senior Secured Revolving Credit Facility | Secured Debt
Line of Credit Facility [Line Items]
Basis spread on variable rate (percent)	2.25%	2.75%						2.00%
LIBOR | Royall Acquisition Co. | January 2015 Term Loan Facility | Line of Credit
Line of Credit Facility [Line Items]
Basis spread on variable rate (percent)					4.00%
Debt instrument, variable rate floor (percent)					1.00%
Interest Rate Swap
Line of Credit Facility [Line Items]
Number of interest rate swap agreements entered into to swap portion of variable rate interest payments for fixed rate interest payments | swap_agreement										3
Derivative notional amount								$ 262,300,000	$ 276,800,000	$ 287,500,000
Effective portion of loss, net of tax								300,000	200,000
Hedge ineffectiveness								$ 400,000	0
Interest Rate Swap | Base Rate
Line of Credit Facility [Line Items]
Average base rate paid by the Company (percent)								1.282%
Other Noncurrent Liabilities | Interest Rate Swap
Line of Credit Facility [Line Items]
Interest rate derivative assets at fair value								$ 1,000,000	$ 400,000

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Debt - Schedule of Long-term Debt (Details) - USD ($)	Dec. 31, 2016	Dec. 31, 2015
Debt Instrument [Line Items]
Less: Amounts due in next twelve months ($50,312 face value less unamortized discount of $965)	$ (49,347,000)	$ (27,743,000)
Total	472,739,000	$ 522,086,000
Repayments of principal in next 12 months	50,312,000
Secured Debt
Debt Instrument [Line Items]
Long-term debt	422,086,000
Less: Amounts due in next twelve months ($50,312 face value less unamortized discount of $965)	(49,347,000)
Total	472,739,000
Repayments of principal in next 12 months	50,312,000
Amount expected to be amortized in next 12 months	$ 965,000
Secured Debt | October 2015 Senior Secured Revolving Credit Facility
Debt Instrument [Line Items]
Stated interest rate percentage	2.77%
Debt instrument, face amount	$ 424,687,000
Original issue discount	2,601,000
Revolving Credit Facility
Debt Instrument [Line Items]
Long-term debt	$ 100,000,000
Revolving Credit Facility | October 2015 Senior Secured Revolving Credit Facility
Debt Instrument [Line Items]
Stated interest rate percentage	2.77%

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Debt- Schedule of Maturities of Long-term Debt (Details) $ in Thousands	Dec. 31, 2016 USD ($)
Debt Disclosure [Abstract]
2016	$ 50,312
Long-term Debt, Maturities, Repayments of Principal in Year Two	79,062
2018	86,250
2019	309,063
Total	$ 524,687

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Stockholders' equity - Additional Information (Detail) - USD ($)			9 Months Ended	12 Months Ended
	Jan. 21, 2015	Jan. 09, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015	Nov. 30, 2015
Class of Stock [Line Items]
Increased share repurchase program						$ 550,000,000
Purchases of treasury stock			$ 36,014,000	$ 61,616,000	$ 53,000,000
Stock repurchased and retired during period (in shares)				19,778,800
Total cost of common stock repurchase				$ 513,500,000
Number of shares subject to repurchase (in shares)				0
Remaining authorized repurchase amount				$ 36,500,000
Number of shares repurchased under stock repurchase program (in shares)			731,559	1,951,258
Post-confirmation, preferred and common stock held in treasury			$ 7,300	$ 19,513	10,700
Treasury stock retirement resulted in reductions to treasury stock			36,000,000	61,600,000	53,000,000
Treasury stock retirement resulted in reductions to retained earnings			$ 36,000,000	$ 61,600,000	$ 53,000,000
Number of shares retired by the Company (in shares)			17,827,542		1,069,357
Shares issued	3,650,000
Shares issued (dollars per share)	$ 43.00
Shares issued, underwriting discount (dollars per share)	1.935
Shares issued, net (dollars per share)	$ 41.065
Payments of stock issuance costs	$ 1,100,000
Proceeds from issuance of common stock	$ 148,800,000
Common Stock
Class of Stock [Line Items]
Treasury stock, shares, acquired (in shares)			731,559	1,951,258	1,069,357
Royall Acquisition Co.
Class of Stock [Line Items]
Business acquisition, equity interest issued, number of shares (in shares)	1,755,000	2,428,364

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Stock-based compensation - Additional Information (Detail)							9 Months Ended	12 Months Ended
	Dec. 31, 2015 $ / shares	Dec. 30, 2015	Jun. 09, 2015 shares	Jan. 09, 2015 USD ($) $ / shares shares	Sep. 06, 2013	Sep. 05, 2013	Dec. 31, 2014 USD ($) $ / shares shares	Dec. 31, 2016 USD ($) group $ / shares shares	Dec. 31, 2015 USD ($) $ / shares shares	Mar. 31, 2014 $ / shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized under ESPP								1,684,000
Share price (dollars per share) | $ / shares				$ 49.92
Number of stock options granted (shares)							1,144,973	1,345,000	2,102,916
Weighted average exercise price of options granted (dollars per share) | $ / shares							$ 52.28	$ 28.44	$ 50.45
Number of options exercised (shares)							233,999	303,490	218,109
Intrinsic value of options exercised | $							$ 7,300,000	$ 4,700,000	$ 6,600,000
Stock options vested							411,259	341,024	387,748
Fair value of options vested | $							$ 4,200,000	$ 100,000	$ 5,000,000
Restricted stock units granted (shares)							336,113	534,205	568,511
Weighted average grant date fair value of options granted (dollars per share) | $ / shares							$ 14.49	$ 10.00	$ 15.49
Stock option awards, expected dividend yield (percent)							0.00%	0.00%	0.00%
Number of RSUs vested (shares)							387,377	318,877	362,654
Total intrinsic value of RSUs vested in period | $							$ 22,000,000	$ 10,500,000	$ 19,000,000
Shares withheld to satisfy minimum employee tax withholding							133,129	108,315	115,497
Payroll deductions to purchase shares, minimum (percent)								1.00%
Payroll deductions to purchase shares, maximum (percent)								15.00%
Rate of purchase of ESPP shares (percent)								95.00%
Proceeds from issuance of common stock under employee stock purchase plan (in shares)							9,241	14,041	10,496
Average price per ESPP per share (dollars per share) | $ / shares	$ 48.11						$ 46.64	$ 34.00	$ 48.11
Discount of the purchase date closing price (percent)								5.00%
Number of groups analyzing forfeitures | group								6
Number of new groups analyzing forfeitures | group								2
Stock-based compensation costs capitalized as part of the cost of an asset | $								$ 0
Total unrecognized compensation cost related to stock-based compensation | $								$ 49,000,000
Weighted average period of stock-based compensation (years)								2 years 5 months
Tax benefits associated with compensation expense | $							$ 392,000	$ 1,285,000	$ 4,855,000
Executive Team
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of groups analyzing forfeitures | group								3
Forfeiture rate (percent)								9.35%
General Employee
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of groups analyzing forfeitures | group								2
Forfeiture rate (percent)								3.30%
Estimated forfeiture rate (percent)	5.50%	4.60%
Board Of Directors
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of groups analyzing forfeitures | group								1
Estimated forfeiture rate (percent)								0.00%
Executive Group
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of groups analyzing forfeitures | group								2
Executive One
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated forfeiture rate (percent)								0.40%
Executive Two
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated forfeiture rate (percent)								1.00%
Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average exercise price of options granted (dollars per share) | $ / shares							$ 57.31	$ 28.52	$ 53.42
Number of options exercised (shares)							233,999	303,490	218,109
Employee Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock available for issuance (shares)								1,453,429
Shares authorized under ESPP							970,937
Award requisite service period (years)								4 years
Restricted stock units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized under ESPP							104,026
Weighted average grant date fair value, outstanding awards (dollars per share) | $ / shares	$ 52.82						$ 48.89	$ 42.13	$ 52.82	$ 41.81
Award minimum requisite service period (years)							1 year	1 year
Award requisite service period (years)								6 years
Restricted stock units granted (shares)							183,156	510,625	376,771
Weighted average grant date fair value of RSU (dollars per share) | $ / shares							$ 55.02	$ 31.01	$ 52.99
Number of RSUs vested (shares)							387,377	317,984	362,654
Option vesting term (years)								4 years
Restricted Stock Units (RSUs) with No Market Conditions
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average grant date fair value of RSU (dollars per share) | $ / shares							$ 42.92	$ 31.07	$ 51.94
Restricted Stock Units, Performance and Market Condition Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average grant date fair value of options granted (dollars per share) | $ / shares							$ 15.75		$ 15.49
Stock option awards, risk-free interest rate (percent)							1.70%		1.60%
Stock option awards, expected lives in years							5 years		5 years
Stock option awards, expected volatility (percent)							30.00%		31.30%
Stock option awards, expected dividend yield (percent)							0.00%		0.00%
Number of RSUs vested (shares)									0
Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option awards, expected lives in years							5 years	5 years 15 days	4 years
Option vesting term (years)								6 months
Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option awards, expected lives in years							5 years 5 months 19 days	5 years 6 months 15 days	5 years 5 months 11 days
Option vesting term (years)								6 years
Stock Incentive 2009 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of additional shares authorized			3,800,000
Common stock available for issuance (shares)								1,862,891
Maximum contractual term (years)					7 years	5 years
Royall Inducement Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized under ESPP				1,906,666
Aggregate grant date fair value | $				$ 26,800,000
Royall Inducement Plan | Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum contractual term (years)				7 years
Shares authorized under ESPP				1,751,000
Award vesting rights (percent)								50.00%
Royall Inducement Plan | Restricted stock units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized under ESPP				145,867
Weighted average grant date fair value, outstanding awards (dollars per share) | $ / shares				$ 49.92
Grant date fair value | $				$ 7,300,000
Award vesting rights (percent)								50.00%
Royall Inducement Plan | Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance target (percent)								70.00%
Royall Inducement Plan | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Performance target (percent)								99.00%

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Stock-based compensation - Summary of Changes in Common Stock Options (Detail) - USD ($) $ / shares in Units, $ in Millions		9 Months Ended	12 Months Ended
		Dec. 31, 2014	Dec. 31, 2016		Dec. 31, 2015
Number of Options
Number of Options, Exercised (shares)		(233,999)	(303,490)		(218,109)
Weighted Average Exercise Price
Weighted Average Exercise Price, Granted (dollars per share)		$ 52.28	$ 28.44		$ 50.45
Performance-Based Options
Number of Options
Number of Options, Outstanding, Beginning balance (shares)		20,000	2,013,325		994,605
Number of Options, Granted (shares)		974,605	319,900		1,774,820
Number of Options, Exercised (shares)		0	0		0
Number of Options, Forfeited (shares)		0	(215,370)		(756,100)
Number of Options, Outstanding, Ending balance (shares)		994,605	2,117,855	[1]	2,013,325
Number of Options, Exercisable, Ending balance (shares)	[2]		26,872
Weighted Average Exercise Price
Weighted Average Exercise Price, Outstanding, Beginning balance (dollars per share)		$ 29.58	$ 50.42		$ 50.96
Weighted Average Exercise Price, Granted (dollars per share)		51.40	28.20		49.90
Weighted Average Exercise Price, Exercised (dollars per share)		0.00	0.00		0.00
Weighted Average Exercise Price, Forfeited (dollars per share)		0.00	49.92		49.92
Weighted Average Exercise Price, Outstanding, Ending balance (dollars per share)		$ 50.96	47.11	[1]	$ 50.42
Weighted Average Exercise Price, Exercisable, Ending balance (dollars per share)	[2]		$ 34.91
Weighted average remaining contractual term in years, outstanding			5 years
Aggregate intrinsic value, outstanding			$ 1.7
Weighted average remaining contractual term in years, exercisable			2 years
Aggregate intrinsic value, exercisable			$ 0.1
Service-Based Options
Number of Options
Number of Options, Outstanding, Beginning balance (shares)		1,810,323	1,843,110		1,746,692
Number of Options, Granted (shares)		170,368	1,025,100		328,096
Number of Options, Exercised (shares)		(233,999)	(303,490)		(218,109)
Number of Options, Forfeited (shares)		0	(39,542)		(13,569)
Number of Options, Outstanding, Ending balance (shares)		1,746,692	2,525,178	[3]	1,843,110
Number of Options, Exercisable, Ending balance (shares)	[4]		1,021,192
Weighted Average Exercise Price
Weighted Average Exercise Price, Outstanding, Beginning balance (dollars per share)		$ 32.86	$ 41.73		$ 37.19
Weighted Average Exercise Price, Granted (dollars per share)		57.31	28.52		53.42
Weighted Average Exercise Price, Exercised (dollars per share)		18.36	16.05		21.76
Weighted Average Exercise Price, Forfeited (dollars per share)		0.00	52.68		60.27
Weighted Average Exercise Price, Outstanding, Ending balance (dollars per share)		$ 37.19	39.28	[3]	$ 41.73
Weighted Average Exercise Price, Exercisable, Ending balance (dollars per share)	[4]		$ 43.29
Weighted average remaining contractual term in years, outstanding			4 years
Aggregate intrinsic value, outstanding			$ 7.4
Weighted average remaining contractual term in years, exercisable			2 years
Aggregate intrinsic value, exercisable			$ 2.5

[1] The weighted average remaining contractual term for all performance-based options outstanding at December 31, 2016 is approximately five years and the aggregate intrinsic value is $1.7 million.

[2] The weighted average remaining contractual term for all performance-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $0.1 million.

[3] The weighted average remaining contractual term for all service-based options outstanding at December 31, 2016 is approximately four years and the aggregate intrinsic value is $7.4 million.

[4] The weighted average remaining contractual term for all service-based options exercisable as of December 31, 2016 is approximately two years and the aggregate intrinsic value is $2.5 million.

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Stock-based compensation - Summary of Exercise Prices and Contractual Lives of Options Outstanding under Stock Incentive Plans (Detail)	12 Months Ended
	Dec. 31, 2016 $ / shares shares
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Shares | shares	4,643,033
Weighted Average Exercise Price (dollars per share)	$ 42.85
Weighted Average Remaining Contractual Life - Years	4 years 6 months
$ 0.00 – $ 9.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 0
Range of exercise prices, maximum (dollars per share	$ 9.99
Shares | shares	0
Weighted Average Exercise Price (dollars per share)	$ 0.00
Weighted Average Remaining Contractual Life - Years	0 months
10.00 – 19.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 10.00
Range of exercise prices, maximum (dollars per share	$ 19.99
Shares | shares	70,500
Weighted Average Exercise Price (dollars per share)	$ 16.58
Weighted Average Remaining Contractual Life - Years	3 months 18 days
20.00 – 29.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 20.00
Range of exercise prices, maximum (dollars per share	$ 29.99
Shares | shares	1,469,478
Weighted Average Exercise Price (dollars per share)	$ 27.83
Weighted Average Remaining Contractual Life - Years	5 years 7 months 6 days
30.00 – 39.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 30.00
Range of exercise prices, maximum (dollars per share	$ 39.99
Shares | shares	46,432
Weighted Average Exercise Price (dollars per share)	$ 35.18
Weighted Average Remaining Contractual Life - Years	6 years 5 months 6 days
40.00 – 49.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 40.00
Range of exercise prices, maximum (dollars per share	$ 49.99
Shares | shares	1,495,769
Weighted Average Exercise Price (dollars per share)	$ 48.14
Weighted Average Remaining Contractual Life - Years	3 years 5 months 6 days
50.00 – 59.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 50.00
Range of exercise prices, maximum (dollars per share	$ 59.99
Shares | shares	1,476,482
Weighted Average Exercise Price (dollars per share)	$ 52.57
Weighted Average Remaining Contractual Life - Years	4 years 7 months 6 days
60.00 – 69.99
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 60.00
Range of exercise prices, maximum (dollars per share	$ 69.99
Shares | shares	84,372
Weighted Average Exercise Price (dollars per share)	$ 66.90
Weighted Average Remaining Contractual Life - Years	4 years 2 months 6 days

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Stock-based compensation - Summary of Changes in RSUs and PSUs(Detail) - $ / shares	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Number of options RSUs
Granted (shares)	336,113	534,205	568,511
Vested (shares)	(387,377)	(318,877)	(362,654)
Performance-Based Restricted Stock Units
Number of options RSUs
Non-vested beginning balance (shares)	42,880	301,032	187,297
Granted (shares)	152,957	23,580	191,740
Forfeited (shares)	(8,540)	(66,139)	(78,005)
Vested (shares)	0	(893)	0
Non-vested ending balance (shares)	187,297	257,580	301,032
Weighted Average Grant Date Fair Value, RSU
Weighted Average grant date fair value non-vested, balance (dollars per share)	$ 47.87	$ 39.10	$ 31.85
Weighted average grant date fair value, granted (dollars per share)	28.43	32.28	49.87
Weighted average grant date fair value, forfeited (dollars per share)	51.15	51.15	48.16
Weighted average grant date fair value, vested (dollars per share)	0.00	50.41	0.00
Weighted average grant date Fair value non-vested, balance (dollars per share)	$ 31.85	$ 35.34	$ 39.10
Restricted stock units
Number of options RSUs
Non-vested beginning balance (shares)	1,067,582	839,613	859,285
Granted (shares)	183,156	510,625	376,771
Forfeited (shares)	(4,076)	(64,170)	(33,789)
Vested (shares)	(387,377)	(317,984)	(362,654)
Non-vested ending balance (shares)	859,285	968,084	839,613
Weighted Average Grant Date Fair Value, RSU
Weighted Average grant date fair value non-vested, balance (dollars per share)	$ 41.81	$ 52.82	$ 48.89
Weighted average grant date fair value, granted (dollars per share)	55.02	31.01	52.99
Weighted average grant date fair value, forfeited (dollars per share)	48.83	47.18	55.74
Weighted average grant date fair value, vested (dollars per share)	32.27	51.48	43.43
Weighted average grant date Fair value non-vested, balance (dollars per share)	$ 48.89	$ 42.13	$ 52.82

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Stock-based compensation - Valuation of Stock Options (Detail) - $ / shares	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Share Based Payment Award Stock Options Valuation Assumptions [Line Items]
Risk-free interest rate, Minimum (percent)	1.53%	95.00%	1.18%
Risk-free interest rate, Maximum (percent)	1.75%	1.64%	1.67%
Expected volatility, Minimum (percent)	29.80%	36.40%	31.20%
Expected volatility, Maximum (percent)	30.90%	38.40%	33.00%
Dividend yield (percent)	0.00%	0.00%	0.00%
Weighted average exercise price of options granted (dollars per share)	$ 52.28	$ 28.44	$ 50.45
Weighted average grant date fair value of options granted (dollars per share)	$ 14.49	$ 10.00	$ 15.49
Number of stock options granted (shares)	1,144,973	1,345,000	2,102,916
Minimum
Share Based Payment Award Stock Options Valuation Assumptions [Line Items]
Expected lives in years	5 years	5 years 15 days	4 years
Maximum
Share Based Payment Award Stock Options Valuation Assumptions [Line Items]
Expected lives in years	5 years 5 months 19 days	5 years 6 months 15 days	5 years 5 months 11 days

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Stock-based compensation - Summary of Stock-based Compensation Expense (Detail) - USD ($) $ in Thousands	3 Months Ended								9 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Stock-based compensation expense included in Costs and expenses
Total costs and expenses									$ 17,965	$ 29,435	$ 29,093
Operating income	$ 25,520	$ 12,134	$ 18,088	$ 20,796	$ (90,029)	$ 19,151	$ 12,320	$ 4,158	14,103	76,538	(54,400)
Employee Stock Purchase Plan
Stock-based compensation expense included in Costs and expenses
Total costs and expenses									17,965	29,435	29,093
Operating income									(17,965)	(29,435)	(29,093)
Cost of services | Employee Stock Purchase Plan
Stock-based compensation expense included in Costs and expenses
Total costs and expenses									5,977	9,231	9,211
Member relations and marketing | Employee Stock Purchase Plan
Stock-based compensation expense included in Costs and expenses
Total costs and expenses									3,348	5,028	5,176
General and administrative | Employee Stock Purchase Plan
Stock-based compensation expense included in Costs and expenses
Total costs and expenses									$ 8,640	$ 15,176	$ 14,706

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Stock-based compensation - Summary of Stock-based Compensation Expense by Award (Detail) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation	$ 17,965	$ 29,435	$ 29,093
Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation	5,431	13,270	10,908
Restricted stock units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation	$ 12,534	$ 16,165	$ 18,185

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Income taxes - Summary of Provision for Income Taxes (Detail) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Current tax expense
Federal	$ 3,613	$ 13,527	$ 6,225
State and local	1,680	3,694	1,781
Foreign	620	626	524
Total current tax expense	5,913	17,847	8,530
Deferred tax (benefit) expense
Federal	(297)	(7,279)	(6,376)
State and local	(2,086)	472	13,046
Foreign	0	0	0
Total deferred tax (benefit) expense	(2,383)	(6,807)	6,670
Provision for income taxes	$ 3,530	$ 11,040	$ 15,200

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Income taxes- Income before Income Tax (Details) - USD ($) $ in Thousands	3 Months Ended								9 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Income Tax Disclosure [Abstract]
U.S. sources									$ 10,445	$ 53,433	$ (101,386)
Non-U.S. sources									2,331	2,179	1,968
Income (loss) before provision for income taxes and gains (losses) from equity method investments	$ 20,712	$ 6,088	$ 12,776	$ 16,036	$ (99,036)	$ 12,551	$ 7,038	$ (19,971)	$ 12,776	$ 55,612	$ (99,418)

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Income taxes - Statutory Rates to Income before Provision for Income Taxes (Detail)	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Income Tax Disclosure [Abstract]
Statutory U.S. federal income tax rate	35.00%	35.00%	35.00%
Section 162(m) compensation	11.70%	0.50%	(0.80%)
State income tax, net of U.S. federal income tax benefit	7.40%	4.60%	3.50%
Washington, D.C. QHTC income tax credits and D.C. law changes	(9.80%)	(0.00%)	(13.40%)
Uncertain tax position	5.40%	(0.30%)	0.70%
Federal R&D credit (net of associated UTP)	(25.70%)	(22.70%)	1.80%
Return to provision adjustment	3.20%	1.20%	(0.40%)
Goodwill impairment	0.00%	0.00%	(38.30%)
Meals and entertainment	5.50%	2.70%	(1.50%)
Stock-based compensation	0.00%	(2.80%)	0.00%
Other permanent differences, net	(5.10%)	1.70%	(1.90%)
Effective tax rate	27.60%	19.90%	(15.30%)

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Income taxes - Tax Effect of Differences between Tax Bases of Assets and Liabilities (Detail) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Deferred Tax Assets, Net, Classification [Abstract]
Federal R&D credits	$ 6,107	$ 420
Deferred compensation accrued for financial reporting purposes	7,139	13,284
Stock-based compensation	21,384	15,724
Acquired net operating loss carryforwards	2,794	5,421
Reserve for uncollectible revenue	2,508	2,119
Basis difference on investment in unconsolidated entities	962	7,208
Debt issuance costs	2,066	2,801
Deferred rent	3,248	1,466
Depreciation	1,057	0
Tax credit carryforwards	1,094	332
Unrealized foreign exchange loss	667	0
Outside basis difference on cost method investment	1,967	0
Other	1,490	835
Total deferred tax assets	52,483	49,610
Valuation allowance	0	(49)
Total deferred tax assets, net of valuation allowance	52,483	49,561
Capitalized software development costs	(33,599)	(31,042)
Deferred incentive compensation and other deferred charges	(11,211)	(11,940)
Acquired intangibles and goodwill; and acquisition related costs	(94,947)	(97,278)
Depreciation	0	(3,031)
Other	(1,739)	(163)
Total deferred tax liabilities	(141,496)	(143,454)
Net deferred income tax liabilities	$ (89,013)	$ (93,893)

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Income taxes - Additional Information (Detail) - USD ($)	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015	Mar. 31, 2014
Income Tax Examination [Line Items]
Operating loss carryforwards		$ 2,800,000
Tax credit carryforward, amount		14,100,000
Interest or penalties on unrecognized tax benefits	$ 0	100,000.0	$ 300,000.0
Unrecognized tax benefits	$ 828,000	7,416,000	1,385,000	$ 0
Domestic Tax Authority | Research Tax Credit Carryforward
Income Tax Examination [Line Items]
Tax credit carryforward, amount used		$ 4,600,000	$ 1,800,000

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Income Taxes - Schedule of Unrecognized Tax Benefits Roll Forward (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Reconciliation of Unrecognized Tax Benefits, Excluding Amounts Pertaining to Examined Tax Returns [Roll Forward]
Balance at beginning of the period	$ 0	$ 1,385	$ 828
Additions based on tax positions related to the current periods	497	1,126	281
Additions for tax positions of prior periods	331	4,905	0
Positions assumed in acquisition	0	0	276
Balance at end of the period	$ 828	$ 7,416	$ 1,385

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Commitments and contingencies - Additional Information (Detail) - USD ($) $ in Millions	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Commitments and Contingencies Disclosure [Abstract]
Depreciated leases		$ 33.3	$ 37.0
Rental and executory expenses	$ 13.2	23.7	23.1
Purchase obligation, 2017		1.4
Purchase obligation, 2018		$ 1.0
Minimum age of employees for defined contribution plan		21 years
Minimum discretionary matching contributions		0.00%
Maximum discretionary matching contributions		100.00%
Maximum percentage of employee contribution of base salary (up to)		4.00%
Discretionary contributions	$ 0.0	$ 5.9	$ 4.9
Amounts outstanding on line of credit		$ 19.1

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Commitments and contingencies - Future Minimum Lease Payments (Detail) $ in Thousands	Dec. 31, 2016 USD ($)
Operating Leased Assets [Line Items]
2016	$ 17,421
2017	16,255
2018	27,658
2019	31,759
2020	30,269
Thereafter	384,824
Total	508,186
Operating leases
Operating Leased Assets [Line Items]
2016	17,421
2017	16,255
2018	11,143
2019	6,741
2020	4,880
Thereafter	5,613
Total	62,053
Build-to-suit lease obligation
Operating Leased Assets [Line Items]
2016	0
2017	0
2018	16,515
2019	25,018
2020	25,389
Thereafter	379,211
Total	$ 446,133

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Segments and geographic areas - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2016 Segment
Segment Reporting [Abstract]
Number of operating segments	1

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Segments and geographic areas - Revenue Information (Detail) - USD ($) $ in Thousands	3 Months Ended								9 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 203,852	$ 200,455	$ 198,382	$ 200,735	$ 204,951	$ 200,492	$ 183,583	$ 179,322	$ 434,002	$ 803,424	$ 768,348
United States
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue									417,194	784,447	749,880
Other Countries
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue									$ 16,808	$ 18,977	$ 18,468

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Quarterly financial data (unaudited) - Summarized Financial Data (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								9 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Quarterly Financial Information Disclosure [Abstract]
Revenue	$ 203,852	$ 200,455	$ 198,382	$ 200,735	$ 204,951	$ 200,492	$ 183,583	$ 179,322	$ 434,002	$ 803,424	$ 768,348
Operating income	25,520	12,134	18,088	20,796	(90,029)	19,151	12,320	4,158	14,103	76,538	(54,400)
(Loss) income from continuing operations before provision for income taxes and and gains (losses) in equity method investments	20,712	6,088	12,776	16,036	(99,036)	12,551	7,038	(19,971)	12,776	55,612	(99,418)
Net (loss) income attributable to common stockholders	$ 35,866	$ 37,538	$ 7,495	$ 10,339	$ (105,280)	$ 672	$ 7,666	$ (22,072)	$ 2,706	$ 91,238	$ (119,014)
Earnings Per Share [Abstract]
Net (loss) income attributable to common stockholders per share — basic (dollars per share)	$ 0.89	$ 0.94	$ 0.19	$ 0.25	$ (2.52)	$ 0.02	$ 0.18	$ (0.54)	$ (0.10)	$ 2.25	$ (2.84)
Net (loss) income attributable to common stockholders per share — diluted (dollars per share)	$ 0.88	$ 0.93	$ 0.18	$ 0.25	$ (2.52)	$ 0.02	$ 0.18	$ (0.54)	$ (0.10)	$ 2.23	$ (2.84)

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Supplemental cash flow (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Cash paid (received) for:
Income taxes	$ 32	$ 25,919	$ (4,695)
Interest	0	14,090	17,646
Non-cash activities:
Clinovations earn-out liability share-based payment	0	2,703	0
Increase in estimated cost of construction of a building under a build-to-suit lease	$ 0	$ 60,667	$ 2,700

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Quarterly financial data (unaudited) - Narrative (Details) - Adjustments $ in Millions	3 Months Ended
	Sep. 30, 2016 USD ($)
Error Corrections and Prior Period Adjustments Restatement [Line Items]
Period increase (decrease) for income taxes	$ 4.2
Evolent Health Inc | Gain (Loss) on Equity Method Investment
Error Corrections and Prior Period Adjustments Restatement [Line Items]
Period increase (decrease) for income taxes	$ (5.1)

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Subsequent Events (Details) - Reduction in force - Scenario, Forecast $ in Millions	Jan. 03, 2017 USD ($) employee
Minimum
Subsequent Event [Line Items]
Restructuring and related cost, expected cost	$ 7
Maximum
Subsequent Event [Line Items]
Reduction in force | employee	220
Restructuring and related cost, expected cost	$ 9

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Schedule II - Valuation and Qualifying Accounts (Detail) - Allowance for uncollectible revenue - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Movement in Valuation Allowances and Reserves [Roll Forward]
Balance at Beginning of Year	$ 6,850	$ 5,709	$ 7,530
Additions Charged to Revenue	8,938	5,577	4,893
Additions Charged to Other Accounts	0	0	310
Deductions From Reserve	8,258	4,906	7,024
Balance at End of Year	$ 7,530	$ 6,380	$ 5,709