IIJ Announces Nine Months Financial Results for the Fiscal Year Ending March 31, 2010

TOKYO, Feb. 12, 2010 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. (Nasdaq: IIJI) (TSE:3774) ("IIJ") today announced its consolidated financial results for the nine months ended December 31, 2009.(1) 

 Highlights of Financial Results for the Nine Months Ended Dec 2009

• Revenues were JPY48,313 million ($519.0 million), down 4.9% YoY due to the continued decline in systems integration revenue.
• Operating income was JPY2,007 million ($21.6 million), up 8.8% YoY with continuous increase of connectivity and outsourcing service gross margin. Operation loss related to the new ATM operation business was JPY730 million ($7.8 million), up 57.0% YoY.
• Net income attributable to IIJ(2) was JPY1,133 million ($12.2 million), up 219.8% YoY.
• FY2009 revenue target was revised down from JPY73,000 million to JPY68,000 million, yet profit target remain unchanged.
• IIJ to absorb two of its wholly-owned subsidiary on April 1, 2010 (Scheduled). 

Nine Months Overview and Business Outlook

"We have achieved income growth for three consecutive quarters in these tough economic environment," said Koichi Suzuki, President and CEO of IIJ.

"During the nine months ended December 31, 2009, our business environment were tough as companies continued to withhold their investments and kept a tight grip on spending. Cost down pressure has also been severe. In such economic environment, total revenue decreased YoY dragged by the decrease in SI revenue. Both systems construction and systems operation and maintenance were heavily affected resulting in a weaker than expected outcome. Yet, in such economic situation, connectivity service and outsourcing service revenues continued to increase followed by steady demands. Over 1Gbps connectivity service, mobile data communication service, and outsourcing services such as email and security related continued to growth."

"Additionally, we continue to operate the company with discipline," continued Suzuki. "We have taken actions to lower our cost and expenses to improve profitability. As a result, gross margin for connectivity and outsourcing increased and general and administrative expenses decreased YoY. Accordingly, despite the increase in losses related to the ATM operation business which is in its start-up phase with 147 ATMs placed as of December 31, 2009, our operating income is increasing and our operating margin ratio is improving quarter by quarter."

"For our mid- to long-term growth, to best position ourselves in the future IT outsourcing market, we have taken several actions. In November 2009, we have launched our cloud computing service "IIJ GIO". The pre-sales of this cloud computing service are doing well and has already been adopted by several clients such as the Cabinet Office web site."

"We have decided to absorb our two 100% owned consolidated subsidiaries, which are engaging in systems integration business on April 1, 2010. As seen in the cloud-computing concept, the trend to outsource corporate information system with network element are accelerating. To seize IT demands in this trends, we believe the best solution would be to unite our internet related network technology and the systems integration ability of our subsidiaries through this merger. We will reform ourselves to best seize mid-term IT demands which should continuously occur and become strong when the economic situation recovers."

Nine Months Financial Results Summary

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

Nine Months Financial Results

Revenues

Revenues were JPY48,313 million (down 4.9% YoY).

Connectivity and Outsourcing Services revenue were JPY27,601 million, up 6.4% YoY. Connectivity service for corporate use increased by 6.8% YoY. Over 1Gbps IP connectivity services increased, reaching 121 contracts as of December 31, 2009 (up 39 contracts YoY). IIJ Mobile service also increased with contracts reaching over 36,000 contracts. For connectivity service for home use, revenue increased by 5.7% YoY. The shift from ADSL to optical fiber service which charge higher monthly fees has contributed to the increase in revenue as well as the increase in mobile data communication service, launched in December 2008, under hi-ho and IIJmio brands. For outsourcing services, email related, network outsourcing related and security related services contributed to the YoY increase.

SI revenues were JPY20,165 million, down 16.3% YoY. Systems construction revenues decreased by 38.7% YoY to JPY6,135 million, heavily affected by the weak Japanese economy. Systems operation and maintenance revenues also slightly decreased by 0.4% YoY to JPY14,030 million as the decrease in systems construction revenue had affected the new engagements of systems operation and maintenance contracts. There were also severe cost down pressure from large accounts as they are tightening cost reduction. The order backlog for systems construction and equipment sales was JPY5,297 million (up 25.0% YoY) and order backlog for systems operation and maintenance was JPY9,689 million (up 4.1% YoY) as of as of December 31, 2009, respectively.

Equipment sales revenues were JPY439 million, down 39.6% YoY.

ATM Operation Business revenues were JPY108 million compared to JPY17 million for the nine months ended December 2008. As of December 31, 2009, there are 147 ATMs placed in Japan.

Cost and expense

Cost of revenues was JPY38,693 million (down 6.2% YoY).

Cost of Connectivity and Outsourcing Services revenue was JPY22,878 million, up 4.7% YoY largely affected by the increase in network operation related costs, outsourcing related costs. Circuit related cost also increased in relation to the growth of mobile data communication service. Backbone cost was JPY2,745 million, down 1.1% YoY. Gross margin was JPY4,722 million, up 15.5% YoY and gross margin ratio was 17.1%, up 1.3% points YoY.

Cost of SI revenues was JPY14,751 million (down 20.3% YoY) largely due to the decrease in outsourcing related costs as a result of reduction of full-time outsourcing personnel. Purchasing cost also decreased along with the decrease in systems construction revenues. Gross margin was JPY5,414 million, down 3.3% YoY and gross margin ratio was 26.8%, up 3.6% points YoY.

Cost of Equipment Sales revenues was JPY380 million (down 40.5% YoY).

Cost of ATM Operation Business revenues was JPY684 million compared to JPY261 million for the nine months ended December 2008 as it is in its start-up phase.

SG&A Expenses and R&D

Sales and marketing expenses were JPY3,928 million (up 12.0% YoY). There were increase in personnel related expenses, disposal of non-amortized intangible assets and amortization related to the back-office system which began its operation from this quarter.

General and administrative expenses were JPY3,444 million, down 13.2% YoY, largely due to the decrease of outsourcing related expenses and general expenses as a result of tight cost control.

Research and development expenses were JPY 241 million, up 11.4% YoY as expenses related to IIJ Innovation Institute Inc. Increased.

Operating income

Operating income increased by 8.8% YoY to JPY 2,007 million. While operating loss related to the new ATM operation business increased, gross margin of connectivity and outsourcing service increased and general and administrative expenses decreased.

Other income (expenses)

Other income (expenses) was net other expense of JPY224 million compared to net other expense of JPY602 million for the nine months ended December 2008 as impairment losses on equity securities and interest expense decreased compared to the nine months ended December 2008.

Income before income tax expenses

Income before income tax expenses was JPY1,783 million, up 43.6% YoY.

Net Income

Net income was JPY868 million compared to JPY95 million for the nine months ended December 2008.

Income tax expense was JPY1,042 million compared to JPY1,192 million for the nine months ended December 2008. Deferred tax expenses was JPY790 million compared to JPY972 million for the nine months ended December 2008.

Equity in net income of equity method investees was JPY127 million compared to JPY45 million for the nine months ended December 2008.

Net income attributable to IIJ

Net income attributable to IIJ was JPY 1,133 million, up 219.8% YoY.

Net losses attributable to noncontrolling interests was JPY265 million compared to JPY259 million for the nine months ended December 2008, both related to GDX Japan Inc. and Trust Networks Inc.

Nine Months Financial Condition

Balance Sheets

As of December 31, 2009, the balance of total assets was JPY49,002 million, a decrease of JPY3,300 million from the balance as of March 31, 2009.

For current assets, as compared to each of the respective balances as of March 31, 2009, cash and cash equivalents decreased by JPY1,722 million, accounts receivables decreased by JPY1,682 million, inventories related to SI projects increased by JPY693 million and prepaid expenses related to network equipment maintenance increased by JPY561 million, respectively. As for current liabilities, as compared to each of the respective balances as of March 31, 2009, short-term borrowings decreased by JPY2,250 million and accounts payable decreased by JPY1,029 million. Noncurrent capital lease obligations decreased by JPY932 million from the balances as of March 31, 2009.

As of December 31, 2009, we had net deferred tax asset (current) of JPY492 million and net deferred tax asset (non-current) of JPY1,770 million, respectively.

The balance of other investments as of December 31, 2009 was JPY2,117 million, an increase of JPY202 million from the balance as of March 31, 2009. The breakdown of other investments were JPY1,036 million in nonmarketable equity securities, JPY727 million in available-for-sale securities and JPY354 million in other.

As of December 31, 2009, the balance of non-amortized intangible assets (excluding telephone rights) such as goodwill was JPY5,368 million and the balance of amortized intangible assets were JPY227 million. The breakdown of non-amortized intangible assets were JPY2,639 million in goodwill, JPY2,537 million in customer relationships and JPY192 million in trademark. The breakdown of amortized intangible assets were JPY122 million in customer relationships and JPY105 million in licenses.

Total IIJ shareholders' equity as of December 31, 2009 was JPY25,818 million, an increase of JPY649 million from the balance as of March 31, 2009. IIJ Shareholders' equity ratio (IIJ shareholders' equity/total assets) as of December 31, 2009 was 52.7%, up 4.6 points compared to March 31, 2009.

Cash Flows

Cash and cash equivalents as of December 31, 2009 were JPY8,466 million compared to JPY8,955 million as of December 31, 2008.

Net cash provided by operating activities for the nine months ended December 31, 2009 was JPY6,261 million compared to net cash provided by operating activities of JPY5,351 million for the nine months ended December 31, 2008. While operating income increased due to the increase in gross margin from connectivity and outsourcing service and the decrease general and administrative expenses, there were changes in operating assets and liabilities during the nine months ended December 31, 2009, mainly resulting from the decrease in accounts receivables of JPY1,657 million (decrease of JPY2,656 million for the nine months ended December 31, 2008), increase in inventories and prepaid expenses of JPY638 million (increase of JPY1,249 million for the nine months ended December 31, 2008) and decrease in accounts payable related to on-going SI projects of JPY669 million (decrease of JPY2,122 million for the nine months ended December 31, 2008).

Net cash used in investing activities for the nine months ended December 31, 2009 was JPY2,798 million compared to net cash used in investing activities of JPY2,926 million for the nine months ended December 31, 2008, mainly due to payment of JPY2,625 million for the purchase of property and equipment (payment of JPY2,663 million for the nine months ended December 31, 2008) and the purchase of short-term and other investments of JPY250 million (purchase of JPY125 million for the nine months ended December 31, 2008).

Net cash used in financing activities for the nine months ended December 31, 2009 was JPY5,163 million compared to net cash used in financing activities of JPY4,911 million for the nine months ended December 31, 2008, mainly due to principal payments under capital leases of JPY2,658 million (payment of JPY2,848 million for the nine months ended December 31, 2008), net repayment of short-term borrowings with initial maturities less than three months of JPY2,250 million (net repayment of JPY1,350 million for the nine months ended December 31, 2008) and payments of JPY405 million for FY2008 year-end dividends and FY2009 interim period dividends.

Reconciliation of Non-GAAP Financial Measures

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

FY2009 Financial Targets (announced on May 15, 2009)

Our targets for the fiscal year ending March 31, 2010 are as follows: 

Revenues for the nine months ended December 31, 2009 was below our target mainly because systems integration revenues was heavily affected by the tough business environment with companies continuing to withhold their investments and keeping a tight grip on spending. On the contrary, operating income for the nine months ended December 31, 2009 was in line with our target so far, as outsourcing related costs and general and administrative expenses decreased as a result of tight cost control.

For the Full FY2009 target, we have revised downward our revenue target from JPY73,000 million to JPY68,000 million by taking into account the revenue level and the SI and equipment sales order backlog. Targets for operating income, income before income tax expense (benefit) and net income attributable to IIJ remain unchanged considering the income level for the nine months ended December 31, 2009 and this fourth quarter revenue target.

Changes in accounting principles, procedures and disclosures in quarterly consolidated financial statements

Accounting Standards Codification

Effective July 1, 2009, IIJ adopted the FASB Accounting Standards Codification ("ASC") 105, "Generally Accepted Accounting Principles (the provisions of which were previously included in SFAS No. 168 "Accounting Standards Codification and the hierarchy of generally accepted accounting principles"). This pronouncement prescribes the change which divides non-governmental U.S. GAAP into the authoritative Codification and the non-authoritative guidance, doing away with the previous fourlevel hierarchy. Accordingly, IIJ's consolidated financial statements from the second quarter of fiscal year ending March 2010 follows the Codification in place of legacy accounting pronouncements.

Business Combinations

Effective April 1, 2009, IIJ adopted ASC805, "Business Combinations". ASC805 requires an acquirer in a business combination to generally recognize and measure all the identifiable assets acquired, the liabilities assumed, goodwill and any noncontrolling interest in the acquiree at their fair values as of the acquisition date. The adoption of ASC805 did not have any impact on IIJ's results of operations and financial position as there were no business combinations during the nine months ended December 31, 2009, however the impact in the future would depend on the size and the detail of the business combination.

Noncontrolling Interests in Consolidated Financial Statements

Effective April 1, 2009, IIJ adopted ASC810 " Consolidations". ASC810 requires noncontrolling interest held by parties other than the parent be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent's equity. ASC810 also require changes in parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for as equity transactions. Upon the adoption of ASC810, "Noncontrolling interests", which were previously referred to as "Minority interests" and classified between "Total liabilities" and "Shareholders' equity" in the consolidated balance sheets, are now included as a separate component of "Equity". In addition, "Net income" in the consolidated statements of income now includes net income attributable to noncontrolling interests, which was previously referred to as "Minority interests" and deducted. As a result, the adoption of ASC810 changed the presentation and disclosure of noncontrolling interest in the consolidated financial statements retrospectively, but did not have a material impact on IIJ's results of operations and financial position.

Presentation

Presentation Materials will be posted on our web site (http://www.iij.ad.jp/en/IR/) on February 12, 2010.

About Internet Initiative Japan Inc.

Founded in 1992, IIJ is one of Japan's leading Internet-access and comprehensive network solutions providers. IIJ and its group of companies provide total network solutions that mainly cater to high-end corporate customers. IIJ's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. Moreover, IIJ has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ was listed on the U.S. NASDAQ Stock Market in 1999 and on the First Section of the Tokyo Stock Exchange in 2006.

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

Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and managements' current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2008 revenues and operating and net profitability, are subject to various risks, uncertainties and other factors that could cause IIJ's actual results to differ materially from those contained in any forward-looking statement. These risks, uncertainties and other factors include: IIJ's ability to maintain and increase revenues from higher-margin services such as systems integration and outsourcing services; the possibility that revenues from connectivity services may decline substantially as a result of competition and other factors; the ability to compete in a rapidly evolving and competitive marketplace; the impact on IIJ's profits of fluctuations in costs such as backbone costs and subcontractor costs; the impact on IIJ's profits of fluctuations in the price of available-for-sale securities; the impact of technological changes in its industry; IIJ's ability to raise additional capital to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from time to time in IIJ's filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission.

Tables to follow

3rd Quarter FY2009 Consolidated Financial Results (3 months)

The following tables are highlight data of 3rd Quarter FY2009 consolidated financial results (unaudited, from October 1, 2009 to December 31, 2009).

Reconciliation of Non-GAAP Financial Measures

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

The following table summarizes the reconciliation of capital expenditures to the purchase of property and equipment in our consolidated statements of cash flows that are prepared and presented in accordance with U.S. GAAP.

Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the nine month ended December 31, 2009 in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Nine Months Ended December 31, 2009
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]

                                                                                                                                               February 12, 2010

Company name: Internet Initiative Japan Inc.       Exchange listed: Tokyo Stock Exchange First Section
Stock code number: 3774                                  URL: http://www.iij.ad.jp/
Representative: Koichi Suzuki, President and Representative Director
Contact: Akihisa Watai, Director and CFO           TEL: (03) 5259-6500
Filing of quarterly report (Shihanki-hokokusho) to the regulatory organization in Japan: February 15, 2010 (Scheduled)

 (Amounts of less than JPY one million are rounded)

1. Consolidated Financial Results for the Nine months Ended December 31, 2009
(April 1, 2009 to December 31, 2009)

  2. Dividends

3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2010

4. Others

(1) Change of Condition in Consolidated Subsidiaries during the Nine Months Ended December 31, 2009
     (Change of Condition in Specific Consolidated Subsidiaries with a Change of Scope of Consolidation): None

(2) Application of Simplified Accounting Method or Specific Accounting Principles for quarterly consolidated financial statements: None

(3) Changes in Significant Accounting and Reporting Policies for Consolidated Financial Statements

1) Changes due to the revision of accounting standards: Yes
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, 2009:           206,478 shares
     As of March 31, 2009:                 206,478 shares

2) The number of treasury stock:

     As of December 31, 2009:     3,934 shares
     As of March 31, 2009:           3,934 shares

3) The weighted average number of shares outstanding:

     For the nine months ended December 31, 2009:    202,544 shares
     For the nine months ended December 31, 2008:    202,544 shares