IIJ Announces Nine Months Financial Results

Internet Initiative Japan Inc. today announced its consolidated financial results for the nine months ended December 31, 2010.1

"With the cloud computing service performing as a door opener to new customers, in spite of the continued weakness in Japanese economy and corporate spending on network systems, our outsourcing services continued to grow. 4 months additional revenue from IIJ-GS which we acquired from AT&T Japan on September 1, 2010 as well contributed to revenue and income growth," said Koichi Suzuki, President and CEO of IIJ.

Much faster speed than we expected

"Our new cloud computing service is growing at a much faster speed than we expected. It is one of our fastest growing service. As of December 2010, we are servicing over 300 cloud computing projects to both customers we had prior contact with and to those who are new to us and there are over 1,000 prospected cloud computing projects," continued Suzuki.

"Should the contingency arise, our outsourcing services just as Web-gateway service, SMX service, contents delivery network service and data center related services have as well continued its steady growth. We believe it's our long experience in providing outsourcing service and our persistent effort to introduce new services which prevents any internet related security crisis that makes corporate clients choose our services. While the 3rd quarter of this fiscal year, we've launched several new services: IIJ Mobile Biz Plus that provides access restriction features, IIJ Smart Mobile Manager that enables remote management of iPad and other smart phone devices and add on firewall feature for SMF service. All these services give solutions to those critical problems which many corporate clients are facing."

"There's as well been progress with IIJ-GS. IIJ and IIJ-GS has strengthened its sales force that cross-sells both IIJ's network outsourcing services and IIJ-GS's WAN services to both corporate clients," said Suzuki.

"For our mid-term business developments, we will introduce new services just in case to furthermore expanding our service facilities for cloud computing just as Japan's first container-unit commercial data center. We will as well promote the use of IPv6 address. As many of you may know, the Internet will run out of IPv4 addresses to allocate and internet users, both corporate and individual, in the end will have to start using IPv6 addresses. Our backbones, servers and services are already IPv6 ready and we have solutions, engineering skills and experience to support IPv6. As for IIJ-GS, it is currently preparing to take its business abroad, especially in Asia, by providing global-WAN services mainly to Japanese companies overseas."

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

Revenues for Internet connectivity services for corporate use were JPY10,433 million, up 0.6% YoY as IIJ mobile service and broadband connectivity services increased. Contracts of over 1Gbps IP service as of end of December 2010 was 127 contracts, up 6 contracts YoY.

WAN Services revenue were JPY9,702 million, up 408.8% YoY. There were additional earnings related to IIJ-GS of 4 months.

Outsourcing services revenue were JPY11,001 million, up 7.9% YoY. Services just as Web Security, anti-spam email related services, contents delivery services, data center related services and cloud computing related services increased, respectively. Our cloud computing service "IIJ GIO" is growing and its monthly revenue, including revenue which is recognized in systems operation and maintenance, as of end of December 2010 has reached over JPY90 million.

SI earnings were JPY19,784 million, down 1.9% YoY. Systems construction earnings, a one-time revenue, were JPY6,920 million, up 12.8% YoY as there were mid- to small sized network construction projects. Systems operation and maintenance earnings, a recurring revenue, was JPY12,864 million, down 8.3% YoY affected by the scale-down from a certain large client in 1Q10.

Cost of earnings was JPY45,257 million, up 17.0% YoY. Cost of earnings related to IIJ-GS of 4 months were JPY6,976 million.

Cost of Network Services revenue was JPY29,205 million, up 27.7% YoY mainly due to the increase in circuit related and outsourcing related costs related to IIJ-GS of 4 months. Gross margin for network services was JPY6,905 million, up 46.2% YoY and gross margin ratio was 19.1%.

Cost of SI earnings was JPY14,876 million, up 0.8% YoY. During purchasing cost decreased, network operation related and personnel related costs increased. Gross margin for SI was JPY4,908 million, down 9.3% YoY and gross margin ratio was 24.8%.

Cost of Equipment Sales earnings was JPY473 million, up 24.6% YoY. Gross margin was JPY77 million and gross margin ratio was 13.9%.

Cost of ATM Operation Business earnings was JPY703 million. Outsourcing costs were reduced. We are additionally placing new ATMs and full FY2010 operating loss related to ATM operation business is expected to be around JPY0.6 billion.

Operating income was JPY2,430 million, up 21.1% YoY as gross margin for network services increased and operation loss related to ATM operation business decreased.

Net loss attributable to noncontrolling interests was JPY152 million, related to Trust Networks Inc. and GDX Japan Inc.

As of December 31, 2010, the balance of non-amortized intangible assets just as goodwill was JPY4,306 million and the balance of amortized intangible assets was JPY7,228 million. The breakdown of non-amortized intangible assets were JPY4,114 million in goodwill and JPY192 in trademark. The breakdown of amortized intangible assets were JPY7,191 million in customer relationships and JPY37 million in licenses.

Net cash provided by operating activities for the nine months ended December 31, 2010 was JPY8,387 million compared to net cash provided by operating activities of JPY6,261 million for the nine months ended December 31, 2009. During operating income increased YoY due to the increase in gross margin for network services, there were changes in operating assets and liabilities while the nine months ended December 31, 2010, mainly resulting from the Increase in inventories, prepaid expenses and other current and noncurrent assets of JPY722 million, increase in accounts payable of JPY3,950 million, decrease in accrued expenses and other current and noncurrent liabilities of JPY2,031 million.

Generally speaking, our full year target largely depends on the outcome of the 4th quarter revenue and income results which becomes the largest due to seasonal factors. Taking into account our nine months ended December 31, 2010 results, we remain our full FY2010 target unchanged.

The second quarter of FY2010

From the second quarter of FY2010, to reflect the acquisition of IIJ Global on September 1, 2010, "WAN services", which were elements of "Outsourcing services earnings" were separately disclosed to clarify the contents of WAN services earnings. To boot, "Connectivity Services" was renamed to "Internet Connectivity Services".

"While the fiscal years ended March 31, 2007 and 2008, IIJ acquired additional shares of its subsidiary, IIJ Research Inc. and made it IIJ's 100% owned consolidated subsidiary. In the course of these acquisitions, IIJ recognized indefinite-lived customer relationship intangible asset of JPY2,669,152 thousand in the aggregated. Subsequent to the issuance of its March 31, 2010 financial statements, IIJ's management determined that the deferred tax liabilities associated with the intangible asset should have been recorded with corresponding increase in goodwill then of the acquisitions. The amounts for goodwill, deferred tax liabilities and total assets as of March 31, 2010 as before reported were JPY2,639,319 thousand, JPY212,773 thousand and JPY51,115,450 thousand, respectively. The amounts for goodwill, deferred tax liabilities and total assets as of March 31, 2010 as corrected are JPY3,620,342 thousand, JPY1,193,796 thousand and JPY52,096,473 thousand, respectively. The effect on income statement is immaterial.

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 nine months of Fiscal Year Ending March 31, 2011(from April 1 to December 31, 2010) in the form defined by the Tokyo Stock Exchange.