IIJ Announces First Six Months Financial Results for the Fiscal Year Ending March 31, 2018

TOKYO, Nov. 07, 2017 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its first six months consolidated financial results for the fiscal year ending March 31, 2018 (“1H17” from April 1, 2017 to September 30, 2017).¹

Overview of 1H17 Financial Results and Business Outlook

“Overall Japanese enterprises’ IT appetite has been favorable. Our recurring revenue, 84.9% of total 1H17 revenues, increased by 13.6% year over year as we continued to accumulate Internet connectivity, security, WAN, and Cloud. Operating income growth was achieved as planned with the increase in gross margin amounts along with revenue accumulation absorbing the increase in operating cost,” said Eijiro Katsu, COO and President of IIJ.

“As for enterprise network services, IIJ Omnibus services, cloud-like network services incorporating SDN/NFV² technologies, were accumulated as we’ve seen demands to replace traditional enterprise WAN and to connect multiple Cloud services. Needs for Security services continue to be strong. With the enforcement of the Basic Law for Cyber Security and the implementation of the Social Security and Tax Number System, so-called “my number,” regulatory agencies such as the FSA³ and the METI⁴ have announced guidelines to be taken by Japanese enterprises against cyber threats. As an ISP with over twenty years of reliable network operation, we’re well positioned to collect Big Data of Internet traffic information and apply them in our Security services to further enhance them continuously.”

“Regarding Mobile, we continue to be profitable and carry business developments strategically. Our 1H17 enterprise Mobile revenue, excluding MVNE transactions, increased by 15.4% YoY. By leveraging our blue-chip customer base and soon-to-be-realized full-MVNO functions, we aim to maximize our mobile infrastructure utilization, which is currently largely dependent on consumer traffic pattern (traffic concentrated the most during commuting time and lunch time and vast vacant hours during the day).”

“The ways Japanese enterprises use IT have been evolving continuously as seen in the concepts like Cloud, Big Data, IoT to name a few. New concepts shall continue to emerge and we strive to to be the core platform provider to realize them. Strong demands for Security services, expanding market for Mobile, and attractive concept of IoT are all tailwild for our business growth as we already have elements to meet these demands,” said Koichi Suzuki, Founder, CEO, and Chairman of IIJ.

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1} Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with U.S. GAAP, unaudited and consolidated.
² SDN (Software Defined Networking) refers to technology in which the entire network is centrally controlled by software in order to dynamically configure the network while NFV (Network Functions Virtualization) refers to technology that virtualizes functions previously implemented using dedicated devices and, instead, implements them as software on standard high-volume servers.
³ FSA stands for the Financial Services Agency of Japan.
⁴ METI stands for the Ministry of Economy, Trade and Industry of Japan.

1H17 Financial Results Summary

We have omitted segment analysis because most of our revenues are dominated by network services and systems integration (SI) business.

1H17 Revenues and Income

Revenues

Total revenues were JPY82,988 million, up 12.0% YoY (JPY74,123 million for 1H16).

Network services revenue was JPY52,285 million, up 16.6% YoY (JPY44,836 million for 1H16).

Revenues for Internet connectivity services for enterprise were JPY13,266 million, up 25.4% YoY from JPY10,577 million for 1H16, mainly due to an increase in Mobile-related services revenues along with an expansion of MVNE business clients’ transactions.

Revenues for Internet connectivity services for consumers were JPY12,352 million, up 19.6% YoY from JPY10,328 million for 1H16, mainly due to the revenue growth of “IIJmio Mobile Services,” consumer mobile services which offer inexpensive data communication and voice services with SIM cards.

Revenues for WAN services were JPY14,083 million, up 6.0% YoY compared to JPY13,289 million for 1H16.

Revenues for Outsourcing services were JPY12,584 million, up 18.3% YoY from JPY10,642 million for 1H16, mainly due to an increase in security-related services revenues.

*1. IP service revenues include revenues from the data center connectivity service.

*1. Numbers in the table above show number of contracts except for “IIJ Mobile service (Enterprise),” “IIJ” and “hi-ho” which show number of subscriptions.
*2. Regarding IP service, data center connectivity service and IIJ FiberAccess/F and IIJ DSL/F of Internet connectivity services (Enterprise), total contracted bandwidths are calculated by multiplying number of contracts by contracted bandwidths respectively.

SI revenues were JPY26,999 million, up 4.8% YoY (JPY25,768 million for 1H16).

Systems construction revenue, a one-time revenue, was JPY8,808 million, up 2.6% YoY (JPY8,583 million for 1H16). Systems operation and maintenance revenue, a recurring revenue, was JPY18,191 million, up 5.9% YoY (JPY17,185 million for 1H16), mainly due to continued accumulation of the orders and an increase in private cloud services’ revenues.

Orders received for SI and equipment sales totaled JPY32,246 million, down 6.6% YoY (JPY34,516 million for 1H16); orders received for systems construction and equipment sales were JPY13,543 million, up 1.7% YoY (JPY13,321 million for 1H16) and orders received for systems operation and maintenance were JPY18,703 million, down 11.8% YoY (JPY21,194 million for 1H16).

Order backlog for SI and equipment sales as of September 30, 2017 amounted to JPY45,088 million, up 10.2% YoY (JPY40,926 million as of September 30, 2016); order backlog for systems construction and equipment sales was JPY10,254 million, up 9.7% YoY (JPY9,349 million as of September 30, 2016) and order backlog for systems operation and maintenance was JPY34,834 million, up 10.3% YoY (JPY31,577 million as of September 30, 2016).

Equipment sales revenues were JPY1,660 million, up 13.2% YoY (JPY1,467 million for 1H16) mainly due to an increase in selling mobile devices.

ATM operation business revenues were JPY2,044 million, down 0.4% YoY (JPY2,052 million for 1H16). As of September 30, 2017, 1,093 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY69,962 million, up 12.3% YoY (JPY62,275 million for 1H16).

Cost of network services revenue was JPY43,036 million, up 17.2% YoY (JPY36,715 million for 1H16). There were an increase in outsourcing-related costs with our mobile infrastructure enhancement along with our mobile-related revenue increase and an increase in network operation-related costs. Gross margin was JPY9,249 million, up 13.9% YoY (JPY8,120 million for 1H16) and gross margin ratio was 17.7% compared to 18.1% in 1H16.

Cost of SI revenues was JPY24,221 million, up 5.3% YoY (JPY22,993 million for 1H16). The increase was mainly due to increases in outsourcing-related and personnel-related costs. Gross margin was JPY2,778 million, up 0.1% YoY (JPY2,775 million for 1H16) and gross margin ratio was 10.3% compared to 10.8% in 1H16.

Cost of equipment sales revenues was JPY1,505 million, up 12.1% YoY (JPY1,343 million for 1H16). Gross margin was JPY155 million (JPY124 million for 1H16) and gross margin ratio was 9.3% compared to 8.4% in 1H16.

Cost of ATM operation business revenues was JPY1,200 million, down 1.9% YoY (JPY1,224 million for 1H16). Gross margin was JPY844 million (JPY829 million for 1H16) and gross margin ratio was 41.3% compared to 40.4% in 1H16.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY10,710 million, up 8.2% YoY (JPY9,900 million for 1H16).

Sales and marketing expenses were JPY6,327 million, up 12.3% YoY (JPY5,636 million for 1H16) mainly due to increases in sales commission expenses, advertising expenses, and personnel-related expenses.

General and administrative expenses were JPY4,132 million, up 2.8% YoY (JPY4,020 million for 1H16) mainly due to increases in personnel-related expenses.

Research and development expenses were JPY251 million, up 2.7% YoY (JPY244 million for 1H16).

Operating income

Operating income was JPY2,316 million, up 18.9% YoY (JPY1,948 million for 1H16).

Other income (expenses)

Other income (expenses) was an income of JPY153 million (an income of JPY157 million for 1H16), mainly because of dividend income of JPY197 million (JPY91 million for 1H16), distribution from fund investment of JPY122 million (included in other-net of JPY106 million, JPY120 million for 1H16), and interest expense of JPY184 million (JPY142 million for 1H16).

Income before income tax expenses

Income before income tax expenses was JPY2,469 million, up 17.3% YoY (JPY2,105 million for 1H16).

Net income

Income tax expense was JPY970 million (JPY954 million for 1H16).

Equity in net income of equity method investees was JPY78 million (JPY42 million for 1H16) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY1,577 million, up 32.1% YoY (JPY1,193 million for 1H16).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY89 million (JPY85 million for 1H16) mainly related to net income of Trust Networks Inc.

Net income attributable to IIJ was JPY1,488 million, up 34.3% YoY (JPY1,108 million for 1H16).

1H17 Balance Sheets

Balance sheets

As of September 30, 2017, the balance of total assets was JPY140,488 million, increased by JPY4,059 million from the balance as of March 31, 2017 of JPY137,395 million. 

As of September 30, 2017, the balance of current assets was JPY62,219 million, decreased by JPY1,503 million from the balance as of March 31, 2017 of JPY63,722 million. The major breakdown of current assets was a decrease in cash and cash equivalents by JPY2,088 million to JPY19,871 million, a decrease in accounts receivable by JPY1,151 million to JPY26,233 million and an increase in inventories by JPY1,364 million to JPY4,162 million. As of September 30, 2017, the balance of noncurrent assets was JPY78,269 million, increased by JPY4,596 million from the balance as of March 31, 2017 of JPY73,673 million. The major breakdown of noncurrent assets was an increase in property and equipment by JPY2,418 million to JPY42,193 million and an increase in other investments by JPY1,764 million to JPY9,689 million mainly due to an increase in the fair value of available-for-sale securities. Other investments as of September 30, 2017, consisted of JPY7,498 million in available-for-sale securities, JPY1,124 million in nonmarketable equity securities and JPY1,067 million in investments in funds, including some through a trust. As of September 30, 2017, the balance of non-amortized intangible assets was JPY6,220 million and the major breakdown of non-amortized intangible assets was JPY6,170 million in goodwill. The balance of amortized intangible assets, which was customer relationships, was JPY2,853 million, decreased by JPY183 million from the balance as of March 31, 2017 of JPY3,036 million. 

As of September 30, 2017, the balance of current liabilities was JPY40,831 million, increased by JPY848 million from the balance as of March 31, 2017 of JPY39,983 million. The major breakdown of current liabilities was an increase in capital lease obligations-current portion by JPY584 million to JPY5,403 million and a decrease in accounts payable (trade and other) by JPY170 million to JPY16,792 million. As of September 30, 2017, the balance of noncurrent liabilities was JPY30,255 million, increased by JPY223 million from the balance as of March 31, 2017 of JPY30,032 million. The major breakdown of noncurrent liabilities was an increase in capital lease obligations-noncurrent by JPY1,043 million to JPY11,427 million. 

As of September 30, 2017, the balance of total IIJ shareholders’ equity was JPY68,777 million, increased by JPY2,035 million and IIJ shareholders’ equity ratio (total IIJ shareholders’ equity divided by total assets) as of September 30, 2017 was 49.0%.

1H17 Cash Flows

Cash flows

Cash and cash equivalents as of September 30, 2017 were JPY19,871 million (JPY19,668 million as of September 30, 2016).

Net cash provided by operating activities for 1H17 was JPY6,102 million (net cash provided by operating activities of JPY4,073 million for 1H16.) There were net income of JPY1,577 million, depreciation and amortization of JPY6,022 million and net cash out flow of JPY1,512 million (JPY2,747 million for 1H16) from changes in operating assets and liabilities. As for changes in operating assets and liabilities, there were a decrease in accounts receivable mainly due to receipts of accounts receivable, an increase in inventories, and an increase in prepaid expenses mainly due to payments in relation to upfront payment for maintenance cost for service facilities and software licenses.

Net cash used in investing activities for 1H17 was JPY4,499 million (net cash used in investing activities of JPY3,896 million for 1H16), mainly due to payments for purchase of property and equipment of JPY6,423 million (JPY5,358 million for 1H16) and proceeds from sales of property and equipment, which include sales and leaseback transactions, of JPY2,384 million (JPY1,209 million for 1H16).

Net cash used in financing activities for 1H17 was JPY3,673 million (net cash provided by financing activities of JPY155 million for 1H16), mainly due to principal payments under capital leases of JPY2,764 million (JPY2,314 million for 1H16) and FY2016 year-end dividends payments of JPY608 million (JPY505 million for 1H16).

FY2017 Financial Targets

Due to seasonal factors, our financial results tend to be strong in the second half and strongest in fourth quarter every fiscal year. 1H17 financial results resulted almost as our disclosed target. Our financial targets for the fiscal year ending March 31, 2018 (FY2017) announced on May 15, 2017 remain unchanged.

1H17 Reconciliation of Non-GAAP Financial Measures

The following table summarizes the reconciliation of adjusted EBITDA to net income attributable to IIJ in our consolidated statements of income that are prepared in accordance with U.S. GAAP.

Presentation

Presentation materials will be posted on our web site (https://www.iij.ad.jp/en/ir/) on November 7, 2017.

About Internet Initiative Japan Inc.

Founded in 1992, IIJ is one of Japan's leading Internet-access and comprehensive network solutions providers. IIJ and its group companies provide total network solutions that mainly cater to high-end corporate customers. IIJ's services include high-quality Internet connectivity services, mobile services, security services, cloud computing services, and systems integration. Moreover, IIJ has built one of the largest Internet backbone networks in Japan that is connected to the United States, the United Kingdom and Asia. IIJ listed on the U.S. NASDAQ Stock Market in 1999 and on the First Section of the Tokyo Stock Exchange in 2006.

For inquiries, contact:

IIJ Investor Relations
Tel: +81-3-5205-6500 E-mail: [email protected] URL: https://www.iij.ad.jp/en/ir

Statements made in this press release regarding IIJ’s or management’s intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ’s and managements’ current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2017 revenues and operating and net profitability, are subject to various risks, uncertainties and other factors that could cause IIJ’s actual results to differ materially from those contained in any forward-looking statement. These risks, uncertainties and other factors include: IIJ’s ability to maintain and increase revenues from higher-margin services such as systems integration and outsourcing services; the possibility that revenues from connectivity services may decline substantially as a result of competition and other factors; the ability to compete in a rapidly evolving and competitive marketplace; the impact on IIJ's profits of fluctuations in costs such as backbone costs and subcontractor costs; the impact on IIJ's profits of fluctuations in the price of available-for-sale securities; the impact of technological changes in its industry; IIJ’s ability to raise additional capital to cover its indebtedness; the possibility that NTT, IIJ’s largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from time to time in IIJ’s filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission.

Second Quarter FY2017 Consolidated Financial Results (3 months)

The following tables are highlight data of 2nd Quarter FY2017 (3 months) consolidated financial results (unaudited, for the three months ended September 30, 2017).

*1 IP service revenues include revenues from the data center connectivity service.

Reconciliation of Non-GAAP Financial Measures (2nd Quarter FY2017 (3 months))

The following table summarizes the reconciliation of adjusted EBITDA to net income in our consolidated statements of income that are prepared in accordance with U.S. GAAP.

The following table summarizes the reconciliation of capital expenditures to the purchase of property and equipment in our consolidated statements of cash flows that are prepared and presented in accordance with U.S. GAAP.

Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the six months ended September 30, 2017 (“1H17”) in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Six Months ended September 30, 2017
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]

November 7, 2017

Company name: Internet Initiative Japan Inc.
Exchange listed: Tokyo Stock Exchange First Section
Stock code number: 3774
URL: https://www.iij.ad.jp/
Representative: Eijiro Katsu, President and Representative Director
Contact: Akihisa Watai, Managing Director and CFO
TEL: (03) 5205-6500
Scheduled date for filing of quarterly report (Shihanki-houkokusho) to Japan’s regulatory organization: November 14, 2017
Scheduled date for dividend payment: December 8, 2017
Supplemental material on annual results: Yes
Presentation on quarterly report: Yes (for institutional investors and analysts)

(Note) Change from the latest released dividend forecasts: No.

(Note1) Changes from the latest forecasts released: No

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