IIJ Announces First Six Months Financial Results for the Fiscal Year Ending March 31, 2012

TOKYO, Nov. 8, 2011 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (Nasdaq:IIJI) (TSE:3774) announced today its consolidated financial results for the first six months of Fiscal Year Ending March 31, 2012 (from April 1 to September 30, 2011, "1H FY2011", "1H11").¹

• 1H FY2011 revenue increased by 37.7% YoY followed by steady demands for our recurring type services and the additional revenue related to IIJ Global Solutions ("IIJ-Global"), a consolidated subsidiary from Sep. 1, 2010.
• 1H FY2011 operating income increased by 103.8% YoY and net income attributable to IIJ increased by 58.4%, both exceeding our initial 1H FY2011 target by 22.4% and 36.1%, respectively.
• Full FY2011 financial targets remain unchanged.
• FY2011 interim period cash dividend: JPY1,500 per share as planned (IIJ's 1 common stock equivalent to 400 ADSs).

Overview of 1H FY2011 Financial Results and Business Outlook

"We continued to record strong and encouraging quarter by quarter double-digit revenue and profit growth in a volatile environment," said Koichi Suzuki, President and CEO of IIJ. "We saw customer demands in our overall recurring type services; outsourcing, systems operation and maintenance, cloud computing, internet connectivity for corporate use and WAN services, and had steady revenue growth in each."

"Our cloud computing services is one of our main areas of business focus and becoming the revenue growth driver. As mentioned previously, cloud computing services have just begun in Japan. Service application providers ("SAPs") are increasing usage and more blue-chip companies and academic societies are newly adopting our cloud computing platform for their network infrastructure. Our cloud computing service monthly revenues for Sep. 2011 was beyond our initial expectations, which has reached over JPY250 million from JPY120 million for March 2011. We expect to keep this robust growth rate for the coming quarters."

"To meet strong cloud computing demands, we have opened 'Mitaka Data Center', the first data center in the Kanto region for cloud computing services. We are also expanding the number of containers in Matsue Data Center."

"Globalization is indispensable to the Japanese companies and we have seen increasing demands for global network services from our clients, especially in the Asian area. To answer to these requirements, we are continuously enhancing our global network business. IIJ-Global has decided to establish a representative office in Bangkok and a subsidiary in Shanghai. IIJ-Global offers managed global Internet VPN service, closed-network International WAN service and related outsourcing services. IIJ, tied up with IIJ America Inc. and IIJ-Global, provides global-server-outsourcing solutions especially for SAPs. As a group, we will further focus on our global business continuously with strengthening partnerships with local carriers and or SIers and would set up more offices especially in Asian regions."

"We remain focused and committed on enhancing our service line-ups, to providing solutions that suits best and what is demanded by our customers as their total network solution provider, domestically and globally."

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. The translation of Japanese yen into U.S. dollars is solely for the convenience of readers outside of Japan. The rate used for the translation was JPY77.04 per US$1.00, which was the noon buying rate on September 30, 2011.

1H FY2011 Financial Results Summary

We have omitted segment analysis because most of our revenues are dominated by Network services and SI business.

1H FY2011 Results of Operation

Revenues

Revenues were JPY47,207 million, up 37.7% YoY. Outsourcing services, WAN services, systems integration (SI) increased, respectively and there were additional revenues from IIJ-Global of JPY12,998 million (6 months).

Network Services revenue were JPY31,321 million, up 51.4% YoY.

Revenues for Internet connectivity services for corporate use were JPY7,277 million, up 4.8% YoY. Both the number of contracts and bandwidth usage increased.

Revenues for Internet connectivity services for home use were JPY2,930 million, down 12.6% YoY.

WAN Services revenue was JPY12,702 million (up 285.2% YoY) compared to JPY3,297 million for 1H10. There was additional revenue related to IIJ-Global of 6 months compared to 1 month for 1H10 as well as the increase in number of new contracts of IIJ's WAN service.

Outsourcing services revenue were JPY8,412 million, up 18.6% YoY. Data center, "IIJ GIO hosting package" and web security-related services grew continuously. 

SI revenues were JPY14,714 million, up 13.3% YoY. Systems construction revenue, a one-time revenue, increased by 15.5% YoY to JPY5,194 million due to systems construction projects related to IIJ-Global and the accumulation of mid- to small sized construction projects. Systems operation and maintenance revenues, a recurring revenue, increased by 12.2% YoY to JPY9,520 million due to the continuous accumulation of our "IIJ GIO component service".

The order backlog for systems construction and equipment sales was JPY4,590 million, down 14.1% YoY. The order backlog for systems operation and maintenance was JPY13,412 million, up 21.3% YoY.

Equipment sales revenues were JPY611 million, up 64.7% YoY.

ATM Operation Business revenues were JPY561 million. As of Nov. 8, 2011, 349 ATMs are placed.

Cost and expense

Cost of revenues was JPY37,971 million, up 38.4% YoY. Cost of revenues related to IIJ-Global was JPY10,438 million.

Cost of Network Services revenue was JPY25,046 million, up 49.1% YoY due to the increase in circuit-related and outsourcing-related costs related to IIJ-Global. Gross margin for network services was JPY6,275 million, up 61.6% YoY and gross margin ratio was 20.0%, up 1.3% YoY.

Cost of SI revenues was JPY11,726 million, up 18.9% YoY. Network operation-related costs such as servers and network equipments costs mainly for our cloud computing service increased. Purchasing cost also increased due to the increase in equipment sales revenues. Gross margin for SI was JPY2,988 million, down 4.5% YoY and gross margin ration was 20.3%, down 3.8% YoY.

Cost of Equipment Sales revenues was JPY546 million, up 74.4% YoY. Gross margin was JPY64 million, up 12.0% YoY and gross margin ratio was 10.6%.

Cost of ATM Operation Business revenues increased to JPY653 million (JPY456 million for 1H10) in relation to the increase in the number ATMs. Gross loss of ATM operation business decreased to JPY92 million from gross loss of JPY228 million for 1H10.

SG&A and R&D Expenses

SG&A and R&D expenses were JPY6,788 million, up 20.3% YoY. SG&A expenses related to IIJ-Global was JPY1,519 million.

Sales and marketing expenses were JPY3,917 million, up 35.9% YoY mainly due to the increase in personnel-related expenses and depreciation and amortization. Amortization of customer relationship related to IIJ-Global was JPY212 million.

General and administrative expenses were JPY2,708 million, up 4.0% YoY. Personnel-related and outsourcing-related expenses increased.

Research and development expenses were JPY163 million, up 5.8% YoY.

Operating income

Operating income was JPY2,448 million, up 103.8% YoY as gross margin of network services revenues increased and gross loss of ATM operation business decreased.

Other income (expenses)

Other income (expenses) was net other expense of JPY157 million mainly due to interest expenses and losses on write-down of other investments.

Income before income tax expenses

Income before income tax expenses was JPY2,291 million, up 127.7% YoY (JPY1,006 million in 1H10)

Net Income

Income tax expense was JPY1,056 million (JPY280 million in 1H10). Deferred income tax expenses was JPY166 million (JPY164 million in 1H10).

Equity in net income of equity method investees was JPY77 million (JPY32 million in 1H10). Net income was JPY1,312 million, up 73.2% YoY (JPY758 million in 1H10).

Net income attributable to IIJ

Net loss attributable to noncontrolling interests was JPY49 million (JPY101 million in 1H10), mainly related to Trust Networks Inc.

Net income attributable to IIJ was JPY1,361 million, up 58.4% YoY (JPY859 million in 1H10).

1H FY2011 Financial Condition

Balance Sheets

As of September 30, 2011, the balance of total assets was JPY69,102 million, decreased by JPY2,371 million from the balance as of March 31, 2011.

For current assets, as compared to each of the respective balances as of March 31, 2011, cash and cash equivalents decreased by JPY2,339 million and accounts receivable decreased by JPY1,979 million. As for noncurrent assets, as compared to each of the respective balances as of March 31, 2011, property and equipments increased by JPY2,234 million. As for current liabilities, as compared to the respective balance as of March 31, 2011, accounts payable decreased by JPY4,896 million. As for the bank borrowings, short-term borrowings decreased by JPY4,460 million, long-term borrowings -current portion increased by JPY1,010 million, long-term borrowing increased by JPY1,990 million, respectively, as borrowings to purchase IIJ-Global stocks was refinanced. Capital lease obligations – noncurrent increased by JPY1,128 million.

As of September 30, 2011, the balance of other investments was JPY2,870 million, an increase of JPY76 million from the balance as of March 31, 2011. The breakdown of other investments were JPY1,899 million in nonmarketable equity securities, JPY819 million in available-for-sale securities and JPY152 million in other.

As of September 30, 2011, the balance of non-amortized intangible assets (excluding telephone rights) such as goodwill was JPY5,980 million, and its breakdown was JPY5,788 million in goodwill and JPY192 million in trademark. As of September 30, 2011, the balance of amortized intangible assets, which was customer relationships, was JPY5,536 million.

Total IIJ shareholders' equity as of September 30, 2011 was JPY30,748 million, an increase of JPY1,096 million from the balance as of March 31, 2011. IIJ Shareholders' equity ratio (total IIJ shareholders' equity/total assets) as of September 30, 2011 was 44.5%.

Cash Flows

Cash and cash equivalents as of September 30, 2011 were JPY10,974 million compared to JPY9,408 million as of September 30, 2010.

Net cash provided by operating activities for 1H11 was JPY4,288 million (1H10 was net cash provided by operating activities of JPY5,109 million). While operating income increased YoY mainly due to the increase in gross margin for network services, accounts payable decreased as there were payments for purchased equipments for systems integration projects and accounts receivable decreased.

Net cash used in investing activities for 1H11 was JPY3,234 million (1H10 was net cash used in investing activities of JPY11,737 million), mainly due to payments for purchase of property and equipment of JPY3,382 million (JPY2,164 million for 1H10).

Net cash used in financing activities for 1H11 was JPY3,358 million (1H10 was net cash provided by financing activities of JPY7,304 million), mainly due to proceeds from issuance of long-term borrowings of JPY3,000 million, net repayments of short-term borrowings of JPY4,460 million (short-term borrowings of JPY9,000 million for 1H10), principle payments under capital leases of JPY1,594 million (JPY1,480 million for 1H10) and JPY304 million for FY2010 year-end dividends payments (JPY253 million for 1H10).

FY2011 Financial Targets

While stock revenues grew steadily, revenue for 1H11 was slightly lower than our initial 1H11 target mainly due to shortage of systems construction and ATM operation business revenues. Operating income, income before income tax expense and net income attributable to IIJ exceeded our initial 1H11 target, respectively, along with the continuous increase in stock revenues and stable costs and expenses.

We remain our full FY2011 targets unchanged as they largely depend on the outcome of the 4th quarter revenue and income results which generally becomes the largest due to seasonal factors.

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 November 8, 2011.

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 of companies provide total network solutions that mainly cater to high-end corporate customers. IIJ's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. Moreover, IIJ has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ listed on the U.S. NASDAQ Stock Market in 1999 and on the First Section of the Tokyo Stock Exchange in 2006.

The Internet Initiative Japan Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4613

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 FY2011 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.

Tables to follow

2nd Quarter FY2011 Consolidated Financial Results (3 months)

The following tables are highlight data of 2nd Quarter FY2011 consolidated financial results (unaudited, from July 1, 2011 to September 30, 2011).

Reconciliation of Non-GAAP Financial Measures

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, 2011 in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the first Six Months Ended September 30, 2011
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]