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

TOKYO, Feb. 09, 2016 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its consolidated financial results for the nine months of the fiscal year ending March 31, 2016 (“3Q15”, from April 1, 2015 to December 31, 2015).¹

Overview of 3Q15 Financial Results and Business Outlook

“3Q15 nine months revenues and operating income increased by 13.1% and 7.6% respectively year over year,” said Eijiro Katsu, President and COO of IIJ. “Continuous revenue growth, mainly led by mobile services, cloud services and systems integration, absorbs the overall operating costs increase, especially costs related to mobile infrastructure expansion, human resources enhancement and new services’ investment and development.²”

“With regards to our mobile business, the total subscription as of 3Q15-end exceeded our target of one million. Japanese MVNO³ market should significantly expand in the middle term along with a subscriber migration from traditional mobile carriers to MVNOs and the government’s efforts to revitalize Japanese mobile market.⁴ We believe our mobile business scale should become several times larger hereafter by which we survive as one of a few large MVNOs in Japan. Our mobile business strategy is to accumulate more consumer subscription through direct sales and MVNE⁵ and provide solutions that meet enterprise needs especially related to M2M⁶ and IoT⁷ so that our mobile infrastructure utilization can be improved with different types of traffic,⁸” said Katsu.

“Leveraging our accumulated expertise on reliable network and systems operation, we launched new network service “IIJ Omnibus Service⁹” and new cloud service “IIJ GIO Infrastructure P2.¹⁰” A good number of prospective orders have been accumulated since their launch in fall 2015, and we anticipate they become one of our strong growth drivers for the middle term. Security-related services and solutions, another area we’re well positioned to exercise our value-added features, have been showing steady and continuous growth along with the growing demand to protect corporate systems from numerous security incidents. We can continuously differentiate ourselves from competitors by integrating our advantages on mobile, cloud, security and so on,” continued Katsu.

“We’ve been continuously making investment in business and service developments for mobile and cloud, and these investments have begun to contribute to strong revenue growth. In addition to these, we’d like to further focus on Internet-based streaming and broadcasting¹¹ and enhancing overseas business. Ever since the establishment of IIJ, I’ve always envisioned that Internet would be the fundamental technology for every part of society and that is slowly but surely happening in Japan. We should greatly benefit from those progresses,” concluded Koichi Suzuki, Founder and CEO of IIJ.

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

² We launched new network service “IIJ Omnibus Service” and new cloud service “IIJ GIO Infrastructure P2 Service” in September and November, respectively, during 2015.

³ Mobile Virtual Network Operator (MVNO) borrows mobile infrastructure from mobile network operators to offer mobile related services.

⁴ Triggered by Prime Minister Abe’s comment on current mobile carriers’ pricing is too complicated and too expensive, Ministry of Internal Affairs and Communications set up a study group to discuss such issues among interested parties which includes MVNOs such as IIJ.

⁵ Mobile Virtual Network Enabler (MVNE) provides business and service infrastructure to MVNOs.

⁶ Machine to Machine (M2M) enables devices connected to network to exchange information automatically and perform designated actions.

⁷ Internet of Things (IoT) enables not only physical objects but any “things” connected to network to exchange information automatically.

⁸ Generally speaking, consumers and corporate users consume data at different hours for different purposes. For example, consumers tend to use mobile when they are heading to office, heading back to home, and during lunch hours while corporate users use mobile during the day time to check emails from outside of office and midnight for M2M transactions. IIJ can improve mobile infrastructure utilization because IIJ provides services to both consumers and corporate users from the same infrastructure.

⁹ “IIJ Omnibus Service” incorporates SDN and NFV technologies, automatically offers several network elements.

¹⁰ “IIJ GIO Infrastructure P2” offers reliable public could infrastructure with increased processing performance as well as private cloud infrastructure.

¹¹ Digitally distributing contents such as movies, videos and music via Internet has slowly become a trend in Japan. For instance, IIJ launched the world’s first live streaming service that delivers high-resolution audio in December 2015.

3Q15 Financial Results Summary

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

3Q15 Results of Operation

Revenues

Total revenues were JPY99,382 million, up 13.1% YoY (JPY87,846 million in 3Q14).

Network services revenue was JPY58,216 million, up 13.8% YoY.

Revenues for Internet connectivity services for enterprise were JPY12,871 million, up 4.7% YoY compared to JPY12,288 million for 3Q14 mainly as our MVNE partners’ businesses had been expanding.

Revenues for Internet connectivity services for consumers were JPY10,708 million, up 86.1% YoY compared to JPY5,753 million for 3Q14, mainly due to the continuous revenue growth of “IIJmio High-speed Mobile/D services,” consumer mobile services which offer inexpensive data communication and voice services with SIM cards.

Revenues for WAN services were JPY18,826 million, up 3.8% YoY compared to JPY18,145 million for 3Q14.

Revenues for outsourcing services were JPY15,811 million, up 5.6% YoY compared to JPY14,976 million for 3Q14 mainly by the increase in security-related services.

SI revenues were JPY35,921 million, up 10.0% YoY.

Systems construction revenue, a one-time revenue, was JPY11,547 million, down 7.6% YoY. Systems operation and maintenance revenue, a recurring revenue, was JPY24,374 million, up 21.0% YoY mainly due to an increase in revenues of projects shifted from systems construction to systems operation and maintenance phase and “IIJ GIO Component Services” revenues.

Orders received for SI and equipment sales totaled JPY43,250 million, up 7.1% YoY; orders received for systems construction and equipment sales were JPY20,164 million, up 23.1% YoY and orders received for systems operation and maintenance were JPY23,086 million, down 3.9% YoY.

Order backlog for SI and equipment sales as of December 31, 2015 amounted to JPY34,017 million, up 10.9% YoY; order backlog for systems construction and equipment sales was JPY10,986 million, up 44.2% YoY and order backlog for systems operation and maintenance was JPY23,031 million, down 0.2% YoY.

Equipment sales revenues were JPY2,365 million, up 73.2% YoY mainly due to an increase in selling mobile devices.

ATM operation business revenues were JPY2,880 million, up 7.7% YoY. As of December 31, 2015, 1,106 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY81,589 million, up 14.3% YoY (JPY71,398 million in 3Q14).

Cost of network services revenue was JPY47,079 million, up 17.3% YoY. There was an increase in cost related to mobile services along with the increase in mobile services revenue. Gross margin was JPY11,137 million, up 1.0% YoY and gross margin ratio was 19.1%.

Cost of SI revenues was JPY30,455 million, up 8.1% YoY. The increase was mainly due to an increase in outsourcing-related and personnel-related costs. Gross margin was JPY5,467 million, up 22.4% YoY and gross margin ratio was 15.2%.

Cost of equipment sales revenues was JPY2,125 million, up 77.6% YoY. There was an increase in purchasing costs along with the increase in equipment sales revenues. Gross margin was JPY240 million and gross margin ratio was 10.1%.

Cost of ATM operation business revenues was JPY1,930 million, up 2.1% YoY. Gross margin was JPY950 million and gross margin ratio was 33.0%.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY13,720 million, up 8.4% YoY (JPY12,662 million in 3Q14).

Sales and marketing expenses were JPY7,842 million, up 14.8% YoY. There was an increase in sales commission expenses related to mobile services and personnel-related expenses.

General and administrative expenses were JPY5,532 million, up 1.2% YoY. There was an increase in personnel-related expenses.

Research and development expenses were JPY346 million, down 5.2% YoY.

Operating income

Operating income was JPY4,073 million, up 7.6% YoY (JPY3,786 million for 3Q14).

Other income (expenses)

Other income (expenses) was an income of JPY105 million (an income of JPY103 million for 3Q14). There were distribution from fund investment of JPY144 million (included in other-net of JPY159 million), dividend income of JPY88 million from other investments and interest expense of JPY171 million.

Income before income tax expenses

Income before income tax expenses was JPY4,178 million, up 7.4% YoY (JPY3,889 million for 3Q14).

Net income

Income tax expense was JPY1,697 million (JPY1,633 million for 3Q14).

Equity in net income of equity method investees was JPY207 million (JPY115 million for 3Q14), mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY2,688 million, up 13.3% YoY (JPY2,371 million for 3Q14).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY115 million, mainly related to net income of Trust Networks Inc. (JPY57 million for 3Q14).

Net income attributable to IIJ was JPY2,573 million, up 11.2% YoY (JPY2,314 million for 3Q14).

3Q15 Financial Condition

Balance sheets

As of December 31, 2015, the balance of total assets was JPY110,602 million, increased by JPY1,896 million from the balance as of March 31, 2015 of JPY108,705 million.

As for current assets as of December 31, 2015, as compared to the respective balances as of March 31, 2015, prepaid expenses increased by JPY1,687 million, inventories increased by JPY1,504 million, cash and cash equivalents decreased by JPY2,860 million and accounts receivable decreased by JPY2,026 million. As for noncurrent assets as of December 31, 2015, as compared to the respective balances as of March 31, 2015, property and equipment increased by JPY3,644 million and prepaid expenses—noncurrent increased by JPY1,036 million. As for current liabilities as of December 31, 2015, as compared to the respective balances as of March 31, 2015, accrued expenses increased by JPY226 million and accounts payable decreased by JPY685 million.

As for the balances of capital lease obligations as of December 31, 2015, as compared to the respective balances as of March 31, 2015, capital lease obligations-current portion decreased by JPY59 million to JPY3,463 million and capital lease obligations-noncurrent increased by JPY776 million to JPY5,117 million.

As of December 31, 2015, the balance of other investments decreased by JPY561 million to JPY6,099 million. The breakdown of other investments were JPY4,237 million in available-for-sale securities, JPY951 million in nonmarketable equity securities and JPY911 million in investments in funds, including some through a trust.

As of December 31, 2015, the breakdown of major non-amortized intangible assets were JPY6,170 million in goodwill and JPY107 million in trademark. The balance of amortized intangible assets, which was customer relationships, was JPY3,514 million.

Total IIJ shareholders’ equity as of December 31, 2015 compared to the balance as of March 31, 2015, increased by JPY1,439 million to JPY63,943 million. IIJ shareholders’ equity ratio (total IIJ shareholders’ equity divided by total assets) as of December 31, 2015 was 57.8%.

Cash flows

Cash and cash equivalents as of December 31, 2015 were JPY18,234 million compared to JPY21,047 million as of December 31, 2014.

Net cash provided by operating activities for 3Q15 was JPY7,811 million compared to net cash provided by operating activities of JPY10,012 million for 3Q14. There were net income of JPY2,688 million, depreciation and amortization of JPY7,294 million and net cash out flow from changes in operating assets and liabilities of JPY2,427 million.

Net cash used in investing activities for 3Q15 was JPY6,634 million compared to net cash used in investing activities of JPY6,318 million for 3Q14, mainly due to payments for purchase of property and equipment of JPY8,454 million (JPY6,569 million for 3Q14) and proceeds from sales of property and equipment of JPY1,093 million (JPY536 million for 3Q14).

Net cash used in financing activities for 3Q15 was JPY4,047 million compared to net cash used in financing activities of JPY5,131 million for 3Q14, mainly due to principal payments under capital leases of JPY3,040 million (JPY3,140 million for 3Q14) and FY2014 year-end and FY2015 interim dividend payments of JPY1,011 million (JPY1,011 million for 3Q14).

Prospects for the Fiscal Year Ending March 31, 2016

3Q15 nine months revenues and operating income have resulted almost accordingly with our plan. For 4Q15, there remains some uncertainty including weaker than expected cloud revenues and the timing of the revenue recognition related to a container type datacenter export project which might be delayed to FY2016. On the other hand, our systems construction revenues tend to be largest in 4Q every year due to seasonal factors and our mobile services and systems operation and maintenance revenues have been exceeding our target from 1Q15. Additionally, the revised wholesale telecommunications service charge of NTT Docomo, Inc. which was fixed in March last year is another uncertainty. Docomo calculates connection charge, a flat-rate per Mbps which is the same charge for all of its MVNOs, every year based on its actual costs in a previous year in an accordance with the rules administrated by the Ministry of Internal Affairs and Communications. For FY2015 IIJ estimates such charge, which decreased by 23.5% in FY2014 from a year before, to be decreased by 15% from a year before. With all these factors considered, our FY2015 financial targets announced on May 15, 2015 remain unchanged.

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 February 9, 2016.

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 revenues, 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 but not limited to: a decrease of corporate spending or capital expenditure due to depression in the Japanese economy and/or corporate earnings decreased; an inability to achieve anticipated results and cause negative impact on profitability; a possibility that less of reliability for our services and loss of business changes due to interruption or suspension of our services; an excess increase and fluctuation in network-related costs, mobile-related costs, outsourcing costs, personnel cost etc.; a possibility to lose business opportunity due to our inadequate resources in personnel and others; an increase in competition and strong pricing pressure; the recording of an impairment loss as a result of an impairment test on the non-amortized intangible assets such as goodwill: a decline in value and trading value of our hodling securities. Please refer to IIJ’s filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission for other risks.



Third Quarter FY2015 Consolidated Financial Results (3 months)

The following tables are highlight data of 3rd Quarter FY2015 (3 months) consolidated financial results (unaudited, for the three months ended December 31, 2015).

Reconciliation of Non-GAAP Financial Measures (3rd Quarter FY2015 (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 nine months ended December 31, 2015 (“3Q15”) in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Nine Months ended December 31, 2015
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]

February 9, 2016
Company name: Internet Initiative Japan Inc.   
Exchange listed: Tokyo Stock Exchange First Section
Stock code number: 3774                    
URL: http://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: February 15, 2016
Scheduled date for interim dividend payment: -
Supplemental material on quarterly results: Yes
Presentation on quarterly report: Yes (for institutional investors and analysts)

* Notes