Bridge Report:（4319）TAC second quarter of Fiscal Year ending March 2022

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

Company Information

Stock Information

*The share price is the closing price on Nov 12th. Number of shares issued, DPS and EPS are from the financial results for the second quarter of fiscal year ending March 2022. ROE and BPS are from the previous fiscal year.

Earnings Trends

*Unit: Million yen. Forecasts are based on company estimates. 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 financial results for the second quarter of Fiscal Year ending March 2022 and other information about TAC.

Index

Key Points
1. Company Overview
2. Second Quarter of the Fiscal Year ending March 2022 Earnings Results
3. Fiscal Year ending March 2022 Earnings Estimates
4. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• In the second quarter of the term ending March 2022, sales and profit increased year on year. Sales on a cash basis recovered from the drop in the same period of the previous year caused by the spread of the novel coronavirus, and stood at 10,997 million yen, up 11.1% year on year. Sales on an accrual basis increased 10.0% year on year to 11,156 million yen. The year-on-year increase rates of cost of sales and SG&A were only 9.7% and 2.4%, respectively, so operating profit on an accrual basis grew 22.4% year on year to 1,111 million yen. Net profit rose 5.7% year on year to 775 million yen.

   

• There is no change in the full-year earnings forecast. While both sales and operating profit are expected to grow in the term ending March 2022, the company projects that ordinary profit and net profit will shrink because there will be no temporary factor associated with non-operating profit or loss. Sales on a cash basis, sales on an accrual basis, and operating profit are forecasted to rise 4.2% year on year to 20,650 million yen, 3.8% year on year to 20,500 million yen, and 48.3% year on year to 600 million yen, respectively. The company plans to increase sales by generating sales through new channels and breaking fresh ground into a new business field, and boost profit significantly through policies, such as appropriate control of rent. It, however, forecasts that ordinary profit and net profit will drop because it is expected to record no income from subsidies as in the previous fiscal year. A dividend is to be 6.00 yen/share, up 1.00 yen/share year on year. The dividend payout ratio will be 29.2%.

   

• Regarding the impact of the spread of the novel coronavirus, vaccination rate reached the order of 70%. Some examinations were postponed or cancelled due to the novel coronavirus in the previous years, but they were resumed this fiscal year, so it can be expected that they will improve business performance.

   

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 September 2021.

【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. 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 (Government officials in the Main 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 billing 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】

Return on Equity (ROE) improved for the first time in four fiscal years thanks to the significant profitability increase. The company forecasts that net profit margin will fall to 1.9% because there will be no transient factor, reducing ROE to 6.4% this fiscal year.

2. Second Quarter of the Fiscal Year ending March 2022 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 “advances received.” These advances received 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 post-adjustment sales or sales on an accrual basis). While sales booked on the income statement are “sales on an accrual basis (tuition advance post-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. This fiscal year, the company started applying the Accounting Standard for Revenue Recognition, so the estimated amount of product returns in the publishing business was taken into account, increasing sales by 200 million yen.

Regarding Seasonal Characteristics
The company’s quarterly trends are as follows. Sales on a cash basis (tuition advance pre-adjustment sales) refers to sales after aggregating tuitions, and sales on an accrual basis (tuition advance post-adjustment sales) refers to sales after allocating tuitions to the period in which the company provides education services.

Examinations for the company’s main certification courses, such as Certified Public Accountants and Certified Public Tax Accountant, are held from spring to fall (Q1 to Q3), and applications for courses for mainly university students, such as public officer courses, are concentrated in the spring and summer (Q1 to Q2). Therefore, applications (sales on a cash basis) in the fourth quarter tend to be less than in other quarters.
On the other hand, operating expenses, such as rent, instructor fees, and advertising expenses, are booked in a fixed amount each month, so there is no quarterly bias.

(1) Consolidated Earnings

*Units: Million yen. Quarterly net profit is quarterly net profit attributable to owners of parent (the same applies for net profit hereinafter).

Sales and profit grew.
Sales on a cash basis recovered from the drop in the same period of the previous year caused by the spread of the novel coronavirus, and stood at 10,997 million yen, up 11.1% year on year. Every segment saw a sales growth. Sales on an accrual basis increased 10.0% year on year to 11,156 million yen. The year-on-year increase rates of cost of sales and SG&A were only 9.7% and 2.4%, respectively, so operating profit on an accrual basis grew 22.4% year on year to 1,111 million yen. Net profit rose 5.7% year on year to 775 million yen. This fiscal year, the company started applying the Accounting Standard for Revenue Recognition, so the estimated amount of returns in the publishing business was taken into account, increasing sales by 200 million yen and cost of sales by 84 million yen. On the other hand, a reserve for sales returns was posted for gross profit, so this does not affect net gross profit and other profits.

(2) Business Segment Trends

Sales on a cash basis by Business Segment

*Units:Million yen

Operating profit on a cash basis by Business Segment

*Units: Million yen

【Personal Education】
Sales grew, and profit increased six times.

Regarding the course for Certified Public Accountant, which is one of their major courses, a short-answer exam was held in May as usual (in the previous year, it was held in August), causing a difference in the timing for applying for products targeted at those who have the experience of taking that exam for the next fiscal year, and sales on a cash basis increased in the first quarter, but declined year on year in the second quarter, so cumulative sales in the second quarter dropped slightly year on year. Regarding the Bookkeeping course, examinations have been held as scheduled this year (in the previous year, the exams in June were cancelled), so the number of applications for the course of TAC remained healthy in the second quarter. Regarding the Public Officer courses, when the second quarter of the previous year, which was in the wake of lifting of the state of emergency, is compared with the second quarter of this year, it can be understood that the activities of college students, who are major attendees of TAC’s courses, were sluggish, and college students took a wait-and-see stance because they faced difficulty leading a campus life while taking TAC’s course and wondered whether to work in the private sector or the public sector. In that situation, cumulative sales on a cash basis in the second quarter dropped from the previous year.
Regarding costs, total operating expenses, including remunerations for lecturers, outsourcing expenses for producing teaching materials, and rents, were 5,875 million yen, down 1.1% year on year.

【Corporate Training】
Sales grew, and profit rose considerably.

The demand for training in enterprises was healthy as a whole, mainly in the IT and International and Financial Services & Real Estate fields. Regarding in-college seminars, colleges were temporarily closed last year, but this year, in addition to online classes, face-to-face classes were resumed little by little while taking anti-infection measures. Accordingly, the sales in the six months from April to September increased 17.4% year on year. The sales of affiliated schools, whose major customers are local individuals, decreased 3.7% year on year. The sales of provision of contents to local vocational schools increased 26.4% year on year. The sales from training programs entrusted by local municipalities grew 11.8% year on year.
Regarding costs, operating expenses, including remunerations for lecturers and marketing personnel costs, were 1,693 million yen, up 12.5% year on year.

【Publishing】
Sales and profit increased

In addition to the demand from housebound consumers amid the novel coronavirus pandemic, many bookstores were in business in the first quarter this year unlike in the first quarter of the previous year and books were published as scheduled this year while publications were put off last year in response to the postponement of exams. Accordingly, sales grew considerably.

In terms of costs, production costs, including outsourcing and consignment expenses, augmented due to the sales growth, and the company conducted some sales promotion activities, so total operating expenses were 1,652 million yen, up 61.7% year on year.
The application of the Accounting Standard for Revenue Recognition, etc. increased sales by 200 million yen, but did not affect operating
profit.

【Manpower Business】
Sales grew, and profit rose considerably.
Amid the lingering novel coronavirus infection, the demand for accounting personnel is strong, job seekers are increasing, and an increasing number of job seekers get a job in a short period of time. These trends indicate a change in the job switching market. The medical manpower business of Medical Office Staffing Kansai Co., Ltd. performed well in the second quarter, as sales increased steadily thanks to the increase of clients through the enhancement of its marketing capability. Consequently, sales and profit grew.

(3) Trend by Certification Category

At the beginning of the first quarter of the term ending March 2022, the company started applying the Accounting Standard for Revenue Recognition, etc., so the net amount of possible product returns in the publishing business (the inclusion of product returns posted at the end of the previous fiscal year in sales and the deduction of product returns as of the end of the second quarter of this fiscal year from sales) was taken into account when calculating sales. For reasonably estimating the amount of product returns, the company adopted an overall estimation method based on actual product returns in the past, without prorating it among business domains. Accordingly, the sum of quarterly sales in respective domains in the second quarter (the figure written in the “consolidated sales” cell of the table below) is not equal to the sales in the quarterly consolidated profit-and-loss statement.

Sales on an accrual basis by Certification Category

*Unit: Million yen

【Market Overview】
In fiscal 2020, some exams were cancelled due to the spread of the novel coronavirus, so applicants decreased considerably. In fiscal 2021, most of the certification exams, etc. are to be held as scheduled.

【Overview of each domain】
(Finance and Accounting Area)
Regarding Bookkeeping Exams, the Official Business Skills Test in Bookkeeping in June 2020 was cancelled, but unified tests (in the paper format) were held in February and June 2021. The number of applicants in February and June was 73,745 for the second class and 128,818 for the third class. The number of takers of online exams during the period from December 2020 to June 2021 was 49,411 for the second class and 96,062 for the third class.
Regarding Certified Public Accountants, the number of applicants in 2021 was 14,192, up 961 from the previous year, showing the growth for the sixth consecutive year.
Regarding Certified Public Tax Accountants, the number of applicants in 2021 was 35,774, up 639 from the previous year.

(Public Officer and Labor Area)
Due to the novel coronavirus pandemic, the Public Officer examinations in fiscal 2020 were postponed, but most of the exams in fiscal 2021 were conducted as scheduled.
There is a trend of choosing a job in the private sector, so would-be civil servants are decreasing.

(Law Area)
The number of applicants for the preliminary bar exam in 2021 was 14,317, down 1,001 or 6.5% from the previous year.
The number of applicants for the exam for Judicial Scriveners in 2021 was 14,988, up 557 or 3.9% from the previous year. The number of applicants for the exam for Patent Attorneys in 2021 was 3,859, up 458 or 13.5% from the previous year.

(4) Student Number Trends

*Units: Person

Number of students by Certification Category

*Units: Person

(5) Financial Conditions and Cash Flow

◎Main Balance Sheet Items

*Units: Million yen

Current assets increased 1,623 million yen from the end of the previous fiscal year, due to the growth of cash, equivalents, etc. Fixed assets rose 187 million yen from the end of the previous fiscal year, due to the increase of tangible fixed assets, etc.
Total assets grew 1,811 million yen from the end of the previous fiscal year to 22,228 million yen.
Total liabilities augmented 1,068 million yen from the end of the previous fiscal year to 15,670 million yen, due to the rise in interest bearing liabilities, etc.
Net assets grew 742 million yen from the end of the previous fiscal year to 6,558 million yen, due to the rise in retained earnings, etc.
As a result, capital-to-asset ratio rose 1.1% from the end of the previous fiscal year to 29.5%.

3. Fiscal Year ending March 2022 Earnings Estimates

(1) Consolidated Earnings

*Units:Million yen. Estimates are those of the company.

No change in earnings forecast.
There is no revision to the full-year earnings forecasts. While both sales and operating profit are expected to grow in the term ending March 2022, the company projects that ordinary profit and net profit will shrink because there will be no temporary factor associated with non-operating profit or loss. Sales on a cash basis, sales on an accrual basis, and operating profit are forecasted to rise 4.2% year on year to 20,650 million yen, 3.8% year on year to 20,500 million yen, and 48.3% year on year to 600 million yen, respectively. The company plans to increase sales by generating sales through new channels and breaking fresh ground into a new business field, and boost profit significantly through policies, such as appropriate control of rent. It, however, forecasts that ordinary profit and net profit will drop because it is expected to record no income from subsidies as in the previous fiscal year. A dividend is to be 6.00 yen/share, up 1.00 yen/share year on year. The dividend payout ratio will be 29.2%.

4. Conclusions

Regarding the impact of the spread of the new coronavirus infection, the vaccination rate has reached the 70% level. Various trials that were postponed or cancelled last year due to the impact of corona have returned this fiscal year, which is expected to be an upside factor.

<Reference: Regarding Corporate Governance>

◎Operating type, and the composition of directors and auditors

◎Corporate Governance Report
Updated on June 28, 2021
<Basic Policy>
The company's basic policy regarding corporate governance is to put importance on prompt decision-making. The company currently has ten internal directors. On the other hand, the company also assigned five outside directors to properly maintain the corporate governance and the legal compliance system required as a public company, and it operates them to function efficiently.

Japan is rapidly shifting from a mature industrial society to a knowledge society. In the knowledge society, knowledgeable specialists (professionals) are required in various fields, and the areas of their participation are expanding. "Professional" is derived from the word “profess” = "declare in front of God." Thus, in medieval Europe, knowledgeable specialists such as priests, doctors, accountants, and teachers were professionals who made a vow to God when employed. Since the company started the business of training Certified Public Accountants, it has been in charge of training many professionals required in modern times on behalf of universities.

The group has received support from a wide range of customers (university students, working people, and corporations) through its bases and media, with the management philosophy of "cultivating the professionals that society needs" and "being deeply involved in personal growth." The company aims to be a strong player in the education services and human resource training and supply markets. It believes that the most basic proposition required of a joint-stock company, "increasing shareholder value," can be achieved only by having a support base by its customers, who are stakeholders.

That kind of professionals' self-discipline is part of the organizational culture in the group's corporate governance. The directors of the company themselves also aspire to regulate themselves as "management professionals." The Companies Act stipulates that the term of each director shall be one year (two years for directors belonging to the audit and supervisory committee), and shareholders judge whether respective directors have served as “professionals in business administration” in each term at a general meeting of shareholders. Our company adopted the organizational structure as a company with an audit and supervisory committee, and strives to enhance the functions to oversee and audit business management and comply with laws and regulations thoroughly, with the aim of achieving highly transparent business management.

<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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