IIJ Announces First Three Months Financial Results for the Fiscal Year Ending March 31, 2015

TOKYO, Aug. 8, 2014 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") IIJI (TSE:3774) today announced its consolidated financial results for the first three months of the fiscal year ending March 31, 2015 (1Q14, from April 1, 2014 to June 30, 2014).¹

Overview of 1Q14 Financial Results and Business Outlook

"Under favorable business circumstances, we stay focused on actively investing our resources in services and solutions developments especially for cloud, mobile, BigData, M2M (Machine to Machine connection), SDN/NFV² and overseas-related fields to significantly enhance our business scale in the middle to long term while bearing increasing costs at the moment. Among developments, we released several new products such as high-performance database services for BigData and cloud-based M2M platform in 1Q14. We've seen strong system investment demands supported by Japanese economic recovery and we believe the combination of our systems integration expertise and prominent services we develop should become an overwhelming differentiation against competitors in the long run," said Koichi Suzuki, Founder and CEO of IIJ.

"Our MVNO (Mobile Virtual Network Operator) services for consumers have been growing rapidly with our low-cost LTE SIM card offerings. We started offering voice call services, MNP (mobile number portability) option and unlocked SIM smartphones in 1Q14. LTE SIM services have been receiving much attention in the Japanese market and we anticipate a certain volume of price-sensitive mobile carriers' subscribers to switch within several years. Although our consumer service is growing, our main focus with MVNO business remains on enterprises. M2M and MVNE (Mobile Virtual Network Enabler) demands from blue-chips should continue to rise and become our important business growth drivers in near future by leveraging our large MVNO infrastructure and related services we develop on our own," followed Eijiro Katsu, COO and President of IIJ.

"We've continuously acquired advanced integrated transactions in 1Q14. Examples include one of the largest Japanese financial institutions' cloud adoptions for their online security controls and a major logistics provider's replacement of all of their internal systems to cloud. With regards to our overseas business, which is in start-up phase with deficit, we acquired container type datacenters construction transactions in Russia and Laos³ by leveraging our technology expertise. We also receive several requests to construct cloud infrastructure from some Asian countries. These kinds of business opportunities come from our continuous efforts to expand our overseas presence," continued Katsu.

"With regards to 1Q14 financial results, operating income decreased YoY while revenues increased. As we expected, fixed costs such as personnel-related costs increased with inviting 129 new graduates and the annual salary raise for existing employees and we had a one-time headquarter relocation-related cost, which will also incur in 2Q. On the other hand, our 1Q systems integration revenue tends to be the smallest due to seasonal factors in relation with Japanese corporates' budget system and recurring revenues should only increase gradually quarter by quarter. While we don't anticipate 1H14 financial results to be strong, we believe our business investment should enhance revenue accumulation in 2H14 and thereafter," concluded Katsu.

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

² SDN/NFV: SDN is an abbreviation for Software Defined Network while NFV is an abbreviation for Network Functions Virtualization.

³ Laos's official name is Lao People's Democratic Republic.

1Q14 Financial Results Summary

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

1Q14 Results of Operation

Revenues

Total revenues were JPY27,552 million, up 4.2% YoY.

Network Services revenue was JPY16,800 million, up 0.1% YoY.

Revenues for Internet connectivity services for enterprise were JPY4,093 million, down 2.4% YoY. While mobile service revenues increased, revenue decrease in IP service in the previous fiscal year continued to affect IP service revenues for 1Q14.

Revenues for Internet connectivity services for consumer were JPY1,714 million, up 22.7% YoY. Revenue growth of low-priced LTE SIM card offerings covered revenue decrease from our legacy-type services.

WAN services revenues were JPY5,985 million, down 5.1% YoY due to revenue decrease in previous fiscal year and price reduction at the beginning of fiscal year.

Outsourcing services revenues were JPY5,008 million, up 2.5% YoY, mainly by the increase in revenues of "IIJ GIO Hosting Package Services."

⁴ We have renamed Internet Connectivity Service (for Corporate Use) and Internet Connectivity Service (for home use) to Internet Connectivity Service (Enterprise) and Internet Connectivity Service (Consumer), respectively in June 2014.

⁵ IP Service revenues include revenues from the Data Center Connectivity Service.

SI revenues were JPY9,457 million, up 8.8% YoY.

Systems construction revenue, a one-time revenue, was JPY3,084 million, up 4.1% YoY. Systems operation and maintenance revenue, a recurring revenue, was JPY6,373 million, up 11.3% YoY. "IIJ GIO Component Services" revenues increased and the systems construction project that completed in the previous quarter shifted to operation and maintenance phase, which contributed to systems operation and maintenance revenue increase.

Orders received for SI and equipment sales for the three months ended June 30, 2014 totaled JPY12,180 million, down 7.0% YoY; orders received for systems construction and equipment sales were JPY4,377 million, down 14.2% YoY and orders received for systems operation and maintenance were JPY7,803 million, down 2.3% YoY.

Order backlog for SI and equipment sales as of June 30, 2014 amounted to JPY26,564 million, up 10.0% YoY; order backlog for systems construction and equipment sales was JPY5,929 million, up 7.4% YoY and order backlog for systems operation and maintenance was JPY20,635 million, up 10.7% YoY.

Equipment sales revenues were JPY466 million, up 46.3% YoY.

ATM Operation Business revenues were JPY829 million, up 28.6% YoY. The increase was in accordance with the continuous increase in the numbers of operating ATMs. As of August 8, 2014, 915 ATMs are in operation (652 ATMs as of August 6, 2013).

Cost and expense

Total cost of revenues was JPY22,555 million, up 5.3% YoY.

Cost of Network Services revenue was JPY13,214 million, down 0.2% YoY. Gross margin was JPY3,586 million, up 1.2% YoY and gross margin ratio was 21.3% (21.1% in 1Q13).

Cost of SI revenues was JPY8,322 million, up 13.2% YoY. The increase was mainly due to the increase in outsourcing-related and personnel-related costs. Gross margin was JPY1,136 million, down 15.4% YoY and gross margin ratio was 12.0% (15.4% in 1Q13).

Cost of Equipment Sales revenues was JPY417 million, up 46.6% YoY. Gross margin was JPY49 million, up 44.0% YoY and gross margin ratio was 10.5% (10.7% in 1Q13).

Cost of ATM Operation Business revenues was JPY602 million, up 12.5% YoY in accordance with the number of newly placed ATMs. Gross margin was JPY227 million, up 107.1% YoY and gross margin ratio was 27.4% (17.0% in 1Q13).

SG&A and R&D Expenses

SG&A and R&D expenses in total were JPY4,229 million, up 13.6% YoY (JPY3,725 million in 1Q13).

Sales and marketing expenses were JPY2,276 million, up 7.6% YoY. The increase was mainly due to the increase in personnel-related expenses.

General and administrative expenses were JPY1,829 million, up 21.9% YoY. The increase was mainly due to the increase in personnel-related expenses and the additional expenses related to the relocation of headquarter in 1Q14.

Research and development expenses were JPY124 million, up 13.6% YoY.

Operating income

Operating income was JPY768 million, down 41.2% YoY (JPY1,305 million for 1Q13).

Other income (expenses)

Other income (expenses) was an income of JPY59 million (an income of JPY126 million for 1Q13). There were gains related to other investments of JPY82 million and interest expense of JPY61 million.

Income before income tax expenses

Income before income tax expenses was JPY827 million, down 42.2% YoY. (JPY1,431 million for 1Q13)

Net Income

Income tax expense was JPY352 million (JPY537 million for 1Q13).

Equity in net income of equity method investees was JPY34 million (JPY65 million for 1Q13) mainly due to net income of Internet Multifeed Co.and Internet Revolution, Inc.

As a result of the above, net income was JPY509 million, down 46.9% YoY (JPY959 million for 1Q13).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY18 million mainly related to net income of Trust Networks Inc. (JPY5 million for 1Q13).

Net income attributable to IIJ was JPY491 million, down 48.5% YoY (JPY954 million for 1Q13).

1Q14 Financial Condition

Balance Sheets

As of June 30, 2014, the balance of total assets was JPY101,703 million, decreased by JPY2,164 million from the balance as of March 31, 2014 of JPY103,867 million.

As for current assets as of June 30, 2014, as compared to the respective balances as of March 31, 2014, cash and cash equivalents decreased by JPY2,000 million, accounts receivable decreased by JPY1,919 million and prepaid expense increased by JPY1,405 million. As for noncurrent assets, as compared to the respective balance as of March 31, 2014, guarantee deposits increased by JPY1,526 million along with our headquarter relocation. As for current liabilities, as compared to the respective balances as of March 31, 2014, accounts payable decreased by JPY1,823 million and income taxes payable decreased by JPY914 million.

As for the balances of capital lease obligations, as compared to the respective balances as of March 31, 2014, capital lease obligations-current portion decreased by JPY52 million to JPY3,701 million and capital lease obligations-noncurrent decreased by JPY262 million to JPY4,341 million.

As of June 30, 2014, the balance of other investments was JPY5,676 million. The breakdown of other investments were JPY2,977 million in available-for-sale securities, JPY2,620 million in nonmarketable equity securities and JPY78 million in other.

As of June 30, 2014, 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 JPY4,103 million.

Total IIJ shareholders' equity as of June 30, 2014 decreased by JPY537 million to JPY59,375 million, mainly due to FY2013 year-end dividends payments of JPY505 million and decrease in accumulated other comprehensive income by 537 million mainly as a result of decrease in unrealized gain in other investments. IIJ shareholders' equity ratio (total IIJ shareholders' equity/total assets) as of June 30, 2014 was 58.4%.

Cash Flows

Cash and cash equivalents as of June 30, 2014 were JPY20,421 million compared to JPY10,276 million as of June 30, 2013.

Net cash provided by operating activities for 1Q14 was JPY2,855 million compared to net cash provided by operating activities of JPY1,528 million for 1Q13 mainly due to the decrease in payments of operating liabilities, while net income decreased from 1Q13.

Net cash used in investing activities for 1Q14 was JPY3,339 million compared to net cash used in investing activities of JPY2,340 million for 1Q13 mainly due to payments for purchase of property and equipment of JPY1,936 million (JPY1,719 million for 1Q13) and payments of guarantee deposits of JPY1,537 million (JPY661 million for 1Q13).

Net cash used in financing activities for 1Q14 was JPY1,509 million compared to net cash used in financing activities of JPY1,387 million for 1Q13, mainly due to principal payments under capital leases of JPY1,004 million (JPY981 million for 1Q13) and FY2013 year-end dividends payments of JPY505 million (JPY405 million for 1Q13).

Prospects for the Fiscal Year Ending March 31, 2015

Due to seasonal factors, our financial results tend to be weak in first quarter and strong in fourth quarter every fiscal year. 1Q14 revenue was almost in line with our initial expectation while operating income was slightly weaker than expected. Gross margin of systems integration was affected by extra work related to certain systems construction projects we completed last fiscal year.

Our FY2014 financial targets announced on May 15, 2014 remain unchanged although operating income of 1H14 may be a little bit weak. We had an increase in fixed type cost such as personnel-related at the beginning of a fiscal year, and we expect network services and system operation and maintenance revenues should accumulate quarter by quarter and system construction revenues should become large in 2H14.

Reconciliation of Non-GAAP Financial Measures

The following table summarizes the reconciliation of adjusted EBITDA to net income attributable to IIJ in our consolidated statements of income that are prepared in accordance with U.S. GAAP.

Presentation

Presentation materials will be posted on our web site (http://www.iij.ad.jp/en/ir/) on August 8, 2014.

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, and cloud computing. Moreover, IIJ has built one of the largest Internet backbone networks in Japan that is connected to the United States, the United Kingdom and Asia. IIJ listed on the U.S. NASDAQ Stock Market in 1999 and on the First Section of the Tokyo Stock Exchange in 2006.

Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and managements' current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2014 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.

⁶ Depreciation and amortization includes impairment loss on other intangible assets. (See IIJ's consolidated financial statements for details).