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IIJ Announces First Three Months Financial Results for the Fiscal Year Ending March 31, 2018

TOKYO, Aug. 08, 2017 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its first three months consolidated financial results for the fiscal year ending March 31, 2018 (“1Q17” from April 1, 2017 to June 30, 2017).1

Highlights of Financial Results for 1Q17
Revenues JPY41.0 billion (up 13.2% YoY)
Operating Income JPY1.1 billion (up 34.4% YoY)
Net Income attributable to IIJ JPY0.7 billion (up 33.4% YoY)
Financial Targets for FY2017
Revenues JPY176.0 billion (up 11.5% YoY)
Operating Income JPY6.5 billion (up 26.6% YoY)
Net Income attributable to IIJ JPY4.0 billion (up 26.3% YoY)
Financial Targets for 1H17
Revenues JPY82.4 billion (up 11.2% YoY)
Operating Income JPY2.0 billion (up 2.7% YoY)
Net Income attributable to IIJ JPY1.1 billion (down 0.7% YoY)

Overview of 1Q17 Financial Results and Business Outlook

“We started 1Q17 with strong year over year revenue growth of 13.2%. The operating income also increased 34.4% year over year. This good start reflects continuous recurring revenue growth we’ve been accumulating from the last fiscal year,” said Eijiro Katsu, COO and President of IIJ.

“1Q17 monthly recurring revenues, which were 85.1% of 1Q17 total revenue, increased 3.2% quarter over quarter and 13.3% year over year. With an accumulation of many transactions, network, cloud, security, mobile, WAN and all these monthly recurring revenues accomplished a favorable start, overall. We also had local governments’ “Information Security Cloud” projects, in which we provide Internet connectivity, cloud, security, data center, and SI, which contributed to the quarter over quarter revenue growth. Gross margin amount increased for both network services and systems integration which absorbed the increase in operating costs and made the overall operating income increase,” continued Katsu.

“Japan is approaching towards a network-based society and IoT should be a key theme. As examples, the Ministry of Agriculture, Forestry and Fishers has chosen us for a feasibility study on paddy water control management system. We also co-work with a prominent Japanese housing corporation and an electric power company on low-carbon housing system by incorporating IoT-based air-conditioning systems combined with weather forecast data. We’ve been involved in these kinds of IoT-related discussions, received from Japanese companies. We expect to play an important role with our technology and wide range of services we’ve accumulated towards a forthcoming connected society in the middle to long term,” said Koichi Suzuki, Founder, CEO and Chairman 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.

1Q17 Financial Results Summary

Operating Results Summary
1Q16 1Q17 YoY
Change
JPY millions JPY millions %
Total revenues36,179 40,964 13.2
Network services22,075 25,686 16.4
Systems integration (SI)12,366 13,599 10.0
Equipment sales730 676 (7.4)
ATM operation business1,008 1,003 (0.5)
Total costs30,397 34,434 13.3
Network services18,030 21,066 16.8
Systems integration (SI)11,094 12,163 9.6
Equipment sales665 604 (9.2)
ATM operation business608 601 (1.3)
Total gross margin5,782 6,530 12.9
Network services4,045 4,619 14.2
Systems integration (SI)1,272 1,436 12.9
Equipment sales65 72 11.2
ATM operation business400 402 0.6
SG&A expenses and R&D4,946 5,406 9.3
Operating income836 1,124 34.4
Income before income tax expense994 1,163 17.0
Net income attributable to IIJ529 706 33.4


Segment Results Summary
1Q161Q17
JPY millions
JPY millions
Total revenues 36,179 40,964
Network services and SI business 35,264 40,052
ATM operation business 1,008 1,003
Elimination (93)(91)
Operating income 836 1,124
Network service and SI business 514 804
ATM operation business 356 367
Elimination (34)(47)

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


1Q17 Revenues and Income

Revenues

Total revenues were JPY40,964 million, up 13.2% YoY (JPY36,179 million for 1Q16).

Network services revenue was JPY25,686 million, up 16.4% YoY (JPY22,075 million for 1Q16).

Revenues for Internet connectivity services for enterprise were JPY6,524 million, up 29.2% YoY from JPY5,048 million for 1Q16, mainly due to an increase in mobile-related services revenues along with an expansion of MVNE business clients’ transactions.

Revenues for Internet connectivity services for consumers were JPY6,155 million, up 23.2% YoY from JPY4,996 million for 1Q16, 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 JPY6,970 million, up 3.6% YoY compared to JPY6,729 million for 1Q16.

Revenues for Outsourcing services were JPY6,037 million, up 13.9% YoY from JPY5,302 million for 1Q16, mainly due to an increase in security-related services revenues.


Network Services Revenues Breakdown
1Q16 1Q17 YoY
Change
JPY millions JPY millions %
Internet connectivity services (Enterprise) 5,048 6,524 29.2
IP service*1 2,401 2,490 3.7
IIJ FiberAccess/F and IIJ DSL/F 761 753 (1.0)
IIJ Mobile service (Enterprise) 1,829 3,225 76.4
IIJ Mobile MVNO Platform Service 1,123 2,359 110.0
Others 57 56 (2.8)
Internet connectivity services (Consumer) 4,996 6,155 23.2
IIJ 4,430 5,697 28.6
IIJmio Mobile Service 3,864 5,013 29.8
hi-ho 566 458 (19.1)
WAN services 6,729 6,970 3.6
Outsourcing services 5,302 6,037 13.9
Total network services 22,075 25,686 16.4

*1. IP service revenues include revenues from the data center connectivity service.

Number of Contracts and Subscription for Connectivity Services*1
as of
June 30, 2016
as of
June 30, 2017
YoY
Change
Internet connectivity services (Enterprise) 616,356 1,005,410 389,054
IP service (1Gbps-) 376 450 74
IP service (100Mbps-999Mbps) 540 598 58
IP service (-99Mbps) 659 642 (17)
IIJ Data center connectivity service 264 240 (24)
IIJ FiberAccess/F and IIJ DSL/F 73,111 71,390 (1,721)
IIJ Mobile service (Enterprise) 540,326 931,049 390,723
IIJ Mobile MVNO Platform Service 333,375 639,659 306,284
Others 1,080 1,041 (39)
Internet connectivity services (Consumer) 1,283,614 1,453,068 169,454
IIJ 1,141,236 1,322,313 181,077
IIJmio Mobile Service 810,753 965,692 154,939
hi-ho 142,378 130,755 (11,623)
Total contracted bandwidth*2 2,239.0Gbps 2,882.6Gbps 643.6Gbps

*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. 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 JPY13,599 million, up 10.0% YoY (JPY12,366 million for 1Q16).

Systems construction revenue, a one-time revenue, was JPY4,440 million, up 20.7% YoY (JPY3,678 million for 1Q16). Systems operation and maintenance revenue, a recurring revenue, was JPY9,159 million, up 5.4% YoY (JPY8,688 million for 1Q16), mainly due to continued accumulation of the orders and an increase in private cloud services’ revenues.

Orders received for SI and equipment sales totaled JPY16,990 million, down 0.9% YoY (JPY17,150 million for 1Q16); orders received for systems construction and equipment sales were JPY6,664 million, up 1.5% YoY (JPY6,564 million for 1Q16) and orders received for systems operation and maintenance were JPY10,326 million, down 2.5% YoY (JPY10,586 million for 1Q16).

Order backlog for SI and equipment sales as of June 30, 2017 amounted to JPY44,216 million, up 17.3% YoY (JPY37,699 million as of June 30, 2016); order backlog for systems construction and equipment sales was JPY8,727 million, up 6.0% YoY (JPY8,233 million as of June 30, 2016) and order backlog for systems operation and maintenance was JPY35,489 million, up 20.4% YoY (JPY29,466 million as of June 30, 2016).

Equipment sales revenues were JPY676 million, down 7.4% YoY (JPY730 million for 1Q16) mainly due to the fluctuation in sales of equipment and mobile devices.

ATM operation business revenues were JPY1,003 million, down 0.5% YoY (JPY1,008 million for 1Q16). As of June 30, 2017, 1,083 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY34,434 million, up 13.3% YoY (JPY30,397 million for 1Q16).

Cost of network services revenue was JPY21,066 million, up 16.8% YoY (JPY18,030 million for 1Q16). 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. Gross margin was JPY4,619 million, up 14.2% YoY (JPY4,045 million for 1Q16) and gross margin ratio was18.0% compared to 18.3% in 1Q16.

Cost of SI revenues was JPY12,163 million, up 9.6% YoY (JPY11,094 million for 1Q16). The increase was mainly due to the increase in outsourcing-related and personnel-related costs. Gross margin was JPY1,436 million, up 12.9% YoY (JPY1,272 million for 1Q16) and gross margin ratio was 10.6% compared to 10.3% in 1Q16.

Cost of equipment sales revenues was JPY604 million, down 9.2% YoY (JPY665 million for 1Q16). Gross margin was JPY72 million (JPY65 million for 1Q16) and gross margin ratio was 10.6% compared to 8.9% in 1Q16.

Cost of ATM operation business revenues was JPY601 million, down 1.3% YoY (JPY608 million for 1Q16). Gross margin was JPY402 million (JPY400 million for 1Q16) and gross margin ratio was 40.1% compared to 39.7% in 1Q16.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY5,406 million, up 9.3% YoY (JPY4,946 million for 1Q16).

Sales and marketing expenses were JPY3,149 million, up 13.8% YoY (JPY2,766 million for 1Q16) mainly due to increases in advertising expenses, sales commission expenses of mobile-related services, and personnel-related expenses.

General and administrative expenses were JPY2,130 million, up 3.6% YoY (JPY2,056 million for 1Q16) mainly due to increases in personnel-related expenses.

Research and development expenses were JPY127 million, up 2.9% YoY (JPY124 million for 1Q16).

Operating income

Operating income was JPY1,124 million, up 34.4% YoY (JPY836 million for 1Q16).

Other income (expenses)

Other income (expenses) was an income of JPY39 million (an income of JPY158 million for 1Q16), mainly because of dividend income of JPY72 million (JPY63 million for 1Q16), distribution from fund investment of JPY57 million (included in other-net of JPY42 million, JPY49 million for 1Q16), and interest expense of JPY89 million (JPY69 million for 1Q16).

Income before income tax expenses

Income before income tax expenses was JPY1,163 million, up 17.0% YoY (JPY994 million for 1Q16).

Net income

Income tax expense was JPY451 million (JPY440 million for 1Q16).

Equity in net income of equity method investees was JPY36 million (JPY17 million for 1Q16) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY748 million, up 31.0% YoY (JPY571 million for 1Q16).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY42 million (JPY42 million for 1Q16) mainly related to net income of Trust Networks Inc.

Net income attributable to IIJ was JPY706 million, up 33.4% YoY (JPY529 million for 1Q16)

1Q17 Balance Sheets

Balance sheets

As of June 30, 2017, the balance of total assets was JPY136,500 million, decreased by JPY895 million from the balance as of March 31, 2017 of JPY137,395 million.

As of June 30, 2017, the balance of current assets was JPY60,246 million, decreased by JPY3,476 million from the balance as of March 31, 2017 of JPY63,722 million. The major breakdown of current assets was a decrease in accounts receivable by JPY3,325 million to JPY24,059 million, a decrease in cash and cash equivalents by JPY1,450 million to JPY20,508 million, an increase in prepaid expenses by JPY2,108 million to JPY9,719 million. As of June 30, 2017, the balance of noncurrent assets was JPY76,254 million, increased by JPY2,581 million from the balance as of March 31, 2017 of JPY73,673 million. The major breakdown of noncurrent assets was an increase in deferred tax asset-noncurrent by JPY1,060 million to JPY1,141 million mainly due to a change of the accounting standard, an increase in other investments by JPY906 million to JPY8,831 million mainly due to an increase in the fair value of available-for-sale securities, and an increase in property and equipment by JPY640 million to JPY40,415 million. Other investments as of June 30, 2017, consisted of JPY6,670 million in available-for-sale securities, JPY1,124 million in nonmarketable equity securities and JPY1,038 million in investments in funds, including some through a trust. As of June 30, 2017, the balance of non-amortized intangible assets was JPY6,220 million and the major breakdown of non-amortized intangible assets was JPY6,170 million in goodwill. The balance of amortized intangible assets, which was customer relationships, was JPY2,944 million, decreased by JPY92 million from the balance as of March 31, 2017 of JPY3,036 million.

As of June 30, 2017, the balance of current liabilities was JPY37,738 million, decreased by JPY2,245 million from the balance as of March 31, 2017 of JPY39,983 million. The major breakdown of current liabilities was a decrease in accounts payable (trade and other) JPY2,980 million and an increase in capital lease obligations-current portion by JPY305 million to JPY5,124 million. As of June 30, 2017, the balance of noncurrent liabilities was JPY30,739 million, increased by JPY708 million from the balance as of March 31, 2017 of JPY30,032 million. The major breakdown of noncurrent liabilities was an increase in capital lease obligations-noncurrent by JPY624 million to JPY11,009 million.

As of June 30, 2017, the balance of total IIJ shareholders’ equity was JPY67,389 million, increased by JPY647 million and IIJ shareholders’ equity ratio (total IIJ shareholders’ equity divided by total assets) as of June 30, 2017 was 49.4%.

1Q17 Cash Flows

Cash flows

Cash and cash equivalents as of June 30, 2017 were JPY20,508 million (JPY18,504 million as of June 30, 2016).

Net cash provided by operating activities for 1Q17 was JPY3,237 million (net cash used in operating activities of JPY117 million for 1Q16.) There were net income of JPY748 million, depreciation and amortization of JPY2,979 million and net cash out flow of JPY690 million (JPY3,571 million for 1Q16) from changes in operating assets and liabilities. As for changes in operating assets and liabilities, there were a decrease in accounts receivable mainly due to receipts of accounts receivable, an increase in prepaid expenses mainly due to payments in relation to upfront payment for maintenance cost for service facilities and software licenses and seasonal bonus payments to our employees, and a decrease in accounts payable (trade and other) mainly due to payments of accounts payable.

Net cash used in investing activities for 1Q17 was JPY2,572 million (net cash used in investing activities of JPY2,188 million for 1Q16), mainly due to payments for purchase of property and equipment of JPY3,839 million (JPY3,085 million for 1Q16) and proceeds from sales of property and equipment, which include sales and leaseback transactions, of JPY1,276 million (JPY404 million for 1Q16).

Net cash used in financing activities for 1Q17 was JPY2,098 million (net cash provided by financing activities of JPY1,344 million for 1Q16), mainly due to principal payments under capital leases of JPY1,335 million (JPY1,125 million for 1Q16) and FY2016 year-end dividends payments of JPY608 million (JPY505 million for 1Q16).

FY2017 Financial Targets

Due to seasonal factors, our financial results tend to be small in first quarter and large in fourth quarter every fiscal year. 1Q17 income was slightly higher than we expected; however, contribution of first quarter to full year results are not very large. Therefore, our financial targets for the fiscal year ending March 31, 2018 (FY2017) announced on May 15, 2017 remain unchanged.

1Q17 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
1Q161Q17
JPY millions JPY millions
Adjusted EBITDA 3,448 4,103
Depreciation and Amortization (2,612) (2,979)
Operating Income 836 1,124
Other Income 158 39
Income Tax Expense 440 451
Equity in Net Income of Equity Method Investees 17 36
Net income 571 748
Less: Net income attributable to noncontrolling interests (42) (42)
Net Income attributable to IIJ 529 706


CAPEX
1Q16 1Q17
JPY millions JPY millions
CAPEX, including capital leases 4,688 5,340
Acquisition of Assets by Entering into Capital Leases 1,891 2,268
Purchase of Property and Equipment 2,797 3,072


Presentation

Presentation materials will be posted on our web site (https://www.iij.ad.jp/en/ir/) on August 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: https://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 FY2017 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, 2017 and June 30, 2017)
As of March 31, 2017 As of June 30, 2017
Thousands of
JPY
Thousands of
JPY
ASSETS
CURRENT ASSETS:
Cash and cash equivalents21,958,591 20,508,225
Accounts receivable, net of allowance for doubtful accounts of JPY 107,684 thousand and JPY 112,385 thousand at March 31, 2017 and June 30, 2017, respectively27,383,692 24,059,068
Inventories2,798,054 3,115,959
Prepaid expenses—current7,610,925 9,718,714
Deferred tax assets—current1,298,469 -
Other current assets, net of allowance for doubtful accounts of JPY 15,192 thousand at March 31, 2017 and June 30, 2017, respectively2,672,008 2,843,592
Total current assets63,721,739 60,245,558
INVESTMENTS IN EQUITY METHOD INVESTEES3,150,175 3,173,008
OTHER INVESTMENTS7,924,914 8,831,196
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of JPY 50,566,983 thousand and JPY 51,987,126 thousand at March 31, 2017 and June 30, 2017, respectively39,775,444 40,415,418
GOODWILL6,169,609 6,169,609
OTHER INTANGIBLE ASSETS—Net3,087,017 2,995,042
GUARANTEE DEPOSITS3,060,365 3,065,701
DEFERRED TAX ASSETS—Noncurrent80,566 1,140,682
NET INVESTMENT IN SALES-TYPE LEASES—Noncurrent2,047,682 1,845,894
Prepaid expenses—Noncurrent6,607,437 6,968,043
OTHER ASSETS, net of allowance for doubtful accounts of JPY 61,877 thousand and JPY 59,498 thousand at March 31, 2017 and June 30, 2017, respectively1,770,201 1,649,540
TOTAL137,395,149 136,499,691
As of March 31, 2017 As of June 30, 2017
Thousands of
JPY
Thousands of
JPY
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings9,250,000 9,250,000
Capital lease obligations—current portion4,818,723 5,124,025
Accounts payable—trade14,653,065 13,028,880
Accounts payable—other2,308,790 952,611
Income taxes payable1,075,745 318,179
Accrued expenses2,755,581 2,714,107
Deferred income—current3,750,542 4,462,206
Other current liabilities1,370,661 1,888,255
Total current liabilities39,983,107 37,738,263
LONG-TERM BORROWINGS8,500,000 8,500,000
CAPITAL LEASE OBLIGATIONS—Noncurrent10,384,643 11,008,657
ACCRUED RETIREMENT AND PENSION COSTS—Noncurrent3,532,965 3,593,797
DEFERRED TAX LIABILITIES—Noncurrent963,845 1,222,341
DEFERRED INCOME—Noncurrent3,656,612 3,471,380
OTHER NONCURRENT LIABILITIES2,993,777 2,943,221
Total Liabilities70,014,949 68,477,659
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common-stock—authorized, 75,520,000 shares; issued and outstanding, 46,711,400 and 46,713,800 shares at March 31, 2017 and June 30, 2017, respectively25,509,499 25,511,804
Additional paid-in capital36,117,511 36,129,788
Retained earnings4,511,945 4,609,672
Accumulated other comprehensive income2,499,700 3,034,242
Treasury stock —1,650,909 shares held by the company at March 31, 2017 and June 30, 2017, respectively(1,896,784) (1,896,784)
Total Internet Initiative Japan Inc. shareholders' equity66,741,871 67,388,722
NONCONTROLLING INTERESTS638,329 633,310
Total equity67,380,200 68,022,032
TOTAL137,395,149 136,499,691

Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income and
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
(For the three months ended June 30, 2016 and June 30, 2017)
Three Months Ended Three Months Ended
June 30, 2016 June 30, 2017
Thousands of
JPY
Thousands of
JPY
REVENUES:
Network services:
Internet connectivity services (enterprise)5,047,825 6,523,846
Internet connectivity services (consumer)4,996,069 6,154,713
WAN services6,729,601 6,969,904
Outsourcing services5,301,656 6,037,221
Total22,075,151 25,685,684
Systems integration:
Systems construction3,678,367 4,439,994
Systems operation and maintenance8,687,939 9,159,313
Total12,366,306 13,599,307
Equipment sales729,699 675,922
ATM operation business1,008,095 1,002,992
Total revenues36,179,251 40,963,905
COSTS AND EXPENSES:
Cost of network services18,030,232 21,066,296
Cost of systems integration11,093,569 12,162,837
Cost of equipment sales664,985 603,976
Cost of ATM operation business608,327 600,642
Total costs30,397,113 34,433,751
Sales and marketing2,766,497 3,148,710
General and administrative2,055,679 2,129,782
Research and development123,643 127,271
Total costs and expenses35,342,932 39,839,514
OPERATING INCOME836,319 1,124,391
OTHER INCOME (EXPENSES):
Dividend income63,379 72,272
Interest income9,123 7,978
Interest expense(69,157) (88,932)
Foreign exchange gain (loss), net(90,500) 5,087
Net gain on sales of other investments213,938 -
Impairment of other investments(17,829) -
Other —net48,797 41,811
Other income —net157,751 38,216
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES994,070 1,162,607
INCOME TAX EXPENSE440,089 450,641
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES16,735 35,859
NET INCOME570,716 747,825
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS(41,457) (41,781)
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.529,259 706,044
Three Months Ended Three Months Ended
June 30, 2016 June 30, 2017
NET INCOME PER SHARE
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES (shares)45,952,691 45,062,838
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES (shares)46,059,998 45,202,227
BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs)91,905,382 90,125,677
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs)92,119,996 90,404,454
BASIC NET INCOME PER SHARE (JPY)11.52 15.67
DILUTED NET INCOME PER SHARE (JPY)11.49 15.62
BASIC NET INCOME PER ADS EQUIVALENT (JPY)5.76 7.83
DILUTED NET INCOME PER ADS EQUIVALENT (JPY)5.75 7.81
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Three Months Ended
June 30, 2016 June 30, 2017
Thousands of
JPY
Thousands of
JPY
NET INCOME570,716 747,825
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments(222,449) (75,709)
Unrealized holding gain (loss) on securities121,246 609,373
Defined benefit pension plans- 878
TOTAL COMPREHENSIVE INCOME469,513 1,282,367
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS(41,457) (41,781)
COMPREHENSIVE INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.428,056 1,240,586

Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Cash Flows (Unaudited)
(For the three months ended June 30, 2016 and June 30, 2017)
Three Months Ended Three Months Ended
June 30, 2016 June 30, 2017
Thousands of
JPY
Thousands of
JPY
OPERATING ACTIVITIES:
Net income570,716 747,825
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization2,612,239 2,979,342
Provision for retirement and pension costs, less payments61,172 62,303
Provision for allowance for doubtful accounts1,423 23,661
Gain on sales of property and equipment(5,425) (13,869)
Loss on disposal of property and equipment9,954 21,639
Net gain on sales of other investments(213,938) -
Impairment of other investments17,829 -
Foreign exchange loss (gain), net73,002 (2,589)
Equity in net income of equity method investees, less dividends received34,347 15,332
Deferred income tax expense300,934 108,916
Others(9,020) (15,109)
Changes in operating assets and liabilities:
Decrease in accounts receivable1,673,982 3,288,086
Decrease in net investment in sales-type lease — noncurrent183,809 201,788
Increase in inventories(6,587) (320,774)
Increase in prepaid expenses(2,175,960) (2,113,231)
Increase in other current and noncurrent assets(1,593,216) (447,177)
Decrease in accounts payable(2,079,654) (1,718,921)
Decrease in income taxes payable(836,023) (757,485)
Decrease in accrued expenses(32,340) (39,674)
Increase in deferred income—current289,208 714,717
Increase (decrease) in deferred income—noncurrent104,511 (175,856)
Increase in other current and noncurrent liabilities901,588 678,461
Net cash provided by (used in) operating activities(117,449) 3,237,385
INVESTING ACTIVITIES:
Purchase of property and equipment(3,084,531) (3,839,315)
Proceeds from sales of property and equipment404,390 1,275,766
Purchase of other investments(37,796) (27,656)
Investment in an equity method investee- (43,000)
Proceeds from sales of other investments303,614 33,199
Payments of guarantee deposits(2,024) (12,559)
Refund of guarantee deposits42,387 10,077
Payments for refundable insurance policies(14,091) (14,091)
Proceeds from subsidies200,000 48,976
Other- (3,000)
Net cash used in investing activities(2,188,051) (2,571,603)
Three Months Ended Three Months Ended
June 30, 2016 June 30, 2017
Thousands of
JPY
Thousands of
JPY
FINANCING ACTIVITIES:
Proceeds from short-term borrowings with initial maturities over three months and long-term borrowings3,000,000 2,500,000
Net decrease in short-term borrowings with initial maturities less than three months- (2,500,000)
Principal payments under capital leases(1,124,910) (1,334,954)
Repayments of long-term accounts payable- (108,135)
Dividends paid(505,480) (608,317)
Other(26,000) (46,797)
Net cash provided by (used in) financing activities1,343,610 (2,098,203)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(102,714) (17,945)
NET DECREASE IN CASH AND CASH EQUIVALENTS(1,064,604) (1,450,366)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD19,569,095 21,958,591
CASH AND CASH EQUIVALENTS, END OF THE PERIOD18,504,491 20,508,225
ADDITIONAL CASH FLOW INFORMATION:
Interest paid68,699 87,211
Income taxes paid941,083 1,027,984
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets by entering into capital leases1,891,072 2,268,329
Facilities purchase liabilities796,407 952,611

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, 2016June 30, 2017
Thousands of JPYThousands of JPY
Network service and systems integration business35,263,867 40,051,731
Customers35,171,156 39,960,913
Intersegment92,711 90,818
ATM operation business1,008,095 1,002,992
Customers 1,008,095 1,002,992
Intersegment- -
Elimination(92,711)(90,818)
Consolidated total36,179,251 40,963,905
Segment profit or loss:
Three Months EndedThree Months Ended
June 30, 2016June 30, 2017
Thousands of JPYThousands of JPY
Network service and systems integration business513,553 804,025
ATM operation business356,232 366,832
Elimination(33,466)(46,466)
Consolidated operating income836,319 1,124,391
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, 2017 (“1Q17”) in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Three Months ended June 30, 2017
[Under accounting principles generally accepted in the United States ("U.S. GAAP")]

August 8, 2017
Company name: Internet Initiative Japan Inc.
Exchange listed: Tokyo Stock Exchange First Section
Stock code number: 3774
URL: https://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 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 Three Months Ended June 30, 2017 (April 1, 2017 to June 30, 2017)
(1) Consolidated Results of Operations (% shown is YoY change)
Total revenues
Operating income
Income before
income tax expense
Net income
attributable to IIJ
JPY millions % JPY millions% JPY millions% JPY millions%
Three months ended
June 30, 2017
40,964 13.2 1,124 34.4 1,163 17.0 706 33.4
Three months ended
June 30, 2016
36,179 15.0 836 (26.7) 994 (22.2) 529 (26.6)


(Note1) Total comprehensive income attributable to IIJ
For the three months ended June 30, 2017: JPY1,241 million (up 189.8% YoY)
For the three months ended June 30, 2016: JPY428 million (down 45.6%)
(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
JPY JPY
Three months ended
June 30, 2017
15.67 15.62
Three months ended
June 30, 2016
11.52 11.49

(2) Consolidated Financial Position
Total assets Total equity Total IIJ shareholders'
equity
Total IIJ shareholders'
equity to total assets
JPY millions JPY millions JPY millions %
As of June 30, 2017 136,500 68,022 67,389 49.4
As of March 31, 2017 137,395 67,380 66,742 48.6


2. Dividends
Dividend per Shares
1Q-end 2Q-end 3Q-end Year-end Total
JPY JPY JPY JPY JPY
Fiscal Year Ended
March 31, 2017
- 13.50 - 13.50 27.00
Fiscal Year Ending
March 31, 2018
-
Fiscal Year Ending
March 31, 2018
(forecast)
13.50 - 13.50 27.00

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

3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2018
(April 1, 2017 through March 31, 2018) (% shown is YoY change)
Total
Revenues
Operating
Income
Income 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, 2017
82,400 11.2 2,000 2.7 2,000 (5.0) 1,100 (0.7) 24.41
Fiscal Year Ending
March 31, 2018
176,000 11.5 6,500 26.6 6,500 19.8 4,000 26.3 88.77

(Note1) Changes from the latest forecasts released: No

* Notes

(1)Changes in significant subsidiaries for the three months ended June 30, 2017
(Changes in significant subsidiaries for the three months ended June 30, 2017 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: Yes
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17 “Balance Sheet Classification of Deferred Taxes.” This ASU requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. IIJ adopted this ASU from the first quarter beginning April 1, 2017, on a prospective basis, and did not retrospectively adjust the consolidated balance sheet as of March 31, 2017. As of March 31, 2017, the balance of current deferred tax assets and liabilities amounted to JPY1,298,469 thousand and JPY108,994 thousand, respectively.
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, 2017: 46,713,800 shares
As of March 31, 2017: 46,711,400 shares
2)The number of treasury stock:
As of June 30, 2017: 1,650,909 shares
As of March 31, 2017: 1,650,909 shares
3)The weighted average number of shares outstanding:
For the three months ended June 30, 2017: 45,062,838 shares
For the three months ended June 30, 2016: 45,952,691 shares


Source:Internet Initiative Japan Inc.