IIJ Announces Nine Months Financial Results for th

TOKYO, Feb. 08, 2017 (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, 2017 (“3Q16”, from April 1, 2016 to December 31, 2016). ¹

Overview of 3Q16 Financial Results and Business Outlook

“Our continuous business and service developments are reflected in our strong revenue accumulation. 3Q16 three-month revenue growth year over year was 16.0%: 2Q16 12.0%, 1Q16 15.0%, 4Q15 17.2% and 3Q15 11.0%. We continue to focus on investing in the fields of cloud, mobile, security, and next generation network usage such as IoT and BigData. Mainly due to the overall cost increase along with the recent aggressive business investments and the deterioration of systems integration gross margin from 1H16 ² , 3Q16 nine-month operating income decreased year over year,” said Eijiro Katsu, President and COO of IIJ.

“Mobile services continued to be a leading revenue growth driver. 3Q16 nine-month revenue grew by 78.0% year over year to JPY19.1 billion and the total subscription as of 3Q16-end reached to 1.7 million, an increase of 59.4% year over year. Transactions by our 124 MVNE clients, including MVNOs, prominent retailers, and many cable TV operators, continued to expand. Other contributing factors for the strong 3Q16 revenue growth were an export project of our container type data center to the Republic of Laos ³  and continuous revenue accumulation of cloud services and non-mobile network services,” said Katsu.

“We’re making continuous progresses of our business developments this fiscal year. We’ll be the first Japanese full-MVNO service provider as we aim to capture enterprises’ mobile needs such as IoT and BigData type of usages which are expected to be implemented much more widely in the near future. We established a joint venture ⁴  with a major Japanese broadcasting company, Nippon Television Netowrk Corporation, to become a main CDN ⁵  provider in the coming age of Internet-based broadcasting including 4K. Regarding security services, we further enhanced “IIJ DDoS Protection Services” by constructing worldwide network systems to protect our clients from global DDoS attacks. We launched “IIJ IoT Services,” packaged service offering necessary function to build IoT systems. We believe our recent actions shall make our role and value as a service platform provider of network, cloud, mobile, security and network outstanding in the middle to long term. We also expect that expansion of service revenues from these continuous business developments should generate continuous gross margin improvement which leads to operating income growth going forward,” concluded Koichi Suzuki, Founder, Chairman and CEO 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.

²  For details on our downward revision for FY2016 financial target, please refer to our press release titled ”IIJ Revises its First Half and Full-Year Financial Targets for FY2016” which can be found at http://www.iij.ad.jp/en/ir/news/2016/pdf/FY16revision_E.pdf

³  For details on our involvement on Laos project, please refer to our press release titled “’Lao PDR Energy Efficient Datacenter Project’ Cloud Datacenter Using Joint crediting Mechanism Starts Demonstration Operation” which can be found at http://www.iij.ad.jp/en/news/pressrelease/2016/1130.html

⁴  For details on the establishment of the joint venture, please refer to our press release titled “IIJ and Nippon TV to Establish a Joint Venture for Video Distribution Platforms” which can be found at http://www.iij.ad.jp/en/news/pressrelease/2016/1201.html

⁵  CDN (Contents Distribution Network) is an optimized network to distribute contents such as pictures and videos.

3Q16 Financial Results Summary

We have omitted segment analysis because most of our revenues are dominated by network services and systems integration (SI) business.

3Q16 Revenues and Income

Revenues

Total revenues were JPY113,602 million, up 14.3% YoY (JPY99,382 million for 3Q15).

Network services revenue was JPY68,481 million, up 17.6% YoY (JPY58,216 million for 3Q15).

Revenues for Internet connectivity services for enterprise were JPY16,461 million, up 27.9% YoY from JPY12,871 million for 3Q15 mainly due to an increase in mobile-related services revenues along with an expansion of MVNE business clients’ business transaction.

Revenues for Internet connectivity services for consumers were JPY15,903 million, up 48.5% YoY from JPY10,708 million for 3Q15, mainly due to the revenue growth of “IIJmio Mobile Services,” consumer mobile services which offer inexpensive data communication and voice services with SIM cards.

Revenues for WAN services were JPY19,848 million, up 5.4% YoY compared to JPY18,826 million for 3Q15.

Revenues for Outsourcing services were JPY16,269 million, up 2.9% YoY from JPY15,811 million for 3Q15.

*1. IP service revenues include revenues from the data center connectivity service. *2. From 1Q16, the revenue from “IIJ Mobile MVNO Platform Service”, which is included in “IIJ Mobile service (Enterprise),” is disclosed. “IIJ Mobile MVNO Platform Service” provides MVNO platform to our MVNE clients. *3. From 1Q16, the revenue from “IIJmio Mobile Service” (formerly known as ”IIJmio High Speed Mobile Service” until September 30, 2016), which is included in “Internet connectivity services (Consumer)” provided by IIJ, is disclosed.

*1. Numbers in the table above show number of contracts except for “IIJ Mobile service (Enterprise),” “IIJ” and “hi-ho” which show number of subscriptions.

*2. From 1Q16, the number of subscription for “IIJ Mobile MVNO Platform Service”, which is included in “IIJ Mobile service (Enterprise)”, is disclosed.

*3. From 1Q16, the number of subscription for “IIJmio Mobile Service” (formerly known as ”IIJmio High Speed Mobile Service” until September 30, 2016), which is included in “Internet connectivity services (Consumer)” provided by IIJ, is disclosed.

*4. Regarding IP service, data center connectivity service and IIJ FiberAccess/F and IIJ DSL/F of Internet connectivity services (Enterprise), total contracted bandwidths are calculated by multiplying number of contracts by contracted bandwidths respectively.

SI revenues were JPY39,858 million, up 11.0% YoY (JPY35,921 million for 3Q15).

Systems construction revenue, a one-time revenue, was JPY13,973 million, up 21.0% YoY, mainly due to the revenue recognition of an export project of our container type data center in 3Q16. Systems operation and maintenance revenue, a recurring revenue, was JPY25,885 million, up 6.2% YoY, mainly due to an increase in private cloud services’ revenues although certain relatively large systems operation and maintenance projects were cancelled in 1H16.

Orders received for SI and equipment sales totaled JPY51,730 million, up 19.6% YoY; orders received for systems construction and equipment sales were JPY21,031 million, up 4.3% YoY and orders received for systems operation and maintenance were JPY30,699 million, up 33.0% YoY.

Order backlog for SI and equipment sales as of December 31, 2016 amounted to JPY43,309 million, up 27.3% YoY; order backlog for systems construction and equipment sales was JPY10,928 million, down 0.5% YoY and order backlog for systems operation and maintenance was JPY32,381 million, up 40.6% YoY.

Equipment sales revenues were JPY2,207 million, down 6.6% YoY (JPY2,365 million for 3Q15).

ATM operation business revenues were JPY3,056 million, up 6.1% YoY (JPY2,880 million for 3Q15). As of December 31, 2016, 1,066 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY95,772 million, up 17.4% YoY (JPY81,589 million for 3Q15).

Cost of network services revenue was JPY56,274 million, up 19.5% YoY (JPY47,079 million for 3Q15). There were an increase in outsourcing-related costs with our mobile infrastructure enhancement along with our mobile-related revenue increase, an increase in circuit-related costs along with our WAN services revenue increase, and an increase in network operation-related costs with our network enhancement and the launch of “IIJ Omnibus Service.” Gross margin was JPY12,207 million, up 9.6% YoY and gross margin ratio was 17.8% compared to 19.1% in 3Q15.

Cost of SI revenues was JPY35,644 million, up 17.0% YoY (JPY30,455 million for 3Q15). There were an increase in outsourcing-related and purchasing costs along with our SI revenue increase, an increase in personnel-related, and an increase in network operation-related costs mainly along with the launch of “IIJ GIO Infrastructure P2.” Gross margin was JPY4,214 million, down 22.9% YoY and gross margin ratio was 10.6% compared to 15.2% in 3Q15. It was mainly due to profit deterioration of our cloud-related services and especially 1H16 profit deterioration resulted from low productivity of systems engineers and the delay in offering some functions of our ASP-type foreign exchange system.

Cost of equipment sales revenues was JPY2,024 million, down 4.7% YoY (JPY2,125 million for 3Q15). Gross margin was JPY183 million (JPY239 million for 3Q15) and gross margin ratio was 8.3% compared to 10.1% in 3Q15.

Cost of ATM o peration b usiness revenues was JPY1,830 million, down 5.2% YoY (JPY1,930 million for 3Q15). Gross margin was JPY1,226 million (JPY950 million for 3Q15) and gross margin ratio was 40.1% compared to 33.0% in 3Q15.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY14,675 million, up 7.0% YoY (JPY13,720 million for 3Q15).

Sales and marketing expenses were JPY8,392 million, up 7.0% YoY (JPY7,842 million for 3Q15) mainly due to increases in sales commission expenses and advertising expenses.

General and administrative expenses were JPY5,928 million, up 7.2% YoY (JPY5,532 million for 3Q15) mainly due to increases in office rent expenses, commission expenses and taxes and public dues.

Research and development expenses were JPY355 million, up 2.5% YoY (JPY346 million for 3Q15).

Operating income

Operating income was JPY3,155 million, down 22.5% YoY (JPY4,073 million for 3Q15).

Other income (expenses)

Other income (expenses) was an income of JPY278 million (an income of JPY105 million for 3Q15), mainly because of net gain on sales of other investments of JPY214 million (JPY24 million for 3Q15), distribution from fund investment of JPY208 million (included in other-net, JPY144 million for 3Q15), dividend income of JPY106 million from other investments (JPY88 million for 3Q15), interest expense of JPY218 million (JPY171 million for 3Q15) and foreign exchange losses of JPY23 million (JPY11 million for 3Q15).

Income before income tax expenses

Income before income tax expenses was JPY3,433 million, down 17.8% YoY (JPY4,178 million for 3Q15).

Net income

Income tax expense was JPY1,466 million (JPY1,697 million for 3Q15).

Equity in net income of equity method investees was JPY69 million (JPY207 million for 3Q15) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY2,036 million, down 24.2% YoY (JPY2,688 million for 3Q15).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY126 million mainly related to net income of Trust Networks Inc. (JPY115 million for 3Q15).

Net income attributable to IIJ was JPY1,910 million, down 25.8% YoY (JPY2,573 million for 3Q15).

3Q16 Balance Sheets and Cash Flows

Balance sheets

As of December 31, 2016, the balance of total assets was JPY130,915 million, increased by JPY13,081 million from the balance as of March 31, 2016 of JPY117,835 million.

As of December 31, 2016, the balance of current assets was JPY60,683 million, increased by JPY7,277 million from the balance as of March 31, 2016 of JPY53,406 million. The major breakdown of current assets was an increase in prepaid expenses by JPY2,410 million to JPY7,180 million, an increase in cash and cash equivalents by JPY1,697 million to JPY21,266 million and an increase in inventories by JPY1,572 million to JPY3,576 million. As of December 31, 2016, the balance of noncurrent assets was JPY70,233 million, increased by JPY5,804 million from the balance as of March 31, 2016 of JPY64,429 million. The major breakdown of noncurrent assets was an increase in property and equipment by JPY2,757 million to JPY37,081 million, an increase in other investments by JPY1,362 million to JPY7,310 million mainly due to change an increase in the fair value of available-for-sale securities, and increase in prepaid expenses-noncurrent by JPY1,291 million to JPY6,278 million. Other investments as of December 31, 2016, mainly consisted of JPY5,258 million in available-for-sale securities (including JPY4,920 million of strategic shareholdings), JPY1,124 million in nonmarketable equity securities and JPY929 million in investments in funds, including some through a trust. As of December 31, 2016, the major breakdown of non-amortized intangible assets was JPY6,170 million in goodwill and JPY96 million in trademark. The balance of amortized intangible assets, which was customer relationships, was JPY3,132 million.

As of December 31, 2016, the balance of current liabilities was JPY36,219 million, increased by JPY153 million from the balance as of March 31, 2016 of JPY36,066 million mainly due to an increase in capital lease obligations-current portion by JPY524 million to JPY4,479 million. As of December 31, 2016, the balance of noncurrent liabilities was JPY28,931 million, increased by JPY12,506 million from the balance as of March 31, 2016 of JPY16,425 million. The major breakdown of noncurrent liabilities was an increase in long-term borrowings by JPY8,500 million to JPY8,500 million and an increase in capital lease obligations-noncurrent by JPY1,752 million to JPY9,532 million.

As of December 31, 2016, the balance of total IIJ shareholders’ equity was JPY65,167 million, increased by JPY322 million from the balance as of March 31, 2016 of JPY64,845 million. There was an increase in treasury stock by JPY982 million to JPY1,374 million due to the repurchase of own shares, authorized at the meeting of IIJ’s Board of Directors held on November 4, 2016. IIJ shareholders’ equity ratio (total IIJ shareholders’ equity divided by total assets) as of December 31, 2016 was 49.8%.

Cash flows

Cash and cash equivalents as of December 31, 2016 were JPY21,266 million (JPY18,234 million as of December 31, 2015).

Net cash provided by operating activities for 3Q16 was JPY4,408 million (net cash provided by operating activities of JPY7,811 million for 3Q15.) There were net income of JPY2,036 million, depreciation and amortization of JPY8,006 million and net cash out flow of JPY5,979 million from changes in operating assets and liabilities. As for changes in operating assets and liabilities, there were an increase in prepaid expenses (including prepaid expenses-noncurrent) in relation to up front payment for software licenses and maintenance cost for service facilities, an increase in inventories due to the increase in systems construction projects, an increase in prepaid expenses for seasonal bonus payments to our employees and an increase mainly in accounts receivable in relation to an export project of our container type data center in 3Q16.

Net cash used in investing activities for 3Q16 was JPY5,389 million (net cash used in investing activities of JPY6,634 million for 3Q15), mainly due to payments for purchase of property and equipment of JPY7,940 million (JPY8,454 million for 3Q15) and proceeds from sales of property and equipment, which include sales and leaseback, of JPY2,219 million (JPY1,093 million for 3Q15).

Net cash provided by financing activities for 3Q16 was JPY2,831 million (net cash used in financing activities of JPY4,047 million for 3Q15), mainly due to proceeds from long-term borrowings of JPY8,500 million, principal payments under capital leases of JPY3,535 million (JPY3,040 million for 3Q15), FY2015 year-end and FY2016 interim dividend payments of JPY1,126 million (JPY1,011 million for 3Q15) and payments for purchase of treasury stock of JPY982 million.

FY2016 Financial Targets

On November 4, 2016, we revised our financial targets for FY2016 which was announced on May 13, 2016. Due to seasonal factors, our fourth quarter revenue and income volume tend to be the largest. Therefore, our financial target announced on November 4, 2016 remain unchanged.

We conducted the repurchase of our own shares which was authorized at the meeting of our Board of Directors held on November 4, 2016. Final results of share repurchase is as follows; period of repurchase: from November 7, 2016 to January 31, 2017, total number of shares repurchased: 892,200 shares, aggregate repurchased amount: JPY1,499,933 thousand.

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 February 8, 2017.

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 companies provide total network solutions that mainly cater to high-end corporate customers. IIJ's services include high-quality Internet connectivity services, systems integration, cloud computing services, security services and mobile services. 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.

For inquiries, contact:

IIJ Investor Relations Tel: +81-3-5205-6500 E-mail: ir@iij.ad.jp URL: http://www.iij.ad.jp/en/ir

Statements made in this press release regarding IIJ’s or 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 FY2016 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.

Third Quarter FY2016 Consolidated Financial Results (3 months)

The following tables are highlight data of 3rd Quarter FY2016 (3 months) consolidated financial results (unaudited, for the three months ended December 31, 2016).

*1 IP service revenues include revenues from the data center connectivity service. *2 From 1Q16, the revenue from “IIJ Mobile MVNO Platform Service”, which is included in “IIJ Mobile service (Enterprise),” is disclosed. “IIJ Mobile MVNO Platform Service” provides MVNO platform to our MVNE clients. *3 From 1Q16, the revenue from “IIJmio Mobile Service” (formerly known as ”IIJmio High Speed Mobile Service” until September 30, 2016), which is included in “Internet connectivity services (Consumer)” provided by IIJ, is disclosed.

Reconciliation of Non-GAAP Financial Measures (3rd Quarter FY2016 (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.

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 months ended December 31, 2016 (“3Q16”) in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Nine Months ended December 31, 2016 [Under accounting principles generally accepted in the United States ("U.S. GAAP")]

February 8, 2017 Company name: Internet Initiative Japan Inc. Exchange listed: Tokyo Stock Exchange First Section 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) 5205-6500 Scheduled date for filing of quarterly report ( Shihanki -houkokusho ) to Japan’s regulatory organization: February 14, 2017 Scheduled date for dividend payment: - Supplemental material on annual results: Yes Presentation on quarterly report: 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, 2016 (April 1, 2016 to December 31, 2016)

2. Dividends

(Note) Change from the latest released dividend forecasts: No.

3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2017

(Note1) Changes from the latest forecasts released: No

* Notes