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

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| Source: Internet Initiative Japan Inc.

TOKYO, Feb. 7, 2014 (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, 2014 (from April 1, 2013 to December 31, 2013, "3Q13").1

 
Highlights of 3Q13 Financial Results 
     
Revenues JPY82,746 million (up 7.9% YoY)  
Operating Income JPY4,211 million (down 16.5% YoY)  
Net Income attributable to IIJ JPY2,924 million (down 6.0% YoY)  
     
Revised Full FY2013 Financial Targets
▪  We revised FY2013 financial targets due to the weaker than expected recurring revenues which mainly came from certain large customers. The operating income was impacted accordingly as the costs for recurring revenues are not directly correlated with revenue trend.
     
  Previous Target Revised Target (Feb. 7)
 Revenues JPY117,000 million JPY114,000 million
 Operating Income JPY9,400 million JPY6,000 million
 Net Income attributable to IIJ JPY6,000 million JPY4,700 million
 

Overview of 9 months for FY2013 Financial Results and Business Outlook

"We recognize the coming several years to be remarkable period for IIJ to leap into the next level of business phase. The continuous technological innovation of network infrastructure, the ongoing development of the widely-used smart phones and other portable devises, and the evolving IT needs as seen with the growing concept of big data should promote the further adoption of network and cloud usages by Japanese enterprises and governmental organization supported by the returned demand on systems investment along with the Japanese economic recovery. To grasp these favorable growth opportunities, we're enhancing our business investments more than ever. This fiscal year, we're increasing the procurement number of employees and aggressively investing in cloud and overseas businesses in particular," said Koichi Suzuki, Founder and CEO of IIJ.

"Along with our business expansion, our operating costs, including depreciation and amortization, personnel and overseas business-related costs, have increased largely from the beginning of this fiscal year. On the other hand, we've suffered from some large customers' recurring revenues slow down and decrease than estimated this fiscal year. Certain carriers, network operators and game providers are one of our largest customers, and we had serious price down pressure for Internet connectivity and WAN services and partial cancellation of server usage from them due to their individual business conditions. Costs of our recurring revenues are mainly costs to operate and maintain network facilities and equipment such as depreciation, personnel and circuit related costs and these costs are not directly correlated with individual revenue increase or decrease in general. Thus, the increasing gap to our initial expectation quarter by quarter in recurring revenues impacts our income level significantly. We're seeing quite fine systems construction orders, yet it wouldn't be strong enough to cover their reduced volume. Considering these situations, we revised our financial target downward," said Eijiro Katsu, President and COO of IIJ.

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 JPY105.25 per US$1.00, which was the noon buying rate on December 31, 2013.

"We perceive this fiscal year's financial situation as a part of the course for future growth, although the sales slumps of large customers have not been expected. Sales activities have been quite fine in accumulating new orders and polishing the existing deep relationships with our core customers. It is true that our business transactions with large customers continuously become significant and our business volatility becomes large along with that. We need to implement further stronger control and management for large accounts and also increase such large customers and transactions more to reduce total business volatility. We believe our cloud strategy to capture blue-chips' core platform systems should respond this issue to grow our customers into large accounts in the middle term," continued Katsu.

"We can anticipate continuous growth of network and outsourcing demands, strong SI orders next year. As for large accounts, network carriers' traffic should continuously grow and game providers' server usage should grow in total. We are still in the middle of business investment and we continuously pursue business expansion strategy. We'll devote ourselves on network services development and the accumulation of profitable recurring revenue services. Also, with further investment and cost control, we believe we will get back to the track to strong income growth in the next fiscal year. Lastly, we'd like to pursue M&A transactions to support our business scale-up," concluded Suzuki.

3rd Quarter FY2013 Financial Results Summary

Operating Results Summary
  3Q12 3Q13 YoY %
Change
  JPY millions JPY millions  
Total Revenues  76,690  82,746  7.9
Network Services  48,515  50,301  3.7
Systems Integration (SI)  25,601  29,197  14.0
Equipment Sales  867  1,178  35.8
ATM Operation Business  1,707  2,070  21.3
Total Costs  61,165  67,228  9.9
Network Services  37,972  39,764  4.7
Systems Integration (SI)  20,994  24,826  18.3
Equipment Sales  749  1,062  41.7
ATM Operation Business  1,450  1,576  8.7
SG&A Expenses and R&D  10,482  11,307  7.9
Operating Income  5,043  4,211  (16.5)
Income before Income Tax Expense  4,946  4,625  (6.5)
Net Income attributable to IIJ  3,112  2,924  (6.0)
       
Segment Results Summary
  3Q12 3Q13
  JPY millions JPY millions
Total Revenues  76,690  82,746
Network Services and SI Business  75,399  81,029
ATM Operation Business  1,707  2,070
Elimination  416  353
Operating Income  5,043  4,211
Network Service and SI Business  4,965  3,899
ATM Operation Business  164  400
Elimination  86  88

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

3rd Quarter FY2013 Results of Operation

Revenues

Total revenues were JPY82,746 million, up 7.9% YoY.

Network Services revenue was JPY50,301 million, up 3.7% YoY.

Revenues for Internet connectivity services for corporate use were JPY12,499 million, up 6.1% YoY. The increase was mainly due to the increasing demands for broader bandwidth and mobile service. However, the rate of change was lower than the plan mainly due to the strong price down pressure by certain large customers.

Revenues for Internet connectivity services for home use were JPY4,397 million, up 7.0% YoY. The revenues grew as we have continued to accumulate orders for LTE mobile data communication service. Especially, the low-priced mobile service for SIM-free mobile phones led the revenue to growth and the number of its contracts was approximately 119,000 as of December 31, 2013.

WAN services revenues were JPY18,786 million, decreased slightly compared to 3Q12. While revenues from the other general customers increased continuously, the strong price down pressure by certain large customers had an impact on the decrease of the revenues.

Outsourcing services revenues were JPY14,619 million, up 6.4% YoY. The revenue growth was mainly due to the increase of revenues in "IIJ GIO Hosting Package Services" and datacenter-related services.

Network Services Revenues Breakdown
  3Q12 3Q13 YoY %
Change
  JPY millions JPY millions  
Internet Connectivity Service (Corporate Use)  11,783  12,499  6.1
IP Service2  7,435  7,818  5.2
IIJ FiberAccess/F and IIJ DSL/F  2,397  2,368  (1.2)
IIJ Mobile Service3  1,772  2,141  20.8
Others  179  172  (3.9)
Internet Connectivity Service (Home Use)  4,111  4,397  7.0
Under IIJ Brand  969  1,577  62.8
hi-ho  2,678  2,297  (14.2)
OEM  464  523  12.6
WAN Services  18,880  18,786  (0.5)
Outsourcing Services  13,741  14,619  6.4
Total Network Services  48,515  50,301  3.7
       
Number of Contracts for Connectivity Services
  as of
Dec. 31, 2012
as of
Dec. 31, 2013
YoY
Change
Internet Connectivity Services (Corporate Use)  105,672  128,635  22,963
IP Service (-99Mbps)  908  873  (35)
IP Service (100Mbps-999Mbps)  370  434  64
IP Service (1Gbps-)  186  263  77
IIJ Data Center Connectivity Service  309  293  (16)
IIJ FiberAccess/F and IIJ DSL/F  46,670  53,536  6,866
IIJ Mobile Service4  55,883  71,940  16,057
Others  1,346  1,296  (50)
Internet Connectivity Services (Home Use)   465,624  596,458  130,834
Under IIJ Brand  89,885  152,191  62,306
hi-ho  150,238  157,087  6,849
OEM  225,501  287,180  61,679
Total Contracted Bandwidth  1,107.5Gbps 1,501.8Gbps 394.3Gbps

SI revenues were JPY29,197 million, up 14.0% YoY.

Systems construction revenue, a one-time revenue, was JPY11,635 million, up 18.4% YoY, mainly due to the continuous accumulation of orders and the trend of large scale projects in accordance with the returned demand on systems investment along with the Japanese economic recovery. Systems operation and maintenance revenue, a recurring revenue, was JPY17,562 million, up 11.3% YoY. The increase was mainly due to the increase in revenue of "IIJ GIO Component Services."

The orders received for SI and equipment sales were JPY36,156 million, significantly increased by 21.1% YoY. In the breakdown, the orders received for systems construction and equipment sales were JPY16,236 million, up 33.2% YoY, and the orders received for systems operation and maintenance were JPY19,920 million, up 12.7% YoY.

The order backlog for SI and equipment sales as of December 31, 2013 amounted to JPY25,862 million, up 27.7% YoY. In the breakdown, the order backlog for systems construction and equipment sales was JPY7,126 million, up 33.6% YoY, and the order backlog for systems operation and maintenance was JPY18,736 million, up 25.6% YoY.

Equipment sales revenues were JPY1,178 million, up 35.8% YoY.

ATM Operation Business revenues were JPY2,070 million, up 21.3% YoY. The increase was mainly in accordance with the increase in the numbers of newly placed ATMs. 785 ATMs were placed as of February 7, 2014.

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.

Cost and expense

Total cost of revenues was JPY67,228 million, up 9.9% YoY.

Cost of Network Services revenues was JPY39,764 million, up 4.7% YoY. The increase was mainly due to the increase in network operation related costs as well as circuit-related and personnel-related costs. Gross margin was JPY10,538 million, down 0.1% YoY and gross margin ratio was 20.9%, down 0.8 points YoY due to the strong price down pressure in Internet connectivity and WAN services from certain large customers.

Cost of SI revenues was JPY24,826 million, up 18.3% YoY. The increase was mainly due to the increase in purchasing costs along with the increase in systems construction revenues as well as outsourcing-related and personnel-related costs. Gross margin was JPY4,371 million, down 5.1% YoY and gross margin ratio was 15.0% due to the trend of large scale projects.

Cost of Equipment Sales revenues was JPY1,062 million, up 41.7% YoY. Gross margin was JPY 116 million and gross margin ratio was 9.8%.

Cost of ATM Operation Business revenues was JPY1,576 million, up 8.7% YoY. The increase was in accordance with the number of newly placed ATMs. Gross margin was JPY494 million and gross margin ratio was 23.8%.

SG&A and R&D expenses

SG&A and R&D expenses were JPY11,307 million, up 7.9% YoY.

Sales and Marketing expenses were JPY6,346 million, up 5.2% YoY. The increase was mainly due to the increase in personnel-related expenses along with the increase in employees, rent expenses, and sales commission expenses related to Internet connectivity services for home use.

General and Administrative expenses were JPY4,645 million, up 12.0% YoY. The increase was mainly due to the increase in personnel-related expenses along with the increase in employees, rent expenses, depreciation, and commission expenses related to the procurement of employees.

Research and Development expenses were JPY316 million, up 3.9% YoY.

Operating income

Operating income was JPY4,211 million, down 16.5% YoY.

Other income (expenses)

Other income (expenses) was an income of JPY414 million (an expense of JPY97 million for 3Q12), mainly due to foreign currency gains of JPY203 million (foreign currency losses of JPY13 million for 3Q12) and net gain on other investments of JPY172 million, and interest expense of JPY194 million.

Income before income tax expense

Income before income tax expense was JPY4,625 million, down 6.5% YoY (JPY4,946 million for 3Q12) as a result of the decrease in operating income.

Net income

Income tax expense was JPY1,841 million (JPY1,954 million for 3Q12).

Equity in net income of equity method investees was JPY191 million (JPY131 million for 3Q12) mainly due to net income of Internet Revolution, Inc. and Internet Multifeed Co.

As a result of the above, net income was JPY2,975 million, down 4.8% YoY (JPY3,123 million for 3Q12).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY51 million mainly related to net income of Trust Networks Inc. (JPY11 million for 3Q12).

Net income attributable to IIJ was JPY2,924 million, down 6.0% YoY (JPY3,112 million for 3Q12).

3rd Quarter FY2013 Financial Condition

Balance Sheets

As of December 31, 2013, the balance of total assets was JPY100,596 million, increased by JPY18,485 million from the balance as of March 31, 2013 (JPY82,111 million as of March 31, 2013).

As for current assets as of December 31, 2013, as compared to the respective balances as of March 31, 2013, cash and cash equivalents increased by JPY9,843 million mainly due to the equity finance in the previous quarter, prepaid expenses increased by JPY1,474 million, inventories increased by JPY1,216 million and accounts receivable decreased by JPY1,998 million. As for noncurrent assets, as compared to the respective balances as of March 31, 2013, other investments increased by JPY3,656 million mainly due to the increase in its fair value, property and equipment increased by JPY3,531 million by continuous capital expenditure mainly for network infrastructure including cloud-related and guarantee deposits increased by JPY672 million along with our office expansion. As for current liabilities, as compared to the respective balances as of March 31, 2013, income taxes payable decreased by 1,493 million and accounts payable decreased by JPY1,303 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 JPY144 million to JPY3,649 million and capital lease obligations-noncurrent decreased by JPY449 million to JPY4,922 million.

As of December 31, 2013, the balance of other investments was JPY7,427 million. The breakdown of other investments were JPY4,477 million in available-for-sale securities including listed stocks, JPY2,242 million in nonmarketable equity securities, and JPY708 million in other. There was a large increase in fair value in one of our stock held for business relation due to going public in Japan.

As of December 31, 2013, the breakdown of major 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 JPY4,317 million.

As of December 31, 2013, the balance of total IIJ shareholders' equity was JPY58,838 million, increased by JPY21,231 million from the balance as of March 31, 2013 due to increase in common-stock and additional paid-in capital as a result of equity finance and net income in 3Q13. IIJ shareholders' equity ratio (total IIJ shareholders' equity/total assets) as of December 31, 2013 was 58.5%.

Cash Flows

Cash and cash equivalents as of December 31, 2013 were JPY22,102 million compared to JPY10,648 million as of December 31, 2012.

Net cash provided by operating activities for 3Q13 was JPY5,732 million compared to net cash provided by operating activities of JPY5,880 million for 3Q12. In YoY comparison, net income decreased, while depreciation and amortization, which are non-cash expenses, increased. There were also the changes in operating assets and liabilities; cash inflow in accounts receivable increased, while cash outflows in operating liabilities such as accounts payable, increased.

Net cash used in investing activities for 3Q13 was JPY8,480 million compared to net cash used in investing activities of JPY4,704 million for 3Q12, mainly due to payments for purchase of property and equipment of JPY7,228 million (JPY4,410 million for 3Q12), payments for purchase of other investments of JPY1,128 million (JPY407 million for 3Q12) and payments for guarantee deposits of JPY681 million (JPY87 million for 3Q12).

Net cash provided by financing activities for 3Q13 was JPY12,408 million compared to net cash used in financing activities of JPY4,057 million for 3Q12, mainly due to proceeds from issuance of common stock of JPY17,271 million, principal payments under capital leases of JPY2,942 million (JPY2,741 million for 3Q12), net repayments of borrowings of JPY1,010 million (JPY610 million for 3Q12), JPY911 million in total for FY2012 year-end dividends and FY2013 interim dividends payments (JPY709 million for 3Q12).

FY2013 Financial Targets (revised on February 7, 2014)

We revised the target of consolidated financial results for the fiscal year ending March 31, 2014 announced on May 15, 2013. The table below shown is the summary of the revision.

Revision for the Consolidated Financial Targets for FY2013
  Total
Revenues
Operating
Income
Income before
Income Tax
Expense
(Benefit)
Net Income
attributable to
IIJ
Basic Net
Income
attributable to IIJ
per Share
  JPY millions JPY millions JPY millions JPY millions JPY
Previous Target  117,000  9,400  9,000  6,000  135.42
Revised Target  114,000  6,000  6,500  4,700  106.08

Please refer to page 25 and 26 of this press release for more details.

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.

Adjusted EBITDA
  3Q12 3Q13
  JPY millions JPY millions
Adjusted EBITDA  10,586  10,715
Depreciation and Amortization5  5,543  6,504
Operating Income  5,043  4,211
Other Income (Expense)  (97)  414
Income Tax Expense  1,954  1,841
Equity in Net Income of Equity Method Investees  131  191
Net Income  3,123  2,975
Less: Net Income attributable to Noncontrolling Interests  (11)  (51)
Net Income attributable to IIJ  3,112 2,924
 
CAPEX
  3Q12 3Q13
  JPY millions JPY millions
CAPEX, including Capital Leases  8,452  9,863
Acquisition of Assets by Entering into Capital Leases  4,042  2,635
Purchase of Property and Equipment  4,410  7,228

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 February 7, 2014.

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/.

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.

Internet Initiative Japan Inc.
Quarterly Consolidated Balance Sheets (Unaudited)
(As of March 31, 2013 and December 31, 2013)
 
  As of March 31, 2013 As of December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
ASSETS      
CURRENT ASSETS:      
Cash and cash equivalents 12,258,872 209,999 22,102,350
Accounts receivable, net of allowance for
 doubtful accounts of JPY 93,934 thousand and
 JPY 55,215 thousand at March 31, 2013
 and December 31, 2013, respectively
18,764,703 159,304 16,766,820
Inventories 1,301,684 23,919 2,517,444
Prepaid expenses 2,492,164 37,685 3,966,324
Deferred tax assets —current 1,046,828 8,527 897,481
Other current assets, net of allowance for
 doubtful accounts of JPY 10,732 thousand and
 JPY 720 thousand at March 31, 2013 and
 December 31, 2013, respectively
1,576,718 18,511 1,948,278
Total current assets 37,440,969 457,945 48,198,697
INVESTMENTS IN EQUITY METHOD INVESTEES 1,681,723 17,795 1,872,927
OTHER INVESTMENTS 3,771,262 70,568 7,427,324
PROPERTY AND EQUIPMENT, net of accumulated
 depreciation and amortization of JPY 29,516,394
 thousand and JPY 33,715,595 thousand at March
 31, 2013 and December 31, 2013, respectively
23,025,755 252,321 26,556,765
GOODWILL 5,969,951 56,722 5,969,951
OTHER INTANGIBLE ASSETS —Net 4,791,431 42,332 4,455,457
GUARANTEE DEPOSITS 2,051,449 25,874 2,723,190
DEFERRED TAX ASSETS —Noncurrent 163,773 350 36,850
NET INVESTMENT IN SALES-TYPE LEASES —
Noncurrent
898,040 7,511 790,568
Prepaid expenses —Noncurrent 2,201,108 23,012 2,422,007
OTHER ASSETS, net of allowance for doubtful
 accounts of JPY 71,727 thousand and JPY 62,600
 thousand at March 31, 2013 and December 31, 2013,
 respectively
115,805 1,351 142,188
TOTAL 82,111,266 955,781 100,595,924
 
 
  As of March 31, 2013 As of December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
LIABILITIES AND SHAREHOLDERS' EQUITY      
CURRENT LIABILITIES:      
Short-term borrowings 9,400,000 89,311 9,400,000
Long-term borrowings —current portion 1,010,000 9,311 980,000
Capital lease obligations —current portion 3,505,471 34,673 3,649,275
Accounts payable —trade 10,973,120 95,193 10,019,098
Accounts payable —other 949,264 5,706 600,544
Income taxes payable 1,669,849 1,677 176,502
Accrued expenses 2,266,427 20,480 2,155,517
Deferred income —current 1,806,074 16,045 1,688,703
Other current liabilities 803,902 11,685 1,229,878
Total current liabilities 32,384,107 284,081 29,899,517
LONG-TERM BORROWINGS 980,000
CAPITAL LEASE OBLIGATIONS —Noncurrent 5,370,365 46,762 4,921,708
ACCRUED RETIREMENT AND PENSION COSTS
 —Noncurrent
2,112,085 21,707 2,284,623
DEFERRED TAX LIABILITIES —Noncurrent 412,132 13,465 1,417,180
DEFERRED INCOME —Noncurrent 2,562,208 24,728 2,602,593
OTHER NONCURRENT LIABILITIES 656,191 5,262 553,853
Total Liabilities 44,477,088 396,005 41,679,474
COMMITMENTS AND CONTINGENCIES      
       
SHAREHOLDERS' EQUITY:      
Common-stock
—authorized, 75,520,000 shares;
 issued and outstanding, 41,295,600 shares at
 March 31, 2013
16,833,847 242,252 25,497,022
—authorized, 75,520,000 shares;
 issued and outstanding, 46,697,800 shares at
 December 31, 2013
     
Additional paid-in capital 27,300,325 341,544 35,947,501
Accumulated deficit (6,399,088) (41,669) (4,385,715)
Accumulated other comprehensive income 263,770 20,630 2,171,324
Treasury stock —758,800 shares and 758,813 shares
 held by the company at March 31, 2013 and
 December 31, 2013, respectively
(392,079) (3,726) (392,122)
Total Internet Initiative Japan Inc. shareholders' equity 37,606,775 559,031 58,838,010
NONCONTROLLING INTERESTS 27,403 745 78,440
Total equity 37,634,178 559,776 58,916,450
TOTAL 82,111,266 955,781 100,595,924
 
(Note) The U.S. dollar amounts have been translated from yen, for convenience only, at the rate of JPY 105.25 per 1U.S. dollar which was
 the noon buying rate in New York City for cable transfers in foreign currencies as of December 31, 2013.
       
Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income and
Quarterly Consolidated Statements of Other Comprehensive Income (Unaudited)
(For the nine months ended December 31, 2012 and December 31, 2013)
 
Quarterly Consolidated Statements of Income
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
REVENUES:      
Network services:      
Internet connectivity services (corporate use) 11,783,029 118,760 12,499,526
Internet connectivity services (home use) 4,110,638 41,775 4,396,796
WAN services 18,879,758 178,489 18,785,947
Outsourcing services 13,741,605 138,900 14,619,196
Total 48,515,030 477,924 50,301,465
Systems integration:      
Systems construction 9,824,179 110,547 11,635,117
Systems operation and maintenance 15,776,992 166,856 17,561,594
Total 25,601,171 277,403 29,196,711
Equipment sales 867,303 11,192 1,177,989
ATM operation business 1,706,586 19,670 2,070,278
Total revenues 76,690,090 786,189 82,746,443
COST AND EXPENSES:      
Cost of network services 37,971,665 377,803 39,763,829
Cost of systems integration 20,993,632 235,878 24,826,140
Cost of equipment sales 749,397 10,091 1,062,057
Cost of ATM operation business 1,450,459 14,980 1,576,636
Total cost 61,165,153 638,752 67,228,662
Sales and marketing 6,030,817 60,292 6,345,713
General and administrative 4,147,197 44,138 4,645,519
Research and development 304,060 3,000 315,800
Total cost and expenses 71,647,227 746,182 78,535,694
OPERATING INCOME 5,042,863 40,007 4,210,749
OTHER INCOME (EXPENSE):      
Dividend income 44,513 459 48,259
Interest income 19,889 177 18,670
Interest expense (217,897) (1,844) (194,108)
Foreign exchange gains (losses) (12,705) 1,925 202,598
Net gain on sales of other investments 13,565 1,023 107,655
Net gain on other investments -- 1,638 172,423
Losses on write-down of other investments (19,788) -- --
Other —net 75,526 562 59,186
Other income (expense) —net (96,897) 3,940 414,683
INCOME FROM OPERATIONS BEFORE INCOME
 TAX EXPENSE AND EQUITY IN NET INCOME
 OF EQUITY METHOD INVESTEES
4,945,966 43,947 4,625,432
INCOME TAX EXPENSE  1,954,168 17,498 1,841,690
EQUITY IN NET INCOME OF EQUITY METHOD
 INVESTEES
131,688 1,817 191,204
NET INCOME 3,123,486 28,266 2,974,946
LESS: NET INCOME ATTRIBUTABLE TO
 NONCONTROLLING INTERESTS
(11,201) (484) (50,876)
NET INCOME ATTRIBUTABLE TO INTERNET
 INITIATIVE JAPAN INC.
3,112,285 27,782 2,924,070
 
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
NET INCOME PER SHARE      
BASIC WEIGHTED-AVERAGE NUMBER OF
 SHARES (shares)
40,536,800   43,772,437
DILUTED WEIGHTED-AVERAGE NUMBER
 OF SHARES (shares)
40,569,000   43,825,204
BASIC WEIGHTED-AVERAGE NUMBER OF
 ADS EQUIVALENTS (ADSs)
81,073,600   87,544,874
DILUTED WEIGHTED-AVERAGE NUMBER
 OF ADS EQUIVALENTS (ADSs)
81,138,000   87,650,408
BASIC NET INCOME PER SHARE
 (JPY / U.S. Dollars / JPY)
76.78 0.63 66.80
DILUTED NET INCOME PER SHARE
 (JPY / U.S. Dollars / JPY)
76.72 0.63 66.72
BASIC NET INCOME PER ADS
 EQUIVALENT (JPY / U.S. Dollars / JPY)
38.39 0.32 33.40
DILUTED NET INCOME PER ADS
 EQUIVALENT (JPY / U.S. Dollars / JPY)
38.36 0.32 33.36
 
 
(Note) The U.S. dollar amounts have been translated from yen, for convenience only, at the rate of JPY 105.25 per 1U.S. dollar which was
 the noon buying rate in New York City for cable transfers in foreign currencies as of December 31, 2013.
 
Quarterly Consolidated Statements of Other Comprehensive Income
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
NET INCOME 3,123,486 28,266 2,974,946
Comprehensive income (loss):      
Foreign currency translation adjustments (14,446) 2,652 279,107
Unrealized holding gain (loss) on securities 89,799 15,472 1,628,430
Defined benefit pension plans 178 1 178
Total comprehensive income  3,199,017 46,391 4,882,661
Less: Comprehensive income attributable to
   noncontrolling interests
(11,201) (485) (51,037)
Comprehensive income attributable to Internet 
   Initiative Japan Inc.
3,187,816 45,906 4,831,624
 
 
(Note) The U.S. dollar amounts have been translated from yen, for convenience only, at the rate of JPY 105.25 per 1U.S. dollar which was
 the noon buying rate in New York City for cable transfers in foreign currencies as of December 31, 2013.
       
       
Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Cash Flows (Unaudited)
(For the nine months ended December 31, 2012 and December 31, 2013)
 
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
OPERATING ACTIVITIES:      
Net income 3,123,486 28,266 2,974,946
Adjustments to reconcile net income to net cash
 provided by operating activities:
 
Depreciation and amortization 5,543,517 61,798 6,504,202
Provision for retirement and pension costs,
 less payments
165,262 1,642 172,815
Reversal of allowance for doubtful accounts (142) (435) (45,808)
Loss on disposal of property and equipment 4,593 109 11,443
Net gain on sales of other investments (13,565) (1,023) (107,655)
Net gain on other investments -- (1,638) (172,423)
Impairment of other investments 19,788 -- --
Foreign exchange gains, net (17,284) (1,477) (155,394)
Equity in net income of equity method investees (131,688) (1,817) (191,204)
Deferred income tax expense 151,975 3,711 390,591
Others 13,153 509 53,567
Changes in operating assets and liabilities net of effects
 from acquisition of a company:
 
Decrease in accounts receivable 435,371 19,739 2,077,501
Decrease in net investment in sales-type lease — noncurrent 239,867 1,021 107,472
Increase in inventories (981,707) (11,534) (1,213,943)
Increase in prepaid expenses (1,392,119) (13,890) (1,461,899)
Increase in other current and noncurrent assets (578,545) (5,064) (532,984)
Increase (decrease) in accounts payable 59,748 (9,378) (987,036)
Decrease in income taxes payable (1,820,268) (14,189) (1,493,410)
Increase (decrease) in deferred income-noncurrent 776,649 (80) (8,392)
Increase (decrease) in accrued expenses and 
 other current and noncurrent liabilities
281,706 (1,809) (190,343)
Net cash provided by operating activities 5,879,797 54,461 5,732,046
INVESTING ACTIVITIES:      
Purchase of property and equipment (4,410,119) (68,671) (7,227,651)
Proceeds from sales of property and equipment 472,706 2,247 236,499
Purchase of available-for-sale securities (41,250) (936) (98,494)
Purchase of other investments (407,002) (10,716) (1,127,831)
Investment in an equity method investee (100,000) -- --
Proceeds from sales of available-for-sale securities -- 3,723 391,814
Proceeds from sales of other investments 92,634 190 20,000
Payments of guarantee deposits (86,954) (6,474) (681,378)
Refund of guarantee deposits 15,363 74 7,818
Payments for refundable insurance policies (554) (44) (4,697)
Refund from insurance policies -- 152 16,026
Acquisition of a newly controlled company,
 net of cash acquired
(229,058) -- --
Other (9,618) (116) (12,209)
Net cash used in investing activities (4,703,852) (80,571) (8,480,103)
 
 
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
FINANCING ACTIVITIES:      
Proceeds from issuance of short-term borrowings
 with initial maturities over three months
71,000 2,375 250,000
Repayments of short-term borrowings with initial
 maturities over three months and long-term borrowings
(1,081,000) (11,971) (1,260,000)
Principal payments under capital leases (2,740,622) (27,953) (2,942,006)
Net increase in short-term borrowings with
 initial maturities less than three months
400,000 -- --
Proceeds from issuance of stock to minority shareholders 2,570 -- --
Dividends paid (709,394) (8,653) (910,697)
Proceeds from issuance of common stock, net of issuance cost -- 164,097 17,271,204
Other -- (0) (41)
Net cash provided by (used in) financing activities (4,057,446) 117,895 12,408,460
       
EFFECT OF EXCHANGE RATE CHANGES ON
 CASH AND CASH EQUIVALENTS
(7,027) 1,740 183,075
       
NET INCREASE (DECREASE) IN CASH AND CASH 
 EQUIVALENTS
(2,888,528) 93,525 9,843,478
CASH AND CASH EQUIVALENTS, BEGINNING OF
 THE PERIOD
13,536,824 116,474 12,258,872
CASH AND CASH EQUIVALENTS, END OF
 THE PERIOD
10,648,296 209,999 22,102,350
 
ADDITIONAL CASH FLOW INFORMATION:    
Interest paid 218,322 1,847 194,375
Income taxes paid 3,484,499 25,660 2,700,675
       
NONCASH INVESTING AND FINANCING ACTIVITIES:    
Acquisition of assets by entering into capital leases 4,041,871 25,040 2,635,473
Facilities purchase liabilities 367,018 5,706 600,544
Asset retirement obligation -- 1,684 177,223
Acquisition of a company:      
 Assets acquired 404,139 -- --
 Liabilities assumed 104,321 -- --
 Noncontrolling interests 118 -- --
 Cash paid (299,700) -- --
 Cash acquired  70,642 -- --
 Acquisition of a newly controlled company,
 net of cash acquired
229,058 -- --
 
       
(Note) The U.S. dollar amounts have been translated from yen, for convenience only, at the rate of JPY 105.25 per 1U.S. dollar which was the noon buying rate in New York City for cable transfers in foreign currencies as of December 31, 2013.
     
Going Concern Assumption (Unaudited)
Nothing to be reported.
 
Material Changes In Shareholders' Equity (Unaudited)
IIJ issued new shares by way of public offering with payment due July 18, 2013 and by way of third-party allotment in connection with secondary offering of shares by way of over-allotment with payment due August 5, 2013. As a result, common stock and additional paid-in capital increased by JPY8,662 million and JPY8,610 million, respectively.
 
Segment Information (Unaudited)
Business Segments:
Revenues:
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
  Thousands of JPY Thousands of JPY
Network service and systems integration business 75,399,477 81,028,754
Customers 74,983,504 80,676,165
Intersegment 415,973 352,589
ATM operation business 1,706,586 2,070,278
Customers 1,706,586 2,070,278
Intersegment -- --
Elimination 415,973 352,589
Consolidated total 76,690,090 82,746,443
Segment profit or loss:    
  Nine Months Ended
December 31, 2012
Nine Months Ended
December 31, 2013
  Thousands of JPY Thousands of JPY
Network service and systems integration business 4,964,544 3,899,222
ATM operation business 163,845 399,972
Elimination 85,526 88,445
Consolidated operating income 5,042,863 4,210,749
     
Geographic information is not presented due to immateriality of revenue attributable to international operations.
 
Subsequent Events (Unaudited)
Nothing to be reported.

3rd Quarter FY2013 Consolidated Financial Results (3 months)

The following tables are highlight data of 3rd Quarter FY2013 consolidated financial results (unaudited, from October 1, 2013 to December 31, 2013).

Operating Results Summary
  3Q12 3Q13 YoY %
Change
  JPY millions JPY millions  
Total Revenues: 25,581 28,349 10.8
Network Services 16,256 16,691 2.7
Systems Integration (SI) 8,475 10,524 24.2
Equipment Sales 225 422 87.4
ATM Operation Business 625 712 14.0
Cost of Revenues: 20,204 23,262 15.1
Network Services 12,589 13,299 5.6
Systems Integration (SI) 6,904 9,061 31.2
Equipment Sales 198 381 92.2
ATM Operation Business 513 521 1.6
SG&A Expenses and R&D 3,597 3,885 8.0
Operating Income 1,780 1,202 (32.5)
Income before Income Tax Expense 1,770 1,278 (27.8)
Net Income attributable to IIJ 1,105 719 (34.9)
 
Network Services Revenues Breakdown
  3Q12 3Q13 YoY %
Change
  JPY millions JPY millions  
Internet Connectivity Service (Corporate Use) 3,967 4,141 4.4
IP Service 2,500 2,550 2.0
IIJ FiberAccess/F and IIJ DSL/F 791 793 0.2
IIJ Mobile Service 616 740 20.2
Others 60 58 (2.5)
Internet Connectivity Service (Home Use) 1,343 1,541 14.8
Under IIJ Brand 348 596 71.7
hi-ho 837 766 (8.6)
OEM 158 179 13.5
WAN Services 6,302 6,168 (2.1)
Outsourcing Services 4,644 4,841 4.2
Network Services Revenues 16,256 16,691 2.7

Reconciliation of Non-GAAP Financial Measures (3rd Quarter FY2013 (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.

Adjusted EBITDA
  3Q12 3Q13
  JPY millions JPY millions
Adjusted EBITDA 3,684 3,468
Depreciation and Amortization 1,904 2,266
Operating Income 1,780 1,202
Other Income (Expense) (10) 76
Income Tax Expense 703 599
Equity in Net Income of Equity Method Investees 49 64
Net income 1,115 743
Less: Net income attributable to noncontrolling interests (10) (24)
Net Income attributable to IIJ 1,105 719

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.

CAPEX
  3Q12 3Q13
  JPY millions JPY millions
CAPEX, including capital leases 2,549 5,216
Acquisition of Assets by Entering into Capital Leases 924 772
Purchase of Property and Equipment 1,625 4,444
 
Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income (Unaudited)
(For the three months ended December 31, 2012 and December 31, 2013)
 
  Three Months Ended
December 31, 2012
Three Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
REVENUES:      
Network services:      
Internet connectivity services (corporate use) 3,967,404 39,348 4,141,412
Internet connectivity services (home use) 1,342,487 14,641 1,541,006
WAN services 6,302,542 58,600 6,167,599
Outsourcing services 4,643,995 45,995 4,840,919
Total 16,256,428 158,584 16,690,936
Systems integration:      
Systems Construction 3,130,593 42,602 4,483,875
Systems Operation and Maintenance 5,343,964 57,386 6,039,819
Total 8,474,557 99,988 10,523,694
Equipment sales 225,523 4,016 422,680
ATM operation business 624,581 6,766 712,174
Total revenues 25,581,089 269,354 28,349,484
COST AND EXPENSES:      
Cost of network services 12,589,051 126,361 13,299,490
Cost of systems integration 6,904,274 86,090 9,060,955
Cost of equipment sales 198,152 3,619 380,895
Cost of ATM operation business 512,418 4,947 520,692
Total cost 20,203,895 221,017 23,262,032
Sales and marketing 2,099,141 20,743 2,183,154
General and administrative 1,402,120 15,281 1,608,318
Research and development 95,777 895 94,210
Total cost and expenses 23,800,933 257,936 27,147,714
OPERATING INCOME 1,780,156 11,418 1,201,770
OTHER INCOME (EXPENSE):      
Dividend income 9,751 119 12,499
Interest income 5,066 56 5,869
Interest expense (72,734) (586) (61,641)
Foreign exchange gains (losses) 37,292 601 63,313
Net gain on sales of other investments 236 24,803
Other—net 10,137 297 31,221
Other income (expense) — net (10,488) 723 76,064
       
INCOME FROM OPERATIONS BEFORE INCOME
 TAX EXPENSE AND EQUITY IN NET INCOME
 IN EQUITY METHOD INVESTEES
1,769,668 12,141 1,277,834
       
INCOME TAX EXPENSE  702,996 5,687 598,517
EQUITY IN NET INCOME OF EQUITY
 METHOD INVESTEES
48,600 607 63,846
NET INCOME 1,115,272 7,061 743,163
LESS: NET INCOME ATTRIBUTABLE TO
 NONCONTROLLING INTERESTS
(10,143) (228) (23,964)
NET INCOME ATTRIBUTABLE TO
 INTERNET INITIATIVE JAPAN INC.
1,105,129 6,833 719,199
 
       
 
  Three Months Ended
December 31, 2012
Three Months Ended
December 31, 2013
NET INCOME PER SHARE      
BASIC WEIGHTED-AVERAGE NUMBER OF
 SHARES (shares)
40,536,800   45,938,987
DILUTED WEIGHTED-AVERAGE NUMBER
 OF SHARES (shares)
40,577,200   45,995,002
BASIC WEIGHTED-AVERAGE NUMBER OF
 ADS EQUIVALENTS (ADSs)
81,073,600   91,877,974
DILUTED WEIGHTED-AVERAGE NUMBER
 OF ADS EQUIVALENTS (ADSs)
81,154,400   91,990,004
BASIC NET INCOME PER SHARE
 (JPY / U.S. Dollars / JPY)
27.26 0.15 15.66
DILUTED NET INCOME PER SHARE
 (JPY / U.S. Dollars / JPY)
27.24 0.15 15.64
BASIC NET INCOME PER ADS
 EQUIVALENT (JPY / U.S. Dollars / JPY)
13.63 0.07 7.83
DILUTED NET INCOME PER ADS
 EQUIVALENT (JPY / U.S. Dollars / JPY)
13.62 0.07 7.82
 
 
(Note) The U.S. dollar amounts have been translated from yen, for convenience only, at the rate of JPY 105.25 per 1U.S. dollar which was the noon buying rate in New York City for cable transfers in foreign currencies as of December 31, 2013.
       
Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Cash Flows (Unaudited)
(For the three months ended December 31, 2012 and December 31, 2013)
 
  Three Months Ended
December 31, 2012
Three Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
OPERATING ACTIVITIES:      
Net income 1,115,272 7,061 743,163
Adjustments to reconcile net income to net cash
 provided by operating activities:
     
Depreciation and amortization 1,904,175 21,527 2,265,726
Provision for retirement and pension
 costs, less payments
58,532 524 55,092
Provision for (reversal of) allowance for doubtful 
 accounts
(228) 13 1,392
Loss on disposal of property and equipment 2,278 74 7,827
Net gain on sales of other investments -- (236) (24,803)
Foreign exchange gains, net (53,502) (640) (67,370)
Equity in net income of equity method
 investees
(48,600) (607) (63,846)
Deferred income tax expense 27,645 2,100 221,007
Others 12,186 500 52,633
Changes in operating assets and liabilities net of effects
 from acquisition of a company:
     
Decrease (increase) in accounts receivable 257,960 (557) (58,605)
Decrease in net investment in sales-type
 lease―noncurrent
98,612 404 42,497
Increase in inventories (199,318) (4,326) (455,298)
Increase in prepaid expenses (442,220) (5,024) (528,822)
Increase in other current and noncurrent assets (626,725) (6,509) (685,056)
Increase (decrease) in accounts payable (241,843) 4,995 525,733
Decrease in income taxes payable (499,552) (6,648) (699,762)
Increase in deferred income― noncurrent 500,559 3,498 368,209
Increase in accrued expenses, other
 current and noncurrent liabilities
44,303 3,199 336,714
Net cash provided by operating activities 1,909,534 19,348 2,036,431
INVESTING ACTIVITIES:      
Purchase of property and equipment (1,624,929) (42,220) (4,443,660)
Proceeds from sales of property and equipment 97,701 1,078 113,413
Purchase of available-for-sale securities (21,644) (614) (64,592)
Purchase of other investments (33,093) (429) (45,191)
Proceeds from sales of available-for-sale securities -- 1,638 172,452
Proceeds from sales of other investments 3,517 152 16,000
Payments of guarantee deposits (64,481) (181) (19,095)
Refund of guarantee deposits 2,966 7 706
Payments for refundable insurance policies (186) (45) (4,697)
Other (9,678) (28) (2,959)
Net cash used in investing activities (1,649,827) (40,642) (4,277,623)
 
     
 
  Three Months Ended
December 31, 2012
Three Months Ended
December 31, 2013
  Thousands of
JPY
Thousands of
U.S. Dollars
Thousands of
JPY
FINANCING ACTIVITIES:      
Proceeds from issuance of short-term borrowings
 with initial maturities over three months
50,000 475 50,000
Repayments of short-term borrowings with initial
 maturities over three months and long-term borrowings
(71,000) (475) (50,000)
Principal payments under capital leases (927,968) (9,212) (969,549)
Proceeds from issuance of subsidiary stock to
 minority shareholders
2,570 -- --
Dividends paid (354,697) (4,801) (505,329)
Net cash used in financing activities (1,301,095) (14,013) (1,474,878)
       
EFFECT OF EXCHANGE RATE CHANGES ON
 CASH AND CASH EQUIVALENTS
19,234 350 36,790
       
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,022,154) (34,957) (3,679,280)
CASH AND CASH EQUIVALENTS, BEGINNING OF
 THE PERIOD
11,670,450 244,956 25,781,630
CASH AND CASH EQUIVALENTS, END OF
 THE PERIOD
10,648,296 209,999 22,102,350
 
 
(Note) The U.S. dollar amounts have been translated from yen, for convenience only, at the rate of JPY 105.25 per 1U.S. dollar which was the noon buying rate in New York City for cable transfers in foreign currencies as of December 31, 2013.

Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the nine months ended December 31, 2013 in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Nine Months Ended December 31, 2013
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]
February 7, 2014
Company name: Internet Initiative Japan Inc.  Exchange listed: First Section, Tokyo Stock Exchange
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) 5259-6500
Filing of quarterly report (Shihanki-houkokusho) to the regulatory organization in Japan: Scheduled on February 14, 2014  
Payment of dividend: -  Supplemental material on quarterly results: Yes
Presentation on quarterly results: Yes (for institutional investors and analysts)  
(Amounts of less than JPY one million are rounded)  
   
1. Consolidated Financial Results for the Nine Months Ended December 31, 2013  
(April 1, 2013 to December 31, 2013)  
(1) Consolidated Results of Operations  (% shown is YoY change)
  Total Revenues Operating Income Income before Income
Tax Expense
Net Income attributable
to IIJ
  JPY millions % JPY millions % JPY millions % JPY millions %
Nine Months Ended
December 31, 2013
82,746 7.9 4,211 (16.5) 4,625 (6.5) 2,924 (6.0)
Nine Months Ended
December 31, 2012
76,690 8.4 5,043 26.1 4,946 30.8 3,112 30.2

(Note1) Total comprehensive income attributable to IIJ

Nine Months Ended December 31, 2013: JPY4,832 million (up 51.6% YoY)          

Nine Months Ended December 31, 2012: JPY3,188 million (up 33.9% YoY)

(Note2) Income before income tax expense represents income from operations before income tax expense and equity in net income of equity method investees in IIJ's consolidated financial statements.

     
  Basic Net Income attributable
to IIJ per Share
Diluted Net Income attributable
to IIJ per Share
  JPY JPY
Nine Months Ended December 31, 2013 66.80 66.72
Nine Months Ended December 31, 2012 76.78 76.72

(Note) IIJ conducted a 1:200 stock split on common stock with an effective date of October 1, 2012. Accordingly, basic net income attributable to IIJ per share and diluted net income attributable to IIJ per share have been adjusted as if the stock split were conducted on April 1, 2012, at the beginning of the fiscal year ended March 31, 2013.

(2) Consolidated Financial Position         
  Total Assets Total Equity Total IIJ Shareholders'
Equity
Total IIJ Shareholders' Equity
to Total Assets
  JPY millions JPY millions JPY millions %
As of December 31, 2013 100,596 58,916 58,838 58.5
As of March 31, 2013 82,111 37,634 37,607 45.8
   
2. Dividends  
  Dividends per Share
  1Q-end 2Q-end 3Q-end Year-end Total
  JPY JPY JPY JPY  
Fiscal Year Ended
March 31, 2013
-- 1,750.00 -- 10.00 1,760.00
Fiscal Year Ending
March 31, 2014
-- 11.00 --    
Fiscal Year Ending
March 31, 2014 (forecast)
      11.00 22.00
(Note1) Changes in the latest forecasts released: None          
(Note2) IIJ conducted a 1:200 stock split on common stock with an effective date of October 1, 2012. 2Q-end dividend (interim dividend) for the fiscal year ended March 31, 2013 does not take the stock split into consideration. The dividends for 2Q-end and the total dividend for the fiscal year ended March 31, 2013 would have been JPY8.75 and JPY18.75 respectively if the stock split were conducted on April 1, 2012, at the beginning of the fiscal year ended March 31, 2013.          

 

3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2014
(April 1, 2013 through March 31, 2014) (% shown is YoY change)
  Total
Revenues
Operating
Income
Income before
Income Tax
Expense (Benefit)
Net Income
attributable to IIJ
Basic Net Income
attributable to IIJ
per Share
  JPY millions % JPY millions % JPY millions % JPY millions % JPY
Fiscal Year Ending
March 31, 2014
114,000 7.3 6,000 (22.6) 6,500 (16.2) 4,700 (11.3) 106.08
(Note1) Changes in the latest forecasts released: Yes
(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 calculated to reflect the increases in the number of shares outstanding.

* Notes

(1) Changes in significant subsidiaries for the nine months ended December 31, 2013

(Changes in significant subsidiaries for the nine months ended December 31, 2013 which resulted in changes in scope of consolidation): None

(2) Application of simplified or exceptional accounting: None

(3) 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: None

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

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

As of December 31, 2013: 46,697,800 shares

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

2) The number of treasury stock:

As of December 31, 2013: 758,813 shares

As of March 31, 2013: 758,800 shares

3) The weighted average number of shares outstanding:

For the nine months ended December 31, 2013: 43,772,437 shares

For the nine months ended December 31, 2012: 40,536,800 shares

(Note) 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 adjusted as if the stock split were conducted on April 1, 2012, at the beginning of the fiscal year ended March 31, 2013.

[English Translation]

February 7, 2014
Company address: 1-105 Kanda Jimbo-cho, Chiyoda-ku, Tokyo
Company name: Internet Initiative Japan Inc.
Company representative: Eijiro Katsu, President and Representative Director
(Stock Code Number: 3774 The First Section of the Tokyo Stock Exchange)
Contact: Akihisa Watai, Managing Director and CFO
TEL: 03-5259-6500

IIJ Revises its Full-Year Financial Target for the Fiscal Year ending March 31, 2014

TOKYO-- February 7, 2014 - Internet Initiative Japan Inc. ("IIJ") (Nasdaq:IIJI) (TSE1:3774) announced today that given the current business situation, IIJ has revised its financial targets for the fiscal year ending March 31, 2014 ("FY2013") from the targets announced on May 15, 2013, when released the consolidated full year financial results for the fiscal year ended March 31, 2013.

1.      Revision for the Consolidated Financial Targets for full FY2013

Full FY2013 (From April 1, 2013 to March 31, 2014)
  Total
Revenues
Operating
Income
Income before
Income Tax
Expense(Benefit)
Net Income
attributable to
IIJ
Basic Net
Income
attributable to
IIJ per Share
  JPY millions JPY millions JPY millions JPY millions JPY
Previous Target (A) 117,000 9,400 9,000 6,000 135.42
New Target (B) 114,000 6,000 6,500 4,700 106.08
Change (B-A) (3,000) (3,400) (2,500) (1,300) --
Change (%) (2.6%) (36.2%) (27.8%) (21.7%) --
<Reference>
FY2012 Actual
106,248 7,753 7,757 5,301 130.76

(Note) IIJ conducted a 1:200 stock split on common stock with an effective date of October 1, 2012. Accordingly, basic net income per share for the fiscal year ended March 31, 2013 ("FY2012") has been adjusted as if the stock split were conducted on April 1, 2012, at the beginning of FY2012.

The year-end dividend target remains unchanged from JPY11.00 announced on May 15, 2013.

2.      Reason for Revision

We believe that the business growth opportunities for IIJ group should be greater than ever for the middle term, considering the current overall market situation. The continuous technological innovation of network infrastructure, the ongoing development of the widely-used smart phones and other portable devises, and the evolving IT needs as seen with the growing concept of big data should promote the further adoption of network and cloud usages by Japanese enterprises and governmental organization supported by the returned demand on systems investment along with the Japanese economic recovery. Realizing the coming few years would be a critical period for IIJ business growth, we have been quite aggressive in business investment from the beginning of this fiscal year. Such business investment includes the enhanced procurement of employees, the continued expansion of network infrastructure, the continued service development, and the reinforcement of new business investment such as overseas business.

The operating costs and expenses for the nine months in FY2013 (from April 1, 2013 to December 31, 2013, "3Q13") increased significantly by JPY6,888 million, up 9.6% compared with the same period of the previous fiscal year ("YoY") mainly due to the above described business investment. The table below shows the breakdown of year over year difference in revenue, cost and SG&A and R&D expenses. The increase in the costs of systems integration revenues is principally purchasing costs, outsourcing-related and personnel-related costs in accordance with its revenue increase. The increase in the costs of network services revenues and SG&A and R&D expenses was mainly related to the business expansion operation including the increased number of employees, the expansion of network infrastructure including cloud-related, and the reinforcement of overseas business. The breakdown by items is as follows: the total personnel-related costs increased by JPY1,281 million, up 11.1% YoY, the outsourcing-related costs increased by JPY1,882 million, up 12.7%, the rent-related costs increased by JPY362 million, up 22.2% YoY, the depreciation and amortization increased by JPY814 million, up 14.8% YoY, and the purchasing costs increased by JPY1,339 million, up 24.1% YoY. 

     
  Nine Months for the Fiscal Year Ended
March 31, 2013
Nine Months for the Fiscal Year Ending
March 31, 2014
  Revenues Costs and Expenses Revenues Costs and Expenses        
  YoY Change
(JPY millions)
YoY
Change
YoY Change
(JPY millions)
YoY
Change
YoY Change
(JPY millions)
YoY
Change
YoY Change
(JPY millions)
YoY
Change
Network Services 1,273 2.7% 385 1.0% 1,786 3.7% 1,792 4.7%
Systems Integration 3,893 17.9% 3,727 21.6% 3,596 14.0% 3,833 18.3%
Equipment Sales (11) (1.3%) (37) (4.7%) 311 35.8% 313 41.7%
ATM Operation Business 784 85.0% 437 43.2% 364 21.3% 126 8.7%
SG&A and R&D Expenses -- -- 382 3.8% -- -- 825 7.9%
Total 5,938 8.4%   4,893 7.3% 6,056 7.9% 6,888 9.6%

On the other hand, the total revenues for 3Q13 fell short of the initial plan. The gap was primarily due to the recurring revenues which consist of network services revenues (Internet connectivity services, outsourcing services, and WAN services) and operation and maintenance revenues of systems integration revenues. One of the most critical factors affecting the gap of recurring revenues was the slowing down and/or decrease of revenue from certain large customers of carriers, network operators and game providers who led FY2012 revenue growth. Because of these large customers' individual business conditions, the strong price down pressure in Internet connectivity and WAN services and the reduced server usage in cloud services and systems operation and maintenance have been taken place. Those gaps in the recurring revenue have been increasing quarter by quarter and it is estimated to become even greater in the fourth quarter. The recurring revenues from these certain large customers are estimated to be approximately JPY2.0 billion short of the initial target. While the systems construction revenues are expected to be strong based on the favorable order situation, the accumulation of the recurring revenues from the other general customers has not been as strong as the initial plan due to factors such as the postponement of new services launch. Because of all these relevant reasons, we revised FY2013 total revenues target from JPY117.0 billion to JPY114.0 billion, down 2.6% compared with the target.

The operating income for 3Q13 decreased by 16.5% YoY. The decrease in profit has been widening - the operating income for the first half of FY2013 decreased by 7.8% YoY. The developing decrease in profit is primarily because the recurring revenue has not been accumulating as planned. Also, the above described business expansion strategies have been resulted in the increase in the cost and expenses. The costs of the recurring revenues are mainly costs to operate and maintain the network facilities and equipment such as circuit costs, depreciation, personnel-related and outsourcing-related costs, and these costs are not directly correlated with individual revenue increase or decrease. Thus, the fluctuations in the recurring revenues tend to have a significant impact on operating income in general. The widening of the operating income gap is estimated to continue in the fourth quarter. In regards to the favorable order situation of systems construction, its gross margin ratio is to be lower than the plan as the trend of large scale projects is observed. Considering these relevant factors, we revised FY2013 operating income target from JPY9.4 billion to JPY6.0 billion, down 36.2% compared with the previous target.

The targets for income before income tax expense and net income attributable to IIJ have also been revised in accordance with the above described revisions respectively.

(*) The above targets for FY2013 consolidated financial results are based on information available at the time of the announcement and the actual results may differ from the targets due to various factors.

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