IIJ Announces First Three Months Financial Results for the Fiscal Year Ending March 31, 2014

TOKYO, Aug. 6, 2013 (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, 2014 (1Q13, from April 1, 2013 to June 30, 2013). ¹

Overview of 1^st Quarter FY2013 Financial Results and Business Outlook

"The new fiscal year started with the 1st quarter resulted in line with our initial expectation," said Koichi Suzuki, the founder and CEO of IIJ.

"As for the business environment in the 1st quarter, we continue to see the increasing demand for systems integration and are accumulating large-scale projects continuously. Also, the demand for outsourcing enterprises' IT systems, including cloud computing services, continues to be strong. We're receiving orders of large-scale cloud transactions from certain large enterprises who are beginning to adopt cloud computing for their business process. To take advantage of these business environments, we've hired a large number of employees at the beginning of this fiscal year and they should contribute to our continuous growth in the middle term."

"The 1st quarter financial results reflect ordinary seasonal factors. The fixed expenses such as personnel-related expense tend to increase as a new fiscal year begins. On the other hand, we're usually pressured to reduce monthly recurring revenues by our certain clients whose budgets renew at the beginning of fiscal year. Also, 1st quarter systems construction revenue tends to be the smallest every year. As a result, 1Q13 operating income decreased a little compared with 1Q12. Despite all these, we stay pretty optimistic as the impact was within our expectations."

"To accelerate our business development and expand further in this highly competitive market, we secured money for growth by issuing new shares, which amounted to approx. JPY17.3 billion. With this fund, we'll be able to aggressively advance our business development including M&A opportunities. The addition of Mr. Katsu as new President and COO strengthens our management abilities and thus expands our business scale. The stable business growth we've made every year has led us to where we're now and we recognized that it is the appropriate timing to increase our business investments. Through the enhancement of management structure and the equity finance, we aim to take IIJ to the next level of growth and scale," concluded Suzuki.

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 JPY99.21 per US$1.00, which was the noon buying rate on June 28, 2013.

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

1^st Quarter FY2013 Results of Operation

Revenues

Total revenues were JPY26,441 million, up 6.4% YoY.

Network Services revenue was JPY16,785 million, up 4.3% YoY.

Revenues for Internet connectivity services for corporate use were JPY4,191 million, up 8.4% YoY. The increase was mainly due to the increasing demands for broader bandwidth.

Revenues for Internet connectivity services for home use were JPY1,397 million, down 2.2% YoY. While our LTE mobile data communication service, which was introduced in February 2012, has been accumulating orders continuously, the cancellations of old type connectivity services continued.

WAN services revenues were JPY6,310 million, stayed almost flat compared to 1Q12.

Outsourcing services revenues were JPY4,887 million, up 9.0% YoY. The revenue growth was mainly led by the continuous demands on "IIJ GIO Hosting Package Services" and datacenter-related services.

SI revenues were JPY8,692 million, up 9.3% YoY.

Systems construction revenue, a one-time revenue, was JPY2,964 million, up 7.4% YoY. The increase was led mainly by the increase in the number and the scale of systems construction projects. Systems operation and maintenance revenue, a recurring revenue, was JPY5,728 million, up 10.3% YoY. The increase was mainly due to the continuous demands on "IIJ GIO Component Services" and the operation and maintenance revenue for the large scale SI construction projects completed in the last fiscal year.

The orders received for SI and equipment sales were JPY13,090 million, up 28.9% YoY. In the breakdown, the orders received for systems construction and equipment sales were JPY5,102 million, up 36.2% YoY, and the orders received for systems operation and maintenance were JPY7,988 million, up 24.7% YoY.

The order backlog for SI and equipment sales as of June 30, 2013 amounted to JPY24,159 million, up 29.0% YoY. In the breakdown, the order backlog for systems construction and equipment sales was JPY5,523 million, up 22.9% YoY, and the order backlog for systems operation and maintenance was JPY18,636 million, up 31.0% YoY.

Equipment sales revenues were JPY319 million, down 3.6% YoY.

² IP Service revenues include revenues from the Data Center Connectivity Service.

³ Revenue from mobile data communication service for home use is included in Internet Connectivity Service (Home Use). 

⁴ Contracts of IIJ Mobile Service are of mobile data communication service for corporate use.

ATM Operation Business revenues were JPY645 million, up 37.9% YoY. The increase was in accordance with the increase in the numbers of newly placed ATMs. 652 ATMs were placed as of August 6, 2013.

Cost and expense

Total cost of revenues was JPY21,411 million, up 6.9% YoY.

Cost of Network Services revenues was JPY13,242 million, up 3.7% YoY. Gross margin was JPY3,544 million, up 6.5% YoY. Gross margin ratio was 21.1%, up 0.4 points from 1Q12. The increase was mainly due to the increase in outsourcing-related, personnel-related and circuit-related costs.

Cost of SI revenues was JPY7,350 million, up 12.0% YoY. The increase was mainly due to the increase in outsourcing-related and personnel-related costs. Gross margin was JPY1,343 million, down 3.2% YoY and gross margin ratio was 15.4%.

Cost of Equipment Sales revenues was JPY284 million, up 4.3% YoY. Gross margin was JPY34 million and gross margin ratio was 10.7%.

Cost of ATM Operation Business revenues was JPY535 million, up 27.1% YoY. The increase was in accordance with the number of newly placed ATMs. Gross margin was JPY110 million and gross margin ratio was 17.0%.

SG&A and R&D expenses

SG&A and R&D expenses were JPY3,725 million, up 8.1% YoY.

Sales and marketing expenses were JPY2,115 million, up 9.6% YoY. The increase was mainly due to the increase in personnel-related expenses, rent expenses related to expanded office spaces, sales commission expenses related to Internet connectivity services for home use and advertising expenses.

General and administrative expenses were JPY1,501 million, up 6.3% YoY. The increase was mainly due to the increase in personnel-related expenses and staff-training expenses related to the increase in employees as well as the increase in rent expenses related to the expanded office spaces.

Research and development expenses were JPY109 million, up 5.0% YoY.

Operating income

Operating income was JPY1,305 million, down 5.0% YoY. While gross margin of network services and systems integration revenues for 1st quarter were small due to seasonal factors, fixed expenses such as personnel-related expense increased at the beginning of this fiscal year.

Other income (expenses)

Other income (expenses) was an income of JPY126 million (an expense of JPY1 million for 1Q12), mainly due to foreign currency gains of JPY93 million, compared to foreign currency losses of JPY20 million in 1Q12.

Income before income tax expense

Income before income tax expense was JPY1,431 million, up 4.2% YoY (JPY1,373 million for 1Q12) as a result that the increase in nonoperating income exceeded the decrease in operating income.

Net income

Income tax expense was JPY537 million (JPY515 million for 1Q12).

Equity in net income of equity method investees was JPY65 million (JPY33 million for 1Q12) mainly due to net income of Internet Revolution, Inc. and Internet Multifeed Co.

As a result of the above, net income was JPY959 million, up 7.6% YoY (JPY891 million for 1Q12).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY5 million mainly related to net income of Trust Networks Inc (Net loss attributable to non-controlling interests of JPY6 million for 1Q12).

Net income attributable to IIJ was JPY954 million, up 6.4 % YoY (JPY897 million for 1Q12).

1^st Quarter FY2013 Financial Condition

Balance Sheets

As of June 30, 2013, the balance of total assets was JPY79,776 million, decreased by JPY2,335 million from the balance as of March 31, 2013 (JPY82,111 million as of March 31, 2013).

As for current assets as of June 30, 2013, as compared to the respective balances as of March 31, 2013, cash and cash equivalents decreased by JPY1,982 million mainly due to the payment of income taxes, accounts receivable decreased by JPY2,894 million and prepaid expenses increased by 1,424 million. As for noncurrent assets, as compared to the respective balance as of March 31, 2013, property and equipment increased by JPY458 million, resulting mainly from investments in network and servers, and guarantee deposits for office rent increased by JPY657 million. As for current liabilities, as compared to the respective balance as of March 31, 2013, accounts payable decreased by JPY2,610 million and income taxes payable decreased by JPY1,489 million.

As for the balances of capital lease obligations, as compared to the respective balances as of March 31, 2013, capital lease obligations-current portion increased by JPY145 million to JPY3,651 million and capital lease obligations-noncurrent increased by JPY49 million to JPY5,420 million.

As of June 30, 2013, the balance of other investments was JPY3,749 million. The breakdown of other investments were JPY2,146 million in nonmarketable equity securities, JPY1,265 million in available-for-sale securities and JPY338 million in other.

As of June 30, 2013, the balance of non-amortized intangible assets (excluding telephone rights) such as goodwill was JPY6,077 million, and the breakdown of non-amortized intangible assets were JPY5,970 million in goodwill and JPY107 million in trademark. The balance of amortized intangible assets, which was customer relationships, was JPY4,547 million.

Total IIJ shareholders' equity as of June 30, 2013 was JPY38,458 million, increased by JPY851 million from the respective balance as of March 31, 2013. IIJ shareholders' equity ratio (total IIJ shareholders' equity/total assets) as of June 30, 2013 was 48.2%.

Cash Flows

Cash and cash equivalents as of June 30, 2013 were JPY10,276 million compared to JPY11,471 million as of June 30, 2012.

Net cash provided by operating activities for 1Q13 was JPY1,528 million compared to net cash provided by operating activities of JPY1,424 million for 1Q12. The increase from 1Q12 was mainly due to the increase in net income and the increase in depreciation and amortization, which are non-cash expenses.

Net cash used in investing activities for 1Q13 was JPY2,340 million compared to net cash used in investing activities of JPY2,131 million for 1Q12, mainly due to payments for purchase of property and equipment of JPY1,719 million (JPY1,658 million for 1Q12) and payments for guarantee deposits of JPY661 million (JPY1 million for 1Q12).

Net cash used in financing activities for 1Q13 was JPY1,387 million compared to net cash used in financing activities of JPY1,332 million for 1Q12, mainly due to principal payments under capital leases of JPY981 million (JPY877 million for 1Q12), payment of FY2012 year-end dividends of JPY405 million (JPY355 million for 1Q12).

Prospects for the Fiscal Year Ending March 31, 2014

Due to seasonal factors, our financial results tend to be weak in first quarter and strong in fourth quarter of every fiscal year. In this 1Q13, we were pressured by our certain large network service clients to reduce the monthly recurring revenues. Systems construction revenue was small as it is in every first quarter. On the expenses side, the fixed expenses such as personnel-related expenses increased as a new fiscal year begins. Thus 1Q13 operating income decreased a little compared to 1Q12, yet this was within our expectations and the business development is proceeding accordingly with our original plan.

Our FY2013 financial targets announced on May 15, 2013 remain unchanged as the orders for systems construction have been accumulated at a good pace and the monthly recurring revenues of network services and systems operation and maintenance should continue to increase and contribute to the full year operating income increase.

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.

⁵ Depreciation and amortization includes impairment loss on other intangible assets. (See IIJ's consolidated financial statements for details).

Presentation

Presentation materials will be posted on our web site (http://www.iij.ad.jp/en/ir/) on August 6, 2013.

About Internet Initiative Japan Inc.

Founded in 1992, Internet Initiative Japan Inc. 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 systems integration, security services, Internet access, and cloud computing. Moreover, IIJ has built one of the largest Internet backbone networks in Japan that is connected to the United States and the United Kingdom. IIJ listed on NASDAQ in 1999 and on the First Section of the Tokyo Stock Exchange in 2006. For more information about IIJ, visit the IIJ Web site at http://www.iij.ad.jp/en/.

For inquiries, contact:

IIJ Investor Relations
Tel: +81-3-5259-6500 E-mail: ir@iij.ad.jp URL: http://www.iij.ad.jp/en/ir

Statements made in this press release regarding IIJ's or managements' 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 chances due to interrupt or suspend of our services, an excess increase in network rerated cost and outsourcing cost, 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 results of an impairment test on the non-amortized intangible assets such as goodwill, a decline in value and trending value of our holding 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 ("SEC") for other risks.

* Notes

(1) Changes in significant subsidiaries for the three months ended June 30, 2013

(Changes in significant subsidiaries for the three months ended June 30, 2013 which resulted in changes in scope of consolidation): None

(2) Changes in significant accounting and reporting policies for the quarterly consolidated financial statements

1) Changes due to the revision of accounting standards: None

2) Others: No

(3) Number of shares outstanding (shares of common stock)

1) The number of shares outstanding (inclusive of treasury stock):

As of June 30, 2013: 41,297,800 shares

As of March 31, 2013: 41,295,600 shares

2) The number of treasury stock:

As of June 30, 2013: 758,813 shares

As of March 31, 2013: 758,800 shares

3) The weighted average number of shares outstanding:

For the three months ended June 30, 2013: 40,538,973 shares

For the three months ended June 30, 2012: 40,536,800 shares

(Note1) IIJ conducted a 1:200 stock split on common stock with an effective date of October 1, 2012. The number of shares outstanding (shares of common stock) in the above have been calculated as if the stock split were conducted on April 1, 2012, the beginning of the fiscal year ended March 31, 2013.

(Note2) IIJ issued 4,700,000 shares of common stock by way of public offering on July 18, 2013. IIJ also issued 700,000 shares of common stock by way of third-party allotment in connection with secondary offering of shares by way of over-allotment on August 5, 2013. Basic Net Income attributable to IIJ per Share in the above "3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2014" was recalculated to reflect the increases in the number of shares outstanding.