Outlook for Progate, Inc. <9560>

2. Future growth strategy. (1) Elementary and junior high school department. Step <9795> has been working on increasing its share in the Yokohama-Kawasaki area, where an increase in the number of students is expected, as its most important priority in order to continue to grow as a teaching institute specialized in Kanagawa prefecture in the medium to long term. The number of successful applicants at public schools in Yokohama City in the spring of 2024 widened the gap with other schools, and for the second consecutive year, the number of successful applicants to Yokohama Suiran High School, which is considered the most difficult school in the prefecture, accounted for over 40% of the total successful applicants, further strengthening the brand power in the Yokohama area. The company aims to continue to achieve overwhelming numbers of successful applicants at Yokohama Suiran in the future. In the case of the company, the selection of desired schools is left up to the students' initiative, so it is unlikely that the number of successful applicants to Yokohama Suiran High School will suddenly increase. However, the company expects that the number of successful applicants will continue to increase in the future, as they plan to increase the number of students in the Yokohama-Kawasaki area. Regarding Tama High School, which is considered the most difficult in Kawasaki City, the number of successful applicants in the spring of 2024 was 59, which is 17 less than the previous year, and the difference with the top institute (124) has widened. It is believed that this is due to a decrease in the number of expectations from STEP students, as well as the influence of the top institute increasing its number of schools and strengthening them in the vicinity of Tama School. However, the company has increased the number of schools and students along the JR Nanbu Line and Odakyu Line in recent years, so it is expected to take the top position within the next two years. (2) High school department. Among the students attending public junior high schools in Kanagawa prefecture, the proportion of STEP students was 11.0% as of October 2023. Of this, 14.5% were in areas other than Yokohama and Kawasaki, 9.2% were in Yokohama City, and 5.0% were in Kawasaki City. On the other hand, according to population forecasts up to 2030, the northern part of Yokohama City and Kawasaki City are expected to continue to increase, while the western part of the prefecture and Yokosuka City are expected to continue to decline, making it reasonable to expand the number of schools and increase the share in the Yokohama-Kawasaki area. As an immediate goal, the company aims to increase the share of junior high school department students in the Yokohama-Kawasaki area to about 15%, and plans to open new schools at a pace of approximately 3 to 4 schools per year in these areas. It is believed that it will be possible to achieve a 15% share in the Kawasaki area with around 15 schools and in the Yokohama area with around 25 schools, and the expansion of share in the Yokohama-Kawasaki area could increase the number of students to 1.34 times the current level, assuming that the number of STEP students at other public junior high schools remains stable. If this is achieved over a 10-year period, the increase in the number of students would be an annual rate of 3%. Looking at the share of students in major urban areas, there are regions that have higher shares than 15%, such as Fujisawa City, where the company is headquartered, at 26.0%, Kamakura City at 22.7%, and Ebina City at 19.9%, so there is sufficient potential for the Yokohama-Kawasaki area to achieve a share of over 15% in the long term. In fact, the share has already been extended to the 16% range in Aoba and Totsuka districts of Yokohama City. The pace of school development depends on the development of teachers and the availability of appropriate real estate. As for the search for real estate, the market environment for finding property has become easier compared to before, as competitor institutes withdraw from the market or financial institutions consolidate their sales bases. In fact, the Hi-STEP Shin-Yurigaoka School was opened in a property that had been withdrawn by a competitor institute.

In connection with the financial earnings reports for the August 2024 period, the company has once again revealed its future growth strategy. They have highlighted three key strategic priorities in the areas of English coaching services, subscription services, and M&A. By implementing these strategies, they aim to achieve approximately 30% growth in sales and profits each quarter, with the goal of transitioning to the Tokyo Main Board market.

(1) English Coaching Services

a) Increased Awareness through Branding Reinforcement

In commemoration of the company's 8th anniversary in September 2024, they released a new commercial featuring a new visual and message, and simultaneously launched train and video advertisements mainly in the metropolitan area. According to the company, train advertisements have been highly effective in increasing awareness, with search volumes for 'Progate' and 'Shadten' increasing by approximately 20-30% compared to a year ago, demonstrating immediate results. To strengthen long-term branding, they plan to continue appealing to potential customers through awareness advertising until 'Progate' becomes synonymous with English learning, thus establishing a virtuous cycle of increased search volume, higher conversion rates, and expanded sales.

b) Strengthening Business for Corporations

They will continue to enhance business for large-scale corporate clients who have substantial and sustained demand. The market for corporate English training shows persistent demand, particularly among global companies, where it is a practical necessity, and many companies also encourage obtaining related qualifications. To capture such demand, the company is promoting the development of new clients and expanding transactions with existing ones. With 285 corporate clients as of the end of August 2024, significantly fewer than major English language schools, they see a vast potential for customer acquisition. Leveraging their effective learning techniques that provide a high return on investment in English proficiency as their weapon, they aim to differentiate themselves from competitors. They believe that cases where continued and expanded transactions are achieved through effective learning even with a small number of participants do exist, and thus they plan to trigger continued growth in transactions by starting with small groups, including human resources personnel, and linking them to future expansions.

c) Improvement of service quality through data utilization.

Visualizing and analyzing learners' data to further enhance service quality. Information regarding learners' study time, content usage, and English proficiency growth can be understood not only through discussions with dedicated consultants but also by obtaining data such as usage status of learning apps. By collecting and utilizing quantitative and qualitative data like satisfaction with the curriculum and improvement requests from discussions with learners, feedback can be provided to consultants, while also contributing to the improvement of service quality.

(2) Subscription Services

Focusing on enriching content that contributes to the continued English learning of subscribers, emphasizing the improvement of various products to promote long-term use. Adding content that helps maintain motivation for learning continuation, such as pursuing app usability and improving learning stress, from the user's perspective.

For the main service, 'Shadten,' balancing demand generation and increased supply capacity to expand sales. With the increase in users, the need to secure competent shadowing advisors for maintaining and improving service quality is essential. By rigorously evaluating and assessing the suitability of candidates for hiring, with a selection ratio of 20:1, maintaining correction quality through enriched training programs post-hiring. Building an unreplicable correction system by realizing high operational capabilities on the field, enhancing the system's infrastructure, and focusing on increasing sales.

For 'Spiful,' focusing on product improvements shortly after launch. Aiming to establish its position as a learning app that efficiently conducts speaking training through enhanced functionalities. Implementing features like AI-based automatic scoring of speaking content, smart learning functions recommending review content based on speaking results, and habit-forming functions recording and visualizing learning achievements for reflection.

For 'Deartalk,' establishing its position as an app for casual English conversation learning, capturing the demand for English conversation. Providing high efficiency and refined learning experience compared to existing online English conversation services. Implementing features to respond to user needs such as conversation learning skipping unnecessary conversations with instructors, reflection feature based on user speaking records, no reservation required for conversing on desired topics, difficulty adjustments, accent selection, and Japanese help functions to enhance customer convenience and encourage continued use.

(3) Mergers and Acquisitions

The company aims to utilize M&A for further growth and expand its business areas. In addition to the current main battlefield of adult English learning, they are considering M&A for areas other than English learning areas such as adjacent infant and child English learning areas, and global talent development. The company is confident in winning competition in the adult market through organic growth and has the time flexibility for initiatives to expand their customer base, therefore, it is likely that they will carefully consider and proceed with the evaluation of M&A targets that contribute to future business expansion. The scale of M&A is expected to be in the range of hundreds of millions to tens of billions of yen, and the selection criteria include businesses that contribute to expanding business areas, establish complementary relationships with the company's existing services, and are expected to have synergies, in addition to seeking acquisitions at a fair price.

(Writer: FISCO analyst Tomoichi Murase)