Paychex, Inc. (PAYX) Earnings Call Transcript & Summary

Good morning. Welcome to the shareholders of Paychex, Inc. and guests. We will now begin the 2020 annual meeting of stockholders. We will start with a short video and then turn it over to Tom Golisano, Chairman of the Board of Paychex, Inc. [Presentation]

Good morning, ladies and gentlemen, and welcome to the 2020 annual meeting of stockholders for Paychex, Inc. I am Tom Golisano, Chairman of the Board of Paychex, and it's my pleasure to welcome you all today. We are hosting our meeting virtually, which allows us to observe safety protocols and to reach a greater number of our shareholders. We have shareholders and guests attending via the web portal. As it is our custom, we will conduct the business portion of our meeting first, answer questions at the end of the presentations from our President and CEO and CFO. Though we may not be able to answer every question, we will provide a response to as many as possible in the time allowed. In keeping with the digital approach to this year's meeting, it is now 10 a.m. Eastern Time on Thursday, October 15, 2020, and this meeting is officially called to order. At this time, I would like to introduce our Board of Directors. Present with us virtually today are Thomas Bonadio, Joseph Doody, David Flaschen; Pamela Joseph, Marty Mucci, Joseph Tucci, Joseph Velli and Kara Wilson and me, I guess. We have also virtually by our -- we're also joined virtually by our independent auditors, PricewaterhouseCoopers, being represented by Sean Hoover. PwC is available during the question-and-answer period to respond to appropriate questions. Finally, Todd Card, Corporate Counsel for the company, has been appointed to act as inspector of election. I would like to take a moment to comment on our dividend. Our quarterly dividend now is at $0.62 per share. During fiscal 2020, we paid out approximately $889 million in dividends, which is 81% of our fiscal 2020 net income. Now we will move on to the more formal part of the meeting. We will provide time for general questions later in this meeting. Only validated stockholders may ask questions in the designated field on the web portal. [Operator Instructions] Please note that this meeting is being recorded. The Board of Directors fixed August 17, 2020, as the record date for determining stockholders entitled to vote this meeting. An affidavit has been delivered attesting to the fact that either one, a notice of Internet availability under the notice of the meeting, the proxy statement and the 2020 annual meeting report to shareholders. The documents -- two, the documents themselves were mailed on or about September 4, 2020, to all stockholders as the record date and will be incorporated into the minutes of this meeting. The stockholder list shows that as of the record date, there were approximately 360 million shares of common stock outstanding and entitled to vote at this meeting. We were informed by the inspector election that approximately 89% of the outstanding common stock is present in person or by proxy. I, therefore, declare a quorum is present for purpose of the transactioning business at this meeting. On behalf of the Board of Directors of the company, I would like to thank all stockholders who returned their proxies. Now I will present the matters to be voted upon. Please note that we will give stockholders the opportunity to ask questions or comment on the proposals themselves after all the proposals have been presented. Proposal #1, election of directors. The first matter to come before this meeting is the election of 9 directors, each of which will hold office until the 2021 Annual Meeting of Stockholders or until their successes are duly elected and qualified. The following persons have been nominated: B. Thomas Golisano, Thomas Bonadio, Joseph Doody; David Flaschen, Pamela Joseph, Marty Mucci, Joseph Tucci, Joseph Velli and Kara Wilson. Proposal #2. Advisory vote to approve named executive officer compensation. The second proposal is the advisory vote to approve the compensation of our named executive officers as described in our proxy statement, commonly known as the say-on-pay vote. This Board is recommending a vote for this proposal. Last year, our shareholders overwhelmingly approved the compensation of our named executive officers with approximately 95% of the votes cast in favor of the proposal. As a result, we retained the core design of our compensation programs for fiscal 2021. It is our belief that the compensation plan as described in the proxy statement is effective in achieving the desired goals of aligning our executive compensation with the interest of our shareholders. Proposal #3. The third proposal asks stockholders to approve the company's 2002 stock incentive plan and to amend the plan to reflect changes to applicable laws and best practices. No additional shares are being requested. Our Board believes that the effective use of stock-based long-term incentive compensation is vital to our ability to achieve continued strong performance in the future. The Board is voting a vote for yes on this proposal. The last matter to come before the meeting is the ratification of selection of our independent registered public accounting firm. The audit committee has appointed PricewaterhouseCoopers as the company's dependent accountants for the fiscal year ending May 21, 2021. The Board believes that it is appropriate to seek stockholder ratification of this appointment. The Board is recommending a vote for this proposal. If any stockholder would like to ask your question or raise a comment regarding any of the proposals, please submit them through the web portal. We will address them during the Q&A period. The polls are now open for voting. Any stockholder who has not yet voted may do so by clicking the voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or Internet do not need to take any further action. While that is all being done, I will now turn the meeting over to Marty Mucci, our President and Chief Executive Officer, to provide an overview of what is happening in Paychex and to answer your questions. Please welcome Marty.

Good morning, and welcome to our Paychex Annual Shareholder Meeting. We appreciate your participation and interest as we come to you virtually this year for the first time. We're very proud of our innovation 49 years since our beginning. And now with a multitude of products, markets and service options. Our goal is still to make it simple for our clients through a combination of innovative technology and very personalized service. We are particularly proud of the support we've been able to provide our clients during the pandemic. It's such a difficult time for all businesses. We will work to be the best in our industry to our clients, our employees and our shareholders. I'd like to introduce you to the executive team to you now with this next slide. This team continues to do an outstanding job in fiscal '20, particularly during the onset of the COVID-19 pandemic. Even with the impact of the pandemic on our fourth quarter, we had a solid financial performance in fiscal 2020 and good growth, particularly in our mid-market HR Outsourcing and retirement sales, ending fiscal '20 with more than 680,000 payroll and PEO clients. In the fourth quarter, with the onset of the pandemic, we focused our attention on the safety of our employees and the critical assistance to our clients during one of the most challenging economies in our history. We introduced a significant number of innovative product enhancements to support our clients' HR, payroll, retirement and insurance needs. And we also maintained our dividend and continue to have one of the highest dividend yields in our sector, over 3%, and closed the fiscal year with nearly a $26 billion market cap, which today is close to $30 billion. We have continued to focus on driving top line revenue and profit growth. Total revenue has averaged 8% annually over the last 5 years and net income averaged annual growth rate of 10%. And once again, net income exceeded $1 billion in fiscal 2020. In fiscal '20, revenue exceeded $4 billion, doubling our revenue in over the last 10 years. More than half of our revenue is now coming from nonpayroll products and services. We are proud of our response to the sudden impact of the COVID pandemic in March. We moved over 14,000 employees to work from home in just 6 days. Over 95% of our employees most still remain in that situation today, while continuing to provide excellent service to our clients. The day that Paycheck Protection Program loans were made available, we offered the first payroll report to the market and -- which has now been downloaded over 500,000 times to support the application with prepopulated payroll data, making it easy for our clients to file. We created a COVID help center online that is updated daily and by state with the latest news and requirements. We held webinars, some attended by over 10,000 participants, to help them with the changing regulations. And we partnered with 3 fintech companies to help our clients facilitate the process to receive small business loans at a critical time. In the most recent, we created the most comprehensive Paycheck Protection Program loan forgiveness estimator and a signature ready application, again, with prepopulated payroll data. Basically, clients fill in their other information and can file this electronically -- sign it electronically and file it for their loan forgiveness. Our past investments in mobile technology and innovative product offerings positioned us well not only for future growth but also to respond to the pandemic environment. Our clients' top concerns in this environment and in most environments are staying compliant, engaging their employees and managing their cash flow. When you think about staying compliant, it was -- we helped them with their ability to handle the new rules for paid family and sick leave, deferring payroll taxes and now reopening their businesses safely with things like our iris scan time clocks, which work great with masks; COVID testing through our partner HireRight; mobile health attestations; and OSHA incident tracking; and of course, the support of our over 600 HR generalists or specialists providing HR support in person, telephonically or by video conference. Keeping employees engaged is also critically important to our clients, and we've supported them with video interviewing of candidates, paperless onboarding into their businesses and training of new hires through our Learning Management System, which provides both new and pre done training. Communicating with employees through our Flex application allows documents to be sent, received and electronically signed and organized through our own application, including performance management support, all of these things helpful in a remote working environment. Optimizing cash flow is obviously critical to our clients as well. In addition to making it easier for our clients to file and receive forgiveness for their PPP loans, we also offered flexibility to employees to be paid on demand, and we were the first and still the only in our industry to offer real-time payments, allowing payments to be made almost instantly. With the increase in technology, service is always and continues to be a critically important service to our clients, but new client preferences increased with COVID. Much of our technology allows for more self-service for both the client and the employee, online and mobile, benefiting the client, their employees and Paychex. And our Flex Assistant, which handled over 2.5 million interactions with automated responses to questions online and on their mobile app. But at Paychex, you can always reach a live payroll specialist 7/24/365 days a year. We are the only company to do this in our space and allows us to be very responsive any way the client needs us. Our client retention and satisfaction results have maintained record highs and we believe this is part of the value -- shows the value that we have brought our clients during this pandemic in particular. We maintain leading market positions in our businesses and this is very important to us. We're #1 in the small business payroll market, approximately -- paying approximately 12 million employees. We pay 1 in 12 private sector employees. Our HR Outsourcing, our PEO and ASO offerings serve more client employees than any other competitor by far, serving 1.4 million worksite employees. And we continue to be #1 in the 401(k) retirement business with over 91,000 plans, which is the 10% of all retirement plans in the U.S.. And our insurance agency is the 22nd largest in the U.S. with nearly $2.5 billion in annual premiums. All of our sectors are continuing to grow with much opportunity and more upfront integrated selling success -- coming from our integrated selling success. We're also proud of the recognition we continue to receive as a company, some of it you may have seen on the earlier video, in particular, our recognition for high ethics, product innovation and technology and the excellent training of our team. And that we have been recognized on the Future 50 list by Forbes for consistent performance and continued innovation as well as most recently receiving the Top HR Product Award from the annual HR Tech Conference. So what are the trends we are seeing in the economy? Well, Paychex in the -- with the IHS Markit Employment Watch, tracks Small Business Jobs Index and wages and it's released monthly. After a significant drop in jobs, as we all saw in March and April, the return of these jobs has been progressing. We are still far below the job growth numbers, of course, of last year, but a second round of government stimulus is important to the business community. So while we have seen jobs continue to recover, it is happening slowly. Let's talk about industry trends. Industry trends to continue to be in our favor, and frankly, most of them accelerated during the pandemic. The need for HR support increased and certainly came down in employee size. The workforce is now more part-time and remote, making employee communication, scheduling, time tracking and recruiting increasing the demand for support. Client and employee experience is more important than ever. They're looking for an easy user interface that's flexible, and we're pleased that our mobile app is a 5-star app, allowing for a more employee self-service and most functions can be done with 1 to 3 clicks. And we provide data analytics capabilities to our clients to be able to help them measure themselves against many other businesses of their size and type. And of course, compliance needs are up. There's more state regulations, there's more complexity and there's more enforcement. Paid family leave, COVID-related time off, health and safety tracking, all are new and more difficult and challenging for businesses today. So our strategic investments, we believe, have positioned us well, and we continue to accelerate our investments, including our marketing spend, our advertising to increase our web presence and sales leads. We've increased our sales team, particularly inside sales, and provided much web chat product demoing and self-onboarding capability for our clients as they want more choice in the way they buy and start up their products. And of course, our innovations in products have continued to accelerate. Having integrated Oasis last year, one of the largest private PEOs in the country, we continue to look for strategic acquisitions in our markets. So our purpose is clear: make it simple for clients and give them the freedom to succeed and do what they do best, run their business. With leading positions in our markets, accelerated investments in our innovative Software as a Service cloud-based full-service solutions, combined with flexible, personalized online and direct service models, we provide the best opportunity for continued growth in the small and mid-markets. And we are -- we pledge to continue to be a leader in shareholder returns. I'm excited by our prospects in our future and I appreciate your support and investment. I'd now like to ask Efrain Rivera, our Chief Financial Officer, to take you through the numbers in a little more detail. Efrain?

Thanks, Marty. Good morning, and welcome to all of our shareholders and guests attending this virtual event. It's a pleasure to be with you here today. I'll review our financial results for fiscal 2020 and our financial position. I'll also update you on the start of fiscal 2021 and then share our expectations for the full year. Let me begin with our standard legal disclaimer. Management will make certain statements that are forward-looking in our presentations to you today. You should be aware that these statements need to be evaluated in light of certain risk factors. The risk factors are disclosed in our press releases and other periodic filings with the SEC. Also, you'll hear me refer to adjusted EBITDA, which stands for earnings before interest, taxes, depreciation and amortization and adjusted for certain onetime costs, along with the measures of adjusted net income and adjusted diluted earnings per share. These are all considered to be non-GAAP measures. That basically means that we adjusted the related GAAP measures for noncontrollable items to give a better reflection of our results of operations. For a discussion of these measures and a reconciliation to the related GAAP measures, I'll refer you to Management's Discussion and Analysis section on -- in our annual report, our Form 10-K and our quarterly reports on 10-Q, which are filed with the SEC and available on our IR web page. Now let's look at some of the highlights of fiscal 2020 financial results. Our largest revenue source, Management Solutions, includes payroll and HCM software, retirement services and HR administrative services, including comprehensive administrative services organization bundle, known as ASO. This revenue represents our suite of integrated HCM solutions. The second category is PEO and insurance services revenue. Our PEO, which stands for professional employer organization, and our insurance services have similar operational and economic characteristics. Both involve the provision of insurance benefits to clients. This category includes the results of acquisitions we have made in the PEO space over the past few years. As you can see from the chart, Management Solutions makes up 75% of our service revenues. Last year, it was 78% of our service revenues. Our investment in the PEO business and strong growth is changing the composition of our revenue. Fiscal 2020. It was a great year, but it came in 2 parts. The first 9 months of the year, we really had a very, very solid year. Then COVID-19 hit during the fourth quarter, and there were challenges we had to face related to the impacts of COVID-19 on the economy and small businesses in general. However, we ended fiscal 2020 with growth across all our lines of businesses and that's why I say it was a great year. Total service revenue grew 7% over the prior year. Operating income increased 7%. It was approximately 36% of total revenue, relatively consistent with the prior year. Strong growth in the PEO-moderated margins, and this is due to the accounting for direct insurance costs, which are reflected as revenues as they are passed through to the client but have lower margins. We continue to invest in the business, particularly in sales and marketing, product and technology. Interest on funds held for clients grew 8% during the year. This increase was due to higher realized gains on the sale of securities, partially offset by lower average investment balances and lower interest rates. The realized gains resulted from repositioning of our client funds portfolio to enhance liquidity in response to the uncertainty caused by COVID-19. We returned approximately 81% of our net income back to stockholders in the form of dividends, as Tom said earlier. We continue to have a strong financial position with cash and corporate investments of over $1 billion as of May 31, 2020. And in a period when many companies were drawing on their credit lines to meet operational needs, we were actually building a cash balance and that's a credit to the strength of the financial position of the company. Now let's look at fiscal 2020 results of operations in a little bit more detail. Management Solutions grew 3%, driven by growth in the client base. It was growing much faster in the first part of the year and then Q4 moderated that growth. Revenue per client grew higher -- as a result of higher price realization and increased penetrance of our suite of solutions. PEO and Insurance Solutions revenue grew 22%. The growth was attributable to the acquisition of Oasis in December 2018, together with growth in clients across our PEO business. Insurance Solutions revenue represents about 19% of total PEO and Insurance Solutions revenue. For fiscal 2020, Insurance Solutions revenue increased due to growth in the number of health and benefits clients and it was partially offset by lower workers' comp premiums. Interest rates on high-quality investments decreased by a total of 225 basis points during fiscal 2020, with 150 basis points of this decline occurring in March in reaction to the economic impacts of COVID-19. The Fed funds rate now has been in a range of 0 to 25 basis points since March 2020. Our combined investment portfolios, interest on funds held for clients and corporate investments earned an average rate of return of 1.8% for fiscal 2020 compared to 1.9% for fiscal 2019. This will continue to be a headwind as we go through this year. Our average invested balances for our funds held for clients decreased approximately 1% for fiscal 2020. Average invested balances were impacted by lower client fund collections due to COVID-19 and changes in the client base mix, partially offset by wage inflation and timing of collections and remittances. Net income, diluted earnings per share increased 6% for fiscal 2020 despite a tough fourth quarter and decline in interest rates. Our non-GAAP measures of adjusted net income and adjusted earnings per share exclude the impacts of onetime tax benefits and other discrete tax items and reflect growth of 5% and 6%, respectively, for fiscal 2020. Let's look at the balance sheet and our cash flows. Corporate cash and investments remain strong, as I mentioned earlier, at $1 billion as of May 31, 2020. Our ability to generate cash from our operations allowed us to pay substantial dividends to our stockholders while still investing in the business. We have approximately $800 million of total debt, which is primarily private placement debt issued during fiscal '19 to fund the Oasis acquisition, which was the largest acquisition in our history. Our cash flows from operations were approximately $1.4 billion for the fiscal year, that in a very tough year. Our stockholders' equity was $2.8 billion as of May 31, 2020, reflecting approximately $890 million in dividends paid during the fiscal year and $170 million in repurchases of Paychex common stock. Our return on equity for the 12 months ended May 31, 2020, was a very robust 41%. Now I'd like to take you through results for the first quarter of fiscal 2021 and our expectations for the full year. Our results of operations for the first quarter were adversely impacted as businesses continue to be affected by the COVID-19 crisis. Total revenue and service revenue both declined 6% compared to the prior year first quarter. Management Solutions revenue decreased 5% for the first quarter, driven by lower client employee counts across many of our HCM solutions as well as increases in companies either not processing payroll or paying fewer employees. Retirement services revenue was an area where we saw growth with an increase in the number of retirement plans that we serve. PEO and Insurance Solutions revenue declined 7% for the first quarter, again driven by a decrease in worksite employee surveys -- served. Insurance services revenue also declined as a result of lower workers' comp premiums, driven by reduced wages and related premium rates. Interest on funds held for clients decreased 28%, again the impact of lower average investment balances, average interest rates and realized gains. Average investment balances were impacted by lower client fund collections and changes in the client base mix, partially offset by wage inflation and timing of collections and remittances. Net income was down 20%, diluted earnings per share declined 19% for the first quarter, but adjusted net income and adjusted diluted earnings per share both declined 11%. These adjusted measures include -- exclude $31 million of onetime costs that we incurred during the first quarter related to accelerated cost savings initiatives. These initiatives are primarily related to reducing our brick-and-mortar facilities' footprint and headcount optimization. We anticipate that going forward, we will benefit from approximately $40 million of annual cost savings from these initiatives. We have anticipated the greatest impact of COVID-19 to be reflected in the first quarter. While we saw a decline year-over-year, we are pleased to say that our key indicators did reflect a faster recovery during the quarter and our results exceeded our expectations. Let's look at the outlook now. Looking beyond the first quarter, we document our short-term expectations through the guidance we provide in disclosures to shareholders and to Wall Street. The guidance is provided in our press releases and our periodic SEC filings that can be found on our website. Our guidance for the full year fiscal 2021, as updated with our first quarter earnings, incorporates our anticipated impacts resulting from the COVID-19 pandemic based on current assumptions and market conditions. As the situation continues to unfold, future developments could certainly alter our guidance. With that said, we anticipate that Management Solutions revenue will decline in the range of 1% to 3%. PEO and Insurance Solutions is anticipated to decline in the range of 2% to 5%. We anticipate interest on funds held for clients to be in the range of $55 million to $65 million for fiscal 2021. Total revenue is anticipated to decline in the range of 2% to 4% with the company resuming a pattern of growth in the second half of the year. Adjusted operating margins, which includes onetime costs associated with our cost savings initiatives, is anticipated to be approximately 35%. Adjusted EBITDA margin is anticipated to be approximately 40%. Interest expense net is expected to be in the range of $30 million to $35 million. The effective income tax is anticipated to be in the range of 24% to 25%. Adjusted diluted earnings per share is anticipated to decline in the range of 6% to 8%. Let's talk about long-term capital strategy. Management and the Board continuously look for opportunities to maximize our cash deployment. We continue to invest in our integrated cloud-based suite of HCM solutions and our mobility offerings as well as digital sales and service capabilities. We also continue to evaluate potential acquisition opportunities as they arise. We are anticipating capital expenditures of approximately $120 million to $130 million for fiscal 2021. During fiscal 2020, we returned $1.1 billion to stockholders. This is comprised approximately, as you heard earlier, $890 million of dividends, representing 81% of our net income and about $170 million utilized to repurchase our common stock. In May 2019, our Board authorized a stock repurchase plan for up to $400 million to be used by May 2022. About $200 million of this authorization remains. Let me summarize. During these trying times, our business model has proven to be resilient as it has for almost 50 years. While we expect 2021 results to moderate somewhat due to COVID-19, we're confident that we'll come out of this a stronger company and I think that those results are already becoming evident. We'll continue to drive revenue and earnings growth and generate robust cash flows, which allow us to invest back into the business and continue to return value to shareholders. Our investments in the business have positioned us for future long-term growth, and we remain committed to building value for you, our shareholders. At this time, I would like to turn the meeting back to our President and CEO, Marty Mucci.

Thank you, Efrain. We'll now open the meeting for stockholder questions and comments. We can begin with a few that we received in advance of today's meeting, and then we'll take stockholder questions that are being entered today on the web portal. Though we may not be able to answer every question, we will provide a response to as many as possible in the time allowed. Only questions that are germane to the meeting will be addressed and our corporate Secretary, Stephanie Schaeffer, will now proceed to ask the questions submitted by our shareholders in advance. Stephanie?

Thank you, Marty. Here's our first shareholder question. I see that the total fees paid to the independent auditor were $2,371,000 for fiscal 2020 versus $2,083,000 for 2019. That's an increase of approximately 13.8% year-over-year. Please discuss the reasons for an increase of this magnitude.

Sure. Our audit fees increased from PwC about 3% for a price -- annual price increase, but we also had additional work. The majority of this increase was driven by additional work. We moved audits from our -- one of our subsidiaries, HROI. We moved that audit to PwC from another auditing firm. That increased about 6% -- the fees about 6%. And we had an increase due to Oasis Sarbanes-Oxley audits that had to be done, and that was a major increase, a part of this. And then, frankly, we had a reduction from some onetime fees in the previous year. So overall, this was mostly of an increase directed by more work given to Pricewaterhouse, our respected auditors. And by the way, in fiscal '21, we're projected to see a decrease in audit fees, actually, of just under 3%. Stephanie?

Okay. Our next question from the shareholders. Would you specifically address your relationship with 2 of your competitors, i.e., Paycom and Paylocity Holdings individually? They both seem to be operating in your market space, are growing rapidly and use much the same words when describing their business.

Yes. We compete, I think, very effectively with both companies. I believe we offer the most fully integrated product set, meaning if you're looking for one company and one platform for your complete needs of HR administration, payroll, retirement and insurance, we are the only company of the 3 that provide that. We are also -- allow our clients to integrate with their unique vendors if they choose to do so as well. Our technology is second to none. It follows a mobile-first approach. And we're the only company to back up our innovative technology offerings with both automated service support, along with a 7/24/365 live support. Mostly we see Paylocity in the lower end of the mid-market, which we define as about 20 employees or above. Paycom plays more in the 100-employee space. Our Flex platform competes very effectively against both technology platforms of these competitors. Our approach is very different, though, than Paylocity and Paycom. Paylocity has a set of features that they've developed internally, and they partner with third parties for the rest, specifically employee benefit providers for insurance and retirement. And Paycom also partners with third parties for retirement. What makes us unique at Paychex is when we compete is that we offer our industry-leading technology and our HR Services offering also with a dedicated HR consultant that works hand-in-hand with our clients' businesses. We have over 600 SHRM-certified HR consultants that leverage our innovative Flex technology to help them drive efficiencies into our clients' businesses and act as a true HR partner, offering them effective recommendations on things like compliance, hiring, terminations and everything in between. Neither of the competitors offer this. We leverage this as a differentiator, and we continue to see a very strong growth in our HR Services sales as a result.

Our next shareholder question. Please explain how your PEO relationship works with your customers?

Sure. Our PEO business, or professional employer organization, offering -- this offering really allows our clients to have a co-employer relationship with Paychex or Oasis, our subsidiary, where we can offer our full suite of HR, administration, payroll and retirements products, including access for their employees to a variety of benefit plans that many businesses, given their size or scope, may not normally have access to on their own, combined with our dedicated HR specialist support. Between our PEO and our ASO client base, we service over 1.4 million worksite employees, like I said earlier, making us one of the largest in this business. Stephanie?

Okay. Next question, how do you decide what countries to operate in?

Well, for the most part, we look where we see an opportunity to add value to prospective clients by using our technology, scale and leverage of our nearly 50 years of product innovation, experience and service delivery. We continue to see our most significant opportunity right here in the U.S., but we have also been in Germany for over 15 years, and more recently, in Denmark and Northern Europe, offering payroll and HR Services to both small and midsized businesses. So we continue to look at other countries that may also offer similar opportunities for us in the future. Stephanie?

Our next question. Out of 9 positions on the Board, why are only 2 women? Why is everyone 50 plus? I would feel better if you had some younger people. What is your succession plan?

Well, thank you for the question. We realize it's important to have diversity of thought and experience on our Board. In the last few years, we have had some Board changes, frankly, with 2 of the long-serving Board members retiring. And I would note that the 2 of the last 3 board appointments were women and one was under 50 at the time she joined us. Additionally, in July of this year, our Board adopted a diversity policy for both CEO and Board searches, which require a diverse slate of candidates for any external search. With respect to succession planning, our governance and comp committee -- compensation committee, which also serves as our nominating committee, regularly renews our Board size and composition and future needs. We are mindful of the need for continuity and experience and how important the experience of our Board has been to us as we -- as the strong support of our Board members receives from our shareholders has been very important with every director receiving over 90% of the votes cast for in this election and in other past elections. This is an area where our Board will continue to review, but we greatly value the experience and backgrounds that our Board members provide us.

And our last shareholder question, Marty. Can you comment on where you are seeing the greatest long-term competitive threat and how you plan to try to mitigate it?

Yes. I think our -- the competitive threat, if anything, continues to be, will we be able to provide innovative technology and flexibility for our clients. Things have changed. Paychex has always been about personalized service. But the definition of that service for our clients and their employees has changed quite dramatically over the years and frankly, has accelerated quickly with COVID-19 and a lot of employees of our clients working from home. So the biggest threat is are we staying competitive from a technology standpoint and always understanding that service is #1, and how you provide that service has to move forward with the demands of the clients and their employees. We're very proud of the innovations we've made and continue to make and have planned out, frankly, for the next 12 to 24 months that are already in place. We're proud of the fact that we saw the need for a mobile app that is a 5-star app that provides all of the needs of our clients and our employees. And we're very proud of the fact that we've given our employee -- our clients and their employees a lot of choice, choice in how they buy, how they select Paychex, how they demonstrate Paychex applications themselves and can either use us to help them set up or use themselves to set up. So I feel that the longest threat is staying ahead of the market, understanding what the needs are and moving forward from there.

That concludes our shareholder questions today, Marty.

Okay. Thank you. Stephanie, we will now end the question-and-answer period. Thank you for your questions. I'll now turn this back over to Tom Golisano, our Chairman, for election results. Before I do, I do want to mention that this November in our system is Tom's 50th anniversary of being with company. Of course, the company started officially in 1971, so our 50-year anniversary is next year. But knowing Tom, he got started a little early, started putting things together. And this November, I'd like to congratulate Tom on 50 years of starting Paychex and growing into what today is a $30 billion market cap company. Tom, congratulations, and I turn it back over to you.

Thanks, Marty. It's been a tremendous experience with a huge amount of quality people that have made it happen over the years. It's been terrific, and I hope our shareholders are happy with us. They should be, nah, I'm kidding. Now that everyone has had an opportunity to vote, I now declare the polls for the 2020 Annual Shareholder Meeting closed. Our inspector of election will now report on the preliminary results.

Mr. Chairman, the preliminary vote report shows that the 9 nominees for election to the Board have been duly elected, the compensation of the named executive officers has been approved by advisory vote, the Paychex, Inc. stock incentive plan has been approved and amended and the selection of the company's independent registered public accounting firm has been ratified. We will be reporting the final vote results in a Form 8-K to be filed within 4 business days.

Thank you, Todd. If there is no other business, then this concludes our meeting. On behalf of my fellow directors and the company's executives, I wish to express our appreciation to all of you for attending this meeting and for your investment in Paychex. Our 2020 Annual Meeting of Shareholders is now adjourned. Thank you much.

That concludes the Paychex, Inc. 2020 Annual Meeting of Stockholders. Thank you for attending, and have a good day.