IIJ Announces Full Year and Fourth Quarter Financial Results

Internet Initiative Japan Inc. today announced its full year and 4th quarter consolidated financial results for the fiscal year ended March 31, 2012.1

"FY2011 results were satisfactory to us with earnings and income largely increasing. To boot to the good financial results, we saw good progress with our new services and businesses we've invested in, just as cloud computing services and ATM operation business. We can expect another double-digit growth the following year," said Koichi Suzuki, President and CEO of IIJ.

"Today's results demonstrate our successful strategy," continued Suzuki. "Combining our over 15 years of experience providing outsourcing services, pioneering technological skills in developing network services and our strong relationships with Japanese blue chip customers, we have been successful in attracting outsourcing and network service demands. Broadband services are growing as data traffic increases. Outsourcing services just as data center and security related services are growing fast along with clients' needs for professional IT support. Our cloud computing service "IIJ GIO" has as well continued its revenue growth while its second year of service. IIJ GIO increased its number of customers and revenue for FY2011 reached over JPY3.1 billion compared to JPY0.6 billion the previous year."

"We have as well strengthened our global network services towards the growing demands from Japanese companies that are heading into global markets. We are now prepared to provide Cloud computing services in the United States and in China at the same time with global internet-VPN service and bilingual help desk service. We have as well established a subsidiary and a representative office in the Asian region.

"As a result, combined with the full contribution of IIJ Global Solutions which we acquired in September 2010, our FY2011 earnings increased by 18.1% YoY and operating income increased by 53.4% YoY. Even though there were initial cost burden related to our new services and projects, especially cloud computing services, gross margin related to network service increased. Just in case to that, ATM operation business which we have been engaging as a new supplemental growth driver near reached its break-even point in 4Q11."

Revenues were JPY97,315 million, up 18.1% YoY. Should the contingency arise to the full year contribution from IIJ-Global of JPY26,118 million), network services earnings contributed to the total revenue growth.  

Revenues for Internet connectivity services for corporate use were JPY14,707 million, up 5.0% YoY as new IP Service contracts accumulated and volume charge earnings increased.

WAN Services revenue was JPY25,667 million, up 59.4% YoY due to the full year contribution of IIJ-Global as then as the increase in number of new contracts of IIJ's WAN services.

Outsourcing services revenue were JPY17,319 million, up 15.2% YoY. Services just as data center services, IIJ GIO Hosting Package Service and security-related services grew indiscriminately.

SI earnings were JPY31,469 million, up 6.9% YoY. Systems construction revenue, a one-time revenue, increased by 0.5% to JPY11,997 million. Projects were mainly mid- to small sized construction projects. Systems operation and maintenance revenue, a recurring revenue, increased by 11.2% to JPY19,472 million. The increase was mainly due to the steady increase in IIJ GIO Component service.

ATM Operation Business earnings were JPY1,324 million. The ATM operation business is operated by Trust Networks Inc., IIJ's consolidated subsidiary, and it receives a commission for each bank withdrawal transaction when a customer uses its serviced ATMs. As of May 15, 2012, 440 ATMs are placed.

Cost of earnings was JPY77,326 million, up 17.5% YoY. Cost of earnings related to IIJ-Global was JPY20,894 million).

Cost of Network Services revenue was JPY49,985 million, up 19.9% YoY mainly due to the increase in circuit-related costs of IIJ-Global and outsourcing-related costs. Gross margin for network services was JPY13,425 million, up 34.5% YoY and gross margin ratio was 21.2%, up 1.8 points YoY.

Cost of SI earnings was JPY24,979 million, up 11.2% YoY. The increase was mainly due to the increase in both outsourcing cost and network operation related cost for the most part for IIJ GIO. Gross margin for SI was JPY6,491 million, down 7.0% YoY and gross margin ratio was 20.6%.

Cost of Equipment Sales earnings was JPY980 million, up 43.5% YoY. Gross margin was JPY131 million and gross margin ratio was 11.8%.

Cost of ATM Operation Business earnings was JPY1,382 million, up 38.2% YoY mainly due to the increase in the number of newly placed ATMs. Gross loss for ATM operation business decreased to JPY58 million from JPY484 million in FY2010 due to the increase in earnings.  

SG&A and R&D expenses were JPY13,636 million, up 9.5% YoY. SG&A expenses related to IIJ-Global was JPY3,037 million). The ratio of SG&A and R&D expenses to total revenue was 14.0%, down 1.1 points compared to the ratio of FY2010.

Operating income was JPY6,353 million, up 53.4% YoY as there were full year contribution from IIJ-Global, increase in gross margin of network services earnings and the decrease in gross loss of ATM operation business.

Equity in net income of equity method investees was JPY124 million mainly due to income of Internet Multifeed Co. and Internet Revolution, Inc.

Net loss attributable to noncontrolling interests was JPY66 million related to Trust Networks Inc.  

For current assets as of March 31, 2012, as compared to the respective balances as of March 31, 2011, accounts receivable decreased by JPY709 million. As for noncurrent assets, as compared to each of the respective balances as of March 31, 2011, property and equipment increased by JPY3,255 million, resulting from the increase of investment in servers, network equipment and facilities for cloud computing service and others, prepaid expense -noncurrent increased by JPY350 million and other intangible assets- net decreased by JPY658 million. As for current liabilities, as compared to each of the respective balances as of March 31, 2011, accounts payable decreased by JPY3,821 million and income taxes payable increased by JPY1,855 million.

As of March 31, 2012, the balance of non-amortized intangible assets just as goodwill was JPY5,943 million, and the breakdown of non-amortized intangible assets were JPY5,788 million in goodwill and JPY155 million in trademark. As of March 31, 2012, the balance of amortized intangible assets, which was customer relationships, was JPY5,223 million.

Net cash provided by operating activities for FY2011 was JPY11,659 million compared to net cash provided by operating activities of JPY12,564 million for FY2010. Operating income increased YoY mainly due to the full year operating income from IIJ-Global contributed, gross margin of network services earnings increased and gross loss of ATM operation business decreased. Just in case, there were effects of changes in operating assets and liabilities just as decrease in accounts payable in relation to payment for equipments for systems integration projects.

We target revenue of JPY107 billion yen, up 10.0% YoY. We expect earnings from our network services to continue to increase, IIJ GIO revenue to largely increase, additional earnings from the global business, and ATM operation business earnings to increase along with the increase in number of newly placed ATMs.

For operating income, we target JPY7.5 billion, up 18.0 % YoY with expectations for continuous gross margin increase in network services, and by IIJ GIO and ATM operating business to turning into positive in FY2012 from their deficits in FY2011.

While we give full consideration in securing our funds to strengthen our financial position and to prepare for our mid- to-long term operation and business development, we seek to achieve stable and continuous dividends to shareholders.

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 clients. IIJ's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. In addition, IIJ has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. 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, just as statements regarding FY2008 earnings 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 earnings from higher-margin services just as systems integration and outsourcing services; the opportunity that earnings 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 just 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 opportunity that NTT, IIJ's largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from place to place in IIJ's filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission.

Note: The following information is provided to disclose Internet Initiative Japan Inc. financial results for the Fiscal Year Ended March 31, 2012("FY2011") in the form defined by the Tokyo Stock Exchange.

IIJ's board of directors consists of 12 members including 4 outside directors. Takashi Hiroi, an outside director of IIJ, is an employee of NTT. But, he is monitoring IIJ's business operations as an outside director and does not have any personal relationships, just as family relationships, with IIJ's other directors and auditors. He did not acquire any interest just as capital or business relationships upon becoming an outside director.

IIJ uses services provided by Nippon Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone West Corporation for a significant portion of its access circuits, and services provided by NTT Communications Corporation for a significant portion of its domestic and international backbones. The amount paid to NTT East and West, and to NTT Communications for their telecommunication circuits was JPY1,426million and JPY3,046 million, respectively for the fiscal year ended March 31, 2012.

IIJ leases a part of Internet data center facilities from NTT Group companies to provide our Internet data center services to our clients and the amount paid to NTT Group related to the lease of Internet data center facilities are JPY1,699 million.

Business transactions with the NTT Group are within the scope of normal business practices, and there is no special contract made in relation to the investment by NTT Group.