IIJ Announces its First Six Months Financial Results for the Fiscal Year Ending March 31, 2020

Internet Initiative Japan Inc.

E-mail: [email protected] Tel: +81-3-5205-6500
URL: https://www.iij.ad.jp/en/ir

TOKYO, Nov. 08, 2019 (GLOBE NEWSWIRE) — Internet Initiative Japan Inc. (“IIJ”, TSE:3774) today announced its first six months consolidated financial results for the fiscal year ending March 31, 2020 (“1H19”, from April 1, 2019 to September 30, 2019) under International Financial Reporting Standards (IFRS).¹

Overview of 1H19 Financial Results and Business Outlook

“Under favorable business environment, we effectively executed business strategies and continuously focused on capturing Japanese enterprises’ IT needs and we believe such efforts were translated to strong 1H19 financial results: total revenue and operating profit exceeded our target. Enterprise recurring revenue⁶ strongly grew by 10.2% year over year by accumulating orders of various network services, such as security and mobile, as well as systems operation and maintenance. As for systems integration (SI), demands continued to be strong and gross margin continued to expand, up 13.3% from 1H18. Strong revenue and gross margin growth of both network services and SI absorbed total cost increase and led to operating profit growth. As a result of this good business cycle, we revised our full-year financial targets upwards based on our assumption that favorable IT demands to continue,” said Koichi Suzuki, Founder, Chairman and CEO of IIJ.

¹ Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with International Financial Reporting Standards (IFRS), unaudited and consolidated.

² YoY is an abbreviation for year over year change.

³ Net Profit is “Profit for the period attributable to owners of the parent”.

⁴ Normalized profit is calculated by allocating JPY2.05 billion of additional cost recorded in 4Q18, as a result of the difference between our estimate (14% decrease) and the actual revision (5% decrease) of NTT Docomo’s mobile interconnectivity unit charge to the attributable each quarter of FY2018. Please refer page 5 of our presentation material for 1H19 earnings which explains this year over year operating profit in details.

⁵ For details on our upward revision for FY2019 financial target, please refer to our press release titled “Notice Regarding Differences between Financial Targets and Actual Results for the First Half of the Fiscal Year Ending March 2020 and Revision of the Full-Year Financial Targets” which was announced on November 8, 2019.

⁶ The enterprise recurring revenue described here is the sum of Internet connectivity for enterprises (excluding MVNE), outsourcing, and systems operation and maintenance. It does not include WAN revenues, which decreased year over year due to existing large clients’ migration transaction from WAN to mobile.

“Following FY2018, we continued to enhance our comprehensive network service line-ups ranging from Internet, mobile, security, and cloud throughout 1H19. For mobile, we introduced new services such as eSIM by leveraging our full-MVNO infrastructure. To strengthen our IoT business foundation, we have made business alliances with several device manufactures including Advantech, one of the top global industrial computer manufactures. We continuously prepare ourselves for advanced IoT usages and stronger demands which should rise in the middle term from Japanese enterprises. As for DeCurret and JOCDN, our newly established affiliated companies, they both raised capital by inviting new enterprise shareholders and have been executing their business strategy on schedule,” said Eijiro Katsu, President and COO of IIJ.

Regarding the retroactively adjusted 1H19 financial results

As an MVNO, we purchase mobile infrastructure mainly from NTT Docomo Inc. The unit price for mobile interconnectivity charge is revised every year and has been decreasing. Because the unit price is fixed at the end of our fiscal year, we apply our own estimate of unit price decrease rate to calculate mobile infrastructure cost throughout a fiscal year. Difference amount between our estimate and revised charge is recorded as a one-time cost or reduction in cost in 4Q.

In FY2018, the difference between our estimate and the revised was large and we recorded JPY2.05 billion of cost in 4Q18. Essentially this one-time additional cost should have been allocated to attributable each quarter of FY2018. Adjusted figures by the result of such allocation (“Adjusted”) are as follows:

Adjusted 1H18 results and Adjusted YoY changes are as follows:

1H19 Financial Results Summary

We have adopted IFRS 16 “Leases” (hereinafter “IFRS 16”) from 1Q19. As for the details, please refer to “Changes in Accounting Policies” written in the page 18 of this document.

(Notes)

1. We have adopted IFRS from the filing of our FY2018 annual report “Yuka-shoken-houkokusho.” The reporting period of foreign consolidated subsidiaries are different from the period under the Generally Accepted Accounting Principles in the United States (U.S. GAAP). Along with the change, the figures for 1H18 are different from 1H18 results disclosed in the past.
2. Systems integration includes equipment sales.

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

1H19 Revenues and Income

Revenues

Total revenues were JPY99,220 million, up 8.8% YoY (JPY91,224 million for 1H18).

Network services revenue was JPY61,204 million, up 5.2% YoY (JPY58,158 million for 1H18).

Revenues for Internet connectivity services for enterprise were JPY18,075 million, up 13.3% YoY from JPY15,955 million for 1H18, mainly due to an increase in mobile-related services revenues such as MVNE and M2M/IoT type revenues by leveraging our full-MVNO infrastructure.

Revenues for Internet connectivity services for consumers were JPY12,997 million, up 3.3% YoY from JPY12,585 million for 1H18. The revenue growth was mainly due to “IIJmio Mobile Service,” consumer mobile services.

Revenues for WAN services were JPY14,342 million, down 7.3% YoY from JPY15,473 million for 1H18, mainly because of the planned migration projects of large enterprises clients who are moving away from dedicated line to mobile to connect their multiple locations.

Revenues for Outsourcing services were JPY15,790 million, up 11.6% YoY from JPY14,145 million for 1H18, mainly due to an increase in security-related services revenues.

(Notes)

1. Numbers in the table above show number of contracts except for “IIJ Mobile Services (enterprise)” and “IIJmio Mobile Service” which show number of subscriptions.
2. The numbers of IP service contracts includes the numbers of IIJ data center connectivity service contracts.
3. Total contracted bandwidth is calculated by multiplying number of contracts under “Internet connectivity services (enterprise)” except for “IIJ Mobile Services” and the contracted bandwidths of the services respectively.
4. Along with our change in accounting principle from the U.S. GAAP to IFRS from the filing of our FY2018 annual report “Yuka-shoken-houkokusho,” the reporting period of foreign consolidated subsidiaries are different. As a result, the number of our Internet connectivity service contracts and total contracted bandwidth described above are different from the past disclosure.

SI revenues, including equipment sales were JPY35,916 million, up 15.9% YoY (JPY30,995 million for 1H18).

Systems construction and equipment sales revenue, a one-time revenue, was JPY13,754 million, up 27.5% YoY (JPY10,790 million for 1H18). In addition to an increase in usual revenue of completed project, we recognized JPY1.3 billion of revenue along with construction progresses. Systems operation and maintenance revenue, a recurring revenue, was JPY22,162 million, up 9.7% YoY (JPY20,205 million for 1H18), mainly due to continued accumulation of systems operation orders as well as an increase in private cloud services’ revenues.

Orders received for SI and equipment sales totaled JPY36,351 million, up 4.1% YoY (JPY34,928 million for 1H18); orders received for systems construction and equipment sales were JPY14,610 million, almost the same as JPY14,694 million for 1H18, and orders received for systems operation and maintenance were JPY21,741 million, up 7.4% YoY (JPY20,234 million for 1H18).

Order backlog for SI and equipment sales as of September 30, 2019 amounted to JPY51,550 million, up 2.0% YoY (JPY50,529 million as of September 30, 2018); order backlog for systems construction and equipment sales was JPY8,696 million, down 20.7% YoY (JPY10,969 million as of September 30, 2018) and order backlog for systems operation and maintenance was JPY42,853 million, up 8.3% YoY (JPY39,559 million as of September 30, 2018).

ATM operation business revenues were JPY2,100 million, up 1.4% YoY (JPY2,071 million for 1H18).

Cost of sales

Total cost of sales was JPY84,020 million, up 9.1% YoY (JPY76,977 million for 1H18 and JPY77,962 million as Adjusted) and Adjusted YoY change was up 7.8%.

Cost of network services revenue was JPY51,153 million, up 5.5% YoY (JPY48,500 million for 1H18 and JPY49,485 million as Adjusted) and Adjusted YoY change in cost of network services revenue was up 3.4% YoY. There were an increase in outsourcing-related costs along with our mobile-related revenue increase and a decrease in circuit-related costs along with our WAN services revenue decrease. Gross profit was JPY10,051 million, up 4.1% YoY (JPY9,658 million for 1H18 and JPY8,673 million as Adjusted), Adjusted YoY change in gross profit was up 15.9%, and gross profit ratio was 16.4% (16.6% for 1H18 and 14.9% as Adjusted).

Cost of SI revenues, including equipment sales was JPY31,742 million, up 16.2% YoY (JPY27,310 million for 1H18). There were an increase in purchasing costs along with increase in our systems construction revenue and an increase in network operation-related costs. Gross profit was JPY4,174 million, up 13.3% YoY (JPY3,685 million for 1H18) and gross profit ratio was 11.6% (11.9% for 1H18).

Cost of ATM operation business revenues was JPY1,125 million, down 3.6% YoY (JPY1,167 million for 1H18). Gross profit was JPY975 million (JPY904 million for 1H18) and gross profit ratio was 46.4% (43.7% for 1H18).                                                          

Selling, general and administrative expenses and other operating income and expenses

Selling, general and administrative expenses, which include research and development expenses, totaled JPY11,901 million, up 8.3% YoY (JPY10,992 million for 1H18), mainly due to increases in personnel-related expenses and sales commission expenses.
Other operating income was JPY159 million (JPY79 million for 1H18).
Other operating expenses was JPY106 million (JPY49 million for 1H18), mainly due to disposal loss on fixed assets.

Operating profit

Operating profit was JPY3,352 million (JPY3,285 million for 1H18 and JPY2,300 million as Adjusted), up 2.0% YoY and Adjusted YoY change was up 45.7%.

Finance income and expenses, and share of profit (loss) of investments accounted for using equity method

Finance income was JPY119 million, compared to JPY390 million for 1H18. It included dividend income of JPY61 million (JPY75 million for 1H18).

Finance expense was JPY295 million, compared to JPY222 million for 1H18. It included interest expenses of JPY279 million (JPY214 million for 1H18).

Share of loss of investments accounted for using equity method was JPY133 million (compared to loss of JPY23 million for 1H18), mainly due to our share of loss in DeCurret Inc. of JPY685 million and gains on changes in equity of JPY376 million arisen from issuance of common stock of DeCurret Inc.

Profit before tax

Profit before tax was JPY3,043 million (JPY3,430 million for 1H18 and JPY2,445 million as Adjusted), down 11.3% YoY and Adjusted YoY change was up 24.5%.

Profit for the period

Income tax expense was JPY1,185 million (JPY1,249 million for 1H18). As a result, profit for the period was JPY1,858 million (JPY2,181 million for 1H18 and JPY1,506 million as Adjusted), down 14.8% YoY and Adjusted YoY change was up 23.4%.

Profit for the period attributable to non-controlling interests was JPY102 million (JPY86 million for 1H18) mainly related to net income of Trust Networks Inc. As a result, profit for the period attributable to owners of parent was JPY1,756 million (JPY2,095 million for 1H18 and JPY1,420 million as Adjusted), down 16.2% YoY and Adjusted YoY change was up 23.6%.

Financial Position as of September 30, 2019

As of September 30, 2019, the balance of total assets was JPY201,972 million, increased by JPY34,683 million from the balance as of March 31, 2019 of JPY167,289 million.

As of September 30, 2019, the balance of current assets was JPY79,574 million, increased by JPY602 million from the balance as of March 31, 2019 of JPY78,791 million. The major breakdown of fluctuation and balance of current assets was: an increase in cash and cash equivalents by JPY2,079 million to JPY34,036 million, a decrease in trade receivables by JPY3,164 million to JPY30,212 million, a decrease in inventories by JPY1,360 million to JPY2,044 million and an increase in prepaid expenses by JPY1,720 million to JPY10,242 million.

As of September 30, 2019, the balance of non-current assets was JPY122,398 million, increased by JPY34,081 million from the balance as of March 31, 2019 of JPY88,318 million. Along with the adoption of IFRS 16 from the first quarter of the fiscal year ending March 31, 2020, right-of-use assets were newly accounted. The breakdown of right-of-use assets was: JPY33,942 million of assets under operating lease contracts which was newly recognized, mainly related to our office and data centers lease contracts, and JPY15,827 million of assets under finance lease contracts, most of which were transferred from tangible and intangible assets. Other investments was JPY10,019 million, decreased by JPY1,384 million mainly due to sales of our portion of holding equity securities.

As of September 30, 2019, the balance of current liabilities was JPY62,708 million, increased by JPY9,804 million from the balance as of March 31, 2019 of JPY52,904 million. Trade and other payables decreased by JPY4,916 million to JPY17,046 million. Borrowings increased by JPY3,195 million to JPY15,945 million. The breakdown of increase in the borrowings was: an increase by JPY3,030 million in short-term borrowings, a decrease by JPY750 million due to payment of long-term borrowings, and an increase by JPY915 million due to a transfer from non-current liabilities. Other financial liabilities increased by JPY10,791 million to JPY17,822 million. The increase included JPY10,254 million related to operating lease recognized along with the adoption of IFRS 16.

As of September 30, 2019, the balance of non-current liabilities was JPY60,249 million, increased by JPY22,984 million from the balance as of March 31, 2019 of JPY37,265 million. Long-term borrowings decreased by JPY915 million to JPY13,085 million due to a transfer to current portion. Other financial liabilities increased by JPY23,982 million to JPY36,133 million. The increase included JPY23,749 million related to operating lease recognized along with the adoption of IFRS 16.

As of September 30, 2019, the balance of equity attributable to owners of parent was JPY78,117 million, increased by JPY1,846 million from the balance as of March 31, 2019 of JPY76,271 million. Ratio of owners’ equity to total assets was 38.7% as of September 30, 2019.

1H19 Cash Flows

Cash and cash equivalents as of September 30, 2019 were JPY34,036 million (JPY27,885 million as of September 30, 2018).

Net cash provided by operating activities for 1H19 was JPY13,394 million (net cash provided by operating activities of JPY13,871 million for 1H18). There were profit before tax of JPY3,043 million, depreciation and amortization of JPY14,300 million, including JPY6,160 million of depreciation of right-of-use operating lease assets newly recognized by the adoption of IFRS 16, and income taxes paid of JPY1,330 million. Regarding changes in operating assets and liabilities, it was net cash out of JPY2,947 million mainly due to payment of trade and other payables and prepaid expenses in relation to upfront payment for software licenses and maintenance cost for service facilities, while there were cash in by collecting trade receivables and by selling inventories.

Net cash used in investing activities for 1H19 was JPY4,087 million (net cash used in investing activities of JPY3,507 million for 1H18), mainly due to payments for purchase of tangible assets of JPY4,788 million (JPY3,111 million for 1H18), payments for purchase of intangible assets, such as software, of JPY2,422 million (JPY2,510 million for 1H18), and proceeds from sales of other investments, such as equity securities, of JPY2,673 million.

Net cash used in financing activities for 1H19 was JPY7,139 million (net cash used in financing activities of JPY3,902 million for 1H18), mainly due to proceeds from short-term borrowings of JPY3,030 million, payments of other financial liabilities of JPY10,230 million (JPY3,502 million for 1H18), including JPY6,149 million of payment of operating lease obligations newly recognized by the adoption of IFRS 16.

Future Prospects including FY2019 Financial Targets

Financial targets for FY2019 disclosed on May 14, 2019 have been revised. For details, please refer to our press release “Notice Regarding Differences between Financial Targets and Actual Results for the First Half of the Fiscal Year Ending March 2020 and Revision of the Full-Year Financial Targets” which was announced today, November 8, 2019.

Presentation

Presentation materials will be posted on our web site (https://www.iij.ad.jp/en/ir/) on November 8, 2019.

Presentation materials are also available in these file archives: http://ml.globenewswire.com/Resource/Download/04432389-91c5-4919-b7c2-de8cba214ab0 

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 operates 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 First Section of the Tokyo Stock Exchange in 2006.

For inquiries, contact:

IIJ Investor Relations　Tel: +81-3-5205-6500  E-mail: [email protected]  URL: https://www.iij.ad.jp/en/ir

Disclaimer:

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 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.

Notes to Condensed Consolidated Financial Statements (UNAUDITED)

Going Concern Assumption (Unaudited)

         Nothing to be reported.

Material Changes In Shareholders’ Equity (Unaudited)

         Nothing to be reported.

Segment Information (Unaudited)
IIJ and its subsidiaries (collectively “the Company”) primarily operates its network service and system integration business, which provides a comprehensive range of network solutions to meet its customers’ needs by cross-selling a variety of services, including Internet connectivity services, WAN services, outsourcing services, systems integration and sales of network-related equipment, and the ATM operation business. Therefore, the Company defined two reportable segments: “Network service and systems integration business” and “ATM operation business”.
Intersegment transactions are based on market price.

Segment information for the Company is as follows:

Six months ended September 30, 2018

Six months ended September 30, 2019

Subsequent Events (Unaudited)

            Nothing to be reported.

Changes in Accounting Policies (Unaudited)

The Company applied the following standard starting from the first quarter of the fiscal year ending March 31, 2020.

The Company adopted IFRS 16 “Leases” (issued in January 2016) from the first quarter of the fiscal year ending March 31, 2020.

According to the transition approach, the Company has adopted IFRS 16 retrospectively and the cumulative effect of applying this standard was recognized as adjustment of retained earnings at the beginning date of the first quarter of the fiscal year ending March 31, 2020. In applying IFRS 16, the Company chooses the practical expedient in IFRS 16 paragraph C3 and assesses whether contracts contain leases in accordance with IAS 17 “Leases” (hereinafter, “IAS 17”) and IFRIC 4 “Determining whether an Arrangement contains a Lease.”

The Company recognized right-of-use assets and other financial liabilities related to leases previously classified as operating leases under the principles of IAS 17 were recognized at the date of initial application of IFRS 16. These liabilities are measured at present value of the remaining lease payments discounted using the lessee’s incremental borrowing rate at the date of initial application. Right-of-use assets are measured retrospectively as if IFRS 16 had been applied from the inception date. Right-of-use assets are depreciated using the straight-line method.

For leases that were previously classified as finance leases as a lessee under the principles of IAS 17, the carrying amount of right-of-use assets and other financial liabilities as of the date of initial application has been measured based on the carrying amount of right-of-use assets and other financial liabilities, respectively, under IAS 17 as of the day immediately before that date.

The following is the reconciliation of non-cancellable operating lease contracts disclosed applying IAS 17 as of March 31, 2019 and other financial liabilities related to leases recognized in the consolidated statement of financial position at the date of initial application.

As a result of the adoption of IFRS 16, the Company recorded right-of-use assets of JPY38,988,207 thousand and other financial liabilities of JPY39,037,445 thousand at April 1, 2019. In addition, retained earnings decreased by JPY33,728 thousand primarily due to having adopted the method where the cumulative effect of applying this standard is recognized at the date of initial application.

The following practical expedients are used in the adoption of IFRS 16.

• A single discount rate is applied to portfolios of leases with reasonably similar characteristics.
• Leases for which the lease term ends within 12 months of the date of initial application are accounted for in the same way as short-term leases.
• Initial direct costs are excluded from the measurement of the right-of-use asset at the date of initial application.
• The Company uses hindsight to calculate the lease term for lease contracts including options to extend or terminate the lease.

The balances of other financial liabilities related to leases are as follows:

Note: The following information is provided to disclose Internet Initiative Japan Inc. (“IIJ”) financial results (unaudited) for the three months ended September 30, 2019 (“1H19”) in the form defined by the Tokyo Stock Exchange.

Consolidated Financial Results for the Six Months ended September 30, 2019　[Under IFRS]

1. Consolidated Financial Results for the Six Months ended September 30, 2019 (April 1, 2019 to September 30, 2019)

(Reference)

Regarding year over year (YoY) change of profit, one-time cost in relation to mobile services recorded in 4Q18 should essentially have been allocated to attributable each quarter of FY2018 to disclose our actual profit situation. Considering such allocation, YoY change would be as follows: Operating profit up 45.7%, Profit (loss) before tax up 24.5%, Profit (loss) for the period up 23.4%, Profit (loss) attributable to owners of the parent up 23.6%, and Other comprehensive income up 49.4%. For details, please refer to “Regarding the retroactively adjusted 1H18 financial results” which is written on page 2 of this earnings release.

(2) Consolidated Financial Position

2．Dividends

(Note) Changes from the latest forecasts disclosed: No

3．Targets of Consolidated Financial Results for the Fiscal Year Ending March 31, 2020 (April 1, 2019 through March 31, 2020)                                                                    

(Note 1)  Changes from the latest forecasts disclosed: Yes
(Note 2)  As for the details about our financial targets for the fiscal year ending March 31, 2020, please refer to please refer to our press release “Notice Regarding Differences between Financial Targets and Actual Results for the First Half of the Fiscal Year Ending March 2020 and Revision of the Full-Year Financial Targets” which was announced today, November 8, 2019.

* Notes:
(1) Changes in significant subsidiaries: None

(2) Changes in accounting policies and estimate
     i. Changes in accounting policies required by IFRS: Yes
     ii. Other changes in accounting policies: None
     iii. Changes in accounting estimates: None
     (As for the details of the above (2)-i, please refer to the page 18 of this document)

(3) Number of shares issued (common stock)
      i. Number of shares issued (inclusive of treasury stock):
         As of September 30, 2019: 46,734,600 shares
         As of March 31, 2019: 46,721,400 shares

      ii. Number of treasury stock:
          As of September 30, 2019: 1,650,911 shares
          As of March 31, 2019: 1,650,911 shares

      iii. Number of weighted average common shares outstanding:
          For the six months ended September 30, 2019: 45,077,125 shares
          For the six months ended September 30, 2018: 45,070,449 shares

* Status of Audit Procedures
      This document is not subject to the quarterly review by certified public accountant or independent auditor.

* Explanation on the Appropriate Use of Future Outlook and other special instructions
i) Forward-looking statements Forward-looking statements disclosed in this document are based on IIJ Group’s expectation, estimates, and projections based on information available to IIJ Group as of November 8, 2019. As these forward-looking statements are subject to known and unknown risks and uncertainties, actual results may differ from those disclosed due, for example, to but not limited to changes in business climate and/or market trends. As for our latest forecast of our financial targets for the fiscal year ending March 31, 2020, please refer to the page 7 of this document.

ii) Adoption of IFRS
We have adopted IFRS from the Annual Securities Report (Yuka-shoken houkokusho) for the fiscal year ended March 31, 2019. As for the disclosure of our quarterly consolidated financial results, we have adopted IFRS from the first quarter of the fiscal year ending March 31, 2020. Financial information for the fiscal year ended March 31, 2019 are also prepared in accordance with IFRS.

iii) Others
Presentation material will be disclosed on TDnet as well as posted on our website on Friday, November 8, 2019.