updated 11/15/2010 12:45:32 AM ET 2010-11-15T05:45:32

TOKYO, Nov. 15, 2010 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (Nasdaq:IIJI) (TSE:3774) today announced its consolidated financial results for the first six months of Fiscal Year Ending March 31, 2011 (from April 1 to September 30, 2010, "1H10").1

  •  IIJ made IIJ Global Solutions Inc. ("IIJ-GS") its 100% owned subsidiary on Sep. 1, 2010
      • Purchase amount: JPY9.2 billion
      • Acquired approximately 1,600 corporate customers and 245 employees
      • 1H FY2010 revenue increased by 6.2% YoY followed by steady demands for outsourcing services and additional revenue of 1 month related to IIJ-GS.
      • 1H FY2010 operating income increased by 3.0% YoY mainly due to the increase in gross margin of network service revenues, operating income related to IIJ-GS of 1 month and the decrease in operating loss of ATM operation business.
      • Full FY2010 Financial targets remain unchanged.
      • FY2010 interim period cash dividend: JPY1,250 per share as planned  (IIJ's 1 common stock equivalent to 400 ADSs).

      Overview of 1H FY2010 Financial Results and Business Outlook

      "Along with the increasing demands for outsourcing needs, we are finally starting to see the emergence of Cloud Computing in Japan," said Koichi Suzuki, President and CEO of IIJ. "Japanese companies are aggressively comparing their options for outsourcing services in the Japanese IT market. Our long experience of nearly fifteen years in this outsourcing service market, our pioneering technological skills to introduce new outsourcing services including cloud computing services and our strong customer relationship with over 6,500 corporate customers are what makes us strongly positioned in this particular outsourcing fields," continued Suzuki.

      "During the first half of this fiscal year, to further strengthen our position in the outsourcing market, we have introduced many new services and solutions. We have introduced series of cloud computing services, an ASP-based foreign exchange (FX) platform service, a new M2M module compatible with IIJ mobile service and many more. We also began the construction of Japan's first commercial data center using outside-air cooled container units in the outskirts of Japan. This new data center will be Japan's first container data center offering low-cost, high-server density, and scalability needed to meet the demands of the cloud computing era."

      "In addition, we have complete the transaction to acquire the subsidiary of AT&T Japan LLC and began its operation by the name 'IIJ Global Solutions Inc.' on September 1, 2010. To realize group synergy and enhance our cross selling strategy, IIJ will provide its network solution to the acquired approximately 1,600 clients and IIJ-GS will provide its WAN services to IIJ's over 6,500 corporate customers for further business growth. Revenues, cost of revenues, SG&A and operating income related to IIJ-GS of 1 month were JPY2,246 million, JPY1,761 million, JPY224 million and JPY261 million, respectively."

      "For our ATM operation business, the steady increase in revenues and the decrease in costs resulted in the decrease in operating loss related to ATM operation business. The preparation to introduce new ATMs are set and we expect to increase around 250 additional ATMs in around 3 months."

      "As a results, our 1H FY2010 revenue and profit increased year-over-year and exceeded its original target. During the latter half of FY2010, we will continue to seize outsourcing related demands and focus on achieving our full FY2010 target, which remain unchanged."

      1H FY2010 Financial Results Summary


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

      1H FY2010 Results of Operation

      Revenues

      Revenues were JPY34,272 million, up 6.2% YoY. Additional revenues of 1 month related to IIJ-GS was JPY2,246 million.

      Network Services revenue were JPY20,686 million, up 13.0% YoY.

      Internet Connectivity services for corporate use were JPY6,941 million, up 0.8% YoY. IP service is going well. While there were affects from cancellation due to corporate merger and migration of contracted lines from certain large clients at the beginning of the fiscal year, we are getting new large contracts and the volume charge revenue which decreased in 4Q09 is recovering. Contracts of over 1Gbps IP service at the end of September 2010 increased by 22 contracts YoY. IIJ mobile increased its number of contracts as M2M projects using IIJ mobile increased. Broadband connectivity services also increased along with the increase in sales partners.

      Internet Connectivity services for home use revenue were JPY3,352 million, down 1.7% YoY.

      WAN Services revenue were JPY3,297 million, up 160.9% YoY. There were additional revenues related to IIJ-GS.

      Outsourcing services revenue were JPY7,096 million, up 5.2% YoY. Services such as data center related services, contents delivery services, anti-spam email related services and security services increased, respectively. Our cloud computing service "IIJ GIO" is growing and its revenue, including revenue which is recognized in systems operation and maintenance, has reached almost JPY50 million per month.

      SI revenues were JPY12,987 million, down 4.7% YoY affected by the scale-down of a contract from a certain large client in 1Q10. As for systems construction, despite the forementioned scale-down from a certain large client, there were mid- to small sized network construction projects which resulted in the increased revenues of JPY4,499 million, up 8.5% YoY. As for systems operation and maintenance, its revenues were JPY8,488 million, down 10.4% YoY. While there were new operation and maintenance contracts, the forementioned scale-down from a certain large client affected its revenues.

      The order backlog for systems construction and equipment sales was JPY5,344 million, up 20.7% YoY. The order backlog for systems operation and maintenance was JPY11,055 million, down 6.4% YoY, affected by the forementioned scale-down from a certain large client.

      Equipment sales revenues were JPY371 million, up 19.8% YoY.

      ATM Operation Business revenues were JPY228 million. The ATM operation business is operated by trust Networks Inc., IIJ's consolidated subsidiary, and it receives a commission for each bank withdrawal transaction when a customer uses its serviced ATMs. The ATM operation business is currently in its phase of business start-up and is expected to introduce around 250 additional ATMs  in around 3 months. As of November 15, 2010, 148 ATMs are placed.

      Cost and expense

      Cost of revenues was JPY27,431 million, up  5.4% YoY. Cost of revenues related to IIJ-GS of 1 month were JPY1,761 million.

      Cost of Network Services revenue was JPY16,803 million, up 9.7% YoY mainly due to the increase in IIJ-GS related costs of 1 months. Gross margin for network services was JPY3,883 million, up 29.8% YoY and gross margin ratio was 18.8%, up 2.4% YoY.

      Cost of SI revenues was JPY9,859 million, down 1.9% YoY. While network operation related and personnel related costs increased, purchasing cost decreased. Gross margin for SI was JPY3,128 million, down 12.5% YoY and gross margin ratio was 24.1%, down 2.1% YoY.  

      Cost of Equipment Sales revenues was JPY313 million, up 16.3% YoY. Gross margin for equipment sales was JPY58 million and gross margin ratio was 15.5%, up 2.5% YoY.

      Cost of ATM Operation Business revenues was JPY456 million. Outsourcing costs were reduced.

      SG&A and R&D Expenses

      SG&A and R&D expenses were JPY5,640 million, up 11.2% YoY. SG&A and R&D expenses related to IIJ-GS of 1 month was JPY224 million.

      Sales and marketing expenses were JPY2,883 million, up 11.2% YoY mainly due to increase in personnel related expenses and depreciation and amortization.

      General and administrative expenses were JPY2,603 million, up 12.4% YoY mainly due to increase in depreciation and amortization and the one-time M&A related expenses for the acquisition of IIJ-GS of JPY56 million.

      Research and development expenses were JPY154 million, down 5.8% YoY.

      Operating income

      Operating income was JPY1,201 million, up 3.0% YoY as gross margin increased.

      Other income (expenses)

      Other income (expenses) was net other expense of JPY195 million as there were losses on write-down of other investments and interest expense. 1H09 was net other expense of JPY140 million.

      Income before income tax expenses

      Income before income tax expenses was JPY1,006 million, down 1.9% YoY (JPY1,026 million in 1H09).

      Net Income

      Income tax expense was JPY280 million (JPY528 million in 1H09). Deferred tax expenses was JPY164 million compared to expense of JPY373 million in 2Q09.

      Equity in net income of equity method investees was JPY32 million (JPY42 million in 1H09).

      Net income was JPY758 million, up 40.3% YoY (JPY540 million in 1H09).

      Net income attributable to IIJ

      Net loss attributable to noncontrolling interests was JPY101 million (JPY175 million in 1H09), related to GDX Japan Inc. and Trust Networks Inc.

      Net income attributable to IIJ was JPY859 million, up 20.1% YoY (JPY715 million in 1H09).

      1H FY2010 Financial Condition

      Balance Sheets

      As of September 30, 2010, the balance of total assets was JPY65,923 million, an increase of JPY14,807 million from the balance as of March 31, 2010 as a result of the acquisition of IIJ-GS.

      Due to the acquisition of IIJ-GS, the balance of assets and liabilities increased respectively. The balance of assets and liabilities as of September 2010 was as follows: current assets was JPY9,191 million (mainly accounts receivables), noncurrent assets was JPY7,986 million (mainly intangible assets and property and equipment), current liabilities was JPY7,767 million (mainly accounts payable and accrued expenses) and noncurrent liabilities was JPY78 million. The measurement of the assets acquired and liabilities assumed related to the acquisition of IIJ-GS is to be completed within a year from the acquisition date. The measurement has not yet been completed as of the end of September 2010, and therefore, the preliminary estimates are subject to revisions.

      For current assets, as compared to each of the respective balances as of March 31, 2010, accounts receivable increased by JPY6,227 million and prepaid expenses increased by JPY690 million. As of noncurrent assets, other intangible assets (net) increased by JPY4,772 million, goodwill increased by JPY757 million and property and equipments increased by JPY1,836 million. As for current liabilities, as compared to each of the respective balances as of March 31, 2010, short-term borrowings increased by JPY9,000 million mainly for the acquisition of IIJ-GS, accrued expenses increased by JPY5,910 million. Noncurrent capital lease obligations decreased by JPY493 million to JPY3,164 million.

      The balance of other investments as of September 30, 2010 was JPY2,796 million, an increase of JPY214 million from the balance as of March 31, 2010. The breakdown of other investments were JPY1,796 million in nonmarketable equity securities, JPY791 million in available-for-sale securities and JPY209 million in other.

      As of September 30, 2010, the balance of non-amortized intangible assets (excluding telephone rights) such as goodwill was JPY3,589 million and the balance of amortized intangible assets was JPY7,385 million. The breakdown of non-amortized intangible assets were JPY3,397 million in goodwill (JPY857 million related to IIJ-GS) and JPY192 million in trademark. The breakdown of amortized intangible assets were JPY7,312 million in customer relationships (JPY4,856 million related to IIJ-GS) and JPY73 million in licenses.

      Total IIJ shareholders' equity as of September 30, 2010 was JPY27,765 million, a crease of JPY446 million from the balance as of March 31, 2010. IIJ Shareholders' equity ratio (IIJ shareholders' equity/total assets) as of September 30, 2010 was 42.1%.

      Cash Flows

      Cash and cash equivalents as of September 30, 2010 were JPY9,408 million compared to JPY10,789 million as of September 30, 2009. The cash flow of IIJ-GS did not have a material effect on consolidated cash flows for 1H10 because under the agreement between AT&T Japan LLC and IIJ, AT&T Japan LLC collected accounts receivables and paid accounts payable on behalf of IIJ-GS.

      Net cash provided by operating activities for 1H10 was JPY5,109 million compared to net cash provided by operating activities of JPY4,792 million in 1H09. Operating income increased YoY. While operating income increased YoY, there were changes in operating assets and liabilities during 1H10, mainly resulting from the increase in accounts receivable of JPY754 million and increase in accrued expenses, other current and noncurrent liabilities of JPY2,260 million. 

      Net cash used in investing activities for 1H10 was JPY11,737 million compared to net cash used in investing activities of JPY2,105 million in 1H09, mainly due to the acquisition of IIJ-GS for JPY9,170 million and the purchase of property and equipment of JPY2,164 million.

      Net cash provided by financing activities for 1H10 was JPY7,304 million compared to net cash used in financing activities of JPY2,063 million in 1H09, mainly due to net increase in short-term borrowings (net) of JPY9,000 million, principal payments under capital leases of JPY1,480 million and payments of JPY253 million for FY2009 year-end dividends.

      FY2010 Financial Targets (announced on June 1, 2010)

      Our targets for the fiscal year ending March 31, 2011 are as follows:

      The Japanese economy is currently at a standstill and is expected to continue to be weak for a while. However, for the first half of this fiscal year ("1H10"), we have seen a recovery in the overall results in the Japanese corporate sector.

      For our 1H10 financial results, total revenues exceeded our original target as there were additional revenue from IIJ-GS of 1 month and the results for operating income was as originally targeted. Generally speaking, revenue and profit for the first half of the year are smaller compared to the latter half of the year and whether achieving our full year target largely depends on the continuous increase in recurring revenues and the revenues from systems construction for the fourth quarter of the fiscal year which becomes the largest due to seasonal factors. For the latter half of FY2010, we will continue to focus on increasing stock revenue such as cloud computing related services, accumulate SI contracts towards the end of fiscal year and also continue to manage tight cost control. Considering the above, we have not changed our full FY2010 financial target announced on June 1, 2010.

      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.

      Presentation

      Presentation Materials will be posted on our web site (http://www.iij.ad.jp/en/IR/) on November 15, 2010.

      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 of companies provide total network solutions that mainly cater to high-end corporate customers. IIJ's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. Moreover, IIJ has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ was listed on the U.S. NASDAQ Stock Market in 1999 and on the First Section of the Tokyo Stock Exchange in 2006.

      The Internet Initiative Japan Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4613

      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 FY2008 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.

      2nd Quarter FY2010 Consolidated Financial Results (3 months)

      The following tables are highlight data of 2nd Quarter FY2010 consolidated financial results (unaudited, from July 1, 2010 to September 30, 2010).

      Reconciliation of Non-GAAP Financial Measures

      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.

      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.

      Reference Information

      The following data for the past two fiscal years and the six months ended September 30, 2010 are reference information.

      "WAN services", which were components of "Outsourcing services revenues" were separately disclosed to reflect the acquisition of IIJ Global Solutions Inc. on September 2010.

      Note: The following information is provided to disclose Internet Initiative Japan Inc. ("IIJ") financial results (unaudited) for the first six months of Fiscal Year Ending March 31, 2011(from April 1 to September 30, 2010) in the form defined by the Tokyo Stock Exchange.

      Consolidated Financial Results for the Six Months Ended September 30, 2010
      [Under accounting principles generally accepted in the United States ("U.S. GAAP")]

      November 15, 2010

      Company name: Internet Initiative Japan Inc.       Exchange listed: Tokyo Stock Exchange First Section

      Stock code number: 3774                                  URL: http://www.iij.ad.jp/

      Representative: Koichi Suzuki, President and Representative Director

      Contact: Akihisa Watai, Managing Director and CFO       TEL: (03) 5259-6500

      Schedule date for filing of quarterly report: scheduled on November 15, 2010

      Scheduled date for dividend payment: December 6, 2010

      Supplemental material on quarterly results: Yes

      Presentation on quarterly results: Yes (for institutional investors and analysts)

       (Amounts of less than JPY one million are rounded)

       

       

       

       

       

      4. Others

      (1) Change in significant subsidiaries for the three months ended September 30, 2010

      (Change in significant subsidiaries for the three months ended September 30, 2010 which resulted in changes in scope of consolidation): Yes

      Newly Consolidated (Name: IIJ Global Solutions Inc.) Excluded: ( - )

      (2) Application of simplified or exceptional accounting: None

      (Application of simplified or exceptional accounting for quarterly consolidated financial statements):

      (3) Changes in Significant Accounting and Reporting Policies for Consolidated Financial Statements

      1) Changes duet to the revision of accounting standards: Yes

      2) Others: Yes

      (4) Number of Shares Outstanding (Shares of Common Stock)

      1) The number of shares outstanding (inclusive of treasury stock):

           As of September 30, 2010:          206,478 shares

           As of March 31, 2010:     206,478 shares

      2) The number of treasury stock:

           As of September 30, 2010:          3,794 shares

           As of March 31, 2010:     3,934 shares

      3) The weighted average number of shares outstanding:

           For the three months ended September 30, 2010: 202,605shares

           For the three months ended September 30, 2009: 202,544 shares

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