EXHIBIT 1
IIJ Announces Third Quarter Results for the Fiscal Year Ending March 31, 2008
TOKYO, Feb. 12, 2008 (PRIME NEWSWIRE) -- Internet Initiative Japan Inc. (Nasdaq:IIJI) (Tokyo Stock Exchange First Section:3774) ("IIJ"), one of Japan's leading Internet-access and comprehensive network solutions providers, today announced its financial results for the third quarter of the fiscal year ending March 31, 2008 ("FY2007") (1).
Highlights of Third Quarter FY2007 Results * Revenue totaled JPY 18,359 million ($ 164.3 million), an increase of 35.1% from 3Q06, mainly due to a steady increase in recurring revenues from connectivity and value-added services ("VAS") and systems operation and maintenance, and the completion of a remarkable large-scale systems construction project. * Operating income was JPY 1,136 million ($10.2 million), an increase of 15.2% from 3Q06, mainly due to an increase in gross margin in connectivity and VAS and systems integration ("SI"). * Net income was JPY 611 million ($5.5 million), a decrease of 56.5% from 3Q06. The decrease was mainly due to a decrease in other income by an absence of large capital gains from equity securities and the affect of income tax accounting. Financial Targets for FY2007(2) * We are maintaining our initial targets for the full FY2007 that we disclosed on May 15, 2007.
Overview of 3rd Quarter FY2007 Financial Results and Business Outlook (2)
"We achieved the highest revenues and operating income for the third quarter of the fiscal year in our history," said Koichi Suzuki, President and CEO of IIJ. "In 3Q07, monthly recurring revenues from connectivity and VAS, and systems operation and maintenance continued to increase steadily and they became the base for our stable growth. Corporate customers are shifting to higher speeds and there are continuing demands for connectivity services over 1Gbps, especially in the telecommunications and Information Technology ("IT") sectors. One-time revenues from systems construction increased significantly, mainly due to the completion of a remarkable large-scale network and application development project in 3Q07. We will continue to take such large-scale SI projects to increase the top line of revenues. Though there are unstable factors in the Japanese economy, corporate IT investments have stably increased through this quarter."
"We continued to be engaged in the development of our middle- and long-term growth," continued Suzuki. "We announced the start of "IIJ Mobile" for corporate customers under a scheme of Mobile Virtual Network Operator ("MVNO"). With this service, our corporate customers can access the Internet and Intranet more flexibly and securely. We plan to establish "IIJ Innovation Institute", a business incubation center for technology development and commercialization of the next generation of the Internet. We continued to provide our content distribution platform to "acTVila", which is promoted by major Japanese TV manufacturers to be a TV portals standard. We have been engaged in a highly reliable e-mail messaging infrastructure through GDX Japan Inc ("GDX"), a 51.0% owned subsidiary. We are being prepared to provide ATM network operations through Trust Networks Inc. ("TN"), a 60.2% owned subsidiary."
"The decrease in net income compared to the previous quarter was mainly due to income tax accounting," said Akihisa Watai, CFO of IIJ. "We had tax operating loss carryforwards of JPY 17,083 million as of March 31, 2007 and we recorded deferred income tax assets which resulted in deferred tax benefit of JPY 2,114 million in 2Q07. In 3Q07, we recorded deferred tax expenses to the contrary caused by the realization of deferred income tax assets as a result of recording taxable income."
3rd Quarter FY2007 Financial Results
Results of Operation Operating Results Summary (JPY in millions) --------------------------------------------------------------------- 3Q07 3Q06 YoY % change --------------------------------------------------------------------- Total Revenues 18,359 13,587 35.1% --------------------------------------------------------------------- Total Costs 14,851 10,727 38.4% --------------------------------------------------------------------- SG&A Expenses and R&D 2,372 1,874 26.6% --------------------------------------------------------------------- Operating Income 1,136 986 15.2% --------------------------------------------------------------------- Income before Income Tax Expense(3) 1,017 1,603 (36.5%) --------------------------------------------------------------------- Net Income 611 1,405 (56.5%) ---------------------------------------------------------------------
Revenues
Revenues in 3Q07 totaled JPY 18,359 million, an increase of 35.1% from JPY 13,587 million in 3Q06.
Revenues (JPY in millions) --------------------------------------------------------------------- 3Q07 3Q06 YoY % change --------------------------------------------------------------------- Total Revenues: 18,359 13,587 35.1% --------------------------------------------------------------------- Connectivity and Value-added Services 8,049 6,100 31.9% --------------------------------------------------------------------- SI 9,911 7,093 39.7% --------------------------------------------------------------------- Equipment Sales 399 393 1.4% ---------------------------------------------------------------------
Connectivity and Value-added Services ("VAS") revenues were JPY 8,049 million in 3Q07, an increase of 31.9% compared to 3Q06.
Revenues from connectivity services for corporate users were JPY 3,023 million, an increase of 7.5% compared to 3Q06. Revenues from IP Services, the services mainly used by corporate headquarters and data centers, increased by 6.0% compared to 3Q06, mainly due to the acquisition of new contracts and the shift of our corporate customers to higher speeds. Revenues from broadband services increased by 24.3% compared to 3Q06, mainly due to the expansion of broadband utilization in the corporate internal network.
Revenues from connectivity services for home users were JPY 1,513 million in 3Q07, an increase of 206.4% compared to 3Q06. Despite a decrease in revenues from IIJ4U and OEM services, the increase was mainly due to additional revenues of JPY 1,118 million from connectivity services for home users of hi-ho, which we acquired in June 2007.
VAS revenues were JPY 2,479 million in 3Q07, an increase of 33.2% compared to 3Q06. The increase was mainly due to an increase in revenues from e-mail related services and data centers.
Other revenues were JPY 1,033 million in 3Q07, an increase of 10.9% compared to 3Q06.
SI revenues increased 39.7% to JPY 9,911 million in 3Q07 compared to 3Q06. The increase was mainly due to an increase of 64.2% in one-time revenues from systems construction, especially related to the completion of a remarkable large-scale network and application development project in 3Q07, and an increase of 14.4% in monthly recurring revenues from systems operation and maintenance compared to 3Q06.
Equipment sales revenues were JPY 399 million in 3Q07, an increase of 1.4% compared to 3Q06.
Cost and expense
Cost of revenues was JPY 14,851 million in 3Q07, an increase of 38.4% compared to 3Q06.
Cost of Revenues (JPY in millions) --------------------------------------------------------------------- 3Q07 3Q06 YoY % change --------------------------------------------------------------------- Cost of Revenues: 14,851 10,727 38.4% --------------------------------------------------------------------- Connectivity and Value-added Services 6,738 5,073 32.8% --------------------------------------------------------------------- SI 7,771 5,322 46.0% --------------------------------------------------------------------- Equipment Sales 342 333 2.7% ---------------------------------------------------------------------
Cost of Connectivity and VAS revenues was JPY 6,738 million in 3Q07, an increase of 32.8% compared to 3Q06, mainly due to an increase in costs of JPY 1,188 million from hi-ho, which we acquired in June 2007, along with additional revenues of JPY 1,350 million. The increase was also due to an increase in circuit and personnel related costs and the initial cost for new business development.
The gross margin for Internet connectivity and value-added services in 3Q07 was JPY 1,311 million, an increase of 27.6% compared to 3Q06. The gross margin ratio in 3Q07 was 16.3%, compared to 16.8% in 3Q06. The decrease in gross margin ratio was mainly due to an increase in the cost of revenues from connectivity and VAS of hi-ho, whose gross margin ratio was relatively lower than that of other connectivity and VAS, and the initial cost for new business development.
Cost of SI revenues was JPY 7,771 million in 3Q07, an increase of 46.0% compared to 3Q06. The increase was mainly due to an increase in purchase, outsourcing costs and personnel related costs along with an increase in revenues from SI projects.
The gross margin for SI in 3Q07 was JPY 2,140 million and the gross margin ratio in 3Q07 was 21.6%, compared to 25.0% in 3Q06. The decrease in the gross margin ratio was mainly due to the completion of a remarkable large-scale network and application development project in 3Q07, which had relatively lower gross margin compared to that of other ordinary projects.
Cost of Equipment Sales revenues was JPY 342 million in 3Q07, an increase of 2.7% compared to 3Q06.
The gross margin ratio for equipment sales in 3Q07 was 14.3%, compared to 15.4% in 3Q06.
Sales and marketing expenses were JPY 1,124 million in 3Q07, an increase of 23.5% compared to 3Q06. The increase was mainly due to an increase in advertising and personnel expenses along with business expansion, as well as the addition of sales and marketing expenses related to hi-ho of JPY 104 million.
General and administrative expenses were JPY 1,185 million in 3Q07, an increase of 28.2% compared to 3Q06. The increase was mainly due to an increase in personnel expenses, outsourcing expenses and initial expenses for new business development.
Research and development expenses were JPY 63 million in 3Q07, an increase of 58.5% compared to 3Q06.
Operating income
Operating income was JPY 1,136 million in 3Q07, an increase of 15.2% compared to 3Q06. The increase was mainly due to the increase of JPY 368 million in gross margin from SI and the increase of JPY 284 million in gross margin from connectivity and VAS, despite the increase in sales and marketing and general and administrative expenses.
Other expenses and others
Other expenses in 3Q07 were JPY 119 million, compared to other income of JPY 617 million in 3Q06. The decrease was mainly due to a significant decrease in gains from the sale of available-for-sale securities. The gains from the sale of available-for-sale securities in 3Q07 were JPY 4 million, compared to JPY 757 million in 3Q06.
Income tax expense in 3Q07 was JPY 392 million, compared to income tax expense of JPY 93 million in 3Q06. The increase was mainly due to deferred income tax expenses of JPY 179 million.
Minority interests in losses of subsidiaries in 3Q07 were JPY 27 million, compared to minority interests in earnings of subsidiaries of JPY 70 million in 3Q06. Minority interests in losses of subsidiaries were mainly related to GDX and the elimination of minority interests related to four consolidated subsidiaries that became wholly owned by us in 2007, because we acquired shares of IIJ Technology Inc. and Net Care, Inc. from their minority shareholders.
Equity in net loss of equity method investees in 3Q07 was JPY 42 million, mainly represented by equity in net loss of Internet Revolution Inc.
Net income was JPY 611 million in 3Q07, a decrease of 56.5% compared to 3Q06.
Financial Condition
Balance Sheets
As of December 31, 2007, total assets increased by JPY 5,304 million from JPY 47,693 million as of March 31, 2007 to JPY 52,997 million. For current assets, accounts receivable increased by JPY 2,125 million which includes accounts receivable of JPY 3,045 million related to a remarkable large-scale network and application development project which was completed in 3Q07; prepaid expenses increased by JPY 1,181 million, mainly for bonus payments to our employees and maintenance expenses related to SI projects; other current assets increased by JPY 1,221 million, mainly due to an increase in current deferred income tax assets (net) resulting from a reduction of the valuation allowance that we made in 2Q07; and cash decreased by JPY 4,340 million, each compared to the respective balance as of March 31, 2007. Property and equipment increased by JPY 1,279 million from the balance as of March 31, 2007, mainly due to our acquisition of hi-ho and an increase in property to provide services to our customers and ourselves. Intangible assets increased by JPY 3,048 million from the balance as of March 31, 2007, mainly due to the recording of non-amortized intangible assets upon our acquisition of interest in consolidated subsidiaries and hi-ho. Other assets increased by JPY 739 million mainly due to an increase in non-current deferred tax assets (net) resulting from the reversal of the valuation allowance. The fair value of available-for-sale securities as of December 31, 2007 decreased by JPY 342 million from the amount as of March 31, 2007 to JPY 967 million.
For current liabilities, short-term borrowings increased by JPY 3,600 million from the balance as of March 31, 2007, due to our acquisition of shares of two consolidated subsidiaries from their minority shareholders, and accounts payable decreased by JPY 1,944 million from the balance as of March 31, 2007.
Total shareholders' equity as of December 31, 2007 was JPY 24,140 million, an increase of JPY 4,028 million from JPY 20,112 million as of March 31, 2007.
Cash Flows
Cash as of December 31, 2007 was JPY 9,214 million.
Net cash provided by operating activities in 3Q07 was JPY 338 million, compared to net cash provided by operating activities of JPY 2,063 million in 3Q06. Operating income increased in 3Q07 compared to 3Q06 because gross margin from connectivity and VAS and SI increased compared to 3Q06. However, net cash provided by operating activities in 3Q07 was due to changes in operating assets and liabilities during 3Q07, mainly resulting from an increase in accounting receivables along with the completion of a remarkable large-scale network and application development project in 3Q07.
Net cash used in investing activities in 3Q07 was JPY 711 million, compared to net cash provided by investing activities of JPY 25 million in 3Q06. We paid JPY 623 million for the purchase of property and equipment and JPY 200 million for the purchase of short-term and other investments. We also recorded JPY 124 million by the acquisition of a newly controlled company, net of cash acquired, resulting from making TN our consolidated subsidiaries in 3Q07. We have invested JPY 500 million in total in TN through 3Q07 for new business development.
Net cash used in financing activities in 3Q07 was JPY 2,061 million, compared to net cash used in financing activities of JPY 996 million in 3Q06. We recorded repayments of short-term borrowings with initial maturities over three months and long-term borrowings of JPY 9,200 million and principal payments under capital leases of JPY 906 million and payment of dividend for the interim period of FY2007 of JPY 155 million. We recorded proceeds of JPY 5,500 million from the issuance of short-term borrowings with initial maturities over three months and a net increase in short-term borrowings with initial maturities less than three months of JPY 2,700 million.
3rd Quarter FY2007 Business Review
Analysis by Service
Connectivity and Value-added Services
For connectivity services for corporate use, customers continued to shift to higher speeds and there was a significant increase in the number of contracts for our broadband services, IIJ FiberAccess/F and IIJ DSL/F for constructing corporate internal networks using Internet VPN. Total contracted bandwidth increased by 86.0 Gbps to 346.0 Gbps compared to 3Q06.
For connectivity services for home use, there were additional revenues of JPY 1,118 million from hi-ho, which we acquired in June 2007. Number of Contracts for Connectivity Services(4)
Number of Contracts for Connectivity Services(4) --------------------------------------------------------------------- YoY % 3Q07 3Q06 Change --------------------------------------------------------------------- Connectivity Services (Corporate Use) 24,877 18,261 6,616 --------------------------------------------------------------------- IP Service (-99Mbps) 805 754 51 --------------------------------------------------------------------- IP Service (100Mbps-999Mbps) 191 153 38 --------------------------------------------------------------------- IP Service (1Gbps-) 61 60 1 --------------------------------------------------------------------- IIJ Data Center Connectivity Service 293 264 29 --------------------------------------------------------------------- IIJ FiberAccess/F and IIJ DSL/F 21,573 15,379 6,194 --------------------------------------------------------------------- Others 1,954 1,651 303 --------------------------------------------------------------------- Connectivity Services (Home Use) 481,352 569,282 (87,930) --------------------------------------------------------------------- Under IIJ Brand 51,820 57,286 (5,466) --------------------------------------------------------------------- hi-ho 190,808 -- 190,808 --------------------------------------------------------------------- OEM(5) 238,724 511,996 (273,272) --------------------------------------------------------------------- Total Contracted Bandwidth 346.0Gbps 260.0Gbps 86.0Gbps --------------------------------------------------------------------- Connectivity and VAS Revenue Breakdown and Cost(4) (JPY in millions) --------------------------------------------------------------------- YoY % 3Q07 3Q06 Change ---------------------------------------------------------------=----- Connectivity Service Revenues (Corporate Use) 3,023 2,813 7.5% --------------------------------------------------------------------- IP Service(6) 2,239 2,113 6.0% --------------------------------------------------------------------- IIJ FiberAccess/F and IIJ DSL/F 680 547 24.3% --------------------------------------------------------------------- Others 104 154 (32.3%) --------------------------------------------------------------------- Connectivity Service Revenues (Home Use) 1,513 494 206.4% --------------------------------------------------------------------- Under IIJ Brand 271 294 (7.7%) --------------------------------------------------------------------- hi-ho 1,118 -- -- --------------------------------------------------------------------- OEM 124 200 (38.0%) --------------------------------------------------------------------- VAS Revenues 2,479 1,861 33.2% --------------------------------------------------------------------- Other Revenues 1,033 932 10.9% --------------------------------------------------------------------- Total Connectivity and VAS Revenues 8,049 6,100 31.9% --------------------------------------------------------------------- Cost of Connectivity and VAS 6,738 5,073 32.8% --------------------------------------------------------------------- Backbone Cost (included in the cost of Connectivity and VAS)(7) 905 888 1.9% --------------------------------------------------------------------- Connectivity and VAS Gross Margin Ratio 16.3% 16.8% -- ---------------------------------------------------------------------
SI
One-time revenues from systems construction in 3Q07 increased by 64.2% compared to 3Q06, mainly due to the completion of a remarkable large-scale network and application development project in 3Q07.
Recurring revenues from systems operation and maintenance in 3Q07 steadily increased by 14.4% compared to 3Q06.
SI Revenue Breakdown and Cost (JPY in millions) -------------------------------------------------------------------- YoY % 3Q07 3Q06 Change -------------------------------------------------------------------- SI Revenues 9,911 7,093 39.7% -------------------------------------------------------------------- Systems Construction 5,920 3,605 64.2% -------------------------------------------------------------------- Systems Operation and Maintenance 3,991 3,488 14.4% -------------------------------------------------------------------- Cost of SI 7,771 5,322 46.0% -------------------------------------------------------------------- SI Gross Margin Ratio 21.6% 25.0% -- --------------------------------------------------------------------
The order backlog for SI and equipment sales as of December 31, 2007 was JPY 16,242 million, an increase of 62.7% from the amount as of December 31, 2006.
SI and Equipment Sales Order Backlog (JPY in millions) -------------------------------------------------------------------- YoY % 3Q07 3Q06 Change -------------------------------------------------------------------- SI and Equipment Sales Order Backlog 16,242 9,985 62.7% --------------------------------------------------------------------
Equipment Sales
Revenues from equipment sales increased by 1.4% compared to 3Q06.
Equipment Sales Revenue and Cost (JPY in millions) -------------------------------------------------------------------- YoY % 3Q07 3Q06 Change -------------------------------------------------------------------- Equipment Sales Revenues 399 393 1.4% -------------------------------------------------------------------- Cost of Equipment Sales 342 333 2.7% -------------------------------------------------------------------- Equipment Sales Gross Margin Ratio 14.3% 15.4% -- --------------------------------------------------------------------
Other Financial Statistics
Other Financial Statistics (JPY in millions) -------------------------------------------------------------------- YoY % 3Q07 3Q06 Change -------------------------------------------------------------------- Adjusted EBITDA(8) 2,379 2,044 16.4% -------------------------------------------------------------------- CAPEX, including capital leases(9) 1,242 1,250 (0.6%) -------------------------------------------------------------------- Depreciation and amortization 1,243 1,058 17.4% --------------------------------------------------------------------
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 and presented in Appendix 2:
Adjusted EBITDA (JPY in millions) -------------------------------------------------------------------- 3Q07 3Q06 -------------------------------------------------------------------- Adjusted EBITDA 2,379 2,044 -------------------------------------------------------------------- Depreciation and Amortization (1,243) (1,058) -------------------------------------------------------------------- Operating Income 1,136 986 -------------------------------------------------------------------- Other Income (Expense) (119) 617 -------------------------------------------------------------------- Income Tax Expense 392 93 -------------------------------------------------------------------- Minority Interests in Losses (Earnings) of Subsidiaries 27 (70) -------------------------------------------------------------------- Equity in Net Loss of Equity Method Investees (42) (36) -------------------------------------------------------------------- Net Income 611 1,405 --------------------------------------------------------------------
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 in Appendix 3:
CAPEX (JPY in millions) -------------------------------------------------------------------- 3Q07 3Q06 -------------------------------------------------------------------- CAPEX, including capital leases 1,242 1,250 -------------------------------------------------------------------- Acquisition of Assets by Entering into Capital Leases 619 824 -------------------------------------------------------------------- Purchase of Property and Equipment 623 426 --------------------------------------------------------------------
Target
Our targets for the financial results for the full FY2007 are as follows:
(JPY in millions) --------------------------------------------------------------------- Income before Income Tax Operating Expense Revenues Income (Benefit) Net Income --------------------------------------------------------------------- Full FY2007 69,000 4,600 5,100 5,600 ---------------------------------------------------------------------
We expect to make a cash dividend of JPY 750 per share of common stock for the fiscal year ending March 31, 2008. 400 American Depository Shares represent 1 share of common stock.
Presentation
On February 13, 2008, we will post a presentation of our results on our website. For details, please access the following URL: http://www.iij.ad.jp/en/IR/
About Internet Initiative Japan Inc.
Founded in 1992, Internet Initiative Japan Inc. (IIJ) (Nasdaq:IIJI) (Tokyo Stock Exchange First Section:3774) is one of Japan's leading Internet-access and comprehensive network solutions providers. The company has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ and its group of companies provide total network solutions that mainly cater to high-end corporate customers. The company's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design.
The Internet Initiative Japan Inc. logo is available at http://www.primenewswire.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 FY2007 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 value-added 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.
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(1) Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with U.S. GAAP. All financial figures are unaudited and consolidated. For all 3Q07 results, translations of Japanese yen amounts into U.S. dollars are solely for the convenience of readers outside of Japan and have been made at the rate of JPY 111.71 = US$1.00.
(2) This Overview and Business Outlook contains forward-looking statements and projections such as statements regarding FY2007 revenues and operating and net income that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. These risks and uncertainties include, but are not limited to, the factors noted at the end of this release and to the risk factors and other information included in our annual report on Form 20-F, filed with the SEC on July 6, 2007, as well as other filings and documents furnished to the Securities and Exchange Commission. We plan to keep this press release publicly available on our Web site (www.iij.ad.jp), but may discontinue this practice at any time. We intend to publish our next Overview and Business Outlook in our 4Q07 and the full FY2007 earnings release, presently scheduled for release in May 2008.
(3) In this document, income before income tax expense represents income from operations before income tax expense, minority interests and equity in net loss of equity method investees in our consolidated financial statements.
(4) As we announced in our 1Q07 earnings release, the classifications in the table were changed from the table used in the past because of our acquisition of hi-ho, a company engaged mainly in the Internet business for home use. "Dedicated Access Services" and "Dial-up Access Services" were reclassified to "Connectivity Services for Corporate Use" and "Connectivity Services for Home Use", respectively.
(5) OEM services provided to other service providers.
(6) IP Service revenues include revenues from the Data Center Connectivity Service.
(7) From the point of comparable disclosure, the backbone cost related to hi-ho is excluded.
(8) Please refer to the Reconciliation of Non-GAAP Financial Measures below.
(9) Please refer to the Reconciliation of Non-GAAP Financial Measures below.
Appendix 1 Internet Initiative Japan Inc. ------------------------------ Quarterly Consolidated Balance Sheets (Unaudited) ------------------------------------------------- As of December 31, 2007 and March 31, 2007 As of December 31, 2007 As of March 31, 2007 --------------------------------------------------------------------- Thousands Thousands Thousands of U.S. Dollars of JPY % of JPY % --------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash 82,486 9,214,447 13,554,544 Short-term investment 109 12,170 12,093 Accounts receivable, net of allowance for doubtful accounts of JPY 23,842 thousand and JPY 32,489 thousand at December 31, 2007 and March 31, 2007, respectively 105,639 11,800,972 9,675,725 Inventories 9,199 1,027,568 1,111,086 Prepaid expenses 20,002 2,234,473 1,053,270 Other current assets, net of allowance for doubtful accounts of JPY 720 thousand and JPY 4,570 thousand at December 31, 2007 and March 31, 2007, respectively 19,259 2,151,418 930,571 ------- ---------- ---------- Total current assets 236,694 26,441,048 49.9 26,337,289 55.2 INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES, net of loan loss valuation allowance of JPY 16,701 thousand at December 31, 2007 and March 31, 2007, respectively 9,136 1,020,574 1.9 858,490 1.8 OTHER INVESTMENTS 22,608 2,525,546 4.8 2,841,741 6.0 PROPERTY AND EQUIPMENT--Net 99,467 11,111,429 21.0 9,832,396 20.6 INTANGIBLE ASSETS--Net 53,036 5,924,679 11.2 2,876,894 6.0 GUARANTEE DEPOSITS 17,679 1,974,902 3.7 1,686,141 3.5 OTHER ASSETS, net of allowance for doubtful accounts of JPY 66,812 thousand and JPY 69,050 thousand at December 31, 2007 and March 31, 2007, respectively 35,799 3,999,134 7.5 3,260,053 6.9 ------- ---------- ---------- TOTAL 474,419 52,997,312 100.0 47,693,004 100.0 ------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings 86,384 9,650,000 6,050,000 Long-term borrowings --current portion -- -- 290,000 Capital lease obligations--current portion 29,868 3,336,491 2,953,173 Accounts payable 58,377 6,521,313 8,464,835 Accrued expenses 8,884 992,476 897,355 Other current liabilities 17,934 2,003,408 2,477,486 ------- ---------- ---------- Total current liabilities 201,447 22,503,688 42.5 21,132,849 44.3 CAPITAL LEASE OBLIGATIONS --Noncurrent 40,473 4,521,225 8.5 4,318,309 9.1 ACCRUED RETIREMENT AND PENSION COSTS 7,865 878,629 1.6 750,042 1.5 OTHER NONCURRENT LIABILITIES 5,540 618,819 1.2 564,618 1.2 ------- ---------- ---------- Total Liabilities 255,325 28,522,361 53.8 26,765,818 56.1 ------- ---------- ---------- MINORITY INTEREST 2,998 334,868 0.6 815,182 1.7 ------- ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common-stock 150,693 16,833,847 31.8 16,833,847 35.3 --authorized, 377,600 shares; issued and outstanding, 206,478 shares at December 31, 2007 --authorized, 377,600 shares; issued and outstanding, 204,300 shares at March 31, 2007 Additional paid-in capital 247,173 27,611,737 52.1 26,599,217 55.8 Accumulated deficit (184,801)(20,644,087) (39.0)(24,270,769) (50.9) Accumulated other comprehensive income 3,031 338,586 0.7 949,709 2.0 ------- ---------- ---------- Total shareholders' equity 216,096 24,140,083 45.6 20,112,004 42.2 ------- ---------- ---------- TOTAL 474,419 52,997,312 100.0 47,693,004 100.0 ------- ---------- ---------- --------------------------------------------------------------------- (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007. Appendix 2 Internet Initiative Japan Inc. ------------------------------ Quarterly Consolidated Statements of Income (Unaudited) ------------------------------------------------------- (For the three months ended December 31, 2007 and December 31, 2006) Three Months Ended December 31, 2007 December 31, 2006 ----------------------------------------------- Thousands Thousands % of Thousands % of of U.S. of total of total Dollars JPY revenues JPY revenues ---------------------------------------------------------------------- REVENUES: Connectivity and value-added services: Connectivity (corporate use) 27,065 3,023,437 2,813,474 Connectivity (home use) 13,545 1,513,141 493,879 Value-added services 22,193 2,479,136 1,861,118 Other 9,249 1,033,186 931,872 ------- ---------- ---------- Total 72,052 8,048,900 6,100,343 Systems integration 88,724 9,911,309 7,093,326 Equipment sales 3,571 398,953 393,436 ------- ---------- ---------- Total revenues 164,347 18,359,162 100.0 13,587,105 100.0 ------- ---------- ---------- COST AND EXPENSES: Cost of connectivity and value-added services 60,313 6,737,501 5,072,712 Cost of systems integration 69,567 7,771,305 5,321,685 Cost of equipment sales 3,060 341,881 333,035 ------- ---------- ---------- Total cost 132,940 14,850,687 80.9 10,727,432 78.9 Sales and marketing 10,065 1,124,352 6.1 910,087 6.7 General and administrative 10,608 1,184,997 6.5 924,021 6.8 Research and development 564 63,043 0.3 39,786 0.3 ------- ---------- ---------- Total cost and expenses 154,177 17,223,079 93.8 12,601,326 92.7 ------- ---------- ---------- OPERATING INCOME 10,170 1,136,083 6.2 985,779 7.3 ------- ---------- ---------- OTHER INCOME (EXPENSES): Interest income 78 8,689 3,701 Interest expense (1,019) (113,769) (98,861) Foreign exchange gain (loss) 13 1,407 (244) Gain (loss) on other investments--net (141) (15,795) 756,521 Other--net 6 707 (43,720) ------- ---------- ---------- Other income (expenses)--net (1,063) (118,761) (0.7) 617,397 4.5 ------- ---------- ---------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES 9,107 1,017,322 5.5 1,603,176 11.8 INCOME TAX EXPENSE 3,507 391,731 2.1 92,596 0.7 MINORITY INTERESTS IN (EARNINGS) LOSSES OF SUBSIDIARIES 245 27,394 0.1 (69,927) (0.5) EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES (379) (42,394) (0.2) (35,724) (0.3) ------- ---------- ---------- NET INCOME 5,466 610,591 3.3 1,404,929 10.3 ---------------------------------------------------------------------- BASIC WEIGHTED-AVERAGE NUMBER OF SHARES 206,478 203,989 DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES 206,839 204,224 BASIC WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS 82,591,200 81,595,600 DILUTED WEIGHTED-AVERAGE NUMBER OF ADS EQUIVALENTS 82,735,483 81,689,600 ---------------------------------------------------------------------- U.S. Dollars JPY JPY ---------------------------------------------------------------------- BASIC NET INCOME PER SHARE 26.47 2,957 6,887 DILUTED NET INCOME PER SHARE 26.43 2,952 6,879 BASIC NET INCOME PER ADS EQUIVALENT 0.07 7.39 17.22 DILUTED NET INCOME PER ADS EQUIVALENT 0.07 7.38 17.20 ---------------------------------------------------------------------- (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007. Appendix 3 Internet Initiative Japan Inc. ------------------------------ Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited) --------------------------------------------------------------------- (For the three months ended December 31, 2007 and December 31, 2006) Three Months Ended December 31, December 31, 2007 2006 ----------------------- ----------- Thousands Thousands Thousands of U.S. of of Dollars JPY JPY ---------------------------------------------------------------------- OPERATING ACTIVITIES: Net income 5,466 610,591 1,404,929 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,125 1,242,764 1,058,490 Provision for (reversal of) doubtful accounts and advances (19) (2,145) 4,471 Loss (gain) on other investments--net 141 15,795 (756,521) Foreign exchange loss 5 558 4,321 Equity in net loss of equity method investees 379 42,394 35,724 Minority interests in earnings (losses) of subsidiaries (245) (27,394) 69,927 Deferred income tax expense 1,603 179,046 21,871 Others 428 47,806 208,481 Changes in operating assets and liabilities: Increase in accounts receivable (24,152) (2,697,964) (283,644) Decrease (increase) in inventories, prepaid expenses and other current and noncurrent assets 2,577 287,832 (703,233) Increase in accounts payable 5,001 558,649 832,177 Increase in accrued expenses, other current and noncurrent liabilities 715 79,867 166,449 --------------------------------------------------------------------- Net cash provided by operating activities 3,024 337,799 2,063,442 --------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of property and equipment (5,581) (623,435) (426,499) Purchase of available-for-sale securities (30) (3,380) (405,059) Purchase of short-term and other investments (1,792) (200,152) (11,984) Proceeds from available-for-sale securities 70 7,808 984,867 Proceeds from sales and redemption of other investments 124 13,828 4,380 Acquisition of a newly controlled company, net of cash acquired 1,109 123,842 -- Acquisition of businesses -- -- (74,751) Payment of guarantee deposits--net (151) (16,835) (33,039) Other (117) (13,025) (12,949) --------------------------------------------------------------------- Net cash provided by (used in) investing activities (6,368) (711,349) 24,966 --------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of short-term borrowings with initial maturities over three months 49,234 5,500,000 4,150,000 Repayments of short-term borrowings with initial maturities over three months and long-term borrowings (82,356) (9,200,000) (4,410,113) Proceeds from securities loan agreement -- -- 80,640 Principal payments under capital leases (8,112) (906,201) (866,065) Increase in short-term borrowings with initial maturities less than three months -- net 24,170 2,700,000 50,000 Dividends paid (1,386) (154,859) -- --------------------------------------------------------------------- Net cash used in financing activities (18,450) (2,061,060) (995,538) --------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (186) (20,819) 2,495 NET INCREASE (DECREASE) IN CASH (21,980) (2,455,429) 1,095,365 CASH, BEGINNING OF EACH PERIOD 104,466 11,669,876 12,859,745 --------------------------------------------------------------------- CASH, END OF EACH PERIOD 82,486 9,214,447 13,955,110 --------------------------------------------------------------------- (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007. Note: The following information is provided to disclose IIJ's financial results for the nine months ended December 31, 2007 in the form defined by the Tokyo Stock Exchange. Consolidated Financial Results for the Nine Months Ended December 31, 2007 (Under accounting principles generally accepted in the United States ("U.S. GAAP")) February 12, 2008 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, Director and CFO TEL: (03) 5259-6500 (Amounts of less than JPY one million are rounded) 1. Consolidated Financial Results for the Nine Months Ended December 31, 2007 (April 1, 2007 to December 31, 2007) (1) Consolidated Results of Operations (% shown is YoY change) ------------------------------------------------------------------- Total revenues Operating income ------------------------------------------------------------------- JPY % JPY % millions millions Nine months ended December 31, 2007 48,349 20.8 2,952 25.3 Nine months ended December 31, 2006 40,031 18.9 2,356 63.1 ------------------------------------------------------------------- Fiscal year ended March 31, 2007 57,055 3,500 ------------------------------------------------------------------- Income before income tax Net benefit income ------------------------------------------------------------------- JPY % JPY % millions millions Nine months ended December 31, 2007 2,715 (27.6) 4,088 (4.0) Nine months ended December 31, 2006 3,748 20.4 4,259 51.4 ------------------------------------------------------------------- Fiscal year ended March 31, 2007 5,049 5,410 ------------------------------------------------------------------- Basic net Diluted net income per share income per share ------------------------------------------------------------------- JPY JPY Nine months ended December 31, 2007 19,829 19,803 Nine months ended December 31, 2006 20,878 20,858 ------------------------------------------------------------------- Fiscal year ended March 31, 2007 26,519 26,487 ------------------------------------------------------------------- (Note) 1. In this document, Income before income tax benefit represents income from operations before income tax benefit, minority interests and equity in net loss of equity method investees in IIJ's consolidated financial statements. 2. The weighted average number of shares outstanding was 206,161, 203,989, 203,992 for the nine months ended December 31, 2007, the nine months ended December 31, 2006, and the fiscal year ended March 31, 2007, respectively. (2) Consolidated Financial Position ------------------------------------------------------------------- Shareholders' equity as a percentage of Shareholders' Total Shareholders' total equity assets equity assets per share ------------------------------------------------------------------- JPY JPY millions millions % JPY Nine months ended December 31, 2007 52,997 24,140 45.6 116,914 Nine months ended December 31, 2006 45,463 20,273 44.6 99,385 ------------------------------------------------------------------- Fiscal Year ended March 31, 2007 47,693 20,112 42.2 98,592 ------------------------------------------------------------------- (Note) Shareholders' equity, shareholders' equity as a percen tage of total assets and shareholders' equity per share are calculated in accordance with U.S. GAAP. (3) Consolidated Cash Flows ------------------------------------------------------------------- Net cash Net cash Net cash provided by Cash and cash provided by used in (used in) equivalents, operating investing financing end of activities activities activities period ------------------------------------------------------------------- JPY JPY JPY JPY millions millions millions millions Nine months ended December 31, 2007 455 (5,063) 285 9,214 Nine months ended December 31, 2006 4,576 (1,097) (3,246) 13,955 ------------------------------------------------------------------- Fiscal Year ended March 31, 2007 7,402 (3,014) (4,560) 13,555 ------------------------------------------------------------------- 2. Dividends ------------------------------------------------------------------- Dividend per share of common stock ------------------------------------------------------------------- Interim Year-end Total ------------------------------------------------------------------- JPY JPY JPY Fiscal year ended March 31, 2007 -- 1,500.00 1,500.00 ------------------------------------------------------------------- Fiscal year ending March 31, 2008 750.00 ------------------------------------------------------------------- Fiscal year ending March 31, 2008 (Target) 750.00 1,500.00 ------------------------------------------------------------------- (Note) IIJ maintains its initial dividend plan for the fiscal year ending March 31, 2008 that IIJ announced on May 15, 2007. 3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2008 (Reference) (April 1, 2007 through March 31, 2008) (% shown is YoY change) ------------------------------------------------------------------- Total Operating revenues income ------------------------------------------------------------------- JPY % JPY % millions millions Fiscal year ending March 31, 2008 69,000 20.9 4,600 31.4 ------------------------------------------------------------------- Income before income tax benefit Net income ------------------------------------------------------------------- JPY % JPY % millions millions Fiscal year ending March 31, 2008 5,100 1.0 5,600 3.5 ------------------------------------------------------------------- Basic net income per share ------------------------------------------------------------------- JPY Fiscal year ending March 31, 2008 27,122 ------------------------------------------------------------------- (Note) The number of shares of common stock used to calculate basic net income per share above is 206,478 shares. 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. 4. Others (1) Change of Condition in Consolidated Subsidiaries during the Nine Months Ended December 31, 2007(Change of Condition in Specific Consolidated Subsidiaries with a Change of Scope of Consolidation): None (2) Adoption of Simplified Accounting Method: None (3) Changes in Accounting and Reporting of Significant Accounting and Reporting Policies from the Most Recent Fiscal Year: None
[Qualitative Information and Financial Statements]
1. Qualitative Information on the Consolidated Results of Operation
(1) | Overview of Consolidated Results of Operation for the |
Nine Months Ended December 31, 2007 | |
(from April 1, 2007 to December 31, 2007) |
The Japanese economy for the nine months ended December 31, 2007 partly showed a weak aspect, affected by a standstill of improvements in corporate earnings and employment and almost flattened personal spending. For the future, IIJ needs to take into consideration an impact to the economy inside and outside Japan, by the fluctuation in the financial capital market affected by sub-prime loan issues and the trend of crude oil prices as an unstable factor.
For the data communications market which the IIJ Group belongs to, corporate customers are continuously shifting to higher speeds for Internet connectivity services and there are continuous demands for outsourcing services for corporate information systems, such as demands for security services.
Under such business environment, for the revenues of the IIJ Group for the nine months ended December 31, 2007, revenues from connectivity and value-added services ("VAS") increased by JPY 4,735 million, 26.1% year-over-year, mainly due to a steady increase in monthly recurring revenues, affected by continuous increases in contracted bandwidth for Internet connectivity services and the number of contracts for VAS. Revenues from systems integration ("SI") increased by JPY 3,867 million, 19.0% year-over-year, mainly due to the completion of a large-scale systems construction project in the three months ended December 31, 2007 and an increase in monthly recurring revenues from systems operation and maintenance.
In the nine months ended December 31, 2007, the IIJ Group started to be engaged in the new business development for its middle- and long-term growth, such as mobile data communications services for corporate customers under a scheme of Mobile Virtual Network Operator ("MVNO"), a business incubation center for technology development and commercialization for the next generation of the Internet, and provision of content distribution platform to "acTVila", TV portals for digital televisions, e-mail messaging infrastructure through IIJ's consolidated subsidiary, GDX Japan Inc. ("GDX"), and ATM network operations through IIJ's consolidated subsidiary, Trust Networks Inc. ("TN").
As a result, for the consolidated results of operation for the nine months ended December 31, 2007, revenues were JPY 48,349 million, an increase of 20.8% year-over-year. Gross margin was JPY 9,688 million, an increase of 25.5% year-over-year. Operating income was JPY 2,952 million, an increase of 25.3% year-over-year. Income before income tax benefit was JPY 2,715 million, a decrease of 27.6% year-on-year, mainly due to a decrease in the gains from the sale of available-for-sale securities. Net income was JPY 4,088 million, a decrease of 4.0% year-over-year, mainly due to the record of deferred tax benefit of JPY 1,791 million.
(2) Analysis of Results of Operation
1) Revenues
Revenues for the nine months ended December 31, 2007 were JPY 48,349 million, an increase of 20.8% year-over-year.
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | YoY % change | |
JPY millions | JPY millions | % | |
Connectivity and VAS | 22,856 | 18,120 | 26.1 |
SI | 24,213 | 20,347 | 19.0 |
Equipment sales | 1,280 | 1,565 | (18.2) |
Total revenues | 48,349 | 40,031 | 20.8 |
Revenues from connectivity and VAS were JPY 22,856 million, an increase of 26.1% year-over-year, mainly due to an increase in monthly recurring revenues, affected by continuous increases in the contracted bandwidth for Internet connectivity services for corporate users and the number of contracts for connectivity and VAS. There were additional revenues of JPY 2,537 million (7 months) from connectivity services for home users of hi-ho Inc. ("hi-ho"), which IIJ acquired in June 2007.
Revenues from SI were JPY 24,213 million, an increase of 19.0% year-over-year. The increase was mainly due to the completion of a large-scale network and application development project in the three months ended December 31, 2007 and an increase in monthly recurring revenues from systems operation and maintenance.
Equipment sales revenues were JPY 1,280 million, a decrease of 18.2% year-over-year.
2) Cost of Revenues
Cost of revenues for the nine months ended December 31, 2007 was JPY 38,662 million, an increase of 19.7% year-over-year.
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | YoY % change | |
JPY millions | JPY millions | % | |
Connectivity and VAS | 19,005 | 15,397 | 23.4 |
SI | 18,558 | 15,514 | 19.6 |
Equipment sales | 1,098 | 1,398 | (21.5) |
Total cost of revenues | 38,662 | 32,309 | 19.7 |
The cost of connectivity and VAS revenues, which are mostly fixed-type cost such as backbone cost, was JPY 19,005 million, an increase of 23.4% year-over-year. The increase is mainly due to an addition of JPY 2,675 million in costs of revenues along with revenues of JPY 3,098 million from hi-ho, which IIJ acquired in June 2007 (both for 7 months), an increase in circuit related cost (an increase of JPY 258 million year-over-year) and personnel related cost (an increase of JPY 216 million year-over-year) and initial cost for new business development of JPY 62 million.
The cost of SI revenues, which are mostly variable-type cost such as outsourcing costs and purchase, was JPY 18,558 million, an increase of 19.6% year-over-year. The increase was mainly due to an increase in cost such as purchase and outsourcing cost (an increase of JPY 1,689 million year-over-year) and an increase in personnel related cost (an increase of JPY 402 million year-over-year) along with an increase in revenues from SI projects.
The cost of equipment sales revenues was JPY 1,098 million, a decrease of 21.5% year-over-year, as revenues from equipment sales declined.
3) Sales and Marketing Expenses, General and Administrative Expenses and Research and Development
Sales and marketing expenses were JPY 3,152 million, an increase of 23.9% year-over-year. The increase was mainly due to an increase in sales and marketing expenses of JPY 288 million related to hi-ho (7 months), which IIJ acquired in June 2007, and personnel related and advertising expenses.
General and administrative expenses were JPY 3,405 million, an increase of 26.1% year-over-year. The increase was mainly due to an increase in personnel related expenses, rent expenses caused by expansion of offices along with the business growth and initial expenses for new business development.
Research and development expenses were JPY 179 million, an increase of 47.1% year-over-year.
4) Operating Income
Operating income was JPY 2,952 million, an increase of 25.3% year-over-year. The increase was due to the increase of JPY 1,127 million in gross margin from connectivity and VAS and an increase of JPY 823 million in gross margin from SI, despite the increase in sales and marketing and general and administrative expenses.
In the nine months ended December 31, 2007, IIJ Group started to be engaged in the new business development of its middle- and long-term growth as below. Along with the engagement in the new business development, initial cost or expenditures totaled to JPY 171 million, including operating losses of JPY 108 million related to IIJ's consolidated subsidiaries, GDX and TN, adversely affecting the profitability in the nine months ended December 31, 2007.
Item | Description |
Provision of content distribution platform to "acTVila" | Provision of high quality content distribution platform to "acTVila", TV portals for digital televisions |
Mobile data communications services for corporate customers under a scheme of MVNO | Provision of "IIJ Mobile", mobile data communications services for corporate customers under a scheme of MVNO, in cooperation with NTT DoCoMo, Inc. and EMOBILE Ltd. |
IIJ Innovation Institute | A business incubation center for technology development and commercialization for the next generation of the Internet |
GDX (IIJ's consolidated subsidiary) | Provision of e-mail messaging network services and others (IIJ's consolidated subsidiary. IIJ's ownership is 51.0%) |
TN (IIJ's consolidated subsidiary) | Operation of ATM network (IIJ's consolidated subsidiary. IIJ's ownership is 60.2%) |
Note: IIJ's ownership to the two consolidated subsidiaries above is as of the date of the announcement of this document. |
5) Other Income (Expenses)
Other expenses were JPY 237 million, compared to other income of JPY 1,391 million in the nine months ended December 31, 2006. The decrease was mainly due to a decrease in the gains from the sale of available-for-sale securities from JPY 1,680 million in the nine months ended December 31, 2006 to JPY 218 million in the nine months ended December 31, 2007.
6) Income before Income Tax Benefit
Income before income tax benefit was JPY 2,715 million, a decrease of 27.6% year-over-year. The decrease was because IIJ recorded other expenses of JPY 237 million mainly due to the decrease in the gains from the sale of available-for-sale securities.
7) Income Tax Benefit, Minority Interests and Equity in Net Loss of Equity Method Investees
Income tax benefit was JPY 1,413 million, compared to income tax benefit of JPY 867 million in the nine months ended December 31, 2006.
Minority interests in losses of subsidiaries were JPY 52 million, compared to minority interests in earnings of subsidiaries of JPY 195 million in the nine months ended December 31, 2006. Minority interests in losses of subsidiaries were mainly related GDX and the elimination of minority interests related to four consolidated subsidiaries that became wholly owned by IIJ in 2007, because IIJ acquired shares of IIJ Technology Inc. and Net Care, Inc. from their minority shareholders.
Equity in net loss of equity method investees was JPY 92 million, compared to JPY 161 million, mainly represented by equity in net loss of Internet Revolution Inc.
8) Net Income
Net income was JPY 4,088 million, a decrease of 4.0% year-over-year.
(3) Analysis by Service
1) Internet connectivity and VAS
Revenues from connectivity services for corporate users were 9,005 million, an increase of 7.9% year-over-year. The increase was mainly due to the acquisition of new contracts for IP Service, the shift of the IIJ Group's corporate users to higher speeds and an increase of the number of contracts for broadband services.
Revenues from connectivity services for home users were JPY 3,808 million, an increase of 157.8% year-over-year. Despite a decrease in revenues from IIJ4U and OEM services, the increase was mainly due to additional revenues of JPY 2,537 million (7 months) from connectivity services for home users of hi-ho.
Revenues from VAS were JPY 6,964 million, an increase of 26.4% year-over-year. The increase was mainly due to an increase in revenues from network-related outsourcing services such as security services, Internet VPN and data centers affected by an increase in corporate outsourcing needs.
Other revenues were JPY 3,079 million, an increase of 10.4% year-over-year.
As a result, revenues from connectivity and VAS totaled JPY 22,856 million, an increase of 26.1% year-over-year. The gross margin for connectivity and VAS was JPY 3,850 million, an increase of 41.4% year-over-year and the gross margin ratio increased to 16.8% from 15.0% in the nine months ended December 31, 2006.
<Connectivity and VAS Revenues, Cost of Revenues and Gross Margin Ratio>
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | YoY % Change | |
JPY millions | JPY millions | % | |
Connectivity and VAS revenues | 22,856 | 18,120 | 26.1 |
Connectivity service revenues (corporate use) | 9,005 | 8,346 | 7.9 |
IP Service (including Data Center Connectivity Service) | 6,682 | 6,253 | 6.9 |
IIJ FiberAccess/F and IIJ DSL/F | 1,959 | 1,596 | 22.8 |
Others | 363 | 497 | (26.9) |
Connectivity service revenues (home use) | 3,808 | 1,477 | 157.8 |
Under IIJ brand | 831 | 896 | (7.3) |
hi-ho | 2,537 | — | — |
OEM | 440 | 581 | (24.2) |
VAS revenues | 6,964 | 5,508 | 26.4 |
Other revenues | 3,079 | 2,789 | 10.4 |
Cost of connectivity and VAS | 19,005 | 15,397 | 23.4 |
Backbone cost (note) | 2,574 | 2,636 | (2.4) |
Gross margin ratio | 16.8% | 15.0% | — |
Note: From the point of comparable disclosure, the backbone cost related to hi-ho, which IIJ acquired in June 2007, is excluded.
<Numbers of Internet Connectivity Contracts and Total Contracted Bandwidth> (Numbers of contracts)
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | Change | |
Connectivity services (corporate use) | 24,877 | 18,261 | 6,616 |
IP Service (-99Mbps) | 805 | 754 | 51 |
IP Service (100Mbps-999Mbps) | 191 | 153 | 38 |
IP Service (1Gbps-) | 61 | 60 | 1 |
IIJ Data Center Connectivity Service | 293 | 264 | 29 |
IIJ FiberAccess/F and IIJ DSL/F | 21,573 | 15,379 | 6,194 |
Others | 1,954 | 1,651 | 303 |
Connectivity services (home use) | 481,352 | 569,282 | (87,930) |
Under IIJ brand | 51,280 | 57,286 | (5,466) |
hi-ho | 190,808 | — | 190,808 |
OEM | 238,724 | 511,996 | (273,272) |
Total contracted bandwidth | 346.0 Gbps | 260.0 Gbps | 86.0 Gbps |
(Note) As IIJ announced in its earnings release for the first quarter of the fiscal year ending March 31, 2008, the classifications in the table were changed from the table used in the past because of its acquisition of hi-ho, a company engaged mainly in the Internet business for home use. "Dedicated Access Services" and "Dial-up Access Services" were reclassified to Connectivity Services for Corporate Use" and "Connectivity Services for Home Use", respectively. |
2) SI
Revenues from SI were JPY 11,572 million, an increase of 14.7% year-over-year. One-time revenues from systems construction were JPY 12,641 million, an increase of 23.3% year-over-year, mainly due to the completion of a large-scale network and application development project in the three months ended December 31, 2007. Monthly recurring revenues from systems operation and maintenance increased to JPY 11,572 million, an increase of 14.7% year-over-year.
The order backlog for SI and equipment sales as of December 31, 2007 was JPY 16,242 million, an increase of 62.7% from the amount as of December 31, 2006.
The gross margin for SI was JPY 5,655 million, an increase of 17.0% year-on-year.
The gross margin ratio was 23.4%, affected by the completion of a large-scale network and application development project in the three months ended December 31, 2007, which had relatively lower gross margin compared to that of other ordinary projects.
<SI Revenues, Cost of Revenues and Gross Margin Ratio>
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | YoY % Change | |
JPY millions | JPY millions | % | |
SI revenues | 24,213 | 20,347 | 19.0 |
Systems construction | 12,641 | 10,254 | 23.3 |
Systems operation and maintenance | 11,572 | 10,093 | 14.7 |
Cost of SI | 18,558 | 15,514 | 19.6 |
SI gross margin ratio | 23.4% | 23.8% | — |
<SI and Equipment Sales Order Backlog>
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | YoY % Change | |
JPY millions | JPY millions | % | |
SI and equipment sales order backlog | 16,242 | 9,985 | 62.7 |
3) Equipment sales
Revenues from equipment sales were JPY 1,280 million. The gross margin for equipment sales was JPY 182 million and the gross margin ratio was 14.2%.
<Equipment Sales Revenue and Cost>
Nine months ended December 31, 2007 | Nine months ended December 31, 2006 | YoY % Change | |
JPY millions | JPY millions | % | |
Equipment sales revenues | 1,280 | 1,564 | (18.2) |
Cost of equipment sales | 1,098 | 1,398 | (21.5) |
Equipment sales gross margin ratio | 14.2% | 10.6% | — |
2. Qualitative Information on the Consolidated Financial Position
(1) Assets, Liabilities and Total Shareholders' Equity
As of December 31, 2007, total assets increased by JPY 5,304 million from JPY 47,693 million as of March 31, 2007 to JPY 52,997 million. For current assets, accounts receivable increased by JPY 2,125 million which includes accounts receivable of JPY 3,045 million related to a large-scale network and application development project which was completed in the three months ended December 31, 2007; prepaid expenses increased by JPY 1,181 million, mainly for bonus payments to the IIJ Group's employees and maintenance expenses related to SI projects; other current assets increased by JPY 1,221 million, mainly due to an increase in current deferred income tax assets (net) resulting from a reduction of the valuation allowance; and cash decreased by JPY 4,340 million, each compared to the respective balance as of March 31, 2007. Property and equipment increased by JPY 1,279 million from the balance as of March 31, 2007, mainly due to our acquisition of hi-ho and an increase in property to provide services to our customers and ourselves. Intangible assets increased by JPY 3,048 million from the balance as of March 31, 2007, mainly due to the recording of non-amortized intangible assets upon our acquisition of interest in consolidated subsidiaries and hi-ho. Other assets increased by JPY 739 million mainly due to an increase in non-current deferred tax assets (net) resulting from the reversal of the valuation allowance. The fair value of available-for-sale securities as of December 31, 2007 decreased by JPY 342 million from the amount as of March 31, 2007 to JPY 967 million. For current liabilities, short-term borrowings increased by JPY 3,600 million from the balance as of March 31, 2007, due to IIJ's acquisition of shares of two consolidated subsidiaries from their minority shareholders, and accounts payable decreased by JPY 1,944 million from the balance as of March 31, 2007.
Total shareholders' equity as of December 31, 2007 was JPY 24,140 million, an increase of JPY 4,028 million from JPY 20,112 million as of March 31, 2007.
(2) Cash Flows
Cash as of December 31, 2007 was JPY 9,214 million, a decrease of JPY 4,340 million year-over-year.
(Net cash provided by operating activities)
Net cash provided by operating activities was JPY 455 million, compared to net cash provided by operating activities of JPY 4,576 million in the nine months ended December 31, 2006. Operating income increased compared to the nine months ended December 31, 2006, because gross margin from connectivity and VAS and SI increased. However, net cash provided by operating activities was due to changes in operating assets and liabilities, mainly resulting from an increase in accounting receivables along with the completion of a large-scale network and application development project in the three months ended December 31, 2007, an increase in operating assets such as prepaid expenses related to on-going SI projects, a decrease in operating liabilities such as accounts payable related to purchase for SI projects.
(Net cash used in investing activities)
Net cash used in investing activities was JPY 5,063 million, compared to net cash used in investing activities of JPY 1,097 million in the nine months ended December 31, 2006. IIJ paid JPY 1,975 million for the purchase of subsidiary stock from minority shareholders and JPY 1,615 million for the purchase of property and equipment. IIJ also recorded JPY 789 million by the acquisition of the two newly controlled company, net of cash acquired, resulting from the acquisition of shares of hi-ho for JPY 912 million and the acquisition of cash of JPY 124 million from TN, which IIJ made its consolidated subsidiary by investing JPY 500 million for new business development.
(Net cash provided by financing activities)
Net cash provided by financing activities was JPY 285 million, compared to net cash used in financing activities of JPY 3,246 million in the nine months ended December 31, 2006. IIJ recorded proceeds of JPY 5,000 million from new short-term borrowings with initial maturities over three months for the acquisition of shares of its two consolidated subsidiaries from their minority shareholders (through the end of the nine months ended December 31, 2007, JPY 2,000 million of the amount was repaid and the remaining amount was re-financed as short-term borrowings with initial maturities less than three months) and the part of short-term borrowings with initial maturities over three months was re-financed. As a result, for the proceeds from banks, IIJ recorded JPY 2,950 million of a net increase in short-term borrowings with initial maturities less than three months and JPY 360 million of net proceeds from issuance of short-term borrowings with initial maturities over three months and long-term borrowings. IIJ also recorded JPY 2,564 million of principal payments under capital leases, JPY 461 million of dividend payment for the end of the fiscal year ended March 31, 2007 and the interim period ended September 30, 2007.
3. Qualitative Information on the Target for the Consolidated Financial Results
While it expects that corporate earnings continue to show steady growth for the future of Japanese economy, IIJ need to take into consideration an impact to the economy inside and outside Japan, by the fluctuation in the financial capital market affected by sub-prime loan issues and the trend of crude oil prices.
The consolidated financial results of the IIJ Group for the nine months ended December 31, 2007 were almost in line with the initial target. For the consolidated financial results for the IIJ Group, revenues and income have trends to be the highest in the three months ending March 31, compared to the other quarters, since systems investments and expenditures of corporate customers usually become the highest at the end of fiscal year. Though there are unclear factors such as deferral of revenue recognition to the next fiscal year due to the shift of completion of systems construction projects to the next fiscal year, an impact by an initial expenditure for new business development and an impact by a decrease in gains from sale of available-for-sale securities affected by flagging stock markets, IIJ does not revise its initial target that it disclosed on May 15, 2007 in consideration of recent business achievement. The target remains to be JPY 69,000 million (an increase of 20.9% year-over-year) for total revenues, JPY 4,600 million (an increase of 31.4% year-over-year) for operating income, JPY 5,100 million (an increase of 1.0% year-over-year) for income before income tax benefit (expense) and JPY 5,600 million (an increase of 3.5% year-over-year) for net income.
4. Others
(1) Change of Condition in Consolidated Subsidiaries during the Nine Months Ended December 31, 2007: None
(Change of Condition in Specific Consolidated Subsidiaries with the Change of Scope of Consolidation)
(2) Adoption of Simplified Accounting Method: None
(3) Changes in Accounting and Reporting Policies from the Most Recent Fiscal year: None
Consolidated Financial Statements (Unaudited) (From April 1, 2007 through December 31, 2007) (1) Consolidated Balance Sheets ---------------------------------------------------------- As of December 31, As of December 31, 2007 2006 ---------------------------------------------------------- Thousands of U.S Thousands Thousands Dollars of JPY % of JPY % ---------------------------------------------------------- ASSETS CURRENT ASSETS: Cash 82,486 9,214,447 13,955,110 Accounts receivable, net of allowance for doubtful accounts of JPY 23,842 thousand, JPY 24,690 thousand and JPY 32,489 thousand at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 105,639 11,800,972 8,169,550 Short-term investment 109 12,170 11,809 Inventories 9,199 1,027,568 1,088,259 Prepaid expenses 20,002 2,234,473 1,562,891 Other current assets, net of allowance for doubtful accounts of JPY 720 thousand, JPY 3,850 thousand and JPY 4,570 thousand at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 19,259 2,151,418 996,890 ------ --------- ------- Total current assets 236,694 26,441,048 49.9 25,784,509 56.7 INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES, net of loan loss valuation allowance of JPY 16,701 at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 9,136 1,020,574 1.9 1,008,407 2.2 OTHER INVESTMENTS 22,608 2,525,546 4.8 5,441,508 12.0 PROPERTY AND EQUIPMENT-Net 99,467 11,111,429 21.0 9,417,245 20.7 INTANGIBLE ASSETS--Net 53,036 5,924,679 11.2 671,429 1.5 GUARANTEE DEPOSITS 17,679 1,974,902 3.7 1,583,128 3.5 OTHER ASSETS, net of allowance for doubtful accounts of JPY 66,812 thousand, JPY 66,366 thousand and JPY 69,050 thousand at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 35,799 3,999,134 7.5 1,556,832 3.4 ------- --------- ---------- TOTAL 474,419 52,997,312 100.0 45,463,058 100.0 ------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings 86,384 9,650,000 5,600,000 Long-term borrowings- current portion -- -- 1,000,363 Payable under securities loan agreement -- -- 561,600 Capital- lease obligations- current portion 29,868 3,336,491 2,848,075 Accounts payable 58,377 6,521,313 5,808,051 Accrued expenses 8,884 992,476 665,112 Other current liabilities 17,934 2,003,408 1,994,410 ------- --------- ---------- --- Total current liabil- ities 201,447 22,503,688 42.5 18,477,611 40.6 CAPITAL LEASE OBLIGATIONS- Noncurrent 40,473 4,521,225 8.5 4,295,908 9.5 ACCRUED RETIREMENT AND PENSION COSTS 7,865 878,629 1.6 382,619 0.8 OTHER NONCURRENT LIABILITIES 5,540 618,819 1.2 600,167 1.3 ------- --------- ---------- Total Liabil- ities 255,325 28,522,361 53.8 23,756,305 52.2 ------- ---------- ---------- MINORITY INTEREST 2,998 34,868 0.6 1,433,341 3.2 ------- ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock- authorized, 377,600 shares; issued and outstanding, 206,478 shares at December 31, 2007- authorized, 377,600 shares; issued and outstanding, 204,300 shares at December 31, 2006 and March 31, 2007 150,693 16,833,847 31.8 16,833,847 37.0 Additional paid-in capital 247,173 27,611,737 52.1 26,599,217 58.5 Accumulated deficit (184,801)(20,644,087)(39.0)(25,421,633)(55.9) Accumulated other comprehensive income 3,031 338,586 0.7 2,346,219 5.2 Treasury stock- 777 shares held by an equity method investee at December 31, 2006 -- -- -- (84,238) (0.2) ------- --------- ---------- Total shareholders' equity 216,096 24,140,083 45.6 20,273,412 44.6 ------- --------- ---------- TOTAL 474,419 52,997,312 100.0 45,463,058 100.0 ------- --------- ---------- -------------------- As of March 31, 2007 ------------------- Thousands of JPY % ------------------ ASSETS CURRENT ASSETS: Cash 13,554,544 Accounts receivable, net of allowance for doubtful accounts of JPY 23,842 thousand, JPY 24,690 thousand and JPY 32,489 thousand at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 9,675,725 Short-term investment 12,093 Inventories 1,111,086 Prepaid expenses 1,053,270 Other current assets, net of allowance for doubtful accounts of JPY 720 thousand, JPY 3,850 thousand and JPY 4,570 thousand at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 930,571 Total current assets 26,337,289 55.2 ---------- INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES, net of loan loss valuation allowance of JPY 16,701 at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 858,490 1.8 OTHER INVESTMENTS 2,841,741 6.0 PROPERTY AND EQUIPMENT-Net 9,832,396 20.6 INTANGIBLE ASSETS--Net 2,876,894 6.0 GUARANTEE DEPOSITS 1,686,141 3.5 OTHER ASSETS, net of allowance for doubtful accounts of JPY 66,812 thousand, JPY 66,366 thousand and JPY 69,050 thousand at December 31, 2007, December 31, 2006 and March 31, 2007, respectively 3,260,053 6.9 ---------- TOTAL 47,693,004 100.0 ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings 6,050,000 Long-term borrowings- current portion 290,000 Payable under securities loan agreement -- Capital- lease obligations- current portion 2,953,173 Accounts payable 8,464,835 Accrued expenses 897,355 Other current liabilities 2,477,486 ---------- Total current liabil- ities 21,132,849 44.3 CAPITAL LEASE OBLIGATIONS- Noncurrent 4,318,309 9.1 ACCRUED RETIREMENT AND PENSION COSTS 750,042 1.5 OTHER NONCURRENT LIABILITIES 564,618 1.2 ---------- Total Liabil- ities 26,765,818 56.1 ---------- MINORITY INTEREST 815,182 1.7 ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock- authorized, 377,600 shares; issued and outstanding, 206,478 shares at December 31, 2007- authorized, 377,600 shares; issued and outstanding, 204,300 shares at December 31, 2006 and March 31, 2007 16,833,847 35.3 Additional paid-in capital 26,599,217 55.8 Accumulated deficit (24,270,769) (50.9) Accumulated other comprehensive income 949,709 2.0 Treasury stock- 777 shares held by an equity method investee at December 31, 2006 -- -- ---------- Total shareholders' equity 20,112,004 42.2 ---------- TOTAL 47,693,004 100.0 ---------- (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007. (2) Consolidated Statements of Income Nine Months Ended Nine Months Ended December 31, 2007 December 31, 2006 ------------------------------------------------ Thousands Thousands % Thousands % of U.S. of of total of of total Dollars JPY revenues JPY revenues ---------------------------------------------------------------------- REVENUES: Connectivity and value-added services: Connectivity (corporate use) 80,608 9,004,721 8,345,756 Connectivity (home use) 34,088 3,807,989 1,477,036 Value-added services 62,337 6,963,603 5,508,337 Other 27,565 3,079,293 2,788,701 --------- --------- --------- Total 204,598 22,855,606 18,119,830 Systems integration 216,753 24,213,497 20,347,104 Equipment sales 11,461 1,280,303 1,564,205 --------- --------- --------- Total revenues 432,812 48,349,406 100.0 40,031,139 100.0 --------- --------- --------- COST AND EXPENSES: Cost of connectivity and value-added services 170,130 19,005,171 15,396,845 Cost of systems integration 166,128 18,558,164 15,513,501 Cost of equipment sales 9,831 1,098,267 1,399,048 --------- --------- --------- Total cost 346,089 38,661,602 80.0 32,309,394 80.7 Sales and marketing 28,212 3,151,505 6.5 2,542,815 6.4 General and administrative 30,477 3,404,620 7.0 2,700,746 6.7 Research and development 1,607 179,488 0.4 121,977 0.3 --------- --------- --------- Total cost and expenses 406,385 45,397,215 93.9 37,674,932 94.1 --------- --------- --------- OPERATING INCOME 26,427 2,952,191 6.1 2,356,207 5.9 --------- --------- --------- OTHER INCOME (EXPENSES): Interest income 360 40,244 11,182 Interest expense (2,946) (329,047) (304,361) Foreign exchange gain (loss) 21 2,330 (254) Gain (loss) on other investments -net 302 33,679 1,679,356 Other-net 138 15,409 5,377 --------- --------- --------- Other income (expenses)-net (2,125) (237,385) (0.5) 1,391,300 3.5 --------- --------- --------- INCOME FROM OPERATIONS BEFORE INCOME TAX BENEFIT, MINORITY INTERESTS AND EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES 24,302 2,714,806 5.6 3,747,507 9.4 --------- --------- --------- INCOME TAX BENEFIT (12,650) (1,413,102) (2.9) (867,187) (2.2) MINORITY INTERESTS IN (EARNINGS) LOSSES OF SUBSIDIARIES 462 51,606 0.1 (195,035) (0.5) EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES (819) (91,523) (0.1) (160,810) (0.4) --------- --------- --------- NET INCOME 36,595 4,087,991 8.5 4,258,849 10.7 --------- --------- --------- Fiscal Year Ended March 31, 2007 ---------------------- Thousands % of of total JPY revenues --------------------------------------------- REVENUES: Connectivity and value-added services Connectivity (corporate use) 11,239,062 Connectivity (home use) 1,968,948 Value-added services 7,415,533 Other 3,729,633 --------- Total 24,353,176 Systems integration 30,527,081 Equipment sales 2,174,324 --------- Total revenues 57,054,581 100.0 --------- COST AND EXPENSES: Cost of connectivity and value-added services 20,545,358 Cost of systems integration 23,529,045 Cost of equipment sales 1,893,216 --------- Total cost 45,967,619 80.6 Sales and marketing 3,438,725 6.0 General and administrative 3,970,692 7.0 Research and development 177,273 0.3 --------- Total cost and expenses 53,554,309 93.9 --------- OPERATING INCOME 3,500,272 6.1 --------- OTHER INCOME (EXPENSES): Interest income 23,037 Interest expense (397,439) Foreign exchange gain (loss) (297) Gain (loss) on other investments -net 1,866,510 Other-net 56,605 --------- Other income (expenses)-net 1,548,416 2.7 --------- INCOME FROM OPERATIONS BEFORE INCOME TAX BENEFIT, MINORITY INTERESTS AND 5,048,688 8.8 EQUITY IN NET LOSS --------- OF EQUITY METHOD INVESTEES
INCOME TAX BENEFIT (803,943) (1.4) MINORITY INTERESTS IN (EARNINGS) LOSSES OF SUBSIDIARIES (232,719) (0.4) EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES (210,199) (0.3) --------- NET INCOME 5,409,713 9.5 --------- Nine Months Nine months Fiscal Year Ended Ended Ended December 31, December 31, March 31, 2007 2006 2007 ----------------------------------------------- Shares Shares Shares -------------------------------------------------------------------- BASIC WEIGHTED- AVERAGE NUMBER OF SHARES 206,161 203,989 203,992 DILUTED WEIGHTED- AVERAGE NUMBER OF SHARES 206,432 204,186 204,244 -------------------------------------------------------------------- U.S. Dollars JPY JPY JPY -------------------------------------------------------------------- BASIC NET INCOME PER SHARE 177.50 19,829 20,878 26,519 DILUTED NET INCOME PER SHARE 177.27 19,803 20,858 26,487 -------------------------------------------------------------------- (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007. (3) Consolidated Statements of Shareholders' Equity Consolidated statements of shareholders' equity for the nine months ended December 31, 2007 (Unit: Thousands of JPY) Shares of Common Stock Outstanding (Including Treasury Additional Stock) Common Paid-in Accumulated (Shares) Stock Capital Deficit --------------------------------------------------------------------- BALANCE, APRIL 1, 2007 204,300 16,833,847 26,599,217 (24,270,769) Net income 4,087,991 Other comprehensive loss, net of tax Total comprehensive income Payment of dividends (461,309) Issuance of common stock related to share exchanges, net of issuance cost 2,178 1,012,520 --------------------------------------------- BALANCE, DECEMBER 31, 2007 206,478 16,833,847 27,611,737 (20,644,087) --------------------------------------------- Accumulated Other Comprehensive Treasury Income Stock Total --------------------------------------------------------------------- BALANCE, APRIL 1, 2007 949,709 -- 20,112,004 Net income 4,087,991 Other comprehensive loss, net of tax (611,123) (611,123) --------- Total comprehensive 3,476,868 income Payment of dividends (461,309) Issuance of common stock related to share exchanges, net of issuance cost 1,012,520 ------------------------------------ BALANCE, DECEMBER 31, 2007 338,586 -- 24,140,083 ------------------------------------ Consolidated statements of shareholders' equity for the nine months ended December 31, 2007 (Unit: Thousands of U.S. Dollars) Shares of Common Stock Outstanding (Including Treasury Additional Stock) Common Paid-in Accumulated (Shares) Stock Capital Deficit --------------------------------------------------------------------- BALANCE, APRIL 1, 2007 204,300 150,693 238,109 (217,266) Net income 36,595 Other comprehensive loss, net of tax Total comprehensive income Payment of dividends (4,130) Issuance of common stock related to share exchanges, net of issuance cost 2,178 9,064 BALANCE, DECEMBER 31, 2007 206,478 150,693 247,173 (184,801) --------------------------------------------------------------------- Accumulated Other Comprehensive Treasury Income Stock Total --------------------------------------------------------------------- BALANCE, APRIL 1, 2007 8,502 -- 180,038 Net income 36,595 Other comprehensive (5,471) (5,471) loss, net of tax ---------- Total comprehensive 31,124 income Payment of dividends (4,130) Issuance of common stock related to share exchanges, net of issuance cost 9,064 BALANCE, DECEMBER 31, 2007 3,031 -- 216,096 (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007. --------------------------------------------------------------------- Shares of Common Stock Outstanding (Including Treasury Additional Stock) Common Paid-in Accumulated (Shares) Stock Capital Deficit --------------------------------------------------------------------- BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482) Net income 4,258,849 Other comprehensive loss, net of tax Total comprehensive loss BALANCE, DECEMBER 31, 2006 204,300 16,833,847 26,599,217 (25,421,633) ---------------------------------------------- Accumulated Other Comprehensive Treasury Income Stock Total BALANCE, APRIL 1, 2006 6,553,594 (84,238) 20,221,938 Net income 4,258,849 Other comprehensive loss, net of tax (4,207,375) (4,207,375) Total comprehensive ---------- loss 51,474 BALANCE, DECEMBER 31, 2006 2,346,219 (84,238) 20,273,412 --------------------------------------------- Consolidated statements of shareholders' equity for the fiscal year ended March 31, 2007 (Unit: Thousands of JPY) --------------------------------------------------------------------- Shares of Common Stock Outstanding (Including Treasury Additional Stock) Common Paid-in Accumulated (Shares) Stock Capital Deficit --------------------------------------------------------------------- BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482) Net income 5,409,713 Other comprehensive loss, net of tax Total comprehensive loss Adjustment to initially apply SFAS158, net of tax Dissolution of reciprocal interests due to sale of investment in an equity method investee --------------------------------------------------------------------- BALANCE, MARCH 31, 2007 204,300 16,833,847 26,599,217 (24,270,769) ---------------------------------------------- Accumulated Other Comprehensive Treasury Income Stock Total BALANCE, APRIL 1, 2006 6,553,594 (84,238) 20,221,938 Net income 5,409,713 Other comprehensive loss, net of tax (5,492,154) (5,492,154) ---------- Total comprehensive (82,441) loss Adjustment to initially apply SFAS158, net of tax (111,731) (111,731) Dissolution of reciprocal interests due to sale of investment in an equity method investee 84,238 84,238 --------------------------------------------------------------------- BALANCE, MARCH 31, 2007 949,709 -- 20,112,004 ---------------------------------------------- (4) Condensed Consolidated Statements of Cash Flows --------------------------------------------------------------------- Nine Months Nine Months Fiscal Year Ended Ended Ended Dec. 31, Dec. 31, March 31, 2007 2006 2007 --------------------------------------------------------------------- Thousands Thousands Thousands Thousands of U.S. of of of Dollars JPY JPY JPY --------------------------------------------------------------------- OPERATING ACTIVITIES: Net income 36,595 4,087,991 4,258,849 5,409,713 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,164 3,481,394 3,234,615 4,228,048 Provision for (reversal of) doubtful accounts and advances (63) (7,069) 25 12,232 Gain on other investments -- net (301) (33,679) (1,679,356) (1,866,510) Foreign exchange loss 35 3,955 1,935 2,226 Equity in net loss of equity method investees 819 91,523 160,810 210,199 Minority interests in earnings (losses) of subsidiaries (462) (51,606) 195,035 232,719 Deferred income tax benefit (16,027) (1,790,391) (1,223,275) (1,494,685) Others 1,290 144,053 297,719 534,035 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (18,991) (2,121,457) 3,864,892 2,376,126 Increase in inventories, prepaid expenses and other current and noncurrent assets (12,095) (1,351,187) (610,349) (1,235,003) Decrease in accounts payable (14,549) (1,625,227) (4,127,491) (1,872,969) Increase (decrease) in accrued expenses, other current and noncurrent liabilities (3,346) (373,793) 202,463 865,376 --------------------------------------------------------------------- Net cash provided by operating activities 4,069 454,507 4,575,872 7,401,507 --------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of property and equipment (14,457) (1,614,994) (986,367) (1,287,906) Purchase of available-for-sale securities (4,631) (517,275) (575,623) (802,662) Purchase of short-term and other investments (2,077) (231,974) (1,502,601) (1,794,358) Investment in an equity method investee (2,241) (250,389) -- -- Proceeds from sales of investment in an equity method investee -- -- -- 185,900 Purchase of subsidiary stock from minority shareholders (17,681) (1,975,123) (27,559) (3,077,764) Proceeds from sales of available-for-sale securities 5,522 616,920 2,085,241 3,883,915 Proceeds from sales and redemption of short-term and other investments 184 20,579 21,781 110,446 Acquisition of newly controlled companies, net of cash acquired (7,059) (788,608) -- -- Acquisition of businesses -- -- (74,751) (74,751) Payment of guarantee deposits -- net (2,500) (279,324) (17,396) (118,411) Other (386) (43,154) (19,743) (38,020) --------------------------------------------------------------------- Net cash used in investing activities (45,326) (5,063,342) (1,097,018) (3,013,611) --------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of short-term borrowings with initial maturities over three months 142,333 15,900,000 8,800,000 10,500,000 Repayments of short-term borrowings with initial maturities over three months (139,110)(15,540,000) (5,629,600) (7,639,963) Proceeds from securities loan agreement -- -- 1,057,680 1,057,680 Repayments of securities loan agreement -- -- (1,495,680) (2,057,280) Principal payments under capital leases (22,954) (2,564,142) (2,573,613) (3,259,875) Increase (decrease) in short-term borrowings with initial maturities less than three months -- net 26,408 2,950,000 (3,405,000) (3,355,000) Proceeds from issuance of subsidiary stock to minority shareholders -- -- -- 194,679 Amount of dividend payment (4,130) (461,309) -- -- --------------------------------------------------------------------- Net cash provided by (used in) financing activities 2,547 284,549 (3,246,213) (4,559,759) --------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (141) (15,811) (4,552) (614) NET DECREASE IN CASH (38,851) (4,340,097) 228,089 (172,477) CASH, BEGINNING OF EACH PERIOD 121,337 13,554,544 13,727,021 13,727,021 --------------------------------------------------------------------- CASH, END OF EACH PERIOD 82,486 9,214,447 13,955,110 13,554,544 --------------------------------------------------------------------- --------------------------------------------------------------------- ADDITIONAL CASH FLOW INFORMATION: Interest paid 2,948 329,316 287,451 383,461 Income taxes paid 8,360 933,930 339,973 347,826 NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of assets by entering into capital leases 26,114 2,917,146 1,741,877 2,664,706 Purchase of minority interests of consolidated subsidiaries through share exchanges 9,064 1,012,520 -- -- Acquisition of business and a company: Assets acquired 20,762 2,319,277 236,307 236,307 Cash paid (15,356) (1,715,450) (74,751) (74,751) Liabilities assumed 3,294 367,989 161,556 161,556 Minority interests assumed 2,112 235,838 -- -- --------------------------------------------------------------------- (Note) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 111.71, which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of December 31, 2007.
CONTACT: IIJ Investor Relations Office Taisuke Ono +81-3-5259-6500 ir@iij.ad.jp http://www.iij.ad.jp