■ The future outlook for Stem Inc <9795>

1. Performance outlook for the period ending September 2025.

For the period ending September 2025, the performance is forecasted to show an increase in revenue of 4.1% year-on-year to 15,714 million yen, an increase in operating profit of 4.6% to 3,674 million yen, an increase in ordinary profit of 4.1% to 3,709 million yen, and an increase in Net income of 1.3% to 2,541 million yen, continuing the trend of increasing revenue and profit. As of the end of October 2024, the number of students is expected to show an increase of 4.3% compared to the same month last year, thus maintaining a strong start on the previous trend, with an estimated overall increase of around 4% expected. It should be noted that amidst rising prices leading to a review of tuition fees by many tutoring schools, the company plans to limit tuition fee adjustments to minor adjustments for the new academic year.

(1) Junior High School Division

In terms of new school openings, a single school named 'Hi-STEP Hiratsuka School' (Hiratsuka City) will be opened in the elementary and middle school division, and 'STEP Kids Shonandai Classroom' (Fujisawa City) will open in spring 2025. Traditionally, schools have been opened at a pace of 3-4 schools per year, but for the period ending September 2025, the focus will be placed on consolidating the academic operations, hence restricting new school openings. While efforts have been made to recruit and train teachers alongside the expansion of school facilities, there is a judgment that it is necessary to strengthen the backup system for teachers in response to the work style reforms and anticipated improvements in parental leave uptake. As part of this effort, the recruitment of university students as part-time teachers specializing in supplementary lessons (former STEP students) has begun experimentally at large schools, with plans to gradually increase recruitment numbers. Additionally, an ancillary effect of reducing new school openings will be a decrease in teacher transfers, allowing teachers to spend more time with the same students, thus enabling more effective learning guidance.

In place of new school openings, efforts will also be made to increase the occupancy rate (the ratio of the number of students to the recruitment capacity) at each school, and plans to increase classes at existing schools that are already at full capacity will be pursued to increase the number of students. The total number of classes in the elementary and middle school division was 1,875 as of November 5, 2024, which is a 1.7% increase compared to the same month last year, with an occupancy rate that has risen by 2.0 points to 81.7%, indicating that there is ample room for student expansion even in existing schools. The number of students in the elementary and middle school division has started off with a higher growth rate of 3.9% compared to the same month last year as of the end of October 2024. The primary factor is the significant increase of 8.5% for elementary school students, and steady growth is expected going forward.

(2) High School Division

In the high school division, the Yokohama school, which is full across all grades, will expand in December 2024 (allowing for an increase of about 100 students). Among the existing eight-story building where the current school is located, only floors 4 to 6 were used until now, but since the second floor has become vacant, it has been newly leased. However, due to high demand for admission, further expansion is expected to be necessary at an early stage. Additionally, the Center Minami School is reaching full capacity in all subjects for the first and second years, which will likely require expansion. The number of students in the high school division has also started with a higher growth rate of 6.3% compared to the same month last year as of the end of October 2024. Particularly, there is a higher growth rate among students preparing for entrance exams, and a single-digit growth rate is anticipated for the period ending September 2025.

(3) After-school childcare

Regarding the after-school childcare department that started in 2016, although the impact on performance is still minor, it has been steadily growing and starting to contribute to profits. For the fiscal year ending September 2024, revenue is expected to exceed 0.2 billion yen, a 20% increase compared to the previous term, and the operating margin has first exceeded 10%, achieving three consecutive terms of operating profit. With a focus on realizing a safe, secure, and meaningful after-school life, and a place for intellectual growth, various educational programs aimed at fostering intellectual curiosity are being offered, which has been well-received by students and parents leading to word-of-mouth effects. As of the end of October 2024, the number of students has increased by 19.0% year-on-year to 502, growing at a double-digit pace. The composition ratio by grade shows that 1st graders account for 34.9%, 2nd graders 27.3%, 3rd graders 22.3%, and 4th graders 15.5%, indicating that the lower grades are steadily increasing in student numbers.

As "Exploration Programs" for enjoyable learning, there are nine types including science, programming, broad liberal arts, language, English, Eiken courses, English conversation, mathematics, and mathematics (thinking). Additionally, there are six types of "Enjoy Programs" (sports and hobbies) including sign language, shogi, hyakuninisshu, music, dance, and physical education.

"Shonan Classroom" and "Tsujido Classroom" have already contributed to profits, and "Chigasaki Classroom" also achieved operating profit in the fiscal year ending September 2024. The "Hakuraku Classroom," which was newly opened in Yokohama City in the spring of 2023, mainly consists of 1st and 2nd graders, with about 40 students, showing a gradual growth compared to the second year of existing classrooms. This is attributed to the availability of free after-school services at each school in Yokohama City. However, there is a certain demand from parents who wish for their children to participate in diverse programs that cultivate intellectual curiosity, which is a characteristic of STEP Kids, thus aiming for profitability by the fiscal year ending September 2026, which will be the fourth year of operation.

"STEP Kids Shonandai," which will open in the spring of 2025, is located in Fujisawa City, which serves as its base, resulting in many participants in the pre-briefing session, and a smooth start is anticipated from the first year. Furthermore, regarding the expansion after 2026, if necessary human resources for operating the classrooms can be secured in nearby areas where "STEP" exists, classes will be subsequently opened.

(4) Cost outlook and recruitment status

For the fiscal year ending September 2025, costs are projected to increase by 120 million yen due to depreciation expense and operational costs associated with the core system update, as well as increases in personnel costs, educational materials costs, and utility expenses. On the other hand, it seems that recruitment and advertising expenses are planned to remain at a similar level to the previous term. However, since there are only two new openings, there is a possibility that advertising expenses may decrease according to our company’s view.

The update of the core system is scheduled for around spring 2025. Once this system is operational, real-time information sharing between the head office and each school is expected to improve operational efficiency. The new system will enable real-time data linkage and information sharing between the head office and each school, thus streamlining administrative tasks.

Regarding the recruitment plan, it is expected that new graduate hiring will decrease by about 10 people to just under 30 people starting in spring 2024, but approximately 20 mid-career hirings will take place, planning a total recruitment of about 50 people, similar to the previous period. As measures to strengthen recruitment capabilities, in addition to referral hiring, efforts are being made to improve recognition by participating in recruitment events and utilizing the official YouTube channel. Furthermore, regarding the turnover rate, it has decreased due to the effects of treatment improvements implemented in the last three years.

(Written by FISCO guest analyst, Jo Sato)