Bridge Report:（4319）TAC the Fiscal Year March 2020

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

Company Information

Stock Information

*The share price is the closing price on June 10. Each figure was taken from the brief report on results for the term ended Mar. 2020.

Earnings Trends

*Unit: ¥mn. 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).

We present this Bridge Report reviewing fiscal year March 2020 earnings results and other information about TAC.

Index

Key Points
1. Company Overview
2. Fiscal Year March 2020 Earnings Results
3. Fiscal Year March 2021 Earnings Estimates
4. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• The sales on a cash basis for the term ended March 2020 were 20,398 million yen, up 0.7% year on year. The sales of the Personal Education segment’s core services, such as Certified Public Accountant courses and Architects and Building Engineers courses, were healthy and the sales of the publishing business grew. Sales on an accrual basis were 20,331 million yen, down 0.7% year on year. Gross profit margin dropped 1.0% year on year. Gross profit decreased 3.2% year on year. SG&A expenses declined 1.0% year on year due to the reduction of the operating expenses but could not be offset. As a result, operating profit on an accrual basis decreased 52.4% year on year to 162 million yen.

   

• The sales on a cash basis for the term ending March 2021 are expected to decline 0.2% year on year to 20,350 million yen, while sales on an accrual basis are estimated to increase 0.1% year on year to 20,350 million yen. Operating profit is projected to be 690 million yen, up 325.6% year on year. Sales are expected to be at the same level as the previous term, but gross profit margin is forecasted to improve 2.2% and SG&A ratio is expected to fall 0.3% due to the cost reduction. The company anticipates a significant growth in profit. The dividend is to be 5.00 yen/share, unchanged from the previous term. The estimated payout ratio is 22.6%.

   

• The forecast for this term does not reflect the impact of shortened business hours of schools and partial postponement or suspension of corporate training programs and on-campus seminars caused by the spread of the novel coronavirus on earnings. The company will make a new announcement if it becomes necessary to revise its earnings forecasts and dividend forecasts as a result of compiling new earnings forecasts after the pandemic subsides.

   

• Although a substantial profit growth is expected in the current fiscal year, the forecast does not reflect the impact of the spread of the novel coronavirus and the company believes that there is a high possibility that the spread of the infection will have a negative impact in the short term. Therefore, investors have no choice but to wait for the disclosure of the first quarter results.

   

• On the other hand, although the fundamental reform of the cost structure is important from a medium-term perspective, it is essential to expand the top line through diversification of revenue sources and other means. While the medical staffing section continues to struggle, we are interested to know about the progress of the company’s efforts to realize the effects of its M&As, which have been conducted, including Zoshinkai.

   

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, Certified Public Tax Accountants, Real Estate Appraisers, Labor and Social Security Attorney, 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, 1 Equity Method Affiliated Company, 1 Non-Consolidated Subsidiary / not accounted for by Equity Method)

*As of the end of March 2020.

【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, Bookkeeping, and Certified Public 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 (National career track), 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, Certified Public Tax Accountant and Bookkeeping), 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】

ROE declined for three consecutive terms because of the decrease in profitability and leverage. The company estimates that net profit Margin in this term will be 2.0% and ROE will improve to 7.3%.

2. Fiscal Year March 2020 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 were flat and profit was down
The sales on a cash basis for the term ended March 2020 were 20,398 million yen, up 0.7% year on year. The sales of the Personal Education segment’s core services, such as Certified Public Accountant courses and Architects and Building Engineers courses, were healthy and the sales of the publishing business grew. Sales on an accrual basis were 20,331 million yen, down 0.7% year on year. Gross profit margin dropped 1.0% year on year. Gross profit decreased 3.2% year on year. SG&A expenses declined 1.0% year on year due to the reduction of the operating expenses but could not be offset. As a result, operating profit on an accrual basis decreased 52.4% year on year to 162 million yen.

(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

The results were impacted by reaction to the rush demand before the consumption tax hike, shortened business hours due to the spread of the novel coronavirus, and other factors.
Operating costs declined 0.3% year on year.

【Corporate Training Business】
Sales and profit increased

Operating costs, including instruction fees and personnel expenses for operation, increased 2.9% year on year

【Publishing Business】
Sales and profit increased

Sales increased for eight successive terms.
Operating costs rose 2.5% year on year.

【Manpower Business】
Sales and profit declined
The demand for personnel in audit corporations, tax accountant corporations, and private enterprises is stable, but the sales of personnel introduction and advertisement decreased as the gap between job offers and job seekers in conditions is wider and the effectiveness of job advertisement for securing human resources has begun to fade.
Sales of temporary staffing shrunk due to the amendment to the Worker Dispatch Law.
As for the business of introduction and dispatch of medical office staff and nurse, little progress was made in large-scale projects from last fiscal year, leading to profit declining, while personnel expenses kept rising. Thus, the business has been struggling.

(3) Trend by Certification Category

Sales on an accrual basis by Certification Category

*Units: ¥mn

【Market Overview】
The number of applicants for various certification tests offered by TAC in 2019 declined from 2.514 million in the previous year to 2.512 million. It dropped for three consecutive years, but has remained stable after a significant decline from 2010 to 2014.

(Finance and Accounting Area)
Applications for the Certified Public Accountant course, our mainstay services has been healthy throughout the year.

(Financial Service and Real Estate Area)
FP, Securities Analyst and Architects and Building Engineers courses were strong and sales increased.

(IT and International Area)
Sales from information processing training for enterprises were solid until the third quarter. CompTIA-related sales were also steady.

(Management and Taxation Area)
Although the decline rate of applicants for the test for licensed Certified Public Tax Accountant was lower than the overall decline rate, the number of applications for the course fell slightly. The sales of the Small and Medium Enterprise Management Consultant course were also sluggish.

(Law Area)
Demand increased due to the revision to the Civil Code, but sales were sluggish overall.

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

(Medical and Welfare Area)
Large projects were discontinued and sales declined.

(4) Student Number Trends

*Units: Persons

Number of students by Certification Category

Business Trends by Curriculum Category (Combined Total for both Personal and Corporate Instruction)
<Increases>
Certified Public Accountant course, Securities Analyst and Architects and Building Engineers courses etc.

<Declines>
Bookkeeping course, Certified Public Tax Accountant course, Real Estate Notary course, Government Officials course (Regular Service and Local Government course) etc.
The number of corporate trainees increased with new orders for outsourced training, but declined for correspondence training, university seminars and affiliated schools.

(5) Financial Conditions and Cash Flow

◎Main Balance Sheet Items

*Units: ¥mn

Current assets decreased 1,184 million yen from the end of the previous term due to the decline in cash and cash equivalents, etc. Fixed assets fell 48 million yen from the end of the previous term as investments and other assets dropped. Total assets were 20,253 million yen, down 1,232 million yen from the end of the previous term.
Total liabilities were 14,775 million yen, down 1,212 million yen from the end of the previous term, due to the decrease in debts, etc.
Net assets were 5,478 million yen, down 20 million yen from the end of the previous term, as retained earnings fell.
As a result, capital adequacy ratio improved 1.4% from the end of the previous term to 27.0%.

◎Cash flow statement

The surplus of operating CF expanded due to the increase in tuition protection trust beneficiary interest, etc.
Since there were no longer proceeds from the sale and redemption of securities, which were posted in the previous term, investing CF turned negative.
Free CF was almost unchanged.
The deficit of financing CF expanded due to the decrease in short-term debts, etc.
The cash position fell.

(6) Topics

◎ Extending the expiration date of special coupons for shareholders
Due to the spread of COVID-19, in order to secure opportunities in using a discount coupon, the company decided to extend the expiration date of special coupons distributed in late June 2019 for shareholders as of the end of March 2019 and special coupons distributed in early December 2019 for shareholders as of the end of September 2019 for two months each.

3. Fiscal Year March 2021 Earnings Estimates

(1) Consolidated Earnings

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

Sales was flat year to year, but profits are expected to increase significantly.
The sales on a cash basis for the term ending March 2021 are expected to decline 0.2% year on year to 20,350 million yen, while sales on an accrual basis are estimated to increase 0.1% year on year to 20,350 million yen. Operating profit is projected to be 690 million yen, up 325.6% year on year. Sales are expected to be at the same level as the previous term, but gross profit margin is forecasted to improve 2.2% and SG&A ratio is expected to fall 0.3% due to the cost reduction. The company anticipates a significant growth in profit. The dividend is to be 5.00 yen/share, unchanged from the previous term. The estimated payout ratio is 22.6%.

The forecast for this term does not reflect the impact of shortened business hours of schools and partial postponement or suspension of corporate training programs and on-campus seminars caused by the spread of the novel coronavirus on earnings. The company will make a new announcement if it becomes necessary to revise its earnings forecasts and dividend forecasts as a result of compiling new earnings forecasts after the pandemic subsides.

(2) Various Initiatives

① Novel Coronavirus-related efforts
The company has not reflected the impact of the novel coronavirus on its earnings forecast, but it anticipates the following effects.

In the Personnel Education Business, the external environment and market (student) needs vary among courses, so each course will be adapted accordingly. In the Corporate Training Business, the company will conduct training and seminars in response to requests (implementation methods, timing, etc.) from business partners (enterprises, universities, etc.), and expand e-learning and correspondence training content.
In the Publishing Business, the company will respond quickly to orders placed via the Internet such as the direct sales webstore (the cyber bookstore), Amazon, and other websites, and improve product appeal by differentiating its products from competitors’. As for the Manpower Business, the company will make efforts to minimize the impact on each business by holding job fairs in response to request from business partners (audit corporations, accounting firms, etc.), quickly securing human resources meeting the needs of business partners, etc., and focus on developing a framework for the business environment after the pandemic subsides.

As of the date of announcement of financial results, the Spring Japan Information-Technology Engineers Examination, the 155th Official Business Skill Test in Bookkeeping, the Bar Examination (short-answer-format), the Real Estate Appraisal Examination (short-answer format), the Certified Public Accountant Examination (short-answer format), the Public Officer Examination, FP Skills Test, etc. have been postponed or cancelled.

TAC’s courses are designed and run on the assumption that the examinations will be held. Therefore, if the examinations are cancelled, there is a risk that courses related to the cancelled examinations will not be offered. Also, if the postponement date remains undetermined for a long time, or if there is prolonged uncertainty regarding the next year’s and subsequent exams and the employment status of those who have obtained qualifications, an increasing number of customers may hold off on signing up for courses.

On the other hand, considering that there is a certain level of need for qualified professionals in all circumstances as they are part of the infrastructure supporting Japanese society and that demand for qualifications generally increases during recessionary periods, the company believes that the number of applications for courses will not change much, or may even increase in the long term.

As for costs, since personnel costs related to instructors and employees, rentals mainly for nationwide branches, advertising expenses, etc. are fixed costs, any increase or decrease in sales caused by fluctuations in course applications will have an almost immediate impact on operating profit and other kinds of profits for each stage.
As a result, it is difficult to predict the overall performance of the company at this point of time, but the company believes that earnings are likely to be adversely affected in the short term.

② Radical reforms of the cost structure
The company will continue to review and reform the cost structure drastically.

◎Rent expenses
In response to the trend of 10-30% price hike with low vacancy rates due to the booming economy, floor space was reviewed. Also, it was reduced and relocated for schools including the Kobe, Yokohama, Yaesu and Suidobashi schools in the term ended March 2020 as a measure to reduce costs.
If the effect of the floor reduction were to contribute for one year, the rent reduction would be 228 million yen in the term ended March 2019 and 209 million yen in the term ended March 2020.
As the upward trend in prices will continue in the current term and beyond, the company will review floor space. Moreover, the company expects a decline of approx. 400 million yen by the term ending March 2023 through continuous reduction in floor space.

◎Personnel expenses
In addition to efficiently carrying out IT-based operations, for example, by promoting the use of online reception services and utilizing IT at school reception desks, the company will focus on assigning personnel to sales department to enhance sales.

◎Advertisement cost
As the cost of paper is on the rise and advertising media are shifting to the Internet platform, the company will promote paperless brochures and shift to online advertisement.

Since the effect of reduction in floor space will appear after six months to a year, it is necessary to make quick decisions and execute them based on operating conditions, but the goal is to shift to a profitable cost structure while maintaining the learning environment for students.

4. Conclusions

Although a substantial profit growth is expected in the current fiscal year, the forecast does not reflect the impact of the spread of the novel coronavirus and the company believes that there is a high possibility that the spread of the infection will have a negative impact in the short term. Therefore, investors have no choice but to wait for the disclosure of the first quarter results.

On the other hand, although the fundamental reform of the cost structure is important from a medium-term perspective, it is essential to expand the top line through diversification of revenue sources and other means. While the medical staffing section continues to struggle, we are interested to know about the progress of the company’s efforts to realize the effects of its M&As, which have been conducted, including Zoshinkai.

<Reference: Regarding Corporate Governance>

◎Operating type, and the composition of directors and auditors

◎Corporate Governance Report
Updated on June 28, 2019

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

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

To view back numbers of Bridge Reports on TAC Co., Ltd. (4319) and other companies and to see IR related seminars of Bridge Salon, please go to our website at the following url: www.bridge-salon.jp/