Bridge Report:（4319）TAC Fiscal Year March 2019

Toshio Tada, President	TAC Co., Ltd. (4319)

Company Information

Stock Information

*The share price is the closing price on June 13. The number of shares issued was calculated by subtracting the treasury shares from the number of outstanding shares at the end of the latest quarter. ROE and BPS are the results of the previous term.

Earnings Trends

* Forecast by the Company. These values are on an accrual basis. Net income is profit attributable to owners of parent (the same applies for net income hereinafter).
*Unit: ¥mn

We present this Bridge Report reviewing fiscal year March 2019 earnings results and other information about TAC.

Index

Key Points
1. Company Overview
2. Fiscal Year March 2019 Earnings Results
3. Fiscal Year March 2020 Earnings Estimates
4. Conclusions
<Reference: Corporate Governance>

Key Points

• The sales on a cash basis for the term ended March 2019 were 20,253 million yen, down 3.4% year on year. The sales on an accrual basis were 20,474 million yen, down 2.3% year on year. Sales declined for the first time in four terms due to the sluggish sales of the mainstay service of the company such as the Public Officer Courses. While the sales of the Personnel Education, Corporate Training, and Manpower Business decreased, the sales of the Publishing grew. As for the cost of sales, outsourcing expenses increased while personnel expenses decreased. Although SG&A expenses were unchanged from the previous term, operating profit on an accrual basis was 340 million yen, down 59.1% year on year.

   

• Sales on an accrual basis for the term ending March 2020 are expected to decline to 20,430 million yen, down 0.2% year on year. The sales of the Public Officer Courses are forecast to remain sluggish this term. Operating profit is expected to fall 6.1% year on year to 320 million yen. According to the company, the plan is based on the minimum profit margin that must be maintained. The dividend is to be 5.00 yen/share, down 3 yen/share from the previous term. The estimated payout ratio is 92.5%. Although the dividend is expected to decline due to decreases in sales and profit for the two consecutive terms, the company plans to enhance marketing and radically reform the cost structure, aiming for the bottom-out of sales and profit and recovering them.

   

• According to the company, the estimated figures for this term are based on the minimum profit margin that must be maintained although the business environment is harsh. Although the Publishing and Manpower Business are favorable, it is necessary to make the Personnel Education bottom out and recover for sales growth. TAC is expected to establish a business structure that can tolerate external environmental factors by drastically reforming its cost structure, utilizing the M&A strategies as it declared, etc..

   

1. Company Overview

TAC Co., Ltd. is known as the "TAC, The Certification School" where university students and working people come to study to increase their chances of passing tests for various certifications and qualifications. The Company operates schools throughout Japan that educate students and adults in academic fields necessary to pass certification and Public Officer tests to become Certified Public Accountants, Licensed Tax Accountants, Real Estate Appraisers, Certified Social Insurance and Labor Consultant, Bar Examination, Judicial Scriveners and other professional occupations. In addition, TAC also provides various training programs for corporate clients and conducts publishing business as well.

TAC Group (9 Consolidated Subsidiaries, 2 Equity Method Affiliated Company, 1 Non-Consolidated Subsidiary / not accounted for by Equity Method)

*As of end of March 2019.

【1-1 Corporate History】

TAC was established in December 1980 as a school providing instruction to people seeking to obtain certifications and qualifications through examinations, including courses for the Certified Public Accountant, Bookkeeper, and Licensed Tax Accountant examinations. In October 2001, TAC listed its shares on the Over-The-Counter Market, and later moved its shares to the Second Section of the Tokyo Stock Exchange in January 2003 and then to the First Section in March 2004. TAC acquired KSS Co., Ltd. (formerly known as Waseda Management Publishing), which conducts certification and qualification acquisition support services including the provision of preparatory courses for Bar Examination, Judicial Scrivener, Patent Attorney, Level-1 Civil Service, Special Personnel of the MOFA, in September 2009. Through the addition of this company, TAC has been able to fortify its strengths in the accounting area by adding certification preparatory courses in the legal area, and to round out its service lineup with courses in the Public Officer area. In December 2013, the Company formed a collaborative agreement that included the sharing of capital with Zoshinkai Publishers Co., Ltd. for work in the development of a correspondence course education service for elementary, junior and senior high school students. Furthermore, other M&A activities were conducted in June 2014 to enter into the medical office area.

【1-2 Strengths】

(1) Detailed Response to Changes, Revisions in Examination System, Laws
Since the founding of the Company, TAC instructors have made revisions to the text materials used in its courses every year, and this ability to respond to changes and revisions in the examination and legal systems is a distinguishing feature and strength of TAC. For a company like TAC with sales approaching ¥20.0 billion, absorbing the costs of updating text materials on an annual basis is possible. However, new entrants and smaller players in the market have a much more difficult time absorbing the costs of updating teaching materials. Other strengths of TAC include its knowhow and efficiency accumulated over the history of its operations in providing the most updated information to the students of its courses.

(2) Full-Scale Lineup and Active Course Development
TAC has risen to become the top player in the industry through its active efforts to develop courses in new areas, including those targeting university students, and it has become the first company within its industry to list its shares. Along with the acquisition of W Seminar’s certification and qualification acquisition support business in 2009, TAC has been able to fortify its weakness in the areas of legal and Public Officer related courses. Consequently, the Company now boasts of a strong business model comprised of the three main cornerstones of accounting (Certified Public Accountant, Licensed Tax Accountant and Bookkeeper), legal, and Public Officer related certification and qualification acquisition support courses.

(3) Providing Innovative Services with a Focus upon Students
Innovative services are yet another strength of TAC. TAC was the first school in the certification and qualification acquisition support services market to introduce educational media and enable students to choose which instructor they would like to study under. This corporate focus upon satisfying the needs of students is reflected in the quality of the text materials offered and has contributed to the establishment of a strong brand reputation as “TAC, The Certification School.”

【1-3 ROE Analysis】

For the first time in three terms, return on equity (ROE) fell below 8%, which is generally said to be the value Japanese companies should aim for, because of the decrease in the ratio of net income. The company estimated that net profit Margin in this term will be 0.5% and REO will decline to 1.8%.

2. Fiscal Year March 2019 Earnings Results

Regarding Sales
Students applying for courses are required to pay tuitions at the time of their initial application (TAC calls these fees tuition advance pre-adjustment sales or sales on a cash basis), which are then booked on the balance sheet as a liability under the title “tuition advance.” These tuition advances are then written down and booked as sales in the month that educational services were provided to the student (TAC calls these fees tuition advance pre-adjustment sales or sales on an accrual basis). While sales booked on the income statement are “sales on an accrual basis (tuition advance pre-adjustment sales)”, the actual indicator of the sales conditions of the Company in the term are considered to be the “sales on a cash basis (tuition advance pre-adjustment sales)” (The fact that cash and equivalents are influenced strongly by the sales on a cash income is a characteristic that is shared with companies that take orders) and they are deemed to be a leading indicator for actual sales. Therefore, TAC management identifies this “sales on a cash basis (tuition advance pre-adjustment sales)” as a key management indicator.

Regarding Seasonal Characteristics
Examinations for the majority of certification courses are held from the second (July to September) to third quarters (October to December), and core courses, especially those for Certified Public Accountants and Licensed Tax Accountants, fall into the time frame for examinations in the following year. At the same time, all courses fall into the fourth (January to March) and first quarters (April to June).
Despite an increase in sales on a cash basis and Account receivable-trade sales during the second and third quarters, tuition advances are written down and booked depending upon enrollment period and gross margin is profoundly influenced because of the booking of a fixed level of expenses every month. In the fourth and first quarters, these tuition advances are then written down and booked as sales in each month, causing gross margin to increase.

(1) Consolidated Earnings

*Units: ¥mn. Net profit is profit attributable to owners of parent (the same applies for net income hereinafter).

Sales and profit declined
The sales on a cash basis were 20,253 million yen, down 3.4% year on year. The sales on an accrual basis were 20,474 million yen, down 2.3% year on year. Sales declined for the first time in the past four terms due to the sluggish sales of the mainstay service of the company such as the Public Officer Courses. The sales of the Personnel Education, Corporate Training, and Manpower Business decreased whereas the sales of the Publishing grew. As for the cost of sales, outsourcing expenses increased while personnel expenses decreased.
Although SG&A expenses were unchanged from the previous term, operating profit on a cash basis was 118 million yen, down 86.0% year on year. Operating profit on an accrual basis was 340 million yen, down 59.1% year on year.

(2) Business Segment Trends

Sales on a cash basis by Business Segment

*Units: ¥mn

Operating profit on a cash basis by Business Segment

*Units: ¥mn

【Personnel Education】

Sales and profit declined （Operating loss）

The sales of the company’s mainstay service, the Public Officer Courses, have continued declining due to the favorable situation of private employment.

【Corporate Training Business】

Sales and profit declined

Operating expenses, including instruction fees and personnel expenses for marketing, augmented 2.7% year on year.

【Publishing Business】

Higher Sales, Higher Profits
・Books for the preparation for qualification test for Real Estate Notary, Financial Planner, Condominium Management Consultant, Administrative Scrivener, etc.
・Books related to Licensed Electrical Engineer-class 3, which is the company’s new course, contributed to sales.

・In addition to law-related books such as Bar Examination and Judicial Scrivener, the new publication of books for preparing for the exams for Certified Social Insurance and Labor Consultant contributed to sales.

Operating expenses increased by 2.0% year on year. Although outsourcing expenses including personnel expenses and production expenses for the renewal of travel books increased, sales promotion expenses were curtailed.

【Manpower Business】

Higher Sales, Higher Profits
As for accounting-related Manpower Business, sales from personnel introduction grew from last year due to its greatly increased demand in audit corporations, tax accountant corporations, and private enterprises.
Sales from advertisement decreased as the effectiveness of job advertisement for securing human resources has begun to fade.
Sales from temporary staffing shrunk due to the impact of the amendment of the Worker Dispatch Law.
As for medical human resources services, sales increased as Medical Office Staffing Kansai Co., Ltd. received orders for a large-scale project. However, overall costs centered on personnel expenses are rising, putting the business in a difficult situation.

(3) Trend by Certification Category

Sales on an accrual basis by Certification Category

*Units: ¥mn

Student Numbers

*Units: ¥mn

【Market Overview】

The number of official test applicants of the various curricula taught by TAC in 2018 declined from the previous year 2.6 million to 2.548 million. It dropped two year straight.

(Financial Service, Real Estate Area)
Sales from Architect and Building Engineers, Real Estate Notary, and Financial Planner were healthy.

（Medical, Welfare Area）
Medical Office Staffing Kansai Co., Ltd. received orders for a large-scale project.

（Management, Taxation）
As for Licensed Tax Accountant, although the overall number of examinees indicates a steeper decline, the number of students applying for the courses decreased as well. Additionally, Small and Medium Enterprise Management Consultant did not see growth either.

（Law）
Sales from Judicial Scrivener were sluggish as the overall number of students has been decreasing.

（Public Officer, Labor）
The sales from the Government Officials course (Regular Service and Local Government course) decreased, as the employment conditions in the private sector were good.

(4) Student Number Trends

*Units: Persons

Business Trends by Curriculum Category (Combined Total for both Personal and Corporate Instruction)
<Increases>
The Architect and Building Engineer Courses, Financial Planner Courses, CompTIA, Courses for Bookkeeping

<Declines>
Licensed Tax Accountant, Small and Medium Enterprise Management Consultant, Judicial Scrivener, the Government Officials course (Regular Service and Local Government course), etc.
The number of corporate students in online training was unchanged from last year while that in in-university seminars and affiliated schools decreased. Consigned training programs increased.

(5) Financial Conditions

◎Main Balance Sheet Items

*Units: ¥mn

Current assets declined 201 million yen from the end of the previous term due to the decrease in securities. Fixed assets remain unchanged.
Total liabilities were 15,987 million yen, down 338 million yen from the end of the previous term, due to the decline in tuition advances and debts.
Net assets were 5,498 million yen, up 206 million yen from the end of the previous term, due to the increase in retained earnings, etc.
As a result, capital adequacy ratio rose 1.1% from the end of the previous term to 25.6%.

◎Cash flow statement

Operating CF shrank due to the decrease in net profit before taxes.
Investing CF and free CF grew and became positive due to gains on sale of securities.
The cash position improved.

3. Fiscal Year March 2020 Earnings Estimates

(1) Consolidated Earnings

*Units: ¥mn. Estimates are those of the company.

Sales estimated to remain unchanged from the previous year and profits estimated to decline.
Sales on an accrual basis are expected to be 20,430 million yen, down 0.2% year on year. The sales of the Government Officials Courses are forecast to remain sluggish this term as well.
Operating profit is expected to drop to 320 million yen, down 6.1% year on year.
The dividend is to be 5.00 yen/share, down 3 yen/share from the previous term. The estimated payout ratio is 92.5%.

(2) Approaches after this term
Although the dividend is forecast to decline due to decreases in sales and profit for the two consecutive terms, the company aims for bottoming out of its sales and profit and to recover them with the following approaches in the aspect of business and cost.

1. Approaches in each segment
(Personnel Education)
As for the Government Officials, the company plans to minimize the decrease in the number of students and prepare for economic recession as the recruitment status in private enterprises for new graduates is projected to be healthy for the time being.
In addition, as the number of students for both Licensed Tax Accountant and Judicial Scrivener Courses has been decreasing for the 8 consecutive years, there is an urgent need to minimize the decrease.
On the other hand, the number of students in Certified Public Accountant Courses tends to increase since the employment status in audit corporations for exam-qualified students is healthy. The company plans to actively capitalize on the fact that it has the lion’s share in the number of students passing exams and to steadily capture demand.
In either case, the company will carry out strategies for each course that appropriately respond to external environmental factors and meet the needs of the market (students).

(Corporate Training)
The company plans to reinforce sales capabilities by increasing personnel for marketing. TAC School Mito (affiliated school) is scheduled to open in September 2019 and to offer courses for Government Officials, Licensed Tax Accountant, Certified Social Insurance and Labor Consultant, Real Estate Notary, etc.

(Publishing)
The overseas version of the popular “Otona Tabi Premium Series” is scheduled to be published sequentially from October 2019.
A total of 15 titles are to cover Honolulu, Guam, Taipei, Paris, Italy, Singapore, Hong Kong, Vietnam, New York, Seoul, etc.

(Manpower Business)
In response to the booming demand in the career-change market for Certified Public Accountants and USCPA, the company plans to enhance personnel introduction business of Certified Public Accountants and USCPA.The company will focus on attracting job seekers as well as improving the quality of consultants.

2. Drastic reform of the cost structure
Operating costs composed of cost and SG&A expenses increased to 20.1 billion yen while the sales on an accrual basis for the previous term was 20.4 billion yen. The company acknowledges that it needs to review the costs drastically and take action.

◎Advertisement cost
The company plans to make paperless brochures and shift its advertising media to the Internet as paper costs are projected to increase and advertising media are shifting to the Internet.

◎Outsourcing expenses
The impact of increasing paper cost is significant here as well. Meanwhile, the company plans to release electronic teaching materials as the demand for them is increasing.

◎Rent expenses
Although the company currently has 22 sites, the daytime operating rates in many sites are declining. In addition, the learning style has been changing; an increasing number of students uses the Internet and downloads content instead of going to a classroom.
Under these circumstances, the company plans to make decisions on reducing and relocating sites quickly based on their operation rates, as well as installing equipment that meets the needs of students.

◎Personnel expenses
In the office, securing human resources is becoming more difficult, and the increase in the minimum hourly wage has become an issue.
In addition, it has also been difficult to secure instructors, and demand for instructors is growing due to the increase in the field of study for each examination subject and expertise therein.

The company plans to further improve work efficiency with utilization of IT etc., while maintaining around 500 employees as a whole. In order to enhance sales, the company also plans to reshuffle the personnel.

4. Conclusions

According to the company, the estimated figures for this term are based on the minimum profit margin that must be maintained although the business environment is harsh. Although the Publishing and Manpower Business are favorable, it is necessary to make the Personnel Education bottom out and recover for sales growth. TAC is expected to establish a business structure that can tolerate external environmental factors by drastically reforming its cost structure, utilizing the M&A strategies as it declared, etc..

<Reference: Regarding Corporate Governance>

◎Operating type, and the composition of directors and auditors

◎Corporate Governance Report
Updated on December 21, 2018

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>

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