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IIJ Announces First Three Months Financial Results for the Fiscal Year Ending March 31, 2017

TOKYO, Aug. 05, 2016 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its consolidated financial results for the first three months of the fiscal year ending March 31, 2017 (“1Q16”, from April 1, 2016 to June 30, 2016).1

Highlights of Financial Results for 1Q16
RevenuesJPY36,179 million (up 15.0% YoY)
Operating IncomeJPY836 million (down 26.7% YoY)
Net Income attributable to IIJJPY529 million (down 26.6% YoY)

Overview of 1Q16 Financial Results and Business Outlook

“We started off a new fiscal year with continuous strong revenue growth which was led by recurring revenues, especially mobile services. Overall business environment continues to be favorable. Enterprises’ systems investment appetite seems to maintain a good tone and security-related demands continue to be strong,” said Koichi Suzuki, Founder, CEO, and Chairman of IIJ.

“Regarding our MVNO2 services, we added approx. 172 thousand subscriptions in this three-month period, strongest net increase ever. Our total subscription reached to approx. 1.4 million as of June 30, 2016, which is in line with our annual plan. We're enhancing sales channels including by the means of MVNE3 transactions and we announced two new large sales partnerships in 1Q16. Our tie-up with JAPAN POST Co., Ltd. (“Japan Post”)4, launched on August 1st, should contribute in further reaching out to the mass market which includes elderly people by leveraging Japan Post’s branches for sales. U-NEXT Co., Ltd.5 started to offer their “U-mobile Premium” in July by using our mobile infrastructure under the MVNE scheme. Our consumer mobile growth strategy is to capture growing demands of consumers through many of established sales partnerships,” said Eijiro Katsu, COO and President of IIJ.

“Regarding our cloud computing services, while its quarterly revenue growth in 1Q16 wasn’t so large due to seasonal factors6, we’re seeing quite an attractive accumulation of large-scale prospective orders such as information platforms for local governments, a service platform for a financial information service provider, full-scale cloud migration of large BtoC site, and virtual desktop infrastructure for a financial institution. We will launch “IIJ IoT Service” in November as we firmly believe the needs for IoT7 should significantly grow for the long-term. With expertise in both network and cloud computing, we’re well positioned to exercise our competitive advantages,” continued Katsu.

“1Q16 operating income decreased year over year as expected. In every first quarter, we generally see fixed costs increase such as personnel-related, while revenues don’t increase largely due to seasonal factors. This was also the case for 1Q16. Additionally, our business investments for cloud, mobile, “IIJ Omnibus,” our new network service, security, Contents Delivery Network (“CDN”) and so on have been continuously increasing along with our middle term growth strategy. Lastly, we had temporary negative income impact of approx. JPY0.12 billion regarding NTT Docomo’s connectivity charge annual revision as disclosed in our FY16 forecast announced on May 13, 2016 in our presentation material,8” 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 Mobile Virtual Network Operator (MVNO) borrows mobile infrastructure from mobile network operators to offer mobile related services.

3 Mobile Virtual Network Enabler (MVNE) provides business and service infrastructure to MVNOs.

4 Japan Post was a government-owned corporation offering services including postal which was privatized in 2007. Japan Post has over 20 thousand branches all over Japan as of June 30, 2016. For more details on the tie-up, please refer to our press release titled “IIJ to Begin Selling "IIJmio High-speed Mobile/D Service" and SIM-free device as a Set via Post Office” at http://www.iij.ad.jp/en/news/pressrelease/2016/0705.html

5 U-next Co. Ltd., a subsidiary of USEN, operates contents platform business as well as communication network business in which they offer MVNO services mainly to consumers.

6 Our recurring revenue services, including cloud computing services, are often involved in price revision and/or contract term change which usually take place in April every year. It is triggered by our enterprise customers’ yearly budget discussion.

7 Internet of Things (IoT) enables not only physical objects but also any “things” connected to network to exchange information automatically.

8 We purchase NTT Docomo’s mobile infrastructure to offer our MVNO services. We estimate we should have approx. JPY0.6 billion temporary positive cost impact in FY16 for the usage of mobile interconnectivity during FY15, as the unit price should decrease. We plan to recognize its quadrant amount in each FY16 quarter. We had recognized approx. JPY0.27 billion in 1Q15 for the usage of mobile interconnectivity during FY14. Therefore, 1Q16 income was negatively impacted by approx. JPY0.12 billion.

1Q16 Financial Results Summary

Operating Results Summary
1Q151Q16YoY %
Change
JPY millionsJPY millions
Total revenues31,46436,179 15.0
Network services18,48122,075 19.4
Systems integration (SI)11,07412,366 11.7
Equipment sales946730 (22.9)
ATM operation business9631,008 4.7
Total costs25,80630,397 17.8
Network services14,70218,030 22.6
Systems integration (SI)9,59111,094 15.7
Equipment sales859665 (22.5)
ATM operation business654608 (6.9)
SG&A expenses and R&D4,5174,946 9.5
Operating income1,141836 (26.7)
Income before income tax expense1,278994 (22.2)
Net income attributable to IIJ721529 (26.6)


Segment Results Summary
1Q151Q16
JPY millionsJPY millions
Total revenues 31,464 36,179
Network services and SI business 30,597 35,264
ATM operation business 963 1,008
Elimination (96) (93)
Operating income 1,141 836
Network service and SI business 910 514
ATM operation business 265 356
Elimination (34) (34)

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

1Q16 Revenues and Income

Revenues

Total revenues were JPY36,179 million, up 15.0% YoY (JPY31,464 million for 1Q15).

Network services revenue was JPY22,075 million, up 19.4% YoY (JPY18,481 million for 1Q15).

Revenues for Internet connectivity services for enterprise were JPY5,048million, up 24.1% YoY from JPY4,068 million for 1Q15 mainly due to an increase in mobile related services revenues. The number of our MVNE business clients continued to increase and their business volume also expanded.

Revenues for Internet connectivity services for consumers were JPY4,996 million, up 61.1% YoY from JPY3,102 million for 1Q15, mainly due to the significant revenue growth of “IIJmio High-speed Mobile/D services,” consumer mobile services which offer inexpensive data communication and voice services with SIM cards.

Revenues for WAN services revenues were JPY6,729 million, up 8.3% YoY compared to JPY6,216 million for 1Q15 as we continued to accumulate orders from enterprise customers.

Revenues for Outsourcing services revenues were JPY5,302 million, up 4.1% YoY from JPY5,095 million for 1Q15.

Network Services Revenues Breakdown
1Q161Q15YoY %
Change
4Q15QoQ %
Change
JPY millionsJPY millions JPY millions
Internet connectivity services (Enterprise)5,0484,068 24.1 4,727 6.8
IP service*12,4012,341 2.6 2,453 (2.1)
IIJ FiberAccess/F and IIJ DSL/F761771 (1.4)768 (1.0)
IIJ Mobile service (Enterprise)1,829889 105.7 1,440 27.0
IIJ Mobile MVNO Platform Service*21,123293 283.0 780 44.1
Others5767 (14.4)66 (12.9)
Internet connectivity services (Consumer)4,9963,102 61.1 4,548 9.9
IIJ4,4302,434 82.0 3,952 12.1
IIJmio High Speed Mobile Service*33,8642,093 84.6 3,406 13.5
hi-ho566668 (15.3)596 (5.1)
WAN services6,7296,216 8.3 6,350 6.0
Outsourcing services5,3025,095 4.1 5,455 (2.8)
Total network services22,07518,481 19.4 21,080 4.7

*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 High Speed Mobile Services”, which is included in “Internet connectivity services (Consumer)” provided by IIJ, is disclosed. Below table shows revenues of “IIJ Mobile MVNO Platform Service” and “IIJmio High Speed Mobile Service” recognized in the fiscal year ended March 31, 2016.

Unit: JPY in millions
FY2015
1Q2Q3Q4Q
IIJ Mobile MVNO Platform Service293406584780
IIJmio High Speed Mobile Service2,0932,4713,0313,406


Number of Contracts and Subscription for Connectivity Services*1
as of
June 30,
2016
as of
June 30,
2015
YoY
Change
as of
March 31,
2016
QoQ
Change
Internet connectivity services (Enterprise)616,356298,385 317,971 510,067 106,289
IP service (1Gbps-)376334 42 367 9
IP service (100Mbps-999Mbps)540499 41 532 8
IP service (-99Mbps)659737 (78)690 (31)
IIJ Data center connectivity service264273 (9)270 (6)
IIJ FiberAccess/F and IIJ DSL/F73,11165,759 7,352 75,932 (2,821)
IIJ Mobile service (Enterprise)540,326229,492 310,834 431,030 109,296
IIJ Mobile MVNO Platform Service*2333,375103,880 229,495 250,757 82,618
Others1,0801,291 (211)1,246 (166)
Internet connectivity services (Consumer) 1,283,614996,367 287,247 1,230,600 53,014
IIJ1,141,236841,751 299,485 1,084,295 56,941
IIJmio High Speed Mobile Service*3810,753527,008 283,745 747,395 63,358
hi-ho142,378154,616 (12,238)146,305 (3,927)
Total contracted bandwidth*42,239.0Gbps1,912.0Gbps327.0Gbps2,315.9Gbps(76.9)Gbps

*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 High Speed Mobile Service”, which is included in “Internet connectivity services (Consumer)” provided by IIJ, is disclosed. Below table shows subscription number of “IIJ Mobile MVNO Platform Service” and “IIJmio High Mobile Speed Service” recognized in the fiscal year ended March 31, 2016.

FY2015
As of June
30, 2015
As of Sep.
30, 2015
As of Dec.
31, 2015
As of Mar.
31, 2016
IIJ Mobile MVNO Platform Service103,880136,160181,859250,757
IIJmio High Speed Mobile Service527,008604,586685,044747,395

*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 JPY12,366 million, up 11.7% YoY (JPY11,074 million for 1Q15).

Systems construction revenue, a one-time revenue, was JPY3,678 million, up 14.9% YoY. Systems operation and maintenance revenue, a recurring revenue, was JPY8,688 million, up 10.4% YoY, mainly due to the continuous accumulation of systems construction projects and the increase in private cloud services revenues.

Orders received for SI and equipment sales totaled JPY17,150 million, up 24.3% YoY; orders received for systems construction and equipment sales were JPY6,564 million, up 4.1% YoY and orders received for systems operation and maintenance were JPY10,586 million, up 41.4% YoY.

Order backlog for SI and equipment sales as of June 30, 2016 amounted to JPY37,699 million, up 22.3% YoY; order backlog for systems construction and equipment sales was JPY8,233 million, up 19.4% YoY and order backlog for systems operation and maintenance was JPY29,466 million, up 23.1% YoY.

Equipment sales revenues were JPY730 million, down 22.9% YoY (JPY946 million for 1Q15).

ATM operation business revenues were JPY1,008 million, up 4.7% YoY (JPY963 million for 1Q15). As of June 30, 2016, 1,053ATMs have been placed.

Cost and expense

Total cost of revenues was JPY30,397 million, up 17.8% YoY (JPY25,806 million for 1Q15).

Cost of network services revenue was JPY18,030 million, up 22.6% YoY (JPY14,702 million for 1Q15). The increase was mainly related to outsourcing-related costs which increased along with the increase in mobile related revenue, circuit-related costs which increased along with the increase in WAN service revenue, and the increase in network operation-related costs. The increase in cost of network services revenue also reflects the increases in network operation-related, outsourcing-related and personnel-related costs which increased along with the enhancement of “IIJ Omnibus Service” as well as the increases in outsourcing-related and personnel-related costs which increased along with the enhancement of our CDN business. Additionally, as we had recognized approx. JPY0.27 billion of temporary positive impact in 1Q15 related to mobile interconnectivity costs, we recognized approx. JPY0.15 billion of that in 1Q16. Therefore, we had approx. JPY0.12 billion of temporary negative impact YoY. Gross margin was JPY4,045 million, up 7.0% YoY and gross margin ratio was 18.3% compared to 20.4% in 1Q15.

Cost of SI revenues was JPY11,094 million, up 15.7% YoY (JPY9,591 million for 1Q15). There were increases in purchasing-related, outsourcing-related and network operation-related costs along with the increase in SI revenues. The increase in cost of SI revenues also reflect the increases in network operation-related, outsourcing-related and personnel-related costs along with the enhancement of “IIJ GIO Infrastructure P2” and IoT/BigData related solutions. Gross margin was JPY1,273 million, down 14.2% YoY and gross margin ratio was 10.3% compared to 13.4% in 1Q15.

Cost of equipment sales revenues was JPY665 million, down 22.5% YoY (JPY859 million for 1Q15). Gross margin was JPY65 million and gross margin ratio was 8.9% compared to 9.2% in 1Q15.

Cost of ATM operation business revenues was JPY608 million, down 6.9% YoY (JPY654 million for 1Q15). Gross margin was JPY400 million and gross margin ratio was 39.7% compared to 32.1% in 1Q15.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY4,946 million, up 9.5 % YoY (JPY4,517 million in 1Q15).

Sales and marketing expenses were JPY2,766 million, up 10.3% YoY (JPY2,507 million for 1Q15). There were increases in sales commission expenses and advertising expenses related to mobile services.

General and administrative expenses were JPY2,056 million, up 8.0% YoY (JPY1,903 million for 1Q15). There were increases in rent expenses, commission expenses, personnel-related costs and taxes and public dues.

Research and development expenses were JPY124 million, up 15.9% YoY (JPY107 million for 1Q15).

Operating income

Operating income was JPY836 million, down 26.7% YoY (JPY1,141 million for 1Q15).

Other income (expenses)

Other income (expenses) was an income of JPY158 million (an income of JPY137 million for 1Q15), mainly because there were net gain on sales of other investments of JPY214 million, dividend income of JPY63 million from other investments (JPY63 million for 1Q15), distribution from fund investment of JPY49 million which was included in other-net, foreign exchange losses of JPY91 million(gain of JPY27 million for 1Q15) and interest expense of JPY69 million (JPY57 million for 1Q15).

Income before income tax expenses

Income before income tax expenses was JPY994 million, down 22.2% YoY (JPY1,278 million for 1Q15).

Net income

Income tax expense was JPY440 million (JPY561 million for 1Q15).

Equity in net income of equity method investees was JPY17 million (JPY61 million for 1Q15) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY571 million, down 26.7% YoY (JPY778 million for 1Q15).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY42 million mainly related to net income of Trust Networks Inc. (JPY57 million for 1Q15).

Net income attributable to IIJ was JPY529 million, down 26.6% YoY (JPY721 million for 1Q15).

1Q16 Balance Sheets and Cash Flows

Balance sheets

As of June 30, 2016, the balance of total assets was JPY119,272 million, increased by JPY1,437 million from the balance as of March 31, 2016 of JPY117,835 million.

As for current assets as of June 30, 2016, as compared to the respective balances as of March 31, 2016, prepaid expenses increased by JPY2,162 million, accounts receivable decreased by JPY1,712 million and cash and cash equivalents decreased by JPY1,065 million. As for noncurrent assets as of June 30, 2016, as compared to the respective balances as of March 31, 2016, property and equipment increased by JPY1,042 million and prepaid expenses-noncurrent increased by JPY643 million. As for liabilities as of June 30, 2016, as compared to the respective balances as of March 31, 2016, long-term borrowings increased by JPY3,000 million and accounts payable decreased by JPY2,755 million.

As for the balances of capital lease obligations as of June 30, 2016, as compared to the respective balances as of March 31, 2016, capital lease obligations-current portion increased by JPY158 million to JPY4,112 million and capital lease obligations-noncurrent increased by JPY595 million to JPY8,374 million.

As of June 30, 2016, the balance of other investments increased by JPY105 million to JPY6,054 million. The breakdown of other investments were JPY4,100 million in available-for-sale securities, JPY1,022 million in investments in funds, including some through a trust, and JPY931 million in nonmarketable equity securities.

As of June 30, 2016, the breakdown of major non-amortized intangible assets were JPY6,170 million in goodwill and JPY96 million in trademark. The balance of amortized intangible assets, which was customer relationships, was JPY3,322 million.

Total IIJ shareholders’ equity as of June 30, 2016 compared to the balance as of March 31, 2016, decreased by JPY63 million to JPY64,782 million. IIJ shareholders’ equity ratio (total IIJ shareholders’ equity divided by total assets) as of June 30, 2016 was 54.3%.

Cash flows

Cash and cash equivalents as of June 30, 2016 were JPY18,504 million compared to JPY20,004 million as of June 30, 2015.

Net cash used in operating activities for 1Q16 was JPY117 million compared to net cash provided by operating activities of JPY2,498 million for 1Q15. There were net income of JPY571 million, depreciation and amortization of JPY2,612 million and net cash out flow of JPY3,571 million from changes in operating assets and liabilities. There were an increase in prepaid expenses (including prepaid expenses-noncurrent) along with an increase in maintenance for service facilities and systems integration projects and there was an increase in accounts receivable resulted from an increase in systems integration projects and mobile related service revenue as well as a certain customer’s payment procedure.

Net cash used in investing activities for 1Q16 was JPY2,188 million compared to net cash used in investing activities of JPY2,053 million for 1Q15, mainly due to payments for purchase of property and equipment of JPY3,085 million (JPY2,370 million for 1Q15), proceeds from sales of property and equipment of JPY404 million (JPY 219 million for 1Q15) and proceeds from sales of other investments of JPY304 million (JPY 4 million for 1Q15).

Net cash provided by financing activities for 1Q16 was JPY1,344 million compared to net cash used in financing activities of JPY1,539 million for 1Q15, mainly due to proceeds from long-term borrowings of JPY 3,000million, principal payments under capital leases of JPY1,125 million (JPY1,034 million for 1Q15) and FY2015 year-end dividends payments of JPY505 million (JPY505 million for 1Q15).

FY2016 Financial Targets

Due to seasonal factors, our financial results tend to be weak in first quarter and strong in fourth quarter every fiscal year. Regarding 1Q16, while we continued to see strong revenue growth led by recurring revenues, operating income decreased compared to 1Q15 due mainly for the following factors: increase in operating costs due for business investment and service developments for the middle term growth, increase in fixed-costs such as personnel-related as a new fiscal year began, smallest overall revenue in 1Q because of small systems integration revenue, and temporary negative impact of approx. JPY0.12 billion regarding NTT Docomo’s connectivity change annual revision.9

We expect continuous recurring revenue growth, increase in systems integration revenue quarter by quarter and temporary positive impact of approximately JPY0.6 billion regarding NTT Docomo’s connectivity charge annual revision which quadrant amount will be recognized in each quarter[10] should absorb the increase in operating costs. Therefore, our FY2016 financial targets announced on May 13, 2016 remain unchanged.

Our financial targets for FY2016 are as follows:

Unit: JPY in billions
RevenuesOperating
Income
Income before
Income Tax
Expense
Net Income
attributable to IIJ
1H FY2016 Target73.82.82.81.9
Full FY2016 Target159.07.37.35.0

9 We purchase NTT Docomo’s mobile infrastructure to offer our MVNO services. We estimate approx. JPY0.6 billion temporary positive cost impact for FY15 mobile interconnectivity usage as the actual decrease rate was larger than our expectation. We plan to recognize its quadrant amount in each FY16 quarter. Because of this specific accounting procedure, 1Q16 income was negatively impacted by approx. JPY0.12 billion because we had recognized approx. JPY0.27 billion of onetime positive impact regarding FY14 mobile interconnectivity usage in 1Q15.

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.

Adjusted EBITDA
1Q151Q16
JPY millionsJPY millions
Adjusted EBITDA 3,480 3,448
Depreciation and Amortization*1 (2,339) (2,612)
Operating Income 1,141 836
Other Income 137 158
Income Tax Expense 561 440
Equity in Net Income of Equity Method Investees 61 17
Net income 778 571
Less: Net income attributable to noncontrolling interests (57) (42)
Net Income attributable to IIJ 721 529

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

CAPEX
1Q151Q16
JPY millionsJPY millions
CAPEX, including capital leases3,0204,688
Acquisition of Assets by Entering into Capital Leases6501,891
Purchase of Property and Equipment2,3702,797

Presentation

Presentation materials will be posted on our web site (http://www.iij.ad.jp/en/ir/) on August 5, 2016.

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.


Internet Initiative Japan Inc.
Consolidated Balance Sheets (Unaudited)
(As of March 31, 2016 and June 30, 2016)
As of March 31, 2016 As of June 30, 2016
Thousands of
JPY
Thousands of
JPY
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 19,569,095 18,504,491
Accounts receivable, net of allowance for doubtful accounts of JPY 74,229 thousand and JPY 73,967 thousand at March 31, 2016 and June 30, 2016, respectively 23,746,683 22,034,191
Inventories 2,003,573 2,006,107
Prepaid expenses—current 4,769,988 6,931,544
Deferred tax assets—current 1,481,651 1,145,298
Other current assets, net of allowance for doubtful accounts of JPY 15,693 thousand and JPY 15,192 thousand at March 31, 2016 and June 30, 2016, respectively 1,834,951 2,882,489
Total current assets 53,405,941 53,504,120
INVESTMENTS IN EQUITY METHOD INVESTEES 2,979,652 2,893,514
OTHER INVESTMENTS 5,948,741 6,053,519
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of JPY 45,345,543 thousand and JPY 46,928,616 thousand at March 31, 2016 and June 30, 2016, respectively 34,324,150 35,366,605
GOODWILL 6,169,609 6,169,609
OTHER INTANGIBLE ASSETS—Net 3,549,459 3,454,177
GUARANTEE DEPOSITS 3,084,681 3,073,304
DEFERRED TAX ASSETS—Noncurrent 224,316 243,254
NET INVESTMENT IN SALES-TYPE LEASES—Noncurrent 2,444,848 2,261,039
Prepaid expenses—Noncurrent 4,987,193 5,629,860
OTHER ASSETS, net of allowance for doubtful accounts of JPY 61,593 thousand and JPY 61,647 thousand at March 31, 2016 and June 30, 2016, respectively 716,314 622,809
TOTAL 117,834,904 119,271,810
As of March 31, 2016 As of June 30, 2016
Thousands of
JPY
Thousands of
JPY
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings 9,250,000 9,250,000
Capital lease obligations—current portion 3,954,386 4,112,412
Accounts payable—trade 13,906,703 11,852,704
Accounts payable—other 1,497,767 796,407
Income taxes payable 1,078,412 242,283
Accrued expenses 2,932,653 2,894,980
Deferred income—current 2,528,885 2,812,377
Other current liabilities 917,300 1,729,851
Total current liabilities 36,066,106 33,691,014
LONG-TERM BORROWINGS - 3,000,000
CAPITAL LEASE OBLIGATIONS—Noncurrent 7,779,367 8,374,336
ACCRUED RETIREMENT AND PENSION COSTS—Noncurrent 3,581,426 3,642,598
DEFERRED TAX LIABILITIES—Noncurrent 710,055 740,154
DEFERRED INCOME—Noncurrent 3,092,562 3,185,729
OTHER NONCURRENT LIABILITIES 1,261,413 1,342,033
Total Liabilities 52,490,929 53,975,864
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common-stock—authorized, 75,520,000 shares; issued and outstanding, 46,711,400 shares at March 31, 2016 and June 30, 2016, respectively 25,509,499 25,509,499
Additional paid-in capital 36,059,833 36,073,771
Retained earnings 2,471,276 2,495,055
Accumulated other comprehensive income 1,196,669 1,095,466
Treasury stock —758,709 shares held by the company at March 31, 2016 and June 30, 2016, respectively (392,070) (392,070)
Total Internet Initiative Japan Inc. shareholders' equity 64,845,207 64,781,721
NONCONTROLLING INTERESTS 498,768 514,225
Total equity 65,343,975 65,295,946
TOTAL 117,834,904 119,271,810


Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income and
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
(For the three months ended June 30, 2015 and June 30, 2016)
Three Months Ended Three Months Ended
June 30, 2015 June 30, 2016
Thousands of
JPY
Thousands of
JPY
REVENUES:
Network services:
Internet connectivity services (enterprise) 4,067,441 5,047,825
Internet connectivity services (consumer) 3,102,048 4,996,069
WAN services 6,216,087 6,729,601
Outsourcing services 5,095,159 5,301,656
Total 18,480,735 22,075,151
Systems integration:
Systems construction 3,202,545 3,678,367
Systems operation and maintenance 7,871,174 8,687,939
Total 11,073,719 12,366,306
Equipment sales 945,890 729,699
ATM operation business 963,257 1,008,095
Total revenues 31,463,601 36,179,251
COSTS AND EXPENSES:
Cost of network services 14,702,015 18,030,232
Cost of systems integration 9,591,101 11,093,569
Cost of equipment sales 858,575 664,985
Cost of ATM operation business 653,677 608,327
Total costs 25,805,368 30,397,113
Sales and marketing 2,507,084 2,766,497
General and administrative 1,903,671 2,055,679
Research and development 106,701 123,643
Total costs and expenses 30,322,824 35,342,932
OPERATING INCOME 1,140,777 836,319
OTHER INCOME (EXPENSES):
Dividend income 63,043 63,379
Interest income 4,572 9,123
Interest expense (57,103) (69,157)
Foreign exchange gain (loss), net 27,293 (90,500)
Net gain on sales of other investments - 213,938
Impairment of other investments - (17,829)
Other —net 99,689 48,797
Other income—net 137,494 157,751
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES 1,278,271 994,070
INCOME TAX EXPENSE 561,301 440,089
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES 61,469 16,735
NET INCOME 778,439 570,716
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (57,400) (41,457)
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC. 721,039 529,259
Three Months Ended Three Months Ended
June 30, 2015 June 30, 2016
NET INCOME PER SHARE
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES (shares) 45,942,291 45,952,691
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES (shares) 46,029,883 46,059,998
BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs) 91,884,582 91,905,382
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs) 92,059,766 92,119,996
BASIC NET INCOME PER SHARE (JPY) 15.69 11.52
DILUTED NET INCOME PER SHARE (JPY) 15.66 11.49
BASIC NET INCOME PER ADS EQUIVALENT (JPY) 7.85 5.76
DILUTED NET INCOME PER ADS EQUIVALENT (JPY) 7.83 5.75
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Three Months Ended
June 30, 2015 June 30, 2016
Thousands of
JPY
Thousands of
JPY
NET INCOME 778,439 570,716
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments (51,269) (222,449)
Unrealized holding gain (loss) on securities 121,786 121,246
Defined benefit pension plans (416) -
TOTAL COMPREHENSIVE INCOME 848,540 469,513
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (61,358) (41,457)
COMPREHENSIVE INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC. 787,182 428,056


Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Cash Flows (Unaudited)
(For the three months ended June 30, 2015 and June 30, 2016)
Three Months Ended Three Months Ended
June 30, 2015 June 30, 2016
Thousands of
JPY
Thousands of
JPY
OPERATING ACTIVITIES:
Net income 778,439 570,716
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 2,339,387 2,612,239
Provision for retirement and pension costs, less payments 26,163 61,172
Provision for allowance for doubtful accounts 14,915 1,423
Gain on sales of property and equipment (20,930) (5,425)
Loss on disposal of property and equipment 30,606 9,954
Net gain on sales of other investments - (213,938)
Impairment of other investments - 17,829
Foreign exchange loss (gain), net (23,963) 73,002
Equity in net income of equity method investees, less dividends received (61,469) 34,347
Deferred income tax expense 111,398 300,934
Others (8,295) (9,020)
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,041,751 1,673,982
Decrease in net investment in sales-type lease — noncurrent 99,403 183,809
Increase in inventories (448,377) (6,587)
Increase in prepaid expenses (1,753,447) (2,175,960)
Increase in other current and noncurrent assets (391,447) (1,593,216)
Decrease in accounts payable (1,581,146) (2,079,654)
Decrease in income taxes payable (293,613) (836,023)
Increase (decrease) in accrued expenses 201,517 (32,340)
Increase in deferred income—current 480,357 289,208
Increase (decrease) in deferred income—noncurrent (54,803) 104,511
Increase in other current and noncurrent liabilities 11,354 901,588
Net cash provided by (used in) operating activities 2,497,800 (117,449)
INVESTING ACTIVITIES:
Purchase of property and equipment (2,370,014) (3,084,531)
Proceeds from sales of property and equipment 218,600 404,390
Purchase of available-for-sale securities (12,178) -
Purchase of other investments (228,379) (37,796)
Proceeds from sales of available-for-sale securities 141,235 -
Proceeds from sales of other investments 4,000 303,614
Payments of guarantee deposits (2,620) (2,024)
Refund of guarantee deposits 1,434 42,387
Payments for refundable insurance policies (14,091) (14,091)
Refund from insurance policies 10,108 -
Proceeds from subsidies 200,000 200,000
Other (666) -
Net cash used in investing activities (2,052,571) (2,188,051)
Three Months Ended Three Months Ended
June 30, 2015 June 30, 2016
Thousands of
JPY
Thousands of
JPY
FINANCING ACTIVITIES:
Proceeds from issuance of short-term borrowings with initial maturities over three months and long-term borrowings 1,500,000 3,000,000
Principal payments under capital leases (1,034,055) (1,124,910)
Net decrease in short-term borrowings with initial maturities less than three months (1,500,000) -
Dividends paid (505,365) (505,480)
Other - (26,000)
Net cash provided by (used in) financing activities (1,539,420) 1,343,610
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 4,961 (102,714)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,089,230) (1,064,604)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 21,093,633 19,569,095
CASH AND CASH EQUIVALENTS, END OF THE PERIOD 20,004,403 18,504,491
ADDITIONAL CASH FLOW INFORMATION:
Interest paid 56,690 68,699
Income taxes paid 735,399 941,083
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets by entering into capital leases 650,385 1,891,072
Facilities purchase liabilities 1,250,781 796,407


Going Concern Assumption (Unaudited)
Nothing to be reported.
Material Changes In Shareholders' Equity (Unaudited)
Nothing to be reported.
Segment Information (Unaudited)
Business Segments:
Revenues:
Three Months EndedThree Months Ended
June 30, 2015June 30, 2016
Thousands of JPYThousands of JPY
Network service and systems integration business 30,597,120 35,263,867
Customers 30,500,344 35,171,156
Intersegment 96,776 92,711
ATM operation business 963,257 1,008,095
Customers 963,257 1,008,095
Intersegment - -
Elimination (96,776) (92,711)
Consolidated total 31,463,601 36,179,251
Segment profit or loss:
Three Months Ended Three Months Ended
June 30, 2015June 30, 2016
Thousands of JPYThousands of JPY
Network service and systems integration business 910,482 513,553
ATM operation business 264,663 356,232
Elimination (34,368) (33,466)
Consolidated operating income 1,140,777 836,319
Geographic information is not presented due to immateriality of revenue attributable to international operations.
Subsequent Events (Unaudited)
Nothing to be reported.

Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the three months ended June 30, 2016 (“1Q16”) in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Three Months ended June 30, 2016
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]

August 5, 2016
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: August 15, 2016
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 Three Months Ended June 30, 2016 (April 1, 2016 to June 30, 2016)

(1) Consolidated Results of Operations (% shown is YoY change)
Total revenuesOperating incomeIncome before
income tax expense
Net income
attributable to IIJ
JPY millions%JPY millions%JPY millions%JPY millions%
Three Months Ended
June 30, 2016
36,17915.0836 (26.7)994 (22.2)529 (26.6)
Three Months Ended
June 30, 2015
31,46414.21,141 48.5 1,278 54.5 721 46.8


(Note1) Total comprehensive income attributable to IIJ
For the three months ended June 30, 2016: JPY428 million (down 45.6%)
For the three months ended June 30, 2015: JPY787 million (-)
(Note2) Income before income tax expense represents income from operations before income tax expense and equity in net income in equity method investees, respectively, in IIJ's consolidated financial statements.


Basic net income
attributable to IIJ per share
Diluted net income
attributable to IIJ per share
JPYJPY
Three Months Ended
June 30, 2016
11.5211.49
Three Months Ended
June 30, 2015
15.6915.66


(2) Consolidated Financial Position
Total assetsTotal equityTotal IIJ shareholders'
equity
Total IIJ shareholders'
equity to total assets
JPY millionsJPY millionsJPY millions%
As of June 30, 2016119,27265,29664,78254.3
As of March 31, 2016117,83565,34464,84555.0

2. Dividends

Dividend per Shares
1Q-end2Q-end3Q-endYear-endTotal
JPYJPYJPYJPYJPY
Fiscal Year Ended
March 31, 2016
-11.00-11.0022.00
Fiscal Year Ended
March 31, 2017
-
Fiscal Year Ending
March 31, 2017
(forecast)
13.50-13.5027.00

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

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

(April 1, 2016 through March 31, 2017) (% shown is YoY change)
Total RevenuesOperating IncomeIncome before
Income Tax
Expense (Benefit)
Net Income
attributable to IIJ
Basic Net Income
attributable to IIJ
per Share
JPY millions%JPY millions%JPY millions%JPY millions%JPY
Interim Period Ending
September 30, 2016
73,80013.02,8009.22,8005.81,90015.041.35
Fiscal Year Ending
March 31, 2017
159,00013.17,30018.97,30017.95,00023.8108.81

* Notes

(1) Changes in significant subsidiaries for the three months ended June 30, 2016
(Changes in significant subsidiaries for the three months ended June 30, 2016 which resulted in changes in scope of consolidation): None
(2) Changes in significant accounting and reporting policies for the consolidated financial statements
1) Changes due to the revision of accounting standards: No
2) Others: No
(3) Number of shares outstanding (shares of common stock)
1) The number of shares outstanding (inclusive of treasury stock):
As of June 30, 2016: 46,711,400 shares
As of March 31, 2016: 46,711,400 shares
2) The number of treasury stock:
As of June 30, 2016: 758,709 shares
As of March 31, 2016: 758,709 shares
3) The weighted average number of shares outstanding:
For the three months ended June 30, 2016: 45,952,691 shares
For the three months ended June 30, 2015: 45,942,291 shares


Source:Internet Initiative Japan Inc.