More “Below the Line” Expenses and Cost Capitalization in FY20

We believe that ATO's true operating margin and FCF are both below that presented by management because of management's aggressive use of adjustments to operating margin and the non-inclusion of acquisition costs in FCF. Cost capitalization has been increasing, raising the possibility of more earnings benefits. Excluding certain benefits, we estimate that operating margin was 8.0% in FY20 compared to the reported 9.0%. Additionally, organic revenue growth may disappoint following the rise in unbilled receivables in FY20, which could indicate accelerated revenue recognition. Thus, we are adding ATO to our Biggest Concerns list.