ToB strategy takes shape with Mercer Japan partnership and ENGLISH COMPANY's turnaround to profitability; subscription mix reaching 44% and cross-app integration concept set to become next growth drivers

Summary

3Q standalone revenue of JPY 1,808M (+27.5% YoY) and operating income of JPY 352M (+43.9% YoY), with both top and bottom lines hitting record highs. ENGLISH COMPANY (EC) achieved profitability in its first quarter under the group, with PMI progressing ahead of expectations. The company announced a strategic partnership with Mercer Japan, accelerating expansion into ToB × global talent development. Following the M&A, full-year consolidated guidance was revised upward to revenue of JPY 7,600M (+32.2% YoY) and operating income of JPY 1,450M (+20.5% YoY).

Key Points (Earnings Highlights and Growth Actions)

• Management Strategy and Market View
  • Recognizes the growing need for global talent development as Japanese companies' overseas revenue mix rises, viewing this as a key growth opportunity
  • Positions ToB corporate business as top strategic priority, expanding touchpoints through the Mercer Japan partnership and hosting the Global Talent Symposium
  • Emphasizes the human × technology hybrid as the optimal solution for English learning in the AI era; maintains the stance that SHADOTEN corrections should be performed by humans
• Current Business Progress and Drivers
  • English coaching revenue of JPY 972M (+13.9% YoY); subscription revenue of JPY 836M (+48.0% YoY), with subscriptions accounting for 46% of 3Q standalone revenue and 44% of 3Q cumulative revenue
  • SHADOTEN paid subscribers reached 11,673 (+32.5% YoY), with monthly revenue of ~JPY 220M, annualizing to ~JPY 2.5B
  • EC reversed four consecutive quarters of losses to achieve profitability in its first quarter under the group; PMI progressing faster than planned
• Strategic Initiatives and Inflection Points
  • Co-developed management-focused English coaching for overseas expatriate managers with Mercer Japan; now offered to major enterprises
  • Following the resignation of Vice President Yamasaki, executed a ToSTNeT-3 share buyback of up to 1.25M shares (~10% of shares outstanding) to mitigate overhang concerns
  • Built upsell funnels from PROWAS (free English vocabulary app) to other Progrit services via point exchange functionality

Outlook and Strategy

• Full-year consolidated guidance revised to revenue of JPY 7,600M and operating income of JPY 1,450M; standalone revenue of JPY 7,100M is expected to be achieved
• EC will incur upfront investment in 4Q for unprofitable studio closures, capex, and AI infrastructure buildout, but is expected to finish H2 in the black
• Corporate business has significant headroom for expansion: coverage of enterprises with revenue above JPY 1T stands at only 23%, leaving ample room for new client acquisition and deepening existing relationships
• M&A pipeline continues with ToB × global talent development as the top priority, targeting deals in the JPY several hundred million to several billion range
• Service portfolio strategy builds an upsell loop from PROWAS as the entry point through SHADOTEN, Speafull, Dear Talk, and Progrit
• Annual dividend of JPY 22.00 per share (interim JPY 11.00 paid + year-end JPY 11.00 forecast), maintaining a ~30% payout ratio target

Positive Factors

• Subscription revenue mix reaching 44% deepens the recurring revenue base, a structural shift from the low-teens % at the time of IPO
• SHADOTEN monthly revenue of ~JPY 220M and Speafull monthly revenue of ~JPY 61M demonstrate each app has matured into an independent revenue pillar
• Strong service quality metrics sustained: alumni satisfaction of 4.5/5.0, continuation course enrollment rate of 72%, and friend referral ratio of 19%
• EC's PMI progressing ahead of plan, with further gross margin improvement potential through transfer of Progrit's operational know-how
• Partnership with Mercer Japan provides access to over 90% of the top 100 TSE Prime-listed companies as a distribution channel
• Cash and deposits of JPY 3,717M at 3Q-end provide ample liquidity, preserving capacity for additional M&A

Concerns and Risks

• Gross profit margin declines from 74.0% to 72.6% (full-year forecast) and OPM from 20.0% to 19.1% due to EC consolidation
• SHADOTEN paid subscriber net adds slowed to ~+100 QoQ, impacted by elevated short-term churn following the 2Q growth surge
• EC's 4Q upfront investment means its contribution to consolidated operating income is expected to be breakeven to marginally positive for H2
• Overhang concern from ~2M shares held by departing Vice President Yamasaki (partially absorbed via ToSTNeT-3 buyback)
• Goodwill of JPY 294M (amortized evenly over 11 years) recorded, driving the equity ratio down from 54.2% to 47.7%
• Effective tax rate rises YoY as the wage increase tax incentive is not expected to be applied, pressuring net margin

Performance Highlights

3Q standalone revenue of JPY 1,808M (+27.5% YoY) set a new record high. Operating income of JPY 352M (+43.9% YoY) demonstrated profit accumulation in 3Q, consistent with the strategic shift to front-load investment in H1 and harvest in H2. 3Q cumulative progress rates of 72% for revenue and 74% for operating income indicate solid tracking toward full-year guidance.

• SHADOTEN Paid Subscribers: 11,673 (+32.5% YoY)
• Speafull Paid Subscribers: 15,199 (2.5x YoY)
• Corporate Training Client Companies: 396 (+70 YoY)
• Alumni Satisfaction: 4.5/5.0
• Continuation Course Enrollment Rate: 72%
• Friend Referral Ratio: 19%
• Consultants: 166 (+15 QoQ)
• Annual Dividend Per Share (Forecast): JPY 22.00

Q&A List

• Q: How do you think about pricing power for SHADOTEN and Speafull subscription services?
  A: We believe there is always room for price increases. Our approach across all businesses and services is to raise prices only when we are confident that the service has improved and delivers greater value to customers. This drives higher profitability, enables better employee compensation, and fuels reinvestment — that is our fundamental management philosophy. SHADOTEN is already one of the most expensive English apps in Japan, but there is still some room for further increases. Speafull is currently ~JPY 5,000 per month, and as we continue to enhance the service, there is room to raise pricing. We are not committing to a specific timeline, but the headroom exists.
• Q: What is behind the decline in gross profit margin in the revised guidance, and how should we think about future trajectory?
  A: On a standalone basis, Progrit and ENGLISH COMPANY have different gross margin profiles — ours is higher, so consolidation mechanically lowers the blended rate. Additionally, with subscriptions now accounting for ~40% of revenue, the structural difference in margin profiles between the two revenue streams is also a contributing factor. Going forward, we plan to introduce ENGLISH COMPANY to the business model that has worked well for Progrit, and expect gross margin improvement as part of the PMI process.
• Q: Is there a vision for expanding into larger markets going forward?
  A: The English language market itself has enormous potential — the industry leader generates roughly JPY 50B in revenue, and we believe we can absolutely reach at least JPY 50B. But even that is still JPY 50B, so we need to think bigger. We are not fixated solely on English education; our ambition is to enhance Japanese companies' competitiveness on the global stage. With cross-border M&A activity accelerating, there is a clear gap between the globalization of business and the globalization of organizations and talent. We want to evolve into a company that supports the holistic globalization of organizations — not just English proficiency.
• Q: Is the strategic partnership with Mercer Japan driven by challenges in acquiring corporate clients?
  A: This is not a partnership born out of a negative, problem-driven need. It originated from a positive desire to pursue broader opportunities. We wanted to accelerate our corporate business — not just through internal resources but by leveraging external assets as well — to better support enterprises. We approached Mercer with a proposal and structured the partnership. The goal is to mutually leverage their global network and expertise in HR and organizational consulting, jointly develop new programs, and bring them to market. This should be understood as a partnership driven by growth opportunity, not problem-solving.
• Q: Beyond English skills, what kind of knowledge do Japanese expatriates need when managing local staff overseas?
  A: There are many aspects, but a key example is the communication gap arising from cultural differences. In Japan, a subtle hint like "I'd appreciate it if you could do this" gets the job done, but overseas, the same phrasing may be interpreted as optional. It frequently happens that someone says "yes" but then doesn't follow through. What's needed is practical English communication skills that go beyond language proficiency — understanding cultural differences and communicating in ways that effectively motivate local staff to take action. The training materials we co-developed with Mercer incorporate these nuanced, practical elements.
• Q: What are your thoughts on expanding overseas awareness through platforms like LinkedIn?
  A: We do not currently have any specific partnership discussions with LinkedIn or similar platforms, but it is certainly possible in the future. We are not fixated on improving English proficiency exclusively for Japanese people — we aspire to serve a global audience. For now, given the market dynamics and our competitive strengths, we are focused on the Japanese market. But at the right time, we want to make our best-in-class services available to people overseas as well.
• Q: Can deploying ENGLISH COMPANY talent to Progrit help reduce future hiring costs?
  A: Our basic approach is to operate Progrit and ENGLISH COMPANY as separate entities. Both services enjoy strong demand and a large customer base, so they will continue to deliver their respective services independently. That said, the advantage of having both is optionality — if demand for Progrit were to soften while ENGLISH COMPANY's demand increased, we could redeploy consultants, and vice versa. We hold that flexibility as a strategic lever, but as long as demand remains robust for both, we will operate them independently.
• Q: Is there a plan to shift earnings quality toward a more recurring, stock-type model?
  A: This shift is already well underway. Roughly four years ago around the time of our IPO, subscription revenue accounted for about 20-some percent; it has now risen to the mid-40s %, meaning the quality of revenue has meaningfully shifted toward recurring streams. Going forward, we want to continue growing both Progrit and subscriptions while deepening our commitment to the corporate business and enterprise support. We expect demand for organizational globalization to continue expanding, and we aim to build a stable business through long-term corporate relationships. Our focus is on delivering consistent EPS growth, building investor confidence, and driving share price appreciation through a higher P/E multiple.
• Q: Will there be any changes in shareholding ratios following COO Yamasaki's departure?
  A: Today at 4:15 PM, we disclosed Vice President Yamasaki's resignation and a share buyback via ToSTNeT-3. We plan to purchase up to 1.25M shares — roughly 10% of total shares outstanding — at today's closing price in tomorrow morning's session. Yamasaki and his asset management company collectively hold just under ~2M shares, and the terms of this buyback are structured so that a majority of those shares will be absorbed, significantly mitigating the overhang concern in one decisive move.