The Advisory Board (ABCO) Robert W. Musslewhite on Q2 2016 Results - Earnings Call Transcript

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The Advisory Board Co. (NASDAQ:ABCO)

Q2 2016 Earnings Call

July 27, 2016 5:30 pm ET

Executives

Robert W. Musslewhite - Chairman & Chief Executive Officer

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Analysts

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Ryan S. Daniels - William Blair & Co. LLC

Jamie J. Stockton - Wells Fargo Securities LLC

Richard Close - Canaccord Genuity Group, Inc.

Mike Reid - Cantor Fitzgerald Securities

Matthew G. Hewitt - Craig-Hallum Capital Group LLC

Eric Percher - Barclays Capital, Inc.

Sean W. Wieland - Piper Jaffray & Co. (Broker)

Nicholas M. Jansen - Raymond James & Associates, Inc.

Matthew D. Gillmor - Robert W. Baird & Co., Inc. (Broker)

Randle Glenn Reece - Avondale Partners LLC

Robert Willoughby - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Stephanie J. Davis - JPMorgan Securities LLC

Steven P. Halper - FBR Capital Markets & Co.

Jonathan Young - Bank of America Merrill Lynch

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Operator

Welcome to The Advisory Board Company's Earnings Conference Call for the Quarter Ended June 30, 2016. As a reminder, this conference call is being recorded.

Your host for the call today is Mr. Robert Musslewhite, Chief Executive Officer of The Advisory Board Company. This call will be archived and available from 8:00 p.m. this evening until 11:00 p.m. on August 3 via webcast on the company's website in the section entitled Investor Relations.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding The Advisory Board Company's expected quarterly and annual financial performance for calendar 2016. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements.

Without limiting the foregoing discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in The Advisory Board Company's filings with the Securities and Exchange Commission and in its second quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. For additional information on the company's results and outlook, please refer to its second quarter news release. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time, I will turn the conference call over to the company's Chief Executive Officer, Mr. Robert Musslewhite. Please go ahead.

My apologies, we're just experiencing some technical difficulties. The conference will begin shortly.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Good evening. This is Robert Musslewhite, Chairman and CEO of The Advisory Board. We thought you would enjoy some soothing music to kick off our call tonight. Hope you relax before a plethora of information that we're going to release here. So, sorry about the delay. I'm joined today by Michael Kirshbaum, our Chief Financial Officer.

We have a three-part agenda for this evening's call. First, I will give you a summary of our performance for the quarter ended June 30, 2016 covering our financial results, drivers of our business performance and an update on our key priorities for the year. I will then turn it over to Michael to take us through a more detailed review of the financials. Then I will close with a few final thoughts. And as always, we will be happy to take questions at the end of the session.

In the quarter ended June 30, 2016, Advisory Board revenue was $198 million, up 4.3% from $190 million of adjusted revenue in the quarter ended June 30, 2015. Contract value increased 5% to $775 million as of June 30, 2016, up from $742 million as of June 30, 2015.

Adjusted EBITDA was $48 million for the quarter, compared to $46 million in the same quarter last year, an increase of 5%. Adjusted net income was $19 million or $0.47 per diluted share, a 12% increase over the same period a year ago.

At the close of the June quarter, I'm pleased that the company is performing well against expectations for the year. We continue to deliver deep value to our health care and education members, who are actively seeking the comprehensive best practice-based research, technology, consulting and tech-enabled service support that we provide.

Given the complexity members face today in both of the markets we serve, the need for our help remains acute. We've built enduring relationships by meeting that need holistically and our success in doing so is reflected in our financial results.

Over the first half of the year, we made good progress on our key strategic initiatives. I'm particularly pleased with performance of the Royall & Company business, which has improved substantially over the course of the last year.

Strong member attachment to Royall's data and insight-driven capabilities is not only playing out in its financial results, but it's also contributing significantly to our overall relationships with colleges and universities, because we were able to serve them in a more robust way across the student lifecycle.

In prior discussions, I've updated you on the improvement we've been seeing in Royall from an operational perspective, integrating the business, innovating on joint new product development and enhancing sales and renewals practices. And while not surprising, it is gratifying to see that this improvement has translated to a meaningfully positive inflection in the growth trajectory of the business.

As you know, Royall just finished its most important sales and renewals period, which operates in line with the cadence of the college and university admission season and we saw a strong performance through this busy season, with new sales coming in well ahead of last year and modest improvements in an already strong renewal rate as well.

As a result, we're set up for solid mid-teens growth in Royall across the next fiscal year and now have the robust growth platform we envisioned when we acquired the business last year.

While I'm pleased with Royall's financial results, I'm even more excited about what is driving those results, which are the tremendous value stories we are seeing in our member institutions. Enrollment is a critical factor in our members' success and is viewed in increasingly complex ways across every institution, from small local colleges to the most selected universities.

While the declining number of high school graduates presents unprecedented challenges in filling entering classes, institutions also must focus on increasing racial, geographic, and socioeconomic diversity and finding and enrolling the students with the best match to academic background for success on their campus.

Royall's technology and data enabled service platform makes it the industry leader in driving best-in-class enrollment results and Royall members consistently see tangible, measurable ROI.

For example, one Royall client saw 152% increase in entering class enrollment this admission season. The administration told us that the work exceeded their wildest hopes and goals and made this a transformational year for the university.

A private research university in the Northeast increased entering class enrollment by 12%, growing net revenue by nearly $2 million. The university also met challenging institutional goals to expand female enrollment and increase academic quality by an average of 20 SAT points. And one highly selective private liberal arts college saw a 43% increase in applications submitted through the common application through their Royall partnership.

In addition, applications from minority populations increased at even greater rates, with application from African-American students up 83% and application from Latino students up 102%, supporting the colleges' institutional goal of increasing diversity.

One university president sent an amazing e-mail that I have to share. Last September, she had told her board that it would take two years to close the gap on an $11 million shortfall. Instead, we were able to help them to close the gap in just one year. Her email to our team said, "This has been a record year in terms of applications and deposits. We held steady on quality, increased diversity, reduced the acceptance rate and will likely increase yield. We also increased net tuition revenue from an average of 3% to more than 14.5%. And as you may know, we demonstrated our return on investment to be 1,300% or a 13 to 1 ROI in just one year. This year was a real success story of the campus coming together, quickly embracing change and everyone pitching into help with admissions. The collaboration that occurred this year between admissions and our academic units was unparalleled.

Our Royall initiative helps drive the students and parents to pay attention to us. With your help, we were able to accept them quickly and package them with scholarships, and then our folks really turned on the personalized attention to help keep them interested to deposit and now ultimately enroll. While there are a lot of people to thank, I specially want to thank our team from Royall for partnering with me to achieve these great results."

Needless to say, our team here was ecstatic to receive such praise from a university president. We are using this type of outstanding member value as the basis for continued innovation, and our hard work to integrate Royall under the rest of our education business sets us up well to conceive and execute on new ways to serve our members. Our day one risk analysis that I mentioned in the last call was one of our initial steps in combining our Royall data and our student success data. This work provides critical insight in advance on the students with the highest risk of dropping out of school after the first year.

Our ability to link pre-college data and information gleaned through the enrollment process with deep institution specific student success data is unique within the market and the sophisticated predictive analytics through which we run this data further differentiates our platform. This project on first year persistence is just the beginning of what we plan to do with the incredible portfolio of assets we have developed in our education business.

With our unparalleled best practice research base, Royall's proven enrollment prowess, our impactful student success analytics capabilities and our strong relationships with 1,100 colleges and universities, we have the building blocks to drive real value throughout the entire student lifecycle and fundamentally change and improve higher education in our country. We are optimistic about our prospects and excited by the great work going on throughout our education business this year.

On the health care side, our members are facing tremendous complexity, and we are perfectly positioned to fulfill their need for comprehensive solutions to their challenging issues. For example, the ongoing transformation of Medicare payment systems and structures continues to be an up-at-night issue for our members.

Medicare reimbursement continues to shift toward value-based models and recent developments add much more nuance and complexity to an already challenging transition underway.

In April of this year, Congress passed the Medicare Access and CHIP Reauthorization Act, commonly known as MACRA. MACRA had overwhelming bipartisan support and implemented a new payment system for physician services under Medicare Part B. Starting in 2017 as currently enacted and continuing to unfold over the next decade, MACRA reshapes physician reimbursement with profound consequences for physician and health system strategy.

It will no longer be possible for provider organizations to take a passive or indifferent approach to payment transformation. The Advisory Board is uniquely positioned to support our members in this transition. Our best practice research teams have been identifying and refining what it takes to succeed under risk for many years. Their insight is reflected not only in our strategic research, but also in the analytics support we offer through our Crimson Suite and revenue cycle technologies as well as in a hands-on implementation assistance we provide through our consulting.

Further, as more physicians seek hospital employment in order to gain a partner in managing all the complexity associated with MACRA, our health system relationship position us perfectly to serve them on these topics and address questions of future strategy.

What's more is The Advisory Board has grown to serve physician groups, post-acute providers, insurers, and other stakeholders, as well as hospitals and health systems. Our expertise now spans the entire continuum of health care that our members are becoming responsible for managing.

Even more transformative than the shift to value is the emergence of a consumer-driven market for health care. This trend began with insurance markets moving to a more retail-oriented model with the public and private insurance exchanges. This trend is now cascading to the point of care. More and more health care consumers now have significant out-of-pocket financial responsibilities, and slowly but surely more access to meaningful, actionable cost and quality information. That combination sets the stage for innovators and new market entrants to deliver value directly to consumers, bypassing the players, physicians, insurers, and to some extent employers that have traditionally controlled health care choices and spending.

Health systems that ignore or undervalue this shift are at risk of being marginalized, while those that adopt consumer-focused competitive postures and build durable consumer relationships stand to outperform those that do not. Again, The Advisory Board is in the ideal position to deliver value to our members if they address the realities of health care consumerism. Our marketing consumer analytics investments like our Planning 20/20 Suite and our Audience Rx consumer outreach platform provide health systems with essential competencies, and technologies like HealthPost and iRound help members stay ahead of a constantly rising competitive standard for access and experience.

As always, our support is built on the foundation laid by our in-depth research, including consumer level preference surveys, local employer assessments, and best practice identification from across the industry. By helping our members become truly consumer-focused health systems, we're enabling their long lasting competitive advantage and improving the care they deliver to their communities. Those are just two examples. Hospitals and health systems are facing myriad new trends and big questions about their futures, and for each set of key member issues, we have an outstanding set of assets and the deep knowledge to deploy them intelligently against the specific member circumstances for maximum impact.

Further, our constant innovation means that we are able to stay ahead of the curve and offer new capabilities as the market changes, meeting members' needs and driving impact throughout the industry.

Having covered commercial performance in Royall, as well as having provided broader updates on our health care and education businesses, I wanted to quickly comment on the other two focus areas I mentioned in our last call before I turn things over to Michael. These were our reorganization and M&A.

First on our reorganization, as you'll recall in 2016, we consolidated the health care organization to align more around the member and less around products. The moves we made enable us to more nimbly reformulate offerings into broader solutions, align new and existing product development work and provide greater coordination across sales and account management to inflect each member's multiyear contract value. Now, several months in, we are pleased with the early progress we are seeing, but also acknowledge that change of this magnitude requires time to work its way through the organization and truly bear fruit. We are seeing some early wins and insights. For example, we recently had a great story where our teams collaborated effectively to focus our efforts on the area of greatest member need. The institution needed to inflect a $20 million budget swing to improve financial performance.

Our team did an outstanding job targeting areas of opportunity to improve operations across both the hospital and medical group, and quickly got the CEO fully on board with our findings. The team then worked together to scope a comprehensive margin improvement solution that includes consulting services, leverages performance improvement from our Crimson Practice Management and supply chain technologies and engages key executives in our research program for CFOs. This was complemented by the coordination of our margin improvement and population health teams already working at the institution, which are now presenting executive updates holistically across all of our programs and emphasizing the synergies among the different efforts.

By working differently, we have set ourselves up to deliver greater impact. The member recognizes this and therefore was willing to expand their partnership with us to a much deeper and more comprehensive level. Our ability to coordinate in ways like this brings directly from the organizational process and cultural changes we've been driving through the business. This gives us confidence in the changes we are making and we are optimistic that they will continue to bear fruit over the coming months, if the change management efforts continue.

Finally on M&A, I don't have any major update here. I'd just reiterate that our M&A team is now more actively back in the market. Our goal is to find the next Crimson or Southwind or Concuity or Clinovations or GradesFirst, capabilities that will enhance our ability to address members' most important problems and that will also contribute to our future growth and expansion.

As you know, deal timelines are unpredictable and the decision to acquire, there are a number of factors that go into it, so it's difficult to forecast specific timing. That said, we are pleased that our strong balance sheet enables us to consider possible deals and we continue to view smart, targeted M&A as an important part of our long-term growth strategy.

With that, I'll turn things over to Michael.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Thanks, Robert. Today's financial review will cover the income statement, cash flow and balance sheet for the quarter ending June 30, 2016 as well as outlook for the remainder of calendar year 2016. Please note that we've published slides as a supplement to the financial presentation that will highlight key points as I discuss our financial performance. These slides can be found in the Investors section of our website at www.advisory.com/ir.

A quick summary of this quarter's result from page three show that for the quarter ending June 30, 2016 we achieved revenue of $198.4 million, an increase of 4.3% over adjusted revenue in Q2 of last year, adjusted EBITDA, $47.7 million, an increase of 4.7% over adjusted EBITDA in Q2 of last year. Non-GAAP earnings per share of $0.47, an increase of 20.5% over Q2 of last year and contract value of $74.9 million, an increase of 4.5% over Q2 of last year.

Looking at the summary of top line growth on page four, for the quarter, revenue was $198.4 million, up 4.3% over adjusted revenue in the same quarter of last year. Contract value increased 4.5% to $774.9 million as of June 30, 2016, up from $741.7 million as of June 30, 2015. As in prior quarters, revenue in contract value growth is driven by new sales supported by consistent strong renewal rates in both health care and education.

Looking at earnings on page five, adjusted EBITDA for the quarter ending June 30, 2016 was $47.7 million, up from $45.6 million in the same period of the prior year. Non-GAAP earnings per diluted share were $0.47 in the quarter, ending June 30, 2016, compared to $0.39 in the quarter ending June 30, 2015. The growth in adjusted EBITDA for the year can be attributed to revenue growth scaling over our fixed cost base.

For the quarter ending June 30, 2016, cost of services was $96.4 million, compared to $92.5 million in the same quarter of the prior year. Gross margins for the quarter ending June 30, 2016 increased to 51.4% compared to 49.6% last year due to growth from new and existing programs scaling over the fixed cost, including the scaling of acquisitions that we completed in 2013 and 2014. Member relations and marketing expense was $32.7 million, or 16.5% of revenue in the quarter ending June 30, 2016, compared to $29.4 million or 16% of revenue in the same quarter of the prior year due to growth in sales head count and related travel expense. G&A expense was $32.2 million or 16.2% of revenue in the quarter ending June 30, 2016, compared to $30.9 million or 16.8% of revenue in the same quarter of the prior year.

Depreciation and amortization expense in the quarter was $18.9 million or 9.5% of revenue, compared to $18.5 million or 10.1% of revenue in the same quarter of the prior year. Depreciation and amortization decreased as a percentage of revenue due to our reduced growth in capital expenditures.

Interest expense in the quarter ending June 30, 2016 was $4.4 million, compared to $5.2 million in the same quarter of the prior year. The decrease was due to a lower debt balance and improved rates from our debt refinancing last fall.

Other expense in the quarter was $900,000 compared to expense of $100,000 in the same quarter of the prior year. The other expense for this quarter represents the effect of foreign currency exchange rate fluctuation on our international receivables primarily due to weakening of the British pound.

Our tax rate this quarter was 38.1% compared to an adjusted tax rate of 43.2% in the quarter ending June 30, 2015. For the quarter ending June 30, 2016, adjusted net income was $19 million compared to $16.9 million for the quarter ending June 30, 2015.

On a GAAP basis, net income and earnings per diluted share for the quarter ending June 30, 2016 was $7.5 million and $0.18 per share, respectively. For adjusted versus GAAP results, a reconciliation of GAAP to adjusted and non-GAAP results can be found in our press release, and in addition on page nine in the appendix from our slide presentation.

Turning to page six and looking at cash flow and balance sheet. For the three months ending June 30, 2016, our cash flow used in operating activities was $4.1 million compared to $1.2 million used in the same period last year. Historically, our June quarters are lowest cash quarter of the year due to the timings of collections and payment of our annual staff bonuses. Capital expenditures for the quarter ending June 30, 2016 were $11 million compared to $13.5 million in the same quarter of last year.

Free cash flow, defined as cash flow from operations less capital expenditures, for the three months ending June 30, 2016 was negative $15.1 million compared to negative $14.7 million in the same period last year. Additionally, this quarter, we were able to reinvest in our share repurchase program. During the quarter, we repurchased 803,000 shares of stock for $26.2 million at an average market price of $32.58.

As of June 30, 2016, we have approximately $44.5 million remaining on our share repurchase authorization. As of June 30, 2016, our cash, cash equivalents and marketable securities balances were approximately $17.4 million. Membership fees receivable, which excludes long-term receivables, was $600.5 million as of June 30, 2016 compared to $603.2 million as of June 30, 2015.

Excluding the effects of progress payments, DSOs on billed AR were 57 days as of June 30, 2016, down from 58 days as of June 30, 2015. Total deferred revenue, net of amounts that we billed after 12 months was $720.4 million as of June 30, 2016. Excluding long-term deferred, the current portion of deferred revenue balance as of June 30, 2016 was $568.3 million.

As of June 30, 2016, our debt balance was $553 million, which is approximately three times our last 12 months' adjusted EBITDA. During the quarter, we drew $17 million on our revolver to fund additional share repurchase, which we anticipate paying back before year end.

Based on Evolent's share price, our investment in Evolent was worth approximately $222 million as of June 30, 2016. This is not visible on our balance sheet, as their IPO was deemed a non-commercial transaction for us.

Turning to page seven and looking ahead to the remainder of calendar year 2016, the following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions, which are subject to change over time.

We are raising our guidance for calendar year 2016 as follows. For the calendar year, we expect revenue to be in a range of $817 million to $830 million, up from a range of $810 million to $830 million previously. We expect adjusted EBITDA to be in a range of $190 million to $195 million, up from a range of $188 million to $195 million previously. We expect non-GAAP earnings per diluted share to be in a range of $1.83 to $1.90, up from a range of $1.63 to $1.73 previously.

For the year, we expect stock-based compensation to be approximately $32 million, interest expense to be approximately $19 million, amortization of acquisition-related intangible assets to be approximately $29 million, amortization of non-acquisition-related assets to be approximately $50 million, capital expenditures to be approximately $60 million, share count to be approximately 41 million shares and effective tax rate to be in a range of 38% to 40%. While, we generally don't provide quarterly guidance for the third quarter of calendar year 2016, we expect revenue to be in a range of approximately $200 million $205 million, and adjusted EBITDA to be in a range of $40 million to $44 million.

This concludes the financial summary. I will now turn things back over to Robert.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks, Michael. Just to wrap up with a few closing thoughts while we are obviously where we hope to be at this point in the year and have seen a lot of positive early wins, our work is far from over. There is a lot of change and much work in progress, so we have all engines firing and executing against the goal before us. We serve two incredibly important industries with huge addressable markets. In each, our portfolio is well-positioned to deliver tremendous results, and as a result of that, grow our relationships. We've invested in organizational realignment to better capture this opportunity and we're optimistic that that will play out across the year and lead to continued strong results.

All of this work is driven first and foremost by our passionate and dedicated people. As always, we are committed to their engagement, development, opportunity and growth. This spring, we administered our bi-annual engagement survey and received helpful feedback that we are using to drive our next round of talent initiatives.

We were excited that for the 8th year running, we are honored as one of modern health care's best places to work. We view this honor as a tangible reminder of the importance of our ongoing investment in our team and we'll continue to remember that it is our team that allows us to make the critical improvements needed today in health care, education and our communities.

Thank you. We'll now open up the line for your questions.

Question-and-Answer Session

Operator

Thank you. Your first question comes from Mohan Naidu with Oppenheimer. Please go ahead.

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

Thanks for taking my questions. Robert, maybe on the Royall side, can you give us a sense of what's done within the Q2 timeframe with respect to the selling season versus what is still left going into Q3?

Robert W. Musslewhite - Chairman & Chief Executive Officer

So, if you think about Royall, we've always thought about dividing out new sales, which are brand new clients from renewals and upsells to existing clients. So, the part that's pretty much done in terms of going through the selling season is we now have done the new client sales primarily. And again, that number came in well ahead of expectations and far ahead of last year which is great. In terms of renewals, that were continuous. There are current relationships where we're still doing work for members and that can lead to ongoing contracting for future work across the summer and even ahead of next year's academic year, even in some cases (31:51) during the next academic year.

So, unlike The Advisory work side of the business, Royall renewals can stretch into the following year, but based on our track record relative to last year, we now know the pattern of renewal uptake and have a good sense of how that works seasonally. So, we've very good visibility into that across the rest of the year.

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

Okay. Maybe just one quick follow-up for Michael. Can you give us the split on contract value contribution from Royall in the quarter?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

So, obviously, with the strong selling of renewal pieces from Royall contract value is growing mid-teens-plus, therefore the non-renewals are a little bit lower on the overall, but as Robert mentioned, a good sales renewal performance in Royall leading to strong contract value.

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

Great. I'll call hop back in the queue. Thank you very much.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks.

Operator

Thank you. Your next question comes from Donald Hooker with KeyBanc. Please go ahead.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Great. I just have really a broad question to help educate us. In the higher education market, when I think about the kind of legislative environment, I think there is a higher education act floating out there. Are there other macro catalysts driving that market? I mean I get it's a growth market on a standalone basis, but I'm just thinking is there any kind of legislative catalyst on the horizon that we should be hopeful for?

Robert W. Musslewhite - Chairman & Chief Executive Officer

We always look at legislative as just part of the catalyst that we see in both industries, just like health care where there has been legislation that has driven innovation, there's a lot of other factors on the health care side that we talked about; higher deductibles, aging of the population, and those forces have contributed as much to the change in complexity that our members see there as the legislation has. And so, I think higher ed is the same way, there is always talk about legislation and there has been some legislation, but I would argue that the fundamental industry structural forces are creating a ton of change in complexity there that's starting to rival what we are seeing on the health care side.

So things like a lot of pressure on ROI and higher education, not just from the government, but from parents and students as they start to have more measures of performance and start to face seemingly un-payable tuition levels that's become much more scrutinized, signs of consumer marketing being something that's coming to higher education. Traditionally that was really the realm of some of the for-profit graduate programs, but you're seeing that much science is coming across much more of a higher education landscape.

A lot of focus on data analytics and decision support and the ability to use data to improve operations, again that's a way we've seen in health care across the past several years, it's really starting to play out in higher ed. And I talked a lot about the kind of supply and demand imbalance. You have high school seniors not increasing, essentially seniors going to college, the number of those are not increasing against a similar demand for those students out there, and so the competition for students and all the pressures to diversify classes and have a more qualified class and have a class more likely to succeed. These are huge challenges for colleges and universities, so we have been increasingly bullish on this market as one that feels like health care a decade ago as it was coming in to its big period of change, higher ed feels like it's entering an era like that right now.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Okay. And maybe one follow-on. In terms of sort of free cash flow going forward, I would think of Royall and The Advisory Board, I guess as well as being very strong free cash flow generators, I know that moves quarter-to-quarter, but in generally I think that's fair and then so looking ahead is there is sort of a way to think about free cash flow, for the rest of the year and into 2017 and maybe as a conversion from EBITDA, what is the some sort of metrics that we kind of gravitate towards?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah so John, you're right that both, both the Royall business and the typical legacy Advisory Board business are very strong cash flow businesses. Historically if you look our cash flow from operations, is roughly what our EBITDA is sort of 90% to 105% to 110% of our adjusted EBITDA and then you just have to subtract out the interest expense. If we take our adjusted EBITDA subtract out interest expense, which is about $90 million this year, that is plus or minus 10% to 15% of that is what our cash flow from operations is year-over-year and fluctuations based on timing of cash.

So there is little bit of variability there. And then you take out, our CapEx from that, which has been about $60 million in the last couple of years, but in general obviously relative to EBITDA, we covered a lot of EBITDA straight to cash, you've seen this year, that enabled us to both pay down debt, de-lever, also buyback a lot of shares and going forward I'm probably anticipate your next question but you know those are probably the primary uses of free cash.

One as we talked about in the past, having some flexibility for M&A, when we find the right deal, we believe that's a great way to create shareholder value. And then beyond M&A, continuing to look at the deleveraging versus share repurchase and right now the math given the interest rate and share prices has favored share repurchase this year.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Thank you.

Operator

Thank you. Your next question comes from Ryan Daniels with William Blair. Please go ahead.

Ryan S. Daniels - William Blair & Co. LLC

Yeah. Good evening, guys. Thanks for taking the question. Robert, a follow-up one for you just on the health care business. I know a lot of this quarter's focus is on Royall, but just want to get any color you might have more deeply on if you're feeling better about the health care segment given the restructuring in the end market? Or if it's kind of still a wait and see game into December. Just how are you feeling about health care overall?

Robert W. Musslewhite - Chairman & Chief Executive Officer

We feel good about health care, I think we, obviously, have a little lower growth expectation for the business this year versus prior years. We discussed that at the beginning of the year. We did not do a health care acquisition last year. And we had some issues then in parts of the business at the end of last year. But I'd say, overall health care is still feel like the demand dynamics are very strong. It continues to be one of the most complex and challenging times our members have ever seen, and members have a bunch of key priorities. And if you look at what they need, they need partners who can work side-by-side with them to drive transformation and ROI back to their organizations. The feedback we continue to hear from members is that we have the best portfolio of products to help them overall across all their most pressing issues.

Obviously, we feel like we need to do a lot of work to ensure that we are organized to bring the best of what we have to members when they need it, but as a market it's a great market and there is a need for tons of health. And so I still feel very good about the prospects in health care. If you want to get into some of the areas in health care, of course like always, there is some areas that are performing a little better and areas that are performing a little behind where we'd expect it to be, but in general we're pleased where we ended the first half. If you kind of look at it from a member value delivery renewals and new sales perspective.

Ryan S. Daniels - William Blair & Co. LLC

Okay. That's helpful color. And then Michael, a follow-up for you. Adjusted EBITDA was well above the targets you laid out last quarter. I think you talked about it dropping $5 million to $8 million even though revenue is pretty close what you thought. So, is there anything in particular that drove the big EBITDA upside this period?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah. Just a couple of things. Obviously revenue finished towards the higher end of what we had anticipated, so obviously when revenue takes to high end that tends to flow through. And then similar to last quarter, we are performing well against our budget, so we've seen some areas of positive variance, some of those are timing related that will shift in second half of the year, and some of those we believe are sustainable and that's what allowed us to raise our EBITDA guidance on the year.

Ryan S. Daniels - William Blair & Co. LLC

Okay. Great. Thanks, guys. I'll hop back in the queue.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Thanks.

Operator

Your next question comes from Jamie Stockton with Wells Fargo. Please go ahead.

Jamie J. Stockton - Wells Fargo Securities LLC

Hi, thanks for taking my questions. I guess maybe just a follow-up on what Ryan was asking about in your comment about, being ahead of what you wanted to be at from an expense standpoint. I mean, is there anything, anymore color on kind of what, what is going on? It looks like the (40:12) is certainly coming in a lot lower. You've had a couple of quarters where it's sequentially declined, I mean, are there any specific actions that you guys have taken that's driving that?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

No. I mean, a lot of this on the year, when we talked about on, we gave guidance for the year, that in general we've seen scale in existing programs. We saw – couple of areas, we tried to improve efficiency like we do every year. And not having M&A this year, so things like that how enabled us to deliver on the year 150 basis points or so margin expansion, which is when we talked about beginning of the year. For the first half of the year, we are well on pace to do that.

There is always a little bit of timing, so some expenses that we probably anticipated to happen in the first half of the year, that will happen in the second half of the year, obviously with Royall performing well, it's a high margin business, that helps as well. And overall for the year, I think we'll – if you look at the, what we did on margins for the first half of the year, the June quarter is probably a little bit higher than what we finished on year for margins, but the first half of year margins are probably indicative of what we would expect for the full year

Jamie J. Stockton - Wells Fargo Securities LLC

Okay. And then maybe just a quick one on the balance sheet, you've bought back roughly 4% of your shares in the last couple of quarters, I think – you said that you're at kind of three times net debt for trailing EBITDA. As we move forward, let's say over the next year or so, what's your temperature on that – on that level of leverage, should we expect it to stay relatively constant and you'll do something with the cash that Don was asking about earlier or will you pay down debt?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah, I think we have always said that our business has a lot of visibility from cash flow, so it is one that can handle debt at three times and where we think will be by the end of the year which will probably be 27 (42:10) and with cash probably a little bit below that on a net basis. It certainly is manageable for us. And so, it really depends on the opportunity set. Again as I have mentioned earlier, if we can find the right deals that we believe that we have seen in the past, that can create a lot of shareholder value. So finding the right deals and making sure we're getting the right price and mix in our business, and we believe that they can grow, that is a great use of cash. And so if we find the right opportunity, we could stay where we are at debt, maybe even take it up a little bit for the right deal.

In the absence of that, then we are looking at debt pay down versus share repurchase. We do have a mandatory schedule for debt pay down, which will continue to get us into the mid 2s% and below. Whether we accelerate that or not, depends on the overall environment in terms of what our interest rates look like, what our share price looks like and obviously what the M&A market looks like, so it's hard to know. I think the priorities I laid out earlier, so M&A if we can find the right deals, share repurchase and debt pay down is probably the right prioritization, but obviously things change. We'll continue to look at it.

Jamie J. Stockton - Wells Fargo Securities LLC

Okay. Thank you.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Thank you.

Operator

Thank you. Your next question comes from Richard Close with Canaccord Genuity. Please go ahead.

Richard Close - Canaccord Genuity Group, Inc.

Congratulations on the quarter. Thanks for taking the call. Robert, you talked a little bit about the restructuring, a work in progress taking a while, and then you've the mid-teens growth on the Royall side. So I guess implying 2% to 3%. Let's call it 3% contract value growth in the core business. Where do you see that troughing, and I guess in terms of a timing-wise and beginning to turn and move higher back to I guess your historic levels.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Yeah. We're obviously working hard at that. There is a lot to execute on across the second half of the year. We did the bulk of our new sales, in the second half of the year, even particularly in the fourth quarter. So driving a lot of change, we wanted to be sure we get through the year of doing that before we proclaim any sort of victory. And just to be clear, I haven't come out and said we're going to get back to the levels that we were at several years ago.

Obviously, we want to continue to perform as well as we can. We have a ton of visibility in what we'll do this year, in terms of 2016. I think it's, we have solid growth and very strong margin expansion and EPS growth, that feels very visible. Regarding 2017 and beyond, I think what I've said is, if we execute well, we'll see better growth next year. And you will certainly see continued scalability with expanded margins again and strong EBITDA, EPS and cash flow performance.

So that's where we are headed. I think the health care business like I said, has tons of opportunity. I think, we're doing the right things to align for the long-term against the opportunities (44:55) and enormous addressable market, members need our help. I think we're in a very distinctive position. But how quickly does that manifest, in terms of a healthy extra points of growth is hard to say at this point. But we're pleased where we are in the year. I think this is natural where we wanted to be. It feels like we're on the right track in terms of the strategic initiatives we're doing over the second half of the year.

Richard Close - Canaccord Genuity Group, Inc.

So, a follow-up to that, do you have a preference on the M&A side in health care since that is normalized somewhat. Or on the education side where it seems to be a very hot area right now.

Robert W. Musslewhite - Chairman & Chief Executive Officer

I think there is great opportunities on both side to be honest. It's a little bit different to your point. We do have a large platform in health care, $300 million plus technology business, and so if you're looking at tech acquisitions, it even needs to fit that platform really easily where we can see visible integration or needs to be in such a different area that it doesn't need to be an integrated back into that platform. So, I think it does raise the bar a little bit on some of the things we look at there, but there are still plenty of opportunities out there on the health care side.

And yeah, to your point higher ed [education] there is all kinds of opportunities in higher ed [education], we've focused our work heavily around the student lifecycle. But we have a great platform of which to build but there is certainly places where we could accelerate something that we can bring to members through an acquisition that would sit very well with the business there as well. So, we're looking on both sides as well as short answer, sorry I made it so long. But that's the short answer.

Richard Close - Canaccord Genuity Group, Inc.

Okay. Thank you. Congratulations.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from Joseph Foresi with Cantor Fitzgerald. Please go ahead.

Mike Reid - Cantor Fitzgerald Securities

Hi, guys. This is Mike Reid on for Joe. Thanks for taking the call. Just a question on some of the reorganization. Could you go into a little bit more specific, I guess, color on what exactly has been done there, what maybe left in the kind of changes you've been able to see so far and we'll see going forward from that.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Sure. I think if you recall, we essentially we're trying to get the health care organization to be a lot more member centric in sales and delivery and really how we're thinking about organizing its members. So there were three primary goals that, first to enable us to nimbly reformulate our research technology and consulting offerings into broader solutions that stand the businesses that we can develop and take to market and essentially deliver holistically in order to meet members' needs, where they need a deeper and more comprehensive partner. And second was aligning our new product development work more closely with our existing product development work, that method – innovation would be more built of our existing platform and integrating with existing products. And then third, providing greater coordination of flexibility across both sales and account management, so that we could leverage the best member touch point for driving each members multi-year contract value, didn't have to always be frontend sales.

And so, if I kind of weigh across that, I think we've had good early wins on all three of them, but none of them are done. The first is a very complex undertaking, which is taking what you'd say are a pretty separate business. When we've run them in past, separate business with separate products, and looking for ways to put those together in a way that makes sense to the member and helps us to deliver on a broader value proposition to the member, that takes time, and we've had some good early wins. I mentioned in our last call Planning 20/20 and the effort we have to combine one of our larger technology programs with several of our research programs into new capabilities that's been a real success, but that work is ongoing across the portfolio and it's going to just take time.

Second in terms of the aligning new product development work with our existing product development work. It feels very good in terms of plan, so if you look at the individual product development plans, they are much more forward looking and there is a lot of innovation embedded in there. So our investment dollars have been going into those places, but the proof will be in the pudding as we actually develop those products and look for ways to help that increase our contract value with our members. And so, again I think, I like the work, I like the progress, but the big wins are in the future on that one.

And then third, sales of account management have been unified all the year, that's yielded a bunch of great wins. We've certainly seen that in our large contract segments are our national and strategic account segment, where we really focused on looking at overall contract value for a member and had real agnostic. We've been really very agnostic to where conversations take place about expanding contract value, and there have been a lot of very productive conversations that have come through renewals, that have ended up with an expanded relationship. I gave an example of one in the prepared remarks.

And so, look we're early in the work, but they are going – it's going according to plan, and I would expect this to continue to drive better yield as the strategy rolls out across the future. That's the best update I can give you, it's one of these things that we'd expect to start having some yields this year, but again given our back-weighted sales on the year, I'm looking towards next year from a commercial perspective, this is going to take several quarters to fully roll in.

Mike Reid - Cantor Fitzgerald Securities

All right. Great. Thanks, that was a good update. Thanks.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks.

Operator

Your next question comes from Matt Hewitt with Craig-Hallum. Please go ahead.

Matthew G. Hewitt - Craig-Hallum Capital Group LLC

Good afternoon, gentlemen. Congratulations on a great quarter.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Thanks, Matt.

Matthew G. Hewitt - Craig-Hallum Capital Group LLC

I've got one for Michael, and then a separate question for Robert. But Michael, I just want to make sure I heard correctly, the guidance that you provided for Q3, which seemed to imply a pretty large step-up for Q4, based upon the full-year guidance. Is that what we should anticipate?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah. So, it's a little bit of déjà vu to last year's exact same time. If you remember, last year we talked about this year, and it really has to do with Royall seasonality. The way the contract structures Royall, a lot of them start in September and run through May or June. And so, what you have is, Q1 has a small step down to Q2, a pretty big step down in revenue in Q3, and then a big step up in Q4, just based on the way the core revenue works on this contracts. And obviously in a largely fixed cost business, the EBITDA works the same way.

So, we talked about that last year. Last year, fortunately or unfortunately, if you think about it, we ended up pulling forward a lot of revenues at some of those one-time revenue components from Q4 into Q3, so you don't see it in a historical numbers. But, it's basically due to the underlying Royall business. Overall as you know, we've got a lot of visibility in the business, lot of contracts in place to do that and so it's really with the existing contracts and that's what causes that ramp to materialize.

If you look at where we finished H1 as a percentage of the full-year, I think last year, historically, we do 47%, 48% of our revenue in the first half of the year; last year, it was 48.5%. If you multiply the same percentage through this year, you get to the – basically the middle of our guidance range on revenue.

Similarly, if you look at June contract value relative to the year, core revenue versus last year's percentage versus this year, gets back to the middle of the guidance range. So, I know you guys are looking for ways to support it, but from our standpoint, we've got the contract in place to support that and it's basically due to Royall seasonality?

Matthew G. Hewitt - Craig-Hallum Capital Group LLC

Okay. That makes a lot of sense and thank you for the clarification regarding last year, that's helpful. Robert one for you, so in last quarter, you touched on this a little bit regarding the – some of the changes that you've made internally in the healthcare side and how that's and some of the consolidation you're seeing on the customer side as well, whether you're seeing larger, longer term contracts, the sales cycle is maybe taking a little bit longer. What did you see in Q2? Are those sales cycles maybe shortening a little bit as the changes you've implemented start to bear fruit, any color along those signs would be very helpful? Thank you.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Sure. We saw across second quarter, 54% of sales came from large contracts which is a tick down, pretty similar to what we saw across the first quarter. First quarter is not a huge sales quarter for us. So, that's been pretty consistent, so I guess the best way to describe it is, we didn't see any change in cycle times. It felt pretty similar, but given that the mix was not increasing of the large versus the small, it meant that you weren't seeing a sort of delay in sales that would be caused by average cycle time increasing. So, I don't have anything to report on cycle time changes itself as predicted we sort of finished where we expected and wanted to be based on what we saw coming end of the quarter.

Matthew G. Hewitt - Craig-Hallum Capital Group LLC

All right. Thank you.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks.

Operator

Your next question comes from Eric Percher with Barclays. Please go ahead.

Eric Percher - Barclays Capital, Inc.

Banks, I want to return to the topic from two questions ago. So, I definitely agree with you on déjà vu when we look back at last year and we had too much anxiety about the Q3 relative to Q4 and then of course Q3 turned out better than guidance. Could you just walk again through the one-time items that were historically following into Q4 with those healthcare items that typically sell that way that last year saw into Q3 and now we're expecting Q4 again. What was that Royall seasonality specific and or a combination of both?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

So, the one-time items that hit in Q3 instead of Q4 last year were almost entirely healthcare. If you remember, it was, we had one large implementation of complex care management contract which hit, we don't have milestones but this contract we did, we hit the delivery milestones early.

We also have in our rev cycle and supply chain work, we do have some more contracts that have success payments and generally the way our sales not work as we sell lot in December and then when we get to the anniversaries one there is due. We got those earlier last year but both those in the September versus the December quarter. And so that was unique the last year, we haven't seen that historically so for this year I wouldn't expect us to have those one-time things pulled forward into Q3 from Q4, so that's why we've guided to the pacing that we have.

Eric Percher - Barclays Capital, Inc.

Okay. That's helpful. And a separate topic by the Audience Rx a year later, I know you talked about 30 customers last quarter. Could you talk a bit about the development as well as the customer number?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah. I think it continues to go really well. It's the place that we feel like it's very much in line with the trends that I talked about in terms of more consumer-centric market and the need for our health systems to be attracting, retaining, engaging consumers just like other consumer facing industries have to be in. So, Audience Rx is obviously a critical component, that when we think about a consumer platform that we need to deliver, that's a critical part of it.

The other thing I talked about little bit last quarter is, leveraging Audience Rx in, on a higher ed side – capabilities from Audience Rx from higher ed side, this is thing that allows colleges to target students to open one of their emails with – for example outreach through other channels. So, student opens an email, later then on Facebook and there is an ad for that college with a call to action might visit us now on Facebook, so we are doing some of that in higher ed as well, so it's been a very useful capability for us to have as a platform. We are continuing to see good member growth kind of in line with the expectations.

Eric Percher - Barclays Capital, Inc.

Interesting. Thank you.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks.

Operator

Your next question comes from Sean Wieland with Piper Jaffray. Please go ahead.

Sean W. Wieland - Piper Jaffray & Co. (Broker)

Thank you very much. So, Robert you talked a bit about the, the opportunity with Medicare and specifically MACRA, and the new payment systems there. It's easy, now we hear a lot about generalities about MACRA, but can you be specific about what your customers are coming to you for to contract with you for either in terms of products or services and how specifically you are positioned to help these customers?

Robert W. Musslewhite - Chairman & Chief Executive Officer

Yeah. Thanks for the question. It's actually a great example of the power of The Advisory Board, because it calls sort of all dimensions of our work. I'd say, first and foremost, our take on the market is that people, specifically physicians but in also health systems, they don't really know what just hit them. This is a bipartisan bill passed without a lot of fanfare. I don't know where AHA was or any of the regulatory – the associations because it's a huge change and our perspective is this, members don't understand the change.

So, we immediately held once we kind of got our hands around the bill, we held a teleconference series that we've had over 3,500 participants, individual participants, plus thousands of others have read our blog posts and expert perspectives. So from a research perspective, we very quickly help members understand what does the regulation say, what are the implications for you. So, that's been a huge focus since the bill passed.

And then, quickly after that, when people realize, oh, my gosh, what's happening for our health system members, or a larger physician practice, we do a market level impact assessment. So, specifically what track should a member be on, should they go MIPS or APM and what's the subsequent impact on their P&L. Generally, what that is, obviously, it's hard to do the long-term implications; but in general, that scares physicians into a situation where they fear being on the downside of that.

And so, it has them looking for partners to join with, specifically health systems for the most part because health systems have already made a lot of the investments to do the quality reporting required, the cost reporting required and all the things that go into kind of maintaining or increasing reimbursement under this new regulation.

And so, from our perspective, once we've done those things, pretty quickly, we're starting to see health systems need help with physician practice strategy. So, do they want a clinically integrated networks, do they look at acquisition, do they want to – should they still be acquiring physicians, given this regulation, that's the big thing, we're seeing right now. And I think it's going to take a lot to play out, because a lot of physicians still don't really have a lot of awareness around what's happening. And so I think, we're in the early stages of a big push in demand for our physician alignment and clinical integration work.

And then once that work has taken place pretty quickly, this is another risk-based structure. So, while we've done a ton of work on risk as you know, I think we're going to see members – who probably – we're going to say, okay under this new risk regime, can we evaluate new risk contracting opportunities and be sure we optimize to give the contracts we're already in.

So, you'd see a bump in interest in our population health work and our care standardization work, as both really try to perform well under the new reimbursement scheme. So it is, again, I try not to get involved and hyperbole on these calls, but some of our researchers would say that this one regulation has the potential to be as impactful as the ACA itself. It's a fundamental change in reimbursement on the physician side, that's going to drive differences and behavior going forward. And so that kind of change in complexity really does create opportunities for us to serve members in broader ways.

Sean W. Wieland - Piper Jaffray & Co. (Broker)

That is super helpful. Thanks so much.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Thanks.

Operator

Your next question comes from Nicholas Jansen with Raymond James. Please go ahead.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Hey guys, congrats on the Royall news. Quickly on health care, if we think about the implied 4Q ramp, how much of that is depended upon health care recovering at all, relative to the kind of low single-digit contract value today?

And then secondly, if you were to monetize the Evolent stake at some point in time over a series – a series of sales, how do we think about the capital gains, taxes, tied to that, is it a 15% rate or is it something higher? Thank you.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Sure. I'll take both questions. So on the first part, as you know, our business has a lot of visibility and a lot of deferred revenue. And so most – well, obviously we felt to sell some through the next quarter to deliver core revenues for the year, most of what we sell from this point to the end of the year, particularly since to sell heavily weighted to December, really sets up a core revenue for next year.

So, lot of this year is in place. There is not a lot of acceleration needed to hit numbers. It's basically what we have on the balance sheet right now through the first half sales and went through pending renewals. So, there was range of performance there, but there is a lot of visibility into the guidance for the second half of the year.

On Evolent, obviously, the business has performed really well, just from an internal perspective, they've hit numbers, they are delivering value to their members, their stock has performed well as well. So, it's been a really great investment for us overall.

I do think we have lot of flexibility now to start thinking about monetizing it, just given the way that the markets work and how much insider ownerships that are versus their trading volume, it would probably be in small pieces. So, we probably won't be able to doing material for a while, but we could start selling smaller pieces of it in the second half of this year.

And then tax is a little complicated. We have – our cost base ended pretty low, it's about $3 a share, so about $33 million of invested capital in it. The tax at capital gains rate, which is good news. The bad news is the corporate capital gains rates are statutory rates, so it's 40%. However, we do have – part of our Evolent stake does have a tax receivable agreement with it. So when we do sell those shares, there is a tax receivable generated back to us from Evolent that could be worth $40 million to $50 million. That doesn't totally offset all the taxes, but offsets a bunch of it. It's not due until Evolent is profitable, so we would get it several years out; but overall, it does lessen a lot of the tax benefit although there's a little bit of timing to it.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Thanks for the color, Michael.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

And just to give you numbers, Nick. If you take the share price today, which I think is around $24 to $25, that makes it worth $280 million-some to us on a gross basis, probably $185 million on a net basis, then you have back to CRA and it gets back to $230 million, $240-ish million.

Operator

Your next question comes from Matthew Gillmor with Robert Baird. Please go ahead.

Matthew D. Gillmor - Robert W. Baird & Co., Inc. (Broker)

Hey. Thanks for taking the question. I wanted to ask a follow-up on the contract value metric and understand the sales performance on the health care side. I think Robert provided some insight, and I know 2Q isn't the most active selling season for health care, but with contract value growth growing in the 3% range on health care, is that just the normal fluctuation we should expect around a mid-single digit growth outlook or were there is some sort of specific areas in health care that were a little weaker this quarter?

Robert W. Musslewhite - Chairman & Chief Executive Officer

I'll let Michael come back on the explanation of the metrics. But, in general, this is where we wanted to be on the year and it's pretty much what we expected. I'd say, if you want a little more color on the health care, if we think about sales, first of all renewals across the business were fantastic. We continue to see very strong renewal performance. We saw that in our institutional metric last quarter.

What I see in health care, increasingly we've thought about our work and as we've combined across research technology consulting, we increasingly think about three terrains or vertical areas of strategy, operations and care delivery. And I'd say, if our rate goes down, we feel very positive momentum in strategy and operations. So, those are two of the three verticals. Strategy had great traction of our Planning 20/20 work and helping health systems formulate and execute on the growth strategies, as well as a really great start from our Clinovations business and EMR optimization work that we've talked about with you in the past, that was great to see.

In operations, we saw members focusing heavily on margins, which grow strong momentum on the cost side and actually revenue cycles finishing, we've had some lowered expectations as you know, but finished ahead of those lowered expectations, which was nice to see in the second quarter.

In care delivery things were more mixed. We continue to do a great job helping members navigate and evaluate care, but where we lagged a little bit is in our physician practice work, and also had a little bit of challenges in the older technologies in that vertical. But I'd say, if I look across the last six months, we did see a little bit of momentum there, and I think given my comments on macro and the physician practice work, I still think there is pretty good outlook for the year, but overall that was the one that didn't perform quite as well as the others.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Hey, Matt in terms of the June quarter, June actually is a pretty important sales period for us, December is the biggest, it's about 40% of our sales and renewals, and June is the second biggest about 25%, so it's an important sales period.

In terms of the overall metric, a little bit of – we had a pretty tough comp, if you remember last year June was probably our best contract value period. We were heading, I think, north of 17%, excluding Royall, and so we had incredible first half last year. We had a pretty good first half this year, but just the comp is a little bit tougher. As Robert said, overall, we are progressing like where we'd expect to be for the year.

Matthew D. Gillmor - Robert W. Baird & Co., Inc. (Broker)

Got it. I appreciate the color. Thank you.

Operator

Thank you. Your next question comes from Randy Reece with Avondale Partners. Please go ahead.

Randle Glenn Reece - Avondale Partners LLC

Good afternoon. My question is about, if you have a better understanding why there is such a spread in performance of different health care practices right now, probably wider spread than there has been in the past. Just from the customer perspective, do you know more about the customer point of view?

Robert W. Musslewhite - Chairman & Chief Executive Officer

I'm sorry, Randy, I don't fully understand what you're asking. You mean in terms of our practice there's more variation or in general across the business – across the market?

Randle Glenn Reece - Avondale Partners LLC

Well, across the market, but also I'd like you to put it in context with your own experience.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Again, I hope I'm answering your question, but I think, I stated kind of what we're seeing in terms of market demand and where we're seeing relative traction versus others. So, I guess, I can't really answer us relative to others only that we've continued to see members need a lot of help in a changing and complex environment, so.

Randle Glenn Reece - Avondale Partners LLC

The main issue that we picked up, just from the marketplace is the difficulty of getting customers to focus on spending, in the same magnitude that they had over the past few years and that maybe internally needs are fragmented?

Robert W. Musslewhite - Chairman & Chief Executive Officer

Yeah, if you go back to what we're talking about in January, when we kind of came into this year with a lower growth outlook. I certainly think that's one of the contributing factors. Since that, two things on that to mention, one is that members do have a lot of top priorities, and so you have to be agile and able to meet their needs.

And I do think, like I said earlier, we have probably the broadest and best portfolio to serve members across any key priority that they have. But you got to know what their need is and be able to target that, and that's a big part of the internal initiatives that I've talked about already. I think the second thing we saw is that the market is no longer uniform, and so what one member might have a focus on today is not the same thing as another member.

We've traditionally developed our product to serve the broad market. And so again, one of the reasons that we've tried to become much more member-focused is that we can do a better job of tailoring our portfolios against each members' individual needs, so they're very linked. That's the dynamic we've seen and certainly it has, I'd say it was a factor in playing out across 2015, in terms of – some of those – it was one of the reasons we gave for some of the slower sales across that year. And it's one of the things that's led us to the strategic initiatives that we're pursuing this year.

I do think, again, if you look at our portfolio and look at where we expect member needs to be and you look at the way we're aligning our sales and now our delivery and our operations against it, I think we're going to be in a great position to serve the demand environment that we see.

So, yes, that's the trend, but I don't think it's necessarily negative for us, and we have a lot of natural advantages by being in a research business that fears at first for members whenever there's needs that they have in advance.

Randle Glenn Reece - Avondale Partners LLC

Thank you very much.

Operator

Thank you. Your next question comes from Robert Willoughby with Credit Suisse. Please go ahead.

Robert Willoughby - Credit Suisse Securities (USA) LLC (Broker)

I have no questions. Thank you.

Operator

Thank you. Your next question comes from Stephanie Davis with JPMorgan. Please go ahead.

Stephanie J. Davis - JPMorgan Securities LLC

Hi, guys. Thanks for taking my question. Can you give us an update in your team selling approach, is any measurable upticks you're seeing in cross sells or revenue per now that Royall key selling season is behind us?

Robert W. Musslewhite - Chairman & Chief Executive Officer

I'd say again if I'm understanding your question correctly, I'll start with higher ed, Royall's good performance has also reflected good cross sell performance on the higher education side of the business. So, if you look at number of EAB, Royall combination members, it's up above 140 today, which is a good increase. And you look at the number of members using both well and our student success platform, you're looking at over 40, which is up from a little number just a few months ago.

So, I had seen very good cross sell on that side and outside of those two that I gave you a lot of good cross sell opportunity – lot of good cross sell activity. On the health care side, I don't have the numbers, but anecdotally, I can tell you that most of our growth in health care is always cross sell.

And so, in general anything that's driving better sales and better performance in health care is going to almost definitionally be expanding health care cross sell rates. And so all the initiatives we talked about are making us feel better and better about kind of improving that cross sell rate from where it has fallen off here within the last year. And so, again without giving you specifics, which I know maybe you're asking for, I can tell you that we're feeling good about the initiatives having an impact on that number across this year and in the next year.

Stephanie J. Davis - JPMorgan Securities LLC

All right. Thank you. Very helpful.

Operator

Thank you. Your next question comes from Steve Halper with FBR. Please go ahead.

Steven P. Halper - FBR Capital Markets & Co.

Hi, guys. Thanks for taking the question. You've talked about – you made a comment that you are relative – you're not quite sure that you'll get back to historic levels in terms of growth and contract value and it's understandable. But, as you look at the landscape and what you've done on the business, what would you think is the long-term sustainable growth rate in the health care business based on what you see today or where are you going?

Robert W. Musslewhite - Chairman & Chief Executive Officer

Well, it's a fair question, but I think it's also fair that I'm not going to be able to answer that in a way that you probably want. Look, we think we have great end market dynamics, huge addressable market. We have an incredible platform of which to serve members, so at a minimum we should continue to grow, and I think if we execute well, overall better rates in this year on the health care side and we're a large business and it's a market that number of participants in the market are not growing, so that means continued very strong cross-sell and good performance.

And what I can tell you is, we are seeing this year is even the slower growth rate you're seeing a mid-teens EBITDA growth rate and even better EPS growth and that scalability is inherent in any growth that we put up.

So, I think if I had to answer your question looking forward, I'd expect to see continued margin expansion, continued very strong EPS performance, and hopefully this year representing a low point in terms of the growth rate over multiple years. That's probably the best indication I gave you. We still have a lot of work to do across second half of this year just to get 2017 to a number that we're all happy with and so that's our focus.

Steven P. Halper - FBR Capital Markets & Co.

Great. Thank you.

Operator

Thank you. Your next question comes from Steven Valiquette with Bank of America. Please go ahead.

Jonathan Young - Bank of America Merrill Lynch

Hey, guys. This is Jonathan Young on for Steve. Just in terms of the marketplace. Do you feel that the – the marketplace has slowed down somewhat or has it perhaps the urgency for some of your offerings from your members – for your offerings increased among your members, are they more about that, I guess to continue to accelerate the growth a little bit into next year that you have the reorganization process that you guys are going through is really what's needed to drive things forward?

Robert W. Musslewhite - Chairman & Chief Executive Officer

Okay. I think I've answered a lot of this, but I'll try to answer what I think to your question, which is, I do feel very good about the end market dynamics. I think we have a lot to offer our members. We have the best platform out there to serve them in a lot of these areas. And so, certainly, if you go back to what we talked about in our February call, we did feel like there was some slowing in the market, although a lot of the issues that we attributed to our lower growth rate this year were we felt like executional.

I think as you've seen across the market across the spring, there's been a little more choppiness among other players serving health care providers. And so, unquestionably there has been a change in the market, it's a change that we started seeing last year. And if we talked about, and I think we have a strategy in place to adjust to that change and has seen some good early results against that strategy.

So, yeah, in the near-term, I think there is probably a little more choppiness. But over the medium and long-term, again I do think that this is a market that's going to be ton of help, and they're going to need help with dealing with a bunch of really critical issues that are existential in nature, a whole different reimbursement scheme, they need to take on, and be accountable for a much larger swap of the population. They need to be consumer-focused in a world that never had to do that before, these are the needs to probably take on more physicians and manage the larger physician networks, these are not easy challenges and they are the ones, where members are going to just need tons of help.

So, I continue to be very bullish on what we can do in this market and not every year it's going to have the perfect demand environment, the perfect environment to go sell everything perfectly; but I do feel like, if you look at our multi-year period, we're very well positioned.

Jonathan Young - Bank of America Merrill Lynch

Okay. And just quickly. I think in the first quarter you mentioned that you had more contracts, a little bit more weighted towards to your contracts, were you seeing the same thing this quarter as well?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah, we talked about with Royall, the push towards multi-year contracting, I think we've seen consistent trends, so from a new sales perspective around 60% – a little roughly 60% of our contracts are coming in multi-year on our renewals it's probably a little under 50%. So, pretty good progress there through the first cycle and obviously it's going to be continued progress for us overall.

Jonathan Young - Bank of America Merrill Lynch

Okay. Great. Thanks.

Operator

Thank you. Your next question comes from Shlomo Rosenbaum with Stifel. Please go ahead.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Hi, thank you for squeezing me in here. Hey, Michael, can you just update us on the mix of revenue, we haven't heard that in a while, research versus offer versus consulting.

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah. A lot of things that Robert mentioned, do blur the lines a little bit, in terms of the way, we're trying to serve members, a little more comprehensively and less in individual product silos. That said, there hasn't been a dramatic change. I think those businesses have had pretty consistent growth rate. So, the mix is not that different than what we talked about, three months ago, six months, nine months ago.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Can you give us some specifics because the consulting aspect of it seem to have slowed down, so I would have thought that would it's kind of changing?

Michael T. Kirshbaum - Chief Financial Officer & Treasurer

Yeah. I mean, consulting always has variability, so we had quarter for consulting – and again consulting is a smallest portion of three, so 15% of revenue. So sometimes it grows a little faster, it goes up 16% to 17%, sometimes it grows a little slower, goes down to 12% to 13%, and it's variable.

So, and we talked about last fall, revenue cycle consulting slowing down, one of the comments Robert made earlier is Clinovation, which is EMR optimization business had a good first half of the year, so there's puts and takes in consulting. And overall, I think it's pretty similar to that mix we talked about historically.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Okay. Thanks.

Operator

Thank you. There are no further questions at this time. I'll now hand back to Mr. Musslewhite for closing remarks.

Robert W. Musslewhite - Chairman & Chief Executive Officer

Hi. Well, thank you all for the questions and the participation tonight. And we look forward to talking to all of you over the coming months and hopefully at our Investor Day this fall. So, thank you very much and we'll talk to you soon.

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