August 14, 2020

The company demonstrated the operational leverage of the business model in 2Q 2020 with adjusted operating margin above 24%, is there any reason why these margins could not be close, if not above 30% in the medium term (in-line with sector peers)?

Our adjusted operating margin was 24.3% for the quarter and 20.5% year to date. Margins through the end of the second quarter reflect our efforts to control expenses while continuing to fund longer-term growth initiatives. There are certain short-term actions that we have taken, which lowered the rate of expense growth. These include slowing of hiring, certain decisions around compensation, and a focus on discretionary spend. We have also seen other margin benefits directly related to the current environment, including limited travel, lower healthcare utilization, and reduced facilities operating costs.

Because our business exhibits a high degree of operating leverage, and because we operate in attractive, growing end markets, we believe we have opportunity to expand operating margin over time. That said, we do not manage our business toward any short-term targets because we prefer to remain flexible with respect to what’s happening in the current operating environment and competitive landscape. For example, if we see an attractive new growth opportunity that makes sense for us to pursue, we will allocate our resources accordingly, even if that means spending ticks up in the short or medium-term. Conversely, in light of challenging situations like the COVID-19 pandemic, we will take steps to evaluate our current level of spend.

As we have said before, we engage in many of the same kinds of products and services as our peers. Margin disparity often stems from differences in revenue growth rate and business mix. Our most recent analysis, which we shared in our 2020 Annual Meeting, places us in the middle of our peer group with respect to operating margin comparability, but at the high end of the range when it comes to organic revenue growth and free cash flow conversion.

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