IIJ Announces First Three Months Financial Results for the Fiscal Year Ending March 31, 2016

TOKYO, Aug. 7, 2015 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its consolidated financial results for the first three months of the fiscal year ending March 31, 2016 ("1Q15", from April 1, 2015 to June 30, 2015).¹

Overview of 1Q15 Financial Results and Business Outlook

"We continue to see revenue accumulation at an accelerated pace under favorable market situation where demands for mobile, cloud and systems integration continue to be strong. 1Q15 three-month revenue growth rate year over year ("YoY") increased to 14.2% from 11.7% in 4Q14 and 8.2% in 3Q14," said Eijiro Katsu, President and COO of IIJ.

"Consumer mobile has been particularly strong; its subscription increased by 97 thousand in 1Q15, compared to 91 thousand increase in 4Q14 and 94 thousand in 3Q14. Strong 1Q15 growth was related to 1Q seasonality² as well as our updated competitive price plan.³ Furthermore, we've enhanced a sales partnership with one of the largest retailers in Japan, Aeon, who started to handle MNP⁴ transaction in their 209 stores nationwide from July. Systems operation and maintenance, which includes private cloud revenues,⁵ also showed a strong revenue growth of 23.5% YoY in 1Q15," continued Katsu.

"1Q15 operating income grew by 48.5% YoY to JPY1.1 billion. We recognized a temporary positive impact of approx. JPY0.27 billion related to NTT Docomo's mobile interconnectivity cost. We applied our supposed annual decrease rate of 15% for interconnectivity telecommunications service charge per bandwidth, which should be fixed in March 2016, to our mobile infrastructure usage during FY2014.⁶ Last fiscal year, we recognized the same positive impact of approx. JPY0.29 billion in 2Q. Although 1Q contribution to the full fiscal year is small, we think we had a good start for FY2015," said Katsu.

¹ Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with U.S. GAAP. All financial figures are unaudited and consolidated.

² New fiscal year generally begins in April in Japan when new jobs, new school and moving, for example, trigger many changes in people's living environment.

³ We increased bundled data volume with the same monthly charge under the new price plan, which went effective in April 2015. For detail, please refer to our press release: http://www.iij.ad.jp/en/news/pressrelease/2015/0310.html

⁴ Mobile Number Portability known as MNP enables mobile phone users to retain their phone number when switching from one mobile phone carrier to another.

⁵ Approx. 85% of 1Q15 cloud revenues were recognized in systems operation and maintenance.

⁶ NTT Docomo's FY2013 mobile interconnectivity telecommunications service charge per bandwidth, which was fixed in March 2015, decreased by 23.5% from a year ago. The same charge for FY2014 should be fixed in March 2016. In the meantime, NTT Docomo's bill for FY2015 mobile interconnectivity usage has been 25% off temporarily from April 2015. During FY2015, IIJ has been calculating its mobile interconnectivity costs by applying our supposed annual decrease rate of 15%. In 1Q15, IIJ recognized a deduction amount which amounted to approx. JPY0.27 billion for FY2014 mobile interconnectivity cost by applying our supposed annual decrease rate of 15% to our FY2014 mobile infrastructure usage.

"We're happy to announce about our new services which will be launched this fall. The new cloud services, "IIJ GIO Infrastructure P2," offers reliable public cloud infrastructure with increased processing performance as well as private cloud infrastructure which can be accessed instantly through an online application form.⁷ The new network service, "IIJ Omnibus Service," which incorporates SDN and NFV technologies,⁸ automatically offers several network elements.⁹ We see a rapid increase in demands for Internet security as a response to the recent security incidents and threats. Our new security solution, which was launched in July, responds to cyber-attacks by collecting log data from a variety of customers' networking devises.¹⁰ Together with our existing multi-layered security services and solution line-ups, we can serve the needs of large Japanese enterprises and governmental organizations. We firmly believe continuous development and offering of innovative and highly reliable services/solutions should promote Japanese enterprises to outsource their IT systems, strengthen our cross-selling business model and ultimately contribute to our sustainable business growth," concluded Koichi Suzuki, Founder and CEO of IIJ.

1Q15 Financial Results Summary

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

⁷ For detail, please refer to our press release: http://www.iij.ad.jp/en/news/pressrelease/2015/0714.html

⁸ Software Defined Networking known as SDN is often defined as a technology in which entire network is centrally controlled by software to dynamically configure the network. Network Function Virtualization known as NFV is often defined as a technology that virtualizes functions previously implemented using dedicated devises and instead, implements them as software on standard high-volume servers.

⁹ For detail, please refer to our press release: http://www.iij.ad.jp/en/news/pressrelease/2015/0715.html

¹⁰ For detail, please refer to our press release: http://www.iij.ad.jp/en/news/pressrelease/2015/0707.html

1Q15 Results of Operation

Revenues

Total revenues were JPY31,464 million, up 14.2% YoY.

Network services revenue was JPY18,481 million, up 10.0% YoY.

Revenues for Internet connectivity services for enterprise were JPY4,068 million, down 0.6% YoY from JPY4,093 million for 1Q14. There were increase in enterprise mobile service revenues and decrease in IP services revenues including data center connectivity services revenues.

Revenues for Internet connectivity services for consumer were JPY3,102 million, up 81.0% YoY from JPY1,714 million for 1Q14, mainly due to the revenue growth of consumer mobile services "IIJmio High-speed Mobile/D service," consumer mobile services which offers inexpensive data communication and voice services with SIM cards.

WAN services revenues were JPY6,216 million, up 3.9% YoY compared to JPY5,985 million for 1Q14.

Outsourcing services revenues were JPY5,095 million, up 1.7% YoY from JPY5,008 million for 1Q14.

SI revenues were JPY11,074 million, up 17.1% YoY.

Systems construction revenue, a one-time revenue, was JPY3,203 million, up 3.8% YoY. Revenue increased mainly due to the increase in the number and the scale of systems construction projects. Systems operation and maintenance revenue, a recurring revenue, was JPY7,871 million, up 23.5% YoY mainly due to the continuous accumulation of systems construction projects that were shifted to system operation and maintenance.

Orders received for SI and equipment sales totaled JPY13,794 million, up 13.3% YoY; orders received for systems construction and equipment sales were JPY6,308 million, up 44.1% YoY and orders received for systems operation and maintenance were JPY7,486 million, down 4.1% YoY. In 1Q15, we received a systems construction order related to a large scale network integration project which amounts to approx. JPY2.1 billion.

Order backlog for SI and equipment sales as of June 30, 2015 amounted to JPY30,827 million, up 16.0% YoY; order backlog for systems construction and equipment sales was JPY6,893 million, up 16.3% YoY and order backlog for systems operation and maintenance was JPY23,934 million, up 16.0% YoY.

Equipment sales revenues were JPY946 million, up 102.9% YoY mainly due to an increase in portable devises and similar products along with an increase in mobile related services.

ATM operation business revenues were JPY963 million, up 16.2% YoY. The increase was in accordance with the increase in the number of placed ATMs. As of June 30, 2015, 1,081 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY25,806 million, up 14.4% YoY.

Cost of network services revenue was JPY14,702 million, up 11.3% YoY. There was an increase in mobile related cost along with an increase in mobile related revenue. On the other hand, we had a temporary positive impact of approx. JPY0.27 billion related to NTT Docomo's mobile interconnectivity cost by applying supposed annual decrease rate of 15% to our mobile infrastructure usage during FY2014. Gross margin was JPY3,779 million, up 5.4% YoY and gross margin ratio was 20.4% compared to 21.3% in 1Q14.

Cost of SI revenues was JPY9,591 million, up 15.3% YoY. The increase was mainly due to the increase in outsourcing-related and personnel-related costs. Gross margin was JPY1,483 million, up 30.6% YoY and gross margin ratio was 13.4% compared to 12.0% in 1Q14.

Cost of equipment sales revenues was JPY859 million, up 105.8% YoY. Gross margin was JPY87 million and gross margin ratio was 9.2% compared to 10.5% in 1Q14.

Cost of ATM operation business revenues was JPY654 million, up 8.5% YoY in accordance with increase in the number of placed ATMs. Gross margin was JPY310 million and gross margin ratio was 32.1% compared to 27.4% in 1Q14.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY4,517 million, up 6.8 % YoY (JPY4,229 million in 1Q14).

Sales and marketing expenses were JPY2,507 million, up 10.2% YoY. The increase was mainly due to the increase personnel-related expenses and sales commission expenses, especially related to mobile services.

General and administrative expenses were JPY1,903 million, up 4.1% YoY. The increase was mainly due to the increase in personnel-related expenses.

Research and development expenses were JPY107 million, down 14.0% YoY.

Operating income

Operating income was JPY1,141 million, up 48.5% YoY (JPY768 million for 1Q14).

Other income (expenses)

Other income (expenses) was an income of JPY137 million (an income of JPY59 million for 1Q14), mainly due to distribution of JPY96 million (included in other-net of JPY100 million) and dividend income of JPY63 million from other investments and interest expense of JPY57 million.

Income before income tax expenses

Income before income tax expenses was JPY1,278 million, up 54.5% YoY (JPY827 million for 1Q14).

Net income

Income tax expense was JPY561 million (JPY352 million for 1Q14).

Equity in net income of equity method investees was JPY61 million (JPY34 million for 1Q14) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY778 million, up 52.9% YoY (JPY509 million for 1Q14).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY57 million mainly related to net income of Trust Networks Inc. (JPY18 million for 1Q14).

Net income attributable to IIJ was JPY721 million, up 46.8% YoY (JPY491 million for 1Q14).

1Q15 Financial Condition

Balance sheets

As of June 30, 2015, the balance of total assets was JPY107,292 million, decreased by JPY1,413 million from the balance as of March 31, 2015 of JPY108,705 million.

As for current assets as of June 30, 2015, as compared to the respective balances as of March 31, 2015, accounts receivable decreased by JPY3,070 million, prepaid expenses increased by JPY1,751 million and cash and cash equivalents decreased by JPY1,089 million. As for noncurrent assets as of June 30, 2015, as compared to the respective balances as of March 31, 2015, property and equipment increased by JPY375 million. As for current liabilities as of June 30, 2015, as compared to the respective balances as of March 31, 2015, accounts payable decreased by JPY1,771 million and income taxes payable decreased by JPY294 million.

As for the balances of capital lease obligations as of June 30, 2015, as compared to the respective balances as of March 31, 2015, capital lease obligations-current portion decreased by JPY178 million to JPY3,344 million and capital lease obligations-noncurrent decreased by JPY206 million to JPY4,134 million.

As of June 30, 2015, the balance of other investments increased by JPY406 million to JPY7,067 million. The breakdown of other investments were JPY4,496 million in available-for-sale securities, JPY1,592 million in investments in funds, including some through a trust, and JPY979 million in nonmarketable equity securities.

As of June 30, 2015, the breakdown of major non-amortized intangible assets were JPY6,170 million in goodwill and JPY108 million in trademark. The balance of amortized intangible assets, which was customer relationships, was JPY3,708 million.

Total IIJ shareholders' equity as of June 30, 2015 compared to the balance as of March 31, 2015, increased by JPY295 million to JPY62,800 million. IIJ shareholders' equity ratio (total IIJ shareholders' equity divided by total assets) as of June 30, 2015 was 58.5%.

Cash flows

Cash and cash equivalents as of June 30, 2015 were JPY20,004 million compared to JPY20,421 million as of June 30, 2014.

Net cash provided by operating activities for 1Q15 was JPY2,498 million compared to net cash provided by operating activities of JPY2,855 million for 1Q14. While 1Q15 operating income increased compared to 1Q14, there were effects of changes in operating assets and liabilities such as an increase in prepaid expenses.

Net cash used in investing activities for 1Q15 was JPY2,053 million compared to net cash used in investing activities of JPY3,339 million for 1Q14, mainly due to payments for purchase of property and equipment of JPY2,370 million (JPY1,936 million for 1Q14).

Net cash used in financing activities for 1Q15 was JPY1,539 million compared to net cash used in financing activities of JPY1,509 million for 1Q14, mainly due to principal payments under capital leases of JPY1,034 million (JPY1,004 million for 1Q14) and FY2014 year-end dividends payments of JPY505 million (JPY505 million for 1Q14).

Prospects for the Fiscal Year Ending March 31, 2016

Due to seasonal factors, our financial results tend to be weak in first quarter and strong in fourth quarter every fiscal year, and our FY2015 financial targets announced on May 15, 2015 remain unchanged. We had a temporary positive impact of approx. JPY0.27 billion in 1Q15 as we applied our supposed annual decrease rate to NTT Docomo's mobile interconnectivity charge, which should be fixed in March 2016, for our mobile infrastructure usage during FY2014. We also had the same temporary positive impact of approx. JPY0.29 billion in last fiscal year's 2Q.

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 (http://www.iij.ad.jp/en/ir/) on August 7, 2015.

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, systems integration, cloud computing services, security services and mobile services. 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.

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 FY2015 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.