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

TOKYO, Nov. 07, 2017 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its first six months consolidated financial results for the fiscal year ending March 31, 2018 (“1H17” from April 1, 2017 to September 30, 2017).1

Highlights of Financial Results for 1H17
Revenues JPY83.0 billion (up 12.0% YoY)
Operating Income JPY2.3 billion (up 18.9% YoY)
Net Income attributable to IIJ JPY1.5 billion (up 34.3% 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)

Overview of 1H17 Financial Results and Business Outlook

“Overall Japanese enterprises’ IT appetite has been favorable. Our recurring revenue, 84.9% of total 1H17 revenues, increased by 13.6% year over year as we continued to accumulate Internet connectivity, security, WAN, and Cloud. Operating income growth was achieved as planned with the increase in gross margin amounts along with revenue accumulation absorbing the increase in operating cost,” said Eijiro Katsu, COO and President of IIJ.

“As for enterprise network services, IIJ Omnibus services, cloud-like network services incorporating SDN/NFV2 technologies, were accumulated as we’ve seen demands to replace traditional enterprise WAN and to connect multiple Cloud services. Needs for Security services continue to be strong. With the enforcement of the Basic Law for Cyber Security and the implementation of the Social Security and Tax Number System, so-called “my number,” regulatory agencies such as the FSA3 and the METI4 have announced guidelines to be taken by Japanese enterprises against cyber threats. As an ISP with over twenty years of reliable network operation, we’re well positioned to collect Big Data of Internet traffic information and apply them in our Security services to further enhance them continuously.”

“Regarding Mobile, we continue to be profitable and carry business developments strategically. Our 1H17 enterprise Mobile revenue, excluding MVNE transactions, increased by 15.4% YoY. By leveraging our blue-chip customer base and soon-to-be-realized full-MVNO functions, we aim to maximize our mobile infrastructure utilization, which is currently largely dependent on consumer traffic pattern (traffic concentrated the most during commuting time and lunch time and vast vacant hours during the day).”

“The ways Japanese enterprises use IT have been evolving continuously as seen in the concepts like Cloud, Big Data, IoT to name a few. New concepts shall continue to emerge and we strive to to be the core platform provider to realize them. Strong demands for Security services, expanding market for Mobile, and attractive concept of IoT are all tailwild for our business growth as we already have elements to meet these demands,” 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, unaudited and consolidated.
2 SDN (Software Defined Networking) refers to technology in which the entire network is centrally controlled by software in order to dynamically configure the network while NFV (Network Functions Virtualization) refers to technology that virtualizes functions previously implemented using dedicated devices and, instead, implements them as software on standard high-volume servers.
3 FSA stands for the Financial Services Agency of Japan.
4 METI stands for the Ministry of Economy, Trade and Industry of Japan.

1H17 Financial Results Summary

Operating Results Summary
1H161H17YoY
Change
JPY millionsJPY millions%
Total revenues74,12382,98812.0
Network services44,83652,28516.6
Systems integration (SI)25,76826,9994.8
Equipment sales1,4671,66013.2
ATM operation business2,0522,044(0.4)
Total costs62,27569,96212.3
Network services36,71543,03617.2
Systems integration (SI)22,99324,2215.3
Equipment sales1,3431,50512.1
ATM operation business1,2241,200(1.9)
Total gross margin11,84813,0269.9
Network services8,1209,24913.9
Systems integration (SI)2,7752,7780.1
Equipment sales12415525.3
ATM operation business8298441.8
SG&A expenses and R&D9,90010,7108.2
Operating income1,9482,31618.9
Income before income tax expense2,1052,46917.3
Net income attributable to IIJ1,1081,48834.3

Segment Results Summary
1H161H17
JPY millionsJPY millions
Total revenues74,123 82,988
Network services and SI business72,257 81,121
ATM operation business2,052 2,044
Elimination(186)(177)
Operating income1,948 2,316
Network service and SI business1,281 1,640
ATM operation business734 764
Elimination(67)(88)

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

1H17 Revenues and Income

Revenues

Total revenues were JPY82,988 million, up 12.0% YoY (JPY74,123 million for 1H16).

Network services revenue was JPY52,285 million, up 16.6% YoY (JPY44,836 million for 1H16).

Revenues for Internet connectivity services for enterprise were JPY13,266 million, up 25.4% YoY from JPY10,577 million for 1H16, 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 JPY12,352 million, up 19.6% YoY from JPY10,328 million for 1H16, 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 JPY14,083 million, up 6.0% YoY compared to JPY13,289 million for 1H16.

Revenues for Outsourcing services were JPY12,584 million, up 18.3% YoY from JPY10,642 million for 1H16, mainly due to an increase in security-related services revenues.

Network Services Revenues Breakdown
1H161H17YoY
Change
JPY millionsJPY millions%
Internet connectivity services (Enterprise)10,57713,26625.4
IP service*14,8734,9962.5
IIJ FiberAccess/F and IIJ DSL/F1,5181,510(0.5)
IIJ Mobile service (Enterprise)4,0726,64963.3
IIJ Mobile MVNO Platform Service 2,5734,91991.2
Others114111(3.1)
Internet connectivity services (Consumer)10,32812,35219.6
IIJ9,22611,45824.2
IIJmio Mobile Service8,03510,08725.5
hi-ho1,102894(18.9)
WAN services13,28914,0836.0
Outsourcing services10,64212,58418.3
Total network services44,83652,28516.6

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

Number of Contracts and Subscription for Connectivity Services*1
as of
September 30, 2016
as of
September 30, 2017
YoY
Change
Internet connectivity services (Enterprise)721,6911,095,677373,986
IP service (1Gbps-)41045949
IP service (100Mbps-999Mbps)55961960
IP service (-99Mbps)642635(7)
IIJ Data center connectivity service262239(23)
IIJ FiberAccess/F and IIJ DSL/F72,10271,365(737)
IIJ Mobile service (Enterprise)646,6501,021,327374,677
IIJ Mobile MVNO Platform Service418,098682,512264,414
Others1,0661,033(33)
Internet connectivity services (Consumer) 1,346,4771,419,32972,852
IIJ1,207,1841,290,73583,551
IIJmio Mobile Service874,852972,28497,432
hi-ho139,293128,594(10,699)
Total contracted bandwidth*22,371.8Gbps2,932.5Gbps560.7Gbps

*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 JPY26,999 million, up 4.8% YoY (JPY25,768 million for 1H16).

Systems construction revenue, a one-time revenue, was JPY8,808 million, up 2.6% YoY (JPY8,583 million for 1H16). Systems operation and maintenance revenue, a recurring revenue, was JPY18,191 million, up 5.9% YoY (JPY17,185 million for 1H16), mainly due to continued accumulation of the orders and an increase in private cloud services’ revenues.

Orders received for SI and equipment sales totaled JPY32,246 million, down 6.6% YoY (JPY34,516 million for 1H16); orders received for systems construction and equipment sales were JPY13,543 million, up 1.7% YoY (JPY13,321 million for 1H16) and orders received for systems operation and maintenance were JPY18,703 million, down 11.8% YoY (JPY21,194 million for 1H16).

Order backlog for SI and equipment sales as of September 30, 2017 amounted to JPY45,088 million, up 10.2% YoY (JPY40,926 million as of September 30, 2016); order backlog for systems construction and equipment sales was JPY10,254 million, up 9.7% YoY (JPY9,349 million as of September 30, 2016) and order backlog for systems operation and maintenance was JPY34,834 million, up 10.3% YoY (JPY31,577 million as of September 30, 2016).

Equipment sales revenues were JPY1,660 million, up 13.2% YoY (JPY1,467 million for 1H16) mainly due to an increase in selling mobile devices.

ATM operation business revenues were JPY2,044 million, down 0.4% YoY (JPY2,052 million for 1H16). As of September 30, 2017, 1,093 ATMs have been placed.

Cost and expense

Total cost of revenues was JPY69,962 million, up 12.3% YoY (JPY62,275 million for 1H16).

Cost of network services revenue was JPY43,036 million, up 17.2% YoY (JPY36,715 million for 1H16). There were an increase in outsourcing-related costs with our mobile infrastructure enhancement along with our mobile-related revenue increase and an increase in network operation-related costs. Gross margin was JPY9,249 million, up 13.9% YoY (JPY8,120 million for 1H16) and gross margin ratio was 17.7% compared to 18.1% in 1H16.

Cost of SI revenues was JPY24,221 million, up 5.3% YoY (JPY22,993 million for 1H16). The increase was mainly due to increases in outsourcing-related and personnel-related costs. Gross margin was JPY2,778 million, up 0.1% YoY (JPY2,775 million for 1H16) and gross margin ratio was 10.3% compared to 10.8% in 1H16.

Cost of equipment sales revenues was JPY1,505 million, up 12.1% YoY (JPY1,343 million for 1H16). Gross margin was JPY155 million (JPY124 million for 1H16) and gross margin ratio was 9.3% compared to 8.4% in 1H16.

Cost of ATM operation business revenues was JPY1,200 million, down 1.9% YoY (JPY1,224 million for 1H16). Gross margin was JPY844 million (JPY829 million for 1H16) and gross margin ratio was 41.3% compared to 40.4% in 1H16.

SG&A and R&D expenses

SG&A and R&D expenses in total were JPY10,710 million, up 8.2% YoY (JPY9,900 million for 1H16).

Sales and marketing expenses were JPY6,327 million, up 12.3% YoY (JPY5,636 million for 1H16) mainly due to increases in sales commission expenses, advertising expenses, and personnel-related expenses.

General and administrative expenses were JPY4,132 million, up 2.8% YoY (JPY4,020 million for 1H16) mainly due to increases in personnel-related expenses.

Research and development expenses were JPY251 million, up 2.7% YoY (JPY244 million for 1H16).

Operating income

Operating income was JPY2,316 million, up 18.9% YoY (JPY1,948 million for 1H16).

Other income (expenses)

Other income (expenses) was an income of JPY153 million (an income of JPY157 million for 1H16), mainly because of dividend income of JPY197 million (JPY91 million for 1H16), distribution from fund investment of JPY122 million (included in other-net of JPY106 million, JPY120 million for 1H16), and interest expense of JPY184 million (JPY142 million for 1H16).

Income before income tax expenses

Income before income tax expenses was JPY2,469 million, up 17.3% YoY (JPY2,105 million for 1H16).

Net income

Income tax expense was JPY970 million (JPY954 million for 1H16).

Equity in net income of equity method investees was JPY78 million (JPY42 million for 1H16) mainly due to net income of Internet Multifeed Co.

As a result of the above, net income was JPY1,577 million, up 32.1% YoY (JPY1,193 million for 1H16).

Net income attributable to IIJ

Net income attributable to non-controlling interests was JPY89 million (JPY85 million for 1H16) mainly related to net income of Trust Networks Inc.

Net income attributable to IIJ was JPY1,488 million, up 34.3% YoY (JPY1,108 million for 1H16).

1H17 Balance Sheets

Balance sheets

As of September 30, 2017, the balance of total assets was JPY140,488 million, increased by JPY4,059 million from the balance as of March 31, 2017 of JPY137,395 million.

As of September 30, 2017, the balance of current assets was JPY62,219 million, decreased by JPY1,503 million from the balance as of March 31, 2017 of JPY63,722 million. The major breakdown of current assets was a decrease in cash and cash equivalents by JPY2,088 million to JPY19,871 million, a decrease in accounts receivable by JPY1,151 million to JPY26,233 million and an increase in inventories by JPY1,364 million to JPY4,162 million. As of September 30, 2017, the balance of noncurrent assets was JPY78,269 million, increased by JPY4,596 million from the balance as of March 31, 2017 of JPY73,673 million. The major breakdown of noncurrent assets was an increase in property and equipment by JPY2,418 million to JPY42,193 million and an increase in other investments by JPY1,764 million to JPY9,689 million mainly due to an increase in the fair value of available-for-sale securities. Other investments as of September 30, 2017, consisted of JPY7,498 million in available-for-sale securities, JPY1,124 million in nonmarketable equity securities and JPY1,067 million in investments in funds, including some through a trust. As of September 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 JPY2,853 million, decreased by JPY183 million from the balance as of March 31, 2017 of JPY3,036 million.

As of September 30, 2017, the balance of current liabilities was JPY40,831 million, increased by JPY848 million from the balance as of March 31, 2017 of JPY39,983 million. The major breakdown of current liabilities was an increase in capital lease obligations-current portion by JPY584 million to JPY5,403 million and a decrease in accounts payable (trade and other) by JPY170 million to JPY16,792 million. As of September 30, 2017, the balance of noncurrent liabilities was JPY30,255 million, increased by JPY223 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 JPY1,043 million to JPY11,427 million.

As of September 30, 2017, the balance of total IIJ shareholders’ equity was JPY68,777 million, increased by JPY2,035 million and IIJ shareholders’ equity ratio (total IIJ shareholders’ equity divided by total assets) as of September 30, 2017 was 49.0%.

1H17 Cash Flows

Cash flows

Cash and cash equivalents as of September 30, 2017 were JPY19,871 million (JPY19,668 million as of September 30, 2016).

Net cash provided by operating activities for 1H17 was JPY6,102 million (net cash provided by operating activities of JPY4,073 million for 1H16.) There were net income of JPY1,577 million, depreciation and amortization of JPY6,022 million and net cash out flow of JPY1,512 million (JPY2,747 million for 1H16) 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 inventories, and an increase in prepaid expenses mainly due to payments in relation to upfront payment for maintenance cost for service facilities and software licenses.

Net cash used in investing activities for 1H17 was JPY4,499 million (net cash used in investing activities of JPY3,896 million for 1H16), mainly due to payments for purchase of property and equipment of JPY6,423 million (JPY5,358 million for 1H16) and proceeds from sales of property and equipment, which include sales and leaseback transactions, of JPY2,384 million (JPY1,209 million for 1H16).

Net cash used in financing activities for 1H17 was JPY3,673 million (net cash provided by financing activities of JPY155 million for 1H16), mainly due to principal payments under capital leases of JPY2,764 million (JPY2,314 million for 1H16) and FY2016 year-end dividends payments of JPY608 million (JPY505 million for 1H16).

FY2017 Financial Targets

Due to seasonal factors, our financial results tend to be strong in the second half and strongest in fourth quarter every fiscal year. 1H17 financial results resulted almost as our disclosed target. Our financial targets for the fiscal year ending March 31, 2018 (FY2017) announced on May 15, 2017 remain unchanged.

1H17 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
1H161H17
JPY millionsJPY millions
Adjusted EBITDA7,232 8,338
Depreciation and Amortization(5,284)(6,022)
Operating Income1,948 2,316
Other Income157 153
Income Tax Expense954 970
Equity in Net Income of Equity Method Investees42 78
Net income1,193 1,577
Less: Net income attributable to noncontrolling interests(85)(89)
Net Income attributable to IIJ1,108 1,488

CAPEX
1H161H17
JPY millionsJPY millions
CAPEX, including capital leases8,3729,346
Acquisition of Assets by Entering into Capital Leases3,7924,407
Purchase of Property and Equipment4,5804,939

Presentation

Presentation materials will be posted on our web site (https://www.iij.ad.jp/en/ir/) on November 7, 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, mobile services, security services, cloud computing services, and systems integration. 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 September 30, 2017)
As of March 31, 2017 As of September 30, 2017
Thousands of
JPY
Thousands of
JPY
ASSETS
CURRENT ASSETS:
Cash and cash equivalents21,958,591 19,871,031
Accounts receivable, net of allowance for doubtful accounts of JPY 107,684 thousand and JPY 118,818 thousand at March 31, 2017 and September 30, 2017, respectively27,383,692 26,232,982
Inventories2,798,054 4,161,605
Prepaid expenses—current7,610,925 8,754,465
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 September 30, 2017, respectively2,672,008 3,198,549
Total current assets63,721,739 62,218,632
INVESTMENTS IN EQUITY METHOD INVESTEES3,150,175 3,348,297
OTHER INVESTMENTS7,924,914 9,688,715
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of JPY 50,566,983 thousand and JPY 53,371,055 thousand at March 31, 2017 and September 30, 2017, respectively39,775,444 42,193,028
GOODWILL6,169,609 6,169,609
OTHER INTANGIBLE ASSETS—Net3,087,017 2,903,851
GUARANTEE DEPOSITS3,060,365 3,344,109
DEFERRED TAX ASSETS—Noncurrent80,566 278,249
NET INVESTMENT IN SALES-TYPE LEASES—Noncurrent2,047,682 1,659,092
Prepaid expenses—Noncurrent6,607,437 7,165,675
OTHER ASSETS, net of allowance for doubtful accounts of JPY 61,877 thousand and JPY 59,498 thousand at March 31, 2017 and September 30, 2017, respectively1,770,201 1,518,816
TOTAL137,395,149 140,488,073
As of March 31, 2017 As of September 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 5,402,826
Accounts payable—trade14,653,065 14,899,050
Accounts payable—other2,308,790 1,892,484
Income taxes payable1,075,745 1,013,528
Accrued expenses2,755,581 2,981,193
Deferred income—current3,750,542 4,173,380
Other current liabilities1,370,661 1,218,373
Total current liabilities39,983,107 40,830,834
LONG-TERM BORROWINGS8,500,000 8,500,000
CAPITAL LEASE OBLIGATIONS—Noncurrent10,384,643 11,427,196
ACCRUED RETIREMENT AND PENSION COSTS—Noncurrent3,532,965 3,656,900
DEFERRED TAX LIABILITIES—Noncurrent963,845 377,108
DEFERRED INCOME—Noncurrent3,656,612 3,426,385
OTHER NONCURRENT LIABILITIES2,993,777 2,866,928
Total Liabilities70,014,949 71,085,351
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 September 30, 2017, respectively25,509,499 25,511,804
Additional paid-in capital36,117,511 36,147,204
Retained earnings4,511,945 5,391,597
Accumulated other comprehensive income2,499,700 3,622,761
Treasury stock—1,650,909 shares held by the company at March 31, 2017 and September 30, 2017, respectively(1,896,784) (1,896,784)
Total Internet Initiative Japan Inc. shareholders' equity66,741,871 68,776,582
NONCONTROLLING INTERESTS638,329 626,140
Total equity67,380,200 69,402,722
TOTAL137,395,149 140,488,073

Internet Initiative Japan Inc.
Consolidated Statements of Income and
Consolidated Statements of Comprehensive Income (Unaudited)
(For the six months ended September 30, 2016 and September 30, 2017)
Six Months Ended Six Months Ended
September 30, 2016 September 30, 2017
Thousands of
JPY
Thousands of
JPY
REVENUES:
Network services:
Internet connectivity services (enterprise)10,576,874 13,265,963
Internet connectivity services (consumer)10,328,320 12,351,654
WAN services13,288,712 14,083,378
Outsourcing services10,641,860 12,584,446
Total44,835,766 52,285,441
Systems integration:
Systems construction8,583,419 8,807,948
Systems operation and maintenance17,184,907 18,191,065
Total25,768,326 26,999,013
Equipment sales1,466,658 1,659,919
ATM operation business2,052,520 2,043,912
Total revenues74,123,270 82,988,285
COSTS AND EXPENSES:
Cost of network services36,715,290 43,036,356
Cost of systems integration22,992,923 24,221,215
Cost of equipment sales1,343,117 1,505,161
Cost of ATM operation business1,223,494 1,199,748
Total costs62,274,824 69,962,480
Sales and marketing5,635,948 6,327,165
General and administrative4,020,356 4,131,984
Research and development244,440 251,127
Total costs and expenses72,175,568 80,672,756
OPERATING INCOME1,947,702 2,315,529
OTHER INCOME (EXPENSES):
Dividend income91,407 197,063
Interest income18,518 15,776
Interest expense(142,345) (184,365)
Foreign exchange gain (loss), net(105,916) 18,708
Net gain on sales of other investments213,938 -
Impairment of other investments(30,554) -
Other —net112,605 106,088
Other income —net157,653 153,270
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES2,105,355 2,468,799
INCOME TAX EXPENSE953,678 969,527
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES41,646 77,339
NET INCOME1,193,323 1,576,611
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS(85,389) (88,642)
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.1,107,934 1,487,969
Six Months Ended Six Months Ended
September 30, 2016 September 30, 2017
NET INCOME PER SHARE
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES (shares)45,952,691 45,062,865
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES (shares)46,065,072 45,207,332
BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs)91,905,382 90,125,730
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs)92,130,144 90,414,664
BASIC NET INCOME PER SHARE (JPY)24.11 33.02
DILUTED NET INCOME PER SHARE (JPY)24.05 32.91
BASIC NET INCOME PER ADS EQUIVALENT (JPY)12.06 16.51
DILUTED NET INCOME PER ADS EQUIVALENT (JPY)12.03 16.46
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
Six Months Ended Six Months Ended
September 30, 2016 September 30, 2017
Thousands of
JPY
Thousands of
JPY
NET INCOME1,193,323 1,576,611
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments(410,090) (55,208)
Unrealized holding gain (loss) on securities450,761 1,176,581
Defined benefit pension plans7,252 1,688
TOTAL COMPREHENSIVE INCOME1,241,246 2,699,672
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS(85,389) (88,642)
COMPREHENSIVE INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.1,155,857 2,611,030


Internet Initiative Japan Inc.
Consolidated Statements of Cash Flows (Unaudited)
(For the six months ended September 30, 2016 and September 30, 2017)
Six Months Ended Six Months Ended
September 30, 2016 September 30, 2017
Thousands of
JPY
Thousands of
JPY
OPERATING ACTIVITIES:
Net income1,193,323 1,576,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization5,283,504 6,021,880
Provision for retirement and pension costs, less payments122,446 126,779
Provision for allowance for doubtful accounts5,133 45,236
Gain on sales of property and equipment(7,704) (14,504)
Loss on disposal of property and equipment35,656 37,154
Net gain on sales of other investments(213,938) -
Impairment of other investments30,554 -
Foreign exchange loss (gain), net83,098 (8,458)
Equity in net loss (income) of equity method investees, less dividends received9,436 (26,148)
Deferred income tax expense (benefit)283,182 (135,948)
Others(5,180) (8,029)
Changes in operating assets and liabilities:
Decrease in accounts receivable495,836 1,101,059
Decrease in net investment in sales-type lease — noncurrent299,172 388,590
Increase in inventories(712,514) (1,363,001)
Increase in prepaid expenses(1,407,533) (1,147,128)
Increase in other current and noncurrent assets(1,684,572) (1,064,686)
Increase in accounts payable518,161 212,392
Decrease in income taxes payable(592,886) (62,145)
Increase (decrease) in accrued expenses(46,417) 224,914
Increase in deferred income—current48,007 425,608
Increase (decrease) in deferred income—noncurrent123,300 (211,511)
Increase (decrease) in other current and noncurrent liabilities212,789 (16,384)
Net cash provided by operating activities4,072,853 6,102,281
INVESTING ACTIVITIES:
Purchase of property and equipment(5,358,105) (6,423,288)
Proceeds from sales of property and equipment1,209,468 2,383,761
Purchase of other investments(287,058) (57,489)
Investment in an equity method investee- (174,808)
Proceeds from sales of other investments304,542 33,456
Payments of guarantee deposits(14,403) (294,033)
Refund of guarantee deposits77,476 15,276
Payments for refundable insurance policies(28,181) (28,181)
Proceeds from subsidies200,000 48,976
Other- (3,000)
Net cash used in investing activities(3,896,261) (4,499,330)
Six Months Ended Six Months Ended
September 30, 2016 September 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(2,313,763) (2,764,221)
Repayments of long-term accounts payable- (203,272)
Dividends paid(505,480) (608,317)
Other(26,000) (97,660)
Net cash provided by (used in) financing activities154,757 (3,673,470)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(232,622) (17,041)
NET DECREASE IN CASH AND CASH EQUIVALENTS98,727 (2,087,560)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD19,569,095 21,958,591
CASH AND CASH EQUIVALENTS, END OF THE PERIOD19,667,822 19,871,031
ADDITIONAL CASH FLOW INFORMATION:
Interest paid142,045 180,466
Income taxes paid1,333,495 1,115,207
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets by entering into capital leases3,792,166 4,407,216
Facilities purchase liabilities1,254,427 1,892,484


Going Concern Assumption (Unaudited)
Nothing to be reported.
Material Changes In Shareholders' Equity (Unaudited)
Nothing to be reported.
Segment Information (Unaudited)
Business Segments:
Revenues:
Six Months EndedSix Months Ended
September 30, 2016September 30, 2017
Thousands of JPYThousands of JPY
Network service and systems integration business72,257,102 81,120,647
Customers72,070,750 80,944,373
Intersegment186,352 176,274
ATM operation business2,052,520 2,043,912
Customers 2,052,520 2,043,912
Intersegment- -
Elimination(186,352)(176,274)
Consolidated total74,123,270 82,988,285
Segment profit or loss:
Six Months EndedSix Months Ended
September 30, 2016September 30, 2017
Thousands of JPYThousands of JPY
Network service and systems integration business1,280,776 1,640,053
ATM operation business734,373 763,799
Elimination(67,447)(88,323)
Consolidated operating income1,947,702 2,315,529
Geographic information is not presented due to immateriality of revenue attributable to international operations.
Subsequent Events (Unaudited)
Nothing to be reported.

Second Quarter FY2017 Consolidated Financial Results (3 months)

The following tables are highlight data of 2nd Quarter FY2017 (3 months) consolidated financial results (unaudited, for the three months ended September 30, 2017).

Operating Results Summary
2Q162Q17YoY %
Change
JPY millionsJPY millions
Total Revenues:37,94442,02410.8
Network Services22,76126,60016.9
Systems Integration (SI)13,40213,399(0.0)
Equipment Sales73798433.5
ATM Operation Business1,0441,041(0.3)
Cost of Revenues:31,87835,52811.5
Network Services18,68521,97017.6
Systems Integration (SI)11,90012,0581.3
Equipment Sales67890132.9
ATM Operation Business615599(2.6)
SG&A Expenses and R&D4,9555,3057.1
Operating Income1,1111,1917.2
Income before Income Tax Expense1,1111,30617.5
Net Income attributable to IIJ57978235.1

Network Service Revenue Breakdown
2Q162Q17YoY %
Change
JPY millionsJPY millions
Internet Connectivity Service (Enterprise)5,5296,74221.9
IP Service*12,4722,5061.4
IIJ FiberAccess/F and IIJ DSL/F757757(0.1)
IIJ Mobile Service2,2433,42452.6
IIJ Mobile MVNO Platform Service1,4502,56076.5
Others5755(3.4)
Internet Connectivity Service (Consumer)5,3326,19716.2
IIJ4,7965,76120.1
IIJmio High Speed Mobile Service4,1715,07421.6
hi-ho536436(18.6)
WAN Services6,5597,1138.5
Outsourcing Services5,3416,54822.6
Network Services Revenues22,76126,60016.9

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

Reconciliation of Non-GAAP Financial Measures (2nd Quarter FY2017 (3 months))

The following table summarizes the reconciliation of adjusted EBITDA to net income in our consolidated statements of income that are prepared in accordance with U.S. GAAP.

Adjusted EBITDA
2Q162Q17
JPY millionsJPY millions
Adjusted EBITDA3,782 4,234
Depreciation and Amortization(2,671)(3,043)
Operating Income1,111 1,191
Other Income (Expense)(0)115
Income Tax Expense (Benefit)514 518
Equity in Net Income of Equity Method Investees25 41
Net income622 829
Less: Net income attributable to noncontrolling interests(43)(47)
Net Income attributable to IIJ579 782

The following table summarizes the reconciliation of capital expenditures to the purchase of property and equipment in our consolidated statements of cash flows that are prepared and presented in accordance with U.S. GAAP.

CAPEX
2Q162Q17
JPY millionsJPY millions
CAPEX, including capital leases3,6844,006
Acquisition of Assets by Entering into Capital Leases1,9012,139
Purchase of Property and Equipment1,7831,867


Internet Initiative Japan Inc.
Quarterly Consolidated Statements of Income and
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
(Three Months ended September 30, 2016 and September 30, 2017)
Three Months EndedThree Months Ended
September 30, 2016September 30, 2017
Thousands of
JPY
Thousands of
JPY
REVENUES:
Network services:
Internet connectivity services (enterprise)5,529,049 6,742,117
Internet connectivity services (consumer)5,332,251 6,196,941
WAN services6,559,111 7,113,474
Outsourcing services5,340,204 6,547,225
Total22,760,615 26,599,757
Systems integration:
Systems construction4,905,052 4,367,954
Systems operation and maintenance8,496,968 9,031,752
Total13,402,020 13,399,706
Equipment sales736,959 983,997
ATM operation business1,044,425 1,040,920
Total revenues37,944,019 42,024,380
COST AND EXPENSES:
Cost of network services18,685,058 21,970,060
Cost of systems integration11,899,354 12,058,378
Cost of equipment sales678,132 901,185
Cost of ATM operation business615,167 599,106
Total costs31,877,711 35,528,729
Sales and marketing2,869,451 3,178,455
General and administrative1,964,677 2,002,202
Research and development120,797 123,856
Total costs and expenses36,832,636 40,833,242
OPERATING INCOME1,111,383 1,191,138
OTHER INCOME (EXPENSE):
Dividend income28,028 124,791
Interest income9,395 7,798
Interest expense(73,188)(95,433)
Foreign exchange gain (loss), net(15,416)13,621
Impairment of other investments(12,725)-
Other—net63,808 64,277
Other income —net(98)115,054
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES1,111,285 1,306,192
INCOME TAX EXPENSE513,589 518,886
EQUITY IN NET INCOME OF EQUITY METHOD INVESTEES24,911 41,480
NET INCOME622,607 828,786
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS(43,932)(46,861)
NET INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.578,675 781,925
Three Months EndedThree Months Ended
September 30, 2016September 30, 2017
NET INCOME PER SHARE
BASIC WEIGHTED-AVERAGE NUMBER OF SHARES (shares)45,952,691 45,062,891
DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES (shares)46,070,091 45,212,382
BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs)91,905,382 90,125,782
DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS (ADSs)92,140,182 90,424,764
BASIC NET INCOME PER SHARE (JPY)12.59 17.35
DILUTED NET INCOME PER SHARE (JPY)12.56 17.29
BASIC NET INCOME PER ADS EQUIVALENT (JPY)6.30 8.68
DILUTED NET INCOME PER ADS EQUIVALENT (JPY)6.28 8.65
Quarterly Consolidated Statements of Comprehensive Income (Unaudited)
Three Months EndedThree Months Ended
September 30, 2016September 30, 2017
Thousands of
JPY
Thousands of
JPY
NET INCOME622,607 828,786
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments(187,641)20,501
Unrealized holding gain (loss) on securities329,515 567,208
Defined benefit pension plans7,252 810
TOTAL COMPREHENSIVE INCOME771,733 1,417,305
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS(43,932)(46,861)
COMPREHENSIVE INCOME ATTRIBUTABLE TO INTERNET INITIATIVE JAPAN INC.727,801 1,370,444


Internet Initiative Japan Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Three Months ended September 30, 2016 and September 30, 2017)
Three Months Ended Three Months Ended
September 30, 2016 September 30, 2017
Thousands of
JPY
Thousands of
JPY
OPERATING ACTIVITIES:
Net income622,607 828,786
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization2,671,265 3,042,538
Provision for retirement and pension costs, less payments61,274 64,476
Provision for allowance for doubtful accounts3,710 21,575
Gain on sales of property and equipment(2,279) (635)
Loss on disposal of property and equipment25,702 15,515
Impairment of other investments12,725 -
Foreign exchange loss (gain), net10,096 (5,869)
Equity in net income of equity method investees, less dividends received(24,911) (41,480)
Deferred income tax benefit(17,752) (244,864)
Other3,840 7,080
Changes in operating assets and liabilities:
Increase in accounts receivable(1,178,146) (2,187,027)
Decrease in net investment in sales-type lease — noncurrent115,363 186,802
Increase in inventories(705,927) (1,042,227)
Decrease in prepaid expenses768,427 966,103
Increase in other current and noncurrent assets(91,356) (617,509)
Increase in accounts payable2,597,815 1,931,313
Increase in income taxes payable243,137 695,340
Increase (decrease) in accrued expenses(14,077) 264,588
Decrease in deferred income—current(241,201) (289,109)
Increase (decrease) in deferred income—noncurrent18,789 (35,655)
Decrease in other current and noncurrent liabilities(688,799) (694,845)
Net cash provided by operating activities4,190,302 2,864,896
INVESTING ACTIVITIES:
Purchase of property and equipment(2,273,574) (2,583,973)
Proceeds from sales of property and equipment805,078 1,107,995
Purchase of other investments(249,262) (29,833)
Investment in an equity method investee- (131,808)
Proceeds from sales of other investments928 257
Payments of guarantee deposits(12,379) (281,474)
Refund of guarantee deposits35,089 5,199
Payments for refundable insurance policies(14,090) (14,090)
Net cash used in investing activities(1,708,210) (1,927,727)
Three Months Ended Three Months Ended
September 30, 2016 September 30, 2017
Thousands of
JPY
Thousands of
JPY
FINANCING ACTIVITIES:
Principal payments under capital leases(1,188,853) (1,429,267)
Repayments of long-term accounts payable- (95,137)
Other- (50,863)
Net cash used in financing activities(1,188,853) (1,575,267)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(129,908) 904
NET INCREASE IN CASH AND CASH EQUIVALENTS1,163,331 (637,194)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD18,504,491 20,508,225
CASH AND CASH EQUIVALENTS, END OF THE PERIOD19,667,822 19,871,031

Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the six months ended September 30, 2017 (“1H17”) in the form defined by the Tokyo Stock Exchange.

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

November 7, 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: November 14, 2017
Scheduled date for dividend payment: December 8, 2017
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 Six Months Ended September 30, 2017
(April 1, 2017 to September 30, 2017)
(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%
Six months ended
September 30, 2017
82,98812.02,31618.9 2,46917.3 1,48834.3
Six months ended
September 30, 2016
74,12313.51,948(24.0)2,105(20.5)1,108(33.0)


(Note1) Total comprehensive income attributable to IIJ
For the six months ended September 30, 2017: JPY2,611 million (up 125.9% YoY)
For the six months ended September 30, 2016: JPY1,156 million (down 22.6% YoY)
(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
Six months ended
September 30, 2017
33.0232.91
Six months ended
September 30, 2016
24.1124.05

(2) Consolidated Financial Position
Total assetsTotal equityTotal IIJ shareholders'
equity
Total IIJ shareholders'
equity to total assets
JPY millionsJPY millionsJPY millions%
As of September 30, 2017140,48869,40368,77749.0
As of March 31, 2017137,39567,38066,74248.6


2. Dividends
Dividend per Shares
1Q-end2Q-end3Q-endYear-endTotal
JPYJPYJPYJPYJPY
Fiscal Year Ended
March 31, 2017
-13.50-13.5027.00
Fiscal Year Ending
March 31, 2018
-13.50
Fiscal Year Ending
March 31, 2018
(forecast)
-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, 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
Fiscal Year Ending
March 31, 2018
176,00011.56,50026.66,50019.84,00026.388.77

(Note1) Changes from the latest forecasts released: No

* Notes
(1)Changes in significant subsidiaries for the six months ended September 30, 2017
(Changes in significant subsidiaries for the six months ended September 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 September 30, 2017: 46,713,800 shares
As of March 31, 2017: 46,711,400 shares
2)The number of treasury stock:
As of September 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 six months ended September 30, 2017: 45,062,865 shares
For the six months ended September 30, 2016: 45,952,691 shares

Source:Internet Initiative Japan, Inc.